WAR-TIME FINANCIAL PROBLEMS

by

HARTLEY WITHERS

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A Description of the Money Market, by WALTER BAGEHOT. Edited with anew Preface by HARTLEY WITHERS. "There is no city man, howeverripe his experience, who could not add to his knowledge from itspages. "--_Financial News_. 

 "Blest paper credit! last and best supply! That lends Corruption lighter wings to fly: Gold imp'd by thee, can compass hardest things, Can pocket States, can fetch or carry Kings; A single leaf shall waft an Army o'er, Or ship off Senates to a distant Shore; A leaf, like Sibyl's, scatter to and fro Our fates and fortunes, as the winds shall blow; Pregnant with thousands flits the Scrap unseen, And silent sells a King, or buys a Queen. "

POPE, _Moral Essays_. 

PREFACE

At a time when Finance is of greater importance than ever before, itis hoped that this small volume may be of interest and value to thepublic, and help the application of war's lessons to the problems thatface us in peace. 

The contents, with the exception of the last article on "Money orGoods?" (which appeared in the Trade Supplement of the _Times_ forDecember, 1918), have already been published in _Sperling's Journal_, from September, 1917, to March, 1919; they have been left as they werewritten, except for a few verbal corrections. 

I desire to express my thanks to the Editors of _Sperling's Journal_and of the _Times_ for their kind permission to reprint the articles. 

H. WITHERS. 

June, 1919. 

CONTENTS

ITHE OUTLOOK FOR CAPITALThe Creation of Capital--The Inducement--War and Capital

IILONDON'S FINANCIAL POSITIONLondon after the War--A German View--The Rocks Ahead--Our RelativePosition secure--Faulty Finance--The Strength we have shown--The Natureand Limits of American Competition--No other likely Rivals

IIIWAR FINANCE AS IT MIGHT HAVE BEEN--IFinancial Conditions in August, 1914--No Scheme prepared to meet thePossibility of War--A Short Struggle expected--The Importance of Financeas a Weapon--Labour's Example--The Economic Problem of War--TheAdvantages of Direct Taxation--The Government follows the Path of LeastResistance--The Effect of Currency Inflation

IVWAR FINANCE AS IT MIGHT HAVE BEEN--IIThe Changed Spirit of the Country--A Great Opportunely thrownaway--What Taxation might have done--The Perils of Inflation--Driftingstupidly along the Line of Least Resistance--It is we who pay, not"Posterity"

VA LEVY ON CAPITALThe Objects of the Levy--Its Origin and History--How it would work inPractice--The Attitude of the Chancellor--The Effects of the Scheme indiscouraging Thrift--Its Fallacies and Injustices--The InsuperableObstacles to its Application--Its Influence on Production--One of theTests of a Tax--Judged by this Test the Proposed Levy is doomed

VIOUR BANKING MACHINERYThe Recent Amalgamations--Will the Provinces suffer?--Consolidation nota New Movement--The Figures of the Past Three Decades--Reduction ofCompetion not yet a Danger--The Alleged Neglect of LocalInterests--Shall we ultimately have One Huge Banking Monopoly?--TheSuggested Repeal of the Bank Act--Sir E. Holden's Proposal

VIITHE COMPANIES ACTSAnother Government Committee--The Fallacy of imitatingGermany--Prussianising British Commerce--The Inquiry into the CompaniesActs--Will Labour Influence dominate the Report?--Increased Productionthe Great Need--Will it be met by tightening up the Companies Acts?--TheDangers of too much Strictness--Some Reforms necessary--Publicity, Education, Higher Ideals the only Lasting Solution--The Importance ofForeign Investments--Industry cannot take all Risks and no Profits

VIIITHE YEAR'S BALANCE-SHEETThe Figures of the National Budget--A Large Increase in Revenue and aLarger in Expenditure--Comparison with Last Year and with theEstimates--The Proportion borne by Taxation still too Low--The Folly ofour Policy of Incessant Borrowing--Its Injustice to the Fighting Men

IXCOMPARATIVE WAR FINANCEThe New Budget--Our own and Germany's Balance-sheets--The Enemy'sDifficulties--Mr Bonar Law's Optimism--Special Advantages which Peacewill bring to Germany--A Comparison with American Finance--How much havewe raised from Revenue?--The Value of the Pound To-day--The 1918 Budgetan Improvement on its Predecessors--But Direct Taxation still tooLow--Deductions from the Chancellor's Estimates

XINTERNATIONAL CURRENCYAn Inopportune Proposal--What is Currency?--The Primitive System ofBarter--The Advantages possessed by the Precious Metals--Gold as aStandard of Value--Its Failure to remain Constant--Currency andPrices--The Complication of other Instruments of Credit--No Substitutefor Gold in Sight--Its Acceptability not shaken by the War--AFluctuating Standard not wholly Disadvantageous--An InternationalCurrency fatal to the Task of Reconstruction--Stability and Certaintythe Great Needs

XIBONUS SHARESA Deluge of Bonus Shares--The Effect on the Market--A Problem inFinancial Psychology--The Capitalisation of Reserves--The Stock ExchangeView--The Issue of Bonus-carrying Shares--The Case of the A. B. C. --AWiser Variation from Canada--Bonus Shares on Flotation--An AmericanDevice--Midwife or Doctor?--The Good and Bad Points of both Systems

XIISTATE MONOPOLY IN BANKINGBank Fusions and the State--Their Effects on the Bank of England--MrSidney Webb's Forecast--His Views of the Benefits of a BankMonopoly--The Contrast between German Experts and BritishAmateurs--Bankers' Charges as affected by Fusions--The Effects ofMonopoly without the Fact--The "Disinterested Management" Fallacy--TheProposal to split Banking Functions--A Picture of the State in Control

XIIIFOREIGN CAPITALThe Difference between Aims and Acts--Should Foreign Capital be allowedin British Industry?--The Supremacy of London and National Trade--Noneed to fear German Capital--We shall need all we can get--ForeignShares in British Companies--Can and should the Disclosure of ForeignOwnership be forced?--The Difficulties of the Problem--Aliens andBritish Shipping--The Position of "Key" Industries--Freedom to Importand Export Capital our Best Policy

XIVNATIONAL GUILDSThe Present Economic Structure--Its Weaknesses and Injustices--Werethings ever better?--The Aim of State Socialism--A Rival Theory--The NewMovement of Guild Socialism--Its Doctrines and Assumptions--Payment "asHuman Beings"--The "Degradation" of earning Wages--Productionirrespective of Demand--Is that the Real Meaning of Freedom?--The OldEvils under a New Name--A Conceivably Practical Scheme for some otherWorld

XVPOST-WAR FINANCETaxation after the War--Mr. Hoare's Scheme described and analysed--ThePosition of the Rentier--Estimates of the Post-War Debt--The CompulsoryLoan Proposal--What Advantages has it over a Levy on Capital?--TheArgument from Social Justice--Questions still to be answered--The Choicebetween a Levy and Stiff Taxation--Are we still a Creditor Nation?--OurDebt not a Hopeless Problem--Suggestions for solving it

XVITHE CURRENCY REPORTCurrency Policy during the War--Its Disastrous Medievalism--The Reportof the Cunliffe Committee--A Blast of Common Sense--The Condemnation ofour War Finance--Inflation and the Rise in Prices--The Figures of thePresent Position--The Break in the Old Relation between Legal Tender andGold--How to restore it--Stop Borrowing and reduce the FloatingDebt--Return to the Old System--The Committee's Sane Conservatism--ASound Currency vital to National Recovery

XVIIMEETING THE WAR BILLThe Total War Debt--What are our Loans to the Allies worth?--OtherUncertain Items--The Prospects of making Germany pay--The Right Way toregard the Debt--Our Capital largely intact--A Reform of the IncomeTax--The Debt to America--The Levy on Capital and other Schemes--Theonly Real Aids to Recovery

XVIIITHE REGULATION OF THE CURRENCYMacaulay on Depreciated Currency--Its Evils To-day--The Plight of theRentier--Mr Goodenough's Suggestion--Sir Edward Holden's Criticisms ofthe Currency Committee--His Scheme of Reform--Two Departments or One inthe Bank of England?--Not a Vital Question--The Ratio of Notes toGold--Objections to a Hard-and-fast Ratio--The Limit on Note Issues--TheFederal Reserve Act and American Optimism--Currency and CommercialPaper--A Central Gold Reserve with Central Control

XIXTIGHTENING THE FETTERS OF FINANCEThe New Meaning of Licence--The Question of Capital Issues--Text of theTreasury Regulations--Their Scope and Effect--The Position of the StockExchange--Wider Issues at Stake--Should Capital be set Free?--TheArguments for and against--Perils of an Excessive Caution--The NewCommittee and its Terms of Reference--The Absurdity of prohibitingShare-splitting--The Storm in the House of Commons--Disappearance of theRetrospective Clause--A Sample of Bureaucratic Stupidity

XXMONEY OR GOODS?"Boundless Wealth"--Money and the Volume of Trade--The QuantityTheory--The Gold Standard--How is the Volume of Paper to beregulated?--Mr Kitson's Ideal

INDEX

WAR-TIME FINANCIAL PROBLEMS

I

THE OUTLOOK FOR CAPITAL

_September_, 1917

The Creation of Capital--The Inducement--War and Capital

One of the questions that are now most keenly agitating the minds ofthe investing public and of financiers who cater for its wants, andalso of employers and organisers of industry who are trying to seetheir way into after-the-war conditions, is that of the supply ofcapital. On this subject there are two contradictory theories: oneconsiders that owing to the destruction of capital during the war, capital will be for many years at a famine price; the other, thatowing to the exhaustion of all the warring powers, that is, of thegreater part of the civilised world, the spirit of enterprise will bealmost dead, the demand for capital will be extremely limited, andconsequently the supply of it on offer will go begging to find a user. It seems likely that, as usual, the truth lies somewhere between thesetwo extreme views; but we shall best answer the question if we firstget a clear idea of what we mean by capital. 

On the subject of the definition of capital, economists differ withall the consistency that they only show in differing. One of theearliest descriptions of capital was given by Turgot, who thought thatcapital meant "valeurs accumulées. " In this wide sense the word coversall goods which have value, that is, can be exchanged into othergoods. From this point of view, the schoolboy who invests sixpence inmarbles is a capitalist, because he has bought an asset which is notimmediately consumed, but can, later on, if his fancy urges him, beexchanged into white mice or any other object of his desire. On theother hand, the schoolfellow who at the same time spends sixpence oncherries and eats them has put his money into immediate consumption, his asset is digested, and he has no capital in any sense of the word. 

Later, the definition was narrowed by John Stuart Mill, for instance, into the sense of wealth set aside to increase production. From thispoint of view capital practically means the equipment and tools ofindustry in the widest sense of the word, including agriculture andtransport. Lately economists have shown a tendency to go back to thewider application of the word, and an American economist, Dr Anderson, who has just published a book on the Value of Money, goes so fartherein as to state that a "dollar is capital. " The language of theCity generally uses the word in the narrow sense adopted by Mill, andthere is very much to be said for this view of the real meaning ofcapital. Marbles to play with, houses to live in, motor-cars to gojoy-riding in--all these are assets which can be disposed of, and so, in a sense, may be called capital. But the businesslike meaning of theword is the tools and equipment of industry, because it is only bytheir possession that the wealth of mankind not only increases man'spresent enjoyment, but enhances his future output of the goodsnecessary for his existence. 

If we take the word in this sense it becomes at once apparent that thetheory is exaggerated which maintains that war is destroying capital, so that capital will long be at a famine price. The extent to whichwar is actually destroying the tools and equipment of industry isquite limited. On the actual battlefield that sort of destructionproceeds apace when factories are shelled into shapeless lumps ofbricks, and when the surface of the earth, that man's skill haddeveloped into great productive fertility, is torn into craters andcovered with rubbish. There is also rapid destruction of a veryimportant part of the equipment of industry owing to the submarinecampaign, which is sinking so many fine ships that were meant tocarry goods from one country to another. But, apart from this actualdestruction on the battlefield and on the sea, the tools and equipmentof industry over the greater part of the earth remain untouched. It istrue that, owing to the preoccupations of the war, not so much workas usual is being put into the upkeep and repair of our railways, factories and other industrial tools. But at the same time an enormousamount of new machinery is being created for the manufacture ofmunitions and other stuff needed for the war, and a large part of thisnew machinery ought to be available as industrial capital when the waris over. Those people who talk so glibly of the enormous destructionof capital by the war are surely making a mistake common to mindswhich look at economic questions through a financial telescope, mistaking money for capital. They see that an enormous amount of moneyis being spent on the war, and they jump to the conclusion that thismoney, if not spent upon the war, would have been put into capitalinvestments and so have increased the tools and equipment of industry. In fact, a great deal of the money now spent upon the war wouldhave been spent, if there had been no war, not upon increasing theequipment of production, but upon purely frivolous and extravagantconsumption. There is no need to dwell on the effect of war inreducing many kinds of expenditure on which hundreds of millionsmust have gone in peace time, and this restriction of extravagantconsumption has to be deducted before we even admit, not that allmoney spent upon the war is destroyed capital, but even that all themoney spent upon the war is destroying what might otherwise havebecome capital. 

If, then, it is true that the war is not making a very terriblysubstantial inroad upon the mass of existing capital, how is it goingto affect the supply of capital in the future? To answer this questionwe have to see how capital is created. The answer to this question isvery simple, very obvious, and very dull. Capital can only be createdby saving. 

Saving is such an entirely unpopular virtue that it seems at firstsight a disastrous conclusion to arrive at, that if we want toincrease the supply of capital it can only be done by stimulatingthis unattractive habit; and there is a further question to beasked--whether it will be necessary or desirable to have a greatincrease in the supply of capital. As was pointed out above, onetheory of after-war needs maintains that the world will be soexhausted by this great struggle that it will have no enterprise andno energy left, and that capital will go begging. If this be so, weneed not trouble to inquire as to whether the supply of capital can bemade plentiful. But I venture to think that this view is very probablywrong, though it is very dangerous to prophesy concerning the purelypsychological question of the state of mind in which the citizens ofthe warring Powers will end the war. It is, however, at leastprobable that the prices which are then likely to rule will stimulateenterprise all over the world; that every one will see that there isa great work to be done in getting industry back on to a peacebasis, and a great profit to be made by those who do this work mostsuccessfully, and that the demand for capital is likely, for someyears at least, to clamour for all that can be produced. 

To go back, then, to the statement that only by saving can capitalbe created. The man who saves, instead of spending money on his ownenjoyment, hands it over to some company or Government to be spent onsome industrial or national purpose. When it is put into industryit builds a factory or a ship or a railway or a canal, or clears awilderness for cultivation, or does one of the innumerable otherthings which are necessary for the production and transport of thegoods which mankind enjoys. And it is only by this process of handingover buying power, instead of using it for our own amusement andenjoyment, to others who will use it for furthering production thatthe tools and equipment of industry can be multiplied. 

Something can be done by banks and financiers in supplying credit inthe form of advances and acceptances; but this method is only likeoiling the wheel of industry, the real driving power of which has tobe saved capital. Creating credits simply means that a certain amountof buying power is manufactured and handed over to those to whom thecredit is given. It does not set free any labour or goods to beput into industry. That is only done by the man who abstains fromconsumption and saves money by restraining his desire to spend it onhimself, and puts it at the disposal of industry. The man who savesmoney, who has always hitherto been rather despised by his companionsand resented by a certain class of social reformer and many otheruneducated people as a capitalist bloodsucker, is thus, in fact, theperson who leaves the world richer than he found it, having put hismoney, the product of his own work, into increasing the world'soutput, instead of spending it on such forms of enjoyment as heavylunches and cinema shows. 

The man who does this beneficent work, increasing mankind's output ofgoods, and providing employment as long as the factory or railway thathe helps to build is running, is induced to do so, as a rule, by thepurely selfish motive of providing for his old age or for those whocome after him by earning the rate of interest that is paid to him forhis capital. What is this rate of interest going to be, and how mucheffect does it have upon the creation of capital?

Some people argue that a low rate of interest makes people save morebecause it is necessary for them to save more in order to acquireindependence. Others maintain that a high rate of interest inducespeople to save because they can see the direct advantage of doing so. Both these arguments are probably true in some cases. But, as a rule, people who have the instinct of saving will save, within certainlimits, whatever the rate of interest may be. When the rate ofinterest is low they will certainly not reduce their saving becauseeach hundred pounds that they put away brings them in comparativelylittle, and when the rate of interest is high the attraction of thehigh rate will also deter them from diminishing the amount that theyput aside. Moreover, we have to consider, not only the money paymentinvolved by the rate of interest, but its buying power in goods. In1896 trustee securities could only be bought to return a yield of2-1/2 per cent. For the buyer; now the investor can get 5-1/4 percent. And more from the British Government. And yet the power thatthis 5-1/4 gives him over the goods and services that he wants for hiscomfort Is probably not greater, and very likely rather less, than thepower which he got in 1896 from his 2-1/2 per cent. One of the fewfacts which seem to stand out clearly from a study of the movement ofthe prices of securities, and consequently of the rate of interest tobe derived from them, is that the rate of interest is high when theprice of commodities is high, and vice versa. So that the answer tothe question: What is the rate of interest likely to be after the war?may be given, in Quaker fashion, by another question: What will happento the index number of the prices of commodities? It seems fairlyprobable that both these questions may be answered, very tentativelyand diffidently, by the expression of a hope that after a time, whenpeace conditions have settled down and all the merchant ships of theworld have been restored to their peaceful occupations, the generallevel of the price of commodities will be materially lower than it isnow, though probably considerably higher than it was before the war. If this be so, then it is fairly safe to expect that the rate ofinterest, as expressed in money, will follow the movement of prices ofgoods. But it must be remembered that by rate of interest I mean thepure rate of interest, that is to say, the rate earned on perpetualfixed-charge securities of the highest class. It may be that, owing tothe very large amount of gilt-edged securities created in the courseof the war by the various warring Governments, the rate of profit tobe earned by the man who takes the risks of industry from dividendson ordinary shares and stocks will have to be made relatively moreattractive than it was before the war. 

If, then, capital can only be created by saving, how far will the warhave helped towards its more plentiful production?

Here, again, we are faced with a psychological question which can onlybe answered by those who are bold enough to forecast the state of mindin which the majority of people will find themselves when the war isover. If there is a great reaction, and everybody's one desire is tothrow this nightmare of war off their chests and go back to the timesas they were before it happened, then all that the war has taught usabout the production of capital will have been wasted. But I ratherdoubt whether this will be so. Saving merely means the diversion ofa certain proportion of the output of industry into the furtherequipment of industry. The war has taught us lessons which, if weuse them aright, will help us to increase enormously the output ofindustry. So that if these lessons are used aright, and industry doesnot waste its time in squabbles over the sharing of its product, itsoutput may be so great that a comparatively smaller amount of savingin relation to the total output may produce a larger amount of capitalthan was made available in days before the war. There is a furtherpoint, that the war has taught a great many people who never saved atall to save a good deal. It was estimated before the war that we inthis country were saving about four hundred millions a year. Thisfigure was necessarily a guess, and must be taken for what it isworth. There can be no doubt that the amount of real saving now inprogress, voluntary, owing to the patriotic effort of people who thinkthey ought to restrict their own consumption so that the needs ofour fighters may be provided, and enforced through the action of theGovernment in taking taxes and inflating the currency, is very muchgreater than it was before the war; probably at least twice as muchwhen all allowance has been made for depreciation of the currency. Some people think that this saving lesson will have been learned, willhave become a habit, will continue and will grow. If so, if peoplesave a larger proportion of their income than they did before, andif the total output of goods is increased, as it easily may be, itbecomes at once evident that there is a possibility of a freer supplyof capital for industry than has ever been seen. But in looking atthis hopeful and optimistic picture, we must never forget that it canonly be painted by those who are prepared to leave out of the canvasall the danger of industrial strife and dislocation, and all thedanger of reaction to the old habits of luxurious spending which areso strong a possibility in the other direction. The war has shown ushow we can, if we like, increase production, reduce consumption, andso have a larger margin than ever before to be put into providingcapital for industry. Whether we really have learned these lessons andwill apply them remains to be seen. 

There is also a possibility that some people may recognise that savingmoney and applying it to the re-equipment of the world for peaceindustry is a patriotically praiseworthy object not less than savingin time of war for the equipment of the Army. It may be that thebenefit conferred by those who save, in increasing the output ofmankind, will be more generally recognised, and that the supply ofcapital may, when the war is over, be increased on patriotic grounds, or on grounds even wider than mere patriotism--a desire to help agreat stride forward in the material welfare of mankind. 

Capital is a very tender plant, and it will be very easy, if mistakesare made, to frighten those who see the benefits of accumulation forthemselves and others. Labour troubles and industrial unrest areextremely likely to have the effect of destroying capital bypreventing it coming into existence. If we remember that capital canonly be created by being saved, it becomes evident that if those whosave are threatened with too deep an inroad into their reward for sodoing, on the part of labour, they will hesitate to save; and if theaction of labour has this effect, labour will be sawing off the boughon which it sits. For it is new capital that sets new industry going, and it is only by a continual supply of new industry that a continualdemand for fresh labour can be maintained. 

There is also at present much mischievous talk about a great tax oncapital for the purpose of redeeming, or hastening the redemption of, war debt. It is clear at once that it is not possible to tax capitalif we remember that capital consists of the tools and equipment ofindustry, or even, in the wider sense of the word, of accumulatedassets which have not been consumed. Unless the Government is preparedto take payment in factory chimneys, railway sleepers, houses andfields, or the securities and mortgages that are claims on theirproduct, it is not possible to tax capital. The only thing that theGovernment can tax is the output, that is to say, the annual incomeof the people. In other words, a tax on capital is simply a form ofincome tax assessed, not according to a man's income, but according tothe assets of which he is possessed. The effect of such a tax wouldbe that he who has spent everything that he has earned on his ownenjoyment would go scot free in the matter of the capital tax, andwould be rewarded for his improvidence by being asked to make nosacrifice; while his thrifty brother who, out of a smaller income, hasset aside a certain proportion during the last twenty or thirty years, would have to hand over a portion of his current income assessedupon the value of the assets into which he has put his savings. Incidentally, it may be remarked that it would take years to make thisnecessary valuation, and that it would probably be done in a veryinequitable manner by untrained and incompetent officials. But theimportant point is this, that if the Government shows a tendency totake the possession of assets as a basis for taxation it will bedirectly encouraging those who spend their whole income in riotousliving and frivolous amusement, and discouraging those who help toincrease mankind's output by adding to the capital available. 

Finally, it may be added that the shyness of the saver will be greatlydiminished if he can feel that there is a trustworthy machinery ofcompany promotion, so that he can rely on any savings that he putsinto industry having at least a fair chance of yielding him a fairreward. This subject is too vast to enter into at present, but itis one to which those who are responsible for the management of ourfinancial affairs cannot give too much attention. Every time the realinvestor is swindled out of his money there is more than a chance thathe will look upon all forms of saving as a folly to be left to thecredulous. It is easy to say that it was his own fault, that he oughtto have been more careful, or consulted a better broker; but he will, with equal ease, retort that If honest financiers knew their businessbetter, they would have long ago made things easier for the ignorantinvestor to know whether he was putting his money into genuineenterprise or throwing it down a sink. 

Like all other divagations on the subject of what may happen in thefuture, this attempt to forecast has necessarily consisted of "dimglimpses into the obvious, " as the undergraduate said of Jowett'ssermon. All that we can be sure of is this: that if the greatopportunities that will lie open to mankind at the end of the warare rightly used, if we use its lessons to increase our production, restrict our frivolous consumption, and put a larger proportion of ourlarger production into stimulating production still further, thereought to be a great increase in the amount of capital available tosupply the great increase which may be expected in the amount ofcapital demanded. The fact that the chief nations of the world willhave enormous debts on which to pay interest is not one that neednecessarily terrify us from this point of view. The arranging andimposition of the taxation necessary for meeting the interest on thesedebts will involve very serious political and social questions; butthe payment of this interest need not necessarily diminish production, and it may probably help in checking consumption. It will not impairthe total wealth of the world as a whole; it will merely affect itsdistribution. And since it will mean that a considerable part of theworld's output will, for this reason, be handed over to the holders ofthe various Government debts, who, _ex hypothesi_, will be people whohave saved money in the past, it is at least possible that they maydevote a considerable amount of the spin so received to further savingor increasing the supply of capital available. 

II

LONDON'S FINANCIAL POSITION

_October_, 1917

London after the War--A German View--The Rocks Ahead--Our RelativePosition secure--Faulty Finance--The Strength we have shown--TheNature and Limits of American Competition--No other likely Rivals. 

Will the prestige of the London money market be maintained when thewar is over? This is a question of enormous importance, not onlyto every one who works in and about the City, but to all who areinterested in the maintenance and increase of England's wealth. Likeall other questions about what is going to happen some day, the answerto it will depend to a very great extent on what happens between thepresent moment and the return of peace. To arrive at an answer we havefirst to consider on what London's financial prestige has been basedin the past, and on this subject we are able to cite in evidence theopinion of an enemy. Our own views about the reasons which gave usfinancial eminence may well be coloured by national and patrioticprejudice, but when we take the opinion of a German we may be prettysure that it is not warped by any predisposition in favour of Englishcharacter and achievement. 

A little book published this year by Messrs. Macmillan and Co. , entitled "England's Financial Supremacy, " contains a translation ofa series of articles from the _Frankfurter Zeitung_, and from thiswitness we are able to get some information which may be valuable, andis certainly interesting. 

The basis of England's financial supremacy is recapitulated as followsby this devil's advocate:--

"The influence of history, a mighty empire, a cosmopolitan StockExchange, intimate business connections throughout the whole world, cheap money, a free gold market, steady exchanges, an almost unlimitedmarket for capital and an excellent credit system, an elastic systemof company legislation, a model Insurance organisation and the help ofGermans, these are the factors that have created England's financialsupremacy. Perhaps we have omitted one other factor, the errors andomissions of other nations. "

Coming closer to detail, our critic says, with regard to theinternational nature of the business done on the London StockExchange:--

"In recent years London had almost lost its place as the busiest stockmarket in the world. New York, as a rule, Berlin on many occasions, could show more dealings than London. But there was no denying theinternational character of its business. This was due to England'sposition of company promoter and money lender to the world; to the wayin which new capital was issued there; to its Stock Exchange rules, so independent of legislative and Treasury interference; to theinternational character of its Stock Exchange members, and to thecosmopolitan character of its clients, "

On the subject of our Insurance business and the fair-mindedness andquickness of settlement with which it was conducted, we can cite thesame witness as follows:--

"Insurance, again, represented by the well-known organisation ofLloyds, which in form is something between a stock exchange and aco-operative partnership, is nowhere more elastic and adaptable thanin London. It must be said, to the credit of Lloyds, that anyoneasking to be insured there was never hindered by bureaucraticrestrictions, and always found his wishes met to the furthest possibleextent. The agencies of Lloyds abroad are also so arranged that boththe insured and the insurer can have their claims settled quickly andequitably. "

But one of the most remarkable tributes to a quality with whichEnglishmen are seldom credited, and one of the frankest confessions ofa complete absence of this quality in our German rivals, is containedin the following passage:--

"A further bad habit, harmful to our economic development, isnarrow-mindedness. This, too, is very prevalent in Germany--andelsewhere as well. And this is not surprising. Even among thegeneration which is active to-day, the older members grew up at a timewhen possibilities of development were restricted and environment wasnarrow. With commendable foresight many of these older men havefreed themselves from this petty spirit, and are second to none inenterprise and energy. Germany can be as proud of its 'captains ofindustry' as America itself. But many commercial circles in Germanyare still unable to free themselves from these shackles. The relationsbetween buyer and seller are still often disturbed by petty quibbling. In those industries where cartels and syndicates have not yet beenformed, too great a rôle is played by dubious practices of many kinds, by infringements of payment stipulations, by unjustifiable deductions, etc. , while, on the other hand, the cartels are often too ruthlessin their action. In this field we have very much to learn from theEnglish business man. Long commercial tradition and internationalbusiness experience have taught him long ago that broad-mindedness isthe best business principle. Look at the English form of contract, themethods of insurance companies, the settlement of business disputes!You will find no narrow-mindedness there. Tolerance, another qualitywhich the German lacks, has been of great practical advantage to theEnglishman. Until recently the City has never resented the settlementof foreigners, who were soon able to win positions of importancethere. Can one imagine that in Berlin an Italian or a South American, with very little knowledge of the German language, would be not onlyentrusted with the management of leading banks and companies, butwould be allowed in German clubs to lay down--in their faultyGerman--the law as to the way in which Germany should be developed?Impossible! Yet this could be seen again and again in England, andthe country gained greatly by it. If the English have now developeda hatred of the foreigner, it only means that the end of England'ssupremacy is all the nearer. "

According to our German critic the great fabric that has been built upon these characteristics and qualities is threatened with ruin by thewar; and the heritage which we are supposed to be losing is to fall, by some process which is not made very clear, largely into the handsof Berlin. In order that we may not be accused of taking the laudatoryplums out of this German pudding and leaving out all criticisms andaccusations, let us quote in full the passage in which he dances inanticipation on London's corpse:--

"Let us sum up. England's reputation for honest business dealing andfor trustworthy administration has suffered. Her insular inviolabilityhas been put in question. The ravages of war have undermined theachievements of many generations. Her free gold market has brokendown. The flow of capital towards London will fall off, for those whocannot borrow there will no longer send deposits. The surplus shownin her balance-sheet will contract. Foreign trade will also decrease. Hand in hand with this fall, free trade, that mighty agent in thedevelopment of England's supremacy, will, in all probability, giveplace to protection. Stock Exchange business will grow less. Rates ofinterest will be permanently higher. "

How much truth is there in all this? Has our reputation for honestdealing and for trustworthy administration suffered? Surely not in theeyes of any reasonable and unprejudiced observer. In the course of thegreatest war in history, fought by Germany with weapons which haveinvolved the violation of the most sacred laws of humanity andcivilisation, England has acted with a respect for the interests ofneutrals which has been severely criticised by impatient observers athome. As for our "insular inviolability" having been put in question, it certainly has not, so far, suffered any serious damage. Our Fleethas defended us from invasion with complete success, and the damagedone by marine and aerial raiders to our property on shore isnegligible. Our free gold market is said to have broken down. Theproof of the pudding is in the eating. Germany, when the war began, immediately relieved the Reichsbank from any obligation of meetingits notes in gold, and frankly went on to a paper basis. England hasalready shipped well over 200 millions in gold to America to financeher purchases there and those of her Allies. 

It may be true that capital will not flow to London if London is notin a position to lend, but we see no reason why London should not beable to resume her position as an international money lender, notperhaps immediately on the declaration of peace, but as soon as theaftermath of war has been cleared away and the first few months ofdifficulty and danger have been passed. The prophecy that foreigntrade will decrease may also be true for a time owing to thedestruction of merchant shipping that the war is causing. Thispossibility, however, may be remedied between now and the end of thewar if the great programmes of merchant shipbuilding which have beenundertaken by the British and American Governments are duly carriedout. In any case, even if foreign trade decreases, there is no reasonwhatever to expect that England's will decrease faster than that ofother nations. 

In all these problems we have to look for the relative answer and toconsider not whether England has suffered by the war, for it is mostobvious that she has, but whether she will have been found to havesuffered more than any competitor who may threaten her after-warposition. 

"Free trade, " says our German Jeremiah, "that mighty agent in thedevelopment of England's supremacy, will, in all probability, giveplace to protection. " We venture to think that it will be recognisedthat the Free Trade policy of the past gave us a well-distributedwealth which was an invaluable weapon in time of war, and that anyattempt to impose import duties when peace comes will be admitted, even by the most ardent Tariff Reformers, as untimely when there islikely to be a world-wide scramble for food and raw materials, and theone object of every nation will be to get them wherever they can andas cheaply as they can. 

If Stock Exchange business will be less, though this does not by anymeans follow, there is no reason why it should be relatively lesshere than in other centres. As to rates of interest being permanentlyhigher, the same answer applies. It may be true, but there is noreason why they should be relatively higher in London than elsewhere;and, if they are high, it will be because there will be a great demandfor capital, which will mean a great trade expansion; both in theprovision of capital and in meeting the demands of trade expansionEngland will be doing what she has done with marked success in thepast and can, if she works in the right way now and after the war, doagain with equal and still greater success. 

There is, however, a danger that threatens our financial positionafter the war, on the subject of which our German critic is discreetlysilent, because that danger threatens the position of Germany verymuch more emphatically. It consists in the way in which our Governmentis at present meeting the needs of war finance, not by compellingeconomy on the civilian population through taxation and borrowingdirect from investors, but by manufacturing currency for the purposesof the war by means of the printing press and the banking machinery. The effect of this policy is seen in the enormous mass of Treasurynotes with which the country has been flooded. Their total is nownearly 180 millions or perhaps 100 millions more than the gold whichthey were originally designed to replace. 

It is also to be seen in the great increase in banking deposits whichhas been a feature of our financial history since the war began. Somepeople regard this feature as a phenomenal proof of the growth of ourwealth during the war. I am afraid there is little foundation for thispleasant assumption, for these new deposits have been called intobeing by the banks subscribing to Government securities, whether WarLoan, Treasury Bills, Exchequer Bonds or Ways and Means advances orlending their customers the wherewithal to do so. By this processthe balance-sheets of the banks are swollen on both sides, by theGovernment securities and advances to customers among the assets, against which the banks create new deposits, so giving the communityas a whole the right to draw more cheques. 

Every time the bank makes an advance it gives the borrower a credit inits books, that is to say, the right to draw cheques to that amount;the borrower draws on the credit and hands it to any one to whom heowes money; but as long as the advance is outstanding there will be adeposit out against it in the books of some bank or another. 

It is an easy way for the Government to finance the war by getting thebanks to manufacture money for it. Nobody feels any poorer for theprocess, in fact, those who have new money in their pockets or intheir bank balance feel richer, but the result of thus multiplyingcurrency without any increase in the supply of goods and services tobe bought inevitably helps the rise in prices which makes the warcostly, puts the burden of it on to the wrong shoulders, and likewisecheapens the value of the English pound as measured in othercurrencies. This is why the evils involved by this process become sorelevant to the question now at issue. 

If the Government is allowed to go on financing the war by increasingthe currency with the very reluctant help of the bankers, thedifficulties of maintaining our gold standard and keeping theexchanges in favour of London will be very greatly magnified whenthe war is over and our gold reserves are no longer protected by thesubmarines and the high cost of shipping gold that they produce. Ittherefore follows that all who have the true interests of the City atheart should use all the influence they can to force the Government toadopt a sounder financial policy before it is too late. 

It is true that our war finance has hitherto been sounder than that ofany other warring Power, but it has fallen very short if we apply therough test of the proportion of the cost of war borne out of taxationand compare our performance with the results achieved by our ancestorsin the Napoleonic and Crimean wars. 

If we have done better than France, Italy, Russia and Germany in thisrespect, it must also be remembered that the financial prestige whichthese countries had to maintain was not nearly so great and wellestablished as ours, with the possible exception of France; andFrance, being exposed to the ravages of a ruthless invader, was in aposition which put special obstacles in the way of the canons of soundfinance. 

If, then, there are certain dangers that threaten our financialposition when the war is over, we must remember, on the other hand, that the war has already done a great deal to maintain our financialprestige and raise it to a height at which it never stood before. 

When the war began we were expected to finance the Allies, to keep theseas clear and put a small Expeditionary Force to support the leftflank of the French Army, and to do these things during a contestwhich was expected by the consensus of expert opinion to last not morethan a few months. All these things we accomplished, and we werethe only Power at war which did actually accomplish all that it wasexpected and asked to do. More than that, we also undertook a greattask which was not in our programme; we created a great army on aContinental scale, and, at the same time, continued to carry out theother tasks which had been assigned to us. 

All these things we did, and that we should have done them wasevidence of economic strength and adaptability which have astonishedthe world. To have financed the Allies and ourselves as long as we didwould have been comparatively easy if our population could have beenleft at work to turn out the stuff and services, the provision ofwhich are implied by financing; but for us to have been able to do itand at the same time to improvise an army which is now consistentlyand regularly beating the Germans is an achievement which willinevitably raise the world's opinion of our economic strength, onwhich financial prestige is ultimately based. 

But, as it has been said, in discussing this question we have to lookat it all the time from the relative point of view. How will ourprestige be when the war is over, not as compared with what it wasbefore the war, but as compared with what any other rival in any otherpart of the world can show? Here we have to acknowledge at once, freely and frankly, that, as compared with New York, we shall havegone backward. 

America will have been enormously enriched by the war, which we shallcertainly have not. America will have been opening up channels ofinternational trade and international finance, and so New York willhave been gaining at the expense of London. It is certain that whenthe war is over America's dependence upon London for credits againstthe shipments of goods to and from her shores will have been verygreatly lessened, if not altogether a thing of the past. 

This change would have happened any way, war or no war, but it hasbeen greatly quickened by the war. Before the war America was alreadymaking arrangements, under her new banking system, to promote themachinery for acceptance and discount, in order that goods sent to herfrom foreign countries should be financed by bills drawn on Americanbanks and houses in dollars instead of on English banks and houses insterling. 

Apart from this development, which would have happened in any case, itremains to be seen how far New York will be in a position to act asa rival of London as the world's financial centre. The internalresources and potentialities of America are so enormous, and there issuch a vast amount of work to be done in developing them and bringingthem to full fruition, that it does not at all follow that Americawill yet be inclined to take the position in international trade andfinance which will one day surely be hers, when she has done all thework that is waiting to be done in her own back premises. 

America has a new banking and monetary system on trial which has metthe difficult problems of the war with great success. These problems, however, are not nearly as complicated and various as those which arelikely to arise in time of peace. When a nation is turning out anenormous amount of goods for which the rest of the world is preparedto pay any price, her finance is a comparatively simple business. Evennow, when America has assumed the duty of financing a large number ofAllies impoverished by three years of war which have been enrichingher, she is still simplifying the problem by restricting her advancesto the payment for goods bought in America. 

That New York will be greatly strengthened by the war, which hasbrought masses of American securities back to the country of originand has put into the hands of American bankers and investors largeblocks of European promises to pay, is as clear as noonday; butwhether when the war is over New York will care to be bothered muchwith problems of international finance remains to be seen. In thefirst place, the claims of her own country upon her financialresources will be insatiable and imperative, In the second place, thebusiness of international finance is carried out on very finely cutterms; and the Americans being accustomed to the fat rates of profitwhich business at home has given them may not care to devote muchattention to the international market, in which the risks are big, the turnover is enormous and the profits very finely cut. It hasbeen remarked by a shrewd observer that the Americans will never dobusiness for a thirty-second. 

In the third place, it must be remembered that the geographicalposition of London is more favourable than that of New York as a worldcentre, as the world is at present constituted. England, anchored offthe coast of Europe, is clearly marked as the depôt for the entrepôttrade of the Old and New Worlds. New York is clearly marked as thecentre for the trade of the Western hemisphere, and it is likelyenough that New York and London, acting together as the financialchiefs of the two hemispheres, may be gradually united into what ispractically one market by the growing ties of mutual interest. 

With regard to the position of other possible rivals to London'sposition, it need only be said that they have certainly been weakenedmuch more rapidly than has London during the course of the war. Paris, threatened by the near approach of an invading foe, has inevitablysuffered much more severely than London, and is likely to take longerin recovering the great position as a provider of capital which wasgiven to her by the thrift of the average French citizen. Every oneexpects with confidence to see, when the war is over, a miraculousrecovery in France produced by the same spirit which worked miraclesafter the war of 1871, aided and abetted by the subsequent improvementin man's control over the forces of nature, and also by the deep andworld-wide sympathy which all will feel for France as the champion offreedom who has suffered most severely in its cause during the war. But it is impossible to expect, after what France has suffered, thatshe will be, for some time, in a position seriously to challengeLondon as a financial rival. All Englishmen will hope that the daywhen she will be in a position to challenge us again will comequickly. 

As to Berlin, the only other possible rival to London in Europe, verylittle need be said. The German authority quoted above has alreadyshown some of the difficulties with which Berlin has to struggle. He spoke of the narrow-mindedness of German finance, of the "pettyquibbling" which often disturbs the relations between buyer andseller, of the "dubious practices of many kinds, infringements ofpayment stipulations, unjustifiable deductions, " etc. , and the"ruthless" action of the cartels. He acknowledges that though Germanyhad a gold standard "too much anxiety used to be shown when the goldexport point was reached, " and that "it was also feared that to exportgold would incur the wrath of the Reichsbank. "

With these disadvantages to struggle against, quoted from the mouth ofa German observer, Germany has also succeeded by her ruthless policyduring the war in earning the deep hostility of the greater part ofmankind. Sentiment probably enters into business relations a good dealmore than most business men admit, and for any country to set out togain the leadership in trade and finance by outraging the feelings ofmost of its possible customers is an extraordinary piece of stupidity. 

It seems, then, that apart from the relative weakening of London ascompared with New York, there is very little need for us to fear anyserious change in England's financial position after the war as longas the Government's faulty finance is not allowed too seriously toendanger the position of our gold standard. It is true that we shallnot benefit, as much as we undoubtedly have in the past, from the"help of Germans" in developing our finance. But indirectly theGermans will still be helping us by the great stimulus that the warwill have given us towards efficiency and hard work. 

What we have to do in order to secure London's position after the waris to restore as soon as we can the system that had established it inthe century before the war. We have to show the world that, far fromany intention to abandon Free Trade, we mean to take a long stepforward along the line of international activity which has been thesource of our greatness in the past. We want, as soon as possible, toget back that freedom from Government control which has given us suchelasticity and adaptability to our money market, our Stock Exchangeand our Insurance business. A certain amount of Government controlwill inevitably have to continue for a time after the war, but thesooner we rid ourselves of it the sooner we shall restore to theLondon money market those qualities which, after the reputation thatit has for honesty, soundness and straight dealing, were most helpfulin building up its eminence. 

Above all, we have to work hard both in finance and industry andcommerce. Finance, which is the machinery for handling claims forgoods and services, can only be active and effective if industry andcommerce are active and effective behind it, turning out the goods andservices to meet the claims that finance creates. A great industrialand commercial output, with severe restriction of unnecessaryconsumption so that a great margin may go into capital equipment, willsoon repair the ravages of war, bring down the price of credit and ofcapital and make London once more the place in which these things aremost cheaply and freely to be bought. 

Finally, if we want to restore London as a place in which all thefinancial transactions of the world were centred, we must rememberthat we cannot do so if we restrict the facilities given to foreignersto come here and settle and do business. It is not possible to be aninternational centre with an insular sentiment. 

III

WAR FINANCE AS IT MIGHT HAVE BEEN--I

_November_, 1917

Financial Conditions in August, 1914--No Scheme prepared to meet thePossibility of War--A Short Struggle expected--The Importance ofFinance as a Weapon--Labour's Example--The Economic Problem ofWar--The Advantages of Direct Taxation--The Government follows thePath of Least Resistance--The Effect of Currency Inflation. 

A legend current in the City says that the Imperial War Committee, orwhatever was the august body entrusted with the task of thinking outwar problems beforehand, had done its work with regard to the Army andNavy, transport and provision, and everything else that we should wantfor the war, and were going on to the question of finance next week, when the war intervened. Whatever may be the truth of this story, theevents of the war confirm the opinion that if it was not true it oughtto have been. We are continually accused of not having been ready forthe war; but, in fact, we were quite ready to do everything that wehad promised to do with regard to military and naval operations. OurNavy was ready in its place in the fighting line, and the dispatchwith which our Expeditionary Force was collected from all parts of thekingdom, and shipped across to France, was a miracle of efficiency andpractical organisation. It is true that we had not got an Army on aContinental scale, but it was no part of our contract that we shouldhave one. The fighting on land was in those days expected to be doneby our Allies, assisted by a small British force on the left flank ofthe French Army. That British force was duly there, and circumstanceswhich were quite unforeseen made it necessary for us to undertake atask which was no part of our original programme and create an Armyon a Continental scale, in addition to doing everything that we hadpromised beforehand to a much greater extent than was in the bargain. 

But in finance there was no evidence that any thought-out policy hadbeen arrived at in order to make the best possible use of the nation'seconomic resources for the war when it came. The acute crisis in theCity which occurred in August, 1914, was a minor matter which hardlyaffected the subsequent history of our war finance except by givingdangerous evidence of the ease by which financial problems can beapparently surmounted by the simple method of creating bankingcredits. That crisis merely arose from the fact that we were sostrong financially, and had so great a hold upon the finance of othercountries in the world, that when we decided, owing to stress of war, to leave off lending to foreigners and to call in loans that we hadmade by way of accepting and bill-discounting arrangements, the wholemachinery of exchange broke down because from all over the world themarket in exchange went one way. Everybody wanted to buy bills onLondon, and there were no bills to be had. 

There was also the internal problem which arose because some of thepublic and some of the banks took to the evil practice of hoardinggold just at the wrong moment, and consequently there was no availablesupply of legal tender currency except in the shape of Bank of Englandnotes, the smallest denomination of which is £5. It is known that ourbankers had long before pointed out to the Treasury that if ever abanking crisis arose there would, or might be, this demand for a papercurrency of smaller denominations than £5; this suggestion got into apigeon-hole at the Treasury and was deep under the dust of Whitehallby the time experience proved how big a gap in our financial armourhad been made by its neglect. If the £1 notes, with which we are nowso familiar, had been ready when the war broke out, or, still better, if the Bank of England had been empowered and instructed to have anissue of its own £1 notes ready, it may at least be contended that themoratorium, which was so bad a financial beginning of the war, mighthave been avoided. 

But this opening crisis was a short-lived matter, and was promptlydealt with, thanks to the energy and courage of Mr Lloyd George, whowas then Chancellor of the Exchequer, and saw that things had to bedone quickly, and took the advice of the City as to what had to bedone. The measures then employed erred, if at all, on the side ofdoing too much, which was certainly a mistake in the right directionif in any. What is much more evident is the fact that not only hadthere been no attempt to provide against just such a jolt to ourfinancial machine as took place when the war began, but that, quiteapart from the financial machinery of the City, no reasoned andthought-out attention had been given to the great problems ofgovernmental finance which war on such a scale brought with it. Thereis, of course, the excuse that nobody expected the war to be on thisscale, or to last so long. The general view was that the strugglewould be over in a few months, and must certainly be so if for noother reason because the economic strain would be so great that thenations of Europe could not stand it for a long time. On the otherhand, we must remember that Lord Kitchener, whom most men thenregarded as representing all that was most trustworthy in militaryopinion, made arrangements from the beginning on the assumption thatthe war might last for three years. So, while some excuse may be madefor our lack of financial foresight, it does seem to have been theduty of those whose business it is to manage our finances to havethought out a complete scheme to be adopted in case of war if at anytime we should be involved in one on a European scale. Instead ofwhich, not only would it appear that no such endeavour had been madeby our Treasury experts before the war, but that no such endeavourhas ever been made by them since the war began. All through thewar's history many of the country's mistakes have been based on theencouraging conviction that the war would be over in the next sixmonths. This conviction is still cherished to this day, and there canbe no doubt that if those who cherish it hold on to it long enoughthey will come right some day. 

But if delusions of this kind may be fairly excused in the man inthe street, they do not seem to be any excuse for those who areresponsible for our finance for their total lack of a thought-outscheme at the beginning of the war, and their total failure to produceone as the war went on. We have financed the war by haphazard methods, limping along the line of least resistance. We are continuing to doso, and we may do so to the end, though there are now growing signs ofan impatience both among the property-owning classes and others ofthe system by which we are financing the war by piling up debt andmanufacturing banking credits. 

The objections to the policy on the part of the "haves" and the "havenots" are, of course, different, but as they both converge to thesame point, namely, to the reform of our system of war finance, it ispossible that they may in time have the effect of shaking even theconfidence of our politicians and officials in the haphazard andslipshod methods which would long ago have produced financial disasterif it had not been for the great financial strength of the country. 

Finance is an enormously important weapon in the hands of our rulersfor gliding the economic activities of the people. This is so even inpeace time to a certain extent, though the revenue then collected isso small an item in the total national income that it counts for muchless than in war, when the power that the Government can wield byits policy in taxation and borrowing might have been all-powerful inkeeping the nation on the right lines in the matter of spending andkeeping down the cost of the war, and in maintaining our financialstaying power to a far greater extent than has actually been done. 

It is easy, as they say on the Stock Exchange, to job backwards, andit is also easy, and perhaps rather unprofitable, to hazard opinionsabout what would have happened if things had been otherwise. Nevertheless, when we look back on the spirit of the country as it wasin those early days of the war, when the violation of Belgium had senta chivalrous thrill through the hearts of all classes in the country, when we all recognised that we were faced with the greatest crisisin our history, that our country and the future of civilisation wereabout to be tested by the severest strain ever applied to them, thatthe life and fortune of the individual did not count, but that thewar and victory were the only interests that any one had a right toconsider--when one remembers all these things, and the use that a wisefinancial policy might have made of them, it is impossible to avoidthe conclusion that the history of the war in this country and itssocial and political effects might have been something much finer, much cleaner and more noble if only the weapons of finance had beenmore boldly and wisely used. It is not a good thing to indulge inhigh-falutin' on this subject. It is absurd to suppose that the warsuddenly turned us all into plaster saints at the beginning, and thatwe might have continued so to the end if the State had dealt with ourmoney in a proper way. But without setting up any such idealisticarguments as these, looking back on those early days of the war, onecan still remember the thrill of earnestness and of eagerness forself-sacrifice which has since then given way lamentably to warprofiteering, war strikes, and a general struggle among many classesof the community to make as much as possible out of the war, merelybecause our financial leaders have never really put the country'sfinancial problem properly before the country. 

We were not plaster saints, but we were either Idealistic and perhapsfoolish people who attached great importance to the freedom andsecurity of small nations and all those items in the programme ofidealistic Radicalism, or else we were good, red-hot, true-blueJingoes with a hearty hatred for Germany, and enjoyed the thought thatthe big fight which we had long foreseen between the two countries wasat last going to be fought out. Or, again, we were just commonplacepeople who did not much believe in idealistic Radicalism oranti-German bitterness, but saw that the whole future of our countrywas at stake, and were prepared to do anything for it. A fine examplewas set us in those days by the Trade Union leaders. The industrialworld was seething with discontent. The Suffragettes in London and theCarsonites in Ireland had shown us how much could be done by appealsto physical force in a lazy-minded community; and hints of industrialrevolution, with great organised strikes, which were going to tie upthe transport industry of the country were in the air. And then, whenthe war came, the Labour leaders said, "No strikes until the war isover. Our country comes first. "

This was the lead given to the country by those down at the bottom, who had the least to lose, and whose patriotism during the course ofthe war has frequently been questioned. At the top the financial andproperty-owning classes, having been saved by Mr Lloyd George's ableadroitness from a bad crisis in the City, were entirely tame, andwould have suffered anything in the way of taxation or financialconscription if the need for it had been properly put before them. 

It is almost amusing to remember now that in those early days of thewar the shareholders in Home Railway companies were thought lucky. TheGovernment were taking the railways over, and were guaranteeing thattheir proprietors should receive the same dividends as they had hadbefore the war. Such was the view in financial and property-owningcircles of results of war that, so far from any expectation of thehuge profits which war has put into the pockets of certain classes, they were only too thankful if they could be assured that their grossincomes were not going to be reduced. 

Such was the spirit with which the Government of that day had todeal. A spirit in all classes earnestly patriotic, and so thoroughlyfrightened of the economic consequences of the war that it would havebeen ready to face any sacrifices that the Government had asked of it. How, then, would the Government have dealt with this spirit if it hadtaken the trouble really to think out the problem of war finance ona long view instead of proceeding along a haphazard line, adjustingpeace methods to war without any consideration as to their adequacy?If the problem had been really thought out beforehand the Governmentmust have seen clearly that the real economic problem in war-time isnot merely a question of raising money, since that can at any timebe done easily by means of a printing-press, but of diverting theindustrial energy of the nation from peace to war purposes, that isto say, transferring from the enjoyment of the individual citizenthe goods and services that used to contribute to his comfort andamusement, and turning them over to the provision of the things neededfor the war. War's needs can only be met out of the current productionof the world as it is at present. All the warring powers begin awar with certain accumulated war stores consisting of battleships, ammunition, guns and all other forms of war material. Apart from thesestores with which they begin, the whole work of providing the armieswith the fighting materials that they require, and the food andclothes that they consume, has to be done during the course of thewar, that is to say, out of the current production of the moment. 

Therefore the real economic problem that any Government has to face inwar-time is that of inducing its citizens to reduce their purchase ofgoods and services, that is to say, to spend less, so that allthe things required for the Army and Navy may be obtained by theGovernment. It is true that some of the goods and services requiredfor carrying on war can be obtained from foreign countries by anybelligerent which is able to communicate with them freely. In thatcase the current production of the foreigner can be called in to help. But this can only be done if the warring country is able to ship goodsto the foreigner in payment for what it buys, or if it is able toobtain a loan from the foreigner, or some other foreign country, inorder to pay for its purchases abroad, or again, if, as in our case, it holds a large accumulation of securities which foreign countriesare prepared to take in exchange for goods that they send for thepurposes of the war. By these two last-named processes, raising moneyabroad, and selling securities to foreign nations, the warring countryimpoverishes itself for the future. When it borrows abroad it pledgesitself to export goods and services in future to meet interest andsinking fund on the money so raised, so getting no goods and servicesin return. When it ships its accumulated wealth in the form ofsecurities it gives up for the future any claim to goods and servicesfrom the debtor country which used to come to it to meet interest andredemption. It is only by shipping goods in return for goods importedfor the war that a country can keep its financial staying-power on aneven keel. 

Thus the problem which a statesman who had thought out the economicsof war beforehand would have recognised as the keystone of his policy, would have been that of diverting the activities of the country fromproviding itself with comforts and amusements to turning out goodsrequired for war, and of doing so with the least possible friction, the least possible alteration in the economic equilibrium of thecountry, and, above all, with the least possible cost to the nationalfinances. We arrive at the true aspect of this problem more easily ifwe leave out the question of money altogether and think of it in unitsof energy. When a nation goes to war it means to say that it has toapply so many units of energy to the business of fighting, and toprovide the fighters with all that they need. If at the beginningof the war its utmost capacity of output was, to mention merely afanciful figure, a thousand million units of energy, and if it wasclear that the fighting forces of the country would need for theirproper maintenance five hundred million units of energy, then it isclear that the nation's ordinary consumption of goods and serviceswould have to be reduced to the extent of five hundred millions ofunits of energy, which would have to be applied to the war, that is, assuming that its possible output remained the same. 

In other words, the spending power of the citizens of the countryhad to be reduced so that the industrial energy that used to go intomeeting their wants might be made available for the purposes offighting forces. Now what was the straightest, simplest and cleanestway of bringing about this reduction in buying power on the part ofthe ordinary citizen which has been shown to be necessary for thepurposes of war finance? Clearly the best way of doing it is bytaxation equitably imposed. When the State taxes, it says in effectto the citizens, "Your country needs certain goods and services, youtherefore will have to go without those goods and services, and thesimplest way to make you do this is to take away your money and soration your buying power. Whatever is needed for the Army and Navywill be taken away from you by taxation, and the result of this willbe that, instead of your indulging in comforts and luxuries, to theextent of the war's needs the Government will use your money forpaying for what is needed for the Army and Navy. "

If such a policy had been carried out the cost of the war to thecommunity would have been enormously cheapened. There need have beenno general rise in prices because there would have been no increasein demand for goods and services. Anything that the Governmentspent would have been counter-balanced by decreased spending by theindividual; any work that the Government needed for the war would havebeen counter-balanced by a reduction in demand for work on the partof individual citizens. There would have been no multiplication ofcurrency owing to enormous credits raised by the Government; therewould have been merely a transfer of buying power from individuals tothe State. The process would have been gradual, there need have beenno acute dislocation, but as the cost of the war increased, that is tosay, as the Government needed more and more goods and services for itsprosecution, the community would gradually have shed one after anotherthe extravagances on which it spent so many hundreds of millions indays before the war. As it shed these extravagances the labourand energy needed to produce them would have been automaticallytransferred to the service of the war, or to the production ofnecessaries of life. By this simple process of monetary rationing allthe frantic appeals for economy, and most of the complicated, tangledproblems raised by such matters as Food Control or National Servicewould have been avoided. 

But, it may be contended, this is setting up an ideal so absurdlytoo high that you cannot expect any modern nation to rise up to it. Perhaps this is true, though I am not at all sure that if we had had areally bold and far-sighted Finance Minister at the beginning of thewar he might not have persuaded the nation to tackle its war problemon this exalted line. At least it can be claimed that our financialrulers might have looked into the history of the matter and seen whatour ancestors had done in big wars in this matter of paying for warcosts out of taxation, with the determination to do at least as wellas they did, and perhaps rather better, owing to the overwhelmingscale of modern financial problems. If they had done so they wouldhave found that both in the Napoleonic and the Crimean wars we paidfor nearly half the cost of the war out of revenue as they went on, whereas in the present war the proportion that we are paying bytaxation, instead of being 47 per cent. , as it was when our sturdyancestors fought against Napoleon, is less than 20 per cent. [1]Why has this been so? Partly, no doubt, owing to the slackness andcowardice of our politicians, and the apathy of the overworkedofficials, who have been too busy with the details of finance to thinkthe problem out on a large scale. But it is chiefly, I think, becauseour system of taxation, though probably the best in the world, involves so many inequities that it cannot be applied on a reallylarge scale without producing a discontent which might have hadserious consequences on our conduct of the war. 

[Footnote 1: See _Economist_, August 4, 1917, p. 151. ]

It is not possible nowadays, now that the working classes areconscious of their strength, to apply taxation to ordinary articlesof general consumption with anything like the ruthlessness which informer days produced such widespread misery. Indirect taxation of thiskind carries with it this inherent weakness that its burden falls mostheavily on those who are least able to bear it, consequently it isbound to break in the hand of those who attempt to apply it withanything like vigour to a community which is prepared to stand up forfair treatment. A tax on bread or salt obviously hits the wage-earnerat 30s. A week infinitely harder than it hits the millionaire, and sothe country would not tolerate taxes on bread or salt. Direct taxes, such as Income Tax and Death Duties, have this enormous advantage, that they can really be regulated so as to press with continuallyincreasing severity upon those who are best able to bear them. Unfortunately our Income Tax is still so unjustly imposed that it wasclearly impossible to make full use of it without its being firstreformed. That two men, each earning £1000 a year, should pay the sameIncome Tax, in spite of one having a wife and five children, whilethe other is a careless bachelor, is such a blot upon this otherwiseexcellent tax that it is generally agreed that the present rate of 5s. Is as high as it can be made to go unless some reform is introducedinto its incidence. The need for its reform is made the excuse for asparing use of the tax, and we have been on several occasions assuredthat, as soon as the war is over, this reform will be set about. 

In the meantime the Government falls back on funding about 80 percent. Of its requirements of the war on a system of borrowing. Inso far as the money subscribed to its loans is money that is beinggenuinely saved by investors this process has exactly the same effectas taxation, that is to say, somebody goes without goods and servicesand hands over his power to buy them to the State to be used for thewar. Borrowing of this kind consequently does everything that isneeded for the solution of the immediate war problem, and the onlyobjection to it is that it leaves later on the difficulties involvedby raising taxes when the war is over, and economic problems aremuch more complicated in times of peace than in war, for meeting theinterest and redemption of debt. But, in fact, it is well known thatby no means all that the Government has borrowed for war purposes hasbeen provided in this way. Much of the money that the Government hasobtained for war purposes has been got not out of genuine savingsof investors, but by arrangements of various kinds with the bankingmachinery of the country, or by the simple use of the printing-press, with the result that the Government has provided itself with anenormous mass of new currency which has not been taken out of anybodyelse's pocket, but has been manufactured by or for the Government. 

The consequence of the profligate use of this dishonest process isthat general rise in prices, which is in effect an indirect tax on thenecessaries of life, involving all the injustice and ill-feeling whicharises from such a measure. It is inevitable that the working classes, finding themselves subjected to a rise in prices, the cause of whichthey do not understand, but the result of which they see to be a greatdecrease in the buying power of their wages, should believe that theyare being exploited by profiteers, that the rich classes are growingricher at their expense out of the war, and that they and the countryare being bled by a set of unpatriotic capitalist blood-suckers. Itis also natural that the property-owning classes, who find themselvespaying an Income Tax which they regard as extortionate, shouldconsider that the working classes by their continuous demands forhigher wages to meet higher cost of living, are trying to exploitthe country in their own interests in a time of national crisis, anddisplaying a most unedifying spirit. The social result of this evilpolicy of inflation, in embittering class against class, is a matterwhich it is difficult to exaggerate. Some people think that it wasinevitable. This is too wide a question to be entered into now, butat least it must be contended that if it is inevitable the extent towhich it is being practised might have been very greatly diminished. 

Do we mean to go on to the end of the war with this muddling policy ofbad finance? If we still insist on believing that the war cannot lastanother six months, and there is therefore no need to pull ourselvesup short financially and put things in order, then we certainly shalldo so. But we should surely recognise that there is at least a chancethat the war may go on for years, that if so our present financialmethods will leave us with a burden of debt which is appalling toconsider, and that in any case, whether the war lasts another sixmonths or another six years, a reform of our financial methods is longoverdue, is inevitable some time, and will pay us better the sooner itis set about. 

IV

WAR FINANCE AS IT MIGHT HAVE BEEN--II

_December_, 1917

The Changed Spirit of the Country--A Great Opportunity thrownaway--What Taxation might have done--The Perils of Inflation--Driftingstupidly along the Line of Least Resistance--It is we who pay, not"Posterity. "

In the November number of _Sperling's Journal_ I dealt with thequestion of how our war finance might have been improved if a longerview had been taken from the beginning concerning the length of thewar and the measures that would be necessary for raising the money. The subject was too big to be fully covered in the course of onearticle, and I have been given this opportunity of continuing itsexamination. Before doing so I wish to remind my readers once moreof the great difference in the spirit of the country with regard tofinancial self-sacrifice in the early days of the war and at thepresent time, after three years of high profits, public and privateextravagance, and successful demands for higher wages have demoralisedthe public temper into a belief that war is a time for making bigprofits and earning big wages at the expense of the community. In theearly days the spirit of the country was very different, and it mighthave remained so if it had been trained by the use made of publicfinance along the right line. In the early days the Labour leadersannounced that there were to be no strikes during the war, and theproperty-owning classes, with their hearts full of gratitude for thepromptitude with which Mr Lloyd George had met the early war crisis, were ready to do anything that the country asked from them in thematter of monetary sacrifice. Mr Asquith's grandiloquent phrase, "Noprice is too high when Honour is at stake, " might then have been takenliterally by all classes of the community as a call to them to dotheir financial duty. Now it has been largely translated into a beliefthat no price is too high to exact from the Government by thosewho have goods to sell to it, or work to place at its disposal. Inconsidering what might have been in matters of finance we have to bevery careful to remember this evil change which has taken place in thepublic spirit owing to the short-sighted financial measures which havebeen taken by our rulers. 

Thus, when we consider how our war finance might have been improved, we imply all along that the improvements suggested should have beenbegun when the war was in its early stages, and when public opinionwas still ready to do its duty in finance. The conclusion at which wearrived a month ago was that by taxation rather than by borrowing andinflation much more satisfactory results could have been got out ofthe country. If, instead of manufacturing currency for the prosecutionof the war, the Government had taken money from the citizens either bytaxation or by loans raised exclusively out of real savings, the risein prices which has made the war so terribly costly, and has raised sogreat a danger through the unrest and dissatisfaction of the workingclasses, might have been to a great extent avoided, and the higher therate of taxation had been, and the less the amount provided by loans, the less would have been the seriousness of the problem that nowawaits us when the war is over and we have to face the question of theredemption of the debt. 

In this matter of taxation we have certainly done much more thanany of the countries who are fighting either with us or against us. Germany set the example at the beginning of the war of raising nomoney at all by taxation, puffed up with the vain belief that the costof the war, and a good deal more, was going to be handed over to herin the shape of indemnities by her vanquished enemies. This terriblemiscalculation on her part led her to set a very bad example to thewarring Powers, and when protests are made in this country concerningthe low proportion of the war's costs that is being met out oftaxation it is easy for the official apologist to answer, "See howmuch more we are doing than Germany. " It is easy, but it is not a goodanswer. Germany had no financial prestige to maintain; the money thatGermany is raising for financing the war is raised almost entirelyat home, and she rejoices in a population so entirely tame under adominant caste that it would very likely be quite easy for her, when, the war is over, to cancel a large part of the debt by some process offinancial jugglery, and to induce her tame and deluded creditors tobelieve that they have been quite handsomely treated. 

Here, however, in England, we have a financial prestige which is basedupon financial leadership of more than a century. We have also raiseda large part of the money we have used for the prosecution of thewar by borrowing abroad, and so we have to be specially careful inhusbanding that credit, which is so strong a weapon on the side ofliberty and justice. And, further, we have a public which thinks foritself, and will be highly sceptical, and is already inclined to besceptical, concerning the manner in which the Government may treat thenational creditors. Its tendency to think for itself in matters offinance is accompanied by very gross ignorance, which very ofteninduces it to think quite wrongly; and when we find it necessary forthe Chancellor of the Exchequer to make it clear at a succession ofpublic meetings that those who subscribe to War Loans need have nofear that their property in them will be treated worse than any otherkinds of property, we see what evil results the process of too muchborrowing and too little taxation can have in a community which isacutely suspicious and distrustful of its Government, and very liableto ignorant blundering on financial subjects. 

What, then, might have been done if, at the beginning of the war, areally courageous Government, with some power of foreseeing the needsof finance for several years ahead if the war lasted, had made a rightappeal to a people which was at that time ready to do all that wasasked from it for the cause of justice against the common foe? Theproblem by which the Government was faced was this, that it had toacquire for the war an enormous and growing amount of goods andservices required by our fighting forces, some of which could only begot from abroad, and some could only be produced at home, while atthe same time it had to maintain the civilian population with such asupply of the necessaries of life as would maintain them in efficiencyfor doing the work at home which was required to support the effort ofour fighters at the Front. With regard to the goods which came fromabroad, either for war purposes or for the maintenance of the civilianpopulation, the Government obviously had no choice about the manner inwhich payment had to be made. It had no power to tax the suppliers inforeign countries of the goods and services that we needed during thewar period. It consequently could only induce them to supply thesegoods and services by selling them either commodities produced byour own industry, or securities held by our capitalists, or its ownpromises to pay. 

With regard to the goods that we might have available for export, these were likely to be curtailed owing to the diversion of a largenumber of our industrial population into the ranks of the Army andinto munition factories. This curtailment, on the other hand, mightto a certain extent be made good by a reduction in consumption on thepart of the civilian population, so setting free a larger proportionof our manufacturing energy for the production of goods for export. Otherwise the problem of paying for goods purchased from abroad couldonly be solved by the export of securities, and by borrowing fromforeign countries, so that the shells and other war material that wererequired, for example, from America, might be paid for by Americaninvestors in consideration of receiving from us a promise to pay themback some day, and to pay them interest in the meantime. In otherwords, we could only pay for what we needed from abroad by shippinggoods or securities. As is well known, we have financed the war bythese methods to an enormous extent; the actual extent to which wehave done so is not known, but it is believed that we have roughlybalanced by this process the sums that we have lent to our Allies andDominions, which now amount to well over 1300 millions. 

If this is so, we have, in fact, financed the whole of the real costof the war to ourselves at home, and we have done so by taxation, by borrowing saved money, and by inflation--that is to say, bythe manufacture of new currency, with the inevitable result ofdepreciating the buying power of our existing currency as a whole. Howmuch better could the thing have been done? In other words, how muchof the war's cost in so far as it was raised at home could have beenraised by taxation? In theory the answer is very simple, for in theorythe whole cost of the war, in so far as it is raised at home, couldhave been raised by taxation if it could have been raised at all. It is not possible to raise more by any other method than it istheoretically possible to raise by taxation. It is often said, "Allthis preaching about taxation is all very well, but you couldn'tpossibly get anything like the amount that is needed for the war bytaxation, or even by borrowing of saved money. This inflation againstwhich economic theorists are continually railing is inevitable in timeof war because there isn't enough money in the country to provide allthat is needed. "

This argument is simply the embodiment of the old delusion, so commonamong people who handle the machinery of finance, that you can reallyincrease the supply of necessary goods by increasing the supply ofmoney, which is nothing else than claims to goods expressed either inpieces of metal or pieces of paper. As we have seen, all that we havebeen able to raise abroad has been required for advances to our Alliesand Dominions, consequently we have had to fall back upon our own homeproduction for everything needed for our own war costs. Either we haveturned out the goods at home or we have turned out goods to sell toforeigners in exchange for goods that we require from them. But sincewe thus had to rely on home production for the whole of the war'sneeds as far as we were concerned, it is clear that the Governmentcould, if it had been gifted with ideal courage and devotion, and ifit had a people behind it ready to do all that was needed for victory, have taken the whole of the home production, except what was wantedfor maintaining the civilian population in efficiency, for thepurposes of the war. 

It is a commonplace of political theory that the Government has aright to take the whole of the property and the whole of the labour ofits citizens. But it would not, of course, have been possible for theGovernment immediately to inaugurate a policy of setting everybody towork on things required for the war and paying them all a maintenancewage. This might have been done in theory, but in practice it wouldhave involved questions of industrial conscription, which wouldprobably have raised a storm of difficulty. What the Government mighthave done would have been by commandeering the buying power of thecitizen to have set free the whole industrial energy of the communityfor supplying the war's needs and the necessaries of life. At presentthe national output, which is only another way of expressing thenational income, is produced from certain channels of production inresponse to the expectation of demand from those whose possession ofclaims to goods, that is to say, money, gives them the right to saywhat kind of goods they will consume, and consequently the industrialpart of the population will produce. 

Had the Government laid down that the whole cost of the war was to beborne by taxation, the effect of this measure would have been thateverything which was needed for the war would have been placed at thedisposal of the Government by a reduction in spending on the part ofthose who have the spending power. In other words, the only processrequired would have been the readjustment of industrial output fromthe production of goods needed (or thought to be needed) for ordinaryindividuals to those required for war purposes. This readjustmentwould have gone on gradually as the war's cost increased. Therewould have been no competition between the Government and privateindividuals for a limited amount of goods in a restricted market, which has had such a disastrous effect on prices during the course ofthe war; there would have been no manufacture of new currency, whichmeans the creation of new buying power at a time when there are lessgoods to buy, which has had an equally fatal effect on prices; therewould have had to be a very drastic reform in our system of taxation, by which the income tax, the only really equitable engine by which theGovernment can get much money out of us, would have been reformed soas to have borne less hardly upon those with families to bring up. 

Mr Sidney Webb and the Fabians have advocated a system by which thebasis of assessment for income tax should be the income divided by thenumber of members of a family, rather than the mere income without anyconsideration for the number of people that have to be provided forout of it. With some such scheme as this adopted there is no reasonwhy the Government should not have taken, for example, the whole ofall incomes above £1000 a year for each individual, due allowancebeing made for obligations, such as rent, which involve longcontracts. For any single individual to want to spend more than£1000 a year on himself or herself at such a crisis would have beenrecognised, in the early days of the war, as an absurdity; any surplusabove that line might readily have been handed over to the Government, half of it perhaps in taxation and the other half in the form of aforced loan. 

So sweeping a change would not have been necessary at first, perhapsnot at all, because the war's cost would not have grown nearly sorapidly. All surplus income above a certain line would have been takenfor the time being, but with the promise to repay half the amounttaken, so that it should not be made a disadvantage to be rich, and nodiscouragement to accumulation would have been brought about. By thismeans the whole of the nation's buying power among the richer classeswould have been concentrated upon the war, with the result that theprivate extravagance, which is still disgracing us in the fourth yearof the war, would not have been allowed to produce its evil effects. With the rich thus drastically taxed, the working classes would havebeen much less restive under the application of income tax to theirown wages. We should have a much more freely supplied labour market, and since the rise in prices would not have been nearly so severe, labour's claim to higher wages would have been much less equitable, and labour's power to enforce the claim would have been much lessirresistible. 

What the Government has actually done has been to do a little bit oftaxation, much more than anybody else, but still a little bit whencompared with the total cost of the war; a great deal of borrowing, and a great deal of inflation. By this last-named method it producesthe result required, that of diverting to itself a large part of theindustrial output of the country, by the very worst possible means. Itstill, by its failure to tax, leaves buying power in the hands of alarge number of people who see no reason why they should not live verymuch as usual; that is to say, why they should not demand for theirown purposes a proportion of the nation's energy which they have noreal right to require at such a time of crisis. But in order to checktheir demands, and to provide its own needs, the Government, bysetting the bankers to work to provide it with book credits, givesitself an enormous amount of new buying power with which, by theprocess of competition, it secures for itself what is needed for thewar. There is thus throughout the country this unwholesome processof competition between the Government on one hand and unpatrioticspenders on the other, who, between them, put up prices against theGovernment and against all those unfortunate, defenceless people who, being in possession of fixed salaries, or of fixed incomes, have noremedy against rising prices and rising taxation. All that couldpossibly have been spent on the war in this country was the totalincome of the people, less what was required for maintaining thepeople in health and efficiency. That total income Government might, in theory, have taken. If it had done so it could and would have paidfor the whole of the war out of taxation. 

All this, I shall be told, is much too theoretical and idealistic;these things could not have been done in practice. Perhaps not, thoughit is by no means certain, when we look back on the very differenttemper that ruled In the country in the early months of the war. Ifanything of the kind could have been done it would certainly have beena practical proof of determination for the war which would have shownmore clearly than anything else that "no price was too high whenHonour was at stake. " It would also have been an extraordinarydemonstration to the working classes of the sacrifices that propertyowners were ready to make, the result of which might have been thatthe fine spirit shown at the beginning of the war might have beenmaintained until the end, instead of degenerating into a series ofdemands for higher wages, each one of which, as conceded to one set ofworkmen, only stimulates another to demand the same. But even if wegrant that it is only theoretically possible to have performed such afeat as is outlined above, there is surely no question that much moremight have been done than has been done in the matter of paying forthe war by taxation. If we are reminded once more that our ancestorspaid nearly half the cost of the Napoleonic war out of revenue, whilewe are paying about a fifth of the cost of the present war from thesame source, it is easy to see that a much greater effort might havebeen made in view of the very much greater wealth of the country atthe present time. I was going to have added, in view also of itsgreater economic enlightenment, but I feel that after the experienceof the present war, and its financing by currency debasement, the lessabout economic enlightenment the better. 

What, then, stood in the way of measures of finance which would haveobviously had results so much more desirable than those which willface us at the end of the war? As it is, the nation, with all classesembittered owing to suspicions of profiteering on the part of theemployers and of unpatriotic strikes on the part of the workers, willhave to face a load of debt, the service of which is already roughlyequivalent to our total pre-war revenue; while there seems everyprospect that the war may continue for many half-years yet, and everyhalf-year, as it is at present financed, leaves us with a load of debtwhich will require the total yield of the income tax and the super-taxbefore the war to meet the charge upon it. Why have we allowed ourpresent finance to go so wrong? In the first place, perhaps, we mayput the bad example of Germany. Then, surely, our rulers might haveknown better than to have been deluded by such an example. In thesecond place, it was the cowardice of the politicians, who had not thesense in the early days of the war to see how eager the spirit of thecountry was to do all that the war required of it, and consequentlywere afraid to tax at a time when higher taxation would have beensubmitted to most cheerfully by the country. There was also the absurdweakness of our Finance Ministers and our leading financial officials, which allowed our financial machinery to be so much weakened by thedemands of the War Office for enlistment that it has been said in theHouse of Commons by several Chancellors of the Exchequer that it isquite impossible to consider any form of new taxation becausethe machinery could not undertake it. There has also been greatshort-sightedness on the part of the business men of the country, whohave failed to give the Government a lead in this important matter. Like the Government, they have taken short views, always hoping thatthe war might soon be over, and so have left the country with aproblem that grows steadily more serious with each half-year as wedrift stupidly along the line of least resistance. 

Such war finance as I have outlined--drastic and impracticable asit seems--would have paid us. Taxation in war-time, when industry'sproblem is simplified by the Government's demand for its product, hurts much less than in peace, when industry has not only to turn outthe stuff, but also find a buyer--often a more difficult and expensiveproblem. There is a general belief that by paying for war by loans wehand the business of paying for it on to posterity. In fact, we canno more make posterity pay us back our money than we can carry on warwith goods that posterity will produce. Whatever posterity produces itwill consume. Whatever it pays in interest and amortisation of ourwar debt, it will pay to itself. We cannot get a farthing out ofposterity. All we can do, by leaving it a debt charge, is to affectthe distribution of its wealth among its members. Each loan that weraise makes us taxpayers collectively poorer now, to the extent of thecapital value of the charge on our incomes that it involves. The lesswe thus charge our productive power, and the more we pay up in taxesas the war goes on, the readier we shall be to play a leading part inthe great time of reconstruction. 

V

A LEVY ON CAPITAL

_January_, 1918

The Objects of the Levy--Its Origin and History--How it would work inPractice--The Attitude of the Chancellor--The Effects of the Schemein discouraging Thrift--Its Fallacies and Injustices--The InsuperableObstacles to its Application--Its Influence on Production--One of theTests of a Tax--Judged by this Test the Proposed Levy is doomed. 

By some curious mental process the idea of a levy on capital has comeinto rapidly increasing prominence in the last few months, and seemsto be gaining popularity in quarters where one would least expect it. On the other hand, it is naturally arousing intense opposition, bothamong those who would be most closely affected by its imposition, andalso among those who view with grave concern the possible and probableeconomic effects of such a system of dealing with the national debt. Isay "dealing with the national debt" because, as will be clear, asa system of raising money for the war the suggestion of the levy oncapital has little or nothing to recommend it. But, as will also bemade clear, the proposal has been put forward as a thing to be doneimmediately in order to increase the funds in the hands of theChancellor of the Exchequer to be spent on war purposes. 

A levy on capital is, of course, merely a variation of the tax onproperty, which has long existed in the United States, and had beenresorted to before now by Governments, of which the German Governmentis a leading example, in order to provide funds for a specialemergency. This it can very easily do as long as the levy is not toohigh. If, for example, you tax a man to the extent of 1-1/2 per cent. To 2 per cent. Of the value of his property, on which he may beearning an average of 5 to 6 per cent. In interest, then the levy oncapital becomes merely a form of income tax, assessed not according tothe income of the taxpayer but according to the alleged value of hisproperty. It is thus, again, a variation of the system long adoptedin this country of a special rate of income tax on what is called"unearned" income, i. E. Income from invested property. But it isonly when one begins to adopt the broadminded views lately fashionableof the possibilities of a levy on capital and to talk of taking, say, 20 per cent. Of the value of a man's property from him in the courseof a year, that it becomes evident that he cannot be expected to payanything like this sum, in cash, unless either a market is somehowprovided--which seems difficult if all property owners at once areto be mulcted of a larger amount than their incomes--or unless theGovernment is prepared to accept part at least of the levy in theshape of property handed over at a valuation. 

Before, however, we come to deal in detail with the difficultiesand drawbacks of the suggestion, it may be interesting to trace thehistory of the movement in its favour, and to see some of the forms inwhich it has been put forward. It may be said that the ball was openedearly last September when, in the _Daily News_ of the 8th of thatmonth, its able and always interesting editor dealt in one of hisilluminating Saturday articles with the question of "How to Payfor the War. " He began with the assumption that the capital of theindividuals of the nation has increased during the war from 16, 000millions to 20, 000 millions. A 10 per cent. Levy on this, heproceeded, would realise 2000 millions. It would extinguish debt tothat amount and reduce the interest on debt by 120 millions. The levywould be graduated--say, 5 per cent. On fortunes of £1000 to £20, 000;10 per cent. On £20, 000 to £50, 000; up to 30 per cent. On sums over£1, 000, 000; and the individual taxpayer was to pay the levy "in whatform was convenient, in his stocks or his shares, his houses or hisfields, in personalty or realty. "

Just about the same time the _Round Table_, a quarterly magazine whichis usually most illuminating on the subject of finance, chimed in witha more or less similar suggestion in an article on "Finance After theWar. " It remarked that the difficulty of applying a levy on capital is"probably not so great as appears at first sight. " The total capitalwealth of the community it estimated at about 24, 000 millionssterling. To pay off a war debt of 3000 millions would thereforerequire a levy of one-eighth. Evidently this could not be raised inmoney, nor would it be necessary. Holders of War Loans would pay theirproportion in a simple way by surrendering one-eighth of their scrip. Holders of other forms of property would be assessed for one-eighth ofits value and be called on to acquire and to surrender to the Statethe same amount of War Loan scrip. To do this, they would be obligedto realise a part of their property or to mortgage it, "but, " addedthe _Round Table_ cheerfully, "there is no insuperable difficultyabout that. "

The first thing that strikes one when one examines these two schemesis the difference in their view concerning the amount of capitalwealth available for taxation. Mr Gardiner made the comparativelymodest estimate of 16, 000 millions to 20, 000 millions; the _RoundTable_ plumps for 24, 000 millions, and, incidentally, it may beremarked that some conservative estimates put it as low as 11, 000millions. Thus we have a possible range for the fancy of the schemebuilder of from 11, 000 to 24, 000 millions in the property on whichtaxation is proposed to be levied. But it is when we come to thedetails of these schemes that the difficulties begin to glare. MrGardiner tells us that millionaires would pay up to 30 per cent. Oftheir property, and that they would pay in what form was convenient, in houses, fields, etc. , etc. But he does not explain by whatprinciple the Government is to distribute among the holders of thedebt, the repayment of whom is the object of the levy, the strangeassortment of miscellaneous assets which it would thus collect fromthe property owners of the country. 

In commenting on this scheme the _Economist_ of September 15th tookthe case of a man with a fortune of £100, 000 invested before the warin a well-assorted list of securities, the whole of which he had, forpatriotic reasons, converted during the war into War Loans. He wouldhave no difficulty about paying his capital levy, for he wouldobviously surrender something between 10 and 20 per cent. Of hisholding. But, "in exchange for nearly two-thirds of the rest, he mightfind himself landed with houses and bits of land all over the country, a batch of unsaleable mining shares, a collection of blue china, apearl necklace, a Chippendale sideboard, and a doubtful Titian, "The _Round Table's_ suggestion seems to be even more impracticable. According to it, holders of all other forms of property besides WarLoans would be assessed for one-eighth of its value--it does notexplain how the value is to be arrived at, nor how long it would taketo do it--and would then be called on to acquire and to surrender tothe State the same amount of War Loan scrip. To do this they wouldbe obliged to realise a part of their property or to mortgage it, aprocess which would seem likely to produce a pretty state of affairsin the property market; and a very pleasant state of affairs indeedwould arise for the holders of War Loan scrip, since there would be alarge crowd of compulsory buyers in the market from whom the holderswould apparently be able to extort any price that they liked for theirstock. 

The next stage in the proceedings was a deputation to the Chancellorof the Exchequer, concerning which more anon, of leaders of variousgroups of the Labour Party, to press upon Mr Bonar Law the principleof what is called "the Conscription of Wealth, " and the publication ator soon after that time, which was about the middle of November, of apamphlet on the subject of the "Conscription of Riches, " by the WarEmergency Workers' National Committee, 1, Victoria Street, S. W. Amongwhat this pamphlet describes as "the three practicable methods ofconscripting wealth" No. 1 is as follows:--

A Capital Tax, on the lines of the present Death Duties, which aregraduated from nothing (on estates under £300, and legacies under £20)up to about 20 per cent. (on very large estates left as legacies tostrangers). 

If a "Death Duty" at the existing rates were now levied simultaneouslyon every person in the kingdom possessing over £300 wealth (everyperson might be legally deemed to have died, and to be his own heir), it might yield to the Chancellor of the Exchequer about £900, 000, 000. It would be necessary to offer a discount for payment in cash; and inorder to avoid simultaneous forced sales, to accept, in lieu of cash, securities at a valuation; and to take mortgages on land. 

Here it will be seen that the Emergency Workers had improved on the_Round Table_, and agreed with Mr Gardiner, by providing that theGovernment should take securities at a valuation and mortgages on landin lieu of cash in order to avoid simultaneous forced sales. But theydo not seem to have perceived that, in so far as the Government tooksecurities or accepted mortgages on land, it would not be gettingmoney to pay for the war, which was the object of the proposedConscription of Wealth, but would only be obtaining property fromwhich the Government would in due course later on receive an income, probably averaging about one-twentieth of its value. 

Perhaps, however, it would be more correct to say that those who putthe scheme forward did not ignore this drawback to it, but ratherliked it, for reasons quite irrelevant to the objects that they wereapparently pursuing. A good deal of prominence was given about thesame time to the question of a levy on capital in the _New Statesman_well known to be the organ of Mr Sidney Webb and other members of theFabian Society. These distinguished and very intellectual Socialistswould, of course, be quite pleased if, in an apparent endeavour to payfor the war, they actually succeeded in securing, by the Government'sacquisition of blocks of securities from property owners, thatofficial control of industry and production which is the object ofState Socialists. 

It will be noted, however, in this scheme that no mention is made ofany forms of property to be accepted by the Government in lieu of cashexcept securities and mortgages on land. Items such as furniture, books, pictures and jewellery are ignored, and in one of the articlesin the _New Statesman_, discussing the question of a capital levy, itwas distinctly suggested that these commodities should be left outof the scheme so as to save the trouble involved by valuation. Unfortunately, if we leave out these forms of property the naturalresult is to stimulate the tendency, lately shown by an unfortunatelylarge number of patriotic taxpayers, of putting money into pearlnecklaces and other such gewgaws in order to avoid income tax. Ifby buying fur coats, old masters and diamond tiaras it will be bepossible in future to avoid paying, not only income tax, but also acapital levy, it is to be feared that appeals to people to save theirmoney and invest it in War Bonds are likely to be seriously interferedwith. 

Unfortunately, the _Statesman_ was able to announce that the appealfor this system of taxation had been received with a good deal ofsympathy by the Chancellor of the Exchequer, and the next stage in thehistory of the agitation was the publication on Boxing Day in severalof the daily papers of what appeared to be an official summary, issuedthrough the Central News, of what the Chancellor had said to thedeputation of Labour Leaders introduced by Mr Sidney Webb, whichwaited on him, as already described, in the middle of November. Havingpointed out that he had never seen any proposal which seemed to himto be practicable for getting money during the war by conscriptingwealth, Mr Bonar Law added that, though "perhaps he had not thoughtenough about it to justify him in saying so, " his own feeling was thatit would be better, both for the wealthy classes and the country, tohave this levy on capital, and reduce the burden of the national debtwhen the war was over. It need not be said that this statement by theChancellor has been very far from helpful to the efforts of those whoare trying to induce unthrifty citizens to save their money and put itinto National War Bonds for the finance of the war. 

"Why, " people argue, "should we go out of our way to save and takethese securities if, when the war is over, a large slice of oursavings is to be taken away from us by means of this levy on capital?If we had been doubting between the enjoyment of such comforts andluxuries as are possible in war-time and the austere duty of thrift, we shall naturally now choose the pleasanter path, spend our money onourselves and on those who depend on us, instead of saving it up tobe taken away again when the war is over, while those who have spenttheir money as they liked will be let off scot free. " Certainly, it ismuch to be regretted that the Chancellor of the Exchequer should havelet such a statement go forth, especially as he himself admits thatperhaps he has not thought enough about it to justify him in sayingso. If the Chancellor of the Exchequer has not time to think aboutwhat he is going to say to a Labour deputation which approaches him onan extremely important revolution in our fiscal system, it is surelyhigh time that we should get one who has sufficient leisure to enablehim to give his mind to problems of this sort when they are put beforehim. 

In the course of this review of the forms in which suggestions for alevy on capital have been put forward, some of the difficulties andinjustices inherent in it have already been pointed out. Its advocatesseem as a rule to base the demand for it upon an assumption whichinvolves a complete fallacy. This is that, since the conscriptionof life has been applied during the war, it is necessary thatconscription of wealth should also be brought to bear in order to makethe war sacrifice of all classes equal. For instance, the EmergencyWorkers' pamphlet, quoted above, states that, "in view of the factthat the Government has not shrunk from Compulsory Conscription ofMen, " the Committee demands that "for all the future money requiredto carry on the war, the Government ought, in common fairness, toaccompany the Conscription of Men by the Conscription of Wealth. "

This contention seems to imply that the conscription of men and theconscription of wealth apply to two different classes; in other words, that the owners of wealth have been able to avoid the conscription ofmen. This, of course, is absolutely untrue. The wealthiest and thepoorest have to serve the country in the front line alike, if they arefit. The proportion of those who are fit is probably higher among thewealthy classes, and, consequently, the conscription of men appliesto them more severely. Again, the officers are largely drawn fromthe comparatively wealthy classes, and it is pretty certain that theproportion of casualties among officers has been higher during the warthan among the rank and file. Thus, as far as the conscription of menis concerned, the sacrifice imposed upon all classes in the communityis alike, or, if anything, presses rather more heavily upon those whoown wealth. Conscription of wealth as well as conscription of lifethus involves a double sacrifice to the owners of property. 

This double sacrifice, in fact, the owners of property have, as isquite right, borne throughout the war by the much more rapid increasein direct taxation than in indirect. It is right that the owners ofproperty should bear the heavier monetary burden of the war becausethey, having more to lose and therefore more to gain by a successfulend of the war, should certainly pay a larger proportion of its cost. It was also inevitable that they should do so because, when money iswanted for the war or any other purpose, it can only be taken in largeamounts from those who have a surplus over what is needed to providethem with the necessaries and decencies of life. But the argumentwhich puts forward a capital levy on the ground that the rich havebeen escaping war sacrifice is fallacious in itself, and is a wickedmisrepresentation likely to embitter still further the bad feelingbetween classes. 

Nevertheless, Mr Bonar Law thinks that, since the cost of the war mustinevitably fall chiefly upon the owners of property, and since ittherefore becomes a question of expediency with them whether theyshould pay at once in the form of a capital levy or over a long seriesof years in increased taxation, he is inclined to think that theformer method is one which would be most convenient to them and bestfor the country. This contention cannot be set aside lightly, andthere can be no doubt that if, by making a dead lift, the wealthyclasses of the country could throw off their shoulders a large part ofthe burden of the war debt, such a scheme is well worth considering aslong as it does not carry with it serious drawbacks. 

It seems to me, however, that the drawbacks are very considerable. In the first place, I have not seen any really practicable scheme ofredeeming debt by means of a levy on capital In so far as the levy ispaid in the form of surrendered War Loans, it is simple enough. In sofar as it is paid in other securities or mortgages on land or otherforms of property, it is difficult to see how the assets acquired bythe State through the levy could be distributed among the debtholders whom it is proposed to pay off. Would they be forced to takesecurities, mortgages on land, furniture, etc. , as the Governmentchose to distribute them, or would the Government have to nurse anenormous holding of various forms of property and gradually realisethem and so pay off debt?

Again, a great injustice would surely be involved by laying the wholeburden of this oppressive levy upon owners of accumulated property, sopenalising those who save capital for the community and letting offthose who squander their incomes. A characteristic argument on thispoint was provided by the _New Statesman_ in a recent issue. It arguedthat, because ordinary income tax would still be exacted, the contrastbetween the successful barrister with an Income of £20, 000 a year andno savings, who would consequently escape the capital levy, and thepoor clergyman who had saved £1000 and would consequently be liable toit, fell to the ground. In other words, because both lawyer and parsonpaid income tax, it was fair that the former should escape the capitallevy while the latter should have to pay it!

But needs must when the devil drives, and in a crisis of this kind itis not always possible to look too closely into questions of equity inraising money. It is necessary, however, to look very closely into theprobable economic effects of any suggested form of taxation, and, ifwe find that it is likely to diminish the future wealth productionof the nation, to reject it, however attractive it may seem to beat first sight. A levy on capital which would certainly check theincentive to save, by the fear that, if such a thing were oncesuccessfully put through, it might very likely be repeated, would dryup the springs of that supply of capital which is absolutely essentialto the increase of the nation's productive power. Moreover, businessmen who suddenly found themselves shorn of 10 to 20 per cent. Oftheir available capital would find their ability to enter into freshenterprise seriously diminished just at the very time when it isessential that all the organisers of production and commerce in thiscountry should be most actively engaged in every possible form ofenterprise, in order to make good the ravages of war. 

VI

OUR BANKING MACHINERY

_February_, 1918

The Recent Amalgamations--Will the Provinces suffer?--Consolidationnot a New Movement--The Figures of the Past Three Decades--Reductionof Competition not yet a Danger--The Alleged Neglect of LocalInterests--Shall we ultimately have One Huge Banking Monopoly?--TheSuggested Repeal of the Bank Act--Sir E. Holden's Proposal. 

Banking problems have lately loomed large in the financial landscape. It will be remembered that about a year and a half ago a Committeewas appointed to consider the creation of a new institution speciallyadapted for financing overseas trade and for the encouragement ofindustrial and other ventures through their years of infancy, andthat the charter which was finally granted to the British TradeCorporation, as this institution was ultimately called, roused agreat deal of opposition both on the part of banks and of traders whothought that a Government institution with a monopoly characterwas going to cut into their business with the help of a Governmentsubsidy. In fact, there was no subsidy at all in question, and thefears of the trading world of competition on the part of the newchartered institution only arose owing to its unfortunate name, whichwas given to it in order to allay the apprehensions of the banks whichhad been provoked by the title originally designed for it, namely, theBritish Trade Bank. There seems no reason why this Company shouldnot do good work for British trade without treading on the toes ofanybody. Although naturally its activities cannot be developed on anysubstantial scale until the war is over, its Chairman assured theshareholders at the end of January that its preliminary spadework wasbeing carefully attended to. 

After this small storm in a teacup had died down those interested inour banking efficiency were again excited by the rapid progress madeby the process of amalgamation among our great banks, which began toshow acute activity again in the last months of 1917. The suddenlyannounced amalgamation of the London and South-Western and Londonand Provincial Banks led to a whole host of rumours as to otheramalgamations which were to follow; and though most of these proved tobe untrue a fresh sensation was aroused when the union was announcedof the National Provincial Bank of England and the Union of London andSmith's Bank. All the old arguments were heard again on the subject ofthe objections, from the point of view of industry in the provinces, to the formation of great banking institutions, with enormous figureson both sides of the balance-sheet, working from London, often, it wasalleged, with no consideration for the needs of the provincial usersof credit. These latest amalgamations, which have united banks whichalready had head offices in London, gave less cause than usual forthese provincial apprehensions, which had far more solid reason behindthem when purely provincial banks were amalgamated with institutionswhose head office was in London. Nevertheless, the argument was heardthat the great size and scale on which these amalgamated banks werebound to work would necessarily make them more monopolistic andbureaucratic in their outlook, and less elastic and adaptable in theirdealings with their local customers. 

It seems to me that there is so far very little solid ground for anyapprehension on the part of the business community that the recentdevelopment of banking evolution will tend to any damage to theirinterests. The banks have grown in size with the growth of industry. As industry has tended more and more to be worked by big battalions, it became necessary to have banking institutions with sufficientlylarge resources at their command to meet the great requirements of thehuge industrial organisations that they had to serve. Nevertheless, the tendency towards fewer banks and bigger figures has grown withextraordinary celerity, as the following table shows:--

MOVEMENT OF ENGLISH JOINT-STOCK BANK DEPOSITS, ETC. , SINCE 1886. 

December No. Of Number of Capital Deposit and Total31st Banks Branches Paid up Current Liabilities Accounts1886 109 1, 547 £38, 468, 000 £299, 195, 000 £376, 808, 0001891 106 2, 245 43, 406, 000 391, 842, 000 486, 632, 0001896 94 3, 051 45, 203, 000 495, 233, 000 599, 518, 0001901 74 3, 935 46, 631, 000 584, 841, 000 698, 150, 0001906 55 4, 840 48, 122, 000 647, 889, 000 782, 353, 0001911 44 5, 417 47, 265, 000 748, 641, 000 885, 069, 0001916 35 5, 993 48, 237, 000 1, 154, 877, 000 1, 316, 220, 000

This table is taken from the annual banking numbers of the_Economist_. It will be noticed that in 1886 there were in England 109joint-stock banks with 1547 offices, whose accounts were tabulatedin the _Economist's_ annual review. Their total paid-up capital was38-1/2 millions, their deposit and current accounts were just under300 millions, and their total liabilities were 377 millions. In thecourse of thirty years the 109 banks had shrunk by the process ofamalgamation and absorption to thirty-five, that is to say, they hadbeen divided by three; the number of their offices, however, had beenmultiplied by nearly four, while their deposit accounts had grown from300 millions to 1155, and their total liabilities from 377 to 1316millions. By the amalgamations announced at the end of 1917, and thatof the County of Westminster with Parr's announced on February 1st, the number of joint stock banks will be reduced to 32. The picturewould be still more striking if the figures of the private banks wereincluded, since their number has been reduced, since 1891, from 37 to6. These figures are eloquent of the manner in which the number ofindividual banks has been reduced, while the extent of the bankingaccommodation given to the community has enormously grown, so that thepower wielded by each individual bank has increased by the force ofboth these processes. 

The consequent reduction in competition which is causing some concernamong the trading community has not, as it seems to me, gone farenough yet to be a serious danger. The idea that the big banks withoffices in London give scant consideration to the needs of their localcustomers seems to be so contrary to the interests of the banks thatthey would be extraordinarily bad men of business if those who wereresponsible for their management allowed it to be the fact. It isprobably nearer the truth that banking competition in the provinces isstill so keen that the London management is very careful not to allowanything like bureaucratic stiffness to get into the methods by whichtheir business is managed. By the appointment of local committees theyare careful to do all they can to see that the local interests get allthe credit that is good for them. That local interests get as muchcredit as they want is probably very seldom the case, because it is anatural instinct on the part of an eager business man to want rathermore credit than he ought to have, from a banking point of view. Business interests, as long as they exist in private hands, willalways want rather more credit than there is available, and it willalways be the duty of the banker to ensure that the country's industryis kept on a sound basis by checking the tendency of the eagerbusiness man to undertake rather more than is good for him. From thesentimental point of view it is certainly a pity to have seen many ofthe picturesque old private banks extinguished, the partners in whichwere in close personal touch with their customers, and entered intothe lives of the local communities in a manner which their moderncounterpart is perhaps unable to do. Nevertheless, it is difficultto get away from the fact that if these institutions had been asefficient and as well managed as their admirers depict them to havebeen they would hardly have been driven out of existence by the stressof modern developments and competition. Whatever we may think ofmodern competition, in certain of its aspects, we may at least besure of this--that it does not destroy an institution which is reallywanted by the business community. And if the complaint of localinterests is true, that they are swamped by the cosmopolitanaspirations of the great London offices, they always have it in theirpower to create an institution of the kind that they want, and bygiving it their business to ensure for it a prosperous career. As longas no such tendency is visible in the banking world we may be prettysure that the views expressed concerning the neglect of localinterests by the enormous banks which have grown up with Londoncentres in the last thirty years is to a great extent a myth. Ithas now announced, however, that the whole problem involved by theamalgamation process is to be sifted by a committee to be appointedfor this purpose. 

Another apprehension has arisen in the minds of those who view withcritical vigilance the present tendencies of business and thepresent development of economic opinion among a great section of thecommunity. If, it is urged, the banks continue to swallow one anotherup by the process of amalgamation, how will this tendency end exceptin the creation of one huge bank working a gigantic money monopolywhich the Socialistic tendencies of the present day will, with somereason, insist ought to be taken over by the State for the profit ofthe taxpayer? This view is frankly put forward by those advocates of aSocialistic organisation of society, who say that the modern tendencyof industry towards combinations, rings and trusts is rapidly bringingthe Socialistic millennium within their reach without any efforton the part of Socialistic preachers. They consider that the trustmovement is doing the work of Socialism, much faster than Socialismcould do it for itself; that, in short, as has been argued abovein regard to banking, the tendency towards centralisation and theelimination of competition can only end in the assumption by the Stateof the functions of industry and finance. If this should be so, thefuture is dark for those of us who believe that individual effortis the soul of industrial and financial progress, and that industrycarried on by Government Departments, however efficient and economicalit might be, would be such a deadly dull and unenterprising businessthat all the adaptability and tendency to variation in accordance withthe needs of the moment, which are so strongly shown by individualenterprise, would be lost, to the great detriment of the materialprogress of mankind. 

As things are at present, there is little need to fear thatSocialistic organisation of industry could stand up against competentindividual effort. Anybody who has ever had any business dealingswith a Government Department will inevitably shudder when he tries toimagine how many forms would have to be filled up, how many divisionsof the Department the inevitable mass of papers would have to gothrough, and how much delay and tedium would be involved before thesimplest business proposition could be carried out. But, of course, itis argued by Socialists that Government Departments are only slow andtied up with red tape because they have so long been encouraged to doas little as possible, and that as soon as they are really urged to dothings instead of pursuing a policy of masterly inactivity, there isno reason why they should not develop a promptitude and elasticityquite as great as that hitherto shown by the business community. That such a development as this might take place in the course ofgenerations nobody can deny; at present it must be admitted that withthe great majority of men the money-making incentive is required toget the best out of them. If the process of education produces sogreat a change in the human spirit that men will work as well for thesmall salary of the Civil Service, with a K. C. B. Thrown in, as theywill now in order to gain the prizes of industry and finance, thenperhaps, from the purely economic point of view, the Socialisationof banking may be justified. But we are a long way yet from any suchachievement, and if it is the case that the rapid centralisation ofbanking power in comparatively few hands carries with it the dangerof an attempt to nationalise a business which requires, above all, extreme adaptability and sensitiveness to the needs of the momentas they arise, this is certainly a danger which has to be carefullyconsidered by those who are responsible for the development of theseamalgamation processes. 

And now another great stone has been thrown into the middle of thebanking pond, causing an ever-widening circle of ripples and provokingthe beginning of a discussion which is likely to be with us for sometime to come. Sir Edward Holden, at the meeting of the London City andMidland Bank shareholders on January 29th, made an urgent demand forthe immediate repeal of the Bank Act of 1844. This Act was passed, as all men know, in order to restrict the creation of credit inthe United Kingdom. In the early part of the last century the mostimportant part of a bank's business consisted of the issue of notes, and banking had been carried on in a manner which the countryconsidered unsatisfactory because banks had not paid sufficientattention to the proportion of cash that they ought to hold in theirtills to meet notes if they were presented. Parliament in its wisdomconsequently ordained that the amount of notes which the banks shouldbe allowed to issue, except against actual metal in their vaults, should be fixed at the amount of their issue at that time. Above thelimit so laid down any notes issued by the banks were to be backed bymetal. In the case of the Bank of England the limit then establishedwas £14, 000, 000, and it was enacted that if any note-issuing bank gaveup its right to a note issue the Bank of England should be empoweredto increase its power to issue notes against securities to the extentof two-thirds of the power enjoyed by the bank which was giving up itsprivilege. By this process the Bank of England's right to issue notesagainst securities, what is usually called its fiduciary issue, hasrisen to £18, 450, 000; above that limit every note issued by it has tobe backed by bullion, and is actually backed by gold, though underthe Act one-fifth might be in silver. It was thus anticipated by theframers of the Act that in future any credit required by industrycould only be granted by an increase in the gold held by the issuingbanks. If the Act had fulfilled the anticipations of the Parliamentwhich passed it, if English trade had grown to anything like theextent which it has done since, it could only have done so by theamassing of a mountain of gold, which would have lain in the vaults ofthe Bank of England. 

Fortunately, however, the banking community had at its disposal aweapon of which it was already making considerable use, namely, thesystem of issuing credit by means of banking deposits operated on bycheques. Eight years before Peel's Act was passed two Joint StockBanks had been founded in London, although the Bank of Englandnote-issuing monopoly still made it impossible for any Joint StockBank to issue notes in the London district. It is thus evident thatdeposit banking was already well founded as a profitable business whenPeel, and Parliament behind him, thought that they could sufficientlyregulate the country's banking system so long as they controlled theissue of notes by the Bank of England and other note-issuing banks. Itis perhaps fortunate that Parliament made this mistake, and so enabledour banking machinery to develop by means of deposit banking, and soto ignore the hard-and-fast regulations laid upon it by Peel's Act. This, at least, is what has happened; only in times of acute crisishave the strict regulations of Peel's Act caused any inconvenience, and when that inconvenience arose the Act has been suspended by thegranting of a letter of indemnity from the Treasury to the Governor ofthe Bank. 

Under Peel's Act the present rather anomalous form of the Bank ofEngland's Weekly Return was also laid down. It shows, as all men know, two separate statements; one of the Issue Department and the other ofthe Banking Department. The Issue Department's statement shows thenotes issued as a liability, and on the assets side Government debtand other securities (which are, in fact, also Government securities), amounting to £18, 450, 000 as allowed by the Act, and a balance of gold. The Banking Department's statement shows capital, "Rest" or reservefund, and deposits, public and other, among the liabilities, and onthe other side of the account Government and other securities, all thenotes issued by the Issue Department which are not in circulation, anda small amount of gold and silver which the Banking Department holdsas till money. 

Sir Edward Holden's proposal is that the Act should be repealedpractically in accordance with the system which has been adopted bythe German Reichsbank. The principles which he enumerates, as those onwhich other national banks of issue work, are as follows:--

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

2. Notes are created and issued on the securityof bills of exchange and on the cash balance, so thata relation is established between the notes issuedand the discounts. 

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

4. This fixed ratio may be lowered on paymentof a tax. 

5. The notes should not exceed three times thegold or cash balance. 

By this revolution Sir Edward would abolish all legal restriction onthe issue of notes by the Bank of England. It would hold a certainamount of gold or a certain amount of cash balance against its notes, but in the "cash balance" Sir Edward apparently would include 11millions odd of Government debt, or of Treasury notes. As long as itsnotes were only three times the amount of the gold or of the "cashbalance, " and were backed as to the other two-thirds by bills ofexchange, the situation would be regarded as normal, but if, owing toabnormal circumstances, the Bank desired to increase the amount ofnotes issued against bills of exchange only and to reduce the ratio ofits gold or its cash balance to its notes, it would, at any time, beenabled to do so by the payment of a tax, without going through thehumiliating necessity for an appeal to the Treasury to allow it toexceed the legal limit. 

At the same time, by the abolition of Peel's Act the cumbrous methodsof stating the Bank's position, as published week by week in the BankReturn, would be abolished. The two accounts would be put together, with the result that the Bank's position would be apparently strongerthan it appears to be under the present system, which makes theBanking Department's Return weak at the expense of the great strengththat it gives to the appearance of the Issue Department. This will beshown from the following statement given by Sir Edward Holden of theReturn as issued on January 16th, and as amended according to hisideas:--

BANK STATEMENT, JANUARY 16, 1918. 

ISSUE DEPARTMENT

Notes Issued .. £76, 076, 000 Gold .................. £57, 626, 000 Government Debt ....... 11, 015, 000 Other Securities ...... 7, 435, 000 ----------- ----------- £76, 076, 000 £76, 076, 000Ratio of Gold to Notes Issued = 75. 7 per cent. 

BANKING DEPARTMENT. 

Capital ....... £14, 553, 000 Government Securities ...... £56, 768, 000Rest .......... 3, 363, 000 Other Securities ........... 92, 278, 000Deposits-- Notes .......... £30, 750, 000Public £41, 416, 000 Gold and Silver 1, 143, 000Other 121, 589, 000 ----------- 163, 005, 000 ------------- 31, 893, 000Other Liabilities ... 18, 000 ----------- ----------- £180, 939, 000 £180, 939, 000

Ratio of Cash Balance to Liabilities = 19. 6 per cent. 

RECONSTRUCTED BALANCE-SHEET OF THE BANK, JANUARY 16, 1918. 

Capital £14, 553, 000Rest 3, 363, 000Notes Issued (circulation) 45, 325, 000Deposits 163, 005, 000Other Liabilities 18, 000 ___________ £226, 264, 000

Gold £58, 768, 000Currency Notes 11, 015, 000 ___________ £69, 783, 000

Government Securities 56, 768, 000Other Securities 7, 435, 000 _________ 64, 203, 000

Other Securities 92, 278, 000 ___________ £226, 264, 000

Ratio of Gold to Notes =129. 7 per cent. " " Cash Balance to Liabilities = 33. 5 "

It need not be said that these proposals have aroused the liveliestinterest. At the Bank Meetings held since then several chairmenhave been asked by their shareholders to express their views on SirEdward's proposed revolution. Sir Felix Schuster pronounced cautiouslyin favour of the revision of the Bank Act, and said that he hadadvocated it seventeen years ago. Lord Inchcape, at the NationalProvincial Meeting, thought that the matter required carefulconsideration. Most of us will agree with this view. There iscertainly much to be said for a reform of the Weekly Statement of theBank of England, giving, it may be added, a good deal more detailthan Sir Edward's revised balance-sheet affords. But concerning hisproposal to reconstruct our system of note issue on a foreign model, there is certain to be much difference of opinion. In the first place, owing to the development of our system of banking by deposit andcheque rather than by issue and circulation of notes, the note issueis not nearly so important a business in normal times in this countryas it is in Germany and France. Moreover, the check imposed upon ourbanking community by the need for an appeal to the Treasury before itcan extend its note issue beyond a certain point often acts with, asalutary effect, and the view has even been expressed that if thatcheck were taken away from our system it might be difficult, if notimpossible, to maintain the gold standard which has been of suchenormous value in building up the prestige of London as a financialcentre. I do not think there is much weight in this argument, since, under Sir Edward's plan, the note issue could only be increasedagainst discounts, and the Bank, by the charge that it made fordiscounts, would still be able to control the situation. From thepractical point of view of the present moment, a strong objectionto the scheme is that it would open the door to fresh inflation byunrestricted credit-making just when the dangers of this process arebeginning to dawn even on the minds of our rulers. 

VII

THE COMPANIES ACTS

_March_, 1918

Another Government Committee--The Fallacy of imitatingGermany--Prussianising British Commerce--The Inquiry into theCompanies Acts--Will Labour Influence dominate the Report?--IncreasedProduction the Great Need--Will it be met by tightening up theCompanies Acts?--The Dangers of too much Strictness--Some Reformsnecessary--Publicity, Education, Higher Ideals the only LastingSolution--The Importance of Foreign Investments--Industry cannot takeall Risks and no Profits. 

Every week--almost every day--brings with it the announcement of somenew committee considering some question that may, or may not, arisenow or when the war is over. Especially in the realm of finance hasthe Government's output of committees been notably prolific oflate. We have had a Committee on Currency, a Committee on BankingAmalgamations, and a Committee appointed, humorously enough, by theMinistry of Reconstruction to consider what measures, if any, shouldbe taken to protect the public interest in connection with the policyof industrial combinations--a policy which the Board of Trade hasbeen sedulously fostering. Now comes a Committee to inquire "whatamendments are expedient in the Companies Acts, 1908-1917, principallyhaving regard to the circumstances arising out of the war, and to thedevelopments likely to arise on its conclusion, and to report to theBoard of Trade and to the Ministry of Reconstruction. " It is composedof the Right Hon. Lord Wrenbury (chairman), Mr A. S. Comyns Carr, Sir F. Crisp, Mr G. W. Currie, M. P. , Mr F. Gaspard Farrer, Mr FrankGore-Browne, K. C. , Mr James Martin, the Hon. Algernon H. Mills, MrR. D. Muir, Mr C. T. Needham, M. P. , Mr H. A. Payne, Sir Owen Philipps, M. P. , Sir William Plender, Mr O. C. Quekett, and Mr A. W. Tait. Thesecretary is Mr W. W. Coombs, 55, Whitehall, S. W. 1. There are somegood names on the Committee. Mr. Gaspard Farrer represents a greatissuing house; Sir Frank Crisp, company lawyers; Sir William Plender, the accountants; Mr O. C. Quekett, the Stock Exchange; and Sir OwenPhilipps, the shipping interest. Nevertheless, one cannot helpshuddering when one considers the dangers that threaten Britishfinance and industry from ill-considered measures which might possiblybe recommended by a Committee influenced by the atmosphere of thepresent outlook on financial and commercial affairs. 

One of the interesting features of the present war atmosphere is thefact that, now when we are fighting as hard as we can to defeat allthat is meant by Prussianism a great many of our rulers and publicmen are doing their best to impose Prussianising methods upon thisunfortunate country, merely because it is generally assumed thatPrussian methods have been shown, during the course of the war, tocarry with them a certain amount of efficiency. It is certainly truethat Prussian methods do very well as applied to the Prussians andsubmitted to by other races of Germans. On the other hand, it is atleast open to argument that the British method of freedom, individualinitiative, elasticity and adaptability have produced results, duringthe present war, which have so far been paralleled by no other countryengaged in the contest. Working on interior lines with the assistanceof docile and entirely submissive allies, Germany has certainly donewonderful things in the war, but it by no means follows that theverdict of posterity will not give the palm of achievement to England, who has not only carried out everything that she promised to do beforethe war, but has incidentally and in the course of it created andequipped an Army on a Continental scale, and otherwise done very muchmore for the assistance of her Allies than was contemplated before thewar began. 

It is untrue to say that we were unprepared for the war. We weremore than prepared to do all that we promised to do. What we wereunprepared for was finding ourselves required to turn ourselvesinto, not only the greatest naval Power in the world, but one of thegreatest military Powers also. This demand was sprang upon us, and wehave met it with extraordinary success. The whole idea that Germany'sachievement has been such as to warrant any attempt on our part tomodel our institutions on her pattern seems to me to fall to piecesas soon as one looks calmly at the actual results produced by thedifferent systems. Moreover, even if we were to admit that Germany'sachievement in the war has been immeasurably greater than ours, itstill would not follow that we could improve matters here by followingthe German system. It ought not to be necessary to observe that asystem which is good for one nation or individual is not necessarilygood for another. In the simple matter of diet, for instance, a mostscientifically planned diet given to a child who does not happen tolike it will not do that child any good. These things ought to beobvious, but unfortunately in these times, which call for eminentlypractical thought and effort, there is a curious doctrinaire spiritabroad, and the theorist is continually encouraged to imagine how muchbetter things would be if everything were quite different, whereaswhat we want is the application of practical common sense to practicalfacts as they are. 

In the realm of finance the freedom and individual initiative andelasticity of our English system have long been the envy of the world. Our banking system, as was shown, on an earlier page, has alwaysworked with much less restriction on the part of legislative andofficial interference than any other, and, with the help of thisfreedom from official control, English bankers and finance houses hadmade London the financial centre of the world before the war. Theattempt of Parliament to control banking by Peel's Act of 1844 wasquietly set aside by the banking machinery through the development ofthe use of cheques, which made the regulations imposed on the noteissue a matter of quite minor importance, except in times of severecrisis, when these regulations could always be set aside by anappeal to the Chancellor of the Exchequer. There was no Governmentinterference in the matter of new issues of securities on the LondonStock Exchange or of the quotations granted to new securities by theCommittee of the Stock Exchange. Now the Companies Acts are to berevised in view of what may be necessary after the war, and thereis only too much reason to fear that mistakes may occur through theimposition of drastic restrictions, which look so easy to work onpaper, but are more than likely to have the actual effect of doingmuch more harm than good. 

"Circumstances arising out of the war and developments likely to ariseon its conclusion" give this Committee a roving commission to considerall kinds of things, which may or may not happen, in the light ofwisdom which may be put before it by interested witnesses, and, worsestill, in the light of semi-official pressure to produce a reportwhich will go down well with the House of Commons. Our politicians areat present in a state of extreme servility before the enterprisinggentlemen who are now at the head of what is called the Labour Party. Every one will sympathise with the aspirations of this party in sofar as they aim at bettering the lot of those who do the hard anduninteresting work of the world, and giving them a larger share of theproductions that they help to turn out; but that is not the samething as giving obsequious attention to the views which theirrepresentatives may have concerning the management of financialaffairs, on the subject of which their knowledge is necessarilylimited and their outlook is likely to be, to a certain extent, prejudiced. A recent manifesto put forward by the leaders of the newLabour Party includes in its programme the acquisition by the nationof the means of production--in other words, the expropriation ofprivate capitalists. The Labour people very probably think that bythis simple method they will be able to save the labourer the costof providing capital and the interest which is paid for its use; andpeople who are actuated by this fallacy, which implies that the ratepaid to capital is thinly disguised robbery, inevitably have warpedviews concerning the machinery of finance and the earnings offinanciers. These views, expressed in practical legislation, mighthave the most serious effects not only upon England's financialsupremacy but also on the industrial activity which that financialsupremacy does so much to maintain and foster. 

What, after the war, will be the most important need, from thematerial point of view, for the inhabitants of this country? Howeverthe war may end, and whatever may happen between now and the end ofit, there can be only one answer to this question, and that answeris greatly increased production. The war has already diminished ourcapital resources to the extent of the whole amount that we haveraised by borrowing abroad, that is to say, by pledging the productionof our existing capital, and by selling to foreign countries theforeign securities in which our capitalists had invested duringthe previous century. No one knows the extent to which our capitalresources have been impaired by these two processes, but it may beguessed at as somewhere in the neighbourhood of 1500 millions; thatis to say, about 10 per cent. Of a liberal estimate of the totalaccumulated property of the country at the beginning of the war. Tothis direct diminution in our capital resources we have to add theimpossibility, which has existed during the war, of maintaining ourfactories and industrial equipment in first-class working order byexpenditure on account of depreciation of plant. On the other sideof the balance-sheet we can put a large amount of new machineryintroduced, which may or may not be useful for industrial purposesafter the war; greatly improved methods of organisation, the effect ofwhich may or may not be spoilt when the war is over by uncomfortablerelations between Capital and Labour; and our loans to Allies andDominions, some of which may have to be written off, and most of whichwill return us no interest for some time to come, or will at first payus interest if we lend our debtors the money to pay it with. What thecountry will need, above all, on the material side, is an abundantrevenue, which can only be produced by vigorous and steady effort inindustry, which, again, can only be forthcoming if the machinery ofcredit and finance is given the fullest possible freedom to provideevery one who wants to engage in industry and increase the output ofthe country with the financial facilities, without which nothing canbe done. 

Is it, then, wise at such a time to impose restrictions by a drastictightening up of the Companies Act, upon those who wish by financialactivity, to further the efforts of industries and producers? On thecontrary, it would seem to be a time to give the greatest possiblefreedom to the financial machine so that there shall be the leastpossible delay and difficulty in providing enterprise with theresources that it needs. We can only make good the ravages of war byactivity in production and strict economy in consumption. What we wantto do is to stimulate the people of this country to work as hard asthey can, to produce as much as possible, to consume as little aspossible on unnecessary enjoyment and luxury, and, so, by procuringa big balance of production over consumption, to have the largestpossible volume of available goods for sale to the rest of the world, in order to rebuild our position as a creditor country, which thewar's demands upon us have to some extent impaired. 

It is a commonplace that if it had not been for the great mass offoreign securities, which this country held at the beginning of thewar, we could not nearly so easily have financed the enormous amountof food and munitions which we have had to provide for our population, for our armies, and for the population and armies of our Allies. If, instead of holding a mass of easily marketable securities, we had hadto rely, in order to pay for our purchases of foreign goods, on theproductions of our own mines and factories, and on our power to borrowabroad, then we should have had to restrict very greatly the number ofmen we have put into the firing-line so as to keep them at home forproductive work, or, by the enormous amount of our borrowings, weshould have cheapened the value of British credit abroad to a muchgreater extent than has been the case. Our position as a greatcreditor country was an enormously valuable asset, not only during thewar but also before it, both from a financial and industrial point ofview. It gave us control of the foreign exchanges by enabling us, atany time, to turn the balance of trade in our favour by ceasing for atime to lend money abroad, and calling upon foreign countries to payus the interest due from them. The financial connections which itimplied were of the greatest possible assistance to us in enhancingBritish prestige, and so helping our industry and commerce to push thewares that they produced and handled. 

Reform of the Companies Acts has often before the war been a more orless burning question. Whenever the public thought that it had beenswindled by the company promoting machinery, it used to write lettersto the newspapers and point out that it was a scandal that the sharksof the City should be allowed to prey upon the ignorant public, and that something ought to be done by Parliament to insure thatinvestments offered to the public should somehow or other be madeabsolutely watertight and safe, while by some unexplained method thepublic would still be somehow able to derive large benefits fromfortunate speculations in enterprises which turned out right. Everyone must admit there have been some black pages in the historyof British company promoting, and that many swindles have beenperpetrated by which the public has lost its money and dishonest andthird-rate promoters have retired with the spoil. The question is, however, what is the remedy for this admitted and glaring evil? Is itto be found by making the Companies Laws so strict that no respectablecitizen would venture to become a director owing to the fear of penalservitude if the company on whose board he sat did not happen to pay adividend, and that no prospectus could be issued except in the case ofa concern which had already stood so severe a test that its earningcapacity was placed beyond doubt? It would certainly be possible bylegislative enactment to make any security that was offered as safe asConsols, and less subject to fluctuation in value. But when this hadbeen done the effect would be very much like the effect upon rabbitsof the recent fixing of their price. No more securities would beoffered. 

It is certainly extremely important for the future financial andindustrial development of this country that the machinery of financeand company promotion should be made as clean as possible. What wewant to do is to make everybody see that a great increase in output isrequired, that this great increase in output can only be brought aboutif there is a great increase in the available amount of capital, thatcapital can only be brought into being by being saved, and that it istherefore everybody's business, both for his own sake and that of thecountry, to earn as much as he can and save as much as he can so thatthe country's capital fund can be increased; so that industry, whichwill have many difficult problems to face when the war is over, shallbe as far as possible relieved from any difficulty of finding all thecapital that it needs. To produce these results it is highly necessaryto increase the confidence of the public in the machinery of the StockExchange, in company promotion and all financial issues. Any one whosincerely believes that these results can be produced by tightening upthe Companies Acts is not only entitled but bound to press as hard ashe can for the securing of this object. But is this the right way todo it? There is much to be said at first sight for making more strictthe regulations under which prospectuses have to be issued under theCompanies Acts, demanding a franker statement of the profits in thepast, a fuller statement concerning the prices paid to vendors, andthe prices paid by vendors to sub-vendors, and so forth. Any one whosits down with a pre-war industrial prospectus in his hand can findmany openings for the hand of the reformer. The accounts published bypublic companies might also be made fuller and more informing withadvantage. But even if these obviously beneficial reforms were carriedout, there would always be danger of their evasion. They might tend tothe placing of securities by hole-and-corner methods without the issueof prospectuses at all, and to all the endless devices for dodging thelaw which are so readily provided as soon as any attempt is madeby legislation to go too far ahead of public education and publicfeeling. 

This is the real solution of this problem--publicity, the education ofthe public, and a higher ideal among financiers. As long as the publiclikes to speculate and is greedy and ignorant enough to be taken in bythe wiles of the fraudulent promoter, attempts by legislation to checkthis gentleman's enterprise will be defeated by his ingenuity and thepublic's eagerness to be gulled. The ignorance of the public on thesubject of its investments is abysmal, as anybody knows who is broughtinto practical touch with it. Just as the cure for the production ofrotten and fraudulent patent medicines thrust down the public's throatby assiduous advertising is the education of the public concerning thethings of its stomach, so the real cure for financial swindles is theeducation of the public concerning money matters, and its recognitionof the fact that it is impossible to make a fortune in the Citywithout running risks which involve the possible, not to say probable, loss of all the money with which the speculator starts. When oncethe public has learnt to distinguish between a speculation and aninvestment, and has also learnt honesty enough to be able to knowwhether it wants to speculate or invest, it will have gone muchfurther towards checking the activity of the fraudulent promoterthan any measure that can be recommended by the most respectable andindustrious of committees. At the same time, it must be recognisedby those responsible for our finance, that it is their business, and their interest, to keep the City's back premises clean; becauseinsanitary conditions in the back yard raise a stink which fouls thewhole City. 

In the meantime, if gossip is to be believed, some of the members ofthe Government have the most disquieting intentions concerning thekind of regulations which they wish to impose on the activities of theCity, especially in its financial branch. It is believed that some ofthe bright young gentlemen who now rule us are in favour of Governmentcontrol over the investment of money placed at home, and theprohibition of the issue of foreign securities; and it is evenwhispered that a fantastic scheme for controlling the profits of allindustrial companies, by which anything earned above a certain levelis to be seized for the benefit of the nation, is now a fashionableproject in influential Parliamentary circles. Every one must, ofcourse, admit that a certain amount of control will be necessary forsome time after the war. It may not be possible at once to throw openthe London Money Market to all borrowers, leaving them and it todecide between them who is to be first favoured with a supply of thecapital for which there will be so large a demand when the war isover. Certain industries, those especially on which our export tradedepends, will have to be first served in the matter of the provisionof capital. If it is a choice between the engineering or shipbuildingtrades and a company that wants to start an aeroplane service betweenLondon and Brighton for the idle rich, it would not be reasonable, during the first few months after the war, that the unproductiveproject should be able, by bidding a high price for capital, toforestall the demand of the more useful producer. And with regardto the issue of foreign securities, there is this to be said, thatforeign securities placed in London have the same effect upon foreignexchange as the import into England of goods shipped from any country;that is to say, for the time being they turn the exchange against us. On the other hand, it is a well-known commonplace that imports ofsecurities have to be balanced by exports of goods or services; andas the times when our export trade is most active are those when mostforeign securities are being placed in London, it follows that anyrestrictions placed upon the issue of foreign securities in Londonwill hinder rather than help that recovery in our export trade whichis so essential to the restoration of our position as a creditorcountry. 

Moreover, our rulers must remember this, that in War-time, when allthe letters sent abroad are subject to the eye of the Censor, it ispossible to control the export of British funds abroad; but that inpeace time (unless the censorship is to continue), it will not bepossible to check foreign investment by restricting the issuing offoreign securities in London. If people see better rates to beearned abroad and more favourable prospects offered by the priceof securities on foreign Stock Exchanges, they will invest abroad, whether securities are issued in London or not. As for the curioussuggestion that the profits of industrial companies are henceforwardto be limited and the whole balance above a statutory rate to be takenover by the State for the public good, this would be, in effect, thecontinuance on stricter lines of the Excess Profits Duty. As a warmeasure the Excess Profits Duty has much to be said for it at a timewhen the Government, by its inflationary policy, is putting largewindfalls of profit into the hands of most people who have to hold astock of goods and have only to hold them to see them rise in value. The argument that the State should take back a large proportion ofthis artificially produced profit is sound enough; but, if it isreally to be the case that industry is to be asked for the future totake all the risk of enterprise and handover all the profit abovea certain level to the Government, the reply of industry to such aproposition would inevitably be short, emphatic, unprintable, and byno means productive of revenue to the State. 

VIII

THE YEAR'S BALANCE-SHEET

_April_, 1918

The Figures of the National Budget--A Large Increase in Revenue anda Larger in Expenditure--Comparisons with Last Year and with theEstimates--The Proportions borne by Taxation still too Low--The Follyof our Policy of Incessant Borrowing--Its Injustice to the FightingMen. 

At first sight the figures of revenue and expenditure for the yearending March 31st are extremely satisfactory, at any rate on therevenue side. The Chancellor anticipated a year ago a revenue fromtaxation and State services of £638 millions, and the receipts intothe Exchequer on these accounts actually amount to £707 millions. Onthe expenditure side, however, the increase over the Budget estimatewas very much greater. The estimate was £2290 millions, and the actualamount expended was £2696 millions. Instead, therefore, of a deficitof £1652 millions having to be met by borrowing, there was an actualgap, to be filled by this method, of, roughly, £1990 millions. 

To take the revenue side of the matter first, this being by far themost cheering and satisfactory, we find that the details of therevenue, as compared with last year's, were as follows:--

 Year ending Year ending Mar. 31, 1918. Mar. 31, 1917. Increase. Decrease. £ £ £ £Customs 71, 261, 000 70, 561, 000 700, 000 ---Excise 38, 772, 000 56, 380, 000 --- 17, 608, 000Estate, etc. , Duties 31, 674, 000 31, 232, 000 442, 000 ---Stamps 8, 300, 000 7, 878, 000 422, 000 ---Land Tax 665, 000 640, 000 25, 000 ---House Duty 1, 960, 000 1, 940, 000 20, 000 ---Income Tax and Super Tax 239, 509, 000 205, 033, 000 34, 476, 000 ---Excess Profits Duties, etc. 220, 214, 000 139, 920, 000 80, 294, 000 ---Land Value Duties 685, 000 521, 000 164, 000 ---Postal Service 35, 300, 000 34, 100, 000 1, 200, 000 ---Crown Lands 690, 000 650, 000 40, 000 ---Sundry Loans, etc. 6, 056, 250 8, 055, 817 --- 1, 999, 567Miscellaneous 52, 148, 315 16, 516, 765 35, 631, 550 --- ----------- ----------- ----------- ----------- 707, 234, 565 573, 427, 582 153, 414, 550 19, 607, 567 | | +-----------+----------+ £133, 806, 983 Net Increase. 

A more interesting comparison perhaps is to take the actual receiptsduring the past financial year and compare them, not with the formeryear, but with the estimates of the expected yield of the variousitems. In this case we get the following comparisons:--

[Transcriber's Note: Corrected a typo in the table: "Sundry Loans"line should have a minus(-) instead of a plus(+) as printed. ]

 Actual. Estimated. Difference. £ £ £Customs 71, 261, 000 70, 750, 000 + 511, 000Excise 38, 772, 000 34, 950, 000 + 3, 822, 000Estate Duties 31, 674, 000 29, 000, 000 + 2, 674, 000Stamps 8, 300, 000 8, 000, 000 + 300, 000Land Tax and House Duty 2, 625, 000 2, 600, 000 + 25, 000Income Tax and Super Tax 239, 509, 000 224, 000, 000 + 15, 509, 000Excess Profits Tax 220, 214, 000 200, 000, 000 + 20, 214, 000Land Value Duties 685, 000 400, 000 + 285, 000Postal Services 35, 300, 000 33, 700, 000 + 1, 600, 000Crown Lands 690, 000 600, 000 + 90, 000Sundry Loans, etc. 6, 056, 000 7, 500, 000 - 1, 444, 000Miscellaneous 52, 148, 000 27, 100, 000 + 25, 048, 000

Certainly, the country is entitled to congratulate itself on thistremendous evidence of elasticity of revenue, and to a certain extenton the effort that it has made in providing this enormous sum of moneyfrom the proceeds of taxation and State services. But when this muchhas been admitted we have to hasten to add that the figures are notnearly so big as they look, and that there is much less "to writehome about, " as the schoolboy said, than there appears to be at firstsight. Those champions of the Government methods of war finance whomaintain that we have, during the past year, multiplied the pre-warrevenue, of roughly, £200 millions by more than 3-1/2, so arriving atthe present revenue of over £700 millions, are not comparing likewith like. The statement is perfectly true on paper, and expressed inpounds sterling, but then the pound sterling of to-day is an entirelydifferent article from the pre-war pound sterling. Owing to the systemof finance pursued by our Government, and by every other Governmentnow engaged in the war, of providing for a large part of the country'sgoods by the mere manufacture of new currency and credit, thebuying power of the pound sterling has been greatly depreciated. By multiplying the amount of legal tender currency in the shape ofTreasury notes, of token currency in the shape of silver and bronzecoinage, and of banking currency through the bank deposits whichare swollen by the banks' investments in Government securities, theGovernment has increased the amount of currency passing from hand tohand in the community while, at the same time, the volume of goodsto be purchased has not been increased with anything like the samerapidity, and may, in fact, have been, actually decreased. Theinevitable result has been a great flood of new money with a greatlydepreciated value. Index numbers show a rise of over 100 per cent. In the average prices of commodities during the war. It is, however, perhaps unfair to assume that the buying power of the pound hasactually been reduced by a half, but it is certainly safe to say thatit has been reduced by a third. Therefore, the revenue raised by theGovernment during the past year has to be reduced by at least a thirdbefore we are justified in comparing our war achievements with theGovernment's pre-war revenue. If we take one-third off £707 millionsit reduces the total raised during the past year by revenue to about£470 millions, less than two and a half times the pre-war revenue. 

From another point of view our satisfaction with the tremendousfigures of the past year's revenue has to be to some extent qualified. The great elasticity shown by the big increase of actual achievementover the Budget estimate has been almost entirely in revenue itemswhich cannot be expected to continue to serve us when the war isover. The total increase in the receipts over estimate amounts to £69millions, and of this £20 millions was provided by the Excess ProfitsDuty, a fiscal weapon which was invented during the war, and forthe purpose of the war. It has always been assumed that it would bediscontinued as soon as the war was over, and if it should not bediscontinued its after-war effect is likely to be very unfortunate ata time when our industrial effort requires all the encouragementthat it can get. Another £25 millions was provided by miscellaneousrevenue, and this windfall again must be largely due to operationsconnected with the war. Finally, the £15-1/2 millions by whichthe income tax exceeded the estimate must again be largely due toinflation and extravagance on the part of the Government, which, bymanufacturing money, and then spending it recklessly, puts big profitsand big incomes into the hands of those who have stocks of goods tosell or who are in a position to produce them. 

If, therefore, the satisfaction with which we regard the big total ofthe Government's revenue receipts has to be considerably modified inthe cold light of close observation, the enormous increase on theexpenditure side gives us very little comfort and calls for the mostdetermined and continued criticism if our reckless Government is to bemade to turn over a new leaf. In the early days of the war there wasmuch excuse for wasting money. We had to improvise a great Army, anda great organisation for equipping it; there was no time then to looktoo closely into the way the money was being spent, but this excuse islong obsolete. It is not possible to waste money without also wastingthe energy and working power of the nation; on this energy and workingpower the staying power of the country depends in its struggle toavert the greatest disaster that can be imagined for civilisation, that is, the victory of the German military power. Seeing that formany months past we have no longer been obliged to finance Russia, andto provide Russia with the mass of materials and the equipment thatshe required, the way in which our expenditure has mounted upduring the course of the year is a very serious blot on the year'sbalance-sheet. We spent during the year ending March 31st, £2696millions against £2198 millions in the previous year, an increase ofclose upon £500 millions; £63 millions of this increase were due tointerest on war debt, the rest of it was due to increased cost of thewar, and few business men will deny that very many of these extramillions might have been saved if our rulers and our bureaucratictyrants had been imbued with any real sense of the need for conservingthe energy of the nation. 

Much has been done by the Committee on National Expenditure to bringhome to the Government opportunities for economy, and methods by whichit can be secured. Can we be equally confident that much has been doneby the Government to carry out the advice that has been given by thisCommittee? The Treasury is frequently blamed for its inability tocheck the rapacity and extravagance of the spending Departments. It isvery likely that the Treasury might have done more if it had not beenled by its own desire for a short-sighted economy into economising onits own staff, the activity and efficiency of which was so absolutelyessential to the proper spending of the nation's money. But when thishas been admitted, the fact remains that the Treasury cannot, or canonly with great difficulty, be stronger on the side of economy thanthe Chancellor of the Exchequer, and that the task of the Chancellorof the Exchequer of imposing economy on a spendthrift War Cabinet isone of extreme difficulty. I hope it is not necessary to say that I donot urge economy from any sordid desire to save the nation's money if, by its spending, victory could be secured or brought a day nearer. Ionly urge it because I believe that the conservation of our resourcesis absolutely necessary to maintain our staying power, and that theseresources are at present being scandalously wasted by the Government. Inter-departmental competition is still complained of in the latestreport of the National Committee on Expenditure, and there seems to bestill very little evidence that the Government Departments have yetpossessed themselves of the simple fact that it is only out of theseresources that victory can be secured, and that any waste of them istherefore a crime against the cause of liberty and progress. 

It is possible that before these lines are in print the Chancellorwill have brought in his new Budget, and therefore any attempt toforecast the measures by which he will meet next year's revenue wouldbe even more futile than most other endeavours at prophecy. But fromthe figures of last year as they are before us we see once more thatthe proportion of expenditure raised by revenue still leaves very muchto be desired; £707 millions out of, roughly, £2700 millions is notnearly enough. It is true that on the expenditure side large sums havebeen put into assets which may some day or other be recoverable, andit is therefore impossible to assume with any approach to accuracywhat the actual cost of the war has been for us during the past year. We have made, for instance, very large advances to our Allies andDominions, and it need not be said that our advances to our ownDominions may be regarded as quite as good as if they were still inour own pockets; but in the case of our Allies, our loans to Russiaare a somewhat questionable asset, and our loans to our otherbrothers-in-arms cannot be regarded as likely to be recoverable forsome time to come, owing to the severity with which the war's pressurehas been laid upon them. With regard to the other assets in whichthe Government has invested our money, such as factories, machinery, ships, supplies and food, etc. , it is at least possible thatconsiderable loss may be involved in the realisation of some of them. It is, however, possible that the actual cost of the war to us duringthe year that is past may turn out some day to have been in theneighbourhood of £2000 millions. If, on the other hand, we deduct fromthe £700 millions raised by revenue the £200 millions which representthe normal pre-war cost of Government to this country we find that theproportion of war's cost raised out of revenue is slightly over 25 percent. This proportion must be taken with all reserve for the reasonsgiven above, but in any case it is very far below the 47 per cent. Ofthe war's cost raised out of revenue by our ancestors in the course ofthe Napoleonic wars. 

It seems to me that this policy of raising so large a proportionof the war's cost by borrowing is one that commends itself toshort-sighted politicians, but is by no means in the interests of thecountry as a whole, or of the taxpayers who now and hereafter have tofind the money for paying for the war. In so far as the war's needshave to be met abroad, borrowing abroad is to some extent inevitableif the borrowing nation has not the necessary resources and labouravailable to turn out goods for export to exchange against those whichhave to be purchased abroad, but in so far as the war's needs arefinanced at home, the policy of borrowing is one that should onlybe used within the narrowest possible limits. By its means theGovernment, instead of making the citizens pay by taxation for thewar as it goes on, hires a certain number of them to pay for it bypromising them a rate of interest, and their money back some day. The interest and the sinking fund for redemption have to be found bytaxation, and so the borrowing process merely postpones taxation fromthe war period to the peace period. During the war period taxation canbe raised comparatively easily owing to the patriotic stimulus andthe simplification of the industrial problem which is provided by theGovernment's insatiable demand for commodities. When the days of peacereturn, however, there will be very grave disturbance and dislocationin industry, and it will have once more to face the problem ofproviding goods, not for a Government which will take all that it canget, but for a public, the demands of which will be uncertain, andwhose buying power will be unevenly distributed, and difficult tocalculate. The process, therefore, which postpones taxation duringthe war period to the peace period seems to be extraordinarilyshort-sighted from the point of view of the nation's economicprogress. Recovery after the war may be astonishingly rapid if allgoes well, but this can only happen if every opportunity is given toindustry to get back to peace work with the least possible friction, and a heavy burden of after-war taxation, such as we shall inevitablyhave to face if our Chancellors of the Exchequer continue to pile upthe debt charge as they have done in the past, will be anything buthelpful to those whose business it will be to set the machinery ofindustry going under peace conditions. 

As things are, if we continue to add anything like £2000 millions ayear to the National Debt, it will not be possible to balance theafter-war Budget without taxation on a heavier scale than is nowimposed, or without retaining the Excess Profit Duty, and so stiflingindustry at a time when it will need all the fresh air that it canget. Apart from this expedient, which would seem to be disastrous fromthe point of view of its effect upon fresh industry, the most widelyadvertised alternative is the capital levy, the objections to whichare patent to all business men. It would involve an enormously costlyand tedious process of valuation, its yield would be problematical, and it might easily deal a blow at the incentive to save on which thesupply of capital after the war entirely depends. A much higher rateof income tax, especially on large incomes, is another solution of theproblem, and it also might obviously have most unfortunate effectsupon the elasticity of industry. A tax on retail purchases has much tobe said in its favour, but against it is the inequity inseparable fromthe impossibility of graduating it according to the ability of thetaxpayer to bear the burden; and a general tariff on imported goods, though it would be welcomed by the many Protectionists in our midst, can hardly be considered as a practical fiscal weapon at a time whenthe need for food, raw material, and all the equipment of industrywill make it necessary to import as rapidly and as cheaply as possiblein order to promote our after-war recovery. 

Apart from these purely economic arguments against the high proportionof the war's costs that we are meeting by borrowing, there is the muchmore important fact of its bad effect on the minds of our soldiers, and of those members of the civilian population who draw mistakeninferences from its effects. From the point of view of our soldiers, who have to go and fight for their country at a time when those whoare left at home are earning high wages and making big profits, it isevidently highly unfair that the war should be financed by a methodwhich postpones taxation. The civilian population left at home, earning high profits and high wages, should clearly pay as much aspossible during the war by immediate taxation, so that the burden oftaxation may be relieved for our soldiers when they return to civillife. In view of the hardships and dangers which our soldiers have toface, and the heroism with which they are facing them, this argumentshould be of overwhelming strength in the eyes of every citizen whohas imagination enough to conceive what our fighting men are doing forus and how supreme is our duty to do everything to relieve them fromany other burden except those which the war compels them to face. There is also the fact that many members of our uninstructedindustrial population believe that the richer classes are growingricher owing to the war, and battening on the proceeds of the loans. I do not think that this is true; on the contrary, I believe thatthe war has brought a considerable shifting of buying power from thewell-to-do classes to the manual workers. Nevertheless, in these timesmisconceptions are awkwardly active for evil. The well-to-do classesas a whole are not really benefited by having their future incomespledged in order to meet the future debt charge, and if, at the sametime, they are believed to be acquiring the right to wealth, whichwealth they will have themselves to provide, the fatuity of theborrowing policy becomes more manifest. For these reasons it issincerely to be hoped that our next fiscal year will be marked bya much higher revenue from taxation, a considerable decrease inexpenditure, and a consequently great improvement in the proportion ofwar's cost met out of revenue, on what has been done in the past year. At our present rate of taxation we are not nearly meeting, out ofpermanent taxes, the sum which will be needed when the war is overfor peace expenditure on the inevitably higher scale, pensions, andinterest and sinking fund on war debt. 

IX

COMPARATIVE WAR FINANCE

_May_, 1918

The New Budget--Our own and Germany's Balance-sheets--The Enemy'sDifficulties--Mr Bonar Law's Optimism--Special Advantages which Peacewill bring to Germany--A Comparison with American Finance--How muchhave we raised from Revenue?--The Value of the Pound To-day--The 1918Budget an Improvement on its Predecessors--But Direct Taxation stilltoo Low--Deductions from the Chancellor's Estimates. 

One of the most interesting passages in a Budget speech of unusualinterest was that in which the Chancellor of the Exchequer comparedthe financial methods of Germany and of this country, as shown bytheir systems of war finance. He began by admitting that it isdifficult to make any accurate calculation on this subject, owingto the very thick mist of obscurity which envelops Germany's actualperformance in the matter of finance since the war began. As theChancellor says, our figures throughout have been presented with theobject of showing quite clearly what is our financial position. Mostof the people who are obliged to study the figures of Governmentfinance would feel inclined to reply that, if this is really so, theChancellor and the Treasury seem to have curiously narrow limitationsin their capacity for clearness. Very few accountants, I imagine, consider the official figures, as periodically published, as models oflucidity. Nevertheless, we can at least claim that in this respect thefigures furnished to us by the Government during the war have beenquite as lucid as those which used to be presented in time of peace, and it is greatly to the credit of the Treasury that, in spite of theenormous figures now involved by Government expenditure, the financialstatements have been published week by week, quarter by quarter, andyear by year, with the same promptitude and punctuality that markedtheir appearance in peace-time. In Germany, the Chancellor says, ithas not been the object of German financial statements to show thefinancial position quite clearly. It is, therefore, difficult to makean exact statement, but he was able to provide the House with a seriesof very interesting figures, taken from the statements of the GermanFinance Ministers themselves. 

His first point is with regard to the increase of expenditure. Thealarming rate with which our expenditure has so steadily grown appearsto be paralleled also in Germany. Up to June, 1916, Germany's monthlyexpenditure was £100 millions. It has now risen to over £187 millions. That means to say that their expenditure per diem is £6-1/4 millions, almost the same as ours, although our expenditure includes items suchas separation allowances and other matters of that kind, borne by theStates and municipalities in Germany, and so not appearing in theGerman imperial figures. 

As to the precise extent of the German war debt, there is nocertainty, but the Chancellor was able to tell the House that the lastGerman Vote of Credit, which was estimated to carry them on to June orJuly, brings the total amount of all their Votes of Credit to £6200millions, and that it is at least certain that that amount has beenadded to their War Debt, because their taxation during the war has notcovered peace expenditure plus debt charge. Up to 1916 they imposed nonew taxation. In 1916 they imposed a war increment tax, something inthe nature of a capital levy, which is stated to have brought in £275millions. They added also that year £25 millions nominally to theirpermanent revenue. In 1917 they added in addition £40 millions totheir permanent revenue, "Assuming, therefore, that their estimateswere realised, the total amount of new taxation levied by them sincethe beginning of the war comes to £365 millions, as against our £1044millions. This £365 millions is not enough to pay the interest uponthe War Debt which had been accumulated up to the end of the year. "

Mr Bonar Law then proceeded to give an estimate of what the Germanbalance-sheet will be a year hence on the same basis on which he hadcalculated ours. With regard to our position, he had calculated thaton the present basis of taxation we shall have a margin of fourmillions at the end of the present year if peace should then breakout. As will be shown later, this estimate of his is somewhatoptimistic, but at any rate our position, compared with that ofGermany, may be described as on velvet. A year hence the German WarDebt will be not less than £8000 millions. The interest on that willbe at least £400 millions, a sinking fund at 1/2 per cent. Will be £40millions. Their pension engagements, which will be much higher thanours owing to their far heavier casualties, have been estimated atamounts ranging as high as £200 millions. The Chancellor was surethat he was within the mark in saying that it will be at least £150millions. Their normal pre-war expenditure was £130 millions, so thatthey will have to face a total expenditure at the end of the war of£720 millions. On the other side of the account their pre-war revenuewas £150 millions. They have announced their intention of this yearraising additional permanent Imperial revenue amounting to £120millions. From the nature of the taxes the Chancellor considers itvery difficult to believe that this amount will be realised, but, assuming that it is, it will make their total additional revenue £185millions. That, added to the pre-war revenue, gives a total of £335millions, showing "a deficit at the end of this year, comparingthe revenue with the expenditure, of £385 millions at least. " TheChancellor added that if that were our position he would certainlythink that bankruptcy was not far from the British Government. 

Another point that the Chancellor was able to make effectively, incomparing our war revenue with Germany's, was the fact that, with theexception of the war increment tax, scarcely any of the additionalrevenue has been obtained from the wealthier classes in Germany. Taxation has been indirect and on commodities which are paid for bythe masses of the people. "The lesson to be drawn from these facts isnot difficult to see. The rulers of Germany, in spite of their hopesof indemnity, must realise that financial stability is one of theelements of national strength. They have not added to their financialstability. " The reason for this failure the Chancellor considers to belargely psychological. It is, in the first place, because they do notcare to add to discontent by increased taxation all over the country, but "it is still more due to this, that in Germany the classes whichhave any influence on or control of the Government are the wealthierclasses, and the Government have been absolutely afraid to forcetaxation upon them. "

It is certainly very pleasant to be able to contemplate the financialblunders by which Germany is so greatly increasing the difficultiesthat it will have to face before the war is over. On the other hand, we have to recognise that the Chancellor, with that incorrigibleoptimism of his, has committed the common but serious error ofover-stating his case by leaving out factors which are in Germany'sfavour, as, for instance, that Germany's debt is to a larger extentthan ours held at home. Since the war began we have raised over £1000millions by borrowing abroad. Our public accounts show that the itemof "Other Debt, " which is generally believed to refer to debt raisedabroad, now amounts to £958 millions, while one of our loans inAmerica, which is separately stated in the account because it wasraised under a special Act, amounted to £51-1/2 millions. It is alsoquite possible that fair amounts of our Treasury bills, perhaps alsoof our Temporary Advances and of our other war securities, have beentaken up by foreigners; but quite apart from that the two itemsalready referred to now amount to more than £1000 millions, though atthe end of March last their amount was only £988 millions. It is alsowell known that we have during the course of the war realised abroadthe cream of our foreign investments, American Railroad Bonds, Municipal and Government holdings in Scandinavia, Argentina, andelsewhere, to an amount concerning which no accurate estimate can bemade, except by those who have access to the Arcana of the Treasury. It may, however, be taken as roughly true that so far the extent ofour total borrowings and realisation of securities abroad has beenbalanced by our loans to our Allies and Dominions, which amounted atthe end of March last to £1526 millions. We have thus entered into anenormous liability on foreign debts and sold a batch of very excellentsecurities on which we used to receive interest from abroad in theshape of goods and services, against which we now hold claims upon ourAllies and Dominions, in respect to the greater part of which it wouldbe absurd to pretend that we can rely on receiving interest for someyears after the war, in view of the much greater economic strainimposed by the war upon our Allies. 

Germany, of course, has been doing these things also. Germany hasparted with her foreign securities. She was selling them in blocks forsome weeks before the war, and Germany, of course, has done everythingthat she could in order to induce neutrals, during the course of thewar, to buy securities from her and to subscribe to her War Loans. Nevertheless, it cannot have been possible for Germany to carry outthese operations to anything like the extent that we have, partlybecause her credit has not been nearly so good, partly because herruthless and brutal conduct of the war has turned the sentiment of theworld against her, and partly because the measures that we have takento check remittances and transfers of money have not been altogetherineffective. On this side of the problem Germany has therefore anadvantage over us, that her war finance, pitiful a$ it has been, has, not owing to any virtue of hers, but owing to force of circumstances, raised her a problem which is to a great extent internal, and will nothave altered her relation to the finance of other countries so much ashas been the case with regard to ourselves. We also have to rememberthat the process of demobilisation will be far simpler, quicker, andcheaper for Germany than for us. Even if the war ended to-morrow theGerman Army would not have far to go in order to get home, and wehope that by the time the war ends the German Army will all have beendriven back into its own country and so will be on its own soil, onlyrequiring to be redistributed to its peace occupations. Our Army willhave to be fetched home, firstly, over Continental railways, probablybattered into a condition of much inefficiency, and then in ships, ofwhich the supply will be very short. The process will be very slow andvery costly. Our Overseas Army will have to be sent back to distantDominions, and the Army of our American Allies will have to be ferriedback over the Atlantic. Consequently if Germany is able to obtainanything like the supply of raw material that she requires she will beable to get back to peace business much more quickly than any of herAnglo-Saxon enemies, and this is an advantage on her side which itwould be unwise to ignore in considering the bad effects on herafter-war activities of the very questionable methods by which she hasfinanced and is financing the war. 

Since we are indulging in these comparisons, it may be interesting toconsider how our American Allies are showing in this matter of warfinance. The _Times_, in its "City Notes" of April 15th, observed, inconnection with the unexpectedly small amount of the third LibertyLoan, that the reason why the smaller figure was adopted for the issuewas that it seems quite certain now that the original estimate forthe expenditure in the fiscal year ending June 30th next was much toohigh. This estimate was 18, 775 million dollars. The _Times_ statedthat the realised amount is likely to be hardly more than 12, 000million dollars, of which about 4500 million dollars will representloans to Allies, and that the estimate for the year's largelyincreased tax revenue was 3886 million dollars, which now seemslikely to be exceeded by the receipts. If this be so, out of a totalexpenditure of £2400 millions, of which £900 millions will be lent tothe Allies, the Americans are apparently raising nearly £800 millionsout of revenue. Therefore if we deduct from both sides of the accountthe pre-war expenditure of about £215 millions and deduct also theloans to Allies from the expenditure, it leaves the cost of the warto America £1285 millions for this year and the war revenue £562millions. If these figures are correct it would thus appear thatAmerica is raising nearly half its actual war cost out of revenue asthe war goes on. 

On the other hand, in the New York _Commercial Chronicle_ of April 6ththe total estimated disbursements for the year are still stated atover 16, 000 million dollars, that is to say, £3200 millions roughly, so that there seems to be considerable uncertainty as to what theactual amount of the expenditure of the United States will be duringthe year ending on June 30th. In any case, there can be no questionthat if the very high proportion of war cost paid out of revenue shownby the _Times_ figures proves to be correct, it will be largely owingto accident or misfortune; if America's war expenditure has notproceeded nearly as fast as was expected, it will be, no doubt, owingnot to economies but to shortcomings in the matter of delivery of wargoods which the Government had expected to pay for in the courseof the fiscal year. It certainly would have been expected that theAmericans would in this matter of war finance be in a position to seta very much higher standard than any of the European belligerentsowing to the enormous wealth that the country has acquired during thetwo and a half years in which it, in the position of a neutral, wasable to sell its produce at highly satisfactory prices to the warringPowers without itself having to incur any of the expenses of war. Onthe other hand, its great distance from the actual seat of operationswill naturally make it difficult for the American Government to imposetaxation as freely as might have been done in the case of peopleswhich are actually on the scene of warfare; so that it is hardly safeto count on American example to improve the standard of war financewhich has been so lamentably low in Europe in the course of thepresent war. According to their original estimates the proportion ofwar cost borne out of taxation seems to have been on very much thesame level as ours, and this has all through the war been very muchlower than the results achieved by our ancestors at the time of theNapoleonic and Crimean wars. 

On this point the proportion of our expenditure, which has been borneout of revenue, the Chancellor stated that up to the end of lastfinancial year, March 31, 1918, the proportion of total expenditureborne out of revenue was 26. 3 per cent. On the estimates which hesubmitted to the House in his Budget speech on April 22nd, theproportion of total expenditure met out of revenue during the currentfinancial year will be 28. 3 per cent. , and the proportion calculatedover the whole period to the end of the current year will be 26. 9 percent. These proportions, however, are between total revenue and totalexpenditure during the war period. The proportion, of course, isnot so high when we try to calculate actual war revenue and warexpenditure by deducting on each side at a rate of £200 millions ayear as representing normal expenditure and revenue and leaving outadvances to Allies and Dominions. On this basis the proportion of warexpenditure met out of war revenue up to March 31, 1918, was, theChancellor stated, 21. 7 per cent. For the year 1917-18 it was 25. 3 percent. , for the current year it will be 26. 5 per cent. , and for thewhole period up to the end of the current year 23. 3 per cent. Thecorresponding figures for the Napoleonic and Crimean wars are given bySir Bernard Mallet in his book on British Budgets as 47 per cent. And47. 4 per cent. So that it will be seen that, judged by this test, ourwar finance, though very much better than Germany's, is not on so higha standard as that set by previous wars. It is true, of course, thatthe rate of expenditure during the present war has been on a scalewhich altogether dwarfs the outgoing in any previous struggle. TheNapoleonic War is calculated to have cost some £800 millions, havinglasted some twenty-three years. Last year we spent £2696 millions, ofwhich near £2000 millions may be taken as war cost, after deductingnormal expenditure and loans to Allies. 

Nevertheless, this argument of the enormous cost of the present wardoes not seem to me to be a good reason why the war should be financedbadly, but rather a reason for making every possible effort to financeit well Are we doing so? At first sight it is a great achievement tohave increased our total revenue from £200 millions before the war to£842 millions, the amount which we are expected to receive duringthe current year on the basis of the proposed additions to taxation, without taking into account any revenue from the suggested luxury tax. But, as I have already pointed out, the comparison of war pounds withpre-war pounds is in itself deceptive. The pounds that we are payingto-day in taxation are by no means the pounds that we paid before thewar; their value in effective buying power has been diminished bysomething like one half. So that even with the proposed additions totaxation we shall not have much more than doubled the revenue of thecountry from taxation and State services as calculated in effectivebuying power. When we consider how much is at stake, that the veryexistence, not only of the country but of civilisation, is endangeredby German aggression, it cannot be said that in the matter of taxationthe country is doing anything like what it ought to have done oranything like what it would have done, willingly and readily, if aproper example had been set by the leading men among us, and if theright kind of financial lead had been given to the country by itsrulers. 

When we look at the details of the Budget, it will be seen that theChancellor has made a considerable advance upon his achievement of ayear ago, when he imposed fresh taxation amounting to £26 millions, twenty of which came from excess profits duty, and could thereforenot be counted upon as permanent, in his Budget for a year whichwas expected to add over £1600 millions to the country's debt, and actually added nearly £2000 millions. For the present year heanticipates an expenditure of £2972 millions, and he is imposing freshtaxation which will realise £68 millions in the current year and£114-1/2 millions in a full year. On the basis of taxation at which itstood last year he estimates for an increase of £67 millions, incometax and super-tax on the old basis being expected to bring in £28millions more, and excess profits duty £80 millions more, againstwhich decreases were estimated at £3-1/2 millions in Excise and £37millions in miscellaneous. He thus expects to get a total increase onthe last year's figures of £135 millions, making for the current yeara total revenue of £842 millions, and leaving a total deficit of£2130 millions to be provided by borrowing. Increases in taxationon spirits, beer, tobacco, and sugar bring in a total of nearly £41millions. An increase of a penny in the stamp duty on cheques isestimated to bring in £750, 000 this year and a million in a full year, and the increases in the income tax and the super-tax will bring in£23 millions in the present year and £61 millions in a full year. Increases in postal charges will bring in £3-1/2 millions this yearand £4 millions in a full year. 

There has been little serious criticism of these changes in taxationexcept that many people, who seem to regard the penny post as a kindof fetish, have expressed regret that the postal rate of the lettershould be raised to 1-1/2 d. This addition seems to me to be merely aninadequate recognition of the depreciation of the buying power of thepenny and to be fully warranted by the country's circumstances. Eitherit will bring in revenue or it will save the Post Office labour, andwhichever of these objects is achieved will increase the country'spower to continue the war. The extra penny stamp on cheques has beenrather absurdly objected to as being likely to increase inflation. Since the effect of it is likely to be that people will draw a smallernumber of small cheques, and will make a larger number of theirpurchases by means of Treasury notes, the tax will merely resultin the substitution of one form of currency for another, and it isdifficult to see how this process will in any way increase inflation. Other arguments might be adduced, which make it undesirable toincrease the outstanding amounts of Treasury notes, but in the matterof inflation through addition to paper currency, it seems to me thatthe proposed tax is entirely blameless. The increase of a shilling inincome tax and super-tax produced a feeling of relief in the City, being considerably lower than had been anticipated. It is hardly thebusiness of the Chancellor of the Exchequer in this most seriouscrisis to produce feelings of relief among the taxpayers, and it seemsto me a great pity that he did not make much freer use of these mostequitable forms of taxation, having first made arrangements (whichcould easily have been done) by which their very severe pressure wouldhave been relieved upon those who have families to bring up. Deathduties, again, he altogether omitted as a source of extra revenue. Hisproposed luxury tax he has left to be evolved by the wisdom of aHouse of Commons Committee, and has thereby given plenty of time toextravagantly minded people to lay in a store of stuff before the taxis brought into being. 

Space will not allow me to deal fully with the Chancellor's veryinteresting analysis of our position as he expects it to be at the endof the financial year on the supposition that the war was then over. He expects a revenue then of £540 millions on the present basis, making, with the yield of the new taxes in a full year, £654 millionsin all, without including the excess profits duty, and he expects anafter-war expenditure of £650 millions, including £50 millions forpensions and £380 millions for debt charge. It seems to me thathis expectation of after-war revenue is too high, and of after-warexpenditure is too low. He says that the estimates have been carefullymade, but that they include "a recovery from the absence of warconditions, " but surely the absence of war conditions is much morelikely to produce a diminution than a recovery in taxation. Under thepresent circumstances, with prices continually rising, the profits ofthose who grow or hold stocks of goods of any kind automatically swellThe rise in prices has only to cease, to say nothing of its beingturned into a fall, to produce at once a big check in those profits, and when we consider the enormous dislocation likely to be produced bythe beginning of the peace period expectations of an elastic revenuewhen the war is over seem to be almost criminally optimistic. 

The Chancellor arrived at his after-war debt charge of £380 millionsby estimating for a gross debt on March 31, 1919, of £7980 millions, which he reduces to a net debt of £6856 millions by deducting halfthe expected face value of loans to Allies, £816 millions, and £308millions for loans to Dominions and India's obligation. But is he, in fact, entitled to count on receiving any interest at all from ourAllies for some years to come after the war? If not, then on thatportion of our debt which is represented by loans to Allies we shallhave to meet interest for ourselves. He also gave an imposing list ofassets in the shape of balances in hand, foodstuffs, land, securities, building ships, stores in munitions department, and arrears oftaxation, amounting in all to nearly £1200 millions. It is certainlyvery pleasant to consider that we shall have all these valuable assetsin hand; but against them we have to allow, which the Chancelloraltogether omitted to do, for the big arrears of expenditure and thehuge cost of demobilisation, which is at least likely to absorb thewhole of them. On the whole, therefore, although we can claim thatour war finance is very much better than that of our enemies, it isdifficult to avoid the conclusion that it might have been verymuch better than it is, and that it is not nearly as good as it isrepresented to be by the optimistic fancy of the Chancellor of theExchequer. 

X

INTERNATIONAL CURRENCY

_June_, 1918

An Inopportune Proposal--What is Currency?--The Primitive System ofBarter--The Advantages possessed by the Precious Metals--Gold asa Standard of Value--Its Failure to remain Constant--Currency andPrices--The Complication of other Instruments of Credit--No Substitutefor Gold in Sight--Its Acceptability not shaken by the War--AFluctuating Standard not wholly Disadvantageous--An InternationalCurrency fatal to the Task of Reconstruction--Stability and Certaintythe Great Needs. 

As if mankind had not enough on its hands at the present moment, anumber of well-meaning people seem to think that this is an opportunetime for raising obscure questions of currency, and trying to makethe public take an interest in schemes for bettering man's lot byimproving the arrangements under which international payments arecarried out. Nobody can deny that some improvement is possible inthis respect, but it may very well be doubted whether, at the presentmoment, when very serious problems of rebuilding have inevitably to befaced and solved, it is advisable to complicate them by introducingthis difficult question which, whenever it is raised, will require themost careful and earnest consideration. 

Since, however, the question is in the air, it may be as well toconsider what is wrong with our present methods, and what sort ofimprovements are suggested by the reformers. At present, as every oneknows, international payments are in normal times ultimately settledby shipments from one country to another of gold. Gold has achievedthis position for reasons which have been described in all thecurrency text-books. Mankind proceeded from a state of barter to acondition in which one particular commodity was used as the chiefmeans of payment simply because this process was found to be muchmore convenient. Under a system of barter an exchange could only beeffected between two people who happened to be possessed each of themof the thing which the other one wanted, and also at the same time towant the thing which the other one possessed, and the extent of theirmutual wants had to lit so exactly that they were able to carry outthe desired exchange. It must obviously have been rare that thingshappened so fortunately that mutually advantageous exchanges werepossible, and the text-books invariably call attention to thedifficulties of the baker who wanted a hat, but was unable to supplyhis need because the hatter did not want bread but fish or some othercommodity. 

It thus happened that we find in primitive communities one particularcommodity of general use being selected for the purpose of what isnow called currency. It is very likely that this process arose quiteunconsciously; the hatter who did not want bread may very likely haveobserved that the baker had something, such as a hit of leather, whichwas more durable than bread, and which the hatter could be quitecertain that either he himself would want at some time, or thatsomebody else would want, and he would therefore always be able toexchange it for something that he wanted. All that is needed forcurrency in a primitive or any other kind of people is that it shouldbe, in the first place, durable, in the second place in universaldemand, and, in the third place, more or less portable. If it alsopossessed the quality of being easily able to be sub-divided withoutimpairing its value, and was such that the various pieces into whichit was sub-divided could be relied on not to vary in desirability, then it came near to perfection from the point of view of currency. 

All these qualities were possessed in an eminent degree by theprecious metals. It is an amusing commentary on the commonly assumedmaterial outlook of the average man that the article which has won itsway to supremacy as currency by its universal desirability, should bethe precious metals which are practically useless except for purposesof ornamentation. For inlaying armour and so adorning the person of asemi-barbarous chief, for making into ornaments for his wives, and forthe embellishment of the temples of his gods, the precious metals hademinent advantages, so eminent that the practical common sense ofmankind discovered that they could always be relied upon as beingacceptable on the part of anybody who had anything to sell. Inthe matter of durability, their power to resist wear and tear wasobviously much greater than that of the hides and tobacco and othercommodities then fulfilling the functions of currency in primitivecommunities. They could also be carried about much more convenientlythan the cattle which have been believed to have fulfilled thefunctions of currency in certain places, and they were capable ofsub-division without any impairing of their value, that is to say, oftheir acceptability. Merely as currency, precious metals thus haveadvantages over any other commodity that can be thought of for thispurpose. 

So far, however, we have only considered the needs of man forcurrency; that is to say, for a medium of exchange for the timebeing. It is obvious, however, that any commodity which fulfils thisfunction, that is to say, is normally taken in payment in the exchangeof commodities and services, also necessarily acquires a still moreimportant duty, that is, it becomes a standard of value, and it is onthe alleged failure of gold to meet the requirements of the standardof value that the present attack upon it is based. On this point thedefenders of the gold standard will find a good deal of difficulty indiscovering anything but a negative defence. The ideal standard ofvalue is one which does not vary, and it cannot be contended thatgold from this point of view has shown any approach to perfection infulfilling this function. It could only do so if the supply of itavailable as currency could by some miracle be kept in constantrelation with, the supply of all other commodities and services thatare being produced by mankind. That it should be constant with eachone of them is, of course, obviously impossible, since the rate atwhich, for example, wheat and pig-iron are being produced necessarilyvaries from time to time as compared with one another. Variations inthe price of wheat and pig-iron are thus inevitable, but it can atleast be claimed by idealists in currency matters that some form ofcurrency might possibly be devised, the amount of which might alwaysbe in agreement with the amount of the total output of saleable goods, in the widest sense of the word, that is being created for man's use. 

It need not be said that this desirability of a constant agreementbetween the volume of currency and the volume of goods coming forwardfor exchange is based on what is called the quantitative theory ofmoney. This theory is still occasionally called in question, but is onthe whole accepted by most economists of to-day, and seems to me tobe a mere arithmetical truism if we only make the meaning of the word"currency" wide enough; that is to say, if we define it as includingall kinds of commodities, including pieces of paper and creditinstruments, which are normally accepted in payment for goodsand services. This addition of credit instruments, however, is acomplication which has considerably confused the problem of goldas the best means of ultimate payment. Taken simply by itself thequantitative theory of money merely says that if money of all kinds isincreased more rapidly than goods, then the buying power of money willdecline, and the prices of goods will go up and vice versa. This seemsto be an obvious truism if we make due allowance for what is calledthe velocity of circulation. If more money is being produced, but thelarger amount is not turned over as rapidly as the currency which wasin existence before, then the effect of the increase will inevitablybe diminished, and perhaps altogether nullified. But other thingsbeing equal, more money will mean higher prices, and less money willmean lower prices. 

But, as has been said, the question is very greatly complicated bythe addition of credit instruments to the volume of money, and thiscomplication has been made still more complicated by the fact thatmany economists have refused to regard as money anything except actualmetal, or at least such credit instruments as are legal tender, thatis to say, have to be taken in payment for commodities, whether theseller wishes to do so or not. For example, many people who areinterested in currency questions would regard at the present moment inthis country gold, Bank of England notes, Treasury notes, and silverand copper up to their legal limits as money, but would deny thistitle to cheques. It seems to me, however, that the fact that thecheque is not and cannot be legal tender does not in practice affector in any way impair the effectiveness of its use as money. As amatter of fact cheques drawn by a good customer of a good bank arereceived all over the country day by day in payment for an enormousvolume of goods. In so far as they are so received, their effect uponprices is exactly the same as that of legal tender currency. Thisfact is now so generally recognised that the Committee on NationalExpenditure has called attention to the financing of the war by bankcredits as one of the reasons for the inflation of prices which hasdone so much to raise the cost of the war. It is, in fact, beinggenerally recognised that the power of the bankers to give theircustomers credits enabling them to draw cheques amounts in fact toan increase in the currency just as much as the power of the Bank ofEngland to print legal tender notes, and the power of the Governmentto print Treasury notes. 

Thus it has happened that by the evolution of the banking systemthe use of the precious metals as currency has been reinforced andexpanded by the printing of an enormous mass of pieces of paper, whether in the form of notes, or in the form of cheques, whicheconomise the use of gold, but have hitherto always been based on thefact that they are convertible into gold on demand, and in fact haveonly been accepted because of this important proviso. Gold as currencywas so convenient and perfect that its perfection has been improvedupon by this ingenious device, which prevented its actually passingfrom hand to hand as currency, and substituted for it an enormous massof pieces of paper which were promises to pay it, if ever the holdersof the paper chose to exercise their power to demand it. By thismethod gold has been enabled to circulate in the form of papersubstitutes to an extent which its actual amount would have madealtogether impossible if it had had to do its circulation, so tospeak, in its own person. From the application of this great economyto gold two consequences have followed; the first is that theeffectiveness of gold as a standard of value has been weakened becausethis power that banks have given to it of circulating by substitutehas obviously depreciated its value by enormously multiplying theeffective supply of it. Depreciation in the buying power of money, anda consequent rise in prices, has consequently been a factor whichhas been almost constantly at work for centuries with occasionalreactions, during which the process went the other way. Anotherconsequence has been that people, seeing the ease with which pieces ofpaper can be multiplied, representing a right to gold which is only inexceptional cases exercised, have proceeded to ask whether there isreally any necessity to have gold behind the paper at all, and whetherit would not be possible to evolve some ideal form of super-paperwhich could take the place of gold as the basis of the ordinary paperwhich is created by the machinery of credit, which would be madeexchangeable into it on demand instead of into gold. 

It is difficult to say how far the events of the war have contributedto the agitation for the substitution for gold of some other form ofinternational currency. It would seem at first sight that the positionof gold at the centre of the credit system has been shaken owingto the fact that in Sweden and some other neutral countries theobligation to receive gold in payment for goods has been for the timebeing abrogated. The critics of the gold standard are thus enabledto say, "See what has happened to your theory of the universalacceptability of gold. Here are countries which refuse to accept anymore gold in payment for goods. They say, 'We do not want your goldany more. We want something that we can eat or make into clothes toput on our backs. '" This is certainly an extremely curious developmentthat is one of the by-products of war's economic lessons. But I do notfeel quite sure that it has really taught us anything new. All thathas ever been claimed for gold is that it is universally acceptablewhen men are buying and selling together under more or less normalcircumstances. It has always been recognised that a shipwrecked crewon a desert island would be unlikely to exchange the coco-nuts or fishor any other commodities likely to sustain life which they could find, for any gold which happened to be in the possession of any of them, except with a view to their being possibly picked up by a passingship, and returning to conditions under which gold would reassume itsold privilege of acceptability. 

During the war the shipping conditions have been such that manycountries have been hard put to it, especially if they were contiguousto nations with which the Entente is at present at war, to get thecommodities which they needed for their subsistence. The Entente, withits command of the sea, has found it necessary to ration them so thatthey should have no available surplus to hand on to the enemy. Theyhave very naturally endeavoured to resist these measures, and in orderto do so have made use of the power that they exercise by their beingin possession of commodities which the Entente desires. Theyhave shown a tendency to say that they would not part with thesecommodities unless the Entente allowed them to have a largerproportion of things needed for subsistence than the Entente thoughtnecessary for them, and it was as part of this battle for largerimports of necessaries that gold has been to some extent looked uponaskance as means of payment, the preference being given to thingsto eat and wear rather than to the metal. These wholly abnormalcircumstances, however, do not seem to me to be any proof that goldwill after the war be any less acceptable as a means of payment thanbefore. The Germans are usually credited with considerable sagacity inmoney matters, with rather more, in fact, I am inclined to think, thanthey actually possess; they, at any rate, show a very eager desire tocollect together and hold on to the largest possible store of gold, obviously with a view to making use of it when the war is over inpayment for raw materials, and other commodities of which they arelikely to find themselves extremely short. America also has shown astrong tendency to maintain as far as possible within its borders theenormous amount of gold which the early years of the war poured intoits hands. While such is the conduct of the chief foreign nations, itis also interesting to note that one comes across a good many peoplewho, in spite of all the admonitions of the Government to all goodcitizens to pay their gold into the banks, still hold on to a smallstore of sovereigns in the fear of some chain of circumstances arisingin which only gold would be taken in payment for commodities. On thewhole, I am inclined to think that the power of gold as a desirablecommodity merely because it is believed to be always acceptable hasnot been appreciably shaken by the events of the war. 

This does not alter the fact that, as has been shown above, gold, complicated by the paper which has been based upon it, cannot claimto have risen to full perfection as a standard of value. Inprimitive times the question of the standard of value hardly arises. Transactions are for the most part carried out and concluded at once, and any seller who takes a piece of metal in payment for his goodsdoes so with the rough knowledge of what that piece of metal will buyfor him at the moment, and that is the only point which concernshim. The standard of value only becomes important when under settledconditions of society long-term contracts bulk large in economictransactions. A man who makes an investment which entitles him to 5per cent. Interest, and repayment in 30 years' time, begins to be veryseriously interested in the question of what command over commoditieshis annual income of 5 per cent. Will give him, and whether therepayment of his money at the end of 30 years will represent therepayment of anything like the same amount of buying power as hismoney now possesses. It is here, of course, that gold has failedbecause, as we have seen, the process has been a fairly steady one ofdepreciation in the buying power of the alleged standard and a rise inthe prices of other commodities. This means to say that the investorwho has accepted repayment at the end of 30 years of the amount thathe lent, be it £100 or £10, 000, has found that the money repaid to himhad by no means the same buying power as the money which he originallyinvested. 

Within limits this tendency of the standard of value towardsdepreciation has possessed considerable advantages, probably muchgreater advantages than would have followed from the contrary processif it had been the other way round. If we can imagine that thecurrency history of the world had been such that a constantlydiminished quantity of currency in relation to the output of othercommodities had caused a steady fall in prices, it is obvious thatthere might have been a very considerable check to the enthusiasm ofindustry. It has indeed been contended that the scarcity of preciousmetals which, with the absence of an organised credit system, producedthis result during the later Roman Empire was a very important causeof the decay into which that Empire fell. I do not feel at allconvinced that this effect would necessarily have followed the cause. It seems to me that the ingenuity of enterprising man is such that theproducer might, and probably would, have found means for facing theprobability of depreciation in price. But it is always an emptypastime to try to imagine what would have happened "if things hadbeen otherwise. " What we do know is that a period of rising prices, especially if the rise does not go too fast, stimulates the enterpriseof producers, and sets business going actively, and consequently itmay at least be claimed that the failure of the gold standard tomaintain that steadiness of value which is an obvious attribute ofthe ideal standard has at least been a failure on the right side, bytending to depreciation of the value of currency, and so to a rise ofthe prices of other commodities. Obviously, people will tuck up theirsleeves more readily to the business of production and manufacture ifthe course of the market in the product which they hope to sell someday is likely to be in their favour rather than against them. 

And when all is admitted concerning the failure of the existingstandard of value, the question is, what substitute can we find whichwill carry with it all the advantages that gold has been shown topossess, and at the same time maintain that steadiness of value whichgold has certainly lacked? We hear airy talk of an internationalcurrency based on the credit of the nations leagued together topromote economic peace. It is certainly very obvious that thediplomatic relations of the world require complete reform, and thesystem by which the nations at present settle disputes betweenthemselves has been found by the experience of the last four years tobe so disgusting, so barbarous and so ridiculous that all the mostcivilised nations of the world are determined to go on with it untilit is stopped for ever. Nevertheless, obvious as it is that some kindof a League of Nations is essential as a form of international policeif civilisation is to be rescued from destruction, it is very doubtfulwhether such an organisation could, at least during the firsthalf-century or so of its existence, be called upon to tackle sodifficult a question as that of the creation of an internationalcurrency based on international credit. In the first place, what willbe required more than anything else after the war in economic matterswill be the elimination of all possible reasons for uncertainty; somuch uncertainty and difficulty will be inevitable that it seems to meto be almost criminal to add to those uncertainties by an outburst ofeloquence on the part of currency reformers if there were any dangerof their recommendations being accepted. It will be difficult enoughto know where the producers of the world are to get raw material, findefficient labour, and then find a market for their products, withoutat the same time upsetting their minds with doubts concerning somekind of new-fangled currency that is to be created, and in which theyare to be made to accept payment, with the possibilities of changesin the system which may have to be effected owing to some quiteunforeseen results happening from its adoption. The gold standard, with all its failures, we do know; we also know that something may bedone some day to remedy them if mankind can produce a set of rulerscapable of approaching the question with all the knowledge andexperience required; but to substitute this system at a time of greatuncertainty for one which might or might not work would seem to betempting Providence in an entirely unnecessary manner at a time whenit is above all necessary to get the economic ship as far as possibleon an even keel. 

If the proposed substitute is to succeed it will have to be at leastas acceptable as gold, and at the same time its quantity must be soregulated as to be at all times constant in relation to the output ofcommodities. Can we pretend that the economic enlightenment of mankindhas yet reached a point at which such a currency could be produced andregulated by the Governments of the world and be accepted by theircitizens?

XI

BONUS SHARES

_July_, 1918

A Deluge of Bonus Shares--The Effect on the Market--A Problem inFinancial Psychology--The Capitalisation of Reserves--The StockExchange View--The Issue of Bonus-carrying Shares--The Case of theA. B. C. --A Wiser Variation from Canada--Bonus Shares on Flotation--AnAmerican Device--Midwife or Doctor?--The Good and Bad Points of BothSystems. 

Of the many kinds of Bonus shares, the one which has lately beenmost prominent in the public eye is that which is produced by thecapitalisation of a reserve fund. There has lately been a perfectepidemic of this kind of Bonus share, which is almost as plentiful asthe caterpillars in the oak trees and the green fly on the allotments. The reason for this outburst is apparently the anxiety which thedirectors of many prosperous industrial companies feel lest the highdividends which good management and sound finance in the past haveenabled them to pay should lay them open to misunderstanding andattack by well-meaning people who think that it is a crime for acompany 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 itsOrdinary shares of 27-1/2 per cent. , and "the directors feel thatthere is a widespread impression that this is the rate of profitearned on the total of the capital invested, and consequently that thecompany is making an unfair profit out of its customers and the labourit employs. This is by no means the case. " It is a lamentable proof ofthe backward state of the economic education of this country that itshould be necessary for well-financed and prosperous concerns to takesteps to make it quite clear to the public that they are not earningmore than they appear to be. In a well-educated community it wouldbe perceived at once that it is the well-financed and prosperouscompanies which improve production in the interests of theirshareholders, their workmen, and the public; that the price which thepublic pays for a commodity is ultimately the price at which the worstfinanced and worst managed companies can just manage to keep alive;that the higher profits earned by the better companies are not wrungout of the pockets of the community, or their workmen, but are theresult of good management and good finance; and that the more the goodcompanies are encouraged to go ahead and drive the bad ones out ofexistence, the better will the community be served, and the betterwill be the chance of the workmen to get good wages. These platitudesare of course, only true in a state of free competition. If there isanything like monopoly the public and the workers are fully justifiedin being suspicious and examining the source from which high dividendsare produced. 

Such being the reason why this outburst of capitalisation of reservesfirst began--since in these days all capitalists and those who have tomanage capital feel that they are working under criticism, which isnot only jealous and suspicious (as it should be), but is also toooften both ignorant and prejudiced--it is interesting to note thatthe movement which was so started has been stimulated by its veryexhilarating effect on the market in the shares of the companiesconcerned. Why this should be so it is difficult at first sight tosay. What happens is merely this--that a company, let us suppose, forthe sake of simplicity, with a capital consisting wholly of 3, 000, 000Ordinary shares, has accumulated out of past profits, or out ofpremiums on new issues of shares, a reserve fund of £1, 000, 000. Itsnet profit has lately averaged £400, 000, and it has, year by year, distributed £300, 000 in the shape of a 10 per cent. Dividend toits shareholders, and put £100, 000 into its reserve fund, which isrepresented on the other side of the balance-sheet by buildingsand plant and a certain amount of first-class investments. If thedirectors now decide to capitalise that £1, 000, 000 of reserve fund, the only effect is that each shareholder will be given one new sharefor every three which he holds in the existing capital, the reservefund will be wiped out, and the ordinary capital will be increasedfrom £3, 000, 000 to £4, 000, 000. None of the shareholders will be inactual fact better off to the extent of one halfpenny, because allwill be in the same position with regard to one another; theirrelative shares in the enterprise will not have been altered. If weimagine, by way of simplifying the problem, that all the Ordinaryshares were in one hand, that one holder would have had in hisOrdinary shares a claim to the total assets of the company, that isto say, to its earning power as long as it is a going concern, and towhatever its assets realise if it went into liquidation; the fact that£1, 000, 000 worth of the assets had been bought out of past profits orpremiums paid on new issues of shares would have already added to thevalue of the claim that he had on the property of the company, and noaddition would be made to that value by turning the reserve fund intoshares. 

In other words, the reserve fund is already the property of theshareholders, and to convert it from reserve fund into capital, makingthem a present of new shares, which merely represent their claimto the assets held against the reserve fund, is as empty a gift aspresenting a man with a piece of paper informing him that he is theowner of his own hat. All this remains equally true if, besides theordinary capital, there is a considerable amount outstanding ofPreference shares and Debenture debt. In any case, the Ordinaryshareholders possess a claim to the earning power of the company whenprior charges have been satisfied, and to whatever surplus may remainon liquidation after first charges have been paid off in full. Whetherthat interest of theirs is represented by a larger or smaller numberof shares, or by shares of a larger or smaller denomination, or by areserve fund upon which they have a claim when all other claims havebeen settled makes no difference whatever as a matter of academicfact. Apart from the sentiment of the matter, there is no reason whyordinary capital should have any nominal value. 

As to the earning power of the company, that, of course, is notaffected one whit by the process. The earning power of the company isall in the assets--the plant, machinery and other property--plusthe elusive qualities which are bound up in the word "goodwill, "representing the selling power, organisation, and the expectation offuture profits. The capitalisation of the reserve simply affects themanner in which the liabilities of the company are arranged, andthe existence of a reserve fund merely means that the Ordinaryshareholders have a claim to a larger amount than their nominalholding in case of liquidation. It does not matter in the leastwhether this larger claim is handed to them in the shape of acertificate, since the nominal amount of their claim has nothingwhatever to do with the amount that their claim realises to themannually 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 byeconomic purists as a retrograde step because it seems likely toencourage the directors to be extravagant in the matter of dividends. In the example which we supposed above of the company with a capitalof three millions and reserve fund of one million, if the reserve fundis turned into Ordinary shares and the earning power of the companyremains the same there may obviously be a temptation to the directorsto modify the prudent policy under which they had hitherto placed onehundred thousand a year to reserve, because if they continued it theshareholders would discover they were really no better off and thatthey simply got a lower rate of dividend on the larger amount ofshares, and that their actual receipts from the company were exactlythe same as before. And if the earning power of the company remainedthe same and the directors left off placing the one hundred thousanda year to reserve, and paid away the whole of the net profit individend, it is clear that the progressive expansion of the company'sbusiness would be to that extent checked. On the other hand, there isa contrary argument that as long as the company has a large reservefund there is a possibility that dissatisfied shareholders may agitatefor a realisation of sufficient assets to enable that reserve fund tobe distributed, especially if it has been wholly acquired out of pastprofits. In this case the capitalisation of the reserve fund puts thistemptation out of their reach since, when once the reserve fund hasbeen capitalised, it can only be got at by greedy shareholders throughthe process of liquidation. Since, however, the shareholder in thesetimes is not quite so short-sighted as he used to be, there is notperhaps really very much advantage in this point. 

But since, as has been shown, capitalisation of reserves has no effectupon the earning power and assets of the company, it is interesting totry and discover why the rumour and announcement of such an intentionon the part of the board of directors is nearly always accompanied bya rise in the shares of the company affected. If the shareholder ismerely to be given a larger nominal claim, which does not in the leastaffect the value of the assets which that claim concerns, and if therelative amount of his claim is exactly the same with regard to theother shareholders, it is clear that the rise in the value of theshares is based entirely either on a psychological mistake on the partof the public and its financial advisers, or on the fact that thetransaction called attention to the value of the shares which havehitherto been undervalued in the market. Probably the movement arisesfrom both these causes. A large number of people think they are betteroff if they have a larger nominal share, without considering thatall the other shareholders are at the same time having their claimincreased, that the assets to which they all have a claim are notbeing increased, and that, consequently, if a sharing-out process wereto take place they would all be exactly as they would have been ifno such capitalisation of reserves had been carried out. And if asufficient number of people think that a share or any other commodityis more valuable, it thereby becomes more valuable, because value isnothing 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 numberof securities, especially in the industrial market, which wouldstand higher if their earning power and position were more closelyscrutinised. This is very clearly seen to be the case from theapparently extravagant prices at which insurance companies, forexample, sometimes buy the businesses of one another. They give aprice which is considerably above the market value of the concern asrepresented by the price of its shares. Critics say that the terms areextravagant, and yet the deal is found to be highly profitable to thebuying company. The profit of the deal, of course, may be increased bythe advantages of amalgamation, but quite apart from that it is clearthat the market price of securities very often undervalues, as italso, perhaps, still oftener overvalues, the real position of thecompanies on whose earning powers they represent claims. In any case, there is the fact that these capitalisations of reserve funds, whichmake no real difference to the actual position of the company, areuniversally regarded, in the language of the Stock Exchange, as "bullpoints. " It is assumed, of course, that the directors would not carryout such an operation unless they saw their way to a higher earningpower in the future as a justification for the larger capital. In thisexpectation the directors might be right or wrong, and, even if theyare right, that prospect of higher earning power, if market pricescould be relied upon to express the true position of a company, wouldhave been "in the price. "

There is another kind of Bonus share, which is not exactly a Bonusshare, but carries a bonus with it. This comes into being when thedirectors of a company sell new shares to existing shareholders at aprice below the terms which they might have obtained if they made anew issue to the general public. The classical example of this systemis the Aerated Bread Company, that concern to which City clerks andjournalists and others owe so much as pioneers of cheap and simplecatering. It will be remembered that in the palmy days of thiscompany, before it had been severely cut into by competition, its £1shares used to stand in the neighbourhood of £15. The directors usedthen to make issues of new shares to existing shareholders at theirface value, that is to say, at £1 per share, although it was obviousthat if they had made a public issue inviting all and sundry tosubscribe they could have sold their new issues at or above £14per share. This system put an enormous bonus in the pockets of theexisting shareholders at the expense of the company and its futureprospects. The directors practically gave to the existing shareholdersa present of £130, 000 if they sold them 10, 000 new shares for £10, 000, which they and the public would have readily subscribed for at£140, 000. There was nothing wicked about the process, but it wasextremely short-sighted. If the company had retained the monopolywhich its pioneer work as a cheap caterer for a long time securedit, it might have kept its prosperity unimpaired even by thisshort-sighted finance. As it was, attracted several competitors, someof which were extremely well managed and financed, and although itstill does a most useful work for the community, its earning power hassuffered considerably. But this is only an extreme example of a systemwhich is reasonable enough if it is not carried too far. The CanadianPacific Railway, for instance, has for many years adopted a verymoderate use of this system, making new issues to its shareholders onterms rather cheaper than it could have obtained by a public issue, but not giving away enough to impair its future seriously in orderto make presents to the existing stockholders by this means. By thecontinued making of small presents to their constituents the directorsof the company have obtained the support of a very loyal body ofstockholders, who feel that they are being well treated but notpampered. This system of granting a small bonus to existingshareholders on occasions when the company has to issue new capital isone which is quite unobjectionable as long as it is not abused. If, owing to the use of it, the directors are encouraged to financethemselves badly, that is to say, to pay out of new capital forimprovements and extensions which a more prudent policy would havefinanced out of earnings, just because they find that these issuescarrying a small bonus makes them popular with the stockholders, thenthe system is being abused. Otherwise there seems no reason to objectto a measure which keeps the shareholders happy and does not do anyharm to the concern so long as it is worked in moderation. 

Finally, there is a Bonus share or stock which does not representaccumulation out of vast profits or issues of new shares at a premium, and does not involve a bonus by the sale to existing shareholders ata price below the terms which could be got in the market, but is atfirst sight pure water, representing merely possibilities, perhapses, and potentialities. This kind of Bonus share is chiefly known on theother side of the Atlantic, and is usually damned with bell, book andcandle by purists among English financial critics. We say on this sideof the water that every pound of an English well-financed companyrepresents a pound which has actually been spent and put into tangibleassets which help the company to earn profits. This boast is by nomeans true, since nearly all industrial companies come into being withsomething paid for in the shape of goodwill, which is of enormousimportance, but can hardly be called a tangible asset; and even in thecase of our railway companies, many millions of original capital wentinto Parliamentary and legal expenses, which have been, in one sense, dead capital ever since, though without this expenditure the railwayscould never have got to work. The American system of Common shares, representing what appears to be water, is only a modification of whatevery company has to do, in one form or another, on this side oranywhere in the world. Wherever an existing business is bought outsomething has to be given over and above the old iron value of theconcern for the value of the connection and other intangible assets. Wherever an entirely new industry is started it has to meet certaininitial expenses. It has to placate, to use the unpleasant Americanword, various interests in order to get to work, or it has to lay outmoney, in building up a concern by advertising or otherwise. It isimpossible that every penny which is put into it will go into actualbuildings, plant, machinery, and stock-in-trade. 

In America the system has been preferred by which the actual tangibleassets of a new concern are financed wholly or largely by issues ofbonds or Preferred stock, and the Common stock is given away to thoseinterested in the promotion, for them either to hold or to use inorder to secure the co-operation of those who may be useful, or modifythe opposition of those who may be dangerous. The net result of it isthat the Common stock is represented in fact by goodwill or the powerto get to work. If the company prospers, then it is the business ofthose who hold these Common shares to see that assets are accumulatedout of profits, to be held against their Common stock, so squeezingthe water out of it and making it good. The system thus possesses thisvery considerable advantage, that those who promote a company areinterested in its future welfare, and watch over it and guide itthrough its subsequent existence, putting energy and good managementat its disposal in order that the paper which they hold may berepresented, not by water, but by real assets, and so may bring them atangible reward. It has thus in some ways a great advantage over theEnglish system, by which the company promoter is too often concernedmerely in the immediate success of the promotion. He is, as one of thegreatest of them described himself, a mere midwife, who brings theinteresting infant into the world, pats its little head, says good-byeto it, and leaves it to take care of itself throughout its troubledexistence. By the American system the promoter is not a midwife but adoctor who assists at the birth of the infant, and also watches overits youth and makes every effort to guide its toddling footsteps insuch a way that it may grow into lusty manhood. It is not until he hasdone so that he is enabled, by the sale of the shares which were givento him at the beginning, to realise the full profit which he expected. The profits realised by this method are in many cases enormous. Onthe other hand, the amount of work that is put in to secure them isinfinitely greater than happens in the case of the English midwifepromoter; and if the enterprise is a failure, then the promoter goeswithout his profits. 

The system, like everything else, is liable to abuse, if a rascallyboard of directors, in a hurry to unload their holding of Common stockon an unsuspecting public, makes the position and prospects of thecompany look better than they are by unscrupulous bookkeeping andextravagant distribution of profits, earned or unearned. These thingshappen in a world in which the ignorance of the public about moneymatters is a constant invitation to those who are skilled in them torelieve the public of money which it would probably mis-spend; but, if well and honestly worked, the system is by no means inherentlyunsound, as some English critics too often assume, and it has beenshown that it carries with it a very great and substantial advantagein the hands of honest people who wish to conduct the business ofcompany promotion on progressive lines. 

XII

STATE MONOPOLY IN BANKING

_August_, 1918

Bank Fusions and the State--Their Effects on the Bank of England--MrSidney Webb's Forecast--His Views of the Benefits of a BankMonopoly--The Contrast between German Experts and BritishAmateurs--Bankers' Charges as affected by Fusions--The Effects ofMonopoly without the Fact--The "Disinterested Management" Fallacy--TheProposal to split Banking Functions--A Picture of the State inControl. 

A few months ago, writing in this Journal on the subject of bankingamalgamations, I referred to one of the objections against them, thatthey tended towards the creation of monopoly, and so encouraged hopeon the part of those who would like to see all forms of industrymanaged by the State, that the banking business might sooner or laterbe taken over and worked as a State monopoly. At that time this dangerof monopoly seemed to be still fairly remote, but since then theprogress of amalgamations has brought it appreciably nearer, andso has vigorously stimulated both the hopes and fears of those whoconsider that it tends to bring nearer the seizure of banking businessby the State. The fear is expressed by Sir Charles Addis, manager ofthe Hongkong Bank and director of the Bank of England, in the Julynumber 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_, MrSidney Webb was developing the same theme, namely, the inevitabilityof banking monopoly and the necessity, as he conceives it, ofdefeating private monopoly for the sake of profit, by State monopolyto be worked, as he hopes, in the public interest. His article isheaded by the rather misleading title, "How to Prevent BankingMonopoly, " for, as has been said, Mr Webb very much wants monopoly, says that it cannot be helped, and sees the fulfilment of some of hispet Socialistic dreams in the direction of it by the bureaucrat whomhe regards as the heaven-sent saviour of society. His very interestingargument 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 ofamalgamation, and that the gains it carries with it are obvious. Hedilates 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 degreethe reduction, through amalgamation, of the necessity which obligesa bank to keep a considerable reserve of cash. It is quite true thatunder normal circumstances cash withdrawn from one bank finds its wayin due course to another, and that with regard to these mere "tillmoney" transfers there might be a considerable reduction in the amountof cash required if all the banking of the country were in the handsof one business, so that what was withdrawn from one branch wouldbe paid into another. But this fact would not alter the need whichcompels a bank to keep considerable reserves in cash in order toprovide against the possibility of a run. A State bank, if the publictakes it into its head that it prefers to have a larger proportion ofcurrency in its own pocket rather than in its bank, may find itselfpulled at for cash just as vigorously as a bank managed by privateenterprise. This was shown in August, 1914, when very large sums werewithdrawn from the Post Office Savings Bank during the crisis whichthen impelled many members of the public to hoard money, or compelledthem to take it out of their banks because they did not find that theordinary system of payment by cheques was working with its usual ease. 

Moreover, Mr Webb's point about what he calls disinterestedmanagement--that is to say, the management of banks by officers whoseremuneration bears no relation to the profit made on each piece ofbusiness transacted--is one of the matters in which English bankingseems likely at least to be modified. Sir Charles Addis, in thearticle already referred to, calls attention in a very strikingpassage to the efficiency of the administration of German and Englishbanks, and makes a comparison between the remuneration given to thebanking 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 £200, 000, 000 the proposal to increase the directors' fees to £1000 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 frommonopoly, he finds that they lie chiefly in a restriction offacilities, and in raising the price exacted for them, and that inboth respects the danger appears to be great. There is, he says, everyreason to expect that the banker, as the nearest approach to the"economic man, " will take the opportunity of raising his chargeseither by increasing the frequency and the rate of the commissionexacted for the keeping of a small account, or by reducing the rate ofinterest allowed on balances, or adopting the common London practiceof refusing it altogether. "The banker, who is not in business for hishealth, may be expected, on this side of his enterprise, to pursue thepolicy of 'charging all that the traffic will bear. ' It would probablypay the banker actually to refuse small accounts, and to penalise theemployment of cheques for small sums. This would be a social loss. "

With regard to the other side of his business, lending to theborrowers, Mr Webb thinks it need not be assumed that the monopolistbanker will actually lend less, because he will seek at all times toemploy all the capital or credit that he can safely dispose of, but MrWebb thinks that he is likely, as the result of being relieved of thefear of competition; to feel free to be more arbitrary in his choiceof borrowers, and therefore able to indulge in discrimination againstpersons or kinds of business that he may dislike; that he will raisehis charges generally for all accommodation, again, theoreticallyto "all that the traffic will bear"; and, finally, that in times ofstress with regard to all applicants, and at all times with regard toany applicant who was "in a tight place, " that he will extort as theprice of indispensable help a theoretically unlimited ransom. 

Such are the effects which Mr Webb fears from the process which hasalready put the control of the greater part of the banking facilitiesof England into the hands of five huge banks. He thinks that thesethings may happen long before it is a question of an absolute monopolyin one hand. A monopoly, he says, may be more or less complete, andthe economic effects of monopoly may be produced to a greater or lessdegree at a point far below a complete monopolisation in a singlehand. There is much truth in this contention of his. Amalgamation hasnow come to such a point that every new one not only brings absolutemonopoly more closely in sight, but increases the ease with whichagreements among the huge banks might suffice to produce the effectsof monopoly without further amalgamations. Mr Webb goes on toargue that it is impossible to stop by legislative prohibition orrestriction the progress towards economic monopoly where such progressis financially advantageous to those concerned, and that the onlyremedy ultimately by which the community can be protected from thedangers which he sees threatening it is for the community to take themonopoly into its own hands, and so to get rid, not of the monopoly, which, from the standpoint of national organisation, he thinks isadvantageous, but of the motives leading to extortion. If, he says, "no shareholders are in control with their perpetual and insatiabledesire for profit, there is no inducement to take advantage of theneeds or helplessness of the customers by restricting service orraising prices. " In this sentence, of course, he begs the wholequestion between the advantage of private enterprise and ofSocialistic organisation. Private enterprise works for profit, andtherefore makes as much profit as it can out of its customers. It is, therefore, according to Mr Webb's argument, probable that if privateenterprise in banking is able to establish monopoly it will squeezethe public to the point of restricting banking facilities and makingthem dearer. No one can deny that there is some truth in thiscontention, but, on the other hand, it may very fairly be argued thatmodern business has perceived the great advantages of a big turnoverand small profits on each transaction. The experience of the greatinsurance companies, and of great catering companies, and of enormousprivate organisations such as the Imperial Tobacco Company, has shownthe enormous advantage of providing cheap facilities to the largestpossible number of customers; so that fears of natural restriction ofbanking facilities, through monopoly, if they cannot be set altogetheraside, are not by any means a certain consequence even of theestablishment of monopoly in private enterprise. 

Still weaker is Mr Webb's assumption that if the interests of theshareholders with "their perpetual and insatiable desire for profit"were eliminated, cheap and plentiful banking facilities wouldinevitably result from bureaucratic management. The contrary hasbeen shown to be the case in the examples of the Post Office, of theTelephone Service, and the London Water Supply. In the case of thetelegraph and the telephones, the Government took over prosperousbusinesses, and has managed them at a loss. In the matter of the PostOffice it is not possible to compare the Government with individualenterprise, but it will generally be admitted that the TelephoneService has by no means been improved since the Government took itover. Mr Webb points out that nationalisation, whether of banks or ofother forms of enterprise, does not necessarily mean government undera Minister by a branch of the Civil Service. But it is impossible toignore the fact that as soon as nationalisation takes place those whoare responsible for the management of the enterprise are practicallycertain to develop the qualities and idiosyncrasies of civil servants, which are so unlikely to tend to elasticity, rapidity and efficiencyin business management. 

In fact, Mr Webb practically grants this point by the very interestingdevelopment he suggests by which the two chief functions of bankingshould be differentiated, and one of them should be nationalisedand the other should remain in the hands of private enterprise. Hedevelops 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 bankingis somewhat startling, and one wonders whether it could possiblywork. On consideration, however, there seems to be nothing actuallyimpracticable about the scheme. The Government would presumably takeover all the offices and branches of the banks of the country, andwould therein accept money on deposit and current account, makingitself liable to pay the money out on demand or at notice, as thecase may be, just as is done by the existing banks; it would holdthe necessary cash reserve, and it would apparently itself invest acertain proportion of the money in Government securities, as the banksdo at present. The more difficult part of the banking business, theadvancing of money to borrowing customers, it would hand over tofinancial institutions, created for this purpose presumably out of theashes of the nationalised banking business. These institutions wouldmake themselves responsible for the lending side of banking, and wouldobviously, and naturally, be allowed to make a profit on this side ofthe business. In this differentiation Mr Webb's ingenuity is seen atits very best. He reserves for the State that part of banking which ispurely a matter of routine, and he leaves to private enterprise thatpart of it which requiries the elasticity and judgment and quicknessin which the average bureaucrat is most likely to fail. A certainamount of friction may easily arise from this differentiation. Theinterest that the State would be enabled to allow to depositors wouldclearly depend to a great extent on the interest which it would beable to receive from the financial institutions engaged in lendingthe money. These institutions could naturally pay the State interestaccording to the rate which they were able to charge their borrowingcustomers, leaving themselves a margin for profit and for protectionagainst the risk that their business would involve. It is obvious thatthere might at times be considerable difficulty in adjusting these twodifferent points of view, and anybody who knows anything about thelength of time and argument involved in inducing officials to make uptheir minds can only fear that occasional jarring in this connectinglink between the two sides of banking might sometimes produce effectswhich would be awkward for the industry of the country. 

But apart from this obvious difficulty, can we contemplate withequanimity the prospect of the State monopoly of the ordinary bankingfacilities 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 customerwishes to leave with his bank? At present the ease and quickness withwhich these routine matters of banking are carried out in England aredeveloped to a point which is the envy of foreign visitors. How wouldit be if every cashier of every bank were converted by the process ofnationalisation from the kindly, businesslike human being as we knowhim into the kind of person who ministers to our wants behind thecounters of the Post Office? As it is, we go into our bank, to presenta cheque in order to provide ourselves with cash for the dailypurposes of life; the cashier looks at the signature, recognisesthe customer, hands him over the money. If that cashier becamea Government official how long would it take him to verify thesignature, to see whether the customer really had a balance to hiscredit, and finally furnish him with what he wanted? It is obviousthat the change suggested by Mr Webb, though it might work, couldonly work to the detriment of the convenience of the public, and hishopeful view that the elimination of the profits of the shareholderswould mean that these profits would go into the pockets of thecommunity in the form of cheapened facilities for banking customersis an ideal largely based on the assumption, that has so often beenproved to be incorrect, that the State can do business as well and ascheaply as private enterprise. It is much more likely that after afew years' time the public would find the business of paying in andgetting out its money a very much more tedious and irritating processthan it is at present, and that the expenses of the matter wouldhave grown to such an extent that the taxpayer might be called uponannually to make good a considerable loss. 

XIII

FOREIGN CAPITAL

_September_, 1918

The Difference between Aims and Acts--Should Foreign Capital beallowed in British Industry?--The Supremacy of London and NationalTrade--No Need to fear German Capital--We shall need all we canget--Foreign Shares in British Companies--Can and should theDisclosure of Foreign Ownership be forced?--The Difficulties ofthe 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 sardonichumour of the Muse of History. The majority of the civilised Powersare banded together to overthrow a menace to civilisation, carryingon a war which, it is hoped, is to produce a state of things in whichmankind, purged of the evil spirits of militarism and aggression, isto start on a new order of co-operation. At the same time, whilewe are engaged in fighting under banners with these noble idealsinscribed on them, a large number of citizens of this country areairing proposals aimed at restrictions upon our intercourse with othernations, especially in the economic sphere. In last month's issue ofthis Journal a very interesting article, signed "Veritas, " discussedthe question as to how far it was in the power of the Allies to makeuse of the economic weapon against their enemies after the war. Thatsuch a question should even be mooted as an end to a war undertakenwith these objects, shows what a number of queer cross-currents areat work in the minds of many of us to-day. But some people go muchfurther than that, and are advocating policies by which we shouldeven restrict our commercial and economic intercourse with ourbrothers-in-arms. If the clamour for Imperial preference is to haveany practical result, it can only tend to cultivate trade within theBritish Empire, protected by an economic ring-fence at the expenseof the trade which, before the war, we carried on with our presentAllies. And a large number of people who, under the cover of Imperialpreference, are agitating also for Protection for this country, wouldendeavour to make the British Isles as far as possible self-sufficientat 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 whichis producing such curious results as these, at a time when the worldis preparing to enter on a period of closer co-operation and improvedand extended relations between one country and another, is confined, in fact, to a few noisy people who possess in a high degree thefaculty of successful self-advertisement. I do not believe that thecountry as a whole is prepared to relinquish the economic policy whichgave it such an enormous increase in material resources during thepast century, and has enabled it to stand forward as the industrialand financial champion of the Allied cause during the difficult earlyyears of the war. Our rulers seem to be sitting very carefully on thetop of the fence, waiting to see which way the cat is going tojump. They have made brave statements about abrogating all treatiesinvolving the most-favoured nation clause and about adopting theprinciple of Imperial preference; but when their eager followers pressthem 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 andto point out that it is above all desirable that our economic policyshould be in unison with that of the United States. 

Whatever may happen in the realm of trade and commercial policy, itwould seem to be self-evident that with regard to capital it would bestill more difficult and undesirable to impose restrictions than withregard to the entry of goods; and above all, it seems to be obviousthat at any rate the free entry of capital into this country is amatter which should be specially encouraged when the war is over. Atthat difficult period we have to secure, if possible, that Britishindustry shall be entirely unhampered in its endeavours to carry outthe very puzzling operations involved by transferring its energiesfrom war activities to peace production. However well the thing maybe managed, it will be an exceedingly difficult and complicatedoperation. In certain industries, especially in shipbuilding andengineering, the building trade and all the allied enterprises, thosewho are responsible for their efficient management ought to be able tocount upon a keen and widely-spread demand for their products. But inmany industries there will necessarily be a good deal of doubt as tothe kind of article which the consuming public at home and abroad islikely to want. There will be the great difficulty of sorting out theright kind of labour, of obtaining the necessary raw materials, and ofgetting the necessary credit and capital. 

That this huge problem can be solved, and solved so well that thecountry can go ahead to a great period of increased productivity andprosperity, I fully believe; but this can only be done if it is ableto command the most efficient co-operation of all the various factorsin production--if employers put their best brains and if workers puttheir best energy into the business, and if everything is done to makethe whole machinery work with the utmost possible smoothness. Oneelement in the machinery, and a highly important one, is the questionof capital. During the war the citizens of this country have beentrained to save and to put their money at the disposal of theGovernment with a success which could hardly have been expectedwhen the war began. Whether they will continue to exercise the sameself-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 largenumber of people who have answered the appeal to save money for thewar to listen with considerable indifference to any appeals thatmay be made to them to save money in order to provide industry withcapital. All the capital that industry can get, it will certainlywant. If, besides what it can get at home, it can also get aconsiderable amount from foreign countries, then its ability to resumework on a prosperous and profitable basis when the war is over will bevery greatly helped. This would seem to be so obvious that one mighthave thought that even a Government which is believed to be flirtingwith what is called Tariff Reform would think twice before it imposedany restrictions on the free flow of foreign capital into Britishindustry. In so far as foreigners lend to us we shall be able toimport raw materials, to be worked up to the profit of Britishindustry, in return for promises to pay--very timely convenience at acritical moment. 

Nevertheless, it would appear that obviousness of the desirability offoreign capital, from whatever source it comes, is by no means evidentto 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, 1908to 1917, particularly having regard to circumstances arising out ofthe war and of the developments likely to arise on its conclusion, "seems to have thought it necessary to provide the Government withschemes by which alien capital could, if the Government thoughtnecessary, be kept out of the country. It was a powerful andrepresentative Committee, and it is very satisfactory to note that itsown view concerning the policy to be pursued was strongly in favour offreedom. It points out in its Report that the question which lay inthe forefront of its investigations was that of the employment offoreign capital in British industries. On the preliminary questionof whether it was desirable that foreign capital should be freelyattracted to this country, there was little, if any, difference ofopinion. For this very sensible conclusion the Committee gives rathera curious reason. It states that the maintenance of London as thefinancial centre of the world is of the first importance for thewell-being of the Empire, and that anything which could impede orrestrict the free flow of capital to the United Kingdom would, initself, be prejudicial to Imperial interests. 

Now, of course, if is entirely true that the maintenance of Londonas a financial centre is very important, but I venture to think thatthose who are most jealous concerning the prestige of London and theimportance of its financial operations would say that it ranks onlysecond to the industrial efficiency of the country as a whole andcannot, in fact, be long maintained unless there is that industrialefficiency behind it, providing a surplus out of which London may beable 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 surelyevident that a financial supremacy which was based merely on a jobbingbusiness, gathering in capital from one nation and lending it toanother, 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 whichproduces a considerable surplus of goods and services which itis prepared to place at the disposal of the world. Owing to thepossession of this surplus it becomes a market in capital, and so getsa considerable jobbing business, but the backbone and foundation ofits position must be, in the end, industrial activity in the widestsense of the word. It therefore seems that the Committee's argumentthat the free flow of capital is essential to the maintenance ofLondon's finance might have been reinforced by the very much strongerone that it is essential to the recuperative power of Britishindustry, which will need every assistance it can get in order tore-establish itself after the war. 

The Committee points out that "any legislation which would tendto impede or restrict the free flow of capital here by imposingrestrictions or creating impediments ought to be jealously watched, lest in the endeavour to prevent what has come to be called 'peacefulpenetration' the normal course of commercial development should bearrested, " and it goes on to observe that at the end of the war, "ifit should be concluded upon such terms as we hope and anticipate, "it is not likely that our present enemies will be in possession ofcapital looking for employment abroad. This is certainly very true. Bythe time the Germans have made the reparations, which will involve somuch rebuilding in Belgium and in the parts of France that theyhave overrun and swept clean of industrial plant, and have in otherrespects made good the damage which their ruthless and uncivilisedmethods of warfare have inflicted, not only on their enemies, but onneutrals, it does not seem likely that they will have much to sparefor capital expansion in foreign countries, especially when weconsider how many problems of reconstruction they will themselves haveto face at home. "To impose restrictions upon the influx of capital, "the Report continues, "aimed at our present enemies, with the resultof deterring the flow of capital from (say) America, would be a policyhighly injurious to the economic recovery and renewed prosperity ofthis country after the war. For these reasons we are of opinionthat in all amendments of the law falling within the scope of ourreference, the expediency of the attraction of foreign capital shouldbe steadily borne in mind. " The Committee thus seems to have thoughtit necessary to administer comfort to anybody who might fear that theunrestricted flow of capital from abroad might involve this country inthe terrible danger of being assisted in its industrial recovery bycapital from Germany. 

If there were, in fact, any possibility of this assistance beinggiven, it would seem to be extremely short-sighted not to allowBritish industry to make use of it. In the matter of "peacefulpenetration, " we have ourselves in the past done perhaps as much asall the rest of the countries of the world put together, with theresult that we have greatly stimulated the development of economicprosperity all over the world; in fact, it may be argued that thegreat progress made in the last century in man's power over the forcesof Nature has been to a great extent due to the freedom with which weinvested capital abroad and opened a free market to the productsof all other countries. At a time when, owing to exceptionalcircumstances, we ourselves happen to be in need of capital, it wouldappear to be an extremely short-sighted policy to refuse to admit it, wherever it came from. We have excellent reason to known that, whencapital is once invested in a foreign country, it is largely in thepower of the inhabitants and Government of that country to control itsworking. Any foreigner, even an enemy, who set up a factory in Englandafter the war would be doing just the very thing which we most ofall 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 peacework. 

The Committee, however, considers that "at the root of the wholematter lies a question which is not one of Company Law amendment atall, but one of high political and economic policy. " It does not fallwithin its province "to inquire whether the traditional policy ofthis country to admit and welcome all who seek our shores and submitthemselves loyally to our laws ought, in the case of some and whataliens, to be revised"; or whether discrimination ought to be madebetween an alien of one nationality and an alien of another. "Asregards aliens who are now our enemies, it may be that the BritishEmpire may adopt the policy that a special stigma ought to be attachedto the German, and that neither as an individual nor as a firm, noras a corporation, ought he, for a time at any rate, to be admitted tocommercial fellowship or to any fellowship with the civilised nationsof the world. " It need not be said that any attempt to apply thisstigma in practice would be extremely difficult to carry out, wouldinvolve all kinds of difficulties and complications in trade and infinance, and that the threat of it is more likely than anything elseto stiffen the resistance of the Germans and to force them to rely ontheir militarist leaders as their only hope of salvation. However, the Committee points out that recent legislation shows a desire toascertain and record the extent to which aliens are active incommerce here, and thinks it necessary to make provision to meet therequirements of the Government in case our rulers should decide toimpose the restrictions which its own common-sense shows it are soundesirable. 

If, it says, foreign capital is to be attracted here, it must berepresented either by shares or by debentures. "The question, therefore, is whether restrictions ought to be imposed upon the extentto which the control of the company shall be allowed to reside inaliens, either by reason of their holding a majority of the shares, orof the debentures, or by reason of their obtaining a majority uponthe Board of Directors; and, if so, how disclosure of their aliencharacter is to be enforced. " It goes on to point out the greatdifficulties which present themselves in the way of securingdisclosure of nationality and ensuring that aliens shall not commandthe control. "The law of trusts, " it says, "is firmly established inthis country. If A, be the registered holder of a share, he is notnecessarily the beneficial owner. He may be a trustee for B. To enactthat the registered holder must be a British subject effects nothing, for B. May be an alien and an enemy. Suppose, however, that you enactthat A. , when his share is allotted or transferred to him, shall makea declaration that he holds in his own right, or that he holds intrust for B. , and that both A. And B. Are British subjects. There isnothing to prevent the creation of a new trust the next day, underwhich C. , an alien enemy, will be the person beneficially entitled. Further, at the earlier date (the date of allotment or transfer) thefacts may be that A. (a British subject) is trustee for B. (a Britishsubject), but that B. (unknown to A. ) is a trustee for C. , an alienenemy. The fact that B. Is trustee for C. Would be purposely withheldfrom A. , and A. 's declaration that he was simply trustee for B. Wouldbe perfectly true. To require that A. Should make a declaration atshort intervals (say once a month), or that A. , B. , C. , and so on, should all make declarations would be, of course, so harassing and sodetrimental as to be, as a matter of business, impossible. The onlyeffectual way of dealing with the matter would be by a provision thatthe share might be forfeited, or might be sold and the proceeds paidto the owner, if an alien should be, or become beneficially entitledto or interested in the share. Such a provision does not in thegeneral case commend itself to us as practical or desirable. " Anyendeavour to control the nationality of the Board of Directorsproduces similar difficulties. It is easy to ensure that they shall beall, or a majority of them, British subjects, but there is no means ofensuring that their actions shall not be controlled by aliens whosenationality is not disclosed. 

Having pointed out these difficulties, which seem in effect to reducethe whole question to the domain of farce, the Committee goes on toinquire whether it is desirable to legislate in the direction offorbidding the employment of foreign capital here in Joint StockCompanies, 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 onealien and another, and to legislate in that direction in the case ofcertain aliens and not of others. 

In answering these questions, the Committee decided that it wasnecessary to discriminate between certain classes of companies--ClassA being companies in general, Class B being companies owning Britishshipping, and Class C companies engaged in "key" industries. Withregard to companies in Class A, they recommend that no restrictionsat all be imposed, but, nevertheless, they elaborate a scheme ofenforcing disclosure of alien ownership if that policy seems tothe legislature to be right. This scheme, the Committee admits, isnecessarily detailed and laborious; it puts difficulties in the way ofinvestment in English securities, whether by British subject or alien. It would supply, no doubt, to the Board of Trade useful informationas to the extent of foreign investment in English industries, but theprice paid for this advantage would, in the Committee's opinion, betoo great. If adopted, the scheme could be evaded. And, with regard tocompanies in general, the Committee's recommendations go the lengthof allowing complete freedom as to the nationality both of thecorporators and of the Board. They would allow, for instance, Americancapitalists to come here and establish themselves as a Britishcorporation in which all the corporators and all the directors wereAmerican, and so with every other nationality. They would make nodiscrimination between aliens of different nationality, for, ifthere is to be such discrimination, there must be the machinery ofdisclosure, involving a deterrent effect and acting prejudiciallyin the case of all investors. But, if any such discrimination wereadopted, the Committee thinks that at any rate it should be limited tosome short period, say, three or five years after the end of the war. 

If, however, the legislature should decide upon the necessity ofdisclosure of alien ownership, the Committee draws up the followingscheme 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 issatisfied that the total exclusion of aliens from ownership of Britishships is not essential for national safety and is not expedient. Ittherefore considers that in these companies it will be sufficient toensure that not more than 20 per cent. Of the power of control shouldbe in alien hands. It thinks that there should be this, limit of 20per cent. , that not more than 20 per cent. Of the share capital shouldbe held by aliens, and that those shares should carry no more than 20per cent. Of the voting power. Alternatively, it considers that thealien holdings should carry no vote at all, but that is a point ofdetail deserving further consideration. It follows that in thisclass there must, in the opinion of the Committee, be disclosure ofnationality, 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 verycomplicated system is recommended. In the first place, the questionwhether a company is one to carry on a "key" industry would seldom ornever arise at the time of its registration. The modern Memorandum ofAssociation includes so many things that a "key" industry might bewithin the powers of almost any company. The question would thus arisewhen the company has got to work. And so the Committee thinks thatthe Board of Trade should be empowered at any time to make an inquirywhether any company is carrying on a "key" industry and, if it findsthat it is, then the company shall, at the direction of the Board ofTrade, require every registered member to make a declaration such as, under the disclosure procedure already described, he would have hadto make if he were at the date of the notice about to receive anallotment or become a transferee. Further, the holders of sharewarrants to bearer would be required to surrender their warrants forcancellation and have their names entered in the register, andall subsequent allottees and transferees would be subject to theobligation of disclosure, as already described, and the limits of 20per cent. Recommended in the case of merchant shipping would then bemade applicable. Under the system of disclosure it follows that bearershares are impossible, but, if disclosure be negatived, the opinion ofthe Committee is in favour of the maintenance of the bearer share. 

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

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

XIV

NATIONAL GUILDS

_October_, 1918

The Present Economic Structure--Its Weaknesses and Injustices--Werethings ever better?--The Aim of State Socialism--A RivalTheory--The New Movement of Guild Socialism--Its Doctrines andAssumptions--Payment "as Human Beings"--The "Degradation" of earningWages--Production irrespective of Demand--Is that the Real Meaningof Freedom?--The Old Evils under a New Name--A Conceivably PracticalScheme for some other World. 

Most people will admit that there are many glaring faults in thepresent economic structure of society. Wealth has been increased at anexhilarating pace during the last century, and yet the war has shownus that we had not nearly realised how great is the productive powerof a nation when it is in earnest, and that the pace at which wealthhas been multiplied may, if we make the right use of our plant andexperience, be very greatly quickened in the next. The great increasein wealth that has taken place has been certainly accompanied by someimprovement in its distribution; but it must be admitted that in thisrespect we are very far from satisfactory results, and that a systemwhich produces bloated luxury plus extreme boredom at one end of thescale and destitution and despair at the other, can hardly be calledthe last word, or even the first, in civilisation. The career has beenopened, more or less, to talent. But the handicap is so uneven andcapricious that only exceptional talent or exceptional luck can fightits way from the bottom to the top, the process by which it does sois not always altogether edifying, and the result, when the thinghas been done, is not always entirely satisfactory either to thevictorious individual or to the community at whose expense he has wonhis spoils. The prize of victory is wealth and buying power, and themeans to victory is, in the main, providing an ignorant and gulliblepublic with some article or service that it wants or can be persuadedto believe that it wants. The kind of person that is most successfulin winning this kind of victory is not always one who is likely tomake the best possible use of the enormous power that wealth now putsinto the hands of its owner. 

Those who are fond of amusing themselves by looking back, throughrose-coloured spectacles, at more or less imaginary pictures of the goodold mediaeval times, can make out a fair case for the argument that inthose days the spoils were won by a better kind of conqueror, who waslikely to make a better use of his victory. In times when man waschiefly a predatory animal and the way to success in life was bymilitary 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, ormaintained a position there, were necessarily possessed of courage andbodily vigour and of all the rough virtues associated with the ideal ofchivalry. Perhaps it was so in some cases, and there is certainlysomething more romantic about the career of a man who fought his way tosuccess than about that of the fortunate speculator in production ortrade, to say nothing of the lucky gambler who can in these times founda fortune on market tips in the Kaffir circus or the industrial "pennybazaar, " Nevertheless, it is likely enough that even in the best of themediaeval days success was not only to the strong and brave, but alsowent often to the cunning, fawning schemer who pulled the brawny leg ofthe burly fighting-man. However that may be, there can be no doubt thatnow the prizes of fortune often go to those who cannot be trusted tomake good use of them or even to enjoy them, that Mr Wells's greatsatire on our financial upstarts--"Tono-Bungay"--has plenty of truth init, and that our present system, by its shocking waste of millions ofgood brains that never get a chance of development, is an economicblunder as well as an injustice that calls for remedy. 

This being so, it is the business of all who want to see things madebetter to examine with most respectful attention any schemes that areput forward for the reconstruction of society, however strongly we mayfeel that real improvement is only to be got, not by reconstructingsociety but by improving the bodily and mental health and efficiencyof its members. The advocates of Socialism have had a patient andinterested hearing for many decades, except among those to whomanything new is necessarily anathema. There was something attractivein the notion that if all men worked for the good of the community andnot for their own individual profit, the work of the world mightbe done much better, because all the waste of competition andadvertisement would be cut out, machinery would be given its fullchance because it would be making work easier instead of causingunemployment, and a greater output, more evenly distributed, wouldenable the nation to breed a race, each generation of which wouldcome nearer to perfection. So splendid if true; but one always feltmisgivings as to whether the general standard of work might notdeteriorate instead of improve if the stimulus of individual gain werewithdrawn; and that the net result might probably be a diminishedoutput consumed by a discontented people, less happy under a possiblystupid and short-sighted bureaucracy, than it is now when the chancesof life at least give it the glorious uncertainty of cricket. Sincethe war our experiences of official control, even when working ona nation trained in individual initiative, have increased thosemisgivings manifold; and hundreds of people who were Socialisticallyinclined in 1914 will now say that any system which handed over theregulation of production and distribution to the State could end onlyin disaster, unless we could first build up a new machinery of Stateand a new people for it to work on. 

Partly, perhaps, owing to this discredit into which the doctrines ofState Socialism have lately fallen, increasing attention has beengiven to a body of theory that was already active before the war andadvocates a system of what it calls Guild Socialism, under whichindustry is to be worked by National Guilds, embracing all theworkers, both by brain and by hand, in the various kinds ofproduction. Its advocates are, as far as I have been able to studytheir pronouncements, decidedly hostile to State Socialism andneedlessly rode to some of its most prominent preachers, such as Mrand Mrs Webb, who at least merit the respect due to those who havegiven lives of work to supporting a cause which they believe to besound and in the best interests of mankind. But in spite of theirchronic and sometimes ill-mannered facetiousness at the expense ofState Socialism and its advocates, the Guild Socialists, as we shallsee, have to rely on State control for very important wheels intheir machinery and leave gaps in it which, as far as disinterestedobservers can see, can only be filled by still further help from thediscredited State. It is no disparagement of the efforts of thesewriters and thinkers to say that their sketch of the system that theyhope to see built up is somewhat hazy. That is inevitable. They aregroping towards a new social and economic order which, in their hopeand belief, would be an improvement. To expect them to work it out inevery detail would be to ask them to commit an absurdity. The thingwould have to grow as it developed, and we can only ask them to showus a main outline. This has been done in many publications, amongwhich I have studied, with as much care as these distracting timesallow, "Self-Government in Industry, " by G. D. H. Cole, "NationalGuilds, " by A. R. Orage (so described on the back of the book, but thetitle-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 isa 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'srightful birthright, and (4) that this freedom is to be achievedthrough the establishment of National Guilds. As to (1) MessrsBechhofer and Reckitt speak on page 99 of their book of the "felony ofCapitalism" as a matter that need not be argued about. Mr Cole makesthe same assumption by observing on page 235 of the work alreadymentioned that "to do good work for a capitalist employer is merely, if we view the situation rationally, to help a thief to steal moresuccessfully. " Well, this view of capital and the capitalist may betrue. Mr Cole is a highly educated and gifted gentleman, and a Fellowof Magdalen. He may have expounded and proved this point in some workthat I have not been fortunate enough to read. But as the abolition ofthe capitalist is one of the chief aims put forward by these writersit seems a pity that they should thus first assert that he is a thiefto be stamped out, instead of explaining the matter to old-fashionedfolk who believe that capitalists are, in the main, the people (orrepresentatives of the people) who have equipped industry, andenormously multiplied its efficiency and output, and so have enabledthe greater part of the existing population of this country (and mostothers) to come into being. But to the Guild Socialists the identityof robbery with capitalism seems to be so self-evident that it needsno proof. Next, as to the wage system. They seem to think that to earna wage is slavery and degradation, but to receive pay is freedom. Withthe best will in the world I have tried to see where this immensedifference between the use of two words, which seem to me to mean muchthe 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 "theroot of the whole tyranny of capitalism, " and then continues:

"There are four distinguishing marks of the wage system upon whichNational Guildsmen are accustomed to fix their attention. Let me setthem out clearly in the simplest terms, "1. The wage system abstracts 'labour' from the labourer, so that theone can be bought and sold apart from the other. 

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

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

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

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

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

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

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

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

Now, looking with a most dispassionate eye and an eager desire to findout what it is that Labour and its spokesmen are grouping after, canone find in these "marks of degraded status" any serious evil, oranything that is capable of remedy under any conceivable economicsystem? In all of them the wage-earner is on exactly the same footingas the salary-earner or the professional piece-worker. The labour ofthe manager of the works can also be abstracted from the manager, andcan be bought and sold apart from him. One would have thoughtthat this fact is rather in favour of the manager and of thewage-earner--or would Mr. Cole prefer that the latter should be boughtand sold himself? The salary-earner and the professional are onlyemployed when somebody wants them. The manager's term of employment islonger, but the professional pieceworker, such as I am when I writethis article, has usually no contracted term, and is only paid foractual work done. I also have no control over the organisation of theproduction of _Sperling's Journal_ or any other paper for which I dopiecework. I am very glad that it is so, for organising production isa very difficult and complicated and risky business, and from allthe risks of it the wage-earner is saved. The salary-earner or theprofessional, when once his product is turned out and paid for, alsosurrenders all claim upon the product. What else could any reasonablewage-earner or professional expect or desire? The brickmaker or thedoctor cannot, after being paid for making bricks or mending a brokenleg, expect still to have the bricks or the leg for his very own. Andhow much use would they be to him if he could? Unless he were to beallowed to sell them again to somebody else, which, after being oncepaid 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 theworker must be secured "payment as a human being, and not merely as amortal tenement of so much labour power for which an efficient demandexists. " This, especially to an incurably lazy person like myself, isan extremely attractive programme. To be paid, and paid well, merelyin return for having "taken the trouble to be born, " is an idealtowards which my happiest dreams have ever struggled in vain. Butwould it work as a practical scheme? Speaking for myself, I canguarantee that under such circumstances I should potter about withmany activities that would amuse my delicious leisure, but I doubtwhether any of them would be regarded by society as a fit return forthe pleasant livelihood that it gave me. And human society can only besupplied with the things that it needs if its members turn out, notwhat 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, inmy humble judgment, to be entirely unsocial As things are, nobody canmake money unless he produces what somebody wants and will pay for. Even the capitalist, if he puts his capital into producing an articlefor which there is no demand, will get no return on it. In otherwords, we can only earn economic freedom by doing something that ourfellows want us to do, and so co-operating in the work of supplyingman's need. (That many of man's needs are stupid and vulgar is mosttrue, but the only way to cure that is to teach him to want somethingbetter. ) The Guildsmen seem to think that this necessity to make or dosomething that is wanted implies slavery, and ought to be abolished. They are fond of quoting Rousseau's remark that "man is born free andis everywhere in chains. " But is man born free to work as and on whathe likes? In a state of Nature man is born--in most climates--underthe sternest necessity to work hard to catch or grow his food, to makehimself clothes and build himself shelter. And If he ignores thisnecessity 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 makessociety responsible for the subsistence of all those born under itswing; but it is not part of the scheme of the universe. 

Such are a few of the weaknesses involved by the theoretical basison which Guild Socialism is built. When we come to its practicalapplication we find the creed still more unsatisfactory. Even ifwe grant--an enormous and quite unjustified assumption--that theGuildsman, if he is to be paid merely for being alive, will work hardenough to pay the community for paying him, we have then to ask howand whether he will achieve greater freedom under the Guilds thanhe has now. Now, freedom is only to be got by work of a kind thatsomebody wants, and wants enough to pay for it. And so the consumerultimately decides what work shall be done. The Guildsman says thatthe producer ought to decide what he shall produce and what is to bedone with it when he has produced it. "Under Guild Socialism, " saysMr Cole, [1] "as under Syndicalism, the State stands apart fromproduction, and the worker is placed in control. " Very well, but whatone wants to know is what will happen if the Guilds choose to producethings that nobody wants. Will they and their members be paid all thesame? Presumably, since they are to be paid "as human beings" and notbecause there is a demand for their work. But if so, what will happento the Guildsman as consumer? There will be no freedom about hischoice of things that he would like to enjoy. And what about admissionto membership of a Guild, the price at which the Guilds will exchangeproducts one with another, and the provision of capital? The nearestapproach to an answer to these questions is given by Messrs Bechhoferand Reckitt in Chapter VIII, of the "Meaning of National Guilds. " Thischapter describes "National Guilds in Being. " It tells us that "eachman will be free to choose his Guild, " which sounds very pleasant, but is completely spoilt by the end of the sentence, which says "andactual entrance will depend on the demand for labour. " It sounds justlike 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 obtainan entry elsewhere. " Most sensible, but where is the freedom? TheGuildsman will not be able to do the work that he wants to do unlessthere 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 tocleaning the streets and flushing the drains. Messrs. Bechhofer andReckitt are, in fact, so sensible and practical that they abandonaltogether the freedom of the producer to produce what he likes. "Indeed, " they write, "a query often brought to confound NationalGuildsmen is this: What would happen to a National Guild that began towork wholly according to its own pleasure without regard to the otherGuilds and the rest of the community? We may reply, first, thatthis spirit would be as unnatural among the Guilds as it is naturalnowadays with the present anti-communal, capitalist system ofindustry" (but under the present system any one who worked withoutregard to the rest of the community would very soon be in the hands ofa Receiver); "secondly, if it did arise in any Guild, this contemptfor the rest of the community would be met by the concerted actionof the other Guilds. The dependence of any individual Guild upon theothers would be necessarily so great that a recalcitrant Guild wouldfind itself at once in a most difficult position, and a Guild thatpressed forward demands that were generally felt by the rest of thecommunity to be impossible or unreasonable would soon be brought backinto line again. "

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

Of course; but if so, where is the Guildsman's alleged freedom? EveryGuild and every Guildsman would have to adapt himself to the wants ofthe community, just as all of us who work for our living have to donow. He would be no more free than I am, and I am no more free thanthe person who is sometimes described as a "wage slave. " The Guildsmanmight be happier in the feeling that he worked for a Guild rather thana capitalist employer, but this is by no means certain. The writersjust quoted show with much frankness and good sense that there wouldbe plenty of opening for friction, suspicion, discontent and strikes. "A Guild, " they say, "that thought itself ill-used by its fellowswould 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 qualifiedto judge" of their ability, whoever they may be, and every such choicewould be ratified by the workers who are to be affected by it. "TheGuild would build up in this way a pyramid of officers, each chosen bythe grade immediately below that which he is to occupy, " Did not theBolsheviks try something like this system, with results that were notconducive to efficient production? And to meet the danger that theofficials as a whole might combine "in a huge conspiracy againstthe rank and file, " Messrs Bechhofer and Reckitt can only suggestvigilance committees within the Guilds. In a word, Guild Socialismseems to be a system that might possibly be worked by a set of ideallyperfect beings; but as folk are in this workaday world one can onlydoubt whether it would be conducive either to freedom, efficiency or apleasant life for those who lived under it. 

XV

POST-WAR FINANCE

_November_, 1918

Taxation after the War--Mr. Hoare's Scheme described and analysed--ThePosition of the Rentier--Estimates of the Post-War Debt--TheCompulsory Loan Proposal--What Advantages has it over a Levy onCapital?--The Argument from Social Justice--Questions still to beanswered--The Choice between a Levy and Stiff Taxation--Are we stilla Creditor Nation?--Our Debt not a Hopeless Problem--Suggestions forsolving it. 

Under this heading two very interesting articles were contributed tothe 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 endof the war has been brought appreciably nearer by the feats of theAllied 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 bythe bad finance of the war, the low proportion of its cost that hasbeen paid for out of taxation, and the consequent huge debt withwhich--it is already over £7000 millions gross--the State will besaddled? Mr. Hoare answered the question by proposing a scheme oftaxation 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 jointstock companies or sleeping partnerships. " He added that in hisopinion earned income above a certain figure might reasonably be addedto this category on the ground that it has, in some instances, verymuch the same characteristics as unearned; the income of a "successfulprofessional man or clown or jockey or opera star" being due topeculiar qualities; "and it would be no great hardship if earnedincome above, say, a thousand a year for a married couple, with anadditional three hundred for every child under twenty-five years ofage were regarded as unearned, and taxed accordingly. " Income wasthus the basis of Mr Hoare's scheme. Rente he regards as an agencyregulating distribution, and requiring to be constantly checked. "Itis, " he says, "an elementary principle of social health, and economicprosperity that the share of the national wealth enjoyed by theRentier, by the owner, that is, of unearned income, should not beexcessive, " Most people who can follow his admirable example and takea detached and unbiassed view of questions which affect their pocketso closely, will agree with him In this opinion. The Rentier lives onthe 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 toofat at the expense of those who are working now, lest the latter bediscouraged and work with less spirit. 

At the same time we have to remember that the work done in the past bythe Rentier or those whom he represents, has given us the plant andequipment (in the widest sense of the phrase) with which we are nowworking. If, therefore, we penalise the Rentier too severely we shalldiscourage his future creation; the present race of earners, if theysee that those who are living on past savings are shorn too closewill be deterred from saving, will put their surplus earnings intoextravagant spending instead of into plant and equipment, and theeconomic future of the nation, and of the world, will be _pro tanto_less hopeful. If once our fiscal system is going to propagate theview--already so rampant among the happy-go-lucky citizens of thisunthrifty people--that the worst thing to do with money is to save itthere will be bad times ahead for our industry and commerce, which canonly get the capital that it needs if somebody saves it. Mr Hoare'selaborate calculations led him to conclusions involving a tax of11s. 6d. In the pound on unearned income. This figure is, I hope, needlessly high. To arrive at it he assumed that peace might beconcluded towards the end of 1919, and that when peace conditions arefully re-established--which will take, he thinks, three years, theNational Debt will amount to £10, 000 millions, involving annualinterest of £500 millions, which, added to the total Rente of thecountry in 1913 (which he made out to be £520 millions), will make atotal Rente in 1923 of £1020 millions. His view is that the burden ofthe National Debt should be thrown by means of the income tax upon thenational Rente, not taxing it out of existence, but by such a scale oftaxation as would reduce the net Rente of the country to approximatelythe level at which it stood before the war. 

There is good reason to hope that Mr Hoare's figures will not bereached. He took £10, 000 millions merely as a round sum. Mr Bonar Law, it will be remembered, worked out our net debt on March 31st next at£6856 millions, taking credit for half the estimated amount of loansto Allies as a good asset. If we prefer as sounder bookkeeping towrite off the whole of our loans to Allies for the time being andto apply anything that we may hereafter receive on that account toSinking Fund, the debt, on the Chancellor's figures, will amount onMarch 31st (if the war goes on till that date) to £7672 millions. Evenif the war went on for six months more it ought not to bring the debtup to more than £9000 millions at the outside. It is quite true, asMr Hoare says, that the return to peace conditions will be a gradualprocess, and that expenditure will not come back to a peace basis allat once. Demobilisation and other matters which were left, by ourcheery Chancellor, out of the airy after-war balance-sheet that he solight-heartedly constructed, may cost £1000 millions or more beforewe have done with them. But against them we can set a string ofrecoverable assets which, in the Chancellor's hands, footed up a totalof £1172 millions--balances in agents' hands, due debts (apart fromloans to Allies), land, securities, ships, buildings, stores InMunitions 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 £620 millions, "or enough to provide forthe interest of the debt with a 1 per cent. Sinking Fund, andleave £20 millions towards the Supply Services. " But Mr Bonar Lawanticipated a total peace Budget (if the war ended by March 31st next)of £650 millions. This was probably too low, but we may at least hopethat Mr Hoare has gone rather further than was necessary to be on thesafe side. 

In the other article on the subject of post-war debt contributed tothe last number of this Journal, an "Ex-M. P. " plumped for a somewhatnovel variety of the Levy on Capital, in the shape of a CompulsoryLoan, bearing no interest and repayable in 100 years. Each individualcitizen to be made to subscribe to the extent of 20 per cent. Ofhis possessions. Ten per cent. Of the amount due to be paid onapplication, 10 per cent. Six months after allotment, and 80 per cent. On January 1st of the following year. When desired, the Government toadvance at 5 per cent. The money necessary for the payment subsequentto allotment, full repayment of such advances to be made withineight years. A Sinking Fund to be established to redeem the loan atmaturity. But is there any real advantage in this scheme over the Levyon Capital, from which it only differs by the receipt by the payer ofa promise to repay in 100 years' time? The approximate value of£1000 nominal of the Compulsory Loan stock would be, according to"Ex-M. P. 's" calculation, in the year of issue £7 12s. , money beingworth 5 per cent. And assuming that rate to be current during theremainder 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 £1000 and received asecurity, the present value of which might be below £10. They mightvery likely think that outright confiscation (since confiscationoriginally means nothing but "putting into the Treasury") is really asimpler way of dealing with the problem. "Ex-M. P. , " however, estimatesthat the immediate redemption of £2800 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 3-1/2per cent. Stock. This may be true, but if so it is equally true if asimilar or larger amount of debt is cancelled by means of an outrightLevy on Capital. 

The merits and demerits of a Levy on Capital have already been dealtwith in the pages of this Journal "Ex-M. P. , " however, brought forwarda slightly novel form of argument in its favour. He pointed out thatthe money constituting the great increase in debt that has taken placeduring the war will have been, in the main, contributed by people whohave worked at home under the protection of the Army and Navy, whilethe soldiers and sailors have been prevented by the duty which sentthem out to risk their lives from subscribing a proportionate share tothe National Debt. Hence "a class that deserves most of the State willfind itself indebted to a class which--if it does not deserve least ofthe State--has, at any rate, turned a national emergency to personalprofit. " This is a strong argument, which, has been used frequentlyin the course of the war in the pages of the _Economist_, againstborrowing for war purposes to the large extent to which our timidrulers have adopted the policy. "To be really just, " the writercontinued, "the process of taxation ... Must be applied with greatestforce to those who have accumulated their money since the outbreak ofwar, and only to a less degree to those whose fortunes have not beenbuilt upon their country's necessity. The difficulty of separatingthese two classes of wealth is great, and must, in the writer'sopinion, be effected by separate legislation--legislation which mightjustly be based upon the increase in post-1913 incomes, a record ofwhich should now be in preparation at Somerset House. " Everyone willagree that everything possible should be done to take the burden ofthe war debt off the shoulders of those who have fought for us; but itis equally clear that now that the mischief of this huge debt has beendone, it will be exceedingly difficult to repair it by any ingenuitiesof this kind. For instance, if the kind of taxation--in the shape ofa Compulsory Loan--proposed by "Ex-M. P. " were enforced, how can we besure that it would not take a large slice off capital, the next heirto which is a soldier or a sailor? Bad finance is so much easier toperpetrate than to remedy that one is almost certain to come acrosssuch 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 thewar debt represents the gains of those who "have turned a nationalemergency to personal profit. " Some people whose incomes have beenactually decreased by the war, especially when currency depreciationis taken into account, have, in response to the appeals of theWar Savings Committee, saved more than they ever saved before bypatriotically stinting themselves. And even the savers who have savedout of war profits were so far more patriotic than the war profiteerswho did not save but squandered. In all the discussion concerningthe Levy on Capital I have not seen any answer (even in Mr PethickLawrence's very persuasive little book in its favour) to the threegreat objections to it (1) that it lets off the squanderer andpenalises the saver; (2) that the difficulty, trouble and expenseinvolved by the necessary valuation, and the iniquities and fraudsthat are almost certain to arise out of it, will be enormous; and(3) that its economic effect may be very serious in discouragingaccumulation. "Why should any one save, " the unthrifty soul will mostnaturally ask, "if his savings are liable to have a slice cut out ofthem 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; assumethat it can be done once and for all and never again. "Take one-fifthof 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 youpersuade him that it is an emergency measure not to be repeated? Howcan you be sure that it is so? I have heard a very distinguishedSocialist, discussing in private the beauties of the Levy on Capital, point out that it is the sort of thing which, when once the ice hasbeen broken, can be done again so easily. From the Socialist point ofview the Levy on Capital is, of course, a simple means of getting, byrepetitions of it at regular intervals, all the means of productioninto the hands of the State; but would the State make a good use ofthem?

Another assumption about the Levy on Capital that seems to me to bethe merest will o' the wisp is the delusion that the whole saving thatit would entail by reducing the debt charge would necessarily andcertainly go to the relief of income tax. On this assumption MrPethick Lawrence bases his most persuasive appeal to the smallerincome-tax payer, by showing that he would be better off after a Levyon Capital than before it, thanks to the reduction in income tax, which is assumed as axiomatically arising in its train. But isthis certain or even likely? Is it not much more probable that ourGovernment, finding its post-war Budget greatly lightened by a Levy onCapital or a Compulsory Loan to redeem debt, will think itself free toindulge in extravagance, maintaining a considerable part of the warincome tax and wasting it on rash experiments? All these weaknesses, which appear to be inherent alike in the Levy on Capital or in thescheme which gilds the pill by calling it a Compulsory Loan, seem tobe ignored or neglected (perhaps because they are unanswerable) bytheir advocates. On the other hand, there are certain psychologicalarguments on the other side. If the well-to-do, who would have to paythe Levy or subscribe to the Compulsory Loan, would prefer that systemto a high income tax, there is no more to be said. A tax that ispopular with the payer, as compared with other modes of shearinghis fleece, needs no further recommendation. But, in view of theprobability of the experiment, once tried, being shortly andfrequently repeated, I Very much doubt whether this is so; as far as Ihave been able by personal inquiry to test opinion on the point I havefound it almost unanimously adverse among those whom the Levy wouldmost seriously affect. If, as is much more likely, the imposition ofa Levy created better feeling among the working classes and thereturning soldiers and tended to more harmonious co-operation inafter-war tasks of reconstruction, it might be worth while to face itsevils and its dangers. But here again it is quite probable that if theburden of war debt were clearly and palpably put on the shoulders bestable to bear it, that is, on those who are lifted by the giftsof fortune--either in inherited money or unusual brainpower orfaculties--by an equitably graded income tax, the effect might be justas good on the minds of those who suspect that the rich have battenedthroughout the war on exploitation of the poor. 

This much at least seems to be agreed by most reasonable people aboutthe debt charge--that it will have to be raised, either by a Levy onCapital or by income tax or some other form of direct taxation, fromthose who are blessed with a margin. We are not likely to repeat ourancestors' mistake, after the Napoleonic War, of throwing the wholeburden on to the general consumer by indirect taxation of necessariesand of articles of general consumption. Even Tariff "Reformers" saylittle about the revenue that their fiscal schemes would bring in. Andwith good reason. For in so far as they secured Protection they wouldbring in no revenue; we cannot at once keep out foreign goods and taxthem; and any revenue that they brought in would be most expensivelyraised, because a large part of the extra price paid by the consumerwould 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 boldexample--for paying off debt by a huge issue of inconvertiblecurrency, will achieve any practical result. Not only would theydefraud the debt-holder by paying him off in currency enormouslydepreciated by the multiplication of it that would be involved; butthey would also, by that depreciation, throw the burden of the debton the shoulders of the general consumer through a further disastrousrise in prices, and so would accentuate the bitterness and discontentalready rife owing to the war-time dearness and all the suspicions ofprofiteering and exploitation that it has engendered. 

After all, this problem of the war debt, in so far as it is held athome, 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 ofpaying for it will begin. That is not really so. The war has been paidfor as it went on, and, except in so far as it has been financed byborrowing abroad, it has been paid for by us as a nation. Whatever wehave used for the war we have paid for as it went on, partly withthe help of loans from America and from other countries--Argentina, Holland, Switzerland, etc. --that have lent us money. These loansamount, as far as they can be traced from the official figures, to about £1300 millions. Against them we can set our loans to ourDominions, over £200 millions (a perfectly good asset), and our loansto our Allies, perhaps £1500 millions, which the Chancellor proposesto write down by 50 per cent. , and might perhaps treat still moredrastically. To meet this foreign debt we shall have to turn out somuch stuff--goods and services of all kinds--for sale abroad to meetthe interest and repayment. We have further impoverished ourselves byselling our foreign securities abroad No figure has been publishedgiving any clue to the amount of these sales, and we may perhaps guessthem at £1000 millions. If the pre-war estimates of our overseasinvestments at £4000 millions were anywhere near the mark. It thusappears 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 bythose who bought the securities offered, and we have now to pay theminterest and set about repaying them the capital. This processwill not diminish the national wealth, but will only affect itsdistribution. It will not diminish the amount of available capital, but may even rather increase it by gathering into the hands of thedebt-holders--who are ex-hypothesi folk with an inclination forsaving--money that might, if left in the hands of those from whom itis collected, have been squandered. The payment of the debt chargemerely means that those who came forward with their money when theywere asked to subscribe to war loans, have, according to the extentof the effort that they then made, a set-off against the subsequenttaxation involved by the war debt. It would have been a much simplerand more businesslike proceeding to have taken, instead of borrowing, a much larger proportion of the war's cost during the war; but it istoo late now to rub in this platitude which is now pretty generallyadmitted. Mr Hoare showed in last month's Journal that the creationof the War Debt has caused a huge addition to what he has calledRente--the gross income of the propertied classes; and there is muchlogic in his contention that this income is the source from which thedebt charge should be met. At the same time both justice and economicexpediency seem to demand that his wider interpretation of Rente, tomake it include the earnings of those whose special qualifications(or, we may add, special luck) put them in a position to earn moreeasily than the struggling majority, should be applied to taxationinvolved by the debt charge. 

How, then, shall we deal with the debt? In the first place we wanta good Sinking Fund--1 per cent. At least--and all realisations ofassets in the shape of loans repaid, ships, etc. , sold, should beused for reduction of our foreign debt. For the home charge we want aspecial form of income tax that will fall as lightly and indirectlyas possible on industry; that is, that it should be imposed on theindividual taxpayer direct. So that what we want is an extended, reformed and better graduated form of the super-tax brought down solow that every one who is not merely rich but comfortable should payhis share, For example, any single man or woman with any excess over£500 a year of unearned income, or over £800 a year of earned incomemight well pay super-tax on that excess. The exemption limit mightwell be raised by 50 per cent. For married couples (if their jointincomes are still to be counted as one), and by £100 a year for eachchild between the age of five and twenty-five. But all these figuresare mere suggestions, and the details of the scheme would have to beworked out by Inland Revenue officials, whose experience and knowledgeof the practical working of such matters qualifies them for the task. The broad principle is a special tax for the debt charge to be raiseddirect from individual incomes with skilful differentiation, accordingto the circumstances of the taxpayer, in the matter of the numberof his dependants, and also according to the source of the income, whether it is being earned by exertions which illness might terminateor received from invested funds, and therefore beyond the reach of the"slings and arrows of outrageous fortune. " That portion of the taxthat is required for Sinking Fund might be made payable, at the optionof the taxpayer, in Government securities at prices giving someadvantage to the holder. This form of special debt-charge super-taxwould enable the ordinary income tax to be reduced considerably atonce. Mr Edward Lees, secretary to the Manchester and County Bank, hasput forward a scheme by which taxpayers can buy in advance immunityfor so many years from so much annual income tax. If this suggestioncould be worked it might provide a means of quickening the debt'srepayment, though it looks rather like exchanging one form of debt foranother. But, in any case, it is urgent that the long promised reformof income tax should be set in hand at once, so that it may be purgedof its present inequities and anomalies and set to work in peace toredeem debt on a new and more scientific basis. 

XVI

THE CURRENCY REPORT _December_, 1918

Currency Policy during the War--Its Disastrous Mediaevalism--TheReport of the Cunliffe Committee--A Blast of Common Sense--TheCondemnation of our War Finance--Inflation and the Rise in Prices--TheFigures of the Present Position--The Break in the Old Relation betweenLegal Tender and Gold--How to restore it--Stop Borrowing and reducethe Floating Debt--Return to the Old System--The Committee's SaneConservatism--A Sound Currency vital to National Recovery. 

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

A less important but still very objectionable consequence of the floodof currency and credit that the Government has poured out to fill agap in its war finance is the encouragement that it has given to ahost of monetary quacks who believe that all the financial ills ofthe world can be saved if only you give it enough money to handle, oblivious of the effect on prices of mere multiplication of claims togoods without a corresponding increase in the volume of goods. Theseenthusiasts have seen that during war a Government can produce moneyas fast as it likes, and since they think that producing money makesevery one happy they propose to adopt this simple method for payingoff war debt, restarting trade and generally creating a monetarymillennium. How far their nostrums are likely to be adopted, noone can yet say, but some of the utterances of our rulers make oneshudder. 

Into this atmosphere of quackery and delusion the report of theCommittee on Currency and Foreign Exchanges breathes a refreshingblast of sound common sense. Everybody ought to read it. It costs buttwopence; it is only a dozen pages long, and it is described (if youwant to order it) as Cd. 9182. In view of the many attacks that havebeen made on our banking system--especially the Bank Act of 1844--byChambers of Commerce and others before the war, it is rathersurprising that so little criticism should have been heard of thisReport, which practically advocates a return, as rapidly as possible, to the practice and principles imposed by that Act. It may be thatpeace, and all the preoccupations that have followed it, have absorbedmen's minds so entirely that questions of currency seem to be anuntimely irrelevance; or possibly the very heavy weight of theCommittee's authority may have silenced the opposition to itsrecommendations. Presided over by Lord Cunliffe, the late Governor ofthe Bank, and including Sir John Bradbury and Professor Pigou and animposing list of notable bankers, it was a body whose opinioncould only be challenged by critics gifted with the most sereneself-confidence. 

One of the most interesting--especially to advocates of soundfinance--points in its Report is the implied condemnation that itpronounces on the methods by which the war has been financed by ourrulers. It points out that "the need of the Government for fundswherewith to finance the war in excess of the amounts raised bytaxation or by loans from the public has made necessary the creationof credits in their favour with the Bank of England.... The balancescreated by these operations passing by means of payments tocontractors and others to the Joint Stock banks have formed thefoundation of a great growth in their deposits, which have alsobeen swelled by the creation of credits in connection with thesubscriptions to the various War Loans.... The greatly increasedvolume of bank deposits, representing a corresponding increase ofpurchasing power and, therefore, tending in conjunction with othercauses to a great rise of prices, has brought about a correspondingdemand for legal tender currency which could not have been satisfiedunder the stringent provisions of the Act of 1844. " Here we have thestory of bad war finance put as clearly as it can be. Because theGovernment was not able to raise all the money needed for the war onsound lines--that is, by taxation and loans to it of money saved byinvestors--it had recourse to credits raised for it by the Bank ofEngland and the other banks against Treasury Bills, Ways and MeansAdvances, War Loans, War Bonds, and loans to customers who were takingup War Loans, etc. Thereby as these credits created fresh depositsthere was a huge increase in the community's purchasing power; andsince the supply of goods to be purchased was stationary or reduced, the only result was a great increase in prices which made the war, perhaps, nearly twice as costly as it need have been and producedall the suspicion and unrest that has already been referred to. Considering that the Committee included an ex-Governor of the Bankand the Permanent Secretary to the Treasury it could hardly have beenexpected to use much plainer language concerning the failure of ourrulers to get money out of us in the right way for the war andthe vigour with which they made use of the demoralising weapon ofinflation. 

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

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

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

"Fiduciary Issue of the Bank of England £18, 450, 000

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

"Estimated amount of gold coin heldby Banks (excluding gold coin heldin the Issue Department of theBank of England) and in publiccirculation 123, 000, 000 ___________"Grand total £179, 926, 000 ___________

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

"Fiduciary Issue of the Bank of England 18, 450, 000Currency Notes not covered by gold 230, 412, 000 ___________"Total Fiduciary Issues [1] £248, 862, 000Bank of England Notes issued against coin and bullion 65, 368, 000Currency Notes covered by gold 28, 500, 000Estimated amount of gold coin held by Banks (excluding gold coin held by Issue Department of Bank of England), say 40, 000, 000 ___________"Grand total £382, 730, 000

"[Footnote 1: The notes issued by Scottish and Irish banks which havebeen made legal tender during the war have not been included in theforegoing figures. Strictly the amount (about £5, 000, 000) by whichthese issues exceed the amount of gold and currency notes held bythose banks should be added to the figures of the present fiduciaryissues given above. ]

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

It will be noted that the gold held by the banks (other than the Bankof England) and by the public has declined from £123 to £40 millions, according to the Committee's estimate, while, on the other hand, thecirculation of bank notes has risen by £27 millions and the issue ofcurrency notes has taken place to the tune of £259 millions (at thedate of the Report; it is now nearly £300 millions), making a netaddition to legal tender currency of over £200 millions. When wealso remember that there has been a very heavy coinage of silver andcopper, that the Bank of England's deposits have risen by over £100millions and the deposits of the other banks by nearly £700 millions, and all this at a time when most of the industrial activity of thecountry was going into the production of destructive weapons and thesupport of those who were using them, the behaviour of commodities ofordinary use in rising by nearly 100 per cent. Seems to be an exampleof remarkable moderation. With all this new buying power in the handsof the community there is little wonder that some people shouldthink that we have enormously increased our wealth during this mostdestructive and costly war, and should then feel hurt and disappointedwhen they find that this new buying power is robbed of all itsbeauty by the fact that its efficiency as buying power is seriouslydiminished by its mere quantity. 

Such being the state of affairs--a great mass of new credit andcurrency based on securities--it is clear that our currency has beendeprived for the time being of that direct relation with its goldbasis that used in former time to regulate its volume according toworld prices and our international trade position. As the Committeesays, "It is not possible to judge to what extent legal tendercurrency may in fact be depreciated in terms of bullion. But it ispractically certain that there has been some depreciation, and to thisextent therefore the gold standard has ceased to be effective. " Verywell, then, what has to be done to get back to the old state of thingsunder which there was a more or less automatic check on the creationof credit and the issue of currency? This check worked by a systemwhich was elastic and simple. It was not entirely automatic, becauseits working had to be controlled by the Bank of England, which, by theaction of its discount rate, could, more or less, quicken or check theworking of the machine. Legal tender currency could only be increasedby imports of gold; and exports of gold reduced the available amountof legal tender currency; and since a stock of legal tender currencywas essential to meet the demands upon them that bankers madepossible by creating credits, there was thus an Indirect and variableconnection between the country's gold stock and the extent to whichbankers would think it prudent to multiply credits. If credits weremultiplied too fast, our currency was depreciated in value as comparedwith those of other countries and the exchanges went against us andgold either was exported or began to look as if it might be exported. If it was exported the legal tender basis of credit was reduced andthe creation of credit was checked. If the Directors of the Bank ofEngland thought it inadvisable that gold should be exported theycould, by raising the rate of discount and taking artificial measuresto control the supply of credit, produce, without the actual loss ofgold, the effects which that loss would have brought about. 

The keystone of the system was the rigid link between legal tendercurrency and gold. This was secured by the provisions of the Bank Actof 1844, which laid down that above a certain line--which was beforethe war roughly £18-1/2 millions--every Bank of England note issuedshould have gold behind it, pound for pound. In other words, the Bankof England note was, for practical purposes, a bullion certificate. The legal limit on the fiduciary issue (that is, the issue of £18-1/2millions against securities, not gold) could only be exceeded by abreach of the law. The many critics of our banking system seized onthis hard-and-fast restriction and accused it of making our systeminelastic as compared with the German arrangement, under which thelegal limit could at any time be exceeded on payment of a tax or fineon any excess perpetrated. These critics might have been right iflegal tender currency had been the only, or even the predominant, means of payment in England. But, as every office boy knows, it wasnot. Legal tender--gold and Bank of England notes--was hardly everseen in commercial and financial transactions on a serious scale. Wepaid, sometimes, our retail purchases of goods and services in gold;and Bank notes were a popular mode of payment on racecourses and inother places where transactions took place between people who were notvery certain of one another's standing or good faith. But the greatbulk of payments was made in the cheque currency which our bankers haddeveloped outside of the law and could create as fast as prudence--andan eye to the supply of legal tender which every holder of a chequehad a right to demand--allowed them to do so. While cheques providedthe currency of commerce, another form of "money" was produced, againwithout any restriction by the Act, by the pleasant convention whichcaused a credit in the Bank of England's books to be regarded as"cash" for balance-sheet purposes by the banks. These advantagesgave the English system a freedom and elasticity, in spite of thestrictness of the law that regulated the issue of paper currency, thatenabled it to work in a manner that, judged by the test of practicalresults, had one great advantage over that of any of the rivalcentres. It alone in days before the war fulfilled the functions of aninternational banker by being ready at all times and without questionto pay out the gold that was, in the last resort, the final means ofsettling international balances. 

It is the object of Lord Cunliffe's Committee to restore as quicklyas possible the system which, has thus been tried by the test ofexperience, "After the war, " they say in their Report, "our goldholdings will no longer be protected by the submarine danger, and itwill not be possible indefinitely to continue to support the exchangeswith foreign countries by borrowing abroad. Unless the machinery whichlong experience has shown to be the only effective remedy for anadverse balance of trade and an undue growth of credit is oncemore brought into play there will be very grave danger of a creditexpansion in this country and a foreign drain of gold which mightjeopardise the convertibility of our note issues and the internationaltrade position of the country.... We are glad to find that there wasno difference of opinion among the witnesses who appeared before us asto the vital importance of these matters. " The first measure that theyput forward as essential to this end is the cessation at the earliestpossible moment of Government borrowings. "A large part of the creditexpansion arises, as we have shown, from the fact that the expenditureof the Government during the war has exceeded the amounts which theyhave been able to raise by taxation or by loans from the actualsavings of the people. They have been obliged therefore to obtainmoney through the creation of credits by the Bank of England and theJoint Stock banks, with the result that the growth of purchasing powerhas exceeded that of purchasable goods and services. " It is thereforeessential that as soon as possible the State should not only livewithin its income but should begin to reduce indebtedness, especiallythe floating debt, which, being largely held by the banks, has beena cause of credit creation on a great scale. "The shortage of realcapital must be made good by genuine savings. It cannot be met by thecreation of fresh purchasing power in the form of bank advances tothe Government or to manufacturers under Government guarantee orotherwise, and any resort to such expedients can only aggravate theevil and retard, possibly for generations, the recovery of the countryfrom the losses sustained during the war. " With these weighty wordsthe Committee brushes aside a host of schemes that have been urged forputting everything right by devising new machinery for the manufactureof new credit. That new credits will be needed for industry after waris obvious, but what else are our banks for, if not to provide it?They can only be set free to provide it on the scale required if, bythe necessary reduction of the floating debt, they are relieved of thelocking up of their funds in Government securities, which has been oneof the bad results of our bad war finance. 

It goes without saying that the Committee does not recommend thecontinuance in peace of the differential rates for home and foreignmoney that were introduced as a war measure with a view to loweringa rate at which the Government borrowed at home for war purposes. Itwould evidently be too severe a strain on human nature to attempt towork such a system, except in war-time, when the artificial conditionsby which the market was surrounded made it both feasible and desirableto do so. With regard to the note issue, the Committee proposes areturn to the old system and a strictly drawn line for the amount ofthe fiduciary note issue, the whole note issue (with the exception ofthe few surviving private note issues) being put into the hands of theBank of England, all notes being payable in gold in London onlyand being made legal tender throughout the United Kingdom. Thesesuggestions are subject to any special arrangements that may be madewith regard to Scotland and Ireland. An early resumption of thecirculation of gold for internal purposes is not contemplated. Thepublic has become used to paper money, which is in some ways moreconvenient and cheaper; and the luxury of a gold circulation is onethat we can hardly afford at present. Gold will be kept by the Bank ofEngland in a central reserve, and all the other banks should, it issuggested, transfer to it the whole of their present holdings of themetal. In order to give the Bank of England a closer control of thebullion market the Committee thinks it desirable that the export ofgold coin or bullion should, in future, be subject to the conditionthat such coin or bullion had been obtained from the Bank for thepurpose. This measure would give the Bank of England a very closecontrol of the bullion market, so close that there is a danger thatif this control were too rigorously exercised, gold that now comes tothis country might be diverted, with a view to more advantageous sale, to other centres. The amount of the fiduciary issue is a matterthat the Committee leaves open to be determined after experience ofpost-war conditions. They "think that the stringent principles ofthe Act (of 1844) have often had the effect of preventing dangerousdevelopments, and the fact that they have had to be temporarilysuspended on certain rare and exceptional occasions (and those limitedto the earlier years of the Act's operation, when experience ofworking the system was still immature) does not, " in their opinion, invalidate this conclusion. So they propose that the separation of theIssue or Banking Departments should be maintained, but that in futureif an emergency arose requiring an increase in the amount of fiduciarycurrency, this should not involve a breach of the law, but should bemade legal (as it is now under the Currency and Bank Notes Act of1914), subject to the consent of the Treasury. 

It is not proposed at present to secure the circulation of paperinstead of gold by legislation. The Committee considers that "informalaction on the part of the banks may be expected to accomplish allthat is required. " If necessary, however, it points out thatthe circulation of gold could be prevented by making the notesconvertible, at the discretion of the Bank of England, into coin orbar gold. The amount which, in the opinion of the Committee, should beaimed at for the central gold reserve is £150 millions (a sum which isalready almost in sight on its figures quoted above); and "untilthis amount has been reached and maintained concurrently with asatisfactory foreign exchange position for a period of at least ayear, " it thinks that the policy of reducing the uncovered note issue"as and when opportunity offers" should be consistently followed. Howthis opportunity is going to "offer" is not made clear; but presumablya reflow of notes from circulation can only happen through a fall inprices or a reduction in bank deposits by the liquidation of advancesmade to the Government, directly or indirectly, by the banks. 

Concerning the difficult problem of replacing the Bradbury notes byBank of England notes of £1 and 10s. , an ingenious suggestion is madeby the Committee. It observes that there would be some awkwardnessin transferring the issue to the Bank of England before the futuredimensions of the fiduciary issue have been arrived at; and itsuggests that during the transitional period any expansion in Treasurynotes that may take place should be covered, not as now, by Governmentsecurities, but by Bank of England notes taken from the Bank. By thismeans any demands for new currency would operate in the normal way toreduce the reserve of the Banking Department, "which would have to berestored by raising money rates and encouraging gold imports, " and soa step would have been taken to getting back to a business basis inthe currency system and away from the profligate printing-press policyof the war period. 

Such are the suggestions made by this distinguished body for therestoration of our currency. Little has been said against them in theway of serious criticism, but their conservative tendency and thefact that they practically recommend a return to the _status quo_ hascaused some impatience among the financial Hotspurs who proposed tobegin to build a new world by turning everything upside down. Inmatters of finance this process is questionable, interesting as theresult would undoubtedly be. To get to work on tried lines and then, when once industry and finance have recovered their old activity, toamend the machine whenever it is creaking seems to be a more sensibleplan than to delay our start until we have fashioned a new heavenand earth, and then very probably find that they do not work. If themachine is to be set moving, it can only be done by close co-operationbetween the Bank of England and the other banks which have grown byamalgamation into institutions the size of which seem likely tomake the task of central control more difficult than ever. On thisimportant point the Committee is curiously silent. But it recommendsthe adoption of a suggestion made by a Committee of Bankers, whoproposed that banks should in future be required "to publish a monthlystatement showing the average of their weekly balance-sheets duringthe month. " (Will this requisition apply to the Bank of England?) Thisis a welcome suggestion as far as it goes, but unless something isdone by co-operative action to make the Bank rate more automatic inits influence on the actions of the other banks, the difficulty ofmaking it effective seems likely to be considerable. 

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

XVII

MEETING THE WAR BILL

_January_, 1919

The Total War Debt--What are our Loans to the Allies worth?--OtherUncertain Items--The Prospects of making Germany pay--The Right Way toregard the Debt--Our Capital largely intact--A Reform of the IncomeTax--The Debt to America--The Levy on Capital and other Schemes--Theonly Real Aids to Recovery. 

A table published week by week by the _Economist_ shows that fromAugust 1, 1914, to November 9, 1918, the Government paid out £8612millions sterling. From this we have to deduct an estimate of theamount that the Government would have spent if there had not been awar, so that we are at once landed in the realm of conjecture. Thelast pre-war financial year saw an expenditure of £198 millions, andit is safe to assume that this figure would have swollen by a fewmillions a year if peace had continued, so that we may take at least£860 millions from the above total as normal peace expenditure for the4-1/2 years. This gives us £7752 millions as the gross cost of thewar, as far as the period of actual fighting is concerned. From thisfigure, however, we are able to make some big deductions. There areloans to Allies and Dominions, and some other much more readilyrealisable assets than these. We do not know the actual figure of theloans to Allies and Dominions during the war period, because they arenot included in the weekly financial statements. The amount that weborrow abroad is set out week by week--at least, that is believed tobe the meaning of the cryptic item "Other Debt"--but the amount thatwe lend to Allies and Dominions is hidden away in the Supply Servicesor somewhere, and we only get occasional information about it from theChancellor in the course of his speeches on the Budget or on Votes ofCredit. In his last Vote of Credit speech, on November 12, 1918, MrBonar Law gave the chief items of the loans to Allies, and a veryinteresting list it was. The totals up to October 19, 1918, were £1465millions to Allies and £218-1/2 millions to Dominions. The Allieswere indebted to us as follows:--Russia, £568 millions; France, £425millions; Italy, £345 millions; smaller States, £127 millions. [1]

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

Some of these debts may be written off at once, and that cheerfully, seeing that they have been lent brothers-in-arms who have beenhit much harder than we have by the war, and had nothing like ourfinancial strength. The question is, what figure ought we to put onthis asset in deducting it from gross war expenditure in order toarrive at a guess at the real cost? We take our loans to Dominions, ofcourse, as good to the last penny. Mr Bonar Law, in his Budget speechlast April, took our loans to Allies at half their face value. Strictbookkeeping would probably demand a lower figure than 50 per cent. ;but let us follow the ex-Chancellor's example and take loans toAllies, which we will estimate at £1480 millions up to November 9th, as good for £740 millions, and loans to Dominions at £220 millions upto the same date, a total of £960 millions, to be deducted from grosswar cost. Concerning £740 millions of this sum, however, there is acertain amount of doubt. No one questions for a moment the solvencyof France and Italy, but in view of the pressure that the war hasexercised on their producing power, and, in the case of France, thecomplication added by the uncertainties of the position in Russia, inwhich French investors are so deeply interested, one cannot feel surethat they will be able at once to make interest payments. Much willdepend on the sums that they are able to recover from Germany againsttheir bill of damages, on which more anon. But in any case it seemslikely that a general scheme of interest funding, as between theAllies, may have to be adopted for some years to come. 

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

 Balances in agents' hands, debts due, foodstuffs, etc £375 millions. Land, securities, buildings and ships 97 " Stores in Munitions Department (cost price 325 millions) taken at 100 " Additions this financial year 100 " Arrears of taxation 500 " --- Total[1] £1172

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

It will be remembered that in his Budget speech the Chancellor wasproceeding on the assumption that the war would last till March 31stnext--the date at which our financial year ends--and would then beconvenient enough to stop. Happily for us, the valour of our soldiersand those of our Allies, the splendid success of our Fleet and ourmerchantmen In bringing over American troops and their food andequipment with astonishing speed, and the straightforward diplomacyof President Wilson, combined to achieve victory nearly five monthsearlier than the most sanguine had dared to expect. With the verypleasant result--though it is a small matter when compared with theend of the killing of the best of our manhood--that the financialposition is very greatly improved. With regard to the figures givenabove, it should be observed that the "debts" are advances toDominions, but on quite a different basis from our loans to them, being money owed by them against goods and services supplied. [1] Theyand the balances in the hands of agents are both as good as gold. Concerning the others, one is entitled at first sight to feel a gooddeal of scepticism, since such articles as land, buildings, ships andstores, bought or built by Government during a war, are likely to findan extremely sluggish demand when the war is over. However, Mr BonarLaw assured the House that his valuation of these amounts had beenarrived at on a conservative basis, and, what is better still, in hisVote of Credit speech on November 12th, he was able to state thatrevised estimates had shown that their value would be "far greater"than he had previously expected. So perhaps we are entitled to takethem at £1300 millions. 

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

If so, we get the following results for the cost of the fightingperiod:--

 Total Government expenditure, August 1, 1914, to November 9, 1918 £8612 millions. Less estimate of normal peace expenditure 860 " ----- 7752 " Less Loans to Dominions 220 millions. Less Loans to Allies (half face value) 740 " Realisable assets 1300 " ---- 2260 " ---- Net cost of period £5492 "

If war cost would be good enough to cease with the fighting we shouldthus now be able to see, more or less, how we stand. During thefighting period the Government raised by taxation the sum of £2120millions, [1] from which we have again to deduct £860 millions as anestimate for normal peace taxation, if the war had not happened, leaving £1350 millions as the net war taxation, and £4142 millions asthe net addition to debt from the war. 

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

But, of course, there are still some large and uncertain sums to comein to both sides of the account. There is the cost of maintaining ourArmy and Navy during the armistice period, the cost of demobilisation, and the cost of putting an end to war munitions contracts running formany months ahead, holders of which will have to be compensated. Whohas enough assurance to venture on an estimate of the cost of theseitems? Shall we guess them at something between £1000 and £1500millions? And when we have made this guess are we at the end of thewar's cost? Ought we not to include pensions to be paid, and if so, atwhat figure? Fifty millions a year for thirty years? If so, there isanother £1500 millions. And interest on war debt, and for how long?

On the other side of the balance-sheet, the only asset that has notyet been included in the calculation is the sum that we are going toreceive from Germany, Some cheery optimists think that it is possiblefor us and for the Allies to make Germany pay the whole of our warcost. If so, we have halcyon days ahead, for not only shall we be ableto repay the whole war debt but also to pay back to the taxpayer allthe £1350 millions that he produced during the war, unless, as seemsmore likely, the Government finds other uses, or abuses, for themoney, and sets its motley horde of wasters to work again. But thisproblem, of course, is not going to arise. It would not be physicallypossible for Germany to pay the whole of the Allies' war cost, exceptin the course of many generations, and, moreover, the Allies havebound themselves not to make any such demand by the rider that theyadded to President Wilson's peace terms, in giving their assent tothem as the basis on which they were prepared to make peace. Earlyin November they stated that President Wilson's reference to"restoration" of invaded countries should, in their view, be expandedinto a claim for compensation "for all damage done to the civilianpopulation of the Allies and to their property by the aggression ofGermany by land, by sea, and from the air. "[1] This is letting Germanyoff lightly; but, after stating their readiness to make peace on thebasis of the fourteen points, if amended as above (and also withregard to the Freedom of the Seas question) it is not possible forthe European Allies, as the Prime Minister's late manifesto says theypropose to do[2] to expand this claim for civilian damage into ademand for the whole of their war cost up to the limit of the capacityof the Central Powers to pay, without a serious breach of faith. Sothat the question of how much we can get out of Germany is complicatedby the further uncertainty of the size of the bill for damages that wecan present. It will be big enough. We know that the Germans have sunk8-1/2 million tons of British ships during the war. As to the priceat which, for "restoration" purposes, we shall value those ships andtheir cargoes, and all the civilian property damaged by aircraft andbombardment, this is a matter which it would be obviously improperto discuss; but we may be sure that the bill will mount up to manyhundreds of millions, and it remains to be seen whether, after Belgiumand France have presented their account, it will be possible for us tosecure payment even for all the civilian damage that we have suffered. 

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

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

It thus appears that the net cost of the fighting period has beensomewhere in the neighbourhood of £5500 millions, taking our loansto Allies at half their face value; and that the armistice anddemobilisation period is likely to cost another £1000 to £1500millions more, to say nothing of pensions and debt charge that will goon for years (unless the supporters of Levy on Capital have their wayand wipe the debt out), and that against this further expenditure wecan set whatever sum is recovered from Germany. 

Seeing that our total pre-war debt was £710-1/2 millions, or, omittingwhat the Government returns call the Other Capital Liabilities, £653-1/2 millions, these figures of war debt and war cost are at firstsight somewhat appalling. But there is no reason why they shouldterrify us, and there are several reasons why they are, when looked atwith a discriminating eye, much less frightening than when we firstset them out. 

In the first place, we have always to remember that these figures arein after-war pounds, and that the after-war pound is, thanks to theprofligate use by our war Governments of the printing-press and thebanking machine, just about half the size, when measured in actualbuying power, of the pre-war pound. Any one who pays £100 in taxesto-day thereby surrenders claims to about the same amount of goods andservice as he did if he paid £50 in taxes before the war. So that inmaking any comparison between the position now and the position thenwe have to divide the figures of to-day by two. 

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

That effort of self-sacrifice we have already made in so far as wehave paid for our war cost out of money raised at home. That money hasbeen raised in three ways--by taxation, by borrowing saved money, andby inflation. When it is raised by taxation the sacrifice is obvious, and, in nearly all cases, inevitable: we pay our larger war taxes andso we have less to spend on ourselves, and so we go without things. Afew people raise money to pay taxes during war by borrowing or draftson capital, but they are probably so exceptional that their case neednot be considered. We transfer our buying power to the Government tobe used for the fighters, and so we set free the labour and materialthat used to go in providing us with comforts and pleasures; ourcompetition for goods is reduced, and so the Government is able to getwhat it needs out of the nation's production, which is _pro tanto_relieved of our demand. The same thing happens when the Governmentgets money for the war by borrowing money that we save. We reduceexpenditure, and transfer buying power to the State and diminish ourdemand on the nation's production, or that of its foreign supplies. Ifthe whole war cost had been met by these two methods there need havebeen little or no increase in prices here, and the cost of the warwould have been about half what it has been. Of the two methods, taxation is obviously the cleaner, simpler and more honest. Byborrowing, the State hires those who have a margin to put part of itat the disposal of the State at a time of national crisis, instead oftaking it from them outright. As most of the taxation involved bythe subsequent debt charge falls on those who have a margin (as itobviously should) the result is that the people who subscribed to theloans are afterwards taxed to pay themselves interest and to repaythemselves their debt. 

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

Inflation, the third method of paying for war, again produces the sameeffect of a reduction of consumption by the civilian population, butin a roundabout manner, which works at first without being noticed, and so is particularly dear to the adroit politician. By it nobodytransfers buying power to the Government, but the Government andthe bankers, who are generally most reluctant accessories to thetransaction, between them create new buying power, which, coming intoa restricted market for goods in addition to all the existing buyingpower, simply forces everybody to consume less because the money intheir pockets fetches less goods owing to the rise in prices. 

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

Thus, whatever means--straightforward or devious--are used forfinancing war, it is paid for while it goes on by the warring countryif the financing is done at home, or by its foreign creditors if thefinancing is done abroad. And it is, necessarily, almost entirely paidfor out of income, that is, out of current production. It is curiousto find that many people still seem to think that the whole cost ofthe war has come out of capital. Luckily for us it could not be done, or only to a very small extent. Our capital mostly consisted ofrailways, factories, ships, roads, agricultural land, machinery, houses and other things that could not be taken and shot out of a gun. These things we have still got, and though many of them are not insuch good shape as they were, some of them are much better equippedand organised. We have drawn on our stocks of materials and goods--howfar it is impossible to say; we have lost 8-1/2 million tons ofshipping by war losses; in the meantime we have built, bought andcaptured 5-1/2 millions of new tonnage, and we have a claim againstthe Germans for such tonnage. On capital account we have suffered bywear and tear in so far as our upkeep has been neglected owing to lackof labour during the war, and by depletion of materials and stocks, and also, of course, by the fact that if the war had not happened, we should, if pre-war calculations were correct, have put some £1700millions into new investments at home and abroad during the 4-1/4years of fighting and some more hundreds of millions during theafter-war period of Government borrowing and restriction on privateinvestment. But a very large part of the money that went into victorywould otherwise have gone not to capital account but into the pleasantfrivolities, embellishments and vulgarities that made life an amusingabsurdity in days before the war. 

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

These operations were twofold. We sold to foreigners part of ourholdings of foreign securities, thereby and to this extent paying forwar cost out of capital--out of the investments made by ourselvesand our forbears in America and elsewhere. Mr Bonar Law, in a recentinterview in the _Observer_, stated that we had sent back to theUnited States practically the whole of our holdings of Americansecurities to be sold or pledged as collateral for loans, and that thevalue of them was three billion dollars--£600 millions sterling. Anyof them that have only been pledged can presumably be used to meet theloans raised as they fall due, and so will lighten our burden in thematter of repayment. These loans raised abroad are the second mode offoreign financing. By it we had raised up to November 9th nearly £1300millions, as shown by the _Economist's_ table, and to that extent wehave pledged our future production and that of our posterity, to meetthe annual service for interest and repayment. On the other hand, allthis sum and more we have (as shown above) lent to our Allies andDominions, so that the ex-Chancellor was well justified in his boastthat we had only borrowed to finance our Allies, and that we had beenself-sufficient for our own war cost. [1]

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

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

In any case, there is our position. We have a big debt to meet athome and abroad, and we are weakened on capital account by foreignindebtedness, wear and tear of plant and dimunition of stocks andmaterials. Wear and tear and depletion we can soon make good if we setto work and work hard, if our bureaucracy takes away the fetters ofits restrictions and controls (instead of making further additionsto the "Black List" even after the armistice!), and if our rulingwiseacres will refrain from trying to stimulate industry by taxing rawand half-raw materials. For the debt charge many pleasant andsimple fancy strokes are suggested. The Levy on Capital is popular, especially with those who do not own any, but its advocacy is by nomeans confined to them. Mr Pethick Lawrence has published a persuasivelittle book about it, but I cannot see that he meets the objectionsto it. These are, the difficulty of valuation, the fact that in manycases it would have to be paid by instalments, and so would be merelyanother form of income tax, its sparing of the waster and penalisingof the saver, and, consequently, the grave danger that it would checkaccumulation and so dry up the springs of capital. Mr Stilwellhas produced a "Great Plan to Pay for the War, " by which all thebelligerents and neutrals who have been involved in expense by the warwould receive World Bonds from an International Congress for whatthey have spent owing to the war, and would then pay one another anyinternational debts by exchanging these World Bonds, and deal with thehome debt by paying it off in new currency raised on the World Bonds. But, surely, to pay off war debt with a huge addition to currency, making war's inflation many times worse, would be a disastrousbeginning to that new era which is alleged to be dawning. 

By hard work, sparing consumption of luxuries, and a big industrialoutput, we can soon make the debt charge look smaller and smaller ascompared with our aggregate income. Our foreign debt we can only meetby shipping goods and rendering services. But since it was all raisedto be lent to our Allies and our lending of it was essential to avictory which has rid mankind of a terrible menace, it is surelyreasonable that our creditors should not press for repayment in thefirst few difficult years, but should fund our short-dated debts intoloans with twenty-five or thirty years to run. As to the home debt, we can only lighten its burden on the taxpayer by making taxationequitable. To this end reform of the income tax is an urgent need. Wehave to lighten its pressure much more effectively on those who arebringing up families, and by collecting it through employers make itan effective and just tax on those of the working class whose earningsand family liabilities make them fairly subject to it. 

XVIII

THE REGULATION OF THE CURRENCY

_February_, 1919

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

Everyone has read, and most of us have forgotten, the great passage inMacaulay's history which describes the evils of a disordered currency. "It may well be doubted, " he says, "whether all the misery which hadbeen inflicted on the English nation in a quarter of a century by badKings, bad Ministers, bad Parliaments and bad judges was equal to themisery caused in a single year by bad crowns and bad shillings.... While the honour and independence of the State were sold to a foreignPower, while chartered rights were invaded, while fundamental lawswere violated, hundreds of thousands of quiet, honest and industriousfamilies laboured and traded, ate their meals and lay down to rest incomfort and security. Whether Whigs or Tories, Protestants or Jesuitswere uppermost, the grazier drove his beasts to market, the grocerweighed out his currants, the draper measured out his broadcloth, the hum of buyers and sellers was as loud as ever in the towns, theharvest-time was celebrated as joyously as ever in the hamlets, thecream overflowed the pails of Cheshire, the apple juice foamed in thepresses of Herefordshire, the piles of crockery glowed in the furnacesof the Trent, and the barrows of coal rolled fast along the timberrailways of the Tyne. But when the great instrument of exchange becamethoroughly deranged, all trade, all industry, were smitten as with apalsy.... Nothing could be purchased without a dispute. Over everycounter there was wrangling from morning to night. The workman and hisemployer had a quarrel as regularly as the Saturday came round. On afair-day or a market-day the clamours, the reproaches, the taunts, thecurses, were incessant; and it was well if no booth was overturned, and no head broken.... The price of the necessaries of life, of shoes, of ale, of oatmeal, rose fast. The labourer found that the bit ofmetal which, when he received it was called a shilling, would hardly, when he wanted to purchase a pot of beer or a loaf of rye bread, go asfar as sixpence. "

From some of the evils thus dazzlingly described we are happily freein these times. We are not cursed with a currency composed of coinswhich are good, bad and indifferent, with the result that the publicgets the bad and indifferent while the nimble bullion dealers absorband export the good. There is nothing to choose between one piece ofpaper and another, and all that is wrong with them is that there aretoo many of them. But the general result as it affects the labourerwho wants to purchase a pot of beer or anyone else who wants to buyanything is very much the same. A bit of metal that is called ashilling has about the value of a pre-war sixpence and a bit of paperthat is called a Bradbury fetches half as much as the pound of fiveyears ago. Compared with what other peoples are suffering from thesame disease arising from the same surfeit of money in one form oranother, this nuisance that we are enduring is not too terriblysevere. It has entailed great hardship on a class that is smallin number, namely, those who have to live on fixed incomes. Thesalary-earner and the rentier have borne the brunt, while thewage-earner and the profit-maker have been able to expand theirearnings, in paper, at least to a point at which the depreciation ofcurrency have left them no worse off. Seeing that the wage-earnersare those who do the dreariest and dirtiest jobs, and that theprofit-makers are those who take the risks of industry and theenormous responsibility of organising enterprise, they are the classeswhom it is clearly most desirable to encourage. The rentier in thesedays gets less than no sympathy, but we make a great mistake if wethink that we can with impunity crush him between the upper and nethermillstone of fixed income and rising prices. With his help we haveequipped industry at home and abroad. We can, if we choose, bydepreciating the currency still further, lessen still more the rewardthat we pay him for that benefit. He may kick, but he cannot abolishthe equipment with which he has already provided industry. But ifwe make his life too hard he can strike like the rest of us, and byrefusing to provide for any further expansion in industrial equipment, he can hold up production until we have devised some new method oflaying up capital. Currency depreciation is good for the debtor andbad for the creditor; if it goes too far it kills the creditor andreduces business to chaos. 

We are a very long way from the chaos to which many of our Continentalneighbours have already reduced their monetary systems; but thereis fortunately a very general feeling that we are a country with areputation and a prestige on this point; and the business world isgrowing restive concerning the delay on the part of those responsiblein putting an end to a state of things which may have been justifiedby the war's exigencies (though there is much to be said for the viewthat in fact it only added to the war's difficulties) but isnow clearly as out of date as the censorship, which, like it, nevertheless, continues to flourish. This state of things arises fromthe arrangement tinder which an unlimited supply of legal tendercurrency can be manufactured by the Government, which encouraged tocontinue the system by the fact that each note issued is in effect aloan to itself without interest. At the meeting of Barclays Bank onJanuary 27th, Mr. Goodenough demanded that the issue of currency notesby the Government should be stopped forthwith, and that if it werenecessary to provide more currency it would be better for the banksto be allowed to issue notes themselves. This suggestion involves, ofcourse, a complete reversal of the principles on which our monetarysystem has grown up, since it has long been based on a note-issuingmonopoly in the hands of the Bank of England. But these aretopsy-turvy days, in which greyheaded precedent is very justly at aheavy discount; and Mr Goodenough's suggestion very practically getsover a big difficulty that stands in the way of stopping the streamof Bradburys. This difficulty lies in the fact that if the banks werepulled at by their customers for currency and could not supply themwith Bradbury notes, they would be forced to take notes from the Bankof England, with a bad effect on the appearance of its reserve. Ifthe business of issuing notes were put into the hands of the clearingbanks, their power to do so would be limited by the extent of theirassets, or of such of their assets as were thought fit to rank asbacking for their notes. In other words, the note-issuing businesswould once more have to be regulated on banking principles andcontrolled by the price asked, for advances, instead of expressingthe helplessness and improvidence of an impecunious and invertebrateGovernment. In this manner the new departure might be a convenienthalfway-house on the way from chaos back to sanity. But probably it istoo revolutionary and goes too straight in the teeth of the Bank ofEngland's privilege to receive much practical consideration; and thereis the question whether the public would take the new paper readilyand whether it could be made legal tender. 

Sir Edward Holden, in one of those masterly surveys of world financewith which he now instructs the shareholders of the London Joint Cityand Midland Bank, assembled at their annual meeting, gave much of hisattention to an attack on the report of Lord Cunliffe's Committee onCurrency. This was only to be expected, since the Committee had maderecommendations on lines which were largely conservative and didnot embody any of the reforms or changes which had been previouslyadvocated by Sir Edward. Being on this occasion chiefly critical, hedid not make very clear in his latest speech the precise proposalsthat he favours. For them we have to go back to his speech of a yearago, as reported in the _Economist_ of February 2, 1918, p. 171, wherehe stated that "if the Bank (of England) had been working on the sameprinciples as other national banks of issue, there would have beenlittle ground for anxiety, " and that these principles are:--

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

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

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

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

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

As will be remembered, the Cunliffe Committee recommended that thedivision of the Bank of England into an Issue Department and a BankingDepartment, should be retained; that the old principle by which abovea certain fixed limit all notes should be backed by gold, should alsobe retained, but that if at any time a breach of this rule shouldbe found necessary it should be possible, with the consent of theTreasury, and that Bank rate "should be raised to a rate sufficientlyhigh to secure the earliest possible retirement of the excess issue. "Since it was formerly only possible to exceed the limit on thefiduciary issue by a breach of the law, under the Chancellor of theExchequer's promise to get an indemnity for it from Parliament, andsince Treasury tradition insisted on a 10 per cent. Bank rate wheneversuch a breach was permitted or contemplated, it will be seen that theCunliffe Committee proposed some considerable modifications in oursystem and hardly justified Sir Edward's assertion that it "proposedthat the Bank should continue to work under the Act of 1844 asheretofore. "

At first sight there seems to be a good deal of difference between SirEdward's ideal and Lord Cunliffe's, but is not the difference toa great extent superficial? Whether the Bank be divided into twodepartments, each presenting a separate account, or its whole businessbe regarded as one and stated in one account, seems to be rather atrifling question. And the arguments put forward for their severalviews by the two champions are not strikingly convincing. Sir Edwardwants only one account, because he thinks the consequence would be astronger reserve and fewer changes in bank rate. But a mere change ofbookkeeping such as the amalgamation of the two accounts would notmake a half-pennyworth of difference to the extent of the Bank'sresponsibilities and its ability to meet them, and it is on variationsin these factors that movements in bank rate are in most casesdecided. On the other hand, Lord Cunliffe and his colleagues arguethat the main effect of putting the two departments into one would beto place deposits with the Bank of England in the same position asregards convertibility into gold as is now held by the note. On thispoint Sir Edward's answer is telling: "In reply to this statement, Isay that the depositors at the present time can always get gold bydrawing out notes from the reserve and taking gold from the IssueDepartment. There seems to be little difference between the depositorsattacking gold direct and attacking the gold through the notes in thereserve. If the Bank cannot pay the notes when demanded the wholemachinery stops. " Quite so. The notion that the holder of a Bank ofEngland note has now a stronger hold over the Bank's gold than thedepositor seems to be baseless. He can exercise his hold more quicklyperhaps, though even this is doubtful. Since banknotes are notlegal tender at the Bank of England, it is not quite clear that thedepositor would even have to take the trouble to go first to theBanking Department for notes and then to the Issue Department forgold. He might be able to insist on gold in immediate payment of hisdeposit. Still less convincing is the Committee's argument that "theamalgamation of the two departments would inevitably lead in the endto State control of the creation of banking credit generally. " Theirreport might have explained why this should be so, for to the ordinarymind the chain of consequence is not apparent. On the whole it is hardto see much good or harm to be achieved by changing the form of theBank return. It might make the Bank's position look stronger, but itcould not make it really stronger. Nor would it really impair thestrength of the note-holder's position as against the depositor, because even now there is no essential difference. It would substitutea more businesslike and simple statement for a form of accounts whichis cumbrous and stupid and Early Victorian--a relic of an age whichproduced the crinoline, the Crystal Palace and the Albert Memorial. Onthe other hand, to alter a statistical record merely for the sake ofsimplicity and symmetry is questionable. Unless we are getting moreand truer information, it is a pity to make comparisons between oneyear and another difficult by changing the form in which figures aregiven. 

A more essential difference between the two policies lies in SirEdward's advocacy of a ratio--three to one--between notes and gold, and the Committee's support of the old fixed line system. By thelatter, if gold comes in, notes to the same extent can be created, and if gold goes out notes to the amount of the export have to becancelled. Under Sir Edward's policy the influx and efflux of goldwould have an effect on the note issue which would be three times theamount of the gold that came in or went out. This at least is thelogical effect of his statement that "the notes should not exceedthree times the gold or the cash balance. " This law does not seem tobe quite consistent with his view that the fixed ratio of gold tonotes may be lowered by the payment of a tax; but presumably the taxwould come into operation before the three to one part was reached, and at three to one there would be a firm line drawn. On thisassumption the Committee's argument is a very strong one. "If, "says its report (Cd. 9182, p. 8), "the actual note issue is reallycontrolled by the proportion, the arrangement is liable to bring aboutvery violent disturbances. Suppose, for example, that the proportionof gold to notes is actually fixed at one-third and is operative. Then, if the withdrawal of gold for export reduces the proportionbelow the prescribed limit, it is necessary to withdraw notes in theratio of three to one. Any approach to the conditions under which therestriction would become actually operative would then be likely tocause even greater apprehension than the limitation of the Act of1844. " Certainly if, during a foreign drain, for every million of goldthat went out, another two millions of credit, over and above, hadto be cancelled, it is easy to imagine a very jumpy state of mind inLombard Street and on the Stock Exchange. Sir Edward and the Committeeseem to be agreed as to a limit on the note issue, but of the twolimiting systems the old one advocated by the Committee, thoughapparently more severe, would seem to have much less alarmingpossibilities behind it. 

A point on which the commercial world does not seem to have made upits mind, however, is whether there should be a limit at all. Underthe old Act there was a limit which could only be passed by a breachof the law. Under the Cunliffe proposal the limit could be passedwith the consent of the Treasury. Sir Edward has not told us of whatmachinery he proposes for the passing of the limit which he lays down;but in view of the great apprehension that an approach to the limitpoint would, as shown by the Committee, produce, it is clear thatthere would have to be a way round. In Germany there is no limit; youpay a tax on the excess issue and go on merrily. In America it wouldseem that the German system has been taken for a model. In his speechon January 29th Sir Edward quoted Senator Robert Owen, who was theprincipal pioneer of the Federal Reserve Bill through the Senate, asfollows:--"The central idea of the system is elastic currency issuedagainst commercial paper and gold, expanding and contracting accordingto the needs of commerce.... It is of great importance that the volumeof these notes should contract when the commerce of the country doesnot require the notes to be circulation, and the reserve board canrequire them to be returned by imposing a tax upon the issue.... Underthe reserve system a financial panic is impossible. People willnot hoard currency nor hoard gold when they know that they can getcurrency or get gold when required.... America no longer believesa financial panic possible, and therefore the business men, beingperfectly assured as to the stability of credits, do not hesitate toenter manufacturing and commercial enterprises from which they wouldbe deterred under old conditions of unstable credit. " Well, let ushope the Senator is right and that America is right in believing thata financial panic is no longer possible there. But one cannot helpfeeling that such a belief may be rather dangerous in the minds ofpeople so ready to take rose-coloured views as our American cousins. The Federal Reserve system has worked beautifully in a period inwhich American finance has had nothing to do but rake in the enormousprofits of American production at the expense of warring Europe andlend part of them, to be spent in America, to the Allied belligerents. It may work equally well if and when the problem to be faced isdifferent, but it will be interesting to see--for those of us who liveto see--what sort of a tax will be needed to "require" America, in oneof its holiday moods, to return currency that it thinks it needs andthe Federal Reserve Board regards as redundant. 

Another point on which Sir Edward lays great stress, in his attackon the Bank Act of 1844 and the Committee which supports its mainprinciples, is the beauty of the bill of exchange as backing for anote issue, as opposed to Government securities. "There is, " he says, "no automatic system for the redemption of currency notes as would bethe case if they were issued against bills of exchange, which in duecourse would have to be paid off. " Again, "it seems to me that notesshould not be issued against Government securities which may or maynot be paid off, but against bills of exchange which must be met atdue date. " This advantage about a bill of exchange is a very realone to the individual holder who can always put himself in funds byletting the contents of his portfolio "run off"; but is there muchin it as a safeguard against excessive issue of currency in times ofexuberance? In such times bills that fall due are pretty sure tobe replaced by new ones drawn against fresh production--sinceover-production is a common symptom of commercial exuberance--oragainst a resale of the goods on which the original bills were based. As long as anyone who can show produce can be certain to get creditand currency, the notion that the maturing of bills of exchange can berelied to restrict currency expansion within safe limits is surely adangerous assumption. The principle of a fixed limit, to be broken incase of real need, but only after some ceremony has been gone throughgiving notice of the fact that a crisis has been reached, seems ratherto be required by the psychology of speculative mankind. But even ifSir Edward's preference for bills of exchange as backing for notes hasall the merits that he claims that is no reason for urging the repealof the Bank Act to secure their use. Because the Bank Act does notforbid it: it merely says, "there shall be transferred, appropriatedand set apart by the said governor and company to the Issue Departmentof the Bank of England securities to the value of, " etc. It is thepractice of the Bank to put Government securities into the IssueDepartment, but the terms of the Act do not compel them to do so, andif an excess issue were needed they would seem to be empowered to putany bills that they discounted into the assets held against the noteissue. On the whole the terms of the Act leaving them freedom in thematter, except with regard to the "Government debt" of £11 millions, which is specially mentioned as to be transferred to the IssueDepartment, seem to be preferable to a special stipulation in favourof bills of exchange. 

But the most important difference between Sir Edward Holden and theCunliffe Committee seems to be in their attitude towards the goldreserve and the relation between the Bank of England and the rest ofthe items that compose the London money market. The Committee, workingto restore the conditions which made our market the centre of theworld's finance, endeavoured to give back the control of the centralgold reserve to the Bank of England by suggesting, among other things, that the other banks should hand over their gold to it. They omittedto discuss the serious question of the greater difficulty that theBank is likely to find in future in controlling the price of money inthe market, owing to the huge size that the chief clearing banks havenow reached. But a central gold reserve under central control wasevidently the object at which they aimed. Sir Edward will have none ofthis. He says that if this were done the position of the Joint Stockbanks would be weakened, though he does not explain why, since theywould obviously hold notes in place of their gold and so would be ableto meet their customers' demands, now that the latter are accustomedto the use of notes for pocket money. He points out that "the goldwhich was held by the Joint Stock banks before the war proved mostuseful.... At the beginning of the war the banks paid out gold, satisfied the demands of their customers for small currency, and thuseased the situation until currency notes became available. " He seemsto have forgotten that the banks, or most of them, refused to partwith their gold, paid their customers in Bank of England notes which, being for £5 at the smallest, were of little use for pocket money, andso drove them to the Bank to get gold; and we had to have a prolongedbank holiday and a moratorium. Sir Edward is in favour of three goldreserves, one to be held by the Government, one by the clearing banks, and one by the Bank of England. If there were differences between thethree controllers of the reserve at a time of crisis the consequencemight be disastrous. 

In view of the admiration expressed by Sir Edward for the new Americansystem which is so clearly based on central control it is ratherillogical that he should be so strongly in favour of independence onthis side of the water. His opinion is that "the policy of the JointStock banks ought to be to make themselves independent of the Bank ofEngland by maintaining large reserves in their vaults. " Independenceand individualism are a great source of strength in most fields offinancial activity, but in view of the great problems that our moneymarket has to face there seems to be much to be said for co-operationand central control, at least until we have got back to a normal stateof affairs with regard to the foreign exchanges. 

XIX

TIGHTENING THE FETTERS OF FINANCE

_March_, 1919

The New Meaning of Licence--The Question of Capital Issues--Text ofthe Treasury Regulations--Their Scope and Effect--The Position ofthe Stock Exchange--Wider Issues at Stake--Should Capital be setFree?--The Arguments for and against--Perils of an ExcessiveCaution--The New Committee and its Terms of Reference--TheAbsurdity of prohibiting Share-splitting--The Storm in the Houseof Commons--Disappearance of the Retrospective Clause--A Sample ofBureaucratic Stupidity. 

A contrast between liberty and licence is a pleasant alliterativecommonplace beloved by political writers, especially those with areactionary bias. In the light of recent events it seems to be goingto take a new meaning. Licence will soon be understood, not as theabuse of liberty, to which democracies are prone, but as a new weaponby which our bureaucracy will do away with liberty by tightening theshackles on our economic and other activities. For imports and exportsthe licence system is already familiar; if the mines and railways areto be nationalised we may have to be licensed before we can burn coalor go away for a week-end; if the Eugenists have their way a licencewill be necessary before we can propagate the species; and beforewe can get a licence to do anything we shall have to go through anexasperating process of filling in forms innumerable, inconsistent, overlapping and incomprehensible. Finance is the latest victim of thismelancholy tendency. Under the guise of an attempt to give greaterfreedom to it a system has been introduced which makes a Treasurylicence necessary, with penalties under the Defence of the Realm Act, for doing many things which have hitherto been possible for those whowere prepared to forgo the privilege of a Stock Exchange quotation. Let the story be told in official language, as uttered through thePress Bureau, on February 24th, in "Serial No. C. 10917. "

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

"The work of scrutinising proposals for new Capital Issues has beenperformed during the war by the Capital Issues Committee, the objectbeing to refuse sanction for all projects not immediately connectedwith the successful prosecution of the war. The decisions of theTreasury, taken upon the advice of this Committee, have, however, not had any binding force, beyond what is derived from the emergencyregulations of the Stock Exchange, which forbids dealings in any newIssues which have not received Treasury consent. 

"While it is not possible under existing financial conditions todispense altogether with the control of Capital Issues, it has clearlybecome necessary to reconsider the principles upon which sanction hasbeen given or refused in order that no avoidable obstacles may beplaced in the way of providing the Capital necessary for the speedyrestoration of Commerce and Industry, and the development of publicutility services. 

"In view of the numbers of the proposals for fresh Issues of Capitalwhich are to be expected, it is necessary to provide further machineryfor dealing with them and for making the decisions upon themeffective. 

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

"'To consider and advise upon applications received by the Treasuryfor licences under Defence of the Regulation (30 F) for freshIssues of Capital, with a view to preserving Capital during thereconstruction period for essential undertakings in the UnitedKingdom, and to preventing any avoidable drain upon Foreign Exchangesby the export of Capital, except where it is shown to the satisfactionof the Treasury that special circumstances exist. '

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

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

"Before any application is refused the Committee will give theapplicant an opportunity of giving oral evidence in support of hiscase. "

The notice then proceeded to recite the terms of D. O. R. A. 30 F, ofwhich more anon. Next day came a supplementary announcement, "SerialNo. C 10938, " as follows:--

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

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

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

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

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

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

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

Before we go on to consider the new regulation, 30 F, let us try tosee what is the real effect of the document above quoted. It wasevidently intended to be a relaxation of the control of finance. This is shown by the sentence which says that the matter was to bereconsidered "in order that no avoidable obstacle may be placed in theway of providing the capital necessary for the speedy restorationof commerce and industry, and the development of public utilityservices. " And yet it was thought necessary to give legal force andattach penalties to regulations that have worked during the war quitesufficiently well to secure a much stricter control than is nowrequired. The explanation of this apparent inconsistency is probablyto be found in the desire of the Government to meet a grievance of theStock Exchange. Hitherto the only penalty that befell those who madea new issue without getting Treasury sanction was that the securitiesissued could not be dealt in on the Stock Exchange. The practicaleffect of this was that those who acted without Treasury sanctioncould only issue securities subject to this serious drawback, andso an effective but not altogether prohibitive bar was put on theprocess. If this bar was not strong enough in war-time it oughtclearly to have been strengthened long ago; if it was strong enough, then why should it be strengthened now?

From the Stock Exchange point of view it is easy to make out a goodcase for working through licence and penalty rather than through thebanning, of the securities effected, from sanction for dealings. Bythus being used as an official weapon the Stock Exchange penaliseditself and its members. By saying "no security not sanctioned by theTreasury shall be dealt in here, " its Committee restricted businessin the House and drove it outside. This grievance was obvious and wasplentifully commented on during the war. If the Committee had pressedthe point vigorously it could probably have forced the Government longago to abolish the grievance by making all dealings in new issues thatappeared without Treasury sanction illegal and liable to penalty. A patriotic readiness to fall in with the Government's desires wasprobably the reason why the Stock Exchange refrained from embarrassingit, during the war, by too active protests against a grievance thatwas then more or less real; though it should be noted that even if thegrievance had been amended, the Stock Exchange would not necessarilyhave got any more business, but would only have succeeded in stoppinga very moderate amount of business that was being done by outsiders. But when all is said that can be said for the justice of the case thatcan be made by the Stock Exchange, the question still arises whetherit was advisable, at a time when relaxation of restrictions wasdesirable in the interests of the revival of industry, to draw tighterbonds which had been found tight enough to do their work. That theStock Exchange should suffer from limitations from which outsidedealers were exempt was certainly a hardship. On the other hand, since the armistice there has been a considerable expansion in StockExchange business. Oil shares, Mexican securities, industrial shares, insurance shares, and others in which capitalisation of reserves andbonus issues have been used as an effective lever for speculation, have enjoyed spells of considerable activity. With this revival inprogress, in spite of many obvious bear points, such as industrialunrest at home, Bolshevism abroad, the continuance of heavyexpenditure by the Government, and the hardly slackened growth ofthe national debt, it seems to have been scarcely necessary in theinterests of the House to have made regulations which, though perhapsdemanded by abstract justice, imposed new ties on enterprise at atime when complete freedom, as far as it was consistent with the bestinterests of the country, was most of all desirable. 

How far, we have next to ask, is it necessary for the best interestsof the country to restrict the freedom of capital issues? If we lookback at the terms of reference under which the reconstituted Committeeis to work, we see that the officially expressed objects are (1)preserving capital for essential undertakings in the United Kingdom, and (2) preventing any avoidable drain upon Foreign Exchanges by theexport of capital. There is certainly much to be said for both theseobjects. When we lend money to foreigners we give them the right todraw on us now in return for their promises to pay some day; in otherwords, we make an invisible import of foreign securities, and in thepresent state of our trade balance all imports, whether visible orinvisible, need careful watching. It is also very evident that at atime when capital is scarce there is much to be said for keeping itfor essential industries, especially those which produce necessariesand goods for export, and not allowing it to be swept up by borrowerswho are going to devote it to making expensive fripperies on which bigprofits are probable. 

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

Again, it looks very sound and sensible to keep capital for purposesthat are essential, but, on the other hand, it is so enormouslyimportant to set industry going as fast as possible that almost anyone who will do anything in that direction is entitled to be given achance. In war-time, when labour and materials were so scarce thatthey could not turn out all the munitions that were necessary, such arestriction was clearly inevitable. Now, when labour and materials arebecoming more plentiful, and the scarce commodity is the pluck andenterprise that will take the risks involved by getting to work on apeace basis, it may be argued that any one who will take those risks, whatever be the stuff or services that he proposes to produce, shouldbe encouraged rather than checked. It is again a question of thebalance of advantage. If we are going to be so careful in seeing thatcapital is not put to a wrong use that we take all the heart out ofthose who want to make use of it, we shall do more harm than good. Ifby leaving capital free to go into any enterprise that it fancieswe can give a start to industry and promote a spirit of courage andenterprise among its captains, it will be well worth while to do soat the expense of seeing a certain amount of capital going into theproduction of articles that the community might, if it made a morereasonable use of its purchasing power, very well do without. The samequestion arises when we consider the desire of the Government, notexpressed in the above statement, but very freely admitted by Mr BonarLaw, in discussing it in the House of Commons, to keep capital to belent to it rather than expended in, perhaps unnecessary, industry. Here, again, it is clearly in the interest of the taxpayer thatGovernment loans should be raised on the most favourable termspossible. But if, in order to do so, we starve industry of capitalthat it needs, and so check the production on which all of us, Government and citizens alike, ultimately have to live, we shallbe scoring an immediate advantage at the expense of futureprogress--spoiling a possibly brilliant break by putting down thewhite ball for a couple of points. 

There is thus a good deal to be said for setting capital free, beforewe have even arrived at the most serious objection to regulating itunder Treasury licence. This objection is the exasperation, delay anduncertainty involved by this control. Even if we had an ideally wiseand expeditious body to decide about capital issues it might not bethe best thing to set it to work. But when we remember that in orderto see that the wrong sort of issue is not made, all issues willhave to pass through the terribly slow-working process of officialselection before the necessary licence is finally granted, it beginsto look still more likely that we should do well to run the risk ofletting a few goats through the gate, rather than keep all the sheepwaiting outside for months, with the probable result that many of themmay lose altogether their chance of final salvation. It will be notedfrom the official statement that the arbitrary methods of the oldCommittee are to be modified. It has long been a by-word among thosewho had dealings with it; they abused it in quite sulphurous languageand were wont to quote it as an example of all that bureaucratictyranny is and should not be, thereby doing some injustice to ourbureaucrats, seeing that the Committee was manned not by officials butby business men, clothed _pro hac vice_ in the thunder of Whitehall. The new Committee is to sit by panels of three, so as to expeditematters, and so as to allow applicants the privilege of giving oralevidence. This is an innovation that will save some exasperation, butit will hardly accelerate matters, especially as the decision of thepanels will be subject to confirmation by the full Committee, so thatall the work will have to be done twice over. There is thus muchreason to fear that delay, so fatal in business matters, will be aninevitable offspring of the efforts of the new Committee, and the listof different forms on which applications are to be made, given above, shows that all the paraphernalia of red tape will dominate theproceedings. 

Now for the terms of the new Regulation under the Defence of the RealmAct. 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

It will be seen at once that the terms of this document, on anyinterpretation of them, go far beyond the intentions expressed in whatmay be called the official preamble and in the new Committee's termsof reference. One of the clauses seems, with all deference to itsaugust composers, to be merely silly. This is (1)(c) forbiddingsub-division of securities. If a £10 share is split into ten _£1_shares this operation cannot make the smallest difference to thesupply of capital for essential industries or cause any drain on theForeign Exchanges. I am assured by those who have delved into theofficial intention that the reason for the objection of the oldCommittee to splitting schemes, on which this new prohibition isbased, was that splitting made shares more marketable and popular andso more likely to compete with War Bonds. But a mere sale of shares, split small and so popularised, does not absorb any capital. That onlyhappens when, money is put into some new form of industry. If A, whoholds ten £20 shares, is enabled to dispose of them to B because theyare split into 200 £1 shares, then, A instead of B has got the moneyand has to invest it in something. The amount of capital available forinvestment is not diminished by a halfpenny. This regulation is justa piece of short-sighted tyranny which exasperates without doing thesmallest good to anybody. 

More serious, however, was clause (1)(e) under which any securitiesthat have been issued, split, consolidated or renewed without Treasurysanction since January, 1915, were not to be dealt in, in future, without a licence. The result of this clause, if it had stood, wouldhave been that all loans under which such securities had beenpledged would have had to be called in because the collateral becameunsaleable, except after all the ceremonies had been gone throughand a licence had been got. It was also possible to argue that theprohibition to renew or extend the maturity of any security meant thatno loans of any kind could be renewed, and that no commercial billscould be renewed, without a licence. It is true that No. 5 paragraphsays what the expression "securities" includes, but it does not statedefinitely that bonds, Debentures, Debenture stock and marketablesecurities are the only things included. It was a pretty piece ofdrafting, and raised a pretty storm in the House of Commons onFebruary 27th, when a somewhat lurid picture of its effects was drawnby Sir H. Dalziel and Mr Macquisten. Mr Chamberlain not being thenlegally a member of the House, it fell to the lot of Mr Bonar Law toexplain that the Government had really meant to give greater freedom, in making new issues, that the evils anticipated had not beenintended, that he hoped the House would not judge the Government tooharshly for not making unsanctioned issues illegal from the beginning, and that a new Order would be issued removing the retrospective effectof the new regulation. And so amendment was promised of a measurewhich would have had very awkward and unjust effects. It may be arguedthat it would only have affected people who had done, during the war, what they were asked not to do, namely, make issues without Treasurysanction. If the old Committee had been a reasonable and expeditiousbody this argument would have had great weight. But, in view of itscaprices and dilatoriness, there was a good deal of excuse for thosewho decided to do without Treasury sanction and take the consequenceof being unable to market their securities on the Stock Exchange. To propose to add a new penalty and cause the cancelling of all thefinancial arrangements made in connexion with such issues during fouryears was simply piling blunder on blunder. Luckily, the protests ofthe Government's own supporters sufficed to undo the worst of themischief; but the whole affair is only another argument in favour ofthe earliest possible ridding of finance and industry from controlthat is so clumsily exercised. 

XX

MONEY OR GOODS?[1]

_December_, 1918

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

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

In the November _Trade Supplement_ an endeavour was made to answer MrKitson's rather vague and general insinuations and charges against ourbankers concerning the manner in which they do their business. Nowlet us examine the larger and more interesting problem raised by hiscriticism of our currency system. 

In his article in the June _Supplement_ he told us that "if theBritish public had any grasp of the fundamental truths of economicscience they would know that a future of boundless wealth andprosperity is theirs. " This is a cheery and encouraging view and, letus hope, a true one. But, that boundless wealth can only be got if wework for it in the right way. Can Mr Kitson show it to us, and whatare these "fundamental truths of economic science"? It is easier totalk about them than to find any two economists who would give anexactly--or even nearly--similar list of them. Mr Kitson glances "ata few elementary truths. " "Wealth, " he says, "is the product of twoprime factors, man and Nature, generally termed labour and land. Withan unlimited, or practically unlimited, supply of these two factors, how is it that wealth is and has been hitherto so comparativelyscarce?" But is the supply of "man" unlimited in the sense of manable, willing, and properly trained to work? And is the supply of"Nature" unlimited in the sense of land, mines, and factories fullyequipped with the right machinery and served and supplied by adequatemeans of transport? Surely the failure In production on which MrKitson so rightly lays stress is due, at least partly, to lack ofgood workers, good organisers, good machinery, and good transportfacilities. Workers who restrict output, employers who despise scienceand cling to antiquated methods, the opposition of both classes to newand efficient equipment, and large tracts, even of our own land, stillwithout reasonable transport facilities, have something to do withit. And lack of capital--this answer to the question Mr Kitson floutsbecause, he says, "since capital is wealth, " to say that "wealth isscarce because capital is scarce is the same as saying that wealth isscarce because it is scarce. " But is it not a "fundamental truth ofeconomic science" that capital is wealth applied to production? Wealthand capital are by no means identical. When a well-known shipbuildingmagnate laid waste several Surrey farms to make himself a deer-park, the ground that he thus abused was still wealth, but it is no longercapital because it has ceased to produce good food and is merely apleasant lounging-place for his lordship. May not the failure ofproduction be partly due to the fact that, owing to the extravagantand stupid expenditure of so many of the rich, too much work is putinto providing luxuries--of which the above-mentioned deer-park is anexample--and too little into the equipment of industry with the plantthat it needs for its due expansion?

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

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

But is this so? If goods are produced more rapidly than money, it doesnot follow that they could not be sold, but only that they would havebeen sold for less money. The producer would have made a smallerprofit, but on the other hand the cheapening of the product would haveimproved the position of the consumer, the cheapening of materialswould have benefited the manufacturer, and it is just possible thatproduction, instead of being limited, might have been stimulated bycheapness due to scarcity of currency and credit, or, at least, mighthave gone on just as well on a lower all-round level of prices. On thewhole, it is perhaps more probable that a steady rise in prices causedby a gradual increase in the volume of currency and credit would havethe more beneficial effect in stimulating the energies of producers. But Mr Kitson's argument that the volume of currency and creditimposes an absolute limit on the volume of production is surely muchtoo clean-cut an assumption. This absolute limit may be true, ifcurrency cannot be increased, with regard to the aggregate value inmoney of the goods produced. But money value and volume are two quitedifferent things. If our credit system had not been developed as ithas, and we had had to rely on actual gold and silver for carrying onall production and trade, it does not by any means follow that tradeand production might not have been on something like their presentscale in the matter of volume and turnover; but the money value wouldhave been much smaller because prices would have been all round at amuch, lower level. 

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

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

Mr Kitson, however, uses the "Quantity Theory of Money"--the doctrinethat the value or buying power of money varies according to itsquantity in relation to that of the goods that it buys--chiefly as astick wherewith to beat the Gold Standard. He shows, very easily andtruly, that it is absurd to suppose that the value of the monetarygold standard is invariable. Thereby he is only beating a dead horse, for no such argument is nowadays put forward. The variability of thegold standard of value is acknowledged, whenever a fluctuation in thegeneral level of commodity prices is recorded. But gold is the basisof our credit system, and of those of all the economically civilisedcountries of the world, not because its value is believed to beinvariable, but because it is the commodity which is universallyaccepted, in such countries and in normal times, in payment of debts. This quality of acceptability it has got largely by custom andconvention. Mr Kitson speaks of the "selection of gold by the world'sbankers as the basis for money and credit. " But it was selected ascurrency by common custom long before bankers were heard of. And itwas selected because of its permanence, ductility and other qualities, especially its beauty as ornament, which made man, eager to adornhimself, his women-kind, and the temples of his gods, always readyto accept it in payment, knowing also that, because of thisacceptability, he would always be able to exchange it into any goodsthat he wanted. 

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

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

Such, however, seems to be the Promised Land to which Mr Kitson wantsto lead us. Thus he propounds his remedy. "The remedy is surelyobvious. Divorce our legal tender from its alliance with goldentirely, so that the supply of money and credit for our home trade isno longer dependent upon our foreign trade rivals. Base our currencyupon the national credit ... Treat gold as a commodity only, for thesettlement of foreign trade balances. "

This passage in his article in the September _Supplement_ tells uswhat to do. Keep gold, out of deference for foreign prejudice, for thesettlement of foreign trade balances, but make as much paper money asyou like for home use. As our legal tender money is to be "divorcedentirely from its alliance with gold" it clearly cannot be convertibleinto gold. So that apparently we shall have a paper pound and a goldpound (the latter for foreign use) with no connection between them. This stage of economic barbarism has been left behind now even bysome of the South American republics. The paper pound, based on thenational credit, can be multiplied as fast as our legislators thinkfit. If they do not multiply it fast enough, Mr Kitson will tell themthat they are strangling trade, because the volume of productionis limited by the amount of money available. At the same time bankcredits will be multiplied indefinitely because, as was shown in theNovember _Supplement_, Mr Kitson supports a view that the averagebusiness man holds (according to him) that he ought to have a legalright to as much credit as he wants. With the Government printingpaper to please its supporters, with the banks obliged by law to givecredit to every one who asks for it, and with prices soaring on everyaddition to currency and credit, what a country this will be to livein, and what a life will be led by those who have to compile andwork out the index numbers of the prices of commodities! Some of us, perhaps, will prefer the jog-trot conservatism of Lord Cunliffe'sCurrency Committee, who in their recently issued report[1] (whichevery one ought to read) recommend that gold should not be used forcirculation at present, but that endeavours should be made towardsthe cautious reduction of our swollen paper currency, and that itsconvertibility into gold should be maintained. 

[Footnote 1: Cd. 9182, _2d_. ]

INDEX

Addis, Sir Charles, on banking, Aërated Bread Co. , and bonus issues, Allies, loans to, America, effect of war on, War finance of, Bank Act: its purpose, Its suggested repeal, Its working, Bank Amalgamations, progress of, Bechhofer, Mr, on Guild Socialism, Bills of Exchange, as basis of issue, Bonar Law, Mr, on after-war position, On capital levy, On sale of securities, British Trade Corporation, formation of, Brunner, Mond, and bonus shares, Budget, in 1918, Canadian Pacific, and bonus issues, Capital, foreign, Levy on, Meaning of, Supply of, War's destruction of, Capital Issues, Committee on, Licence required for, Need to restrict, Stock Exchange and, Cole, Mr, on Guild Socialism, Cunliffe Committee, report ofCurrency: inflation of, International, Metals as, Origin of, Quantity theory of, Report on, _Daily News_, on capital levy, Expenditure, Committee on, France, after-war position of, Free Trade and British supremacy, Germany, after-war position of, Our claims against, War finance of, Gold standard: affected by war, Faults of, Reasons for, Goodenough, Mr, on note issue, Hoare, Mr Alfred, on taxation, Holden, Sir Edward, and the Bank Act, Inflation, working of, Interest, rate of, Kitson, Mr, on currency, Labour, example set by, Lawrence, Mr Pethick, on capital levy, Lees, Mr Edward, on debt redemption, Lloyds, elasticity of, London, prestige of, Macaulay, Lord, on bad money, _New Statesman_, on capital levy, Owen, Senator, on American system, "Quantity Theory, " of currency, Reserves, capitalising, _Round Table_, on capital levy, Socialism, and bank amalgamations, In light of war, Guild, Stilwell, Mr, on paying for war, Taxation, as war weapon, Increase of, in war, "War Emergency Workers, " on capital levy, Webb, Mr, on State banking,