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War-Time Financial Problems by Hartley Withers

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Within limits this tendency of the standard of value towards
depreciation has possessed considerable advantages, probably much
greater advantages than would have followed from the contrary process
if it had been the other way round. If we can imagine that the
currency history of the world had been such that a constantly
diminished quantity of currency in relation to the output of other
commodities had caused a steady fall in prices, it is obvious that
there might have been a very considerable check to the enthusiasm of
industry. It has indeed been contended that the scarcity of precious
metals which, with the absence of an organised credit system, produced
this result during the later Roman Empire was a very important cause
of the decay into which that Empire fell. I do not feel at all
convinced that this effect would necessarily have followed the cause.
It seems to me that the ingenuity of enterprising man is such that the
producer might, and probably would, have found means for facing the
probability of depreciation in price. But it is always an empty
pastime to try to imagine what would have happened "if things had
been otherwise." What we do know is that a period of rising prices,
especially if the rise does not go too fast, stimulates the enterprise
of producers, and sets business going actively, and consequently it
may at least be claimed that the failure of the gold standard to
maintain that steadiness of value which is an obvious attribute of
the ideal standard has at least been a failure on the right side, by
tending to depreciation of the value of currency, and so to a rise of
the prices of other commodities. Obviously, people will tuck up their
sleeves more readily to the business of production and manufacture if
the course of the market in the product which they hope to sell some
day is likely to be in their favour rather than against them.

And when all is admitted concerning the failure of the existing
standard of value, the question is, what substitute can we find which
will carry with it all the advantages that gold has been shown to
possess, and at the same time maintain that steadiness of value which
gold has certainly lacked? We hear airy talk of an international
currency based on the credit of the nations leagued together to
promote economic peace. It is certainly very obvious that the
diplomatic relations of the world require complete reform, and the
system by which the nations at present settle disputes between
themselves has been found by the experience of the last four years to
be so disgusting, so barbarous and so ridiculous that all the most
civilised nations of the world are determined to go on with it until
it is stopped for ever. Nevertheless, obvious as it is that some kind
of a League of Nations is essential as a form of international police
if civilisation is to be rescued from destruction, it is very doubtful
whether such an organisation could, at least during the first
half-century or so of its existence, be called upon to tackle so
difficult a question as that of the creation of an international
currency based on international credit. In the first place, what will
be required more than anything else after the war in economic matters
will be the elimination of all possible reasons for uncertainty; so
much uncertainty and difficulty will be inevitable that it seems to me
to be almost criminal to add to those uncertainties by an outburst of
eloquence on the part of currency reformers if there were any danger
of their recommendations being accepted. It will be difficult enough
to know where the producers of the world are to get raw material, find
efficient labour, and then find a market for their products, without
at the same time upsetting their minds with doubts concerning some
kind of new-fangled currency that is to be created, and in which they
are to be made to accept payment, with the possibilities of changes
in the system which may have to be effected owing to some quite
unforeseen results happening from its adoption. The gold standard,
with all its failures, we do know; we also know that something may be
done some day to remedy them if mankind can produce a set of rulers
capable of approaching the question with all the knowledge and
experience required; but to substitute this system at a time of great
uncertainty for one which might or might not work would seem to be
tempting Providence in an entirely unnecessary manner at a time when
it is above all necessary to get the economic ship as far as possible
on an even keel.

If the proposed substitute is to succeed it will have to be at least
as acceptable as gold, and at the same time its quantity must be so
regulated as to be at all times constant in relation to the output of
commodities. Can we pretend that the economic enlightenment of mankind
has yet reached a point at which such a currency could be produced and
regulated by the Governments of the world and be accepted by their



_July_, 1918

A Deluge of Bonus Shares--The Effect on the Market--A Problem in
Financial Psychology--The Capitalisation of Reserves--The Stock
Exchange View--The Issue of Bonus-carrying Shares--The Case of the
A.B.C.--A Wiser Variation from Canada--Bonus Shares on Flotation--An
American Device--Midwife or Doctor?--The Good and Bad Points of Both

Of the many kinds of Bonus shares, the one which has lately been
most prominent in the public eye is that which is produced by the
capitalisation of a reserve fund. There has lately been a perfect
epidemic of this kind of Bonus share, which is almost as plentiful as
the caterpillars in the oak trees and the green fly on the allotments.
The reason for this outburst is apparently the anxiety which the
directors of many prosperous industrial companies feel lest the high
dividends which good management and sound finance in the past have
enabled them to pay should lay them open to misunderstanding and
attack by well-meaning people who think that it is a crime for a
company to earn more than a certain percentage on its capital.

This explanation was very frankly given by the directors of Brunner,
Mond and Company, when they lately capitalised part of their reserves.
The company, they stated, has for many years paid a dividend on its
Ordinary shares of 27-1/2 per cent., and "the directors feel that
there is a widespread impression that this is the rate of profit
earned on the total of the capital invested, and consequently that the
company is making an unfair profit out of its customers and the labour
it employs. This is by no means the case." It is a lamentable proof of
the backward state of the economic education of this country that it
should be necessary for well-financed and prosperous concerns to take
steps to make it quite clear to the public that they are not earning
more than they appear to be. In a well-educated community it would
be perceived at once that it is the well-financed and prosperous
companies which improve production in the interests of their
shareholders, their workmen, and the public; that the price which the
public pays for a commodity is ultimately the price at which the worst
financed and worst managed companies can just manage to keep alive;
that the higher profits earned by the better companies are not wrung
out of the pockets of the community, or their workmen, but are the
result of good management and good finance; and that the more the good
companies are encouraged to go ahead and drive the bad ones out of
existence, the better will the community be served, and the better
will be the chance of the workmen to get good wages. These platitudes
are of course, only true in a state of free competition. If there is
anything like monopoly the public and the workers are fully justified
in being suspicious and examining the source from which high dividends
are produced.

Such being the reason why this outburst of capitalisation of reserves
first began--since in these days all capitalists and those who have to
manage capital feel that they are working under criticism, which is
not only jealous and suspicious (as it should be), but is also too
often both ignorant and prejudiced--it is interesting to note that
the movement which was so started has been stimulated by its very
exhilarating effect on the market in the shares of the companies
concerned. Why this should be so it is difficult at first sight to
say. What happens is merely this--that a company, let us suppose, for
the sake of simplicity, with a capital consisting wholly of 3,000,000
Ordinary shares, has accumulated out of past profits, or out of
premiums on new issues of shares, a reserve fund of L1,000,000. Its
net profit has lately averaged L400,000, and it has, year by year,
distributed L300,000 in the shape of a 10 per cent. dividend to
its shareholders, and put L100,000 into its reserve fund, which is
represented on the other side of the balance-sheet by buildings
and plant and a certain amount of first-class investments. If the
directors now decide to capitalise that L1,000,000 of reserve fund,
the only effect is that each shareholder will be given one new share
for every three which he holds in the existing capital, the reserve
fund will be wiped out, and the ordinary capital will be increased
from L3,000,000 to L4,000,000. None of the shareholders will be in
actual fact better off to the extent of one halfpenny, because all
will be in the same position with regard to one another; their
relative shares in the enterprise will not have been altered. If we
imagine, by way of simplifying the problem, that all the Ordinary
shares were in one hand, that one holder would have had in his
Ordinary shares a claim to the total assets of the company, that is
to say, to its earning power as long as it is a going concern, and to
whatever its assets realise if it went into liquidation; the fact that
L1,000,000 worth of the assets had been bought out of past profits or
premiums paid on new issues of shares would have already added to the
value of the claim that he had on the property of the company, and no
addition would be made to that value by turning the reserve fund into

In other words, the reserve fund is already the property of the
shareholders, and to convert it from reserve fund into capital, making
them a present of new shares, which merely represent their claim
to the assets held against the reserve fund, is as empty a gift as
presenting a man with a piece of paper informing him that he is the
owner of his own hat. All this remains equally true if, besides the
ordinary capital, there is a considerable amount outstanding of
Preference shares and Debenture debt. In any case, the Ordinary
shareholders possess a claim to the earning power of the company when
prior charges have been satisfied, and to whatever surplus may remain
on liquidation after first charges have been paid off in full. Whether
that interest of theirs is represented by a larger or smaller number
of shares, or by shares of a larger or smaller denomination, or by a
reserve fund upon which they have a claim when all other claims have
been settled makes no difference whatever as a matter of academic
fact. Apart from the sentiment of the matter, there is no reason why
ordinary capital should have any nominal value.

As to the earning power of the company, that, of course, is not
affected one whit by the process. The earning power of the company is
all in the assets--the plant, machinery and other property--plus
the elusive qualities which are bound up in the word "goodwill,"
representing the selling power, organisation, and the expectation of
future profits. The capitalisation of the reserve simply affects the
manner in which the liabilities of the company are arranged, and
the existence of a reserve fund merely means that the Ordinary
shareholders have a claim to a larger amount than their nominal
holding in case of liquidation. It does not matter in the least
whether this larger claim is handed to them in the shape of a
certificate, since the nominal amount of their claim has nothing
whatever to do with the amount that their claim realises to them
annually in the shape of dividends, or in the event of liquidation,
from the realisation of the company's assets.

In fact, the capitalisation of reserves is sometimes criticised by
economic purists as a retrograde step because it seems likely to
encourage the directors to be extravagant in the matter of dividends.
In the example which we supposed above of the company with a capital
of three millions and reserve fund of one million, if the reserve fund
is turned into Ordinary shares and the earning power of the company
remains the same there may obviously be a temptation to the directors
to modify the prudent policy under which they had hitherto placed one
hundred thousand a year to reserve, because if they continued it the
shareholders would discover they were really no better off and that
they simply got a lower rate of dividend on the larger amount of
shares, and that their actual receipts from the company were exactly
the same as before. And if the earning power of the company remained
the same and the directors left off placing the one hundred thousand
a year to reserve, and paid away the whole of the net profit in
dividend, it is clear that the progressive expansion of the company's
business would be to that extent checked. On the other hand, there is
a contrary argument that as long as the company has a large reserve
fund there is a possibility that dissatisfied shareholders may agitate
for a realisation of sufficient assets to enable that reserve fund to
be distributed, especially if it has been wholly acquired out of past
profits. In this case the capitalisation of the reserve fund puts this
temptation out of their reach since, when once the reserve fund has
been capitalised, it can only be got at by greedy shareholders through
the process of liquidation. Since, however, the shareholder in these
times is not quite so short-sighted as he used to be, there is not
perhaps really very much advantage in this point.

But since, as has been shown, capitalisation of reserves has no effect
upon the earning power and assets of the company, it is interesting to
try and discover why the rumour and announcement of such an intention
on the part of the board of directors is nearly always accompanied by
a rise in the shares of the company affected. If the shareholder is
merely to be given a larger nominal claim, which does not in the least
affect the value of the assets which that claim concerns, and if the
relative amount of his claim is exactly the same with regard to the
other shareholders, it is clear that the rise in the value of the
shares is based entirely either on a psychological mistake on the part
of the public and its financial advisers, or on the fact that the
transaction called attention to the value of the shares which have
hitherto been undervalued in the market. Probably the movement arises
from both these causes. A large number of people think they are better
off if they have a larger nominal share, without considering that
all the other shareholders are at the same time having their claim
increased, that the assets to which they all have a claim are not
being increased, and that, consequently, if a sharing-out process were
to take place they would all be exactly as they would have been if
no such capitalisation of reserves had been carried out. And if a
sufficient number of people think that a share or any other commodity
is more valuable, it thereby becomes more valuable, because value is
nothing else than the amount, whether in money or other commodities,
at which a commodity can be disposed of.

But it is also true that there are, at all times, a very large number
of securities, especially in the industrial market, which would
stand higher if their earning power and position were more closely
scrutinised. This is very clearly seen to be the case from the
apparently extravagant prices at which insurance companies, for
example, sometimes buy the businesses of one another. They give a
price which is considerably above the market value of the concern as
represented by the price of its shares. Critics say that the terms are
extravagant, and yet the deal is found to be highly profitable to the
buying company. The profit of the deal, of course, may be increased by
the advantages of amalgamation, but quite apart from that it is clear
that the market price of securities very often undervalues, as it
also, perhaps, still oftener overvalues, the real position of the
companies on whose earning powers they represent claims. In any case,
there is the fact that these capitalisations of reserve funds, which
make no real difference to the actual position of the company, are
universally regarded, in the language of the Stock Exchange, as "bull
points." It is assumed, of course, that the directors would not carry
out such an operation unless they saw their way to a higher earning
power in the future as a justification for the larger capital. In this
expectation the directors might be right or wrong, and, even if they
are right, that prospect of higher earning power, if market prices
could be relied upon to express the true position of a company, would
have been "in the price."

There is another kind of Bonus share, which is not exactly a Bonus
share, but carries a bonus with it. This comes into being when the
directors of a company sell new shares to existing shareholders at a
price below the terms which they might have obtained if they made a
new issue to the general public. The classical example of this system
is the Aerated Bread Company, that concern to which City clerks and
journalists and others owe so much as pioneers of cheap and simple
catering. It will be remembered that in the palmy days of this
company, before it had been severely cut into by competition, its L1
shares used to stand in the neighbourhood of L15. The directors used
then to make issues of new shares to existing shareholders at their
face value, that is to say, at L1 per share, although it was obvious
that if they had made a public issue inviting all and sundry to
subscribe they could have sold their new issues at or above L14
per share. This system put an enormous bonus in the pockets of the
existing shareholders at the expense of the company and its future
prospects. The directors practically gave to the existing shareholders
a present of L130,000 if they sold them 10,000 new shares for L10,000,
which they and the public would have readily subscribed for at
L140,000. There was nothing wicked about the process, but it was
extremely short-sighted. If the company had retained the monopoly
which its pioneer work as a cheap caterer for a long time secured
it, it might have kept its prosperity unimpaired even by this
short-sighted finance. As it was, attracted several competitors, some
of which were extremely well managed and financed, and although it
still does a most useful work for the community, its earning power has
suffered considerably. But this is only an extreme example of a system
which is reasonable enough if it is not carried too far. The Canadian
Pacific Railway, for instance, has for many years adopted a very
moderate use of this system, making new issues to its shareholders on
terms rather cheaper than it could have obtained by a public issue,
but not giving away enough to impair its future seriously in order
to make presents to the existing stockholders by this means. By the
continued making of small presents to their constituents the directors
of the company have obtained the support of a very loyal body of
stockholders, who feel that they are being well treated but not
pampered. This system of granting a small bonus to existing
shareholders on occasions when the company has to issue new capital is
one which is quite unobjectionable as long as it is not abused. If,
owing to the use of it, the directors are encouraged to finance
themselves badly, that is to say, to pay out of new capital for
improvements and extensions which a more prudent policy would have
financed out of earnings, just because they find that these issues
carrying a small bonus makes them popular with the stockholders, then
the system is being abused. Otherwise there seems no reason to object
to a measure which keeps the shareholders happy and does not do any
harm to the concern so long as it is worked in moderation.

Finally, there is a Bonus share or stock which does not represent
accumulation out of vast profits or issues of new shares at a premium,
and does not involve a bonus by the sale to existing shareholders at
a price below the terms which could be got in the market, but is at
first sight pure water, representing merely possibilities, perhapses,
and potentialities. This kind of Bonus share is chiefly known on the
other side of the Atlantic, and is usually damned with bell, book and
candle by purists among English financial critics. We say on this side
of the water that every pound of an English well-financed company
represents a pound which has actually been spent and put into tangible
assets which help the company to earn profits. This boast is by no
means true, since nearly all industrial companies come into being with
something paid for in the shape of goodwill, which is of enormous
importance, but can hardly be called a tangible asset; and even in the
case of our railway companies, many millions of original capital went
into Parliamentary and legal expenses, which have been, in one sense,
dead capital ever since, though without this expenditure the railways
could never have got to work. The American system of Common shares,
representing what appears to be water, is only a modification of what
every company has to do, in one form or another, on this side or
anywhere in the world. Wherever an existing business is bought out
something has to be given over and above the old iron value of the
concern for the value of the connection and other intangible assets.
Wherever an entirely new industry is started it has to meet certain
initial expenses. It has to placate, to use the unpleasant American
word, various interests in order to get to work, or it has to lay out
money, in building up a concern by advertising or otherwise. It is
impossible that every penny which is put into it will go into actual
buildings, plant, machinery, and stock-in-trade.

In America the system has been preferred by which the actual tangible
assets of a new concern are financed wholly or largely by issues of
bonds or Preferred stock, and the Common stock is given away to those
interested in the promotion, for them either to hold or to use in
order to secure the co-operation of those who may be useful, or modify
the opposition of those who may be dangerous. The net result of it is
that the Common stock is represented in fact by goodwill or the power
to get to work. If the company prospers, then it is the business of
those who hold these Common shares to see that assets are accumulated
out of profits, to be held against their Common stock, so squeezing
the water out of it and making it good. The system thus possesses this
very considerable advantage, that those who promote a company are
interested in its future welfare, and watch over it and guide it
through its subsequent existence, putting energy and good management
at its disposal in order that the paper which they hold may be
represented, not by water, but by real assets, and so may bring them a
tangible reward. It has thus in some ways a great advantage over the
English system, by which the company promoter is too often concerned
merely in the immediate success of the promotion. He is, as one of the
greatest of them described himself, a mere midwife, who brings the
interesting infant into the world, pats its little head, says good-bye
to it, and leaves it to take care of itself throughout its troubled
existence. By the American system the promoter is not a midwife but a
doctor who assists at the birth of the infant, and also watches over
its youth and makes every effort to guide its toddling footsteps in
such a way that it may grow into lusty manhood. It is not until he has
done so that he is enabled, by the sale of the shares which were given
to him at the beginning, to realise the full profit which he expected.
The profits realised by this method are in many cases enormous. On
the other hand, the amount of work that is put in to secure them is
infinitely greater than happens in the case of the English midwife
promoter; and if the enterprise is a failure, then the promoter goes
without his profits.

The system, like everything else, is liable to abuse, if a rascally
board of directors, in a hurry to unload their holding of Common stock
on an unsuspecting public, makes the position and prospects of the
company look better than they are by unscrupulous bookkeeping and
extravagant distribution of profits, earned or unearned. These things
happen in a world in which the ignorance of the public about money
matters is a constant invitation to those who are skilled in them to
relieve the public of money which it would probably mis-spend; but,
if well and honestly worked, the system is by no means inherently
unsound, as some English critics too often assume, and it has been
shown that it carries with it a very great and substantial advantage
in the hands of honest people who wish to conduct the business of
company promotion on progressive lines.



_August_, 1918

Bank Fusions and the State--Their Effects on the Bank of England--Mr
Sidney Webb's Forecast--His Views of the Benefits of a Bank
Monopoly--The Contrast between German Experts and British
Amateurs--Bankers' Charges as affected by Fusions--The Effects of
Monopoly without the Fact--The "Disinterested Management" Fallacy--The
Proposal to split Banking Functions--A Picture of the State in

A few months ago, writing in this Journal on the subject of banking
amalgamations, I referred to one of the objections against them, that
they tended towards the creation of monopoly, and so encouraged hope
on the part of those who would like to see all forms of industry
managed by the State, that the banking business might sooner or later
be taken over and worked as a State monopoly. At that time this danger
of monopoly seemed to be still fairly remote, but since then the
progress of amalgamations has brought it appreciably nearer, and
so has vigorously stimulated both the hopes and fears of those who
consider that it tends to bring nearer the seizure of banking business
by the State. The fear is expressed by Sir Charles Addis, manager of
the Hongkong Bank and director of the Bank of England, in the July
number of the _Edinburgh Review_ in a very interesting article on the
"Problems of British Banking." Sir Charles observes that:

"It may even be questioned whether the gigantic size they have
already attained does not constitute a menace to the predominant
position which the Bank of England has hitherto enjoyed as the
bankers' bank. How will the Bank of England be able to maintain
its supremacy and control the money market, surrounded by banks
individually greater and more powerful than itself, especially
when the object in view is by raising the rate of interest to
prevent an internal or external drain upon our gold reserve? It is
even conceivable that the finance of the State may be threatened,
and it is probably for this reason that in Germany the Prussian
Minister is said to be considering a State monopoly of banking.
Nor can the psychological effect of these great aggrandisements of
capital in the hands of a few banks be ignored. They are virtually
Government-guaranteed institutions. The insolvency of one of
the great banks would involve such widespread disaster that no
Government could stand aside. They would be compelled to make use
of the national resources in order to guarantee the solvency of
private banks. From Government guarantee to Government control
is but a step, and but one step more to nationalisation. We are
playing into the hands of Mr Sidney Webb and the Socialists."

As it happens, in the July number of the _Contemporary Review_, Mr
Sidney Webb was developing the same theme, namely, the inevitability
of banking monopoly and the necessity, as he conceives it, of
defeating private monopoly for the sake of profit, by State monopoly
to be worked, as he hopes, in the public interest. His article is
headed by the rather misleading title, "How to Prevent Banking
Monopoly," for, as has been said, Mr Webb very much wants monopoly,
says that it cannot be helped, and sees the fulfilment of some of his
pet Socialistic dreams in the direction of it by the bureaucrat whom
he regards as the heaven-sent saviour of society. His very interesting
argument is most easily followed by means of a series of quotations.

"We are, it is said, within a measurable distance of there
being--save for unimportant exceptions--only one bank, under
one general manager, probably a Scotsman, whose power over the
nation's industry would be incalculable. Even in the crisis of the
war the matter is receiving the attention of the Government.

"In the opinion of the present writer, the amalgamation of banks
in this country, which has been going on continuously for a
century, though at varying rates, and is being paralleled in
other countries, notably in Germany, and latterly in the Canadian
Dominion, is an economically inevitable development at a certain
stage of capitalist enterprise, and one which cannot effectively
be prevented."

Mr Webb considers that there is no economic limit to this policy of
amalgamation, and that the gains it carries with it are obvious. He
dilates upon these as follows:--

"It may be worth pointing out:

"(a) That apart from the obvious economies in the cost of
administration, common to all business on a large scale, there is,
in British banking practice, a special advantage in a bank being
as extensive and all-pervasive as possible. Where distinct banks
co-exist, there can be no assurance that the periodical shifting
of business, the perpetual transformations in industrial
organisation, the rise and fall of industries, localities or
firms, the changes of fashion and the ebb and flow of demand,
and even a relative diminution of reputation may not lead to a
shrinking of the deposits and current account balances of any one
bank, or even of each bank in turn. Accordingly, every bank has to
maintain an uninvested, or, at least, a specially liquid, reserve
to meet such a possible withdrawal. The smaller, the more
numerous, the more specialised by locality or industry are the
competing banks, the larger must be this reserve. On the other
hand, if all the deposit and current accounts of the nation were
kept at one bank, even if it has innumerable branches, as the
experience of the Post Office Savings Bank shows, no such shifting
of business would affect it; no mere transfers from firm to
firm or from trade to trade would involve any shrinking of its
aggregate balances; and it would need only to have in hand,
somewhere, sufficient currency to replenish temporarily a local
drain on its 'till money.' The nearer the banks can approach to
this condition of monopoly, not only the lower will be their
percentage of working expenses, but also the greater will be the
financial stability, and the smaller the amount that they will
need to keep uninvested in order to meet possible withdrawals.

"(b) That the process of amalgamation has involved an
ever-increasing elimination, from the British banking business, of
the typical profit-maker, first as partner in a private bank, then
as a director in a Joint Stock bank, representing a large personal
holding of shares; and the gradual transfer of practically the
whole conduct of the business to what may be called 'disinterested
management'--that is to say, management by trained, professional
officers serving for salaries, whose remuneration bears no
relation to the profit made on each piece of business transacted.
The part played in the business by the directors themselves seems
to be, with every increase in the magnitude and scope of the
concern, steadily diminishing; and these directors, moreover, come
to be chosen, more and more, not because of their large holdings
of shares, or because of their ancestral or personal connection
with banking, but because of their reputation or influence,
commercial, social or political. The result is that, along with
the process of amalgamation, there has been going on a transfer
of the whole management of banking to the hierarchy of salaried
officials; whilst the supreme decisions on financial policy are in
the hands, in practice, of a very small group of salaried general
managers, only partially in consultation with an equally small
group of chairmen of boards of directors, themselves usually
drawing not inconsiderable salaries."

It seems to me that Mr Webb exaggerates in rather a dangerous degree
the reduction, through amalgamation, of the necessity which obliges
a bank to keep a considerable reserve of cash. It is quite true that
under normal circumstances cash withdrawn from one bank finds its way
in due course to another, and that with regard to these mere "till
money" transfers there might be a considerable reduction in the amount
of cash required if all the banking of the country were in the hands
of one business, so that what was withdrawn from one branch would
be paid into another. But this fact would not alter the need which
compels a bank to keep considerable reserves in cash in order to
provide against the possibility of a run. A State bank, if the public
takes it into its head that it prefers to have a larger proportion of
currency in its own pocket rather than in its bank, may find itself
pulled at for cash just as vigorously as a bank managed by private
enterprise. This was shown in August, 1914, when very large sums were
withdrawn from the Post Office Savings Bank during the crisis which
then impelled many members of the public to hoard money, or compelled
them to take it out of their banks because they did not find that the
ordinary system of payment by cheques was working with its usual ease.

Moreover, Mr Webb's point about what he calls disinterested
management--that is to say, the management of banks by officers whose
remuneration bears no relation to the profit made on each piece of
business transacted--is one of the matters in which English banking
seems likely at least to be modified. Sir Charles Addis, in the
article already referred to, calls attention in a very striking
passage to the efficiency of the administration of German and English
banks, and makes a comparison between the remuneration given to the
banking boards of the two countries. The passage is as follows:--

"Scarcely second in importance to the financial strength of a
bank is the efficiency of its administration. The German board of
direction is composed, to an extent unknown in England, of men
possessed of professional and technical knowledge. No one who has
been present at a meeting of German bank directors in Berlin, when
some foreign enterprise has been under consideration, can have
failed to be impressed by the animation with which it was
discussed, and by the expert and comparative knowledge displayed
by individual directors of the enterprise itself and of the
conditions prevailing in the foreign country in which it was
proposed to undertake it. He may have been led to reflect ruefully
upon the different reception his project met with in his own
country. He will recall the meeting of the London board; the
difficulty of withdrawing its members even temporarily from their
country pursuits and their obvious anxiety to lose no time in
returning to them; most of them old men, many of them long retired
from business; some of them ex-Government officials and the like,
who have never been in business; a few ornamental titled persons;
only one or two here and there who have no train to catch and are
willing to discuss the matter in hand with attention, and, it may
be, with understanding.

"It would be idle to pretend that a board of this kind constitutes
anything like the nexus between industry and finance which obtains
in Germany, and which is very much to be desired in this country.
It may be that we do not pay our men enough. A London director has
to be content with an honorific position, a fee of a few hundred
pounds a year, and, it must be added, a very exiguous degree of
responsibility. That is not enough to attract men in the prime of
life with expert or technical knowledge of industry and finance,
who would have to submit to a reduction in the large incomes they
are earning by the exercise of their special abilities if they
were to accept a seat on the board of a bank. There are two things
which a good man, in the business sense of the term, will not
do without--pay and responsibility. Give him sufficient of the
former, and you may saddle him with as much of the latter as you
like. You may not always get good men by offering them good pay,
but you will certainly not get them without doing so. Apparently
shareholders are content so long as their profits are not reduced
by more than nominal directors' fees. At a recent meeting of a
bank with deposits of over L200,000,000 the proposal to increase
the directors' fees to L1000 a year was met by the rejoinder from
one of the shareholders present that he did not know what the
directors would do with such a sum.

"They manage these things differently in Germany. In the three
banks to which we have already referred, after payment by the
Deutsche Bank of 5 per cent. of the net profits to reserve, and
of the ordinary dividend of 6 per cent., and by the
Disconto-Gesellschaft and the Dresdner Bank of 4 per cent., the
directors receive respectively 7 per cent., 7-1/2 per cent., and
4 per cent. (the Disconto's personally liable partners receive 16
per cent.) out of the remainder. The directors are bound by law
to supervise all the details of the bank's business, and to keep
themselves well informed as to its general policy and methods of
management. They are bound by law to exercise the caution of
a careful business man, and are liable to be sued for damages
arising out of the crime or negligence of their employees. If
cases of this kind are seldom brought to public notice, it is not
because they do not occur, but because the directors, as a rule,
prefer to pay up for the laches of their employees, as they can
well afford to do out of their profits, rather than be haled
before the Court."

When Mr Webb comes to the question of the dangers resulting from
monopoly, he finds that they lie chiefly in a restriction of
facilities, and in raising the price exacted for them, and that in
both respects the danger appears to be great. There is, he says, every
reason to expect that the banker, as the nearest approach to the
"economic man," will take the opportunity of raising his charges
either by increasing the frequency and the rate of the commission
exacted for the keeping of a small account, or by reducing the rate of
interest allowed on balances, or adopting the common London practice
of refusing it altogether. "The banker, who is not in business for his
health, may be expected, on this side of his enterprise, to pursue the
policy of 'charging all that the traffic will bear.' It would probably
pay the banker actually to refuse small accounts, and to penalise the
employment of cheques for small sums. This would be a social loss."

With regard to the other side of his business, lending to the
borrowers, Mr Webb thinks it need not be assumed that the monopolist
banker will actually lend less, because he will seek at all times to
employ all the capital or credit that he can safely dispose of, but Mr
Webb thinks that he is likely, as the result of being relieved of the
fear of competition; to feel free to be more arbitrary in his choice
of borrowers, and therefore able to indulge in discrimination against
persons or kinds of business that he may dislike; that he will raise
his charges generally for all accommodation, again, theoretically
to "all that the traffic will bear"; and, finally, that in times of
stress with regard to all applicants, and at all times with regard to
any applicant who was "in a tight place," that he will extort as the
price of indispensable help a theoretically unlimited ransom.

Such are the effects which Mr Webb fears from the process which has
already put the control of the greater part of the banking facilities
of England into the hands of five huge banks. He thinks that these
things may happen long before it is a question of an absolute monopoly
in one hand. A monopoly, he says, may be more or less complete, and
the economic effects of monopoly may be produced to a greater or less
degree at a point far below a complete monopolisation in a single
hand. There is much truth in this contention of his. Amalgamation has
now come to such a point that every new one not only brings absolute
monopoly more closely in sight, but increases the ease with which
agreements among the huge banks might suffice to produce the effects
of monopoly without further amalgamations. Mr Webb goes on to
argue that it is impossible to stop by legislative prohibition or
restriction the progress towards economic monopoly where such progress
is financially advantageous to those concerned, and that the only
remedy ultimately by which the community can be protected from the
dangers which he sees threatening it is for the community to take the
monopoly into its own hands, and so to get rid, not of the monopoly,
which, from the standpoint of national organisation, he thinks is
advantageous, but of the motives leading to extortion. If, he says,
"no shareholders are in control with their perpetual and insatiable
desire for profit, there is no inducement to take advantage of the
needs or helplessness of the customers by restricting service or
raising prices." In this sentence, of course, he begs the whole
question between the advantage of private enterprise and of
Socialistic organisation. Private enterprise works for profit, and
therefore makes as much profit as it can out of its customers. It is,
therefore, according to Mr Webb's argument, probable that if private
enterprise in banking is able to establish monopoly it will squeeze
the public to the point of restricting banking facilities and making
them dearer. No one can deny that there is some truth in this
contention, but, on the other hand, it may very fairly be argued that
modern business has perceived the great advantages of a big turnover
and small profits on each transaction. The experience of the great
insurance companies, and of great catering companies, and of enormous
private organisations such as the Imperial Tobacco Company, has shown
the enormous advantage of providing cheap facilities to the largest
possible number of customers; so that fears of natural restriction of
banking facilities, through monopoly, if they cannot be set altogether
aside, are not by any means a certain consequence even of the
establishment of monopoly in private enterprise.

Still weaker is Mr Webb's assumption that if the interests of the
shareholders with "their perpetual and insatiable desire for profit"
were eliminated, cheap and plentiful banking facilities would
inevitably result from bureaucratic management. The contrary has
been shown to be the case in the examples of the Post Office, of the
Telephone Service, and the London Water Supply. In the case of the
telegraph and the telephones, the Government took over prosperous
businesses, and has managed them at a loss. In the matter of the Post
Office it is not possible to compare the Government with individual
enterprise, but it will generally be admitted that the Telephone
Service has by no means been improved since the Government took it
over. Mr Webb points out that nationalisation, whether of banks or of
other forms of enterprise, does not necessarily mean government under
a Minister by a branch of the Civil Service. But it is impossible to
ignore the fact that as soon as nationalisation takes place those who
are responsible for the management of the enterprise are practically
certain to develop the qualities and idiosyncrasies of civil servants,
which are so unlikely to tend to elasticity, rapidity and efficiency
in business management.

In fact, Mr Webb practically grants this point by the very interesting
development he suggests by which the two chief functions of banking
should be differentiated, and one of them should be nationalised
and the other should remain in the hands of private enterprise. He
develops this truly ingenious suggestion as follows:--

"Just as we have (except for some obsolescent survivals) separated
the function of issuing paper money from that of keeping current
accounts, so we shall separate the function of keeping current
accounts from that of money-lending. The habit of the British
banker of combining in one and the same concern (_a_) the
essentially routine business of keeping current accounts or
receiving deposits; and (_b_) the much more difficult and
hazardous business of lending capital to private traders, is not
a necessary characteristic of banking organisation; and, whilst
possibly the most profitable to the profit-seeking banker, this
combination may not be the most advantageous from the standpoint
of the community.

"It may accordingly be suggested that the business of banking, as
understood in this country, is destined to be further divided into
two parts, one of which is ripe for immediate nationalisation, and
need no longer be carried on for private profit, whilst the
other should be the sphere of a number of separate and diversely
specialised organisations catering for particular needs. The whole
of the deposit and current account side of banking--with its
services in the way of keeping securities, collecting dividends,
meeting calls, making regular payments, and carrying through the
purchase and sale of securities--ought to be united with the Post
Office and Trustee Savings Banks and the money order and other
postal remittance business, and run as a national service for the
receipt and custody of cash, for the utmost possible development
of the cheque system, and for the cheapest possible organisation
of remittances. There is no longer any reason why this important
branch of social organisation should be abandoned to the
profit-maker, should be made the instrument of levying an
unnecessarily heavy toll on the customers for the benefit of
shareholders, and should now be exposed to the imminent danger of

"If the receipt and custody of deposits and the keeping of current
accounts were made a public service the Government might invest
the funds thus placed at its disposal in a variety of ways. A
certain proportion, perhaps corresponding to what is now held
as savings, would be invested, as at present, in Government
securities--not Consols, but such as are repayable at par at fixed
dates, including Treasury Bills and Terminable Annuities; and any
increase in this amount would, in effect, release so much capital
for other uses, by paying off part of the National Debt. But the
bulk of the amount, corresponding with the proportion of their
resources that the bankers now lend for business purposes, might
be advanced, for terms of varying duration, partly to Government
Departments and local authorities for all their great and rapidly
extending enterprises, formerly abandoned to the profit-maker; and
partly to a series of financial concerns, whose business it should
be to discount the bills and satisfy the requests for loans of
those profit-makers who now appeal to the bankers. But these
financial concerns should be organised, it is suggested, very
largely by trades and industries, specialising in particular
lines, and devoted, so far as possible, to meeting the business
needs of the different occupations. Whether they should be
financial concerns, owned and directed by shareholders, and ran
for their profit; or whether they might not, in some cases, be
owned and directed by the great industrial associations and
combinations that the Government is now promoting in the various
industries, and be run for the advantage of the industries as
wholes, may be a matter for consideration and possible experiment.
In either case, the concerns to which the Government would lend
its capital would, of course, have to be of undoubted financial
stability to be secured, it may be, by large uncalled capital,
or by the joint and several guarantees of a numerous membership;
coupled, possibly, with a charge on the assets."

At first sight this proposal to differentiate the functions of banking
is somewhat startling, and one wonders whether it could possibly
work. On consideration, however, there seems to be nothing actually
impracticable about the scheme. The Government would presumably take
over all the offices and branches of the banks of the country, and
would therein accept money on deposit and current account, making
itself liable to pay the money out on demand or at notice, as the
case may be, just as is done by the existing banks; it would hold
the necessary cash reserve, and it would apparently itself invest a
certain proportion of the money in Government securities, as the banks
do at present. The more difficult part of the banking business, the
advancing of money to borrowing customers, it would hand over to
financial institutions, created for this purpose presumably out of the
ashes of the nationalised banking business. These institutions would
make themselves responsible for the lending side of banking, and would
obviously, and naturally, be allowed to make a profit on this side of
the business. In this differentiation Mr Webb's ingenuity is seen at
its very best. He reserves for the State that part of banking which is
purely a matter of routine, and he leaves to private enterprise that
part of it which requiries the elasticity and judgment and quickness
in which the average bureaucrat is most likely to fail. A certain
amount of friction may easily arise from this differentiation. The
interest that the State would be enabled to allow to depositors would
clearly depend to a great extent on the interest which it would be
able to receive from the financial institutions engaged in lending
the money. These institutions could naturally pay the State interest
according to the rate which they were able to charge their borrowing
customers, leaving themselves a margin for profit and for protection
against the risk that their business would involve. It is obvious that
there might at times be considerable difficulty in adjusting these two
different points of view, and anybody who knows anything about the
length of time and argument involved in inducing officials to make up
their minds can only fear that occasional jarring in this connecting
link between the two sides of banking might sometimes produce effects
which would be awkward for the industry of the country.

But apart from this obvious difficulty, can we contemplate with
equanimity the prospect of the State monopoly of the ordinary banking
facilities as they present themselves to the man in the street,
namely, the provision of bank branches, the use of the cheque book,
the custody of securities and any other articles that the customer
wishes to leave with his bank? At present the ease and quickness with
which these routine matters of banking are carried out in England are
developed to a point which is the envy of foreign visitors. How would
it be if every cashier of every bank were converted by the process of
nationalisation from the kindly, businesslike human being as we know
him into the kind of person who ministers to our wants behind the
counters of the Post Office? As it is, we go into our bank, to present
a cheque in order to provide ourselves with cash for the daily
purposes of life; the cashier looks at the signature, recognises
the customer, hands him over the money. If that cashier became
a Government official how long would it take him to verify the
signature, to see whether the customer really had a balance to his
credit, and finally furnish him with what he wanted? It is obvious
that the change suggested by Mr Webb, though it might work, could
only work to the detriment of the convenience of the public, and his
hopeful view that the elimination of the profits of the shareholders
would mean that these profits would go into the pockets of the
community in the form of cheapened facilities for banking customers
is an ideal largely based on the assumption, that has so often been
proved to be incorrect, that the State can do business as well and as
cheaply as private enterprise. It is much more likely that after a
few years' time the public would find the business of paying in and
getting out its money a very much more tedious and irritating process
than it is at present, and that the expenses of the matter would
have grown to such an extent that the taxpayer might be called upon
annually to make good a considerable loss.



_September_, 1918

The Difference between Aims and Acts--Should Foreign Capital be
allowed in British Industry?--The Supremacy of London and National
Trade--No Need to fear German Capital--We shall need all we can
get--Foreign Shares in British Companies--Can and should the
Disclosure of Foreign Ownership be forced?--The Difficulties of
the Problem--Aliens and British Shipping--The Position of "Key"
Industries--Freedom to Import and Export Capital our Best Policy.

Many things that are now happening must be tickling the sardonic
humour of the Muse of History. The majority of the civilised Powers
are banded together to overthrow a menace to civilisation, carrying
on a war which, it is hoped, is to produce a state of things in which
mankind, purged of the evil spirits of militarism and aggression, is
to start on a new order of co-operation. At the same time, while
we are engaged in fighting under banners with these noble ideals
inscribed on them, a large number of citizens of this country are
airing proposals aimed at restrictions upon our intercourse with other
nations, especially in the economic sphere. In last month's issue of
this Journal a very interesting article, signed "Veritas," discussed
the question as to how far it was in the power of the Allies to make
use of the economic weapon against their enemies after the war. That
such a question should even be mooted as an end to a war undertaken
with these objects, shows what a number of queer cross-currents are
at work in the minds of many of us to-day. But some people go much
further than that, and are advocating policies by which we should
even restrict our commercial and economic intercourse with our
brothers-in-arms. If the clamour for Imperial preference is to have
any practical result, it can only tend to cultivate trade within the
British Empire, protected by an economic ring-fence at the expense
of the trade which, before the war, we carried on with our present
Allies. And a large number of people who, under the cover of Imperial
preference, are agitating also for Protection for this country, would
endeavour to make the British Isles as far as possible self-sufficient
at the expense of their trade, not only with all their present Allies,
but even with their brethren overseas.

It is fortunately probable that the very muddle-headed reasoning which
is producing such curious results as these, at a time when the world
is preparing to enter on a period of closer co-operation and improved
and extended relations between one country and another, is confined,
in fact, to a few noisy people who possess in a high degree the
faculty of successful self-advertisement. I do not believe that the
country as a whole is prepared to relinquish the economic policy which
gave it such an enormous increase in material resources during the
past century, and has enabled it to stand forward as the industrial
and financial champion of the Allied cause during the difficult early
years of the war. Our rulers seem to be sitting very carefully on the
top of the fence, waiting to see which way the cat is going to
jump. They have made brave statements about abrogating all treaties
involving the most-favoured nation clause and about adopting the
principle of Imperial preference; but when their eager followers press
them to do something besides talking about what they are going to do,
they then have a tendency to return to the domain of common-sense and
to point out that it is above all desirable that our economic policy
should be in unison with that of the United States.

Whatever may happen in the realm of trade and commercial policy, it
would seem to be self-evident that with regard to capital it would be
still more difficult and undesirable to impose restrictions than with
regard to the entry of goods; and above all, it seems to be obvious
that at any rate the free entry of capital into this country is a
matter which should be specially encouraged when the war is over. At
that difficult period we have to secure, if possible, that British
industry shall be entirely unhampered in its endeavours to carry out
the very puzzling operations involved by transferring its energies
from war activities to peace production. However well the thing may
be managed, it will be an exceedingly difficult and complicated
operation. In certain industries, especially in shipbuilding and
engineering, the building trade and all the allied enterprises, those
who are responsible for their efficient management ought to be able to
count upon a keen and widely-spread demand for their products. But in
many industries there will necessarily be a good deal of doubt as to
the kind of article which the consuming public at home and abroad is
likely to want. There will be the great difficulty of sorting out the
right kind of labour, of obtaining the necessary raw materials, and of
getting the necessary credit and capital.

That this huge problem can be solved, and solved so well that the
country can go ahead to a great period of increased productivity and
prosperity, I fully believe; but this can only be done if it is able
to command the most efficient co-operation of all the various factors
in production--if employers put their best brains and if workers put
their best energy into the business, and if everything is done to make
the whole machinery work with the utmost possible smoothness. One
element in the machinery, and a highly important one, is the question
of capital. During the war the citizens of this country have been
trained to save and to put their money at the disposal of the
Government with a success which could hardly have been expected
when the war began. Whether they will continue to exercise the same
self-denial when the war is over Is a very open question. At any rate,
there can be no doubt that there will be a tendency among a very large
number of people who have answered the appeal to save money for the
war to listen with considerable indifference to any appeals that
may be made to them to save money in order to provide industry with
capital. All the capital that industry can get, it will certainly
want. If, besides what it can get at home, it can also get a
considerable amount from foreign countries, then its ability to resume
work on a prosperous and profitable basis when the war is over will be
very greatly helped. This would seem to be so obvious that one might
have thought that even a Government which is believed to be flirting
with what is called Tariff Reform would think twice before it imposed
any restrictions on the free flow of foreign capital into British
industry. In so far as foreigners lend to us we shall be able to
import raw materials, to be worked up to the profit of British
industry, in return for promises to pay--very timely convenience at a
critical moment.

Nevertheless, it would appear that obviousness of the desirability of
foreign capital, from whatever source it comes, is by no means evident
to those who are now in charge of the nation's destinies. At any rate,
the Company Law Amendment Committee, which was appointed last February
"to inquire what amendments are expedient in the Companies Acts, 1908
to 1917, particularly having regard to circumstances arising out of
the war and of the developments likely to arise on its conclusion,"
seems to have thought it necessary to provide the Government with
schemes by which alien capital could, if the Government thought
necessary, be kept out of the country. It was a powerful and
representative Committee, and it is very satisfactory to note that its
own view concerning the policy to be pursued was strongly in favour of
freedom. It points out in its Report that the question which lay in
the forefront of its investigations was that of the employment of
foreign capital in British industries. On the preliminary question
of whether it was desirable that foreign capital should be freely
attracted to this country, there was little, if any, difference of
opinion. For this very sensible conclusion the Committee gives rather
a curious reason. It states that the maintenance of London as the
financial centre of the world is of the first importance for the
well-being of the Empire, and that anything which could impede or
restrict the free flow of capital to the United Kingdom would, in
itself, be prejudicial to Imperial interests.

Now, of course, if is entirely true that the maintenance of London
as a financial centre is very important, but I venture to think that
those who are most jealous concerning the prestige of London and the
importance of its financial operations would say that it ranks only
second to the industrial efficiency of the country as a whole and
cannot, in fact, be long maintained unless there is that industrial
efficiency behind it, providing a surplus out of which London may be
able to finance the world and so, incidentally, and as a side issue,
be to a great extent helped by foreign capital to do so. It is surely
evident that a financial supremacy which was based merely on a jobbing
business, gathering in capital from one nation and lending it to
another, would be an extremely precarious and artificial structure,
the continuance of which could not be relied on for many decades.
Finance can only flourish healthily and wholesomely in a country which
produces a considerable surplus of goods and services which it
is prepared to place at the disposal of the world. Owing to the
possession of this surplus it becomes a market in capital, and so gets
a considerable jobbing business, but the backbone and foundation of
its position must be, in the end, industrial activity in the widest
sense of the word. It therefore seems that the Committee's argument
that the free flow of capital is essential to the maintenance of
London's finance might have been reinforced by the very much stronger
one that it is essential to the recuperative power of British
industry, which will need every assistance it can get in order to
re-establish itself after the war.

The Committee points out that "any legislation which would tend
to impede or restrict the free flow of capital here by imposing
restrictions or creating impediments ought to be jealously watched,
lest in the endeavour to prevent what has come to be called 'peaceful
penetration' the normal course of commercial development should be
arrested," and it goes on to observe that at the end of the war, "if
it should be concluded upon such terms as we hope and anticipate,"
it is not likely that our present enemies will be in possession of
capital looking for employment abroad. This is certainly very true. By
the time the Germans have made the reparations, which will involve so
much rebuilding in Belgium and in the parts of France that they
have overrun and swept clean of industrial plant, and have in other
respects made good the damage which their ruthless and uncivilised
methods of warfare have inflicted, not only on their enemies, but on
neutrals, it does not seem likely that they will have much to spare
for capital expansion in foreign countries, especially when we
consider how many problems of reconstruction they will themselves have
to face at home. "To impose restrictions upon the influx of capital,"
the Report continues, "aimed at our present enemies, with the result
of deterring the flow of capital from (say) America, would be a policy
highly injurious to the economic recovery and renewed prosperity of
this country after the war. For these reasons we are of opinion
that in all amendments of the law falling within the scope of our
reference, the expediency of the attraction of foreign capital should
be steadily borne in mind." The Committee thus seems to have thought
it necessary to administer comfort to anybody who might fear that the
unrestricted flow of capital from abroad might involve this country in
the terrible danger of being assisted in its industrial recovery by
capital from Germany.

If there were, in fact, any possibility of this assistance being
given, it would seem to be extremely short-sighted not to allow
British industry to make use of it. In the matter of "peaceful
penetration," we have ourselves in the past done perhaps as much as
all the rest of the countries of the world put together, with the
result that we have greatly stimulated the development of economic
prosperity all over the world; in fact, it may be argued that the
great progress made in the last century in man's power over the forces
of Nature has been to a great extent due to the freedom with which we
invested capital abroad and opened a free market to the products
of all other countries. At a time when, owing to exceptional
circumstances, we ourselves happen to be in need of capital, it would
appear to be an extremely short-sighted policy to refuse to admit it,
wherever it came from. We have excellent reason to known that, when
capital is once invested in a foreign country, it is largely in the
power of the inhabitants and Government of that country to control its
working. Any foreigner, even an enemy, who set up a factory in England
after the war would be doing just the very thing which we most of
all want to be done, namely, setting the wheels of industry going,
relieving the labour market from a possible glut after demobilisation,
and helping that difficult stage of transition from war work to peace

The Committee, however, considers that "at the root of the whole
matter lies a question which is not one of Company Law amendment at
all, but one of high political and economic policy." It does not fall
within its province "to inquire whether the traditional policy of
this country to admit and welcome all who seek our shores and submit
themselves loyally to our laws ought, in the case of some and what
aliens, to be revised"; or whether discrimination ought to be made
between an alien of one nationality and an alien of another. "As
regards aliens who are now our enemies, it may be that the British
Empire may adopt the policy that a special stigma ought to be attached
to the German, and that neither as an individual nor as a firm, nor
as a corporation, ought he, for a time at any rate, to be admitted to
commercial fellowship or to any fellowship with the civilised nations
of the world." It need not be said that any attempt to apply this
stigma in practice would be extremely difficult to carry out, would
involve all kinds of difficulties and complications in trade and in
finance, and that the threat of it is more likely than anything else
to stiffen the resistance of the Germans and to force them to rely on
their militarist leaders as their only hope of salvation. However,
the Committee points out that recent legislation shows a desire to
ascertain and record the extent to which aliens are active in
commerce here, and thinks it necessary to make provision to meet the
requirements of the Government in case our rulers should decide to
impose the restrictions which its own common-sense shows it are so

If, it says, foreign capital is to be attracted here, it must be
represented either by shares or by debentures. "The question,
therefore, is whether restrictions ought to be imposed upon the extent
to which the control of the company shall be allowed to reside in
aliens, either by reason of their holding a majority of the shares, or
of the debentures, or by reason of their obtaining a majority upon
the Board of Directors; and, if so, how disclosure of their alien
character is to be enforced." It goes on to point out the great
difficulties which present themselves in the way of securing
disclosure of nationality and ensuring that aliens shall not command
the control. "The law of trusts," it says, "is firmly established in
this country. If A, be the registered holder of a share, he is not
necessarily the beneficial owner. He may be a trustee for B. To enact
that the registered holder must be a British subject effects nothing,
for B. may be an alien and an enemy. Suppose, however, that you enact
that A., when his share is allotted or transferred to him, shall make
a declaration that he holds in his own right, or that he holds in
trust for B., and that both A. and B. are British subjects. There is
nothing to prevent the creation of a new trust the next day, under
which C., an alien enemy, will be the person beneficially entitled.
Further, at the earlier date (the date of allotment or transfer) the
facts may be that A. (a British subject) is trustee for B. (a British
subject), but that B. (unknown to A.) is a trustee for C., an alien
enemy. The fact that B. is trustee for C. would be purposely withheld
from A., and A.'s declaration that he was simply trustee for B. would
be perfectly true. To require that A. should make a declaration at
short intervals (say once a month), or that A., B., C., and so on,
should all make declarations would be, of course, so harassing and so
detrimental as to be, as a matter of business, impossible. The only
effectual way of dealing with the matter would be by a provision that
the share might be forfeited, or might be sold and the proceeds paid
to the owner, if an alien should be, or become beneficially entitled
to or interested in the share. Such a provision does not in the
general case commend itself to us as practical or desirable." Any
endeavour to control the nationality of the Board of Directors
produces similar difficulties. It is easy to ensure that they shall be
all, or a majority of them, British subjects, but there is no means of
ensuring that their actions shall not be controlled by aliens whose
nationality is not disclosed.

Having pointed out these difficulties, which seem in effect to reduce
the whole question to the domain of farce, the Committee goes on to
inquire whether it is desirable to legislate in the direction of
forbidding the employment of foreign capital here in Joint Stock
Companies, unless:--

(1) There is disclosure of the alien character of the foreign
owner; (2) Not more than a certain proportion of the Company's
shares are held by aliens; (3) The Board, or a certain proportion
of the Board, shall not be alien;

and, further, whether it is desirable to discriminate between one
alien and another, and to legislate in that direction in the case of
certain aliens and not of others.

In answering these questions, the Committee decided that it was
necessary to discriminate between certain classes of companies--Class
A being companies in general, Class B being companies owning British
shipping, and Class C companies engaged in "key" industries. With
regard to companies in Class A, they recommend that no restrictions
at all be imposed, but, nevertheless, they elaborate a scheme of
enforcing disclosure of alien ownership if that policy seems to
the legislature to be right. This scheme, the Committee admits, is
necessarily detailed and laborious; it puts difficulties in the way of
investment in English securities, whether by British subject or alien.
It would supply, no doubt, to the Board of Trade useful information
as to the extent of foreign investment in English industries, but the
price paid for this advantage would, in the Committee's opinion, be
too great. If adopted, the scheme could be evaded. And, with regard to
companies in general, the Committee's recommendations go the length
of allowing complete freedom as to the nationality both of the
corporators and of the Board. They would allow, for instance, American
capitalists to come here and establish themselves as a British
corporation in which all the corporators and all the directors were
American, and so with every other nationality. They would make no
discrimination between aliens of different nationality, for, if
there is to be such discrimination, there must be the machinery of
disclosure, involving a deterrent effect and acting prejudicially
in the case of all investors. But, if any such discrimination were
adopted, the Committee thinks that at any rate it should be limited to
some short period, say, three or five years after the end of the war.

If, however, the legislature should decide upon the necessity of
disclosure of alien ownership, the Committee draws up the following
scheme for securing it in Paragraph 15 of its Report:

15. For reasons already given, it is not possible efficiently to
ensure full disclosure, but the following suggestions would, in
the absence of deliberate and intentional evasion (which would be
quite possible), meet the point and in the large majority of cases
would disclose the extent of alien interests and control:--

(a) Every allottee of shares upon allotment and every transferee
upon transfer should be required to make a declaration disclosing
his nationality and whether he is the beneficial owner of the
shares, and, if not, for whom he is trustee, and what is the
nationality of the beneficial owner, and should undertake within
a limited time, after any change in the beneficial ownership, to
communicate the new facts to the company. In default of compliance
with the above, the shares should, at the option of the company,
either (1) be liable to sale by the company and the holder be
entitled only to the proceeds; or (2) be liable to forfeiture and
the holder be entitled to receive payment from the company of 10
per cent. less than the market value of the share, or if there be
no market value, then 10 per cent. less than the value at which
the share would be taken for _ad valorem_ stamp duty if it were
the subject of transfer. In case the company made default in
exercising its power, the Board of Trade should be authorised to
require the above sale to be made.

(b) Every director, upon coming into office, should be required to
make a declaration disclosing his nationality and stating whether
in his office he is wholly free from the control or influence of
any alien, and if he is not so free, stating by whose directions
or under whose control or influence he is to act and what is the
nationality of that person, and should undertake within a limited
time after any change in that state of things to communicate the
facts to the Board and procure a statement of the facts to be
entered in the Board minutes. Any breach of these obligations to
be visited with a penalty which should be severe.

(c) The company should be required to enter in the register
of members, against the name of every registered member, his
nationality as disclosed by the declaration. In the case where the
registered member is not the beneficial owner, the company should
be required to record, not in the register, but in another book,
the nationality of the beneficial owner as disclosed by the
declaration, and, as regards the latter book, to record the
nationality of any new beneficial owner when and as disclosed by
the registered member. These particulars should be required to be
included in the annual list under Section 26 of the Act of 1908.
That list would thus become not a list of members only, but a list
of members with the addition of beneficial owners. The company
should, further, be required to add to the annual list a summary
of the result as regards nationality showing (1) as regards
registered members, how many are British subjects and how many
shares they hold, and how many are aliens and how many shares they
hold, subdividing the number of the aliens and their holdings
under their respective nationalities; and (2) as regards the
registered members who are British subjects; (a) how many of them
are the beneficial owners and how many shares they hold, and (b)
as regards the rest, what are the nationalities and holdings of
the beneficial owners.

With regard to companies owning British shipping, the Committee is
satisfied that the total exclusion of aliens from ownership of British
ships is not essential for national safety and is not expedient. It
therefore considers that in these companies it will be sufficient to
ensure that not more than 20 per cent. of the power of control should
be in alien hands. It thinks that there should be this, limit of 20
per cent., that not more than 20 per cent. of the share capital should
be held by aliens, and that those shares should carry no more than 20
per cent. of the voting power. Alternatively, it considers that the
alien holdings should carry no vote at all, but that is a point of
detail deserving further consideration. It follows that in this
class there must, in the opinion of the Committee, be disclosure of
nationality, which should be enforced in the manner detailed above,
which, on its own admission, is not proof against deliberate evasion.

With regard to companies carrying on "key" industries, a very
complicated system is recommended. In the first place, the question
whether a company is one to carry on a "key" industry would seldom or
never arise at the time of its registration. The modern Memorandum of
Association includes so many things that a "key" industry might be
within the powers of almost any company. The question would thus arise
when the company has got to work. And so the Committee thinks that
the Board of Trade should be empowered at any time to make an inquiry
whether any company is carrying on a "key" industry and, if it finds
that it is, then the company shall, at the direction of the Board of
Trade, require every registered member to make a declaration such as,
under the disclosure procedure already described, he would have had
to make if he were at the date of the notice about to receive an
allotment or become a transferee. Further, the holders of share
warrants to bearer would be required to surrender their warrants for
cancellation and have their names entered in the register, and
all subsequent allottees and transferees would be subject to the
obligation of disclosure, as already described, and the limits of 20
per cent. recommended in the case of merchant shipping would then be
made applicable. Under the system of disclosure it follows that bearer
shares are impossible, but, if disclosure be negatived, the opinion of
the Committee is in favour of the maintenance of the bearer share.

It should be mentioned that one member of the Committee produced a
reservation strongly combating even the very moderate views expressed
by the Committee on the subject of British shipping and "key"
industries. It should be noted, however, that he attended very few
meetings of the Committee. He points out that, with regard to the
registration of ships as British when they are owned by a company
which has alien shareholders, "it is not usually a question of
permitting a ship which would in any case be British to be under the
control of aliens; the question is whether, if a number of persons,
some or all of whom are aliens, own a ship, they should be permitted
to register it as a British ship by forming themselves into a British
company and establishing an office in the British Dominions. If," he
observes, "they were not allowed to do so they would still own the
ship, but register it as a foreign ship in some other country. It
appears that a number of ships were registered here before the war by
companies with alien shareholders (some even with enemy shareholders).
They were managed in this country; the profits earned by them
were subject to our taxation; they were obliged to conform to the
regulations of our Merchant Shipping Acts; they carried officers and
men who were members of the Royal Naval Reserve; on the outbreak of
war our Government was able to requisition the ships owing to their
British registration and without regard to the nationality of the
shareholders in the companies owning them." It appears to this
recalcitrant member--and there is much to be said for his view--that
all these consequences have been highly advantageous to this country.
On the subject of "key" industries he is equally unconvinced. It
appears to him that "the important thing is to get the industries
established in this country, and that the question of their ownership
is of secondary consequence."

It is very satisfactory to note, in view of wild talk that has lately
been current with regard to restrictions on our power to export
capital, that the Committee has not a word to say for any continuance,
after the war, of the supervision now exercised over new issues. The
restrictions which it did recommend, while admitting their futility,
on imports of capital into our shipping and "key" industries were
evidently based on fears of possible war in future. The moral is that
this war has to be brought to such an end that war and its barbarisms
shall be "spurlos versenkt," and that humanity shall be able to
go about its business unimpeded by all the stupid bothers and
complications that arise from its possibility.



_October_, 1918

The Present Economic Structure--Its Weaknesses and Injustices--Were
things ever better?--The Aim of State Socialism--A Rival
Theory--The New Movement of Guild Socialism--Its Doctrines and
Assumptions--Payment "as Human Beings"--The "Degradation" of earning
Wages--Production irrespective of Demand--Is that the Real Meaning
of Freedom?--The Old Evils under a New Name--A Conceivably Practical
Scheme for some other World.

Most people will admit that there are many glaring faults in the
present economic structure of society. Wealth has been increased at an
exhilarating pace during the last century, and yet the war has shown
us that we had not nearly realised how great is the productive power
of a nation when it is in earnest, and that the pace at which wealth
has been multiplied may, if we make the right use of our plant and
experience, be very greatly quickened in the next. The great increase
in wealth that has taken place has been certainly accompanied by some
improvement in its distribution; but it must be admitted that in this
respect we are very far from satisfactory results, and that a system
which produces bloated luxury plus extreme boredom at one end of the
scale and destitution and despair at the other, can hardly be called
the last word, or even the first, in civilisation. The career has been
opened, more or less, to talent. But the handicap is so uneven and
capricious that only exceptional talent or exceptional luck can fight
its way from the bottom to the top, the process by which it does so
is not always altogether edifying, and the result, when the thing
has been done, is not always entirely satisfactory either to the
victorious individual or to the community at whose expense he has won
his spoils. The prize of victory is wealth and buying power, and the
means to victory is, in the main, providing an ignorant and gullible
public with some article or service that it wants or can be persuaded
to believe that it wants. The kind of person that is most successful
in winning this kind of victory is not always one who is likely to
make the best possible use of the enormous power that wealth now puts
into the hands of its owner.

Those who are fond of amusing themselves by looking back, through
rose-coloured spectacles, at more or less imaginary pictures of the good
old mediaeval times, can make out a fair case for the argument that in
those days the spoils were won by a better kind of conqueror, who was
likely to make a better use of his victory. In times when man was
chiefly a predatory animal and the way to success in life was by
military prowess, readiness in attack and a downright stroke in defence,
it is easy to fancy that the folk who came to the top of the world, or
maintained a position there, were necessarily possessed of courage and
bodily vigour and of all the rough virtues associated with the ideal of
chivalry. Perhaps it was so in some cases, and there is certainly
something more romantic about the career of a man who fought his way to
success than about that of the fortunate speculator in production or
trade, to say nothing of the lucky gambler who can in these times found
a fortune on market tips in the Kaffir circus or the industrial "penny
bazaar," Nevertheless, it is likely enough that even in the best of the
mediaeval days success was not only to the strong and brave, but also
went often to the cunning, fawning schemer who pulled the brawny leg of
the burly fighting-man. However that may be, there can be no doubt that
now the prizes of fortune often go to those who cannot be trusted to
make good use of them or even to enjoy them, that Mr Wells's great
satire on our financial upstarts--"Tono-Bungay"--has plenty of truth in
it, and that our present system, by its shocking waste of millions of
good brains that never get a chance of development, is an economic
blunder as well as an injustice that calls for remedy.

This being so, it is the business of all who want to see things made
better to examine with most respectful attention any schemes that are
put forward for the reconstruction of society, however strongly we may
feel that real improvement is only to be got, not by reconstructing
society but by improving the bodily and mental health and efficiency
of its members. The advocates of Socialism have had a patient and
interested hearing for many decades, except among those to whom
anything new is necessarily anathema. There was something attractive
in the notion that if all men worked for the good of the community and
not for their own individual profit, the work of the world might
be done much better, because all the waste of competition and
advertisement would be cut out, machinery would be given its full
chance because it would be making work easier instead of causing
unemployment, and a greater output, more evenly distributed, would
enable the nation to breed a race, each generation of which would
come nearer to perfection. So splendid if true; but one always felt
misgivings as to whether the general standard of work might not
deteriorate instead of improve if the stimulus of individual gain were
withdrawn; and that the net result might probably be a diminished
output consumed by a discontented people, less happy under a possibly
stupid and short-sighted bureaucracy, than it is now when the chances
of life at least give it the glorious uncertainty of cricket. Since
the war our experiences of official control, even when working on
a nation trained in individual initiative, have increased those
misgivings manifold; and hundreds of people who were Socialistically
inclined in 1914 will now say that any system which handed over the
regulation of production and distribution to the State could end only
in disaster, unless we could first build up a new machinery of State
and a new people for it to work on.

Partly, perhaps, owing to this discredit into which the doctrines of
State Socialism have lately fallen, increasing attention has been
given to a body of theory that was already active before the war and
advocates a system of what it calls Guild Socialism, under which
industry is to be worked by National Guilds, embracing all the
workers, both by brain and by hand, in the various kinds of
production. Its advocates are, as far as I have been able to study
their pronouncements, decidedly hostile to State Socialism and
needlessly rode to some of its most prominent preachers, such as Mr
and Mrs Webb, who at least merit the respect due to those who have
given lives of work to supporting a cause which they believe to be
sound and in the best interests of mankind. But in spite of their
chronic and sometimes ill-mannered facetiousness at the expense of
State Socialism and its advocates, the Guild Socialists, as we shall
see, have to rely on State control for very important wheels in
their machinery and leave gaps in it which, as far as disinterested
observers can see, can only be filled by still further help from the
discredited State. It is no disparagement of the efforts of these
writers and thinkers to say that their sketch of the system that they
hope to see built up is somewhat hazy. That is inevitable. They are
groping towards a new social and economic order which, in their hope
and belief, would be an improvement. To expect them to work it out in
every detail would be to ask them to commit an absurdity. The thing
would have to grow as it developed, and we can only ask them to show
us a main outline. This has been done in many publications, among
which I have studied, with as much care as these distracting times
allow, "Self-Government in Industry," by G.D.H. Cole, "National
Guilds," by A.R. Orage (so described on the back of the book, but the
title-page says that it is by S.G. Hobson, edited by A.R. Orage), and
"The Meaning of National Guilds," by C.E. Bechhofer and M.B. Reckitt.

These authorities seem to agree in thinking (1) that the capitalist is
a thief, (2) that the manual worker is a wage slave, (3) that freedom
(in the sense of being able to work as he likes) is every man's
rightful birthright, and (4) that this freedom is to be achieved
through the establishment of National Guilds. As to (1) Messrs
Bechhofer and Reckitt speak on page 99 of their book of the "felony of
Capitalism" as a matter that need not be argued about. Mr Cole makes
the same assumption by observing on page 235 of the work already
mentioned that "to do good work for a capitalist employer is merely,
if we view the situation rationally, to help a thief to steal more
successfully." Well, this view of capital and the capitalist may be
true. Mr Cole is a highly educated and gifted gentleman, and a Fellow
of Magdalen. He may have expounded and proved this point in some work
that I have not been fortunate enough to read. But as the abolition of
the capitalist is one of the chief aims put forward by these writers
it seems a pity that they should thus first assert that he is a thief
to be stamped out, instead of explaining the matter to old-fashioned
folk who believe that capitalists are, in the main, the people (or
representatives of the people) who have equipped industry, and
enormously multiplied its efficiency and output, and so have enabled
the greater part of the existing population of this country (and most
others) to come into being. But to the Guild Socialists the identity
of robbery with capitalism seems to be so self-evident that it needs
no proof. Next, as to the wage system. They seem to think that to earn
a wage is slavery and degradation, but to receive pay is freedom. With
the best will in the world I have tried to see where this immense
difference between the use of two words, which seem to me to mean much
the same thing, comes in in their view, but I have not succeeded.
Perhaps you will be able to if I give you Mr Cole's own words.

On page 154 of the book cited, he says that the wage system is "the
root of the whole tyranny of capitalism," and then continues:

"There are four distinguishing marks of the wage system upon which
National Guildsmen are accustomed to fix their attention. Let me set
them out clearly in the simplest terms,

"1. The wage system abstracts 'labour' from the labourer, so that the
one can be bought and sold apart from the other.

"2. Consequently, wages are paid to the wage worker only when it is
profitable to the capitalist to employ his labour.

"3. The wage worker, in return for his wage, surrenders all control
over the organisation of production.

"4. The wage worker, in return for his wage, surrenders all claim upon
the product of his labour.

"If the wage system is to be abolished, all these four marks of
degraded status must be removed. National Guilds, then, must assure to
the worker, at least, the following things:--

"1. Recognition and payment as a human being, and not merely as a
mortal tenement of so much labour power for which an efficient demand

"2. Consequently, payment in employment and in unemployment, in
sickness and in health alike.

"3. Control of the organisation of production in co-operation with his

"4. A claim upon the product of his work, also exercised in
co-operation with his fellows."

Now, looking with a most dispassionate eye and an eager desire to find
out what it is that Labour and its spokesmen are grouping after, can
one find in these "marks of degraded status" any serious evil, or
anything that is capable of remedy under any conceivable economic
system? In all of them the wage-earner is on exactly the same footing
as the salary-earner or the professional piece-worker. The labour of
the manager of the works can also be abstracted from the manager, and
can be bought and sold apart from him. One would have thought
that this fact is rather in favour of the manager and of the
wage-earner--or would Mr. Cole prefer that the latter should be bought
and sold himself? The salary-earner and the professional are only
employed when somebody wants them. The manager's term of employment is
longer, but the professional pieceworker, such as I am when I write
this article, has usually no contracted term, and is only paid for
actual work done. I also have no control over the organisation of the
production of _Sperling's Journal_ or any other paper for which I do
piecework. I am very glad that it is so, for organising production is
a very difficult and complicated and risky business, and from all
the risks of it the wage-earner is saved. The salary-earner or the
professional, when once his product is turned out and paid for, also
surrenders all claim upon the product. What else could any reasonable
wage-earner or professional expect or desire? The brickmaker or the
doctor cannot, after being paid for making bricks or mending a broken
leg, expect still to have the bricks or the leg for his very own. And
how much use would they be to him if he could? Unless he were to be
allowed to sell them again to somebody else, which, after being once
paid for them, would merely be absurd.

But when we come to the remedies that Mr. Cole suggests for these
"marks of degraded status," we find in the forefront of them that the
worker must be secured "payment as a human being, and not merely as a
mortal tenement of so much labour power for which an efficient demand
exists." This, especially to an incurably lazy person like myself, is
an extremely attractive programme. To be paid, and paid well, merely
in return for having "taken the trouble to be born," is an ideal
towards which my happiest dreams have ever struggled in vain. But
would it work as a practical scheme? Speaking for myself, I can
guarantee that under such circumstances I should potter about with
many activities that would amuse my delicious leisure, but I doubt
whether any of them would be regarded by society as a fit return for
the pleasant livelihood that it gave me. And human society can only be
supplied with the things that it needs if its members turn out, not
what it amuses them to make or produce, but what other people want.
And It is here that the National Guildsmen's idea of freedom seems, in
my humble judgment, to be entirely unsocial As things are, nobody can
make money unless he produces what somebody wants and will pay for.
Even the capitalist, if he puts his capital into producing an article
for which there is no demand, will get no return on it. In other
words, we can only earn economic freedom by doing something that our
fellows want us to do, and so co-operating in the work of supplying
man's need. (That many of man's needs are stupid and vulgar is most
true, but the only way to cure that is to teach him to want something
better.) The Guildsmen seem to think that this necessity to make or do
something that is wanted implies slavery, and ought to be abolished.
They are fond of quoting Rousseau's remark that "man is born free and
is everywhere in chains." But is man born free to work as and on what
he likes? In a state of Nature man is born--in most climates--under
the sternest necessity to work hard to catch or grow his food, to make
himself clothes and build himself shelter. And If he ignores this
necessity the penalty is death. The notion that man is born with a
"right to live" is totally belied by the facts of natural existence.
It is encouraged by humanitarian sentiment which, rightly makes
society responsible for the subsistence of all those born under its
wing; but it is not part of the scheme of the universe.

Such are a few of the weaknesses involved by the theoretical basis
on which Guild Socialism is built. When we come to its practical
application we find the creed still more unsatisfactory. Even if
we grant--an enormous and quite unjustified assumption--that the
Guildsman, if he is to be paid merely for being alive, will work hard
enough to pay the community for paying him, we have then to ask how
and whether he will achieve greater freedom under the Guilds than
he has now. Now, freedom is only to be got by work of a kind that
somebody wants, and wants enough to pay for it. And so the consumer
ultimately decides what work shall be done. The Guildsman says that
the producer ought to decide what he shall produce and what is to be
done with it when he has produced it. "Under Guild Socialism," says
Mr Cole,[1] "as under Syndicalism, the State stands apart from
production, and the worker is placed in control." Very well, but what
one wants to know is what will happen if the Guilds choose to produce
things that nobody wants. Will they and their members be paid all the
same? Presumably, since they are to be paid "as human beings" and not
because there is a demand for their work. But if so, what will happen
to the Guildsman as consumer? There will be no freedom about his
choice of things that he would like to enjoy. And what about admission
to membership of a Guild, the price at which the Guilds will exchange
products one with another, and the provision of capital? The nearest
approach to an answer to these questions is given by Messrs Bechhofer
and Reckitt in Chapter VIII, of the "Meaning of National Guilds." This
chapter describes "National Guilds in Being." It tells us that "each
man will be free to choose his Guild," which sounds very pleasant,
but is completely spoilt by the end of the sentence, which says "and
actual entrance will depend on the demand for labour." It sounds just
like a capitalistic factory. And then--"Labour in dirty industries,
sewaging, etc.--will probably be in the main of a temporary character,
and will be undertaken by those who are for the time unable to obtain
an entry elsewhere." Most sensible, but where is the freedom? The
Guildsman will not be able to do the work that he wants to do unless
there is a demand for that kind of labour, and in the meantime,
just like the unemployed in the days of darkness, he will be set to
cleaning the streets and flushing the drains. Messrs. Bechhofer and
Reckitt are, in fact, so sensible and practical that they abandon
altogether the freedom of the producer to produce what he likes.
"Indeed," they write, "a query often brought to confound National
Guildsmen is this: What would happen to a National Guild that began to
work wholly according to its own pleasure without regard to the other
Guilds and the rest of the community? We may reply, first, that
this spirit would be as unnatural among the Guilds as it is natural
nowadays with the present anti-communal, capitalist system of
industry" (but under the present system any one who worked without
regard to the rest of the community would very soon be in the hands of
a Receiver); "secondly, if it did arise in any Guild, this contempt
for the rest of the community would be met by the concerted action
of the other Guilds. The dependence of any individual Guild upon the
others would be necessarily so great that a recalcitrant Guild would
find itself at once in a most difficult position, and a Guild that
pressed forward demands that were generally felt by the rest of the
community to be impossible or unreasonable would soon be brought back
into line again."

[Footnote 1: "The Meaning of Industrial Freedom," page 39.]

Of course; but if so, where is the Guildsman's alleged freedom? Every
Guild and every Guildsman would have to adapt himself to the wants of
the community, just as all of us who work for our living have to do
now. He would be no more free than I am, and I am no more free than
the person who is sometimes described as a "wage slave." The Guildsman
might be happier in the feeling that he worked for a Guild rather than
a capitalist employer, but this is by no means certain. The writers
just quoted show with much frankness and good sense that there would
be plenty of opening for friction, suspicion, discontent and strikes.
"A Guild," they say, "that thought itself ill-used by its fellows
would be able to signify its displeasure by the threat of a strike."
The officials of the Guild are to be chosen by the "men best qualified
to judge" of their ability, whoever they may be, and every such choice
would be ratified by the workers who are to be affected by it. "The
Guild would build up in this way a pyramid of officers, each chosen by
the grade immediately below that which he is to occupy," Did not the
Bolsheviks try something like this system, with results that were not
conducive to efficient production? And to meet the danger that the
officials as a whole might combine "in a huge conspiracy against
the rank and file," Messrs Bechhofer and Reckitt can only suggest
vigilance committees within the Guilds. In a word, Guild Socialism
seems to be a system that might possibly be worked by a set of ideally
perfect beings; but as folk are in this workaday world one can only
doubt whether it would be conducive either to freedom, efficiency or a
pleasant life for those who lived under it.



_November_, 1918

Taxation after the War--Mr. Hoare's Scheme described and analysed--The
Position of the Rentier--Estimates of the Post-War Debt--The
Compulsory Loan Proposal--What Advantages has it over a Levy on
Capital?--The Argument from Social Justice--Questions still to be
answered--The Choice between a Levy and Stiff Taxation--Are we still
a Creditor Nation?--Our Debt not a Hopeless Problem--Suggestions for
solving it.

Under this heading two very interesting articles were contributed to
the October issue of _Sperling's Journal_ by Mr Alfred Hoare and an
"Ex-M.P.," and the subject is clearly one to which, now that the end
of the war has been brought appreciably nearer by the feats of the
Allied armies, too much thought and discussion can hardly be given.
How are we going to face the problem that has been built up for us by
the bad finance of the war, the low proportion of its cost that has
been paid for out of taxation, and the consequent huge debt with
which--it is already over L7000 millions gross--the State will be
saddled? Mr. Hoare answered the question by proposing a scheme of
taxation of what he called Rente, by which he meant all forms of
"unearned income"--"rentals from freehold and leasehold property,
interest upon loans whether public or private, and dividends on joint
stock companies or sleeping partnerships." He added that in his
opinion earned income above a certain figure might reasonably be added
to this category on the ground that it has, in some instances, very
much the same characteristics as unearned; the income of a "successful
professional man or clown or jockey or opera star" being due to
peculiar qualities; "and it would be no great hardship if earned
income above, say, a thousand a year for a married couple, with an
additional three hundred for every child under twenty-five years of
age were regarded as unearned, and taxed accordingly." Income was
thus the basis of Mr Hoare's scheme. Rente he regards as an agency
regulating distribution, and requiring to be constantly checked. "It
is," he says, "an elementary principle of social health, and economic
prosperity that the share of the national wealth enjoyed by the
Rentier, by the owner, that is, of unearned income, should not be
excessive," Most people who can follow his admirable example and take
a detached and unbiassed view of questions which affect their pocket
so closely, will agree with him In this opinion. The Rentier lives on
the proceeds of work done in the past by him or by some other person;
and it is not good for our economic health that he should grow too
fat at the expense of those who are working now, lest the latter be
discouraged and work with less spirit.

At the same time we have to remember that the work done in the past by
the Rentier or those whom he represents, has given us the plant and
equipment (in the widest sense of the phrase) with which we are now
working. If, therefore, we penalise the Rentier too severely we shall
discourage his future creation; the present race of earners, if they
see that those who are living on past savings are shorn too close
will be deterred from saving, will put their surplus earnings into
extravagant spending instead of into plant and equipment, and the
economic future of the nation, and of the world, will be _pro tanto_
less hopeful. If once our fiscal system is going to propagate the
view--already so rampant among the happy-go-lucky citizens of this
unthrifty people--that the worst thing to do with money is to save it
there will be bad times ahead for our industry and commerce, which can
only get the capital that it needs if somebody saves it. Mr Hoare's
elaborate calculations led him to conclusions involving a tax of
11s. 6d. in the pound on unearned income. This figure is, I hope,
needlessly high. To arrive at it he assumed that peace might be
concluded towards the end of 1919, and that when peace conditions are
fully re-established--which will take, he thinks, three years, the
National Debt will amount to L10,000 millions, involving annual
interest of L500 millions, which, added to the total Rente of the
country in 1913 (which he made out to be L520 millions), will make a
total Rente in 1923 of L1020 millions. His view is that the burden of
the National Debt should be thrown by means of the income tax upon the
national Rente, not taxing it out of existence, but by such a scale of
taxation as would reduce the net Rente of the country to approximately
the level at which it stood before the war.

There is good reason to hope that Mr Hoare's figures will not be
reached. He took L10,000 millions merely as a round sum. Mr Bonar Law,
it will be remembered, worked out our net debt on March 31st next at
L6856 millions, taking credit for half the estimated amount of loans
to Allies as a good asset. If we prefer as sounder bookkeeping to
write off the whole of our loans to Allies for the time being and
to apply anything that we may hereafter receive on that account to
Sinking Fund, the debt, on the Chancellor's figures, will amount on
March 31st (if the war goes on till that date) to L7672 millions. Even
if the war went on for six months more it ought not to bring the debt
up to more than L9000 millions at the outside. It is quite true, as
Mr Hoare says, that the return to peace conditions will be a gradual
process, and that expenditure will not come back to a peace basis all
at once. Demobilisation and other matters which were left, by our
cheery Chancellor, out of the airy after-war balance-sheet that he so
light-heartedly constructed, may cost L1000 millions or more before
we have done with them. But against them we can set a string of
recoverable assets which, in the Chancellor's hands, footed up a total
of L1172 millions--balances in agents' hands, due debts (apart from
loans to Allies), land, securities, ships, buildings, stores In
Munitions Department, arrears of taxation, and so on. With his 11s.
6d. in the pound on unearned and 6s. in the pound on earned incomes,
Mr Hoare expects a revenue of L620 millions, "or enough to provide for
the interest of the debt with a 1 per cent. Sinking Fund, and
leave L20 millions towards the Supply Services." But Mr Bonar Law
anticipated a total peace Budget (if the war ended by March 31st next)
of L650 millions. This was probably too low, but we may at least hope
that Mr Hoare has gone rather further than was necessary to be on the
safe side.

In the other article on the subject of post-war debt contributed to
the last number of this Journal, an "Ex-M.P." plumped for a somewhat
novel variety of the Levy on Capital, in the shape of a Compulsory
Loan, bearing no interest and repayable in 100 years. Each individual
citizen to be made to subscribe to the extent of 20 per cent. of
his possessions. Ten per cent. of the amount due to be paid on
application, 10 per cent. six months after allotment, and 80 per cent.
on January 1st of the following year. When desired, the Government to
advance at 5 per cent. the money necessary for the payment subsequent
to allotment, full repayment of such advances to be made within
eight years. A Sinking Fund to be established to redeem the loan at
maturity. But is there any real advantage in this scheme over the Levy
on Capital, from which it only differs by the receipt by the payer of
a promise to repay in 100 years' time? The approximate value of
L1000 nominal of the Compulsory Loan stock would be, according to
"Ex-M.P.'s" calculation, in the year of issue L7 12s., money being
worth 5 per cent. and assuming that rate to be current during the
remainder of the term. The claim that there is no confiscation,
because "a perfectly good security is given for the money received,"
would seem rather futile to those who paid L1000 and received a
security, the present value of which might be below L10. They might
very likely think that outright confiscation (since confiscation
originally means nothing but "putting into the Treasury") is really a
simpler way of dealing with the problem. "Ex-M.P.," however, estimates
that the immediate redemption of L2800 millions of debt (which he,
rather modestly, expects to be the result of his 20 per cent. levy)
would enable the balance of the War Debt to be converted into 3-1/2
per cent. stock. This may be true, but if so it is equally true if a
similar or larger amount of debt is cancelled by means of an outright
Levy on Capital.

The merits and demerits of a Levy on Capital have already been dealt
with in the pages of this Journal "Ex-M.P.," however, brought forward
a slightly novel form of argument in its favour. He pointed out that
the money constituting the great increase in debt that has taken place
during the war will have been, in the main, contributed by people who
have worked at home under the protection of the Army and Navy, while
the soldiers and sailors have been prevented by the duty which sent
them out to risk their lives from subscribing a proportionate share to
the National Debt. Hence "a class that deserves most of the State will
find itself indebted to a class which--if it does not deserve least of
the State--has, at any rate, turned a national emergency to personal
profit." This is a strong argument, which, has been used frequently
in the course of the war in the pages of the _Economist_, against
borrowing for war purposes to the large extent to which our timid
rulers have adopted the policy. "To be really just," the writer
continued, "the process of taxation ... must be applied with greatest
force to those who have accumulated their money since the outbreak of
war, and only to a less degree to those whose fortunes have not been
built upon their country's necessity. The difficulty of separating
these two classes of wealth is great, and must, in the writer's
opinion, be effected by separate legislation--legislation which might
justly be based upon the increase in post-1913 incomes, a record of
which should now be in preparation at Somerset House." Everyone will
agree that everything possible should be done to take the burden of
the war debt off the shoulders of those who have fought for us; but it
is equally clear that now that the mischief of this huge debt has been
done, it will be exceedingly difficult to repair it by any ingenuities
of this kind. For instance, if the kind of taxation--in the shape of
a Compulsory Loan--proposed by "Ex-M.P." were enforced, how can we be
sure that it would not take a large slice off capital, the next heir
to which is a soldier or a sailor? Bad finance is so much easier to
perpetrate than to remedy that one is almost certain to come across
such objections as this to any scheme for making the war profiteers
"cough up" some of their gains.

Moreover, we have to remember that by no means the whole of the
war debt represents the gains of those who "have turned a national
emergency to personal profit." Some people whose incomes have been
actually decreased by the war, especially when currency depreciation
is taken into account, have, in response to the appeals of the
War Savings Committee, saved more than they ever saved before by
patriotically stinting themselves. And even the savers who have saved
out of war profits were so far more patriotic than the war profiteers
who did not save but squandered. In all the discussion concerning
the Levy on Capital I have not seen any answer (even in Mr Pethick
Lawrence's very persuasive little book in its favour) to the three
great objections to it (1) that it lets off the squanderer and
penalises the saver; (2) that the difficulty, trouble and expense
involved by the necessary valuation, and the iniquities and frauds
that are almost certain to arise out of it, will be enormous; and
(3) that its economic effect may be very serious in discouraging
accumulation. "Why should any one save," the unthrifty soul will most
naturally ask, "if his savings are liable to have a slice cut out of
them by a levy at any time?" The advocates of the Levy, and "Ex-M.P."
in his advocacy of a Compulsory Loan for repayment of debt; assume
that it can be done once and for all and never again. "Take one-fifth
of a man's savings away as an emergency measure not to be repeated,
and he will at once endeavour to save it back again." But how will you
persuade him that it is an emergency measure not to be repeated? How
can you be sure that it is so? I have heard a very distinguished
Socialist, discussing in private the beauties of the Levy on Capital,
point out that it is the sort of thing which, when once the ice has
been broken, can be done again so easily. From the Socialist point of
view the Levy on Capital is, of course, a simple means of getting, by
repetitions of it at regular intervals, all the means of production
into the hands of the State; but would the State make a good use of

Another assumption about the Levy on Capital that seems to me to be
the merest will o' the wisp is the delusion that the whole saving that
it would entail by reducing the debt charge would necessarily and
certainly go to the relief of income tax. On this assumption Mr
Pethick Lawrence bases his most persuasive appeal to the smaller
income-tax payer, by showing that he would be better off after a Levy
on Capital than before it, thanks to the reduction in income tax,
which is assumed as axiomatically arising in its train. But is
this certain or even likely? Is it not much more probable that our
Government, finding its post-war Budget greatly lightened by a Levy on
Capital or a Compulsory Loan to redeem debt, will think itself free to
indulge in extravagance, maintaining a considerable part of the war
income tax and wasting it on rash experiments? All these weaknesses,
which appear to be inherent alike in the Levy on Capital or in the
scheme which gilds the pill by calling it a Compulsory Loan, seem to
be ignored or neglected (perhaps because they are unanswerable) by
their advocates. On the other hand, there are certain psychological
arguments on the other side. If the well-to-do, who would have to pay
the Levy or subscribe to the Compulsory Loan, would prefer that system
to a high income tax, there is no more to be said. A tax that is
popular with the payer, as compared with other modes of shearing
his fleece, needs no further recommendation. But, in view of the
probability of the experiment, once tried, being shortly and
frequently repeated, I Very much doubt whether this is so; as far as I
have been able by personal inquiry to test opinion on the point I have
found it almost unanimously adverse among those whom the Levy would
most seriously affect. If, as is much more likely, the imposition of
a Levy created better feeling among the working classes and the
returning soldiers and tended to more harmonious co-operation in
after-war tasks of reconstruction, it might be worth while to face its
evils and its dangers. But here again it is quite probable that if the
burden of war debt were clearly and palpably put on the shoulders best
able to bear it, that is, on those who are lifted by the gifts
of fortune--either in inherited money or unusual brainpower or
faculties--by an equitably graded income tax, the effect might be just
as good on the minds of those who suspect that the rich have battened
throughout the war on exploitation of the poor.

This much at least seems to be agreed by most reasonable people about
the debt charge--that it will have to be raised, either by a Levy on
Capital or by income tax or some other form of direct taxation, from
those who are blessed with a margin. We are not likely to repeat our
ancestors' mistake, after the Napoleonic War, of throwing the whole
burden on to the general consumer by indirect taxation of necessaries
and of articles of general consumption. Even Tariff "Reformers" say
little about the revenue that their fiscal schemes would bring in. And
with good reason. For in so far as they secured Protection they would
bring in no revenue; we cannot at once keep out foreign goods and tax
them; and any revenue that they brought in would be most expensively
raised, because a large part of the extra price paid by the consumer
would go not to the State but into the pockets of the home producer.
Nor is it likely that any of the many schemes--of which Mr Stilwell's
"Great Plan, How to Pay for the War," is a particularly bold
example--for paying off debt by a huge issue of inconvertible
currency, will achieve any practical result. Not only would they
defraud the debt-holder by paying him off in currency enormously
depreciated by the multiplication of it that would be involved; but
they would also, by that depreciation, throw the burden of the debt
on the shoulders of the general consumer through a further disastrous
rise in prices, and so would accentuate the bitterness and discontent
already rife owing to the war-time dearness and all the suspicions of
profiteering and exploitation that it has engendered.

After all, this problem of the war debt, in so far as it is held at
home, is not one that ought to terrify us if we look at it steadily.
People talk and write as if when the war is over the business of
paying for it will begin. That is not really so. The war has been paid
for as it went on, and, except in so far as it has been financed by
borrowing abroad, it has been paid for by us as a nation. Whatever we
have used for the war we have paid for as it went on, partly with
the help of loans from America and from other countries--Argentina,
Holland, Switzerland, etc.--that have lent us money. These loans
amount, as far as they can be traced from the official figures,
to about L1300 millions. Against them we can set our loans to our
Dominions, over L200 millions (a perfectly good asset), and our loans
to our Allies, perhaps L1500 millions, which the Chancellor proposes
to write down by 50 per cent., and might perhaps treat still more
drastically. To meet this foreign debt we shall have to turn out so
much stuff--goods and services of all kinds--for sale abroad to meet
the interest and repayment. We have further impoverished ourselves by
selling our foreign securities abroad No figure has been published
giving any clue to the amount of these sales, and we may perhaps guess
them at L1000 millions. If the pre-war estimates of our overseas
investments at L4000 millions were anywhere near the mark. It thus
appears that we shall end the war still a great creditor nation.

In so far as the debt was raised at home, the war was paid for by
those who bought the securities offered, and we have now to pay them
interest and set about repaying them the capital. This process
will not diminish the national wealth, but will only affect its
distribution. It will not diminish the amount of available capital,
but may even rather increase it by gathering into the hands of the
debt-holders--who are ex-hypothesi folk with an inclination for
saving--money that might, if left in the hands of those from whom it
is collected, have been squandered. The payment of the debt charge
merely means that those who came forward with their money when they
were asked to subscribe to war loans, have, according to the extent
of the effort that they then made, a set-off against the subsequent

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