War-Time Financial Problems by Hartley Withers (page 3)

invested.

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

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

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

XI

BONUS SHARES

_July_, 1918

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

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

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

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

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

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

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

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

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

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

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

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

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

XII

STATE MONOPOLY IN BANKING

_August_, 1918

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

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

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

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

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

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

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

“It may be worth pointing out:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

XIII

FOREIGN CAPITAL

_September_, 1918

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

XIV

NATIONAL GUILDS

_October_, 1918

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

XV

POST-WAR FINANCE

_November_, 1918

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

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

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

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

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

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

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

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

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

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

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