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War-Time Financial Problems by Hartley Withers

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taxation involved by the war debt. It would have been a much simpler
and more businesslike proceeding to have taken, instead of borrowing,
a much larger proportion of the war's cost during the war; but it is
too late now to rub in this platitude which is now pretty generally
admitted. Mr Hoare showed in last month's Journal that the creation
of the War Debt has caused a huge addition to what he has called
Rente--the gross income of the propertied classes; and there is much
logic in his contention that this income is the source from which the
debt charge should be met. At the same time both justice and economic
expediency seem to demand that his wider interpretation of Rente, to
make it include the earnings of those whose special qualifications
(or, we may add, special luck) put them in a position to earn more
easily than the struggling majority, should be applied to taxation
involved by the debt charge.

How, then, shall we deal with the debt? In the first place we want
a good Sinking Fund--1 per cent. at least--and all realisations of
assets in the shape of loans repaid, ships, etc., sold, should be
used for reduction of our foreign debt. For the home charge we want a
special form of income tax that will fall as lightly and indirectly
as possible on industry; that is, that it should be imposed on the
individual taxpayer direct. So that what we want is an extended,
reformed and better graduated form of the super-tax brought down so
low that every one who is not merely rich but comfortable should pay
his share, For example, any single man or woman with any excess over
L500 a year of unearned income, or over L800 a year of earned income
might well pay super-tax on that excess. The exemption limit might
well be raised by 50 per cent. for married couples (if their joint
incomes are still to be counted as one), and by L100 a year for each
child between the age of five and twenty-five. But all these figures
are mere suggestions, and the details of the scheme would have to be
worked out by Inland Revenue officials, whose experience and knowledge
of the practical working of such matters qualifies them for the task.
The broad principle is a special tax for the debt charge to be raised
direct from individual incomes with skilful differentiation, according
to the circumstances of the taxpayer, in the matter of the number
of his dependants, and also according to the source of the income,
whether it is being earned by exertions which illness might terminate
or received from invested funds, and therefore beyond the reach of the
"slings and arrows of outrageous fortune." That portion of the tax
that is required for Sinking Fund might be made payable, at the option
of the taxpayer, in Government securities at prices giving some
advantage to the holder. This form of special debt-charge super-tax
would enable the ordinary income tax to be reduced considerably at
once. Mr Edward Lees, secretary to the Manchester and County Bank, has
put forward a scheme by which taxpayers can buy in advance immunity
for so many years from so much annual income tax. If this suggestion
could be worked it might provide a means of quickening the debt's
repayment, though it looks rather like exchanging one form of debt for
another. But, in any case, it is urgent that the long promised reform
of income tax should be set in hand at once, so that it may be purged
of its present inequities and anomalies and set to work in peace to
redeem debt on a new and more scientific basis.


THE CURRENCY REPORT _December_, 1918

Currency Policy during the War--Its Disastrous Mediaevalism--The
Report of the Cunliffe Committee--A Blast of Common Sense--The
Condemnation of our War Finance--Inflation and the Rise in Prices--The
Figures of the Present Position--The Break in the Old Relation between
Legal Tender and Gold--How to restore it--Stop Borrowing and reduce
the Floating Debt--Return to the Old System--The Committee's Sane
Conservatism--A Sound Currency vital to National Recovery.

Among the many features of the late war (how comfortable it is to talk
about the "late war"!) that seem likely to astonish the historian
of the future, perhaps the thing that will surprise him most is the
behaviour of the warring Governments in currency matters. It is
surely, a most extraordinary thing after all that has been thought,
said and written about monetary policy since money was invented that
as soon as a great economic effort was necessary on the part of the
leading civilised Powers, they should all have fallen back on the old
mediaeval dodge of depreciating the currency, varied to suit modern
needs, in order to pay part of their war bill, and should have
continued this policy throughout the course of the war, in spite of
the obvious results that it was producing in the shape of unrest,
suspicion and bitterness on the part of the working classes, who very
naturally thought that the consequent rise in prices was due to the
machinations of unscrupulous capitalists who were exploiting them. It
is even possible that the historian of a century hence may ascribe to
this cause the beginning of the end of our present economic system,
based on the private ownership of capital, for it is very evident that
we have not yet seen the end of the harvest that this bitterness and
discontent are producing.

A less important but still very objectionable consequence of the flood
of currency and credit that the Government has poured out to fill a
gap in its war finance is the encouragement that it has given to a
host of monetary quacks who believe that all the financial ills of
the world can be saved if only you give it enough money to handle,
oblivious of the effect on prices of mere multiplication of claims to
goods without a corresponding increase in the volume of goods. These
enthusiasts have seen that during war a Government can produce money
as fast as it likes, and since they think that producing money makes
every one happy they propose to adopt this simple method for paying
off war debt, restarting trade and generally creating a monetary
millennium. How far their nostrums are likely to be adopted, no
one can yet say, but some of the utterances of our rulers make one

Into this atmosphere of quackery and delusion the report of the
Committee on Currency and Foreign Exchanges breathes a refreshing
blast of sound common sense. Everybody ought to read it. It costs but
twopence; it is only a dozen pages long, and it is described (if you
want to order it) as Cd. 9182. In view of the many attacks that have
been made on our banking system--especially the Bank Act of 1844--by
Chambers of Commerce and others before the war, it is rather
surprising that so little criticism should have been heard of this
Report, which practically advocates a return, as rapidly as possible,
to the practice and principles imposed by that Act. It may be that
peace, and all the preoccupations that have followed it, have absorbed
men's minds so entirely that questions of currency seem to be an
untimely irrelevance; or possibly the very heavy weight of the
Committee's authority may have silenced the opposition to its
recommendations. Presided over by Lord Cunliffe, the late Governor of
the Bank, and including Sir John Bradbury and Professor Pigou and an
imposing list of notable bankers, it was a body whose opinion
could only be challenged by critics gifted with the most serene

One of the most interesting--especially to advocates of sound
finance--points in its Report is the implied condemnation that it
pronounces on the methods by which the war has been financed by our
rulers. It points out that "the need of the Government for funds
wherewith to finance the war in excess of the amounts raised by
taxation or by loans from the public has made necessary the creation
of credits in their favour with the Bank of England.... The balances
created by these operations passing by means of payments to
contractors and others to the Joint Stock banks have formed the
foundation of a great growth in their deposits, which have also
been swelled by the creation of credits in connection with the
subscriptions to the various War Loans.... The greatly increased
volume of bank deposits, representing a corresponding increase of
purchasing power and, therefore, tending in conjunction with other
causes to a great rise of prices, has brought about a corresponding
demand for legal tender currency which could not have been satisfied
under the stringent provisions of the Act of 1844." Here we have the
story of bad war finance put as clearly as it can be. Because the
Government was not able to raise all the money needed for the war on
sound lines--that is, by taxation and loans to it of money saved by
investors--it had recourse to credits raised for it by the Bank of
England and the other banks against Treasury Bills, Ways and Means
Advances, War Loans, War Bonds, and loans to customers who were taking
up War Loans, etc. Thereby as these credits created fresh deposits
there was a huge increase in the community's purchasing power; and
since the supply of goods to be purchased was stationary or reduced,
the only result was a great increase in prices which made the war,
perhaps, nearly twice as costly as it need have been and produced
all the suspicion and unrest that has already been referred to.
Considering that the Committee included an ex-Governor of the Bank
and the Permanent Secretary to the Treasury it could hardly have been
expected to use much plainer language concerning the failure of our
rulers to get money out of us in the right way for the war and
the vigour with which they made use of the demoralising weapon of

It followed as a necessary consequence that the volume of legal tender
currency had to be greatly increased. As prices rose wages rose
with them, and so much more "cash" was needed in order to pay for a
turnover of goods which, fairly constant in volume, demanded more
currency because of their inflated prices. As the Committee says in
its Report (page 5): "Given the necessity for the creation of bank
credits in favour of the Government for the purpose of financing war
expenditure, these issues could not be avoided. If they had not been
made, the banks would have been unable to obtain legal tender with
which to meet cheques drawn for cash on their customers' accounts. The
unlimited issue of currency notes in exchange for credits at the Bank
of England is at once a consequence and an essential condition of the
methods which the Government have found necessary to adopt in order to
meet their war expenditure."

The effect of these causes upon the amount of legal tender currency
(other than subsidiary coin) in the banks and in circulation is
summarised by the Committee in the following table:--

"The amounts on June 30, 1914, may be estimated as follows:--

"Fiduciary Issue of the Bank of England L18,450,000

"Bank of England Notes issued against
gold coin or bullion 38,476,000

"Estimated amount of gold coin held
by Banks (excluding gold coin held
in the Issue Department of the
Bank of England) and in public
circulation 123,000,000
"Grand total L179,926,000

"The corresponding figures on July 10, 1918, as nearly as they can be
estimated, were:--

"Fiduciary Issue of the Bank of England 18,450,000
Currency Notes not covered by gold 230,412,000
"Total Fiduciary Issues [1] L248,862,000
Bank of England Notes issued against
coin and bullion 65,368,000
Currency Notes covered by gold 28,500,000
Estimated amount of gold coin held
by Banks (excluding gold coin held
by Issue Department of Bank of
England), say 40,000,000
"Grand total L382,730,000

"[Footnote 1: The notes issued by Scottish and Irish banks which have
been made legal tender during the war have not been included in the
foregoing figures. Strictly the amount (about L5,000,000) by which
these issues exceed the amount of gold and currency notes held by
those banks should be added to the figures of the present fiduciary
issues given above.]

"There is also a certain amount of gold coin still in the hands of the
public which ought to be added to the last-mentioned figure, but the
amount is unknown."

It will be noted that the gold held by the banks (other than the Bank
of England) and by the public has declined from L123 to L40 millions,
according to the Committee's estimate, while, on the other hand, the
circulation of bank notes has risen by L27 millions and the issue of
currency notes has taken place to the tune of L259 millions (at the
date of the Report; it is now nearly L300 millions), making a net
addition to legal tender currency of over L200 millions. When we
also remember that there has been a very heavy coinage of silver and
copper, that the Bank of England's deposits have risen by over L100
millions and the deposits of the other banks by nearly L700 millions,
and all this at a time when most of the industrial activity of the
country was going into the production of destructive weapons and the
support of those who were using them, the behaviour of commodities of
ordinary use in rising by nearly 100 per cent. seems to be an example
of remarkable moderation. With all this new buying power in the hands
of the community there is little wonder that some people should
think that we have enormously increased our wealth during this most
destructive and costly war, and should then feel hurt and disappointed
when they find that this new buying power is robbed of all its
beauty by the fact that its efficiency as buying power is seriously
diminished by its mere quantity.

Such being the state of affairs--a great mass of new credit and
currency based on securities--it is clear that our currency has been
deprived for the time being of that direct relation with its gold
basis that used in former time to regulate its volume according to
world prices and our international trade position. As the Committee
says, "It is not possible to judge to what extent legal tender
currency may in fact be depreciated in terms of bullion. But it is
practically certain that there has been some depreciation, and to this
extent therefore the gold standard has ceased to be effective." Very
well, then, what has to be done to get back to the old state of things
under which there was a more or less automatic check on the creation
of credit and the issue of currency? This check worked by a system
which was elastic and simple. It was not entirely automatic, because
its working had to be controlled by the Bank of England, which, by the
action of its discount rate, could, more or less, quicken or check the
working of the machine. Legal tender currency could only be increased
by imports of gold; and exports of gold reduced the available amount
of legal tender currency; and since a stock of legal tender currency
was essential to meet the demands upon them that bankers made
possible by creating credits, there was thus an Indirect and variable
connection between the country's gold stock and the extent to which
bankers would think it prudent to multiply credits. If credits were
multiplied too fast, our currency was depreciated in value as compared
with those of other countries and the exchanges went against us and
gold either was exported or began to look as if it might be exported.
If it was exported the legal tender basis of credit was reduced and
the creation of credit was checked. If the Directors of the Bank of
England thought it inadvisable that gold should be exported they
could, by raising the rate of discount and taking artificial measures
to control the supply of credit, produce, without the actual loss of
gold, the effects which that loss would have brought about.

The keystone of the system was the rigid link between legal tender
currency and gold. This was secured by the provisions of the Bank Act
of 1844, which laid down that above a certain line--which was before
the war roughly L18-1/2 millions--every Bank of England note issued
should have gold behind it, pound for pound. In other words, the Bank
of England note was, for practical purposes, a bullion certificate.
The legal limit on the fiduciary issue (that is, the issue of L18-1/2
millions against securities, not gold) could only be exceeded by a
breach of the law. The many critics of our banking system seized on
this hard-and-fast restriction and accused it of making our system
inelastic as compared with the German arrangement, under which the
legal limit could at any time be exceeded on payment of a tax or fine
on any excess perpetrated. These critics might have been right if
legal tender currency had been the only, or even the predominant,
means of payment in England. But, as every office boy knows, it was
not. Legal tender--gold and Bank of England notes--was hardly ever
seen in commercial and financial transactions on a serious scale. We
paid, sometimes, our retail purchases of goods and services in gold;
and Bank notes were a popular mode of payment on racecourses and in
other places where transactions took place between people who were not
very certain of one another's standing or good faith. But the great
bulk of payments was made in the cheque currency which our bankers had
developed outside of the law and could create as fast as prudence--and
an eye to the supply of legal tender which every holder of a cheque
had a right to demand--allowed them to do so. While cheques provided
the currency of commerce, another form of "money" was produced, again
without any restriction by the Act, by the pleasant convention which
caused a credit in the Bank of England's books to be regarded as
"cash" for balance-sheet purposes by the banks. These advantages
gave the English system a freedom and elasticity, in spite of the
strictness of the law that regulated the issue of paper currency, that
enabled it to work in a manner that, judged by the test of practical
results, had one great advantage over that of any of the rival
centres. It alone in days before the war fulfilled the functions of an
international banker by being ready at all times and without question
to pay out the gold that was, in the last resort, the final means of
settling international balances.

It is the object of Lord Cunliffe's Committee to restore as quickly
as possible the system which, has thus been tried by the test of
experience, "After the war," they say in their Report, "our gold
holdings will no longer be protected by the submarine danger, and it
will not be possible indefinitely to continue to support the exchanges
with foreign countries by borrowing abroad. Unless the machinery which
long experience has shown to be the only effective remedy for an
adverse balance of trade and an undue growth of credit is once
more brought into play there will be very grave danger of a credit
expansion in this country and a foreign drain of gold which might
jeopardise the convertibility of our note issues and the international
trade position of the country.... We are glad to find that there was
no difference of opinion among the witnesses who appeared before us as
to the vital importance of these matters." The first measure that they
put forward as essential to this end is the cessation at the earliest
possible moment of Government borrowings. "A large part of the credit
expansion arises, as we have shown, from the fact that the expenditure
of the Government during the war has exceeded the amounts which they
have been able to raise by taxation or by loans from the actual
savings of the people. They have been obliged therefore to obtain
money through the creation of credits by the Bank of England and the
Joint Stock banks, with the result that the growth of purchasing power
has exceeded that of purchasable goods and services." It is therefore
essential that as soon as possible the State should not only live
within its income but should begin to reduce indebtedness, especially
the floating debt, which, being largely held by the banks, has been
a cause of credit creation on a great scale. "The shortage of real
capital must be made good by genuine savings. It cannot be met by the
creation of fresh purchasing power in the form of bank advances to
the Government or to manufacturers under Government guarantee or
otherwise, and any resort to such expedients can only aggravate the
evil and retard, possibly for generations, the recovery of the country
from the losses sustained during the war." With these weighty words
the Committee brushes aside a host of schemes that have been urged for
putting everything right by devising new machinery for the manufacture
of new credit. That new credits will be needed for industry after war
is obvious, but what else are our banks for, if not to provide it?
They can only be set free to provide it on the scale required if, by
the necessary reduction of the floating debt, they are relieved of the
locking up of their funds in Government securities, which has been one
of the bad results of our bad war finance.

It goes without saying that the Committee does not recommend the
continuance in peace of the differential rates for home and foreign
money that were introduced as a war measure with a view to lowering
a rate at which the Government borrowed at home for war purposes. It
would evidently be too severe a strain on human nature to attempt to
work such a system, except in war-time, when the artificial conditions
by which the market was surrounded made it both feasible and desirable
to do so. With regard to the note issue, the Committee proposes a
return to the old system and a strictly drawn line for the amount of
the fiduciary note issue, the whole note issue (with the exception of
the few surviving private note issues) being put into the hands of the
Bank of England, all notes being payable in gold in London only
and being made legal tender throughout the United Kingdom. These
suggestions are subject to any special arrangements that may be made
with regard to Scotland and Ireland. An early resumption of the
circulation of gold for internal purposes is not contemplated. The
public has become used to paper money, which is in some ways more
convenient and cheaper; and the luxury of a gold circulation is one
that we can hardly afford at present. Gold will be kept by the Bank of
England in a central reserve, and all the other banks should, it is
suggested, transfer to it the whole of their present holdings of the
metal. In order to give the Bank of England a closer control of the
bullion market the Committee thinks it desirable that the export of
gold coin or bullion should, in future, be subject to the condition
that such coin or bullion had been obtained from the Bank for the
purpose. This measure would give the Bank of England a very close
control of the bullion market, so close that there is a danger that
if this control were too rigorously exercised, gold that now comes to
this country might be diverted, with a view to more advantageous sale,
to other centres. The amount of the fiduciary issue is a matter
that the Committee leaves open to be determined after experience of
post-war conditions. They "think that the stringent principles of
the Act (of 1844) have often had the effect of preventing dangerous
developments, and the fact that they have had to be temporarily
suspended on certain rare and exceptional occasions (and those limited
to the earlier years of the Act's operation, when experience of
working the system was still immature) does not," in their opinion,
invalidate this conclusion. So they propose that the separation of the
Issue or Banking Departments should be maintained, but that in future
if an emergency arose requiring an increase in the amount of fiduciary
currency, this should not involve a breach of the law, but should be
made legal (as it is now under the Currency and Bank Notes Act of
1914), subject to the consent of the Treasury.

It is not proposed at present to secure the circulation of paper
instead of gold by legislation. The Committee considers that "informal
action on the part of the banks may be expected to accomplish all
that is required." If necessary, however, it points out that
the circulation of gold could be prevented by making the notes
convertible, at the discretion of the Bank of England, into coin or
bar gold. The amount which, in the opinion of the Committee, should be
aimed at for the central gold reserve is L150 millions (a sum which is
already almost in sight on its figures quoted above); and "until
this amount has been reached and maintained concurrently with a
satisfactory foreign exchange position for a period of at least a
year," it thinks that the policy of reducing the uncovered note issue
"as and when opportunity offers" should be consistently followed. How
this opportunity is going to "offer" is not made clear; but presumably
a reflow of notes from circulation can only happen through a fall in
prices or a reduction in bank deposits by the liquidation of advances
made to the Government, directly or indirectly, by the banks.

Concerning the difficult problem of replacing the Bradbury notes by
Bank of England notes of L1 and 10s., an ingenious suggestion is made
by the Committee. It observes that there would be some awkwardness
in transferring the issue to the Bank of England before the future
dimensions of the fiduciary issue have been arrived at; and it
suggests that during the transitional period any expansion in Treasury
notes that may take place should be covered, not as now, by Government
securities, but by Bank of England notes taken from the Bank. By this
means any demands for new currency would operate in the normal way to
reduce the reserve of the Banking Department, "which would have to be
restored by raising money rates and encouraging gold imports," and so
a step would have been taken to getting back to a business basis in
the currency system and away from the profligate printing-press policy
of the war period.

Such are the suggestions made by this distinguished body for the
restoration of our currency. Little has been said against them in the
way of serious criticism, but their conservative tendency and the
fact that they practically recommend a return to the _status quo_ has
caused some impatience among the financial Hotspurs who proposed to
begin to build a new world by turning everything upside down. In
matters of finance this process is questionable, interesting as the
result would undoubtedly be. To get to work on tried lines and then,
when once industry and finance have recovered their old activity, to
amend the machine whenever it is creaking seems to be a more sensible
plan than to delay our start until we have fashioned a new heaven
and earth, and then very probably find that they do not work. If the
machine is to be set moving, it can only be done by close co-operation
between the Bank of England and the other banks which have grown by
amalgamation into institutions the size of which seem likely to
make the task of central control more difficult than ever. On this
important point the Committee is curiously silent. But it recommends
the adoption of a suggestion made by a Committee of Bankers, who
proposed that banks should in future be required "to publish a monthly
statement showing the average of their weekly balance-sheets during
the month." (Will this requisition apply to the Bank of England?) This
is a welcome suggestion as far as it goes, but unless something is
done by co-operative action to make the Bank rate more automatic in
its influence on the actions of the other banks, the difficulty of
making it effective seems likely to be considerable.

Getting the currency right is a most important matter for the future
of our financial position. Another is the question of our debt to
foreigners. Most of this debt we owe to America, and we only owe it
because we had to finance our Allies. We surely ought to be able to
arrange with America that anything that we have to do in giving our
Allies time before asking for repayment they also should do for
us--within limits, say, up to thirty years. In view of all that they
have made and we have lost by this war waged for the cause of all
mankind, this would seem to be reasonable concession on America's



_January_, 1919

The Total War Debt--What are our Loans to the Allies worth?--Other
Uncertain Items--The Prospects of making Germany pay--The Right Way to
regard the Debt--Our Capital largely intact--A Reform of the Income
Tax--The Debt to America--The Levy on Capital and other Schemes--The
only Real Aids to Recovery.

A table published week by week by the _Economist_ shows that from
August 1, 1914, to November 9, 1918, the Government paid out L8612
millions sterling. From this we have to deduct an estimate of the
amount that the Government would have spent if there had not been a
war, so that we are at once landed in the realm of conjecture. The
last pre-war financial year saw an expenditure of L198 millions, and
it is safe to assume that this figure would have swollen by a few
millions a year if peace had continued, so that we may take at least
L860 millions from the above total as normal peace expenditure for the
4-1/2 years. This gives us L7752 millions as the gross cost of the
war, as far as the period of actual fighting is concerned. From this
figure, however, we are able to make some big deductions. There are
loans to Allies and Dominions, and some other much more readily
realisable assets than these. We do not know the actual figure of the
loans to Allies and Dominions during the war period, because they are
not included in the weekly financial statements. The amount that we
borrow abroad is set out week by week--at least, that is believed to
be the meaning of the cryptic item "Other Debt"--but the amount that
we lend to Allies and Dominions is hidden away in the Supply Services
or somewhere, and we only get occasional information about it from the
Chancellor in the course of his speeches on the Budget or on Votes of
Credit. In his last Vote of Credit speech, on November 12, 1918, Mr
Bonar Law gave the chief items of the loans to Allies, and a very
interesting list it was. The totals up to October 19, 1918, were L1465
millions to Allies and L218-1/2 millions to Dominions. The Allies
were indebted to us as follows:--Russia, L568 millions; France, L425
millions; Italy, L345 millions; smaller States, L127 millions.[1]

[Footnote 1: Parliamentary Debates, Vol. 110, No. 114, p. 2560.]

Some of these debts may be written off at once, and that cheerfully,
seeing that they have been lent brothers-in-arms who have been
hit much harder than we have by the war, and had nothing like our
financial strength. The question is, what figure ought we to put on
this asset in deducting it from gross war expenditure in order to
arrive at a guess at the real cost? We take our loans to Dominions, of
course, as good to the last penny. Mr Bonar Law, in his Budget speech
last April, took our loans to Allies at half their face value. Strict
bookkeeping would probably demand a lower figure than 50 per cent.;
but let us follow the ex-Chancellor's example and take loans to
Allies, which we will estimate at L1480 millions up to November 9th,
as good for L740 millions, and loans to Dominions at L220 millions up
to the same date, a total of L960 millions, to be deducted from gross
war cost. Concerning L740 millions of this sum, however, there is a
certain amount of doubt. No one questions for a moment the solvency
of France and Italy, but in view of the pressure that the war has
exercised on their producing power, and, in the case of France, the
complication added by the uncertainties of the position in Russia, in
which French investors are so deeply interested, one cannot feel sure
that they will be able at once to make interest payments. Much will
depend on the sums that they are able to recover from Germany against
their bill of damages, on which more anon. But in any case it seems
likely that a general scheme of interest funding, as between the
Allies, may have to be adopted for some years to come.

As to the other assets that we have to set against our gross
expenditure during the fighting period, they were enumerated by the
Chancellor in his Budget speech last April in the following terms;--

Balances in agents' hands, debts
due, foodstuffs, etc L375 millions.
Land, securities, buildings and ships 97 "
Stores in Munitions Department
(cost price 325 millions) taken at 100 "
Additions this financial year 100 "
Arrears of taxation 500 "
Total[1] L1172

[Footnote 1: Parliamentary Debates, Vol. 105, No. 33, pp. 698-699.]

It will be remembered that in his Budget speech the Chancellor was
proceeding on the assumption that the war would last till March 31st
next--the date at which our financial year ends--and would then be
convenient enough to stop. Happily for us, the valour of our soldiers
and those of our Allies, the splendid success of our Fleet and our
merchantmen In bringing over American troops and their food and
equipment with astonishing speed, and the straightforward diplomacy
of President Wilson, combined to achieve victory nearly five months
earlier than the most sanguine had dared to expect. With the very
pleasant result--though it is a small matter when compared with the
end of the killing of the best of our manhood--that the financial
position is very greatly improved. With regard to the figures given
above, it should be observed that the "debts" are advances to
Dominions, but on quite a different basis from our loans to them,
being money owed by them against goods and services supplied.[1] They
and the balances in the hands of agents are both as good as gold.
Concerning the others, one is entitled at first sight to feel a good
deal of scepticism, since such articles as land, buildings, ships and
stores, bought or built by Government during a war, are likely to find
an extremely sluggish demand when the war is over. However, Mr Bonar
Law assured the House that his valuation of these amounts had been
arrived at on a conservative basis, and, what is better still, in his
Vote of Credit speech on November 12th, he was able to state that
revised estimates had shown that their value would be "far greater"
than he had previously expected. So perhaps we are entitled to take
them at L1300 millions.

[Footnote 1: Parliamentary Debates, Vol. 105, No. 33, p. 698.]

If so, we get the following results for the cost of the fighting

Total Government expenditure,
August 1, 1914, to November
9, 1918 L8612 millions.
Less estimate of normal peace expenditure 860 "
7752 "
Less Loans to Dominions 220 millions.
Less Loans to Allies
(half face value) 740 "
Realisable assets 1300 "
2260 "
Net cost of period L5492 "

If war cost would be good enough to cease with the fighting we should
thus now be able to see, more or less, how we stand. During the
fighting period the Government raised by taxation the sum of L2120
millions,[1] from which we have again to deduct L860 millions as an
estimate for normal peace taxation, if the war had not happened,
leaving L1350 millions as the net war taxation, and L4142 millions as
the net addition to debt from the war.

[Footnote 1: _Economist_, Nov. 16, 1918.]

But, of course, there are still some large and uncertain sums to come
in to both sides of the account. There is the cost of maintaining our
Army and Navy during the armistice period, the cost of demobilisation,
and the cost of putting an end to war munitions contracts running for
many months ahead, holders of which will have to be compensated. Who
has enough assurance to venture on an estimate of the cost of these
items? Shall we guess them at something between L1000 and L1500
millions? And when we have made this guess are we at the end of the
war's cost? Ought we not to include pensions to be paid, and if so, at
what figure? Fifty millions a year for thirty years? If so, there is
another L1500 millions. And interest on war debt, and for how long?

On the other side of the balance-sheet, the only asset that has not
yet been included in the calculation is the sum that we are going to
receive from Germany, Some cheery optimists think that it is possible
for us and for the Allies to make Germany pay the whole of our war
cost. If so, we have halcyon days ahead, for not only shall we be able
to repay the whole war debt but also to pay back to the taxpayer all
the L1350 millions that he produced during the war, unless, as seems
more likely, the Government finds other uses, or abuses, for the
money, and sets its motley horde of wasters to work again. But this
problem, of course, is not going to arise. It would not be physically
possible for Germany to pay the whole of the Allies' war cost, except
in the course of many generations, and, moreover, the Allies have
bound themselves not to make any such demand by the rider that they
added to President Wilson's peace terms, in giving their assent to
them as the basis on which they were prepared to make peace. Early
in November they stated that President Wilson's reference to
"restoration" of invaded countries should, in their view, be expanded
into a claim for compensation "for all damage done to the civilian
population of the Allies and to their property by the aggression of
Germany by land, by sea, and from the air."[1] This is letting Germany
off lightly; but, after stating their readiness to make peace on the
basis of the fourteen points, if amended as above (and also with
regard to the Freedom of the Seas question) it is not possible for
the European Allies, as the Prime Minister's late manifesto says they
propose to do[2] to expand this claim for civilian damage into a
demand for the whole of their war cost up to the limit of the capacity
of the Central Powers to pay, without a serious breach of faith. So
that the question of how much we can get out of Germany is complicated
by the further uncertainty of the size of the bill for damages that we
can present. It will be big enough. We know that the Germans have sunk
8-1/2 million tons of British ships during the war. As to the price
at which, for "restoration" purposes, we shall value those ships and
their cargoes, and all the civilian property damaged by aircraft and
bombardment, this is a matter which it would be obviously improper
to discuss; but we may be sure that the bill will mount up to many
hundreds of millions, and it remains to be seen whether, after Belgium
and France have presented their account, it will be possible for us to
secure payment even for all the civilian damage that we have suffered.

[Footnote 1: _Times_, November 7, 1918.]

[Footnote 2: _Times_, December 6, 1918.]

It thus appears that the net cost of the fighting period has been
somewhere in the neighbourhood of L5500 millions, taking our loans
to Allies at half their face value; and that the armistice and
demobilisation period is likely to cost another L1000 to L1500
millions more, to say nothing of pensions and debt charge that will go
on for years (unless the supporters of Levy on Capital have their way
and wipe the debt out), and that against this further expenditure we
can set whatever sum is recovered from Germany.

Seeing that our total pre-war debt was L710-1/2 millions, or, omitting
what the Government returns call the Other Capital Liabilities,
L653-1/2 millions, these figures of war debt and war cost are at first
sight somewhat appalling. But there is no reason why they should
terrify us, and there are several reasons why they are, when looked at
with a discriminating eye, much less frightening than when we first
set them out.

In the first place, we have always to remember that these figures are
in after-war pounds, and that the after-war pound is, thanks to the
profligate use by our war Governments of the printing-press and the
banking machine, just about half the size, when measured in actual
buying power, of the pre-war pound. Any one who pays L100 in taxes
to-day thereby surrenders claims to about the same amount of goods and
service as he did if he paid L50 in taxes before the war. So that in
making any comparison between the position now and the position then
we have to divide the figures of to-day by two.

In the second, we need not be misled by the Jeremiahs who tell us that
now that we have won the war we have before us the task of paying for
it. This is not true, or true only to a small extent--to the extent,
that is to say, to which we shall, when all these assets and
liabilities have been settled up and balanced, be afflicted with a
foreign debt. Let us leave this question on one side for the time
being, and consider what the position really is with regard to that
part of the war's cost that has been raised at home. In so far as that
has been done, the war cost has been raised by us while the war went
on. In fact, all the war cost has to be raised by somebody while
the war goes on, because the war is fought with stuff and services
produced at the time and paid for at the time. But when Americans lend
us money to pay for some of the stuff that they send us, they pay at
the time and we, or our posterity, have to pay them back later on;
this is the only way in which we can make posterity pay for the war,
and then it only means that our posterity pays America's. It is not
possible to carry on war with wealth that is going to be produced some
day. The effort of self-sacrifice that war demands has to be made by
somebody during its progress--otherwise the war could not be fought.

That effort of self-sacrifice we have already made in so far as we
have paid for our war cost out of money raised at home. That money has
been raised in three ways--by taxation, by borrowing saved money, and
by inflation. When it is raised by taxation the sacrifice is obvious,
and, in nearly all cases, inevitable: we pay our larger war taxes and
so we have less to spend on ourselves, and so we go without things. A
few people raise money to pay taxes during war by borrowing or drafts
on capital, but they are probably so exceptional that their case need
not be considered. We transfer our buying power to the Government to
be used for the fighters, and so we set free the labour and material
that used to go in providing us with comforts and pleasures; our
competition for goods is reduced, and so the Government is able to get
what it needs out of the nation's production, which is _pro tanto_
relieved of our demand. The same thing happens when the Government
gets money for the war by borrowing money that we save. We reduce
expenditure, and transfer buying power to the State and diminish our
demand on the nation's production, or that of its foreign supplies. If
the whole war cost had been met by these two methods there need have
been little or no increase in prices here, and the cost of the war
would have been about half what it has been. Of the two methods,
taxation is obviously the cleaner, simpler and more honest. By
borrowing, the State hires those who have a margin to put part of it
at the disposal of the State at a time of national crisis, instead of
taking it from them outright. As most of the taxation involved by
the subsequent debt charge falls on those who have a margin (as it
obviously should) the result is that the people who subscribed to the
loans are afterwards taxed to pay themselves interest and to repay
themselves their debt.

This subsequent taxation falls on them all alike in proportion to
their ability to pay, or would if the income tax was more equitably
imposed; those who have subscribed their fair share to the loans have
an offset, in the interest that they receive, against the taxation;
those who subscribed less are properly penalised, those who subscribed
more are properly benefited. If only the income tax did not make the
position of fathers of families so unjust, the whole arrangement would
look, at first sight, quite fair, though rather absurd and clumsy,
involving all this subscribing and taxing and paying back instead of
an outright tax and having done with it. But in fact a very grave
inequity is involved by this business of borrowing for war, and laid
upon just the people whom we ought, above all, to treat most fairly,
namely, those who fight for us. The soldiers and sailors risk their
lives for a pittance during the war, while their brothers and sisters
and cousins and uncles and aunts, left at home in security and
comfort, earn bloated profits and wages, and put them, or part of
them, into War Loans; then when the fighters come back, very likely
with their business and connection ruined or lost, they are expected
to contribute to the taxation that goes into the pockets of

Inflation, the third method of paying for war, again produces the same
effect of a reduction of consumption by the civilian population, but
in a roundabout manner, which works at first without being noticed,
and so is particularly dear to the adroit politician. By it nobody
transfers buying power to the Government, but the Government and
the bankers, who are generally most reluctant accessories to the
transaction, between them create new buying power, which, coming into
a restricted market for goods in addition to all the existing buying
power, simply forces everybody to consume less because the money in
their pockets fetches less goods owing to the rise in prices.

The evil attached to this system is obvious enough. It amounts to a
tax on the general consumer in proportion to his consumption, and so
it lays the sacrifice on the shoulders of those least able to bear it.
No Government would have the courage to impose such a tax openly and
frankly. All the warring Governments in varying degrees have used this
roundabout device of imposing it, very likely being quite unaware
of the fraud on the consumer that they were perpetrating. Our own
Government, in fact, having first added by this process to a rise in
the price of bread, then reduced it by a special subsidy--a pleasant
touch of Alice in Wonderland finance. This mode of taxing by raising
prices hits, of course, all those who live on fixed incomes and
salaries and wages. Those who can strike, or take more out of the
consumer, can evade it, and so it falls on the weakest shoulders and
incidentally produces friction, discontent and dangerous suspicion.
But even it works at the time when it happens. Each creation of new
buying power gives the Government, for the moment, control of so much
in goods and services at the expense of the consumer; but when once
the new buying power has been distributed by the State's payments it
is in the hands of the nation as a whole. If the process ceased, the
nation would still have control of the whole of its output, which is
its income, though the injustice involved, to those who are not strong
enough to resist the effects of higher prices, would continue.

Thus, whatever means--straightforward or devious--are used for
financing war, it is paid for while it goes on by the warring country
if the financing is done at home, or by its foreign creditors if the
financing is done abroad. And it is, necessarily, almost entirely paid
for out of income, that is, out of current production. It is curious
to find that many people still seem to think that the whole cost of
the war has come out of capital. Luckily for us it could not be done,
or only to a very small extent. Our capital mostly consisted of
railways, factories, ships, roads, agricultural land, machinery,
houses and other things that could not be taken and shot out of a gun.
These things we have still got, and though many of them are not in
such good shape as they were, some of them are much better equipped
and organised. We have drawn on our stocks of materials and goods--how
far it is impossible to say; we have lost 8-1/2 million tons of
shipping by war losses; in the meantime we have built, bought and
captured 5-1/2 millions of new tonnage, and we have a claim against
the Germans for such tonnage. On capital account we have suffered by
wear and tear in so far as our upkeep has been neglected owing to lack
of labour during the war, and by depletion of materials and stocks,
and also, of course, by the fact that if the war had not happened,
we should, if pre-war calculations were correct, have put some L1700
millions into new investments at home and abroad during the 4-1/4
years of fighting and some more hundreds of millions during the
after-war period of Government borrowing and restriction on private
investment. But a very large part of the money that went into victory
would otherwise have gone not to capital account but into the pleasant
frivolities, embellishments and vulgarities that made life an amusing
absurdity in days before the war.

If, then, the war sacrifice was made during the war, in so far as its
cost was raised at home, how far is it true that we are now faced with
the business of paying for it? If taxation were equitable it would
only be to the extent that those who ought to have made the sacrifice
and did not, will in future have to pay interest to those who did, or
their representatives. So that the first thing we have to do is to
make taxation equitable, that is, lay it on the taxpayer in proportion
to his ability to pay. There will still remain the injustice to those
who have fought for us, which might be cured, or amended, by special
exemptions. With taxation on a really sound basis no further sacrifice
would be involved by the debt charge, and no diminution of the
nation's wealth or consuming power, which will depend, as always, on
its output of goods and services; but only a transfer of consuming
power from taxpayers to debt-holders in accordance with the sacrifice
made by the latter during the war. What we produce as a nation we
shall consume as a nation, subject to the extent that we financed the
war during its course by operations abroad.

These operations were twofold. We sold to foreigners part of our
holdings of foreign securities, thereby and to this extent paying for
war cost out of capital--out of the investments made by ourselves
and our forbears in America and elsewhere. Mr Bonar Law, in a recent
interview in the _Observer_, stated that we had sent back to the
United States practically the whole of our holdings of American
securities to be sold or pledged as collateral for loans, and that the
value of them was three billion dollars--L600 millions sterling. Any
of them that have only been pledged can presumably be used to meet the
loans raised as they fall due, and so will lighten our burden in the
matter of repayment. These loans raised abroad are the second mode of
foreign financing. By it we had raised up to November 9th nearly L1300
millions, as shown by the _Economist's_ table, and to that extent we
have pledged our future production and that of our posterity, to meet
the annual service for interest and repayment. On the other hand, all
this sum and more we have (as shown above) lent to our Allies and
Dominions, so that the ex-Chancellor was well justified in his boast
that we had only borrowed to finance our Allies, and that we had been
self-sufficient for our own war cost.[1]

[Footnote 1: Budget Speech, Parliamentary Debates, vol. 105, No. 33.]

In other words, all that we needed for the war we were able to produce
ourselves, or to obtain in exchange for our produce and assets. On
paper, therefore, our position as a creditor country is only impaired
by our sales of securities. But that is only so on paper. In fact, the
loans that we have raised abroad are good debts that have to be met to
the last penny, and are a first charge on our future output, but the
advances that we have made to our Allies, much harder hit than we are
by the war, are assets on which we cannot depend. They were taken in
our balance-sheet above at half their face value, but there is much to
be said for writing them off altogether and tearing up the I.O.U.'s
of our foreign brothers-in-arms. Their need is greater than ours, it
would be little satisfaction to receive interest and repayment from
them, and the payment due from them, involving difficult problems of
taxation for them, would not help the good relations with them which,
we hope, may be a lasting effect of the war. And such an act of
renunciation on our part would do something towards a restoration
of the spirit with which we entered on war, a spirit which has been
seriously demoralised during its course, largely owing to the results
of our faulty finance, which encouraged profiteering in all classes.

In any case, there is our position. We have a big debt to meet at
home and abroad, and we are weakened on capital account by foreign
indebtedness, wear and tear of plant and dimunition of stocks and
materials. Wear and tear and depletion we can soon make good if we set
to work and work hard, if our bureaucracy takes away the fetters of
its restrictions and controls (instead of making further additions
to the "Black List" even after the armistice!), and if our ruling
wiseacres will refrain from trying to stimulate industry by taxing raw
and half-raw materials. For the debt charge many pleasant and
simple fancy strokes are suggested. The Levy on Capital is popular,
especially with those who do not own any, but its advocacy is by no
means confined to them. Mr Pethick Lawrence has published a persuasive
little book about it, but I cannot see that he meets the objections
to it. These are, the difficulty of valuation, the fact that in many
cases it would have to be paid by instalments, and so would be merely
another form of income tax, its sparing of the waster and penalising
of the saver, and, consequently, the grave danger that it would check
accumulation and so dry up the springs of capital. Mr Stilwell
has produced a "Great Plan to Pay for the War," by which all the
belligerents and neutrals who have been involved in expense by the war
would receive World Bonds from an International Congress for what
they have spent owing to the war, and would then pay one another any
international debts by exchanging these World Bonds, and deal with the
home debt by paying it off in new currency raised on the World Bonds.
But, surely, to pay off war debt with a huge addition to currency,
making war's inflation many times worse, would be a disastrous
beginning to that new era which is alleged to be dawning.

By hard work, sparing consumption of luxuries, and a big industrial
output, we can soon make the debt charge look smaller and smaller as
compared with our aggregate income. Our foreign debt we can only meet
by shipping goods and rendering services. But since it was all raised
to be lent to our Allies and our lending of it was essential to a
victory which has rid mankind of a terrible menace, it is surely
reasonable that our creditors should not press for repayment in the
first few difficult years, but should fund our short-dated debts into
loans with twenty-five or thirty years to run. As to the home debt,
we can only lighten its burden on the taxpayer by making taxation
equitable. To this end reform of the income tax is an urgent need. We
have to lighten its pressure much more effectively on those who are
bringing up families, and by collecting it through employers make it
an effective and just tax on those of the working class whose earnings
and family liabilities make them fairly subject to it.



_February_, 1919

Macaulay on Depreciated Currency--Its Evils To-day--The Plight of the
Rentier--Mr Goodenough's Suggestion--Sir Edward Holden's Criticisms of
the Currency Committee--His Scheme of Reform--Two Departments or One
in the Bank of England?--Not a Vital Question--The Ratio of Notes
to Gold--Objections to a Hard-and-fast Ratio--The Limit on Note
Issues--The Federal Reserve Act and American Optimism--Currency and
Commercial Paper--A Central Gold Reserve with Central Control.

Everyone has read, and most of us have forgotten, the great passage in
Macaulay's history which describes the evils of a disordered currency.
"It may well be doubted," he says, "whether all the misery which had
been inflicted on the English nation in a quarter of a century by bad
Kings, bad Ministers, bad Parliaments and bad judges was equal to the
misery caused in a single year by bad crowns and bad shillings....
While the honour and independence of the State were sold to a foreign
Power, while chartered rights were invaded, while fundamental laws
were violated, hundreds of thousands of quiet, honest and industrious
families laboured and traded, ate their meals and lay down to rest in
comfort and security. Whether Whigs or Tories, Protestants or Jesuits
were uppermost, the grazier drove his beasts to market, the grocer
weighed out his currants, the draper measured out his broadcloth,
the hum of buyers and sellers was as loud as ever in the towns, the
harvest-time was celebrated as joyously as ever in the hamlets, the
cream overflowed the pails of Cheshire, the apple juice foamed in the
presses of Herefordshire, the piles of crockery glowed in the furnaces
of the Trent, and the barrows of coal rolled fast along the timber
railways of the Tyne. But when the great instrument of exchange became
thoroughly deranged, all trade, all industry, were smitten as with a
palsy.... Nothing could be purchased without a dispute. Over every
counter there was wrangling from morning to night. The workman and his
employer had a quarrel as regularly as the Saturday came round. On a
fair-day or a market-day the clamours, the reproaches, the taunts, the
curses, were incessant; and it was well if no booth was overturned,
and no head broken.... The price of the necessaries of life, of shoes,
of ale, of oatmeal, rose fast. The labourer found that the bit of
metal which, when he received it was called a shilling, would hardly,
when he wanted to purchase a pot of beer or a loaf of rye bread, go as
far as sixpence."

From some of the evils thus dazzlingly described we are happily free
in these times. We are not cursed with a currency composed of coins
which are good, bad and indifferent, with the result that the public
gets the bad and indifferent while the nimble bullion dealers absorb
and export the good. There is nothing to choose between one piece of
paper and another, and all that is wrong with them is that there are
too many of them. But the general result as it affects the labourer
who wants to purchase a pot of beer or anyone else who wants to buy
anything is very much the same. A bit of metal that is called a
shilling has about the value of a pre-war sixpence and a bit of paper
that is called a Bradbury fetches half as much as the pound of five
years ago. Compared with what other peoples are suffering from the
same disease arising from the same surfeit of money in one form or
another, this nuisance that we are enduring is not too terribly
severe. It has entailed great hardship on a class that is small
in number, namely, those who have to live on fixed incomes. The
salary-earner and the rentier have borne the brunt, while the
wage-earner and the profit-maker have been able to expand their
earnings, in paper, at least to a point at which the depreciation of
currency have left them no worse off. Seeing that the wage-earners
are those who do the dreariest and dirtiest jobs, and that the
profit-makers are those who take the risks of industry and the
enormous responsibility of organising enterprise, they are the classes
whom it is clearly most desirable to encourage. The rentier in these
days gets less than no sympathy, but we make a great mistake if we
think that we can with impunity crush him between the upper and nether
millstone of fixed income and rising prices. With his help we have
equipped industry at home and abroad. We can, if we choose, by
depreciating the currency still further, lessen still more the reward
that we pay him for that benefit. He may kick, but he cannot abolish
the equipment with which he has already provided industry. But if
we make his life too hard he can strike like the rest of us, and by
refusing to provide for any further expansion in industrial equipment,
he can hold up production until we have devised some new method of
laying up capital. Currency depreciation is good for the debtor and
bad for the creditor; if it goes too far it kills the creditor and
reduces business to chaos.

We are a very long way from the chaos to which many of our Continental
neighbours have already reduced their monetary systems; but there
is fortunately a very general feeling that we are a country with a
reputation and a prestige on this point; and the business world is
growing restive concerning the delay on the part of those responsible
in putting an end to a state of things which may have been justified
by the war's exigencies (though there is much to be said for the view
that in fact it only added to the war's difficulties) but is
now clearly as out of date as the censorship, which, like it,
nevertheless, continues to flourish. This state of things arises from
the arrangement tinder which an unlimited supply of legal tender
currency can be manufactured by the Government, which encouraged to
continue the system by the fact that each note issued is in effect a
loan to itself without interest. At the meeting of Barclays Bank on
January 27th, Mr. Goodenough demanded that the issue of currency notes
by the Government should be stopped forthwith, and that if it were
necessary to provide more currency it would be better for the banks
to be allowed to issue notes themselves. This suggestion involves, of
course, a complete reversal of the principles on which our monetary
system has grown up, since it has long been based on a note-issuing
monopoly in the hands of the Bank of England. But these are
topsy-turvy days, in which greyheaded precedent is very justly at a
heavy discount; and Mr Goodenough's suggestion very practically gets
over a big difficulty that stands in the way of stopping the stream
of Bradburys. This difficulty lies in the fact that if the banks were
pulled at by their customers for currency and could not supply them
with Bradbury notes, they would be forced to take notes from the Bank
of England, with a bad effect on the appearance of its reserve. If
the business of issuing notes were put into the hands of the clearing
banks, their power to do so would be limited by the extent of their
assets, or of such of their assets as were thought fit to rank as
backing for their notes. In other words, the note-issuing business
would once more have to be regulated on banking principles and
controlled by the price asked, for advances, instead of expressing
the helplessness and improvidence of an impecunious and invertebrate
Government. In this manner the new departure might be a convenient
halfway-house on the way from chaos back to sanity. But probably it is
too revolutionary and goes too straight in the teeth of the Bank of
England's privilege to receive much practical consideration; and there
is the question whether the public would take the new paper readily
and whether it could be made legal tender.

Sir Edward Holden, in one of those masterly surveys of world finance
with which he now instructs the shareholders of the London Joint City
and Midland Bank, assembled at their annual meeting, gave much of his
attention to an attack on the report of Lord Cunliffe's Committee on
Currency. This was only to be expected, since the Committee had made
recommendations on lines which were largely conservative and did
not embody any of the reforms or changes which had been previously
advocated by Sir Edward. Being on this occasion chiefly critical, he
did not make very clear in his latest speech the precise proposals
that he favours. For them we have to go back to his speech of a year
ago, as reported in the _Economist_ of February 2, 1918, p. 171, where
he stated that "if the Bank (of England) had been working on the same
principles as other national banks of issue, there would have been
little ground for anxiety," and that these principles are:--

1. One bank of issue and not divided into departments.

2. Notes are created and issued on the security of bills of exchange
and on the cash balance, so that a relation is established between the
notes issued and the discounts.

3. The notes issued are controlled by a fixed ratio of gold to notes
or of the cash balance to notes.

4. This fixed ratio may be lowered by the payment of a tax.

5. The notes should not exceed three times the gold or the cash

As will be remembered, the Cunliffe Committee recommended that the
division of the Bank of England into an Issue Department and a Banking
Department, should be retained; that the old principle by which above
a certain fixed limit all notes should be backed by gold, should also
be retained, but that if at any time a breach of this rule should
be found necessary it should be possible, with the consent of the
Treasury, and that Bank rate "should be raised to a rate sufficiently
high to secure the earliest possible retirement of the excess issue."
Since it was formerly only possible to exceed the limit on the
fiduciary issue by a breach of the law, under the Chancellor of the
Exchequer's promise to get an indemnity for it from Parliament, and
since Treasury tradition insisted on a 10 per cent. Bank rate whenever
such a breach was permitted or contemplated, it will be seen that the
Cunliffe Committee proposed some considerable modifications in our
system and hardly justified Sir Edward's assertion that it "proposed
that the Bank should continue to work under the Act of 1844 as

At first sight there seems to be a good deal of difference between Sir
Edward's ideal and Lord Cunliffe's, but is not the difference to
a great extent superficial? Whether the Bank be divided into two
departments, each presenting a separate account, or its whole business
be regarded as one and stated in one account, seems to be rather a
trifling question. And the arguments put forward for their several
views by the two champions are not strikingly convincing. Sir Edward
wants only one account, because he thinks the consequence would be a
stronger reserve and fewer changes in bank rate. But a mere change of
bookkeeping such as the amalgamation of the two accounts would not
make a half-pennyworth of difference to the extent of the Bank's
responsibilities and its ability to meet them, and it is on variations
in these factors that movements in bank rate are in most cases
decided. On the other hand, Lord Cunliffe and his colleagues argue
that the main effect of putting the two departments into one would be
to place deposits with the Bank of England in the same position as
regards convertibility into gold as is now held by the note. On this
point Sir Edward's answer is telling: "In reply to this statement, I
say that the depositors at the present time can always get gold by
drawing out notes from the reserve and taking gold from the Issue
Department. There seems to be little difference between the depositors
attacking gold direct and attacking the gold through the notes in the
reserve. If the Bank cannot pay the notes when demanded the whole
machinery stops." Quite so. The notion that the holder of a Bank of
England note has now a stronger hold over the Bank's gold than the
depositor seems to be baseless. He can exercise his hold more quickly
perhaps, though even this is doubtful. Since banknotes are not
legal tender at the Bank of England, it is not quite clear that the
depositor would even have to take the trouble to go first to the
Banking Department for notes and then to the Issue Department for
gold. He might be able to insist on gold in immediate payment of his
deposit. Still less convincing is the Committee's argument that "the
amalgamation of the two departments would inevitably lead in the end
to State control of the creation of banking credit generally." Their
report might have explained why this should be so, for to the ordinary
mind the chain of consequence is not apparent. On the whole it is hard
to see much good or harm to be achieved by changing the form of the
Bank return. It might make the Bank's position look stronger, but it
could not make it really stronger. Nor would it really impair the
strength of the note-holder's position as against the depositor,
because even now there is no essential difference. It would substitute
a more businesslike and simple statement for a form of accounts which
is cumbrous and stupid and Early Victorian--a relic of an age which
produced the crinoline, the Crystal Palace and the Albert Memorial. On
the other hand, to alter a statistical record merely for the sake of
simplicity and symmetry is questionable. Unless we are getting more
and truer information, it is a pity to make comparisons between one
year and another difficult by changing the form in which figures are

A more essential difference between the two policies lies in Sir
Edward's advocacy of a ratio--three to one--between notes and gold,
and the Committee's support of the old fixed line system. By the
latter, if gold comes in, notes to the same extent can be created,
and if gold goes out notes to the amount of the export have to be
cancelled. Under Sir Edward's policy the influx and efflux of gold
would have an effect on the note issue which would be three times the
amount of the gold that came in or went out. This at least is the
logical effect of his statement that "the notes should not exceed
three times the gold or the cash balance." This law does not seem to
be quite consistent with his view that the fixed ratio of gold to
notes may be lowered by the payment of a tax; but presumably the tax
would come into operation before the three to one part was reached,
and at three to one there would be a firm line drawn. On this
assumption the Committee's argument is a very strong one. "If,"
says its report (Cd. 9182, p. 8), "the actual note issue is really
controlled by the proportion, the arrangement is liable to bring about
very violent disturbances. Suppose, for example, that the proportion
of gold to notes is actually fixed at one-third and is operative.
Then, if the withdrawal of gold for export reduces the proportion
below the prescribed limit, it is necessary to withdraw notes in the
ratio of three to one. Any approach to the conditions under which the
restriction would become actually operative would then be likely to
cause even greater apprehension than the limitation of the Act of
1844." Certainly if, during a foreign drain, for every million of gold
that went out, another two millions of credit, over and above, had
to be cancelled, it is easy to imagine a very jumpy state of mind in
Lombard Street and on the Stock Exchange. Sir Edward and the Committee
seem to be agreed as to a limit on the note issue, but of the two
limiting systems the old one advocated by the Committee, though
apparently more severe, would seem to have much less alarming
possibilities behind it.

A point on which the commercial world does not seem to have made up
its mind, however, is whether there should be a limit at all. Under
the old Act there was a limit which could only be passed by a breach
of the law. Under the Cunliffe proposal the limit could be passed
with the consent of the Treasury. Sir Edward has not told us of what
machinery he proposes for the passing of the limit which he lays down;
but in view of the great apprehension that an approach to the limit
point would, as shown by the Committee, produce, it is clear that
there would have to be a way round. In Germany there is no limit; you
pay a tax on the excess issue and go on merrily. In America it would
seem that the German system has been taken for a model. In his speech
on January 29th Sir Edward quoted Senator Robert Owen, who was the
principal pioneer of the Federal Reserve Bill through the Senate, as
follows:--"The central idea of the system is elastic currency issued
against commercial paper and gold, expanding and contracting according
to the needs of commerce.... It is of great importance that the volume
of these notes should contract when the commerce of the country does
not require the notes to be circulation, and the reserve board can
require them to be returned by imposing a tax upon the issue.... Under
the reserve system a financial panic is impossible. People will
not hoard currency nor hoard gold when they know that they can get
currency or get gold when required.... America no longer believes
a financial panic possible, and therefore the business men, being
perfectly assured as to the stability of credits, do not hesitate to
enter manufacturing and commercial enterprises from which they would
be deterred under old conditions of unstable credit." Well, let us
hope the Senator is right and that America is right in believing that
a financial panic is no longer possible there. But one cannot help
feeling that such a belief may be rather dangerous in the minds of
people so ready to take rose-coloured views as our American cousins.
The Federal Reserve system has worked beautifully in a period in
which American finance has had nothing to do but rake in the enormous
profits of American production at the expense of warring Europe and
lend part of them, to be spent in America, to the Allied belligerents.
It may work equally well if and when the problem to be faced is
different, but it will be interesting to see--for those of us who live
to see--what sort of a tax will be needed to "require" America, in one
of its holiday moods, to return currency that it thinks it needs and
the Federal Reserve Board regards as redundant.

Another point on which Sir Edward lays great stress, in his attack
on the Bank Act of 1844 and the Committee which supports its main
principles, is the beauty of the bill of exchange as backing for a
note issue, as opposed to Government securities. "There is," he says,
"no automatic system for the redemption of currency notes as would be
the case if they were issued against bills of exchange, which in due
course would have to be paid off." Again, "it seems to me that notes
should not be issued against Government securities which may or may
not be paid off, but against bills of exchange which must be met at
due date." This advantage about a bill of exchange is a very real
one to the individual holder who can always put himself in funds by
letting the contents of his portfolio "run off"; but is there much
in it as a safeguard against excessive issue of currency in times of
exuberance? In such times bills that fall due are pretty sure to
be replaced by new ones drawn against fresh production--since
over-production is a common symptom of commercial exuberance--or
against a resale of the goods on which the original bills were based.
As long as anyone who can show produce can be certain to get credit
and currency, the notion that the maturing of bills of exchange can be
relied to restrict currency expansion within safe limits is surely a
dangerous assumption. The principle of a fixed limit, to be broken in
case of real need, but only after some ceremony has been gone through
giving notice of the fact that a crisis has been reached, seems rather
to be required by the psychology of speculative mankind. But even if
Sir Edward's preference for bills of exchange as backing for notes has
all the merits that he claims that is no reason for urging the repeal
of the Bank Act to secure their use. Because the Bank Act does not
forbid it: it merely says, "there shall be transferred, appropriated
and set apart by the said governor and company to the Issue Department
of the Bank of England securities to the value of," etc. It is the
practice of the Bank to put Government securities into the Issue
Department, but the terms of the Act do not compel them to do so, and
if an excess issue were needed they would seem to be empowered to put
any bills that they discounted into the assets held against the note
issue. On the whole the terms of the Act leaving them freedom in the
matter, except with regard to the "Government debt" of L11 millions,
which is specially mentioned as to be transferred to the Issue
Department, seem to be preferable to a special stipulation in favour
of bills of exchange.

But the most important difference between Sir Edward Holden and the
Cunliffe Committee seems to be in their attitude towards the gold
reserve and the relation between the Bank of England and the rest of
the items that compose the London money market. The Committee, working
to restore the conditions which made our market the centre of the
world's finance, endeavoured to give back the control of the central
gold reserve to the Bank of England by suggesting, among other things,
that the other banks should hand over their gold to it. They omitted
to discuss the serious question of the greater difficulty that the
Bank is likely to find in future in controlling the price of money in
the market, owing to the huge size that the chief clearing banks have
now reached. But a central gold reserve under central control was
evidently the object at which they aimed. Sir Edward will have none of
this. He says that if this were done the position of the Joint Stock
banks would be weakened, though he does not explain why, since they
would obviously hold notes in place of their gold and so would be able
to meet their customers' demands, now that the latter are accustomed
to the use of notes for pocket money. He points out that "the gold
which was held by the Joint Stock banks before the war proved most
useful.... At the beginning of the war the banks paid out gold,
satisfied the demands of their customers for small currency, and thus
eased the situation until currency notes became available." He seems
to have forgotten that the banks, or most of them, refused to part
with their gold, paid their customers in Bank of England notes which,
being for L5 at the smallest, were of little use for pocket money, and
so drove them to the Bank to get gold; and we had to have a prolonged
bank holiday and a moratorium. Sir Edward is in favour of three gold
reserves, one to be held by the Government, one by the clearing banks,
and one by the Bank of England. If there were differences between the
three controllers of the reserve at a time of crisis the consequence
might be disastrous.

In view of the admiration expressed by Sir Edward for the new American
system which is so clearly based on central control it is rather
illogical that he should be so strongly in favour of independence on
this side of the water. His opinion is that "the policy of the Joint
Stock banks ought to be to make themselves independent of the Bank of
England by maintaining large reserves in their vaults." Independence
and individualism are a great source of strength in most fields of
financial activity, but in view of the great problems that our money
market has to face there seems to be much to be said for co-operation
and central control, at least until we have got back to a normal state
of affairs with regard to the foreign exchanges.



_March_, 1919

The New Meaning of Licence--The Question of Capital Issues--Text of
the Treasury Regulations--Their Scope and Effect--The Position of
the Stock Exchange--Wider Issues at Stake--Should Capital be set
Free?--The Arguments for and against--Perils of an Excessive
Caution--The New Committee and its Terms of Reference--The
Absurdity of prohibiting Share-splitting--The Storm in the House
of Commons--Disappearance of the Retrospective Clause--A Sample of
Bureaucratic Stupidity.

A contrast between liberty and licence is a pleasant alliterative
commonplace beloved by political writers, especially those with a
reactionary bias. In the light of recent events it seems to be going
to take a new meaning. Licence will soon be understood, not as the
abuse of liberty, to which democracies are prone, but as a new weapon
by which our bureaucracy will do away with liberty by tightening the
shackles on our economic and other activities. For imports and exports
the licence system is already familiar; if the mines and railways are
to be nationalised we may have to be licensed before we can burn coal
or go away for a week-end; if the Eugenists have their way a licence
will be necessary before we can propagate the species; and before
we can get a licence to do anything we shall have to go through an
exasperating process of filling in forms innumerable, inconsistent,
overlapping and incomprehensible. Finance is the latest victim of this
melancholy tendency. Under the guise of an attempt to give greater
freedom to it a system has been introduced which makes a Treasury
licence necessary, with penalties under the Defence of the Realm Act,
for doing many things which have hitherto been possible for those who
were prepared to forgo the privilege of a Stock Exchange quotation.
Let the story be told in official language, as uttered through the
Press Bureau, on February 24th, in "Serial No. C. 10917."

"In view of the changed conditions resulting from the conclusion
of the armistice, the Treasury has had under consideration the
arrangements which have been in force during the war for the control
of New Issues of Capital.

"The work of scrutinising proposals for new Capital Issues has been
performed during the war by the Capital Issues Committee, the object
being to refuse sanction for all projects not immediately connected
with the successful prosecution of the war. The decisions of the
Treasury, taken upon the advice of this Committee, have, however,
not had any binding force, beyond what is derived from the emergency
regulations of the Stock Exchange, which forbids dealings in any new
Issues which have not received Treasury consent.

"While it is not possible under existing financial conditions to
dispense altogether with the control of Capital Issues, it has clearly
become necessary to reconsider the principles upon which sanction has
been given or refused in order that no avoidable obstacles may be
placed in the way of providing the Capital necessary for the speedy
restoration of Commerce and Industry, and the development of public
utility services.

"In view of the numbers of the proposals for fresh Issues of Capital
which are to be expected, it is necessary to provide further machinery
for dealing with them and for making the decisions upon them

"A regulation under the Defence of the Realm Act has accordingly been
made prohibiting all Capital Issues except under licence from the
Treasury, and the Capital Issues Committee has been reconstituted with
new Terms of Reference, which are as follows:--

"'To consider and advise upon applications received by the Treasury
for licences under Defence of the Regulation (30 F) for fresh
Issues of Capital, with a view to preserving Capital during the
reconstruction period for essential undertakings in the United
Kingdom, and to preventing any avoidable drain upon Foreign Exchanges
by the export of Capital, except where it is shown to the satisfaction
of the Treasury that special circumstances exist.'

"It will be an instruction to the Committee that, in order that
applications may be dealt with expeditiously and to enable oral
evidence to be given in support of them when desired by the applicant,
that the Committee should sit by Panels consisting of three members,
the decision of the Panels to be subject to confirmation by the full

"All applications for licences most be made, in the first instance,
in writing on a Form which can be obtained from the Secretary of the
Capital Issues Committee, Treasury, S.W. 1.

"Before any application is refused the Committee will give the
applicant an opportunity of giving oral evidence in support of his

The notice then proceeded to recite the terms of D.O.R.A. 30 F, of
which more anon. Next day came a supplementary announcement, "Serial
No. C 10938," as follows:--

"With reference to the recent announcement in the Press that all
applications for Treasury licences must be made in writing on a
form obtainable from the Secretary of the Capital Issues Committee,
Treasury, S.W. 1, delay will be avoided if intending applicants will
state which of the following forms they require:--

"Form No. 1. Issue by a proposed New Company to start a fresh

"Form No. 2. Issue by an Existing Company (other than for the
purpose of capitalising profits).

"Form No. 3. Issue by an Existing Company for the purpose of
capitalising profits.

"Form No. 4. Conversion of a Firm into a Limited Company which does
Not involve the introduction of fresh capital.

"Form No. 5. Conversion of a Firm into a Limited Company which Does
involve the introduction of fresh capital.

"If none of the above Forms appears to be applicable (as, e.g., in
amalgamations, sub-divisions of shares, etc.), a statement of the
facts should be submitted in writing."

Before we go on to consider the new regulation, 30 F, let us try to
see what is the real effect of the document above quoted. It was
evidently intended to be a relaxation of the control of finance.
This is shown by the sentence which says that the matter was to be
reconsidered "in order that no avoidable obstacle may be placed in the
way of providing the capital necessary for the speedy restoration
of commerce and industry, and the development of public utility
services." And yet it was thought necessary to give legal force and
attach penalties to regulations that have worked during the war quite
sufficiently well to secure a much stricter control than is now
required. The explanation of this apparent inconsistency is probably
to be found in the desire of the Government to meet a grievance of the
Stock Exchange. Hitherto the only penalty that befell those who made
a new issue without getting Treasury sanction was that the securities
issued could not be dealt in on the Stock Exchange. The practical
effect of this was that those who acted without Treasury sanction
could only issue securities subject to this serious drawback, and
so an effective but not altogether prohibitive bar was put on the
process. If this bar was not strong enough in war-time it ought
clearly to have been strengthened long ago; if it was strong enough,
then why should it be strengthened now?

From the Stock Exchange point of view it is easy to make out a good
case for working through licence and penalty rather than through the
banning, of the securities effected, from sanction for dealings. By
thus being used as an official weapon the Stock Exchange penalised
itself and its members. By saying "no security not sanctioned by the
Treasury shall be dealt in here," its Committee restricted business
in the House and drove it outside. This grievance was obvious and was
plentifully commented on during the war. If the Committee had pressed
the point vigorously it could probably have forced the Government long
ago to abolish the grievance by making all dealings in new issues that
appeared without Treasury sanction illegal and liable to penalty.
A patriotic readiness to fall in with the Government's desires was
probably the reason why the Stock Exchange refrained from embarrassing
it, during the war, by too active protests against a grievance that
was then more or less real; though it should be noted that even if the
grievance had been amended, the Stock Exchange would not necessarily
have got any more business, but would only have succeeded in stopping
a very moderate amount of business that was being done by outsiders.
But when all is said that can be said for the justice of the case that
can be made by the Stock Exchange, the question still arises whether
it was advisable, at a time when relaxation of restrictions was
desirable in the interests of the revival of industry, to draw tighter
bonds which had been found tight enough to do their work. That the
Stock Exchange should suffer from limitations from which outside
dealers were exempt was certainly a hardship. On the other hand,
since the armistice there has been a considerable expansion in Stock
Exchange business. Oil shares, Mexican securities, industrial shares,
insurance shares, and others in which capitalisation of reserves and
bonus issues have been used as an effective lever for speculation,
have enjoyed spells of considerable activity. With this revival in
progress, in spite of many obvious bear points, such as industrial
unrest at home, Bolshevism abroad, the continuance of heavy
expenditure by the Government, and the hardly slackened growth of
the national debt, it seems to have been scarcely necessary in the
interests of the House to have made regulations which, though perhaps
demanded by abstract justice, imposed new ties on enterprise at a
time when complete freedom, as far as it was consistent with the best
interests of the country, was most of all desirable.

How far, we have next to ask, is it necessary for the best interests
of the country to restrict the freedom of capital issues? If we look
back at the terms of reference under which the reconstituted Committee
is to work, we see that the officially expressed objects are (1)
preserving capital for essential undertakings in the United Kingdom,
and (2) preventing any avoidable drain upon Foreign Exchanges by the
export of capital. There is certainly much to be said for both these
objects. When we lend money to foreigners we give them the right to
draw on us now in return for their promises to pay some day; in other
words, we make an invisible import of foreign securities, and in the
present state of our trade balance all imports, whether visible or
invisible, need careful watching. It is also very evident that at a
time when capital is scarce there is much to be said for keeping it
for essential industries, especially those which produce necessaries
and goods for export, and not allowing it to be swept up by borrowers
who are going to devote it to making expensive fripperies on which big
profits are probable.

There remains a very big other side to both these questions. All over
the world there is a demand for goods which have not been produced,
or only in greatly reduced quantities, during the war. This demand is
only effective in so far as willing buyers can pay; some of them have
the needful cash in hand or waiting in London or elsewhere to be drawn
on, but a great number of would-be buyers want to be financed, and
will have to be financed by somebody if the needs that they feel are
to be translated into actual purchases. In other words, in order that
the wheels of industry are to be set turning as fast as they might, if
they had a full chance, somebody has to lend freely. Now, it is surely
most of all important in the national interest that those wheels
should begin spinning as fast as possible, and the question is whether
we are more likely to serve that interest best by keeping a meticulous
eye on the course of exchange and buttoning up our pockets to foreign
borrowers or by leaving capital free to seek its market, knowing that
every time we give the foreigner the right to draw on us we stimulate
our export trade, because his drawing must finally mean a demand on us
for something--goods, securities or gold--and goods are what people
are in these times most anxious to take. If we are going to leave all
the financing to be done by America and fear to import promises to pay
lest they should be followed by demands on our gold, shall we not be
rather in the position of Barry Lyndon, who was given a gold piece by
his mother when he went out into the world, with strict injunctions
always to keep it in his pocket and never to change it? Regard for our
gold standard is most necessary, but the gold standard is not an end
in itself, but merely an important part of a machine which only exists
to serve our industry. If we are so careful of the machine, which is
a mere subsidiary, that we check the industry which it is there to
serve, we shall be like the dandy who got wet through because he had
not the heart to unfurl his beautifully rolled-tip umbrella.

Again, it looks very sound and sensible to keep capital for purposes
that are essential, but, on the other hand, it is so enormously
important to set industry going as fast as possible that almost any
one who will do anything in that direction is entitled to be given a
chance. In war-time, when labour and materials were so scarce that
they could not turn out all the munitions that were necessary, such a
restriction was clearly inevitable. Now, when labour and materials are
becoming more plentiful, and the scarce commodity is the pluck and
enterprise that will take the risks involved by getting to work on a
peace basis, it may be argued that any one who will take those risks,
whatever be the stuff or services that he proposes to produce, should
be encouraged rather than checked. It is again a question of the
balance of advantage. If we are going to be so careful in seeing that
capital is not put to a wrong use that we take all the heart out of
those who want to make use of it, we shall do more harm than good. If
by leaving capital free to go into any enterprise that it fancies
we can give a start to industry and promote a spirit of courage and
enterprise among its captains, it will be well worth while to do so
at the expense of seeing a certain amount of capital going into the
production of articles that the community might, if it made a more
reasonable use of its purchasing power, very well do without. The same
question arises when we consider the desire of the Government, not
expressed in the above statement, but very freely admitted by Mr Bonar
Law, in discussing it in the House of Commons, to keep capital to be
lent to it rather than expended in, perhaps unnecessary, industry.
Here, again, it is clearly in the interest of the taxpayer that
Government loans should be raised on the most favourable terms
possible. But if, in order to do so, we starve industry of capital
that it needs, and so check the production on which all of us,
Government and citizens alike, ultimately have to live, we shall
be scoring an immediate advantage at the expense of future
progress--spoiling a possibly brilliant break by putting down the
white ball for a couple of points.

There is thus a good deal to be said for setting capital free, before
we have even arrived at the most serious objection to regulating it
under Treasury licence. This objection is the exasperation, delay and
uncertainty involved by this control. Even if we had an ideally wise
and expeditious body to decide about capital issues it might not be
the best thing to set it to work. But when we remember that in order
to see that the wrong sort of issue is not made, all issues will
have to pass through the terribly slow-working process of official
selection before the necessary licence is finally granted, it begins
to look still more likely that we should do well to run the risk of
letting a few goats through the gate, rather than keep all the sheep
waiting outside for months, with the probable result that many of them
may lose altogether their chance of final salvation. It will be noted
from the official statement that the arbitrary methods of the old
Committee are to be modified. It has long been a by-word among those
who had dealings with it; they abused it in quite sulphurous language
and were wont to quote it as an example of all that bureaucratic
tyranny is and should not be, thereby doing some injustice to our
bureaucrats, seeing that the Committee was manned not by officials but
by business men, clothed _pro hac vice_ in the thunder of Whitehall.
The new Committee is to sit by panels of three, so as to expedite
matters, and so as to allow applicants the privilege of giving oral
evidence. This is an innovation that will save some exasperation, but
it will hardly accelerate matters, especially as the decision of the
panels will be subject to confirmation by the full Committee, so that
all the work will have to be done twice over. There is thus much
reason to fear that delay, so fatal in business matters, will be an
inevitable offspring of the efforts of the new Committee, and the list
of different forms on which applications are to be made, given above,
shows that all the paraphernalia of red tape will dominate the

Now for the terms of the new Regulation under the Defence of the Realm

"1. The following regulation shall be inserted after Regulation 30

"30 F. The following provisions shall have effect in respect of
new capital issues and to dealings in securities issued for the
purpose of raising capital:

"(1) No person shall, except under and in pursuance of a licence
granted by the Treasury--

"(a) issue, whether for cash or otherwise, any stock, shares or
securities; or

"(b) pay or receive any money on loan on the terms express or
implied that the money is to be or may be applied at some future
date in payment of any stock, shares or securities to be issued at
whatever date to the person making the loan; or

"(c) sub-divide any shares or Debentures into shares or Debentures
of a smaller denomination, or consolidate any shares or Debentures
of a larger denomination; or

"(d) renew or extend the period of maturity of any securities; or

"(e) purchase, sell or otherwise transfer any stock, shares
or securities or any interest therein, or the benefit of any
agreement conferring a right to receive any stock, shares or
securities, if the stock, shares or securities were issued,
sub-divided or consolidated, or renewed or the period of maturity
thereof extended, or the agreement was made, as the case may be,
at any time between the 18th day of January, 1915, and the 24th
day of February, 1919, and the permission of the Treasury was not
obtained to the issue, sub-division, consolidation, renewal or
extension or the making of the agreement, as the case may be.

"(2) No person shall except under and in pursuance of a licence
granted by the Treasury--

"(a) buy or sell any stock, shares or other securities except for
cash or when the purchase or sale takes place in any recognised
Stock Exchange, subject to the rules or regulations of such

"(b) buy or sell any stock, shares or other securities which have
not remained in physical possession in the United Kingdom since
the 30th September, 1914.

"(3) A licence granted under this regulation may be granted
subject to any terms and conditions specified therein.

"(4) If any person acts in contravention of this regulation, or
if any person to whom a licence has been granted under this
regulation subject to any terms or conditions fails to comply with
these terms or conditions, he shall be guilty of a summary offence
against these regulations.

"(5) In this regulation the expression 'securities' includes
Bonds, Debentures, Debenture stock, and marketable securities."

It will be seen at once that the terms of this document, on any
interpretation of them, go far beyond the intentions expressed in what
may be called the official preamble and in the new Committee's terms
of reference. One of the clauses seems, with all deference to its
august composers, to be merely silly. This is (1)(c) forbidding
sub-division of securities. If a L10 share is split into ten _L1_
shares this operation cannot make the smallest difference to the
supply of capital for essential industries or cause any drain on the
Foreign Exchanges. I am assured by those who have delved into the
official intention that the reason for the objection of the old
Committee to splitting schemes, on which this new prohibition is
based, was that splitting made shares more marketable and popular and
so more likely to compete with War Bonds. But a mere sale of shares,
split small and so popularised, does not absorb any capital. That only
happens when, money is put into some new form of industry. If A, who
holds ten L20 shares, is enabled to dispose of them to B because they
are split into 200 L1 shares, then, A instead of B has got the money
and has to invest it in something. The amount of capital available for
investment is not diminished by a halfpenny. This regulation is just
a piece of short-sighted tyranny which exasperates without doing the
smallest good to anybody.

More serious, however, was clause (1)(e) under which any securities
that have been issued, split, consolidated or renewed without Treasury
sanction since January, 1915, were not to be dealt in, in future,
without a licence. The result of this clause, if it had stood, would
have been that all loans under which such securities had been
pledged would have had to be called in because the collateral became
unsaleable, except after all the ceremonies had been gone through
and a licence had been got. It was also possible to argue that the
prohibition to renew or extend the maturity of any security meant that
no loans of any kind could be renewed, and that no commercial bills
could be renewed, without a licence. It is true that No. 5 paragraph
says what the expression "securities" includes, but it does not state
definitely that bonds, Debentures, Debenture stock and marketable
securities are the only things included. It was a pretty piece of
drafting, and raised a pretty storm in the House of Commons on
February 27th, when a somewhat lurid picture of its effects was drawn
by Sir H. Dalziel and Mr Macquisten. Mr Chamberlain not being then
legally a member of the House, it fell to the lot of Mr Bonar Law to
explain that the Government had really meant to give greater freedom,
in making new issues, that the evils anticipated had not been
intended, that he hoped the House would not judge the Government too
harshly for not making unsanctioned issues illegal from the beginning,
and that a new Order would be issued removing the retrospective effect
of the new regulation. And so amendment was promised of a measure
which would have had very awkward and unjust effects. It may be argued
that it would only have affected people who had done, during the war,
what they were asked not to do, namely, make issues without Treasury
sanction. If the old Committee had been a reasonable and expeditious
body this argument would have had great weight. But, in view of its
caprices and dilatoriness, there was a good deal of excuse for those
who decided to do without Treasury sanction and take the consequence
of being unable to market their securities on the Stock Exchange.
To propose to add a new penalty and cause the cancelling of all the
financial arrangements made in connexion with such issues during four
years was simply piling blunder on blunder. Luckily, the protests of
the Government's own supporters sufficed to undo the worst of the
mischief; but the whole affair is only another argument in favour of
the earliest possible ridding of finance and industry from control
that is so clumsily exercised.



_December_, 1918

[Footnote 1: This was the latter of two articles contributed to the
_Times Trade Supplement_ in answer to a series in which Mr Arthur
Kitson had attacked our banking and currency system suggested an
inconvertible paper currency.]

"Boundless Wealth"--Money and the Volume of Trade--The Quantity
Theory--The Gold Standard--How is the Volume of Paper to be
regulated?--Mr Kitson's Ideal.

In the November _Trade Supplement_ an endeavour was made to answer Mr
Kitson's rather vague and general insinuations and charges against our
bankers concerning the manner in which they do their business. Now
let us examine the larger and more interesting problem raised by his
criticism of our currency system.

In his article in the June _Supplement_ he told us that "if the
British public had any grasp of the fundamental truths of economic
science they would know that a future of boundless wealth and
prosperity is theirs." This is a cheery and encouraging view and, let
us hope, a true one. But, that boundless wealth can only be got if we
work for it in the right way. Can Mr Kitson show it to us, and what
are these "fundamental truths of economic science"? It is easier to
talk about them than to find any two economists who would give an
exactly--or even nearly--similar list of them. Mr Kitson glances "at
a few elementary truths." "Wealth," he says, "is the product of two
prime factors, man and Nature, generally termed labour and land. With
an unlimited, or practically unlimited, supply of these two factors,
how is it that wealth is and has been hitherto so comparatively
scarce?" But is the supply of "man" unlimited in the sense of man
able, willing, and properly trained to work? And is the supply of
"Nature" unlimited in the sense of land, mines, and factories fully
equipped with the right machinery and served and supplied by adequate
means of transport? Surely the failure In production on which Mr
Kitson so rightly lays stress is due, at least partly, to lack of
good workers, good organisers, good machinery, and good transport
facilities. Workers who restrict output, employers who despise science
and cling to antiquated methods, the opposition of both classes to new
and efficient equipment, and large tracts, even of our own land, still
without reasonable transport facilities, have something to do with
it. And lack of capital--this answer to the question Mr Kitson flouts
because, he says, "since capital is wealth," to say that "wealth is
scarce because capital is scarce is the same as saying that wealth is
scarce because it is scarce." But is it not a "fundamental truth of
economic science" that capital is wealth applied to production? Wealth
and capital are by no means identical. When a well-known shipbuilding
magnate laid waste several Surrey farms to make himself a deer-park,
the ground that he thus abused was still wealth, but it is no longer
capital because it has ceased to produce good food and is merely a
pleasant lounging-place for his lordship. May not the failure of
production be partly due to the fact that, owing to the extravagant
and stupid expenditure of so many of the rich, too much work is put
into providing luxuries--of which the above-mentioned deer-park is an
example--and too little into the equipment of industry with the plant
that it needs for its due expansion?

Mr Kitson's answer is much easier. According to him, instead of
working better, organising better, and putting more of our output into
plant and equipment and less into self-indulgence and vulgarity all
that we have to do to work the necessary reform is to provide more
money and credit. Since, he says, under the industrial era--

"All goods were made primarily for exchange or rather for sale ... it
followed, therefore, that production could only continue so long as
sales could be effected; and since sales were limited by the amount of
money or credit offered, it followed that production was necessarily
limited by the quantity of money or credit available for commercial

But is this so? If goods are produced more rapidly than money, it does
not follow that they could not be sold, but only that they would have
been sold for less money. The producer would have made a smaller
profit, but on the other hand the cheapening of the product would have
improved the position of the consumer, the cheapening of materials
would have benefited the manufacturer, and it is just possible that
production, instead of being limited, might have been stimulated by
cheapness due to scarcity of currency and credit, or, at least, might
have gone on just as well on a lower all-round level of prices. On the
whole, it is perhaps more probable that a steady rise in prices caused
by a gradual increase in the volume of currency and credit would have
the more beneficial effect in stimulating the energies of producers.
But Mr Kitson's argument that the volume of currency and credit
imposes an absolute limit on the volume of production is surely much
too clean-cut an assumption. This absolute limit may be true, if
currency cannot be increased, with regard to the aggregate value in
money of the goods produced. But money value and volume are two quite
different things. If our credit system had not been developed as it
has, and we had had to rely on actual gold and silver for carrying on
all production and trade, it does not by any means follow that trade
and production might not have been on something like their present
scale in the matter of volume and turnover; but the money value would
have been much smaller because prices would have been all round at a
much, lower level.

This contention is based on what is called the "Quantity Theory of
Money." This theory Mr Kitson wholeheartedly believes, so that this is
not a point that has to be argued with him. "The value of money,"
he says, "as every student of economics knows, is determined by the
quantity of money in use and its velocity of circulation." Quite so.
If you increase the amount of money faster than that of goods, more
money has to be given for less goods; the value, or buying power, of
money is depreciated and prices go up. The present war has given an
excellent example of this process at work. All the warring Governments
have printed acres of paper money, and have worked the credit system
with profligate energy; and so we have a huge increase in currency
and credit, along with little or no increase (probably a decrease) in
consumable goods, and prices have soared like rockets all over the
world. In neutral countries the rise has been as bad as anywhere,
because the neutrals have been choked with the gold that the warring
Powers exported, putting paper in its place. So we see that the volume
of money, on the theory so emphatically expounded by Mr Kitson and
endorsed by common-sense--as long as we are careful to include
all forms of money that are taken in exchange for goods in the
definition--reflects itself at once in prices. If money does not
increase in quantity and goods do, then prices go down, and after
the necessary adjustments are made in rates of wages and salaries,
a larger trade can be done with the same amount of money at a lower
level of values. The volume of money thus limits the aggregate value
of trade, but not its aggregate volume. Periods of falling prices are
not encouraging to producers, and they put too much advantage into the
hands of the _rentier_--the man who lives on fixed interest; on the
other hand, they are generally believed to be in favour of the working
classes, since reductions in wages generally lag behind the fall in
prices, which means increased buying power to the wage-earner.

Mr Kitson's view that the volume of trade is limited by the quantity
of currency and credit is thus based on confusion between volume and
value. Moreover, it follows also from the "Quantity Theory of Money,"
which he holds, that if he applies his remedy and multiplies currency
and credit as fast as he appears to want to, the result will be a
still further depreciation in the buying power of money, and a further
rise in prices and an increase in all the bitterness, discontent,
suspicion, and strikes that the rise in prices has already caused
during the war. Is this a prospect to pray for? Surely if we want to
enjoy "boundless wealth and prosperity" the way to do so is to turn
out goods--things to eat and wear and enjoy--and not to multiply
money, thereby merely depreciating its value, on Mr Kitson's own
admission. He thinks that "nothing but an abundant supply of currency
in the shape of legal tender notes and bank credit, could have enabled
us to undertake successfully such unprecedented burdens" as we have
borne during the war. But it may equally well be argued that we have
borne these burdens because we worked harder than ever before to turn
out the needed stuff, organised better, used our machinery to its
full power, and spent less of our product on luxuries; and that the
abundant currency, by forcing up prices, immensely increased the
cost of the war and produced industrial friction which several times
brought us unpleasantly close to disaster.

Mr Kitson, however, uses the "Quantity Theory of Money"--the doctrine
that the value or buying power of money varies according to its
quantity in relation to that of the goods that it buys--chiefly as a
stick wherewith to beat the Gold Standard. He shows, very easily and
truly, that it is absurd to suppose that the value of the monetary
gold standard is invariable. Thereby he is only beating a dead horse,
for no such argument is nowadays put forward. The variability of the
gold standard of value is acknowledged, whenever a fluctuation in the
general level of commodity prices is recorded. But gold is the basis
of our credit system, and of those of all the economically civilised
countries of the world, not because its value is believed to be
invariable, but because it is the commodity which is universally
accepted, in such countries and in normal times, in payment of debts.
This quality of acceptability it has got largely by custom and
convention. Mr Kitson speaks of the "selection of gold by the world's
bankers as the basis for money and credit." But it was selected as
currency by common custom long before bankers were heard of. And it
was selected because of its permanence, ductility and other qualities,
especially its beauty as ornament, which made man, eager to adorn
himself, his women-kind, and the temples of his gods, always ready
to accept it in payment, knowing also that, because of this
acceptability, he would always be able to exchange it into any goods
that he wanted.

Any other commodity that earned this quality of universal
acceptability could do the work of gold just as well. But until one
has been found, gold, as long as it keeps that quality, holds the
field. And bankers use it as the basis for money and credit, not
because, as Mr Kitson says, they selected it owing to its scarcity,
but because this quality of universal acceptability made it the thing
in which all debts, both at home and abroad, could be paid. "Given,"
says Mr Kitson, "a self-contained trading community with a certain
quantity of legal tender, just sufficient for its commercial needs,
and it makes no difference either to the value or efficiency of the
money or to the trade affected whether it be made of metal or paper."
Quite so, but trading communities are not self-contained. Their
currency has to be convertible into something acceptable abroad, and
that something is, at present, gold. It is possible that the world
may some day evolve an international paper currency that will be
everywhere acceptable. But such an ideal requires a growth of honesty
and mutual confidence among the nations that puts it a long way off.
And how is its volume to be regulated?

This question is all-important, whether the currency be national or
international. Mr Kitson speaks of a currency "just sufficient" for
the community's commercial needs. Who is to decide when the currency
is just sufficient? The Government? A sweet world we should live in,
if among other party questions, Parliament had to consider multiplying
or contracting the currency every year or every month, with all the
interests that would be affected by the consequent rise or fall in
prices, lobbying, speech-making, and pulling strings to work the
oracle to suit their pockets. And, according to Mr Kitson's view, that
the volume of trade is limited by the supply of currency, this volume
would then depend on the whims of the House of Commons, half the
members of which would probably be innocent of a glimmering of
understanding of the enormously important question that they were
deciding. The gold standard, which makes the course of prices depend,
more or less, on the chances of digging up a capricious metal from the
bowels of the earth, has its obvious drawbacks; but it is a clean and
sensible business compared with making them depend on the caprices of
Parliament, complicated by the political corruption that would be only
too likely to follow the putting of such a question into the hands of
our elected and hereditary representatives and rulers.

Such, however, seems to be the Promised Land to which Mr Kitson wants
to lead us. Thus he propounds his remedy. "The remedy is surely
obvious. Divorce our legal tender from its alliance with gold
entirely, so that the supply of money and credit for our home trade is
no longer dependent upon our foreign trade rivals. Base our currency
upon the national credit ... treat gold as a commodity only, for the
settlement of foreign trade balances."

This passage in his article in the September _Supplement_ tells us
what to do. Keep gold, out of deference for foreign prejudice, for the
settlement of foreign trade balances, but make as much paper money as
you like for home use. As our legal tender money is to be "divorced
entirely from its alliance with gold" it clearly cannot be convertible
into gold. So that apparently we shall have a paper pound and a gold
pound (the latter for foreign use) with no connection between them.
This stage of economic barbarism has been left behind now even by
some of the South American republics. The paper pound, based on the
national credit, can be multiplied as fast as our legislators think
fit. If they do not multiply it fast enough, Mr Kitson will tell them
that they are strangling trade, because the volume of production
is limited by the amount of money available. At the same time bank
credits will be multiplied indefinitely because, as was shown in the
November _Supplement_, Mr Kitson supports a view that the average
business man holds (according to him) that he ought to have a legal
right to as much credit as he wants. With the Government printing
paper to please its supporters, with the banks obliged by law to give
credit to every one who asks for it, and with prices soaring on every
addition to currency and credit, what a country this will be to live
in, and what a life will be led by those who have to compile and
work out the index numbers of the prices of commodities! Some of us,
perhaps, will prefer the jog-trot conservatism of Lord Cunliffe's
Currency Committee, who in their recently issued report[1] (which
every one ought to read) recommend that gold should not be used for
circulation at present, but that endeavours should be made towards
the cautious reduction of our swollen paper currency, and that its

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