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Title: War-Time Financial Problems
Author: Withers, Hartley, 1867-1950
Language: English
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Copyright Status: Not copyrighted in the United States. If you live elsewhere check the laws of your country before downloading this ebook. See comments about copyright issues at end of book.

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Works by Hartley Withers


Second Impression.

"He treats of the subject mainly in its relation to industry, and
smooths the path for those who find the way rather thorny. Timely and
instructive."--_Financial Times_.


Second Impression.

"It should be read at once by every taxpayer. Mr. Withers' latest book
can be most heartily commended,"--_Morning Post_.


Fifth Impression.

"It is a good book, it is sure of its public."--_Morning Post_.


Eighteenth Impression.

"Will supersede all other introductions to monetary science; a
safe and indispensable guide through the mazes of the Money
Market."--_Financial News_.


Second Impression.

"Mr. Withers makes the topic interesting in spite of its obvious
and irrepressible technicality. Occasionally he renders it really
amusing."--_Financial News_.


Third Impression.

"Views its subject from the advantageous position of an impartial
observer, the respective cases for capital and labour, rich and poor,
being brought to the reader's attention in a convincingly logical
manner."--_Financial Times_.


Fourth Impression.

"Nothing could be clearer or more enlightening for the general
reader."--_The Times_.


Third Impression.

"We heartily commend a timely work dealt with in popular and simple
style, a standard financial work."--_Morning Post_.


Third Impression.

A Description of the Money Market, by WALTER BAGEHOT. Edited with a
new Preface by HARTLEY WITHERS. "There is no city man, however
ripe his experience, who could not add to his knowledge from its
pages."--_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_.


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

The contents, with the exception of the last article on "Money or
Goods?" (which appeared in the Trade Supplement of the _Times_ for
December, 1918), have already been published in _Sperling's Journal_,
from September, 1917, to March, 1919; they have been left as they were
written, 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.


June, 1919.


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

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

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

The Changed Spirit of the Country--A Great Opportunely thrown
away--What Taxation might have done--The Perils of Inflation--Drifting
stupidly along the Line of Least Resistance--It is we who pay, not

The Objects of the Levy--Its Origin and History--How it would work in
Practice--The Attitude of the Chancellor--The Effects of the Scheme in
discouraging Thrift--Its Fallacies and Injustices--The Insuperable
Obstacles to its Application--Its Influence on Production--One of the
Tests of a Tax--Judged by this Test the Proposed Levy is doomed

The Recent Amalgamations--Will the Provinces suffer?--Consolidation not
a New Movement--The Figures of the Past Three Decades--Reduction of
Competion not yet a Danger--The Alleged Neglect of Local
Interests--Shall we ultimately have One Huge Banking Monopoly?--The
Suggested Repeal of the Bank Act--Sir E. Holden's Proposal

Another Government Committee--The Fallacy of imitating
Germany--Prussianising British Commerce--The Inquiry into the Companies
Acts--Will Labour Influence dominate the Report?--Increased Production
the Great Need--Will it be met by tightening up the Companies Acts?--The
Dangers of too much Strictness--Some Reforms necessary--Publicity,
Education, Higher Ideals the only Lasting Solution--The Importance of
Foreign Investments--Industry cannot take all Risks and no Profits

The Figures of the National Budget--A Large Increase in Revenue and a
Larger in Expenditure--Comparison with Last Year and with the
Estimates--The Proportion borne by Taxation still too Low--The Folly of
our Policy of Incessant Borrowing--Its Injustice to the Fighting Men

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

An Inopportune Proposal--What is Currency?--The Primitive System of
Barter--The Advantages possessed by the Precious Metals--Gold as a
Standard of Value--Its Failure to remain Constant--Currency and
Prices--The Complication of other Instruments of Credit--No Substitute
for Gold in Sight--Its Acceptability not shaken by the War--A
Fluctuating Standard not wholly Disadvantageous--An International
Currency fatal to the Task of Reconstruction--Stability and Certainty
the Great Needs

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

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

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

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

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

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

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

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

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

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





_September_, 1917

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

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

On the subject of the definition of capital, economists differ with
all the consistency that they only show in differing. One of the
earliest descriptions of capital was given by Turgot, who thought that
capital meant "valeurs accumulées." In this wide sense the word covers
all goods which have value, that is, can be exchanged into other
goods. From this point of view, the schoolboy who invests sixpence in
marbles is a capitalist, because he has bought an asset which is not
immediately consumed, but can, later on, if his fancy urges him, be
exchanged into white mice or any other object of his desire. On the
other hand, the schoolfellow who at the same time spends sixpence on
cherries 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 this
point of view capital practically means the equipment and tools of
industry in the widest sense of the word, including agriculture and
transport. Lately economists have shown a tendency to go back to the
wider application of the word, and an American economist, Dr Anderson,
who has just published a book on the Value of Money, goes so far
therein as to state that a "dollar is capital." The language of the
City generally uses the word in the narrow sense adopted by Mill, and
there is very much to be said for this view of the real meaning of
capital. Marbles to play with, houses to live in, motor-cars to go
joy-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 the
word is the tools and equipment of industry, because it is only by
their possession that the wealth of mankind not only increases man's
present enjoyment, but enhances his future output of the goods
necessary for his existence.

If we take the word in this sense it becomes at once apparent that the
theory is exaggerated which maintains that war is destroying capital,
so that capital will long be at a famine price. The extent to which
war is actually destroying the tools and equipment of industry is
quite limited. On the actual battlefield that sort of destruction
proceeds apace when factories are shelled into shapeless lumps of
bricks, and when the surface of the earth, that man's skill had
developed into great productive fertility, is torn into craters and
covered with rubbish. There is also rapid destruction of a very
important part of the equipment of industry owing to the submarine
campaign, which is sinking so many fine ships that were meant to
carry goods from one country to another. But, apart from this actual
destruction on the battlefield and on the sea, the tools and equipment
of industry over the greater part of the earth remain untouched. It is
true that, owing to the preoccupations of the war, not so much work
as usual is being put into the upkeep and repair of our railways,
factories and other industrial tools. But at the same time an enormous
amount of new machinery is being created for the manufacture of
munitions and other stuff needed for the war, and a large part of this
new machinery ought to be available as industrial capital when the war
is over. Those people who talk so glibly of the enormous destruction
of capital by the war are surely making a mistake common to minds
which look at economic questions through a financial telescope,
mistaking money for capital. They see that an enormous amount of money
is being spent on the war, and they jump to the conclusion that this
money, if not spent upon the war, would have been put into capital
investments and so have increased the tools and equipment of industry.
In fact, a great deal of the money now spent upon the war would
have been spent, if there had been no war, not upon increasing the
equipment of production, but upon purely frivolous and extravagant
consumption. There is no need to dwell on the effect of war in
reducing many kinds of expenditure on which hundreds of millions
must have gone in peace time, and this restriction of extravagant
consumption has to be deducted before we even admit, not that all
money spent upon the war is destroyed capital, but even that all the
money spent upon the war is destroying what might otherwise have
become capital.

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

Saving is such an entirely unpopular virtue that it seems at first
sight a disastrous conclusion to arrive at, that if we want to
increase the supply of capital it can only be done by stimulating
this unattractive habit; and there is a further question to be
asked--whether it will be necessary or desirable to have a great
increase in the supply of capital. As was pointed out above, one
theory of after-war needs maintains that the world will be so
exhausted by this great struggle that it will have no enterprise and
no energy left, and that capital will go begging. If this be so, we
need not trouble to inquire as to whether the supply of capital can be
made plentiful. But I venture to think that this view is very probably
wrong, though it is very dangerous to prophesy concerning the purely
psychological question of the state of mind in which the citizens of
the warring Powers will end the war. It is, however, at least
probable that the prices which are then likely to rule will stimulate
enterprise all over the world; that every one will see that there is
a great work to be done in getting industry back on to a peace
basis, and a great profit to be made by those who do this work most
successfully, and that the demand for capital is likely, for some
years at least, to clamour for all that can be produced.

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

Something can be done by banks and financiers in supplying credit in
the form of advances and acceptances; but this method is only like
oiling the wheel of industry, the real driving power of which has to
be saved capital. Creating credits simply means that a certain amount
of buying power is manufactured and handed over to those to whom the
credit is given. It does not set free any labour or goods to be
put into industry. That is only done by the man who abstains from
consumption and saves money by restraining his desire to spend it on
himself, and puts it at the disposal of industry. The man who saves
money, who has always hitherto been rather despised by his companions
and resented by a certain class of social reformer and many other
uneducated people as a capitalist bloodsucker, is thus, in fact, the
person who leaves the world richer than he found it, having put his
money, the product of his own work, into increasing the world's
output, instead of spending it on such forms of enjoyment as heavy
lunches and cinema shows.

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

Some people argue that a low rate of interest makes people save more
because it is necessary for them to save more in order to acquire
independence. Others maintain that a high rate of interest induces
people 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 certain
limits, whatever the rate of interest may be. When the rate of
interest is low they will certainly not reduce their saving because
each hundred pounds that they put away brings them in comparatively
little, and when the rate of interest is high the attraction of the
high rate will also deter them from diminishing the amount that they
put aside. Moreover, we have to consider, not only the money payment
involved by the rate of interest, but its buying power in goods. In
1896 trustee securities could only be bought to return a yield of
2-1/2 per cent. for the buyer; now the investor can get 5-1/4 per
cent. and more from the British Government. And yet the power that
this 5-1/4 gives him over the goods and services that he wants for his
comfort Is probably not greater, and very likely rather less, than the
power which he got in 1896 from his 2-1/2 per cent. One of the few
facts which seem to stand out clearly from a study of the movement of
the prices of securities, and consequently of the rate of interest to
be derived from them, is that the rate of interest is high when the
price of commodities is high, and vice versa. So that the answer to
the question: What is the rate of interest likely to be after the war?
may be given, in Quaker fashion, by another question: What will happen
to the index number of the prices of commodities? It seems fairly
probable that both these questions may be answered, very tentatively
and diffidently, by the expression of a hope that after a time, when
peace conditions have settled down and all the merchant ships of the
world have been restored to their peaceful occupations, the general
level of the price of commodities will be materially lower than it is
now, though probably considerably higher than it was before the war.
If this be so, then it is fairly safe to expect that the rate of
interest, as expressed in money, will follow the movement of prices of
goods. But it must be remembered that by rate of interest I mean the
pure rate of interest, that is to say, the rate earned on perpetual
fixed-charge securities of the highest class. It may be that, owing to
the very large amount of gilt-edged securities created in the course
of the war by the various warring Governments, the rate of profit to
be earned by the man who takes the risks of industry from dividends
on ordinary shares and stocks will have to be made relatively more
attractive than it was before the war.

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

Here, again, we are faced with a psychological question which can only
be answered by those who are bold enough to forecast the state of mind
in which the majority of people will find themselves when the war is
over. If there is a great reaction, and everybody's one desire is to
throw this nightmare of war off their chests and go back to the times
as they were before it happened, then all that the war has taught us
about the production of capital will have been wasted. But I rather
doubt whether this will be so. Saving merely means the diversion of
a certain proportion of the output of industry into the further
equipment of industry. The war has taught us lessons which, if we
use them aright, will help us to increase enormously the output of
industry. So that if these lessons are used aright, and industry does
not waste its time in squabbles over the sharing of its product, its
output may be so great that a comparatively smaller amount of saving
in relation to the total output may produce a larger amount of capital
than was made available in days before the war. There is a further
point, that the war has taught a great many people who never saved at
all to save a good deal. It was estimated before the war that we in
this country were saving about four hundred millions a year. This
figure was necessarily a guess, and must be taken for what it is
worth. There can be no doubt that the amount of real saving now in
progress, voluntary, owing to the patriotic effort of people who think
they ought to restrict their own consumption so that the needs of
our fighters may be provided, and enforced through the action of the
Government in taking taxes and inflating the currency, is very much
greater than it was before the war; probably at least twice as much
when all allowance has been made for depreciation of the currency.
Some people think that this saving lesson will have been learned, will
have become a habit, will continue and will grow. If so, if people
save a larger proportion of their income than they did before, and
if the total output of goods is increased, as it easily may be, it
becomes at once evident that there is a possibility of a freer supply
of capital for industry than has ever been seen. But in looking at
this hopeful and optimistic picture, we must never forget that it can
only be painted by those who are prepared to leave out of the canvas
all the danger of industrial strife and dislocation, and all the
danger of reaction to the old habits of luxurious spending which are
so strong a possibility in the other direction. The war has shown us
how we can, if we like, increase production, reduce consumption, and
so have a larger margin than ever before to be put into providing
capital for industry. Whether we really have learned these lessons and
will apply them remains to be seen.

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

Capital is a very tender plant, and it will be very easy, if mistakes
are made, to frighten those who see the benefits of accumulation for
themselves and others. Labour troubles and industrial unrest are
extremely likely to have the effect of destroying capital by
preventing it coming into existence. If we remember that capital can
only be created by being saved, it becomes evident that if those who
save are threatened with too deep an inroad into their reward for so
doing, on the part of labour, they will hesitate to save; and if the
action of labour has this effect, labour will be sawing off the bough
on 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 continual
demand for fresh labour can be maintained.

There is also at present much mischievous talk about a great tax on
capital for the purpose of redeeming, or hastening the redemption of,
war debt. It is clear at once that it is not possible to tax capital
if we remember that capital consists of the tools and equipment of
industry, or even, in the wider sense of the word, of accumulated
assets which have not been consumed. Unless the Government is prepared
to take payment in factory chimneys, railway sleepers, houses and
fields, or the securities and mortgages that are claims on their
product, it is not possible to tax capital. The only thing that the
Government can tax is the output, that is to say, the annual income
of the people. In other words, a tax on capital is simply a form of
income tax assessed, not according to a man's income, but according to
the assets of which he is possessed. The effect of such a tax would
be that he who has spent everything that he has earned on his own
enjoyment would go scot free in the matter of the capital tax, and
would be rewarded for his improvidence by being asked to make no
sacrifice; while his thrifty brother who, out of a smaller income, has
set aside a certain proportion during the last twenty or thirty years,
would have to hand over a portion of his current income assessed
upon the value of the assets into which he has put his savings.
Incidentally, it may be remarked that it would take years to make this
necessary valuation, and that it would probably be done in a very
inequitable manner by untrained and incompetent officials. But the
important point is this, that if the Government shows a tendency to
take the possession of assets as a basis for taxation it will be
directly encouraging those who spend their whole income in riotous
living and frivolous amusement, and discouraging those who help to
increase mankind's output by adding to the capital available.

Finally, it may be added that the shyness of the saver will be greatly
diminished if he can feel that there is a trustworthy machinery of
company promotion, so that he can rely on any savings that he puts
into industry having at least a fair chance of yielding him a fair
reward. This subject is too vast to enter into at present, but it
is one to which those who are responsible for the management of our
financial affairs cannot give too much attention. Every time the real
investor is swindled out of his money there is more than a chance that
he will look upon all forms of saving as a folly to be left to the
credulous. It is easy to say that it was his own fault, that he ought
to have been more careful, or consulted a better broker; but he will,
with equal ease, retort that If honest financiers knew their business
better, they would have long ago made things easier for the ignorant
investor to know whether he was putting his money into genuine
enterprise or throwing it down a sink.

Like all other divagations on the subject of what may happen in the
future, this attempt to forecast has necessarily consisted of "dim
glimpses into the obvious," as the undergraduate said of Jowett's
sermon. All that we can be sure of is this: that if the great
opportunities that will lie open to mankind at the end of the war
are rightly used, if we use its lessons to increase our production,
restrict our frivolous consumption, and put a larger proportion of our
larger production into stimulating production still further, there
ought to be a great increase in the amount of capital available to
supply the great increase which may be expected in the amount of
capital demanded. The fact that the chief nations of the world will
have enormous debts on which to pay interest is not one that need
necessarily terrify us from this point of view. The arranging and
imposition of the taxation necessary for meeting the interest on these
debts will involve very serious political and social questions; but
the payment of this interest need not necessarily diminish production,
and it may probably help in checking consumption. It will not impair
the total wealth of the world as a whole; it will merely affect its
distribution. And since it will mean that a considerable part of the
world's output will, for this reason, be handed over to the holders of
the various Government debts, who, _ex hypothesi_, will be people who
have saved money in the past, it is at least possible that they may
devote a considerable amount of the spin so received to further saving
or increasing the supply of capital available.



_October_, 1917

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

Will the prestige of the London money market be maintained when the
war is over? This is a question of enormous importance, not only
to every one who works in and about the City, but to all who are
interested in the maintenance and increase of England's wealth. Like
all other questions about what is going to happen some day, the answer
to it will depend to a very great extent on what happens between the
present moment and the return of peace. To arrive at an answer we have
first to consider on what London's financial prestige has been based
in the past, and on this subject we are able to cite in evidence the
opinion of an enemy. Our own views about the reasons which gave us
financial eminence may well be coloured by national and patriotic
prejudice, but when we take the opinion of a German we may be pretty
sure that it is not warped by any predisposition in favour of English
character and achievement.

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

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

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

Coming closer to detail, our critic says, with regard to the
international nature of the business done on the London Stock

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

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

"Insurance, again, represented by the well-known organisation of
Lloyds, which in form is something between a stock exchange and a
co-operative partnership, is nowhere more elastic and adaptable than
in London. It must be said, to the credit of Lloyds, that anyone
asking to be insured there was never hindered by bureaucratic
restrictions, and always found his wishes met to the furthest possible
extent. The agencies of Lloyds abroad are also so arranged that both
the insured and the insurer can have their claims settled quickly and

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

"A further bad habit, harmful to our economic development, is
narrow-mindedness. This, too, is very prevalent in Germany--and
elsewhere as well. And this is not surprising. Even among the
generation which is active to-day, the older members grew up at a time
when possibilities of development were restricted and environment was
narrow. With commendable foresight many of these older men have
freed themselves from this petty spirit, and are second to none in
enterprise and energy. Germany can be as proud of its 'captains of
industry' as America itself. But many commercial circles in Germany
are still unable to free themselves from these shackles. The relations
between buyer and seller are still often disturbed by petty quibbling.
In those industries where cartels and syndicates have not yet been
formed, 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 ruthless
in their action. In this field we have very much to learn from the
English business man. Long commercial tradition and international
business experience have taught him long ago that broad-mindedness is
the best business principle. Look at the English form of contract, the
methods of insurance companies, the settlement of business disputes!
You will find no narrow-mindedness there. Tolerance, another quality
which the German lacks, has been of great practical advantage to the
Englishman. Until recently the City has never resented the settlement
of foreigners, who were soon able to win positions of importance
there. Can one imagine that in Berlin an Italian or a South American,
with very little knowledge of the German language, would be not only
entrusted with the management of leading banks and companies, but
would be allowed in German clubs to lay down--in their faulty
German--the law as to the way in which Germany should be developed?
Impossible! Yet this could be seen again and again in England, and
the country gained greatly by it. If the English have now developed
a hatred of the foreigner, it only means that the end of England's
supremacy is all the nearer."

According to our German critic the great fabric that has been built up
on these characteristics and qualities is threatened with ruin by the
war; 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 hands
of Berlin. In order that we may not be accused of taking the laudatory
plums out of this German pudding and leaving out all criticisms and
accusations, let us quote in full the passage in which he dances in
anticipation on London's corpse:--

"Let us sum up. England's reputation for honest business dealing and
for trustworthy administration has suffered. Her insular inviolability
has been put in question. The ravages of war have undermined the
achievements of many generations. Her free gold market has broken
down. The flow of capital towards London will fall off, for those who
cannot borrow there will no longer send deposits. The surplus shown
in her balance-sheet will contract. Foreign trade will also decrease.
Hand in hand with this fall, free trade, that mighty agent in the
development of England's supremacy, will, in all probability, give
place to protection. Stock Exchange business will grow less. Rates of
interest will be permanently higher."

How much truth is there in all this? Has our reputation for honest
dealing and for trustworthy administration suffered? Surely not in the
eyes of any reasonable and unprejudiced observer. In the course of the
greatest war in history, fought by Germany with weapons which have
involved the violation of the most sacred laws of humanity and
civilisation, England has acted with a respect for the interests of
neutrals which has been severely criticised by impatient observers at
home. As for our "insular inviolability" having been put in question,
it certainly has not, so far, suffered any serious damage. Our Fleet
has defended us from invasion with complete success, and the damage
done by marine and aerial raiders to our property on shore is
negligible. Our free gold market is said to have broken down. The
proof of the pudding is in the eating. Germany, when the war began,
immediately relieved the Reichsbank from any obligation of meeting
its notes in gold, and frankly went on to a paper basis. England has
already shipped well over 200 millions in gold to America to finance
her purchases there and those of her Allies.

It may be true that capital will not flow to London if London is not
in a position to lend, but we see no reason why London should not be
able to resume her position as an international money lender, not
perhaps immediately on the declaration of peace, but as soon as the
aftermath of war has been cleared away and the first few months of
difficulty and danger have been passed. The prophecy that foreign
trade will decrease may also be true for a time owing to the
destruction of merchant shipping that the war is causing. This
possibility, however, may be remedied between now and the end of the
war if the great programmes of merchant shipbuilding which have been
undertaken by the British and American Governments are duly carried
out. In any case, even if foreign trade decreases, there is no reason
whatever to expect that England's will decrease faster than that of
other nations.

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

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

If Stock Exchange business will be less, though this does not by any
means follow, there is no reason why it should be relatively less
here than in other centres. As to rates of interest being permanently
higher, the same answer applies. It may be true, but there is no
reason why they should be relatively higher in London than elsewhere;
and, if they are high, it will be because there will be a great demand
for capital, which will mean a great trade expansion; both in the
provision of capital and in meeting the demands of trade expansion
England will be doing what she has done with marked success in the
past and can, if she works in the right way now and after the war, do
again with equal and still greater success.

There is, however, a danger that threatens our financial position
after the war, on the subject of which our German critic is discreetly
silent, because that danger threatens the position of Germany very
much more emphatically. It consists in the way in which our Government
is at present meeting the needs of war finance, not by compelling
economy on the civilian population through taxation and borrowing
direct from investors, but by manufacturing currency for the purposes
of the war by means of the printing press and the banking machinery.
The effect of this policy is seen in the enormous mass of Treasury
notes with which the country has been flooded. Their total is now
nearly 180 millions or perhaps 100 millions more than the gold which
they were originally designed to replace.

It is also to be seen in the great increase in banking deposits which
has been a feature of our financial history since the war began. Some
people regard this feature as a phenomenal proof of the growth of our
wealth during the war. I am afraid there is little foundation for this
pleasant assumption, for these new deposits have been called into
being by the banks subscribing to Government securities, whether War
Loan, Treasury Bills, Exchequer Bonds or Ways and Means advances or
lending their customers the wherewithal to do so. By this process
the balance-sheets of the banks are swollen on both sides, by the
Government securities and advances to customers among the assets,
against which the banks create new deposits, so giving the community
as a whole the right to draw more cheques.

Every time the bank makes an advance it gives the borrower a credit in
its 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 he
owes money; but as long as the advance is outstanding there will be a
deposit 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 the
banks to manufacture money for it. Nobody feels any poorer for the
process, in fact, those who have new money in their pockets or in
their bank balance feel richer, but the result of thus multiplying
currency without any increase in the supply of goods and services to
be bought inevitably helps the rise in prices which makes the war
costly, puts the burden of it on to the wrong shoulders, and likewise
cheapens the value of the English pound as measured in other
currencies. This is why the evils involved by this process become so
relevant to the question now at issue.

If the Government is allowed to go on financing the war by increasing
the currency with the very reluctant help of the bankers, the
difficulties of maintaining our gold standard and keeping the
exchanges in favour of London will be very greatly magnified when
the war is over and our gold reserves are no longer protected by the
submarines and the high cost of shipping gold that they produce. It
therefore follows that all who have the true interests of the City at
heart should use all the influence they can to force the Government to
adopt a sounder financial policy before it is too late.

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

If we have done better than France, Italy, Russia and Germany in this
respect, it must also be remembered that the financial prestige which
these countries had to maintain was not nearly so great and well
established as ours, with the possible exception of France; and
France, being exposed to the ravages of a ruthless invader, was in a
position which put special obstacles in the way of the canons of sound

If, then, there are certain dangers that threaten our financial
position when the war is over, we must remember, on the other hand,
that the war has already done a great deal to maintain our financial
prestige 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 the
seas clear and put a small Expeditionary Force to support the left
flank of the French Army, and to do these things during a contest
which was expected by the consensus of expert opinion to last not more
than a few months. All these things we accomplished, and we were
the only Power at war which did actually accomplish all that it was
expected and asked to do. More than that, we also undertook a great
task which was not in our programme; we created a great army on a
Continental scale, and, at the same time, continued to carry out the
other tasks which had been assigned to us.

All these things we did, and that we should have done them was
evidence of economic strength and adaptability which have astonished
the world. To have financed the Allies and ourselves as long as we did
would have been comparatively easy if our population could have been
left at work to turn out the stuff and services, the provision of
which are implied by financing; but for us to have been able to do it
and at the same time to improvise an army which is now consistently
and regularly beating the Germans is an achievement which will
inevitably raise the world's opinion of our economic strength, on
which financial prestige is ultimately based.

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

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

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

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

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

That New York will be greatly strengthened by the war, which has
brought masses of American securities back to the country of origin
and has put into the hands of American bankers and investors large
blocks of European promises to pay, is as clear as noonday; but
whether when the war is over New York will care to be bothered much
with problems of international finance remains to be seen. In the
first place, the claims of her own country upon her financial
resources will be insatiable and imperative, In the second place, the
business of international finance is carried out on very finely cut
terms; and the Americans being accustomed to the fat rates of profit
which business at home has given them may not care to devote much
attention to the international market, in which the risks are big,
the turnover is enormous and the profits very finely cut. It has
been remarked by a shrewd observer that the Americans will never do
business for a thirty-second.

In the third place, it must be remembered that the geographical
position of London is more favourable than that of New York as a world
centre, as the world is at present constituted. England, anchored off
the coast of Europe, is clearly marked as the depôt for the entrepôt
trade of the Old and New Worlds. New York is clearly marked as the
centre for the trade of the Western hemisphere, and it is likely
enough that New York and London, acting together as the financial
chiefs of the two hemispheres, may be gradually united into what is
practically one market by the growing ties of mutual interest.

With regard to the position of other possible rivals to London's
position, it need only be said that they have certainly been weakened
much more rapidly than has London during the course of the war. Paris,
threatened by the near approach of an invading foe, has inevitably
suffered much more severely than London, and is likely to take longer
in recovering the great position as a provider of capital which was
given to her by the thrift of the average French citizen. Every one
expects with confidence to see, when the war is over, a miraculous
recovery in France produced by the same spirit which worked miracles
after the war of 1871, aided and abetted by the subsequent improvement
in man's control over the forces of nature, and also by the deep and
world-wide sympathy which all will feel for France as the champion of
freedom who has suffered most severely in its cause during the war.
But it is impossible to expect, after what France has suffered, that
she will be, for some time, in a position seriously to challenge
London as a financial rival. All Englishmen will hope that the day
when she will be in a position to challenge us again will come

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

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

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

What we have to do in order to secure London's position after the war
is to restore as soon as we can the system that had established it in
the century before the war. We have to show the world that, far from
any intention to abandon Free Trade, we mean to take a long step
forward along the line of international activity which has been the
source of our greatness in the past. We want, as soon as possible, to
get back that freedom from Government control which has given us such
elasticity and adaptability to our money market, our Stock Exchange
and our Insurance business. A certain amount of Government control
will inevitably have to continue for a time after the war, but the
sooner we rid ourselves of it the sooner we shall restore to the
London money market those qualities which, after the reputation that
it has for honesty, soundness and straight dealing, were most helpful
in building up its eminence.

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

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



_November_, 1917

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

A legend current in the City says that the Imperial War Committee, or
whatever was the august body entrusted with the task of thinking out
war problems beforehand, had done its work with regard to the Army and
Navy, transport and provision, and everything else that we should want
for 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, the
events of the war confirm the opinion that if it was not true it ought
to have been. We are continually accused of not having been ready for
the war; but, in fact, we were quite ready to do everything that we
had promised to do with regard to military and naval operations. Our
Navy was ready in its place in the fighting line, and the dispatch
with which our Expeditionary Force was collected from all parts of the
kingdom, and shipped across to France, was a miracle of efficiency and
practical organisation. It is true that we had not got an Army on a
Continental scale, but it was no part of our contract that we should
have one. The fighting on land was in those days expected to be done
by our Allies, assisted by a small British force on the left flank of
the French Army. That British force was duly there, and circumstances
which were quite unforeseen made it necessary for us to undertake a
task which was no part of our original programme and create an Army
on a Continental scale, in addition to doing everything that we had
promised beforehand to a much greater extent than was in the bargain.

But in finance there was no evidence that any thought-out policy had
been arrived at in order to make the best possible use of the nation's
economic resources for the war when it came. The acute crisis in the
City which occurred in August, 1914, was a minor matter which hardly
affected the subsequent history of our war finance except by giving
dangerous evidence of the ease by which financial problems can be
apparently surmounted by the simple method of creating banking
credits. That crisis merely arose from the fact that we were so
strong financially, and had so great a hold upon the finance of other
countries 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 had
made by way of accepting and bill-discounting arrangements, the whole
machinery of exchange broke down because from all over the world the
market in exchange went one way. Everybody wanted to buy bills on
London, and there were no bills to be had.

There was also the internal problem which arose because some of the
public and some of the banks took to the evil practice of hoarding
gold just at the wrong moment, and consequently there was no available
supply of legal tender currency except in the shape of Bank of England
notes, the smallest denomination of which is £5. It is known that our
bankers had long before pointed out to the Treasury that if ever a
banking crisis arose there would, or might be, this demand for a paper
currency of smaller denominations than £5; this suggestion got into a
pigeon-hole at the Treasury and was deep under the dust of Whitehall
by the time experience proved how big a gap in our financial armour
had been made by its neglect. If the £1 notes, with which we are now
so familiar, had been ready when the war broke out, or, still better,
if the Bank of England had been empowered and instructed to have an
issue of its own £1 notes ready, it may at least be contended that the
moratorium, which was so bad a financial beginning of the war, might
have been avoided.

But this opening crisis was a short-lived matter, and was promptly
dealt with, thanks to the energy and courage of Mr Lloyd George, who
was then Chancellor of the Exchequer, and saw that things had to be
done quickly, and took the advice of the City as to what had to be
done. The measures then employed erred, if at all, on the side of
doing too much, which was certainly a mistake in the right direction
if in any. What is much more evident is the fact that not only had
there been no attempt to provide against just such a jolt to our
financial machine as took place when the war began, but that, quite
apart from the financial machinery of the City, no reasoned and
thought-out attention had been given to the great problems of
governmental finance which war on such a scale brought with it. There
is, of course, the excuse that nobody expected the war to be on this
scale, or to last so long. The general view was that the struggle
would be over in a few months, and must certainly be so if for no
other reason because the economic strain would be so great that the
nations of Europe could not stand it for a long time. On the other
hand, we must remember that Lord Kitchener, whom most men then
regarded as representing all that was most trustworthy in military
opinion, made arrangements from the beginning on the assumption that
the war might last for three years. So, while some excuse may be made
for our lack of financial foresight, it does seem to have been the
duty of those whose business it is to manage our finances to have
thought out a complete scheme to be adopted in case of war if at any
time we should be involved in one on a European scale. Instead of
which, not only would it appear that no such endeavour had been made
by our Treasury experts before the war, but that no such endeavour
has ever been made by them since the war began. All through the
war's history many of the country's mistakes have been based on the
encouraging conviction that the war would be over in the next six
months. This conviction is still cherished to this day, and there can
be no doubt that if those who cherish it hold on to it long enough
they will come right some day.

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

The objections to the policy on the part of the "haves" and the "have
nots" are, of course, different, but as they both converge to the
same point, namely, to the reform of our system of war finance, it is
possible that they may in time have the effect of shaking even the
confidence of our politicians and officials in the haphazard and
slipshod methods which would long ago have produced financial disaster
if it had not been for the great financial strength of the country.

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

It is easy, as they say on the Stock Exchange, to job backwards, and
it is also easy, and perhaps rather unprofitable, to hazard opinions
about what would have happened if things had been otherwise.
Nevertheless, when we look back on the spirit of the country as it was
in those early days of the war, when the violation of Belgium had sent
a chivalrous thrill through the hearts of all classes in the country,
when we all recognised that we were faced with the greatest crisis
in our history, that our country and the future of civilisation were
about to be tested by the severest strain ever applied to them, that
the life and fortune of the individual did not count, but that the
war and victory were the only interests that any one had a right to
consider--when one remembers all these things, and the use that a wise
financial policy might have made of them, it is impossible to avoid
the conclusion that the history of the war in this country and its
social and political effects might have been something much finer,
much cleaner and more noble if only the weapons of finance had been
more boldly and wisely used. It is not a good thing to indulge in
high-falutin' on this subject. It is absurd to suppose that the war
suddenly turned us all into plaster saints at the beginning, and that
we might have continued so to the end if the State had dealt with our
money in a proper way. But without setting up any such idealistic
arguments as these, looking back on those early days of the war, one
can still remember the thrill of earnestness and of eagerness for
self-sacrifice which has since then given way lamentably to war
profiteering, war strikes, and a general struggle among many classes
of the community to make as much as possible out of the war, merely
because our financial leaders have never really put the country's
financial problem properly before the country.

We were not plaster saints, but we were either Idealistic and perhaps
foolish people who attached great importance to the freedom and
security of small nations and all those items in the programme of
idealistic Radicalism, or else we were good, red-hot, true-blue
Jingoes with a hearty hatred for Germany, and enjoyed the thought that
the big fight which we had long foreseen between the two countries was
at last going to be fought out. Or, again, we were just commonplace
people who did not much believe in idealistic Radicalism or
anti-German bitterness, but saw that the whole future of our country
was at stake, and were prepared to do anything for it. A fine example
was set us in those days by the Trade Union leaders. The industrial
world was seething with discontent. The Suffragettes in London and the
Carsonites in Ireland had shown us how much could be done by appeals
to physical force in a lazy-minded community; and hints of industrial
revolution, with great organised strikes, which were going to tie up
the transport industry of the country were in the air. And then, when
the war came, the Labour leaders said, "No strikes until the war is
over. 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 of
the war has frequently been questioned. At the top the financial and
property-owning classes, having been saved by Mr Lloyd George's able
adroitness from a bad crisis in the City, were entirely tame, and
would have suffered anything in the way of taxation or financial
conscription if the need for it had been properly put before them.

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

Such was the spirit with which the Government of that day had to
deal. A spirit in all classes earnestly patriotic, and so thoroughly
frightened of the economic consequences of the war that it would have
been ready to face any sacrifices that the Government had asked of it.
How, then, would the Government have dealt with this spirit if it had
taken the trouble really to think out the problem of war finance on
a long view instead of proceeding along a haphazard line, adjusting
peace methods to war without any consideration as to their adequacy?
If the problem had been really thought out beforehand the Government
must have seen clearly that the real economic problem in war-time is
not merely a question of raising money, since that can at any time
be done easily by means of a printing-press, but of diverting the
industrial energy of the nation from peace to war purposes, that is
to say, transferring from the enjoyment of the individual citizen
the goods and services that used to contribute to his comfort and
amusement, and turning them over to the provision of the things needed
for the war. War's needs can only be met out of the current production
of the world as it is at present. All the warring powers begin a
war with certain accumulated war stores consisting of battleships,
ammunition, guns and all other forms of war material. Apart from these
stores with which they begin, the whole work of providing the armies
with the fighting materials that they require, and the food and
clothes that they consume, has to be done during the course of the
war, that is to say, out of the current production of the moment.

Therefore the real economic problem that any Government has to face in
war-time is that of inducing its citizens to reduce their purchase of
goods and services, that is to say, to spend less, so that all
the things required for the Army and Navy may be obtained by the
Government. It is true that some of the goods and services required
for carrying on war can be obtained from foreign countries by any
belligerent which is able to communicate with them freely. In that
case 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 goods
to the foreigner in payment for what it buys, or if it is able to
obtain a loan from the foreigner, or some other foreign country, in
order to pay for its purchases abroad, or again, if, as in our case,
it holds a large accumulation of securities which foreign countries
are prepared to take in exchange for goods that they send for the
purposes of the war. By these two last-named processes, raising money
abroad, and selling securities to foreign nations, the warring country
impoverishes itself for the future. When it borrows abroad it pledges
itself to export goods and services in future to meet interest and
sinking fund on the money so raised, so getting no goods and services
in return. When it ships its accumulated wealth in the form of
securities it gives up for the future any claim to goods and services
from the debtor country which used to come to it to meet interest and
redemption. It is only by shipping goods in return for goods imported
for the war that a country can keep its financial staying-power on an
even keel.

Thus the problem which a statesman who had thought out the economics
of war beforehand would have recognised as the keystone of his policy,
would have been that of diverting the activities of the country from
providing itself with comforts and amusements to turning out goods
required for war, and of doing so with the least possible friction,
the least possible alteration in the economic equilibrium of the
country, and, above all, with the least possible cost to the national
finances. We arrive at the true aspect of this problem more easily if
we leave out the question of money altogether and think of it in units
of energy. When a nation goes to war it means to say that it has to
apply so many units of energy to the business of fighting, and to
provide the fighters with all that they need. If at the beginning
of the war its utmost capacity of output was, to mention merely a
fanciful figure, a thousand million units of energy, and if it was
clear that the fighting forces of the country would need for their
proper maintenance five hundred million units of energy, then it is
clear that the nation's ordinary consumption of goods and services
would have to be reduced to the extent of five hundred millions of
units 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 country
had to be reduced so that the industrial energy that used to go into
meeting their wants might be made available for the purposes of
fighting forces. Now what was the straightest, simplest and cleanest
way of bringing about this reduction in buying power on the part of
the ordinary citizen which has been shown to be necessary for the
purposes of war finance? Clearly the best way of doing it is by
taxation equitably imposed. When the State taxes, it says in effect
to the citizens, "Your country needs certain goods and services, you
therefore will have to go without those goods and services, and the
simplest way to make you do this is to take away your money and so
ration your buying power. Whatever is needed for the Army and Navy
will be taken away from you by taxation, and the result of this will
be that, instead of your indulging in comforts and luxuries, to the
extent of the war's needs the Government will use your money for
paying for what is needed for the Army and Navy."

If such a policy had been carried out the cost of the war to the
community would have been enormously cheapened. There need have been
no general rise in prices because there would have been no increase
in demand for goods and services. Anything that the Government
spent would have been counter-balanced by decreased spending by the
individual; any work that the Government needed for the war would have
been counter-balanced by a reduction in demand for work on the part
of individual citizens. There would have been no multiplication of
currency owing to enormous credits raised by the Government; there
would have been merely a transfer of buying power from individuals to
the State. The process would have been gradual, there need have been
no acute dislocation, but as the cost of the war increased, that is to
say, as the Government needed more and more goods and services for its
prosecution, the community would gradually have shed one after another
the extravagances on which it spent so many hundreds of millions in
days before the war. As it shed these extravagances the labour
and energy needed to produce them would have been automatically
transferred to the service of the war, or to the production of
necessaries of life. By this simple process of monetary rationing all
the frantic appeals for economy, and most of the complicated, tangled
problems raised by such matters as Food Control or National Service
would have been avoided.

But, it may be contended, this is setting up an ideal so absurdly
too 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 a
really bold and far-sighted Finance Minister at the beginning of the
war he might not have persuaded the nation to tackle its war problem
on this exalted line. At least it can be claimed that our financial
rulers might have looked into the history of the matter and seen what
our ancestors had done in big wars in this matter of paying for war
costs out of taxation, with the determination to do at least as well
as they did, and perhaps rather better, owing to the overwhelming
scale of modern financial problems. If they had done so they would
have found that both in the Napoleonic and the Crimean wars we paid
for 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 by
taxation, instead of being 47 per cent., as it was when our sturdy
ancestors fought against Napoleon, is less than 20 per cent.[1]
Why has this been so? Partly, no doubt, owing to the slackness and
cowardice of our politicians, and the apathy of the overworked
officials, who have been too busy with the details of finance to think
the problem out on a large scale. But it is chiefly, I think, because
our system of taxation, though probably the best in the world,
involves so many inequities that it cannot be applied on a really
large scale without producing a discontent which might have had
serious 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 are
conscious of their strength, to apply taxation to ordinary articles
of general consumption with anything like the ruthlessness which in
former days produced such widespread misery. Indirect taxation of this
kind carries with it this inherent weakness that its burden falls most
heavily on those who are least able to bear it, consequently it is
bound to break in the hand of those who attempt to apply it with
anything like vigour to a community which is prepared to stand up for
fair treatment. A tax on bread or salt obviously hits the wage-earner
at 30s. a week infinitely harder than it hits the millionaire, and so
the 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 continually
increasing severity upon those who are best able to bear them.
Unfortunately our Income Tax is still so unjustly imposed that it was
clearly impossible to make full use of it without its being first
reformed. That two men, each earning £1000 a year, should pay the same
Income Tax, in spite of one having a wife and five children, while
the other is a careless bachelor, is such a blot upon this otherwise
excellent 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 introduced
into its incidence. The need for its reform is made the excuse for a
sparing use of the tax, and we have been on several occasions assured
that, as soon as the war is over, this reform will be set about.

In the meantime the Government falls back on funding about 80 per
cent. of its requirements of the war on a system of borrowing. In
so far as the money subscribed to its loans is money that is being
genuinely saved by investors this process has exactly the same effect
as taxation, that is to say, somebody goes without goods and services
and hands over his power to buy them to the State to be used for the
war. Borrowing of this kind consequently does everything that is
needed for the solution of the immediate war problem, and the only
objection to it is that it leaves later on the difficulties involved
by raising taxes when the war is over, and economic problems are
much more complicated in times of peace than in war, for meeting the
interest and redemption of debt. But, in fact, it is well known that
by no means all that the Government has borrowed for war purposes has
been provided in this way. Much of the money that the Government has
obtained for war purposes has been got not out of genuine savings
of investors, but by arrangements of various kinds with the banking
machinery of the country, or by the simple use of the printing-press,
with the result that the Government has provided itself with an
enormous mass of new currency which has not been taken out of anybody
else's pocket, but has been manufactured by or for the Government.

The consequence of the profligate use of this dishonest process is
that general rise in prices, which is in effect an indirect tax on the
necessaries of life, involving all the injustice and ill-feeling which
arises from such a measure. It is inevitable that the working classes,
finding themselves subjected to a rise in prices, the cause of which
they do not understand, but the result of which they see to be a great
decrease in the buying power of their wages, should believe that they
are being exploited by profiteers, that the rich classes are growing
richer at their expense out of the war, and that they and the country
are being bled by a set of unpatriotic capitalist blood-suckers. It
is also natural that the property-owning classes, who find themselves
paying an Income Tax which they regard as extortionate, should
consider that the working classes by their continuous demands for
higher wages to meet higher cost of living, are trying to exploit
the country in their own interests in a time of national crisis, and
displaying a most unedifying spirit. The social result of this evil
policy of inflation, in embittering class against class, is a matter
which it is difficult to exaggerate. Some people think that it was
inevitable. This is too wide a question to be entered into now, but
at least it must be contended that if it is inevitable the extent to
which 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 of
bad finance? If we still insist on believing that the war cannot last
another six months, and there is therefore no need to pull ourselves
up short financially and put things in order, then we certainly shall
do so. But we should surely recognise that there is at least a chance
that the war may go on for years, that if so our present financial
methods will leave us with a burden of debt which is appalling to
consider, and that in any case, whether the war lasts another six
months or another six years, a reform of our financial methods is long
overdue, is inevitable some time, and will pay us better the sooner it
is set about.



_December_, 1917

The Changed Spirit of the Country--A Great Opportunity thrown
away--What Taxation might have done--The Perils of Inflation--Drifting
stupidly along the Line of Least Resistance--It is we who pay, not

In the November number of _Sperling's Journal_ I dealt with the
question of how our war finance might have been improved if a longer
view had been taken from the beginning concerning the length of the
war and the measures that would be necessary for raising the money.
The subject was too big to be fully covered in the course of one
article, and I have been given this opportunity of continuing its
examination. Before doing so I wish to remind my readers once more
of the great difference in the spirit of the country with regard to
financial self-sacrifice in the early days of the war and at the
present time, after three years of high profits, public and private
extravagance, and successful demands for higher wages have demoralised
the public temper into a belief that war is a time for making big
profits and earning big wages at the expense of the community. In the
early days the spirit of the country was very different, and it might
have remained so if it had been trained by the use made of public
finance along the right line. In the early days the Labour leaders
announced that there were to be no strikes during the war, and the
property-owning classes, with their hearts full of gratitude for the
promptitude with which Mr Lloyd George had met the early war crisis,
were ready to do anything that the country asked from them in the
matter of monetary sacrifice. Mr Asquith's grandiloquent phrase, "No
price is too high when Honour is at stake," might then have been taken
literally by all classes of the community as a call to them to do
their financial duty. Now it has been largely translated into a belief
that no price is too high to exact from the Government by those
who have goods to sell to it, or work to place at its disposal. In
considering what might have been in matters of finance we have to be
very careful to remember this evil change which has taken place in the
public spirit owing to the short-sighted financial measures which have
been 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 been
begun when the war was in its early stages, and when public opinion
was still ready to do its duty in finance. The conclusion at which we
arrived a month ago was that by taxation rather than by borrowing and
inflation much more satisfactory results could have been got out of
the country. If, instead of manufacturing currency for the prosecution
of the war, the Government had taken money from the citizens either by
taxation or by loans raised exclusively out of real savings, the rise
in prices which has made the war so terribly costly, and has raised so
great a danger through the unrest and dissatisfaction of the working
classes, might have been to a great extent avoided, and the higher the
rate of taxation had been, and the less the amount provided by loans,
the less would have been the seriousness of the problem that now
awaits us when the war is over and we have to face the question of the
redemption of the debt.

In this matter of taxation we have certainly done much more than
any of the countries who are fighting either with us or against us.
Germany set the example at the beginning of the war of raising no
money at all by taxation, puffed up with the vain belief that the cost
of the war, and a good deal more, was going to be handed over to her
in the shape of indemnities by her vanquished enemies. This terrible
miscalculation on her part led her to set a very bad example to the
warring Powers, and when protests are made in this country concerning
the low proportion of the war's costs that is being met out of
taxation it is easy for the official apologist to answer, "See how
much more we are doing than Germany." It is easy, but it is not a good
answer. Germany had no financial prestige to maintain; the money that
Germany is raising for financing the war is raised almost entirely
at home, and she rejoices in a population so entirely tame under a
dominant 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 of
financial jugglery, and to induce her tame and deluded creditors to
believe that they have been quite handsomely treated.

Here, however, in England, we have a financial prestige which is based
upon financial leadership of more than a century. We have also raised
a large part of the money we have used for the prosecution of the
war by borrowing abroad, and so we have to be specially careful in
husbanding that credit, which is so strong a weapon on the side of
liberty and justice. And, further, we have a public which thinks for
itself, and will be highly sceptical, and is already inclined to be
sceptical, concerning the manner in which the Government may treat the
national creditors. Its tendency to think for itself in matters of
finance is accompanied by very gross ignorance, which very often
induces it to think quite wrongly; and when we find it necessary for
the Chancellor of the Exchequer to make it clear at a succession of
public meetings that those who subscribe to War Loans need have no
fear that their property in them will be treated worse than any other
kinds of property, we see what evil results the process of too much
borrowing and too little taxation can have in a community which is
acutely suspicious and distrustful of its Government, and very liable
to ignorant blundering on financial subjects.

What, then, might have been done if, at the beginning of the war, a
really courageous Government, with some power of foreseeing the needs
of finance for several years ahead if the war lasted, had made a right
appeal to a people which was at that time ready to do all that was
asked from it for the cause of justice against the common foe? The
problem by which the Government was faced was this, that it had to
acquire for the war an enormous and growing amount of goods and
services required by our fighting forces, some of which could only be
got from abroad, and some could only be produced at home, while at
the same time it had to maintain the civilian population with such a
supply of the necessaries of life as would maintain them in efficiency
for doing the work at home which was required to support the effort of
our fighters at the Front. With regard to the goods which came from
abroad, either for war purposes or for the maintenance of the civilian
population, the Government obviously had no choice about the manner in
which payment had to be made. It had no power to tax the suppliers in
foreign countries of the goods and services that we needed during the
war period. It consequently could only induce them to supply these
goods and services by selling them either commodities produced by
our own industry, or securities held by our capitalists, or its own
promises 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 large
number of our industrial population into the ranks of the Army and
into munition factories. This curtailment, on the other hand, might
to a certain extent be made good by a reduction in consumption on the
part of the civilian population, so setting free a larger proportion
of our manufacturing energy for the production of goods for export.
Otherwise the problem of paying for goods purchased from abroad could
only be solved by the export of securities, and by borrowing from
foreign countries, so that the shells and other war material that were
required, for example, from America, might be paid for by American
investors in consideration of receiving from us a promise to pay them
back some day, and to pay them interest in the meantime. In other
words, we could only pay for what we needed from abroad by shipping
goods or securities. As is well known, we have financed the war by
these methods to an enormous extent; the actual extent to which we
have done so is not known, but it is believed that we have roughly
balanced by this process the sums that we have lent to our Allies and
Dominions, which now amount to well over 1300 millions.

If this is so, we have, in fact, financed the whole of the real cost
of the war to ourselves at home, and we have done so by taxation,
by borrowing saved money, and by inflation--that is to say, by
the manufacture of new currency, with the inevitable result of
depreciating the buying power of our existing currency as a whole. How
much better could the thing have been done? In other words, how much
of the war's cost in so far as it was raised at home could have been
raised by taxation? In theory the answer is very simple, for in theory
the whole cost of the war, in so far as it is raised at home, could
have 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 is
theoretically possible to raise by taxation. It is often said, "All
this preaching about taxation is all very well, but you couldn't
possibly get anything like the amount that is needed for the war by
taxation, or even by borrowing of saved money. This inflation against
which economic theorists are continually railing is inevitable in time
of war because there isn't enough money in the country to provide all
that is needed."

This argument is simply the embodiment of the old delusion, so common
among people who handle the machinery of finance, that you can really
increase the supply of necessary goods by increasing the supply of
money, which is nothing else than claims to goods expressed either in
pieces of metal or pieces of paper. As we have seen, all that we have
been able to raise abroad has been required for advances to our Allies
and Dominions, consequently we have had to fall back upon our own home
production for everything needed for our own war costs. Either we have
turned out the goods at home or we have turned out goods to sell to
foreigners in exchange for goods that we require from them. But since
we thus had to rely on home production for the whole of the war's
needs as far as we were concerned, it is clear that the Government
could, if it had been gifted with ideal courage and devotion, and if
it 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 wanted
for maintaining the civilian population in efficiency, for the
purposes of the war.

It is a commonplace of political theory that the Government has a
right to take the whole of the property and the whole of the labour of
its citizens. But it would not, of course, have been possible for the
Government immediately to inaugurate a policy of setting everybody to
work on things required for the war and paying them all a maintenance
wage. This might have been done in theory, but in practice it would
have involved questions of industrial conscription, which would
probably have raised a storm of difficulty. What the Government might
have done would have been by commandeering the buying power of the
citizen to have set free the whole industrial energy of the community
for supplying the war's needs and the necessaries of life. At present
the national output, which is only another way of expressing the
national income, is produced from certain channels of production in
response to the expectation of demand from those whose possession of
claims to goods, that is to say, money, gives them the right to say
what kind of goods they will consume, and consequently the industrial
part of the population will produce.

Had the Government laid down that the whole cost of the war was to be
borne by taxation, the effect of this measure would have been that
everything which was needed for the war would have been placed at the
disposal of the Government by a reduction in spending on the part of
those who have the spending power. In other words, the only process
required would have been the readjustment of industrial output from
the production of goods needed (or thought to be needed) for ordinary
individuals to those required for war purposes. This readjustment
would have gone on gradually as the war's cost increased. There
would have been no competition between the Government and private
individuals for a limited amount of goods in a restricted market,
which has had such a disastrous effect on prices during the course of
the war; there would have been no manufacture of new currency, which
means the creation of new buying power at a time when there are less
goods to buy, which has had an equally fatal effect on prices; there
would 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 the
Government can get much money out of us, would have been reformed so
as to have borne less hardly upon those with families to bring up.

Mr Sidney Webb and the Fabians have advocated a system by which the
basis of assessment for income tax should be the income divided by the
number of members of a family, rather than the mere income without any
consideration for the number of people that have to be provided for
out of it. With some such scheme as this adopted there is no reason
why the Government should not have taken, for example, the whole of
all incomes above £1000 a year for each individual, due allowance
being made for obligations, such as rent, which involve long
contracts. For any single individual to want to spend more than
£1000 a year on himself or herself at such a crisis would have been
recognised, in the early days of the war, as an absurdity; any surplus
above 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 a
forced loan.

So sweeping a change would not have been necessary at first, perhaps
not at all, because the war's cost would not have grown nearly so
rapidly. All surplus income above a certain line would have been taken
for the time being, but with the promise to repay half the amount
taken, so that it should not be made a disadvantage to be rich, and no
discouragement to accumulation would have been brought about. By this
means the whole of the nation's buying power among the richer classes
would have been concentrated upon the war, with the result that the
private extravagance, which is still disgracing us in the fourth year
of the war, would not have been allowed to produce its evil effects.
With the rich thus drastically taxed, the working classes would have
been much less restive under the application of income tax to their
own 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 less

What the Government has actually done has been to do a little bit of
taxation, much more than anybody else, but still a little bit when
compared with the total cost of the war; a great deal of borrowing,
and a great deal of inflation. By this last-named method it produces
the result required, that of diverting to itself a large part of the
industrial output of the country, by the very worst possible means. It
still, by its failure to tax, leaves buying power in the hands of a
large number of people who see no reason why they should not live very
much as usual; that is to say, why they should not demand for their
own purposes a proportion of the nation's energy which they have no
real right to require at such a time of crisis. But in order to check
their demands, and to provide its own needs, the Government, by
setting the bankers to work to provide it with book credits, gives
itself an enormous amount of new buying power with which, by the
process of competition, it secures for itself what is needed for the
war. There is thus throughout the country this unwholesome process
of competition between the Government on one hand and unpatriotic
spenders on the other, who, between them, put up prices against the
Government and against all those unfortunate, defenceless people who,
being in possession of fixed salaries, or of fixed incomes, have no
remedy against rising prices and rising taxation. All that could
possibly have been spent on the war in this country was the total
income of the people, less what was required for maintaining the
people in health and efficiency. That total income Government might,
in theory, have taken. If it had done so it could and would have paid
for 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, though
it is by no means certain, when we look back on the very different
temper that ruled In the country in the early months of the war. If
anything of the kind could have been done it would certainly have been
a practical proof of determination for the war which would have shown
more clearly than anything else that "no price was too high when
Honour was at stake." It would also have been an extraordinary
demonstration to the working classes of the sacrifices that property
owners were ready to make, the result of which might have been that
the fine spirit shown at the beginning of the war might have been
maintained until the end, instead of degenerating into a series of
demands for higher wages, each one of which, as conceded to one set of
workmen, only stimulates another to demand the same. But even if we
grant that it is only theoretically possible to have performed such a
feat as is outlined above, there is surely no question that much more
might have been done than has been done in the matter of paying for
the war by taxation. If we are reminded once more that our ancestors
paid nearly half the cost of the Napoleonic war out of revenue, while
we are paying about a fifth of the cost of the present war from the
same source, it is easy to see that a much greater effort might have
been made in view of the very much greater wealth of the country at
the present time. I was going to have added, in view also of its
greater economic enlightenment, but I feel that after the experience
of the present war, and its financing by currency debasement, the less
about economic enlightenment the better.

What, then, stood in the way of measures of finance which would have
obviously had results so much more desirable than those which will
face us at the end of the war? As it is, the nation, with all classes
embittered owing to suspicions of profiteering on the part of the
employers and of unpatriotic strikes on the part of the workers, will
have to face a load of debt, the service of which is already roughly
equivalent to our total pre-war revenue; while there seems every
prospect that the war may continue for many half-years yet, and every
half-year, as it is at present financed, leaves us with a load of debt
which will require the total yield of the income tax and the super-tax
before the war to meet the charge upon it. Why have we allowed our
present finance to go so wrong? In the first place, perhaps, we may
put the bad example of Germany. Then, surely, our rulers might have
known better than to have been deluded by such an example. In the
second place, it was the cowardice of the politicians, who had not the
sense in the early days of the war to see how eager the spirit of the
country was to do all that the war required of it, and consequently
were afraid to tax at a time when higher taxation would have been
submitted to most cheerfully by the country. There was also the absurd
weakness of our Finance Ministers and our leading financial officials,
which allowed our financial machinery to be so much weakened by the
demands of the War Office for enlistment that it has been said in the
House of Commons by several Chancellors of the Exchequer that it is
quite impossible to consider any form of new taxation because
the machinery could not undertake it. There has also been great
short-sightedness on the part of the business men of the country, who
have failed to give the Government a lead in this important matter.
Like the Government, they have taken short views, always hoping that
the war might soon be over, and so have left the country with a
problem that grows steadily more serious with each half-year as we
drift stupidly along the line of least resistance.

Such war finance as I have outlined--drastic and impracticable as
it seems--would have paid us. Taxation in war-time, when industry's
problem is simplified by the Government's demand for its product,
hurts much less than in peace, when industry has not only to turn out
the stuff, but also find a buyer--often a more difficult and expensive
problem. There is a general belief that by paying for war by loans we
hand the business of paying for it on to posterity. In fact, we can
no more make posterity pay us back our money than we can carry on war
with goods that posterity will produce. Whatever posterity produces it
will consume. Whatever it pays in interest and amortisation of our
war debt, it will pay to itself. We cannot get a farthing out of
posterity. All we can do, by leaving it a debt charge, is to affect
the distribution of its wealth among its members. Each loan that we
raise makes us taxpayers collectively poorer now, to the extent of the
capital value of the charge on our incomes that it involves. The less
we thus charge our productive power, and the more we pay up in taxes
as the war goes on, the readier we shall be to play a leading part in
the great time of reconstruction.



_January_, 1918

The Objects of the Levy--Its Origin and History--How it would work in
Practice--The Attitude of the Chancellor--The Effects of the Scheme
in discouraging Thrift--Its Fallacies and Injustices--The Insuperable
Obstacles to its Application--Its Influence on Production--One of the
Tests 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 come
into rapidly increasing prominence in the last few months, and seems
to be gaining popularity in quarters where one would least expect it.
On the other hand, it is naturally arousing intense opposition, both
among those who would be most closely affected by its imposition, and
also among those who view with grave concern the possible and probable
economic effects of such a system of dealing with the national debt. I
say "dealing with the national debt" because, as will be clear, as
a system of raising money for the war the suggestion of the levy on
capital has little or nothing to recommend it. But, as will also be
made clear, the proposal has been put forward as a thing to be done
immediately in order to increase the funds in the hands of the
Chancellor of the Exchequer to be spent on war purposes.

A levy on capital is, of course, merely a variation of the tax on
property, which has long existed in the United States, and had been
resorted to before now by Governments, of which the German Government
is a leading example, in order to provide funds for a special
emergency. This it can very easily do as long as the levy is not too
high. 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 be
earning an average of 5 to 6 per cent. in interest, then the levy on
capital becomes merely a form of income tax, assessed not according to
the income of the taxpayer but according to the alleged value of his
property. It is thus, again, a variation of the system long adopted
in this country of a special rate of income tax on what is called
"unearned" income, i.e. income from invested property. But it is
only when one begins to adopt the broadminded views lately fashionable
of 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 course
of a year, that it becomes evident that he cannot be expected to pay
anything like this sum, in cash, unless either a market is somehow
provided--which seems difficult if all property owners at once are
to be mulcted of a larger amount than their incomes--or unless the
Government is prepared to accept part at least of the levy in the
shape of property handed over at a valuation.

Before, however, we come to deal in detail with the difficulties
and drawbacks of the suggestion, it may be interesting to trace the
history of the movement in its favour, and to see some of the forms in
which it has been put forward. It may be said that the ball was opened
early last September when, in the _Daily News_ of the 8th of that
month, its able and always interesting editor dealt in one of his
illuminating Saturday articles with the question of "How to Pay
for the War." He began with the assumption that the capital of the
individuals of the nation has increased during the war from 16,000
millions to 20,000 millions. A 10 per cent. levy on this, he
proceeded, would realise 2000 millions. It would extinguish debt to
that amount and reduce the interest on debt by 120 millions. The levy
would 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 what
form was convenient, in his stocks or his shares, his houses or his
fields, in personalty or realty."

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

The first thing that strikes one when one examines these two schemes
is the difference in their view concerning the amount of capital
wealth available for taxation. Mr Gardiner made the comparatively
modest estimate of 16,000 millions to 20,000 millions; the _Round
Table_ plumps for 24,000 millions, and, incidentally, it may be
remarked that some conservative estimates put it as low as 11,000
millions. Thus we have a possible range for the fancy of the scheme
builder of from 11,000 to 24,000 millions in the property on which
taxation is proposed to be levied. But it is when we come to the
details of these schemes that the difficulties begin to glare. Mr
Gardiner tells us that millionaires would pay up to 30 per cent. of
their property, and that they would pay in what form was convenient,
in houses, fields, etc., etc. But he does not explain by what
principle the Government is to distribute among the holders of the
debt, the repayment of whom is the object of the levy, the strange
assortment of miscellaneous assets which it would thus collect from
the property owners of the country.

In commenting on this scheme the _Economist_ of September 15th took
the case of a man with a fortune of £100,000 invested before the war
in a well-assorted list of securities, the whole of which he had, for
patriotic reasons, converted during the war into War Loans. He would
have no difficulty about paying his capital levy, for he would
obviously surrender something between 10 and 20 per cent. of his
holding. But, "in exchange for nearly two-thirds of the rest, he might
find himself landed with houses and bits of land all over the country,
a batch of unsaleable mining shares, a collection of blue china, a
pearl 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 War
Loans would be assessed for one-eighth of its value--it does not
explain how the value is to be arrived at, nor how long it would take
to do it--and would then be called on to acquire and to surrender to
the State the same amount of War Loan scrip. To do this they would
be obliged to realise a part of their property or to mortgage it, a
process which would seem likely to produce a pretty state of affairs
in the property market; and a very pleasant state of affairs indeed
would arise for the holders of War Loan scrip, since there would be a
large crowd of compulsory buyers in the market from whom the holders
would apparently be able to extort any price that they liked for their

The next stage in the proceedings was a deputation to the Chancellor
of the Exchequer, concerning which more anon, of leaders of various
groups of the Labour Party, to press upon Mr Bonar Law the principle
of what is called "the Conscription of Wealth," and the publication at
or soon after that time, which was about the middle of November, of a
pamphlet on the subject of the "Conscription of Riches," by the War
Emergency Workers' National Committee, 1, Victoria Street, S.W. Among
what this pamphlet describes as "the three practicable methods of
conscripting wealth" No. 1 is as follows:--

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

If a "Death Duty" at the existing rates were now levied simultaneously
on every person in the kingdom possessing over £300 wealth (every
person 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 in
order 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 the
Government should take securities at a valuation and mortgages on land
in lieu of cash in order to avoid simultaneous forced sales. But they
do not seem to have perceived that, in so far as the Government took
securities or accepted mortgages on land, it would not be getting
money to pay for the war, which was the object of the proposed
Conscription of Wealth, but would only be obtaining property from
which 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 put
the scheme forward did not ignore this drawback to it, but rather
liked it, for reasons quite irrelevant to the objects that they were
apparently pursuing. A good deal of prominence was given about the
same 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 the
Fabian Society. These distinguished and very intellectual Socialists
would, of course, be quite pleased if, in an apparent endeavour to pay
for the war, they actually succeeded in securing, by the Government's
acquisition of blocks of securities from property owners, that
official control of industry and production which is the object of
State Socialists.

It will be noted, however, in this scheme that no mention is made of
any forms of property to be accepted by the Government in lieu of cash
except securities and mortgages on land. Items such as furniture,
books, pictures and jewellery are ignored, and in one of the articles
in the _New Statesman_, discussing the question of a capital levy, it
was distinctly suggested that these commodities should be left out
of the scheme so as to save the trouble involved by valuation.
Unfortunately, if we leave out these forms of property the natural
result is to stimulate the tendency, lately shown by an unfortunately
large number of patriotic taxpayers, of putting money into pearl
necklaces and other such gewgaws in order to avoid income tax. If
by buying fur coats, old masters and diamond tiaras it will be be
possible in future to avoid paying, not only income tax, but also a
capital levy, it is to be feared that appeals to people to save their
money and invest it in War Bonds are likely to be seriously interfered

Unfortunately, the _Statesman_ was able to announce that the appeal
for this system of taxation had been received with a good deal of
sympathy by the Chancellor of the Exchequer, and the next stage in the
history of the agitation was the publication on Boxing Day in several
of the daily papers of what appeared to be an official summary, issued
through the Central News, of what the Chancellor had said to the
deputation of Labour Leaders introduced by Mr Sidney Webb, which
waited on him, as already described, in the middle of November. Having
pointed out that he had never seen any proposal which seemed to him
to be practicable for getting money during the war by conscripting
wealth, Mr Bonar Law added that, though "perhaps he had not thought
enough about it to justify him in saying so," his own feeling was that
it would be better, both for the wealthy classes and the country, to
have this levy on capital, and reduce the burden of the national debt
when the war was over. It need not be said that this statement by the
Chancellor has been very far from helpful to the efforts of those who
are trying to induce unthrifty citizens to save their money and put it
into National War Bonds for the finance of the war.

"Why," people argue, "should we go out of our way to save and take
these securities if, when the war is over, a large slice of our
savings 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 and
luxuries as are possible in war-time and the austere duty of thrift,
we shall naturally now choose the pleasanter path, spend our money on
ourselves and on those who depend on us, instead of saving it up to
be taken away again when the war is over, while those who have spent
their money as they liked will be let off scot free." Certainly, it is
much to be regretted that the Chancellor of the Exchequer should have
let such a statement go forth, especially as he himself admits that
perhaps he has not thought enough about it to justify him in saying
so. If the Chancellor of the Exchequer has not time to think about
what he is going to say to a Labour deputation which approaches him on
an extremely important revolution in our fiscal system, it is surely
high time that we should get one who has sufficient leisure to enable
him to give his mind to problems of this sort when they are put before

In the course of this review of the forms in which suggestions for a
levy on capital have been put forward, some of the difficulties and
injustices inherent in it have already been pointed out. Its advocates
seem as a rule to base the demand for it upon an assumption which
involves a complete fallacy. This is that, since the conscription
of life has been applied during the war, it is necessary that
conscription of wealth should also be brought to bear in order to make
the war sacrifice of all classes equal. For instance, the Emergency
Workers' pamphlet, quoted above, states that, "in view of the fact
that the Government has not shrunk from Compulsory Conscription of
Men," the Committee demands that "for all the future money required
to carry on the war, the Government ought, in common fairness, to
accompany the Conscription of Men by the Conscription of Wealth."

This contention seems to imply that the conscription of men and the
conscription of wealth apply to two different classes; in other words,
that the owners of wealth have been able to avoid the conscription of
men. This, of course, is absolutely untrue. The wealthiest and the
poorest have to serve the country in the front line alike, if they are
fit. The proportion of those who are fit is probably higher among the
wealthy classes, and, consequently, the conscription of men applies
to them more severely. Again, the officers are largely drawn from
the comparatively wealthy classes, and it is pretty certain that the
proportion of casualties among officers has been higher during the war
than among the rank and file. Thus, as far as the conscription of men
is concerned, the sacrifice imposed upon all classes in the community
is alike, or, if anything, presses rather more heavily upon those who
own wealth. Conscription of wealth as well as conscription of life
thus involves a double sacrifice to the owners of property.

This double sacrifice, in fact, the owners of property have, as is
quite right, borne throughout the war by the much more rapid increase
in direct taxation than in indirect. It is right that the owners of
property should bear the heavier monetary burden of the war because
they, having more to lose and therefore more to gain by a successful
end of the war, should certainly pay a larger proportion of its cost.
It was also inevitable that they should do so because, when money is
wanted for the war or any other purpose, it can only be taken in large
amounts from those who have a surplus over what is needed to provide
them with the necessaries and decencies of life. But the argument
which puts forward a capital levy on the ground that the rich have
been escaping war sacrifice is fallacious in itself, and is a wicked
misrepresentation likely to embitter still further the bad feeling
between classes.

Nevertheless, Mr Bonar Law thinks that, since the cost of the war must
inevitably fall chiefly upon the owners of property, and since it
therefore becomes a question of expediency with them whether they
should pay at once in the form of a capital levy or over a long series
of years in increased taxation, he is inclined to think that the
former method is one which would be most convenient to them and best
for the country. This contention cannot be set aside lightly, and
there can be no doubt that if, by making a dead lift, the wealthy
classes of the country could throw off their shoulders a large part of
the burden of the war debt, such a scheme is well worth considering as
long 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 of
redeeming debt by means of a levy on capital In so far as the levy is
paid in the form of surrendered War Loans, it is simple enough. In so
far as it is paid in other securities or mortgages on land or other
forms of property, it is difficult to see how the assets acquired by
the State through the levy could be distributed among the debt
holders whom it is proposed to pay off. Would they be forced to take
securities, mortgages on land, furniture, etc., as the Government
chose to distribute them, or would the Government have to nurse an
enormous holding of various forms of property and gradually realise
them and so pay off debt?

Again, a great injustice would surely be involved by laying the whole
burden of this oppressive levy upon owners of accumulated property, so
penalising those who save capital for the community and letting off
those who squander their incomes. A characteristic argument on this
point was provided by the _New Statesman_ in a recent issue. It argued
that, because ordinary income tax would still be exacted, the contrast
between the successful barrister with an Income of £20,000 a year and
no savings, who would consequently escape the capital levy, and the
poor clergyman who had saved £1000 and would consequently be liable to
it, fell to the ground. In other words, because both lawyer and parson
paid income tax, it was fair that the former should escape the capital
levy while the latter should have to pay it!

But needs must when the devil drives, and in a crisis of this kind it
is not always possible to look too closely into questions of equity in
raising money. It is necessary, however, to look very closely into the
probable economic effects of any suggested form of taxation, and, if
we find that it is likely to diminish the future wealth production
of the nation, to reject it, however attractive it may seem to be
at first sight. A levy on capital which would certainly check the
incentive to save, by the fear that, if such a thing were once
successfully put through, it might very likely be repeated, would dry
up the springs of that supply of capital which is absolutely essential
to the increase of the nation's productive power. Moreover, business
men who suddenly found themselves shorn of 10 to 20 per cent. of
their available capital would find their ability to enter into fresh
enterprise seriously diminished just at the very time when it is
essential that all the organisers of production and commerce in this
country should be most actively engaged in every possible form of
enterprise, in order to make good the ravages of war.



_February_, 1918

The Recent Amalgamations--Will the Provinces suffer?--Consolidation
not a New Movement--The Figures of the Past Three Decades--Reduction
of Competition not yet a Danger--The Alleged Neglect of Local
Interests--Shall we ultimately have One Huge Banking Monopoly?--The
Suggested 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 Committee
was appointed to consider the creation of a new institution specially
adapted for financing overseas trade and for the encouragement of
industrial and other ventures through their years of infancy, and
that the charter which was finally granted to the British Trade
Corporation, as this institution was ultimately called, roused a
great deal of opposition both on the part of banks and of traders who
thought that a Government institution with a monopoly character
was going to cut into their business with the help of a Government
subsidy. In fact, there was no subsidy at all in question, and the
fears of the trading world of competition on the part of the new
chartered institution only arose owing to its unfortunate name, which
was given to it in order to allay the apprehensions of the banks which
had been provoked by the title originally designed for it, namely, the
British Trade Bank. There seems no reason why this Company should
not do good work for British trade without treading on the toes of
anybody. Although naturally its activities cannot be developed on any
substantial scale until the war is over, its Chairman assured the
shareholders at the end of January that its preliminary spadework was
being carefully attended to.

After this small storm in a teacup had died down those interested in
our banking efficiency were again excited by the rapid progress made
by the process of amalgamation among our great banks, which began to
show acute activity again in the last months of 1917. The suddenly
announced amalgamation of the London and South-Western and London
and Provincial Banks led to a whole host of rumours as to other
amalgamations which were to follow; and though most of these proved to
be untrue a fresh sensation was aroused when the union was announced
of the National Provincial Bank of England and the Union of London and
Smith's Bank. All the old arguments were heard again on the subject of
the objections, from the point of view of industry in the provinces,
to the formation of great banking institutions, with enormous figures
on both sides of the balance-sheet, working from London, often, it was
alleged, with no consideration for the needs of the provincial users
of credit. These latest amalgamations, which have united banks which
already had head offices in London, gave less cause than usual for
these provincial apprehensions, which had far more solid reason behind
them when purely provincial banks were amalgamated with institutions
whose head office was in London. Nevertheless, the argument was heard
that the great size and scale on which these amalgamated banks were
bound to work would necessarily make them more monopolistic and
bureaucratic in their outlook, and less elastic and adaptable in their
dealings with their local customers.

It seems to me that there is so far very little solid ground for any
apprehension on the part of the business community that the recent
development of banking evolution will tend to any damage to their
interests. 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 sufficiently
large resources at their command to meet the great requirements of the
huge industrial organisations that they had to serve. Nevertheless,
the tendency towards fewer banks and bigger figures has grown with
extraordinary celerity, as the following table shows:--

SINCE 1886.

December  No. of  Number of   Capital      Deposit and     Total
31st      Banks   Branches    Paid up      Current        Liabilities
1886       109     1,547    £38,468,000   £299,195,000   £376,808,000
1891       106     2,245     43,406,000    391,842,000    486,632,000
1896        94     3,051     45,203,000    495,233,000    599,518,000
1901        74     3,935     46,631,000    584,841,000    698,150,000
1906        55     4,840     48,122,000    647,889,000    782,353,000
1911        44     5,417     47,265,000    748,641,000    885,069,000
1916        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 109
joint-stock banks with 1547 offices, whose accounts were tabulated
in the _Economist's_ annual review. Their total paid-up capital was
38-1/2 millions, their deposit and current accounts were just under
300 millions, and their total liabilities were 377 millions. In the
course of thirty years the 109 banks had shrunk by the process of
amalgamation and absorption to thirty-five, that is to say, they had
been divided by three; the number of their offices, however, had been
multiplied by nearly four, while their deposit accounts had grown from
300 millions to 1155, and their total liabilities from 377 to 1316
millions. By the amalgamations announced at the end of 1917, and that
of the County of Westminster with Parr's announced on February 1st,
the number of joint stock banks will be reduced to 32. The picture
would be still more striking if the figures of the private banks were
included, since their number has been reduced, since 1891, from 37 to
6. These figures are eloquent of the manner in which the number of
individual banks has been reduced, while the extent of the banking
accommodation given to the community has enormously grown, so that the
power wielded by each individual bank has increased by the force of
both these processes.

The consequent reduction in competition which is causing some concern
among the trading community has not, as it seems to me, gone far
enough yet to be a serious danger. The idea that the big banks with
offices in London give scant consideration to the needs of their local
customers seems to be so contrary to the interests of the banks that
they would be extraordinarily bad men of business if those who were
responsible for their management allowed it to be the fact. It is
probably nearer the truth that banking competition in the provinces is
still so keen that the London management is very careful not to allow
anything like bureaucratic stiffness to get into the methods by which
their business is managed. By the appointment of local committees they
are careful to do all they can to see that the local interests get all
the credit that is good for them. That local interests get as much
credit as they want is probably very seldom the case, because it is a
natural instinct on the part of an eager business man to want rather
more credit than he ought to have, from a banking point of view.
Business interests, as long as they exist in private hands, will
always want rather more credit than there is available, and it will
always be the duty of the banker to ensure that the country's industry
is kept on a sound basis by checking the tendency of the eager
business man to undertake rather more than is good for him. From the
sentimental point of view it is certainly a pity to have seen many of
the picturesque old private banks extinguished, the partners in which
were in close personal touch with their customers, and entered into
the lives of the local communities in a manner which their modern
counterpart is perhaps unable to do. Nevertheless, it is difficult
to get away from the fact that if these institutions had been as
efficient and as well managed as their admirers depict them to have
been they would hardly have been driven out of existence by the stress
of modern developments and competition. Whatever we may think of
modern competition, in certain of its aspects, we may at least be
sure of this--that it does not destroy an institution which is really
wanted by the business community. And if the complaint of local
interests is true, that they are swamped by the cosmopolitan
aspirations of the great London offices, they always have it in their
power to create an institution of the kind that they want, and by
giving it their business to ensure for it a prosperous career. As long
as no such tendency is visible in the banking world we may be pretty
sure that the views expressed concerning the neglect of local
interests by the enormous banks which have grown up with London
centres in the last thirty years is to a great extent a myth. It
has now announced, however, that the whole problem involved by the
amalgamation process is to be sifted by a committee to be appointed
for this purpose.

Another apprehension has arisen in the minds of those who view with
critical vigilance the present tendencies of business and the
present development of economic opinion among a great section of the
community. If, it is urged, the banks continue to swallow one another
up by the process of amalgamation, how will this tendency end except
in the creation of one huge bank working a gigantic money monopoly
which the Socialistic tendencies of the present day will, with some
reason, insist ought to be taken over by the State for the profit of
the taxpayer? This view is frankly put forward by those advocates of a
Socialistic organisation of society, who say that the modern tendency
of industry towards combinations, rings and trusts is rapidly bringing
the Socialistic millennium within their reach without any effort
on the part of Socialistic preachers. They consider that the trust
movement is doing the work of Socialism, much faster than Socialism
could do it for itself; that, in short, as has been argued above
in regard to banking, the tendency towards centralisation and the
elimination of competition can only end in the assumption by the State
of the functions of industry and finance. If this should be so, the
future is dark for those of us who believe that individual effort
is the soul of industrial and financial progress, and that industry
carried on by Government Departments, however efficient and economical
it might be, would be such a deadly dull and unenterprising business
that all the adaptability and tendency to variation in accordance with
the needs of the moment, which are so strongly shown by individual
enterprise, would be lost, to the great detriment of the material
progress of mankind.

As things are at present, there is little need to fear that
Socialistic organisation of industry could stand up against competent
individual effort. Anybody who has ever had any business dealings
with a Government Department will inevitably shudder when he tries to
imagine how many forms would have to be filled up, how many divisions
of the Department the inevitable mass of papers would have to go
through, and how much delay and tedium would be involved before the
simplest business proposition could be carried out. But, of course, it
is argued by Socialists that Government Departments are only slow and
tied up with red tape because they have so long been encouraged to do
as little as possible, and that as soon as they are really urged to do
things instead of pursuing a policy of masterly inactivity, there is
no reason why they should not develop a promptitude and elasticity
quite as great as that hitherto shown by the business community.
That such a development as this might take place in the course of
generations nobody can deny; at present it must be admitted that with
the great majority of men the money-making incentive is required to
get the best out of them. If the process of education produces so
great a change in the human spirit that men will work as well for the
small salary of the Civil Service, with a K.C.B. thrown in, as they
will now in order to gain the prizes of industry and finance, then
perhaps, from the purely economic point of view, the Socialisation
of banking may be justified. But we are a long way yet from any such
achievement, and if it is the case that the rapid centralisation of
banking power in comparatively few hands carries with it the danger
of an attempt to nationalise a business which requires, above all,
extreme adaptability and sensitiveness to the needs of the moment
as they arise, this is certainly a danger which has to be carefully
considered by those who are responsible for the development of these
amalgamation processes.

And now another great stone has been thrown into the middle of the
banking pond, causing an ever-widening circle of ripples and provoking
the beginning of a discussion which is likely to be with us for some
time to come. Sir Edward Holden, at the meeting of the London City and
Midland Bank shareholders on January 29th, made an urgent demand for
the immediate repeal of the Bank Act of 1844. This Act was passed,
as all men know, in order to restrict the creation of credit in
the United Kingdom. In the early part of the last century the most
important part of a bank's business consisted of the issue of notes,
and banking had been carried on in a manner which the country
considered unsatisfactory because banks had not paid sufficient
attention to the proportion of cash that they ought to hold in their
tills to meet notes if they were presented. Parliament in its wisdom
consequently ordained that the amount of notes which the banks should
be allowed to issue, except against actual metal in their vaults,
should be fixed at the amount of their issue at that time. Above the
limit so laid down any notes issued by the banks were to be backed by
metal. In the case of the Bank of England the limit then established
was £14,000,000, and it was enacted that if any note-issuing bank gave
up its right to a note issue the Bank of England should be empowered
to increase its power to issue notes against securities to the extent
of two-thirds of the power enjoyed by the bank which was giving up its
privilege. By this process the Bank of England's right to issue notes
against securities, what is usually called its fiduciary issue, has
risen to £18,450,000; above that limit every note issued by it has to
be backed by bullion, and is actually backed by gold, though under
the Act one-fifth might be in silver. It was thus anticipated by the
framers of the Act that in future any credit required by industry
could only be granted by an increase in the gold held by the issuing
banks. If the Act had fulfilled the anticipations of the Parliament
which passed it, if English trade had grown to anything like the
extent which it has done since, it could only have done so by the
amassing of a mountain of gold, which would have lain in the vaults of
the Bank of England.

Fortunately, however, the banking community had at its disposal a
weapon of which it was already making considerable use, namely, the
system of issuing credit by means of banking deposits operated on by
cheques. Eight years before Peel's Act was passed two Joint Stock
Banks had been founded in London, although the Bank of England
note-issuing monopoly still made it impossible for any Joint Stock
Bank to issue notes in the London district. It is thus evident that
deposit banking was already well founded as a profitable business when
Peel, and Parliament behind him, thought that they could sufficiently
regulate the country's banking system so long as they controlled the
issue of notes by the Bank of England and other note-issuing banks. It
is perhaps fortunate that Parliament made this mistake, and so enabled
our banking machinery to develop by means of deposit banking, and so
to 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 crisis
have the strict regulations of Peel's Act caused any inconvenience,
and when that inconvenience arose the Act has been suspended by the
granting of a letter of indemnity from the Treasury to the Governor of
the Bank.

Under Peel's Act the present rather anomalous form of the Bank of
England's Weekly Return was also laid down. It shows, as all men know,
two separate statements; one of the Issue Department and the other of
the Banking Department. The Issue Department's statement shows the
notes issued as a liability, and on the assets side Government debt
and 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 reserve
fund, and deposits, public and other, among the liabilities, and on
the other side of the account Government and other securities, all the
notes issued by the Issue Department which are not in circulation, and
a small amount of gold and silver which the Banking Department holds
as till money.

Sir Edward Holden's proposal is that the Act should be repealed
practically in accordance with the system which has been adopted by
the German Reichsbank. The principles which he enumerates, as those on
which 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 security
of bills of exchange and on the cash balance, so that
a relation is established between the notes issued
and the discounts.

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

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

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

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

At the same time, by the abolition of Peel's Act the cumbrous methods
of stating the Bank's position, as published week by week in the Bank
Return, would be abolished. The two accounts would be put together,
with the result that the Bank's position would be apparently stronger
than it appears to be under the present system, which makes the
Banking Department's Return weak at the expense of the great strength
that it gives to the appearance of the Issue Department. This will be
shown from the following statement given by Sir Edward Holden of the
Return as issued on January 16th, and as amended according to his



Notes Issued .. £76,076,000  Gold .................. £57,626,000
                             Government Debt .......  11,015,000
                             Other Securities ......   7,435,000
                -----------                          -----------
                £76,076,000                          £76,076,000
Ratio of Gold to Notes Issued = 75.7 per cent.


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

Ratio of Cash Balance to Liabilities = 19.6 per cent.

JANUARY 16, 1918.

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

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

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

Other Securities                    92,278,000

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 liveliest
interest. At the Bank Meetings held since then several chairmen
have been asked by their shareholders to express their views on Sir
Edward's proposed revolution. Sir Felix Schuster pronounced cautiously
in favour of the revision of the Bank Act, and said that he had
advocated it seventeen years ago. Lord Inchcape, at the National
Provincial Meeting, thought that the matter required careful
consideration. Most of us will agree with this view. There is
certainly much to be said for a reform of the Weekly Statement of the
Bank of England, giving, it may be added, a good deal more detail
than Sir Edward's revised balance-sheet affords. But concerning his
proposal 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 and
cheque rather than by issue and circulation of notes, the note issue
is not nearly so important a business in normal times in this country
as it is in Germany and France. Moreover, the check imposed upon our
banking community by the need for an appeal to the Treasury before it
can extend its note issue beyond a certain point often acts with, a
salutary effect, and the view has even been expressed that if that
check were taken away from our system it might be difficult, if not
impossible, to maintain the gold standard which has been of such
enormous value in building up the prestige of London as a financial
centre. I do not think there is much weight in this argument, since,
under Sir Edward's plan, the note issue could only be increased
against discounts, and the Bank, by the charge that it made for
discounts, would still be able to control the situation. From the
practical point of view of the present moment, a strong objection
to the scheme is that it would open the door to fresh inflation by
unrestricted credit-making just when the dangers of this process are
beginning to dawn even on the minds of our rulers.



_March_, 1918

Another Government Committee--The Fallacy of imitating
Germany--Prussianising British Commerce--The Inquiry into the
Companies Acts--Will Labour Influence dominate the Report?--Increased
Production the Great Need--Will it be met by tightening up the
Companies Acts?--The Dangers of too much Strictness--Some Reforms
necessary--Publicity, Education, Higher Ideals the only Lasting
Solution--The Importance of Foreign Investments--Industry cannot take
all Risks and no Profits.

Every week--almost every day--brings with it the announcement of some
new committee considering some question that may, or may not, arise
now or when the war is over. Especially in the realm of finance has
the Government's output of committees been notably prolific of
late. We have had a Committee on Currency, a Committee on Banking
Amalgamations, and a Committee appointed, humorously enough, by the
Ministry of Reconstruction to consider what measures, if any, should
be taken to protect the public interest in connection with the policy
of industrial combinations--a policy which the Board of Trade has
been sedulously fostering. Now comes a Committee to inquire "what
amendments are expedient in the Companies Acts, 1908-1917, principally
having regard to the circumstances arising out of the war, and to the
developments likely to arise on its conclusion, and to report to the
Board of Trade and to the Ministry of Reconstruction." It is composed
of 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 Frank
Gore-Browne, K.C., Mr James Martin, the Hon. Algernon H. Mills, Mr
R.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. The
secretary is Mr W.W. Coombs, 55, Whitehall, S.W. 1. There are some
good names on the Committee. Mr. Gaspard Farrer represents a great
issuing house; Sir Frank Crisp, company lawyers; Sir William Plender,
the accountants; Mr O.C. Quekett, the Stock Exchange; and Sir Owen
Philipps, the shipping interest. Nevertheless, one cannot help
shuddering when one considers the dangers that threaten British
finance and industry from ill-considered measures which might possibly
be recommended by a Committee influenced by the atmosphere of the
present outlook on financial and commercial affairs.

One of the interesting features of the present war atmosphere is the
fact that, now when we are fighting as hard as we can to defeat all
that is meant by Prussianism a great many of our rulers and public
men are doing their best to impose Prussianising methods upon this
unfortunate country, merely because it is generally assumed that
Prussian methods have been shown, during the course of the war, to
carry with them a certain amount of efficiency. It is certainly true
that Prussian methods do very well as applied to the Prussians and
submitted to by other races of Germans. On the other hand, it is at
least open to argument that the British method of freedom, individual
initiative, elasticity and adaptability have produced results, during
the present war, which have so far been paralleled by no other country
engaged in the contest. Working on interior lines with the assistance
of docile and entirely submissive allies, Germany has certainly done
wonderful things in the war, but it by no means follows that the
verdict of posterity will not give the palm of achievement to England,
who has not only carried out everything that she promised to do before
the war, but has incidentally and in the course of it created and
equipped an Army on a Continental scale, and otherwise done very much
more for the assistance of her Allies than was contemplated before the
war began.

It is untrue to say that we were unprepared for the war. We were
more than prepared to do all that we promised to do. What we were
unprepared for was finding ourselves required to turn ourselves
into, not only the greatest naval Power in the world, but one of the
greatest military Powers also. This demand was sprang upon us, and we
have met it with extraordinary success. The whole idea that Germany's
achievement has been such as to warrant any attempt on our part to
model our institutions on her pattern seems to me to fall to pieces
as soon as one looks calmly at the actual results produced by the
different systems. Moreover, even if we were to admit that Germany's
achievement in the war has been immeasurably greater than ours, it
still would not follow that we could improve matters here by following
the German system. It ought not to be necessary to observe that a
system which is good for one nation or individual is not necessarily
good for another. In the simple matter of diet, for instance, a most
scientifically planned diet given to a child who does not happen to
like it will not do that child any good. These things ought to be
obvious, but unfortunately in these times, which call for eminently
practical thought and effort, there is a curious doctrinaire spirit
abroad, and the theorist is continually encouraged to imagine how much
better things would be if everything were quite different, whereas
what we want is the application of practical common sense to practical
facts as they are.

In the realm of finance the freedom and individual initiative and
elasticity of our English system have long been the envy of the world.
Our banking system, as was shown, on an earlier page, has always
worked with much less restriction on the part of legislative and
official interference than any other, and, with the help of this
freedom from official control, English bankers and finance houses had
made London the financial centre of the world before the war. The
attempt of Parliament to control banking by Peel's Act of 1844 was
quietly set aside by the banking machinery through the development of
the use of cheques, which made the regulations imposed on the note
issue a matter of quite minor importance, except in times of severe
crisis, when these regulations could always be set aside by an
appeal to the Chancellor of the Exchequer. There was no Government
interference in the matter of new issues of securities on the London
Stock Exchange or of the quotations granted to new securities by the
Committee of the Stock Exchange. Now the Companies Acts are to be
revised in view of what may be necessary after the war, and there
is only too much reason to fear that mistakes may occur through the
imposition of drastic restrictions, which look so easy to work on
paper, but are more than likely to have the actual effect of doing
much more harm than good.

"Circumstances arising out of the war and developments likely to arise
on its conclusion" give this Committee a roving commission to consider
all kinds of things, which may or may not happen, in the light of
wisdom which may be put before it by interested witnesses, and, worse
still, in the light of semi-official pressure to produce a report
which will go down well with the House of Commons. Our politicians are
at present in a state of extreme servility before the enterprising
gentlemen who are now at the head of what is called the Labour Party.
Every one will sympathise with the aspirations of this party in so
far as they aim at bettering the lot of those who do the hard and
uninteresting work of the world, and giving them a larger share of the
productions that they help to turn out; but that is not the same
thing as giving obsequious attention to the views which their
representatives may have concerning the management of financial
affairs, on the subject of which their knowledge is necessarily
limited and their outlook is likely to be, to a certain extent,
prejudiced. A recent manifesto put forward by the leaders of the new
Labour Party includes in its programme the acquisition by the nation
of the means of production--in other words, the expropriation of
private capitalists. The Labour people very probably think that by
this simple method they will be able to save the labourer the cost
of providing capital and the interest which is paid for its use; and
people who are actuated by this fallacy, which implies that the rate
paid to capital is thinly disguised robbery, inevitably have warped
views concerning the machinery of finance and the earnings of
financiers. These views, expressed in practical legislation, might
have the most serious effects not only upon England's financial
supremacy but also on the industrial activity which that financial
supremacy does so much to maintain and foster.

What, after the war, will be the most important need, from the
material point of view, for the inhabitants of this country? However
the war may end, and whatever may happen between now and the end of
it, there can be only one answer to this question, and that answer
is greatly increased production. The war has already diminished our
capital resources to the extent of the whole amount that we have
raised by borrowing abroad, that is to say, by pledging the production
of our existing capital, and by selling to foreign countries the
foreign securities in which our capitalists had invested during
the previous century. No one knows the extent to which our capital
resources have been impaired by these two processes, but it may be
guessed at as somewhere in the neighbourhood of 1500 millions; that
is to say, about 10 per cent. of a liberal estimate of the total
accumulated property of the country at the beginning of the war. To
this direct diminution in our capital resources we have to add the
impossibility, which has existed during the war, of maintaining our
factories and industrial equipment in first-class working order by
expenditure on account of depreciation of plant. On the other side
of the balance-sheet we can put a large amount of new machinery
introduced, which may or may not be useful for industrial purposes
after the war; greatly improved methods of organisation, the effect of
which may or may not be spoilt when the war is over by uncomfortable
relations between Capital and Labour; and our loans to Allies and
Dominions, some of which may have to be written off, and most of which
will return us no interest for some time to come, or will at first pay
us interest if we lend our debtors the money to pay it with. What the
country will need, above all, on the material side, is an abundant
revenue, which can only be produced by vigorous and steady effort in
industry, which, again, can only be forthcoming if the machinery of
credit and finance is given the fullest possible freedom to provide
every one who wants to engage in industry and increase the output of
the country with the financial facilities, without which nothing can
be done.

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

It is a commonplace that if it had not been for the great mass of
foreign securities, which this country held at the beginning of the
war, we could not nearly so easily have financed the enormous amount
of 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 had
to rely, in order to pay for our purchases of foreign goods, on the
productions of our own mines and factories, and on our power to borrow
abroad, then we should have had to restrict very greatly the number of
men we have put into the firing-line so as to keep them at home for
productive work, or, by the enormous amount of our borrowings, we
should have cheapened the value of British credit abroad to a much
greater extent than has been the case. Our position as a great
creditor country was an enormously valuable asset, not only during the
war but also before it, both from a financial and industrial point of
view. It gave us control of the foreign exchanges by enabling us, at
any time, to turn the balance of trade in our favour by ceasing for a
time to lend money abroad, and calling upon foreign countries to pay
us the interest due from them. The financial connections which it
implied were of the greatest possible assistance to us in enhancing
British prestige, and so helping our industry and commerce to push the
wares that they produced and handled.

Reform of the Companies Acts has often before the war been a more or
less burning question. Whenever the public thought that it had been
swindled by the company promoting machinery, it used to write letters
to the newspapers and point out that it was a scandal that the sharks
of the City should be allowed to prey upon the ignorant public,
and that something ought to be done by Parliament to insure that
investments offered to the public should somehow or other be made
absolutely watertight and safe, while by some unexplained method the
public would still be somehow able to derive large benefits from
fortunate speculations in enterprises which turned out right. Every
one must admit there have been some black pages in the history
of British company promoting, and that many swindles have been
perpetrated by which the public has lost its money and dishonest and
third-rate promoters have retired with the spoil. The question is,
however, what is the remedy for this admitted and glaring evil? Is it
to be found by making the Companies Laws so strict that no respectable
citizen would venture to become a director owing to the fear of penal
servitude if the company on whose board he sat did not happen to pay a
dividend, and that no prospectus could be issued except in the case of
a concern which had already stood so severe a test that its earning
capacity was placed beyond doubt? It would certainly be possible by
legislative enactment to make any security that was offered as safe as
Consols, and less subject to fluctuation in value. But when this had
been done the effect would be very much like the effect upon rabbits
of the recent fixing of their price. No more securities would be

It is certainly extremely important for the future financial and
industrial development of this country that the machinery of finance
and company promotion should be made as clean as possible. What we
want to do is to make everybody see that a great increase in output is
required, that this great increase in output can only be brought about
if there is a great increase in the available amount of capital, that
capital can only be brought into being by being saved, and that it is
therefore everybody's business, both for his own sake and that of the
country, to earn as much as he can and save as much as he can so that
the country's capital fund can be increased; so that industry, which
will have many difficult problems to face when the war is over, shall
be as far as possible relieved from any difficulty of finding all the
capital that it needs. To produce these results it is highly necessary
to increase the confidence of the public in the machinery of the Stock
Exchange, in company promotion and all financial issues. Any one who
sincerely believes that these results can be produced by tightening up
the Companies Acts is not only entitled but bound to press as hard as
he can for the securing of this object. But is this the right way to
do it? There is much to be said at first sight for making more strict
the regulations under which prospectuses have to be issued under the
Companies Acts, demanding a franker statement of the profits in the
past, a fuller statement concerning the prices paid to vendors, and
the prices paid by vendors to sub-vendors, and so forth. Any one who
sits down with a pre-war industrial prospectus in his hand can find
many openings for the hand of the reformer. The accounts published by
public companies might also be made fuller and more informing with
advantage. But even if these obviously beneficial reforms were carried
out, there would always be danger of their evasion. They might tend to
the placing of securities by hole-and-corner methods without the issue
of prospectuses at all, and to all the endless devices for dodging the
law which are so readily provided as soon as any attempt is made
by legislation to go too far ahead of public education and public

This is the real solution of this problem--publicity, the education of
the public, and a higher ideal among financiers. As long as the public
likes to speculate and is greedy and ignorant enough to be taken in by
the wiles of the fraudulent promoter, attempts by legislation to check
this gentleman's enterprise will be defeated by his ingenuity and the
public's eagerness to be gulled. The ignorance of the public on the
subject of its investments is abysmal, as anybody knows who is brought
into practical touch with it. Just as the cure for the production of
rotten and fraudulent patent medicines thrust down the public's throat
by assiduous advertising is the education of the public concerning the
things of its stomach, so the real cure for financial swindles is the
education of the public concerning money matters, and its recognition
of the fact that it is impossible to make a fortune in the City
without running risks which involve the possible, not to say probable,
loss of all the money with which the speculator starts. When once
the public has learnt to distinguish between a speculation and an
investment, and has also learnt honesty enough to be able to know
whether it wants to speculate or invest, it will have gone much
further towards checking the activity of the fraudulent promoter
than any measure that can be recommended by the most respectable and
industrious of committees. At the same time, it must be recognised
by those responsible for our finance, that it is their business,
and their interest, to keep the City's back premises clean; because
insanitary conditions in the back yard raise a stink which fouls the
whole City.

In the meantime, if gossip is to be believed, some of the members of
the Government have the most disquieting intentions concerning the
kind of regulations which they wish to impose on the activities of the
City, especially in its financial branch. It is believed that some of
the bright young gentlemen who now rule us are in favour of Government
control over the investment of money placed at home, and the
prohibition of the issue of foreign securities; and it is even
whispered that a fantastic scheme for controlling the profits of all
industrial companies, by which anything earned above a certain level
is to be seized for the benefit of the nation, is now a fashionable
project in influential Parliamentary circles. Every one must, of
course, admit that a certain amount of control will be necessary for
some time after the war. It may not be possible at once to throw open
the London Money Market to all borrowers, leaving them and it to
decide between them who is to be first favoured with a supply of the
capital for which there will be so large a demand when the war is
over. Certain industries, those especially on which our export trade
depends, will have to be first served in the matter of the provision
of capital. If it is a choice between the engineering or shipbuilding
trades and a company that wants to start an aeroplane service between
London and Brighton for the idle rich, it would not be reasonable,
during the first few months after the war, that the unproductive
project should be able, by bidding a high price for capital, to
forestall the demand of the more useful producer. And with regard
to the issue of foreign securities, there is this to be said, that
foreign securities placed in London have the same effect upon foreign
exchange 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 of
securities have to be balanced by exports of goods or services; and
as the times when our export trade is most active are those when most
foreign securities are being placed in London, it follows that any
restrictions placed upon the issue of foreign securities in London
will hinder rather than help that recovery in our export trade which
is so essential to the restoration of our position as a creditor

Moreover, our rulers must remember this, that in War-time, when all
the letters sent abroad are subject to the eye of the Censor, it is
possible to control the export of British funds abroad; but that in
peace time (unless the censorship is to continue), it will not be
possible to check foreign investment by restricting the issuing of
foreign securities in London. If people see better rates to be
earned abroad and more favourable prospects offered by the price
of securities on foreign Stock Exchanges, they will invest abroad,
whether securities are issued in London or not. As for the curious
suggestion that the profits of industrial companies are henceforward
to be limited and the whole balance above a statutory rate to be taken
over by the State for the public good, this would be, in effect, the
continuance on stricter lines of the Excess Profits Duty. As a war
measure the Excess Profits Duty has much to be said for it at a time
when the Government, by its inflationary policy, is putting large
windfalls of profit into the hands of most people who have to hold a
stock 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 of
this artificially produced profit is sound enough; but, if it is
really to be the case that industry is to be asked for the future to
take all the risk of enterprise and handover all the profit above
a certain level to the Government, the reply of industry to such a
proposition would inevitably be short, emphatic, unprintable, and by
no means productive of revenue to the State.



_April_, 1918

The Figures of the National Budget--A Large Increase in Revenue and
a Larger in Expenditure--Comparisons with Last Year and with the
Estimates--The Proportions borne by Taxation still too Low--The Folly
of our Policy of Incessant Borrowing--Its Injustice to the Fighting

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

To take the revenue side of the matter first, this being by far the
most cheering and satisfactory, we find that the details of the
revenue, 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           ---    17,608,000
Estate, 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          ---      1,999,567
Miscellaneous     52,148,315     16,516,765     35,631,550          ---
                 -----------    -----------    -----------  -----------
                 707,234,565    573,427,582    153,414,550   19,607,567
                                               |                      |
                                                      Net Increase.

A more interesting comparison perhaps is to take the actual receipts
during the past financial year and compare them, not with the former
year, but with the estimates of the expected yield of the various
items. 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    +    511,000
Excise                      38,772,000     34,950,000    +  3,822,000
Estate Duties               31,674,000     29,000,000    +  2,674,000
Stamps                       8,300,000      8,000,000    +    300,000
Land Tax and House Duty      2,625,000      2,600,000    +     25,000
Income Tax and Super Tax   239,509,000    224,000,000    + 15,509,000
Excess Profits Tax         220,214,000    200,000,000    + 20,214,000
Land Value Duties              685,000        400,000    +    285,000
Postal Services             35,300,000     33,700,000    +  1,600,000
Crown Lands                    690,000        600,000    +     90,000
Sundry Loans, etc.           6,056,000      7,500,000    -  1,444,000
Miscellaneous               52,148,000     27,100,000    + 25,048,000

Certainly, the country is entitled to congratulate itself on this
tremendous evidence of elasticity of revenue, and to a certain extent
on the effort that it has made in providing this enormous sum of money
from the proceeds of taxation and State services. But when this much
has been admitted we have to hasten to add that the figures are not
nearly so big as they look, and that there is much less "to write
home about," as the schoolboy said, than there appears to be at first
sight. Those champions of the Government methods of war finance who
maintain that we have, during the past year, multiplied the pre-war
revenue, of roughly, £200 millions by more than 3-1/2, so arriving at
the present revenue of over £700 millions, are not comparing like
with like. The statement is perfectly true on paper, and expressed in
pounds sterling, but then the pound sterling of to-day is an entirely
different article from the pre-war pound sterling. Owing to the system
of finance pursued by our Government, and by every other Government
now engaged in the war, of providing for a large part of the country's
goods by the mere manufacture of new currency and credit, the
buying power of the pound sterling has been greatly depreciated.
By multiplying the amount of legal tender currency in the shape of
Treasury notes, of token currency in the shape of silver and bronze
coinage, and of banking currency through the bank deposits which
are swollen by the banks' investments in Government securities, the
Government has increased the amount of currency passing from hand to
hand in the community while, at the same time, the volume of goods
to be purchased has not been increased with anything like the same
rapidity, and may, in fact, have been, actually decreased. The
inevitable result has been a great flood of new money with a greatly
depreciated 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 has
actually been reduced by a half, but it is certainly safe to say that
it has been reduced by a third. Therefore, the revenue raised by the
Government during the past year has to be reduced by at least a third
before we are justified in comparing our war achievements with the
Government's pre-war revenue. If we take one-third off £707 millions
it 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 tremendous
figures of the past year's revenue has to be to some extent qualified.
The great elasticity shown by the big increase of actual achievement
over the Budget estimate has been almost entirely in revenue items
which cannot be expected to continue to serve us when the war is
over. The total increase in the receipts over estimate amounts to £69
millions, and of this £20 millions was provided by the Excess Profits
Duty, a fiscal weapon which was invented during the war, and for
the purpose of the war. It has always been assumed that it would be
discontinued as soon as the war was over, and if it should not be
discontinued its after-war effect is likely to be very unfortunate at
a time when our industrial effort requires all the encouragement
that it can get. Another £25 millions was provided by miscellaneous
revenue, and this windfall again must be largely due to operations
connected with the war. Finally, the £15-1/2 millions by which
the income tax exceeded the estimate must again be largely due to
inflation and extravagance on the part of the Government, which, by
manufacturing money, and then spending it recklessly, puts big profits
and big incomes into the hands of those who have stocks of goods to
sell or who are in a position to produce them.

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

Much has been done by the Committee on National Expenditure to bring
home to the Government opportunities for economy, and methods by which
it can be secured. Can we be equally confident that much has been done
by the Government to carry out the advice that has been given by this
Committee? The Treasury is frequently blamed for its inability to
check the rapacity and extravagance of the spending Departments. It is
very likely that the Treasury might have done more if it had not been
led by its own desire for a short-sighted economy into economising on
its own staff, the activity and efficiency of which was so absolutely
essential to the proper spending of the nation's money. But when this
has been admitted, the fact remains that the Treasury cannot, or can
only with great difficulty, be stronger on the side of economy than
the Chancellor of the Exchequer, and that the task of the Chancellor
of the Exchequer of imposing economy on a spendthrift War Cabinet is
one of extreme difficulty. I hope it is not necessary to say that I do
not 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. I
only urge it because I believe that the conservation of our resources
is absolutely necessary to maintain our staying power, and that these
resources are at present being scandalously wasted by the Government.
Inter-departmental competition is still complained of in the latest
report of the National Committee on Expenditure, and there seems to be
still very little evidence that the Government Departments have yet
possessed themselves of the simple fact that it is only out of these
resources that victory can be secured, and that any waste of them is
therefore a crime against the cause of liberty and progress.

It is possible that before these lines are in print the Chancellor
will have brought in his new Budget, and therefore any attempt to
forecast the measures by which he will meet next year's revenue would
be even more futile than most other endeavours at prophecy. But from
the figures of last year as they are before us we see once more that
the proportion of expenditure raised by revenue still leaves very much
to be desired; £707 millions out of, roughly, £2700 millions is not
nearly enough. It is true that on the expenditure side large sums have
been put into assets which may some day or other be recoverable, and
it is therefore impossible to assume with any approach to accuracy
what 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 and
Dominions, and it need not be said that our advances to our own
Dominions may be regarded as quite as good as if they were still in
our own pockets; but in the case of our Allies, our loans to Russia
are a somewhat questionable asset, and our loans to our other
brothers-in-arms cannot be regarded as likely to be recoverable for
some time to come, owing to the severity with which the war's pressure
has been laid upon them. With regard to the other assets in which
the Government has invested our money, such as factories, machinery,
ships, supplies and food, etc., it is at least possible that
considerable loss may be involved in the realisation of some of them.
It is, however, possible that the actual cost of the war to us during
the year that is past may turn out some day to have been in the
neighbourhood of £2000 millions. If, on the other hand, we deduct from
the £700 millions raised by revenue the £200 millions which represent
the normal pre-war cost of Government to this country we find that the
proportion of war's cost raised out of revenue is slightly over 25 per
cent. This proportion must be taken with all reserve for the reasons
given above, but in any case it is very far below the 47 per cent. of
the war's cost raised out of revenue by our ancestors in the course of
the Napoleonic wars.

It seems to me that this policy of raising so large a proportion
of the war's cost by borrowing is one that commends itself to
short-sighted politicians, but is by no means in the interests of the
country as a whole, or of the taxpayers who now and hereafter have to
find the money for paying for the war. In so far as the war's needs
have to be met abroad, borrowing abroad is to some extent inevitable
if the borrowing nation has not the necessary resources and labour
available to turn out goods for export to exchange against those which
have to be purchased abroad, but in so far as the war's needs are
financed at home, the policy of borrowing is one that should only
be used within the narrowest possible limits. By its means the
Government, instead of making the citizens pay by taxation for the
war as it goes on, hires a certain number of them to pay for it by
promising them a rate of interest, and their money back some day.
The interest and the sinking fund for redemption have to be found by
taxation, and so the borrowing process merely postpones taxation from
the war period to the peace period. During the war period taxation can
be raised comparatively easily owing to the patriotic stimulus and
the simplification of the industrial problem which is provided by the
Government's insatiable demand for commodities. When the days of peace
return, however, there will be very grave disturbance and dislocation
in industry, and it will have once more to face the problem of
providing goods, not for a Government which will take all that it can
get, but for a public, the demands of which will be uncertain, and
whose buying power will be unevenly distributed, and difficult to
calculate. The process, therefore, which postpones taxation during
the war period to the peace period seems to be extraordinarily
short-sighted from the point of view of the nation's economic
progress. Recovery after the war may be astonishingly rapid if all
goes well, but this can only happen if every opportunity is given to
industry to get back to peace work with the least possible friction,
and a heavy burden of after-war taxation, such as we shall inevitably
have to face if our Chancellors of the Exchequer continue to pile up
the debt charge as they have done in the past, will be anything but
helpful to those whose business it will be to set the machinery of
industry going under peace conditions.

As things are, if we continue to add anything like £2000 millions a
year to the National Debt, it will not be possible to balance the
after-war Budget without taxation on a heavier scale than is now
imposed, or without retaining the Excess Profit Duty, and so stifling
industry at a time when it will need all the fresh air that it can
get. Apart from this expedient, which would seem to be disastrous from
the point of view of its effect upon fresh industry, the most widely
advertised alternative is the capital levy, the objections to which
are patent to all business men. It would involve an enormously costly
and tedious process of valuation, its yield would be problematical,
and it might easily deal a blow at the incentive to save on which the
supply of capital after the war entirely depends. A much higher rate
of income tax, especially on large incomes, is another solution of the
problem, and it also might obviously have most unfortunate effects
upon the elasticity of industry. A tax on retail purchases has much to
be said in its favour, but against it is the inequity inseparable from
the impossibility of graduating it according to the ability of the
taxpayer 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 when
the need for food, raw material, and all the equipment of industry
will make it necessary to import as rapidly and as cheaply as possible
in order to promote our after-war recovery.

Apart from these purely economic arguments against the high proportion
of the war's costs that we are meeting by borrowing, there is the much
more important fact of its bad effect on the minds of our soldiers,
and of those members of the civilian population who draw mistaken
inferences 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 who
are left at home are earning high wages and making big profits, it is
evidently highly unfair that the war should be financed by a method
which postpones taxation. The civilian population left at home,
earning high profits and high wages, should clearly pay as much as
possible during the war by immediate taxation, so that the burden of
taxation may be relieved for our soldiers when they return to civil
life. In view of the hardships and dangers which our soldiers have to
face, and the heroism with which they are facing them, this argument
should be of overwhelming strength in the eyes of every citizen who
has imagination enough to conceive what our fighting men are doing for
us and how supreme is our duty to do everything to relieve them from
any other burden except those which the war compels them to face.
There is also the fact that many members of our uninstructed
industrial population believe that the richer classes are growing
richer 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 that
the war has brought a considerable shifting of buying power from the
well-to-do classes to the manual workers. Nevertheless, in these times
misconceptions are awkwardly active for evil. The well-to-do classes
as a whole are not really benefited by having their future incomes
pledged in order to meet the future debt charge, and if, at the same
time, they are believed to be acquiring the right to wealth, which
wealth they will have themselves to provide, the fatuity of the
borrowing policy becomes more manifest. For these reasons it is
sincerely to be hoped that our next fiscal year will be marked by
a much higher revenue from taxation, a considerable decrease in
expenditure, and a consequently great improvement in the proportion of
war'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 of
permanent taxes, the sum which will be needed when the war is over
for peace expenditure on the inevitably higher scale, pensions, and
interest and sinking fund on war debt.



_May_, 1918

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

One of the most interesting passages in a Budget speech of unusual
interest was that in which the Chancellor of the Exchequer compared
the financial methods of Germany and of this country, as shown by
their systems of war finance. He began by admitting that it is
difficult to make any accurate calculation on this subject, owing
to the very thick mist of obscurity which envelops Germany's actual
performance in the matter of finance since the war began. As the
Chancellor says, our figures throughout have been presented with the
object of showing quite clearly what is our financial position. Most
of the people who are obliged to study the figures of Government
finance would feel inclined to reply that, if this is really so, the
Chancellor and the Treasury seem to have curiously narrow limitations
in their capacity for clearness. Very few accountants, I imagine,
consider the official figures, as periodically published, as models of
lucidity. Nevertheless, we can at least claim that in this respect the
figures furnished to us by the Government during the war have been
quite 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 the
enormous figures now involved by Government expenditure, the financial
statements have been published week by week, quarter by quarter, and
year by year, with the same promptitude and punctuality that marked
their appearance in peace-time. In Germany, the Chancellor says, it
has not been the object of German financial statements to show the
financial position quite clearly. It is, therefore, difficult to make
an exact statement, but he was able to provide the House with a series
of very interesting figures, taken from the statements of the German
Finance Ministers themselves.

His first point is with regard to the increase of expenditure. The
alarming rate with which our expenditure has so steadily grown appears
to be paralleled also in Germany. Up to June, 1916, Germany's monthly
expenditure 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 such
as separation allowances and other matters of that kind, borne by the
States and municipalities in Germany, and so not appearing in the
German imperial figures.

As to the precise extent of the German war debt, there is no
certainty, but the Chancellor was able to tell the House that the last
German Vote of Credit, which was estimated to carry them on to June or
July, brings the total amount of all their Votes of Credit to £6200
millions, and that it is at least certain that that amount has been
added to their War Debt, because their taxation during the war has not
covered peace expenditure plus debt charge. Up to 1916 they imposed no
new taxation. In 1916 they imposed a war increment tax, something in
the nature of a capital levy, which is stated to have brought in £275
millions. They added also that year £25 millions nominally to their
permanent revenue. In 1917 they added in addition £40 millions to
their permanent revenue, "Assuming, therefore, that their estimates
were realised, the total amount of new taxation levied by them since
the beginning of the war comes to £365 millions, as against our £1044
millions. This £365 millions is not enough to pay the interest upon
the 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 German
balance-sheet will be a year hence on the same basis on which he had
calculated ours. With regard to our position, he had calculated that
on the present basis of taxation we shall have a margin of four
millions at the end of the present year if peace should then break
out. As will be shown later, this estimate of his is somewhat
optimistic, but at any rate our position, compared with that of
Germany, may be described as on velvet. A year hence the German War
Debt will be not less than £8000 millions. The interest on that will
be at least £400 millions, a sinking fund at 1/2 per cent. will be £40
millions. Their pension engagements, which will be much higher than
ours owing to their far heavier casualties, have been estimated at
amounts ranging as high as £200 millions. The Chancellor was sure
that he was within the mark in saying that it will be at least £150
millions. Their normal pre-war expenditure was £130 millions, so that
they 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 revenue
was £150 millions. They have announced their intention of this year
raising additional permanent Imperial revenue amounting to £120
millions. From the nature of the taxes the Chancellor considers it
very difficult to believe that this amount will be realised, but,
assuming that it is, it will make their total additional revenue £185
millions. That, added to the pre-war revenue, gives a total of £335
millions, showing "a deficit at the end of this year, comparing
the revenue with the expenditure, of £385 millions at least." The
Chancellor added that if that were our position he would certainly
think that bankruptcy was not far from the British Government.

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

It is certainly very pleasant to be able to contemplate the financial
blunders by which Germany is so greatly increasing the difficulties
that it will have to face before the war is over. On the other hand,
we have to recognise that the Chancellor, with that incorrigible
optimism of his, has committed the common but serious error of
over-stating his case by leaving out factors which are in Germany's
favour, as, for instance, that Germany's debt is to a larger extent
than ours held at home. Since the war began we have raised over £1000
millions by borrowing abroad. Our public accounts show that the item
of "Other Debt," which is generally believed to refer to debt raised
abroad, now amounts to £958 millions, while one of our loans in
America, which is separately stated in the account because it was
raised under a special Act, amounted to £51-1/2 millions. It is also
quite possible that fair amounts of our Treasury bills, perhaps also
of our Temporary Advances and of our other war securities, have been
taken up by foreigners; but quite apart from that the two items
already referred to now amount to more than £1000 millions, though at
the end of March last their amount was only £988 millions. It is also
well known that we have during the course of the war realised abroad
the cream of our foreign investments, American Railroad Bonds,
Municipal and Government holdings in Scandinavia, Argentina, and
elsewhere, to an amount concerning which no accurate estimate can be
made, 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 of
our total borrowings and realisation of securities abroad has been
balanced by our loans to our Allies and Dominions, which amounted at
the end of March last to £1526 millions. We have thus entered into an
enormous liability on foreign debts and sold a batch of very excellent
securities on which we used to receive interest from abroad in the
shape of goods and services, against which we now hold claims upon our
Allies and Dominions, in respect to the greater part of which it would
be absurd to pretend that we can rely on receiving interest for some
years after the war, in view of the much greater economic strain
imposed by the war upon our Allies.

Germany, of course, has been doing these things also. Germany has
parted with her foreign securities. She was selling them in blocks for
some weeks before the war, and Germany, of course, has done everything
that she could in order to induce neutrals, during the course of the
war, to buy securities from her and to subscribe to her War Loans.
Nevertheless, it cannot have been possible for Germany to carry out
these operations to anything like the extent that we have, partly
because her credit has not been nearly so good, partly because her
ruthless and brutal conduct of the war has turned the sentiment of the
world against her, and partly because the measures that we have taken
to check remittances and transfers of money have not been altogether
ineffective. On this side of the problem Germany has therefore an
advantage 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 not
have altered her relation to the finance of other countries so much as
has been the case with regard to ourselves. We also have to remember
that the process of demobilisation will be far simpler, quicker, and
cheaper for Germany than for us. Even if the war ended to-morrow the
German Army would not have far to go in order to get home, and we
hope that by the time the war ends the German Army will all have been
driven back into its own country and so will be on its own soil, only
requiring to be redistributed to its peace occupations. Our Army will
have to be fetched home, firstly, over Continental railways, probably
battered into a condition of much inefficiency, and then in ships, of
which the supply will be very short. The process will be very slow and
very costly. Our Overseas Army will have to be sent back to distant
Dominions, and the Army of our American Allies will have to be ferried
back over the Atlantic. Consequently if Germany is able to obtain
anything like the supply of raw material that she requires she will be
able to get back to peace business much more quickly than any of her
Anglo-Saxon enemies, and this is an advantage on her side which it
would be unwise to ignore in considering the bad effects on her
after-war activities of the very questionable methods by which she has
financed and is financing the war.

Since we are indulging in these comparisons, it may be interesting to
consider how our American Allies are showing in this matter of war
finance. The _Times_, in its "City Notes" of April 15th, observed, in
connection with the unexpectedly small amount of the third Liberty
Loan, that the reason why the smaller figure was adopted for the issue
was that it seems quite certain now that the original estimate for
the expenditure in the fiscal year ending June 30th next was much too
high. This estimate was 18,775 million dollars. The _Times_ stated
that the realised amount is likely to be hardly more than 12,000
million dollars, of which about 4500 million dollars will represent
loans to Allies, and that the estimate for the year's largely
increased tax revenue was 3886 million dollars, which now seems
likely to be exceeded by the receipts. If this be so, out of a total
expenditure of £2400 millions, of which £900 millions will be lent to
the Allies, the Americans are apparently raising nearly £800 millions
out of revenue. Therefore if we deduct from both sides of the account
the pre-war expenditure of about £215 millions and deduct also the
loans to Allies from the expenditure, it leaves the cost of the war
to America £1285 millions for this year and the war revenue £562
millions. If these figures are correct it would thus appear that
America is raising nearly half its actual war cost out of revenue as
the war goes on.

On the other hand, in the New York _Commercial Chronicle_ of April 6th
the total estimated disbursements for the year are still stated at
over 16,000 million dollars, that is to say, £3200 millions roughly,
so that there seems to be considerable uncertainty as to what the
actual amount of the expenditure of the United States will be during
the year ending on June 30th. In any case, there can be no question
that if the very high proportion of war cost paid out of revenue shown
by the _Times_ figures proves to be correct, it will be largely owing
to accident or misfortune; if America's war expenditure has not
proceeded nearly as fast as was expected, it will be, no doubt, owing
not to economies but to shortcomings in the matter of delivery of war
goods which the Government had expected to pay for in the course
of the fiscal year. It certainly would have been expected that the
Americans would in this matter of war finance be in a position to set
a very much higher standard than any of the European belligerents
owing to the enormous wealth that the country has acquired during the
two and a half years in which it, in the position of a neutral, was
able to sell its produce at highly satisfactory prices to the warring
Powers without itself having to incur any of the expenses of war. On
the other hand, its great distance from the actual seat of operations
will naturally make it difficult for the American Government to impose
taxation as freely as might have been done in the case of peoples
which are actually on the scene of warfare; so that it is hardly safe
to count on American example to improve the standard of war finance
which has been so lamentably low in Europe in the course of the
present war. According to their original estimates the proportion of
war cost borne out of taxation seems to have been on very much the
same level as ours, and this has all through the war been very much
lower than the results achieved by our ancestors at the time of the
Napoleonic and Crimean wars.

On this point the proportion of our expenditure, which has been borne
out of revenue, the Chancellor stated that up to the end of last
financial year, March 31, 1918, the proportion of total expenditure
borne out of revenue was 26.3 per cent. On the estimates which he
submitted to the House in his Budget speech on April 22nd, the
proportion of total expenditure met out of revenue during the current
financial year will be 28.3 per cent., and the proportion calculated
over the whole period to the end of the current year will be 26.9 per
cent. These proportions, however, are between total revenue and total
expenditure during the war period. The proportion, of course, is
not so high when we try to calculate actual war revenue and war
expenditure by deducting on each side at a rate of £200 millions a
year as representing normal expenditure and revenue and leaving out
advances to Allies and Dominions. On this basis the proportion of war
expenditure met out of war revenue up to March 31, 1918, was, the
Chancellor stated, 21.7 per cent. For the year 1917-18 it was 25.3 per
cent., for the current year it will be 26.5 per cent., and for the
whole period up to the end of the current year 23.3 per cent. The
corresponding figures for the Napoleonic and Crimean wars are given by
Sir Bernard Mallet in his book on British Budgets as 47 per cent. and
47.4 per cent. So that it will be seen that, judged by this test, our
war finance, though very much better than Germany's, is not on so high
a standard as that set by previous wars. It is true, of course, that
the rate of expenditure during the present war has been on a scale
which altogether dwarfs the outgoing in any previous struggle. The
Napoleonic War is calculated to have cost some £800 millions, having
lasted some twenty-three years. Last year we spent £2696 millions, of
which near £2000 millions may be taken as war cost, after deducting
normal expenditure and loans to Allies.

Nevertheless, this argument of the enormous cost of the present war
does not seem to me to be a good reason why the war should be financed
badly, but rather a reason for making every possible effort to finance
it well Are we doing so? At first sight it is a great achievement to
have increased our total revenue from £200 millions before the war to
£842 millions, the amount which we are expected to receive during
the 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 with
pre-war pounds is in itself deceptive. The pounds that we are paying
to-day in taxation are by no means the pounds that we paid before the
war; their value in effective buying power has been diminished by
something like one half. So that even with the proposed additions to
taxation we shall not have much more than doubled the revenue of the
country from taxation and State services as calculated in effective
buying power. When we consider how much is at stake, that the very
existence, not only of the country but of civilisation, is endangered
by German aggression, it cannot be said that in the matter of taxation
the country is doing anything like what it ought to have done or
anything like what it would have done, willingly and readily, if a
proper example had been set by the leading men among us, and if the
right kind of financial lead had been given to the country by its

When we look at the details of the Budget, it will be seen that the
Chancellor has made a considerable advance upon his achievement of a
year ago, when he imposed fresh taxation amounting to £26 millions,
twenty of which came from excess profits duty, and could therefore
not be counted upon as permanent, in his Budget for a year which
was expected to add over £1600 millions to the country's debt,
and actually added nearly £2000 millions. For the present year he
anticipates an expenditure of £2972 millions, and he is imposing fresh
taxation 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 it
stood last year he estimates for an increase of £67 millions, income
tax and super-tax on the old basis being expected to bring in £28
millions more, and excess profits duty £80 millions more, against
which decreases were estimated at £3-1/2 millions in Excise and £37
millions in miscellaneous. He thus expects to get a total increase on
the last year's figures of £135 millions, making for the current year
a total revenue of £842 millions, and leaving a total deficit of
£2130 millions to be provided by borrowing. Increases in taxation
on spirits, beer, tobacco, and sugar bring in a total of nearly £41
millions. An increase of a penny in the stamp duty on cheques is
estimated 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 year
and £4 millions in a full year.

There has been little serious criticism of these changes in taxation
except that many people, who seem to regard the penny post as a kind
of fetish, have expressed regret that the postal rate of the letter
should be raised to 1-1/2 d. This addition seems to me to be merely an
inadequate recognition of the depreciation of the buying power of the
penny and to be fully warranted by the country's circumstances. Either
it will bring in revenue or it will save the Post Office labour, and
whichever of these objects is achieved will increase the country's
power to continue the war. The extra penny stamp on cheques has been
rather absurdly objected to as being likely to increase inflation.
Since the effect of it is likely to be that people will draw a smaller
number of small cheques, and will make a larger number of their
purchases by means of Treasury notes, the tax will merely result
in the substitution of one form of currency for another, and it is
difficult to see how this process will in any way increase inflation.
Other arguments might be adduced, which make it undesirable to
increase the outstanding amounts of Treasury notes, but in the matter
of inflation through addition to paper currency, it seems to me that
the proposed tax is entirely blameless. The increase of a shilling in
income tax and super-tax produced a feeling of relief in the City,
being considerably lower than had been anticipated. It is hardly the
business of the Chancellor of the Exchequer in this most serious
crisis to produce feelings of relief among the taxpayers, and it seems
to me a great pity that he did not make much freer use of these most
equitable forms of taxation, having first made arrangements (which
could easily have been done) by which their very severe pressure would
have been relieved upon those who have families to bring up. Death
duties, again, he altogether omitted as a source of extra revenue. His
proposed luxury tax he has left to be evolved by the wisdom of a
House of Commons Committee, and has thereby given plenty of time to
extravagantly minded people to lay in a store of stuff before the tax
is brought into being.

Space will not allow me to deal fully with the Chancellor's very
interesting analysis of our position as he expects it to be at the end
of 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 millions
in all, without including the excess profits duty, and he expects an
after-war expenditure of £650 millions, including £50 millions for
pensions and £380 millions for debt charge. It seems to me that
his expectation of after-war revenue is too high, and of after-war
expenditure is too low. He says that the estimates have been carefully
made, but that they include "a recovery from the absence of war
conditions," but surely the absence of war conditions is much more
likely to produce a diminution than a recovery in taxation. Under the
present circumstances, with prices continually rising, the profits of
those who grow or hold stocks of goods of any kind automatically swell
The rise in prices has only to cease, to say nothing of its being
turned into a fall, to produce at once a big check in those profits,
and when we consider the enormous dislocation likely to be produced by
the beginning of the peace period expectations of an elastic revenue
when the war is over seem to be almost criminally optimistic.

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



_June_, 1918

An Inopportune Proposal--What is Currency?--The Primitive System of
Barter--The Advantages possessed by the Precious Metals--Gold as
a Standard of Value--Its Failure to remain Constant--Currency and
Prices--The Complication of other Instruments of Credit--No Substitute
for Gold in Sight--Its Acceptability not shaken by the War--A
Fluctuating Standard not wholly Disadvantageous--An International
Currency fatal to the Task of Reconstruction--Stability and Certainty
the Great Needs.

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

Since, however, the question is in the air, it may be as well to
consider what is wrong with our present methods, and what sort of
improvements are suggested by the reformers. At present, as every one
knows, international payments are in normal times ultimately settled
by shipments from one country to another of gold. Gold has achieved
this position for reasons which have been described in all the
currency text-books. Mankind proceeded from a state of barter to a
condition in which one particular commodity was used as the chief
means of payment simply because this process was found to be much
more convenient. Under a system of barter an exchange could only be
effected between two people who happened to be possessed each of them
of the thing which the other one wanted, and also at the same time to
want the thing which the other one possessed, and the extent of their
mutual wants had to lit so exactly that they were able to carry out
the desired exchange. It must obviously have been rare that things
happened so fortunately that mutually advantageous exchanges were
possible, and the text-books invariably call attention to the
difficulties of the baker who wanted a hat, but was unable to supply
his need because the hatter did not want bread but fish or some other

It thus happened that we find in primitive communities one particular
commodity of general use being selected for the purpose of what is
now called currency. It is very likely that this process arose quite
unconsciously; the hatter who did not want bread may very likely have
observed that the baker had something, such as a hit of leather, which
was more durable than bread, and which the hatter could be quite
certain that either he himself would want at some time, or that
somebody else would want, and he would therefore always be able to
exchange it for something that he wanted. All that is needed for
currency in a primitive or any other kind of people is that it should
be, in the first place, durable, in the second place in universal
demand, and, in the third place, more or less portable. If it also
possessed the quality of being easily able to be sub-divided without
impairing its value, and was such that the various pieces into which
it 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 the
precious metals. It is an amusing commentary on the commonly assumed
material outlook of the average man that the article which has won its
way to supremacy as currency by its universal desirability, should be
the precious metals which are practically useless except for purposes
of ornamentation. For inlaying armour and so adorning the person of a
semi-barbarous chief, for making into ornaments for his wives, and for
the embellishment of the temples of his gods, the precious metals had
eminent advantages, so eminent that the practical common sense of
mankind discovered that they could always be relied upon as being
acceptable on the part of anybody who had anything to sell. In
the matter of durability, their power to resist wear and tear was
obviously much greater than that of the hides and tobacco and other
commodities then fulfilling the functions of currency in primitive
communities. They could also be carried about much more conveniently
than the cattle which have been believed to have fulfilled the
functions of currency in certain places, and they were capable of
sub-division without any impairing of their value, that is to say, of
their acceptability. Merely as currency, precious metals thus have
advantages over any other commodity that can be thought of for this

So far, however, we have only considered the needs of man for
currency; that is to say, for a medium of exchange for the time
being. It is obvious, however, that any commodity which fulfils this
function, that is to say, is normally taken in payment in the exchange
of commodities and services, also necessarily acquires a still more
important duty, that is, it becomes a standard of value, and it is on
the alleged failure of gold to meet the requirements of the standard
of value that the present attack upon it is based. On this point the
defenders of the gold standard will find a good deal of difficulty in
discovering anything but a negative defence. The ideal standard of
value is one which does not vary, and it cannot be contended that
gold from this point of view has shown any approach to perfection in
fulfilling this function. It could only do so if the supply of it
available as currency could by some miracle be kept in constant
relation with, the supply of all other commodities and services that
are being produced by mankind. That it should be constant with each
one of them is, of course, obviously impossible, since the rate at
which, for example, wheat and pig-iron are being produced necessarily
varies from time to time as compared with one another. Variations in
the price of wheat and pig-iron are thus inevitable, but it can at
least be claimed by idealists in currency matters that some form of
currency might possibly be devised, the amount of which might always
be 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 agreement
between the volume of currency and the volume of goods coming forward
for exchange is based on what is called the quantitative theory of
money. This theory is still occasionally called in question, but is on
the whole accepted by most economists of to-day, and seems to me to
be 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 including
all kinds of commodities, including pieces of paper and credit
instruments, which are normally accepted in payment for goods
and services. This addition of credit instruments, however, is a
complication which has considerably confused the problem of gold
as the best means of ultimate payment. Taken simply by itself the
quantitative theory of money merely says that if money of all kinds is
increased more rapidly than goods, then the buying power of money will
decline, and the prices of goods will go up and vice versa. This seems
to be an obvious truism if we make due allowance for what is called
the velocity of circulation. If more money is being produced, but the
larger amount is not turned over as rapidly as the currency which was
in existence before, then the effect of the increase will inevitably
be diminished, and perhaps altogether nullified. But other things
being equal, more money will mean higher prices, and less money will
mean lower prices.

But, as has been said, the question is very greatly complicated by
the addition of credit instruments to the volume of money, and this
complication has been made still more complicated by the fact that
many economists have refused to regard as money anything except actual
metal, or at least such credit instruments as are legal tender, that
is to say, have to be taken in payment for commodities, whether the
seller wishes to do so or not. For example, many people who are
interested in currency questions would regard at the present moment in
this country gold, Bank of England notes, Treasury notes, and silver
and copper up to their legal limits as money, but would deny this
title to cheques. It seems to me, however, that the fact that the
cheque is not and cannot be legal tender does not in practice affect
or in any way impair the effectiveness of its use as money. As a
matter of fact cheques drawn by a good customer of a good bank are
received all over the country day by day in payment for an enormous
volume of goods. In so far as they are so received, their effect upon
prices is exactly the same as that of legal tender currency. This
fact is now so generally recognised that the Committee on National
Expenditure has called attention to the financing of the war by bank
credits as one of the reasons for the inflation of prices which has
done so much to raise the cost of the war. It is, in fact, being
generally recognised that the power of the bankers to give their
customers credits enabling them to draw cheques amounts in fact to
an increase in the currency just as much as the power of the Bank of
England to print legal tender notes, and the power of the Government
to print Treasury notes.

Thus it has happened that by the evolution of the banking system
the use of the precious metals as currency has been reinforced and
expanded by the printing of an enormous mass of pieces of paper,
whether in the form of notes, or in the form of cheques, which
economise the use of gold, but have hitherto always been based on the
fact that they are convertible into gold on demand, and in fact have
only been accepted because of this important proviso. Gold as currency
was so convenient and perfect that its perfection has been improved
upon by this ingenious device, which prevented its actually passing
from hand to hand as currency, and substituted for it an enormous mass
of pieces of paper which were promises to pay it, if ever the holders
of the paper chose to exercise their power to demand it. By this
method gold has been enabled to circulate in the form of paper
substitutes to an extent which its actual amount would have made
altogether impossible if it had had to do its circulation, so to
speak, in its own person. From the application of this great economy
to gold two consequences have followed; the first is that the
effectiveness of gold as a standard of value has been weakened because
this power that banks have given to it of circulating by substitute
has obviously depreciated its value by enormously multiplying the
effective supply of it. Depreciation in the buying power of money, and
a consequent rise in prices, has consequently been a factor which
has been almost constantly at work for centuries with occasional
reactions, during which the process went the other way. Another
consequence has been that people, seeing the ease with which pieces of
paper can be multiplied, representing a right to gold which is only in
exceptional cases exercised, have proceeded to ask whether there is
really any necessity to have gold behind the paper at all, and whether
it would not be possible to evolve some ideal form of super-paper
which could take the place of gold as the basis of the ordinary paper
which is created by the machinery of credit, which would be made
exchangeable into it on demand instead of into gold.

It is difficult to say how far the events of the war have contributed
to the agitation for the substitution for gold of some other form of
international currency. It would seem at first sight that the position
of gold at the centre of the credit system has been shaken owing
to the fact that in Sweden and some other neutral countries the
obligation to receive gold in payment for goods has been for the time
being abrogated. The critics of the gold standard are thus enabled
to say, "See what has happened to your theory of the universal
acceptability of gold. Here are countries which refuse to accept any
more gold in payment for goods. They say, 'We do not want your gold
any more. We want something that we can eat or make into clothes to
put on our backs.'" This is certainly an extremely curious development
that is one of the by-products of war's economic lessons. But I do not
feel quite sure that it has really taught us anything new. All that
has ever been claimed for gold is that it is universally acceptable
when men are buying and selling together under more or less normal
circumstances. It has always been recognised that a shipwrecked crew
on a desert island would be unlikely to exchange the coco-nuts or fish
or 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 passing
ship, and returning to conditions under which gold would reassume its
old privilege of acceptability.

During the war the shipping conditions have been such that many
countries have been hard put to it, especially if they were contiguous
to nations with which the Entente is at present at war, to get the
commodities which they needed for their subsistence. The Entente, with
its command of the sea, has found it necessary to ration them so that
they should have no available surplus to hand on to the enemy. They
have very naturally endeavoured to resist these measures, and in order
to do so have made use of the power that they exercise by their being
in possession of commodities which the Entente desires. They
have shown a tendency to say that they would not part with these
commodities unless the Entente allowed them to have a larger
proportion of things needed for subsistence than the Entente thought
necessary for them, and it was as part of this battle for larger
imports of necessaries that gold has been to some extent looked upon
askance as means of payment, the preference being given to things
to eat and wear rather than to the metal. These wholly abnormal
circumstances, however, do not seem to me to be any proof that gold
will after the war be any less acceptable as a means of payment than
before. The Germans are usually credited with considerable sagacity in
money matters, with rather more, in fact, I am inclined to think, than
they actually possess; they, at any rate, show a very eager desire to
collect 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 in
payment for raw materials, and other commodities of which they are
likely to find themselves extremely short. America also has shown a
strong tendency to maintain as far as possible within its borders the
enormous amount of gold which the early years of the war poured into
its hands. While such is the conduct of the chief foreign nations, it
is also interesting to note that one comes across a good many people
who, in spite of all the admonitions of the Government to all good
citizens to pay their gold into the banks, still hold on to a small
store of sovereigns in the fear of some chain of circumstances arising
in which only gold would be taken in payment for commodities. On the
whole, I am inclined to think that the power of gold as a desirable
commodity merely because it is believed to be always acceptable has
not 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 claim
to have risen to full perfection as a standard of value. In
primitive 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 goods
does so with the rough knowledge of what that piece of metal will buy
for him at the moment, and that is the only point which concerns
him. The standard of value only becomes important when under settled
conditions of society long-term contracts bulk large in economic
transactions. A man who makes an investment which entitles him to 5
per cent. interest, and repayment in 30 years' time, begins to be very
seriously interested in the question of what command over commodities
his annual income of 5 per cent. will give him, and whether the
repayment of his money at the end of 30 years will represent the
repayment of anything like the same amount of buying power as his
money now possesses. It is here, of course, that gold has failed
because, as we have seen, the process has been a fairly steady one of
depreciation in the buying power of the alleged standard and a rise in
the prices of other commodities. This means to say that the investor
who has accepted repayment at the end of 30 years of the amount that
he lent, be it £100 or £10,000, has found that the money repaid to him
had by no means the same buying power as the money which he originally

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

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

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



_July_, 1918

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

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

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

Such being the reason why this outburst of capitalisation of reserves
first began--since in these days all capitalists and those who have to
manage capital feel that they are working under criticism, which is
not only jealous and suspicious (as it should be), but is also too
often both ignorant and prejudiced--it is interesting to note that
the movement which was so started has been stimulated by its very
exhilarating effect on the market in the shares of the companies
concerned. Why this should be so it is difficult at first sight to
say. What happens is merely this--that a company, let us suppose, for
the sake of simplicity, with a capital consisting wholly of 3,000,000
Ordinary shares, has accumulated out of past profits, or out of
premiums on new issues of shares, a reserve fund of £1,000,000. Its
net profit has lately averaged £400,000, and it has, year by year,
distributed £300,000 in the shape of a 10 per cent. dividend to
its shareholders, and put £100,000 into its reserve fund, which is
represented on the other side of the balance-sheet by buildings
and plant and a certain amount of first-class investments. If the
directors now decide to capitalise that £1,000,000 of reserve fund,
the only effect is that each shareholder will be given one new share
for every three which he holds in the existing capital, the reserve
fund will be wiped out, and the ordinary capital will be increased
from £3,000,000 to £4,000,000. None of the shareholders will be in
actual fact better off to the extent of one halfpenny, because all
will be in the same position with regard to one another; their
relative shares in the enterprise will not have been altered. If we
imagine, by way of simplifying the problem, that all the Ordinary
shares were in one hand, that one holder would have had in his
Ordinary shares a claim to the total assets of the company, that is
to say, to its earning power as long as it is a going concern, and to
whatever its assets realise if it went into liquidation; the fact that
£1,000,000 worth of the assets had been bought out of past profits or
premiums paid on new issues of shares would have already added to the
value of the claim that he had on the property of the company, and no
addition would be made to that value by turning the reserve fund into

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

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

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

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

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

There is another kind of Bonus share, which is not exactly a Bonus
share, but carries a bonus with it. This comes into being when the
directors of a company sell new shares to existing shareholders at a
price below the terms which they might have obtained if they made a
new issue to the general public. The classical example of this system
is the Aerated Bread Company, that concern to which City clerks and
journalists and others owe so much as pioneers of cheap and simple
catering. It will be remembered that in the palmy days of this
company, before it had been severely cut into by competition, its £1
shares used to stand in the neighbourhood of £15. The directors used
then to make issues of new shares to existing shareholders at their
face value, that is to say, at £1 per share, although it was obvious
that if they had made a public issue inviting all and sundry to
subscribe they could have sold their new issues at or above £14
per share. This system put an enormous bonus in the pockets of the
existing shareholders at the expense of the company and its future
prospects. The directors practically gave to the existing shareholders
a present of £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 was
extremely short-sighted. If the company had retained the monopoly
which its pioneer work as a cheap caterer for a long time secured
it, it might have kept its prosperity unimpaired even by this
short-sighted finance. As it was, attracted several competitors, some
of which were extremely well managed and financed, and although it
still does a most useful work for the community, its earning power has
suffered considerably. But this is only an extreme example of a system
which is reasonable enough if it is not carried too far. The Canadian
Pacific Railway, for instance, has for many years adopted a very
moderate use of this system, making new issues to its shareholders on
terms rather cheaper than it could have obtained by a public issue,
but not giving away enough to impair its future seriously in order
to make presents to the existing stockholders by this means. By the
continued making of small presents to their constituents the directors
of the company have obtained the support of a very loyal body of
stockholders, who feel that they are being well treated but not
pampered. This system of granting a small bonus to existing
shareholders on occasions when the company has to issue new capital is
one which is quite unobjectionable as long as it is not abused. If,
owing to the use of it, the directors are encouraged to finance
themselves badly, that is to say, to pay out of new capital for
improvements and extensions which a more prudent policy would have
financed out of earnings, just because they find that these issues
carrying a small bonus makes them popular with the stockholders, then
the system is being abused. Otherwise there seems no reason to object
to a measure which keeps the shareholders happy and does not do any
harm to the concern so long as it is worked in moderation.

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

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

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



_August_, 1918

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

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

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

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

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

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

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

    "It may be worth pointing out:

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

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

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

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

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

    "It would be idle to pretend that a board of this kind constitutes
    anything like the nexus between industry and finance which obtains
    in Germany, and which is very much to be desired in this country.
    It may be that we do not pay our men enough. A London director has
    to be content with an honorific position, a fee of a few hundred
    pounds a year, and, it must be added, a very exiguous degree of
    responsibility. That is not enough to attract men in the prime of
    life with expert or technical knowledge of industry and finance,
    who would have to submit to a reduction in the large incomes they
    are earning by the exercise of their special abilities if they
    were to accept a seat on the board of a bank. There are two things
    which a good man, in the business sense of the term, will not
    do without--pay and responsibility. Give him sufficient of the
    former, and you may saddle him with as much of the latter as you
    like. You may not always get good men by offering them good pay,
    but you will certainly not get them without doing so. Apparently
    shareholders are content so long as their profits are not reduced
    by more than nominal directors' fees. At a recent meeting of a
    bank with deposits of over £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 from
monopoly, he finds that they lie chiefly in a restriction of
facilities, and in raising the price exacted for them, and that in
both respects the danger appears to be great. There is, he says, every
reason to expect that the banker, as the nearest approach to the
"economic man," will take the opportunity of raising his charges
either by increasing the frequency and the rate of the commission
exacted for the keeping of a small account, or by reducing the rate of
interest allowed on balances, or adopting the common London practice
of refusing it altogether. "The banker, who is not in business for his
health, may be expected, on this side of his enterprise, to pursue the
policy of 'charging all that the traffic will bear.' It would probably
pay the banker actually to refuse small accounts, and to penalise the
employment of cheques for small sums. This would be a social loss."

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

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

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

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

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

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

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

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

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



_September_, 1918

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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



_October_, 1918

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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



_November_, 1918

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

Under this heading two very interesting articles were contributed to
the October issue of _Sperling's Journal_ by Mr Alfred Hoare and an
"Ex-M.P.," and the subject is clearly one to which, now that the end
of the war has been brought appreciably nearer by the feats of the
Allied armies, too much thought and discussion can hardly be given.
How are we going to face the problem that has been built up for us by
the bad finance of the war, the low proportion of its cost that has
been paid for out of taxation, and the consequent huge debt with
which--it is already over £7000 millions gross--the State will be
saddled? Mr. Hoare answered the question by proposing a scheme of
taxation of what he called Rente, by which he meant all forms of
"unearned income"--"rentals from freehold and leasehold property,
interest upon loans whether public or private, and dividends on joint
stock companies or sleeping partnerships." He added that in his
opinion earned income above a certain figure might reasonably be added
to this category on the ground that it has, in some instances, very
much the same characteristics as unearned; the income of a "successful
professional man or clown or jockey or opera star" being due to
peculiar qualities; "and it would be no great hardship if earned
income above, say, a thousand a year for a married couple, with an
additional three hundred for every child under twenty-five years of
age were regarded as unearned, and taxed accordingly." Income was
thus the basis of Mr Hoare's scheme. Rente he regards as an agency
regulating distribution, and requiring to be constantly checked. "It
is," he says, "an elementary principle of social health, and economic
prosperity that the share of the national wealth enjoyed by the
Rentier, by the owner, that is, of unearned income, should not be
excessive," Most people who can follow his admirable example and take
a detached and unbiassed view of questions which affect their pocket
so closely, will agree with him In this opinion. The Rentier lives on
the proceeds of work done in the past by him or by some other person;
and it is not good for our economic health that he should grow too
fat at the expense of those who are working now, lest the latter be
discouraged and work with less spirit.

At the same time we have to remember that the work done in the past by
the Rentier or those whom he represents, has given us the plant and
equipment (in the widest sense of the phrase) with which we are now
working. If, therefore, we penalise the Rentier too severely we shall
discourage his future creation; the present race of earners, if they
see that those who are living on past savings are shorn too close
will be deterred from saving, will put their surplus earnings into
extravagant spending instead of into plant and equipment, and the
economic future of the nation, and of the world, will be _pro tanto_
less hopeful. If once our fiscal system is going to propagate the
view--already so rampant among the happy-go-lucky citizens of this
unthrifty people--that the worst thing to do with money is to save it
there will be bad times ahead for our industry and commerce, which can
only get the capital that it needs if somebody saves it. Mr Hoare's
elaborate calculations led him to conclusions involving a tax of
11s. 6d. in the pound on unearned income. This figure is, I hope,
needlessly high. To arrive at it he assumed that peace might be
concluded towards the end of 1919, and that when peace conditions are
fully re-established--which will take, he thinks, three years, the
National Debt will amount to £10,000 millions, involving annual
interest of £500 millions, which, added to the total Rente of the
country in 1913 (which he made out to be £520 millions), will make a
total Rente in 1923 of £1020 millions. His view is that the burden of
the National Debt should be thrown by means of the income tax upon the
national Rente, not taxing it out of existence, but by such a scale of
taxation as would reduce the net Rente of the country to approximately
the level at which it stood before the war.

There is good reason to hope that Mr Hoare's figures will not be
reached. He took £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 loans
to Allies as a good asset. If we prefer as sounder bookkeeping to
write off the whole of our loans to Allies for the time being and
to apply anything that we may hereafter receive on that account to
Sinking Fund, the debt, on the Chancellor's figures, will amount on
March 31st (if the war goes on till that date) to £7672 millions. Even
if the war went on for six months more it ought not to bring the debt
up to more than £9000 millions at the outside. It is quite true, as
Mr Hoare says, that the return to peace conditions will be a gradual
process, and that expenditure will not come back to a peace basis all
at once. Demobilisation and other matters which were left, by our
cheery Chancellor, out of the airy after-war balance-sheet that he so
light-heartedly constructed, may cost £1000 millions or more before
we have done with them. But against them we can set a string of
recoverable assets which, in the Chancellor's hands, footed up a total
of £1172 millions--balances in agents' hands, due debts (apart from
loans to Allies), land, securities, ships, buildings, stores In
Munitions Department, arrears of taxation, and so on. With his 11s.
6d. in the pound on unearned and 6s. in the pound on earned incomes,
Mr Hoare expects a revenue of £620 millions, "or enough to provide for
the interest of the debt with a 1 per cent. Sinking Fund, and
leave £20 millions towards the Supply Services." But Mr Bonar Law
anticipated 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 hope
that Mr Hoare has gone rather further than was necessary to be on the
safe side.

In the other article on the subject of post-war debt contributed to
the last number of this Journal, an "Ex-M.P." plumped for a somewhat
novel variety of the Levy on Capital, in the shape of a Compulsory
Loan, bearing no interest and repayable in 100 years. Each individual
citizen to be made to subscribe to the extent of 20 per cent. of
his possessions. Ten per cent. of the amount due to be paid on
application, 10 per cent. six months after allotment, and 80 per cent.
on January 1st of the following year. When desired, the Government to
advance at 5 per cent. the money necessary for the payment subsequent
to allotment, full repayment of such advances to be made within
eight years. A Sinking Fund to be established to redeem the loan at
maturity. But is there any real advantage in this scheme over the Levy
on Capital, from which it only differs by the receipt by the payer of
a promise to repay in 100 years' time? The approximate value of
£1000 nominal of the Compulsory Loan stock would be, according to
"Ex-M.P.'s" calculation, in the year of issue £7 12s., money being
worth 5 per cent. and assuming that rate to be current during the
remainder of the term. The claim that there is no confiscation,
because "a perfectly good security is given for the money received,"
would seem rather futile to those who paid £1000 and received a
security, the present value of which might be below £10. They might
very likely think that outright confiscation (since confiscation
originally means nothing but "putting into the Treasury") is really a
simpler way of dealing with the problem. "Ex-M.P.," however, estimates
that the immediate redemption of £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 3-1/2
per cent. stock. This may be true, but if so it is equally true if a
similar or larger amount of debt is cancelled by means of an outright
Levy on Capital.

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

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

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

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

After all, this problem of the war debt, in so far as it is held at
home, is not one that ought to terrify us if we look at it steadily.
People talk and write as if when the war is over the business of
paying for it will begin. That is not really so. The war has been paid
for as it went on, and, except in so far as it has been financed by
borrowing abroad, it has been paid for by us as a nation. Whatever we
have used for the war we have paid for as it went on, partly with
the help of loans from America and from other countries--Argentina,
Holland, Switzerland, etc.--that have lent us money. These loans
amount, as far as they can be traced from the official figures,
to about £1300 millions. Against them we can set our loans to our
Dominions, over £200 millions (a perfectly good asset), and our loans
to our Allies, perhaps £1500 millions, which the Chancellor proposes
to write down by 50 per cent., and might perhaps treat still more
drastically. To meet this foreign debt we shall have to turn out so
much stuff--goods and services of all kinds--for sale abroad to meet
the interest and repayment. We have further impoverished ourselves by
selling our foreign securities abroad No figure has been published
giving any clue to the amount of these sales, and we may perhaps guess
them at £1000 millions. If the pre-war estimates of our overseas
investments at £4000 millions were anywhere near the mark. It thus
appears that we shall end the war still a great creditor nation.

In so far as the debt was raised at home, the war was paid for by
those who bought the securities offered, and we have now to pay them
interest and set about repaying them the capital. This process
will not diminish the national wealth, but will only affect its
distribution. It will not diminish the amount of available capital,
but may even rather increase it by gathering into the hands of the
debt-holders--who are ex-hypothesi folk with an inclination for
saving--money that might, if left in the hands of those from whom it
is collected, have been squandered. The payment of the debt charge
merely means that those who came forward with their money when they
were asked to subscribe to war loans, have, according to the extent
of the effort that they then made, a set-off against the subsequent
taxation involved by the war debt. It would have been a much simpler
and more businesslike proceeding to have taken, instead of borrowing,
a much larger proportion of the war's cost during the war; but it is
too late now to rub in this platitude which is now pretty generally
admitted. Mr Hoare showed in last month's Journal that the creation
of the War Debt has caused a huge addition to what he has called
Rente--the gross income of the propertied classes; and there is much
logic in his contention that this income is the source from which the
debt charge should be met. At the same time both justice and economic
expediency seem to demand that his wider interpretation of Rente, to
make it include the earnings of those whose special qualifications
(or, we may add, special luck) put them in a position to earn more
easily than the struggling majority, should be applied to taxation
involved by the debt charge.

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


THE CURRENCY REPORT _December_, 1918

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

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

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

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

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

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

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

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

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

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

"Estimated amount of gold coin held
by Banks (excluding gold coin held
in the Issue Department of the
Bank of England) and in public
circulation                                123,000,000
"Grand total                              £179,926,000

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

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

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

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

It will be noted that the gold held by the banks (other than the Bank
of England) and by the public has declined from £123 to £40 millions,
according to the Committee's estimate, while, on the other hand, the
circulation of bank notes has risen by £27 millions and the issue of
currency notes has taken place to the tune of £259 millions (at the
date of the Report; it is now nearly £300 millions), making a net
addition to legal tender currency of over £200 millions. When we
also remember that there has been a very heavy coinage of silver and
copper, that the Bank of England's deposits have risen by over £100
millions and the deposits of the other banks by nearly £700 millions,
and all this at a time when most of the industrial activity of the
country was going into the production of destructive weapons and the
support of those who were using them, the behaviour of commodities of
ordinary use in rising by nearly 100 per cent. seems to be an example
of remarkable moderation. With all this new buying power in the hands
of the community there is little wonder that some people should
think that we have enormously increased our wealth during this most
destructive and costly war, and should then feel hurt and disappointed
when they find that this new buying power is robbed of all its
beauty by the fact that its efficiency as buying power is seriously
diminished by its mere quantity.

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

The keystone of the system was the rigid link between legal tender
currency and gold. This was secured by the provisions of the Bank Act
of 1844, which laid down that above a certain line--which was before
the war roughly £18-1/2 millions--every Bank of England note issued
should have gold behind it, pound for pound. In other words, the Bank
of England note was, for practical purposes, a bullion certificate.
The legal limit on the fiduciary issue (that is, the issue of £18-1/2
millions against securities, not gold) could only be exceeded by a
breach of the law. The many critics of our banking system seized on
this hard-and-fast restriction and accused it of making our system
inelastic as compared with the German arrangement, under which the
legal limit could at any time be exceeded on payment of a tax or fine
on any excess perpetrated. These critics might have been right if
legal tender currency had been the only, or even the predominant,
means of payment in England. But, as every office boy knows, it was
not. Legal tender--gold and Bank of England notes--was hardly ever
seen in commercial and financial transactions on a serious scale. We
paid, sometimes, our retail purchases of goods and services in gold;
and Bank notes were a popular mode of payment on racecourses and in
other places where transactions took place between people who were not
very certain of one another's standing or good faith. But the great
bulk of payments was made in the cheque currency which our bankers had
developed outside of the law and could create as fast as prudence--and
an eye to the supply of legal tender which every holder of a cheque
had a right to demand--allowed them to do so. While cheques provided
the currency of commerce, another form of "money" was produced, again
without any restriction by the Act, by the pleasant convention which
caused a credit in the Bank of England's books to be regarded as
"cash" for balance-sheet purposes by the banks. These advantages
gave the English system a freedom and elasticity, in spite of the
strictness of the law that regulated the issue of paper currency, that
enabled it to work in a manner that, judged by the test of practical
results, had one great advantage over that of any of the rival
centres. It alone in days before the war fulfilled the functions of an
international banker by being ready at all times and without question
to pay out the gold that was, in the last resort, the final means of
settling international balances.

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

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

It is not proposed at present to secure the circulation of paper
instead of gold by legislation. The Committee considers that "informal
action on the part of the banks may be expected to accomplish all
that is required." If necessary, however, it points out that
the circulation of gold could be prevented by making the notes
convertible, at the discretion of the Bank of England, into coin or
bar gold. The amount which, in the opinion of the Committee, should be
aimed at for the central gold reserve is £150 millions (a sum which is
already almost in sight on its figures quoted above); and "until
this amount has been reached and maintained concurrently with a
satisfactory foreign exchange position for a period of at least a
year," it thinks that the policy of reducing the uncovered note issue
"as and when opportunity offers" should be consistently followed. How
this opportunity is going to "offer" is not made clear; but presumably
a reflow of notes from circulation can only happen through a fall in
prices or a reduction in bank deposits by the liquidation of advances
made to the Government, directly or indirectly, by the banks.

Concerning the difficult problem of replacing the Bradbury notes by
Bank of England notes of £1 and 10s., an ingenious suggestion is made
by the Committee. It observes that there would be some awkwardness
in transferring the issue to the Bank of England before the future
dimensions of the fiduciary issue have been arrived at; and it
suggests that during the transitional period any expansion in Treasury
notes that may take place should be covered, not as now, by Government
securities, but by Bank of England notes taken from the Bank. By this
means any demands for new currency would operate in the normal way to
reduce the reserve of the Banking Department, "which would have to be
restored by raising money rates and encouraging gold imports," and so
a step would have been taken to getting back to a business basis in
the currency system and away from the profligate printing-press policy
of the war period.

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

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



_January_, 1919

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

A table published week by week by the _Economist_ shows that from
August 1, 1914, to November 9, 1918, the Government paid out £8612
millions sterling. From this we have to deduct an estimate of the
amount that the Government would have spent if there had not been a
war, so that we are at once landed in the realm of conjecture. The
last pre-war financial year saw an expenditure of £198 millions, and
it is safe to assume that this figure would have swollen by a few
millions a year if peace had continued, so that we may take at least
£860 millions from the above total as normal peace expenditure for the
4-1/2 years. This gives us £7752 millions as the gross cost of the
war, as far as the period of actual fighting is concerned. From this
figure, however, we are able to make some big deductions. There are
loans to Allies and Dominions, and some other much more readily
realisable assets than these. We do not know the actual figure of the
loans to Allies and Dominions during the war period, because they are
not included in the weekly financial statements. The amount that we
borrow abroad is set out week by week--at least, that is believed to
be the meaning of the cryptic item "Other Debt"--but the amount that
we lend to Allies and Dominions is hidden away in the Supply Services
or somewhere, and we only get occasional information about it from the
Chancellor in the course of his speeches on the Budget or on Votes of
Credit. In his last Vote of Credit speech, on November 12, 1918, Mr
Bonar Law gave the chief items of the loans to Allies, and a very
interesting list it was. The totals up to October 19, 1918, were £1465
millions to Allies and £218-1/2 millions to Dominions. The Allies
were indebted to us as follows:--Russia, £568 millions; France, £425
millions; 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 been
hit much harder than we have by the war, and had nothing like our
financial strength. The question is, what figure ought we to put on
this asset in deducting it from gross war expenditure in order to
arrive at a guess at the real cost? We take our loans to Dominions, of
course, as good to the last penny. Mr Bonar Law, in his Budget speech
last April, took our loans to Allies at half their face value. Strict
bookkeeping would probably demand a lower figure than 50 per cent.;
but let us follow the ex-Chancellor's example and take loans to
Allies, which we will estimate at £1480 millions up to November 9th,
as good for £740 millions, and loans to Dominions at £220 millions up
to the same date, a total of £960 millions, to be deducted from gross
war cost. Concerning £740 millions of this sum, however, there is a
certain amount of doubt. No one questions for a moment the solvency
of France and Italy, but in view of the pressure that the war has
exercised on their producing power, and, in the case of France, the
complication added by the uncertainties of the position in Russia, in
which French investors are so deeply interested, one cannot feel sure
that they will be able at once to make interest payments. Much will
depend on the sums that they are able to recover from Germany against
their bill of damages, on which more anon. But in any case it seems
likely that a general scheme of interest funding, as between the
Allies, may have to be adopted for some years to come.

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

  Balances in agents' hands, debts
    due, foodstuffs, etc                      £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 was
proceeding on the assumption that the war would last till March 31st
next--the date at which our financial year ends--and would then be
convenient enough to stop. Happily for us, the valour of our soldiers
and those of our Allies, the splendid success of our Fleet and our
merchantmen In bringing over American troops and their food and
equipment with astonishing speed, and the straightforward diplomacy
of President Wilson, combined to achieve victory nearly five months
earlier than the most sanguine had dared to expect. With the very
pleasant result--though it is a small matter when compared with the
end of the killing of the best of our manhood--that the financial
position is very greatly improved. With regard to the figures given
above, it should be observed that the "debts" are advances to
Dominions, but on quite a different basis from our loans to them,
being money owed by them against goods and services supplied.[1] They
and the balances in the hands of agents are both as good as gold.
Concerning the others, one is entitled at first sight to feel a good
deal of scepticism, since such articles as land, buildings, ships and
stores, bought or built by Government during a war, are likely to find
an extremely sluggish demand when the war is over. However, Mr Bonar
Law assured the House that his valuation of these amounts had been
arrived at on a conservative basis, and, what is better still, in his
Vote of Credit speech on November 12th, he was able to state that
revised estimates had shown that their value would be "far greater"
than he had previously expected. So perhaps we are entitled to take
them at £1300 millions.

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

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

  Total Government expenditure,
    August 1, 1914, to November
    9, 1918                                      £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 should
thus now be able to see, more or less, how we stand. During the
fighting period the Government raised by taxation the sum of £2120
millions,[1] from which we have again to deduct £860 millions as an
estimate for normal peace taxation, if the war had not happened,
leaving £1350 millions as the net war taxation, and £4142 millions as
the net addition to debt from the war.

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

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

On the other side of the balance-sheet, the only asset that has not
yet been included in the calculation is the sum that we are going to
receive from Germany, Some cheery optimists think that it is possible
for us and for the Allies to make Germany pay the whole of our war
cost. If so, we have halcyon days ahead, for not only shall we be able
to repay the whole war debt but also to pay back to the taxpayer all
the £1350 millions that he produced during the war, unless, as seems
more likely, the Government finds other uses, or abuses, for the
money, and sets its motley horde of wasters to work again. But this
problem, of course, is not going to arise. It would not be physically
possible for Germany to pay the whole of the Allies' war cost, except
in the course of many generations, and, moreover, the Allies have
bound themselves not to make any such demand by the rider that they
added to President Wilson's peace terms, in giving their assent to
them as the basis on which they were prepared to make peace. Early
in November they stated that President Wilson's reference to
"restoration" of invaded countries should, in their view, be expanded
into a claim for compensation "for all damage done to the civilian
population of the Allies and to their property by the aggression of
Germany by land, by sea, and from the air."[1] This is letting Germany
off lightly; but, after stating their readiness to make peace on the
basis of the fourteen points, if amended as above (and also with
regard to the Freedom of the Seas question) it is not possible for
the European Allies, as the Prime Minister's late manifesto says they
propose to do[2] to expand this claim for civilian damage into a
demand for the whole of their war cost up to the limit of the capacity
of the Central Powers to pay, without a serious breach of faith. So
that the question of how much we can get out of Germany is complicated
by the further uncertainty of the size of the bill for damages that we
can present. It will be big enough. We know that the Germans have sunk
8-1/2 million tons of British ships during the war. As to the price
at which, for "restoration" purposes, we shall value those ships and
their cargoes, and all the civilian property damaged by aircraft and
bombardment, this is a matter which it would be obviously improper
to discuss; but we may be sure that the bill will mount up to many
hundreds of millions, and it remains to be seen whether, after Belgium
and France have presented their account, it will be possible for us to
secure payment even for all the civilian damage that we have suffered.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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



_February_, 1919

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Another point on which Sir Edward lays great stress, in his attack
on the Bank Act of 1844 and the Committee which supports its main
principles, is the beauty of the bill of exchange as backing for a
note issue, as opposed to Government securities. "There is," he says,
"no automatic system for the redemption of currency notes as would be
the case if they were issued against bills of exchange, which in due
course would have to be paid off." Again, "it seems to me that notes
should not be issued against Government securities which may or may
not be paid off, but against bills of exchange which must be met at
due date." This advantage about a bill of exchange is a very real
one to the individual holder who can always put himself in funds by
letting the contents of his portfolio "run off"; but is there much
in it as a safeguard against excessive issue of currency in times of
exuberance? In such times bills that fall due are pretty sure to
be replaced by new ones drawn against fresh production--since
over-production is a common symptom of commercial exuberance--or
against a resale of the goods on which the original bills were based.
As long as anyone who can show produce can be certain to get credit
and currency, the notion that the maturing of bills of exchange can be
relied to restrict currency expansion within safe limits is surely a
dangerous assumption. The principle of a fixed limit, to be broken in
case of real need, but only after some ceremony has been gone through
giving notice of the fact that a crisis has been reached, seems rather
to be required by the psychology of speculative mankind. But even if
Sir Edward's preference for bills of exchange as backing for notes has
all the merits that he claims that is no reason for urging the repeal
of the Bank Act to secure their use. Because the Bank Act does not
forbid it: it merely says, "there shall be transferred, appropriated
and set apart by the said governor and company to the Issue Department
of the Bank of England securities to the value of," etc. It is the
practice of the Bank to put Government securities into the Issue
Department, but the terms of the Act do not compel them to do so, and
if an excess issue were needed they would seem to be empowered to put
any bills that they discounted into the assets held against the note
issue. On the whole the terms of the Act leaving them freedom in the
matter, except with regard to the "Government debt" of £11 millions,
which is specially mentioned as to be transferred to the Issue
Department, seem to be preferable to a special stipulation in favour
of bills of exchange.

But the most important difference between Sir Edward Holden and the
Cunliffe Committee seems to be in their attitude towards the gold
reserve and the relation between the Bank of England and the rest of
the items that compose the London money market. The Committee, working
to restore the conditions which made our market the centre of the
world's finance, endeavoured to give back the control of the central
gold reserve to the Bank of England by suggesting, among other things,
that the other banks should hand over their gold to it. They omitted
to discuss the serious question of the greater difficulty that the
Bank is likely to find in future in controlling the price of money in
the market, owing to the huge size that the chief clearing banks have
now reached. But a central gold reserve under central control was
evidently the object at which they aimed. Sir Edward will have none of
this. He says that if this were done the position of the Joint Stock
banks would be weakened, though he does not explain why, since they
would obviously hold notes in place of their gold and so would be able
to meet their customers' demands, now that the latter are accustomed
to the use of notes for pocket money. He points out that "the gold
which was held by the Joint Stock banks before the war proved most
useful.... At the beginning of the war the banks paid out gold,
satisfied the demands of their customers for small currency, and thus
eased the situation until currency notes became available." He seems
to have forgotten that the banks, or most of them, refused to part
with their gold, paid their customers in Bank of England notes which,
being for £5 at the smallest, were of little use for pocket money, and
so drove them to the Bank to get gold; and we had to have a prolonged
bank holiday and a moratorium. Sir Edward is in favour of three gold
reserves, one to be held by the Government, one by the clearing banks,
and one by the Bank of England. If there were differences between the
three controllers of the reserve at a time of crisis the consequence
might be disastrous.

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



_March_, 1919

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

It will be seen at once that the terms of this document, on any
interpretation of them, go far beyond the intentions expressed in what
may be called the official preamble and in the new Committee's terms
of reference. One of the clauses seems, with all deference to its
august composers, to be merely silly. This is (1)(c) forbidding
sub-division of securities. If a £10 share is split into ten _£1_
shares this operation cannot make the smallest difference to the
supply of capital for essential industries or cause any drain on the
Foreign Exchanges. I am assured by those who have delved into the
official intention that the reason for the objection of the old
Committee to splitting schemes, on which this new prohibition is
based, was that splitting made shares more marketable and popular and
so more likely to compete with War Bonds. But a mere sale of shares,
split small and so popularised, does not absorb any capital. That only
happens when, money is put into some new form of industry. If A, who
holds ten £20 shares, is enabled to dispose of them to B because they
are split into 200 £1 shares, then, A instead of B has got the money
and has to invest it in something. The amount of capital available for
investment is not diminished by a halfpenny. This regulation is just
a piece of short-sighted tyranny which exasperates without doing the
smallest good to anybody.

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



_December_, 1918

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[Footnote 1: Cd. 9182, _2d_.]


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 of
Currency: inflation of,
  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,
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,

*** End of this Doctrine Publishing Corporation Digital Book "War-Time Financial Problems" ***

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