War-time financial problems

WAR-TIME FINANCIAL
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WAR-TIME FINANCIAL
PROBLEMS

BY

HARTLEY WITHERS

" Blest paper credit ! last and best supply'!
That lends Corruption ligh-fr^rinf-s
Gold imp'd by thee, can co.~nrpa.ss "v':-rcfcsh things,
Can pocket States, can fetc'n "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.

LONDON

JOHN MURRAY, ALBEMARLE STREET, W.
1919

Ail rights reserved

PREFACE

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.

H. WITHERS.

June, 191 9.

CONTENTS
i

THE OUTLOOK FOR CAPITAL page
The Creation of Capital— The Inducement— War and Capital . I

II

LONDON'S FINANCIAL POSITION
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 Com-
petition—No other likely Rivals 15

III

WAR FINANCE AS IT MIGHT HAVE BEEN— I
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 Resist-
ance — The Effect of Currency Inflation .... 31

IV

WAR FINANCE AS IT MIGHT HAVE BEEN — II
The Changed Spirit of the Country — A Great Opportunity thrown
away — What Taxation might have done — The Perils of Infla-
tion — Drifting stupidly along the Line of Least Resistance —
It is we who pay, not " Posterity " 48

V

A LEVY t>N CAPITAL
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 . . 63

VI

OUR BANKING MACHINERY
The Recent Amalgamations— Will the Provinces suffer ? — Con-
solidation 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 ... 76

viii

CONTENTS

VII

THE COMPANIES ACTS page
Another Government Committee — The Fallacy of imitating Ger-
many—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 . . . . , . 91

VIII

THE YEAR'S BALANCE-SHEET
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 . . .106

IX

COMPARATIVE WAR FINANCE
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 Com-
parison with American Finance — How much have we raised
from Revenue ?— The Value of the Pound To-day— The 1 9 18
Budget an Improvement on its Predecessors — But Direct
Taxation stiil too Low— Deductions from the Chancellor's
Estimates . . . . - . , . x iS

X

INTERNATIONAL CURRENCY
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
Contant — 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 Stan-
dard not wholly Disadvantageous — An International Currency
fatal to the Task of Reconstruction — Stability and Certainty
the Great Needs 134

XI

BONUS SHARES
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

CONTENTS

ix

Canada— Bonus Shares on Flotation— An American Device
—Midwife or Doctor ?— The Good and Bad Points of both
Systems 149

XII

STATE MONOPOLY IN BANKING

Dank 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 163

XIII

FOREIGN CAPITAL
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 Com-
panies — Can and should the Disclosure of Foreign Ownership
be forced? — The Difficulties of the Problem — Aliens and
British Shipping — The Position of " Key " Industries— Free-
dom to Import and Export Capital our Best Policy . . 180

XIV

NATIONAL GUILDS

The Present Economic Structure— Its Weaknesses and Injustices
— Were things ever belter ? — The Aim of State Socialism—
A Rival Theory — The New Movement of Guild Socialism —
Its Doctrines and Assumptions — Payment il as Human
Beings " — The " Degradation " of earning Wages — Produc-
tion irrespective of Demand— Is that the Heal Meaning of
Freedom? — The Old Evils under a New Name — A Con-
ceivably Practical Scheme for some other World . 19S

XV

POST-WAR FINANCE

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 — Sug-
gestions for solving it 212

X

CONTENTS

XVI

THE CURRENCY REPORT f tags

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 22 7

XVII

MEETING THE WAR BILL
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 , . . . . 243

XVIII

THE REGULATION OF THE CURRENCY
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 Eng-
land ?— 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 261

XIX

TIGHTENING THE FETTERS OF FINANCE
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 — Dis-
appearance of the Retrospective Clause — A Sample of
Bureaucratic Stupidity ♦ 277

XX

MONEY OR GOODS?
" Boundless Wealth " — Money qnd the Volume of Trade — The
Quantity Theory— The Gold Standard — How is the Volume
of Paper to be regulated ? — Mr Kitson's Ideal . . . 293

Index 305

WAR-TIME FINANCIAL
PROBLEMS

i

THE OUTLOOK FOR CAPITAL

September, 1917

The Creation of Capital — The Inducement — War and Capital

One of the questions that are now most keenly
agitating the minds 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 oifer 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

THE OUTLOOK FOR CAPITAL

if we first get a clear idea of what we mean by
capital.

On the subject of the definition of capital, econo-
mists 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 accumulees." 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 six-
pence 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 Ander-
son, 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

WAR'S DESTRUCTION

3

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 business-
like 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 equip-
ment 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 equip-
ment of industry over the greater part of the eaith
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

4

THE OUTLOOK FOR CAPITAL

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 avail-
able 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 ques-
tion we have to see how capital is created. The
answer to this question is very simple, very obvious,

CREATED BY SAVING 5

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 con-
cerning 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

B

6 THE OUTLOOK FOR CAPITAL

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 cultiva-
tion, 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 un-
educated 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 RATE OF INTEREST

7

The man who does this beneficent work, increasing
mankind's output of goods, and providing employ-
ment 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 attrac-
tion of the high rate will also deter them from dimin-
ishing 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 J per cent, for the buyer ;
now the investor can get 5 J per cent, and more from
the British Government. And yet the power that
this 5 1 gives him over the goods and services that he

8 THE OUTLOOK FOR CAPITAL

wants for his comfort is probably not greater, and
very likely rather less, than the power which he got
in 1896 from his 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 conse-
quently 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 commo-
dities? 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

AFTER-WAR SAVING

9

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 every-
body'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 pro-
portion 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 50 great that a com-
paratively 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.

THE OUTLOOK FOR CAPITAL

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 pro-
duction, 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

TAXING CAPITAL

ii

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 pre-

THE OUTLOOK FOR CAPITAL

pared 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 inequit-
able manner by untrained and incompetent officials.
But the important point is this, that if the Govern-
ment 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 dis-
couraging 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

THE SWINDLED INVESTOR 13

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

14 THE OUTLOOK FOR CAPITAL

pay interest is not one that need necessarily terrify
us from this point of view. The arranging and im-
position of the taxation necessary for meeting the
interest on these debts will involve very serious
political and social questions ; but the payment oi
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 sum so
received to further saving or increasing the supply
of capital available.

II

LONDON'S FINANCIAL POSITION
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.

i6 LONDON'S FINANCIAL POSITION

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 cosmo-
politan 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 organi-
sation 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 omis-
sions of other nations."

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

" 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 inter-
national character of its business. This was due to Eng-
land'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

GERMAN NARROWNESS 17

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 ask-
ing to be insured there was never hindered by bureau-
cratic 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 equitably."

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 con-
tained in the following passage : —

" A further bad habit, harmful to our economic deve-
lopment, is narrow-mindedness. This, too, is very pre-
valent 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 d. time when
possibilities of development were restricted and environ-
ment 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 Ger-
many are still unable to free themselves from these
shackles. The relations between buyer and seller are
still often disturbed by petty quibbling. In those indus-
tries where cartels and syndicates have not yet been
formed, too great a rdle 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.

18 LONDON'S FINANCIAL POSITION

In this field we have very much to learn from the English
business man. Long commercial tradition and interna-
tional 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 manage-
ment 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 m 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

HOW MUCH TRUTH?

*9

suffered. Her insular inviolability has been put in ques-
tion. The ravages of war have undermined the achieve-
ments 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 Ger-
many with weapons which have involved the viola-
tion 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 cer-
tainly has not, so far, suffered any serious damage.
Our Fleet has defended us from invasion with com-
plete 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 Reichs-
bank 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

20 LONDON'S FINANCIAL POSITION

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 pro-
grammes of merchant shipbuilding which have been
undertaken by the British and American Govern-
ments 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 position.

" Free trade," says our German Jeremiah, " that
mighty agent in the development of England's
supremacy, will, in all probability, give place to pro-
tection." We venture to think that it will be recog-
nised that the Free Trade policy of the past gave us
a well-distributed wealth which was an invaluable

THE RELATIVE POSITION

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 frvery 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 borrow-
ing direct from investors, but by manufacturing
currency for the purposes of the war by means of the
printing press and the banking machinery. The

c

22 LONDON'S FINANCIAL POSITION

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
t 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

BAD WAR FINANCE

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 inevit-
ably 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

24 LONDON'S FINANCIAL POSITION

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 finance.

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, con-
tinued 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

AMERICA'S ADVANCE

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 dis-
count, in order that goods sent to her from foreign
countries should be financed by bills drawn on

26 LONDON'S FINANCIAL POSITION

American banks and houses in dollars instead of on
English batiks and houses in sterling.

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

THE GEOGRAPHICAL ASPECT

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 im-
perative. 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 favour-
able 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 depot for the entrepot 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 hemi-
spheres, 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

28 LONDON'S FINANCIAL POSITION

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 prpvider of
capital which was given to her by the thrift of the
average French citizen. Every one expects with con-
fidence 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 lias
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 quickly.

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, infringe-
ments of payment stipulations, unjustifiable deduc-
tions/' etc., and the " ruthless " action of the cartels.
He acknowledges that though Germany had a gold

BERLIN'S DIFFICULTIES 29

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 out-
raging 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

30 LONDON'S FINANCIAL POSITION

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, sound-
ness 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 com-
merce 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 con-
sumption 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.

Ill

WAR FINANCE AS IT MIGHT HAVE
BEEN— I

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

32 WAR FINANCE AS IT MIGHT HAVE BEEN

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, lhat
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

THE OPENING CRISIS

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

34 WAR FINANCE AS IT MIGHT HAVE BEEN

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 pit 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 govern-
mental 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 LACK OF PLAN

35

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 con-
tinuing 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 poli-
ticians 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 guiding the economic

36 WAR FINANCE AS IT MIGHT HAVE BEEN

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 rfiight 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 1 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

THE EARLY FEELING

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

38 WAR FINANCE AS IT MIGHT HAVE BEEN

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
strikesuntil thewar 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 expec-
tation 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

THE ECONOMIC PROBLEM

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 before-
hand 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, trans-
ferring 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 produc-
tion of the moment.

Therefore the real economic problem that any

4 o WAR FINANCE AS IT MIGHT HAVE BEEN

Government has to face in war-time is that of in-
ducing 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.

THE ECONOMIC PROBLEM 41

» 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
the fighting forces. Now what was the straightest,

42 WAR FINANCE AS IT MIGHT HAVE BEEN

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 enor-
mously cheapened. There need have been no general
rise in prices because there would have been no
increase in demand for goods and services. Any-
thing 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 in-
dividual 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,

THE EFFECTS OF TAXATION 43

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 ser-
vices for its prosecution, the community would
gradually have shed one after another the extra-
vagances .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 trans-
ferred 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

44 WAR FINANCE AS IT MIGHT HAVE BEEN

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 * 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.

It is not possible nowadays, now that the working
classes are conscious of their strength, to apply
taxation to ordinary articles of general consump-
tion with anything like the ruthlessness which in
former days produced such widespread misery. In-
direct 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

* See Economist, August 4, 1917, p, 15;,

INCOME TAX INEQUITIES 45

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
finding 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

46 WAR FINANCE AS IT MIGHT HAVE BEEN

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
gf 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 under-
stand, 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

EFFECTS OF INFLATION 47

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 in-
evitable. 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.

IV

WAR FINANCE AS IT MIGHT HAVE
BEEN— II

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 " Posterity."

In the November number of Sperlings 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

-NO PRICE TOO 'HIGH"

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
ha.s 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 manu-
facturing currency for the prosecution of the war,
the Government had taken money from the citizens

50 WAR FINANCE AS IT MIGHT HAVE BEEN

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

THE GERMAN EXAMPLE 51

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 com-
munity which is acutely suspicious and distrustful of
its Government, and very liable to ignorant blunder-
ing on financial subjects.

What, then, might have been done if, at the
beginning of the war, a really courageous Govern-
ment, 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

52 WAR FINANCE AS IT MIGHT HAVE BEEN

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 main-
tenance 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 com-
modities 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 pro-
portion of our manufacturing energy for the pro-

OUR WAR COST RAISED AT HOME 53

duction 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 manu-
facture 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

E

54 WAR FINANCE AS IT MIGHT HAVE BEEN

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 pro-
duction, except what was wanted for maintaining
the civilian population in efficiency, for the purposes
of the war.

COMMANDEERING BUYING POWER 55

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 con-
scription, 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 pos-
session 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 lutve been that every-
thing 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 pro-
cess required would have been the readjustment of
industrial output from the production of goods

55 WAR FINANCE AS IT MIGHT HAVE BEEN

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,

TAKING THE MONEY

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 discourage-
ment 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
irresistible.

What the Government has actually done has been
to do a little bit of taxation, much more than any-
body 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

58 WAR FINANCE AS IT MIGHT HAVE BEEN

method it produces the result required, that of
diverting to itself a large part of the industrial out-
put 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 Svho 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 com-
petition, 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

HOW FAR PRACTICABLE ?

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 teen 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 sacri-
fices 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 re-
minded 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 en-
lightenment, but I feel that after the experience
of the present war, and its financing by currency

60 WAR FINANCE AS IT MIGHT HAVE BEEN

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

TAKING SHORT VIEWS

61

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 Govern-
ment, 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

62 WAR FINANCE AS IT MIGHT HAVE BEEN

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.

V

A LEVY ON CAPITAL
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 promi-
nence 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 pos-
sible 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 recom-
mend it. But, as will also be made clear, the pro-
posal 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.

64 A LEVY ON CAPITAL

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 i J 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

THE GROWTH OF THE WAR 65

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

66 A LEVY ON CAPITAL

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 con-
servative 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 hejioes 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

SOME DIFFICULTIES 67

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 sur-
render 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 stock.

The next stage in the proceedings was a deputa-
tion 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

68

A LEVY ON CAPITAL

principle of what is called a 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/ 3 by the War Emergency Workers' National
Committee, I, Victoria Street, S.W. Among what
this pamphlet describes as " the three practicable
methods of conscripting wealth" No. i 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 strangers).

If a <f 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 per-
ceived that, in so far as the Government took secu-
rities 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

THE FABIAN OBJECT 69

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 promi-
nence 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, dis-
cussing the question of a capital levy, it was dis-
tinctly 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 unfor-
tunately large number of patriotic taxpayers, of
putting money into pearl necklaces and other such

F

7°

A LEVY ON CAPITAL

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
with.

Unfortunately, the Statesman was able to an-
nounce 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.

THE CHECK TO SAVING

" 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 him.

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 in-
herent 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

A LEVY ON CAPITAL

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 con-
scription 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 con-
scription 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 com-
paratively wealthy classes, and it is pretty certain
that the proportion of casualties among officers lias
been higher during the war than among the rank and
file. Thus, as far as the conscription of men is con-
cerned, the sacrifice imposed upon all classes in the
community is alike, or, if anything, presses rather
more heavily upon those who own wealth. Con-
scription 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 pro-
perty have, as is quite right, borne throughout the

THE DOUBLE SACRIFICE

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 con-
sidering as long as it does not carry with it serious
drawbacks.

It seems to me, however, that the drawbacks are

A LEVY ON CAPITAL

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 pro-
posed 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 charac-
teristic 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 con-
sequently 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

PROBABLE EFFECTS 75

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 them-
selves 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 pro-
duction 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.

VI

OUR BANKING MACHINERY
February, 1918

The Recent Amalgamations — Will the Provinces suffer ? — Con-
solidation 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 ap-
pointed 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

AMALGAMATIONS

77

trading world of competition on the part of the new
chartered institution only arose owing to its unfor-
tunate 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 enor-
mous figures on both sides of the balance-sheet,
working from London, often, it was alleged, with

78 OUR BANKING MACHINERY

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
qustomers.

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 follow-
ing table shows : —

AMALGAMATION'S PROGRESS

Movement of English Joint-Stock Bank Deposits, Etc.,
since 1886.

December
31st.

No.
of
Banks.

Number
of

Branches.

Capital
Paid up.

j

Deposit and
Current
j Accounts.

Total
Liabilities,

1886
1891
1896
190 1
1906
191 1
1916

I09
I06
94
74
55
44
35

1.547
2.245
3.051
3.935
4,840

5.417
5.993

^38,468,000
43,406,000
45,203,000
46,631,000
48,122,000
47,265,000
48,237,00c

^299,195,000
391,842,000

495.233.°°°
584,841,000
647,889,000
748,641,000
I.I54.S77. 000

£376,808,000
486,632,000
599,518,000
698,150,000
782,353,000
885,069,000
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 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 13 16 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

8o OUR BANKING MACHINERY

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 com-
munity 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 considera-
tion 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 stiff-
ness to get into the methods by which their business
is managed. By the appointment of local com-
mittees 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

THE SENTIMENTAL ASPECT Si

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
been announced, however, that the whole problem

82 OUR BANKING MACHINERY

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 amalgama-
tion, how will this tendency end except in the creation
of one huge bank working a gigantic money mono-
poly 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 centrali-
sation 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 Govern-
ment Departments, however efficient and economical
it might be, would be such a deadly dull and un-
enterprising business that all the adaptability and

GOVERNMENT METHODS 83

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. Any-
body 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 pro-
position 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

84 OUR BANKING MACHINERY

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 un-
satisfactory 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

PEEL'S ACT

85

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

G

86 OUR BANKING MACHINERY

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 incon-
venience, 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 Govern-
ment 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

THE HOLDEN PLAN 87

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 de-
partments.

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

88 OUR BANKING MACHINERY

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 pay-
ment 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 ideas : —

BANK STATEMENT, JANUARY 16, 1918.
Issue Department.

Notes Issued . . £76,076,000 Gold £57,626,000

Government Debt . . 11,0x5,000
Other Securities. . . 7,435,000

£76,076,000 £76,076,000
Ratio of Gold to Notes Issued™ 757 per cent.
Banking Department.

Capital £i4,553,ooo 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

^ t • i.^ 163,005,000 3i,8<J3,ooo

Other Liabilities . . . 18,000

£180,939,000 £180,939,000
Ratio of Cash Balance to Liabilities « i</6 per cent.

THE HOLDEN PLAN

89

RECONSTRUCTED BALANCE-SHEET OF THE BANK,
JANUARY 1 6, 1 91 8.

Capital £i4>553,ooo Gold . . .£58,768,000

Rest 3,363,000 Currency Notes . 11,015,000

Notes Issued (circulation) 4.5,325,000 £69,783,000

Deposits 163,005,000 Government Secu-

Other Liabilities , . . 18,000 rities . . . 56,768,000

Other Securities 7>435>ooo

64,203,000

Other Securities .... 92,278,000

£226,264,000 £226,264,00

Ratio of Gold to Notes . . *=i297 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.

OUR BANKING MACHINERY

Moreover, the check imposed upon our banking com-
munity 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 objec-
tion 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.

VII

THE COMPANIES ACTS
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 — In-
dustry 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 Com-
mittee on Currency, a Committee on Banking Amal-
gamations, 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,

THE COMPANIES ACTS

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 Recon-
struction." 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 0. C.
Quekett, and Mr A. W. Tait. The secretary is Mr
W. W. Coombs, 55, Whitehall, S.W. i. 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 0. C. Quekett, the Stock Ex-
change; 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 Com-
mittee 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 Prus-
sianising methods upon this unfortunate country,
merely because it is generally assumed that Prussian
methods have been shown, during the course of the

PRUSSIANISING BRITAIN 93

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 con-
templated 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 sprung 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

94 THE COMPANIES ACTS

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 appli-
cation 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

POLITICAL INFLUENCES

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 inter-
ference 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

96 THE COMPANIES ACTS

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 expropria-
tion 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 dis-
guised robbery, inevitably have warped views con-
cerning 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 supre-
macy 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

FREEDOM NEEDED

97

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.

g8 THE COMPANIES ACTS

Is it, then, wise at such a time to impose restric-
tions 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 pro-
duction 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

OUR STRENGTH AS CREDITOR 99

very greatly the number of men we have put into
the firing-line so as to keep them at home for pro-
ductive work, or, by the enormous amount of out-
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 inter-
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 water-
tight and safe, while by some unexplained method
the public would still be somehow able to derive
large benefits from fortunate speculations in enter-
prises which turned out right. Every one must

ioo THE COMPANIES ACTS

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 offered.

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

OPENINGS FOR THE REFORMER 101

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 confi-
dence 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 Com-
panies 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

H

102

THE COMPANIES ACTS

go too far ahead of public education and public
feeling.

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 adver-
tising 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 invest-
ment, 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,

OUR RULERS' INTENTIONS

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 regula-
tions 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 fashion-
able 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

104 THE COMPANIES ACTS

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 country.

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 con-
tinue), it will not be possible to check foreign invest-
ment 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 hence-
forward to be limited and the whole balance above

AN UNPRINTABLE ANSWER 105

<a statutory rate to be taken over by the State for
the public good, this would be, in effect, the con-
tinuance 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
it's 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 hand
over all the profit above a certain level to the
Government, the reply of industry to such a pro-
position would inevitably be short, emphatic, un-
printable, and by no means productive of revenue
to the State.

VIII

THE YEAR'S BALANCE-SHEET
April, 191 8

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 Taxa-
tion still too Low — The Folly of our Policy of Incessant
Borrowing — Its Injustice to the Fighting Men,

At first sight the figures of revenue and expenditure
for the year ending March 31st are extremely satis-
factory, 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 expendi-
ture 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 : —

COMPARATIVE FIGURES

107

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 239i5°9»ooo 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,^00,000 ~

Crown Lands . , . 690,000 650,000 4.0,000 —

Sundry Loans, etc. . 6,056,250 8,055,817 — 1,999,567

Miscellaneous . . . 52,148,515 16,516,765 35,631,550 —

707,234.565 573,427,582 153,414.550, 19,607,567

£133,806,983
Net Increase;

A more interesting comparison perhaps is to
take the actual 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 : —

Actual.
£

Estimated.

Difference.

Customs . . .

71,261,000

£

70,750,000

+

£

511,000

Excise ....

38,772,000

34,95°,°°°

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

4-i5,5°9,°o°

Excess Profits Tax

220,214,000

200,000,000

+20,214,000

Land Value Duties

685,000

400,000

+

285,000

Postal Services

35,30°,°°°

33,700,000

+

1,600,000

Crown Lands .

690,000

600,000

90,000

Sundry Loans, etc.

6,056,000

7,500,000

t, 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

io8 THE YEAR'S BALANCE-SHEET

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 main-
tain that we have, during the past year, multiplied
the pre-war revenue, of roughly, £200 millions by
more than 3 J, so arriving at the present revenue of
over £700 millions, are not comparing like with like.
The statement is perfectly true on paper, and ex-
pressed in pounds sterling, but then the pound ster-
ling of to-day is an entirely different v 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 pro-
viding 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

DEPRECIATED MONEY

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 com-
paring 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 achieve-
ment 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

no THE YEAR'S BALANCE-SHEET

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% 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 im-
provise 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

A SERIOUS BLOT

in

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 Govern-
ment 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

H2 THE YEAR'S BALANCE-SHEET

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 Govern-
ment. Inter-departmental competition is still com-
plained of in the latest report of the National Com-
mittee on Expenditure, and there seems to be still
very little evidence that the Government Depart-
ments 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 there-
fore 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 pro-
portion 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

THE ELUSIVE COST 113

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 ; bjit in the case of our
Allies, our loans to Russia are a somewhat question-
able 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 Govern-
ment 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 tnat 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,

H4 THE YEAR'S BALANCE-SHEET

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 pur-
chased 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 pro-
cess 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 Govern-
ment'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 pro-
viding 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 calcu-
late. The process, therefore, which postpones taxa-

THE AFTER-WAR BUDGET

tion 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 oppor-
tunity 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 in-
dustry, 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 „
mcomes, is another solution of the problem, and
it also might obviously have most unfortunate

n6 THE YEAR'S BALANCE-SHEET

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 wel-
comed 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

THE EVILS OF BORROWING 117

every citizen who has imagination enough to con-
ceive 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 pro-
ceeds 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. Never-
theless, 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.

IX

COMPARATIVE WAR FINANCE
May, 1 918

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 191 8 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 through-
out 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

THE GERMAN FIGURES 119

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 £61 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,

120 COMPARATIVE WAR FINANCE

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 /J6200 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, some-
thing 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
revemie. 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 some-
what optimistic, but at any rate our position, com-
pared with that of Germany, may be described as

GERMANY'S DEFICIT 121

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
I 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 Chan-
cellor 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 addi-
tional revenue has been obtained from the wealthier

122 COMPARATIVE WAR FINANCE

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 con-
template 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
t0 £958 millions, while one of our loans in America,
which is separately stated in the account because

OUR FOREIGN DEBT 123

it was raised under a special Act, amounted to £51!
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

124 COMPARATIVE WAR FINANCE

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. Never-
theless, 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 senti-
ment of the world against her, and partly because
the measures that we have taken to check remit-
tances and transfers of money have not been alto-
gether ineffective. On this side of the problem
Germany has therefore an advantage over us, that
her war finance, pitiful as 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 demobilisa-
tion 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 redis-
tributed to its peace occupations. Our Army will
have to be fetched home, firstly, over Continental
railways, probably battered into a condition of

GERMANY'S ADVANTAGE 125

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 con-
sidering 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 fyoQ

126 COMPARATIVE WAR FINANCE

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 disburse-
ments 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 mis-
fortune ; if America's war expenditure has not pro-
ceeded 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 belli-
gerents owing to the enormous wealth that the

AMERICA'S EXPERIENCE 127

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 Govern-
ment 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 pro-
portion 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

128 COMPARATIVE WAR FINANCE

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, 217 per cent.
For the year 1917-18 it was 253 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 Napo-
leonic 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

THE WEAKENED POUND

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 some-
thing 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 rulers.

When we look at the details of the Budget, it
will be seen that the Chancellor has made a con-
siderable 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

130 COMPARATIVE WAR FINANCE

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$ 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 esti-
mated at £j| 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! 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 This addition seems
to me to be merely an inadequate recognition of the

THE CHEQUE TAX

131

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 outstand-
ing 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 blame*
less. 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 alto-
gether omitted as a source of extra revenue. His

132 COMPARATIVE WAR FINANCE

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 auto-
matically 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,

OPTIMISTIC IMAGININGS 133

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 deduct-
ing 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
Exchequer,

X

INTERNATIONAL CURRENCY
June, 1 918

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 Complica-
tion 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 caff 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

THE ORIGIN OF CURRENCY

135

be as well to consider what is wrong with our present
methods, and what sort of improvements are sug-
gested 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 fit 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 w$re possible, and
the text-books invariably call attention to the diffi-
culties 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 commodity.

It thus happened that we find in primitive com-
munities 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 bit of leather, which was

136 INTERNATIONAL CURRENCY

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 pos-
sessed 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 adorn-
ing the person of a semi- barbarous chief, for making
into ornaments for his wives, and for the embellish-
ment of the temples of his gods, the precious metals
had eminent advantages, so eminent that the prac-
tical 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 PRECIOUS METALS

137

the hides and tobacco and other commodities then
fulfilling the functions of currency in primitive com-
munities. 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
purpose.

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 ser-
vices, 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 require-
ments 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

138 INTERNATIONAL CURRENCY

with each one of them is, of course, obviously im-
possible, 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.

THE QUANTITY THEORY 139

This seems to be an obvious truism if we make due
* allowance for what is called the velocity of circula-
tion. 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 instru-
ments 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

140 INTERNATIONAL CURRENCY

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 substi-
tuted 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 circu-
late 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

AN IDEAL SUPER-PAPER

141

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 conse-
quence 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 sub-
stitution 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

142 INTERNATIONAL CURRENCY

standard are thus enabled to say, " See what has
happened to your theory of the universal accept-
ability 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 circum-
stances. It has always been recognised that a ship-
wrecked 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

GOLD STILL WANTED

143

the power that they exercise by their being in pos-
session 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, T 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 main-
tain 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

144 INTERNATIONAL CURRENCY

fear of some chain of circumstances arising in which
only gold would be taken in payment for commodi-
ties. 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 primi-
tive 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 con-
tracts 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

ADVANTAGES OF DEPRECIATION 145

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
£ro,ooo, has found that the money repaid to him
had by no means the same buying power as the
money which he originally invested.

Within limits this tendency of the standard of
value towards depreciation has possessed consider-
able 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 commo-
dities 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 pro-
ducer 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

146 INTERNATIONAL CURRENCY

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 steadi-
ness 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 certainty very obvious that
the diplomatic relations of the world require com-
plete 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

AN ADDED TERROR

147

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 out-
burst 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 up-
setting their minds with doubts concerning some
kind of new-fangleci 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 unfore-
seen 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 sub-
stitute 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

148 INTERNATIONAL CURRENCY

to get the economic ship as far as possible on an
even keel.

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

XI

BONUS SHARES
July, 1918

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

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

This explanation was very frankly given by the

L

i5o

BONUS SHARES

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 27I per cent., and
" the directors feel that there is a widespread impres-
sion 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 share-
holders, 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

CAPITALISING RESERVES

monopoly the public and the workers arefully justified
in being suspicious and examining the source from
which high dividends ^re 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 preju-
diced — 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 accumu-
lated 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 repre-
sented 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

15*

BONUS SHARES

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 enter-
prise 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 what-
ever 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
shares.

In other words, the reserve fund is already the
property of the shareholders, and to convert it from
reserve fund into capital, making them a present of
new shares, which merely represent their claim to
the assets held against the reserve fund, is as empty
a gift as presenting a man with a piece of paper
informing him that he is the owner of his own hat.
All this remains equally true if, besides the ordinary
capital, there is a considerable amount outstanding
of Preference shares and Debenture debt. In any
case, the Ordinary shareholders possess a claim to
the earning power of the company when prior charges
have been satisfied, and to whatever surplus may
remain on liquidation after first charges have been
paid off in full. Whether that interest of theirs is

THE EARNING POWER 153

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 fcaakes 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, organisa-
tion, 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

154

BONUS SHARES

with a capital of three millions and reserve fund of
one million, if the reserve fund is turned info
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 dis-
satisfied 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 share-
holders 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.

A PLEASANT DELUSION 155

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 reservoe 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 com-
modities, at which a commodity can be disposed of.

156 BONUS SHARES

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 amalgama-
tion, 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 expecta-
tion the directors might be right or wrong, and, even
if they are right, that prospect o{ higher earning
power, if market prices could be relied upon to
express the true position of a company, would have
been " in the price/'

CHEAP NEW SHARES

157

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 sub-
scribed for at £140,000. There was nothing wicked
about the process, but it was extremely shortsighted,
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 unim-
paired even by this shortsighted finance. As it was,
success attracted several competitors, some of which

158

BONUS SHARES

were extremely well managed and financed, and
although it still does a most usefuL-work for the
community, its earning power has suffered con-
siderably. 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 con-
stituents 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 pam-
pered. 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 unob-
jectionable 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

CAPITALISING PERHAPSES 159

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 com-
pany 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 good-
will, 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 some-
thing 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

i6o

BONUS SHARES

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-opera-
tion 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

MIDWIFE OR DOCTOR? 161

immediate success of the promotion. He is, as one of
the greatest of them described himself, a mere mid-
wife, 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 pro-
moter ; 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 to<i

BONUS SHARES

often assume, and it has been shown that it carries
with it a very great and substantial advantage in
the hands of honest people who wish to conduct
the business of company promotion on progressive
lines.

XII

STATE MONOPOLY IN BANKING
August, 1918

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

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

164 STATE MONOPOLY IN BANKING

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 supre-
macy 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 Govern-
ment-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 Con-
temporary 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

THE BUREAUCRATIC SAVIOUR 165

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 incal-
culable. Even in the crisis of the war the matter is
receiving the attention of the Government.

" In the opinion of the present writer, the amalgama-
tion 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 Ger-
many, 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

M

166 STATE MONOPOLY IN BANKING

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 remunera-
tion 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*

CASH RESERVES 167

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 amalgama-
tion, 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 with-
drawn 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

168 STATE MONOPOLY IN BANKING

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 compara-
tive 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

THE PAY OF DIRECTORS 169

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

170 STATE MONOPOLY IN BANKING

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., 7J 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 em-
ployees, 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

THE MONOPOLIST RANSOM 171

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 dis-
crimination 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

172 STATE MONOPOLY IN BANKING

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 com-
munity 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 induce-
ment 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 f acilities 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 turn-over and

BUREAUCRATIC MANAGEMENT 173

small profits on each transaction. The experience
of the great insurance companies, and of great
catering companies, and of "enormous private organisa-
tions such as the Imperial Tobacco Company, has
shown the enormous advantage of providing cheap
facilities to the largest possible number of cus-
tomers ; 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 inevit-
ably 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

174 STATE MONOPOLY IN BANKING

are practically certain to develop the qualities and
idiosyncrasies of civil servants, which are so unlikely
to tend to elasticity, rapidity and efficiency in busi-
ness 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 sug-
gestion 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 spe-
cialised 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

A SUGGESTED DIVISION 175

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 share-
holders, and should now be exposed to the imminent
danger of monopoly.

" If the receipt and custody of deposits and the
keeping of current accounts were made a public service
the Government might invest the funds thus placed at
its disposal in a variety of ways. A certain proportion,
perhaps corresponding to what is now held as savings,
would be invested, as at present, in Government securi-
ties — 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 pur-
poses, 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 bo financial concerns,

176 STATE MONOPOLY IN BANKING

owned and directed by shareholders, and run 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 ran for the advantage
of the industries as wholes, may be a matter for con-
sideration 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 con-
sideration, 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

A DIFFICULTY

177

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 in-
genuity 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

i;8 STATE MONOPOLY IN BANKING

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, business-like
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 lif e ;
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 detri-
ment 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

THE PATIENT TAXPAYER

more tedious and irritating process than it is at
present, and that the expenses of the matter would
have grown to such an extent that the taxpayer
might be called upon annually to make good a
considerable loss.

XIII

FOREIGN CAPITAL
September, 1918

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

Many things that are now happening must be tickling
the sardonic humour of the Muse of History. The
majority of the civilised Powers are banded together
to overthrow a menace to civilisation, carrying on a
war which, it is hoped, is to produce a state of things
in which mankind, purged of the evil spirits of mili-
tarism and aggression, is to start on a new order of
co-operation. At the same time, while we are en-
gaged in fighting under banners with these noble
ideals inscribed on them, a large number of citizens
of this country are airing proposals aimed at restric-
tions upon Qur 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

QUEER CROSS-CURRENTS 181

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 com-
mercial 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 culti-
vate 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 im-
proved 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

N

182 FOREIGN CAPITAL

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 state-
ments 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 exceed-
ingly 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 manage-
ment ought to be able to count upon a keen and

DIFFICULTIES AHEAD

183

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 con-
suming 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,

184 FOREIGN CAPITAL

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 —
a 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 Com-
mittee, 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 repre-
sentative 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

A CURIOUS REASON 185

lay in the forefront of its investigations was that of
the employment of foreign capital in British in-
dustries. 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, it" is entirely true that the main-
tenance 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 indus-
trial 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

i86

FOREIGN CAPITAL

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 con-
siderable 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 com-
mercial 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 antici-
pate," 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

FEAR OF GERMANY 187

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 reconstruc-
tion 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 expe-
diency 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 mant'
power over the forces of Nature has been to a greas
extent due to the freedom with which we invested

188 FOREIGN CAPITAL

capital abroad and opened a free market to the pro-
ducts of all other countries. At a time when, owing
to exceptional circumstances, we ourselves happen
to be in need of capital, it would appear to be an
extremely short-sighted policy to refuse to admit it,
wherever it came from. We have excellent reason
to known that, when capital is once invested in a
foreign country, it is largely in the power of the
inhabitants and Government of that country to
control its working. Any foreigner, even an enemy,
who set up a factory in England after the war would
be doing just the very thing which we most of all
want to be done, namely, setting the wheels of
industry going, relieving the labour market from
a possible glut after demobilisation, and helping
that difficult stage of transition from war work to
peace work.

The Committee, however, considers that " at the
root of the whole matter lies a question which is not
one of Company Law amendment at all, but one
of high political and economic policy." It does not
fall within its province " to inquire whether the
traditional policy of this country to admit and
welcome all who seek our shores and submit them-
selves loyally to our laws ought, in the case of some
and what aliens, to be revised " ; or whether dis-
crimination 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

ALIEN ACTIVITY

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 Govern-
ment in case our rulers should decide to impose the
restrictions which its own common-sense shows it
are so undesirable.

If, it says, foreign capital is to be attracted here,
it must be represented either by shares or by deben-
tures. " The question, therefore, is whether restric-
tions 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

FOREIGN CAPITAL

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 declara-
tion 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 pro-
vision 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

THE ELUSIVE ALIEN 191

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 com-
panies 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

FOREIGN CAPITAL

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 Com-
mittee's opinion, be too great. If adopted, the
scheme could be evaded. And, with regard to
companies in general, the Committee's recommenda-
tions 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 discrimina-
tion 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

DEVICE FOR DISCLOSURE 193

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 Boaxd minutes. Any breach of
these obligations to be visited with a penalty
which should be severe.

194

FOREIGN CAPITAL

(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 nation-
ality 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 nation-
alities; 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 (6) as regards
the rest, what axe 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 ex-
pedient. It therefore considers that in these com-
panies it will be sufficient to ensure that not more

SHIPPING AND "KEY" COMPANIES 195

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 recom-
mended. 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

196 FOREIGN CAPITAL

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 com-
bating 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 Com-
mittee. 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 estabhshing 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

THE MORAL

197

with enemy shareholders). They were managed in
this country ; the profits earned by them were sub-
ject 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 com-
panies 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 advan-
tageous 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 restric-
tions on our power to export capital, that the Com-
mittee 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 recom-
mend, 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.

o

XIV

NATIONAL GUILDS
October, 1918

The Present Economic Structure—Its Weaknesses and Injustices
— Were things ever better ? — The Aim of State Socialism —
A Rival Theory — The New Movement of Guild Socialism —
Its Doctrines and Assumptions — Payment " as Human
Beings " — The " Degradation " of earning Wages — Produc-
tion irrespective of Demand — Is that the Real Meaning of
Freedom ? — The Old Evils under a New Name — A Con-
ceivably 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 wor.d, or even the first, in civilisation.

THE MEDIEVAL CONQUEROR 199

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 main-
tained a position there, were necessarily possessed of
courage and bodily vigour and of all the rough
virtues associated with the ideal of chivalry. Per-
haps it was so in some cases, and there is certainly

NATIONAL QUILDS

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 attrac-
tive in the notion that if all men worked for the good
of the community and not for their own individual

ATTRACTIONS AND MISGIVINGS 201

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 experi-
ences 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 regula-
tion 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

202 NATIONAL GUILDS

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 rude 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 some-
times 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 disparage-
ment 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 publica-
tions, among which I have studied, with as much
care as these distracting times allow, " Self-Govern-
ment 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

THE CAPITALIST THIEF 203

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 men-
tioned that "to do good work for a capitalist
employer is merely, if we view the situation ration-
ally, 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.

NATIONAL GUILDS

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 accus-
tomed 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.

THE GUILD IDEAL

205

National Guilds, then, must assure to the worker,
at least, the following things : —

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

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

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

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

Now, looking with a most dispassionate eye and
an eager desire to find out what it is that Labour and
its spokesmen are grouping after, can one find in
these " marks of degraded status " any serious evil,
or anything thc£ 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 piece-
worker, such as I am when I write this article, has
usually no contracted term, and is only paid for actual

206

NATIONAL GUILDS

work done. I also have no control over the organisa-
tion 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 ex-
tremely 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 circum-
stances I should potter about with many activities

AN UNSOCIAL IDEAL 207

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 some-
thing 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

2oS NATIONAL GUILDS

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 assump-
tion — 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 con-
sumer 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,* " 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
* " The Meaning of Industrial Freedom," page 39.

MODIFIED FREEDOM

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 com-
pletely 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 unem-
ployed 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

NATIONAL GUILDS

anti-communal, capitalist system of industry M
(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.' 1

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

VIGILANCE COMMITTEES

ratified by the workers who are to be affected by it.
,( The Guild would build up in this way a pyramid of
officers, each chosen by the grade immediately below
that which he is to occupy / ' Did not the Bolsheviks
try something like this system, with results that were
not conducive to efficient production ? And to meet
the danger that the officials as a whole might combine
" in a huge conspiracy against the rank and file,"
Messrs Bechhofer and Reckitt can only suggest
vigilance committees within the Guilds. In a word,
Guild Socialism seems to be a system that might
possibly be worked by a set of ideally perfect beings ;
but as folk are in this workaday world one can only
doubt whether it would be conducive either to
freedom, efficiency or a pleasant life for those who
lived under it.

XV

% POST-WAR FINANCE
November, 1918

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

Under this heading two very interesting articles
were contributed to the October issue of Sperling's
Journal by Mr Alfred Hoare and an "Ex-M.P.,"
and the subject is clearly one to which, now that the
end of the war has been brought appreciably nearer
by the feats of the Allied armies, too much thought
and discussion can hardly be given. How are we
going to face the problem that has been built up for us
by the bad finance of the war, the low proportion of
its cost that has been paid for out of taxation, and the
consequent huge debt with which — it is already over
£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,

THE RENTIER

213

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 character-
istics as unearned ; the income of a " successful pro-
fessional 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 wc have to remember that the
work done in the past by the Rentier or those whom

v

214

POST-WAR FINANCE

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 ns. 6d. in the pound
on unearned income. This figure is, I hope, need-
lessly 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

THE AFTER-WAR DEBT

215

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 115. 6d. in the pound
on unearned and 6s. in the pound on earned incomes,
Mr Hoare expects a revenue of £620 millions, " or

216 POST-WAR FINANCE

enough to provide for the interest of the debt with a
i 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.V calculation, in the year
of issue £y 125., 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,

"A PERFECTLY GOOD SECURITY" 217

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.R," 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^ 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

2l8

POST-WAR FINANCE

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 prepara-
tion 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

THE LEVY ON CAPITAL 219

been actually decreased by the war, especially when
currency depreciation is taken into account, have, in
response to the appeals of the War Savings Com-
mittee, 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 con-
cerning the Levy on Capital I have not seen any
answer (even in Mr Pethick Lawrence's very per-
suasive 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

POST-WAR FINANCE

been broken, can be done again so easily. From the
Socialist point of view the Levy on Capital is, of
course, a simple means of getting, by repetitions of
it at regular intervals, all the means of production
into the hands of the State; but would the State
make a good use of them ?

Another assumption about the Levy on Capital
that seems to me to be the merest will o' the wisp is
the delusion that the whole saving that it would
entail by reducing the debt charge would necessarily
and certainly go to the relief of income tax. On this
assumption Mr Pethick Lawrence bases his most
persuasive appeal to the smaller income-tax payer, by
showing that he would be better off after a Levy on
Capital than before it, thanks to the reduction in
income tax, which is assumed as axiomatically
arising in its train. But is this certain or even
likely ? Is it not much more probable that our
Government, finding its post-war Budget greatly
lightened by a Levy on Capital or a Compulsory Loan
to redeem debt, will think itself free to indulge in
extravagance, maintaining a considerable part of the
war income tax and wasting it on rash experiments ?
All these weaknesses, which appear to be inherent
alike in the Levy on Capital or in the scheme which
gilds the pill by calling it a Compulsory Loan, seem
to be ignored or neglected (perhaps because they are
unanswerable) by their advocates. On the other
hand, there are certain psychological arguments on
the other side. If the well-to-do, who would have
to pay the Levy or subscribe to the Compulsory
Loan, would prefer that system to a high income tax,

THE CAPITAL LEVY

221

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 brain-
power 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.

222

POST-WAR FINANCE

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 brough t 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 accen-
tuate the bitterness and discontent already rife
owing to the war-time dearness and all the suspicions
of profiteering and exploitation that it has engen-
dered.

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 DEBT

223

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 pro-
poses 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 inclina-
tion for saving — money that might, if left in the

224

POST-WAR FINANCE

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 pro-
ceeding 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 Hoafe 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 qualifica-
tions (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 — i 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

A DEBT-CHARGE SUPERTAX 225

is, that it should be imposed on the individual tax-
payer 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 advan-
tage to the holder. This form of special debt-charge
supertax would enable the ordinary income tax to
be reduced considerably at once. Mr Edward Lees,

226

POST-WAR FINANCE

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 ex-
changing 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.

XVI

THE CURRENCY REPORT
December, 1918

Currency Policy during the War— Its Disastrous Mediae valism —
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 com-
fortable 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

228 THE CURRENCY REPORT

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 shudder.

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

WAR FINANCE CONDEMNED

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 pre-
occupations 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
self-confidence.

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 Govern-
ment 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

Q

230 THE CURRENCY REPORT

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. Thereb}' 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 pro-
duced all the suspicion and unrest that has already
been referred to. Considering that the Committee
included an ex-Governor of the Bank and the Perma-
nent Secretary to the Treasury it could hardly have
been expected to use much plainer language concern-
ing the failure of our rulers to get money out of us

CREDIT DEMANDS CASH

in the right way for the wax and the vigour with
which they made use of the demoralising weapon of
inflation.

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
(P a ge 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 7 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 38,470,000

2 3 2 THE CURRENCY REPORT

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 w . ... 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 * ... £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

" 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

* 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 presc nt
fiduciary issues given above.

AN EXAMPLE OF MODERATION 233

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 dis-
appointed 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

THE CURRENCY REPORT

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 de-
preciation, 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 auto-
matic 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 auto-
matic, 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 LINK WITH GOLD 235 .

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% 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 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

236 THE CURRENCY REPORT

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 hold-
ings 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

THE FIRST MEASURE

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

238 THE CURRENCY REPORT

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 sur-
rounded made it both feasible and desirable to do so.
With regard to the note issue, the Committee pro-
poses 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 sugges-
tions are subject to any special arrangements that
may be made with regard to Scotland and Ireland,

THE BANK AND THE BULLION 239

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 strin-
gent 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

THE CURRENCY REPORT

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 circula-
tion 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 re-
ducing 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 105., an ingenious suggestion is made by the

FINANCIAL HOTSPURS 241

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 distin-
guished 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 question-
able, 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

242 THE CURRENCY REPORT

do not work. If the machine is to be set moving, it
can only be dojie 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 appli&u the Bank of England ?) This is
a welcome suggestion as far as it goes, but unless
something is dene fc, co-operative action to make the
B£nk 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 a^ reasonable concession on America's
part.

XVII

MEETING THE WAR BILL
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 4I 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 deduc-
tions. There are loans to Allies and Dominions, and
some other much more readily realisable assets than

244

MEETING THE WAR BILL

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% millions to Dominions. The Allies were
indebted to us as follows : — Russia, £568 millions ;
France, £425 millions ; Italy, £345 millions ; smaller
States, £127 millions.*

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 book-keeping
would probably demand a lower figure than 50 per
* Parliamentary Debates, Vol. no, No. 114, p. 2560,

ASSETS IN HAND 245

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 gth, 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 £1172

* Parliamentary Debates, Vol. 105, No. 33, pp. 698-699.

R

246 MEETING THE WAR BILL

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 straight-
forward 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.* 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
* Parliamentary Debates, Vol. 105, No. 33, p. 698,

THE NET RESULT

.that their value would be " far greater " than he had
previously expected. So perhaps we are entitled to
take them at £1300 millions.

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

Total Government expenditure,
August 1, 1914, to November
9, 1918 £8612 millions.

Less estimate of normal peace expen-
diture 860

Less Loans to Do-
minions

Less Loans to Allies
(half face value)

Realisable assets ...

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,* from which we have again to deduct
;£86o 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.

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

. * Economist, Nov, 16, igt8.

7752

220 millions.

740
1300

2260

248 MEETING THE WAR BILL

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

THE REPARATION BILL

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." * 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
v (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,f 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 J 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 bom-
bardment, 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,

* Times, November 7, 1918.
f Times, December 6, 1918,

250 MEETING THE WAR BILL

it will be possible for us to secure payment even for
all the civilian damage that we have suff ered.

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 de-
mobilisation 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
millions, or, omitting what the Government returns
call the Other Capital Liabilities, £653! 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 dis-
criminating 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 pa]^s £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

WHILE IT HAPPENED 251

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 alj.
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 some-
body during its progress — otherwise the war cguld
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

252 MEETING THE WAR BILL

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

INJUSTICE TO FIGHTERS

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 com-
fort, 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 debt-holders.

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

254

MEETING THE WAR BILL

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, \vho are generally most reluctant accessories
to the transaction, between them create new buying
power, which, coining 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 con-
sumer 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 pro-
duces friction, discontent and dangerous suspicion.
But even it works at the time when it happens.
Each creation of new buying power gives the Govern-
ment, for the moment, control of so much in goods

OUT OF INCOME

255

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, neces-
sarily, 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 J million tons of shipping by war
losses ; in the meantime we have built, bought and
captured 5| millions of new tonnage, and we have a
claim against the Germans for such tonnage. On
capital account we have sufif ered by wear and tear in
so far as our upkeep has been neglected owing to lack

256 MEETING THE WAR BILL

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 J 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 representa-
tives. So that the first thing we have to do is to
make taxation equitable, that is, lay it on the tax-
payer 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 debtholders
in accordance with the sacrifice made by the latter

OPERATIONS ABROAD 257

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,
Und 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.*

In other words, all that we needed for the war we
were able to produce ourselves, or to obtain in

♦ Budget Speech. Parliamentary Debates, vol. 105, No. 33.

258 MEETING THE WAR BILL

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 indebted-
ness, 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

SUGGESTED FANCY STROKES 259

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
arc, 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 Inter-
national Congress for what they have spent owing to
the war, and would then pay one another any inter-
national 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

26o MEETING THE WAR BILL

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.

XVIII

THE REGULATION OF THE CURRENCY

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 inde-
pendence of the State were sold to a foreign Power,
while chartered rights were invaded, while funda-
mental 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

-s

262 THE REGULATION OF THE CURRENCY

his currants, the draper measured out his broad-
cloth, 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 over-
flowed 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 morn-
ing 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

PENALISING FIXED INCOMES 263

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 any-
thing 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 enter-
prise, 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

264 THE REGULATION OF THE CURRENCY

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 forth-
with, and that if it were necessary to provide more
currency it would be better for the banks to be

A BANKER'S SUGGESTION 265

allowed to issue notes themselves. This suggestion
involves, of course, a complete reversal of the prin-
ciples 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 grey-
headed 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.

266 THE REGULATION OF THE CURRENCY

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 Mid-
land 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 con-
servative 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 re-
ported in the Economist of February 2, 191 8,
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 (hat 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 pay-
ment of a tax.

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

THE CUNLIFFE RECOMMENDATIONS 267

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 per-
mitted 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 heretofore."

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

268 THE REGULATION OF THE CURRENCY

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 amalgama-
tion 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 converti-
bility 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 differ-
ence 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.

THE BANK RETURN 269

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 question-
able. Unless we are getting more and truer infor-
mation, it is a pity to make comparisons between
one year and another difficult by changing the form
in which figures are given.

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 Com-
mittee'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

270 THE REGULATION OF THE CURRENCY

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 state-
ment 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 Com-
mittee'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 opera-
tive. 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 opera-
tive 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 can-
celled, 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

SHOULD THERE BE A LIMIT? 271

limiting systems the old one advocated by the Com-
mittee, 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 con-
tracting 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 impos-
sible. People will not hoard currency nor hoard

272 THE REGULATION OF THE CURRENCY

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 manu-
facturing 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

BILLS AS BASIS

273

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 com-
mercial 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

274 THE REGULATION OF THE CURRENCY

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 Depart-
ment, 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 saj^s that if this were done the position of the

THE JOINT STOCK BANKS

oint Stock banks would be weakened, though he
oes not explain why, since they would obviously
old notes in place of their gold and so would be able
3 meet their customers 1 demands, now that the
itter are accustomed to the use of notes for pocket
loney. He points out that " the gold which was
eld by the Joint Stock banks before the war proved
lost useful. ... At the beginning of the war the
anks paid out gold, satisfied the demands of their
ustomers for small currency, and thus eased the
tuation until currency notes became available/'
[e seems to have forgotten that the banks, or most
f them, refused to part with their gold, paid their
ustomers in Bank of England notes which, being
)r £5 at the smallest, were of little use for pocket
loney, and so drove them to the Bank to get gold ;
nd we had to have a prolonged bank holiday and
moratorium. Sir Edward is in favour of three
old reserves, one to be held by the Government,
ne by the clearing banks, and one by the Bank of
England. If there were differences between the three
ontrollers of the reserve at a time of crisis the
onsequence might be 'disastrous.

In view of the admiration expressed by Sir
Edward for the new American system which is so
learly based on central control it is rather illogical
hat he should be so strongly in favour of independence
n this side of the water. His opinion is that " the
>olicy of the Joint Stock banks ought to be to make
hemselves independent of the Bank of England by
laintaining large reserves in their vaults." Inde-
pendence and individualism are a great source of

276 THE REGULATION OF THE CURRENCY

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.

XIX

TIGHTENING THE FETTERS OF FINANCE
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 nation-
alised 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

T

278 TIGHTENING FETTERS OF FINANCE

an exasperating process of filling in forms innumer-
able, 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

D.O.R.A.

279

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
effective.

" 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 : —

,M 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 recon-
struction 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 expe-
ditiously 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 Committee.

28o TIGHTENING FETTERS OF FINANCE

" All applications for licences must 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. i.

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

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 business.
Form No. 2. Issue by an Existing Company (other

than for the purpose of capitalising

profits).

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

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

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

If none of the above Forms appears to be applicable

FILLING IN FORMS

281

(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 welljto 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

282 TIGHTENING FETTERS OF FINANCE

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 com-
mented 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 patiiotic 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 out-
siders. 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

EXPANDING BUSINESS 283

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 ex-
penditure by the Government, and the hardly slack-
ened 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 cer-
tainly 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

284 TIGHTENING FETTERS OF FINANCE

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 in-
dustries, 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

BARRY LYNDON'S GOLD PIECE 285

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 riot 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 in-
junctions 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-up 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 enter-
prise that will take the risks involved by getting
to work on a peace basis, it may be argued that

286 TIGHTENING FETTERS OF FINANCE

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 ex-
pressed 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

AN EXASPERATING COMMITTEE 287

capital free, before we have even ^rrived 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 bureau-
cratic 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

288 TIGHTENING FETTERS OF FINANCE

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 off-
spring 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 parapher-
nalia of Ted tape will dominate the proceedings.

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

" i. The following regulation shall be inserted
after Regulation 30 EE : —

"30 F. The following provisions shall have
effect in respect of new capital issues and to dealings
in securities issued for the purpose of raising capital :
" (1) No person shall, except under and in pur-
suance 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 de-
nomination, or consolidate any shares or
Debentures of a larger denomination ; or
" (d) renew of extend the period of maturity of

any securities ; or
" (e) purchase, sell or otherwise transfer any

D.O.R.A.

289

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 agree-
ment, as the case may be.
" (2) No person shall except under and in pur-
suance of a licence granted by the Treasury —

" {a) buy or sell any stock, shares or other
securities except for cash or when the
purchase or sale takes place in any
recognised Stock Exchange, subject to
the rules or regulations of such exchange.
" (b) buy or sell any stock, shares or other
securities which have not remained in
physical possession in the United King-
dom 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

2go TIGHTENING FETTERS OF FINANCE

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 Com-
mittee'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 in-
dustries 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 ancf 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

A STORM PRODUCED

291

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 ex-
pression " securities " includes, but it does not state
definitely that bonds, Debentures, Debenture stock
and marketable securities are the only things in-
cluded. 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

292 TIGHTENING FETTERS OF FINANCE

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.

XX

* MONEY OR GOODS ?
December, 1918

" 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

* 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
and suggested an inconvertible paper currency,

U

294

MONEY OR GOODS?

economists who would give an ex&ctly — 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 lightly 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 op-
position of both classes to new and efficient equip-
ment, and large tracts, even of our own land, still
without reasonable transport facilities, have some-
thing 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

WEALTH AND CAPITAL 295

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 expendi-
ture of so many of the rich, too .much work is put
into providing luxuries — of which the above-men-
tioned deer-park is an example — and too little into
the equipment of industry with the plTant 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 pro-
duction 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 purposes."

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

MONEY OR GOODS?

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 cur-
rency 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 pro-
duction 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

VALUE OR VOLUME? 297

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 en-
dorsed by common-sense — as long as we are careful
to include all forms of money that are taken in ex-
change 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 encourag-
ing 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

298 MONEY OR GOODS?

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 bonne
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

THE GOLD STANDARD 299

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 ac-
knowledged, 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 <l 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 ex-
change it into any goods that he wanted.

300

MONEY OR GOODS?

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 com-
munities 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 cur-
rency be national or international. Mr Kitson
speaks of a currency " just sufficient " for the com-
munity'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 multi-
plying or contracting the currency every year or

0

WHO WILL DECIDE?

301

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, accord-
ing 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 under-
standing 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 draw-
backs ; but it is a clean and sensible business
compared with making them depend on the caprices
of Parliament, complicated by the political cor-
ruption 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 com-
modity 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

MONEY OR GOODS?

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 tFe index numbers
of the prices of commodities ! Some of us, perhaps,
will prefer the jog-trot conservatism of Lord Cun-
liffe's Currency Committee, who in their recently
issued report * (which every one ought to read)

* Cd.9182, 2d.

A HUMDRUM CONCLUSION 303

recommend that gold should not be used for circula-
tion 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.

INDEX

Addis, Sir Charles, on banking,

163, 168
Aerated Bread Co., and bonus

issues, 157
Allies, loans to, 244
America, effect of war on, 25
War finance of, 125, 126

Bank Act : its purpose, 84
Its suggested repeal, 84, 273
Its working, 235 seq.
Bank Amalgamations, progress

of, 77 seq., 163
Bechhofer, Mr, on Guild Social-
ism, 209
Bills of Exchange, as basis of

issue, 273
Bonar law, Mr, on after-war
position, 246, 247
On capital levy, 68, 70, 71,
73

On sale of securities, 257
British Trade Corporation, for-
mation of, 76
Brunner, Mond, and bonus

shares, 150
Budget, in 1918, 129 seq.

Canadian Pacific, and bonus

issues, 158
Capital, foreign, 180 seq.
Levy on, 11, 63 seq., 217 seq.,

259
Meaning of, 2
Supply of, 9 seq., 183
War's destruction of, 3

Capital Issues, Committee on,
279, 287, 292
Licence required for, 278 seq.
Need to restrict, 283
Stock Exchange and, 281,
282

Cole, Mr, on Guild Socialism,
202 seq.

Cunliffe Committee, report of

227 seq., 266 seq., 302
Currency : inflation of, 22, 108,
227, 232, 254, 297
Internationa], 134 seq., 300
Metals 'as, 137, 299
Origin 0% .13 5

Quantity raeVry of, 138, 139,
296

Report on, 227 seq.
Daily News, on capital levy,

Expenditure, Committee on,
in

France, after-war position of,
28

Free Trade and British supre-
macy 20

Germany, after- war position of,
29, 124, 186
Our claims against, 249
War finance of, 50, 119 seq.

306 in:

Gold standard : affected by war,
141 seq.
Faults of, 137
Reasons for, 299, 300
Goodenough, Mr, on note issue,
265

Hoare, Mr Alfred, on taxation,

212 seq., 224
Holden, Sir Edward, and the

Bank Act, 84 seq., 266 seq.

Inflation, working of. 22, 108,

Interest, rate of, 7

Kitson, Mr, on currency,
293 seq.

Labour, example set by, 38
Lawrence, Mr Pethick, on

capital levy, 219, 220, 259
Lees, Mr Edward, on debt

redemption, 226
Lloyds, elasticity of, 17
London, prestige of, 15 seq.

Macaulay, Lord, on bad money,
261, 262

New Statesman, on capital
levy, 69, 74

Owen, Senator, on American
system, 271

"Quantity Theory," of cur-
rency, 138, 139, 296 seq.

Reserves, capitalising, 149 seq.
Round Table, on capital
levy, 65

Socialism, and bank amalga-
mations, 82, 164
In light of war, 201
Guild, 198 seq.
Stilwell, Mr, on paying for
war, 222, 259

Taxation, as war weapon, 42,
53, 61, 252
Increase of, in war, 109,
127 seq,

" War Emergency Workers/'
on capital levy, 68, 72

Webb, Mr, on State banking,
165 seq.

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