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+The Project Gutenberg eBook, War-Time Financial Problems, by Hartley
+Withers
+
+
+This eBook is for the use of anyone anywhere at no cost and with
+almost no restrictions whatsoever.  You may copy it, give it away or
+re-use it under the terms of the Project Gutenberg License included
+with this eBook or online at www.gutenberg.org
+
+
+
+
+
+Title: War-Time Financial Problems
+
+Author: Hartley Withers
+
+Release Date: July 29, 2004  [eBook #13045]
+
+Language: English
+
+Character set encoding: ISO-8859-1
+
+
+***START OF THE PROJECT GUTENBERG EBOOK WAR-TIME FINANCIAL PROBLEMS***
+
+
+E-text prepared by the Project Gutenberg Online Distributed Proofreading
+Team from images provided by the Million Book Project
+
+
+
+WAR-TIME FINANCIAL PROBLEMS
+
+by
+
+HARTLEY WITHERS
+
+
+
+
+
+
+
+Works by Hartley Withers
+
+THE BUSINESS OF FINANCE. 6s. net.
+
+Second Impression.
+
+"He treats of the subject mainly in its relation to industry, and
+smooths the path for those who find the way rather thorny. Timely and
+instructive."--_Financial Times_.
+
+
+OUR MONEY AND THE STATE. 3s. 64 net.
+
+Second Impression.
+
+"It should be read at once by every taxpayer. Mr. Withers' latest book
+can be most heartily commended,"--_Morning Post_.
+
+
+STOCKS AND SHARES. 6s. net.
+
+Fifth Impression.
+
+"It is a good book, it is sure of its public."--_Morning Post_.
+
+
+THE MEANING OF MONEY. 6s. net.
+
+Eighteenth Impression.
+
+"Will supersede all other introductions to monetary science; a
+safe and indispensable guide through the mazes of the Money
+Market."--_Financial News_.
+
+
+MONEY CHANGING. 5s. net.
+
+Second Impression.
+
+"Mr. Withers makes the topic interesting in spite of its obvious
+and irrepressible technicality. Occasionally he renders it really
+amusing."--_Financial News_.
+
+
+POVERTY AND WASTE. 6s. net.
+
+Third Impression.
+
+"Views its subject from the advantageous position of an impartial
+observer, the respective cases for capital and labour, rich and poor,
+being brought to the reader's attention in a convincingly logical
+manner."--_Financial Times_.
+
+
+WAR AND LOMBARD STREET. 6s. net.
+
+Fourth Impression.
+
+"Nothing could be clearer or more enlightening for the general
+reader."--_The Times_.
+
+
+INTERNATIONAL FINANCE. 6s. net.
+
+Third Impression.
+
+"We heartily commend a timely work dealt with in popular and simple
+style, a standard financial work."--_Morning Post_.
+
+
+LOMBARD STREET, 6s. net.
+
+Third Impression.
+
+A Description of the Money Market, by WALTER BAGEHOT. Edited with a
+new Preface by HARTLEY WITHERS. "There is no city man, however
+ripe his experience, who could not add to his knowledge from its
+pages."--_Financial News_.
+
+
+
+
+
+  "Blest paper credit! last and best supply!
+  That lends Corruption lighter wings to fly:
+  Gold imp'd by thee, can compass hardest things,
+  Can pocket States, can fetch or carry Kings;
+  A single leaf shall waft an Army o'er,
+  Or ship off Senates to a distant Shore;
+  A leaf, like Sibyl's, scatter to and fro
+  Our fates and fortunes, as the winds shall blow;
+  Pregnant with thousands flits the Scrap unseen,
+  And silent sells a King, or buys a Queen."
+
+POPE, _Moral Essays_.
+
+
+
+
+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, 1919.
+
+
+
+
+CONTENTS
+
+
+I
+THE OUTLOOK FOR CAPITAL
+The Creation of Capital--The Inducement--War and Capital
+
+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 Competition--No other likely Rivals
+
+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
+Resistance--The Effect of Currency Inflation
+
+IV
+WAR FINANCE AS IT MIGHT HAVE BEEN--II
+The Changed Spirit of the Country--A Great Opportunely thrown
+away--What Taxation might have done--The Perils of Inflation--Drifting
+stupidly along the Line of Least Resistance--It is we who pay, not
+"Posterity"
+
+V
+A LEVY ON 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
+
+VI
+OUR BANKING MACHINERY
+The Recent Amalgamations--Will the Provinces suffer?--Consolidation not
+a New Movement--The Figures of the Past Three Decades--Reduction of
+Competion not yet a Danger--The Alleged Neglect of Local
+Interests--Shall we ultimately have One Huge Banking Monopoly?--The
+Suggested Repeal of the Bank Act--Sir E. Holden's Proposal
+
+VII
+THE COMPANIES ACTS
+Another Government Committee--The Fallacy of imitating
+Germany--Prussianising British Commerce--The Inquiry into the Companies
+Acts--Will Labour Influence dominate the Report?--Increased Production
+the Great Need--Will it be met by tightening up the Companies Acts?--The
+Dangers of too much Strictness--Some Reforms necessary--Publicity,
+Education, Higher Ideals the only Lasting Solution--The Importance of
+Foreign Investments--Industry cannot take all Risks and no Profits
+
+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
+
+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 Comparison with American Finance--How much have
+we raised from Revenue?--The Value of the Pound To-day--The 1918 Budget
+an Improvement on its Predecessors--But Direct Taxation still too
+Low--Deductions from the Chancellor's Estimates
+
+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 Constant--Currency and
+Prices--The Complication of other Instruments of Credit--No Substitute
+for Gold in Sight--Its Acceptability not shaken by the War--A
+Fluctuating Standard not wholly Disadvantageous--An International
+Currency fatal to the Task of Reconstruction--Stability and Certainty
+the Great Needs
+
+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 Canada--Bonus Shares on Flotation--An American
+Device--Midwife or Doctor?--The Good and Bad Points of both Systems
+
+XII
+STATE MONOPOLY IN BANKING
+Bank Fusions and the State--Their Effects on the Bank of England--Mr
+Sidney Webb's Forecast--His Views of the Benefits of a Bank
+Monopoly--The Contrast between German Experts and British
+Amateurs--Bankers' Charges as affected by Fusions--The Effects of
+Monopoly without the Fact--The "Disinterested Management" Fallacy--The
+Proposal to split Banking Functions--A Picture of the State in Control
+
+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 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
+
+XIV
+NATIONAL GUILDS
+The Present Economic Structure--Its Weaknesses and Injustices--Were
+things ever better?--The Aim of State Socialism--A Rival Theory--The New
+Movement of Guild Socialism--Its Doctrines and Assumptions--Payment "as
+Human Beings"--The "Degradation" of earning Wages--Production
+irrespective of Demand--Is that the Real Meaning of Freedom?--The Old
+Evils under a New Name--A Conceivably Practical Scheme for some other
+World
+
+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--Suggestions for solving it
+
+XVI
+THE CURRENCY REPORT
+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
+
+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
+
+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 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
+
+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--Disappearance of the
+Retrospective Clause--A Sample of Bureaucratic Stupidity
+
+XX
+MONEY OR GOODS?
+"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
+
+INDEX
+
+
+
+
+WAR-TIME FINANCIAL PROBLEMS
+
+
+
+
+I
+
+THE OUTLOOK FOR CAPITAL
+
+_September_, 1917
+
+The Creation of Capital--The Inducement--War and Capital
+
+
+One of the questions that are now most keenly agitating the minds of
+the investing public and of financiers who cater for its wants, and
+also of employers and organisers of industry who are trying to see
+their way into after-the-war conditions, is that of the supply of
+capital. On this subject there are two contradictory theories: one
+considers that owing to the destruction of capital during the war,
+capital will be for many years at a famine price; the other, that
+owing to the exhaustion of all the warring powers, that is, of the
+greater part of the civilised world, the spirit of enterprise will be
+almost dead, the demand for capital will be extremely limited, and
+consequently the supply of it on offer will go begging to find a user.
+It seems likely that, as usual, the truth lies somewhere between these
+two extreme views; but we shall best answer the question if we first
+get a clear idea of what we mean by capital.
+
+On the subject of the definition of capital, economists differ with
+all the consistency that they only show in differing. One of the
+earliest descriptions of capital was given by Turgot, who thought that
+capital meant "valeurs accumulées." In this wide sense the word covers
+all goods which have value, that is, can be exchanged into other
+goods. From this point of view, the schoolboy who invests sixpence in
+marbles is a capitalist, because he has bought an asset which is not
+immediately consumed, but can, later on, if his fancy urges him, be
+exchanged into white mice or any other object of his desire. On the
+other hand, the schoolfellow who at the same time spends sixpence on
+cherries and eats them has put his money into immediate consumption,
+his asset is digested, and he has no capital in any sense of the word.
+
+Later, the definition was narrowed by John Stuart Mill, for instance,
+into the sense of wealth set aside to increase production. From this
+point of view capital practically means the equipment and tools of
+industry in the widest sense of the word, including agriculture and
+transport. Lately economists have shown a tendency to go back to the
+wider application of the word, and an American economist, Dr Anderson,
+who has just published a book on the Value of Money, goes so far
+therein as to state that a "dollar is capital." The language of the
+City generally uses the word in the narrow sense adopted by Mill, and
+there is very much to be said for this view of the real meaning of
+capital. Marbles to play with, houses to live in, motor-cars to go
+joy-riding in--all these are assets which can be disposed of, and so,
+in a sense, may be called capital. But the businesslike meaning of the
+word is the tools and equipment of industry, because it is only by
+their possession that the wealth of mankind not only increases man's
+present enjoyment, but enhances his future output of the goods
+necessary for his existence.
+
+If we take the word in this sense it becomes at once apparent that the
+theory is exaggerated which maintains that war is destroying capital,
+so that capital will long be at a famine price. The extent to which
+war is actually destroying the tools and equipment of industry is
+quite limited. On the actual battlefield that sort of destruction
+proceeds apace when factories are shelled into shapeless lumps of
+bricks, and when the surface of the earth, that man's skill had
+developed into great productive fertility, is torn into craters and
+covered with rubbish. There is also rapid destruction of a very
+important part of the equipment of industry owing to the submarine
+campaign, which is sinking so many fine ships that were meant to
+carry goods from one country to another. But, apart from this actual
+destruction on the battlefield and on the sea, the tools and equipment
+of industry over the greater part of the earth remain untouched. It is
+true that, owing to the preoccupations of the war, not so much work
+as usual is being put into the upkeep and repair of our railways,
+factories and other industrial tools. But at the same time an enormous
+amount of new machinery is being created for the manufacture of
+munitions and other stuff needed for the war, and a large part of this
+new machinery ought to be available as industrial capital when the war
+is over. Those people who talk so glibly of the enormous destruction
+of capital by the war are surely making a mistake common to minds
+which look at economic questions through a financial telescope,
+mistaking money for capital. They see that an enormous amount of money
+is being spent on the war, and they jump to the conclusion that this
+money, if not spent upon the war, would have been put into capital
+investments and so have increased the tools and equipment of industry.
+In fact, a great deal of the money now spent upon the war would
+have been spent, if there had been no war, not upon increasing the
+equipment of production, but upon purely frivolous and extravagant
+consumption. There is no need to dwell on the effect of war in
+reducing many kinds of expenditure on which hundreds of millions
+must have gone in peace time, and this restriction of extravagant
+consumption has to be deducted before we even admit, not that all
+money spent upon the war is destroyed capital, but even that all the
+money spent upon the war is destroying what might otherwise have
+become capital.
+
+If, then, it is true that the war is not making a very terribly
+substantial inroad upon the mass of existing capital, how is it going
+to affect the supply of capital in the future? To answer this question
+we have to see how capital is created. The answer to this question is
+very simple, very obvious, and very dull. Capital can only be created
+by saving.
+
+Saving is such an entirely unpopular virtue that it seems at first
+sight a disastrous conclusion to arrive at, that if we want to
+increase the supply of capital it can only be done by stimulating
+this unattractive habit; and there is a further question to be
+asked--whether it will be necessary or desirable to have a great
+increase in the supply of capital. As was pointed out above, one
+theory of after-war needs maintains that the world will be so
+exhausted by this great struggle that it will have no enterprise and
+no energy left, and that capital will go begging. If this be so, we
+need not trouble to inquire as to whether the supply of capital can be
+made plentiful. But I venture to think that this view is very probably
+wrong, though it is very dangerous to prophesy concerning the purely
+psychological question of the state of mind in which the citizens of
+the warring Powers will end the war. It is, however, at least
+probable that the prices which are then likely to rule will stimulate
+enterprise all over the world; that every one will see that there is
+a great work to be done in getting industry back on to a peace
+basis, and a great profit to be made by those who do this work most
+successfully, and that the demand for capital is likely, for some
+years at least, to clamour for all that can be produced.
+
+To go back, then, to the statement that only by saving can capital
+be created. The man who saves, instead of spending money on his own
+enjoyment, hands it over to some company or Government to be spent on
+some industrial or national purpose. When it is put into industry
+it builds a factory or a ship or a railway or a canal, or clears a
+wilderness for cultivation, or does one of the innumerable other
+things which are necessary for the production and transport of the
+goods which mankind enjoys. And it is only by this process of handing
+over buying power, instead of using it for our own amusement and
+enjoyment, to others who will use it for furthering production that
+the tools and equipment of industry can be multiplied.
+
+Something can be done by banks and financiers in supplying credit in
+the form of advances and acceptances; but this method is only like
+oiling the wheel of industry, the real driving power of which has to
+be saved capital. Creating credits simply means that a certain amount
+of buying power is manufactured and handed over to those to whom the
+credit is given. It does not set free any labour or goods to be
+put into industry. That is only done by the man who abstains from
+consumption and saves money by restraining his desire to spend it on
+himself, and puts it at the disposal of industry. The man who saves
+money, who has always hitherto been rather despised by his companions
+and resented by a certain class of social reformer and many other
+uneducated people as a capitalist bloodsucker, is thus, in fact, the
+person who leaves the world richer than he found it, having put his
+money, the product of his own work, into increasing the world's
+output, instead of spending it on such forms of enjoyment as heavy
+lunches and cinema shows.
+
+The man who does this beneficent work, increasing mankind's output of
+goods, and providing employment as long as the factory or railway that
+he helps to build is running, is induced to do so, as a rule, by the
+purely selfish motive of providing for his old age or for those who
+come after him by earning the rate of interest that is paid to him for
+his capital. What is this rate of interest going to be, and how much
+effect does it have upon the creation of capital?
+
+Some people argue that a low rate of interest makes people save more
+because it is necessary for them to save more in order to acquire
+independence. Others maintain that a high rate of interest induces
+people to save because they can see the direct advantage of doing so.
+Both these arguments are probably true in some cases. But, as a rule,
+people who have the instinct of saving will save, within certain
+limits, whatever the rate of interest may be. When the rate of
+interest is low they will certainly not reduce their saving because
+each hundred pounds that they put away brings them in comparatively
+little, and when the rate of interest is high the attraction of the
+high rate will also deter them from diminishing the amount that they
+put aside. Moreover, we have to consider, not only the money payment
+involved by the rate of interest, but its buying power in goods. In
+1896 trustee securities could only be bought to return a yield of
+2-1/2 per cent. for the buyer; now the investor can get 5-1/4 per
+cent. and more from the British Government. And yet the power that
+this 5-1/4 gives him over the goods and services that he wants for his
+comfort Is probably not greater, and very likely rather less, than the
+power which he got in 1896 from his 2-1/2 per cent. One of the few
+facts which seem to stand out clearly from a study of the movement of
+the prices of securities, and consequently of the rate of interest to
+be derived from them, is that the rate of interest is high when the
+price of commodities is high, and vice versa. So that the answer to
+the question: What is the rate of interest likely to be after the war?
+may be given, in Quaker fashion, by another question: What will happen
+to the index number of the prices of commodities? It seems fairly
+probable that both these questions may be answered, very tentatively
+and diffidently, by the expression of a hope that after a time, when
+peace conditions have settled down and all the merchant ships of the
+world have been restored to their peaceful occupations, the general
+level of the price of commodities will be materially lower than it is
+now, though probably considerably higher than it was before the war.
+If this be so, then it is fairly safe to expect that the rate of
+interest, as expressed in money, will follow the movement of prices of
+goods. But it must be remembered that by rate of interest I mean the
+pure rate of interest, that is to say, the rate earned on perpetual
+fixed-charge securities of the highest class. It may be that, owing to
+the very large amount of gilt-edged securities created in the course
+of the war by the various warring Governments, the rate of profit to
+be earned by the man who takes the risks of industry from dividends
+on ordinary shares and stocks will have to be made relatively more
+attractive than it was before the war.
+
+If, then, capital can only be created by saving, how far will the war
+have helped towards its more plentiful production?
+
+Here, again, we are faced with a psychological question which can only
+be answered by those who are bold enough to forecast the state of mind
+in which the majority of people will find themselves when the war is
+over. If there is a great reaction, and everybody's one desire is to
+throw this nightmare of war off their chests and go back to the times
+as they were before it happened, then all that the war has taught us
+about the production of capital will have been wasted. But I rather
+doubt whether this will be so. Saving merely means the diversion of
+a certain proportion of the output of industry into the further
+equipment of industry. The war has taught us lessons which, if we
+use them aright, will help us to increase enormously the output of
+industry. So that if these lessons are used aright, and industry does
+not waste its time in squabbles over the sharing of its product, its
+output may be so great that a comparatively smaller amount of saving
+in relation to the total output may produce a larger amount of capital
+than was made available in days before the war. There is a further
+point, that the war has taught a great many people who never saved at
+all to save a good deal. It was estimated before the war that we in
+this country were saving about four hundred millions a year. This
+figure was necessarily a guess, and must be taken for what it is
+worth. There can be no doubt that the amount of real saving now in
+progress, voluntary, owing to the patriotic effort of people who think
+they ought to restrict their own consumption so that the needs of
+our fighters may be provided, and enforced through the action of the
+Government in taking taxes and inflating the currency, is very much
+greater than it was before the war; probably at least twice as much
+when all allowance has been made for depreciation of the currency.
+Some people think that this saving lesson will have been learned, will
+have become a habit, will continue and will grow. If so, if people
+save a larger proportion of their income than they did before, and
+if the total output of goods is increased, as it easily may be, it
+becomes at once evident that there is a possibility of a freer supply
+of capital for industry than has ever been seen. But in looking at
+this hopeful and optimistic picture, we must never forget that it can
+only be painted by those who are prepared to leave out of the canvas
+all the danger of industrial strife and dislocation, and all the
+danger of reaction to the old habits of luxurious spending which are
+so strong a possibility in the other direction. The war has shown us
+how we can, if we like, increase production, reduce consumption, and
+so have a larger margin than ever before to be put into providing
+capital for industry. Whether we really have learned these lessons and
+will apply them remains to be seen.
+
+There is also a possibility that some people may recognise that saving
+money and applying it to the re-equipment of the world for peace
+industry is a patriotically praiseworthy object not less than saving
+in time of war for the equipment of the Army. It may be that the
+benefit conferred by those who save, in increasing the output of
+mankind, will be more generally recognised, and that the supply of
+capital may, when the war is over, be increased on patriotic grounds,
+or on grounds even wider than mere patriotism--a desire to help a
+great stride forward in the material welfare of mankind.
+
+Capital is a very tender plant, and it will be very easy, if mistakes
+are made, to frighten those who see the benefits of accumulation for
+themselves and others. Labour troubles and industrial unrest are
+extremely likely to have the effect of destroying capital by
+preventing it coming into existence. If we remember that capital can
+only be created by being saved, it becomes evident that if those who
+save are threatened with too deep an inroad into their reward for so
+doing, on the part of labour, they will hesitate to save; and if the
+action of labour has this effect, labour will be sawing off the bough
+on which it sits. For it is new capital that sets new industry going,
+and it is only by a continual supply of new industry that a continual
+demand for fresh labour can be maintained.
+
+There is also at present much mischievous talk about a great tax on
+capital for the purpose of redeeming, or hastening the redemption of,
+war debt. It is clear at once that it is not possible to tax capital
+if we remember that capital consists of the tools and equipment of
+industry, or even, in the wider sense of the word, of accumulated
+assets which have not been consumed. Unless the Government is prepared
+to take payment in factory chimneys, railway sleepers, houses and
+fields, or the securities and mortgages that are claims on their
+product, it is not possible to tax capital. The only thing that the
+Government can tax is the output, that is to say, the annual income
+of the people. In other words, a tax on capital is simply a form of
+income tax assessed, not according to a man's income, but according to
+the assets of which he is possessed. The effect of such a tax would
+be that he who has spent everything that he has earned on his own
+enjoyment would go scot free in the matter of the capital tax, and
+would be rewarded for his improvidence by being asked to make no
+sacrifice; while his thrifty brother who, out of a smaller income, has
+set aside a certain proportion during the last twenty or thirty years,
+would have to hand over a portion of his current income assessed
+upon the value of the assets into which he has put his savings.
+Incidentally, it may be remarked that it would take years to make this
+necessary valuation, and that it would probably be done in a very
+inequitable manner by untrained and incompetent officials. But the
+important point is this, that if the Government shows a tendency to
+take the possession of assets as a basis for taxation it will be
+directly encouraging those who spend their whole income in riotous
+living and frivolous amusement, and discouraging those who help to
+increase mankind's output by adding to the capital available.
+
+Finally, it may be added that the shyness of the saver will be greatly
+diminished if he can feel that there is a trustworthy machinery of
+company promotion, so that he can rely on any savings that he puts
+into industry having at least a fair chance of yielding him a fair
+reward. This subject is too vast to enter into at present, but it
+is one to which those who are responsible for the management of our
+financial affairs cannot give too much attention. Every time the real
+investor is swindled out of his money there is more than a chance that
+he will look upon all forms of saving as a folly to be left to the
+credulous. It is easy to say that it was his own fault, that he ought
+to have been more careful, or consulted a better broker; but he will,
+with equal ease, retort that If honest financiers knew their business
+better, they would have long ago made things easier for the ignorant
+investor to know whether he was putting his money into genuine
+enterprise or throwing it down a sink.
+
+Like all other divagations on the subject of what may happen in the
+future, this attempt to forecast has necessarily consisted of "dim
+glimpses into the obvious," as the undergraduate said of Jowett's
+sermon. All that we can be sure of is this: that if the great
+opportunities that will lie open to mankind at the end of the war
+are rightly used, if we use its lessons to increase our production,
+restrict our frivolous consumption, and put a larger proportion of our
+larger production into stimulating production still further, there
+ought to be a great increase in the amount of capital available to
+supply the great increase which may be expected in the amount of
+capital demanded. The fact that the chief nations of the world will
+have enormous debts on which to pay interest is not one that need
+necessarily terrify us from this point of view. The arranging and
+imposition of the taxation necessary for meeting the interest on these
+debts will involve very serious political and social questions; but
+the payment of this interest need not necessarily diminish production,
+and it may probably help in checking consumption. It will not impair
+the total wealth of the world as a whole; it will merely affect its
+distribution. And since it will mean that a considerable part of the
+world's output will, for this reason, be handed over to the holders of
+the various Government debts, who, _ex hypothesi_, will be people who
+have saved money in the past, it is at least possible that they may
+devote a considerable amount of the spin so received to further saving
+or increasing the supply of capital available.
+
+
+
+
+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.
+
+A little book published this year by Messrs. Macmillan and Co.,
+entitled "England's Financial Supremacy," contains a translation of
+a series of articles from the _Frankfurter Zeitung_, and from this
+witness we are able to get some information which may be valuable, and
+is certainly interesting.
+
+The basis of England's financial supremacy is recapitulated as follows
+by this devil's advocate:--
+
+"The influence of history, a mighty empire, a cosmopolitan Stock
+Exchange, intimate business connections throughout the whole world,
+cheap money, a free gold market, steady exchanges, an almost unlimited
+market for capital and an excellent credit system, an elastic system
+of company legislation, a model Insurance organisation and the help of
+Germans, these are the factors that have created England's financial
+supremacy. Perhaps we have omitted one other factor, the errors and
+omissions of other nations."
+
+Coming closer to detail, our critic says, with regard to the
+international nature of the business done on the London Stock
+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
+international character of its business. This was due to England's
+position of company promoter and money lender to the world; to the way
+in which new capital was issued there; to its Stock Exchange rules,
+so independent of legislative and Treasury interference; to the
+international character of its Stock Exchange members, and to the
+cosmopolitan character of its clients,"
+
+On the subject of our Insurance business and the fair-mindedness and
+quickness of settlement with which it was conducted, we can cite the
+same witness as follows:--
+
+"Insurance, again, represented by the well-known organisation of
+Lloyds, which in form is something between a stock exchange and a
+co-operative partnership, is nowhere more elastic and adaptable than
+in London. It must be said, to the credit of Lloyds, that anyone
+asking to be insured there was never hindered by bureaucratic
+restrictions, and always found his wishes met to the furthest possible
+extent. The agencies of Lloyds abroad are also so arranged that both
+the insured and the insurer can have their claims settled quickly and
+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 contained
+in the following passage:--
+
+"A further bad habit, harmful to our economic development, is
+narrow-mindedness. This, too, is very prevalent in Germany--and
+elsewhere as well. And this is not surprising. Even among the
+generation which is active to-day, the older members grew up at a time
+when possibilities of development were restricted and environment was
+narrow. With commendable foresight many of these older men have
+freed themselves from this petty spirit, and are second to none in
+enterprise and energy. Germany can be as proud of its 'captains of
+industry' as America itself. But many commercial circles in Germany
+are still unable to free themselves from these shackles. The relations
+between buyer and seller are still often disturbed by petty quibbling.
+In those industries where cartels and syndicates have not yet been
+formed, too great a rôle is played by dubious practices of many kinds,
+by infringements of payment stipulations, by unjustifiable deductions,
+etc., while, on the other hand, the cartels are often too ruthless
+in their action. In this field we have very much to learn from the
+English business man. Long commercial tradition and international
+business experience have taught him long ago that broad-mindedness is
+the best business principle. Look at the English form of contract, the
+methods of insurance companies, the settlement of business disputes!
+You will find no narrow-mindedness there. Tolerance, another quality
+which the German lacks, has been of great practical advantage to the
+Englishman. Until recently the City has never resented the settlement
+of foreigners, who were soon able to win positions of importance
+there. Can one imagine that in Berlin an Italian or a South American,
+with very little knowledge of the German language, would be not only
+entrusted with the management of leading banks and companies, but
+would be allowed in German clubs to lay down--in their faulty
+German--the law as to the way in which Germany should be developed?
+Impossible! Yet this could be seen again and again in England, and
+the country gained greatly by it. If the English have now developed
+a hatred of the foreigner, it only means that the end of England's
+supremacy is all the nearer."
+
+According to our German critic the great fabric that has been built up
+on these characteristics and qualities is threatened with ruin by the
+war; and the heritage which we are supposed to be losing is to fall,
+by some process which is not made very clear, largely into the hands
+of Berlin. In order that we may not be accused of taking the laudatory
+plums out of this German pudding and leaving out all criticisms and
+accusations, let us quote in full the passage in which he dances in
+anticipation on London's corpse:--
+
+"Let us sum up. England's reputation for honest business dealing and
+for trustworthy administration has suffered. Her insular inviolability
+has been put in question. The ravages of war have undermined the
+achievements of many generations. Her free gold market has broken
+down. The flow of capital towards London will fall off, for those who
+cannot borrow there will no longer send deposits. The surplus shown
+in her balance-sheet will contract. Foreign trade will also decrease.
+Hand in hand with this fall, free trade, that mighty agent in the
+development of England's supremacy, will, in all probability, give
+place to protection. Stock Exchange business will grow less. Rates of
+interest will be permanently higher."
+
+How much truth is there in all this? Has our reputation for honest
+dealing and for trustworthy administration suffered? Surely not in the
+eyes of any reasonable and unprejudiced observer. In the course of the
+greatest war in history, fought by Germany with weapons which have
+involved the violation of the most sacred laws of humanity and
+civilisation, England has acted with a respect for the interests of
+neutrals which has been severely criticised by impatient observers at
+home. As for our "insular inviolability" having been put in question,
+it certainly has not, so far, suffered any serious damage. Our Fleet
+has defended us from invasion with complete success, and the damage
+done by marine and aerial raiders to our property on shore is
+negligible. Our free gold market is said to have broken down. The
+proof of the pudding is in the eating. Germany, when the war began,
+immediately relieved the Reichsbank from any obligation of meeting
+its notes in gold, and frankly went on to a paper basis. England has
+already shipped well over 200 millions in gold to America to finance
+her purchases there and those of her Allies.
+
+It may be true that capital will not flow to London if London is not
+in a position to lend, but we see no reason why London should not be
+able to resume her position as an international money lender, not
+perhaps immediately on the declaration of peace, but as soon as the
+aftermath of war has been cleared away and the first few months of
+difficulty and danger have been passed. The prophecy that foreign
+trade will decrease may also be true for a time owing to the
+destruction of merchant shipping that the war is causing. This
+possibility, however, may be remedied between now and the end of the
+war if the great programmes of merchant shipbuilding which have been
+undertaken by the British and American Governments are duly carried
+out. In any case, even if foreign trade decreases, there is no reason
+whatever to expect that England's will decrease faster than that of
+other nations.
+
+In all these problems we have to look for the relative answer and to
+consider not whether England has suffered by the war, for it is most
+obvious that she has, but whether she will have been found to have
+suffered more than any competitor who may threaten her after-war
+position.
+
+"Free trade," says our German Jeremiah, "that mighty agent in the
+development of England's supremacy, will, in all probability, give
+place to protection." We venture to think that it will be recognised
+that the Free Trade policy of the past gave us a well-distributed
+wealth which was an invaluable weapon in time of war, and that any
+attempt to impose import duties when peace comes will be admitted,
+even by the most ardent Tariff Reformers, as untimely when there is
+likely to be a world-wide scramble for food and raw materials, and the
+one object of every nation will be to get them wherever they can and
+as cheaply as they can.
+
+If Stock Exchange business will be less, though this does not by any
+means follow, there is no reason why it should be relatively less
+here than in other centres. As to rates of interest being permanently
+higher, the same answer applies. It may be true, but there is no
+reason why they should be relatively higher in London than elsewhere;
+and, if they are high, it will be because there will be a great demand
+for capital, which will mean a great trade expansion; both in the
+provision of capital and in meeting the demands of trade expansion
+England will be doing what she has done with marked success in the
+past and can, if she works in the right way now and after the war, do
+again with equal and still greater success.
+
+There is, however, a danger that threatens our financial position
+after the war, on the subject of which our German critic is discreetly
+silent, because that danger threatens the position of Germany very
+much more emphatically. It consists in the way in which our Government
+is at present meeting the needs of war finance, not by compelling
+economy on the civilian population through taxation and borrowing
+direct from investors, but by manufacturing currency for the purposes
+of the war by means of the printing press and the banking machinery.
+The effect of this policy is seen in the enormous mass of Treasury
+notes with which the country has been flooded. Their total is now
+nearly 180 millions or perhaps 100 millions more than the gold which
+they were originally designed to replace.
+
+It is also to be seen in the great increase in banking deposits which
+has been a feature of our financial history since the war began. Some
+people regard this feature as a phenomenal proof of the growth of our
+wealth during the war. I am afraid there is little foundation for this
+pleasant assumption, for these new deposits have been called into
+being by the banks subscribing to Government securities, whether War
+Loan, Treasury Bills, Exchequer Bonds or Ways and Means advances or
+lending their customers the wherewithal to do so. By this process
+the balance-sheets of the banks are swollen on both sides, by the
+Government securities and advances to customers among the assets,
+against which the banks create new deposits, so giving the community
+as a whole the right to draw more cheques.
+
+Every time the bank makes an advance it gives the borrower a credit in
+its books, that is to say, the right to draw cheques to that amount;
+the borrower draws on the credit and hands it to any one to whom he
+owes money; but as long as the advance is outstanding there will be a
+deposit out against it in the books of some bank or another.
+
+It is an easy way for the Government to finance the war by getting the
+banks to manufacture money for it. Nobody feels any poorer for the
+process, in fact, those who have new money in their pockets or in
+their bank balance feel richer, but the result of thus multiplying
+currency without any increase in the supply of goods and services to
+be bought inevitably helps the rise in prices which makes the war
+costly, puts the burden of it on to the wrong shoulders, and likewise
+cheapens the value of the English pound as measured in other
+currencies. This is why the evils involved by this process become so
+relevant to the question now at issue.
+
+If the Government is allowed to go on financing the war by increasing
+the currency with the very reluctant help of the bankers, the
+difficulties of maintaining our gold standard and keeping the
+exchanges in favour of London will be very greatly magnified when
+the war is over and our gold reserves are no longer protected by the
+submarines and the high cost of shipping gold that they produce. It
+therefore follows that all who have the true interests of the City at
+heart should use all the influence they can to force the Government to
+adopt a sounder financial policy before it is too late.
+
+It is true that our war finance has hitherto been sounder than that of
+any other warring Power, but it has fallen very short if we apply the
+rough test of the proportion of the cost of war borne out of taxation
+and compare our performance with the results achieved by our ancestors
+in the Napoleonic and Crimean wars.
+
+If we have done better than France, Italy, Russia and Germany in this
+respect, it must also be remembered that the financial prestige which
+these countries had to maintain was not nearly so great and well
+established as ours, with the possible exception of France; and
+France, being exposed to the ravages of a ruthless invader, was in a
+position which put special obstacles in the way of the canons of sound
+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, continued to carry out the
+other tasks which had been assigned to us.
+
+All these things we did, and that we should have done them was
+evidence of economic strength and adaptability which have astonished
+the world. To have financed the Allies and ourselves as long as we did
+would have been comparatively easy if our population could have been
+left at work to turn out the stuff and services, the provision of
+which are implied by financing; but for us to have been able to do it
+and at the same time to improvise an army which is now consistently
+and regularly beating the Germans is an achievement which will
+inevitably raise the world's opinion of our economic strength, on
+which financial prestige is ultimately based.
+
+But, as it has been said, in discussing this question we have to look
+at it all the time from the relative point of view. How will our
+prestige be when the war is over, not as compared with what it was
+before the war, but as compared with what any other rival in any other
+part of the world can show? Here we have to acknowledge at once,
+freely and frankly, that, as compared with New York, we shall have
+gone backward.
+
+America will have been enormously enriched by the war, which we shall
+certainly have not. America will have been opening up channels of
+international trade and international finance, and so New York will
+have been gaining at the expense of London. It is certain that when
+the war is over America's dependence upon London for credits against
+the shipments of goods to and from her shores will have been very
+greatly lessened, if not altogether a thing of the past.
+
+This change would have happened any way, war or no war, but it has
+been greatly quickened by the war. Before the war America was already
+making arrangements, under her new banking system, to promote the
+machinery for acceptance and discount, in order that goods sent to her
+from foreign countries should be financed by bills drawn on American
+banks and houses in dollars instead of on English banks and houses in
+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 large
+blocks of European promises to pay, is as clear as noonday; but
+whether when the war is over New York will care to be bothered much
+with problems of international finance remains to be seen. In the
+first place, the claims of her own country upon her financial
+resources will be insatiable and imperative, In the second place, the
+business of international finance is carried out on very finely cut
+terms; and the Americans being accustomed to the fat rates of profit
+which business at home has given them may not care to devote much
+attention to the international market, in which the risks are big,
+the turnover is enormous and the profits very finely cut. It has
+been remarked by a shrewd observer that the Americans will never do
+business for a thirty-second.
+
+In the third place, it must be remembered that the geographical
+position of London is more favourable than that of New York as a world
+centre, as the world is at present constituted. England, anchored off
+the coast of Europe, is clearly marked as the depôt for the entrepôt
+trade of the Old and New Worlds. New York is clearly marked as the
+centre for the trade of the Western hemisphere, and it is likely
+enough that New York and London, acting together as the financial
+chiefs of the two hemispheres, may be gradually united into what is
+practically one market by the growing ties of mutual interest.
+
+With regard to the position of other possible rivals to London's
+position, it need only be said that they have certainly been weakened
+much more rapidly than has London during the course of the war. Paris,
+threatened by the near approach of an invading foe, has inevitably
+suffered much more severely than London, and is likely to take longer
+in recovering the great position as a provider of capital which was
+given to her by the thrift of the average French citizen. Every one
+expects with confidence to see, when the war is over, a miraculous
+recovery in France produced by the same spirit which worked miracles
+after the war of 1871, aided and abetted by the subsequent improvement
+in man's control over the forces of nature, and also by the deep and
+world-wide sympathy which all will feel for France as the champion of
+freedom who has suffered most severely in its cause during the war.
+But it is impossible to expect, after what France has suffered, that
+she will be, for some time, in a position seriously to challenge
+London as a financial rival. All Englishmen will hope that the day
+when she will be in a position to challenge us again will come
+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, infringements of
+payment stipulations, unjustifiable deductions," etc., and the
+"ruthless" action of the cartels. He acknowledges that though Germany
+had a gold standard "too much anxiety used to be shown when the gold
+export point was reached," and that "it was also feared that to export
+gold would incur the wrath of the Reichsbank."
+
+With these disadvantages to struggle against, quoted from the mouth of
+a German observer, Germany has also succeeded by her ruthless policy
+during the war in earning the deep hostility of the greater part of
+mankind. Sentiment probably enters into business relations a good deal
+more than most business men admit, and for any country to set out to
+gain the leadership in trade and finance by outraging the feelings of
+most of its possible customers is an extraordinary piece of stupidity.
+
+It seems, then, that apart from the relative weakening of London as
+compared with New York, there is very little need for us to fear any
+serious change in England's financial position after the war as long
+as the Government's faulty finance is not allowed too seriously to
+endanger the position of our gold standard. It is true that we shall
+not benefit, as much as we undoubtedly have in the past, from the
+"help of Germans" in developing our finance. But indirectly the
+Germans will still be helping us by the great stimulus that the war
+will have given us towards efficiency and hard work.
+
+What we have to do in order to secure London's position after the war
+is to restore as soon as we can the system that had established it in
+the century before the war. We have to show the world that, far from
+any intention to abandon Free Trade, we mean to take a long step
+forward along the line of international activity which has been the
+source of our greatness in the past. We want, as soon as possible, to
+get back that freedom from Government control which has given us such
+elasticity and adaptability to our money market, our Stock Exchange
+and our Insurance business. A certain amount of Government control
+will inevitably have to continue for a time after the war, but the
+sooner we rid ourselves of it the sooner we shall restore to the
+London money market those qualities which, after the reputation that
+it has for honesty, soundness and straight dealing, were most helpful
+in building up its eminence.
+
+Above all, we have to work hard both in finance and industry and
+commerce. Finance, which is the machinery for handling claims for
+goods and services, can only be active and effective if industry and
+commerce are active and effective behind it, turning out the goods and
+services to meet the claims that finance creates. A great industrial
+and commercial output, with severe restriction of unnecessary
+consumption so that a great margin may go into capital equipment, will
+soon repair the ravages of war, bring down the price of credit and of
+capital and make London once more the place in which these things are
+most cheaply and freely to be bought.
+
+Finally, if we want to restore London as a place in which all the
+financial transactions of the world were centred, we must remember
+that we cannot do so if we restrict the facilities given to foreigners
+to come here and settle and do business. It is not possible to be an
+international centre with an insular sentiment.
+
+
+
+
+III
+
+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 the dispatch
+with which our Expeditionary Force was collected from all parts of the
+kingdom, and shipped across to France, was a miracle of efficiency and
+practical organisation. It is true that we had not got an Army on a
+Continental scale, but it was no part of our contract that we should
+have one. The fighting on land was in those days expected to be done
+by our Allies, assisted by a small British force on the left flank of
+the French Army. That British force was duly there, and circumstances
+which were quite unforeseen made it necessary for us to undertake a
+task which was no part of our original programme and create an Army
+on a Continental scale, in addition to doing everything that we had
+promised beforehand to a much greater extent than was in the bargain.
+
+But in finance there was no evidence that any thought-out policy had
+been arrived at in order to make the best possible use of the nation's
+economic resources for the war when it came. The acute crisis in the
+City which occurred in August, 1914, was a minor matter which hardly
+affected the subsequent history of our war finance except by giving
+dangerous evidence of the ease by which financial problems can be
+apparently surmounted by the simple method of creating banking
+credits. That crisis merely arose from the fact that we were so
+strong financially, and had so great a hold upon the finance of other
+countries in the world, that when we decided, owing to stress of war,
+to leave off lending to foreigners and to call in loans that we had
+made by way of accepting and bill-discounting arrangements, the whole
+machinery of exchange broke down because from all over the world the
+market in exchange went one way. Everybody wanted to buy bills on
+London, and there were no bills to be had.
+
+There was also the internal problem which arose because some of the
+public and some of the banks took to the evil practice of hoarding
+gold just at the wrong moment, and consequently there was no available
+supply of legal tender currency except in the shape of Bank of England
+notes, the smallest denomination of which is £5. It is known that our
+bankers had long before pointed out to the Treasury that if ever a
+banking crisis arose there would, or might be, this demand for a paper
+currency of smaller denominations than £5; this suggestion got into a
+pigeon-hole at the Treasury and was deep under the dust of Whitehall
+by the time experience proved how big a gap in our financial armour
+had been made by its neglect. If the £1 notes, with which we are now
+so familiar, had been ready when the war broke out, or, still better,
+if the Bank of England had been empowered and instructed to have an
+issue of its own £1 notes ready, it may at least be contended that the
+moratorium, which was so bad a financial beginning of the war, might
+have been avoided.
+
+But this opening crisis was a short-lived matter, and was promptly
+dealt with, thanks to the energy and courage of Mr Lloyd George, who
+was then Chancellor of the Exchequer, and saw that things had to be
+done quickly, and took the advice of the City as to what had to be
+done. The measures then employed erred, if at all, on the side of
+doing too much, which was certainly a mistake in the right direction
+if in any. What is much more evident is the fact that not only had
+there been no attempt to provide against just such a jolt to our
+financial machine as took place when the war began, but that, quite
+apart from the financial machinery of the City, no reasoned and
+thought-out attention had been given to the great problems of
+governmental finance which war on such a scale brought with it. There
+is, of course, the excuse that nobody expected the war to be on this
+scale, or to last so long. The general view was that the struggle
+would be over in a few months, and must certainly be so if for no
+other reason because the economic strain would be so great that the
+nations of Europe could not stand it for a long time. On the other
+hand, we must remember that Lord Kitchener, whom most men then
+regarded as representing all that was most trustworthy in military
+opinion, made arrangements from the beginning on the assumption that
+the war might last for three years. So, while some excuse may be made
+for our lack of financial foresight, it does seem to have been the
+duty of those whose business it is to manage our finances to have
+thought out a complete scheme to be adopted in case of war if at any
+time we should be involved in one on a European scale. Instead of
+which, not only would it appear that no such endeavour had been made
+by our Treasury experts before the war, but that no such endeavour
+has ever been made by them since the war began. All through the
+war's history many of the country's mistakes have been based on the
+encouraging conviction that the war would be over in the next six
+months. This conviction is still cherished to this day, and there can
+be no doubt that if those who cherish it hold on to it long enough
+they will come right some day.
+
+But if delusions of this kind may be fairly excused in the man in
+the street, they do not seem to be any excuse for those who are
+responsible for our finance for their total lack of a thought-out
+scheme at the beginning of the war, and their total failure to produce
+one as the war went on. We have financed the war by haphazard methods,
+limping along the line of least resistance. We are continuing to do
+so, and we may do so to the end, though there are now growing signs of
+an impatience both among the property-owning classes and others of
+the system by which we are financing the war by piling up debt and
+manufacturing banking credits.
+
+The objections to the policy on the part of the "haves" and the "have
+nots" are, of course, different, but as they both converge to the
+same point, namely, to the reform of our system of war finance, it is
+possible that they may in time have the effect of shaking even the
+confidence of our politicians and officials in the haphazard and
+slipshod methods which would long ago have produced financial disaster
+if it had not been for the great financial strength of the country.
+
+Finance is an enormously important weapon in the hands of our rulers
+for gliding the economic activities of the people. This is so even in
+peace time to a certain extent, though the revenue then collected is
+so small an item in the total national income that it counts for much
+less than in war, when the power that the Government can wield by
+its policy in taxation and borrowing might have been all-powerful in
+keeping the nation on the right lines in the matter of spending and
+keeping down the cost of the war, and in maintaining our financial
+staying power to a far greater extent than has actually been done.
+
+It is easy, as they say on the Stock Exchange, to job backwards, and
+it is also easy, and perhaps rather unprofitable, to hazard opinions
+about what would have happened if things had been otherwise.
+Nevertheless, when we look back on the spirit of the country as it was
+in those early days of the war, when the violation of Belgium had sent
+a chivalrous thrill through the hearts of all classes in the country,
+when we all recognised that we were faced with the greatest crisis
+in our history, that our country and the future of civilisation were
+about to be tested by the severest strain ever applied to them, that
+the life and fortune of the individual did not count, but that the
+war and victory were the only interests that any one had a right to
+consider--when one remembers all these things, and the use that a wise
+financial policy might have made of them, it is impossible to avoid
+the conclusion that the history of the war in this country and its
+social and political effects might have been something much finer,
+much cleaner and more noble if only the weapons of finance had been
+more boldly and wisely used. It is not a good thing to indulge in
+high-falutin' on this subject. It is absurd to suppose that the war
+suddenly turned us all into plaster saints at the beginning, and that
+we might have continued so to the end if the State had dealt with our
+money in a proper way. But without setting up any such idealistic
+arguments as these, looking back on those early days of the war, one
+can still remember the thrill of earnestness and of eagerness for
+self-sacrifice which has since then given way lamentably to war
+profiteering, war strikes, and a general struggle among many classes
+of the community to make as much as possible out of the war, merely
+because our financial leaders have never really put the country's
+financial problem properly before the country.
+
+We were not plaster saints, but we were either Idealistic and perhaps
+foolish people who attached great importance to the freedom and
+security of small nations and all those items in the programme of
+idealistic Radicalism, or else we were good, red-hot, true-blue
+Jingoes with a hearty hatred for Germany, and enjoyed the thought that
+the big fight which we had long foreseen between the two countries was
+at last going to be fought out. Or, again, we were just commonplace
+people who did not much believe in idealistic Radicalism or
+anti-German bitterness, but saw that the whole future of our country
+was at stake, and were prepared to do anything for it. A fine example
+was set us in those days by the Trade Union leaders. The industrial
+world was seething with discontent. The Suffragettes in London and the
+Carsonites in Ireland had shown us how much could be done by appeals
+to physical force in a lazy-minded community; and hints of industrial
+revolution, with great organised strikes, which were going to tie up
+the transport industry of the country were in the air. And then, when
+the war came, the Labour leaders said, "No strikes until the war is
+over. Our country comes first."
+
+This was the lead given to the country by those down at the bottom,
+who had the least to lose, and whose patriotism during the course of
+the war has frequently been questioned. At the top the financial and
+property-owning classes, having been saved by Mr Lloyd George's able
+adroitness from a bad crisis in the City, were entirely tame, and
+would have suffered anything in the way of taxation or financial
+conscription if the need for it had been properly put before them.
+
+It is almost amusing to remember now that in those early days of the
+war the shareholders in Home Railway companies were thought lucky. The
+Government were taking the railways over, and were guaranteeing that
+their proprietors should receive the same dividends as they had had
+before the war. Such was the view in financial and property-owning
+circles of results of war that, so far from any expectation of the
+huge profits which war has put into the pockets of certain classes,
+they were only too thankful if they could be assured that their gross
+incomes were not going to be reduced.
+
+Such was the spirit with which the Government of that day had to
+deal. A spirit in all classes earnestly patriotic, and so thoroughly
+frightened of the economic consequences of the war that it would have
+been ready to face any sacrifices that the Government had asked of it.
+How, then, would the Government have dealt with this spirit if it had
+taken the trouble really to think out the problem of war finance on
+a long view instead of proceeding along a haphazard line, adjusting
+peace methods to war without any consideration as to their adequacy?
+If the problem had been really thought out beforehand the Government
+must have seen clearly that the real economic problem in war-time is
+not merely a question of raising money, since that can at any time
+be done easily by means of a printing-press, but of diverting the
+industrial energy of the nation from peace to war purposes, that is
+to say, transferring from the enjoyment of the individual citizen
+the goods and services that used to contribute to his comfort and
+amusement, and turning them over to the provision of the things needed
+for the war. War's needs can only be met out of the current production
+of the world as it is at present. All the warring powers begin a
+war with certain accumulated war stores consisting of battleships,
+ammunition, guns and all other forms of war material. Apart from these
+stores with which they begin, the whole work of providing the armies
+with the fighting materials that they require, and the food and
+clothes that they consume, has to be done during the course of the
+war, that is to say, out of the current production of the moment.
+
+Therefore the real economic problem that any Government has to face in
+war-time is that of inducing its citizens to reduce their purchase of
+goods and services, that is to say, to spend less, so that all
+the things required for the Army and Navy may be obtained by the
+Government. It is true that some of the goods and services required
+for carrying on war can be obtained from foreign countries by any
+belligerent which is able to communicate with them freely. In that
+case the current production of the foreigner can be called in to help.
+But this can only be done if the warring country is able to ship goods
+to the foreigner in payment for what it buys, or if it is able to
+obtain a loan from the foreigner, or some other foreign country, in
+order to pay for its purchases abroad, or again, if, as in our case,
+it holds a large accumulation of securities which foreign countries
+are prepared to take in exchange for goods that they send for the
+purposes of the war. By these two last-named processes, raising money
+abroad, and selling securities to foreign nations, the warring country
+impoverishes itself for the future. When it borrows abroad it pledges
+itself to export goods and services in future to meet interest and
+sinking fund on the money so raised, so getting no goods and services
+in return. When it ships its accumulated wealth in the form of
+securities it gives up for the future any claim to goods and services
+from the debtor country which used to come to it to meet interest and
+redemption. It is only by shipping goods in return for goods imported
+for the war that a country can keep its financial staying-power on an
+even keel.
+
+Thus the problem which a statesman who had thought out the economics
+of war beforehand would have recognised as the keystone of his policy,
+would have been that of diverting the activities of the country from
+providing itself with comforts and amusements to turning out goods
+required for war, and of doing so with the least possible friction,
+the least possible alteration in the economic equilibrium of the
+country, and, above all, with the least possible cost to the national
+finances. We arrive at the true aspect of this problem more easily if
+we leave out the question of money altogether and think of it in units
+of energy. When a nation goes to war it means to say that it has to
+apply so many units of energy to the business of fighting, and to
+provide the fighters with all that they need. If at the beginning
+of the war its utmost capacity of output was, to mention merely a
+fanciful figure, a thousand million units of energy, and if it was
+clear that the fighting forces of the country would need for their
+proper maintenance five hundred million units of energy, then it is
+clear that the nation's ordinary consumption of goods and services
+would have to be reduced to the extent of five hundred millions of
+units of energy, which would have to be applied to the war, that is,
+assuming that its possible output remained the same.
+
+In other words, the spending power of the citizens of the country
+had to be reduced so that the industrial energy that used to go into
+meeting their wants might be made available for the purposes of
+fighting forces. Now what was the straightest, simplest and cleanest
+way of bringing about this reduction in buying power on the part of
+the ordinary citizen which has been shown to be necessary for the
+purposes of war finance? Clearly the best way of doing it is by
+taxation equitably imposed. When the State taxes, it says in effect
+to the citizens, "Your country needs certain goods and services, you
+therefore will have to go without those goods and services, and the
+simplest way to make you do this is to take away your money and so
+ration your buying power. Whatever is needed for the Army and Navy
+will be taken away from you by taxation, and the result of this will
+be that, instead of your indulging in comforts and luxuries, to the
+extent of the war's needs the Government will use your money for
+paying for what is needed for the Army and Navy."
+
+If such a policy had been carried out the cost of the war to the
+community would have been enormously cheapened. There need have been
+no general rise in prices because there would have been no increase
+in demand for goods and services. Anything that the Government
+spent would have been counter-balanced by decreased spending by the
+individual; any work that the Government needed for the war would have
+been counter-balanced by a reduction in demand for work on the part
+of individual citizens. There would have been no multiplication of
+currency owing to enormous credits raised by the Government; there
+would have been merely a transfer of buying power from individuals to
+the State. The process would have been gradual, there need have been
+no acute dislocation, but as the cost of the war increased, that is to
+say, as the Government needed more and more goods and services for its
+prosecution, the community would gradually have shed one after another
+the extravagances on which it spent so many hundreds of millions in
+days before the war. As it shed these extravagances the labour
+and energy needed to produce them would have been automatically
+transferred to the service of the war, or to the production of
+necessaries of life. By this simple process of monetary rationing all
+the frantic appeals for economy, and most of the complicated, tangled
+problems raised by such matters as Food Control or National Service
+would have been avoided.
+
+But, it may be contended, this is setting up an ideal so absurdly
+too high that you cannot expect any modern nation to rise up to it.
+Perhaps this is true, though I am not at all sure that if we had had a
+really bold and far-sighted Finance Minister at the beginning of the
+war he might not have persuaded the nation to tackle its war problem
+on this exalted line. At least it can be claimed that our financial
+rulers might have looked into the history of the matter and seen what
+our ancestors had done in big wars in this matter of paying for war
+costs out of taxation, with the determination to do at least as well
+as they did, and perhaps rather better, owing to the overwhelming
+scale of modern financial problems. If they had done so they would
+have found that both in the Napoleonic and the Crimean wars we paid
+for nearly half the cost of the war out of revenue as they went on,
+whereas in the present war the proportion that we are paying by
+taxation, instead of being 47 per cent., as it was when our sturdy
+ancestors fought against Napoleon, is less than 20 per cent.[1]
+Why has this been so? Partly, no doubt, owing to the slackness and
+cowardice of our politicians, and the apathy of the overworked
+officials, who have been too busy with the details of finance to think
+the problem out on a large scale. But it is chiefly, I think, because
+our system of taxation, though probably the best in the world,
+involves so many inequities that it cannot be applied on a really
+large scale without producing a discontent which might have had
+serious consequences on our conduct of the war.
+
+[Footnote 1: See _Economist_, August 4, 1917, p. 151.]
+
+It is not possible nowadays, now that the working classes are
+conscious of their strength, to apply taxation to ordinary articles
+of general consumption with anything like the ruthlessness which in
+former days produced such widespread misery. Indirect taxation of this
+kind carries with it this inherent weakness that its burden falls most
+heavily on those who are least able to bear it, consequently it is
+bound to break in the hand of those who attempt to apply it with
+anything like vigour to a community which is prepared to stand up for
+fair treatment. A tax on bread or salt obviously hits the wage-earner
+at 30s. a week infinitely harder than it hits the millionaire, and so
+the country would not tolerate taxes on bread or salt. Direct taxes,
+such as Income Tax and Death Duties, have this enormous advantage,
+that they can really be regulated so as to press with continually
+increasing severity upon those who are best able to bear them.
+Unfortunately our Income Tax is still so unjustly imposed that it was
+clearly impossible to make full use of it without its being first
+reformed. That two men, each earning £1000 a year, should pay the same
+Income Tax, in spite of one having a wife and five children, while
+the other is a careless bachelor, is such a blot upon this otherwise
+excellent tax that it is generally agreed that the present rate of 5s.
+is as high as it can be made to go unless some reform is introduced
+into its incidence. The need for its reform is made the excuse for a
+sparing use of the tax, and we have been on several occasions assured
+that, as soon as the war is over, this reform will be set about.
+
+In the meantime the Government falls back on funding about 80 per
+cent. of its requirements of the war on a system of borrowing. In
+so far as the money subscribed to its loans is money that is being
+genuinely saved by investors this process has exactly the same effect
+as taxation, that is to say, somebody goes without goods and services
+and hands over his power to buy them to the State to be used for the
+war. Borrowing of this kind consequently does everything that is
+needed for the solution of the immediate war problem, and the only
+objection to it is that it leaves later on the difficulties involved
+by raising taxes when the war is over, and economic problems are
+much more complicated in times of peace than in war, for meeting the
+interest and redemption of debt. But, in fact, it is well known that
+by no means all that the Government has borrowed for war purposes has
+been provided in this way. Much of the money that the Government has
+obtained for war purposes has been got not out of genuine savings
+of investors, but by arrangements of various kinds with the banking
+machinery of the country, or by the simple use of the printing-press,
+with the result that the Government has provided itself with an
+enormous mass of new currency which has not been taken out of anybody
+else's pocket, but has been manufactured by or for the Government.
+
+The consequence of the profligate use of this dishonest process is
+that general rise in prices, which is in effect an indirect tax on the
+necessaries of life, involving all the injustice and ill-feeling which
+arises from such a measure. It is inevitable that the working classes,
+finding themselves subjected to a rise in prices, the cause of which
+they do not understand, but the result of which they see to be a great
+decrease in the buying power of their wages, should believe that they
+are being exploited by profiteers, that the rich classes are growing
+richer at their expense out of the war, and that they and the country
+are being bled by a set of unpatriotic capitalist blood-suckers. It
+is also natural that the property-owning classes, who find themselves
+paying an Income Tax which they regard as extortionate, should
+consider that the working classes by their continuous demands for
+higher wages to meet higher cost of living, are trying to exploit
+the country in their own interests in a time of national crisis, and
+displaying a most unedifying spirit. The social result of this evil
+policy of inflation, in embittering class against class, is a matter
+which it is difficult to exaggerate. Some people think that it was
+inevitable. This is too wide a question to be entered into now, but
+at least it must be contended that if it is inevitable the extent to
+which it is being practised might have been very greatly diminished.
+
+Do we mean to go on to the end of the war with this muddling policy of
+bad finance? If we still insist on believing that the war cannot last
+another six months, and there is therefore no need to pull ourselves
+up short financially and put things in order, then we certainly shall
+do so. But we should surely recognise that there is at least a chance
+that the war may go on for years, that if so our present financial
+methods will leave us with a burden of debt which is appalling to
+consider, and that in any case, whether the war lasts another six
+months or another six years, a reform of our financial methods is long
+overdue, is inevitable some time, and will pay us better the sooner it
+is set about.
+
+
+
+
+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 _Sperling's Journal_ I dealt with the
+question of how our war finance might have been improved if a longer
+view had been taken from the beginning concerning the length of the
+war and the measures that would be necessary for raising the money.
+The subject was too big to be fully covered in the course of one
+article, and I have been given this opportunity of continuing its
+examination. Before doing so I wish to remind my readers once more
+of the great difference in the spirit of the country with regard to
+financial self-sacrifice in the early days of the war and at the
+present time, after three years of high profits, public and private
+extravagance, and successful demands for higher wages have demoralised
+the public temper into a belief that war is a time for making big
+profits and earning big wages at the expense of the community. In the
+early days the spirit of the country was very different, and it might
+have remained so if it had been trained by the use made of public
+finance along the right line. In the early days the Labour leaders
+announced that there were to be no strikes during the war, and the
+property-owning classes, with their hearts full of gratitude for the
+promptitude with which Mr Lloyd George had met the early war crisis,
+were ready to do anything that the country asked from them in the
+matter of monetary sacrifice. Mr Asquith's grandiloquent phrase, "No
+price is too high when Honour is at stake," might then have been taken
+literally by all classes of the community as a call to them to do
+their financial duty. Now it has been largely translated into a belief
+that no price is too high to exact from the Government by those
+who have goods to sell to it, or work to place at its disposal. In
+considering what might have been in matters of finance we have to be
+very careful to remember this evil change which has taken place in the
+public spirit owing to the short-sighted financial measures which have
+been taken by our rulers.
+
+Thus, when we consider how our war finance might have been improved,
+we imply all along that the improvements suggested should have been
+begun when the war was in its early stages, and when public opinion
+was still ready to do its duty in finance. The conclusion at which we
+arrived a month ago was that by taxation rather than by borrowing and
+inflation much more satisfactory results could have been got out of
+the country. If, instead of manufacturing currency for the prosecution
+of the war, the Government had taken money from the citizens either by
+taxation or by loans raised exclusively out of real savings, the rise
+in prices which has made the war so terribly costly, and has raised so
+great a danger through the unrest and dissatisfaction of the working
+classes, might have been to a great extent avoided, and the higher the
+rate of taxation had been, and the less the amount provided by loans,
+the less would have been the seriousness of the problem that now
+awaits us when the war is over and we have to face the question of the
+redemption of the debt.
+
+In this matter of taxation we have certainly done much more than
+any of the countries who are fighting either with us or against us.
+Germany set the example at the beginning of the war of raising no
+money at all by taxation, puffed up with the vain belief that the cost
+of the war, and a good deal more, was going to be handed over to her
+in the shape of indemnities by her vanquished enemies. This terrible
+miscalculation on her part led her to set a very bad example to the
+warring Powers, and when protests are made in this country concerning
+the low proportion of the war's costs that is being met out of
+taxation it is easy for the official apologist to answer, "See how
+much more we are doing than Germany." It is easy, but it is not a good
+answer. Germany had no financial prestige to maintain; the money that
+Germany is raising for financing the war is raised almost entirely
+at home, and she rejoices in a population so entirely tame under a
+dominant caste that it would very likely be quite easy for her, when,
+the war is over, to cancel a large part of the debt by some process of
+financial jugglery, and to induce her tame and deluded creditors to
+believe that they have been quite handsomely treated.
+
+Here, however, in England, we have a financial prestige which is based
+upon financial leadership of more than a century. We have also raised
+a large part of the money we have used for the prosecution of the
+war by borrowing abroad, and so we have to be specially careful in
+husbanding that credit, which is so strong a weapon on the side of
+liberty and justice. And, further, we have a public which thinks for
+itself, and will be highly sceptical, and is already inclined to be
+sceptical, concerning the manner in which the Government may treat the
+national creditors. Its tendency to think for itself in matters of
+finance is accompanied by very gross ignorance, which very often
+induces it to think quite wrongly; and when we find it necessary for
+the Chancellor of the Exchequer to make it clear at a succession of
+public meetings that those who subscribe to War Loans need have no
+fear that their property in them will be treated worse than any other
+kinds of property, we see what evil results the process of too much
+borrowing and too little taxation can have in a community which is
+acutely suspicious and distrustful of its Government, and very liable
+to ignorant blundering on financial subjects.
+
+What, then, might have been done if, at the beginning of the war, a
+really courageous Government, with some power of foreseeing the needs
+of finance for several years ahead if the war lasted, had made a right
+appeal to a people which was at that time ready to do all that was
+asked from it for the cause of justice against the common foe? The
+problem by which the Government was faced was this, that it had to
+acquire for the war an enormous and growing amount of goods and
+services required by our fighting forces, some of which could only be
+got from abroad, and some could only be produced at home, while at
+the same time it had to maintain the civilian population with such a
+supply of the necessaries of life as would maintain them in efficiency
+for doing the work at home which was required to support the effort of
+our fighters at the Front. With regard to the goods which came from
+abroad, either for war purposes or for the maintenance of the civilian
+population, the Government obviously had no choice about the manner in
+which payment had to be made. It had no power to tax the suppliers in
+foreign countries of the goods and services that we needed during the
+war period. It consequently could only induce them to supply these
+goods and services by selling them either commodities produced by
+our own industry, or securities held by our capitalists, or its own
+promises to pay.
+
+With regard to the goods that we might have available for export,
+these were likely to be curtailed owing to the diversion of a large
+number of our industrial population into the ranks of the Army and
+into munition factories. This curtailment, on the other hand, might
+to a certain extent be made good by a reduction in consumption on the
+part of the civilian population, so setting free a larger proportion
+of our manufacturing energy for the production of goods for export.
+Otherwise the problem of paying for goods purchased from abroad could
+only be solved by the export of securities, and by borrowing from
+foreign countries, so that the shells and other war material that were
+required, for example, from America, might be paid for by American
+investors in consideration of receiving from us a promise to pay them
+back some day, and to pay them interest in the meantime. In other
+words, we could only pay for what we needed from abroad by shipping
+goods or securities. As is well known, we have financed the war by
+these methods to an enormous extent; the actual extent to which we
+have done so is not known, but it is believed that we have roughly
+balanced by this process the sums that we have lent to our Allies and
+Dominions, which now amount to well over 1300 millions.
+
+If this is so, we have, in fact, financed the whole of the real cost
+of the war to ourselves at home, and we have done so by taxation,
+by borrowing saved money, and by inflation--that is to say, by
+the manufacture of new currency, with the inevitable result of
+depreciating the buying power of our existing currency as a whole. How
+much better could the thing have been done? In other words, how much
+of the war's cost in so far as it was raised at home could have been
+raised by taxation? In theory the answer is very simple, for in theory
+the whole cost of the war, in so far as it is raised at home, could
+have been raised by taxation if it could have been raised at all.
+It is not possible to raise more by any other method than it is
+theoretically possible to raise by taxation. It is often said, "All
+this preaching about taxation is all very well, but you couldn't
+possibly get anything like the amount that is needed for the war by
+taxation, or even by borrowing of saved money. This inflation against
+which economic theorists are continually railing is inevitable in time
+of war because there isn't enough money in the country to provide all
+that is needed."
+
+This argument is simply the embodiment of the old delusion, so common
+among people who handle the machinery of finance, that you can really
+increase the supply of necessary goods by increasing the supply of
+money, which is nothing else than claims to goods expressed either in
+pieces of metal or pieces of paper. As we have seen, all that we have
+been able to raise abroad has been required for advances to our Allies
+and Dominions, consequently we have had to fall back upon our own home
+production for everything needed for our own war costs. Either we have
+turned out the goods at home or we have turned out goods to sell to
+foreigners in exchange for goods that we require from them. But since
+we thus had to rely on home production for the whole of the war's
+needs as far as we were concerned, it is clear that the Government
+could, if it had been gifted with ideal courage and devotion, and if
+it had a people behind it ready to do all that was needed for victory,
+have taken the whole of the home production, except what was wanted
+for maintaining the civilian population in efficiency, for the
+purposes of the war.
+
+It is a commonplace of political theory that the Government has a
+right to take the whole of the property and the whole of the labour of
+its citizens. But it would not, of course, have been possible for the
+Government immediately to inaugurate a policy of setting everybody to
+work on things required for the war and paying them all a maintenance
+wage. This might have been done in theory, but in practice it would
+have involved questions of industrial conscription, which would
+probably have raised a storm of difficulty. What the Government might
+have done would have been by commandeering the buying power of the
+citizen to have set free the whole industrial energy of the community
+for supplying the war's needs and the necessaries of life. At present
+the national output, which is only another way of expressing the
+national income, is produced from certain channels of production in
+response to the expectation of demand from those whose possession of
+claims to goods, that is to say, money, gives them the right to say
+what kind of goods they will consume, and consequently the industrial
+part of the population will produce.
+
+Had the Government laid down that the whole cost of the war was to be
+borne by taxation, the effect of this measure would have been that
+everything which was needed for the war would have been placed at the
+disposal of the Government by a reduction in spending on the part of
+those who have the spending power. In other words, the only process
+required would have been the readjustment of industrial output from
+the production of goods needed (or thought to be needed) for ordinary
+individuals to those required for war purposes. This readjustment
+would have gone on gradually as the war's cost increased. There
+would have been no competition between the Government and private
+individuals for a limited amount of goods in a restricted market,
+which has had such a disastrous effect on prices during the course of
+the war; there would have been no manufacture of new currency, which
+means the creation of new buying power at a time when there are less
+goods to buy, which has had an equally fatal effect on prices; there
+would have had to be a very drastic reform in our system of taxation,
+by which the income tax, the only really equitable engine by which the
+Government can get much money out of us, would have been reformed so
+as to have borne less hardly upon those with families to bring up.
+
+Mr Sidney Webb and the Fabians have advocated a system by which the
+basis of assessment for income tax should be the income divided by the
+number of members of a family, rather than the mere income without any
+consideration for the number of people that have to be provided for
+out of it. With some such scheme as this adopted there is no reason
+why the Government should not have taken, for example, the whole of
+all incomes above £1000 a year for each individual, due allowance
+being made for obligations, such as rent, which involve long
+contracts. For any single individual to want to spend more than
+£1000 a year on himself or herself at such a crisis would have been
+recognised, in the early days of the war, as an absurdity; any surplus
+above that line might readily have been handed over to the Government,
+half of it perhaps in taxation and the other half in the form of a
+forced loan.
+
+So sweeping a change would not have been necessary at first, perhaps
+not at all, because the war's cost would not have grown nearly so
+rapidly. All surplus income above a certain line would have been taken
+for the time being, but with the promise to repay half the amount
+taken, so that it should not be made a disadvantage to be rich, and no
+discouragement to accumulation would have been brought about. By this
+means the whole of the nation's buying power among the richer classes
+would have been concentrated upon the war, with the result that the
+private extravagance, which is still disgracing us in the fourth year
+of the war, would not have been allowed to produce its evil effects.
+With the rich thus drastically taxed, the working classes would have
+been much less restive under the application of income tax to their
+own wages. We should have a much more freely supplied labour market,
+and since the rise in prices would not have been nearly so severe,
+labour's claim to higher wages would have been much less equitable,
+and labour's power to enforce the claim would have been much less
+irresistible.
+
+What the Government has actually done has been to do a little bit of
+taxation, much more than anybody else, but still a little bit when
+compared with the total cost of the war; a great deal of borrowing,
+and a great deal of inflation. By this last-named method it produces
+the result required, that of diverting to itself a large part of the
+industrial output of the country, by the very worst possible means. It
+still, by its failure to tax, leaves buying power in the hands of a
+large number of people who see no reason why they should not live very
+much as usual; that is to say, why they should not demand for their
+own purposes a proportion of the nation's energy which they have no
+real right to require at such a time of crisis. But in order to check
+their demands, and to provide its own needs, the Government, by
+setting the bankers to work to provide it with book credits, gives
+itself an enormous amount of new buying power with which, by the
+process of competition, it secures for itself what is needed for the
+war. There is thus throughout the country this unwholesome process
+of competition between the Government on one hand and unpatriotic
+spenders on the other, who, between them, put up prices against the
+Government and against all those unfortunate, defenceless people who,
+being in possession of fixed salaries, or of fixed incomes, have no
+remedy against rising prices and rising taxation. All that could
+possibly have been spent on the war in this country was the total
+income of the people, less what was required for maintaining the
+people in health and efficiency. That total income Government might,
+in theory, have taken. If it had done so it could and would have paid
+for the whole of the war out of taxation.
+
+All this, I shall be told, is much too theoretical and idealistic;
+these things could not have been done in practice. Perhaps not, though
+it is by no means certain, when we look back on the very different
+temper that ruled In the country in the early months of the war. If
+anything of the kind could have been done it would certainly have been
+a practical proof of determination for the war which would have shown
+more clearly than anything else that "no price was too high when
+Honour was at stake." It would also have been an extraordinary
+demonstration to the working classes of the sacrifices that property
+owners were ready to make, the result of which might have been that
+the fine spirit shown at the beginning of the war might have been
+maintained until the end, instead of degenerating into a series of
+demands for higher wages, each one of which, as conceded to one set of
+workmen, only stimulates another to demand the same. But even if we
+grant that it is only theoretically possible to have performed such a
+feat as is outlined above, there is surely no question that much more
+might have been done than has been done in the matter of paying for
+the war by taxation. If we are reminded once more that our ancestors
+paid nearly half the cost of the Napoleonic war out of revenue, while
+we are paying about a fifth of the cost of the present war from the
+same source, it is easy to see that a much greater effort might have
+been made in view of the very much greater wealth of the country at
+the present time. I was going to have added, in view also of its
+greater economic enlightenment, but I feel that after the experience
+of the present war, and its financing by currency debasement, the less
+about economic enlightenment the better.
+
+What, then, stood in the way of measures of finance which would have
+obviously had results so much more desirable than those which will
+face us at the end of the war? As it is, the nation, with all classes
+embittered owing to suspicions of profiteering on the part of the
+employers and of unpatriotic strikes on the part of the workers, will
+have to face a load of debt, the service of which is already roughly
+equivalent to our total pre-war revenue; while there seems every
+prospect that the war may continue for many half-years yet, and every
+half-year, as it is at present financed, leaves us with a load of debt
+which will require the total yield of the income tax and the super-tax
+before the war to meet the charge upon it. Why have we allowed our
+present finance to go so wrong? In the first place, perhaps, we may
+put the bad example of Germany. Then, surely, our rulers might have
+known better than to have been deluded by such an example. In the
+second place, it was the cowardice of the politicians, who had not the
+sense in the early days of the war to see how eager the spirit of the
+country was to do all that the war required of it, and consequently
+were afraid to tax at a time when higher taxation would have been
+submitted to most cheerfully by the country. There was also the absurd
+weakness of our Finance Ministers and our leading financial officials,
+which allowed our financial machinery to be so much weakened by the
+demands of the War Office for enlistment that it has been said in the
+House of Commons by several Chancellors of the Exchequer that it is
+quite impossible to consider any form of new taxation because
+the machinery could not undertake it. There has also been great
+short-sightedness on the part of the business men of the country, who
+have failed to give the Government a lead in this important matter.
+Like the Government, they have taken short views, always hoping that
+the war might soon be over, and so have left the country with a
+problem that grows steadily more serious with each half-year as we
+drift stupidly along the line of least resistance.
+
+Such war finance as I have outlined--drastic and impracticable as
+it seems--would have paid us. Taxation in war-time, when industry's
+problem is simplified by the Government's demand for its product,
+hurts much less than in peace, when industry has not only to turn out
+the stuff, but also find a buyer--often a more difficult and expensive
+problem. There is a general belief that by paying for war by loans we
+hand the business of paying for it on to posterity. In fact, we can
+no more make posterity pay us back our money than we can carry on war
+with goods that posterity will produce. Whatever posterity produces it
+will consume. Whatever it pays in interest and amortisation of our
+war debt, it will pay to itself. We cannot get a farthing out of
+posterity. All we can do, by leaving it a debt charge, is to affect
+the distribution of its wealth among its members. Each loan that we
+raise makes us taxpayers collectively poorer now, to the extent of the
+capital value of the charge on our incomes that it involves. The less
+we thus charge our productive power, and the more we pay up in taxes
+as the war goes on, the readier we shall be to play a leading part in
+the great time of reconstruction.
+
+
+
+
+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 prominence in the last few months, and seems
+to be gaining popularity in quarters where one would least expect it.
+On the other hand, it is naturally arousing intense opposition, both
+among those who would be most closely affected by its imposition, and
+also among those who view with grave concern the possible and probable
+economic effects of such a system of dealing with the national debt. I
+say "dealing with the national debt" because, as will be clear, as
+a system of raising money for the war the suggestion of the levy on
+capital has little or nothing to recommend it. But, as will also be
+made clear, the proposal has been put forward as a thing to be done
+immediately in order to increase the funds in the hands of the
+Chancellor of the Exchequer to be spent on war purposes.
+
+A levy on capital is, of course, merely a variation of the tax on
+property, which has long existed in the United States, and had been
+resorted to before now by Governments, of which the German Government
+is a leading example, in order to provide funds for a special
+emergency. This it can very easily do as long as the levy is not too
+high. If, for example, you tax a man to the extent of 1-1/2 per cent.
+to 2 per cent. of the value of his property, on which he may be
+earning an average of 5 to 6 per cent. in interest, then the levy on
+capital becomes merely a form of income tax, assessed not according to
+the income of the taxpayer but according to the alleged value of his
+property. It is thus, again, a variation of the system long adopted
+in this country of a special rate of income tax on what is called
+"unearned" income, i.e. income from invested property. But it is
+only when one begins to adopt the broadminded views lately fashionable
+of the possibilities of a levy on capital and to talk of taking, say,
+20 per cent. of the value of a man's property from him in the course
+of a year, that it becomes evident that he cannot be expected to pay
+anything like this sum, in cash, unless either a market is somehow
+provided--which seems difficult if all property owners at once are
+to be mulcted of a larger amount than their incomes--or unless the
+Government is prepared to accept part at least of the levy in the
+shape of property handed over at a valuation.
+
+Before, however, we come to deal in detail with the difficulties
+and drawbacks of the suggestion, it may be interesting to trace the
+history of the movement in its favour, and to see some of the forms in
+which it has been put forward. It may be said that the ball was opened
+early last September when, in the _Daily News_ of the 8th of that
+month, its able and always interesting editor dealt in one of his
+illuminating Saturday articles with the question of "How to Pay
+for the War." He began with the assumption that the capital of the
+individuals of the nation has increased during the war from 16,000
+millions to 20,000 millions. A 10 per cent. levy on this, he
+proceeded, would realise 2000 millions. It would extinguish debt to
+that amount and reduce the interest on debt by 120 millions. The levy
+would be graduated--say, 5 per cent. on fortunes of £1000 to £20,000;
+10 per cent. on £20,000 to £50,000; up to 30 per cent. on sums over
+£1,000,000; and the individual taxpayer was to pay the levy "in what
+form was convenient, in his stocks or his shares, his houses or his
+fields, in personalty or realty."
+
+Just about the same time the _Round Table_, a quarterly magazine which
+is usually most illuminating on the subject of finance, chimed in with
+a more or less similar suggestion in an article on "Finance After the
+War." It remarked that the difficulty of applying a levy on capital is
+"probably not so great as appears at first sight." The total capital
+wealth of the community it estimated at about 24,000 millions
+sterling. To pay off a war debt of 3000 millions would therefore
+require a levy of one-eighth. Evidently this could not be raised in
+money, nor would it be necessary. Holders of War Loans would pay their
+proportion in a simple way by surrendering one-eighth of their scrip.
+Holders of other forms of property would be assessed for one-eighth of
+its value and be called on to acquire and to surrender to the State
+the same amount of War Loan scrip. To do this, they would be obliged
+to realise a part of their property or to mortgage it, "but," added
+the _Round Table_ cheerfully, "there is no insuperable difficulty
+about that."
+
+The first thing that strikes one when one examines these two schemes
+is the difference in their view concerning the amount of capital
+wealth available for taxation. Mr Gardiner made the comparatively
+modest estimate of 16,000 millions to 20,000 millions; the _Round
+Table_ plumps for 24,000 millions, and, incidentally, it may be
+remarked that some conservative estimates put it as low as 11,000
+millions. Thus we have a possible range for the fancy of the scheme
+builder of from 11,000 to 24,000 millions in the property on which
+taxation is proposed to be levied. But it is when we come to the
+details of these schemes that the difficulties begin to glare. Mr
+Gardiner tells us that millionaires would pay up to 30 per cent. of
+their property, and that they would pay in what form was convenient,
+in houses, fields, etc., etc. But he does not explain by what
+principle the Government is to distribute among the holders of the
+debt, the repayment of whom is the object of the levy, the strange
+assortment of miscellaneous assets which it would thus collect from
+the property owners of the country.
+
+In commenting on this scheme the _Economist_ of September 15th took
+the case of a man with a fortune of £100,000 invested before the war
+in a well-assorted list of securities, the whole of which he had, for
+patriotic reasons, converted during the war into War Loans. He would
+have no difficulty about paying his capital levy, for he would
+obviously surrender something between 10 and 20 per cent. of his
+holding. But, "in exchange for nearly two-thirds of the rest, he might
+find himself landed with houses and bits of land all over the country,
+a batch of unsaleable mining shares, a collection of blue china, a
+pearl necklace, a Chippendale sideboard, and a doubtful Titian,"
+The _Round Table's_ suggestion seems to be even more impracticable.
+According to it, holders of all other forms of property besides War
+Loans would be assessed for one-eighth of its value--it does not
+explain how the value is to be arrived at, nor how long it would take
+to do it--and would then be called on to acquire and to surrender to
+the State the same amount of War Loan scrip. To do this they would
+be obliged to realise a part of their property or to mortgage it, a
+process which would seem likely to produce a pretty state of affairs
+in the property market; and a very pleasant state of affairs indeed
+would arise for the holders of War Loan scrip, since there would be a
+large crowd of compulsory buyers in the market from whom the holders
+would apparently be able to extort any price that they liked for their
+stock.
+
+The next stage in the proceedings was a deputation to the Chancellor
+of the Exchequer, concerning which more anon, of leaders of various
+groups of the Labour Party, to press upon Mr Bonar Law the principle
+of what is called "the Conscription of Wealth," and the publication at
+or soon after that time, which was about the middle of November, of a
+pamphlet on the subject of the "Conscription of Riches," by the War
+Emergency Workers' National Committee, 1, Victoria Street, S.W. Among
+what this pamphlet describes as "the three practicable methods of
+conscripting wealth" No. 1 is as follows:--
+
+A Capital Tax, on the lines of the present Death Duties, which are
+graduated from nothing (on estates under £300, and legacies under £20)
+up to about 20 per cent. (on very large estates left as legacies to
+strangers).
+
+If a "Death Duty" at the existing rates were now levied simultaneously
+on every person in the kingdom possessing over £300 wealth (every
+person might be legally deemed to have died, and to be his own heir),
+it might yield to the Chancellor of the Exchequer about £900,000,000.
+It would be necessary to offer a discount for payment in cash; and in
+order to avoid simultaneous forced sales, to accept, in lieu of cash,
+securities at a valuation; and to take mortgages on land.
+
+Here it will be seen that the Emergency Workers had improved on the
+_Round Table_, and agreed with Mr Gardiner, by providing that the
+Government should take securities at a valuation and mortgages on land
+in lieu of cash in order to avoid simultaneous forced sales. But they
+do not seem to have perceived that, in so far as the Government took
+securities or accepted mortgages on land, it would not be getting
+money to pay for the war, which was the object of the proposed
+Conscription of Wealth, but would only be obtaining property from
+which the Government would in due course later on receive an income,
+probably averaging about one-twentieth of its value.
+
+Perhaps, however, it would be more correct to say that those who put
+the scheme forward did not ignore this drawback to it, but rather
+liked it, for reasons quite irrelevant to the objects that they were
+apparently pursuing. A good deal of prominence was given about the
+same time to the question of a levy on capital in the _New Statesman_
+well known to be the organ of Mr Sidney Webb and other members of the
+Fabian Society. These distinguished and very intellectual Socialists
+would, of course, be quite pleased if, in an apparent endeavour to pay
+for the war, they actually succeeded in securing, by the Government's
+acquisition of blocks of securities from property owners, that
+official control of industry and production which is the object of
+State Socialists.
+
+It will be noted, however, in this scheme that no mention is made of
+any forms of property to be accepted by the Government in lieu of cash
+except securities and mortgages on land. Items such as furniture,
+books, pictures and jewellery are ignored, and in one of the articles
+in the _New Statesman_, discussing the question of a capital levy, it
+was distinctly suggested that these commodities should be left out
+of the scheme so as to save the trouble involved by valuation.
+Unfortunately, if we leave out these forms of property the natural
+result is to stimulate the tendency, lately shown by an unfortunately
+large number of patriotic taxpayers, of putting money into pearl
+necklaces and other such gewgaws in order to avoid income tax. If
+by buying fur coats, old masters and diamond tiaras it will be be
+possible in future to avoid paying, not only income tax, but also a
+capital levy, it is to be feared that appeals to people to save their
+money and invest it in War Bonds are likely to be seriously interfered
+with.
+
+Unfortunately, the _Statesman_ was able to announce that the appeal
+for this system of taxation had been received with a good deal of
+sympathy by the Chancellor of the Exchequer, and the next stage in the
+history of the agitation was the publication on Boxing Day in several
+of the daily papers of what appeared to be an official summary, issued
+through the Central News, of what the Chancellor had said to the
+deputation of Labour Leaders introduced by Mr Sidney Webb, which
+waited on him, as already described, in the middle of November. Having
+pointed out that he had never seen any proposal which seemed to him
+to be practicable for getting money during the war by conscripting
+wealth, Mr Bonar Law added that, though "perhaps he had not thought
+enough about it to justify him in saying so," his own feeling was that
+it would be better, both for the wealthy classes and the country, to
+have this levy on capital, and reduce the burden of the national debt
+when the war was over. It need not be said that this statement by the
+Chancellor has been very far from helpful to the efforts of those who
+are trying to induce unthrifty citizens to save their money and put it
+into National War Bonds for the finance of the war.
+
+"Why," people argue, "should we go out of our way to save and take
+these securities if, when the war is over, a large slice of our
+savings is to be taken away from us by means of this levy on capital?
+If we had been doubting between the enjoyment of such comforts and
+luxuries as are possible in war-time and the austere duty of thrift,
+we shall naturally now choose the pleasanter path, spend our money on
+ourselves and on those who depend on us, instead of saving it up to
+be taken away again when the war is over, while those who have spent
+their money as they liked will be let off scot free." Certainly, it is
+much to be regretted that the Chancellor of the Exchequer should have
+let such a statement go forth, especially as he himself admits that
+perhaps he has not thought enough about it to justify him in saying
+so. If the Chancellor of the Exchequer has not time to think about
+what he is going to say to a Labour deputation which approaches him on
+an extremely important revolution in our fiscal system, it is surely
+high time that we should get one who has sufficient leisure to enable
+him to give his mind to problems of this sort when they are put before
+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 inherent in it have already been pointed out. Its advocates
+seem as a rule to base the demand for it upon an assumption which
+involves a complete fallacy. This is that, since the conscription
+of life has been applied during the war, it is necessary that
+conscription of wealth should also be brought to bear in order to make
+the war sacrifice of all classes equal. For instance, the Emergency
+Workers' pamphlet, quoted above, states that, "in view of the fact
+that the Government has not shrunk from Compulsory Conscription of
+Men," the Committee demands that "for all the future money required
+to carry on the war, the Government ought, in common fairness, to
+accompany the Conscription of Men by the Conscription of Wealth."
+
+This contention seems to imply that the conscription of men and the
+conscription of wealth apply to two different classes; in other words,
+that the owners of wealth have been able to avoid the conscription of
+men. This, of course, is absolutely untrue. The wealthiest and the
+poorest have to serve the country in the front line alike, if they are
+fit. The proportion of those who are fit is probably higher among the
+wealthy classes, and, consequently, the conscription of men applies
+to them more severely. Again, the officers are largely drawn from
+the comparatively wealthy classes, and it is pretty certain that the
+proportion of casualties among officers has been higher during the war
+than among the rank and file. Thus, as far as the conscription of men
+is concerned, the sacrifice imposed upon all classes in the community
+is alike, or, if anything, presses rather more heavily upon those who
+own wealth. Conscription of wealth as well as conscription of life
+thus involves a double sacrifice to the owners of property.
+
+This double sacrifice, in fact, the owners of property have, as is
+quite right, borne throughout the war by the much more rapid increase
+in direct taxation than in indirect. It is right that the owners of
+property should bear the heavier monetary burden of the war because
+they, having more to lose and therefore more to gain by a successful
+end of the war, should certainly pay a larger proportion of its cost.
+It was also inevitable that they should do so because, when money is
+wanted for the war or any other purpose, it can only be taken in large
+amounts from those who have a surplus over what is needed to provide
+them with the necessaries and decencies of life. But the argument
+which puts forward a capital levy on the ground that the rich have
+been escaping war sacrifice is fallacious in itself, and is a wicked
+misrepresentation likely to embitter still further the bad feeling
+between classes.
+
+Nevertheless, Mr Bonar Law thinks that, since the cost of the war must
+inevitably fall chiefly upon the owners of property, and since it
+therefore becomes a question of expediency with them whether they
+should pay at once in the form of a capital levy or over a long series
+of years in increased taxation, he is inclined to think that the
+former method is one which would be most convenient to them and best
+for the country. This contention cannot be set aside lightly, and
+there can be no doubt that if, by making a dead lift, the wealthy
+classes of the country could throw off their shoulders a large part of
+the burden of the war debt, such a scheme is well worth considering as
+long as it does not carry with it serious drawbacks.
+
+It seems to me, however, that the drawbacks are very considerable.
+In the first place, I have not seen any really practicable scheme of
+redeeming debt by means of a levy on capital In so far as the levy is
+paid in the form of surrendered War Loans, it is simple enough. In so
+far as it is paid in other securities or mortgages on land or other
+forms of property, it is difficult to see how the assets acquired by
+the State through the levy could be distributed among the debt
+holders whom it is proposed to pay off. Would they be forced to take
+securities, mortgages on land, furniture, etc., as the Government
+chose to distribute them, or would the Government have to nurse an
+enormous holding of various forms of property and gradually realise
+them and so pay off debt?
+
+Again, a great injustice would surely be involved by laying the whole
+burden of this oppressive levy upon owners of accumulated property, so
+penalising those who save capital for the community and letting off
+those who squander their incomes. A characteristic argument on this
+point was provided by the _New Statesman_ in a recent issue. It argued
+that, because ordinary income tax would still be exacted, the contrast
+between the successful barrister with an Income of £20,000 a year and
+no savings, who would consequently escape the capital levy, and the
+poor clergyman who had saved £1000 and would consequently be liable to
+it, fell to the ground. In other words, because both lawyer and parson
+paid income tax, it was fair that the former should escape the capital
+levy while the latter should have to pay it!
+
+But needs must when the devil drives, and in a crisis of this kind it
+is not always possible to look too closely into questions of equity in
+raising money. It is necessary, however, to look very closely into the
+probable economic effects of any suggested form of taxation, and, if
+we find that it is likely to diminish the future wealth production
+of the nation, to reject it, however attractive it may seem to be
+at first sight. A levy on capital which would certainly check the
+incentive to save, by the fear that, if such a thing were once
+successfully put through, it might very likely be repeated, would dry
+up the springs of that supply of capital which is absolutely essential
+to the increase of the nation's productive power. Moreover, business
+men who suddenly found themselves shorn of 10 to 20 per cent. of
+their available capital would find their ability to enter into fresh
+enterprise seriously diminished just at the very time when it is
+essential that all the organisers of production and commerce in this
+country should be most actively engaged in every possible form of
+enterprise, in order to make good the ravages of war.
+
+
+
+
+VI
+
+OUR BANKING MACHINERY
+
+_February_, 1918
+
+The Recent Amalgamations--Will the Provinces suffer?--Consolidation
+not a New Movement--The Figures of the Past Three Decades--Reduction
+of Competition not yet a Danger--The Alleged Neglect of Local
+Interests--Shall we ultimately have One Huge Banking Monopoly?--The
+Suggested Repeal of the Bank Act--Sir E. Holden's Proposal.
+
+
+Banking problems have lately loomed large in the financial landscape.
+It will be remembered that about a year and a half ago a Committee
+was appointed to consider the creation of a new institution specially
+adapted for financing overseas trade and for the encouragement of
+industrial and other ventures through their years of infancy, and
+that the charter which was finally granted to the British Trade
+Corporation, as this institution was ultimately called, roused a
+great deal of opposition both on the part of banks and of traders who
+thought that a Government institution with a monopoly character
+was going to cut into their business with the help of a Government
+subsidy. In fact, there was no subsidy at all in question, and the
+fears of the trading world of competition on the part of the new
+chartered institution only arose owing to its unfortunate name, which
+was given to it in order to allay the apprehensions of the banks which
+had been provoked by the title originally designed for it, namely, the
+British Trade Bank. There seems no reason why this Company should
+not do good work for British trade without treading on the toes of
+anybody. Although naturally its activities cannot be developed on any
+substantial scale until the war is over, its Chairman assured the
+shareholders at the end of January that its preliminary spadework was
+being carefully attended to.
+
+After this small storm in a teacup had died down those interested in
+our banking efficiency were again excited by the rapid progress made
+by the process of amalgamation among our great banks, which began to
+show acute activity again in the last months of 1917. The suddenly
+announced amalgamation of the London and South-Western and London
+and Provincial Banks led to a whole host of rumours as to other
+amalgamations which were to follow; and though most of these proved to
+be untrue a fresh sensation was aroused when the union was announced
+of the National Provincial Bank of England and the Union of London and
+Smith's Bank. All the old arguments were heard again on the subject of
+the objections, from the point of view of industry in the provinces,
+to the formation of great banking institutions, with enormous figures
+on both sides of the balance-sheet, working from London, often, it was
+alleged, with no consideration for the needs of the provincial users
+of credit. These latest amalgamations, which have united banks which
+already had head offices in London, gave less cause than usual for
+these provincial apprehensions, which had far more solid reason behind
+them when purely provincial banks were amalgamated with institutions
+whose head office was in London. Nevertheless, the argument was heard
+that the great size and scale on which these amalgamated banks were
+bound to work would necessarily make them more monopolistic and
+bureaucratic in their outlook, and less elastic and adaptable in their
+dealings with their local customers.
+
+It seems to me that there is so far very little solid ground for any
+apprehension on the part of the business community that the recent
+development of banking evolution will tend to any damage to their
+interests. The banks have grown in size with the growth of industry.
+As industry has tended more and more to be worked by big battalions,
+it became necessary to have banking institutions with sufficiently
+large resources at their command to meet the great requirements of the
+huge industrial organisations that they had to serve. Nevertheless,
+the tendency towards fewer banks and bigger figures has grown with
+extraordinary celerity, as the following table shows:--
+
+MOVEMENT OF ENGLISH JOINT-STOCK BANK DEPOSITS, ETC.,
+SINCE 1886.
+
+December  No. of  Number of   Capital      Deposit and     Total
+31st      Banks   Branches    Paid up      Current        Liabilities
+                                           Accounts
+1886       109     1,547    £38,468,000   £299,195,000   £376,808,000
+1891       106     2,245     43,406,000    391,842,000    486,632,000
+1896        94     3,051     45,203,000    495,233,000    599,518,000
+1901        74     3,935     46,631,000    584,841,000    698,150,000
+1906        55     4,840     48,122,000    647,889,000    782,353,000
+1911        44     5,417     47,265,000    748,641,000    885,069,000
+1916        35     5,993     48,237,000  1,154,877,000  1,316,220,000
+
+This table is taken from the annual banking numbers of the
+_Economist_. It will be noticed that in 1886 there were in England 109
+joint-stock banks with 1547 offices, whose accounts were tabulated
+in the _Economist's_ annual review. Their total paid-up capital was
+38-1/2 millions, their deposit and current accounts were just under
+300 millions, and their total liabilities were 377 millions. In the
+course of thirty years the 109 banks had shrunk by the process of
+amalgamation and absorption to thirty-five, that is to say, they had
+been divided by three; the number of their offices, however, had been
+multiplied by nearly four, while their deposit accounts had grown from
+300 millions to 1155, and their total liabilities from 377 to 1316
+millions. By the amalgamations announced at the end of 1917, and that
+of the County of Westminster with Parr's announced on February 1st,
+the number of joint stock banks will be reduced to 32. The picture
+would be still more striking if the figures of the private banks were
+included, since their number has been reduced, since 1891, from 37 to
+6. These figures are eloquent of the manner in which the number of
+individual banks has been reduced, while the extent of the banking
+accommodation given to the community has enormously grown, so that the
+power wielded by each individual bank has increased by the force of
+both these processes.
+
+The consequent reduction in competition which is causing some concern
+among the trading community has not, as it seems to me, gone far
+enough yet to be a serious danger. The idea that the big banks with
+offices in London give scant consideration to the needs of their local
+customers seems to be so contrary to the interests of the banks that
+they would be extraordinarily bad men of business if those who were
+responsible for their management allowed it to be the fact. It is
+probably nearer the truth that banking competition in the provinces is
+still so keen that the London management is very careful not to allow
+anything like bureaucratic stiffness to get into the methods by which
+their business is managed. By the appointment of local committees they
+are careful to do all they can to see that the local interests get all
+the credit that is good for them. That local interests get as much
+credit as they want is probably very seldom the case, because it is a
+natural instinct on the part of an eager business man to want rather
+more credit than he ought to have, from a banking point of view.
+Business interests, as long as they exist in private hands, will
+always want rather more credit than there is available, and it will
+always be the duty of the banker to ensure that the country's industry
+is kept on a sound basis by checking the tendency of the eager
+business man to undertake rather more than is good for him. From the
+sentimental point of view it is certainly a pity to have seen many of
+the picturesque old private banks extinguished, the partners in which
+were in close personal touch with their customers, and entered into
+the lives of the local communities in a manner which their modern
+counterpart is perhaps unable to do. Nevertheless, it is difficult
+to get away from the fact that if these institutions had been as
+efficient and as well managed as their admirers depict them to have
+been they would hardly have been driven out of existence by the stress
+of modern developments and competition. Whatever we may think of
+modern competition, in certain of its aspects, we may at least be
+sure of this--that it does not destroy an institution which is really
+wanted by the business community. And if the complaint of local
+interests is true, that they are swamped by the cosmopolitan
+aspirations of the great London offices, they always have it in their
+power to create an institution of the kind that they want, and by
+giving it their business to ensure for it a prosperous career. As long
+as no such tendency is visible in the banking world we may be pretty
+sure that the views expressed concerning the neglect of local
+interests by the enormous banks which have grown up with London
+centres in the last thirty years is to a great extent a myth. It
+has now announced, however, that the whole problem involved by the
+amalgamation process is to be sifted by a committee to be appointed
+for this purpose.
+
+Another apprehension has arisen in the minds of those who view with
+critical vigilance the present tendencies of business and the
+present development of economic opinion among a great section of the
+community. If, it is urged, the banks continue to swallow one another
+up by the process of amalgamation, how will this tendency end except
+in the creation of one huge bank working a gigantic money monopoly
+which the Socialistic tendencies of the present day will, with some
+reason, insist ought to be taken over by the State for the profit of
+the taxpayer? This view is frankly put forward by those advocates of a
+Socialistic organisation of society, who say that the modern tendency
+of industry towards combinations, rings and trusts is rapidly bringing
+the Socialistic millennium within their reach without any effort
+on the part of Socialistic preachers. They consider that the trust
+movement is doing the work of Socialism, much faster than Socialism
+could do it for itself; that, in short, as has been argued above
+in regard to banking, the tendency towards centralisation and the
+elimination of competition can only end in the assumption by the State
+of the functions of industry and finance. If this should be so, the
+future is dark for those of us who believe that individual effort
+is the soul of industrial and financial progress, and that industry
+carried on by Government Departments, however efficient and economical
+it might be, would be such a deadly dull and unenterprising business
+that all the adaptability and tendency to variation in accordance with
+the needs of the moment, which are so strongly shown by individual
+enterprise, would be lost, to the great detriment of the material
+progress of mankind.
+
+As things are at present, there is little need to fear that
+Socialistic organisation of industry could stand up against competent
+individual effort. Anybody who has ever had any business dealings
+with a Government Department will inevitably shudder when he tries to
+imagine how many forms would have to be filled up, how many divisions
+of the Department the inevitable mass of papers would have to go
+through, and how much delay and tedium would be involved before the
+simplest business proposition could be carried out. But, of course, it
+is argued by Socialists that Government Departments are only slow and
+tied up with red tape because they have so long been encouraged to do
+as little as possible, and that as soon as they are really urged to do
+things instead of pursuing a policy of masterly inactivity, there is
+no reason why they should not develop a promptitude and elasticity
+quite as great as that hitherto shown by the business community.
+That such a development as this might take place in the course of
+generations nobody can deny; at present it must be admitted that with
+the great majority of men the money-making incentive is required to
+get the best out of them. If the process of education produces so
+great a change in the human spirit that men will work as well for the
+small salary of the Civil Service, with a K.C.B. thrown in, as they
+will now in order to gain the prizes of industry and finance, then
+perhaps, from the purely economic point of view, the Socialisation
+of banking may be justified. But we are a long way yet from any such
+achievement, and if it is the case that the rapid centralisation of
+banking power in comparatively few hands carries with it the danger
+of an attempt to nationalise a business which requires, above all,
+extreme adaptability and sensitiveness to the needs of the moment
+as they arise, this is certainly a danger which has to be carefully
+considered by those who are responsible for the development of these
+amalgamation processes.
+
+And now another great stone has been thrown into the middle of the
+banking pond, causing an ever-widening circle of ripples and provoking
+the beginning of a discussion which is likely to be with us for some
+time to come. Sir Edward Holden, at the meeting of the London City and
+Midland Bank shareholders on January 29th, made an urgent demand for
+the immediate repeal of the Bank Act of 1844. This Act was passed,
+as all men know, in order to restrict the creation of credit in
+the United Kingdom. In the early part of the last century the most
+important part of a bank's business consisted of the issue of notes,
+and banking had been carried on in a manner which the country
+considered unsatisfactory because banks had not paid sufficient
+attention to the proportion of cash that they ought to hold in their
+tills to meet notes if they were presented. Parliament in its wisdom
+consequently ordained that the amount of notes which the banks should
+be allowed to issue, except against actual metal in their vaults,
+should be fixed at the amount of their issue at that time. Above the
+limit so laid down any notes issued by the banks were to be backed by
+metal. In the case of the Bank of England the limit then established
+was £14,000,000, and it was enacted that if any note-issuing bank gave
+up its right to a note issue the Bank of England should be empowered
+to increase its power to issue notes against securities to the extent
+of two-thirds of the power enjoyed by the bank which was giving up its
+privilege. By this process the Bank of England's right to issue notes
+against securities, what is usually called its fiduciary issue, has
+risen to £18,450,000; above that limit every note issued by it has to
+be backed by bullion, and is actually backed by gold, though under
+the Act one-fifth might be in silver. It was thus anticipated by the
+framers of the Act that in future any credit required by industry
+could only be granted by an increase in the gold held by the issuing
+banks. If the Act had fulfilled the anticipations of the Parliament
+which passed it, if English trade had grown to anything like the
+extent which it has done since, it could only have done so by the
+amassing of a mountain of gold, which would have lain in the vaults of
+the Bank of England.
+
+Fortunately, however, the banking community had at its disposal a
+weapon of which it was already making considerable use, namely, the
+system of issuing credit by means of banking deposits operated on by
+cheques. Eight years before Peel's Act was passed two Joint Stock
+Banks had been founded in London, although the Bank of England
+note-issuing monopoly still made it impossible for any Joint Stock
+Bank to issue notes in the London district. It is thus evident that
+deposit banking was already well founded as a profitable business when
+Peel, and Parliament behind him, thought that they could sufficiently
+regulate the country's banking system so long as they controlled the
+issue of notes by the Bank of England and other note-issuing banks. It
+is perhaps fortunate that Parliament made this mistake, and so enabled
+our banking machinery to develop by means of deposit banking, and so
+to ignore the hard-and-fast regulations laid upon it by Peel's Act.
+This, at least, is what has happened; only in times of acute crisis
+have the strict regulations of Peel's Act caused any inconvenience,
+and when that inconvenience arose the Act has been suspended by the
+granting of a letter of indemnity from the Treasury to the Governor of
+the Bank.
+
+Under Peel's Act the present rather anomalous form of the Bank of
+England's Weekly Return was also laid down. It shows, as all men know,
+two separate statements; one of the Issue Department and the other of
+the Banking Department. The Issue Department's statement shows the
+notes issued as a liability, and on the assets side Government debt
+and other securities (which are, in fact, also Government securities),
+amounting to £18,450,000 as allowed by the Act, and a balance of gold.
+The Banking Department's statement shows capital, "Rest" or reserve
+fund, and deposits, public and other, among the liabilities, and on
+the other side of the account Government and other securities, all the
+notes issued by the Issue Department which are not in circulation, and
+a small amount of gold and silver which the Banking Department holds
+as till money.
+
+Sir Edward Holden's proposal is that the Act should be repealed
+practically in accordance with the system which has been adopted by
+the German Reichsbank. The principles which he enumerates, as those on
+which other national banks of issue work, are as follows:--
+
+1. One bank of issue, and not divided into departments.
+
+2. Notes are created and issued on the security
+of bills of exchange and on the cash balance, so that
+a relation is established between the notes issued
+and the discounts.
+
+3. The notes issued are controlled by a fixed
+ratio of gold to notes or of the cash balance to notes.
+
+4. This fixed ratio may be lowered on payment
+of a tax.
+
+5. The notes should not exceed three times the
+gold or cash balance.
+
+By this revolution Sir Edward would abolish all legal restriction on
+the issue of notes by the Bank of England. It would hold a certain
+amount of gold or a certain amount of cash balance against its notes,
+but in the "cash balance" Sir Edward apparently would include 11
+millions odd of Government debt, or of Treasury notes. As long as its
+notes were only three times the amount of the gold or of the "cash
+balance," and were backed as to the other two-thirds by bills of
+exchange, the situation would be regarded as normal, but if, owing to
+abnormal circumstances, the Bank desired to increase the amount of
+notes issued against bills of exchange only and to reduce the ratio of
+its gold or its cash balance to its notes, it would, at any time, be
+enabled to do so by the payment of a tax, without going through the
+humiliating necessity for an appeal to the Treasury to allow it to
+exceed the legal limit.
+
+At the same time, by the abolition of Peel's Act the cumbrous methods
+of stating the Bank's position, as published week by week in the Bank
+Return, would be abolished. The two accounts would be put together,
+with the result that the Bank's position would be apparently stronger
+than it appears to be under the present system, which makes the
+Banking Department's Return weak at the expense of the great strength
+that it gives to the appearance of the Issue Department. This will be
+shown from the following statement given by Sir Edward Holden of the
+Return as issued on January 16th, and as amended according to his
+ideas:--
+
+BANK STATEMENT, JANUARY 16, 1918.
+
+ISSUE DEPARTMENT
+
+Notes Issued .. £76,076,000  Gold .................. £57,626,000
+                             Government Debt .......  11,015,000
+                             Other Securities ......   7,435,000
+                -----------                          -----------
+                £76,076,000                          £76,076,000
+Ratio of Gold to Notes Issued = 75.7 per cent.
+
+BANKING DEPARTMENT.
+
+Capital ....... £14,553,000  Government Securities ...... £56,768,000
+Rest ..........   3,363,000  Other Securities ...........  92,278,000
+Deposits--                   Notes .......... £30,750,000
+Public   £41,416,000         Gold and Silver    1,143,000
+Other    121,589,000
+         ----------- 163,005,000            -------------  31,893,000
+Other Liabilities ...     18,000
+                     -----------                          -----------
+                    £180,939,000                         £180,939,000
+
+Ratio of Cash Balance to Liabilities = 19.6 per cent.
+
+RECONSTRUCTED BALANCE-SHEET OF THE BANK,
+JANUARY 16, 1918.
+
+Capital                   £14,553,000
+Rest                        3,363,000
+Notes Issued (circulation) 45,325,000
+Deposits                  163,005,000
+Other Liabilities              18,000
+                          ___________
+                         £226,264,000
+
+Gold                 £58,768,000
+Currency Notes        11,015,000
+                     ___________   £69,783,000
+
+Government Securities 56,768,000
+Other Securities       7,435,000
+                       _________    64,203,000
+
+Other Securities                    92,278,000
+                                   ___________
+                                  £226,264,000
+
+Ratio of Gold to Notes             =129.7 per cent.
+"    " Cash Balance to Liabilities = 33.5     "
+
+It need not be said that these proposals have aroused the liveliest
+interest. At the Bank Meetings held since then several chairmen
+have been asked by their shareholders to express their views on Sir
+Edward's proposed revolution. Sir Felix Schuster pronounced cautiously
+in favour of the revision of the Bank Act, and said that he had
+advocated it seventeen years ago. Lord Inchcape, at the National
+Provincial Meeting, thought that the matter required careful
+consideration. Most of us will agree with this view. There is
+certainly much to be said for a reform of the Weekly Statement of the
+Bank of England, giving, it may be added, a good deal more detail
+than Sir Edward's revised balance-sheet affords. But concerning his
+proposal to reconstruct our system of note issue on a foreign model,
+there is certain to be much difference of opinion. In the first place,
+owing to the development of our system of banking by deposit and
+cheque rather than by issue and circulation of notes, the note issue
+is not nearly so important a business in normal times in this country
+as it is in Germany and France. Moreover, the check imposed upon our
+banking community by the need for an appeal to the Treasury before it
+can extend its note issue beyond a certain point often acts with, a
+salutary effect, and the view has even been expressed that if that
+check were taken away from our system it might be difficult, if not
+impossible, to maintain the gold standard which has been of such
+enormous value in building up the prestige of London as a financial
+centre. I do not think there is much weight in this argument, since,
+under Sir Edward's plan, the note issue could only be increased
+against discounts, and the Bank, by the charge that it made for
+discounts, would still be able to control the situation. From the
+practical point of view of the present moment, a strong objection
+to the scheme is that it would open the door to fresh inflation by
+unrestricted credit-making just when the dangers of this process are
+beginning to dawn even on the minds of our rulers.
+
+
+
+
+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--Industry cannot take
+all Risks and no Profits.
+
+
+Every week--almost every day--brings with it the announcement of some
+new committee considering some question that may, or may not, arise
+now or when the war is over. Especially in the realm of finance has
+the Government's output of committees been notably prolific of
+late. We have had a Committee on Currency, a Committee on Banking
+Amalgamations, and a Committee appointed, humorously enough, by the
+Ministry of Reconstruction to consider what measures, if any, should
+be taken to protect the public interest in connection with the policy
+of industrial combinations--a policy which the Board of Trade has
+been sedulously fostering. Now comes a Committee to inquire "what
+amendments are expedient in the Companies Acts, 1908-1917, principally
+having regard to the circumstances arising out of the war, and to the
+developments likely to arise on its conclusion, and to report to the
+Board of Trade and to the Ministry of Reconstruction." It is composed
+of the Right Hon. Lord Wrenbury (chairman), Mr A.S. Comyns Carr,
+Sir F. Crisp, Mr G.W. Currie, M.P., Mr F. Gaspard Farrer, Mr Frank
+Gore-Browne, K.C., Mr James Martin, the Hon. Algernon H. Mills, Mr
+R.D. Muir, Mr C.T. Needham, M.P., Mr H.A. Payne, Sir Owen Philipps,
+M.P., Sir William Plender, Mr O.C. Quekett, and Mr A.W. Tait. The
+secretary is Mr W.W. Coombs, 55, Whitehall, S.W. 1. There are some
+good names on the Committee. Mr. Gaspard Farrer represents a great
+issuing house; Sir Frank Crisp, company lawyers; Sir William Plender,
+the accountants; Mr O.C. Quekett, the Stock Exchange; and Sir Owen
+Philipps, the shipping interest. Nevertheless, one cannot help
+shuddering when one considers the dangers that threaten British
+finance and industry from ill-considered measures which might possibly
+be recommended by a Committee influenced by the atmosphere of the
+present outlook on financial and commercial affairs.
+
+One of the interesting features of the present war atmosphere is the
+fact that, now when we are fighting as hard as we can to defeat all
+that is meant by Prussianism a great many of our rulers and public
+men are doing their best to impose Prussianising methods upon this
+unfortunate country, merely because it is generally assumed that
+Prussian methods have been shown, during the course of the war, to
+carry with them a certain amount of efficiency. It is certainly true
+that Prussian methods do very well as applied to the Prussians and
+submitted to by other races of Germans. On the other hand, it is at
+least open to argument that the British method of freedom, individual
+initiative, elasticity and adaptability have produced results, during
+the present war, which have so far been paralleled by no other country
+engaged in the contest. Working on interior lines with the assistance
+of docile and entirely submissive allies, Germany has certainly done
+wonderful things in the war, but it by no means follows that the
+verdict of posterity will not give the palm of achievement to England,
+who has not only carried out everything that she promised to do before
+the war, but has incidentally and in the course of it created and
+equipped an Army on a Continental scale, and otherwise done very much
+more for the assistance of her Allies than was contemplated before the
+war began.
+
+It is untrue to say that we were unprepared for the war. We were
+more than prepared to do all that we promised to do. What we were
+unprepared for was finding ourselves required to turn ourselves
+into, not only the greatest naval Power in the world, but one of the
+greatest military Powers also. This demand was sprang upon us, and we
+have met it with extraordinary success. The whole idea that Germany's
+achievement has been such as to warrant any attempt on our part to
+model our institutions on her pattern seems to me to fall to pieces
+as soon as one looks calmly at the actual results produced by the
+different systems. Moreover, even if we were to admit that Germany's
+achievement in the war has been immeasurably greater than ours, it
+still would not follow that we could improve matters here by following
+the German system. It ought not to be necessary to observe that a
+system which is good for one nation or individual is not necessarily
+good for another. In the simple matter of diet, for instance, a most
+scientifically planned diet given to a child who does not happen to
+like it will not do that child any good. These things ought to be
+obvious, but unfortunately in these times, which call for eminently
+practical thought and effort, there is a curious doctrinaire spirit
+abroad, and the theorist is continually encouraged to imagine how much
+better things would be if everything were quite different, whereas
+what we want is the application of practical common sense to practical
+facts as they are.
+
+In the realm of finance the freedom and individual initiative and
+elasticity of our English system have long been the envy of the world.
+Our banking system, as was shown, on an earlier page, has always
+worked with much less restriction on the part of legislative and
+official interference than any other, and, with the help of this
+freedom from official control, English bankers and finance houses had
+made London the financial centre of the world before the war. The
+attempt of Parliament to control banking by Peel's Act of 1844 was
+quietly set aside by the banking machinery through the development of
+the use of cheques, which made the regulations imposed on the note
+issue a matter of quite minor importance, except in times of severe
+crisis, when these regulations could always be set aside by an
+appeal to the Chancellor of the Exchequer. There was no Government
+interference in the matter of new issues of securities on the London
+Stock Exchange or of the quotations granted to new securities by the
+Committee of the Stock Exchange. Now the Companies Acts are to be
+revised in view of what may be necessary after the war, and there
+is only too much reason to fear that mistakes may occur through the
+imposition of drastic restrictions, which look so easy to work on
+paper, but are more than likely to have the actual effect of doing
+much more harm than good.
+
+"Circumstances arising out of the war and developments likely to arise
+on its conclusion" give this Committee a roving commission to consider
+all kinds of things, which may or may not happen, in the light of
+wisdom which may be put before it by interested witnesses, and, worse
+still, in the light of semi-official pressure to produce a report
+which will go down well with the House of Commons. Our politicians are
+at present in a state of extreme servility before the enterprising
+gentlemen who are now at the head of what is called the Labour Party.
+Every one will sympathise with the aspirations of this party in so
+far as they aim at bettering the lot of those who do the hard and
+uninteresting work of the world, and giving them a larger share of the
+productions that they help to turn out; but that is not the same
+thing as giving obsequious attention to the views which their
+representatives may have concerning the management of financial
+affairs, on the subject of which their knowledge is necessarily
+limited and their outlook is likely to be, to a certain extent,
+prejudiced. A recent manifesto put forward by the leaders of the new
+Labour Party includes in its programme the acquisition by the nation
+of the means of production--in other words, the expropriation of
+private capitalists. The Labour people very probably think that by
+this simple method they will be able to save the labourer the cost
+of providing capital and the interest which is paid for its use; and
+people who are actuated by this fallacy, which implies that the rate
+paid to capital is thinly disguised robbery, inevitably have warped
+views concerning the machinery of finance and the earnings of
+financiers. These views, expressed in practical legislation, might
+have the most serious effects not only upon England's financial
+supremacy but also on the industrial activity which that financial
+supremacy does so much to maintain and foster.
+
+What, after the war, will be the most important need, from the
+material point of view, for the inhabitants of this country? However
+the war may end, and whatever may happen between now and the end of
+it, there can be only one answer to this question, and that answer
+is greatly increased production. The war has already diminished our
+capital resources to the extent of the whole amount that we have
+raised by borrowing abroad, that is to say, by pledging the production
+of our existing capital, and by selling to foreign countries the
+foreign securities in which our capitalists had invested during
+the previous century. No one knows the extent to which our capital
+resources have been impaired by these two processes, but it may be
+guessed at as somewhere in the neighbourhood of 1500 millions; that
+is to say, about 10 per cent. of a liberal estimate of the total
+accumulated property of the country at the beginning of the war. To
+this direct diminution in our capital resources we have to add the
+impossibility, which has existed during the war, of maintaining our
+factories and industrial equipment in first-class working order by
+expenditure on account of depreciation of plant. On the other side
+of the balance-sheet we can put a large amount of new machinery
+introduced, which may or may not be useful for industrial purposes
+after the war; greatly improved methods of organisation, the effect of
+which may or may not be spoilt when the war is over by uncomfortable
+relations between Capital and Labour; and our loans to Allies and
+Dominions, some of which may have to be written off, and most of which
+will return us no interest for some time to come, or will at first pay
+us interest if we lend our debtors the money to pay it with. What the
+country will need, above all, on the material side, is an abundant
+revenue, which can only be produced by vigorous and steady effort in
+industry, which, again, can only be forthcoming if the machinery of
+credit and finance is given the fullest possible freedom to provide
+every one who wants to engage in industry and increase the output of
+the country with the financial facilities, without which nothing can
+be done.
+
+Is it, then, wise at such a time to impose restrictions by a drastic
+tightening up of the Companies Act, upon those who wish by financial
+activity, to further the efforts of industries and producers? On the
+contrary, it would seem to be a time to give the greatest possible
+freedom to the financial machine so that there shall be the least
+possible delay and difficulty in providing enterprise with the
+resources that it needs. We can only make good the ravages of war by
+activity in production and strict economy in consumption. What we want
+to do is to stimulate the people of this country to work as hard as
+they can, to produce as much as possible, to consume as little as
+possible on unnecessary enjoyment and luxury, and, so, by procuring
+a big balance of production over consumption, to have the largest
+possible volume of available goods for sale to the rest of the world,
+in order to rebuild our position as a creditor country, which the
+war's demands upon us have to some extent impaired.
+
+It is a commonplace that if it had not been for the great mass of
+foreign securities, which this country held at the beginning of the
+war, we could not nearly so easily have financed the enormous amount
+of food and munitions which we have had to provide for our population,
+for our armies, and for the population and armies of our Allies. If,
+instead of holding a mass of easily marketable securities, we had had
+to rely, in order to pay for our purchases of foreign goods, on the
+productions of our own mines and factories, and on our power to borrow
+abroad, then we should have had to restrict very greatly the number of
+men we have put into the firing-line so as to keep them at home for
+productive work, or, by the enormous amount of our borrowings, we
+should have cheapened the value of British credit abroad to a much
+greater extent than has been the case. Our position as a great
+creditor country was an enormously valuable asset, not only during the
+war but also before it, both from a financial and industrial point of
+view. It gave us control of the foreign exchanges by enabling us, at
+any time, to turn the balance of trade in our favour by ceasing for a
+time to lend money abroad, and calling upon foreign countries to pay
+us the interest due from them. The financial connections which it
+implied were of the greatest possible assistance to us in enhancing
+British prestige, and so helping our industry and commerce to push the
+wares that they produced and handled.
+
+Reform of the Companies Acts has often before the war been a more or
+less burning question. Whenever the public thought that it had been
+swindled by the company promoting machinery, it used to write letters
+to the newspapers and point out that it was a scandal that the sharks
+of the City should be allowed to prey upon the ignorant public,
+and that something ought to be done by Parliament to insure that
+investments offered to the public should somehow or other be made
+absolutely watertight and safe, while by some unexplained method the
+public would still be somehow able to derive large benefits from
+fortunate speculations in enterprises which turned out right. Every
+one must admit there have been some black pages in the history
+of British company promoting, and that many swindles have been
+perpetrated by which the public has lost its money and dishonest and
+third-rate promoters have retired with the spoil. The question is,
+however, what is the remedy for this admitted and glaring evil? Is it
+to be found by making the Companies Laws so strict that no respectable
+citizen would venture to become a director owing to the fear of penal
+servitude if the company on whose board he sat did not happen to pay a
+dividend, and that no prospectus could be issued except in the case of
+a concern which had already stood so severe a test that its earning
+capacity was placed beyond doubt? It would certainly be possible by
+legislative enactment to make any security that was offered as safe as
+Consols, and less subject to fluctuation in value. But when this had
+been done the effect would be very much like the effect upon rabbits
+of the recent fixing of their price. No more securities would be
+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 earn as much as he can and save as much as he can so that
+the country's capital fund can be increased; so that industry, which
+will have many difficult problems to face when the war is over, shall
+be as far as possible relieved from any difficulty of finding all the
+capital that it needs. To produce these results it is highly necessary
+to increase the confidence of the public in the machinery of the Stock
+Exchange, in company promotion and all financial issues. Any one who
+sincerely believes that these results can be produced by tightening up
+the Companies Acts is not only entitled but bound to press as hard as
+he can for the securing of this object. But is this the right way to
+do it? There is much to be said at first sight for making more strict
+the regulations under which prospectuses have to be issued under the
+Companies Acts, demanding a franker statement of the profits in the
+past, a fuller statement concerning the prices paid to vendors, and
+the prices paid by vendors to sub-vendors, and so forth. Any one who
+sits down with a pre-war industrial prospectus in his hand can find
+many openings for the hand of the reformer. The accounts published by
+public companies might also be made fuller and more informing with
+advantage. But even if these obviously beneficial reforms were carried
+out, there would always be danger of their evasion. They might tend to
+the placing of securities by hole-and-corner methods without the issue
+of prospectuses at all, and to all the endless devices for dodging the
+law which are so readily provided as soon as any attempt is made
+by legislation to go too far ahead of public education and public
+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 advertising is the education of the public concerning the
+things of its stomach, so the real cure for financial swindles is the
+education of the public concerning money matters, and its recognition
+of the fact that it is impossible to make a fortune in the City
+without running risks which involve the possible, not to say probable,
+loss of all the money with which the speculator starts. When once
+the public has learnt to distinguish between a speculation and an
+investment, and has also learnt honesty enough to be able to know
+whether it wants to speculate or invest, it will have gone much
+further towards checking the activity of the fraudulent promoter
+than any measure that can be recommended by the most respectable and
+industrious of committees. At the same time, it must be recognised
+by those responsible for our finance, that it is their business,
+and their interest, to keep the City's back premises clean; because
+insanitary conditions in the back yard raise a stink which fouls the
+whole City.
+
+In the meantime, if gossip is to be believed, some of the members of
+the Government have the most disquieting intentions concerning the
+kind of regulations which they wish to impose on the activities of the
+City, especially in its financial branch. It is believed that some of
+the bright young gentlemen who now rule us are in favour of Government
+control over the investment of money placed at home, and the
+prohibition of the issue of foreign securities; and it is even
+whispered that a fantastic scheme for controlling the profits of all
+industrial companies, by which anything earned above a certain level
+is to be seized for the benefit of the nation, is now a fashionable
+project in influential Parliamentary circles. Every one must, of
+course, admit that a certain amount of control will be necessary for
+some time after the war. It may not be possible at once to throw open
+the London Money Market to all borrowers, leaving them and it to
+decide between them who is to be first favoured with a supply of the
+capital for which there will be so large a demand when the war is
+over. Certain industries, those especially on which our export trade
+depends, will have to be first served in the matter of the provision
+of capital. If it is a choice between the engineering or shipbuilding
+trades and a company that wants to start an aeroplane service between
+London and Brighton for the idle rich, it would not be reasonable,
+during the first few months after the war, that the unproductive
+project should be able, by bidding a high price for capital, to
+forestall the demand of the more useful producer. And with regard
+to the issue of foreign securities, there is this to be said, that
+foreign securities placed in London have the same effect upon foreign
+exchange as the import into England of goods shipped from any country;
+that is to say, for the time being they turn the exchange against us.
+On the other hand, it is a well-known commonplace that imports of
+securities have to be balanced by exports of goods or services; and
+as the times when our export trade is most active are those when most
+foreign securities are being placed in London, it follows that any
+restrictions placed upon the issue of foreign securities in London
+will hinder rather than help that recovery in our export trade which
+is so essential to the restoration of our position as a creditor
+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 continue), it will not be
+possible to check foreign investment by restricting the issuing of
+foreign securities in London. If people see better rates to be
+earned abroad and more favourable prospects offered by the price
+of securities on foreign Stock Exchanges, they will invest abroad,
+whether securities are issued in London or not. As for the curious
+suggestion that the profits of industrial companies are henceforward
+to be limited and the whole balance above a statutory rate to be taken
+over by the State for the public good, this would be, in effect, the
+continuance on stricter lines of the Excess Profits Duty. As a war
+measure the Excess Profits Duty has much to be said for it at a time
+when the Government, by its inflationary policy, is putting large
+windfalls of profit into the hands of most people who have to hold a
+stock of goods and have only to hold them to see them rise in value.
+The argument that the State should take back a large proportion of
+this artificially produced profit is sound enough; but, if it is
+really to be the case that industry is to be asked for the future to
+take all the risk of enterprise and handover all the profit above
+a certain level to the Government, the reply of industry to such a
+proposition would inevitably be short, emphatic, unprintable, and by
+no means productive of revenue to the State.
+
+
+
+
+VIII
+
+THE YEAR'S BALANCE-SHEET
+
+_April_, 1918
+
+The Figures of the National Budget--A Large Increase in Revenue and
+a Larger in Expenditure--Comparisons with Last Year and with the
+Estimates--The Proportions borne by Taxation still too Low--The Folly
+of our Policy of Incessant Borrowing--Its Injustice to the Fighting
+Men.
+
+
+At first sight the figures of revenue and expenditure for the year
+ending March 31st are extremely satisfactory, at any rate on the
+revenue side. The Chancellor anticipated a year ago a revenue from
+taxation and State services of £638 millions, and the receipts into
+the Exchequer on these accounts actually amount to £707 millions. On
+the expenditure side, however, the increase over the Budget estimate
+was very much greater. The estimate was £2290 millions, and the actual
+amount expended was £2696 millions. Instead, therefore, of a deficit
+of £1652 millions having to be met by borrowing, there was an actual
+gap, to be filled by this method, of, roughly, £1990 millions.
+
+To take the revenue side of the matter first, this being by far the
+most cheering and satisfactory, we find that the details of the
+revenue, as compared with last year's, were as follows:--
+
+                 Year ending    Year ending
+                Mar. 31, 1918.  Mar. 31, 1917.     Increase.    Decrease.
+                        £              £              £              £
+Customs           71,261,000     70,561,000        700,000          ---
+Excise            38,772,000     56,380,000           ---    17,608,000
+Estate, etc.,
+  Duties          31,674,000     31,232,000        442,000          ---
+Stamps             8,300,000      7,878,000        422,000          ---
+Land Tax             665,000        640,000         25,000          ---
+House Duty         1,960,000      1,940,000         20,000          ---
+Income Tax and
+  Super Tax      239,509,000    205,033,000     34,476,000          ---
+Excess Profits
+  Duties, etc.   220,214,000    139,920,000     80,294,000          ---
+Land Value
+  Duties             685,000        521,000        164,000          ---
+Postal Service    35,300,000     34,100,000      1,200,000          ---
+Crown Lands          690,000        650,000         40,000          ---
+Sundry Loans, etc. 6,056,250      8,055,817          ---      1,999,567
+Miscellaneous     52,148,315     16,516,765     35,631,550          ---
+                 -----------    -----------    -----------  -----------
+                 707,234,565    573,427,582    153,414,550   19,607,567
+                                               |                      |
+                                               +-----------+----------+
+                                                       £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:--
+
+[Transcriber's Note: Corrected a typo in the table: "Sundry Loans"
+line should have a minus(-) instead of a plus(+) as printed.]
+
+                               Actual.     Estimated.     Difference.
+                                 £              £               £
+Customs                     71,261,000     70,750,000    +    511,000
+Excise                      38,772,000     34,950,000    +  3,822,000
+Estate Duties               31,674,000     29,000,000    +  2,674,000
+Stamps                       8,300,000      8,000,000    +    300,000
+Land Tax and House Duty      2,625,000      2,600,000    +     25,000
+Income Tax and Super Tax   239,509,000    224,000,000    + 15,509,000
+Excess Profits Tax         220,214,000    200,000,000    + 20,214,000
+Land Value Duties              685,000        400,000    +    285,000
+Postal Services             35,300,000     33,700,000    +  1,600,000
+Crown Lands                    690,000        600,000    +     90,000
+Sundry Loans, etc.           6,056,000      7,500,000    -  1,444,000
+Miscellaneous               52,148,000     27,100,000    + 25,048,000
+
+Certainly, the country is entitled to congratulate itself on this
+tremendous evidence of elasticity of revenue, and to a certain extent
+on the effort that it has made in providing this enormous sum of money
+from the proceeds of taxation and State services. But when this much
+has been admitted we have to hasten to add that the figures are not
+nearly so big as they look, and that there is much less "to write
+home about," as the schoolboy said, than there appears to be at first
+sight. Those champions of the Government methods of war finance who
+maintain that we have, during the past year, multiplied the pre-war
+revenue, of roughly, £200 millions by more than 3-1/2, so arriving at
+the present revenue of over £700 millions, are not comparing like
+with like. The statement is perfectly true on paper, and expressed in
+pounds sterling, but then the pound sterling of to-day is an entirely
+different article from the pre-war pound sterling. Owing to the system
+of finance pursued by our Government, and by every other Government
+now engaged in the war, of providing for a large part of the country's
+goods by the mere manufacture of new currency and credit, the
+buying power of the pound sterling has been greatly depreciated.
+By multiplying the amount of legal tender currency in the shape of
+Treasury notes, of token currency in the shape of silver and bronze
+coinage, and of banking currency through the bank deposits which
+are swollen by the banks' investments in Government securities, the
+Government has increased the amount of currency passing from hand to
+hand in the community while, at the same time, the volume of goods
+to be purchased has not been increased with anything like the same
+rapidity, and may, in fact, have been, actually decreased. The
+inevitable result has been a great flood of new money with a greatly
+depreciated value. Index numbers show a rise of over 100 per cent.
+in the average prices of commodities during the war. It is, however,
+perhaps unfair to assume that the buying power of the pound has
+actually been reduced by a half, but it is certainly safe to say that
+it has been reduced by a third. Therefore, the revenue raised by the
+Government during the past year has to be reduced by at least a third
+before we are justified in comparing our war achievements with the
+Government's pre-war revenue. If we take one-third off £707 millions
+it reduces the total raised during the past year by revenue to about
+£470 millions, less than two and a half times the pre-war revenue.
+
+From another point of view our satisfaction with the tremendous
+figures of the past year's revenue has to be to some extent qualified.
+The great elasticity shown by the big increase of actual achievement
+over the Budget estimate has been almost entirely in revenue items
+which cannot be expected to continue to serve us when the war is
+over. The total increase in the receipts over estimate amounts to £69
+millions, and of this £20 millions was provided by the Excess Profits
+Duty, a fiscal weapon which was invented during the war, and for
+the purpose of the war. It has always been assumed that it would be
+discontinued as soon as the war was over, and if it should not be
+discontinued its after-war effect is likely to be very unfortunate at
+a time when our industrial effort requires all the encouragement
+that it can get. Another £25 millions was provided by miscellaneous
+revenue, and this windfall again must be largely due to operations
+connected with the war. Finally, the £15-1/2 millions by which
+the income tax exceeded the estimate must again be largely due to
+inflation and extravagance on the part of the Government, which, by
+manufacturing money, and then spending it recklessly, puts big profits
+and big incomes into the hands of those who have stocks of goods to
+sell or who are in a position to produce them.
+
+If, therefore, the satisfaction with which we regard the big total of
+the Government's revenue receipts has to be considerably modified in
+the cold light of close observation, the enormous increase on the
+expenditure side gives us very little comfort and calls for the most
+determined and continued criticism if our reckless Government is to be
+made to turn over a new leaf. In the early days of the war there was
+much excuse for wasting money. We had to improvise a great Army, and
+a great organisation for equipping it; there was no time then to look
+too closely into the way the money was being spent, but this excuse is
+long obsolete. It is not possible to waste money without also wasting
+the energy and working power of the nation; on this energy and working
+power the staying power of the country depends in its struggle to
+avert the greatest disaster that can be imagined for civilisation,
+that is, the victory of the German military power. Seeing that for
+many months past we have no longer been obliged to finance Russia, and
+to provide Russia with the mass of materials and the equipment that
+she required, the way in which our expenditure has mounted up
+during the course of the year is a very serious blot on the year's
+balance-sheet. We spent during the year ending March 31st, £2696
+millions against £2198 millions in the previous year, an increase of
+close upon £500 millions; £63 millions of this increase were due to
+interest on war debt, the rest of it was due to increased cost of the
+war, and few business men will deny that very many of these extra
+millions might have been saved if our rulers and our bureaucratic
+tyrants had been imbued with any real sense of the need for conserving
+the energy of the nation.
+
+Much has been done by the Committee on National Expenditure to bring
+home to the Government opportunities for economy, and methods by which
+it can be secured. Can we be equally confident that much has been done
+by the Government to carry out the advice that has been given by this
+Committee? The Treasury is frequently blamed for its inability to
+check the rapacity and extravagance of the spending Departments. It is
+very likely that the Treasury might have done more if it had not been
+led by its own desire for a short-sighted economy into economising on
+its own staff, the activity and efficiency of which was so absolutely
+essential to the proper spending of the nation's money. But when this
+has been admitted, the fact remains that the Treasury cannot, or can
+only with great difficulty, be stronger on the side of economy than
+the Chancellor of the Exchequer, and that the task of the Chancellor
+of the Exchequer of imposing economy on a spendthrift War Cabinet is
+one of extreme difficulty. I hope it is not necessary to say that I do
+not urge economy from any sordid desire to save the nation's money if,
+by its spending, victory could be secured or brought a day nearer. I
+only urge it because I believe that the conservation of our resources
+is absolutely necessary to maintain our staying power, and that these
+resources are at present being scandalously wasted by the Government.
+Inter-departmental competition is still complained of in the latest
+report of the National Committee on Expenditure, and there seems to be
+still very little evidence that the Government Departments have yet
+possessed themselves of the simple fact that it is only out of these
+resources that victory can be secured, and that any waste of them is
+therefore a crime against the cause of liberty and progress.
+
+It is possible that before these lines are in print the Chancellor
+will have brought in his new Budget, and therefore any attempt to
+forecast the measures by which he will meet next year's revenue would
+be even more futile than most other endeavours at prophecy. But from
+the figures of last year as they are before us we see once more that
+the proportion of expenditure raised by revenue still leaves very much
+to be desired; £707 millions out of, roughly, £2700 millions is not
+nearly enough. It is true that on the expenditure side large sums have
+been put into assets which may some day or other be recoverable, and
+it is therefore impossible to assume with any approach to accuracy
+what the actual cost of the war has been for us during the past year.
+We have made, for instance, very large advances to our Allies and
+Dominions, and it need not be said that our advances to our own
+Dominions may be regarded as quite as good as if they were still in
+our own pockets; but in the case of our Allies, our loans to Russia
+are a somewhat questionable asset, and our loans to our other
+brothers-in-arms cannot be regarded as likely to be recoverable for
+some time to come, owing to the severity with which the war's pressure
+has been laid upon them. With regard to the other assets in which
+the Government has invested our money, such as factories, machinery,
+ships, supplies and food, etc., it is at least possible that
+considerable loss may be involved in the realisation of some of them.
+It is, however, possible that the actual cost of the war to us during
+the year that is past may turn out some day to have been in the
+neighbourhood of £2000 millions. If, on the other hand, we deduct from
+the £700 millions raised by revenue the £200 millions which represent
+the normal pre-war cost of Government to this country we find that the
+proportion of war's cost raised out of revenue is slightly over 25 per
+cent. This proportion must be taken with all reserve for the reasons
+given above, but in any case it is very far below the 47 per cent. of
+the war's cost raised out of revenue by our ancestors in the course of
+the Napoleonic wars.
+
+It seems to me that this policy of raising so large a proportion
+of the war's cost by borrowing is one that commends itself to
+short-sighted politicians, but is by no means in the interests of the
+country as a whole, or of the taxpayers who now and hereafter have to
+find the money for paying for the war. In so far as the war's needs
+have to be met abroad, borrowing abroad is to some extent inevitable
+if the borrowing nation has not the necessary resources and labour
+available to turn out goods for export to exchange against those which
+have to be purchased abroad, but in so far as the war's needs are
+financed at home, the policy of borrowing is one that should only
+be used within the narrowest possible limits. By its means the
+Government, instead of making the citizens pay by taxation for the
+war as it goes on, hires a certain number of them to pay for it by
+promising them a rate of interest, and their money back some day.
+The interest and the sinking fund for redemption have to be found by
+taxation, and so the borrowing process merely postpones taxation from
+the war period to the peace period. During the war period taxation can
+be raised comparatively easily owing to the patriotic stimulus and
+the simplification of the industrial problem which is provided by the
+Government's insatiable demand for commodities. When the days of peace
+return, however, there will be very grave disturbance and dislocation
+in industry, and it will have once more to face the problem of
+providing goods, not for a Government which will take all that it can
+get, but for a public, the demands of which will be uncertain, and
+whose buying power will be unevenly distributed, and difficult to
+calculate. The process, therefore, which postpones taxation during
+the war period to the peace period seems to be extraordinarily
+short-sighted from the point of view of the nation's economic
+progress. Recovery after the war may be astonishingly rapid if all
+goes well, but this can only happen if every opportunity is given to
+industry to get back to peace work with the least possible friction,
+and a heavy burden of after-war taxation, such as we shall inevitably
+have to face if our Chancellors of the Exchequer continue to pile up
+the debt charge as they have done in the past, will be anything but
+helpful to those whose business it will be to set the machinery of
+industry going under peace conditions.
+
+As things are, if we continue to add anything like £2000 millions a
+year to the National Debt, it will not be possible to balance the
+after-war Budget without taxation on a heavier scale than is now
+imposed, or without retaining the Excess Profit Duty, and so stifling
+industry at a time when it will need all the fresh air that it can
+get. Apart from this expedient, which would seem to be disastrous from
+the point of view of its effect upon fresh industry, the most widely
+advertised alternative is the capital levy, the objections to which
+are patent to all business men. It would involve an enormously costly
+and tedious process of valuation, its yield would be problematical,
+and it might easily deal a blow at the incentive to save on which the
+supply of capital after the war entirely depends. A much higher rate
+of income tax, especially on large incomes, is another solution of the
+problem, and it also might obviously have most unfortunate effects
+upon the elasticity of industry. A tax on retail purchases has much to
+be said in its favour, but against it is the inequity inseparable from
+the impossibility of graduating it according to the ability of the
+taxpayer to bear the burden; and a general tariff on imported goods,
+though it would be welcomed by the many Protectionists in our midst,
+can hardly be considered as a practical fiscal weapon at a time when
+the need for food, raw material, and all the equipment of industry
+will make it necessary to import as rapidly and as cheaply as possible
+in order to promote our after-war recovery.
+
+Apart from these purely economic arguments against the high proportion
+of the war's costs that we are meeting by borrowing, there is the much
+more important fact of its bad effect on the minds of our soldiers,
+and of those members of the civilian population who draw mistaken
+inferences from its effects. From the point of view of our soldiers,
+who have to go and fight for their country at a time when those who
+are left at home are earning high wages and making big profits, it is
+evidently highly unfair that the war should be financed by a method
+which postpones taxation. The civilian population left at home,
+earning high profits and high wages, should clearly pay as much as
+possible during the war by immediate taxation, so that the burden of
+taxation may be relieved for our soldiers when they return to civil
+life. In view of the hardships and dangers which our soldiers have to
+face, and the heroism with which they are facing them, this argument
+should be of overwhelming strength in the eyes of every citizen who
+has imagination enough to conceive what our fighting men are doing for
+us and how supreme is our duty to do everything to relieve them from
+any other burden except those which the war compels them to face.
+There is also the fact that many members of our uninstructed
+industrial population believe that the richer classes are growing
+richer owing to the war, and battening on the proceeds of the loans.
+I do not think that this is true; on the contrary, I believe that
+the war has brought a considerable shifting of buying power from the
+well-to-do classes to the manual workers. Nevertheless, in these times
+misconceptions are awkwardly active for evil. The well-to-do classes
+as a whole are not really benefited by having their future incomes
+pledged in order to meet the future debt charge, and if, at the same
+time, they are believed to be acquiring the right to wealth, which
+wealth they will have themselves to provide, the fatuity of the
+borrowing policy becomes more manifest. For these reasons it is
+sincerely to be hoped that our next fiscal year will be marked by
+a much higher revenue from taxation, a considerable decrease in
+expenditure, and a consequently great improvement in the proportion of
+war's cost met out of revenue, on what has been done in the past year.
+At our present rate of taxation we are not nearly meeting, out of
+permanent taxes, the sum which will be needed when the war is over
+for peace expenditure on the inevitably higher scale, pensions, and
+interest and sinking fund on war debt.
+
+
+
+
+IX
+
+COMPARATIVE WAR FINANCE
+
+_May_, 1918
+
+The New Budget--Our own and Germany's Balance-sheets--The Enemy's
+Difficulties--Mr Bonar Law's Optimism--Special Advantages which Peace
+will bring to Germany--A Comparison with American Finance--How much
+have we raised from Revenue?--The Value of the Pound To-day--The 1918
+Budget an Improvement on its Predecessors--But Direct Taxation still
+too Low--Deductions from the Chancellor's Estimates.
+
+
+One of the most interesting passages in a Budget speech of unusual
+interest was that in which the Chancellor of the Exchequer compared
+the financial methods of Germany and of this country, as shown by
+their systems of war finance. He began by admitting that it is
+difficult to make any accurate calculation on this subject, owing
+to the very thick mist of obscurity which envelops Germany's actual
+performance in the matter of finance since the war began. As the
+Chancellor says, our figures throughout have been presented with the
+object of showing quite clearly what is our financial position. Most
+of the people who are obliged to study the figures of Government
+finance would feel inclined to reply that, if this is really so, the
+Chancellor and the Treasury seem to have curiously narrow limitations
+in their capacity for clearness. Very few accountants, I imagine,
+consider the official figures, as periodically published, as models of
+lucidity. Nevertheless, we can at least claim that in this respect the
+figures furnished to us by the Government during the war have been
+quite as lucid as those which used to be presented in time of peace,
+and it is greatly to the credit of the Treasury that, in spite of the
+enormous figures now involved by Government expenditure, the financial
+statements have been published week by week, quarter by quarter, and
+year by year, with the same promptitude and punctuality that marked
+their appearance in peace-time. In Germany, the Chancellor says, it
+has not been the object of German financial statements to show the
+financial position quite clearly. It is, therefore, difficult to make
+an exact statement, but he was able to provide the House with a series
+of very interesting figures, taken from the statements of the German
+Finance Ministers themselves.
+
+His first point is with regard to the increase of expenditure. The
+alarming rate with which our expenditure has so steadily grown appears
+to be paralleled also in Germany. Up to June, 1916, Germany's monthly
+expenditure was £100 millions. It has now risen to over £187 millions.
+That means to say that their expenditure per diem is £6-1/4 millions,
+almost the same as ours, although our expenditure includes items such
+as separation allowances and other matters of that kind, borne by the
+States and municipalities in Germany, and so not appearing in the
+German imperial figures.
+
+As to the precise extent of the German war debt, there is no
+certainty, but the Chancellor was able to tell the House that the last
+German Vote of Credit, which was estimated to carry them on to June or
+July, brings the total amount of all their Votes of Credit to £6200
+millions, and that it is at least certain that that amount has been
+added to their War Debt, because their taxation during the war has not
+covered peace expenditure plus debt charge. Up to 1916 they imposed no
+new taxation. In 1916 they imposed a war increment tax, something in
+the nature of a capital levy, which is stated to have brought in £275
+millions. They added also that year £25 millions nominally to their
+permanent revenue. In 1917 they added in addition £40 millions to
+their permanent revenue, "Assuming, therefore, that their estimates
+were realised, the total amount of new taxation levied by them since
+the beginning of the war comes to £365 millions, as against our £1044
+millions. This £365 millions is not enough to pay the interest upon
+the War Debt which had been accumulated up to the end of the year."
+
+Mr Bonar Law then proceeded to give an estimate of what the German
+balance-sheet will be a year hence on the same basis on which he had
+calculated ours. With regard to our position, he had calculated that
+on the present basis of taxation we shall have a margin of four
+millions at the end of the present year if peace should then break
+out. As will be shown later, this estimate of his is somewhat
+optimistic, but at any rate our position, compared with that of
+Germany, may be described as on velvet. A year hence the German War
+Debt will be not less than £8000 millions. The interest on that will
+be at least £400 millions, a sinking fund at 1/2 per cent. will be £40
+millions. Their pension engagements, which will be much higher than
+ours owing to their far heavier casualties, have been estimated at
+amounts ranging as high as £200 millions. The Chancellor was sure
+that he was within the mark in saying that it will be at least £150
+millions. Their normal pre-war expenditure was £130 millions, so that
+they will have to face a total expenditure at the end of the war of
+£720 millions. On the other side of the account their pre-war revenue
+was £150 millions. They have announced their intention of this year
+raising additional permanent Imperial revenue amounting to £120
+millions. From the nature of the taxes the Chancellor considers it
+very difficult to believe that this amount will be realised, but,
+assuming that it is, it will make their total additional revenue £185
+millions. That, added to the pre-war revenue, gives a total of £335
+millions, showing "a deficit at the end of this year, comparing
+the revenue with the expenditure, of £385 millions at least." The
+Chancellor added that if that were our position he would certainly
+think that bankruptcy was not far from the British Government.
+
+Another point that the Chancellor was able to make effectively, in
+comparing our war revenue with Germany's, was the fact that, with the
+exception of the war increment tax, scarcely any of the additional
+revenue has been obtained from the wealthier classes in Germany.
+Taxation has been indirect and on commodities which are paid for by
+the masses of the people. "The lesson to be drawn from these facts is
+not difficult to see. The rulers of Germany, in spite of their hopes
+of indemnity, must realise that financial stability is one of the
+elements of national strength. They have not added to their financial
+stability." The reason for this failure the Chancellor considers to be
+largely psychological. It is, in the first place, because they do not
+care to add to discontent by increased taxation all over the country,
+but "it is still more due to this, that in Germany the classes which
+have any influence on or control of the Government are the wealthier
+classes, and the Government have been absolutely afraid to force
+taxation upon them."
+
+It is certainly very pleasant to be able to contemplate the financial
+blunders by which Germany is so greatly increasing the difficulties
+that it will have to face before the war is over. On the other hand,
+we have to recognise that the Chancellor, with that incorrigible
+optimism of his, has committed the common but serious error of
+over-stating his case by leaving out factors which are in Germany's
+favour, as, for instance, that Germany's debt is to a larger extent
+than ours held at home. Since the war began we have raised over £1000
+millions by borrowing abroad. Our public accounts show that the item
+of "Other Debt," which is generally believed to refer to debt raised
+abroad, now amounts to £958 millions, while one of our loans in
+America, which is separately stated in the account because it was
+raised under a special Act, amounted to £51-1/2 millions. It is also
+quite possible that fair amounts of our Treasury bills, perhaps also
+of our Temporary Advances and of our other war securities, have been
+taken up by foreigners; but quite apart from that the two items
+already referred to now amount to more than £1000 millions, though at
+the end of March last their amount was only £988 millions. It is also
+well known that we have during the course of the war realised abroad
+the cream of our foreign investments, American Railroad Bonds,
+Municipal and Government holdings in Scandinavia, Argentina, and
+elsewhere, to an amount concerning which no accurate estimate can be
+made, except by those who have access to the Arcana of the Treasury.
+It may, however, be taken as roughly true that so far the extent of
+our total borrowings and realisation of securities abroad has been
+balanced by our loans to our Allies and Dominions, which amounted at
+the end of March last to £1526 millions. We have thus entered into an
+enormous liability on foreign debts and sold a batch of very excellent
+securities on which we used to receive interest from abroad in the
+shape of goods and services, against which we now hold claims upon our
+Allies and Dominions, in respect to the greater part of which it would
+be absurd to pretend that we can rely on receiving interest for some
+years after the war, in view of the much greater economic strain
+imposed by the war upon our Allies.
+
+Germany, of course, has been doing these things also. Germany has
+parted with her foreign securities. She was selling them in blocks for
+some weeks before the war, and Germany, of course, has done everything
+that she could in order to induce neutrals, during the course of the
+war, to buy securities from her and to subscribe to her War Loans.
+Nevertheless, it cannot have been possible for Germany to carry out
+these operations to anything like the extent that we have, partly
+because her credit has not been nearly so good, partly because her
+ruthless and brutal conduct of the war has turned the sentiment of the
+world against her, and partly because the measures that we have taken
+to check remittances and transfers of money have not been altogether
+ineffective. On this side of the problem Germany has therefore an
+advantage over us, that her war finance, pitiful a$ it has been, has,
+not owing to any virtue of hers, but owing to force of circumstances,
+raised her a problem which is to a great extent internal, and will not
+have altered her relation to the finance of other countries so much as
+has been the case with regard to ourselves. We also have to remember
+that the process of demobilisation will be far simpler, quicker, and
+cheaper for Germany than for us. Even if the war ended to-morrow the
+German Army would not have far to go in order to get home, and we
+hope that by the time the war ends the German Army will all have been
+driven back into its own country and so will be on its own soil, only
+requiring to be redistributed to its peace occupations. Our Army will
+have to be fetched home, firstly, over Continental railways, probably
+battered into a condition of much inefficiency, and then in ships, of
+which the supply will be very short. The process will be very slow and
+very costly. Our Overseas Army will have to be sent back to distant
+Dominions, and the Army of our American Allies will have to be ferried
+back over the Atlantic. Consequently if Germany is able to obtain
+anything like the supply of raw material that she requires she will be
+able to get back to peace business much more quickly than any of her
+Anglo-Saxon enemies, and this is an advantage on her side which it
+would be unwise to ignore in considering the bad effects on her
+after-war activities of the very questionable methods by which she has
+financed and is financing the war.
+
+Since we are indulging in these comparisons, it may be interesting to
+consider how our American Allies are showing in this matter of war
+finance. The _Times_, in its "City Notes" of April 15th, observed, in
+connection with the unexpectedly small amount of the third Liberty
+Loan, that the reason why the smaller figure was adopted for the issue
+was that it seems quite certain now that the original estimate for
+the expenditure in the fiscal year ending June 30th next was much too
+high. This estimate was 18,775 million dollars. The _Times_ stated
+that the realised amount is likely to be hardly more than 12,000
+million dollars, of which about 4500 million dollars will represent
+loans to Allies, and that the estimate for the year's largely
+increased tax revenue was 3886 million dollars, which now seems
+likely to be exceeded by the receipts. If this be so, out of a total
+expenditure of £2400 millions, of which £900 millions will be lent to
+the Allies, the Americans are apparently raising nearly £800 millions
+out of revenue. Therefore if we deduct from both sides of the account
+the pre-war expenditure of about £215 millions and deduct also the
+loans to Allies from the expenditure, it leaves the cost of the war
+to America £1285 millions for this year and the war revenue £562
+millions. If these figures are correct it would thus appear that
+America is raising nearly half its actual war cost out of revenue as
+the war goes on.
+
+On the other hand, in the New York _Commercial Chronicle_ of April 6th
+the total estimated disbursements for the year are still stated at
+over 16,000 million dollars, that is to say, £3200 millions roughly,
+so that there seems to be considerable uncertainty as to what the
+actual amount of the expenditure of the United States will be during
+the year ending on June 30th. In any case, there can be no question
+that if the very high proportion of war cost paid out of revenue shown
+by the _Times_ figures proves to be correct, it will be largely owing
+to accident or misfortune; if America's war expenditure has not
+proceeded nearly as fast as was expected, it will be, no doubt, owing
+not to economies but to shortcomings in the matter of delivery of war
+goods which the Government had expected to pay for in the course
+of the fiscal year. It certainly would have been expected that the
+Americans would in this matter of war finance be in a position to set
+a very much higher standard than any of the European belligerents
+owing to the enormous wealth that the country has acquired during the
+two and a half years in which it, in the position of a neutral, was
+able to sell its produce at highly satisfactory prices to the warring
+Powers without itself having to incur any of the expenses of war. On
+the other hand, its great distance from the actual seat of operations
+will naturally make it difficult for the American Government to impose
+taxation as freely as might have been done in the case of peoples
+which are actually on the scene of warfare; so that it is hardly safe
+to count on American example to improve the standard of war finance
+which has been so lamentably low in Europe in the course of the
+present war. According to their original estimates the proportion of
+war cost borne out of taxation seems to have been on very much the
+same level as ours, and this has all through the war been very much
+lower than the results achieved by our ancestors at the time of the
+Napoleonic and Crimean wars.
+
+On this point the proportion of our expenditure, which has been borne
+out of revenue, the Chancellor stated that up to the end of last
+financial year, March 31, 1918, the proportion of total expenditure
+borne out of revenue was 26.3 per cent. On the estimates which he
+submitted to the House in his Budget speech on April 22nd, the
+proportion of total expenditure met out of revenue during the current
+financial year will be 28.3 per cent., and the proportion calculated
+over the whole period to the end of the current year will be 26.9 per
+cent. These proportions, however, are between total revenue and total
+expenditure during the war period. The proportion, of course, is
+not so high when we try to calculate actual war revenue and war
+expenditure by deducting on each side at a rate of £200 millions a
+year as representing normal expenditure and revenue and leaving out
+advances to Allies and Dominions. On this basis the proportion of war
+expenditure met out of war revenue up to March 31, 1918, was, the
+Chancellor stated, 21.7 per cent. For the year 1917-18 it was 25.3 per
+cent., for the current year it will be 26.5 per cent., and for the
+whole period up to the end of the current year 23.3 per cent. The
+corresponding figures for the Napoleonic and Crimean wars are given by
+Sir Bernard Mallet in his book on British Budgets as 47 per cent. and
+47.4 per cent. So that it will be seen that, judged by this test, our
+war finance, though very much better than Germany's, is not on so high
+a standard as that set by previous wars. It is true, of course, that
+the rate of expenditure during the present war has been on a scale
+which altogether dwarfs the outgoing in any previous struggle. The
+Napoleonic War is calculated to have cost some £800 millions, having
+lasted some twenty-three years. Last year we spent £2696 millions, of
+which near £2000 millions may be taken as war cost, after deducting
+normal expenditure and loans to Allies.
+
+Nevertheless, this argument of the enormous cost of the present war
+does not seem to me to be a good reason why the war should be financed
+badly, but rather a reason for making every possible effort to finance
+it well Are we doing so? At first sight it is a great achievement to
+have increased our total revenue from £200 millions before the war to
+£842 millions, the amount which we are expected to receive during
+the current year on the basis of the proposed additions to taxation,
+without taking into account any revenue from the suggested luxury tax.
+But, as I have already pointed out, the comparison of war pounds with
+pre-war pounds is in itself deceptive. The pounds that we are paying
+to-day in taxation are by no means the pounds that we paid before the
+war; their value in effective buying power has been diminished by
+something like one half. So that even with the proposed additions to
+taxation we shall not have much more than doubled the revenue of the
+country from taxation and State services as calculated in effective
+buying power. When we consider how much is at stake, that the very
+existence, not only of the country but of civilisation, is endangered
+by German aggression, it cannot be said that in the matter of taxation
+the country is doing anything like what it ought to have done or
+anything like what it would have done, willingly and readily, if a
+proper example had been set by the leading men among us, and if the
+right kind of financial lead had been given to the country by its
+rulers.
+
+When we look at the details of the Budget, it will be seen that the
+Chancellor has made a considerable advance upon his achievement of a
+year ago, when he imposed fresh taxation amounting to £26 millions,
+twenty of which came from excess profits duty, and could therefore
+not be counted upon as permanent, in his Budget for a year which
+was expected to add over £1600 millions to the country's debt,
+and actually added nearly £2000 millions. For the present year he
+anticipates an expenditure of £2972 millions, and he is imposing fresh
+taxation which will realise £68 millions in the current year and
+£114-1/2 millions in a full year. On the basis of taxation at which it
+stood last year he estimates for an increase of £67 millions, income
+tax and super-tax on the old basis being expected to bring in £28
+millions more, and excess profits duty £80 millions more, against
+which decreases were estimated at £3-1/2 millions in Excise and £37
+millions in miscellaneous. He thus expects to get a total increase on
+the last year's figures of £135 millions, making for the current year
+a total revenue of £842 millions, and leaving a total deficit of
+£2130 millions to be provided by borrowing. Increases in taxation
+on spirits, beer, tobacco, and sugar bring in a total of nearly £41
+millions. An increase of a penny in the stamp duty on cheques is
+estimated to bring in £750,000 this year and a million in a full year,
+and the increases in the income tax and the super-tax will bring in
+£23 millions in the present year and £61 millions in a full year.
+Increases in postal charges will bring in £3-1/2 millions this year
+and £4 millions in a full year.
+
+There has been little serious criticism of these changes in taxation
+except that many people, who seem to regard the penny post as a kind
+of fetish, have expressed regret that the postal rate of the letter
+should be raised to 1-1/2 d. This addition seems to me to be merely an
+inadequate recognition of the depreciation of the buying power of the
+penny and to be fully warranted by the country's circumstances. Either
+it will bring in revenue or it will save the Post Office labour, and
+whichever of these objects is achieved will increase the country's
+power to continue the war. The extra penny stamp on cheques has been
+rather absurdly objected to as being likely to increase inflation.
+Since the effect of it is likely to be that people will draw a smaller
+number of small cheques, and will make a larger number of their
+purchases by means of Treasury notes, the tax will merely result
+in the substitution of one form of currency for another, and it is
+difficult to see how this process will in any way increase inflation.
+Other arguments might be adduced, which make it undesirable to
+increase the outstanding amounts of Treasury notes, but in the matter
+of inflation through addition to paper currency, it seems to me that
+the proposed tax is entirely blameless. The increase of a shilling in
+income tax and super-tax produced a feeling of relief in the City,
+being considerably lower than had been anticipated. It is hardly the
+business of the Chancellor of the Exchequer in this most serious
+crisis to produce feelings of relief among the taxpayers, and it seems
+to me a great pity that he did not make much freer use of these most
+equitable forms of taxation, having first made arrangements (which
+could easily have been done) by which their very severe pressure would
+have been relieved upon those who have families to bring up. Death
+duties, again, he altogether omitted as a source of extra revenue. His
+proposed luxury tax he has left to be evolved by the wisdom of a
+House of Commons Committee, and has thereby given plenty of time to
+extravagantly minded people to lay in a store of stuff before the tax
+is brought into being.
+
+Space will not allow me to deal fully with the Chancellor's very
+interesting analysis of our position as he expects it to be at the end
+of the financial year on the supposition that the war was then over.
+He expects a revenue then of £540 millions on the present basis,
+making, with the yield of the new taxes in a full year, £654 millions
+in all, without including the excess profits duty, and he expects an
+after-war expenditure of £650 millions, including £50 millions for
+pensions and £380 millions for debt charge. It seems to me that
+his expectation of after-war revenue is too high, and of after-war
+expenditure is too low. He says that the estimates have been carefully
+made, but that they include "a recovery from the absence of war
+conditions," but surely the absence of war conditions is much more
+likely to produce a diminution than a recovery in taxation. Under the
+present circumstances, with prices continually rising, the profits of
+those who grow or hold stocks of goods of any kind automatically swell
+The rise in prices has only to cease, to say nothing of its being
+turned into a fall, to produce at once a big check in those profits,
+and when we consider the enormous dislocation likely to be produced by
+the beginning of the peace period expectations of an elastic revenue
+when the war is over seem to be almost criminally optimistic.
+
+The Chancellor arrived at his after-war debt charge of £380 millions
+by estimating for a gross debt on March 31, 1919, of £7980 millions,
+which he reduces to a net debt of £6856 millions by deducting half
+the expected face value of loans to Allies, £816 millions, and £308
+millions for loans to Dominions and India's obligation. But is he,
+in fact, entitled to count on receiving any interest at all from our
+Allies for some years to come after the war? If not, then on that
+portion of our debt which is represented by loans to Allies we shall
+have to meet interest for ourselves. He also gave an imposing list of
+assets in the shape of balances in hand, foodstuffs, land, securities,
+building ships, stores in munitions department, and arrears of
+taxation, amounting in all to nearly £1200 millions. It is certainly
+very pleasant to consider that we shall have all these valuable assets
+in hand; but against them we have to allow, which the Chancellor
+altogether omitted to do, for the big arrears of expenditure and the
+huge cost of demobilisation, which is at least likely to absorb the
+whole of them. On the whole, therefore, although we can claim that
+our war finance is very much better than that of our enemies, it is
+difficult to avoid the conclusion that it might have been very
+much better than it is, and that it is not nearly as good as it is
+represented to be by the optimistic fancy of the Chancellor of the
+Exchequer.
+
+
+
+
+X
+
+INTERNATIONAL CURRENCY
+
+_June_, 1918
+
+An Inopportune Proposal--What is Currency?--The Primitive System of
+Barter--The Advantages possessed by the Precious Metals--Gold as
+a Standard of Value--Its Failure to remain Constant--Currency and
+Prices--The Complication of other Instruments of Credit--No Substitute
+for Gold in Sight--Its Acceptability not shaken by the War--A
+Fluctuating Standard not wholly Disadvantageous--An International
+Currency fatal to the Task of Reconstruction--Stability and Certainty
+the Great Needs.
+
+
+As if mankind had not enough on its hands at the present moment, a
+number of well-meaning people seem to think that this is an opportune
+time for raising obscure questions of currency, and trying to make
+the public take an interest in schemes for bettering man's lot by
+improving the arrangements under which international payments are
+carried out. Nobody can deny that some improvement is possible in
+this respect, but it may very well be doubted whether, at the present
+moment, when very serious problems of rebuilding have inevitably to be
+faced and solved, it is advisable to complicate them by introducing
+this difficult question which, whenever it is raised, will require the
+most careful and earnest consideration.
+
+Since, however, the question is in the air, it may be as well to
+consider what is wrong with our present methods, and what sort of
+improvements are suggested by the reformers. At present, as every one
+knows, international payments are in normal times ultimately settled
+by shipments from one country to another of gold. Gold has achieved
+this position for reasons which have been described in all the
+currency text-books. Mankind proceeded from a state of barter to a
+condition in which one particular commodity was used as the chief
+means of payment simply because this process was found to be much
+more convenient. Under a system of barter an exchange could only be
+effected between two people who happened to be possessed each of them
+of the thing which the other one wanted, and also at the same time to
+want the thing which the other one possessed, and the extent of their
+mutual wants had to lit so exactly that they were able to carry out
+the desired exchange. It must obviously have been rare that things
+happened so fortunately that mutually advantageous exchanges were
+possible, and the text-books invariably call attention to the
+difficulties of the baker who wanted a hat, but was unable to supply
+his need because the hatter did not want bread but fish or some other
+commodity.
+
+It thus happened that we find in primitive communities one particular
+commodity of general use being selected for the purpose of what is
+now called currency. It is very likely that this process arose quite
+unconsciously; the hatter who did not want bread may very likely have
+observed that the baker had something, such as a hit of leather, which
+was more durable than bread, and which the hatter could be quite
+certain that either he himself would want at some time, or that
+somebody else would want, and he would therefore always be able to
+exchange it for something that he wanted. All that is needed for
+currency in a primitive or any other kind of people is that it should
+be, in the first place, durable, in the second place in universal
+demand, and, in the third place, more or less portable. If it also
+possessed the quality of being easily able to be sub-divided without
+impairing its value, and was such that the various pieces into which
+it was sub-divided could be relied on not to vary in desirability,
+then it came near to perfection from the point of view of currency.
+
+All these qualities were possessed in an eminent degree by the
+precious metals. It is an amusing commentary on the commonly assumed
+material outlook of the average man that the article which has won its
+way to supremacy as currency by its universal desirability, should be
+the precious metals which are practically useless except for purposes
+of ornamentation. For inlaying armour and so adorning the person of a
+semi-barbarous chief, for making into ornaments for his wives, and for
+the embellishment of the temples of his gods, the precious metals had
+eminent advantages, so eminent that the practical common sense of
+mankind discovered that they could always be relied upon as being
+acceptable on the part of anybody who had anything to sell. In
+the matter of durability, their power to resist wear and tear was
+obviously much greater than that of the hides and tobacco and other
+commodities then fulfilling the functions of currency in primitive
+communities. They could also be carried about much more conveniently
+than the cattle which have been believed to have fulfilled the
+functions of currency in certain places, and they were capable of
+sub-division without any impairing of their value, that is to say, of
+their acceptability. Merely as currency, precious metals thus have
+advantages over any other commodity that can be thought of for this
+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 services, also necessarily acquires a still more
+important duty, that is, it becomes a standard of value, and it is on
+the alleged failure of gold to meet the requirements of the standard
+of value that the present attack upon it is based. On this point the
+defenders of the gold standard will find a good deal of difficulty in
+discovering anything but a negative defence. The ideal standard of
+value is one which does not vary, and it cannot be contended that
+gold from this point of view has shown any approach to perfection in
+fulfilling this function. It could only do so if the supply of it
+available as currency could by some miracle be kept in constant
+relation with, the supply of all other commodities and services that
+are being produced by mankind. That it should be constant with each
+one of them is, of course, obviously impossible, since the rate at
+which, for example, wheat and pig-iron are being produced necessarily
+varies from time to time as compared with one another. Variations in
+the price of wheat and pig-iron are thus inevitable, but it can at
+least be claimed by idealists in currency matters that some form of
+currency might possibly be devised, the amount of which might always
+be in agreement with the amount of the total output of saleable goods,
+in the widest sense of the word, that is being created for man's use.
+
+It need not be said that this desirability of a constant agreement
+between the volume of currency and the volume of goods coming forward
+for exchange is based on what is called the quantitative theory of
+money. This theory is still occasionally called in question, but is on
+the whole accepted by most economists of to-day, and seems to me to
+be a mere arithmetical truism if we only make the meaning of the word
+"currency" wide enough; that is to say, if we define it as including
+all kinds of commodities, including pieces of paper and credit
+instruments, which are normally accepted in payment for goods
+and services. This addition of credit instruments, however, is a
+complication which has considerably confused the problem of gold
+as the best means of ultimate payment. Taken simply by itself the
+quantitative theory of money merely says that if money of all kinds is
+increased more rapidly than goods, then the buying power of money will
+decline, and the prices of goods will go up and vice versa. This seems
+to be an obvious truism if we make due allowance for what is called
+the velocity of circulation. If more money is being produced, but the
+larger amount is not turned over as rapidly as the currency which was
+in existence before, then the effect of the increase will inevitably
+be diminished, and perhaps altogether nullified. But other things
+being equal, more money will mean higher prices, and less money will
+mean lower prices.
+
+But, as has been said, the question is very greatly complicated by
+the addition of credit instruments to the volume of money, and this
+complication has been made still more complicated by the fact that
+many economists have refused to regard as money anything except actual
+metal, or at least such credit instruments as are legal tender, that
+is to say, have to be taken in payment for commodities, whether the
+seller wishes to do so or not. For example, many people who are
+interested in currency questions would regard at the present moment in
+this country gold, Bank of England notes, Treasury notes, and silver
+and copper up to their legal limits as money, but would deny this
+title to cheques. It seems to me, however, that the fact that the
+cheque is not and cannot be legal tender does not in practice affect
+or in any way impair the effectiveness of its use as money. As a
+matter of fact cheques drawn by a good customer of a good bank are
+received all over the country day by day in payment for an enormous
+volume of goods. In so far as they are so received, their effect upon
+prices is exactly the same as that of legal tender currency. This
+fact is now so generally recognised that the Committee on National
+Expenditure has called attention to the financing of the war by bank
+credits as one of the reasons for the inflation of prices which has
+done so much to raise the cost of the war. It is, in fact, being
+generally recognised that the power of the bankers to give their
+customers credits enabling them to draw cheques amounts in fact to
+an increase in the currency just as much as the power of the Bank of
+England to print legal tender notes, and the power of the Government
+to print Treasury notes.
+
+Thus it has happened that by the evolution of the banking system
+the use of the precious metals as currency has been reinforced and
+expanded by the printing of an enormous mass of pieces of paper,
+whether in the form of notes, or in the form of cheques, which
+economise the use of gold, but have hitherto always been based on the
+fact that they are convertible into gold on demand, and in fact have
+only been accepted because of this important proviso. Gold as currency
+was so convenient and perfect that its perfection has been improved
+upon by this ingenious device, which prevented its actually passing
+from hand to hand as currency, and substituted for it an enormous mass
+of pieces of paper which were promises to pay it, if ever the holders
+of the paper chose to exercise their power to demand it. By this
+method gold has been enabled to circulate in the form of paper
+substitutes to an extent which its actual amount would have made
+altogether impossible if it had had to do its circulation, so to
+speak, in its own person. From the application of this great economy
+to gold two consequences have followed; the first is that the
+effectiveness of gold as a standard of value has been weakened because
+this power that banks have given to it of circulating by substitute
+has obviously depreciated its value by enormously multiplying the
+effective supply of it. Depreciation in the buying power of money, and
+a consequent rise in prices, has consequently been a factor which
+has been almost constantly at work for centuries with occasional
+reactions, during which the process went the other way. Another
+consequence has been that people, seeing the ease with which pieces of
+paper can be multiplied, representing a right to gold which is only in
+exceptional cases exercised, have proceeded to ask whether there is
+really any necessity to have gold behind the paper at all, and whether
+it would not be possible to evolve some ideal form of super-paper
+which could take the place of gold as the basis of the ordinary paper
+which is created by the machinery of credit, which would be made
+exchangeable into it on demand instead of into gold.
+
+It is difficult to say how far the events of the war have contributed
+to the agitation for the substitution for gold of some other form of
+international currency. It would seem at first sight that the position
+of gold at the centre of the credit system has been shaken owing
+to the fact that in Sweden and some other neutral countries the
+obligation to receive gold in payment for goods has been for the time
+being abrogated. The critics of the gold standard are thus enabled
+to say, "See what has happened to your theory of the universal
+acceptability of gold. Here are countries which refuse to accept any
+more gold in payment for goods. They say, 'We do not want your gold
+any more. We want something that we can eat or make into clothes to
+put on our backs.'" This is certainly an extremely curious development
+that is one of the by-products of war's economic lessons. But I do not
+feel quite sure that it has really taught us anything new. All that
+has ever been claimed for gold is that it is universally acceptable
+when men are buying and selling together under more or less normal
+circumstances. It has always been recognised that a shipwrecked crew
+on a desert island would be unlikely to exchange the coco-nuts or fish
+or any other commodities likely to sustain life which they could find,
+for any gold which happened to be in the possession of any of them,
+except with a view to their being possibly picked up by a passing
+ship, and returning to conditions under which gold would reassume its
+old privilege of acceptability.
+
+During the war the shipping conditions have been such that many
+countries have been hard put to it, especially if they were contiguous
+to nations with which the Entente is at present at war, to get the
+commodities which they needed for their subsistence. The Entente, with
+its command of the sea, has found it necessary to ration them so that
+they should have no available surplus to hand on to the enemy. They
+have very naturally endeavoured to resist these measures, and in order
+to do so have made use of the power that they exercise by their being
+in possession of commodities which the Entente desires. They
+have shown a tendency to say that they would not part with these
+commodities unless the Entente allowed them to have a larger
+proportion of things needed for subsistence than the Entente thought
+necessary for them, and it was as part of this battle for larger
+imports of necessaries that gold has been to some extent looked upon
+askance as means of payment, the preference being given to things
+to eat and wear rather than to the metal. These wholly abnormal
+circumstances, however, do not seem to me to be any proof that gold
+will after the war be any less acceptable as a means of payment than
+before. The Germans are usually credited with considerable sagacity in
+money matters, with rather more, in fact, I am inclined to think, than
+they actually possess; they, at any rate, show a very eager desire to
+collect together and hold on to the largest possible store of gold,
+obviously with a view to making use of it when the war is over in
+payment for raw materials, and other commodities of which they are
+likely to find themselves extremely short. America also has shown a
+strong tendency to maintain as far as possible within its borders the
+enormous amount of gold which the early years of the war poured into
+its hands. While such is the conduct of the chief foreign nations, it
+is also interesting to note that one comes across a good many people
+who, in spite of all the admonitions of the Government to all good
+citizens to pay their gold into the banks, still hold on to a small
+store of sovereigns in the fear of some chain of circumstances arising
+in which only gold would be taken in payment for commodities. On the
+whole, I am inclined to think that the power of gold as a desirable
+commodity merely because it is believed to be always acceptable has
+not been appreciably shaken by the events of the war.
+
+This does not alter the fact that, as has been shown above, gold,
+complicated by the paper which has been based upon it, cannot claim
+to have risen to full perfection as a standard of value. In
+primitive times the question of the standard of value hardly arises.
+Transactions are for the most part carried out and concluded at once,
+and any seller who takes a piece of metal in payment for his goods
+does so with the rough knowledge of what that piece of metal will buy
+for him at the moment, and that is the only point which concerns
+him. The standard of value only becomes important when under settled
+conditions of society long-term contracts bulk large in economic
+transactions. A man who makes an investment which entitles him to 5
+per cent. interest, and repayment in 30 years' time, begins to be very
+seriously interested in the question of what command over commodities
+his annual income of 5 per cent. will give him, and whether the
+repayment of his money at the end of 30 years will represent the
+repayment of anything like the same amount of buying power as his
+money now possesses. It is here, of course, that gold has failed
+because, as we have seen, the process has been a fairly steady one of
+depreciation in the buying power of the alleged standard and a rise in
+the prices of other commodities. This means to say that the investor
+who has accepted repayment at the end of 30 years of the amount that
+he lent, be it £100 or £10,000, has found that the money repaid to him
+had by no means the same buying power as the money which he originally
+invested.
+
+Within limits this tendency of the standard of value towards
+depreciation has possessed considerable advantages, probably much
+greater advantages than would have followed from the contrary process
+if it had been the other way round. If we can imagine that the
+currency history of the world had been such that a constantly
+diminished quantity of currency in relation to the output of other
+commodities had caused a steady fall in prices, it is obvious that
+there might have been a very considerable check to the enthusiasm of
+industry. It has indeed been contended that the scarcity of precious
+metals which, with the absence of an organised credit system, produced
+this result during the later Roman Empire was a very important cause
+of the decay into which that Empire fell. I do not feel at all
+convinced that this effect would necessarily have followed the cause.
+It seems to me that the ingenuity of enterprising man is such that the
+producer might, and probably would, have found means for facing the
+probability of depreciation in price. But it is always an empty
+pastime to try to imagine what would have happened "if things had
+been otherwise." What we do know is that a period of rising prices,
+especially if the rise does not go too fast, stimulates the enterprise
+of producers, and sets business going actively, and consequently it
+may at least be claimed that the failure of the gold standard to
+maintain that steadiness of value which is an obvious attribute of
+the ideal standard has at least been a failure on the right side, by
+tending to depreciation of the value of currency, and so to a rise of
+the prices of other commodities. Obviously, people will tuck up their
+sleeves more readily to the business of production and manufacture if
+the course of the market in the product which they hope to sell some
+day is likely to be in their favour rather than against them.
+
+And when all is admitted concerning the failure of the existing
+standard of value, the question is, what substitute can we find which
+will carry with it all the advantages that gold has been shown to
+possess, and at the same time maintain that steadiness of value which
+gold has certainly lacked? We hear airy talk of an international
+currency based on the credit of the nations leagued together to
+promote economic peace. It is certainly very obvious that the
+diplomatic relations of the world require complete reform, and the
+system by which the nations at present settle disputes between
+themselves has been found by the experience of the last four years to
+be so disgusting, so barbarous and so ridiculous that all the most
+civilised nations of the world are determined to go on with it until
+it is stopped for ever. Nevertheless, obvious as it is that some kind
+of a League of Nations is essential as a form of international police
+if civilisation is to be rescued from destruction, it is very doubtful
+whether such an organisation could, at least during the first
+half-century or so of its existence, be called upon to tackle so
+difficult a question as that of the creation of an international
+currency based on international credit. In the first place, what will
+be required more than anything else after the war in economic matters
+will be the elimination of all possible reasons for uncertainty; so
+much uncertainty and difficulty will be inevitable that it seems to me
+to be almost criminal to add to those uncertainties by an outburst of
+eloquence on the part of currency reformers if there were any danger
+of their recommendations being accepted. It will be difficult enough
+to know where the producers of the world are to get raw material, find
+efficient labour, and then find a market for their products, without
+at the same time upsetting their minds with doubts concerning some
+kind of new-fangled currency that is to be created, and in which they
+are to be made to accept payment, with the possibilities of changes
+in the system which may have to be effected owing to some quite
+unforeseen results happening from its adoption. The gold standard,
+with all its failures, we do know; we also know that something may be
+done some day to remedy them if mankind can produce a set of rulers
+capable of approaching the question with all the knowledge and
+experience required; but to substitute this system at a time of great
+uncertainty for one which might or might not work would seem to be
+tempting Providence in an entirely unnecessary manner at a time when
+it is above all necessary to get the economic ship as far as possible
+on an even keel.
+
+If the proposed substitute is to succeed it will have to be at least
+as acceptable as gold, and at the same time its quantity must be so
+regulated as to be at all times constant in relation to the output of
+commodities. Can we pretend that the economic enlightenment of mankind
+has yet reached a point at which such a currency could be produced and
+regulated by the Governments of the world and be accepted by their
+citizens?
+
+
+
+
+XI
+
+BONUS SHARES
+
+_July_, 1918
+
+A Deluge of Bonus Shares--The Effect on the Market--A Problem in
+Financial Psychology--The Capitalisation of Reserves--The Stock
+Exchange View--The Issue of Bonus-carrying Shares--The Case of the
+A.B.C.--A Wiser Variation from Canada--Bonus Shares on Flotation--An
+American Device--Midwife or Doctor?--The Good and Bad Points of Both
+Systems.
+
+
+Of the many kinds of Bonus shares, the one which has lately been
+most prominent in the public eye is that which is produced by the
+capitalisation of a reserve fund. There has lately been a perfect
+epidemic of this kind of Bonus share, which is almost as plentiful as
+the caterpillars in the oak trees and the green fly on the allotments.
+The reason for this outburst is apparently the anxiety which the
+directors of many prosperous industrial companies feel lest the high
+dividends which good management and sound finance in the past have
+enabled them to pay should lay them open to misunderstanding and
+attack by well-meaning people who think that it is a crime for a
+company to earn more than a certain percentage on its capital.
+
+This explanation was very frankly given by the directors of Brunner,
+Mond and Company, when they lately capitalised part of their reserves.
+The company, they stated, has for many years paid a dividend on its
+Ordinary shares of 27-1/2 per cent., and "the directors feel that
+there is a widespread impression that this is the rate of profit
+earned on the total of the capital invested, and consequently that the
+company is making an unfair profit out of its customers and the labour
+it employs. This is by no means the case." It is a lamentable proof of
+the backward state of the economic education of this country that it
+should be necessary for well-financed and prosperous concerns to take
+steps to make it quite clear to the public that they are not earning
+more than they appear to be. In a well-educated community it would
+be perceived at once that it is the well-financed and prosperous
+companies which improve production in the interests of their
+shareholders, their workmen, and the public; that the price which the
+public pays for a commodity is ultimately the price at which the worst
+financed and worst managed companies can just manage to keep alive;
+that the higher profits earned by the better companies are not wrung
+out of the pockets of the community, or their workmen, but are the
+result of good management and good finance; and that the more the good
+companies are encouraged to go ahead and drive the bad ones out of
+existence, the better will the community be served, and the better
+will be the chance of the workmen to get good wages. These platitudes
+are of course, only true in a state of free competition. If there is
+anything like monopoly the public and the workers are fully justified
+in being suspicious and examining the source from which high dividends
+are produced.
+
+Such being the reason why this outburst of capitalisation of reserves
+first began--since in these days all capitalists and those who have to
+manage capital feel that they are working under criticism, which is
+not only jealous and suspicious (as it should be), but is also too
+often both ignorant and prejudiced--it is interesting to note that
+the movement which was so started has been stimulated by its very
+exhilarating effect on the market in the shares of the companies
+concerned. Why this should be so it is difficult at first sight to
+say. What happens is merely this--that a company, let us suppose, for
+the sake of simplicity, with a capital consisting wholly of 3,000,000
+Ordinary shares, has accumulated out of past profits, or out of
+premiums on new issues of shares, a reserve fund of £1,000,000. Its
+net profit has lately averaged £400,000, and it has, year by year,
+distributed £300,000 in the shape of a 10 per cent. dividend to
+its shareholders, and put £100,000 into its reserve fund, which is
+represented on the other side of the balance-sheet by buildings
+and plant and a certain amount of first-class investments. If the
+directors now decide to capitalise that £1,000,000 of reserve fund,
+the only effect is that each shareholder will be given one new share
+for every three which he holds in the existing capital, the reserve
+fund will be wiped out, and the ordinary capital will be increased
+from £3,000,000 to £4,000,000. None of the shareholders will be in
+actual fact better off to the extent of one halfpenny, because all
+will be in the same position with regard to one another; their
+relative shares in the enterprise will not have been altered. If we
+imagine, by way of simplifying the problem, that all the Ordinary
+shares were in one hand, that one holder would have had in his
+Ordinary shares a claim to the total assets of the company, that is
+to say, to its earning power as long as it is a going concern, and to
+whatever its assets realise if it went into liquidation; the fact that
+£1,000,000 worth of the assets had been bought out of past profits or
+premiums paid on new issues of shares would have already added to the
+value of the claim that he had on the property of the company, and no
+addition would be made to that value by turning the reserve fund into
+shares.
+
+In other words, the reserve fund is already the property of the
+shareholders, and to convert it from reserve fund into capital, making
+them a present of new shares, which merely represent their claim
+to the assets held against the reserve fund, is as empty a gift as
+presenting a man with a piece of paper informing him that he is the
+owner of his own hat. All this remains equally true if, besides the
+ordinary capital, there is a considerable amount outstanding of
+Preference shares and Debenture debt. In any case, the Ordinary
+shareholders possess a claim to the earning power of the company when
+prior charges have been satisfied, and to whatever surplus may remain
+on liquidation after first charges have been paid off in full. Whether
+that interest of theirs is represented by a larger or smaller number
+of shares, or by shares of a larger or smaller denomination, or by a
+reserve fund upon which they have a claim when all other claims have
+been settled makes no difference whatever as a matter of academic
+fact. Apart from the sentiment of the matter, there is no reason why
+ordinary capital should have any nominal value.
+
+As to the earning power of the company, that, of course, is not
+affected one whit by the process. The earning power of the company is
+all in the assets--the plant, machinery and other property--plus
+the elusive qualities which are bound up in the word "goodwill,"
+representing the selling power, organisation, and the expectation of
+future profits. The capitalisation of the reserve simply affects the
+manner in which the liabilities of the company are arranged, and
+the existence of a reserve fund merely means that the Ordinary
+shareholders have a claim to a larger amount than their nominal
+holding in case of liquidation. It does not matter in the least
+whether this larger claim is handed to them in the shape of a
+certificate, since the nominal amount of their claim has nothing
+whatever to do with the amount that their claim realises to them
+annually in the shape of dividends, or in the event of liquidation,
+from the realisation of the company's assets.
+
+In fact, the capitalisation of reserves is sometimes criticised by
+economic purists as a retrograde step because it seems likely to
+encourage the directors to be extravagant in the matter of dividends.
+In the example which we supposed above of the company with a capital
+of three millions and reserve fund of one million, if the reserve fund
+is turned into Ordinary shares and the earning power of the company
+remains the same there may obviously be a temptation to the directors
+to modify the prudent policy under which they had hitherto placed one
+hundred thousand a year to reserve, because if they continued it the
+shareholders would discover they were really no better off and that
+they simply got a lower rate of dividend on the larger amount of
+shares, and that their actual receipts from the company were exactly
+the same as before. And if the earning power of the company remained
+the same and the directors left off placing the one hundred thousand
+a year to reserve, and paid away the whole of the net profit in
+dividend, it is clear that the progressive expansion of the company's
+business would be to that extent checked. On the other hand, there is
+a contrary argument that as long as the company has a large reserve
+fund there is a possibility that dissatisfied shareholders may agitate
+for a realisation of sufficient assets to enable that reserve fund to
+be distributed, especially if it has been wholly acquired out of past
+profits. In this case the capitalisation of the reserve fund puts this
+temptation out of their reach since, when once the reserve fund has
+been capitalised, it can only be got at by greedy shareholders through
+the process of liquidation. Since, however, the shareholder in these
+times is not quite so short-sighted as he used to be, there is not
+perhaps really very much advantage in this point.
+
+But since, as has been shown, capitalisation of reserves has no effect
+upon the earning power and assets of the company, it is interesting to
+try and discover why the rumour and announcement of such an intention
+on the part of the board of directors is nearly always accompanied by
+a rise in the shares of the company affected. If the shareholder is
+merely to be given a larger nominal claim, which does not in the least
+affect the value of the assets which that claim concerns, and if the
+relative amount of his claim is exactly the same with regard to the
+other shareholders, it is clear that the rise in the value of the
+shares is based entirely either on a psychological mistake on the part
+of the public and its financial advisers, or on the fact that the
+transaction called attention to the value of the shares which have
+hitherto been undervalued in the market. Probably the movement arises
+from both these causes. A large number of people think they are better
+off if they have a larger nominal share, without considering that
+all the other shareholders are at the same time having their claim
+increased, that the assets to which they all have a claim are not
+being increased, and that, consequently, if a sharing-out process were
+to take place they would all be exactly as they would have been if
+no such capitalisation of reserves had been carried out. And if a
+sufficient number of people think that a share or any other commodity
+is more valuable, it thereby becomes more valuable, because value is
+nothing else than the amount, whether in money or other commodities,
+at which a commodity can be disposed of.
+
+But it is also true that there are, at all times, a very large number
+of securities, especially in the industrial market, which would
+stand higher if their earning power and position were more closely
+scrutinised. This is very clearly seen to be the case from the
+apparently extravagant prices at which insurance companies, for
+example, sometimes buy the businesses of one another. They give a
+price which is considerably above the market value of the concern as
+represented by the price of its shares. Critics say that the terms are
+extravagant, and yet the deal is found to be highly profitable to the
+buying company. The profit of the deal, of course, may be increased by
+the advantages of amalgamation, but quite apart from that it is clear
+that the market price of securities very often undervalues, as it
+also, perhaps, still oftener overvalues, the real position of the
+companies on whose earning powers they represent claims. In any case,
+there is the fact that these capitalisations of reserve funds, which
+make no real difference to the actual position of the company, are
+universally regarded, in the language of the Stock Exchange, as "bull
+points." It is assumed, of course, that the directors would not carry
+out such an operation unless they saw their way to a higher earning
+power in the future as a justification for the larger capital. In this
+expectation the directors might be right or wrong, and, even if they
+are right, that prospect of higher earning power, if market prices
+could be relied upon to express the true position of a company, would
+have been "in the price."
+
+There is another kind of Bonus share, which is not exactly a Bonus
+share, but carries a bonus with it. This comes into being when the
+directors of a company sell new shares to existing shareholders at a
+price below the terms which they might have obtained if they made a
+new issue to the general public. The classical example of this system
+is the Aerated Bread Company, that concern to which City clerks and
+journalists and others owe so much as pioneers of cheap and simple
+catering. It will be remembered that in the palmy days of this
+company, before it had been severely cut into by competition, its £1
+shares used to stand in the neighbourhood of £15. The directors used
+then to make issues of new shares to existing shareholders at their
+face value, that is to say, at £1 per share, although it was obvious
+that if they had made a public issue inviting all and sundry to
+subscribe they could have sold their new issues at or above £14
+per share. This system put an enormous bonus in the pockets of the
+existing shareholders at the expense of the company and its future
+prospects. The directors practically gave to the existing shareholders
+a present of £130,000 if they sold them 10,000 new shares for £10,000,
+which they and the public would have readily subscribed for at
+£140,000. There was nothing wicked about the process, but it was
+extremely short-sighted. If the company had retained the monopoly
+which its pioneer work as a cheap caterer for a long time secured
+it, it might have kept its prosperity unimpaired even by this
+short-sighted finance. As it was, attracted several competitors, some
+of which were extremely well managed and financed, and although it
+still does a most useful work for the community, its earning power has
+suffered considerably. But this is only an extreme example of a system
+which is reasonable enough if it is not carried too far. The Canadian
+Pacific Railway, for instance, has for many years adopted a very
+moderate use of this system, making new issues to its shareholders on
+terms rather cheaper than it could have obtained by a public issue,
+but not giving away enough to impair its future seriously in order
+to make presents to the existing stockholders by this means. By the
+continued making of small presents to their constituents the directors
+of the company have obtained the support of a very loyal body of
+stockholders, who feel that they are being well treated but not
+pampered. This system of granting a small bonus to existing
+shareholders on occasions when the company has to issue new capital is
+one which is quite unobjectionable as long as it is not abused. If,
+owing to the use of it, the directors are encouraged to finance
+themselves badly, that is to say, to pay out of new capital for
+improvements and extensions which a more prudent policy would have
+financed out of earnings, just because they find that these issues
+carrying a small bonus makes them popular with the stockholders, then
+the system is being abused. Otherwise there seems no reason to object
+to a measure which keeps the shareholders happy and does not do any
+harm to the concern so long as it is worked in moderation.
+
+Finally, there is a Bonus share or stock which does not represent
+accumulation out of vast profits or issues of new shares at a premium,
+and does not involve a bonus by the sale to existing shareholders at
+a price below the terms which could be got in the market, but is at
+first sight pure water, representing merely possibilities, perhapses,
+and potentialities. This kind of Bonus share is chiefly known on the
+other side of the Atlantic, and is usually damned with bell, book and
+candle by purists among English financial critics. We say on this side
+of the water that every pound of an English well-financed company
+represents a pound which has actually been spent and put into tangible
+assets which help the company to earn profits. This boast is by no
+means true, since nearly all industrial companies come into being with
+something paid for in the shape of goodwill, which is of enormous
+importance, but can hardly be called a tangible asset; and even in the
+case of our railway companies, many millions of original capital went
+into Parliamentary and legal expenses, which have been, in one sense,
+dead capital ever since, though without this expenditure the railways
+could never have got to work. The American system of Common shares,
+representing what appears to be water, is only a modification of what
+every company has to do, in one form or another, on this side or
+anywhere in the world. Wherever an existing business is bought out
+something has to be given over and above the old iron value of the
+concern for the value of the connection and other intangible assets.
+Wherever an entirely new industry is started it has to meet certain
+initial expenses. It has to placate, to use the unpleasant American
+word, various interests in order to get to work, or it has to lay out
+money, in building up a concern by advertising or otherwise. It is
+impossible that every penny which is put into it will go into actual
+buildings, plant, machinery, and stock-in-trade.
+
+In America the system has been preferred by which the actual tangible
+assets of a new concern are financed wholly or largely by issues of
+bonds or Preferred stock, and the Common stock is given away to those
+interested in the promotion, for them either to hold or to use in
+order to secure the co-operation of those who may be useful, or modify
+the opposition of those who may be dangerous. The net result of it is
+that the Common stock is represented in fact by goodwill or the power
+to get to work. If the company prospers, then it is the business of
+those who hold these Common shares to see that assets are accumulated
+out of profits, to be held against their Common stock, so squeezing
+the water out of it and making it good. The system thus possesses this
+very considerable advantage, that those who promote a company are
+interested in its future welfare, and watch over it and guide it
+through its subsequent existence, putting energy and good management
+at its disposal in order that the paper which they hold may be
+represented, not by water, but by real assets, and so may bring them a
+tangible reward. It has thus in some ways a great advantage over the
+English system, by which the company promoter is too often concerned
+merely in the immediate success of the promotion. He is, as one of the
+greatest of them described himself, a mere midwife, who brings the
+interesting infant into the world, pats its little head, says good-bye
+to it, and leaves it to take care of itself throughout its troubled
+existence. By the American system the promoter is not a midwife but a
+doctor who assists at the birth of the infant, and also watches over
+its youth and makes every effort to guide its toddling footsteps in
+such a way that it may grow into lusty manhood. It is not until he has
+done so that he is enabled, by the sale of the shares which were given
+to him at the beginning, to realise the full profit which he expected.
+The profits realised by this method are in many cases enormous. On
+the other hand, the amount of work that is put in to secure them is
+infinitely greater than happens in the case of the English midwife
+promoter; and if the enterprise is a failure, then the promoter goes
+without his profits.
+
+The system, like everything else, is liable to abuse, if a rascally
+board of directors, in a hurry to unload their holding of Common stock
+on an unsuspecting public, makes the position and prospects of the
+company look better than they are by unscrupulous bookkeeping and
+extravagant distribution of profits, earned or unearned. These things
+happen in a world in which the ignorance of the public about money
+matters is a constant invitation to those who are skilled in them to
+relieve the public of money which it would probably mis-spend; but,
+if well and honestly worked, the system is by no means inherently
+unsound, as some English critics too often assume, and it has been
+shown that it carries with it a very great and substantial advantage
+in the hands of honest people who wish to conduct the business of
+company promotion on progressive lines.
+
+
+
+
+XII
+
+STATE MONOPOLY IN BANKING
+
+_August_, 1918
+
+Bank Fusions and the State--Their Effects on the Bank of England--Mr
+Sidney Webb's Forecast--His Views of the Benefits of a Bank
+Monopoly--The Contrast between German Experts and British
+Amateurs--Bankers' Charges as affected by Fusions--The Effects of
+Monopoly without the Fact--The "Disinterested Management" Fallacy--The
+Proposal to split Banking Functions--A Picture of the State in
+Control.
+
+
+A few months ago, writing in this Journal on the subject of banking
+amalgamations, I referred to one of the objections against them, that
+they tended towards the creation of monopoly, and so encouraged hope
+on the part of those who would like to see all forms of industry
+managed by the State, that the banking business might sooner or later
+be taken over and worked as a State monopoly. At that time this danger
+of monopoly seemed to be still fairly remote, but since then the
+progress of amalgamations has brought it appreciably nearer, and
+so has vigorously stimulated both the hopes and fears of those who
+consider that it tends to bring nearer the seizure of banking business
+by the State. The fear is expressed by Sir Charles Addis, manager of
+the Hongkong Bank and director of the Bank of England, in the July
+number of the _Edinburgh Review_ in a very interesting article on the
+"Problems of British Banking." Sir Charles observes that:
+
+    "It may even be questioned whether the gigantic size they have
+    already attained does not constitute a menace to the predominant
+    position which the Bank of England has hitherto enjoyed as the
+    bankers' bank. How will the Bank of England be able to maintain
+    its supremacy and control the money market, surrounded by banks
+    individually greater and more powerful than itself, especially
+    when the object in view is by raising the rate of interest to
+    prevent an internal or external drain upon our gold reserve? It is
+    even conceivable that the finance of the State may be threatened,
+    and it is probably for this reason that in Germany the Prussian
+    Minister is said to be considering a State monopoly of banking.
+    Nor can the psychological effect of these great aggrandisements of
+    capital in the hands of a few banks be ignored. They are virtually
+    Government-guaranteed institutions. The insolvency of one of
+    the great banks would involve such widespread disaster that no
+    Government could stand aside. They would be compelled to make use
+    of the national resources in order to guarantee the solvency of
+    private banks. From Government guarantee to Government control
+    is but a step, and but one step more to nationalisation. We are
+    playing into the hands of Mr Sidney Webb and the Socialists."
+
+As it happens, in the July number of the _Contemporary Review_, Mr
+Sidney Webb was developing the same theme, namely, the inevitability
+of banking monopoly and the necessity, as he conceives it, of
+defeating private monopoly for the sake of profit, by State monopoly
+to be worked, as he hopes, in the public interest. His article is
+headed by the rather misleading title, "How to Prevent Banking
+Monopoly," for, as has been said, Mr Webb very much wants monopoly,
+says that it cannot be helped, and sees the fulfilment of some of his
+pet Socialistic dreams in the direction of it by the bureaucrat whom
+he regards as the heaven-sent saviour of society. His very interesting
+argument is most easily followed by means of a series of quotations.
+
+    "We are, it is said, within a measurable distance of there
+    being--save for unimportant exceptions--only one bank, under
+    one general manager, probably a Scotsman, whose power over the
+    nation's industry would be incalculable. Even in the crisis of the
+    war the matter is receiving the attention of the Government.
+
+    "In the opinion of the present writer, the amalgamation of banks
+    in this country, which has been going on continuously for a
+    century, though at varying rates, and is being paralleled in
+    other countries, notably in Germany, and latterly in the Canadian
+    Dominion, is an economically inevitable development at a certain
+    stage of capitalist enterprise, and one which cannot effectively
+    be prevented."
+
+Mr Webb considers that there is no economic limit to this policy of
+amalgamation, and that the gains it carries with it are obvious. He
+dilates upon these as follows:--
+
+    "It may be worth pointing out:
+
+    "(a) That apart from the obvious economies in the cost of
+    administration, common to all business on a large scale, there is,
+    in British banking practice, a special advantage in a bank being
+    as extensive and all-pervasive as possible. Where distinct banks
+    co-exist, there can be no assurance that the periodical shifting
+    of business, the perpetual transformations in industrial
+    organisation, the rise and fall of industries, localities or
+    firms, the changes of fashion and the ebb and flow of demand,
+    and even a relative diminution of reputation may not lead to a
+    shrinking of the deposits and current account balances of any one
+    bank, or even of each bank in turn. Accordingly, every bank has to
+    maintain an uninvested, or, at least, a specially liquid, reserve
+    to meet such a possible withdrawal. The smaller, the more
+    numerous, the more specialised by locality or industry are the
+    competing banks, the larger must be this reserve. On the other
+    hand, if all the deposit and current accounts of the nation were
+    kept at one bank, even if it has innumerable branches, as the
+    experience of the Post Office Savings Bank shows, no such shifting
+    of business would affect it; no mere transfers from firm to
+    firm or from trade to trade would involve any shrinking of its
+    aggregate balances; and it would need only to have in hand,
+    somewhere, sufficient currency to replenish temporarily a local
+    drain on its 'till money.' The nearer the banks can approach to
+    this condition of monopoly, not only the lower will be their
+    percentage of working expenses, but also the greater will be the
+    financial stability, and the smaller the amount that they will
+    need to keep uninvested in order to meet possible withdrawals.
+
+    "(b) That the process of amalgamation has involved an
+    ever-increasing elimination, from the British banking business, of
+    the typical profit-maker, first as partner in a private bank, then
+    as a director in a Joint Stock bank, representing a large personal
+    holding of shares; and the gradual transfer of practically the
+    whole conduct of the business to what may be called 'disinterested
+    management'--that is to say, management by trained, professional
+    officers serving for salaries, whose remuneration bears no
+    relation to the profit made on each piece of business transacted.
+    The part played in the business by the directors themselves seems
+    to be, with every increase in the magnitude and scope of the
+    concern, steadily diminishing; and these directors, moreover, come
+    to be chosen, more and more, not because of their large holdings
+    of shares, or because of their ancestral or personal connection
+    with banking, but because of their reputation or influence,
+    commercial, social or political. The result is that, along with
+    the process of amalgamation, there has been going on a transfer
+    of the whole management of banking to the hierarchy of salaried
+    officials; whilst the supreme decisions on financial policy are in
+    the hands, in practice, of a very small group of salaried general
+    managers, only partially in consultation with an equally small
+    group of chairmen of boards of directors, themselves usually
+    drawing not inconsiderable salaries."
+
+It seems to me that Mr Webb exaggerates in rather a dangerous degree
+the reduction, through amalgamation, of the necessity which obliges
+a bank to keep a considerable reserve of cash. It is quite true that
+under normal circumstances cash withdrawn from one bank finds its way
+in due course to another, and that with regard to these mere "till
+money" transfers there might be a considerable reduction in the amount
+of cash required if all the banking of the country were in the hands
+of one business, so that what was withdrawn from one branch would
+be paid into another. But this fact would not alter the need which
+compels a bank to keep considerable reserves in cash in order to
+provide against the possibility of a run. A State bank, if the public
+takes it into its head that it prefers to have a larger proportion of
+currency in its own pocket rather than in its bank, may find itself
+pulled at for cash just as vigorously as a bank managed by private
+enterprise. This was shown in August, 1914, when very large sums were
+withdrawn from the Post Office Savings Bank during the crisis which
+then impelled many members of the public to hoard money, or compelled
+them to take it out of their banks because they did not find that the
+ordinary system of payment by cheques was working with its usual ease.
+
+Moreover, Mr Webb's point about what he calls disinterested
+management--that is to say, the management of banks by officers whose
+remuneration bears no relation to the profit made on each piece of
+business transacted--is one of the matters in which English banking
+seems likely at least to be modified. Sir Charles Addis, in the
+article already referred to, calls attention in a very striking
+passage to the efficiency of the administration of German and English
+banks, and makes a comparison between the remuneration given to the
+banking boards of the two countries. The passage is as follows:--
+
+    "Scarcely second in importance to the financial strength of a
+    bank is the efficiency of its administration. The German board of
+    direction is composed, to an extent unknown in England, of men
+    possessed of professional and technical knowledge. No one who has
+    been present at a meeting of German bank directors in Berlin, when
+    some foreign enterprise has been under consideration, can have
+    failed to be impressed by the animation with which it was
+    discussed, and by the expert and comparative knowledge displayed
+    by individual directors of the enterprise itself and of the
+    conditions prevailing in the foreign country in which it was
+    proposed to undertake it. He may have been led to reflect ruefully
+    upon the different reception his project met with in his own
+    country. He will recall the meeting of the London board; the
+    difficulty of withdrawing its members even temporarily from their
+    country pursuits and their obvious anxiety to lose no time in
+    returning to them; most of them old men, many of them long retired
+    from business; some of them ex-Government officials and the like,
+    who have never been in business; a few ornamental titled persons;
+    only one or two here and there who have no train to catch and are
+    willing to discuss the matter in hand with attention, and, it may
+    be, with understanding.
+
+    "It would be idle to pretend that a board of this kind constitutes
+    anything like the nexus between industry and finance which obtains
+    in Germany, and which is very much to be desired in this country.
+    It may be that we do not pay our men enough. A London director has
+    to be content with an honorific position, a fee of a few hundred
+    pounds a year, and, it must be added, a very exiguous degree of
+    responsibility. That is not enough to attract men in the prime of
+    life with expert or technical knowledge of industry and finance,
+    who would have to submit to a reduction in the large incomes they
+    are earning by the exercise of their special abilities if they
+    were to accept a seat on the board of a bank. There are two things
+    which a good man, in the business sense of the term, will not
+    do without--pay and responsibility. Give him sufficient of the
+    former, and you may saddle him with as much of the latter as you
+    like. You may not always get good men by offering them good pay,
+    but you will certainly not get them without doing so. Apparently
+    shareholders are content so long as their profits are not reduced
+    by more than nominal directors' fees. At a recent meeting of a
+    bank with deposits of over £200,000,000 the proposal to increase
+    the directors' fees to £1000 a year was met by the rejoinder from
+    one of the shareholders present that he did not know what the
+    directors would do with such a sum.
+
+    "They manage these things differently in Germany. In the three
+    banks to which we have already referred, after payment by the
+    Deutsche Bank of 5 per cent. of the net profits to reserve, and
+    of the ordinary dividend of 6 per cent., and by the
+    Disconto-Gesellschaft and the Dresdner Bank of 4 per cent., the
+    directors receive respectively 7 per cent., 7-1/2 per cent., and
+    4 per cent. (the Disconto's personally liable partners receive 16
+    per cent.) out of the remainder. The directors are bound by law
+    to supervise all the details of the bank's business, and to keep
+    themselves well informed as to its general policy and methods of
+    management. They are bound by law to exercise the caution of
+    a careful business man, and are liable to be sued for damages
+    arising out of the crime or negligence of their employees. If
+    cases of this kind are seldom brought to public notice, it is not
+    because they do not occur, but because the directors, as a rule,
+    prefer to pay up for the laches of their employees, as they can
+    well afford to do out of their profits, rather than be haled
+    before the Court."
+
+When Mr Webb comes to the question of the dangers resulting from
+monopoly, he finds that they lie chiefly in a restriction of
+facilities, and in raising the price exacted for them, and that in
+both respects the danger appears to be great. There is, he says, every
+reason to expect that the banker, as the nearest approach to the
+"economic man," will take the opportunity of raising his charges
+either by increasing the frequency and the rate of the commission
+exacted for the keeping of a small account, or by reducing the rate of
+interest allowed on balances, or adopting the common London practice
+of refusing it altogether. "The banker, who is not in business for his
+health, may be expected, on this side of his enterprise, to pursue the
+policy of 'charging all that the traffic will bear.' It would probably
+pay the banker actually to refuse small accounts, and to penalise the
+employment of cheques for small sums. This would be a social loss."
+
+With regard to the other side of his business, lending to the
+borrowers, Mr Webb thinks it need not be assumed that the monopolist
+banker will actually lend less, because he will seek at all times to
+employ all the capital or credit that he can safely dispose of, but Mr
+Webb thinks that he is likely, as the result of being relieved of the
+fear of competition; to feel free to be more arbitrary in his choice
+of borrowers, and therefore able to indulge in discrimination against
+persons or kinds of business that he may dislike; that he will raise
+his charges generally for all accommodation, again, theoretically
+to "all that the traffic will bear"; and, finally, that in times of
+stress with regard to all applicants, and at all times with regard to
+any applicant who was "in a tight place," that he will extort as the
+price of indispensable help a theoretically unlimited ransom.
+
+Such are the effects which Mr Webb fears from the process which has
+already put the control of the greater part of the banking facilities
+of England into the hands of five huge banks. He thinks that these
+things may happen long before it is a question of an absolute monopoly
+in one hand. A monopoly, he says, may be more or less complete, and
+the economic effects of monopoly may be produced to a greater or less
+degree at a point far below a complete monopolisation in a single
+hand. There is much truth in this contention of his. Amalgamation has
+now come to such a point that every new one not only brings absolute
+monopoly more closely in sight, but increases the ease with which
+agreements among the huge banks might suffice to produce the effects
+of monopoly without further amalgamations. Mr Webb goes on to
+argue that it is impossible to stop by legislative prohibition or
+restriction the progress towards economic monopoly where such progress
+is financially advantageous to those concerned, and that the only
+remedy ultimately by which the community can be protected from the
+dangers which he sees threatening it is for the community to take the
+monopoly into its own hands, and so to get rid, not of the monopoly,
+which, from the standpoint of national organisation, he thinks is
+advantageous, but of the motives leading to extortion. If, he says,
+"no shareholders are in control with their perpetual and insatiable
+desire for profit, there is no inducement to take advantage of the
+needs or helplessness of the customers by restricting service or
+raising prices." In this sentence, of course, he begs the whole
+question between the advantage of private enterprise and of
+Socialistic organisation. Private enterprise works for profit, and
+therefore makes as much profit as it can out of its customers. It is,
+therefore, according to Mr Webb's argument, probable that if private
+enterprise in banking is able to establish monopoly it will squeeze
+the public to the point of restricting banking facilities and making
+them dearer. No one can deny that there is some truth in this
+contention, but, on the other hand, it may very fairly be argued that
+modern business has perceived the great advantages of a big turnover
+and small profits on each transaction. The experience of the great
+insurance companies, and of great catering companies, and of enormous
+private organisations such as the Imperial Tobacco Company, has shown
+the enormous advantage of providing cheap facilities to the largest
+possible number of customers; so that fears of natural restriction of
+banking facilities, through monopoly, if they cannot be set altogether
+aside, are not by any means a certain consequence even of the
+establishment of monopoly in private enterprise.
+
+Still weaker is Mr Webb's assumption that if the interests of the
+shareholders with "their perpetual and insatiable desire for profit"
+were eliminated, cheap and plentiful banking facilities would
+inevitably result from bureaucratic management. The contrary has
+been shown to be the case in the examples of the Post Office, of the
+Telephone Service, and the London Water Supply. In the case of the
+telegraph and the telephones, the Government took over prosperous
+businesses, and has managed them at a loss. In the matter of the Post
+Office it is not possible to compare the Government with individual
+enterprise, but it will generally be admitted that the Telephone
+Service has by no means been improved since the Government took it
+over. Mr Webb points out that nationalisation, whether of banks or of
+other forms of enterprise, does not necessarily mean government under
+a Minister by a branch of the Civil Service. But it is impossible to
+ignore the fact that as soon as nationalisation takes place those who
+are responsible for the management of the enterprise are practically
+certain to develop the qualities and idiosyncrasies of civil servants,
+which are so unlikely to tend to elasticity, rapidity and efficiency
+in business management.
+
+In fact, Mr Webb practically grants this point by the very interesting
+development he suggests by which the two chief functions of banking
+should be differentiated, and one of them should be nationalised
+and the other should remain in the hands of private enterprise. He
+develops this truly ingenious suggestion as follows:--
+
+    "Just as we have (except for some obsolescent survivals) separated
+    the function of issuing paper money from that of keeping current
+    accounts, so we shall separate the function of keeping current
+    accounts from that of money-lending. The habit of the British
+    banker of combining in one and the same concern (_a_) the
+    essentially routine business of keeping current accounts or
+    receiving deposits; and (_b_) the much more difficult and
+    hazardous business of lending capital to private traders, is not
+    a necessary characteristic of banking organisation; and, whilst
+    possibly the most profitable to the profit-seeking banker, this
+    combination may not be the most advantageous from the standpoint
+    of the community.
+
+    "It may accordingly be suggested that the business of banking, as
+    understood in this country, is destined to be further divided into
+    two parts, one of which is ripe for immediate nationalisation, and
+    need no longer be carried on for private profit, whilst the
+    other should be the sphere of a number of separate and diversely
+    specialised organisations catering for particular needs. The whole
+    of the deposit and current account side of banking--with its
+    services in the way of keeping securities, collecting dividends,
+    meeting calls, making regular payments, and carrying through the
+    purchase and sale of securities--ought to be united with the Post
+    Office and Trustee Savings Banks and the money order and other
+    postal remittance business, and run as a national service for the
+    receipt and custody of cash, for the utmost possible development
+    of the cheque system, and for the cheapest possible organisation
+    of remittances. There is no longer any reason why this important
+    branch of social organisation should be abandoned to the
+    profit-maker, should be made the instrument of levying an
+    unnecessarily heavy toll on the customers for the benefit of
+    shareholders, and should now be exposed to the imminent danger of
+    monopoly.
+
+    "If the receipt and custody of deposits and the keeping of current
+    accounts were made a public service the Government might invest
+    the funds thus placed at its disposal in a variety of ways. A
+    certain proportion, perhaps corresponding to what is now held
+    as savings, would be invested, as at present, in Government
+    securities--not Consols, but such as are repayable at par at fixed
+    dates, including Treasury Bills and Terminable Annuities; and any
+    increase in this amount would, in effect, release so much capital
+    for other uses, by paying off part of the National Debt. But the
+    bulk of the amount, corresponding with the proportion of their
+    resources that the bankers now lend for business purposes, might
+    be advanced, for terms of varying duration, partly to Government
+    Departments and local authorities for all their great and rapidly
+    extending enterprises, formerly abandoned to the profit-maker; and
+    partly to a series of financial concerns, whose business it should
+    be to discount the bills and satisfy the requests for loans of
+    those profit-makers who now appeal to the bankers. But these
+    financial concerns should be organised, it is suggested, very
+    largely by trades and industries, specialising in particular
+    lines, and devoted, so far as possible, to meeting the business
+    needs of the different occupations. Whether they should be
+    financial concerns, owned and directed by shareholders, and ran
+    for their profit; or whether they might not, in some cases, be
+    owned and directed by the great industrial associations and
+    combinations that the Government is now promoting in the various
+    industries, and be run for the advantage of the industries as
+    wholes, may be a matter for consideration and possible experiment.
+    In either case, the concerns to which the Government would lend
+    its capital would, of course, have to be of undoubted financial
+    stability to be secured, it may be, by large uncalled capital,
+    or by the joint and several guarantees of a numerous membership;
+    coupled, possibly, with a charge on the assets."
+
+At first sight this proposal to differentiate the functions of banking
+is somewhat startling, and one wonders whether it could possibly
+work. On consideration, however, there seems to be nothing actually
+impracticable about the scheme. The Government would presumably take
+over all the offices and branches of the banks of the country, and
+would therein accept money on deposit and current account, making
+itself liable to pay the money out on demand or at notice, as the
+case may be, just as is done by the existing banks; it would hold
+the necessary cash reserve, and it would apparently itself invest a
+certain proportion of the money in Government securities, as the banks
+do at present. The more difficult part of the banking business, the
+advancing of money to borrowing customers, it would hand over to
+financial institutions, created for this purpose presumably out of the
+ashes of the nationalised banking business. These institutions would
+make themselves responsible for the lending side of banking, and would
+obviously, and naturally, be allowed to make a profit on this side of
+the business. In this differentiation Mr Webb's ingenuity is seen at
+its very best. He reserves for the State that part of banking which is
+purely a matter of routine, and he leaves to private enterprise that
+part of it which requiries the elasticity and judgment and quickness
+in which the average bureaucrat is most likely to fail. A certain
+amount of friction may easily arise from this differentiation. The
+interest that the State would be enabled to allow to depositors would
+clearly depend to a great extent on the interest which it would be
+able to receive from the financial institutions engaged in lending
+the money. These institutions could naturally pay the State interest
+according to the rate which they were able to charge their borrowing
+customers, leaving themselves a margin for profit and for protection
+against the risk that their business would involve. It is obvious that
+there might at times be considerable difficulty in adjusting these two
+different points of view, and anybody who knows anything about the
+length of time and argument involved in inducing officials to make up
+their minds can only fear that occasional jarring in this connecting
+link between the two sides of banking might sometimes produce effects
+which would be awkward for the industry of the country.
+
+But apart from this obvious difficulty, can we contemplate with
+equanimity the prospect of the State monopoly of the ordinary banking
+facilities as they present themselves to the man in the street,
+namely, the provision of bank branches, the use of the cheque book,
+the custody of securities and any other articles that the customer
+wishes to leave with his bank? At present the ease and quickness with
+which these routine matters of banking are carried out in England are
+developed to a point which is the envy of foreign visitors. How would
+it be if every cashier of every bank were converted by the process of
+nationalisation from the kindly, businesslike human being as we know
+him into the kind of person who ministers to our wants behind the
+counters of the Post Office? As it is, we go into our bank, to present
+a cheque in order to provide ourselves with cash for the daily
+purposes of life; the cashier looks at the signature, recognises
+the customer, hands him over the money. If that cashier became
+a Government official how long would it take him to verify the
+signature, to see whether the customer really had a balance to his
+credit, and finally furnish him with what he wanted? It is obvious
+that the change suggested by Mr Webb, though it might work, could
+only work to the detriment of the convenience of the public, and his
+hopeful view that the elimination of the profits of the shareholders
+would mean that these profits would go into the pockets of the
+community in the form of cheapened facilities for banking customers
+is an ideal largely based on the assumption, that has so often been
+proved to be incorrect, that the State can do business as well and as
+cheaply as private enterprise. It is much more likely that after a
+few years' time the public would find the business of paying in and
+getting out its money a very much more tedious and irritating process
+than it is at present, and that the expenses of the matter would
+have grown to such an extent that the taxpayer might be called upon
+annually to make good a considerable loss.
+
+
+
+
+XIII
+
+FOREIGN CAPITAL
+
+_September_, 1918
+
+The Difference between Aims and Acts--Should Foreign Capital be
+allowed in British Industry?--The Supremacy of London and National
+Trade--No Need to fear German Capital--We shall need all we can
+get--Foreign Shares in British Companies--Can and should the
+Disclosure of Foreign Ownership be forced?--The Difficulties of
+the Problem--Aliens and British Shipping--The Position of "Key"
+Industries--Freedom to Import and Export Capital our Best Policy.
+
+
+Many things that are now happening must be tickling the sardonic
+humour of the Muse of History. The majority of the civilised Powers
+are banded together to overthrow a menace to civilisation, carrying
+on a war which, it is hoped, is to produce a state of things in which
+mankind, purged of the evil spirits of militarism and aggression, is
+to start on a new order of co-operation. At the same time, while
+we are engaged in fighting under banners with these noble ideals
+inscribed on them, a large number of citizens of this country are
+airing proposals aimed at restrictions upon our intercourse with other
+nations, especially in the economic sphere. In last month's issue of
+this Journal a very interesting article, signed "Veritas," discussed
+the question as to how far it was in the power of the Allies to make
+use of the economic weapon against their enemies after the war. That
+such a question should even be mooted as an end to a war undertaken
+with these objects, shows what a number of queer cross-currents are
+at work in the minds of many of us to-day. But some people go much
+further than that, and are advocating policies by which we should
+even restrict our commercial and economic intercourse with our
+brothers-in-arms. If the clamour for Imperial preference is to have
+any practical result, it can only tend to cultivate trade within the
+British Empire, protected by an economic ring-fence at the expense
+of the trade which, before the war, we carried on with our present
+Allies. And a large number of people who, under the cover of Imperial
+preference, are agitating also for Protection for this country, would
+endeavour to make the British Isles as far as possible self-sufficient
+at the expense of their trade, not only with all their present Allies,
+but even with their brethren overseas.
+
+It is fortunately probable that the very muddle-headed reasoning which
+is producing such curious results as these, at a time when the world
+is preparing to enter on a period of closer co-operation and improved
+and extended relations between one country and another, is confined,
+in fact, to a few noisy people who possess in a high degree the
+faculty of successful self-advertisement. I do not believe that the
+country as a whole is prepared to relinquish the economic policy which
+gave it such an enormous increase in material resources during the
+past century, and has enabled it to stand forward as the industrial
+and financial champion of the Allied cause during the difficult early
+years of the war. Our rulers seem to be sitting very carefully on the
+top of the fence, waiting to see which way the cat is going to
+jump. They have made brave statements about abrogating all treaties
+involving the most-favoured nation clause and about adopting the
+principle of Imperial preference; but when their eager followers press
+them to do something besides talking about what they are going to do,
+they then have a tendency to return to the domain of common-sense and
+to point out that it is above all desirable that our economic policy
+should be in unison with that of the United States.
+
+Whatever may happen in the realm of trade and commercial policy, it
+would seem to be self-evident that with regard to capital it would be
+still more difficult and undesirable to impose restrictions than with
+regard to the entry of goods; and above all, it seems to be obvious
+that at any rate the free entry of capital into this country is a
+matter which should be specially encouraged when the war is over. At
+that difficult period we have to secure, if possible, that British
+industry shall be entirely unhampered in its endeavours to carry out
+the very puzzling operations involved by transferring its energies
+from war activities to peace production. However well the thing may
+be managed, it will be an exceedingly difficult and complicated
+operation. In certain industries, especially in shipbuilding and
+engineering, the building trade and all the allied enterprises, those
+who are responsible for their efficient management ought to be able to
+count upon a keen and widely-spread demand for their products. But in
+many industries there will necessarily be a good deal of doubt as to
+the kind of article which the consuming public at home and abroad is
+likely to want. There will be the great difficulty of sorting out the
+right kind of labour, of obtaining the necessary raw materials, and of
+getting the necessary credit and capital.
+
+That this huge problem can be solved, and solved so well that the
+country can go ahead to a great period of increased productivity and
+prosperity, I fully believe; but this can only be done if it is able
+to command the most efficient co-operation of all the various factors
+in production--if employers put their best brains and if workers put
+their best energy into the business, and if everything is done to make
+the whole machinery work with the utmost possible smoothness. One
+element in the machinery, and a highly important one, is the question
+of capital. During the war the citizens of this country have been
+trained to save and to put their money at the disposal of the
+Government with a success which could hardly have been expected
+when the war began. Whether they will continue to exercise the same
+self-denial when the war is over Is a very open question. At any rate,
+there can be no doubt that there will be a tendency among a very large
+number of people who have answered the appeal to save money for the
+war to listen with considerable indifference to any appeals that
+may be made to them to save money in order to provide industry with
+capital. All the capital that industry can get, it will certainly
+want. If, besides what it can get at home, it can also get a
+considerable amount from foreign countries, then its ability to resume
+work on a prosperous and profitable basis when the war is over will be
+very greatly helped. This would seem to be so obvious that one might
+have thought that even a Government which is believed to be flirting
+with what is called Tariff Reform would think twice before it imposed
+any restrictions on the free flow of foreign capital into British
+industry. In so far as foreigners lend to us we shall be able to
+import raw materials, to be worked up to the profit of British
+industry, in return for promises to pay--very timely convenience at a
+critical moment.
+
+Nevertheless, it would appear that obviousness of the desirability of
+foreign capital, from whatever source it comes, is by no means evident
+to those who are now in charge of the nation's destinies. At any rate,
+the Company Law Amendment Committee, which was appointed last February
+"to inquire what amendments are expedient in the Companies Acts, 1908
+to 1917, particularly having regard to circumstances arising out of
+the war and of the developments likely to arise on its conclusion,"
+seems to have thought it necessary to provide the Government with
+schemes by which alien capital could, if the Government thought
+necessary, be kept out of the country. It was a powerful and
+representative Committee, and it is very satisfactory to note that its
+own view concerning the policy to be pursued was strongly in favour of
+freedom. It points out in its Report that the question which lay in
+the forefront of its investigations was that of the employment of
+foreign capital in British industries. On the preliminary question
+of whether it was desirable that foreign capital should be freely
+attracted to this country, there was little, if any, difference of
+opinion. For this very sensible conclusion the Committee gives rather
+a curious reason. It states that the maintenance of London as the
+financial centre of the world is of the first importance for the
+well-being of the Empire, and that anything which could impede or
+restrict the free flow of capital to the United Kingdom would, in
+itself, be prejudicial to Imperial interests.
+
+Now, of course, if is entirely true that the maintenance of London
+as a financial centre is very important, but I venture to think that
+those who are most jealous concerning the prestige of London and the
+importance of its financial operations would say that it ranks only
+second to the industrial efficiency of the country as a whole and
+cannot, in fact, be long maintained unless there is that industrial
+efficiency behind it, providing a surplus out of which London may be
+able to finance the world and so, incidentally, and as a side issue,
+be to a great extent helped by foreign capital to do so. It is surely
+evident that a financial supremacy which was based merely on a jobbing
+business, gathering in capital from one nation and lending it to
+another, would be an extremely precarious and artificial structure,
+the continuance of which could not be relied on for many decades.
+Finance can only flourish healthily and wholesomely in a country which
+produces a considerable surplus of goods and services which it
+is prepared to place at the disposal of the world. Owing to the
+possession of this surplus it becomes a market in capital, and so gets
+a considerable jobbing business, but the backbone and foundation of
+its position must be, in the end, industrial activity in the widest
+sense of the word. It therefore seems that the Committee's argument
+that the free flow of capital is essential to the maintenance of
+London's finance might have been reinforced by the very much stronger
+one that it is essential to the recuperative power of British
+industry, which will need every assistance it can get in order to
+re-establish itself after the war.
+
+The Committee points out that "any legislation which would tend
+to impede or restrict the free flow of capital here by imposing
+restrictions or creating impediments ought to be jealously watched,
+lest in the endeavour to prevent what has come to be called 'peaceful
+penetration' the normal course of commercial development should be
+arrested," and it goes on to observe that at the end of the war, "if
+it should be concluded upon such terms as we hope and anticipate,"
+it is not likely that our present enemies will be in possession of
+capital looking for employment abroad. This is certainly very true. By
+the time the Germans have made the reparations, which will involve so
+much rebuilding in Belgium and in the parts of France that they
+have overrun and swept clean of industrial plant, and have in other
+respects made good the damage which their ruthless and uncivilised
+methods of warfare have inflicted, not only on their enemies, but on
+neutrals, it does not seem likely that they will have much to spare
+for capital expansion in foreign countries, especially when we
+consider how many problems of reconstruction they will themselves have
+to face at home. "To impose restrictions upon the influx of capital,"
+the Report continues, "aimed at our present enemies, with the result
+of deterring the flow of capital from (say) America, would be a policy
+highly injurious to the economic recovery and renewed prosperity of
+this country after the war. For these reasons we are of opinion
+that in all amendments of the law falling within the scope of our
+reference, the expediency of the attraction of foreign capital should
+be steadily borne in mind." The Committee thus seems to have thought
+it necessary to administer comfort to anybody who might fear that the
+unrestricted flow of capital from abroad might involve this country in
+the terrible danger of being assisted in its industrial recovery by
+capital from Germany.
+
+If there were, in fact, any possibility of this assistance being
+given, it would seem to be extremely short-sighted not to allow
+British industry to make use of it. In the matter of "peaceful
+penetration," we have ourselves in the past done perhaps as much as
+all the rest of the countries of the world put together, with the
+result that we have greatly stimulated the development of economic
+prosperity all over the world; in fact, it may be argued that the
+great progress made in the last century in man's power over the forces
+of Nature has been to a great extent due to the freedom with which we
+invested capital abroad and opened a free market to the products
+of all other countries. At a time when, owing to exceptional
+circumstances, we ourselves happen to be in need of capital, it would
+appear to be an extremely short-sighted policy to refuse to admit it,
+wherever it came from. We have excellent reason to known that, when
+capital is once invested in a foreign country, it is largely in the
+power of the inhabitants and Government of that country to control its
+working. Any foreigner, even an enemy, who set up a factory in England
+after the war would be doing just the very thing which we most of
+all want to be done, namely, setting the wheels of industry going,
+relieving the labour market from a possible glut after demobilisation,
+and helping that difficult stage of transition from war work to peace
+work.
+
+The Committee, however, considers that "at the root of the whole
+matter lies a question which is not one of Company Law amendment at
+all, but one of high political and economic policy." It does not fall
+within its province "to inquire whether the traditional policy of
+this country to admit and welcome all who seek our shores and submit
+themselves loyally to our laws ought, in the case of some and what
+aliens, to be revised"; or whether discrimination ought to be made
+between an alien of one nationality and an alien of another. "As
+regards aliens who are now our enemies, it may be that the British
+Empire may adopt the policy that a special stigma ought to be attached
+to the German, and that neither as an individual nor as a firm, nor
+as a corporation, ought he, for a time at any rate, to be admitted to
+commercial fellowship or to any fellowship with the civilised nations
+of the world." It need not be said that any attempt to apply this
+stigma in practice would be extremely difficult to carry out, would
+involve all kinds of difficulties and complications in trade and in
+finance, and that the threat of it is more likely than anything else
+to stiffen the resistance of the Germans and to force them to rely on
+their militarist leaders as their only hope of salvation. However,
+the Committee points out that recent legislation shows a desire to
+ascertain and record the extent to which aliens are active in
+commerce here, and thinks it necessary to make provision to meet the
+requirements of the Government in case our rulers should decide to
+impose the restrictions which its own common-sense shows it are so
+undesirable.
+
+If, it says, foreign capital is to be attracted here, it must be
+represented either by shares or by debentures. "The question,
+therefore, is whether restrictions ought to be imposed upon the extent
+to which the control of the company shall be allowed to reside in
+aliens, either by reason of their holding a majority of the shares, or
+of the debentures, or by reason of their obtaining a majority upon
+the Board of Directors; and, if so, how disclosure of their alien
+character is to be enforced." It goes on to point out the great
+difficulties which present themselves in the way of securing
+disclosure of nationality and ensuring that aliens shall not command
+the control. "The law of trusts," it says, "is firmly established in
+this country. If A, be the registered holder of a share, he is not
+necessarily the beneficial owner. He may be a trustee for B. To enact
+that the registered holder must be a British subject effects nothing,
+for B. may be an alien and an enemy. Suppose, however, that you enact
+that A., when his share is allotted or transferred to him, shall make
+a declaration that he holds in his own right, or that he holds in
+trust for B., and that both A. and B. are British subjects. There is
+nothing to prevent the creation of a new trust the next day, under
+which C., an alien enemy, will be the person beneficially entitled.
+Further, at the earlier date (the date of allotment or transfer) the
+facts may be that A. (a British subject) is trustee for B. (a British
+subject), but that B. (unknown to A.) is a trustee for C., an alien
+enemy. The fact that B. is trustee for C. would be purposely withheld
+from A., and A.'s declaration that he was simply trustee for B. would
+be perfectly true. To require that A. should make a declaration at
+short intervals (say once a month), or that A., B., C., and so on,
+should all make declarations would be, of course, so harassing and so
+detrimental as to be, as a matter of business, impossible. The only
+effectual way of dealing with the matter would be by a provision that
+the share might be forfeited, or might be sold and the proceeds paid
+to the owner, if an alien should be, or become beneficially entitled
+to or interested in the share. Such a provision does not in the
+general case commend itself to us as practical or desirable." Any
+endeavour to control the nationality of the Board of Directors
+produces similar difficulties. It is easy to ensure that they shall be
+all, or a majority of them, British subjects, but there is no means of
+ensuring that their actions shall not be controlled by aliens whose
+nationality is not disclosed.
+
+Having pointed out these difficulties, which seem in effect to reduce
+the whole question to the domain of farce, the Committee goes on to
+inquire whether it is desirable to legislate in the direction of
+forbidding the employment of foreign capital here in Joint Stock
+Companies, unless:--
+
+    (1) There is disclosure of the alien character of the foreign
+    owner; (2) Not more than a certain proportion of the Company's
+    shares are held by aliens; (3) The Board, or a certain proportion
+    of the Board, shall not be alien;
+
+and, further, whether it is desirable to discriminate between one
+alien and another, and to legislate in that direction in the case of
+certain aliens and not of others.
+
+In answering these questions, the Committee decided that it was
+necessary to discriminate between certain classes of companies--Class
+A being companies in general, Class B being companies owning British
+shipping, and Class C companies engaged in "key" industries. With
+regard to companies in Class A, they recommend that no restrictions
+at all be imposed, but, nevertheless, they elaborate a scheme of
+enforcing disclosure of alien ownership if that policy seems to
+the legislature to be right. This scheme, the Committee admits, is
+necessarily detailed and laborious; it puts difficulties in the way of
+investment in English securities, whether by British subject or alien.
+It would supply, no doubt, to the Board of Trade useful information
+as to the extent of foreign investment in English industries, but the
+price paid for this advantage would, in the Committee's opinion, be
+too great. If adopted, the scheme could be evaded. And, with regard to
+companies in general, the Committee's recommendations go the length
+of allowing complete freedom as to the nationality both of the
+corporators and of the Board. They would allow, for instance, American
+capitalists to come here and establish themselves as a British
+corporation in which all the corporators and all the directors were
+American, and so with every other nationality. They would make no
+discrimination between aliens of different nationality, for, if
+there is to be such discrimination, there must be the machinery of
+disclosure, involving a deterrent effect and acting prejudicially
+in the case of all investors. But, if any such discrimination were
+adopted, the Committee thinks that at any rate it should be limited to
+some short period, say, three or five years after the end of the war.
+
+If, however, the legislature should decide upon the necessity of
+disclosure of alien ownership, the Committee draws up the following
+scheme for securing it in Paragraph 15 of its Report:
+
+    15. For reasons already given, it is not possible efficiently to
+    ensure full disclosure, but the following suggestions would, in
+    the absence of deliberate and intentional evasion (which would be
+    quite possible), meet the point and in the large majority of cases
+    would disclose the extent of alien interests and control:--
+
+    (a) Every allottee of shares upon allotment and every transferee
+    upon transfer should be required to make a declaration disclosing
+    his nationality and whether he is the beneficial owner of the
+    shares, and, if not, for whom he is trustee, and what is the
+    nationality of the beneficial owner, and should undertake within
+    a limited time, after any change in the beneficial ownership, to
+    communicate the new facts to the company. In default of compliance
+    with the above, the shares should, at the option of the company,
+    either (1) be liable to sale by the company and the holder be
+    entitled only to the proceeds; or (2) be liable to forfeiture and
+    the holder be entitled to receive payment from the company of 10
+    per cent. less than the market value of the share, or if there be
+    no market value, then 10 per cent. less than the value at which
+    the share would be taken for _ad valorem_ stamp duty if it were
+    the subject of transfer. In case the company made default in
+    exercising its power, the Board of Trade should be authorised to
+    require the above sale to be made.
+
+    (b) Every director, upon coming into office, should be required to
+    make a declaration disclosing his nationality and stating whether
+    in his office he is wholly free from the control or influence of
+    any alien, and if he is not so free, stating by whose directions
+    or under whose control or influence he is to act and what is the
+    nationality of that person, and should undertake within a limited
+    time after any change in that state of things to communicate the
+    facts to the Board and procure a statement of the facts to be
+    entered in the Board minutes. Any breach of these obligations to
+    be visited with a penalty which should be severe.
+
+    (c) The company should be required to enter in the register
+    of members, against the name of every registered member, his
+    nationality as disclosed by the declaration. In the case where the
+    registered member is not the beneficial owner, the company should
+    be required to record, not in the register, but in another book,
+    the nationality of the beneficial owner as disclosed by the
+    declaration, and, as regards the latter book, to record the
+    nationality of any new beneficial owner when and as disclosed by
+    the registered member. These particulars should be required to be
+    included in the annual list under Section 26 of the Act of 1908.
+    That list would thus become not a list of members only, but a list
+    of members with the addition of beneficial owners. The company
+    should, further, be required to add to the annual list a summary
+    of the result as regards nationality showing (1) as regards
+    registered members, how many are British subjects and how many
+    shares they hold, and how many are aliens and how many shares they
+    hold, subdividing the number of the aliens and their holdings
+    under their respective nationalities; and (2) as regards the
+    registered members who are British subjects; (a) how many of them
+    are the beneficial owners and how many shares they hold, and (b)
+    as regards the rest, what are the nationalities and holdings of
+    the beneficial owners.
+
+With regard to companies owning British shipping, the Committee is
+satisfied that the total exclusion of aliens from ownership of British
+ships is not essential for national safety and is not expedient. It
+therefore considers that in these companies it will be sufficient to
+ensure that not more than 20 per cent. of the power of control should
+be in alien hands. It thinks that there should be this, limit of 20
+per cent., that not more than 20 per cent. of the share capital should
+be held by aliens, and that those shares should carry no more than 20
+per cent. of the voting power. Alternatively, it considers that the
+alien holdings should carry no vote at all, but that is a point of
+detail deserving further consideration. It follows that in this
+class there must, in the opinion of the Committee, be disclosure of
+nationality, which should be enforced in the manner detailed above,
+which, on its own admission, is not proof against deliberate evasion.
+
+With regard to companies carrying on "key" industries, a very
+complicated system is recommended. In the first place, the question
+whether a company is one to carry on a "key" industry would seldom or
+never arise at the time of its registration. The modern Memorandum of
+Association includes so many things that a "key" industry might be
+within the powers of almost any company. The question would thus arise
+when the company has got to work. And so the Committee thinks that
+the Board of Trade should be empowered at any time to make an inquiry
+whether any company is carrying on a "key" industry and, if it finds
+that it is, then the company shall, at the direction of the Board of
+Trade, require every registered member to make a declaration such as,
+under the disclosure procedure already described, he would have had
+to make if he were at the date of the notice about to receive an
+allotment or become a transferee. Further, the holders of share
+warrants to bearer would be required to surrender their warrants for
+cancellation and have their names entered in the register, and
+all subsequent allottees and transferees would be subject to the
+obligation of disclosure, as already described, and the limits of 20
+per cent. recommended in the case of merchant shipping would then be
+made applicable. Under the system of disclosure it follows that bearer
+shares are impossible, but, if disclosure be negatived, the opinion of
+the Committee is in favour of the maintenance of the bearer share.
+
+It should be mentioned that one member of the Committee produced a
+reservation strongly combating even the very moderate views expressed
+by the Committee on the subject of British shipping and "key"
+industries. It should be noted, however, that he attended very few
+meetings of the Committee. He points out that, with regard to the
+registration of ships as British when they are owned by a company
+which has alien shareholders, "it is not usually a question of
+permitting a ship which would in any case be British to be under the
+control of aliens; the question is whether, if a number of persons,
+some or all of whom are aliens, own a ship, they should be permitted
+to register it as a British ship by forming themselves into a British
+company and establishing an office in the British Dominions. If," he
+observes, "they were not allowed to do so they would still own the
+ship, but register it as a foreign ship in some other country. It
+appears that a number of ships were registered here before the war by
+companies with alien shareholders (some even with enemy shareholders).
+They were managed in this country; the profits earned by them
+were subject to our taxation; they were obliged to conform to the
+regulations of our Merchant Shipping Acts; they carried officers and
+men who were members of the Royal Naval Reserve; on the outbreak of
+war our Government was able to requisition the ships owing to their
+British registration and without regard to the nationality of the
+shareholders in the companies owning them." It appears to this
+recalcitrant member--and there is much to be said for his view--that
+all these consequences have been highly advantageous to this country.
+On the subject of "key" industries he is equally unconvinced. It
+appears to him that "the important thing is to get the industries
+established in this country, and that the question of their ownership
+is of secondary consequence."
+
+It is very satisfactory to note, in view of wild talk that has lately
+been current with regard to restrictions on our power to export
+capital, that the Committee has not a word to say for any continuance,
+after the war, of the supervision now exercised over new issues. The
+restrictions which it did recommend, while admitting their futility,
+on imports of capital into our shipping and "key" industries were
+evidently based on fears of possible war in future. The moral is that
+this war has to be brought to such an end that war and its barbarisms
+shall be "spurlos versenkt," and that humanity shall be able to
+go about its business unimpeded by all the stupid bothers and
+complications that arise from its possibility.
+
+
+
+
+XIV
+
+NATIONAL GUILDS
+
+_October_, 1918
+
+The Present Economic Structure--Its Weaknesses and Injustices--Were
+things ever better?--The Aim of State Socialism--A Rival
+Theory--The New Movement of Guild Socialism--Its Doctrines and
+Assumptions--Payment "as Human Beings"--The "Degradation" of earning
+Wages--Production irrespective of Demand--Is that the Real Meaning
+of Freedom?--The Old Evils under a New Name--A Conceivably Practical
+Scheme for some other World.
+
+
+Most people will admit that there are many glaring faults in the
+present economic structure of society. Wealth has been increased at an
+exhilarating pace during the last century, and yet the war has shown
+us that we had not nearly realised how great is the productive power
+of a nation when it is in earnest, and that the pace at which wealth
+has been multiplied may, if we make the right use of our plant and
+experience, be very greatly quickened in the next. The great increase
+in wealth that has taken place has been certainly accompanied by some
+improvement in its distribution; but it must be admitted that in this
+respect we are very far from satisfactory results, and that a system
+which produces bloated luxury plus extreme boredom at one end of the
+scale and destitution and despair at the other, can hardly be called
+the last word, or even the first, in civilisation. The career has been
+opened, more or less, to talent. But the handicap is so uneven and
+capricious that only exceptional talent or exceptional luck can fight
+its way from the bottom to the top, the process by which it does so
+is not always altogether edifying, and the result, when the thing
+has been done, is not always entirely satisfactory either to the
+victorious individual or to the community at whose expense he has won
+his spoils. The prize of victory is wealth and buying power, and the
+means to victory is, in the main, providing an ignorant and gullible
+public with some article or service that it wants or can be persuaded
+to believe that it wants. The kind of person that is most successful
+in winning this kind of victory is not always one who is likely to
+make the best possible use of the enormous power that wealth now puts
+into the hands of its owner.
+
+Those who are fond of amusing themselves by looking back, through
+rose-coloured spectacles, at more or less imaginary pictures of the good
+old mediaeval times, can make out a fair case for the argument that in
+those days the spoils were won by a better kind of conqueror, who was
+likely to make a better use of his victory. In times when man was
+chiefly a predatory animal and the way to success in life was by
+military prowess, readiness in attack and a downright stroke in defence,
+it is easy to fancy that the folk who came to the top of the world, or
+maintained a position there, were necessarily possessed of courage and
+bodily vigour and of all the rough virtues associated with the ideal of
+chivalry. Perhaps it was so in some cases, and there is certainly
+something more romantic about the career of a man who fought his way to
+success than about that of the fortunate speculator in production or
+trade, to say nothing of the lucky gambler who can in these times found
+a fortune on market tips in the Kaffir circus or the industrial "penny
+bazaar," Nevertheless, it is likely enough that even in the best of the
+mediaeval days success was not only to the strong and brave, but also
+went often to the cunning, fawning schemer who pulled the brawny leg of
+the burly fighting-man. However that may be, there can be no doubt that
+now the prizes of fortune often go to those who cannot be trusted to
+make good use of them or even to enjoy them, that Mr Wells's great
+satire on our financial upstarts--"Tono-Bungay"--has plenty of truth in
+it, and that our present system, by its shocking waste of millions of
+good brains that never get a chance of development, is an economic
+blunder as well as an injustice that calls for remedy.
+
+This being so, it is the business of all who want to see things made
+better to examine with most respectful attention any schemes that are
+put forward for the reconstruction of society, however strongly we may
+feel that real improvement is only to be got, not by reconstructing
+society but by improving the bodily and mental health and efficiency
+of its members. The advocates of Socialism have had a patient and
+interested hearing for many decades, except among those to whom
+anything new is necessarily anathema. There was something attractive
+in the notion that if all men worked for the good of the community and
+not for their own individual profit, the work of the world might
+be done much better, because all the waste of competition and
+advertisement would be cut out, machinery would be given its full
+chance because it would be making work easier instead of causing
+unemployment, and a greater output, more evenly distributed, would
+enable the nation to breed a race, each generation of which would
+come nearer to perfection. So splendid if true; but one always felt
+misgivings as to whether the general standard of work might not
+deteriorate instead of improve if the stimulus of individual gain were
+withdrawn; and that the net result might probably be a diminished
+output consumed by a discontented people, less happy under a possibly
+stupid and short-sighted bureaucracy, than it is now when the chances
+of life at least give it the glorious uncertainty of cricket. Since
+the war our experiences of official control, even when working on
+a nation trained in individual initiative, have increased those
+misgivings manifold; and hundreds of people who were Socialistically
+inclined in 1914 will now say that any system which handed over the
+regulation of production and distribution to the State could end only
+in disaster, unless we could first build up a new machinery of State
+and a new people for it to work on.
+
+Partly, perhaps, owing to this discredit into which the doctrines of
+State Socialism have lately fallen, increasing attention has been
+given to a body of theory that was already active before the war and
+advocates a system of what it calls Guild Socialism, under which
+industry is to be worked by National Guilds, embracing all the
+workers, both by brain and by hand, in the various kinds of
+production. Its advocates are, as far as I have been able to study
+their pronouncements, decidedly hostile to State Socialism and
+needlessly rode to some of its most prominent preachers, such as Mr
+and Mrs Webb, who at least merit the respect due to those who have
+given lives of work to supporting a cause which they believe to be
+sound and in the best interests of mankind. But in spite of their
+chronic and sometimes ill-mannered facetiousness at the expense of
+State Socialism and its advocates, the Guild Socialists, as we shall
+see, have to rely on State control for very important wheels in
+their machinery and leave gaps in it which, as far as disinterested
+observers can see, can only be filled by still further help from the
+discredited State. It is no disparagement of the efforts of these
+writers and thinkers to say that their sketch of the system that they
+hope to see built up is somewhat hazy. That is inevitable. They are
+groping towards a new social and economic order which, in their hope
+and belief, would be an improvement. To expect them to work it out in
+every detail would be to ask them to commit an absurdity. The thing
+would have to grow as it developed, and we can only ask them to show
+us a main outline. This has been done in many publications, among
+which I have studied, with as much care as these distracting times
+allow, "Self-Government in Industry," by G.D.H. Cole, "National
+Guilds," by A.R. Orage (so described on the back of the book, but the
+title-page says that it is by S.G. Hobson, edited by A.R. Orage), and
+"The Meaning of National Guilds," by C.E. Bechhofer and M.B. Reckitt.
+
+These authorities seem to agree in thinking (1) that the capitalist is
+a thief, (2) that the manual worker is a wage slave, (3) that freedom
+(in the sense of being able to work as he likes) is every man's
+rightful birthright, and (4) that this freedom is to be achieved
+through the establishment of National Guilds. As to (1) Messrs
+Bechhofer and Reckitt speak on page 99 of their book of the "felony of
+Capitalism" as a matter that need not be argued about. Mr Cole makes
+the same assumption by observing on page 235 of the work already
+mentioned that "to do good work for a capitalist employer is merely,
+if we view the situation rationally, to help a thief to steal more
+successfully." Well, this view of capital and the capitalist may be
+true. Mr Cole is a highly educated and gifted gentleman, and a Fellow
+of Magdalen. He may have expounded and proved this point in some work
+that I have not been fortunate enough to read. But as the abolition of
+the capitalist is one of the chief aims put forward by these writers
+it seems a pity that they should thus first assert that he is a thief
+to be stamped out, instead of explaining the matter to old-fashioned
+folk who believe that capitalists are, in the main, the people (or
+representatives of the people) who have equipped industry, and
+enormously multiplied its efficiency and output, and so have enabled
+the greater part of the existing population of this country (and most
+others) to come into being. But to the Guild Socialists the identity
+of robbery with capitalism seems to be so self-evident that it needs
+no proof. Next, as to the wage system. They seem to think that to earn
+a wage is slavery and degradation, but to receive pay is freedom. With
+the best will in the world I have tried to see where this immense
+difference between the use of two words, which seem to me to mean much
+the same thing, comes in in their view, but I have not succeeded.
+Perhaps you will be able to if I give you Mr Cole's own words.
+
+
+On page 154 of the book cited, he says that the wage system is "the
+root of the whole tyranny of capitalism," and then continues:
+
+"There are four distinguishing marks of the wage system upon which
+National Guildsmen are accustomed to fix their attention. Let me set
+them out clearly in the simplest terms,
+
+"1. The wage system abstracts 'labour' from the labourer, so that the
+one can be bought and sold apart from the other.
+
+"2. Consequently, wages are paid to the wage worker only when it is
+profitable to the capitalist to employ his labour.
+
+"3. The wage worker, in return for his wage, surrenders all control
+over the organisation of production.
+
+"4. The wage worker, in return for his wage, surrenders all claim upon
+the product of his labour.
+
+"If the wage system is to be abolished, all these four marks of
+degraded status must be removed. National Guilds, then, must assure to
+the worker, at least, the following things:--
+
+"1. Recognition and payment as a human being, and not merely as a
+mortal tenement of so much labour power for which an efficient demand
+exists.
+
+"2. Consequently, payment in employment and in unemployment, in
+sickness and in health alike.
+
+"3. Control of the organisation of production in co-operation with his
+fellows.
+
+"4. A claim upon the product of his work, also exercised in
+co-operation with his fellows."
+
+Now, looking with a most dispassionate eye and an eager desire to find
+out what it is that Labour and its spokesmen are grouping after, can
+one find in these "marks of degraded status" any serious evil, or
+anything that is capable of remedy under any conceivable economic
+system? In all of them the wage-earner is on exactly the same footing
+as the salary-earner or the professional piece-worker. The labour of
+the manager of the works can also be abstracted from the manager, and
+can be bought and sold apart from him. One would have thought
+that this fact is rather in favour of the manager and of the
+wage-earner--or would Mr. Cole prefer that the latter should be bought
+and sold himself? The salary-earner and the professional are only
+employed when somebody wants them. The manager's term of employment is
+longer, but the professional pieceworker, such as I am when I write
+this article, has usually no contracted term, and is only paid for
+actual work done. I also have no control over the organisation of the
+production of _Sperling's Journal_ or any other paper for which I do
+piecework. I am very glad that it is so, for organising production is
+a very difficult and complicated and risky business, and from all
+the risks of it the wage-earner is saved. The salary-earner or the
+professional, when once his product is turned out and paid for, also
+surrenders all claim upon the product. What else could any reasonable
+wage-earner or professional expect or desire? The brickmaker or the
+doctor cannot, after being paid for making bricks or mending a broken
+leg, expect still to have the bricks or the leg for his very own. And
+how much use would they be to him if he could? Unless he were to be
+allowed to sell them again to somebody else, which, after being once
+paid for them, would merely be absurd.
+
+But when we come to the remedies that Mr. Cole suggests for these
+"marks of degraded status," we find in the forefront of them that the
+worker must be secured "payment as a human being, and not merely as a
+mortal tenement of so much labour power for which an efficient demand
+exists." This, especially to an incurably lazy person like myself, is
+an extremely attractive programme. To be paid, and paid well, merely
+in return for having "taken the trouble to be born," is an ideal
+towards which my happiest dreams have ever struggled in vain. But
+would it work as a practical scheme? Speaking for myself, I can
+guarantee that under such circumstances I should potter about with
+many activities that would amuse my delicious leisure, but I doubt
+whether any of them would be regarded by society as a fit return for
+the pleasant livelihood that it gave me. And human society can only be
+supplied with the things that it needs if its members turn out, not
+what it amuses them to make or produce, but what other people want.
+And It is here that the National Guildsmen's idea of freedom seems, in
+my humble judgment, to be entirely unsocial As things are, nobody can
+make money unless he produces what somebody wants and will pay for.
+Even the capitalist, if he puts his capital into producing an article
+for which there is no demand, will get no return on it. In other
+words, we can only earn economic freedom by doing something that our
+fellows want us to do, and so co-operating in the work of supplying
+man's need. (That many of man's needs are stupid and vulgar is most
+true, but the only way to cure that is to teach him to want something
+better.) The Guildsmen seem to think that this necessity to make or do
+something that is wanted implies slavery, and ought to be abolished.
+They are fond of quoting Rousseau's remark that "man is born free and
+is everywhere in chains." But is man born free to work as and on what
+he likes? In a state of Nature man is born--in most climates--under
+the sternest necessity to work hard to catch or grow his food, to make
+himself clothes and build himself shelter. And If he ignores this
+necessity the penalty is death. The notion that man is born with a
+"right to live" is totally belied by the facts of natural existence.
+It is encouraged by humanitarian sentiment which, rightly makes
+society responsible for the subsistence of all those born under its
+wing; but it is not part of the scheme of the universe.
+
+Such are a few of the weaknesses involved by the theoretical basis
+on which Guild Socialism is built. When we come to its practical
+application we find the creed still more unsatisfactory. Even if
+we grant--an enormous and quite unjustified assumption--that the
+Guildsman, if he is to be paid merely for being alive, will work hard
+enough to pay the community for paying him, we have then to ask how
+and whether he will achieve greater freedom under the Guilds than
+he has now. Now, freedom is only to be got by work of a kind that
+somebody wants, and wants enough to pay for it. And so the consumer
+ultimately decides what work shall be done. The Guildsman says that
+the producer ought to decide what he shall produce and what is to be
+done with it when he has produced it. "Under Guild Socialism," says
+Mr Cole,[1] "as under Syndicalism, the State stands apart from
+production, and the worker is placed in control." Very well, but what
+one wants to know is what will happen if the Guilds choose to produce
+things that nobody wants. Will they and their members be paid all the
+same? Presumably, since they are to be paid "as human beings" and not
+because there is a demand for their work. But if so, what will happen
+to the Guildsman as consumer? There will be no freedom about his
+choice of things that he would like to enjoy. And what about admission
+to membership of a Guild, the price at which the Guilds will exchange
+products one with another, and the provision of capital? The nearest
+approach to an answer to these questions is given by Messrs Bechhofer
+and Reckitt in Chapter VIII, of the "Meaning of National Guilds." This
+chapter describes "National Guilds in Being." It tells us that "each
+man will be free to choose his Guild," which sounds very pleasant,
+but is completely spoilt by the end of the sentence, which says "and
+actual entrance will depend on the demand for labour." It sounds just
+like a capitalistic factory. And then--"Labour in dirty industries,
+sewaging, etc.--will probably be in the main of a temporary character,
+and will be undertaken by those who are for the time unable to obtain
+an entry elsewhere." Most sensible, but where is the freedom? The
+Guildsman will not be able to do the work that he wants to do unless
+there is a demand for that kind of labour, and in the meantime,
+just like the unemployed in the days of darkness, he will be set to
+cleaning the streets and flushing the drains. Messrs. Bechhofer and
+Reckitt are, in fact, so sensible and practical that they abandon
+altogether the freedom of the producer to produce what he likes.
+"Indeed," they write, "a query often brought to confound National
+Guildsmen is this: What would happen to a National Guild that began to
+work wholly according to its own pleasure without regard to the other
+Guilds and the rest of the community? We may reply, first, that
+this spirit would be as unnatural among the Guilds as it is natural
+nowadays with the present anti-communal, capitalist system of
+industry" (but under the present system any one who worked without
+regard to the rest of the community would very soon be in the hands of
+a Receiver); "secondly, if it did arise in any Guild, this contempt
+for the rest of the community would be met by the concerted action
+of the other Guilds. The dependence of any individual Guild upon the
+others would be necessarily so great that a recalcitrant Guild would
+find itself at once in a most difficult position, and a Guild that
+pressed forward demands that were generally felt by the rest of the
+community to be impossible or unreasonable would soon be brought back
+into line again."
+
+[Footnote 1: "The Meaning of Industrial Freedom," page 39.]
+
+Of course; but if so, where is the Guildsman's alleged freedom? Every
+Guild and every Guildsman would have to adapt himself to the wants of
+the community, just as all of us who work for our living have to do
+now. He would be no more free than I am, and I am no more free than
+the person who is sometimes described as a "wage slave." The Guildsman
+might be happier in the feeling that he worked for a Guild rather than
+a capitalist employer, but this is by no means certain. The writers
+just quoted show with much frankness and good sense that there would
+be plenty of opening for friction, suspicion, discontent and strikes.
+"A Guild," they say, "that thought itself ill-used by its fellows
+would be able to signify its displeasure by the threat of a strike."
+The officials of the Guild are to be chosen by the "men best qualified
+to judge" of their ability, whoever they may be, and every such choice
+would be ratified by the workers who are to be affected by it. "The
+Guild would build up in this way a pyramid of officers, each chosen by
+the grade immediately below that which he is to occupy," Did not the
+Bolsheviks try something like this system, with results that were not
+conducive to efficient production? And to meet the danger that the
+officials as a whole might combine "in a huge conspiracy against
+the rank and file," Messrs Bechhofer and Reckitt can only suggest
+vigilance committees within the Guilds. In a word, Guild Socialism
+seems to be a system that might possibly be worked by a set of ideally
+perfect beings; but as folk are in this workaday world one can only
+doubt whether it would be conducive either to freedom, efficiency or a
+pleasant life for those who lived under it.
+
+
+
+
+XV
+
+POST-WAR FINANCE
+
+_November_, 1918
+
+Taxation after the War--Mr. Hoare's Scheme described and analysed--The
+Position of the Rentier--Estimates of the Post-War Debt--The
+Compulsory Loan Proposal--What Advantages has it over a Levy on
+Capital?--The Argument from Social Justice--Questions still to be
+answered--The Choice between a Levy and Stiff Taxation--Are we still
+a Creditor Nation?--Our Debt not a Hopeless Problem--Suggestions for
+solving it.
+
+
+Under this heading two very interesting articles were contributed to
+the October issue of _Sperling's Journal_ by Mr Alfred Hoare and an
+"Ex-M.P.," and the subject is clearly one to which, now that the end
+of the war has been brought appreciably nearer by the feats of the
+Allied armies, too much thought and discussion can hardly be given.
+How are we going to face the problem that has been built up for us by
+the bad finance of the war, the low proportion of its cost that has
+been paid for out of taxation, and the consequent huge debt with
+which--it is already over £7000 millions gross--the State will be
+saddled? Mr. Hoare answered the question by proposing a scheme of
+taxation of what he called Rente, by which he meant all forms of
+"unearned income"--"rentals from freehold and leasehold property,
+interest upon loans whether public or private, and dividends on joint
+stock companies or sleeping partnerships." He added that in his
+opinion earned income above a certain figure might reasonably be added
+to this category on the ground that it has, in some instances, very
+much the same characteristics as unearned; the income of a "successful
+professional man or clown or jockey or opera star" being due to
+peculiar qualities; "and it would be no great hardship if earned
+income above, say, a thousand a year for a married couple, with an
+additional three hundred for every child under twenty-five years of
+age were regarded as unearned, and taxed accordingly." Income was
+thus the basis of Mr Hoare's scheme. Rente he regards as an agency
+regulating distribution, and requiring to be constantly checked. "It
+is," he says, "an elementary principle of social health, and economic
+prosperity that the share of the national wealth enjoyed by the
+Rentier, by the owner, that is, of unearned income, should not be
+excessive," Most people who can follow his admirable example and take
+a detached and unbiassed view of questions which affect their pocket
+so closely, will agree with him In this opinion. The Rentier lives on
+the proceeds of work done in the past by him or by some other person;
+and it is not good for our economic health that he should grow too
+fat at the expense of those who are working now, lest the latter be
+discouraged and work with less spirit.
+
+At the same time we have to remember that the work done in the past by
+the Rentier or those whom he represents, has given us the plant and
+equipment (in the widest sense of the phrase) with which we are now
+working. If, therefore, we penalise the Rentier too severely we shall
+discourage his future creation; the present race of earners, if they
+see that those who are living on past savings are shorn too close
+will be deterred from saving, will put their surplus earnings into
+extravagant spending instead of into plant and equipment, and the
+economic future of the nation, and of the world, will be _pro tanto_
+less hopeful. If once our fiscal system is going to propagate the
+view--already so rampant among the happy-go-lucky citizens of this
+unthrifty people--that the worst thing to do with money is to save it
+there will be bad times ahead for our industry and commerce, which can
+only get the capital that it needs if somebody saves it. Mr Hoare's
+elaborate calculations led him to conclusions involving a tax of
+11s. 6d. in the pound on unearned income. This figure is, I hope,
+needlessly high. To arrive at it he assumed that peace might be
+concluded towards the end of 1919, and that when peace conditions are
+fully re-established--which will take, he thinks, three years, the
+National Debt will amount to £10,000 millions, involving annual
+interest of £500 millions, which, added to the total Rente of the
+country in 1913 (which he made out to be £520 millions), will make a
+total Rente in 1923 of £1020 millions. His view is that the burden of
+the National Debt should be thrown by means of the income tax upon the
+national Rente, not taxing it out of existence, but by such a scale of
+taxation as would reduce the net Rente of the country to approximately
+the level at which it stood before the war.
+
+There is good reason to hope that Mr Hoare's figures will not be
+reached. He took £10,000 millions merely as a round sum. Mr Bonar Law,
+it will be remembered, worked out our net debt on March 31st next at
+£6856 millions, taking credit for half the estimated amount of loans
+to Allies as a good asset. If we prefer as sounder bookkeeping to
+write off the whole of our loans to Allies for the time being and
+to apply anything that we may hereafter receive on that account to
+Sinking Fund, the debt, on the Chancellor's figures, will amount on
+March 31st (if the war goes on till that date) to £7672 millions. Even
+if the war went on for six months more it ought not to bring the debt
+up to more than £9000 millions at the outside. It is quite true, as
+Mr Hoare says, that the return to peace conditions will be a gradual
+process, and that expenditure will not come back to a peace basis all
+at once. Demobilisation and other matters which were left, by our
+cheery Chancellor, out of the airy after-war balance-sheet that he so
+light-heartedly constructed, may cost £1000 millions or more before
+we have done with them. But against them we can set a string of
+recoverable assets which, in the Chancellor's hands, footed up a total
+of £1172 millions--balances in agents' hands, due debts (apart from
+loans to Allies), land, securities, ships, buildings, stores In
+Munitions Department, arrears of taxation, and so on. With his 11s.
+6d. in the pound on unearned and 6s. in the pound on earned incomes,
+Mr Hoare expects a revenue of £620 millions, "or enough to provide for
+the interest of the debt with a 1 per cent. Sinking Fund, and
+leave £20 millions towards the Supply Services." But Mr Bonar Law
+anticipated a total peace Budget (if the war ended by March 31st next)
+of £650 millions. This was probably too low, but we may at least hope
+that Mr Hoare has gone rather further than was necessary to be on the
+safe side.
+
+In the other article on the subject of post-war debt contributed to
+the last number of this Journal, an "Ex-M.P." plumped for a somewhat
+novel variety of the Levy on Capital, in the shape of a Compulsory
+Loan, bearing no interest and repayable in 100 years. Each individual
+citizen to be made to subscribe to the extent of 20 per cent. of
+his possessions. Ten per cent. of the amount due to be paid on
+application, 10 per cent. six months after allotment, and 80 per cent.
+on January 1st of the following year. When desired, the Government to
+advance at 5 per cent. the money necessary for the payment subsequent
+to allotment, full repayment of such advances to be made within
+eight years. A Sinking Fund to be established to redeem the loan at
+maturity. But is there any real advantage in this scheme over the Levy
+on Capital, from which it only differs by the receipt by the payer of
+a promise to repay in 100 years' time? The approximate value of
+£1000 nominal of the Compulsory Loan stock would be, according to
+"Ex-M.P.'s" calculation, in the year of issue £7 12s., money being
+worth 5 per cent. and assuming that rate to be current during the
+remainder of the term. The claim that there is no confiscation,
+because "a perfectly good security is given for the money received,"
+would seem rather futile to those who paid £1000 and received a
+security, the present value of which might be below £10. They might
+very likely think that outright confiscation (since confiscation
+originally means nothing but "putting into the Treasury") is really a
+simpler way of dealing with the problem. "Ex-M.P.," however, estimates
+that the immediate redemption of £2800 millions of debt (which he,
+rather modestly, expects to be the result of his 20 per cent. levy)
+would enable the balance of the War Debt to be converted into 3-1/2
+per cent. stock. This may be true, but if so it is equally true if a
+similar or larger amount of debt is cancelled by means of an outright
+Levy on Capital.
+
+The merits and demerits of a Levy on Capital have already been dealt
+with in the pages of this Journal "Ex-M.P.," however, brought forward
+a slightly novel form of argument in its favour. He pointed out that
+the money constituting the great increase in debt that has taken place
+during the war will have been, in the main, contributed by people who
+have worked at home under the protection of the Army and Navy, while
+the soldiers and sailors have been prevented by the duty which sent
+them out to risk their lives from subscribing a proportionate share to
+the National Debt. Hence "a class that deserves most of the State will
+find itself indebted to a class which--if it does not deserve least of
+the State--has, at any rate, turned a national emergency to personal
+profit." This is a strong argument, which, has been used frequently
+in the course of the war in the pages of the _Economist_, against
+borrowing for war purposes to the large extent to which our timid
+rulers have adopted the policy. "To be really just," the writer
+continued, "the process of taxation ... must be applied with greatest
+force to those who have accumulated their money since the outbreak of
+war, and only to a less degree to those whose fortunes have not been
+built upon their country's necessity. The difficulty of separating
+these two classes of wealth is great, and must, in the writer's
+opinion, be effected by separate legislation--legislation which might
+justly be based upon the increase in post-1913 incomes, a record of
+which should now be in preparation at Somerset House." Everyone will
+agree that everything possible should be done to take the burden of
+the war debt off the shoulders of those who have fought for us; but it
+is equally clear that now that the mischief of this huge debt has been
+done, it will be exceedingly difficult to repair it by any ingenuities
+of this kind. For instance, if the kind of taxation--in the shape of
+a Compulsory Loan--proposed by "Ex-M.P." were enforced, how can we be
+sure that it would not take a large slice off capital, the next heir
+to which is a soldier or a sailor? Bad finance is so much easier to
+perpetrate than to remedy that one is almost certain to come across
+such objections as this to any scheme for making the war profiteers
+"cough up" some of their gains.
+
+Moreover, we have to remember that by no means the whole of the
+war debt represents the gains of those who "have turned a national
+emergency to personal profit." Some people whose incomes have been
+actually decreased by the war, especially when currency depreciation
+is taken into account, have, in response to the appeals of the
+War Savings Committee, saved more than they ever saved before by
+patriotically stinting themselves. And even the savers who have saved
+out of war profits were so far more patriotic than the war profiteers
+who did not save but squandered. In all the discussion concerning
+the Levy on Capital I have not seen any answer (even in Mr Pethick
+Lawrence's very persuasive little book in its favour) to the three
+great objections to it (1) that it lets off the squanderer and
+penalises the saver; (2) that the difficulty, trouble and expense
+involved by the necessary valuation, and the iniquities and frauds
+that are almost certain to arise out of it, will be enormous; and
+(3) that its economic effect may be very serious in discouraging
+accumulation. "Why should any one save," the unthrifty soul will most
+naturally ask, "if his savings are liable to have a slice cut out of
+them by a levy at any time?" The advocates of the Levy, and "Ex-M.P."
+in his advocacy of a Compulsory Loan for repayment of debt; assume
+that it can be done once and for all and never again. "Take one-fifth
+of a man's savings away as an emergency measure not to be repeated,
+and he will at once endeavour to save it back again." But how will you
+persuade him that it is an emergency measure not to be repeated? How
+can you be sure that it is so? I have heard a very distinguished
+Socialist, discussing in private the beauties of the Levy on Capital,
+point out that it is the sort of thing which, when once the ice has
+been broken, can be done again so easily. From the Socialist point of
+view the Levy on Capital is, of course, a simple means of getting, by
+repetitions of it at regular intervals, all the means of production
+into the hands of the State; but would the State make a good use of
+them?
+
+Another assumption about the Levy on Capital that seems to me to be
+the merest will o' the wisp is the delusion that the whole saving that
+it would entail by reducing the debt charge would necessarily and
+certainly go to the relief of income tax. On this assumption Mr
+Pethick Lawrence bases his most persuasive appeal to the smaller
+income-tax payer, by showing that he would be better off after a Levy
+on Capital than before it, thanks to the reduction in income tax,
+which is assumed as axiomatically arising in its train. But is
+this certain or even likely? Is it not much more probable that our
+Government, finding its post-war Budget greatly lightened by a Levy on
+Capital or a Compulsory Loan to redeem debt, will think itself free to
+indulge in extravagance, maintaining a considerable part of the war
+income tax and wasting it on rash experiments? All these weaknesses,
+which appear to be inherent alike in the Levy on Capital or in the
+scheme which gilds the pill by calling it a Compulsory Loan, seem to
+be ignored or neglected (perhaps because they are unanswerable) by
+their advocates. On the other hand, there are certain psychological
+arguments on the other side. If the well-to-do, who would have to pay
+the Levy or subscribe to the Compulsory Loan, would prefer that system
+to a high income tax, there is no more to be said. A tax that is
+popular with the payer, as compared with other modes of shearing
+his fleece, needs no further recommendation. But, in view of the
+probability of the experiment, once tried, being shortly and
+frequently repeated, I Very much doubt whether this is so; as far as I
+have been able by personal inquiry to test opinion on the point I have
+found it almost unanimously adverse among those whom the Levy would
+most seriously affect. If, as is much more likely, the imposition of
+a Levy created better feeling among the working classes and the
+returning soldiers and tended to more harmonious co-operation in
+after-war tasks of reconstruction, it might be worth while to face its
+evils and its dangers. But here again it is quite probable that if the
+burden of war debt were clearly and palpably put on the shoulders best
+able to bear it, that is, on those who are lifted by the gifts
+of fortune--either in inherited money or unusual brainpower or
+faculties--by an equitably graded income tax, the effect might be just
+as good on the minds of those who suspect that the rich have battened
+throughout the war on exploitation of the poor.
+
+This much at least seems to be agreed by most reasonable people about
+the debt charge--that it will have to be raised, either by a Levy on
+Capital or by income tax or some other form of direct taxation, from
+those who are blessed with a margin. We are not likely to repeat our
+ancestors' mistake, after the Napoleonic War, of throwing the whole
+burden on to the general consumer by indirect taxation of necessaries
+and of articles of general consumption. Even Tariff "Reformers" say
+little about the revenue that their fiscal schemes would bring in. And
+with good reason. For in so far as they secured Protection they would
+bring in no revenue; we cannot at once keep out foreign goods and tax
+them; and any revenue that they brought in would be most expensively
+raised, because a large part of the extra price paid by the consumer
+would go not to the State but into the pockets of the home producer.
+Nor is it likely that any of the many schemes--of which Mr Stilwell's
+"Great Plan, How to Pay for the War," is a particularly bold
+example--for paying off debt by a huge issue of inconvertible
+currency, will achieve any practical result. Not only would they
+defraud the debt-holder by paying him off in currency enormously
+depreciated by the multiplication of it that would be involved; but
+they would also, by that depreciation, throw the burden of the debt
+on the shoulders of the general consumer through a further disastrous
+rise in prices, and so would accentuate the bitterness and discontent
+already rife owing to the war-time dearness and all the suspicions of
+profiteering and exploitation that it has engendered.
+
+After all, this problem of the war debt, in so far as it is held at
+home, is not one that ought to terrify us if we look at it steadily.
+People talk and write as if when the war is over the business of
+paying for it will begin. That is not really so. The war has been paid
+for as it went on, and, except in so far as it has been financed by
+borrowing abroad, it has been paid for by us as a nation. Whatever we
+have used for the war we have paid for as it went on, partly with
+the help of loans from America and from other countries--Argentina,
+Holland, Switzerland, etc.--that have lent us money. These loans
+amount, as far as they can be traced from the official figures,
+to about £1300 millions. Against them we can set our loans to our
+Dominions, over £200 millions (a perfectly good asset), and our loans
+to our Allies, perhaps £1500 millions, which the Chancellor proposes
+to write down by 50 per cent., and might perhaps treat still more
+drastically. To meet this foreign debt we shall have to turn out so
+much stuff--goods and services of all kinds--for sale abroad to meet
+the interest and repayment. We have further impoverished ourselves by
+selling our foreign securities abroad No figure has been published
+giving any clue to the amount of these sales, and we may perhaps guess
+them at £1000 millions. If the pre-war estimates of our overseas
+investments at £4000 millions were anywhere near the mark. It thus
+appears that we shall end the war still a great creditor nation.
+
+In so far as the debt was raised at home, the war was paid for by
+those who bought the securities offered, and we have now to pay them
+interest and set about repaying them the capital. This process
+will not diminish the national wealth, but will only affect its
+distribution. It will not diminish the amount of available capital,
+but may even rather increase it by gathering into the hands of the
+debt-holders--who are ex-hypothesi folk with an inclination for
+saving--money that might, if left in the hands of those from whom it
+is collected, have been squandered. The payment of the debt charge
+merely means that those who came forward with their money when they
+were asked to subscribe to war loans, have, according to the extent
+of the effort that they then made, a set-off against the subsequent
+taxation involved by the war debt. It would have been a much simpler
+and more businesslike proceeding to have taken, instead of borrowing,
+a much larger proportion of the war's cost during the war; but it is
+too late now to rub in this platitude which is now pretty generally
+admitted. Mr Hoare showed in last month's Journal that the creation
+of the War Debt has caused a huge addition to what he has called
+Rente--the gross income of the propertied classes; and there is much
+logic in his contention that this income is the source from which the
+debt charge should be met. At the same time both justice and economic
+expediency seem to demand that his wider interpretation of Rente, to
+make it include the earnings of those whose special qualifications
+(or, we may add, special luck) put them in a position to earn more
+easily than the struggling majority, should be applied to taxation
+involved by the debt charge.
+
+How, then, shall we deal with the debt? In the first place we want
+a good Sinking Fund--1 per cent. at least--and all realisations of
+assets in the shape of loans repaid, ships, etc., sold, should be
+used for reduction of our foreign debt. For the home charge we want a
+special form of income tax that will fall as lightly and indirectly
+as possible on industry; that is, that it should be imposed on the
+individual taxpayer direct. So that what we want is an extended,
+reformed and better graduated form of the super-tax brought down so
+low that every one who is not merely rich but comfortable should pay
+his share, For example, any single man or woman with any excess over
+£500 a year of unearned income, or over £800 a year of earned income
+might well pay super-tax on that excess. The exemption limit might
+well be raised by 50 per cent. for married couples (if their joint
+incomes are still to be counted as one), and by £100 a year for each
+child between the age of five and twenty-five. But all these figures
+are mere suggestions, and the details of the scheme would have to be
+worked out by Inland Revenue officials, whose experience and knowledge
+of the practical working of such matters qualifies them for the task.
+The broad principle is a special tax for the debt charge to be raised
+direct from individual incomes with skilful differentiation, according
+to the circumstances of the taxpayer, in the matter of the number
+of his dependants, and also according to the source of the income,
+whether it is being earned by exertions which illness might terminate
+or received from invested funds, and therefore beyond the reach of the
+"slings and arrows of outrageous fortune." That portion of the tax
+that is required for Sinking Fund might be made payable, at the option
+of the taxpayer, in Government securities at prices giving some
+advantage to the holder. This form of special debt-charge super-tax
+would enable the ordinary income tax to be reduced considerably at
+once. Mr Edward Lees, secretary to the Manchester and County Bank, has
+put forward a scheme by which taxpayers can buy in advance immunity
+for so many years from so much annual income tax. If this suggestion
+could be worked it might provide a means of quickening the debt's
+repayment, though it looks rather like exchanging one form of debt for
+another. But, in any case, it is urgent that the long promised reform
+of income tax should be set in hand at once, so that it may be purged
+of its present inequities and anomalies and set to work in peace to
+redeem debt on a new and more scientific basis.
+
+
+
+
+XVI
+
+THE CURRENCY REPORT _December_, 1918
+
+Currency Policy during the War--Its Disastrous Mediaevalism--The
+Report of the Cunliffe Committee--A Blast of Common Sense--The
+Condemnation of our War Finance--Inflation and the Rise in Prices--The
+Figures of the Present Position--The Break in the Old Relation between
+Legal Tender and Gold--How to restore it--Stop Borrowing and reduce
+the Floating Debt--Return to the Old System--The Committee's Sane
+Conservatism--A Sound Currency vital to National Recovery.
+
+
+Among the many features of the late war (how comfortable it is to talk
+about the "late war"!) that seem likely to astonish the historian
+of the future, perhaps the thing that will surprise him most is the
+behaviour of the warring Governments in currency matters. It is
+surely, a most extraordinary thing after all that has been thought,
+said and written about monetary policy since money was invented that
+as soon as a great economic effort was necessary on the part of the
+leading civilised Powers, they should all have fallen back on the old
+mediaeval dodge of depreciating the currency, varied to suit modern
+needs, in order to pay part of their war bill, and should have
+continued this policy throughout the course of the war, in spite of
+the obvious results that it was producing in the shape of unrest,
+suspicion and bitterness on the part of the working classes, who very
+naturally thought that the consequent rise in prices was due to the
+machinations of unscrupulous capitalists who were exploiting them. It
+is even possible that the historian of a century hence may ascribe to
+this cause the beginning of the end of our present economic system,
+based on the private ownership of capital, for it is very evident that
+we have not yet seen the end of the harvest that this bitterness and
+discontent are producing.
+
+A less important but still very objectionable consequence of the flood
+of currency and credit that the Government has poured out to fill a
+gap in its war finance is the encouragement that it has given to a
+host of monetary quacks who believe that all the financial ills of
+the world can be saved if only you give it enough money to handle,
+oblivious of the effect on prices of mere multiplication of claims to
+goods without a corresponding increase in the volume of goods. These
+enthusiasts have seen that during war a Government can produce money
+as fast as it likes, and since they think that producing money makes
+every one happy they propose to adopt this simple method for paying
+off war debt, restarting trade and generally creating a monetary
+millennium. How far their nostrums are likely to be adopted, no
+one can yet say, but some of the utterances of our rulers make one
+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 costs but
+twopence; it is only a dozen pages long, and it is described (if you
+want to order it) as Cd. 9182. In view of the many attacks that have
+been made on our banking system--especially the Bank Act of 1844--by
+Chambers of Commerce and others before the war, it is rather
+surprising that so little criticism should have been heard of this
+Report, which practically advocates a return, as rapidly as possible,
+to the practice and principles imposed by that Act. It may be that
+peace, and all the preoccupations that have followed it, have absorbed
+men's minds so entirely that questions of currency seem to be an
+untimely irrelevance; or possibly the very heavy weight of the
+Committee's authority may have silenced the opposition to its
+recommendations. Presided over by Lord Cunliffe, the late Governor of
+the Bank, and including Sir John Bradbury and Professor Pigou and an
+imposing list of notable bankers, it was a body whose opinion
+could only be challenged by critics gifted with the most serene
+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 Government for funds
+wherewith to finance the war in excess of the amounts raised by
+taxation or by loans from the public has made necessary the creation
+of credits in their favour with the Bank of England.... The balances
+created by these operations passing by means of payments to
+contractors and others to the Joint Stock banks have formed the
+foundation of a great growth in their deposits, which have also
+been swelled by the creation of credits in connection with the
+subscriptions to the various War Loans.... The greatly increased
+volume of bank deposits, representing a corresponding increase of
+purchasing power and, therefore, tending in conjunction with other
+causes to a great rise of prices, has brought about a corresponding
+demand for legal tender currency which could not have been satisfied
+under the stringent provisions of the Act of 1844." Here we have the
+story of bad war finance put as clearly as it can be. Because the
+Government was not able to raise all the money needed for the war on
+sound lines--that is, by taxation and loans to it of money saved by
+investors--it had recourse to credits raised for it by the Bank of
+England and the other banks against Treasury Bills, Ways and Means
+Advances, War Loans, War Bonds, and loans to customers who were taking
+up War Loans, etc. Thereby as these credits created fresh deposits
+there was a huge increase in the community's purchasing power; and
+since the supply of goods to be purchased was stationary or reduced,
+the only result was a great increase in prices which made the war,
+perhaps, nearly twice as costly as it need have been and produced
+all the suspicion and unrest that has already been referred to.
+Considering that the Committee included an ex-Governor of the Bank
+and the Permanent Secretary to the Treasury it could hardly have been
+expected to use much plainer language concerning the failure of our
+rulers to get money out of us in the right way for the war and
+the vigour with which they made use of the demoralising weapon of
+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 (page 5): "Given the necessity for the creation of bank
+credits in favour of the Government for the purpose of financing war
+expenditure, these issues could not be avoided. If they had not been
+made, the banks would have been unable to obtain legal tender with
+which to meet cheques drawn for cash on their customers' accounts. The
+unlimited issue of currency notes in exchange for credits at the Bank
+of England is at once a consequence and an essential condition of the
+methods which the Government have found necessary to adopt in order to
+meet their war expenditure."
+
+The effect of these causes upon the amount of legal tender currency
+(other than subsidiary coin) in the banks and in circulation is
+summarised by the Committee in the following table:--
+
+"The amounts on June 30, 1914, may be estimated as follows:--
+
+"Fiduciary Issue of the Bank of England   £18,450,000
+
+"Bank of England Notes issued against
+   gold coin or bullion                    38,476,000
+
+"Estimated amount of gold coin held
+by Banks (excluding gold coin held
+in the Issue Department of the
+Bank of England) and in public
+circulation                                123,000,000
+                                           ___________
+"Grand total                              £179,926,000
+                                           ___________
+
+"The corresponding figures on July 10, 1918, as nearly as they can be
+estimated, were:--
+
+"Fiduciary Issue of the Bank of England    18,450,000
+Currency Notes not covered by gold        230,412,000
+                                          ___________
+"Total Fiduciary Issues [1]              £248,862,000
+Bank of England Notes issued against
+   coin and bullion                        65,368,000
+Currency Notes covered by gold             28,500,000
+Estimated amount of gold coin held
+   by Banks (excluding gold coin held
+   by Issue Department of Bank of
+   England), say                           40,000,000
+                                          ___________
+"Grand total                             £382,730,000
+
+"[Footnote 1: The notes issued by Scottish and Irish banks which have
+been made legal tender during the war have not been included in the
+foregoing figures. Strictly the amount (about £5,000,000) by which
+these issues exceed the amount of gold and currency notes held by
+those banks should be added to the figures of the present fiduciary
+issues given above.]
+
+"There is also a certain amount of gold coin still in the hands of the
+public which ought to be added to the last-mentioned figure, but the
+amount is unknown."
+
+It will be noted that the gold held by the banks (other than the Bank
+of England) and by the public has declined from £123 to £40 millions,
+according to the Committee's estimate, while, on the other hand, the
+circulation of bank notes has risen by £27 millions and the issue of
+currency notes has taken place to the tune of £259 millions (at the
+date of the Report; it is now nearly £300 millions), making a net
+addition to legal tender currency of over £200 millions. When we
+also remember that there has been a very heavy coinage of silver and
+copper, that the Bank of England's deposits have risen by over £100
+millions and the deposits of the other banks by nearly £700 millions,
+and all this at a time when most of the industrial activity of the
+country was going into the production of destructive weapons and the
+support of those who were using them, the behaviour of commodities of
+ordinary use in rising by nearly 100 per cent. seems to be an example
+of remarkable moderation. With all this new buying power in the hands
+of the community there is little wonder that some people should
+think that we have enormously increased our wealth during this most
+destructive and costly war, and should then feel hurt and disappointed
+when they find that this new buying power is robbed of all its
+beauty by the fact that its efficiency as buying power is seriously
+diminished by its mere quantity.
+
+Such being the state of affairs--a great mass of new credit and
+currency based on securities--it is clear that our currency has been
+deprived for the time being of that direct relation with its gold
+basis that used in former time to regulate its volume according to
+world prices and our international trade position. As the Committee
+says, "It is not possible to judge to what extent legal tender
+currency may in fact be depreciated in terms of bullion. But it is
+practically certain that there has been some depreciation, and to this
+extent therefore the gold standard has ceased to be effective." Very
+well, then, what has to be done to get back to the old state of things
+under which there was a more or less automatic check on the creation
+of credit and the issue of currency? This check worked by a system
+which was elastic and simple. It was not entirely automatic, because
+its working had to be controlled by the Bank of England, which, by the
+action of its discount rate, could, more or less, quicken or check the
+working of the machine. Legal tender currency could only be increased
+by imports of gold; and exports of gold reduced the available amount
+of legal tender currency; and since a stock of legal tender currency
+was essential to meet the demands upon them that bankers made
+possible by creating credits, there was thus an Indirect and variable
+connection between the country's gold stock and the extent to which
+bankers would think it prudent to multiply credits. If credits were
+multiplied too fast, our currency was depreciated in value as compared
+with those of other countries and the exchanges went against us and
+gold either was exported or began to look as if it might be exported.
+If it was exported the legal tender basis of credit was reduced and
+the creation of credit was checked. If the Directors of the Bank of
+England thought it inadvisable that gold should be exported they
+could, by raising the rate of discount and taking artificial measures
+to control the supply of credit, produce, without the actual loss of
+gold, the effects which that loss would have brought about.
+
+The keystone of the system was the rigid link between legal tender
+currency and gold. This was secured by the provisions of the Bank Act
+of 1844, which laid down that above a certain line--which was before
+the war roughly £18-1/2 millions--every Bank of England note issued
+should have gold behind it, pound for pound. In other words, the Bank
+of England note was, for practical purposes, a bullion certificate.
+The legal limit on the fiduciary issue (that is, the issue of £18-1/2
+millions against securities, not gold) could only be exceeded by a
+breach of the law. The many critics of our banking system seized on
+this hard-and-fast restriction and accused it of making our system
+inelastic as compared with the German arrangement, under which the
+legal limit could at any time be exceeded on payment of a tax or fine
+on any excess perpetrated. These critics might have been right if
+legal tender currency had been the only, or even the predominant,
+means of payment in England. But, as every office boy knows, it was
+not. Legal tender--gold and Bank of England notes--was hardly ever
+seen in commercial and financial transactions on a serious scale. We
+paid, sometimes, our retail purchases of goods and services in gold;
+and Bank notes were a popular mode of payment on racecourses and in
+other places where transactions took place between people who were not
+very certain of one another's standing or good faith. But the great
+bulk of payments was made in the cheque currency which our bankers had
+developed outside of the law and could create as fast as prudence--and
+an eye to the supply of legal tender which every holder of a cheque
+had a right to demand--allowed them to do so. While cheques provided
+the currency of commerce, another form of "money" was produced, again
+without any restriction by the Act, by the pleasant convention which
+caused a credit in the Bank of England's books to be regarded as
+"cash" for balance-sheet purposes by the banks. These advantages
+gave the English system a freedom and elasticity, in spite of the
+strictness of the law that regulated the issue of paper currency, that
+enabled it to work in a manner that, judged by the test of practical
+results, had one great advantage over that of any of the rival
+centres. It alone in days before the war fulfilled the functions of an
+international banker by being ready at all times and without question
+to pay out the gold that was, in the last resort, the final means of
+settling international balances.
+
+It is the object of Lord Cunliffe's Committee to restore as quickly
+as possible the system which, has thus been tried by the test of
+experience, "After the war," they say in their Report, "our gold
+holdings will no longer be protected by the submarine danger, and it
+will not be possible indefinitely to continue to support the exchanges
+with foreign countries by borrowing abroad. Unless the machinery which
+long experience has shown to be the only effective remedy for an
+adverse balance of trade and an undue growth of credit is once
+more brought into play there will be very grave danger of a credit
+expansion in this country and a foreign drain of gold which might
+jeopardise the convertibility of our note issues and the international
+trade position of the country.... We are glad to find that there was
+no difference of opinion among the witnesses who appeared before us as
+to the vital importance of these matters." The first measure that they
+put forward as essential to this end is the cessation at the earliest
+possible moment of Government borrowings. "A large part of the credit
+expansion arises, as we have shown, from the fact that the expenditure
+of the Government during the war has exceeded the amounts which they
+have been able to raise by taxation or by loans from the actual
+savings of the people. They have been obliged therefore to obtain
+money through the creation of credits by the Bank of England and the
+Joint Stock banks, with the result that the growth of purchasing power
+has exceeded that of purchasable goods and services." It is therefore
+essential that as soon as possible the State should not only live
+within its income but should begin to reduce indebtedness, especially
+the floating debt, which, being largely held by the banks, has been
+a cause of credit creation on a great scale. "The shortage of real
+capital must be made good by genuine savings. It cannot be met by the
+creation of fresh purchasing power in the form of bank advances to
+the Government or to manufacturers under Government guarantee or
+otherwise, and any resort to such expedients can only aggravate the
+evil and retard, possibly for generations, the recovery of the country
+from the losses sustained during the war." With these weighty words
+the Committee brushes aside a host of schemes that have been urged for
+putting everything right by devising new machinery for the manufacture
+of new credit. That new credits will be needed for industry after war
+is obvious, but what else are our banks for, if not to provide it?
+They can only be set free to provide it on the scale required if, by
+the necessary reduction of the floating debt, they are relieved of the
+locking up of their funds in Government securities, which has been one
+of the bad results of our bad war finance.
+
+It goes without saying that the Committee does not recommend the
+continuance in peace of the differential rates for home and foreign
+money that were introduced as a war measure with a view to lowering
+a rate at which the Government borrowed at home for war purposes. It
+would evidently be too severe a strain on human nature to attempt to
+work such a system, except in war-time, when the artificial conditions
+by which the market was surrounded made it both feasible and desirable
+to do so. With regard to the note issue, the Committee proposes a
+return to the old system and a strictly drawn line for the amount of
+the fiduciary note issue, the whole note issue (with the exception of
+the few surviving private note issues) being put into the hands of the
+Bank of England, all notes being payable in gold in London only
+and being made legal tender throughout the United Kingdom. These
+suggestions are subject to any special arrangements that may be made
+with regard to Scotland and Ireland. An early resumption of the
+circulation of gold for internal purposes is not contemplated. The
+public has become used to paper money, which is in some ways more
+convenient and cheaper; and the luxury of a gold circulation is one
+that we can hardly afford at present. Gold will be kept by the Bank of
+England in a central reserve, and all the other banks should, it is
+suggested, transfer to it the whole of their present holdings of the
+metal. In order to give the Bank of England a closer control of the
+bullion market the Committee thinks it desirable that the export of
+gold coin or bullion should, in future, be subject to the condition
+that such coin or bullion had been obtained from the Bank for the
+purpose. This measure would give the Bank of England a very close
+control of the bullion market, so close that there is a danger that
+if this control were too rigorously exercised, gold that now comes to
+this country might be diverted, with a view to more advantageous sale,
+to other centres. The amount of the fiduciary issue is a matter
+that the Committee leaves open to be determined after experience of
+post-war conditions. They "think that the stringent principles of
+the Act (of 1844) have often had the effect of preventing dangerous
+developments, and the fact that they have had to be temporarily
+suspended on certain rare and exceptional occasions (and those limited
+to the earlier years of the Act's operation, when experience of
+working the system was still immature) does not," in their opinion,
+invalidate this conclusion. So they propose that the separation of the
+Issue or Banking Departments should be maintained, but that in future
+if an emergency arose requiring an increase in the amount of fiduciary
+currency, this should not involve a breach of the law, but should be
+made legal (as it is now under the Currency and Bank Notes Act of
+1914), subject to the consent of the Treasury.
+
+It is not proposed at present to secure the circulation of paper
+instead of gold by legislation. The Committee considers that "informal
+action on the part of the banks may be expected to accomplish all
+that is required." If necessary, however, it points out that
+the circulation of gold could be prevented by making the notes
+convertible, at the discretion of the Bank of England, into coin or
+bar gold. The amount which, in the opinion of the Committee, should be
+aimed at for the central gold reserve is £150 millions (a sum which is
+already almost in sight on its figures quoted above); and "until
+this amount has been reached and maintained concurrently with a
+satisfactory foreign exchange position for a period of at least a
+year," it thinks that the policy of reducing the uncovered note issue
+"as and when opportunity offers" should be consistently followed. How
+this opportunity is going to "offer" is not made clear; but presumably
+a reflow of notes from circulation can only happen through a fall in
+prices or a reduction in bank deposits by the liquidation of advances
+made to the Government, directly or indirectly, by the banks.
+
+Concerning the difficult problem of replacing the Bradbury notes by
+Bank of England notes of £1 and 10s., an ingenious suggestion is made
+by the Committee. It observes that there would be some awkwardness
+in transferring the issue to the Bank of England before the future
+dimensions of the fiduciary issue have been arrived at; and it
+suggests that during the transitional period any expansion in Treasury
+notes that may take place should be covered, not as now, by Government
+securities, but by Bank of England notes taken from the Bank. By this
+means any demands for new currency would operate in the normal way to
+reduce the reserve of the Banking Department, "which would have to be
+restored by raising money rates and encouraging gold imports," and so
+a step would have been taken to getting back to a business basis in
+the currency system and away from the profligate printing-press policy
+of the war period.
+
+Such are the suggestions made by this distinguished body for the
+restoration of our currency. Little has been said against them in the
+way of serious criticism, but their conservative tendency and the
+fact that they practically recommend a return to the _status quo_ has
+caused some impatience among the financial Hotspurs who proposed to
+begin to build a new world by turning everything upside down. In
+matters of finance this process is questionable, interesting as the
+result would undoubtedly be. To get to work on tried lines and then,
+when once industry and finance have recovered their old activity, to
+amend the machine whenever it is creaking seems to be a more sensible
+plan than to delay our start until we have fashioned a new heaven
+and earth, and then very probably find that they do not work. If the
+machine is to be set moving, it can only be done by close co-operation
+between the Bank of England and the other banks which have grown by
+amalgamation into institutions the size of which seem likely to
+make the task of central control more difficult than ever. On this
+important point the Committee is curiously silent. But it recommends
+the adoption of a suggestion made by a Committee of Bankers, who
+proposed that banks should in future be required "to publish a monthly
+statement showing the average of their weekly balance-sheets during
+the month." (Will this requisition apply to the Bank of England?) This
+is a welcome suggestion as far as it goes, but unless something is
+done by co-operative action to make the Bank rate more automatic in
+its influence on the actions of the other banks, the difficulty of
+making it effective seems likely to be considerable.
+
+Getting the currency right is a most important matter for the future
+of our financial position. Another is the question of our debt to
+foreigners. Most of this debt we owe to America, and we only owe it
+because we had to finance our Allies. We surely ought to be able to
+arrange with America that anything that we have to do in giving our
+Allies time before asking for repayment they also should do for
+us--within limits, say, up to thirty years. In view of all that they
+have made and we have lost by this war waged for the cause of all
+mankind, this would seem to be reasonable concession on America's
+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
+4-1/2 years. This gives us £7752 millions as the gross cost of the
+war, as far as the period of actual fighting is concerned. From this
+figure, however, we are able to make some big deductions. There are
+loans to Allies and Dominions, and some other much more readily
+realisable assets than these. We do not know the actual figure of the
+loans to Allies and Dominions during the war period, because they are
+not included in the weekly financial statements. The amount that we
+borrow abroad is set out week by week--at least, that is believed to
+be the meaning of the cryptic item "Other Debt"--but the amount that
+we lend to Allies and Dominions is hidden away in the Supply Services
+or somewhere, and we only get occasional information about it from the
+Chancellor in the course of his speeches on the Budget or on Votes of
+Credit. In his last Vote of Credit speech, on November 12, 1918, Mr
+Bonar Law gave the chief items of the loans to Allies, and a very
+interesting list it was. The totals up to October 19, 1918, were £1465
+millions to Allies and £218-1/2 millions to Dominions. The Allies
+were indebted to us as follows:--Russia, £568 millions; France, £425
+millions; Italy, £345 millions; smaller States, £127 millions.[1]
+
+[Footnote 1: Parliamentary Debates, Vol. 110, No. 114, p. 2560.]
+
+Some of these debts may be written off at once, and that cheerfully,
+seeing that they have been lent brothers-in-arms who have been
+hit much harder than we have by the war, and had nothing like our
+financial strength. The question is, what figure ought we to put on
+this asset in deducting it from gross war expenditure in order to
+arrive at a guess at the real cost? We take our loans to Dominions, of
+course, as good to the last penny. Mr Bonar Law, in his Budget speech
+last April, took our loans to Allies at half their face value. Strict
+bookkeeping would probably demand a lower figure than 50 per cent.;
+but let us follow the ex-Chancellor's example and take loans to
+Allies, which we will estimate at £1480 millions up to November 9th,
+as good for £740 millions, and loans to Dominions at £220 millions up
+to the same date, a total of £960 millions, to be deducted from gross
+war cost. Concerning £740 millions of this sum, however, there is a
+certain amount of doubt. No one questions for a moment the solvency
+of France and Italy, but in view of the pressure that the war has
+exercised on their producing power, and, in the case of France, the
+complication added by the uncertainties of the position in Russia, in
+which French investors are so deeply interested, one cannot feel sure
+that they will be able at once to make interest payments. Much will
+depend on the sums that they are able to recover from Germany against
+their bill of damages, on which more anon. But in any case it seems
+likely that a general scheme of interest funding, as between the
+Allies, may have to be adopted for some years to come.
+
+As to the other assets that we have to set against our gross
+expenditure during the fighting period, they were enumerated by the
+Chancellor in his Budget speech last April in the following terms;--
+
+  Balances in agents' hands, debts
+    due, foodstuffs, etc                      £375 millions.
+  Land, securities, buildings and ships         97    "
+  Stores in Munitions Department
+    (cost price 325 millions) taken at         100    "
+  Additions this financial year                100    "
+  Arrears of taxation                          500    "
+                                               ---
+               Total[1]                      £1172
+
+[Footnote 1: Parliamentary Debates, Vol. 105, No. 33, pp. 698-699.]
+
+It will be remembered that in his Budget speech the Chancellor was
+proceeding on the assumption that the war would last till March 31st
+next--the date at which our financial year ends--and would then be
+convenient enough to stop. Happily for us, the valour of our soldiers
+and those of our Allies, the splendid success of our Fleet and our
+merchantmen In bringing over American troops and their food and
+equipment with astonishing speed, and the straightforward diplomacy
+of President Wilson, combined to achieve victory nearly five months
+earlier than the most sanguine had dared to expect. With the very
+pleasant result--though it is a small matter when compared with the
+end of the killing of the best of our manhood--that the financial
+position is very greatly improved. With regard to the figures given
+above, it should be observed that the "debts" are advances to
+Dominions, but on quite a different basis from our loans to them,
+being money owed by them against goods and services supplied.[1] They
+and the balances in the hands of agents are both as good as gold.
+Concerning the others, one is entitled at first sight to feel a good
+deal of scepticism, since such articles as land, buildings, ships and
+stores, bought or built by Government during a war, are likely to find
+an extremely sluggish demand when the war is over. However, Mr Bonar
+Law assured the House that his valuation of these amounts had been
+arrived at on a conservative basis, and, what is better still, in his
+Vote of Credit speech on November 12th, he was able to state that
+revised estimates had shown that their value would be "far greater"
+than he had previously expected. So perhaps we are entitled to take
+them at £1300 millions.
+
+[Footnote 1: Parliamentary Debates, Vol. 105, No. 33, p. 698.]
+
+If so, we get the following results for the cost of the fighting
+period:--
+
+  Total Government expenditure,
+    August 1, 1914, to November
+    9, 1918                                      £8612 millions.
+  Less estimate of normal peace expenditure        860    "
+                                                 -----
+                                                  7752    "
+  Less Loans to Dominions     220 millions.
+  Less Loans to Allies
+    (half face value)         740    "
+  Realisable assets          1300    "
+                             ----
+                                                  2260    "
+                                                  ----
+  Net cost of period                             £5492    "
+
+If war cost would be good enough to cease with the fighting we should
+thus now be able to see, more or less, how we stand. During the
+fighting period the Government raised by taxation the sum of £2120
+millions,[1] from which we have again to deduct £860 millions as an
+estimate for normal peace taxation, if the war had not happened,
+leaving £1350 millions as the net war taxation, and £4142 millions as
+the net addition to debt from the war.
+
+[Footnote 1: _Economist_, Nov. 16, 1918.]
+
+But, of course, there are still some large and uncertain sums to come
+in to both sides of the account. There is the cost of maintaining our
+Army and Navy during the armistice period, the cost of demobilisation,
+and the cost of putting an end to war munitions contracts running for
+many months ahead, holders of which will have to be compensated. Who
+has enough assurance to venture on an estimate of the cost of these
+items? Shall we guess them at something between £1000 and £1500
+millions? And when we have made this guess are we at the end of the
+war's cost? Ought we not to include pensions to be paid, and if so, at
+what figure? Fifty millions a year for thirty years? If so, there is
+another £1500 millions. And interest on war debt, and for how long?
+
+On the other side of the balance-sheet, the only asset that has not
+yet been included in the calculation is the sum that we are going to
+receive from Germany, Some cheery optimists think that it is possible
+for us and for the Allies to make Germany pay the whole of our war
+cost. If so, we have halcyon days ahead, for not only shall we be able
+to repay the whole war debt but also to pay back to the taxpayer all
+the £1350 millions that he produced during the war, unless, as seems
+more likely, the Government finds other uses, or abuses, for the
+money, and sets its motley horde of wasters to work again. But this
+problem, of course, is not going to arise. It would not be physically
+possible for Germany to pay the whole of the Allies' war cost, except
+in the course of many generations, and, moreover, the Allies have
+bound themselves not to make any such demand by the rider that they
+added to President Wilson's peace terms, in giving their assent to
+them as the basis on which they were prepared to make peace. Early
+in November they stated that President Wilson's reference to
+"restoration" of invaded countries should, in their view, be expanded
+into a claim for compensation "for all damage done to the civilian
+population of the Allies and to their property by the aggression of
+Germany by land, by sea, and from the air."[1] This is letting Germany
+off lightly; but, after stating their readiness to make peace on the
+basis of the fourteen points, if amended as above (and also with
+regard to the Freedom of the Seas question) it is not possible for
+the European Allies, as the Prime Minister's late manifesto says they
+propose to do[2] to expand this claim for civilian damage into a
+demand for the whole of their war cost up to the limit of the capacity
+of the Central Powers to pay, without a serious breach of faith. So
+that the question of how much we can get out of Germany is complicated
+by the further uncertainty of the size of the bill for damages that we
+can present. It will be big enough. We know that the Germans have sunk
+8-1/2 million tons of British ships during the war. As to the price
+at which, for "restoration" purposes, we shall value those ships and
+their cargoes, and all the civilian property damaged by aircraft and
+bombardment, this is a matter which it would be obviously improper
+to discuss; but we may be sure that the bill will mount up to many
+hundreds of millions, and it remains to be seen whether, after Belgium
+and France have presented their account, it will be possible for us to
+secure payment even for all the civilian damage that we have suffered.
+
+[Footnote 1: _Times_, November 7, 1918.]
+
+[Footnote 2: _Times_, December 6, 1918.]
+
+It thus appears that the net cost of the fighting period has been
+somewhere in the neighbourhood of £5500 millions, taking our loans
+to Allies at half their face value; and that the armistice and
+demobilisation period is likely to cost another £1000 to £1500
+millions more, to say nothing of pensions and debt charge that will go
+on for years (unless the supporters of Levy on Capital have their way
+and wipe the debt out), and that against this further expenditure we
+can set whatever sum is recovered from Germany.
+
+Seeing that our total pre-war debt was £710-1/2 millions, or, omitting
+what the Government returns call the Other Capital Liabilities,
+£653-1/2 millions, these figures of war debt and war cost are at first
+sight somewhat appalling. But there is no reason why they should
+terrify us, and there are several reasons why they are, when looked at
+with a discriminating eye, much less frightening than when we first
+set them out.
+
+In the first place, we have always to remember that these figures are
+in after-war pounds, and that the after-war pound is, thanks to the
+profligate use by our war Governments of the printing-press and the
+banking machine, just about half the size, when measured in actual
+buying power, of the pre-war pound. Any one who pays £100 in taxes
+to-day thereby surrenders claims to about the same amount of goods and
+service as he did if he paid £50 in taxes before the war. So that in
+making any comparison between the position now and the position then
+we have to divide the figures of to-day by two.
+
+In the second, we need not be misled by the Jeremiahs who tell us that
+now that we have won the war we have before us the task of paying for
+it. This is not true, or true only to a small extent--to the extent,
+that is to say, to which we shall, when all these assets and
+liabilities have been settled up and balanced, be afflicted with a
+foreign debt. Let us leave this question on one side for the time
+being, and consider what the position really is with regard to that
+part of the war's cost that has been raised at home. In so far as that
+has been done, the war cost has been raised by us while the war went
+on. In fact, all the war cost has to be raised by somebody while
+the war goes on, because the war is fought with stuff and services
+produced at the time and paid for at the time. But when Americans lend
+us money to pay for some of the stuff that they send us, they pay at
+the time and we, or our posterity, have to pay them back later on;
+this is the only way in which we can make posterity pay for the war,
+and then it only means that our posterity pays America's. It is not
+possible to carry on war with wealth that is going to be produced some
+day. The effort of self-sacrifice that war demands has to be made by
+somebody during its progress--otherwise the war could not be fought.
+
+That effort of self-sacrifice we have already made in so far as we
+have paid for our war cost out of money raised at home. That money has
+been raised in three ways--by taxation, by borrowing saved money, and
+by inflation. When it is raised by taxation the sacrifice is obvious,
+and, in nearly all cases, inevitable: we pay our larger war taxes and
+so we have less to spend on ourselves, and so we go without things. A
+few people raise money to pay taxes during war by borrowing or drafts
+on capital, but they are probably so exceptional that their case need
+not be considered. We transfer our buying power to the Government to
+be used for the fighters, and so we set free the labour and material
+that used to go in providing us with comforts and pleasures; our
+competition for goods is reduced, and so the Government is able to get
+what it needs out of the nation's production, which is _pro tanto_
+relieved of our demand. The same thing happens when the Government
+gets money for the war by borrowing money that we save. We reduce
+expenditure, and transfer buying power to the State and diminish our
+demand on the nation's production, or that of its foreign supplies. If
+the whole war cost had been met by these two methods there need have
+been little or no increase in prices here, and the cost of the war
+would have been about half what it has been. Of the two methods,
+taxation is obviously the cleaner, simpler and more honest. By
+borrowing, the State hires those who have a margin to put part of it
+at the disposal of the State at a time of national crisis, instead of
+taking it from them outright. As most of the taxation involved by
+the subsequent debt charge falls on those who have a margin (as it
+obviously should) the result is that the people who subscribed to the
+loans are afterwards taxed to pay themselves interest and to repay
+themselves their debt.
+
+This subsequent taxation falls on them all alike in proportion to
+their ability to pay, or would if the income tax was more equitably
+imposed; those who have subscribed their fair share to the loans have
+an offset, in the interest that they receive, against the taxation;
+those who subscribed less are properly penalised, those who subscribed
+more are properly benefited. If only the income tax did not make the
+position of fathers of families so unjust, the whole arrangement would
+look, at first sight, quite fair, though rather absurd and clumsy,
+involving all this subscribing and taxing and paying back instead of
+an outright tax and having done with it. But in fact a very grave
+inequity is involved by this business of borrowing for war, and laid
+upon just the people whom we ought, above all, to treat most fairly,
+namely, those who fight for us. The soldiers and sailors risk their
+lives for a pittance during the war, while their brothers and sisters
+and cousins and uncles and aunts, left at home in security and
+comfort, earn bloated profits and wages, and put them, or part of
+them, into War Loans; then when the fighters come back, very likely
+with their business and connection ruined or lost, they are expected
+to contribute to the taxation that goes into the pockets of
+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 being noticed,
+and so is particularly dear to the adroit politician. By it nobody
+transfers buying power to the Government, but the Government and
+the bankers, who are generally most reluctant accessories to the
+transaction, between them create new buying power, which, coming into
+a restricted market for goods in addition to all the existing buying
+power, simply forces everybody to consume less because the money in
+their pockets fetches less goods owing to the rise in prices.
+
+The evil attached to this system is obvious enough. It amounts to a
+tax on the general consumer in proportion to his consumption, and so
+it lays the sacrifice on the shoulders of those least able to bear it.
+No Government would have the courage to impose such a tax openly and
+frankly. All the warring Governments in varying degrees have used this
+roundabout device of imposing it, very likely being quite unaware
+of the fraud on the consumer that they were perpetrating. Our own
+Government, in fact, having first added by this process to a rise in
+the price of bread, then reduced it by a special subsidy--a pleasant
+touch of Alice in Wonderland finance. This mode of taxing by raising
+prices hits, of course, all those who live on fixed incomes and
+salaries and wages. Those who can strike, or take more out of the
+consumer, can evade it, and so it falls on the weakest shoulders and
+incidentally produces friction, discontent and dangerous suspicion.
+But even it works at the time when it happens. Each creation of new
+buying power gives the Government, for the moment, control of so much
+in goods and services at the expense of the consumer; but when once
+the new buying power has been distributed by the State's payments it
+is in the hands of the nation as a whole. If the process ceased, the
+nation would still have control of the whole of its output, which is
+its income, though the injustice involved, to those who are not strong
+enough to resist the effects of higher prices, would continue.
+
+Thus, whatever means--straightforward or devious--are used for
+financing war, it is paid for while it goes on by the warring country
+if the financing is done at home, or by its foreign creditors if the
+financing is done abroad. And it is, necessarily, almost entirely paid
+for out of income, that is, out of current production. It is curious
+to find that many people still seem to think that the whole cost of
+the war has come out of capital. Luckily for us it could not be done,
+or only to a very small extent. Our capital mostly consisted of
+railways, factories, ships, roads, agricultural land, machinery,
+houses and other things that could not be taken and shot out of a gun.
+These things we have still got, and though many of them are not in
+such good shape as they were, some of them are much better equipped
+and organised. We have drawn on our stocks of materials and goods--how
+far it is impossible to say; we have lost 8-1/2 million tons of
+shipping by war losses; in the meantime we have built, bought and
+captured 5-1/2 millions of new tonnage, and we have a claim against
+the Germans for such tonnage. On capital account we have suffered by
+wear and tear in so far as our upkeep has been neglected owing to lack
+of labour during the war, and by depletion of materials and stocks,
+and also, of course, by the fact that if the war had not happened,
+we should, if pre-war calculations were correct, have put some £1700
+millions into new investments at home and abroad during the 4-1/4
+years of fighting and some more hundreds of millions during the
+after-war period of Government borrowing and restriction on private
+investment. But a very large part of the money that went into victory
+would otherwise have gone not to capital account but into the pleasant
+frivolities, embellishments and vulgarities that made life an amusing
+absurdity in days before the war.
+
+If, then, the war sacrifice was made during the war, in so far as its
+cost was raised at home, how far is it true that we are now faced with
+the business of paying for it? If taxation were equitable it would
+only be to the extent that those who ought to have made the sacrifice
+and did not, will in future have to pay interest to those who did, or
+their representatives. So that the first thing we have to do is to
+make taxation equitable, that is, lay it on the taxpayer in proportion
+to his ability to pay. There will still remain the injustice to those
+who have fought for us, which might be cured, or amended, by special
+exemptions. With taxation on a really sound basis no further sacrifice
+would be involved by the debt charge, and no diminution of the
+nation's wealth or consuming power, which will depend, as always, on
+its output of goods and services; but only a transfer of consuming
+power from taxpayers to debt-holders in accordance with the sacrifice
+made by the latter during the war. What we produce as a nation we
+shall consume as a nation, subject to the extent that we financed the
+war during its course by operations abroad.
+
+These operations were twofold. We sold to foreigners part of our
+holdings of foreign securities, thereby and to this extent paying for
+war cost out of capital--out of the investments made by ourselves
+and our forbears in America and elsewhere. Mr Bonar Law, in a recent
+interview in the _Observer_, stated that we had sent back to the
+United States practically the whole of our holdings of American
+securities to be sold or pledged as collateral for loans, and that the
+value of them was three billion dollars--£600 millions sterling. Any
+of them that have only been pledged can presumably be used to meet the
+loans raised as they fall due, and so will lighten our burden in the
+matter of repayment. These loans raised abroad are the second mode of
+foreign financing. By it we had raised up to November 9th nearly £1300
+millions, as shown by the _Economist's_ table, and to that extent we
+have pledged our future production and that of our posterity, to meet
+the annual service for interest and repayment. On the other hand, all
+this sum and more we have (as shown above) lent to our Allies and
+Dominions, so that the ex-Chancellor was well justified in his boast
+that we had only borrowed to finance our Allies, and that we had been
+self-sufficient for our own war cost.[1]
+
+[Footnote 1: Budget Speech, Parliamentary Debates, vol. 105, No. 33.]
+
+In other words, all that we needed for the war we were able to produce
+ourselves, or to obtain in exchange for our produce and assets. On
+paper, therefore, our position as a creditor country is only impaired
+by our sales of securities. But that is only so on paper. In fact, the
+loans that we have raised abroad are good debts that have to be met to
+the last penny, and are a first charge on our future output, but the
+advances that we have made to our Allies, much harder hit than we are
+by the war, are assets on which we cannot depend. They were taken in
+our balance-sheet above at half their face value, but there is much to
+be said for writing them off altogether and tearing up the I.O.U.'s
+of our foreign brothers-in-arms. Their need is greater than ours, it
+would be little satisfaction to receive interest and repayment from
+them, and the payment due from them, involving difficult problems of
+taxation for them, would not help the good relations with them which,
+we hope, may be a lasting effect of the war. And such an act of
+renunciation on our part would do something towards a restoration
+of the spirit with which we entered on war, a spirit which has been
+seriously demoralised during its course, largely owing to the results
+of our faulty finance, which encouraged profiteering in all classes.
+
+In any case, there is our position. We have a big debt to meet at
+home and abroad, and we are weakened on capital account by foreign
+indebtedness, wear and tear of plant and dimunition of stocks and
+materials. Wear and tear and depletion we can soon make good if we set
+to work and work hard, if our bureaucracy takes away the fetters of
+its restrictions and controls (instead of making further additions
+to the "Black List" even after the armistice!), and if our ruling
+wiseacres will refrain from trying to stimulate industry by taxing raw
+and half-raw materials. For the debt charge many pleasant and
+simple fancy strokes are suggested. The Levy on Capital is popular,
+especially with those who do not own any, but its advocacy is by no
+means confined to them. Mr Pethick Lawrence has published a persuasive
+little book about it, but I cannot see that he meets the objections
+to it. These are, the difficulty of valuation, the fact that in many
+cases it would have to be paid by instalments, and so would be merely
+another form of income tax, its sparing of the waster and penalising
+of the saver, and, consequently, the grave danger that it would check
+accumulation and so dry up the springs of capital. Mr Stilwell
+has produced a "Great Plan to Pay for the War," by which all the
+belligerents and neutrals who have been involved in expense by the war
+would receive World Bonds from an International Congress for what
+they have spent owing to the war, and would then pay one another any
+international debts by exchanging these World Bonds, and deal with the
+home debt by paying it off in new currency raised on the World Bonds.
+But, surely, to pay off war debt with a huge addition to currency,
+making war's inflation many times worse, would be a disastrous
+beginning to that new era which is alleged to be dawning.
+
+By hard work, sparing consumption of luxuries, and a big industrial
+output, we can soon make the debt charge look smaller and smaller as
+compared with our aggregate income. Our foreign debt we can only meet
+by shipping goods and rendering services. But since it was all raised
+to be lent to our Allies and our lending of it was essential to a
+victory which has rid mankind of a terrible menace, it is surely
+reasonable that our creditors should not press for repayment in the
+first few difficult years, but should fund our short-dated debts into
+loans with twenty-five or thirty years to run. As to the home debt,
+we can only lighten its burden on the taxpayer by making taxation
+equitable. To this end reform of the income tax is an urgent need. We
+have to lighten its pressure much more effectively on those who are
+bringing up families, and by collecting it through employers make it
+an effective and just tax on those of the working class whose earnings
+and family liabilities make them fairly subject to it.
+
+
+
+
+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 independence of the State were sold to a foreign
+Power, while chartered rights were invaded, while fundamental laws
+were violated, hundreds of thousands of quiet, honest and industrious
+families laboured and traded, ate their meals and lay down to rest in
+comfort and security. Whether Whigs or Tories, Protestants or Jesuits
+were uppermost, the grazier drove his beasts to market, the grocer
+weighed out his currants, the draper measured out his broadcloth,
+the hum of buyers and sellers was as loud as ever in the towns, the
+harvest-time was celebrated as joyously as ever in the hamlets, the
+cream overflowed the pails of Cheshire, the apple juice foamed in the
+presses of Herefordshire, the piles of crockery glowed in the furnaces
+of the Trent, and the barrows of coal rolled fast along the timber
+railways of the Tyne. But when the great instrument of exchange became
+thoroughly deranged, all trade, all industry, were smitten as with a
+palsy.... Nothing could be purchased without a dispute. Over every
+counter there was wrangling from morning to night. The workman and his
+employer had a quarrel as regularly as the Saturday came round. On a
+fair-day or a market-day the clamours, the reproaches, the taunts, the
+curses, were incessant; and it was well if no booth was overturned,
+and no head broken.... The price of the necessaries of life, of shoes,
+of ale, of oatmeal, rose fast. The labourer found that the bit of
+metal which, when he received it was called a shilling, would hardly,
+when he wanted to purchase a pot of beer or a loaf of rye bread, go as
+far as sixpence."
+
+From some of the evils thus dazzlingly described we are happily free
+in these times. We are not cursed with a currency composed of coins
+which are good, bad and indifferent, with the result that the public
+gets the bad and indifferent while the nimble bullion dealers absorb
+and export the good. There is nothing to choose between one piece of
+paper and another, and all that is wrong with them is that there are
+too many of them. But the general result as it affects the labourer
+who wants to purchase a pot of beer or anyone else who wants to buy
+anything is very much the same. A bit of metal that is called a
+shilling has about the value of a pre-war sixpence and a bit of paper
+that is called a Bradbury fetches half as much as the pound of five
+years ago. Compared with what other peoples are suffering from the
+same disease arising from the same surfeit of money in one form or
+another, this nuisance that we are enduring is not too terribly
+severe. It has entailed great hardship on a class that is small
+in number, namely, those who have to live on fixed incomes. The
+salary-earner and the rentier have borne the brunt, while the
+wage-earner and the profit-maker have been able to expand their
+earnings, in paper, at least to a point at which the depreciation of
+currency have left them no worse off. Seeing that the wage-earners
+are those who do the dreariest and dirtiest jobs, and that the
+profit-makers are those who take the risks of industry and the
+enormous responsibility of organising enterprise, they are the classes
+whom it is clearly most desirable to encourage. The rentier in these
+days gets less than no sympathy, but we make a great mistake if we
+think that we can with impunity crush him between the upper and nether
+millstone of fixed income and rising prices. With his help we have
+equipped industry at home and abroad. We can, if we choose, by
+depreciating the currency still further, lessen still more the reward
+that we pay him for that benefit. He may kick, but he cannot abolish
+the equipment with which he has already provided industry. But if
+we make his life too hard he can strike like the rest of us, and by
+refusing to provide for any further expansion in industrial equipment,
+he can hold up production until we have devised some new method of
+laying up capital. Currency depreciation is good for the debtor and
+bad for the creditor; if it goes too far it kills the creditor and
+reduces business to chaos.
+
+We are a very long way from the chaos to which many of our Continental
+neighbours have already reduced their monetary systems; but there
+is fortunately a very general feeling that we are a country with a
+reputation and a prestige on this point; and the business world is
+growing restive concerning the delay on the part of those responsible
+in putting an end to a state of things which may have been justified
+by the war's exigencies (though there is much to be said for the view
+that in fact it only added to the war's difficulties) but is
+now clearly as out of date as the censorship, which, like it,
+nevertheless, continues to flourish. This state of things arises from
+the arrangement tinder which an unlimited supply of legal tender
+currency can be manufactured by the Government, which encouraged to
+continue the system by the fact that each note issued is in effect a
+loan to itself without interest. At the meeting of Barclays Bank on
+January 27th, Mr. Goodenough demanded that the issue of currency notes
+by the Government should be stopped forthwith, and that if it were
+necessary to provide more currency it would be better for the banks
+to be allowed to issue notes themselves. This suggestion involves, of
+course, a complete reversal of the principles on which our monetary
+system has grown up, since it has long been based on a note-issuing
+monopoly in the hands of the Bank of England. But these are
+topsy-turvy days, in which greyheaded precedent is very justly at a
+heavy discount; and Mr Goodenough's suggestion very practically gets
+over a big difficulty that stands in the way of stopping the stream
+of Bradburys. This difficulty lies in the fact that if the banks were
+pulled at by their customers for currency and could not supply them
+with Bradbury notes, they would be forced to take notes from the Bank
+of England, with a bad effect on the appearance of its reserve. If
+the business of issuing notes were put into the hands of the clearing
+banks, their power to do so would be limited by the extent of their
+assets, or of such of their assets as were thought fit to rank as
+backing for their notes. In other words, the note-issuing business
+would once more have to be regulated on banking principles and
+controlled by the price asked, for advances, instead of expressing
+the helplessness and improvidence of an impecunious and invertebrate
+Government. In this manner the new departure might be a convenient
+halfway-house on the way from chaos back to sanity. But probably it is
+too revolutionary and goes too straight in the teeth of the Bank of
+England's privilege to receive much practical consideration; and there
+is the question whether the public would take the new paper readily
+and whether it could be made legal tender.
+
+Sir Edward Holden, in one of those masterly surveys of world finance
+with which he now instructs the shareholders of the London Joint City
+and Midland Bank, assembled at their annual meeting, gave much of his
+attention to an attack on the report of Lord Cunliffe's Committee on
+Currency. This was only to be expected, since the Committee had made
+recommendations on lines which were largely conservative and did
+not embody any of the reforms or changes which had been previously
+advocated by Sir Edward. Being on this occasion chiefly critical, he
+did not make very clear in his latest speech the precise proposals
+that he favours. For them we have to go back to his speech of a year
+ago, as reported in the _Economist_ of February 2, 1918, p. 171, where
+he stated that "if the Bank (of England) had been working on the same
+principles as other national banks of issue, there would have been
+little ground for anxiety," and that these principles are:--
+
+1. One bank of issue and not divided into departments.
+
+2. Notes are created and issued on the security of bills of exchange
+and on the cash balance, so that a relation is established between the
+notes issued and the discounts.
+
+3. The notes issued are controlled by a fixed ratio of gold to notes
+or of the cash balance to notes.
+
+4. This fixed ratio may be lowered by the payment of a tax.
+
+5. The notes should not exceed three times the gold or the cash
+balance.
+
+As will be remembered, the Cunliffe Committee recommended that the
+division of the Bank of England into an Issue Department and a Banking
+Department, should be retained; that the old principle by which above
+a certain fixed limit all notes should be backed by gold, should also
+be retained, but that if at any time a breach of this rule should
+be found necessary it should be possible, with the consent of the
+Treasury, and that Bank rate "should be raised to a rate sufficiently
+high to secure the earliest possible retirement of the excess issue."
+Since it was formerly only possible to exceed the limit on the
+fiduciary issue by a breach of the law, under the Chancellor of the
+Exchequer's promise to get an indemnity for it from Parliament, and
+since Treasury tradition insisted on a 10 per cent. Bank rate whenever
+such a breach was permitted or contemplated, it will be seen that the
+Cunliffe Committee proposed some considerable modifications in our
+system and hardly justified Sir Edward's assertion that it "proposed
+that the Bank should continue to work under the Act of 1844 as
+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 convincing. Sir Edward
+wants only one account, because he thinks the consequence would be a
+stronger reserve and fewer changes in bank rate. But a mere change of
+bookkeeping such as the amalgamation of the two accounts would not
+make a half-pennyworth of difference to the extent of the Bank's
+responsibilities and its ability to meet them, and it is on variations
+in these factors that movements in bank rate are in most cases
+decided. On the other hand, Lord Cunliffe and his colleagues argue
+that the main effect of putting the two departments into one would be
+to place deposits with the Bank of England in the same position as
+regards convertibility into gold as is now held by the note. On this
+point Sir Edward's answer is telling: "In reply to this statement, I
+say that the depositors at the present time can always get gold by
+drawing out notes from the reserve and taking gold from the Issue
+Department. There seems to be little difference between the depositors
+attacking gold direct and attacking the gold through the notes in the
+reserve. If the Bank cannot pay the notes when demanded the whole
+machinery stops." Quite so. The notion that the holder of a Bank of
+England note has now a stronger hold over the Bank's gold than the
+depositor seems to be baseless. He can exercise his hold more quickly
+perhaps, though even this is doubtful. Since banknotes are not
+legal tender at the Bank of England, it is not quite clear that the
+depositor would even have to take the trouble to go first to the
+Banking Department for notes and then to the Issue Department for
+gold. He might be able to insist on gold in immediate payment of his
+deposit. Still less convincing is the Committee's argument that "the
+amalgamation of the two departments would inevitably lead in the end
+to State control of the creation of banking credit generally." Their
+report might have explained why this should be so, for to the ordinary
+mind the chain of consequence is not apparent. On the whole it is hard
+to see much good or harm to be achieved by changing the form of the
+Bank return. It might make the Bank's position look stronger, but it
+could not make it really stronger. Nor would it really impair the
+strength of the note-holder's position as against the depositor,
+because even now there is no essential difference. It would substitute
+a more businesslike and simple statement for a form of accounts which
+is cumbrous and stupid and Early Victorian--a relic of an age which
+produced the crinoline, the Crystal Palace and the Albert Memorial. On
+the other hand, to alter a statistical record merely for the sake of
+simplicity and symmetry is questionable. Unless we are getting more
+and truer information, it is a pity to make comparisons between one
+year and another difficult by changing the form in which figures are
+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 Committee's support of the old fixed line system. By the
+latter, if gold comes in, notes to the same extent can be created,
+and if gold goes out notes to the amount of the export have to be
+cancelled. Under Sir Edward's policy the influx and efflux of gold
+would have an effect on the note issue which would be three times the
+amount of the gold that came in or went out. This at least is the
+logical effect of his statement that "the notes should not exceed
+three times the gold or the cash balance." This law does not seem to
+be quite consistent with his view that the fixed ratio of gold to
+notes may be lowered by the payment of a tax; but presumably the tax
+would come into operation before the three to one part was reached,
+and at three to one there would be a firm line drawn. On this
+assumption the Committee's argument is a very strong one. "If,"
+says its report (Cd. 9182, p. 8), "the actual note issue is really
+controlled by the proportion, the arrangement is liable to bring about
+very violent disturbances. Suppose, for example, that the proportion
+of gold to notes is actually fixed at one-third and is operative.
+Then, if the withdrawal of gold for export reduces the proportion
+below the prescribed limit, it is necessary to withdraw notes in the
+ratio of three to one. Any approach to the conditions under which the
+restriction would become actually operative would then be likely to
+cause even greater apprehension than the limitation of the Act of
+1844." Certainly if, during a foreign drain, for every million of gold
+that went out, another two millions of credit, over and above, had
+to be cancelled, it is easy to imagine a very jumpy state of mind in
+Lombard Street and on the Stock Exchange. Sir Edward and the Committee
+seem to be agreed as to a limit on the note issue, but of the two
+limiting systems the old one advocated by the Committee, though
+apparently more severe, would seem to have much less alarming
+possibilities behind it.
+
+A point on which the commercial world does not seem to have made up
+its mind, however, is whether there should be a limit at all. Under
+the old Act there was a limit which could only be passed by a breach
+of the law. Under the Cunliffe proposal the limit could be passed
+with the consent of the Treasury. Sir Edward has not told us of what
+machinery he proposes for the passing of the limit which he lays down;
+but in view of the great apprehension that an approach to the limit
+point would, as shown by the Committee, produce, it is clear that
+there would have to be a way round. In Germany there is no limit; you
+pay a tax on the excess issue and go on merrily. In America it would
+seem that the German system has been taken for a model. In his speech
+on January 29th Sir Edward quoted Senator Robert Owen, who was the
+principal pioneer of the Federal Reserve Bill through the Senate, as
+follows:--"The central idea of the system is elastic currency issued
+against commercial paper and gold, expanding and contracting according
+to the needs of commerce.... It is of great importance that the volume
+of these notes should contract when the commerce of the country does
+not require the notes to be circulation, and the reserve board can
+require them to be returned by imposing a tax upon the issue.... Under
+the reserve system a financial panic is impossible. People will
+not hoard currency nor hoard gold when they know that they can get
+currency or get gold when required.... America no longer believes
+a financial panic possible, and therefore the business men, being
+perfectly assured as to the stability of credits, do not hesitate to
+enter manufacturing and commercial enterprises from which they would
+be deterred under old conditions of unstable credit." Well, let us
+hope the Senator is right and that America is right in believing that
+a financial panic is no longer possible there. But one cannot help
+feeling that such a belief may be rather dangerous in the minds of
+people so ready to take rose-coloured views as our American cousins.
+The Federal Reserve system has worked beautifully in a period in
+which American finance has had nothing to do but rake in the enormous
+profits of American production at the expense of warring Europe and
+lend part of them, to be spent in America, to the Allied belligerents.
+It may work equally well if and when the problem to be faced is
+different, but it will be interesting to see--for those of us who live
+to see--what sort of a tax will be needed to "require" America, in one
+of its holiday moods, to return currency that it thinks it needs and
+the Federal Reserve Board regards as redundant.
+
+Another point on which Sir Edward lays great stress, in his attack
+on the Bank Act of 1844 and the Committee which supports its main
+principles, is the beauty of the bill of exchange as backing for a
+note issue, as opposed to Government securities. "There is," he says,
+"no automatic system for the redemption of currency notes as would be
+the case if they were issued against bills of exchange, which in due
+course would have to be paid off." Again, "it seems to me that notes
+should not be issued against Government securities which may or may
+not be paid off, but against bills of exchange which must be met at
+due date." This advantage about a bill of exchange is a very real
+one to the individual holder who can always put himself in funds by
+letting the contents of his portfolio "run off"; but is there much
+in it as a safeguard against excessive issue of currency in times of
+exuberance? In such times bills that fall due are pretty sure to
+be replaced by new ones drawn against fresh production--since
+over-production is a common symptom of commercial exuberance--or
+against a resale of the goods on which the original bills were based.
+As long as anyone who can show produce can be certain to get credit
+and currency, the notion that the maturing of bills of exchange can be
+relied to restrict currency expansion within safe limits is surely a
+dangerous assumption. The principle of a fixed limit, to be broken in
+case of real need, but only after some ceremony has been gone through
+giving notice of the fact that a crisis has been reached, seems rather
+to be required by the psychology of speculative mankind. But even if
+Sir Edward's preference for bills of exchange as backing for notes has
+all the merits that he claims that is no reason for urging the repeal
+of the Bank Act to secure their use. Because the Bank Act does not
+forbid it: it merely says, "there shall be transferred, appropriated
+and set apart by the said governor and company to the Issue Department
+of the Bank of England securities to the value of," etc. It is the
+practice of the Bank to put Government securities into the Issue
+Department, but the terms of the Act do not compel them to do so, and
+if an excess issue were needed they would seem to be empowered to put
+any bills that they discounted into the assets held against the note
+issue. On the whole the terms of the Act leaving them freedom in the
+matter, except with regard to the "Government debt" of £11 millions,
+which is specially mentioned as to be transferred to the Issue
+Department, seem to be preferable to a special stipulation in favour
+of bills of exchange.
+
+But the most important difference between Sir Edward Holden and the
+Cunliffe Committee seems to be in their attitude towards the gold
+reserve and the relation between the Bank of England and the rest of
+the items that compose the London money market. The Committee, working
+to restore the conditions which made our market the centre of the
+world's finance, endeavoured to give back the control of the central
+gold reserve to the Bank of England by suggesting, among other things,
+that the other banks should hand over their gold to it. They omitted
+to discuss the serious question of the greater difficulty that the
+Bank is likely to find in future in controlling the price of money in
+the market, owing to the huge size that the chief clearing banks have
+now reached. But a central gold reserve under central control was
+evidently the object at which they aimed. Sir Edward will have none of
+this. He says that if this were done the position of the Joint Stock
+banks would be weakened, though he does not explain why, since they
+would obviously hold notes in place of their gold and so would be able
+to meet their customers' demands, now that the latter are accustomed
+to the use of notes for pocket money. He points out that "the gold
+which was held by the Joint Stock banks before the war proved most
+useful.... At the beginning of the war the banks paid out gold,
+satisfied the demands of their customers for small currency, and thus
+eased the situation until currency notes became available." He seems
+to have forgotten that the banks, or most of them, refused to part
+with their gold, paid their customers in Bank of England notes which,
+being for £5 at the smallest, were of little use for pocket money, and
+so drove them to the Bank to get gold; and we had to have a prolonged
+bank holiday and a moratorium. Sir Edward is in favour of three gold
+reserves, one to be held by the Government, one by the clearing banks,
+and one by the Bank of England. If there were differences between the
+three controllers of the reserve at a time of crisis the consequence
+might be disastrous.
+
+In view of the admiration expressed by Sir Edward for the new American
+system which is so clearly based on central control it is rather
+illogical that he should be so strongly in favour of independence on
+this side of the water. His opinion is that "the policy of the Joint
+Stock banks ought to be to make themselves independent of the Bank of
+England by maintaining large reserves in their vaults." Independence
+and individualism are a great source of strength in most fields of
+financial activity, but in view of the great problems that our money
+market has to face there seems to be much to be said for co-operation
+and central control, at least until we have got back to a normal state
+of affairs with regard to the foreign exchanges.
+
+
+
+
+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 nationalised we may have to be licensed before we can burn coal
+or go away for a week-end; if the Eugenists have their way a licence
+will be necessary before we can propagate the species; and before
+we can get a licence to do anything we shall have to go through an
+exasperating process of filling in forms innumerable, inconsistent,
+overlapping and incomprehensible. Finance is the latest victim of this
+melancholy tendency. Under the guise of an attempt to give greater
+freedom to it a system has been introduced which makes a Treasury
+licence necessary, with penalties under the Defence of the Realm Act,
+for doing many things which have hitherto been possible for those who
+were prepared to forgo the privilege of a Stock Exchange quotation.
+Let the story be told in official language, as uttered through the
+Press Bureau, on February 24th, in "Serial No. C. 10917."
+
+"In view of the changed conditions resulting from the conclusion
+of the armistice, the Treasury has had under consideration the
+arrangements which have been in force during the war for the control
+of New Issues of Capital.
+
+"The work of scrutinising proposals for new Capital Issues has been
+performed during the war by the Capital Issues Committee, the object
+being to refuse sanction for all projects not immediately connected
+with the successful prosecution of the war. The decisions of the
+Treasury, taken upon the advice of this Committee, have, however,
+not had any binding force, beyond what is derived from the emergency
+regulations of the Stock Exchange, which forbids dealings in any new
+Issues which have not received Treasury consent.
+
+"While it is not possible under existing financial conditions to
+dispense altogether with the control of Capital Issues, it has clearly
+become necessary to reconsider the principles upon which sanction has
+been given or refused in order that no avoidable obstacles may be
+placed in the way of providing the Capital necessary for the speedy
+restoration of Commerce and Industry, and the development of public
+utility services.
+
+"In view of the numbers of the proposals for fresh Issues of Capital
+which are to be expected, it is necessary to provide further machinery
+for dealing with them and for making the decisions upon them
+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:--
+
+"'To consider and advise upon applications received by the Treasury
+for licences under Defence of the Regulation (30 F) for fresh
+Issues of Capital, with a view to preserving Capital during the
+reconstruction period for essential undertakings in the United
+Kingdom, and to preventing any avoidable drain upon Foreign Exchanges
+by the export of Capital, except where it is shown to the satisfaction
+of the Treasury that special circumstances exist.'
+
+"It will be an instruction to the Committee that, in order that
+applications may be dealt with expeditiously and to enable oral
+evidence to be given in support of them when desired by the applicant,
+that the Committee should sit by Panels consisting of three members,
+the decision of the Panels to be subject to confirmation by the full
+Committee.
+
+"All applications for licences most be made, in the first instance,
+in writing on a Form which can be obtained from the Secretary of the
+Capital Issues Committee, Treasury, S.W. 1.
+
+"Before any application is refused the Committee will give the
+applicant an opportunity of giving oral evidence in support of his
+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 Does
+    involve the introduction of fresh capital.
+
+"If none of the above Forms appears to be applicable (as, e.g., in
+amalgamations, sub-divisions of shares, etc.), a statement of the
+facts should be submitted in writing."
+
+Before we go on to consider the new regulation, 30 F, let us try to
+see what is the real effect of the document above quoted. It was
+evidently intended to be a relaxation of the control of finance.
+This is shown by the sentence which says that the matter was to be
+reconsidered "in order that no avoidable obstacle may be placed in the
+way of providing the capital necessary for the speedy restoration
+of commerce and industry, and the development of public utility
+services." And yet it was thought necessary to give legal force and
+attach penalties to regulations that have worked during the war quite
+sufficiently well to secure a much stricter control than is now
+required. The explanation of this apparent inconsistency is probably
+to be found in the desire of the Government to meet a grievance of the
+Stock Exchange. Hitherto the only penalty that befell those who made
+a new issue without getting Treasury sanction was that the securities
+issued could not be dealt in on the Stock Exchange. The practical
+effect of this was that those who acted without Treasury sanction
+could only issue securities subject to this serious drawback, and
+so an effective but not altogether prohibitive bar was put on the
+process. If this bar was not strong enough in war-time it ought
+clearly to have been strengthened long ago; if it was strong enough,
+then why should it be strengthened now?
+
+From the Stock Exchange point of view it is easy to make out a good
+case for working through licence and penalty rather than through the
+banning, of the securities effected, from sanction for dealings. By
+thus being used as an official weapon the Stock Exchange penalised
+itself and its members. By saying "no security not sanctioned by the
+Treasury shall be dealt in here," its Committee restricted business
+in the House and drove it outside. This grievance was obvious and was
+plentifully commented on during the war. If the Committee had pressed
+the point vigorously it could probably have forced the Government long
+ago to abolish the grievance by making all dealings in new issues that
+appeared without Treasury sanction illegal and liable to penalty.
+A patriotic readiness to fall in with the Government's desires was
+probably the reason why the Stock Exchange refrained from embarrassing
+it, during the war, by too active protests against a grievance that
+was then more or less real; though it should be noted that even if the
+grievance had been amended, the Stock Exchange would not necessarily
+have got any more business, but would only have succeeded in stopping
+a very moderate amount of business that was being done by outsiders.
+But when all is said that can be said for the justice of the case that
+can be made by the Stock Exchange, the question still arises whether
+it was advisable, at a time when relaxation of restrictions was
+desirable in the interests of the revival of industry, to draw tighter
+bonds which had been found tight enough to do their work. That the
+Stock Exchange should suffer from limitations from which outside
+dealers were exempt was certainly a hardship. On the other hand,
+since the armistice there has been a considerable expansion in Stock
+Exchange business. Oil shares, Mexican securities, industrial shares,
+insurance shares, and others in which capitalisation of reserves and
+bonus issues have been used as an effective lever for speculation,
+have enjoyed spells of considerable activity. With this revival in
+progress, in spite of many obvious bear points, such as industrial
+unrest at home, Bolshevism abroad, the continuance of heavy
+expenditure by the Government, and the hardly slackened growth of
+the national debt, it seems to have been scarcely necessary in the
+interests of the House to have made regulations which, though perhaps
+demanded by abstract justice, imposed new ties on enterprise at a
+time when complete freedom, as far as it was consistent with the best
+interests of the country, was most of all desirable.
+
+How far, we have next to ask, is it necessary for the best interests
+of the country to restrict the freedom of capital issues? If we look
+back at the terms of reference under which the reconstituted Committee
+is to work, we see that the officially expressed objects are (1)
+preserving capital for essential undertakings in the United Kingdom,
+and (2) preventing any avoidable drain upon Foreign Exchanges by the
+export of capital. There is certainly much to be said for both these
+objects. When we lend money to foreigners we give them the right to
+draw on us now in return for their promises to pay some day; in other
+words, we make an invisible import of foreign securities, and in the
+present state of our trade balance all imports, whether visible or
+invisible, need careful watching. It is also very evident that at a
+time when capital is scarce there is much to be said for keeping it
+for essential industries, especially those which produce necessaries
+and goods for export, and not allowing it to be swept up by borrowers
+who are going to devote it to making expensive fripperies on which big
+profits are probable.
+
+There remains a very big other side to both these questions. All over
+the world there is a demand for goods which have not been produced,
+or only in greatly reduced quantities, during the war. This demand is
+only effective in so far as willing buyers can pay; some of them have
+the needful cash in hand or waiting in London or elsewhere to be drawn
+on, but a great number of would-be buyers want to be financed, and
+will have to be financed by somebody if the needs that they feel are
+to be translated into actual purchases. In other words, in order that
+the wheels of industry are to be set turning as fast as they might, if
+they had a full chance, somebody has to lend freely. Now, it is surely
+most of all important in the national interest that those wheels
+should begin spinning as fast as possible, and the question is whether
+we are more likely to serve that interest best by keeping a meticulous
+eye on the course of exchange and buttoning up our pockets to foreign
+borrowers or by leaving capital free to seek its market, knowing that
+every time we give the foreigner the right to draw on us we stimulate
+our export trade, because his drawing must finally mean a demand on us
+for something--goods, securities or gold--and goods are what people
+are in these times most anxious to take. If we are going to leave all
+the financing to be done by America and fear to import promises to pay
+lest they should be followed by demands on our gold, shall we not be
+rather in the position of Barry Lyndon, who was given a gold piece by
+his mother when he went out into the world, with strict injunctions
+always to keep it in his pocket and never to change it? Regard for our
+gold standard is most necessary, but the gold standard is not an end
+in itself, but merely an important part of a machine which only exists
+to serve our industry. If we are so careful of the machine, which is
+a mere subsidiary, that we check the industry which it is there to
+serve, we shall be like the dandy who got wet through because he had
+not the heart to unfurl his beautifully rolled-tip umbrella.
+
+Again, it looks very sound and sensible to keep capital for purposes
+that are essential, but, on the other hand, it is so enormously
+important to set industry going as fast as possible that almost any
+one who will do anything in that direction is entitled to be given a
+chance. In war-time, when labour and materials were so scarce that
+they could not turn out all the munitions that were necessary, such a
+restriction was clearly inevitable. Now, when labour and materials are
+becoming more plentiful, and the scarce commodity is the pluck and
+enterprise that will take the risks involved by getting to work on a
+peace basis, it may be argued that any one who will take those risks,
+whatever be the stuff or services that he proposes to produce, should
+be encouraged rather than checked. It is again a question of the
+balance of advantage. If we are going to be so careful in seeing that
+capital is not put to a wrong use that we take all the heart out of
+those who want to make use of it, we shall do more harm than good. If
+by leaving capital free to go into any enterprise that it fancies
+we can give a start to industry and promote a spirit of courage and
+enterprise among its captains, it will be well worth while to do so
+at the expense of seeing a certain amount of capital going into the
+production of articles that the community might, if it made a more
+reasonable use of its purchasing power, very well do without. The same
+question arises when we consider the desire of the Government, not
+expressed in the above statement, but very freely admitted by Mr Bonar
+Law, in discussing it in the House of Commons, to keep capital to be
+lent to it rather than expended in, perhaps unnecessary, industry.
+Here, again, it is clearly in the interest of the taxpayer that
+Government loans should be raised on the most favourable terms
+possible. But if, in order to do so, we starve industry of capital
+that it needs, and so check the production on which all of us,
+Government and citizens alike, ultimately have to live, we shall
+be scoring an immediate advantage at the expense of future
+progress--spoiling a possibly brilliant break by putting down the
+white ball for a couple of points.
+
+There is thus a good deal to be said for setting capital free, before
+we have even arrived at the most serious objection to regulating it
+under Treasury licence. This objection is the exasperation, delay and
+uncertainty involved by this control. Even if we had an ideally wise
+and expeditious body to decide about capital issues it might not be
+the best thing to set it to work. But when we remember that in order
+to see that the wrong sort of issue is not made, all issues will
+have to pass through the terribly slow-working process of official
+selection before the necessary licence is finally granted, it begins
+to look still more likely that we should do well to run the risk of
+letting a few goats through the gate, rather than keep all the sheep
+waiting outside for months, with the probable result that many of them
+may lose altogether their chance of final salvation. It will be noted
+from the official statement that the arbitrary methods of the old
+Committee are to be modified. It has long been a by-word among those
+who had dealings with it; they abused it in quite sulphurous language
+and were wont to quote it as an example of all that bureaucratic
+tyranny is and should not be, thereby doing some injustice to our
+bureaucrats, seeing that the Committee was manned not by officials but
+by business men, clothed _pro hac vice_ in the thunder of Whitehall.
+The new Committee is to sit by panels of three, so as to expedite
+matters, and so as to allow applicants the privilege of giving oral
+evidence. This is an innovation that will save some exasperation, but
+it will hardly accelerate matters, especially as the decision of the
+panels will be subject to confirmation by the full Committee, so that
+all the work will have to be done twice over. There is thus much
+reason to fear that delay, so fatal in business matters, will be an
+inevitable offspring of the efforts of the new Committee, and the list
+of different forms on which applications are to be made, given above,
+shows that all the paraphernalia of red tape will dominate the
+proceedings.
+
+Now for the terms of the new Regulation under the Defence of the Realm
+Act.
+
+    "1. The following regulation shall be inserted after Regulation 30
+    EE:--
+
+    "30 F. The following provisions shall have effect in respect of
+    new capital issues and to dealings in securities issued for the
+    purpose of raising capital:
+
+    "(1) No person shall, except under and in pursuance of a licence
+    granted by the Treasury--
+
+    "(a) issue, whether for cash or otherwise, any stock, shares or
+    securities; or
+
+    "(b) pay or receive any money on loan on the terms express or
+    implied that the money is to be or may be applied at some future
+    date in payment of any stock, shares or securities to be issued at
+    whatever date to the person making the loan; or
+
+    "(c) sub-divide any shares or Debentures into shares or Debentures
+    of a smaller denomination, or consolidate any shares or Debentures
+    of a larger denomination; or
+
+    "(d) renew or extend the period of maturity of any securities; or
+
+    "(e) purchase, sell or otherwise transfer any stock, shares
+    or securities or any interest therein, or the benefit of any
+    agreement conferring a right to receive any stock, shares or
+    securities, if the stock, shares or securities were issued,
+    sub-divided or consolidated, or renewed or the period of maturity
+    thereof extended, or the agreement was made, as the case may be,
+    at any time between the 18th day of January, 1915, and the 24th
+    day of February, 1919, and the permission of the Treasury was not
+    obtained to the issue, sub-division, consolidation, renewal or
+    extension or the making of the agreement, as the case may be.
+
+    "(2) No person shall except under and in pursuance of a licence
+    granted by the Treasury--
+
+    "(a) buy or sell any stock, shares or other securities except for
+    cash or when the purchase or sale takes place in any recognised
+    Stock Exchange, subject to the rules or regulations of such
+    exchange.
+
+    "(b) buy or sell any stock, shares or other securities which have
+    not remained in physical possession in the United Kingdom since
+    the 30th September, 1914.
+
+    "(3) A licence granted under this regulation may be granted
+    subject to any terms and conditions specified therein.
+
+    "(4) If any person acts in contravention of this regulation, or
+    if any person to whom a licence has been granted under this
+    regulation subject to any terms or conditions fails to comply with
+    these terms or conditions, he shall be guilty of a summary offence
+    against these regulations.
+
+    "(5) In this regulation the expression 'securities' includes
+    Bonds, Debentures, Debenture stock, and marketable securities."
+
+It will be seen at once that the terms of this document, on any
+interpretation of them, go far beyond the intentions expressed in what
+may be called the official preamble and in the new Committee's terms
+of reference. One of the clauses seems, with all deference to its
+august composers, to be merely silly. This is (1)(c) forbidding
+sub-division of securities. If a £10 share is split into ten _£1_
+shares this operation cannot make the smallest difference to the
+supply of capital for essential industries or cause any drain on the
+Foreign Exchanges. I am assured by those who have delved into the
+official intention that the reason for the objection of the old
+Committee to splitting schemes, on which this new prohibition is
+based, was that splitting made shares more marketable and popular and
+so more likely to compete with War Bonds. But a mere sale of shares,
+split small and so popularised, does not absorb any capital. That only
+happens when, money is put into some new form of industry. If A, who
+holds ten £20 shares, is enabled to dispose of them to B because they
+are split into 200 £1 shares, then, A instead of B has got the money
+and has to invest it in something. The amount of capital available for
+investment is not diminished by a halfpenny. This regulation is just
+a piece of short-sighted tyranny which exasperates without doing the
+smallest good to anybody.
+
+More serious, however, was clause (1)(e) under which any securities
+that have been issued, split, consolidated or renewed without Treasury
+sanction since January, 1915, were not to be dealt in, in future,
+without a licence. The result of this clause, if it had stood, would
+have been that all loans under which such securities had been
+pledged would have had to be called in because the collateral became
+unsaleable, except after all the ceremonies had been gone through
+and a licence had been got. It was also possible to argue that the
+prohibition to renew or extend the maturity of any security meant that
+no loans of any kind could be renewed, and that no commercial bills
+could be renewed, without a licence. It is true that No. 5 paragraph
+says what the expression "securities" includes, but it does not state
+definitely that bonds, Debentures, Debenture stock and marketable
+securities are the only things included. It was a pretty piece of
+drafting, and raised a pretty storm in the House of Commons on
+February 27th, when a somewhat lurid picture of its effects was drawn
+by Sir H. Dalziel and Mr Macquisten. Mr Chamberlain not being then
+legally a member of the House, it fell to the lot of Mr Bonar Law to
+explain that the Government had really meant to give greater freedom,
+in making new issues, that the evils anticipated had not been
+intended, that he hoped the House would not judge the Government too
+harshly for not making unsanctioned issues illegal from the beginning,
+and that a new Order would be issued removing the retrospective effect
+of the new regulation. And so amendment was promised of a measure
+which would have had very awkward and unjust effects. It may be argued
+that it would only have affected people who had done, during the war,
+what they were asked not to do, namely, make issues without Treasury
+sanction. If the old Committee had been a reasonable and expeditious
+body this argument would have had great weight. But, in view of its
+caprices and dilatoriness, there was a good deal of excuse for those
+who decided to do without Treasury sanction and take the consequence
+of being unable to market their securities on the Stock Exchange.
+To propose to add a new penalty and cause the cancelling of all the
+financial arrangements made in connexion with such issues during four
+years was simply piling blunder on blunder. Luckily, the protests of
+the Government's own supporters sufficed to undo the worst of the
+mischief; but the whole affair is only another argument in favour of
+the earliest possible ridding of finance and industry from control
+that is so clumsily exercised.
+
+
+
+
+XX
+
+MONEY OR GOODS?[1]
+
+_December_, 1918
+
+[Footnote 1: This was the latter of two articles contributed to the
+_Times Trade Supplement_ in answer to a series in which Mr Arthur
+Kitson had attacked our banking and currency system suggested an
+inconvertible paper currency.]
+
+"Boundless Wealth"--Money and the Volume of Trade--The Quantity
+Theory--The Gold Standard--How is the Volume of Paper to be
+regulated?--Mr Kitson's Ideal.
+
+
+In the November _Trade Supplement_ an endeavour was made to answer Mr
+Kitson's rather vague and general insinuations and charges against our
+bankers concerning the manner in which they do their business. Now
+let us examine the larger and more interesting problem raised by his
+criticism of our currency system.
+
+In his article in the June _Supplement_ he told us that "if the
+British public had any grasp of the fundamental truths of economic
+science they would know that a future of boundless wealth and
+prosperity is theirs." This is a cheery and encouraging view and, let
+us hope, a true one. But, that boundless wealth can only be got if we
+work for it in the right way. Can Mr Kitson show it to us, and what
+are these "fundamental truths of economic science"? It is easier to
+talk about them than to find any two economists who would give an
+exactly--or even nearly--similar list of them. Mr Kitson glances "at
+a few elementary truths." "Wealth," he says, "is the product of two
+prime factors, man and Nature, generally termed labour and land. With
+an unlimited, or practically unlimited, supply of these two factors,
+how is it that wealth is and has been hitherto so comparatively
+scarce?" But is the supply of "man" unlimited in the sense of man
+able, willing, and properly trained to work? And is the supply of
+"Nature" unlimited in the sense of land, mines, and factories fully
+equipped with the right machinery and served and supplied by adequate
+means of transport? Surely the failure In production on which Mr
+Kitson so rightly lays stress is due, at least partly, to lack of
+good workers, good organisers, good machinery, and good transport
+facilities. Workers who restrict output, employers who despise science
+and cling to antiquated methods, the opposition of both classes to new
+and efficient equipment, and large tracts, even of our own land, still
+without reasonable transport facilities, have something to do with
+it. And lack of capital--this answer to the question Mr Kitson flouts
+because, he says, "since capital is wealth," to say that "wealth is
+scarce because capital is scarce is the same as saying that wealth is
+scarce because it is scarce." But is it not a "fundamental truth of
+economic science" that capital is wealth applied to production? Wealth
+and capital are by no means identical. When a well-known shipbuilding
+magnate laid waste several Surrey farms to make himself a deer-park,
+the ground that he thus abused was still wealth, but it is no longer
+capital because it has ceased to produce good food and is merely a
+pleasant lounging-place for his lordship. May not the failure of
+production be partly due to the fact that, owing to the extravagant
+and stupid expenditure of so many of the rich, too much work is put
+into providing luxuries--of which the above-mentioned deer-park is an
+example--and too little into the equipment of industry with the plant
+that it needs for its due expansion?
+
+Mr Kitson's answer is much easier. According to him, instead of
+working better, organising better, and putting more of our output into
+plant and equipment and less into self-indulgence and vulgarity all
+that we have to do to work the necessary reform is to provide more
+money and credit. Since, he says, under the industrial era--
+
+"All goods were made primarily for exchange or rather for sale ... it
+followed, therefore, that production could only continue so long as
+sales could be effected; and since sales were limited by the amount of
+money or credit offered, it followed that production was necessarily
+limited by the quantity of money or credit available for commercial
+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 materials
+would have benefited the manufacturer, and it is just possible that
+production, instead of being limited, might have been stimulated by
+cheapness due to scarcity of currency and credit, or, at least, might
+have gone on just as well on a lower all-round level of prices. On the
+whole, it is perhaps more probable that a steady rise in prices caused
+by a gradual increase in the volume of currency and credit would have
+the more beneficial effect in stimulating the energies of producers.
+But Mr Kitson's argument that the volume of currency and credit
+imposes an absolute limit on the volume of production is surely much
+too clean-cut an assumption. This absolute limit may be true, if
+currency cannot be increased, with regard to the aggregate value in
+money of the goods produced. But money value and volume are two quite
+different things. If our credit system had not been developed as it
+has, and we had had to rely on actual gold and silver for carrying on
+all production and trade, it does not by any means follow that trade
+and production might not have been on something like their present
+scale in the matter of volume and turnover; but the money value would
+have been much smaller because prices would have been all round at a
+much, lower level.
+
+This contention is based on what is called the "Quantity Theory of
+Money." This theory Mr Kitson wholeheartedly believes, so that this is
+not a point that has to be argued with him. "The value of money,"
+he says, "as every student of economics knows, is determined by the
+quantity of money in use and its velocity of circulation." Quite so.
+If you increase the amount of money faster than that of goods, more
+money has to be given for less goods; the value, or buying power, of
+money is depreciated and prices go up. The present war has given an
+excellent example of this process at work. All the warring Governments
+have printed acres of paper money, and have worked the credit system
+with profligate energy; and so we have a huge increase in currency
+and credit, along with little or no increase (probably a decrease) in
+consumable goods, and prices have soared like rockets all over the
+world. In neutral countries the rise has been as bad as anywhere,
+because the neutrals have been choked with the gold that the warring
+Powers exported, putting paper in its place. So we see that the volume
+of money, on the theory so emphatically expounded by Mr Kitson and
+endorsed by common-sense--as long as we are careful to include
+all forms of money that are taken in exchange for goods in the
+definition--reflects itself at once in prices. If money does not
+increase in quantity and goods do, then prices go down, and after
+the necessary adjustments are made in rates of wages and salaries,
+a larger trade can be done with the same amount of money at a lower
+level of values. The volume of money thus limits the aggregate value
+of trade, but not its aggregate volume. Periods of falling prices are
+not encouraging to producers, and they put too much advantage into the
+hands of the _rentier_--the man who lives on fixed interest; on the
+other hand, they are generally believed to be in favour of the working
+classes, since reductions in wages generally lag behind the fall in
+prices, which means increased buying power to the wage-earner.
+
+Mr Kitson's view that the volume of trade is limited by the quantity
+of currency and credit is thus based on confusion between volume and
+value. Moreover, it follows also from the "Quantity Theory of Money,"
+which he holds, that if he applies his remedy and multiplies currency
+and credit as fast as he appears to want to, the result will be a
+still further depreciation in the buying power of money, and a further
+rise in prices and an increase in all the bitterness, discontent,
+suspicion, and strikes that the rise in prices has already caused
+during the war. Is this a prospect to pray for? Surely if we want to
+enjoy "boundless wealth and prosperity" the way to do so is to turn
+out goods--things to eat and wear and enjoy--and not to multiply
+money, thereby merely depreciating its value, on Mr Kitson's own
+admission. He thinks that "nothing but an abundant supply of currency
+in the shape of legal tender notes and bank credit, could have enabled
+us to undertake successfully such unprecedented burdens" as we have
+borne during the war. But it may equally well be argued that we have
+borne these burdens because we worked harder than ever before to turn
+out the needed stuff, organised better, used our machinery to its
+full power, and spent less of our product on luxuries; and that the
+abundant currency, by forcing up prices, immensely increased the
+cost of the war and produced industrial friction which several times
+brought us unpleasantly close to disaster.
+
+Mr Kitson, however, uses the "Quantity Theory of Money"--the doctrine
+that the value or buying power of money varies according to its
+quantity in relation to that of the goods that it buys--chiefly as a
+stick wherewith to beat the Gold Standard. He shows, very easily and
+truly, that it is absurd to suppose that the value of the monetary
+gold standard is invariable. Thereby he is only beating a dead horse,
+for no such argument is nowadays put forward. The variability of the
+gold standard of value is acknowledged, whenever a fluctuation in the
+general level of commodity prices is recorded. But gold is the basis
+of our credit system, and of those of all the economically civilised
+countries of the world, not because its value is believed to be
+invariable, but because it is the commodity which is universally
+accepted, in such countries and in normal times, in payment of debts.
+This quality of acceptability it has got largely by custom and
+convention. Mr Kitson speaks of the "selection of gold by the world's
+bankers as the basis for money and credit." But it was selected as
+currency by common custom long before bankers were heard of. And it
+was selected because of its permanence, ductility and other qualities,
+especially its beauty as ornament, which made man, eager to adorn
+himself, his women-kind, and the temples of his gods, always ready
+to accept it in payment, knowing also that, because of this
+acceptability, he would always be able to exchange it into any goods
+that he wanted.
+
+Any other commodity that earned this quality of universal
+acceptability could do the work of gold just as well. But until one
+has been found, gold, as long as it keeps that quality, holds the
+field. And bankers use it as the basis for money and credit, not
+because, as Mr Kitson says, they selected it owing to its scarcity,
+but because this quality of universal acceptability made it the thing
+in which all debts, both at home and abroad, could be paid. "Given,"
+says Mr Kitson, "a self-contained trading community with a certain
+quantity of legal tender, just sufficient for its commercial needs,
+and it makes no difference either to the value or efficiency of the
+money or to the trade affected whether it be made of metal or paper."
+Quite so, but trading communities are not self-contained. Their
+currency has to be convertible into something acceptable abroad, and
+that something is, at present, gold. It is possible that the world
+may some day evolve an international paper currency that will be
+everywhere acceptable. But such an ideal requires a growth of honesty
+and mutual confidence among the nations that puts it a long way off.
+And how is its volume to be regulated?
+
+This question is all-important, whether the currency be national or
+international. Mr Kitson speaks of a currency "just sufficient" for
+the community's commercial needs. Who is to decide when the currency
+is just sufficient? The Government? A sweet world we should live in,
+if among other party questions, Parliament had to consider multiplying
+or contracting the currency every year or every month, with all the
+interests that would be affected by the consequent rise or fall in
+prices, lobbying, speech-making, and pulling strings to work the
+oracle to suit their pockets. And, according to Mr Kitson's view, that
+the volume of trade is limited by the supply of currency, this volume
+would then depend on the whims of the House of Commons, half the
+members of which would probably be innocent of a glimmering of
+understanding of the enormously important question that they were
+deciding. The gold standard, which makes the course of prices depend,
+more or less, on the chances of digging up a capricious metal from the
+bowels of the earth, has its obvious drawbacks; but it is a clean and
+sensible business compared with making them depend on the caprices of
+Parliament, complicated by the political corruption that would be only
+too likely to follow the putting of such a question into the hands of
+our elected and hereditary representatives and rulers.
+
+Such, however, seems to be the Promised Land to which Mr Kitson wants
+to lead us. Thus he propounds his remedy. "The remedy is surely
+obvious. Divorce our legal tender from its alliance with gold
+entirely, so that the supply of money and credit for our home trade is
+no longer dependent upon our foreign trade rivals. Base our currency
+upon the national credit ... treat gold as a commodity only, for the
+settlement of foreign trade balances."
+
+This passage in his article in the September _Supplement_ tells us
+what to do. Keep gold, out of deference for foreign prejudice, for the
+settlement of foreign trade balances, but make as much paper money as
+you like for home use. As our legal tender money is to be "divorced
+entirely from its alliance with gold" it clearly cannot be convertible
+into gold. So that apparently we shall have a paper pound and a gold
+pound (the latter for foreign use) with no connection between them.
+This stage of economic barbarism has been left behind now even by
+some of the South American republics. The paper pound, based on the
+national credit, can be multiplied as fast as our legislators think
+fit. If they do not multiply it fast enough, Mr Kitson will tell them
+that they are strangling trade, because the volume of production
+is limited by the amount of money available. At the same time bank
+credits will be multiplied indefinitely because, as was shown in the
+November _Supplement_, Mr Kitson supports a view that the average
+business man holds (according to him) that he ought to have a legal
+right to as much credit as he wants. With the Government printing
+paper to please its supporters, with the banks obliged by law to give
+credit to every one who asks for it, and with prices soaring on every
+addition to currency and credit, what a country this will be to live
+in, and what a life will be led by those who have to compile and
+work out the index numbers of the prices of commodities! Some of us,
+perhaps, will prefer the jog-trot conservatism of Lord Cunliffe's
+Currency Committee, who in their recently issued report[1] (which
+every one ought to read) recommend that gold should not be used for
+circulation at present, but that endeavours should be made towards
+the cautious reduction of our swollen paper currency, and that its
+convertibility into gold should be maintained.
+
+[Footnote 1: Cd. 9182, _2d_.]
+
+
+
+
+INDEX
+
+
+Addis, Sir Charles, on banking,
+Aërated Bread Co., and bonus issues,
+Allies, loans to,
+America, effect of war on,
+  War finance of,
+
+Bank Act: its purpose,
+  Its suggested repeal,
+  Its working,
+Bank Amalgamations, progress of,
+Bechhofer, Mr, on Guild Socialism,
+Bills of Exchange, as basis of issue,
+Bonar Law, Mr, on after-war position,
+  On capital levy,
+  On sale of securities,
+British Trade Corporation, formation of,
+Brunner, Mond, and bonus shares,
+Budget, in 1918,
+
+Canadian Pacific, and bonus issues,
+Capital, foreign,
+  Levy on,
+  Meaning of,
+  Supply of,
+  War's destruction of,
+Capital Issues, Committee on,
+  Licence required for,
+  Need to restrict,
+  Stock Exchange and,
+Cole, Mr, on Guild Socialism,
+Cunliffe Committee, report of
+Currency: inflation of,
+  International,
+  Metals as,
+  Origin of,
+  Quantity theory of,
+  Report on,
+
+_Daily News_, on capital levy,
+
+Expenditure, Committee on,
+
+France, after-war position of,
+Free Trade and British supremacy,
+
+Germany, after-war position of,
+  Our claims against,
+  War finance of,
+Gold standard: affected by war,
+  Faults of,
+  Reasons for,
+Goodenough, Mr, on note issue,
+
+Hoare, Mr Alfred, on taxation,
+Holden, Sir Edward, and the Bank Act,
+
+Inflation, working of,
+Interest, rate of,
+
+Kitson, Mr, on currency,
+
+Labour, example set by,
+Lawrence, Mr Pethick, on capital levy,
+Lees, Mr Edward, on debt redemption,
+Lloyds, elasticity of,
+London, prestige of,
+
+Macaulay, Lord, on bad money,
+
+_New Statesman_, on capital levy,
+
+Owen, Senator, on American system,
+
+"Quantity Theory," of currency,
+
+Reserves, capitalising,
+_Round Table_, on capital levy,
+
+Socialism, and bank amalgamations,
+  In light of war,
+  Guild,
+Stilwell, Mr, on paying for war,
+
+Taxation, as war weapon,
+  Increase of, in war,
+
+"War Emergency Workers," on capital levy,
+Webb, Mr, on State banking,
+
+
+
+***END OF THE PROJECT GUTENBERG EBOOK WAR-TIME FINANCIAL PROBLEMS***
+
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+The Project Gutenberg eBook, War-Time Financial Problems, by Hartley
+Withers
+
+
+This eBook is for the use of anyone anywhere at no cost and with
+almost no restrictions whatsoever.  You may copy it, give it away or
+re-use it under the terms of the Project Gutenberg License included
+with this eBook or online at www.gutenberg.org
+
+
+
+
+
+Title: War-Time Financial Problems
+
+Author: Hartley Withers
+
+Release Date: July 29, 2004  [eBook #13045]
+
+Language: English
+
+Character set encoding: ISO-646-US (US-ASCII)
+
+
+***START OF THE PROJECT GUTENBERG EBOOK WAR-TIME FINANCIAL PROBLEMS***
+
+
+E-text prepared by the Project Gutenberg Online Distributed Proofreading
+Team from images provided by the Million Book Project
+
+
+
+WAR-TIME FINANCIAL PROBLEMS
+
+by
+
+HARTLEY WITHERS
+
+
+
+
+
+
+
+Works by Hartley Withers
+
+THE BUSINESS OF FINANCE. 6s. net.
+
+Second Impression.
+
+"He treats of the subject mainly in its relation to industry, and
+smooths the path for those who find the way rather thorny. Timely and
+instructive."--_Financial Times_.
+
+
+OUR MONEY AND THE STATE. 3s. 64 net.
+
+Second Impression.
+
+"It should be read at once by every taxpayer. Mr. Withers' latest book
+can be most heartily commended,"--_Morning Post_.
+
+
+STOCKS AND SHARES. 6s. net.
+
+Fifth Impression.
+
+"It is a good book, it is sure of its public."--_Morning Post_.
+
+
+THE MEANING OF MONEY. 6s. net.
+
+Eighteenth Impression.
+
+"Will supersede all other introductions to monetary science; a
+safe and indispensable guide through the mazes of the Money
+Market."--_Financial News_.
+
+
+MONEY CHANGING. 5s. net.
+
+Second Impression.
+
+"Mr. Withers makes the topic interesting in spite of its obvious
+and irrepressible technicality. Occasionally he renders it really
+amusing."--_Financial News_.
+
+
+POVERTY AND WASTE. 6s. net.
+
+Third Impression.
+
+"Views its subject from the advantageous position of an impartial
+observer, the respective cases for capital and labour, rich and poor,
+being brought to the reader's attention in a convincingly logical
+manner."--_Financial Times_.
+
+
+WAR AND LOMBARD STREET. 6s. net.
+
+Fourth Impression.
+
+"Nothing could be clearer or more enlightening for the general
+reader."--_The Times_.
+
+
+INTERNATIONAL FINANCE. 6s. net.
+
+Third Impression.
+
+"We heartily commend a timely work dealt with in popular and simple
+style, a standard financial work."--_Morning Post_.
+
+
+LOMBARD STREET, 6s. net.
+
+Third Impression.
+
+A Description of the Money Market, by WALTER BAGEHOT. Edited with a
+new Preface by HARTLEY WITHERS. "There is no city man, however
+ripe his experience, who could not add to his knowledge from its
+pages."--_Financial News_.
+
+
+
+
+
+  "Blest paper credit! last and best supply!
+  That lends Corruption lighter wings to fly:
+  Gold imp'd by thee, can compass hardest things,
+  Can pocket States, can fetch or carry Kings;
+  A single leaf shall waft an Army o'er,
+  Or ship off Senates to a distant Shore;
+  A leaf, like Sibyl's, scatter to and fro
+  Our fates and fortunes, as the winds shall blow;
+  Pregnant with thousands flits the Scrap unseen,
+  And silent sells a King, or buys a Queen."
+
+POPE, _Moral Essays_.
+
+
+
+
+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, 1919.
+
+
+
+
+CONTENTS
+
+
+I
+THE OUTLOOK FOR CAPITAL
+The Creation of Capital--The Inducement--War and Capital
+
+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 Competition--No other likely Rivals
+
+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
+Resistance--The Effect of Currency Inflation
+
+IV
+WAR FINANCE AS IT MIGHT HAVE BEEN--II
+The Changed Spirit of the Country--A Great Opportunely thrown
+away--What Taxation might have done--The Perils of Inflation--Drifting
+stupidly along the Line of Least Resistance--It is we who pay, not
+"Posterity"
+
+V
+A LEVY ON 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
+
+VI
+OUR BANKING MACHINERY
+The Recent Amalgamations--Will the Provinces suffer?--Consolidation not
+a New Movement--The Figures of the Past Three Decades--Reduction of
+Competion not yet a Danger--The Alleged Neglect of Local
+Interests--Shall we ultimately have One Huge Banking Monopoly?--The
+Suggested Repeal of the Bank Act--Sir E. Holden's Proposal
+
+VII
+THE COMPANIES ACTS
+Another Government Committee--The Fallacy of imitating
+Germany--Prussianising British Commerce--The Inquiry into the Companies
+Acts--Will Labour Influence dominate the Report?--Increased Production
+the Great Need--Will it be met by tightening up the Companies Acts?--The
+Dangers of too much Strictness--Some Reforms necessary--Publicity,
+Education, Higher Ideals the only Lasting Solution--The Importance of
+Foreign Investments--Industry cannot take all Risks and no Profits
+
+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
+
+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 Comparison with American Finance--How much have
+we raised from Revenue?--The Value of the Pound To-day--The 1918 Budget
+an Improvement on its Predecessors--But Direct Taxation still too
+Low--Deductions from the Chancellor's Estimates
+
+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 Constant--Currency and
+Prices--The Complication of other Instruments of Credit--No Substitute
+for Gold in Sight--Its Acceptability not shaken by the War--A
+Fluctuating Standard not wholly Disadvantageous--An International
+Currency fatal to the Task of Reconstruction--Stability and Certainty
+the Great Needs
+
+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 Canada--Bonus Shares on Flotation--An American
+Device--Midwife or Doctor?--The Good and Bad Points of both Systems
+
+XII
+STATE MONOPOLY IN BANKING
+Bank Fusions and the State--Their Effects on the Bank of England--Mr
+Sidney Webb's Forecast--His Views of the Benefits of a Bank
+Monopoly--The Contrast between German Experts and British
+Amateurs--Bankers' Charges as affected by Fusions--The Effects of
+Monopoly without the Fact--The "Disinterested Management" Fallacy--The
+Proposal to split Banking Functions--A Picture of the State in Control
+
+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 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
+
+XIV
+NATIONAL GUILDS
+The Present Economic Structure--Its Weaknesses and Injustices--Were
+things ever better?--The Aim of State Socialism--A Rival Theory--The New
+Movement of Guild Socialism--Its Doctrines and Assumptions--Payment "as
+Human Beings"--The "Degradation" of earning Wages--Production
+irrespective of Demand--Is that the Real Meaning of Freedom?--The Old
+Evils under a New Name--A Conceivably Practical Scheme for some other
+World
+
+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--Suggestions for solving it
+
+XVI
+THE CURRENCY REPORT
+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
+
+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
+
+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 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
+
+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--Disappearance of the
+Retrospective Clause--A Sample of Bureaucratic Stupidity
+
+XX
+MONEY OR GOODS?
+"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
+
+INDEX
+
+
+
+
+WAR-TIME FINANCIAL PROBLEMS
+
+
+
+
+I
+
+THE OUTLOOK FOR CAPITAL
+
+_September_, 1917
+
+The Creation of Capital--The Inducement--War and Capital
+
+
+One of the questions that are now most keenly agitating the minds of
+the investing public and of financiers who cater for its wants, and
+also of employers and organisers of industry who are trying to see
+their way into after-the-war conditions, is that of the supply of
+capital. On this subject there are two contradictory theories: one
+considers that owing to the destruction of capital during the war,
+capital will be for many years at a famine price; the other, that
+owing to the exhaustion of all the warring powers, that is, of the
+greater part of the civilised world, the spirit of enterprise will be
+almost dead, the demand for capital will be extremely limited, and
+consequently the supply of it on offer will go begging to find a user.
+It seems likely that, as usual, the truth lies somewhere between these
+two extreme views; but we shall best answer the question if we first
+get a clear idea of what we mean by capital.
+
+On the subject of the definition of capital, economists differ with
+all the consistency that they only show in differing. One of the
+earliest descriptions of capital was given by Turgot, who thought that
+capital meant "valeurs 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 sixpence in
+marbles is a capitalist, because he has bought an asset which is not
+immediately consumed, but can, later on, if his fancy urges him, be
+exchanged into white mice or any other object of his desire. On the
+other hand, the schoolfellow who at the same time spends sixpence on
+cherries and eats them has put his money into immediate consumption,
+his asset is digested, and he has no capital in any sense of the word.
+
+Later, the definition was narrowed by John Stuart Mill, for instance,
+into the sense of wealth set aside to increase production. From this
+point of view capital practically means the equipment and tools of
+industry in the widest sense of the word, including agriculture and
+transport. Lately economists have shown a tendency to go back to the
+wider application of the word, and an American economist, Dr Anderson,
+who has just published a book on the Value of Money, goes so far
+therein as to state that a "dollar is capital." The language of the
+City generally uses the word in the narrow sense adopted by Mill, and
+there is very much to be said for this view of the real meaning of
+capital. Marbles to play with, houses to live in, motor-cars to go
+joy-riding in--all these are assets which can be disposed of, and so,
+in a sense, may be called capital. But the businesslike meaning of the
+word is the tools and equipment of industry, because it is only by
+their possession that the wealth of mankind not only increases man's
+present enjoyment, but enhances his future output of the goods
+necessary for his existence.
+
+If we take the word in this sense it becomes at once apparent that the
+theory is exaggerated which maintains that war is destroying capital,
+so that capital will long be at a famine price. The extent to which
+war is actually destroying the tools and equipment of industry is
+quite limited. On the actual battlefield that sort of destruction
+proceeds apace when factories are shelled into shapeless lumps of
+bricks, and when the surface of the earth, that man's skill had
+developed into great productive fertility, is torn into craters and
+covered with rubbish. There is also rapid destruction of a very
+important part of the equipment of industry owing to the submarine
+campaign, which is sinking so many fine ships that were meant to
+carry goods from one country to another. But, apart from this actual
+destruction on the battlefield and on the sea, the tools and equipment
+of industry over the greater part of the earth remain untouched. It is
+true that, owing to the preoccupations of the war, not so much work
+as usual is being put into the upkeep and repair of our railways,
+factories and other industrial tools. But at the same time an enormous
+amount of new machinery is being created for the manufacture of
+munitions and other stuff needed for the war, and a large part of this
+new machinery ought to be available as industrial capital when the war
+is over. Those people who talk so glibly of the enormous destruction
+of capital by the war are surely making a mistake common to minds
+which look at economic questions through a financial telescope,
+mistaking money for capital. They see that an enormous amount of money
+is being spent on the war, and they jump to the conclusion that this
+money, if not spent upon the war, would have been put into capital
+investments and so have increased the tools and equipment of industry.
+In fact, a great deal of the money now spent upon the war would
+have been spent, if there had been no war, not upon increasing the
+equipment of production, but upon purely frivolous and extravagant
+consumption. There is no need to dwell on the effect of war in
+reducing many kinds of expenditure on which hundreds of millions
+must have gone in peace time, and this restriction of extravagant
+consumption has to be deducted before we even admit, not that all
+money spent upon the war is destroyed capital, but even that all the
+money spent upon the war is destroying what might otherwise have
+become capital.
+
+If, then, it is true that the war is not making a very terribly
+substantial inroad upon the mass of existing capital, how is it going
+to affect the supply of capital in the future? To answer this question
+we have to see how capital is created. The answer to this question is
+very simple, very obvious, and very dull. Capital can only be created
+by saving.
+
+Saving is such an entirely unpopular virtue that it seems at first
+sight a disastrous conclusion to arrive at, that if we want to
+increase the supply of capital it can only be done by stimulating
+this unattractive habit; and there is a further question to be
+asked--whether it will be necessary or desirable to have a great
+increase in the supply of capital. As was pointed out above, one
+theory of after-war needs maintains that the world will be so
+exhausted by this great struggle that it will have no enterprise and
+no energy left, and that capital will go begging. If this be so, we
+need not trouble to inquire as to whether the supply of capital can be
+made plentiful. But I venture to think that this view is very probably
+wrong, though it is very dangerous to prophesy concerning the purely
+psychological question of the state of mind in which the citizens of
+the warring Powers will end the war. It is, however, at least
+probable that the prices which are then likely to rule will stimulate
+enterprise all over the world; that every one will see that there is
+a great work to be done in getting industry back on to a peace
+basis, and a great profit to be made by those who do this work most
+successfully, and that the demand for capital is likely, for some
+years at least, to clamour for all that can be produced.
+
+To go back, then, to the statement that only by saving can capital
+be created. The man who saves, instead of spending money on his own
+enjoyment, hands it over to some company or Government to be spent on
+some industrial or national purpose. When it is put into industry
+it builds a factory or a ship or a railway or a canal, or clears a
+wilderness for cultivation, or does one of the innumerable other
+things which are necessary for the production and transport of the
+goods which mankind enjoys. And it is only by this process of handing
+over buying power, instead of using it for our own amusement and
+enjoyment, to others who will use it for furthering production that
+the tools and equipment of industry can be multiplied.
+
+Something can be done by banks and financiers in supplying credit in
+the form of advances and acceptances; but this method is only like
+oiling the wheel of industry, the real driving power of which has to
+be saved capital. Creating credits simply means that a certain amount
+of buying power is manufactured and handed over to those to whom the
+credit is given. It does not set free any labour or goods to be
+put into industry. That is only done by the man who abstains from
+consumption and saves money by restraining his desire to spend it on
+himself, and puts it at the disposal of industry. The man who saves
+money, who has always hitherto been rather despised by his companions
+and resented by a certain class of social reformer and many other
+uneducated people as a capitalist bloodsucker, is thus, in fact, the
+person who leaves the world richer than he found it, having put his
+money, the product of his own work, into increasing the world's
+output, instead of spending it on such forms of enjoyment as heavy
+lunches and cinema shows.
+
+The man who does this beneficent work, increasing mankind's output of
+goods, and providing employment as long as the factory or railway that
+he helps to build is running, is induced to do so, as a rule, by the
+purely selfish motive of providing for his old age or for those who
+come after him by earning the rate of interest that is paid to him for
+his capital. What is this rate of interest going to be, and how much
+effect does it have upon the creation of capital?
+
+Some people argue that a low rate of interest makes people save more
+because it is necessary for them to save more in order to acquire
+independence. Others maintain that a high rate of interest induces
+people to save because they can see the direct advantage of doing so.
+Both these arguments are probably true in some cases. But, as a rule,
+people who have the instinct of saving will save, within certain
+limits, whatever the rate of interest may be. When the rate of
+interest is low they will certainly not reduce their saving because
+each hundred pounds that they put away brings them in comparatively
+little, and when the rate of interest is high the attraction of the
+high rate will also deter them from diminishing the amount that they
+put aside. Moreover, we have to consider, not only the money payment
+involved by the rate of interest, but its buying power in goods. In
+1896 trustee securities could only be bought to return a yield of
+2-1/2 per cent. for the buyer; now the investor can get 5-1/4 per
+cent. and more from the British Government. And yet the power that
+this 5-1/4 gives him over the goods and services that he wants for his
+comfort Is probably not greater, and very likely rather less, than the
+power which he got in 1896 from his 2-1/2 per cent. One of the few
+facts which seem to stand out clearly from a study of the movement of
+the prices of securities, and consequently of the rate of interest to
+be derived from them, is that the rate of interest is high when the
+price of commodities is high, and vice versa. So that the answer to
+the question: What is the rate of interest likely to be after the war?
+may be given, in Quaker fashion, by another question: What will happen
+to the index number of the prices of commodities? It seems fairly
+probable that both these questions may be answered, very tentatively
+and diffidently, by the expression of a hope that after a time, when
+peace conditions have settled down and all the merchant ships of the
+world have been restored to their peaceful occupations, the general
+level of the price of commodities will be materially lower than it is
+now, though probably considerably higher than it was before the war.
+If this be so, then it is fairly safe to expect that the rate of
+interest, as expressed in money, will follow the movement of prices of
+goods. But it must be remembered that by rate of interest I mean the
+pure rate of interest, that is to say, the rate earned on perpetual
+fixed-charge securities of the highest class. It may be that, owing to
+the very large amount of gilt-edged securities created in the course
+of the war by the various warring Governments, the rate of profit to
+be earned by the man who takes the risks of industry from dividends
+on ordinary shares and stocks will have to be made relatively more
+attractive than it was before the war.
+
+If, then, capital can only be created by saving, how far will the war
+have helped towards its more plentiful production?
+
+Here, again, we are faced with a psychological question which can only
+be answered by those who are bold enough to forecast the state of mind
+in which the majority of people will find themselves when the war is
+over. If there is a great reaction, and everybody's one desire is to
+throw this nightmare of war off their chests and go back to the times
+as they were before it happened, then all that the war has taught us
+about the production of capital will have been wasted. But I rather
+doubt whether this will be so. Saving merely means the diversion of
+a certain proportion of the output of industry into the further
+equipment of industry. The war has taught us lessons which, if we
+use them aright, will help us to increase enormously the output of
+industry. So that if these lessons are used aright, and industry does
+not waste its time in squabbles over the sharing of its product, its
+output may be so great that a comparatively smaller amount of saving
+in relation to the total output may produce a larger amount of capital
+than was made available in days before the war. There is a further
+point, that the war has taught a great many people who never saved at
+all to save a good deal. It was estimated before the war that we in
+this country were saving about four hundred millions a year. This
+figure was necessarily a guess, and must be taken for what it is
+worth. There can be no doubt that the amount of real saving now in
+progress, voluntary, owing to the patriotic effort of people who think
+they ought to restrict their own consumption so that the needs of
+our fighters may be provided, and enforced through the action of the
+Government in taking taxes and inflating the currency, is very much
+greater than it was before the war; probably at least twice as much
+when all allowance has been made for depreciation of the currency.
+Some people think that this saving lesson will have been learned, will
+have become a habit, will continue and will grow. If so, if people
+save a larger proportion of their income than they did before, and
+if the total output of goods is increased, as it easily may be, it
+becomes at once evident that there is a possibility of a freer supply
+of capital for industry than has ever been seen. But in looking at
+this hopeful and optimistic picture, we must never forget that it can
+only be painted by those who are prepared to leave out of the canvas
+all the danger of industrial strife and dislocation, and all the
+danger of reaction to the old habits of luxurious spending which are
+so strong a possibility in the other direction. The war has shown us
+how we can, if we like, increase production, reduce consumption, and
+so have a larger margin than ever before to be put into providing
+capital for industry. Whether we really have learned these lessons and
+will apply them remains to be seen.
+
+There is also a possibility that some people may recognise that saving
+money and applying it to the re-equipment of the world for peace
+industry is a patriotically praiseworthy object not less than saving
+in time of war for the equipment of the Army. It may be that the
+benefit conferred by those who save, in increasing the output of
+mankind, will be more generally recognised, and that the supply of
+capital may, when the war is over, be increased on patriotic grounds,
+or on grounds even wider than mere patriotism--a desire to help a
+great stride forward in the material welfare of mankind.
+
+Capital is a very tender plant, and it will be very easy, if mistakes
+are made, to frighten those who see the benefits of accumulation for
+themselves and others. Labour troubles and industrial unrest are
+extremely likely to have the effect of destroying capital by
+preventing it coming into existence. If we remember that capital can
+only be created by being saved, it becomes evident that if those who
+save are threatened with too deep an inroad into their reward for so
+doing, on the part of labour, they will hesitate to save; and if the
+action of labour has this effect, labour will be sawing off the bough
+on which it sits. For it is new capital that sets new industry going,
+and it is only by a continual supply of new industry that a continual
+demand for fresh labour can be maintained.
+
+There is also at present much mischievous talk about a great tax on
+capital for the purpose of redeeming, or hastening the redemption of,
+war debt. It is clear at once that it is not possible to tax capital
+if we remember that capital consists of the tools and equipment of
+industry, or even, in the wider sense of the word, of accumulated
+assets which have not been consumed. Unless the Government is prepared
+to take payment in factory chimneys, railway sleepers, houses and
+fields, or the securities and mortgages that are claims on their
+product, it is not possible to tax capital. The only thing that the
+Government can tax is the output, that is to say, the annual income
+of the people. In other words, a tax on capital is simply a form of
+income tax assessed, not according to a man's income, but according to
+the assets of which he is possessed. The effect of such a tax would
+be that he who has spent everything that he has earned on his own
+enjoyment would go scot free in the matter of the capital tax, and
+would be rewarded for his improvidence by being asked to make no
+sacrifice; while his thrifty brother who, out of a smaller income, has
+set aside a certain proportion during the last twenty or thirty years,
+would have to hand over a portion of his current income assessed
+upon the value of the assets into which he has put his savings.
+Incidentally, it may be remarked that it would take years to make this
+necessary valuation, and that it would probably be done in a very
+inequitable manner by untrained and incompetent officials. But the
+important point is this, that if the Government shows a tendency to
+take the possession of assets as a basis for taxation it will be
+directly encouraging those who spend their whole income in riotous
+living and frivolous amusement, and discouraging those who help to
+increase mankind's output by adding to the capital available.
+
+Finally, it may be added that the shyness of the saver will be greatly
+diminished if he can feel that there is a trustworthy machinery of
+company promotion, so that he can rely on any savings that he puts
+into industry having at least a fair chance of yielding him a fair
+reward. This subject is too vast to enter into at present, but it
+is one to which those who are responsible for the management of our
+financial affairs cannot give too much attention. Every time the real
+investor is swindled out of his money there is more than a chance that
+he will look upon all forms of saving as a folly to be left to the
+credulous. It is easy to say that it was his own fault, that he ought
+to have been more careful, or consulted a better broker; but he will,
+with equal ease, retort that If honest financiers knew their business
+better, they would have long ago made things easier for the ignorant
+investor to know whether he was putting his money into genuine
+enterprise or throwing it down a sink.
+
+Like all other divagations on the subject of what may happen in the
+future, this attempt to forecast has necessarily consisted of "dim
+glimpses into the obvious," as the undergraduate said of Jowett's
+sermon. All that we can be sure of is this: that if the great
+opportunities that will lie open to mankind at the end of the war
+are rightly used, if we use its lessons to increase our production,
+restrict our frivolous consumption, and put a larger proportion of our
+larger production into stimulating production still further, there
+ought to be a great increase in the amount of capital available to
+supply the great increase which may be expected in the amount of
+capital demanded. The fact that the chief nations of the world will
+have enormous debts on which to pay interest is not one that need
+necessarily terrify us from this point of view. The arranging and
+imposition of the taxation necessary for meeting the interest on these
+debts will involve very serious political and social questions; but
+the payment of this interest need not necessarily diminish production,
+and it may probably help in checking consumption. It will not impair
+the total wealth of the world as a whole; it will merely affect its
+distribution. And since it will mean that a considerable part of the
+world's output will, for this reason, be handed over to the holders of
+the various Government debts, who, _ex hypothesi_, will be people who
+have saved money in the past, it is at least possible that they may
+devote a considerable amount of the spin so received to further saving
+or increasing the supply of capital available.
+
+
+
+
+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.
+
+A little book published this year by Messrs. Macmillan and Co.,
+entitled "England's Financial Supremacy," contains a translation of
+a series of articles from the _Frankfurter Zeitung_, and from this
+witness we are able to get some information which may be valuable, and
+is certainly interesting.
+
+The basis of England's financial supremacy is recapitulated as follows
+by this devil's advocate:--
+
+"The influence of history, a mighty empire, a cosmopolitan Stock
+Exchange, intimate business connections throughout the whole world,
+cheap money, a free gold market, steady exchanges, an almost unlimited
+market for capital and an excellent credit system, an elastic system
+of company legislation, a model Insurance organisation and the help of
+Germans, these are the factors that have created England's financial
+supremacy. Perhaps we have omitted one other factor, the errors and
+omissions of other nations."
+
+Coming closer to detail, our critic says, with regard to the
+international nature of the business done on the London Stock
+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
+international character of its business. This was due to England's
+position of company promoter and money lender to the world; to the way
+in which new capital was issued there; to its Stock Exchange rules,
+so independent of legislative and Treasury interference; to the
+international character of its Stock Exchange members, and to the
+cosmopolitan character of its clients,"
+
+On the subject of our Insurance business and the fair-mindedness and
+quickness of settlement with which it was conducted, we can cite the
+same witness as follows:--
+
+"Insurance, again, represented by the well-known organisation of
+Lloyds, which in form is something between a stock exchange and a
+co-operative partnership, is nowhere more elastic and adaptable than
+in London. It must be said, to the credit of Lloyds, that anyone
+asking to be insured there was never hindered by bureaucratic
+restrictions, and always found his wishes met to the furthest possible
+extent. The agencies of Lloyds abroad are also so arranged that both
+the insured and the insurer can have their claims settled quickly and
+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 contained
+in the following passage:--
+
+"A further bad habit, harmful to our economic development, is
+narrow-mindedness. This, too, is very prevalent in Germany--and
+elsewhere as well. And this is not surprising. Even among the
+generation which is active to-day, the older members grew up at a time
+when possibilities of development were restricted and environment was
+narrow. With commendable foresight many of these older men have
+freed themselves from this petty spirit, and are second to none in
+enterprise and energy. Germany can be as proud of its 'captains of
+industry' as America itself. But many commercial circles in Germany
+are still unable to free themselves from these shackles. The relations
+between buyer and seller are still often disturbed by petty quibbling.
+In those industries where cartels and syndicates have not yet been
+formed, too great a role is played by dubious practices of many kinds,
+by infringements of payment stipulations, by unjustifiable deductions,
+etc., while, on the other hand, the cartels are often too ruthless
+in their action. In this field we have very much to learn from the
+English business man. Long commercial tradition and international
+business experience have taught him long ago that broad-mindedness is
+the best business principle. Look at the English form of contract, the
+methods of insurance companies, the settlement of business disputes!
+You will find no narrow-mindedness there. Tolerance, another quality
+which the German lacks, has been of great practical advantage to the
+Englishman. Until recently the City has never resented the settlement
+of foreigners, who were soon able to win positions of importance
+there. Can one imagine that in Berlin an Italian or a South American,
+with very little knowledge of the German language, would be not only
+entrusted with the management of leading banks and companies, but
+would be allowed in German clubs to lay down--in their faulty
+German--the law as to the way in which Germany should be developed?
+Impossible! Yet this could be seen again and again in England, and
+the country gained greatly by it. If the English have now developed
+a hatred of the foreigner, it only means that the end of England's
+supremacy is all the nearer."
+
+According to our German critic the great fabric that has been built up
+on these characteristics and qualities is threatened with ruin by the
+war; and the heritage which we are supposed to be losing is to fall,
+by some process which is not made very clear, largely into the hands
+of Berlin. In order that we may not be accused of taking the laudatory
+plums out of this German pudding and leaving out all criticisms and
+accusations, let us quote in full the passage in which he dances in
+anticipation on London's corpse:--
+
+"Let us sum up. England's reputation for honest business dealing and
+for trustworthy administration has suffered. Her insular inviolability
+has been put in question. The ravages of war have undermined the
+achievements of many generations. Her free gold market has broken
+down. The flow of capital towards London will fall off, for those who
+cannot borrow there will no longer send deposits. The surplus shown
+in her balance-sheet will contract. Foreign trade will also decrease.
+Hand in hand with this fall, free trade, that mighty agent in the
+development of England's supremacy, will, in all probability, give
+place to protection. Stock Exchange business will grow less. Rates of
+interest will be permanently higher."
+
+How much truth is there in all this? Has our reputation for honest
+dealing and for trustworthy administration suffered? Surely not in the
+eyes of any reasonable and unprejudiced observer. In the course of the
+greatest war in history, fought by Germany with weapons which have
+involved the violation of the most sacred laws of humanity and
+civilisation, England has acted with a respect for the interests of
+neutrals which has been severely criticised by impatient observers at
+home. As for our "insular inviolability" having been put in question,
+it certainly has not, so far, suffered any serious damage. Our Fleet
+has defended us from invasion with complete success, and the damage
+done by marine and aerial raiders to our property on shore is
+negligible. Our free gold market is said to have broken down. The
+proof of the pudding is in the eating. Germany, when the war began,
+immediately relieved the Reichsbank from any obligation of meeting
+its notes in gold, and frankly went on to a paper basis. England has
+already shipped well over 200 millions in gold to America to finance
+her purchases there and those of her Allies.
+
+It may be true that capital will not flow to London if London is not
+in a position to lend, but we see no reason why London should not be
+able to resume her position as an international money lender, not
+perhaps immediately on the declaration of peace, but as soon as the
+aftermath of war has been cleared away and the first few months of
+difficulty and danger have been passed. The prophecy that foreign
+trade will decrease may also be true for a time owing to the
+destruction of merchant shipping that the war is causing. This
+possibility, however, may be remedied between now and the end of the
+war if the great programmes of merchant shipbuilding which have been
+undertaken by the British and American Governments are duly carried
+out. In any case, even if foreign trade decreases, there is no reason
+whatever to expect that England's will decrease faster than that of
+other nations.
+
+In all these problems we have to look for the relative answer and to
+consider not whether England has suffered by the war, for it is most
+obvious that she has, but whether she will have been found to have
+suffered more than any competitor who may threaten her after-war
+position.
+
+"Free trade," says our German Jeremiah, "that mighty agent in the
+development of England's supremacy, will, in all probability, give
+place to protection." We venture to think that it will be recognised
+that the Free Trade policy of the past gave us a well-distributed
+wealth which was an invaluable weapon in time of war, and that any
+attempt to impose import duties when peace comes will be admitted,
+even by the most ardent Tariff Reformers, as untimely when there is
+likely to be a world-wide scramble for food and raw materials, and the
+one object of every nation will be to get them wherever they can and
+as cheaply as they can.
+
+If Stock Exchange business will be less, though this does not by any
+means follow, there is no reason why it should be relatively less
+here than in other centres. As to rates of interest being permanently
+higher, the same answer applies. It may be true, but there is no
+reason why they should be relatively higher in London than elsewhere;
+and, if they are high, it will be because there will be a great demand
+for capital, which will mean a great trade expansion; both in the
+provision of capital and in meeting the demands of trade expansion
+England will be doing what she has done with marked success in the
+past and can, if she works in the right way now and after the war, do
+again with equal and still greater success.
+
+There is, however, a danger that threatens our financial position
+after the war, on the subject of which our German critic is discreetly
+silent, because that danger threatens the position of Germany very
+much more emphatically. It consists in the way in which our Government
+is at present meeting the needs of war finance, not by compelling
+economy on the civilian population through taxation and borrowing
+direct from investors, but by manufacturing currency for the purposes
+of the war by means of the printing press and the banking machinery.
+The effect of this policy is seen in the enormous mass of Treasury
+notes with which the country has been flooded. Their total is now
+nearly 180 millions or perhaps 100 millions more than the gold which
+they were originally designed to replace.
+
+It is also to be seen in the great increase in banking deposits which
+has been a feature of our financial history since the war began. Some
+people regard this feature as a phenomenal proof of the growth of our
+wealth during the war. I am afraid there is little foundation for this
+pleasant assumption, for these new deposits have been called into
+being by the banks subscribing to Government securities, whether War
+Loan, Treasury Bills, Exchequer Bonds or Ways and Means advances or
+lending their customers the wherewithal to do so. By this process
+the balance-sheets of the banks are swollen on both sides, by the
+Government securities and advances to customers among the assets,
+against which the banks create new deposits, so giving the community
+as a whole the right to draw more cheques.
+
+Every time the bank makes an advance it gives the borrower a credit in
+its books, that is to say, the right to draw cheques to that amount;
+the borrower draws on the credit and hands it to any one to whom he
+owes money; but as long as the advance is outstanding there will be a
+deposit out against it in the books of some bank or another.
+
+It is an easy way for the Government to finance the war by getting the
+banks to manufacture money for it. Nobody feels any poorer for the
+process, in fact, those who have new money in their pockets or in
+their bank balance feel richer, but the result of thus multiplying
+currency without any increase in the supply of goods and services to
+be bought inevitably helps the rise in prices which makes the war
+costly, puts the burden of it on to the wrong shoulders, and likewise
+cheapens the value of the English pound as measured in other
+currencies. This is why the evils involved by this process become so
+relevant to the question now at issue.
+
+If the Government is allowed to go on financing the war by increasing
+the currency with the very reluctant help of the bankers, the
+difficulties of maintaining our gold standard and keeping the
+exchanges in favour of London will be very greatly magnified when
+the war is over and our gold reserves are no longer protected by the
+submarines and the high cost of shipping gold that they produce. It
+therefore follows that all who have the true interests of the City at
+heart should use all the influence they can to force the Government to
+adopt a sounder financial policy before it is too late.
+
+It is true that our war finance has hitherto been sounder than that of
+any other warring Power, but it has fallen very short if we apply the
+rough test of the proportion of the cost of war borne out of taxation
+and compare our performance with the results achieved by our ancestors
+in the Napoleonic and Crimean wars.
+
+If we have done better than France, Italy, Russia and Germany in this
+respect, it must also be remembered that the financial prestige which
+these countries had to maintain was not nearly so great and well
+established as ours, with the possible exception of France; and
+France, being exposed to the ravages of a ruthless invader, was in a
+position which put special obstacles in the way of the canons of sound
+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, continued to carry out the
+other tasks which had been assigned to us.
+
+All these things we did, and that we should have done them was
+evidence of economic strength and adaptability which have astonished
+the world. To have financed the Allies and ourselves as long as we did
+would have been comparatively easy if our population could have been
+left at work to turn out the stuff and services, the provision of
+which are implied by financing; but for us to have been able to do it
+and at the same time to improvise an army which is now consistently
+and regularly beating the Germans is an achievement which will
+inevitably raise the world's opinion of our economic strength, on
+which financial prestige is ultimately based.
+
+But, as it has been said, in discussing this question we have to look
+at it all the time from the relative point of view. How will our
+prestige be when the war is over, not as compared with what it was
+before the war, but as compared with what any other rival in any other
+part of the world can show? Here we have to acknowledge at once,
+freely and frankly, that, as compared with New York, we shall have
+gone backward.
+
+America will have been enormously enriched by the war, which we shall
+certainly have not. America will have been opening up channels of
+international trade and international finance, and so New York will
+have been gaining at the expense of London. It is certain that when
+the war is over America's dependence upon London for credits against
+the shipments of goods to and from her shores will have been very
+greatly lessened, if not altogether a thing of the past.
+
+This change would have happened any way, war or no war, but it has
+been greatly quickened by the war. Before the war America was already
+making arrangements, under her new banking system, to promote the
+machinery for acceptance and discount, in order that goods sent to her
+from foreign countries should be financed by bills drawn on American
+banks and houses in dollars instead of on English banks and houses in
+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 large
+blocks of European promises to pay, is as clear as noonday; but
+whether when the war is over New York will care to be bothered much
+with problems of international finance remains to be seen. In the
+first place, the claims of her own country upon her financial
+resources will be insatiable and imperative, In the second place, the
+business of international finance is carried out on very finely cut
+terms; and the Americans being accustomed to the fat rates of profit
+which business at home has given them may not care to devote much
+attention to the international market, in which the risks are big,
+the turnover is enormous and the profits very finely cut. It has
+been remarked by a shrewd observer that the Americans will never do
+business for a thirty-second.
+
+In the third place, it must be remembered that the geographical
+position of London is more favourable than that of New York as a world
+centre, as the world is at present constituted. England, anchored off
+the coast of Europe, is clearly marked as the 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 hemispheres, may be gradually united into what is
+practically one market by the growing ties of mutual interest.
+
+With regard to the position of other possible rivals to London's
+position, it need only be said that they have certainly been weakened
+much more rapidly than has London during the course of the war. Paris,
+threatened by the near approach of an invading foe, has inevitably
+suffered much more severely than London, and is likely to take longer
+in recovering the great position as a provider of capital which was
+given to her by the thrift of the average French citizen. Every one
+expects with confidence to see, when the war is over, a miraculous
+recovery in France produced by the same spirit which worked miracles
+after the war of 1871, aided and abetted by the subsequent improvement
+in man's control over the forces of nature, and also by the deep and
+world-wide sympathy which all will feel for France as the champion of
+freedom who has suffered most severely in its cause during the war.
+But it is impossible to expect, after what France has suffered, that
+she will be, for some time, in a position seriously to challenge
+London as a financial rival. All Englishmen will hope that the day
+when she will be in a position to challenge us again will come
+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, infringements of
+payment stipulations, unjustifiable deductions," etc., and the
+"ruthless" action of the cartels. He acknowledges that though Germany
+had a gold standard "too much anxiety used to be shown when the gold
+export point was reached," and that "it was also feared that to export
+gold would incur the wrath of the Reichsbank."
+
+With these disadvantages to struggle against, quoted from the mouth of
+a German observer, Germany has also succeeded by her ruthless policy
+during the war in earning the deep hostility of the greater part of
+mankind. Sentiment probably enters into business relations a good deal
+more than most business men admit, and for any country to set out to
+gain the leadership in trade and finance by outraging the feelings of
+most of its possible customers is an extraordinary piece of stupidity.
+
+It seems, then, that apart from the relative weakening of London as
+compared with New York, there is very little need for us to fear any
+serious change in England's financial position after the war as long
+as the Government's faulty finance is not allowed too seriously to
+endanger the position of our gold standard. It is true that we shall
+not benefit, as much as we undoubtedly have in the past, from the
+"help of Germans" in developing our finance. But indirectly the
+Germans will still be helping us by the great stimulus that the war
+will have given us towards efficiency and hard work.
+
+What we have to do in order to secure London's position after the war
+is to restore as soon as we can the system that had established it in
+the century before the war. We have to show the world that, far from
+any intention to abandon Free Trade, we mean to take a long step
+forward along the line of international activity which has been the
+source of our greatness in the past. We want, as soon as possible, to
+get back that freedom from Government control which has given us such
+elasticity and adaptability to our money market, our Stock Exchange
+and our Insurance business. A certain amount of Government control
+will inevitably have to continue for a time after the war, but the
+sooner we rid ourselves of it the sooner we shall restore to the
+London money market those qualities which, after the reputation that
+it has for honesty, soundness and straight dealing, were most helpful
+in building up its eminence.
+
+Above all, we have to work hard both in finance and industry and
+commerce. Finance, which is the machinery for handling claims for
+goods and services, can only be active and effective if industry and
+commerce are active and effective behind it, turning out the goods and
+services to meet the claims that finance creates. A great industrial
+and commercial output, with severe restriction of unnecessary
+consumption so that a great margin may go into capital equipment, will
+soon repair the ravages of war, bring down the price of credit and of
+capital and make London once more the place in which these things are
+most cheaply and freely to be bought.
+
+Finally, if we want to restore London as a place in which all the
+financial transactions of the world were centred, we must remember
+that we cannot do so if we restrict the facilities given to foreigners
+to come here and settle and do business. It is not possible to be an
+international centre with an insular sentiment.
+
+
+
+
+III
+
+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 the dispatch
+with which our Expeditionary Force was collected from all parts of the
+kingdom, and shipped across to France, was a miracle of efficiency and
+practical organisation. It is true that we had not got an Army on a
+Continental scale, but it was no part of our contract that we should
+have one. The fighting on land was in those days expected to be done
+by our Allies, assisted by a small British force on the left flank of
+the French Army. That British force was duly there, and circumstances
+which were quite unforeseen made it necessary for us to undertake a
+task which was no part of our original programme and create an Army
+on a Continental scale, in addition to doing everything that we had
+promised beforehand to a much greater extent than was in the bargain.
+
+But in finance there was no evidence that any thought-out policy had
+been arrived at in order to make the best possible use of the nation's
+economic resources for the war when it came. The acute crisis in the
+City which occurred in August, 1914, was a minor matter which hardly
+affected the subsequent history of our war finance except by giving
+dangerous evidence of the ease by which financial problems can be
+apparently surmounted by the simple method of creating banking
+credits. That crisis merely arose from the fact that we were so
+strong financially, and had so great a hold upon the finance of other
+countries in the world, that when we decided, owing to stress of war,
+to leave off lending to foreigners and to call in loans that we had
+made by way of accepting and bill-discounting arrangements, the whole
+machinery of exchange broke down because from all over the world the
+market in exchange went one way. Everybody wanted to buy bills on
+London, and there were no bills to be had.
+
+There was also the internal problem which arose because some of the
+public and some of the banks took to the evil practice of hoarding
+gold just at the wrong moment, and consequently there was no available
+supply of legal tender currency except in the shape of Bank of England
+notes, the smallest denomination of which is L5. 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 L5; 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 L1 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 L1 notes ready, it may at least be contended that the
+moratorium, which was so bad a financial beginning of the war, might
+have been avoided.
+
+But this opening crisis was a short-lived matter, and was promptly
+dealt with, thanks to the energy and courage of Mr Lloyd George, who
+was then Chancellor of the Exchequer, and saw that things had to be
+done quickly, and took the advice of the City as to what had to be
+done. The measures then employed erred, if at all, on the side of
+doing too much, which was certainly a mistake in the right direction
+if in any. What is much more evident is the fact that not only had
+there been no attempt to provide against just such a jolt to our
+financial machine as took place when the war began, but that, quite
+apart from the financial machinery of the City, no reasoned and
+thought-out attention had been given to the great problems of
+governmental finance which war on such a scale brought with it. There
+is, of course, the excuse that nobody expected the war to be on this
+scale, or to last so long. The general view was that the struggle
+would be over in a few months, and must certainly be so if for no
+other reason because the economic strain would be so great that the
+nations of Europe could not stand it for a long time. On the other
+hand, we must remember that Lord Kitchener, whom most men then
+regarded as representing all that was most trustworthy in military
+opinion, made arrangements from the beginning on the assumption that
+the war might last for three years. So, while some excuse may be made
+for our lack of financial foresight, it does seem to have been the
+duty of those whose business it is to manage our finances to have
+thought out a complete scheme to be adopted in case of war if at any
+time we should be involved in one on a European scale. Instead of
+which, not only would it appear that no such endeavour had been made
+by our Treasury experts before the war, but that no such endeavour
+has ever been made by them since the war began. All through the
+war's history many of the country's mistakes have been based on the
+encouraging conviction that the war would be over in the next six
+months. This conviction is still cherished to this day, and there can
+be no doubt that if those who cherish it hold on to it long enough
+they will come right some day.
+
+But if delusions of this kind may be fairly excused in the man in
+the street, they do not seem to be any excuse for those who are
+responsible for our finance for their total lack of a thought-out
+scheme at the beginning of the war, and their total failure to produce
+one as the war went on. We have financed the war by haphazard methods,
+limping along the line of least resistance. We are continuing to do
+so, and we may do so to the end, though there are now growing signs of
+an impatience both among the property-owning classes and others of
+the system by which we are financing the war by piling up debt and
+manufacturing banking credits.
+
+The objections to the policy on the part of the "haves" and the "have
+nots" are, of course, different, but as they both converge to the
+same point, namely, to the reform of our system of war finance, it is
+possible that they may in time have the effect of shaking even the
+confidence of our politicians and officials in the haphazard and
+slipshod methods which would long ago have produced financial disaster
+if it had not been for the great financial strength of the country.
+
+Finance is an enormously important weapon in the hands of our rulers
+for gliding the economic activities of the people. This is so even in
+peace time to a certain extent, though the revenue then collected is
+so small an item in the total national income that it counts for much
+less than in war, when the power that the Government can wield by
+its policy in taxation and borrowing might have been all-powerful in
+keeping the nation on the right lines in the matter of spending and
+keeping down the cost of the war, and in maintaining our financial
+staying power to a far greater extent than has actually been done.
+
+It is easy, as they say on the Stock Exchange, to job backwards, and
+it is also easy, and perhaps rather unprofitable, to hazard opinions
+about what would have happened if things had been otherwise.
+Nevertheless, when we look back on the spirit of the country as it was
+in those early days of the war, when the violation of Belgium had sent
+a chivalrous thrill through the hearts of all classes in the country,
+when we all recognised that we were faced with the greatest crisis
+in our history, that our country and the future of civilisation were
+about to be tested by the severest strain ever applied to them, that
+the life and fortune of the individual did not count, but that the
+war and victory were the only interests that any one had a right to
+consider--when one remembers all these things, and the use that a wise
+financial policy might have made of them, it is impossible to avoid
+the conclusion that the history of the war in this country and its
+social and political effects might have been something much finer,
+much cleaner and more noble if only the weapons of finance had been
+more boldly and wisely used. It is not a good thing to indulge in
+high-falutin' on this subject. It is absurd to suppose that the war
+suddenly turned us all into plaster saints at the beginning, and that
+we might have continued so to the end if the State had dealt with our
+money in a proper way. But without setting up any such idealistic
+arguments as these, looking back on those early days of the war, one
+can still remember the thrill of earnestness and of eagerness for
+self-sacrifice which has since then given way lamentably to war
+profiteering, war strikes, and a general struggle among many classes
+of the community to make as much as possible out of the war, merely
+because our financial leaders have never really put the country's
+financial problem properly before the country.
+
+We were not plaster saints, but we were either Idealistic and perhaps
+foolish people who attached great importance to the freedom and
+security of small nations and all those items in the programme of
+idealistic Radicalism, or else we were good, red-hot, true-blue
+Jingoes with a hearty hatred for Germany, and enjoyed the thought that
+the big fight which we had long foreseen between the two countries was
+at last going to be fought out. Or, again, we were just commonplace
+people who did not much believe in idealistic Radicalism or
+anti-German bitterness, but saw that the whole future of our country
+was at stake, and were prepared to do anything for it. A fine example
+was set us in those days by the Trade Union leaders. The industrial
+world was seething with discontent. The Suffragettes in London and the
+Carsonites in Ireland had shown us how much could be done by appeals
+to physical force in a lazy-minded community; and hints of industrial
+revolution, with great organised strikes, which were going to tie up
+the transport industry of the country were in the air. And then, when
+the war came, the Labour leaders said, "No strikes until the war is
+over. Our country comes first."
+
+This was the lead given to the country by those down at the bottom,
+who had the least to lose, and whose patriotism during the course of
+the war has frequently been questioned. At the top the financial and
+property-owning classes, having been saved by Mr Lloyd George's able
+adroitness from a bad crisis in the City, were entirely tame, and
+would have suffered anything in the way of taxation or financial
+conscription if the need for it had been properly put before them.
+
+It is almost amusing to remember now that in those early days of the
+war the shareholders in Home Railway companies were thought lucky. The
+Government were taking the railways over, and were guaranteeing that
+their proprietors should receive the same dividends as they had had
+before the war. Such was the view in financial and property-owning
+circles of results of war that, so far from any expectation of the
+huge profits which war has put into the pockets of certain classes,
+they were only too thankful if they could be assured that their gross
+incomes were not going to be reduced.
+
+Such was the spirit with which the Government of that day had to
+deal. A spirit in all classes earnestly patriotic, and so thoroughly
+frightened of the economic consequences of the war that it would have
+been ready to face any sacrifices that the Government had asked of it.
+How, then, would the Government have dealt with this spirit if it had
+taken the trouble really to think out the problem of war finance on
+a long view instead of proceeding along a haphazard line, adjusting
+peace methods to war without any consideration as to their adequacy?
+If the problem had been really thought out beforehand the Government
+must have seen clearly that the real economic problem in war-time is
+not merely a question of raising money, since that can at any time
+be done easily by means of a printing-press, but of diverting the
+industrial energy of the nation from peace to war purposes, that is
+to say, transferring from the enjoyment of the individual citizen
+the goods and services that used to contribute to his comfort and
+amusement, and turning them over to the provision of the things needed
+for the war. War's needs can only be met out of the current production
+of the world as it is at present. All the warring powers begin a
+war with certain accumulated war stores consisting of battleships,
+ammunition, guns and all other forms of war material. Apart from these
+stores with which they begin, the whole work of providing the armies
+with the fighting materials that they require, and the food and
+clothes that they consume, has to be done during the course of the
+war, that is to say, out of the current production of the moment.
+
+Therefore the real economic problem that any Government has to face in
+war-time is that of inducing its citizens to reduce their purchase of
+goods and services, that is to say, to spend less, so that all
+the things required for the Army and Navy may be obtained by the
+Government. It is true that some of the goods and services required
+for carrying on war can be obtained from foreign countries by any
+belligerent which is able to communicate with them freely. In that
+case the current production of the foreigner can be called in to help.
+But this can only be done if the warring country is able to ship goods
+to the foreigner in payment for what it buys, or if it is able to
+obtain a loan from the foreigner, or some other foreign country, in
+order to pay for its purchases abroad, or again, if, as in our case,
+it holds a large accumulation of securities which foreign countries
+are prepared to take in exchange for goods that they send for the
+purposes of the war. By these two last-named processes, raising money
+abroad, and selling securities to foreign nations, the warring country
+impoverishes itself for the future. When it borrows abroad it pledges
+itself to export goods and services in future to meet interest and
+sinking fund on the money so raised, so getting no goods and services
+in return. When it ships its accumulated wealth in the form of
+securities it gives up for the future any claim to goods and services
+from the debtor country which used to come to it to meet interest and
+redemption. It is only by shipping goods in return for goods imported
+for the war that a country can keep its financial staying-power on an
+even keel.
+
+Thus the problem which a statesman who had thought out the economics
+of war beforehand would have recognised as the keystone of his policy,
+would have been that of diverting the activities of the country from
+providing itself with comforts and amusements to turning out goods
+required for war, and of doing so with the least possible friction,
+the least possible alteration in the economic equilibrium of the
+country, and, above all, with the least possible cost to the national
+finances. We arrive at the true aspect of this problem more easily if
+we leave out the question of money altogether and think of it in units
+of energy. When a nation goes to war it means to say that it has to
+apply so many units of energy to the business of fighting, and to
+provide the fighters with all that they need. If at the beginning
+of the war its utmost capacity of output was, to mention merely a
+fanciful figure, a thousand million units of energy, and if it was
+clear that the fighting forces of the country would need for their
+proper maintenance five hundred million units of energy, then it is
+clear that the nation's ordinary consumption of goods and services
+would have to be reduced to the extent of five hundred millions of
+units of energy, which would have to be applied to the war, that is,
+assuming that its possible output remained the same.
+
+In other words, the spending power of the citizens of the country
+had to be reduced so that the industrial energy that used to go into
+meeting their wants might be made available for the purposes of
+fighting forces. Now what was the straightest, simplest and cleanest
+way of bringing about this reduction in buying power on the part of
+the ordinary citizen which has been shown to be necessary for the
+purposes of war finance? Clearly the best way of doing it is by
+taxation equitably imposed. When the State taxes, it says in effect
+to the citizens, "Your country needs certain goods and services, you
+therefore will have to go without those goods and services, and the
+simplest way to make you do this is to take away your money and so
+ration your buying power. Whatever is needed for the Army and Navy
+will be taken away from you by taxation, and the result of this will
+be that, instead of your indulging in comforts and luxuries, to the
+extent of the war's needs the Government will use your money for
+paying for what is needed for the Army and Navy."
+
+If such a policy had been carried out the cost of the war to the
+community would have been enormously cheapened. There need have been
+no general rise in prices because there would have been no increase
+in demand for goods and services. Anything that the Government
+spent would have been counter-balanced by decreased spending by the
+individual; any work that the Government needed for the war would have
+been counter-balanced by a reduction in demand for work on the part
+of individual citizens. There would have been no multiplication of
+currency owing to enormous credits raised by the Government; there
+would have been merely a transfer of buying power from individuals to
+the State. The process would have been gradual, there need have been
+no acute dislocation, but as the cost of the war increased, that is to
+say, as the Government needed more and more goods and services for its
+prosecution, the community would gradually have shed one after another
+the extravagances on which it spent so many hundreds of millions in
+days before the war. As it shed these extravagances the labour
+and energy needed to produce them would have been automatically
+transferred to the service of the war, or to the production of
+necessaries of life. By this simple process of monetary rationing all
+the frantic appeals for economy, and most of the complicated, tangled
+problems raised by such matters as Food Control or National Service
+would have been avoided.
+
+But, it may be contended, this is setting up an ideal so absurdly
+too high that you cannot expect any modern nation to rise up to it.
+Perhaps this is true, though I am not at all sure that if we had had a
+really bold and far-sighted Finance Minister at the beginning of the
+war he might not have persuaded the nation to tackle its war problem
+on this exalted line. At least it can be claimed that our financial
+rulers might have looked into the history of the matter and seen what
+our ancestors had done in big wars in this matter of paying for war
+costs out of taxation, with the determination to do at least as well
+as they did, and perhaps rather better, owing to the overwhelming
+scale of modern financial problems. If they had done so they would
+have found that both in the Napoleonic and the Crimean wars we paid
+for nearly half the cost of the war out of revenue as they went on,
+whereas in the present war the proportion that we are paying by
+taxation, instead of being 47 per cent., as it was when our sturdy
+ancestors fought against Napoleon, is less than 20 per cent.[1]
+Why has this been so? Partly, no doubt, owing to the slackness and
+cowardice of our politicians, and the apathy of the overworked
+officials, who have been too busy with the details of finance to think
+the problem out on a large scale. But it is chiefly, I think, because
+our system of taxation, though probably the best in the world,
+involves so many inequities that it cannot be applied on a really
+large scale without producing a discontent which might have had
+serious consequences on our conduct of the war.
+
+[Footnote 1: See _Economist_, August 4, 1917, p. 151.]
+
+It is not possible nowadays, now that the working classes are
+conscious of their strength, to apply taxation to ordinary articles
+of general consumption with anything like the ruthlessness which in
+former days produced such widespread misery. Indirect taxation of this
+kind carries with it this inherent weakness that its burden falls most
+heavily on those who are least able to bear it, consequently it is
+bound to break in the hand of those who attempt to apply it with
+anything like vigour to a community which is prepared to stand up for
+fair treatment. A tax on bread or salt obviously hits the wage-earner
+at 30s. a week infinitely harder than it hits the millionaire, and so
+the country would not tolerate taxes on bread or salt. Direct taxes,
+such as Income Tax and Death Duties, have this enormous advantage,
+that they can really be regulated so as to press with continually
+increasing severity upon those who are best able to bear them.
+Unfortunately our Income Tax is still so unjustly imposed that it was
+clearly impossible to make full use of it without its being first
+reformed. That two men, each earning L1000 a year, should pay the same
+Income Tax, in spite of one having a wife and five children, while
+the other is a careless bachelor, is such a blot upon this otherwise
+excellent tax that it is generally agreed that the present rate of 5s.
+is as high as it can be made to go unless some reform is introduced
+into its incidence. The need for its reform is made the excuse for a
+sparing use of the tax, and we have been on several occasions assured
+that, as soon as the war is over, this reform will be set about.
+
+In the meantime the Government falls back on funding about 80 per
+cent. of its requirements of the war on a system of borrowing. In
+so far as the money subscribed to its loans is money that is being
+genuinely saved by investors this process has exactly the same effect
+as taxation, that is to say, somebody goes without goods and services
+and hands over his power to buy them to the State to be used for the
+war. Borrowing of this kind consequently does everything that is
+needed for the solution of the immediate war problem, and the only
+objection to it is that it leaves later on the difficulties involved
+by raising taxes when the war is over, and economic problems are
+much more complicated in times of peace than in war, for meeting the
+interest and redemption of debt. But, in fact, it is well known that
+by no means all that the Government has borrowed for war purposes has
+been provided in this way. Much of the money that the Government has
+obtained for war purposes has been got not out of genuine savings
+of investors, but by arrangements of various kinds with the banking
+machinery of the country, or by the simple use of the printing-press,
+with the result that the Government has provided itself with an
+enormous mass of new currency which has not been taken out of anybody
+else's pocket, but has been manufactured by or for the Government.
+
+The consequence of the profligate use of this dishonest process is
+that general rise in prices, which is in effect an indirect tax on the
+necessaries of life, involving all the injustice and ill-feeling which
+arises from such a measure. It is inevitable that the working classes,
+finding themselves subjected to a rise in prices, the cause of which
+they do not understand, but the result of which they see to be a great
+decrease in the buying power of their wages, should believe that they
+are being exploited by profiteers, that the rich classes are growing
+richer at their expense out of the war, and that they and the country
+are being bled by a set of unpatriotic capitalist blood-suckers. It
+is also natural that the property-owning classes, who find themselves
+paying an Income Tax which they regard as extortionate, should
+consider that the working classes by their continuous demands for
+higher wages to meet higher cost of living, are trying to exploit
+the country in their own interests in a time of national crisis, and
+displaying a most unedifying spirit. The social result of this evil
+policy of inflation, in embittering class against class, is a matter
+which it is difficult to exaggerate. Some people think that it was
+inevitable. This is too wide a question to be entered into now, but
+at least it must be contended that if it is inevitable the extent to
+which it is being practised might have been very greatly diminished.
+
+Do we mean to go on to the end of the war with this muddling policy of
+bad finance? If we still insist on believing that the war cannot last
+another six months, and there is therefore no need to pull ourselves
+up short financially and put things in order, then we certainly shall
+do so. But we should surely recognise that there is at least a chance
+that the war may go on for years, that if so our present financial
+methods will leave us with a burden of debt which is appalling to
+consider, and that in any case, whether the war lasts another six
+months or another six years, a reform of our financial methods is long
+overdue, is inevitable some time, and will pay us better the sooner it
+is set about.
+
+
+
+
+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 _Sperling's Journal_ I dealt with the
+question of how our war finance might have been improved if a longer
+view had been taken from the beginning concerning the length of the
+war and the measures that would be necessary for raising the money.
+The subject was too big to be fully covered in the course of one
+article, and I have been given this opportunity of continuing its
+examination. Before doing so I wish to remind my readers once more
+of the great difference in the spirit of the country with regard to
+financial self-sacrifice in the early days of the war and at the
+present time, after three years of high profits, public and private
+extravagance, and successful demands for higher wages have demoralised
+the public temper into a belief that war is a time for making big
+profits and earning big wages at the expense of the community. In the
+early days the spirit of the country was very different, and it might
+have remained so if it had been trained by the use made of public
+finance along the right line. In the early days the Labour leaders
+announced that there were to be no strikes during the war, and the
+property-owning classes, with their hearts full of gratitude for the
+promptitude with which Mr Lloyd George had met the early war crisis,
+were ready to do anything that the country asked from them in the
+matter of monetary sacrifice. Mr Asquith's grandiloquent phrase, "No
+price is too high when Honour is at stake," might then have been taken
+literally by all classes of the community as a call to them to do
+their financial duty. Now it has been largely translated into a belief
+that no price is too high to exact from the Government by those
+who have goods to sell to it, or work to place at its disposal. In
+considering what might have been in matters of finance we have to be
+very careful to remember this evil change which has taken place in the
+public spirit owing to the short-sighted financial measures which have
+been taken by our rulers.
+
+Thus, when we consider how our war finance might have been improved,
+we imply all along that the improvements suggested should have been
+begun when the war was in its early stages, and when public opinion
+was still ready to do its duty in finance. The conclusion at which we
+arrived a month ago was that by taxation rather than by borrowing and
+inflation much more satisfactory results could have been got out of
+the country. If, instead of manufacturing currency for the prosecution
+of the war, the Government had taken money from the citizens either by
+taxation or by loans raised exclusively out of real savings, the rise
+in prices which has made the war so terribly costly, and has raised so
+great a danger through the unrest and dissatisfaction of the working
+classes, might have been to a great extent avoided, and the higher the
+rate of taxation had been, and the less the amount provided by loans,
+the less would have been the seriousness of the problem that now
+awaits us when the war is over and we have to face the question of the
+redemption of the debt.
+
+In this matter of taxation we have certainly done much more than
+any of the countries who are fighting either with us or against us.
+Germany set the example at the beginning of the war of raising no
+money at all by taxation, puffed up with the vain belief that the cost
+of the war, and a good deal more, was going to be handed over to her
+in the shape of indemnities by her vanquished enemies. This terrible
+miscalculation on her part led her to set a very bad example to the
+warring Powers, and when protests are made in this country concerning
+the low proportion of the war's costs that is being met out of
+taxation it is easy for the official apologist to answer, "See how
+much more we are doing than Germany." It is easy, but it is not a good
+answer. Germany had no financial prestige to maintain; the money that
+Germany is raising for financing the war is raised almost entirely
+at home, and she rejoices in a population so entirely tame under a
+dominant caste that it would very likely be quite easy for her, when,
+the war is over, to cancel a large part of the debt by some process of
+financial jugglery, and to induce her tame and deluded creditors to
+believe that they have been quite handsomely treated.
+
+Here, however, in England, we have a financial prestige which is based
+upon financial leadership of more than a century. We have also raised
+a large part of the money we have used for the prosecution of the
+war by borrowing abroad, and so we have to be specially careful in
+husbanding that credit, which is so strong a weapon on the side of
+liberty and justice. And, further, we have a public which thinks for
+itself, and will be highly sceptical, and is already inclined to be
+sceptical, concerning the manner in which the Government may treat the
+national creditors. Its tendency to think for itself in matters of
+finance is accompanied by very gross ignorance, which very often
+induces it to think quite wrongly; and when we find it necessary for
+the Chancellor of the Exchequer to make it clear at a succession of
+public meetings that those who subscribe to War Loans need have no
+fear that their property in them will be treated worse than any other
+kinds of property, we see what evil results the process of too much
+borrowing and too little taxation can have in a community which is
+acutely suspicious and distrustful of its Government, and very liable
+to ignorant blundering on financial subjects.
+
+What, then, might have been done if, at the beginning of the war, a
+really courageous Government, with some power of foreseeing the needs
+of finance for several years ahead if the war lasted, had made a right
+appeal to a people which was at that time ready to do all that was
+asked from it for the cause of justice against the common foe? The
+problem by which the Government was faced was this, that it had to
+acquire for the war an enormous and growing amount of goods and
+services required by our fighting forces, some of which could only be
+got from abroad, and some could only be produced at home, while at
+the same time it had to maintain the civilian population with such a
+supply of the necessaries of life as would maintain them in efficiency
+for doing the work at home which was required to support the effort of
+our fighters at the Front. With regard to the goods which came from
+abroad, either for war purposes or for the maintenance of the civilian
+population, the Government obviously had no choice about the manner in
+which payment had to be made. It had no power to tax the suppliers in
+foreign countries of the goods and services that we needed during the
+war period. It consequently could only induce them to supply these
+goods and services by selling them either commodities produced by
+our own industry, or securities held by our capitalists, or its own
+promises to pay.
+
+With regard to the goods that we might have available for export,
+these were likely to be curtailed owing to the diversion of a large
+number of our industrial population into the ranks of the Army and
+into munition factories. This curtailment, on the other hand, might
+to a certain extent be made good by a reduction in consumption on the
+part of the civilian population, so setting free a larger proportion
+of our manufacturing energy for the production of goods for export.
+Otherwise the problem of paying for goods purchased from abroad could
+only be solved by the export of securities, and by borrowing from
+foreign countries, so that the shells and other war material that were
+required, for example, from America, might be paid for by American
+investors in consideration of receiving from us a promise to pay them
+back some day, and to pay them interest in the meantime. In other
+words, we could only pay for what we needed from abroad by shipping
+goods or securities. As is well known, we have financed the war by
+these methods to an enormous extent; the actual extent to which we
+have done so is not known, but it is believed that we have roughly
+balanced by this process the sums that we have lent to our Allies and
+Dominions, which now amount to well over 1300 millions.
+
+If this is so, we have, in fact, financed the whole of the real cost
+of the war to ourselves at home, and we have done so by taxation,
+by borrowing saved money, and by inflation--that is to say, by
+the manufacture of new currency, with the inevitable result of
+depreciating the buying power of our existing currency as a whole. How
+much better could the thing have been done? In other words, how much
+of the war's cost in so far as it was raised at home could have been
+raised by taxation? In theory the answer is very simple, for in theory
+the whole cost of the war, in so far as it is raised at home, could
+have been raised by taxation if it could have been raised at all.
+It is not possible to raise more by any other method than it is
+theoretically possible to raise by taxation. It is often said, "All
+this preaching about taxation is all very well, but you couldn't
+possibly get anything like the amount that is needed for the war by
+taxation, or even by borrowing of saved money. This inflation against
+which economic theorists are continually railing is inevitable in time
+of war because there isn't enough money in the country to provide all
+that is needed."
+
+This argument is simply the embodiment of the old delusion, so common
+among people who handle the machinery of finance, that you can really
+increase the supply of necessary goods by increasing the supply of
+money, which is nothing else than claims to goods expressed either in
+pieces of metal or pieces of paper. As we have seen, all that we have
+been able to raise abroad has been required for advances to our Allies
+and Dominions, consequently we have had to fall back upon our own home
+production for everything needed for our own war costs. Either we have
+turned out the goods at home or we have turned out goods to sell to
+foreigners in exchange for goods that we require from them. But since
+we thus had to rely on home production for the whole of the war's
+needs as far as we were concerned, it is clear that the Government
+could, if it had been gifted with ideal courage and devotion, and if
+it had a people behind it ready to do all that was needed for victory,
+have taken the whole of the home production, except what was wanted
+for maintaining the civilian population in efficiency, for the
+purposes of the war.
+
+It is a commonplace of political theory that the Government has a
+right to take the whole of the property and the whole of the labour of
+its citizens. But it would not, of course, have been possible for the
+Government immediately to inaugurate a policy of setting everybody to
+work on things required for the war and paying them all a maintenance
+wage. This might have been done in theory, but in practice it would
+have involved questions of industrial conscription, which would
+probably have raised a storm of difficulty. What the Government might
+have done would have been by commandeering the buying power of the
+citizen to have set free the whole industrial energy of the community
+for supplying the war's needs and the necessaries of life. At present
+the national output, which is only another way of expressing the
+national income, is produced from certain channels of production in
+response to the expectation of demand from those whose possession of
+claims to goods, that is to say, money, gives them the right to say
+what kind of goods they will consume, and consequently the industrial
+part of the population will produce.
+
+Had the Government laid down that the whole cost of the war was to be
+borne by taxation, the effect of this measure would have been that
+everything which was needed for the war would have been placed at the
+disposal of the Government by a reduction in spending on the part of
+those who have the spending power. In other words, the only process
+required would have been the readjustment of industrial output from
+the production of goods needed (or thought to be needed) for ordinary
+individuals to those required for war purposes. This readjustment
+would have gone on gradually as the war's cost increased. There
+would have been no competition between the Government and private
+individuals for a limited amount of goods in a restricted market,
+which has had such a disastrous effect on prices during the course of
+the war; there would have been no manufacture of new currency, which
+means the creation of new buying power at a time when there are less
+goods to buy, which has had an equally fatal effect on prices; there
+would have had to be a very drastic reform in our system of taxation,
+by which the income tax, the only really equitable engine by which the
+Government can get much money out of us, would have been reformed so
+as to have borne less hardly upon those with families to bring up.
+
+Mr Sidney Webb and the Fabians have advocated a system by which the
+basis of assessment for income tax should be the income divided by the
+number of members of a family, rather than the mere income without any
+consideration for the number of people that have to be provided for
+out of it. With some such scheme as this adopted there is no reason
+why the Government should not have taken, for example, the whole of
+all incomes above L1000 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
+L1000 a year on himself or herself at such a crisis would have been
+recognised, in the early days of the war, as an absurdity; any surplus
+above that line might readily have been handed over to the Government,
+half of it perhaps in taxation and the other half in the form of a
+forced loan.
+
+So sweeping a change would not have been necessary at first, perhaps
+not at all, because the war's cost would not have grown nearly so
+rapidly. All surplus income above a certain line would have been taken
+for the time being, but with the promise to repay half the amount
+taken, so that it should not be made a disadvantage to be rich, and no
+discouragement to accumulation would have been brought about. By this
+means the whole of the nation's buying power among the richer classes
+would have been concentrated upon the war, with the result that the
+private extravagance, which is still disgracing us in the fourth year
+of the war, would not have been allowed to produce its evil effects.
+With the rich thus drastically taxed, the working classes would have
+been much less restive under the application of income tax to their
+own wages. We should have a much more freely supplied labour market,
+and since the rise in prices would not have been nearly so severe,
+labour's claim to higher wages would have been much less equitable,
+and labour's power to enforce the claim would have been much less
+irresistible.
+
+What the Government has actually done has been to do a little bit of
+taxation, much more than anybody else, but still a little bit when
+compared with the total cost of the war; a great deal of borrowing,
+and a great deal of inflation. By this last-named method it produces
+the result required, that of diverting to itself a large part of the
+industrial output of the country, by the very worst possible means. It
+still, by its failure to tax, leaves buying power in the hands of a
+large number of people who see no reason why they should not live very
+much as usual; that is to say, why they should not demand for their
+own purposes a proportion of the nation's energy which they have no
+real right to require at such a time of crisis. But in order to check
+their demands, and to provide its own needs, the Government, by
+setting the bankers to work to provide it with book credits, gives
+itself an enormous amount of new buying power with which, by the
+process of competition, it secures for itself what is needed for the
+war. There is thus throughout the country this unwholesome process
+of competition between the Government on one hand and unpatriotic
+spenders on the other, who, between them, put up prices against the
+Government and against all those unfortunate, defenceless people who,
+being in possession of fixed salaries, or of fixed incomes, have no
+remedy against rising prices and rising taxation. All that could
+possibly have been spent on the war in this country was the total
+income of the people, less what was required for maintaining the
+people in health and efficiency. That total income Government might,
+in theory, have taken. If it had done so it could and would have paid
+for the whole of the war out of taxation.
+
+All this, I shall be told, is much too theoretical and idealistic;
+these things could not have been done in practice. Perhaps not, though
+it is by no means certain, when we look back on the very different
+temper that ruled In the country in the early months of the war. If
+anything of the kind could have been done it would certainly have been
+a practical proof of determination for the war which would have shown
+more clearly than anything else that "no price was too high when
+Honour was at stake." It would also have been an extraordinary
+demonstration to the working classes of the sacrifices that property
+owners were ready to make, the result of which might have been that
+the fine spirit shown at the beginning of the war might have been
+maintained until the end, instead of degenerating into a series of
+demands for higher wages, each one of which, as conceded to one set of
+workmen, only stimulates another to demand the same. But even if we
+grant that it is only theoretically possible to have performed such a
+feat as is outlined above, there is surely no question that much more
+might have been done than has been done in the matter of paying for
+the war by taxation. If we are reminded once more that our ancestors
+paid nearly half the cost of the Napoleonic war out of revenue, while
+we are paying about a fifth of the cost of the present war from the
+same source, it is easy to see that a much greater effort might have
+been made in view of the very much greater wealth of the country at
+the present time. I was going to have added, in view also of its
+greater economic enlightenment, but I feel that after the experience
+of the present war, and its financing by currency debasement, the less
+about economic enlightenment the better.
+
+What, then, stood in the way of measures of finance which would have
+obviously had results so much more desirable than those which will
+face us at the end of the war? As it is, the nation, with all classes
+embittered owing to suspicions of profiteering on the part of the
+employers and of unpatriotic strikes on the part of the workers, will
+have to face a load of debt, the service of which is already roughly
+equivalent to our total pre-war revenue; while there seems every
+prospect that the war may continue for many half-years yet, and every
+half-year, as it is at present financed, leaves us with a load of debt
+which will require the total yield of the income tax and the super-tax
+before the war to meet the charge upon it. Why have we allowed our
+present finance to go so wrong? In the first place, perhaps, we may
+put the bad example of Germany. Then, surely, our rulers might have
+known better than to have been deluded by such an example. In the
+second place, it was the cowardice of the politicians, who had not the
+sense in the early days of the war to see how eager the spirit of the
+country was to do all that the war required of it, and consequently
+were afraid to tax at a time when higher taxation would have been
+submitted to most cheerfully by the country. There was also the absurd
+weakness of our Finance Ministers and our leading financial officials,
+which allowed our financial machinery to be so much weakened by the
+demands of the War Office for enlistment that it has been said in the
+House of Commons by several Chancellors of the Exchequer that it is
+quite impossible to consider any form of new taxation because
+the machinery could not undertake it. There has also been great
+short-sightedness on the part of the business men of the country, who
+have failed to give the Government a lead in this important matter.
+Like the Government, they have taken short views, always hoping that
+the war might soon be over, and so have left the country with a
+problem that grows steadily more serious with each half-year as we
+drift stupidly along the line of least resistance.
+
+Such war finance as I have outlined--drastic and impracticable as
+it seems--would have paid us. Taxation in war-time, when industry's
+problem is simplified by the Government's demand for its product,
+hurts much less than in peace, when industry has not only to turn out
+the stuff, but also find a buyer--often a more difficult and expensive
+problem. There is a general belief that by paying for war by loans we
+hand the business of paying for it on to posterity. In fact, we can
+no more make posterity pay us back our money than we can carry on war
+with goods that posterity will produce. Whatever posterity produces it
+will consume. Whatever it pays in interest and amortisation of our
+war debt, it will pay to itself. We cannot get a farthing out of
+posterity. All we can do, by leaving it a debt charge, is to affect
+the distribution of its wealth among its members. Each loan that we
+raise makes us taxpayers collectively poorer now, to the extent of the
+capital value of the charge on our incomes that it involves. The less
+we thus charge our productive power, and the more we pay up in taxes
+as the war goes on, the readier we shall be to play a leading part in
+the great time of reconstruction.
+
+
+
+
+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 prominence in the last few months, and seems
+to be gaining popularity in quarters where one would least expect it.
+On the other hand, it is naturally arousing intense opposition, both
+among those who would be most closely affected by its imposition, and
+also among those who view with grave concern the possible and probable
+economic effects of such a system of dealing with the national debt. I
+say "dealing with the national debt" because, as will be clear, as
+a system of raising money for the war the suggestion of the levy on
+capital has little or nothing to recommend it. But, as will also be
+made clear, the proposal has been put forward as a thing to be done
+immediately in order to increase the funds in the hands of the
+Chancellor of the Exchequer to be spent on war purposes.
+
+A levy on capital is, of course, merely a variation of the tax on
+property, which has long existed in the United States, and had been
+resorted to before now by Governments, of which the German Government
+is a leading example, in order to provide funds for a special
+emergency. This it can very easily do as long as the levy is not too
+high. If, for example, you tax a man to the extent of 1-1/2 per cent.
+to 2 per cent. of the value of his property, on which he may be
+earning an average of 5 to 6 per cent. in interest, then the levy on
+capital becomes merely a form of income tax, assessed not according to
+the income of the taxpayer but according to the alleged value of his
+property. It is thus, again, a variation of the system long adopted
+in this country of a special rate of income tax on what is called
+"unearned" income, i.e. income from invested property. But it is
+only when one begins to adopt the broadminded views lately fashionable
+of the possibilities of a levy on capital and to talk of taking, say,
+20 per cent. of the value of a man's property from him in the course
+of a year, that it becomes evident that he cannot be expected to pay
+anything like this sum, in cash, unless either a market is somehow
+provided--which seems difficult if all property owners at once are
+to be mulcted of a larger amount than their incomes--or unless the
+Government is prepared to accept part at least of the levy in the
+shape of property handed over at a valuation.
+
+Before, however, we come to deal in detail with the difficulties
+and drawbacks of the suggestion, it may be interesting to trace the
+history of the movement in its favour, and to see some of the forms in
+which it has been put forward. It may be said that the ball was opened
+early last September when, in the _Daily News_ of the 8th of that
+month, its able and always interesting editor dealt in one of his
+illuminating Saturday articles with the question of "How to Pay
+for the War." He began with the assumption that the capital of the
+individuals of the nation has increased during the war from 16,000
+millions to 20,000 millions. A 10 per cent. levy on this, he
+proceeded, would realise 2000 millions. It would extinguish debt to
+that amount and reduce the interest on debt by 120 millions. The levy
+would be graduated--say, 5 per cent. on fortunes of L1000 to L20,000;
+10 per cent. on L20,000 to L50,000; up to 30 per cent. on sums over
+L1,000,000; and the individual taxpayer was to pay the levy "in what
+form was convenient, in his stocks or his shares, his houses or his
+fields, in personalty or realty."
+
+Just about the same time the _Round Table_, a quarterly magazine which
+is usually most illuminating on the subject of finance, chimed in with
+a more or less similar suggestion in an article on "Finance After the
+War." It remarked that the difficulty of applying a levy on capital is
+"probably not so great as appears at first sight." The total capital
+wealth of the community it estimated at about 24,000 millions
+sterling. To pay off a war debt of 3000 millions would therefore
+require a levy of one-eighth. Evidently this could not be raised in
+money, nor would it be necessary. Holders of War Loans would pay their
+proportion in a simple way by surrendering one-eighth of their scrip.
+Holders of other forms of property would be assessed for one-eighth of
+its value and be called on to acquire and to surrender to the State
+the same amount of War Loan scrip. To do this, they would be obliged
+to realise a part of their property or to mortgage it, "but," added
+the _Round Table_ cheerfully, "there is no insuperable difficulty
+about that."
+
+The first thing that strikes one when one examines these two schemes
+is the difference in their view concerning the amount of capital
+wealth available for taxation. Mr Gardiner made the comparatively
+modest estimate of 16,000 millions to 20,000 millions; the _Round
+Table_ plumps for 24,000 millions, and, incidentally, it may be
+remarked that some conservative estimates put it as low as 11,000
+millions. Thus we have a possible range for the fancy of the scheme
+builder of from 11,000 to 24,000 millions in the property on which
+taxation is proposed to be levied. But it is when we come to the
+details of these schemes that the difficulties begin to glare. Mr
+Gardiner tells us that millionaires would pay up to 30 per cent. of
+their property, and that they would pay in what form was convenient,
+in houses, fields, etc., etc. But he does not explain by what
+principle the Government is to distribute among the holders of the
+debt, the repayment of whom is the object of the levy, the strange
+assortment of miscellaneous assets which it would thus collect from
+the property owners of the country.
+
+In commenting on this scheme the _Economist_ of September 15th took
+the case of a man with a fortune of L100,000 invested before the war
+in a well-assorted list of securities, the whole of which he had, for
+patriotic reasons, converted during the war into War Loans. He would
+have no difficulty about paying his capital levy, for he would
+obviously surrender something between 10 and 20 per cent. of his
+holding. But, "in exchange for nearly two-thirds of the rest, he might
+find himself landed with houses and bits of land all over the country,
+a batch of unsaleable mining shares, a collection of blue china, a
+pearl necklace, a Chippendale sideboard, and a doubtful Titian,"
+The _Round Table's_ suggestion seems to be even more impracticable.
+According to it, holders of all other forms of property besides War
+Loans would be assessed for one-eighth of its value--it does not
+explain how the value is to be arrived at, nor how long it would take
+to do it--and would then be called on to acquire and to surrender to
+the State the same amount of War Loan scrip. To do this they would
+be obliged to realise a part of their property or to mortgage it, a
+process which would seem likely to produce a pretty state of affairs
+in the property market; and a very pleasant state of affairs indeed
+would arise for the holders of War Loan scrip, since there would be a
+large crowd of compulsory buyers in the market from whom the holders
+would apparently be able to extort any price that they liked for their
+stock.
+
+The next stage in the proceedings was a deputation to the Chancellor
+of the Exchequer, concerning which more anon, of leaders of various
+groups of the Labour Party, to press upon Mr Bonar Law the principle
+of what is called "the Conscription of Wealth," and the publication at
+or soon after that time, which was about the middle of November, of a
+pamphlet on the subject of the "Conscription of Riches," by the War
+Emergency Workers' National Committee, 1, Victoria Street, S.W. Among
+what this pamphlet describes as "the three practicable methods of
+conscripting wealth" No. 1 is as follows:--
+
+A Capital Tax, on the lines of the present Death Duties, which are
+graduated from nothing (on estates under L300, and legacies under L20)
+up to about 20 per cent. (on very large estates left as legacies to
+strangers).
+
+If a "Death Duty" at the existing rates were now levied simultaneously
+on every person in the kingdom possessing over L300 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 L900,000,000.
+It would be necessary to offer a discount for payment in cash; and in
+order to avoid simultaneous forced sales, to accept, in lieu of cash,
+securities at a valuation; and to take mortgages on land.
+
+Here it will be seen that the Emergency Workers had improved on the
+_Round Table_, and agreed with Mr Gardiner, by providing that the
+Government should take securities at a valuation and mortgages on land
+in lieu of cash in order to avoid simultaneous forced sales. But they
+do not seem to have perceived that, in so far as the Government took
+securities or accepted mortgages on land, it would not be getting
+money to pay for the war, which was the object of the proposed
+Conscription of Wealth, but would only be obtaining property from
+which the Government would in due course later on receive an income,
+probably averaging about one-twentieth of its value.
+
+Perhaps, however, it would be more correct to say that those who put
+the scheme forward did not ignore this drawback to it, but rather
+liked it, for reasons quite irrelevant to the objects that they were
+apparently pursuing. A good deal of prominence was given about the
+same time to the question of a levy on capital in the _New Statesman_
+well known to be the organ of Mr Sidney Webb and other members of the
+Fabian Society. These distinguished and very intellectual Socialists
+would, of course, be quite pleased if, in an apparent endeavour to pay
+for the war, they actually succeeded in securing, by the Government's
+acquisition of blocks of securities from property owners, that
+official control of industry and production which is the object of
+State Socialists.
+
+It will be noted, however, in this scheme that no mention is made of
+any forms of property to be accepted by the Government in lieu of cash
+except securities and mortgages on land. Items such as furniture,
+books, pictures and jewellery are ignored, and in one of the articles
+in the _New Statesman_, discussing the question of a capital levy, it
+was distinctly suggested that these commodities should be left out
+of the scheme so as to save the trouble involved by valuation.
+Unfortunately, if we leave out these forms of property the natural
+result is to stimulate the tendency, lately shown by an unfortunately
+large number of patriotic taxpayers, of putting money into pearl
+necklaces and other such gewgaws in order to avoid income tax. If
+by buying fur coats, old masters and diamond tiaras it will be be
+possible in future to avoid paying, not only income tax, but also a
+capital levy, it is to be feared that appeals to people to save their
+money and invest it in War Bonds are likely to be seriously interfered
+with.
+
+Unfortunately, the _Statesman_ was able to announce that the appeal
+for this system of taxation had been received with a good deal of
+sympathy by the Chancellor of the Exchequer, and the next stage in the
+history of the agitation was the publication on Boxing Day in several
+of the daily papers of what appeared to be an official summary, issued
+through the Central News, of what the Chancellor had said to the
+deputation of Labour Leaders introduced by Mr Sidney Webb, which
+waited on him, as already described, in the middle of November. Having
+pointed out that he had never seen any proposal which seemed to him
+to be practicable for getting money during the war by conscripting
+wealth, Mr Bonar Law added that, though "perhaps he had not thought
+enough about it to justify him in saying so," his own feeling was that
+it would be better, both for the wealthy classes and the country, to
+have this levy on capital, and reduce the burden of the national debt
+when the war was over. It need not be said that this statement by the
+Chancellor has been very far from helpful to the efforts of those who
+are trying to induce unthrifty citizens to save their money and put it
+into National War Bonds for the finance of the war.
+
+"Why," people argue, "should we go out of our way to save and take
+these securities if, when the war is over, a large slice of our
+savings is to be taken away from us by means of this levy on capital?
+If we had been doubting between the enjoyment of such comforts and
+luxuries as are possible in war-time and the austere duty of thrift,
+we shall naturally now choose the pleasanter path, spend our money on
+ourselves and on those who depend on us, instead of saving it up to
+be taken away again when the war is over, while those who have spent
+their money as they liked will be let off scot free." Certainly, it is
+much to be regretted that the Chancellor of the Exchequer should have
+let such a statement go forth, especially as he himself admits that
+perhaps he has not thought enough about it to justify him in saying
+so. If the Chancellor of the Exchequer has not time to think about
+what he is going to say to a Labour deputation which approaches him on
+an extremely important revolution in our fiscal system, it is surely
+high time that we should get one who has sufficient leisure to enable
+him to give his mind to problems of this sort when they are put before
+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 inherent in it have already been pointed out. Its advocates
+seem as a rule to base the demand for it upon an assumption which
+involves a complete fallacy. This is that, since the conscription
+of life has been applied during the war, it is necessary that
+conscription of wealth should also be brought to bear in order to make
+the war sacrifice of all classes equal. For instance, the Emergency
+Workers' pamphlet, quoted above, states that, "in view of the fact
+that the Government has not shrunk from Compulsory Conscription of
+Men," the Committee demands that "for all the future money required
+to carry on the war, the Government ought, in common fairness, to
+accompany the Conscription of Men by the Conscription of Wealth."
+
+This contention seems to imply that the conscription of men and the
+conscription of wealth apply to two different classes; in other words,
+that the owners of wealth have been able to avoid the conscription of
+men. This, of course, is absolutely untrue. The wealthiest and the
+poorest have to serve the country in the front line alike, if they are
+fit. The proportion of those who are fit is probably higher among the
+wealthy classes, and, consequently, the conscription of men applies
+to them more severely. Again, the officers are largely drawn from
+the comparatively wealthy classes, and it is pretty certain that the
+proportion of casualties among officers has been higher during the war
+than among the rank and file. Thus, as far as the conscription of men
+is concerned, the sacrifice imposed upon all classes in the community
+is alike, or, if anything, presses rather more heavily upon those who
+own wealth. Conscription of wealth as well as conscription of life
+thus involves a double sacrifice to the owners of property.
+
+This double sacrifice, in fact, the owners of property have, as is
+quite right, borne throughout the war by the much more rapid increase
+in direct taxation than in indirect. It is right that the owners of
+property should bear the heavier monetary burden of the war because
+they, having more to lose and therefore more to gain by a successful
+end of the war, should certainly pay a larger proportion of its cost.
+It was also inevitable that they should do so because, when money is
+wanted for the war or any other purpose, it can only be taken in large
+amounts from those who have a surplus over what is needed to provide
+them with the necessaries and decencies of life. But the argument
+which puts forward a capital levy on the ground that the rich have
+been escaping war sacrifice is fallacious in itself, and is a wicked
+misrepresentation likely to embitter still further the bad feeling
+between classes.
+
+Nevertheless, Mr Bonar Law thinks that, since the cost of the war must
+inevitably fall chiefly upon the owners of property, and since it
+therefore becomes a question of expediency with them whether they
+should pay at once in the form of a capital levy or over a long series
+of years in increased taxation, he is inclined to think that the
+former method is one which would be most convenient to them and best
+for the country. This contention cannot be set aside lightly, and
+there can be no doubt that if, by making a dead lift, the wealthy
+classes of the country could throw off their shoulders a large part of
+the burden of the war debt, such a scheme is well worth considering as
+long as it does not carry with it serious drawbacks.
+
+It seems to me, however, that the drawbacks are very considerable.
+In the first place, I have not seen any really practicable scheme of
+redeeming debt by means of a levy on capital In so far as the levy is
+paid in the form of surrendered War Loans, it is simple enough. In so
+far as it is paid in other securities or mortgages on land or other
+forms of property, it is difficult to see how the assets acquired by
+the State through the levy could be distributed among the debt
+holders whom it is proposed to pay off. Would they be forced to take
+securities, mortgages on land, furniture, etc., as the Government
+chose to distribute them, or would the Government have to nurse an
+enormous holding of various forms of property and gradually realise
+them and so pay off debt?
+
+Again, a great injustice would surely be involved by laying the whole
+burden of this oppressive levy upon owners of accumulated property, so
+penalising those who save capital for the community and letting off
+those who squander their incomes. A characteristic argument on this
+point was provided by the _New Statesman_ in a recent issue. It argued
+that, because ordinary income tax would still be exacted, the contrast
+between the successful barrister with an Income of L20,000 a year and
+no savings, who would consequently escape the capital levy, and the
+poor clergyman who had saved L1000 and would consequently be liable to
+it, fell to the ground. In other words, because both lawyer and parson
+paid income tax, it was fair that the former should escape the capital
+levy while the latter should have to pay it!
+
+But needs must when the devil drives, and in a crisis of this kind it
+is not always possible to look too closely into questions of equity in
+raising money. It is necessary, however, to look very closely into the
+probable economic effects of any suggested form of taxation, and, if
+we find that it is likely to diminish the future wealth production
+of the nation, to reject it, however attractive it may seem to be
+at first sight. A levy on capital which would certainly check the
+incentive to save, by the fear that, if such a thing were once
+successfully put through, it might very likely be repeated, would dry
+up the springs of that supply of capital which is absolutely essential
+to the increase of the nation's productive power. Moreover, business
+men who suddenly found themselves shorn of 10 to 20 per cent. of
+their available capital would find their ability to enter into fresh
+enterprise seriously diminished just at the very time when it is
+essential that all the organisers of production and commerce in this
+country should be most actively engaged in every possible form of
+enterprise, in order to make good the ravages of war.
+
+
+
+
+VI
+
+OUR BANKING MACHINERY
+
+_February_, 1918
+
+The Recent Amalgamations--Will the Provinces suffer?--Consolidation
+not a New Movement--The Figures of the Past Three Decades--Reduction
+of Competition not yet a Danger--The Alleged Neglect of Local
+Interests--Shall we ultimately have One Huge Banking Monopoly?--The
+Suggested Repeal of the Bank Act--Sir E. Holden's Proposal.
+
+
+Banking problems have lately loomed large in the financial landscape.
+It will be remembered that about a year and a half ago a Committee
+was appointed to consider the creation of a new institution specially
+adapted for financing overseas trade and for the encouragement of
+industrial and other ventures through their years of infancy, and
+that the charter which was finally granted to the British Trade
+Corporation, as this institution was ultimately called, roused a
+great deal of opposition both on the part of banks and of traders who
+thought that a Government institution with a monopoly character
+was going to cut into their business with the help of a Government
+subsidy. In fact, there was no subsidy at all in question, and the
+fears of the trading world of competition on the part of the new
+chartered institution only arose owing to its unfortunate name, which
+was given to it in order to allay the apprehensions of the banks which
+had been provoked by the title originally designed for it, namely, the
+British Trade Bank. There seems no reason why this Company should
+not do good work for British trade without treading on the toes of
+anybody. Although naturally its activities cannot be developed on any
+substantial scale until the war is over, its Chairman assured the
+shareholders at the end of January that its preliminary spadework was
+being carefully attended to.
+
+After this small storm in a teacup had died down those interested in
+our banking efficiency were again excited by the rapid progress made
+by the process of amalgamation among our great banks, which began to
+show acute activity again in the last months of 1917. The suddenly
+announced amalgamation of the London and South-Western and London
+and Provincial Banks led to a whole host of rumours as to other
+amalgamations which were to follow; and though most of these proved to
+be untrue a fresh sensation was aroused when the union was announced
+of the National Provincial Bank of England and the Union of London and
+Smith's Bank. All the old arguments were heard again on the subject of
+the objections, from the point of view of industry in the provinces,
+to the formation of great banking institutions, with enormous figures
+on both sides of the balance-sheet, working from London, often, it was
+alleged, with no consideration for the needs of the provincial users
+of credit. These latest amalgamations, which have united banks which
+already had head offices in London, gave less cause than usual for
+these provincial apprehensions, which had far more solid reason behind
+them when purely provincial banks were amalgamated with institutions
+whose head office was in London. Nevertheless, the argument was heard
+that the great size and scale on which these amalgamated banks were
+bound to work would necessarily make them more monopolistic and
+bureaucratic in their outlook, and less elastic and adaptable in their
+dealings with their local customers.
+
+It seems to me that there is so far very little solid ground for any
+apprehension on the part of the business community that the recent
+development of banking evolution will tend to any damage to their
+interests. The banks have grown in size with the growth of industry.
+As industry has tended more and more to be worked by big battalions,
+it became necessary to have banking institutions with sufficiently
+large resources at their command to meet the great requirements of the
+huge industrial organisations that they had to serve. Nevertheless,
+the tendency towards fewer banks and bigger figures has grown with
+extraordinary celerity, as the following table shows:--
+
+MOVEMENT OF ENGLISH JOINT-STOCK BANK DEPOSITS, ETC.,
+SINCE 1886.
+
+December  No. of  Number of   Capital      Deposit and     Total
+31st      Banks   Branches    Paid up      Current        Liabilities
+                                           Accounts
+1886       109     1,547    L38,468,000   L299,195,000   L376,808,000
+1891       106     2,245     43,406,000    391,842,000    486,632,000
+1896        94     3,051     45,203,000    495,233,000    599,518,000
+1901        74     3,935     46,631,000    584,841,000    698,150,000
+1906        55     4,840     48,122,000    647,889,000    782,353,000
+1911        44     5,417     47,265,000    748,641,000    885,069,000
+1916        35     5,993     48,237,000  1,154,877,000  1,316,220,000
+
+This table is taken from the annual banking numbers of the
+_Economist_. It will be noticed that in 1886 there were in England 109
+joint-stock banks with 1547 offices, whose accounts were tabulated
+in the _Economist's_ annual review. Their total paid-up capital was
+38-1/2 millions, their deposit and current accounts were just under
+300 millions, and their total liabilities were 377 millions. In the
+course of thirty years the 109 banks had shrunk by the process of
+amalgamation and absorption to thirty-five, that is to say, they had
+been divided by three; the number of their offices, however, had been
+multiplied by nearly four, while their deposit accounts had grown from
+300 millions to 1155, and their total liabilities from 377 to 1316
+millions. By the amalgamations announced at the end of 1917, and that
+of the County of Westminster with Parr's announced on February 1st,
+the number of joint stock banks will be reduced to 32. The picture
+would be still more striking if the figures of the private banks were
+included, since their number has been reduced, since 1891, from 37 to
+6. These figures are eloquent of the manner in which the number of
+individual banks has been reduced, while the extent of the banking
+accommodation given to the community has enormously grown, so that the
+power wielded by each individual bank has increased by the force of
+both these processes.
+
+The consequent reduction in competition which is causing some concern
+among the trading community has not, as it seems to me, gone far
+enough yet to be a serious danger. The idea that the big banks with
+offices in London give scant consideration to the needs of their local
+customers seems to be so contrary to the interests of the banks that
+they would be extraordinarily bad men of business if those who were
+responsible for their management allowed it to be the fact. It is
+probably nearer the truth that banking competition in the provinces is
+still so keen that the London management is very careful not to allow
+anything like bureaucratic stiffness to get into the methods by which
+their business is managed. By the appointment of local committees they
+are careful to do all they can to see that the local interests get all
+the credit that is good for them. That local interests get as much
+credit as they want is probably very seldom the case, because it is a
+natural instinct on the part of an eager business man to want rather
+more credit than he ought to have, from a banking point of view.
+Business interests, as long as they exist in private hands, will
+always want rather more credit than there is available, and it will
+always be the duty of the banker to ensure that the country's industry
+is kept on a sound basis by checking the tendency of the eager
+business man to undertake rather more than is good for him. From the
+sentimental point of view it is certainly a pity to have seen many of
+the picturesque old private banks extinguished, the partners in which
+were in close personal touch with their customers, and entered into
+the lives of the local communities in a manner which their modern
+counterpart is perhaps unable to do. Nevertheless, it is difficult
+to get away from the fact that if these institutions had been as
+efficient and as well managed as their admirers depict them to have
+been they would hardly have been driven out of existence by the stress
+of modern developments and competition. Whatever we may think of
+modern competition, in certain of its aspects, we may at least be
+sure of this--that it does not destroy an institution which is really
+wanted by the business community. And if the complaint of local
+interests is true, that they are swamped by the cosmopolitan
+aspirations of the great London offices, they always have it in their
+power to create an institution of the kind that they want, and by
+giving it their business to ensure for it a prosperous career. As long
+as no such tendency is visible in the banking world we may be pretty
+sure that the views expressed concerning the neglect of local
+interests by the enormous banks which have grown up with London
+centres in the last thirty years is to a great extent a myth. It
+has now announced, however, that the whole problem involved by the
+amalgamation process is to be sifted by a committee to be appointed
+for this purpose.
+
+Another apprehension has arisen in the minds of those who view with
+critical vigilance the present tendencies of business and the
+present development of economic opinion among a great section of the
+community. If, it is urged, the banks continue to swallow one another
+up by the process of amalgamation, how will this tendency end except
+in the creation of one huge bank working a gigantic money monopoly
+which the Socialistic tendencies of the present day will, with some
+reason, insist ought to be taken over by the State for the profit of
+the taxpayer? This view is frankly put forward by those advocates of a
+Socialistic organisation of society, who say that the modern tendency
+of industry towards combinations, rings and trusts is rapidly bringing
+the Socialistic millennium within their reach without any effort
+on the part of Socialistic preachers. They consider that the trust
+movement is doing the work of Socialism, much faster than Socialism
+could do it for itself; that, in short, as has been argued above
+in regard to banking, the tendency towards centralisation and the
+elimination of competition can only end in the assumption by the State
+of the functions of industry and finance. If this should be so, the
+future is dark for those of us who believe that individual effort
+is the soul of industrial and financial progress, and that industry
+carried on by Government Departments, however efficient and economical
+it might be, would be such a deadly dull and unenterprising business
+that all the adaptability and tendency to variation in accordance with
+the needs of the moment, which are so strongly shown by individual
+enterprise, would be lost, to the great detriment of the material
+progress of mankind.
+
+As things are at present, there is little need to fear that
+Socialistic organisation of industry could stand up against competent
+individual effort. Anybody who has ever had any business dealings
+with a Government Department will inevitably shudder when he tries to
+imagine how many forms would have to be filled up, how many divisions
+of the Department the inevitable mass of papers would have to go
+through, and how much delay and tedium would be involved before the
+simplest business proposition could be carried out. But, of course, it
+is argued by Socialists that Government Departments are only slow and
+tied up with red tape because they have so long been encouraged to do
+as little as possible, and that as soon as they are really urged to do
+things instead of pursuing a policy of masterly inactivity, there is
+no reason why they should not develop a promptitude and elasticity
+quite as great as that hitherto shown by the business community.
+That such a development as this might take place in the course of
+generations nobody can deny; at present it must be admitted that with
+the great majority of men the money-making incentive is required to
+get the best out of them. If the process of education produces so
+great a change in the human spirit that men will work as well for the
+small salary of the Civil Service, with a K.C.B. thrown in, as they
+will now in order to gain the prizes of industry and finance, then
+perhaps, from the purely economic point of view, the Socialisation
+of banking may be justified. But we are a long way yet from any such
+achievement, and if it is the case that the rapid centralisation of
+banking power in comparatively few hands carries with it the danger
+of an attempt to nationalise a business which requires, above all,
+extreme adaptability and sensitiveness to the needs of the moment
+as they arise, this is certainly a danger which has to be carefully
+considered by those who are responsible for the development of these
+amalgamation processes.
+
+And now another great stone has been thrown into the middle of the
+banking pond, causing an ever-widening circle of ripples and provoking
+the beginning of a discussion which is likely to be with us for some
+time to come. Sir Edward Holden, at the meeting of the London City and
+Midland Bank shareholders on January 29th, made an urgent demand for
+the immediate repeal of the Bank Act of 1844. This Act was passed,
+as all men know, in order to restrict the creation of credit in
+the United Kingdom. In the early part of the last century the most
+important part of a bank's business consisted of the issue of notes,
+and banking had been carried on in a manner which the country
+considered unsatisfactory because banks had not paid sufficient
+attention to the proportion of cash that they ought to hold in their
+tills to meet notes if they were presented. Parliament in its wisdom
+consequently ordained that the amount of notes which the banks should
+be allowed to issue, except against actual metal in their vaults,
+should be fixed at the amount of their issue at that time. Above the
+limit so laid down any notes issued by the banks were to be backed by
+metal. In the case of the Bank of England the limit then established
+was L14,000,000, 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 L18,450,000; above that limit every note issued by it has to
+be backed by bullion, and is actually backed by gold, though under
+the Act one-fifth might be in silver. It was thus anticipated by the
+framers of the Act that in future any credit required by industry
+could only be granted by an increase in the gold held by the issuing
+banks. If the Act had fulfilled the anticipations of the Parliament
+which passed it, if English trade had grown to anything like the
+extent which it has done since, it could only have done so by the
+amassing of a mountain of gold, which would have lain in the vaults of
+the Bank of England.
+
+Fortunately, however, the banking community had at its disposal a
+weapon of which it was already making considerable use, namely, the
+system of issuing credit by means of banking deposits operated on by
+cheques. Eight years before Peel's Act was passed two Joint Stock
+Banks had been founded in London, although the Bank of England
+note-issuing monopoly still made it impossible for any Joint Stock
+Bank to issue notes in the London district. It is thus evident that
+deposit banking was already well founded as a profitable business when
+Peel, and Parliament behind him, thought that they could sufficiently
+regulate the country's banking system so long as they controlled the
+issue of notes by the Bank of England and other note-issuing banks. It
+is perhaps fortunate that Parliament made this mistake, and so enabled
+our banking machinery to develop by means of deposit banking, and so
+to ignore the hard-and-fast regulations laid upon it by Peel's Act.
+This, at least, is what has happened; only in times of acute crisis
+have the strict regulations of Peel's Act caused any inconvenience,
+and when that inconvenience arose the Act has been suspended by the
+granting of a letter of indemnity from the Treasury to the Governor of
+the Bank.
+
+Under Peel's Act the present rather anomalous form of the Bank of
+England's Weekly Return was also laid down. It shows, as all men know,
+two separate statements; one of the Issue Department and the other of
+the Banking Department. The Issue Department's statement shows the
+notes issued as a liability, and on the assets side Government debt
+and other securities (which are, in fact, also Government securities),
+amounting to L18,450,000 as allowed by the Act, and a balance of gold.
+The Banking Department's statement shows capital, "Rest" or reserve
+fund, and deposits, public and other, among the liabilities, and on
+the other side of the account Government and other securities, all the
+notes issued by the Issue Department which are not in circulation, and
+a small amount of gold and silver which the Banking Department holds
+as till money.
+
+Sir Edward Holden's proposal is that the Act should be repealed
+practically in accordance with the system which has been adopted by
+the German Reichsbank. The principles which he enumerates, as those on
+which other national banks of issue work, are as follows:--
+
+1. One bank of issue, and not divided into departments.
+
+2. Notes are created and issued on the security
+of bills of exchange and on the cash balance, so that
+a relation is established between the notes issued
+and the discounts.
+
+3. The notes issued are controlled by a fixed
+ratio of gold to notes or of the cash balance to notes.
+
+4. This fixed ratio may be lowered on payment
+of a tax.
+
+5. The notes should not exceed three times the
+gold or cash balance.
+
+By this revolution Sir Edward would abolish all legal restriction on
+the issue of notes by the Bank of England. It would hold a certain
+amount of gold or a certain amount of cash balance against its notes,
+but in the "cash balance" Sir Edward apparently would include 11
+millions odd of Government debt, or of Treasury notes. As long as its
+notes were only three times the amount of the gold or of the "cash
+balance," and were backed as to the other two-thirds by bills of
+exchange, the situation would be regarded as normal, but if, owing to
+abnormal circumstances, the Bank desired to increase the amount of
+notes issued against bills of exchange only and to reduce the ratio of
+its gold or its cash balance to its notes, it would, at any time, be
+enabled to do so by the payment of a tax, without going through the
+humiliating necessity for an appeal to the Treasury to allow it to
+exceed the legal limit.
+
+At the same time, by the abolition of Peel's Act the cumbrous methods
+of stating the Bank's position, as published week by week in the Bank
+Return, would be abolished. The two accounts would be put together,
+with the result that the Bank's position would be apparently stronger
+than it appears to be under the present system, which makes the
+Banking Department's Return weak at the expense of the great strength
+that it gives to the appearance of the Issue Department. This will be
+shown from the following statement given by Sir Edward Holden of the
+Return as issued on January 16th, and as amended according to his
+ideas:--
+
+BANK STATEMENT, JANUARY 16, 1918.
+
+ISSUE DEPARTMENT
+
+Notes Issued .. L76,076,000  Gold .................. L57,626,000
+                             Government Debt .......  11,015,000
+                             Other Securities ......   7,435,000
+                -----------                          -----------
+                L76,076,000                          L76,076,000
+Ratio of Gold to Notes Issued = 75.7 per cent.
+
+BANKING DEPARTMENT.
+
+Capital ....... L14,553,000  Government Securities ...... L56,768,000
+Rest ..........   3,363,000  Other Securities ...........  92,278,000
+Deposits--                   Notes .......... L30,750,000
+Public   L41,416,000         Gold and Silver    1,143,000
+Other    121,589,000
+         ----------- 163,005,000            -------------  31,893,000
+Other Liabilities ...     18,000
+                     -----------                          -----------
+                    L180,939,000                         L180,939,000
+
+Ratio of Cash Balance to Liabilities = 19.6 per cent.
+
+RECONSTRUCTED BALANCE-SHEET OF THE BANK,
+JANUARY 16, 1918.
+
+Capital                   L14,553,000
+Rest                        3,363,000
+Notes Issued (circulation) 45,325,000
+Deposits                  163,005,000
+Other Liabilities              18,000
+                          ___________
+                         L226,264,000
+
+Gold                 L58,768,000
+Currency Notes        11,015,000
+                     ___________   L69,783,000
+
+Government Securities 56,768,000
+Other Securities       7,435,000
+                       _________    64,203,000
+
+Other Securities                    92,278,000
+                                   ___________
+                                  L226,264,000
+
+Ratio of Gold to Notes             =129.7 per cent.
+"    " Cash Balance to Liabilities = 33.5     "
+
+It need not be said that these proposals have aroused the liveliest
+interest. At the Bank Meetings held since then several chairmen
+have been asked by their shareholders to express their views on Sir
+Edward's proposed revolution. Sir Felix Schuster pronounced cautiously
+in favour of the revision of the Bank Act, and said that he had
+advocated it seventeen years ago. Lord Inchcape, at the National
+Provincial Meeting, thought that the matter required careful
+consideration. Most of us will agree with this view. There is
+certainly much to be said for a reform of the Weekly Statement of the
+Bank of England, giving, it may be added, a good deal more detail
+than Sir Edward's revised balance-sheet affords. But concerning his
+proposal to reconstruct our system of note issue on a foreign model,
+there is certain to be much difference of opinion. In the first place,
+owing to the development of our system of banking by deposit and
+cheque rather than by issue and circulation of notes, the note issue
+is not nearly so important a business in normal times in this country
+as it is in Germany and France. Moreover, the check imposed upon our
+banking community by the need for an appeal to the Treasury before it
+can extend its note issue beyond a certain point often acts with, a
+salutary effect, and the view has even been expressed that if that
+check were taken away from our system it might be difficult, if not
+impossible, to maintain the gold standard which has been of such
+enormous value in building up the prestige of London as a financial
+centre. I do not think there is much weight in this argument, since,
+under Sir Edward's plan, the note issue could only be increased
+against discounts, and the Bank, by the charge that it made for
+discounts, would still be able to control the situation. From the
+practical point of view of the present moment, a strong objection
+to the scheme is that it would open the door to fresh inflation by
+unrestricted credit-making just when the dangers of this process are
+beginning to dawn even on the minds of our rulers.
+
+
+
+
+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--Industry cannot take
+all Risks and no Profits.
+
+
+Every week--almost every day--brings with it the announcement of some
+new committee considering some question that may, or may not, arise
+now or when the war is over. Especially in the realm of finance has
+the Government's output of committees been notably prolific of
+late. We have had a Committee on Currency, a Committee on Banking
+Amalgamations, and a Committee appointed, humorously enough, by the
+Ministry of Reconstruction to consider what measures, if any, should
+be taken to protect the public interest in connection with the policy
+of industrial combinations--a policy which the Board of Trade has
+been sedulously fostering. Now comes a Committee to inquire "what
+amendments are expedient in the Companies Acts, 1908-1917, principally
+having regard to the circumstances arising out of the war, and to the
+developments likely to arise on its conclusion, and to report to the
+Board of Trade and to the Ministry of Reconstruction." It is composed
+of the Right Hon. Lord Wrenbury (chairman), Mr A.S. Comyns Carr,
+Sir F. Crisp, Mr G.W. Currie, M.P., Mr F. Gaspard Farrer, Mr Frank
+Gore-Browne, K.C., Mr James Martin, the Hon. Algernon H. Mills, Mr
+R.D. Muir, Mr C.T. Needham, M.P., Mr H.A. Payne, Sir Owen Philipps,
+M.P., Sir William Plender, Mr O.C. Quekett, and Mr A.W. Tait. The
+secretary is Mr W.W. Coombs, 55, Whitehall, S.W. 1. There are some
+good names on the Committee. Mr. Gaspard Farrer represents a great
+issuing house; Sir Frank Crisp, company lawyers; Sir William Plender,
+the accountants; Mr O.C. Quekett, the Stock Exchange; and Sir Owen
+Philipps, the shipping interest. Nevertheless, one cannot help
+shuddering when one considers the dangers that threaten British
+finance and industry from ill-considered measures which might possibly
+be recommended by a Committee influenced by the atmosphere of the
+present outlook on financial and commercial affairs.
+
+One of the interesting features of the present war atmosphere is the
+fact that, now when we are fighting as hard as we can to defeat all
+that is meant by Prussianism a great many of our rulers and public
+men are doing their best to impose Prussianising methods upon this
+unfortunate country, merely because it is generally assumed that
+Prussian methods have been shown, during the course of the war, to
+carry with them a certain amount of efficiency. It is certainly true
+that Prussian methods do very well as applied to the Prussians and
+submitted to by other races of Germans. On the other hand, it is at
+least open to argument that the British method of freedom, individual
+initiative, elasticity and adaptability have produced results, during
+the present war, which have so far been paralleled by no other country
+engaged in the contest. Working on interior lines with the assistance
+of docile and entirely submissive allies, Germany has certainly done
+wonderful things in the war, but it by no means follows that the
+verdict of posterity will not give the palm of achievement to England,
+who has not only carried out everything that she promised to do before
+the war, but has incidentally and in the course of it created and
+equipped an Army on a Continental scale, and otherwise done very much
+more for the assistance of her Allies than was contemplated before the
+war began.
+
+It is untrue to say that we were unprepared for the war. We were
+more than prepared to do all that we promised to do. What we were
+unprepared for was finding ourselves required to turn ourselves
+into, not only the greatest naval Power in the world, but one of the
+greatest military Powers also. This demand was sprang upon us, and we
+have met it with extraordinary success. The whole idea that Germany's
+achievement has been such as to warrant any attempt on our part to
+model our institutions on her pattern seems to me to fall to pieces
+as soon as one looks calmly at the actual results produced by the
+different systems. Moreover, even if we were to admit that Germany's
+achievement in the war has been immeasurably greater than ours, it
+still would not follow that we could improve matters here by following
+the German system. It ought not to be necessary to observe that a
+system which is good for one nation or individual is not necessarily
+good for another. In the simple matter of diet, for instance, a most
+scientifically planned diet given to a child who does not happen to
+like it will not do that child any good. These things ought to be
+obvious, but unfortunately in these times, which call for eminently
+practical thought and effort, there is a curious doctrinaire spirit
+abroad, and the theorist is continually encouraged to imagine how much
+better things would be if everything were quite different, whereas
+what we want is the application of practical common sense to practical
+facts as they are.
+
+In the realm of finance the freedom and individual initiative and
+elasticity of our English system have long been the envy of the world.
+Our banking system, as was shown, on an earlier page, has always
+worked with much less restriction on the part of legislative and
+official interference than any other, and, with the help of this
+freedom from official control, English bankers and finance houses had
+made London the financial centre of the world before the war. The
+attempt of Parliament to control banking by Peel's Act of 1844 was
+quietly set aside by the banking machinery through the development of
+the use of cheques, which made the regulations imposed on the note
+issue a matter of quite minor importance, except in times of severe
+crisis, when these regulations could always be set aside by an
+appeal to the Chancellor of the Exchequer. There was no Government
+interference in the matter of new issues of securities on the London
+Stock Exchange or of the quotations granted to new securities by the
+Committee of the Stock Exchange. Now the Companies Acts are to be
+revised in view of what may be necessary after the war, and there
+is only too much reason to fear that mistakes may occur through the
+imposition of drastic restrictions, which look so easy to work on
+paper, but are more than likely to have the actual effect of doing
+much more harm than good.
+
+"Circumstances arising out of the war and developments likely to arise
+on its conclusion" give this Committee a roving commission to consider
+all kinds of things, which may or may not happen, in the light of
+wisdom which may be put before it by interested witnesses, and, worse
+still, in the light of semi-official pressure to produce a report
+which will go down well with the House of Commons. Our politicians are
+at present in a state of extreme servility before the enterprising
+gentlemen who are now at the head of what is called the Labour Party.
+Every one will sympathise with the aspirations of this party in so
+far as they aim at bettering the lot of those who do the hard and
+uninteresting work of the world, and giving them a larger share of the
+productions that they help to turn out; but that is not the same
+thing as giving obsequious attention to the views which their
+representatives may have concerning the management of financial
+affairs, on the subject of which their knowledge is necessarily
+limited and their outlook is likely to be, to a certain extent,
+prejudiced. A recent manifesto put forward by the leaders of the new
+Labour Party includes in its programme the acquisition by the nation
+of the means of production--in other words, the expropriation of
+private capitalists. The Labour people very probably think that by
+this simple method they will be able to save the labourer the cost
+of providing capital and the interest which is paid for its use; and
+people who are actuated by this fallacy, which implies that the rate
+paid to capital is thinly disguised robbery, inevitably have warped
+views concerning the machinery of finance and the earnings of
+financiers. These views, expressed in practical legislation, might
+have the most serious effects not only upon England's financial
+supremacy but also on the industrial activity which that financial
+supremacy does so much to maintain and foster.
+
+What, after the war, will be the most important need, from the
+material point of view, for the inhabitants of this country? However
+the war may end, and whatever may happen between now and the end of
+it, there can be only one answer to this question, and that answer
+is greatly increased production. The war has already diminished our
+capital resources to the extent of the whole amount that we have
+raised by borrowing abroad, that is to say, by pledging the production
+of our existing capital, and by selling to foreign countries the
+foreign securities in which our capitalists had invested during
+the previous century. No one knows the extent to which our capital
+resources have been impaired by these two processes, but it may be
+guessed at as somewhere in the neighbourhood of 1500 millions; that
+is to say, about 10 per cent. of a liberal estimate of the total
+accumulated property of the country at the beginning of the war. To
+this direct diminution in our capital resources we have to add the
+impossibility, which has existed during the war, of maintaining our
+factories and industrial equipment in first-class working order by
+expenditure on account of depreciation of plant. On the other side
+of the balance-sheet we can put a large amount of new machinery
+introduced, which may or may not be useful for industrial purposes
+after the war; greatly improved methods of organisation, the effect of
+which may or may not be spoilt when the war is over by uncomfortable
+relations between Capital and Labour; and our loans to Allies and
+Dominions, some of which may have to be written off, and most of which
+will return us no interest for some time to come, or will at first pay
+us interest if we lend our debtors the money to pay it with. What the
+country will need, above all, on the material side, is an abundant
+revenue, which can only be produced by vigorous and steady effort in
+industry, which, again, can only be forthcoming if the machinery of
+credit and finance is given the fullest possible freedom to provide
+every one who wants to engage in industry and increase the output of
+the country with the financial facilities, without which nothing can
+be done.
+
+Is it, then, wise at such a time to impose restrictions by a drastic
+tightening up of the Companies Act, upon those who wish by financial
+activity, to further the efforts of industries and producers? On the
+contrary, it would seem to be a time to give the greatest possible
+freedom to the financial machine so that there shall be the least
+possible delay and difficulty in providing enterprise with the
+resources that it needs. We can only make good the ravages of war by
+activity in production and strict economy in consumption. What we want
+to do is to stimulate the people of this country to work as hard as
+they can, to produce as much as possible, to consume as little as
+possible on unnecessary enjoyment and luxury, and, so, by procuring
+a big balance of production over consumption, to have the largest
+possible volume of available goods for sale to the rest of the world,
+in order to rebuild our position as a creditor country, which the
+war's demands upon us have to some extent impaired.
+
+It is a commonplace that if it had not been for the great mass of
+foreign securities, which this country held at the beginning of the
+war, we could not nearly so easily have financed the enormous amount
+of food and munitions which we have had to provide for our population,
+for our armies, and for the population and armies of our Allies. If,
+instead of holding a mass of easily marketable securities, we had had
+to rely, in order to pay for our purchases of foreign goods, on the
+productions of our own mines and factories, and on our power to borrow
+abroad, then we should have had to restrict very greatly the number of
+men we have put into the firing-line so as to keep them at home for
+productive work, or, by the enormous amount of our borrowings, we
+should have cheapened the value of British credit abroad to a much
+greater extent than has been the case. Our position as a great
+creditor country was an enormously valuable asset, not only during the
+war but also before it, both from a financial and industrial point of
+view. It gave us control of the foreign exchanges by enabling us, at
+any time, to turn the balance of trade in our favour by ceasing for a
+time to lend money abroad, and calling upon foreign countries to pay
+us the interest due from them. The financial connections which it
+implied were of the greatest possible assistance to us in enhancing
+British prestige, and so helping our industry and commerce to push the
+wares that they produced and handled.
+
+Reform of the Companies Acts has often before the war been a more or
+less burning question. Whenever the public thought that it had been
+swindled by the company promoting machinery, it used to write letters
+to the newspapers and point out that it was a scandal that the sharks
+of the City should be allowed to prey upon the ignorant public,
+and that something ought to be done by Parliament to insure that
+investments offered to the public should somehow or other be made
+absolutely watertight and safe, while by some unexplained method the
+public would still be somehow able to derive large benefits from
+fortunate speculations in enterprises which turned out right. Every
+one must admit there have been some black pages in the history
+of British company promoting, and that many swindles have been
+perpetrated by which the public has lost its money and dishonest and
+third-rate promoters have retired with the spoil. The question is,
+however, what is the remedy for this admitted and glaring evil? Is it
+to be found by making the Companies Laws so strict that no respectable
+citizen would venture to become a director owing to the fear of penal
+servitude if the company on whose board he sat did not happen to pay a
+dividend, and that no prospectus could be issued except in the case of
+a concern which had already stood so severe a test that its earning
+capacity was placed beyond doubt? It would certainly be possible by
+legislative enactment to make any security that was offered as safe as
+Consols, and less subject to fluctuation in value. But when this had
+been done the effect would be very much like the effect upon rabbits
+of the recent fixing of their price. No more securities would be
+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 earn as much as he can and save as much as he can so that
+the country's capital fund can be increased; so that industry, which
+will have many difficult problems to face when the war is over, shall
+be as far as possible relieved from any difficulty of finding all the
+capital that it needs. To produce these results it is highly necessary
+to increase the confidence of the public in the machinery of the Stock
+Exchange, in company promotion and all financial issues. Any one who
+sincerely believes that these results can be produced by tightening up
+the Companies Acts is not only entitled but bound to press as hard as
+he can for the securing of this object. But is this the right way to
+do it? There is much to be said at first sight for making more strict
+the regulations under which prospectuses have to be issued under the
+Companies Acts, demanding a franker statement of the profits in the
+past, a fuller statement concerning the prices paid to vendors, and
+the prices paid by vendors to sub-vendors, and so forth. Any one who
+sits down with a pre-war industrial prospectus in his hand can find
+many openings for the hand of the reformer. The accounts published by
+public companies might also be made fuller and more informing with
+advantage. But even if these obviously beneficial reforms were carried
+out, there would always be danger of their evasion. They might tend to
+the placing of securities by hole-and-corner methods without the issue
+of prospectuses at all, and to all the endless devices for dodging the
+law which are so readily provided as soon as any attempt is made
+by legislation to go too far ahead of public education and public
+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 advertising is the education of the public concerning the
+things of its stomach, so the real cure for financial swindles is the
+education of the public concerning money matters, and its recognition
+of the fact that it is impossible to make a fortune in the City
+without running risks which involve the possible, not to say probable,
+loss of all the money with which the speculator starts. When once
+the public has learnt to distinguish between a speculation and an
+investment, and has also learnt honesty enough to be able to know
+whether it wants to speculate or invest, it will have gone much
+further towards checking the activity of the fraudulent promoter
+than any measure that can be recommended by the most respectable and
+industrious of committees. At the same time, it must be recognised
+by those responsible for our finance, that it is their business,
+and their interest, to keep the City's back premises clean; because
+insanitary conditions in the back yard raise a stink which fouls the
+whole City.
+
+In the meantime, if gossip is to be believed, some of the members of
+the Government have the most disquieting intentions concerning the
+kind of regulations which they wish to impose on the activities of the
+City, especially in its financial branch. It is believed that some of
+the bright young gentlemen who now rule us are in favour of Government
+control over the investment of money placed at home, and the
+prohibition of the issue of foreign securities; and it is even
+whispered that a fantastic scheme for controlling the profits of all
+industrial companies, by which anything earned above a certain level
+is to be seized for the benefit of the nation, is now a fashionable
+project in influential Parliamentary circles. Every one must, of
+course, admit that a certain amount of control will be necessary for
+some time after the war. It may not be possible at once to throw open
+the London Money Market to all borrowers, leaving them and it to
+decide between them who is to be first favoured with a supply of the
+capital for which there will be so large a demand when the war is
+over. Certain industries, those especially on which our export trade
+depends, will have to be first served in the matter of the provision
+of capital. If it is a choice between the engineering or shipbuilding
+trades and a company that wants to start an aeroplane service between
+London and Brighton for the idle rich, it would not be reasonable,
+during the first few months after the war, that the unproductive
+project should be able, by bidding a high price for capital, to
+forestall the demand of the more useful producer. And with regard
+to the issue of foreign securities, there is this to be said, that
+foreign securities placed in London have the same effect upon foreign
+exchange as the import into England of goods shipped from any country;
+that is to say, for the time being they turn the exchange against us.
+On the other hand, it is a well-known commonplace that imports of
+securities have to be balanced by exports of goods or services; and
+as the times when our export trade is most active are those when most
+foreign securities are being placed in London, it follows that any
+restrictions placed upon the issue of foreign securities in London
+will hinder rather than help that recovery in our export trade which
+is so essential to the restoration of our position as a creditor
+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 continue), it will not be
+possible to check foreign investment by restricting the issuing of
+foreign securities in London. If people see better rates to be
+earned abroad and more favourable prospects offered by the price
+of securities on foreign Stock Exchanges, they will invest abroad,
+whether securities are issued in London or not. As for the curious
+suggestion that the profits of industrial companies are henceforward
+to be limited and the whole balance above a statutory rate to be taken
+over by the State for the public good, this would be, in effect, the
+continuance on stricter lines of the Excess Profits Duty. As a war
+measure the Excess Profits Duty has much to be said for it at a time
+when the Government, by its inflationary policy, is putting large
+windfalls of profit into the hands of most people who have to hold a
+stock of goods and have only to hold them to see them rise in value.
+The argument that the State should take back a large proportion of
+this artificially produced profit is sound enough; but, if it is
+really to be the case that industry is to be asked for the future to
+take all the risk of enterprise and handover all the profit above
+a certain level to the Government, the reply of industry to such a
+proposition would inevitably be short, emphatic, unprintable, and by
+no means productive of revenue to the State.
+
+
+
+
+VIII
+
+THE YEAR'S BALANCE-SHEET
+
+_April_, 1918
+
+The Figures of the National Budget--A Large Increase in Revenue and
+a Larger in Expenditure--Comparisons with Last Year and with the
+Estimates--The Proportions borne by Taxation still too Low--The Folly
+of our Policy of Incessant Borrowing--Its Injustice to the Fighting
+Men.
+
+
+At first sight the figures of revenue and expenditure for the year
+ending March 31st are extremely satisfactory, at any rate on the
+revenue side. The Chancellor anticipated a year ago a revenue from
+taxation and State services of L638 millions, and the receipts into
+the Exchequer on these accounts actually amount to L707 millions. On
+the expenditure side, however, the increase over the Budget estimate
+was very much greater. The estimate was L2290 millions, and the actual
+amount expended was L2696 millions. Instead, therefore, of a deficit
+of L1652 millions having to be met by borrowing, there was an actual
+gap, to be filled by this method, of, roughly, L1990 millions.
+
+To take the revenue side of the matter first, this being by far the
+most cheering and satisfactory, we find that the details of the
+revenue, as compared with last year's, were as follows:--
+
+                 Year ending    Year ending
+                Mar. 31, 1918.  Mar. 31, 1917.     Increase.    Decrease.
+                        L              L              L              L
+Customs           71,261,000     70,561,000        700,000          ---
+Excise            38,772,000     56,380,000           ---    17,608,000
+Estate, etc.,
+  Duties          31,674,000     31,232,000        442,000          ---
+Stamps             8,300,000      7,878,000        422,000          ---
+Land Tax             665,000        640,000         25,000          ---
+House Duty         1,960,000      1,940,000         20,000          ---
+Income Tax and
+  Super Tax      239,509,000    205,033,000     34,476,000          ---
+Excess Profits
+  Duties, etc.   220,214,000    139,920,000     80,294,000          ---
+Land Value
+  Duties             685,000        521,000        164,000          ---
+Postal Service    35,300,000     34,100,000      1,200,000          ---
+Crown Lands          690,000        650,000         40,000          ---
+Sundry Loans, etc. 6,056,250      8,055,817          ---      1,999,567
+Miscellaneous     52,148,315     16,516,765     35,631,550          ---
+                 -----------    -----------    -----------  -----------
+                 707,234,565    573,427,582    153,414,550   19,607,567
+                                               |                      |
+                                               +-----------+----------+
+                                                       L133,806,983
+                                                      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:--
+
+[Transcriber's Note: Corrected a typo in the table: "Sundry Loans"
+line should have a minus(-) instead of a plus(+) as printed.]
+
+                               Actual.     Estimated.     Difference.
+                                 L              L               L
+Customs                     71,261,000     70,750,000    +    511,000
+Excise                      38,772,000     34,950,000    +  3,822,000
+Estate Duties               31,674,000     29,000,000    +  2,674,000
+Stamps                       8,300,000      8,000,000    +    300,000
+Land Tax and House Duty      2,625,000      2,600,000    +     25,000
+Income Tax and Super Tax   239,509,000    224,000,000    + 15,509,000
+Excess Profits Tax         220,214,000    200,000,000    + 20,214,000
+Land Value Duties              685,000        400,000    +    285,000
+Postal Services             35,300,000     33,700,000    +  1,600,000
+Crown Lands                    690,000        600,000    +     90,000
+Sundry Loans, etc.           6,056,000      7,500,000    -  1,444,000
+Miscellaneous               52,148,000     27,100,000    + 25,048,000
+
+Certainly, the country is entitled to congratulate itself on this
+tremendous evidence of elasticity of revenue, and to a certain extent
+on the effort that it has made in providing this enormous sum of money
+from the proceeds of taxation and State services. But when this much
+has been admitted we have to hasten to add that the figures are not
+nearly so big as they look, and that there is much less "to write
+home about," as the schoolboy said, than there appears to be at first
+sight. Those champions of the Government methods of war finance who
+maintain that we have, during the past year, multiplied the pre-war
+revenue, of roughly, L200 millions by more than 3-1/2, so arriving at
+the present revenue of over L700 millions, are not comparing like
+with like. The statement is perfectly true on paper, and expressed in
+pounds sterling, but then the pound sterling of to-day is an entirely
+different article from the pre-war pound sterling. Owing to the system
+of finance pursued by our Government, and by every other Government
+now engaged in the war, of providing for a large part of the country's
+goods by the mere manufacture of new currency and credit, the
+buying power of the pound sterling has been greatly depreciated.
+By multiplying the amount of legal tender currency in the shape of
+Treasury notes, of token currency in the shape of silver and bronze
+coinage, and of banking currency through the bank deposits which
+are swollen by the banks' investments in Government securities, the
+Government has increased the amount of currency passing from hand to
+hand in the community while, at the same time, the volume of goods
+to be purchased has not been increased with anything like the same
+rapidity, and may, in fact, have been, actually decreased. The
+inevitable result has been a great flood of new money with a greatly
+depreciated value. Index numbers show a rise of over 100 per cent.
+in the average prices of commodities during the war. It is, however,
+perhaps unfair to assume that the buying power of the pound has
+actually been reduced by a half, but it is certainly safe to say that
+it has been reduced by a third. Therefore, the revenue raised by the
+Government during the past year has to be reduced by at least a third
+before we are justified in comparing our war achievements with the
+Government's pre-war revenue. If we take one-third off L707 millions
+it reduces the total raised during the past year by revenue to about
+L470 millions, less than two and a half times the pre-war revenue.
+
+From another point of view our satisfaction with the tremendous
+figures of the past year's revenue has to be to some extent qualified.
+The great elasticity shown by the big increase of actual achievement
+over the Budget estimate has been almost entirely in revenue items
+which cannot be expected to continue to serve us when the war is
+over. The total increase in the receipts over estimate amounts to L69
+millions, and of this L20 millions was provided by the Excess Profits
+Duty, a fiscal weapon which was invented during the war, and for
+the purpose of the war. It has always been assumed that it would be
+discontinued as soon as the war was over, and if it should not be
+discontinued its after-war effect is likely to be very unfortunate at
+a time when our industrial effort requires all the encouragement
+that it can get. Another L25 millions was provided by miscellaneous
+revenue, and this windfall again must be largely due to operations
+connected with the war. Finally, the L15-1/2 millions by which
+the income tax exceeded the estimate must again be largely due to
+inflation and extravagance on the part of the Government, which, by
+manufacturing money, and then spending it recklessly, puts big profits
+and big incomes into the hands of those who have stocks of goods to
+sell or who are in a position to produce them.
+
+If, therefore, the satisfaction with which we regard the big total of
+the Government's revenue receipts has to be considerably modified in
+the cold light of close observation, the enormous increase on the
+expenditure side gives us very little comfort and calls for the most
+determined and continued criticism if our reckless Government is to be
+made to turn over a new leaf. In the early days of the war there was
+much excuse for wasting money. We had to improvise a great Army, and
+a great organisation for equipping it; there was no time then to look
+too closely into the way the money was being spent, but this excuse is
+long obsolete. It is not possible to waste money without also wasting
+the energy and working power of the nation; on this energy and working
+power the staying power of the country depends in its struggle to
+avert the greatest disaster that can be imagined for civilisation,
+that is, the victory of the German military power. Seeing that for
+many months past we have no longer been obliged to finance Russia, and
+to provide Russia with the mass of materials and the equipment that
+she required, the way in which our expenditure has mounted up
+during the course of the year is a very serious blot on the year's
+balance-sheet. We spent during the year ending March 31st, L2696
+millions against L2198 millions in the previous year, an increase of
+close upon L500 millions; L63 millions of this increase were due to
+interest on war debt, the rest of it was due to increased cost of the
+war, and few business men will deny that very many of these extra
+millions might have been saved if our rulers and our bureaucratic
+tyrants had been imbued with any real sense of the need for conserving
+the energy of the nation.
+
+Much has been done by the Committee on National Expenditure to bring
+home to the Government opportunities for economy, and methods by which
+it can be secured. Can we be equally confident that much has been done
+by the Government to carry out the advice that has been given by this
+Committee? The Treasury is frequently blamed for its inability to
+check the rapacity and extravagance of the spending Departments. It is
+very likely that the Treasury might have done more if it had not been
+led by its own desire for a short-sighted economy into economising on
+its own staff, the activity and efficiency of which was so absolutely
+essential to the proper spending of the nation's money. But when this
+has been admitted, the fact remains that the Treasury cannot, or can
+only with great difficulty, be stronger on the side of economy than
+the Chancellor of the Exchequer, and that the task of the Chancellor
+of the Exchequer of imposing economy on a spendthrift War Cabinet is
+one of extreme difficulty. I hope it is not necessary to say that I do
+not urge economy from any sordid desire to save the nation's money if,
+by its spending, victory could be secured or brought a day nearer. I
+only urge it because I believe that the conservation of our resources
+is absolutely necessary to maintain our staying power, and that these
+resources are at present being scandalously wasted by the Government.
+Inter-departmental competition is still complained of in the latest
+report of the National Committee on Expenditure, and there seems to be
+still very little evidence that the Government Departments have yet
+possessed themselves of the simple fact that it is only out of these
+resources that victory can be secured, and that any waste of them is
+therefore a crime against the cause of liberty and progress.
+
+It is possible that before these lines are in print the Chancellor
+will have brought in his new Budget, and therefore any attempt to
+forecast the measures by which he will meet next year's revenue would
+be even more futile than most other endeavours at prophecy. But from
+the figures of last year as they are before us we see once more that
+the proportion of expenditure raised by revenue still leaves very much
+to be desired; L707 millions out of, roughly, L2700 millions is not
+nearly enough. It is true that on the expenditure side large sums have
+been put into assets which may some day or other be recoverable, and
+it is therefore impossible to assume with any approach to accuracy
+what the actual cost of the war has been for us during the past year.
+We have made, for instance, very large advances to our Allies and
+Dominions, and it need not be said that our advances to our own
+Dominions may be regarded as quite as good as if they were still in
+our own pockets; but in the case of our Allies, our loans to Russia
+are a somewhat questionable asset, and our loans to our other
+brothers-in-arms cannot be regarded as likely to be recoverable for
+some time to come, owing to the severity with which the war's pressure
+has been laid upon them. With regard to the other assets in which
+the Government has invested our money, such as factories, machinery,
+ships, supplies and food, etc., it is at least possible that
+considerable loss may be involved in the realisation of some of them.
+It is, however, possible that the actual cost of the war to us during
+the year that is past may turn out some day to have been in the
+neighbourhood of L2000 millions. If, on the other hand, we deduct from
+the L700 millions raised by revenue the L200 millions which represent
+the normal pre-war cost of Government to this country we find that the
+proportion of war's cost raised out of revenue is slightly over 25 per
+cent. This proportion must be taken with all reserve for the reasons
+given above, but in any case it is very far below the 47 per cent. of
+the war's cost raised out of revenue by our ancestors in the course of
+the Napoleonic wars.
+
+It seems to me that this policy of raising so large a proportion
+of the war's cost by borrowing is one that commends itself to
+short-sighted politicians, but is by no means in the interests of the
+country as a whole, or of the taxpayers who now and hereafter have to
+find the money for paying for the war. In so far as the war's needs
+have to be met abroad, borrowing abroad is to some extent inevitable
+if the borrowing nation has not the necessary resources and labour
+available to turn out goods for export to exchange against those which
+have to be purchased abroad, but in so far as the war's needs are
+financed at home, the policy of borrowing is one that should only
+be used within the narrowest possible limits. By its means the
+Government, instead of making the citizens pay by taxation for the
+war as it goes on, hires a certain number of them to pay for it by
+promising them a rate of interest, and their money back some day.
+The interest and the sinking fund for redemption have to be found by
+taxation, and so the borrowing process merely postpones taxation from
+the war period to the peace period. During the war period taxation can
+be raised comparatively easily owing to the patriotic stimulus and
+the simplification of the industrial problem which is provided by the
+Government's insatiable demand for commodities. When the days of peace
+return, however, there will be very grave disturbance and dislocation
+in industry, and it will have once more to face the problem of
+providing goods, not for a Government which will take all that it can
+get, but for a public, the demands of which will be uncertain, and
+whose buying power will be unevenly distributed, and difficult to
+calculate. The process, therefore, which postpones taxation during
+the war period to the peace period seems to be extraordinarily
+short-sighted from the point of view of the nation's economic
+progress. Recovery after the war may be astonishingly rapid if all
+goes well, but this can only happen if every opportunity is given to
+industry to get back to peace work with the least possible friction,
+and a heavy burden of after-war taxation, such as we shall inevitably
+have to face if our Chancellors of the Exchequer continue to pile up
+the debt charge as they have done in the past, will be anything but
+helpful to those whose business it will be to set the machinery of
+industry going under peace conditions.
+
+As things are, if we continue to add anything like L2000 millions a
+year to the National Debt, it will not be possible to balance the
+after-war Budget without taxation on a heavier scale than is now
+imposed, or without retaining the Excess Profit Duty, and so stifling
+industry at a time when it will need all the fresh air that it can
+get. Apart from this expedient, which would seem to be disastrous from
+the point of view of its effect upon fresh industry, the most widely
+advertised alternative is the capital levy, the objections to which
+are patent to all business men. It would involve an enormously costly
+and tedious process of valuation, its yield would be problematical,
+and it might easily deal a blow at the incentive to save on which the
+supply of capital after the war entirely depends. A much higher rate
+of income tax, especially on large incomes, is another solution of the
+problem, and it also might obviously have most unfortunate effects
+upon the elasticity of industry. A tax on retail purchases has much to
+be said in its favour, but against it is the inequity inseparable from
+the impossibility of graduating it according to the ability of the
+taxpayer to bear the burden; and a general tariff on imported goods,
+though it would be welcomed by the many Protectionists in our midst,
+can hardly be considered as a practical fiscal weapon at a time when
+the need for food, raw material, and all the equipment of industry
+will make it necessary to import as rapidly and as cheaply as possible
+in order to promote our after-war recovery.
+
+Apart from these purely economic arguments against the high proportion
+of the war's costs that we are meeting by borrowing, there is the much
+more important fact of its bad effect on the minds of our soldiers,
+and of those members of the civilian population who draw mistaken
+inferences from its effects. From the point of view of our soldiers,
+who have to go and fight for their country at a time when those who
+are left at home are earning high wages and making big profits, it is
+evidently highly unfair that the war should be financed by a method
+which postpones taxation. The civilian population left at home,
+earning high profits and high wages, should clearly pay as much as
+possible during the war by immediate taxation, so that the burden of
+taxation may be relieved for our soldiers when they return to civil
+life. In view of the hardships and dangers which our soldiers have to
+face, and the heroism with which they are facing them, this argument
+should be of overwhelming strength in the eyes of every citizen who
+has imagination enough to conceive what our fighting men are doing for
+us and how supreme is our duty to do everything to relieve them from
+any other burden except those which the war compels them to face.
+There is also the fact that many members of our uninstructed
+industrial population believe that the richer classes are growing
+richer owing to the war, and battening on the proceeds of the loans.
+I do not think that this is true; on the contrary, I believe that
+the war has brought a considerable shifting of buying power from the
+well-to-do classes to the manual workers. Nevertheless, in these times
+misconceptions are awkwardly active for evil. The well-to-do classes
+as a whole are not really benefited by having their future incomes
+pledged in order to meet the future debt charge, and if, at the same
+time, they are believed to be acquiring the right to wealth, which
+wealth they will have themselves to provide, the fatuity of the
+borrowing policy becomes more manifest. For these reasons it is
+sincerely to be hoped that our next fiscal year will be marked by
+a much higher revenue from taxation, a considerable decrease in
+expenditure, and a consequently great improvement in the proportion of
+war's cost met out of revenue, on what has been done in the past year.
+At our present rate of taxation we are not nearly meeting, out of
+permanent taxes, the sum which will be needed when the war is over
+for peace expenditure on the inevitably higher scale, pensions, and
+interest and sinking fund on war debt.
+
+
+
+
+IX
+
+COMPARATIVE WAR FINANCE
+
+_May_, 1918
+
+The New Budget--Our own and Germany's Balance-sheets--The Enemy's
+Difficulties--Mr Bonar Law's Optimism--Special Advantages which Peace
+will bring to Germany--A Comparison with American Finance--How much
+have we raised from Revenue?--The Value of the Pound To-day--The 1918
+Budget an Improvement on its Predecessors--But Direct Taxation still
+too Low--Deductions from the Chancellor's Estimates.
+
+
+One of the most interesting passages in a Budget speech of unusual
+interest was that in which the Chancellor of the Exchequer compared
+the financial methods of Germany and of this country, as shown by
+their systems of war finance. He began by admitting that it is
+difficult to make any accurate calculation on this subject, owing
+to the very thick mist of obscurity which envelops Germany's actual
+performance in the matter of finance since the war began. As the
+Chancellor says, our figures throughout have been presented with the
+object of showing quite clearly what is our financial position. Most
+of the people who are obliged to study the figures of Government
+finance would feel inclined to reply that, if this is really so, the
+Chancellor and the Treasury seem to have curiously narrow limitations
+in their capacity for clearness. Very few accountants, I imagine,
+consider the official figures, as periodically published, as models of
+lucidity. Nevertheless, we can at least claim that in this respect the
+figures furnished to us by the Government during the war have been
+quite as lucid as those which used to be presented in time of peace,
+and it is greatly to the credit of the Treasury that, in spite of the
+enormous figures now involved by Government expenditure, the financial
+statements have been published week by week, quarter by quarter, and
+year by year, with the same promptitude and punctuality that marked
+their appearance in peace-time. In Germany, the Chancellor says, it
+has not been the object of German financial statements to show the
+financial position quite clearly. It is, therefore, difficult to make
+an exact statement, but he was able to provide the House with a series
+of very interesting figures, taken from the statements of the German
+Finance Ministers themselves.
+
+His first point is with regard to the increase of expenditure. The
+alarming rate with which our expenditure has so steadily grown appears
+to be paralleled also in Germany. Up to June, 1916, Germany's monthly
+expenditure was L100 millions. It has now risen to over L187 millions.
+That means to say that their expenditure per diem is L6-1/4 millions,
+almost the same as ours, although our expenditure includes items such
+as separation allowances and other matters of that kind, borne by the
+States and municipalities in Germany, and so not appearing in the
+German imperial figures.
+
+As to the precise extent of the German war debt, there is no
+certainty, but the Chancellor was able to tell the House that the last
+German Vote of Credit, which was estimated to carry them on to June or
+July, brings the total amount of all their Votes of Credit to L6200
+millions, and that it is at least certain that that amount has been
+added to their War Debt, because their taxation during the war has not
+covered peace expenditure plus debt charge. Up to 1916 they imposed no
+new taxation. In 1916 they imposed a war increment tax, something in
+the nature of a capital levy, which is stated to have brought in L275
+millions. They added also that year L25 millions nominally to their
+permanent revenue. In 1917 they added in addition L40 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 L365 millions, as against our L1044
+millions. This L365 millions is not enough to pay the interest upon
+the War Debt which had been accumulated up to the end of the year."
+
+Mr Bonar Law then proceeded to give an estimate of what the German
+balance-sheet will be a year hence on the same basis on which he had
+calculated ours. With regard to our position, he had calculated that
+on the present basis of taxation we shall have a margin of four
+millions at the end of the present year if peace should then break
+out. As will be shown later, this estimate of his is somewhat
+optimistic, but at any rate our position, compared with that of
+Germany, may be described as on velvet. A year hence the German War
+Debt will be not less than L8000 millions. The interest on that will
+be at least L400 millions, a sinking fund at 1/2 per cent. will be L40
+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 L200 millions. The Chancellor was sure
+that he was within the mark in saying that it will be at least L150
+millions. Their normal pre-war expenditure was L130 millions, so that
+they will have to face a total expenditure at the end of the war of
+L720 millions. On the other side of the account their pre-war revenue
+was L150 millions. They have announced their intention of this year
+raising additional permanent Imperial revenue amounting to L120
+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 L185
+millions. That, added to the pre-war revenue, gives a total of L335
+millions, showing "a deficit at the end of this year, comparing
+the revenue with the expenditure, of L385 millions at least." The
+Chancellor added that if that were our position he would certainly
+think that bankruptcy was not far from the British Government.
+
+Another point that the Chancellor was able to make effectively, in
+comparing our war revenue with Germany's, was the fact that, with the
+exception of the war increment tax, scarcely any of the additional
+revenue has been obtained from the wealthier classes in Germany.
+Taxation has been indirect and on commodities which are paid for by
+the masses of the people. "The lesson to be drawn from these facts is
+not difficult to see. The rulers of Germany, in spite of their hopes
+of indemnity, must realise that financial stability is one of the
+elements of national strength. They have not added to their financial
+stability." The reason for this failure the Chancellor considers to be
+largely psychological. It is, in the first place, because they do not
+care to add to discontent by increased taxation all over the country,
+but "it is still more due to this, that in Germany the classes which
+have any influence on or control of the Government are the wealthier
+classes, and the Government have been absolutely afraid to force
+taxation upon them."
+
+It is certainly very pleasant to be able to contemplate the financial
+blunders by which Germany is so greatly increasing the difficulties
+that it will have to face before the war is over. On the other hand,
+we have to recognise that the Chancellor, with that incorrigible
+optimism of his, has committed the common but serious error of
+over-stating his case by leaving out factors which are in Germany's
+favour, as, for instance, that Germany's debt is to a larger extent
+than ours held at home. Since the war began we have raised over L1000
+millions by borrowing abroad. Our public accounts show that the item
+of "Other Debt," which is generally believed to refer to debt raised
+abroad, now amounts to L958 millions, while one of our loans in
+America, which is separately stated in the account because it was
+raised under a special Act, amounted to L51-1/2 millions. It is also
+quite possible that fair amounts of our Treasury bills, perhaps also
+of our Temporary Advances and of our other war securities, have been
+taken up by foreigners; but quite apart from that the two items
+already referred to now amount to more than L1000 millions, though at
+the end of March last their amount was only L988 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 L1526 millions. We have thus entered into an
+enormous liability on foreign debts and sold a batch of very excellent
+securities on which we used to receive interest from abroad in the
+shape of goods and services, against which we now hold claims upon our
+Allies and Dominions, in respect to the greater part of which it would
+be absurd to pretend that we can rely on receiving interest for some
+years after the war, in view of the much greater economic strain
+imposed by the war upon our Allies.
+
+Germany, of course, has been doing these things also. Germany has
+parted with her foreign securities. She was selling them in blocks for
+some weeks before the war, and Germany, of course, has done everything
+that she could in order to induce neutrals, during the course of the
+war, to buy securities from her and to subscribe to her War Loans.
+Nevertheless, it cannot have been possible for Germany to carry out
+these operations to anything like the extent that we have, partly
+because her credit has not been nearly so good, partly because her
+ruthless and brutal conduct of the war has turned the sentiment of the
+world against her, and partly because the measures that we have taken
+to check remittances and transfers of money have not been altogether
+ineffective. On this side of the problem Germany has therefore an
+advantage over us, that her war finance, pitiful a$ it has been, has,
+not owing to any virtue of hers, but owing to force of circumstances,
+raised her a problem which is to a great extent internal, and will not
+have altered her relation to the finance of other countries so much as
+has been the case with regard to ourselves. We also have to remember
+that the process of demobilisation will be far simpler, quicker, and
+cheaper for Germany than for us. Even if the war ended to-morrow the
+German Army would not have far to go in order to get home, and we
+hope that by the time the war ends the German Army will all have been
+driven back into its own country and so will be on its own soil, only
+requiring to be redistributed to its peace occupations. Our Army will
+have to be fetched home, firstly, over Continental railways, probably
+battered into a condition of much inefficiency, and then in ships, of
+which the supply will be very short. The process will be very slow and
+very costly. Our Overseas Army will have to be sent back to distant
+Dominions, and the Army of our American Allies will have to be ferried
+back over the Atlantic. Consequently if Germany is able to obtain
+anything like the supply of raw material that she requires she will be
+able to get back to peace business much more quickly than any of her
+Anglo-Saxon enemies, and this is an advantage on her side which it
+would be unwise to ignore in considering the bad effects on her
+after-war activities of the very questionable methods by which she has
+financed and is financing the war.
+
+Since we are indulging in these comparisons, it may be interesting to
+consider how our American Allies are showing in this matter of war
+finance. The _Times_, in its "City Notes" of April 15th, observed, in
+connection with the unexpectedly small amount of the third Liberty
+Loan, that the reason why the smaller figure was adopted for the issue
+was that it seems quite certain now that the original estimate for
+the expenditure in the fiscal year ending June 30th next was much too
+high. This estimate was 18,775 million dollars. The _Times_ stated
+that the realised amount is likely to be hardly more than 12,000
+million dollars, of which about 4500 million dollars will represent
+loans to Allies, and that the estimate for the year's largely
+increased tax revenue was 3886 million dollars, which now seems
+likely to be exceeded by the receipts. If this be so, out of a total
+expenditure of L2400 millions, of which L900 millions will be lent to
+the Allies, the Americans are apparently raising nearly L800 millions
+out of revenue. Therefore if we deduct from both sides of the account
+the pre-war expenditure of about L215 millions and deduct also the
+loans to Allies from the expenditure, it leaves the cost of the war
+to America L1285 millions for this year and the war revenue L562
+millions. If these figures are correct it would thus appear that
+America is raising nearly half its actual war cost out of revenue as
+the war goes on.
+
+On the other hand, in the New York _Commercial Chronicle_ of April 6th
+the total estimated disbursements for the year are still stated at
+over 16,000 million dollars, that is to say, L3200 millions roughly,
+so that there seems to be considerable uncertainty as to what the
+actual amount of the expenditure of the United States will be during
+the year ending on June 30th. In any case, there can be no question
+that if the very high proportion of war cost paid out of revenue shown
+by the _Times_ figures proves to be correct, it will be largely owing
+to accident or misfortune; if America's war expenditure has not
+proceeded nearly as fast as was expected, it will be, no doubt, owing
+not to economies but to shortcomings in the matter of delivery of war
+goods which the Government had expected to pay for in the course
+of the fiscal year. It certainly would have been expected that the
+Americans would in this matter of war finance be in a position to set
+a very much higher standard than any of the European belligerents
+owing to the enormous wealth that the country has acquired during the
+two and a half years in which it, in the position of a neutral, was
+able to sell its produce at highly satisfactory prices to the warring
+Powers without itself having to incur any of the expenses of war. On
+the other hand, its great distance from the actual seat of operations
+will naturally make it difficult for the American Government to impose
+taxation as freely as might have been done in the case of peoples
+which are actually on the scene of warfare; so that it is hardly safe
+to count on American example to improve the standard of war finance
+which has been so lamentably low in Europe in the course of the
+present war. According to their original estimates the proportion of
+war cost borne out of taxation seems to have been on very much the
+same level as ours, and this has all through the war been very much
+lower than the results achieved by our ancestors at the time of the
+Napoleonic and Crimean wars.
+
+On this point the proportion of our expenditure, which has been borne
+out of revenue, the Chancellor stated that up to the end of last
+financial year, March 31, 1918, the proportion of total expenditure
+borne out of revenue was 26.3 per cent. On the estimates which he
+submitted to the House in his Budget speech on April 22nd, the
+proportion of total expenditure met out of revenue during the current
+financial year will be 28.3 per cent., and the proportion calculated
+over the whole period to the end of the current year will be 26.9 per
+cent. These proportions, however, are between total revenue and total
+expenditure during the war period. The proportion, of course, is
+not so high when we try to calculate actual war revenue and war
+expenditure by deducting on each side at a rate of L200 millions a
+year as representing normal expenditure and revenue and leaving out
+advances to Allies and Dominions. On this basis the proportion of war
+expenditure met out of war revenue up to March 31, 1918, was, the
+Chancellor stated, 21.7 per cent. For the year 1917-18 it was 25.3 per
+cent., for the current year it will be 26.5 per cent., and for the
+whole period up to the end of the current year 23.3 per cent. The
+corresponding figures for the Napoleonic and Crimean wars are given by
+Sir Bernard Mallet in his book on British Budgets as 47 per cent. and
+47.4 per cent. So that it will be seen that, judged by this test, our
+war finance, though very much better than Germany's, is not on so high
+a standard as that set by previous wars. It is true, of course, that
+the rate of expenditure during the present war has been on a scale
+which altogether dwarfs the outgoing in any previous struggle. The
+Napoleonic War is calculated to have cost some L800 millions, having
+lasted some twenty-three years. Last year we spent L2696 millions, of
+which near L2000 millions may be taken as war cost, after deducting
+normal expenditure and loans to Allies.
+
+Nevertheless, this argument of the enormous cost of the present war
+does not seem to me to be a good reason why the war should be financed
+badly, but rather a reason for making every possible effort to finance
+it well Are we doing so? At first sight it is a great achievement to
+have increased our total revenue from L200 millions before the war to
+L842 millions, the amount which we are expected to receive during
+the current year on the basis of the proposed additions to taxation,
+without taking into account any revenue from the suggested luxury tax.
+But, as I have already pointed out, the comparison of war pounds with
+pre-war pounds is in itself deceptive. The pounds that we are paying
+to-day in taxation are by no means the pounds that we paid before the
+war; their value in effective buying power has been diminished by
+something like one half. So that even with the proposed additions to
+taxation we shall not have much more than doubled the revenue of the
+country from taxation and State services as calculated in effective
+buying power. When we consider how much is at stake, that the very
+existence, not only of the country but of civilisation, is endangered
+by German aggression, it cannot be said that in the matter of taxation
+the country is doing anything like what it ought to have done or
+anything like what it would have done, willingly and readily, if a
+proper example had been set by the leading men among us, and if the
+right kind of financial lead had been given to the country by its
+rulers.
+
+When we look at the details of the Budget, it will be seen that the
+Chancellor has made a considerable advance upon his achievement of a
+year ago, when he imposed fresh taxation amounting to L26 millions,
+twenty of which came from excess profits duty, and could therefore
+not be counted upon as permanent, in his Budget for a year which
+was expected to add over L1600 millions to the country's debt,
+and actually added nearly L2000 millions. For the present year he
+anticipates an expenditure of L2972 millions, and he is imposing fresh
+taxation which will realise L68 millions in the current year and
+L114-1/2 millions in a full year. On the basis of taxation at which it
+stood last year he estimates for an increase of L67 millions, income
+tax and super-tax on the old basis being expected to bring in L28
+millions more, and excess profits duty L80 millions more, against
+which decreases were estimated at L3-1/2 millions in Excise and L37
+millions in miscellaneous. He thus expects to get a total increase on
+the last year's figures of L135 millions, making for the current year
+a total revenue of L842 millions, and leaving a total deficit of
+L2130 millions to be provided by borrowing. Increases in taxation
+on spirits, beer, tobacco, and sugar bring in a total of nearly L41
+millions. An increase of a penny in the stamp duty on cheques is
+estimated to bring in L750,000 this year and a million in a full year,
+and the increases in the income tax and the super-tax will bring in
+L23 millions in the present year and L61 millions in a full year.
+Increases in postal charges will bring in L3-1/2 millions this year
+and L4 millions in a full year.
+
+There has been little serious criticism of these changes in taxation
+except that many people, who seem to regard the penny post as a kind
+of fetish, have expressed regret that the postal rate of the letter
+should be raised to 1-1/2 d. This addition seems to me to be merely an
+inadequate recognition of the depreciation of the buying power of the
+penny and to be fully warranted by the country's circumstances. Either
+it will bring in revenue or it will save the Post Office labour, and
+whichever of these objects is achieved will increase the country's
+power to continue the war. The extra penny stamp on cheques has been
+rather absurdly objected to as being likely to increase inflation.
+Since the effect of it is likely to be that people will draw a smaller
+number of small cheques, and will make a larger number of their
+purchases by means of Treasury notes, the tax will merely result
+in the substitution of one form of currency for another, and it is
+difficult to see how this process will in any way increase inflation.
+Other arguments might be adduced, which make it undesirable to
+increase the outstanding amounts of Treasury notes, but in the matter
+of inflation through addition to paper currency, it seems to me that
+the proposed tax is entirely blameless. The increase of a shilling in
+income tax and super-tax produced a feeling of relief in the City,
+being considerably lower than had been anticipated. It is hardly the
+business of the Chancellor of the Exchequer in this most serious
+crisis to produce feelings of relief among the taxpayers, and it seems
+to me a great pity that he did not make much freer use of these most
+equitable forms of taxation, having first made arrangements (which
+could easily have been done) by which their very severe pressure would
+have been relieved upon those who have families to bring up. Death
+duties, again, he altogether omitted as a source of extra revenue. His
+proposed luxury tax he has left to be evolved by the wisdom of a
+House of Commons Committee, and has thereby given plenty of time to
+extravagantly minded people to lay in a store of stuff before the tax
+is brought into being.
+
+Space will not allow me to deal fully with the Chancellor's very
+interesting analysis of our position as he expects it to be at the end
+of the financial year on the supposition that the war was then over.
+He expects a revenue then of L540 millions on the present basis,
+making, with the yield of the new taxes in a full year, L654 millions
+in all, without including the excess profits duty, and he expects an
+after-war expenditure of L650 millions, including L50 millions for
+pensions and L380 millions for debt charge. It seems to me that
+his expectation of after-war revenue is too high, and of after-war
+expenditure is too low. He says that the estimates have been carefully
+made, but that they include "a recovery from the absence of war
+conditions," but surely the absence of war conditions is much more
+likely to produce a diminution than a recovery in taxation. Under the
+present circumstances, with prices continually rising, the profits of
+those who grow or hold stocks of goods of any kind automatically swell
+The rise in prices has only to cease, to say nothing of its being
+turned into a fall, to produce at once a big check in those profits,
+and when we consider the enormous dislocation likely to be produced by
+the beginning of the peace period expectations of an elastic revenue
+when the war is over seem to be almost criminally optimistic.
+
+The Chancellor arrived at his after-war debt charge of L380 millions
+by estimating for a gross debt on March 31, 1919, of L7980 millions,
+which he reduces to a net debt of L6856 millions by deducting half
+the expected face value of loans to Allies, L816 millions, and L308
+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 L1200 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_, 1918
+
+An Inopportune Proposal--What is Currency?--The Primitive System of
+Barter--The Advantages possessed by the Precious Metals--Gold as
+a Standard of Value--Its Failure to remain Constant--Currency and
+Prices--The Complication of other Instruments of Credit--No Substitute
+for Gold in Sight--Its Acceptability not shaken by the War--A
+Fluctuating Standard not wholly Disadvantageous--An International
+Currency fatal to the Task of Reconstruction--Stability and Certainty
+the Great Needs.
+
+
+As if mankind had not enough on its hands at the present moment, a
+number of well-meaning people seem to think that this is an opportune
+time for raising obscure questions of currency, and trying to make
+the public take an interest in schemes for bettering man's lot by
+improving the arrangements under which international payments are
+carried out. Nobody can deny that some improvement is possible in
+this respect, but it may very well be doubted whether, at the present
+moment, when very serious problems of rebuilding have inevitably to be
+faced and solved, it is advisable to complicate them by introducing
+this difficult question which, whenever it is raised, will require the
+most careful and earnest consideration.
+
+Since, however, the question is in the air, it may be as well to
+consider what is wrong with our present methods, and what sort of
+improvements are suggested by the reformers. At present, as every one
+knows, international payments are in normal times ultimately settled
+by shipments from one country to another of gold. Gold has achieved
+this position for reasons which have been described in all the
+currency text-books. Mankind proceeded from a state of barter to a
+condition in which one particular commodity was used as the chief
+means of payment simply because this process was found to be much
+more convenient. Under a system of barter an exchange could only be
+effected between two people who happened to be possessed each of them
+of the thing which the other one wanted, and also at the same time to
+want the thing which the other one possessed, and the extent of their
+mutual wants had to lit so exactly that they were able to carry out
+the desired exchange. It must obviously have been rare that things
+happened so fortunately that mutually advantageous exchanges were
+possible, and the text-books invariably call attention to the
+difficulties of the baker who wanted a hat, but was unable to supply
+his need because the hatter did not want bread but fish or some other
+commodity.
+
+It thus happened that we find in primitive communities one particular
+commodity of general use being selected for the purpose of what is
+now called currency. It is very likely that this process arose quite
+unconsciously; the hatter who did not want bread may very likely have
+observed that the baker had something, such as a hit of leather, which
+was more durable than bread, and which the hatter could be quite
+certain that either he himself would want at some time, or that
+somebody else would want, and he would therefore always be able to
+exchange it for something that he wanted. All that is needed for
+currency in a primitive or any other kind of people is that it should
+be, in the first place, durable, in the second place in universal
+demand, and, in the third place, more or less portable. If it also
+possessed the quality of being easily able to be sub-divided without
+impairing its value, and was such that the various pieces into which
+it was sub-divided could be relied on not to vary in desirability,
+then it came near to perfection from the point of view of currency.
+
+All these qualities were possessed in an eminent degree by the
+precious metals. It is an amusing commentary on the commonly assumed
+material outlook of the average man that the article which has won its
+way to supremacy as currency by its universal desirability, should be
+the precious metals which are practically useless except for purposes
+of ornamentation. For inlaying armour and so adorning the person of a
+semi-barbarous chief, for making into ornaments for his wives, and for
+the embellishment of the temples of his gods, the precious metals had
+eminent advantages, so eminent that the practical common sense of
+mankind discovered that they could always be relied upon as being
+acceptable on the part of anybody who had anything to sell. In
+the matter of durability, their power to resist wear and tear was
+obviously much greater than that of the hides and tobacco and other
+commodities then fulfilling the functions of currency in primitive
+communities. They could also be carried about much more conveniently
+than the cattle which have been believed to have fulfilled the
+functions of currency in certain places, and they were capable of
+sub-division without any impairing of their value, that is to say, of
+their acceptability. Merely as currency, precious metals thus have
+advantages over any other commodity that can be thought of for this
+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 services, also necessarily acquires a still more
+important duty, that is, it becomes a standard of value, and it is on
+the alleged failure of gold to meet the requirements of the standard
+of value that the present attack upon it is based. On this point the
+defenders of the gold standard will find a good deal of difficulty in
+discovering anything but a negative defence. The ideal standard of
+value is one which does not vary, and it cannot be contended that
+gold from this point of view has shown any approach to perfection in
+fulfilling this function. It could only do so if the supply of it
+available as currency could by some miracle be kept in constant
+relation with, the supply of all other commodities and services that
+are being produced by mankind. That it should be constant with each
+one of them is, of course, obviously impossible, since the rate at
+which, for example, wheat and pig-iron are being produced necessarily
+varies from time to time as compared with one another. Variations in
+the price of wheat and pig-iron are thus inevitable, but it can at
+least be claimed by idealists in currency matters that some form of
+currency might possibly be devised, the amount of which might always
+be in agreement with the amount of the total output of saleable goods,
+in the widest sense of the word, that is being created for man's use.
+
+It need not be said that this desirability of a constant agreement
+between the volume of currency and the volume of goods coming forward
+for exchange is based on what is called the quantitative theory of
+money. This theory is still occasionally called in question, but is on
+the whole accepted by most economists of to-day, and seems to me to
+be a mere arithmetical truism if we only make the meaning of the word
+"currency" wide enough; that is to say, if we define it as including
+all kinds of commodities, including pieces of paper and credit
+instruments, which are normally accepted in payment for goods
+and services. This addition of credit instruments, however, is a
+complication which has considerably confused the problem of gold
+as the best means of ultimate payment. Taken simply by itself the
+quantitative theory of money merely says that if money of all kinds is
+increased more rapidly than goods, then the buying power of money will
+decline, and the prices of goods will go up and vice versa. This seems
+to be an obvious truism if we make due allowance for what is called
+the velocity of circulation. If more money is being produced, but the
+larger amount is not turned over as rapidly as the currency which was
+in existence before, then the effect of the increase will inevitably
+be diminished, and perhaps altogether nullified. But other things
+being equal, more money will mean higher prices, and less money will
+mean lower prices.
+
+But, as has been said, the question is very greatly complicated by
+the addition of credit instruments to the volume of money, and this
+complication has been made still more complicated by the fact that
+many economists have refused to regard as money anything except actual
+metal, or at least such credit instruments as are legal tender, that
+is to say, have to be taken in payment for commodities, whether the
+seller wishes to do so or not. For example, many people who are
+interested in currency questions would regard at the present moment in
+this country gold, Bank of England notes, Treasury notes, and silver
+and copper up to their legal limits as money, but would deny this
+title to cheques. It seems to me, however, that the fact that the
+cheque is not and cannot be legal tender does not in practice affect
+or in any way impair the effectiveness of its use as money. As a
+matter of fact cheques drawn by a good customer of a good bank are
+received all over the country day by day in payment for an enormous
+volume of goods. In so far as they are so received, their effect upon
+prices is exactly the same as that of legal tender currency. This
+fact is now so generally recognised that the Committee on National
+Expenditure has called attention to the financing of the war by bank
+credits as one of the reasons for the inflation of prices which has
+done so much to raise the cost of the war. It is, in fact, being
+generally recognised that the power of the bankers to give their
+customers credits enabling them to draw cheques amounts in fact to
+an increase in the currency just as much as the power of the Bank of
+England to print legal tender notes, and the power of the Government
+to print Treasury notes.
+
+Thus it has happened that by the evolution of the banking system
+the use of the precious metals as currency has been reinforced and
+expanded by the printing of an enormous mass of pieces of paper,
+whether in the form of notes, or in the form of cheques, which
+economise the use of gold, but have hitherto always been based on the
+fact that they are convertible into gold on demand, and in fact have
+only been accepted because of this important proviso. Gold as currency
+was so convenient and perfect that its perfection has been improved
+upon by this ingenious device, which prevented its actually passing
+from hand to hand as currency, and substituted for it an enormous mass
+of pieces of paper which were promises to pay it, if ever the holders
+of the paper chose to exercise their power to demand it. By this
+method gold has been enabled to circulate in the form of paper
+substitutes to an extent which its actual amount would have made
+altogether impossible if it had had to do its circulation, so to
+speak, in its own person. From the application of this great economy
+to gold two consequences have followed; the first is that the
+effectiveness of gold as a standard of value has been weakened because
+this power that banks have given to it of circulating by substitute
+has obviously depreciated its value by enormously multiplying the
+effective supply of it. Depreciation in the buying power of money, and
+a consequent rise in prices, has consequently been a factor which
+has been almost constantly at work for centuries with occasional
+reactions, during which the process went the other way. Another
+consequence has been that people, seeing the ease with which pieces of
+paper can be multiplied, representing a right to gold which is only in
+exceptional cases exercised, have proceeded to ask whether there is
+really any necessity to have gold behind the paper at all, and whether
+it would not be possible to evolve some ideal form of super-paper
+which could take the place of gold as the basis of the ordinary paper
+which is created by the machinery of credit, which would be made
+exchangeable into it on demand instead of into gold.
+
+It is difficult to say how far the events of the war have contributed
+to the agitation for the substitution for gold of some other form of
+international currency. It would seem at first sight that the position
+of gold at the centre of the credit system has been shaken owing
+to the fact that in Sweden and some other neutral countries the
+obligation to receive gold in payment for goods has been for the time
+being abrogated. The critics of the gold standard are thus enabled
+to say, "See what has happened to your theory of the universal
+acceptability of gold. Here are countries which refuse to accept any
+more gold in payment for goods. They say, 'We do not want your gold
+any more. We want something that we can eat or make into clothes to
+put on our backs.'" This is certainly an extremely curious development
+that is one of the by-products of war's economic lessons. But I do not
+feel quite sure that it has really taught us anything new. All that
+has ever been claimed for gold is that it is universally acceptable
+when men are buying and selling together under more or less normal
+circumstances. It has always been recognised that a shipwrecked crew
+on a desert island would be unlikely to exchange the coco-nuts or fish
+or any other commodities likely to sustain life which they could find,
+for any gold which happened to be in the possession of any of them,
+except with a view to their being possibly picked up by a passing
+ship, and returning to conditions under which gold would reassume its
+old privilege of acceptability.
+
+During the war the shipping conditions have been such that many
+countries have been hard put to it, especially if they were contiguous
+to nations with which the Entente is at present at war, to get the
+commodities which they needed for their subsistence. The Entente, with
+its command of the sea, has found it necessary to ration them so that
+they should have no available surplus to hand on to the enemy. They
+have very naturally endeavoured to resist these measures, and in order
+to do so have made use of the power that they exercise by their being
+in possession of commodities which the Entente desires. They
+have shown a tendency to say that they would not part with these
+commodities unless the Entente allowed them to have a larger
+proportion of things needed for subsistence than the Entente thought
+necessary for them, and it was as part of this battle for larger
+imports of necessaries that gold has been to some extent looked upon
+askance as means of payment, the preference being given to things
+to eat and wear rather than to the metal. These wholly abnormal
+circumstances, however, do not seem to me to be any proof that gold
+will after the war be any less acceptable as a means of payment than
+before. The Germans are usually credited with considerable sagacity in
+money matters, with rather more, in fact, I am inclined to think, than
+they actually possess; they, at any rate, show a very eager desire to
+collect together and hold on to the largest possible store of gold,
+obviously with a view to making use of it when the war is over in
+payment for raw materials, and other commodities of which they are
+likely to find themselves extremely short. America also has shown a
+strong tendency to maintain as far as possible within its borders the
+enormous amount of gold which the early years of the war poured into
+its hands. While such is the conduct of the chief foreign nations, it
+is also interesting to note that one comes across a good many people
+who, in spite of all the admonitions of the Government to all good
+citizens to pay their gold into the banks, still hold on to a small
+store of sovereigns in the fear of some chain of circumstances arising
+in which only gold would be taken in payment for commodities. On the
+whole, I am inclined to think that the power of gold as a desirable
+commodity merely because it is believed to be always acceptable has
+not been appreciably shaken by the events of the war.
+
+This does not alter the fact that, as has been shown above, gold,
+complicated by the paper which has been based upon it, cannot claim
+to have risen to full perfection as a standard of value. In
+primitive times the question of the standard of value hardly arises.
+Transactions are for the most part carried out and concluded at once,
+and any seller who takes a piece of metal in payment for his goods
+does so with the rough knowledge of what that piece of metal will buy
+for him at the moment, and that is the only point which concerns
+him. The standard of value only becomes important when under settled
+conditions of society long-term contracts bulk large in economic
+transactions. A man who makes an investment which entitles him to 5
+per cent. interest, and repayment in 30 years' time, begins to be very
+seriously interested in the question of what command over commodities
+his annual income of 5 per cent. will give him, and whether the
+repayment of his money at the end of 30 years will represent the
+repayment of anything like the same amount of buying power as his
+money now possesses. It is here, of course, that gold has failed
+because, as we have seen, the process has been a fairly steady one of
+depreciation in the buying power of the alleged standard and a rise in
+the prices of other commodities. This means to say that the investor
+who has accepted repayment at the end of 30 years of the amount that
+he lent, be it L100 or L10,000, 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 considerable advantages, probably much
+greater advantages than would have followed from the contrary process
+if it had been the other way round. If we can imagine that the
+currency history of the world had been such that a constantly
+diminished quantity of currency in relation to the output of other
+commodities had caused a steady fall in prices, it is obvious that
+there might have been a very considerable check to the enthusiasm of
+industry. It has indeed been contended that the scarcity of precious
+metals which, with the absence of an organised credit system, produced
+this result during the later Roman Empire was a very important cause
+of the decay into which that Empire fell. I do not feel at all
+convinced that this effect would necessarily have followed the cause.
+It seems to me that the ingenuity of enterprising man is such that the
+producer might, and probably would, have found means for facing the
+probability of depreciation in price. But it is always an empty
+pastime to try to imagine what would have happened "if things had
+been otherwise." What we do know is that a period of rising prices,
+especially if the rise does not go too fast, stimulates the enterprise
+of producers, and sets business going actively, and consequently it
+may at least be claimed that the failure of the gold standard to
+maintain that steadiness of value which is an obvious attribute of
+the ideal standard has at least been a failure on the right side, by
+tending to depreciation of the value of currency, and so to a rise of
+the prices of other commodities. Obviously, people will tuck up their
+sleeves more readily to the business of production and manufacture if
+the course of the market in the product which they hope to sell some
+day is likely to be in their favour rather than against them.
+
+And when all is admitted concerning the failure of the existing
+standard of value, the question is, what substitute can we find which
+will carry with it all the advantages that gold has been shown to
+possess, and at the same time maintain that steadiness of value which
+gold has certainly lacked? We hear airy talk of an international
+currency based on the credit of the nations leagued together to
+promote economic peace. It is certainly very obvious that the
+diplomatic relations of the world require complete reform, and the
+system by which the nations at present settle disputes between
+themselves has been found by the experience of the last four years to
+be so disgusting, so barbarous and so ridiculous that all the most
+civilised nations of the world are determined to go on with it until
+it is stopped for ever. Nevertheless, obvious as it is that some kind
+of a League of Nations is essential as a form of international police
+if civilisation is to be rescued from destruction, it is very doubtful
+whether such an organisation could, at least during the first
+half-century or so of its existence, be called upon to tackle so
+difficult a question as that of the creation of an international
+currency based on international credit. In the first place, what will
+be required more than anything else after the war in economic matters
+will be the elimination of all possible reasons for uncertainty; so
+much uncertainty and difficulty will be inevitable that it seems to me
+to be almost criminal to add to those uncertainties by an outburst of
+eloquence on the part of currency reformers if there were any danger
+of their recommendations being accepted. It will be difficult enough
+to know where the producers of the world are to get raw material, find
+efficient labour, and then find a market for their products, without
+at the same time upsetting their minds with doubts concerning some
+kind of new-fangled currency that is to be created, and in which they
+are to be made to accept payment, with the possibilities of changes
+in the system which may have to be effected owing to some quite
+unforeseen results happening from its adoption. The gold standard,
+with all its failures, we do know; we also know that something may be
+done some day to remedy them if mankind can produce a set of rulers
+capable of approaching the question with all the knowledge and
+experience required; but to substitute this system at a time of great
+uncertainty for one which might or might not work would seem to be
+tempting Providence in an entirely unnecessary manner at a time when
+it is above all necessary to get the economic ship as far as possible
+on an even keel.
+
+If the proposed substitute is to succeed it will have to be at least
+as acceptable as gold, and at the same time its quantity must be so
+regulated as to be at all times constant in relation to the output of
+commodities. Can we pretend that the economic enlightenment of mankind
+has yet reached a point at which such a currency could be produced and
+regulated by the Governments of the world and be accepted by their
+citizens?
+
+
+
+
+XI
+
+BONUS SHARES
+
+_July_, 1918
+
+A Deluge of Bonus Shares--The Effect on the Market--A Problem in
+Financial Psychology--The Capitalisation of Reserves--The Stock
+Exchange View--The Issue of Bonus-carrying Shares--The Case of the
+A.B.C.--A Wiser Variation from Canada--Bonus Shares on Flotation--An
+American Device--Midwife or Doctor?--The Good and Bad Points of Both
+Systems.
+
+
+Of the many kinds of Bonus shares, the one which has lately been
+most prominent in the public eye is that which is produced by the
+capitalisation of a reserve fund. There has lately been a perfect
+epidemic of this kind of Bonus share, which is almost as plentiful as
+the caterpillars in the oak trees and the green fly on the allotments.
+The reason for this outburst is apparently the anxiety which the
+directors of many prosperous industrial companies feel lest the high
+dividends which good management and sound finance in the past have
+enabled them to pay should lay them open to misunderstanding and
+attack by well-meaning people who think that it is a crime for a
+company to earn more than a certain percentage on its capital.
+
+This explanation was very frankly given by the directors of Brunner,
+Mond and Company, when they lately capitalised part of their reserves.
+The company, they stated, has for many years paid a dividend on its
+Ordinary shares of 27-1/2 per cent., and "the directors feel that
+there is a widespread impression that this is the rate of profit
+earned on the total of the capital invested, and consequently that the
+company is making an unfair profit out of its customers and the labour
+it employs. This is by no means the case." It is a lamentable proof of
+the backward state of the economic education of this country that it
+should be necessary for well-financed and prosperous concerns to take
+steps to make it quite clear to the public that they are not earning
+more than they appear to be. In a well-educated community it would
+be perceived at once that it is the well-financed and prosperous
+companies which improve production in the interests of their
+shareholders, their workmen, and the public; that the price which the
+public pays for a commodity is ultimately the price at which the worst
+financed and worst managed companies can just manage to keep alive;
+that the higher profits earned by the better companies are not wrung
+out of the pockets of the community, or their workmen, but are the
+result of good management and good finance; and that the more the good
+companies are encouraged to go ahead and drive the bad ones out of
+existence, the better will the community be served, and the better
+will be the chance of the workmen to get good wages. These platitudes
+are of course, only true in a state of free competition. If there is
+anything like monopoly the public and the workers are fully justified
+in being suspicious and examining the source from which high dividends
+are produced.
+
+Such being the reason why this outburst of capitalisation of reserves
+first began--since in these days all capitalists and those who have to
+manage capital feel that they are working under criticism, which is
+not only jealous and suspicious (as it should be), but is also too
+often both ignorant and prejudiced--it is interesting to note that
+the movement which was so started has been stimulated by its very
+exhilarating effect on the market in the shares of the companies
+concerned. Why this should be so it is difficult at first sight to
+say. What happens is merely this--that a company, let us suppose, for
+the sake of simplicity, with a capital consisting wholly of 3,000,000
+Ordinary shares, has accumulated out of past profits, or out of
+premiums on new issues of shares, a reserve fund of L1,000,000. Its
+net profit has lately averaged L400,000, and it has, year by year,
+distributed L300,000 in the shape of a 10 per cent. dividend to
+its shareholders, and put L100,000 into its reserve fund, which is
+represented on the other side of the balance-sheet by buildings
+and plant and a certain amount of first-class investments. If the
+directors now decide to capitalise that L1,000,000 of reserve fund,
+the only effect is that each shareholder will be given one new share
+for every three which he holds in the existing capital, the reserve
+fund will be wiped out, and the ordinary capital will be increased
+from L3,000,000 to L4,000,000. None of the shareholders will be in
+actual fact better off to the extent of one halfpenny, because all
+will be in the same position with regard to one another; their
+relative shares in the enterprise will not have been altered. If we
+imagine, by way of simplifying the problem, that all the Ordinary
+shares were in one hand, that one holder would have had in his
+Ordinary shares a claim to the total assets of the company, that is
+to say, to its earning power as long as it is a going concern, and to
+whatever its assets realise if it went into liquidation; the fact that
+L1,000,000 worth of the assets had been bought out of past profits or
+premiums paid on new issues of shares would have already added to the
+value of the claim that he had on the property of the company, and no
+addition would be made to that value by turning the reserve fund into
+shares.
+
+In other words, the reserve fund is already the property of the
+shareholders, and to convert it from reserve fund into capital, making
+them a present of new shares, which merely represent their claim
+to the assets held against the reserve fund, is as empty a gift as
+presenting a man with a piece of paper informing him that he is the
+owner of his own hat. All this remains equally true if, besides the
+ordinary capital, there is a considerable amount outstanding of
+Preference shares and Debenture debt. In any case, the Ordinary
+shareholders possess a claim to the earning power of the company when
+prior charges have been satisfied, and to whatever surplus may remain
+on liquidation after first charges have been paid off in full. Whether
+that interest of theirs is represented by a larger or smaller number
+of shares, or by shares of a larger or smaller denomination, or by a
+reserve fund upon which they have a claim when all other claims have
+been settled makes no difference whatever as a matter of academic
+fact. Apart from the sentiment of the matter, there is no reason why
+ordinary capital should have any nominal value.
+
+As to the earning power of the company, that, of course, is not
+affected one whit by the process. The earning power of the company is
+all in the assets--the plant, machinery and other property--plus
+the elusive qualities which are bound up in the word "goodwill,"
+representing the selling power, organisation, and the expectation of
+future profits. The capitalisation of the reserve simply affects the
+manner in which the liabilities of the company are arranged, and
+the existence of a reserve fund merely means that the Ordinary
+shareholders have a claim to a larger amount than their nominal
+holding in case of liquidation. It does not matter in the least
+whether this larger claim is handed to them in the shape of a
+certificate, since the nominal amount of their claim has nothing
+whatever to do with the amount that their claim realises to them
+annually in the shape of dividends, or in the event of liquidation,
+from the realisation of the company's assets.
+
+In fact, the capitalisation of reserves is sometimes criticised by
+economic purists as a retrograde step because it seems likely to
+encourage the directors to be extravagant in the matter of dividends.
+In the example which we supposed above of the company with a capital
+of three millions and reserve fund of one million, if the reserve fund
+is turned into Ordinary shares and the earning power of the company
+remains the same there may obviously be a temptation to the directors
+to modify the prudent policy under which they had hitherto placed one
+hundred thousand a year to reserve, because if they continued it the
+shareholders would discover they were really no better off and that
+they simply got a lower rate of dividend on the larger amount of
+shares, and that their actual receipts from the company were exactly
+the same as before. And if the earning power of the company remained
+the same and the directors left off placing the one hundred thousand
+a year to reserve, and paid away the whole of the net profit in
+dividend, it is clear that the progressive expansion of the company's
+business would be to that extent checked. On the other hand, there is
+a contrary argument that as long as the company has a large reserve
+fund there is a possibility that dissatisfied shareholders may agitate
+for a realisation of sufficient assets to enable that reserve fund to
+be distributed, especially if it has been wholly acquired out of past
+profits. In this case the capitalisation of the reserve fund puts this
+temptation out of their reach since, when once the reserve fund has
+been capitalised, it can only be got at by greedy shareholders through
+the process of liquidation. Since, however, the shareholder in these
+times is not quite so short-sighted as he used to be, there is not
+perhaps really very much advantage in this point.
+
+But since, as has been shown, capitalisation of reserves has no effect
+upon the earning power and assets of the company, it is interesting to
+try and discover why the rumour and announcement of such an intention
+on the part of the board of directors is nearly always accompanied by
+a rise in the shares of the company affected. If the shareholder is
+merely to be given a larger nominal claim, which does not in the least
+affect the value of the assets which that claim concerns, and if the
+relative amount of his claim is exactly the same with regard to the
+other shareholders, it is clear that the rise in the value of the
+shares is based entirely either on a psychological mistake on the part
+of the public and its financial advisers, or on the fact that the
+transaction called attention to the value of the shares which have
+hitherto been undervalued in the market. Probably the movement arises
+from both these causes. A large number of people think they are better
+off if they have a larger nominal share, without considering that
+all the other shareholders are at the same time having their claim
+increased, that the assets to which they all have a claim are not
+being increased, and that, consequently, if a sharing-out process were
+to take place they would all be exactly as they would have been if
+no such capitalisation of reserves had been carried out. And if a
+sufficient number of people think that a share or any other commodity
+is more valuable, it thereby becomes more valuable, because value is
+nothing else than the amount, whether in money or other commodities,
+at which a commodity can be disposed of.
+
+But it is also true that there are, at all times, a very large number
+of securities, especially in the industrial market, which would
+stand higher if their earning power and position were more closely
+scrutinised. This is very clearly seen to be the case from the
+apparently extravagant prices at which insurance companies, for
+example, sometimes buy the businesses of one another. They give a
+price which is considerably above the market value of the concern as
+represented by the price of its shares. Critics say that the terms are
+extravagant, and yet the deal is found to be highly profitable to the
+buying company. The profit of the deal, of course, may be increased by
+the advantages of amalgamation, but quite apart from that it is clear
+that the market price of securities very often undervalues, as it
+also, perhaps, still oftener overvalues, the real position of the
+companies on whose earning powers they represent claims. In any case,
+there is the fact that these capitalisations of reserve funds, which
+make no real difference to the actual position of the company, are
+universally regarded, in the language of the Stock Exchange, as "bull
+points." It is assumed, of course, that the directors would not carry
+out such an operation unless they saw their way to a higher earning
+power in the future as a justification for the larger capital. In this
+expectation the directors might be right or wrong, and, even if they
+are right, that prospect of higher earning power, if market prices
+could be relied upon to express the true position of a company, would
+have been "in the price."
+
+There is another kind of Bonus share, which is not exactly a Bonus
+share, but carries a bonus with it. This comes into being when the
+directors of a company sell new shares to existing shareholders at a
+price below the terms which they might have obtained if they made a
+new issue to the general public. The classical example of this system
+is the Aerated Bread Company, that concern to which City clerks and
+journalists and others owe so much as pioneers of cheap and simple
+catering. It will be remembered that in the palmy days of this
+company, before it had been severely cut into by competition, its L1
+shares used to stand in the neighbourhood of L15. The directors used
+then to make issues of new shares to existing shareholders at their
+face value, that is to say, at L1 per share, although it was obvious
+that if they had made a public issue inviting all and sundry to
+subscribe they could have sold their new issues at or above L14
+per share. This system put an enormous bonus in the pockets of the
+existing shareholders at the expense of the company and its future
+prospects. The directors practically gave to the existing shareholders
+a present of L130,000 if they sold them 10,000 new shares for L10,000,
+which they and the public would have readily subscribed for at
+L140,000. There was nothing wicked about the process, but it was
+extremely short-sighted. If the company had retained the monopoly
+which its pioneer work as a cheap caterer for a long time secured
+it, it might have kept its prosperity unimpaired even by this
+short-sighted finance. As it was, attracted several competitors, some
+of which were extremely well managed and financed, and although it
+still does a most useful work for the community, its earning power has
+suffered considerably. But this is only an extreme example of a system
+which is reasonable enough if it is not carried too far. The Canadian
+Pacific Railway, for instance, has for many years adopted a very
+moderate use of this system, making new issues to its shareholders on
+terms rather cheaper than it could have obtained by a public issue,
+but not giving away enough to impair its future seriously in order
+to make presents to the existing stockholders by this means. By the
+continued making of small presents to their constituents the directors
+of the company have obtained the support of a very loyal body of
+stockholders, who feel that they are being well treated but not
+pampered. This system of granting a small bonus to existing
+shareholders on occasions when the company has to issue new capital is
+one which is quite unobjectionable as long as it is not abused. If,
+owing to the use of it, the directors are encouraged to finance
+themselves badly, that is to say, to pay out of new capital for
+improvements and extensions which a more prudent policy would have
+financed out of earnings, just because they find that these issues
+carrying a small bonus makes them popular with the stockholders, then
+the system is being abused. Otherwise there seems no reason to object
+to a measure which keeps the shareholders happy and does not do any
+harm to the concern so long as it is worked in moderation.
+
+Finally, there is a Bonus share or stock which does not represent
+accumulation out of vast profits or issues of new shares at a premium,
+and does not involve a bonus by the sale to existing shareholders at
+a price below the terms which could be got in the market, but is at
+first sight pure water, representing merely possibilities, perhapses,
+and potentialities. This kind of Bonus share is chiefly known on the
+other side of the Atlantic, and is usually damned with bell, book and
+candle by purists among English financial critics. We say on this side
+of the water that every pound of an English well-financed company
+represents a pound which has actually been spent and put into tangible
+assets which help the company to earn profits. This boast is by no
+means true, since nearly all industrial companies come into being with
+something paid for in the shape of goodwill, which is of enormous
+importance, but can hardly be called a tangible asset; and even in the
+case of our railway companies, many millions of original capital went
+into Parliamentary and legal expenses, which have been, in one sense,
+dead capital ever since, though without this expenditure the railways
+could never have got to work. The American system of Common shares,
+representing what appears to be water, is only a modification of what
+every company has to do, in one form or another, on this side or
+anywhere in the world. Wherever an existing business is bought out
+something has to be given over and above the old iron value of the
+concern for the value of the connection and other intangible assets.
+Wherever an entirely new industry is started it has to meet certain
+initial expenses. It has to placate, to use the unpleasant American
+word, various interests in order to get to work, or it has to lay out
+money, in building up a concern by advertising or otherwise. It is
+impossible that every penny which is put into it will go into actual
+buildings, plant, machinery, and stock-in-trade.
+
+In America the system has been preferred by which the actual tangible
+assets of a new concern are financed wholly or largely by issues of
+bonds or Preferred stock, and the Common stock is given away to those
+interested in the promotion, for them either to hold or to use in
+order to secure the co-operation of those who may be useful, or modify
+the opposition of those who may be dangerous. The net result of it is
+that the Common stock is represented in fact by goodwill or the power
+to get to work. If the company prospers, then it is the business of
+those who hold these Common shares to see that assets are accumulated
+out of profits, to be held against their Common stock, so squeezing
+the water out of it and making it good. The system thus possesses this
+very considerable advantage, that those who promote a company are
+interested in its future welfare, and watch over it and guide it
+through its subsequent existence, putting energy and good management
+at its disposal in order that the paper which they hold may be
+represented, not by water, but by real assets, and so may bring them a
+tangible reward. It has thus in some ways a great advantage over the
+English system, by which the company promoter is too often concerned
+merely in the immediate success of the promotion. He is, as one of the
+greatest of them described himself, a mere midwife, who brings the
+interesting infant into the world, pats its little head, says good-bye
+to it, and leaves it to take care of itself throughout its troubled
+existence. By the American system the promoter is not a midwife but a
+doctor who assists at the birth of the infant, and also watches over
+its youth and makes every effort to guide its toddling footsteps in
+such a way that it may grow into lusty manhood. It is not until he has
+done so that he is enabled, by the sale of the shares which were given
+to him at the beginning, to realise the full profit which he expected.
+The profits realised by this method are in many cases enormous. On
+the other hand, the amount of work that is put in to secure them is
+infinitely greater than happens in the case of the English midwife
+promoter; and if the enterprise is a failure, then the promoter goes
+without his profits.
+
+The system, like everything else, is liable to abuse, if a rascally
+board of directors, in a hurry to unload their holding of Common stock
+on an unsuspecting public, makes the position and prospects of the
+company look better than they are by unscrupulous bookkeeping and
+extravagant distribution of profits, earned or unearned. These things
+happen in a world in which the ignorance of the public about money
+matters is a constant invitation to those who are skilled in them to
+relieve the public of money which it would probably mis-spend; but,
+if well and honestly worked, the system is by no means inherently
+unsound, as some English critics too often assume, and it has been
+shown that it carries with it a very great and substantial advantage
+in the hands of honest people who wish to conduct the business of
+company promotion on progressive lines.
+
+
+
+
+XII
+
+STATE MONOPOLY IN BANKING
+
+_August_, 1918
+
+Bank Fusions and the State--Their Effects on the Bank of England--Mr
+Sidney Webb's Forecast--His Views of the Benefits of a Bank
+Monopoly--The Contrast between German Experts and British
+Amateurs--Bankers' Charges as affected by Fusions--The Effects of
+Monopoly without the Fact--The "Disinterested Management" Fallacy--The
+Proposal to split Banking Functions--A Picture of the State in
+Control.
+
+
+A few months ago, writing in this Journal on the subject of banking
+amalgamations, I referred to one of the objections against them, that
+they tended towards the creation of monopoly, and so encouraged hope
+on the part of those who would like to see all forms of industry
+managed by the State, that the banking business might sooner or later
+be taken over and worked as a State monopoly. At that time this danger
+of monopoly seemed to be still fairly remote, but since then the
+progress of amalgamations has brought it appreciably nearer, and
+so has vigorously stimulated both the hopes and fears of those who
+consider that it tends to bring nearer the seizure of banking business
+by the State. The fear is expressed by Sir Charles Addis, manager of
+the Hongkong Bank and director of the Bank of England, in the July
+number of the _Edinburgh Review_ in a very interesting article on the
+"Problems of British Banking." Sir Charles observes that:
+
+    "It may even be questioned whether the gigantic size they have
+    already attained does not constitute a menace to the predominant
+    position which the Bank of England has hitherto enjoyed as the
+    bankers' bank. How will the Bank of England be able to maintain
+    its supremacy and control the money market, surrounded by banks
+    individually greater and more powerful than itself, especially
+    when the object in view is by raising the rate of interest to
+    prevent an internal or external drain upon our gold reserve? It is
+    even conceivable that the finance of the State may be threatened,
+    and it is probably for this reason that in Germany the Prussian
+    Minister is said to be considering a State monopoly of banking.
+    Nor can the psychological effect of these great aggrandisements of
+    capital in the hands of a few banks be ignored. They are virtually
+    Government-guaranteed institutions. The insolvency of one of
+    the great banks would involve such widespread disaster that no
+    Government could stand aside. They would be compelled to make use
+    of the national resources in order to guarantee the solvency of
+    private banks. From Government guarantee to Government control
+    is but a step, and but one step more to nationalisation. We are
+    playing into the hands of Mr Sidney Webb and the Socialists."
+
+As it happens, in the July number of the _Contemporary Review_, Mr
+Sidney Webb was developing the same theme, namely, the inevitability
+of banking monopoly and the necessity, as he conceives it, of
+defeating private monopoly for the sake of profit, by State monopoly
+to be worked, as he hopes, in the public interest. His article is
+headed by the rather misleading title, "How to Prevent Banking
+Monopoly," for, as has been said, Mr Webb very much wants monopoly,
+says that it cannot be helped, and sees the fulfilment of some of his
+pet Socialistic dreams in the direction of it by the bureaucrat whom
+he regards as the heaven-sent saviour of society. His very interesting
+argument is most easily followed by means of a series of quotations.
+
+    "We are, it is said, within a measurable distance of there
+    being--save for unimportant exceptions--only one bank, under
+    one general manager, probably a Scotsman, whose power over the
+    nation's industry would be incalculable. Even in the crisis of the
+    war the matter is receiving the attention of the Government.
+
+    "In the opinion of the present writer, the amalgamation of banks
+    in this country, which has been going on continuously for a
+    century, though at varying rates, and is being paralleled in
+    other countries, notably in Germany, and latterly in the Canadian
+    Dominion, is an economically inevitable development at a certain
+    stage of capitalist enterprise, and one which cannot effectively
+    be prevented."
+
+Mr Webb considers that there is no economic limit to this policy of
+amalgamation, and that the gains it carries with it are obvious. He
+dilates upon these as follows:--
+
+    "It may be worth pointing out:
+
+    "(a) That apart from the obvious economies in the cost of
+    administration, common to all business on a large scale, there is,
+    in British banking practice, a special advantage in a bank being
+    as extensive and all-pervasive as possible. Where distinct banks
+    co-exist, there can be no assurance that the periodical shifting
+    of business, the perpetual transformations in industrial
+    organisation, the rise and fall of industries, localities or
+    firms, the changes of fashion and the ebb and flow of demand,
+    and even a relative diminution of reputation may not lead to a
+    shrinking of the deposits and current account balances of any one
+    bank, or even of each bank in turn. Accordingly, every bank has to
+    maintain an uninvested, or, at least, a specially liquid, reserve
+    to meet such a possible withdrawal. The smaller, the more
+    numerous, the more specialised by locality or industry are the
+    competing banks, the larger must be this reserve. On the other
+    hand, if all the deposit and current accounts of the nation were
+    kept at one bank, even if it has innumerable branches, as the
+    experience of the Post Office Savings Bank shows, no such shifting
+    of business would affect it; no mere transfers from firm to
+    firm or from trade to trade would involve any shrinking of its
+    aggregate balances; and it would need only to have in hand,
+    somewhere, sufficient currency to replenish temporarily a local
+    drain on its 'till money.' The nearer the banks can approach to
+    this condition of monopoly, not only the lower will be their
+    percentage of working expenses, but also the greater will be the
+    financial stability, and the smaller the amount that they will
+    need to keep uninvested in order to meet possible withdrawals.
+
+    "(b) That the process of amalgamation has involved an
+    ever-increasing elimination, from the British banking business, of
+    the typical profit-maker, first as partner in a private bank, then
+    as a director in a Joint Stock bank, representing a large personal
+    holding of shares; and the gradual transfer of practically the
+    whole conduct of the business to what may be called 'disinterested
+    management'--that is to say, management by trained, professional
+    officers serving for salaries, whose remuneration bears no
+    relation to the profit made on each piece of business transacted.
+    The part played in the business by the directors themselves seems
+    to be, with every increase in the magnitude and scope of the
+    concern, steadily diminishing; and these directors, moreover, come
+    to be chosen, more and more, not because of their large holdings
+    of shares, or because of their ancestral or personal connection
+    with banking, but because of their reputation or influence,
+    commercial, social or political. The result is that, along with
+    the process of amalgamation, there has been going on a transfer
+    of the whole management of banking to the hierarchy of salaried
+    officials; whilst the supreme decisions on financial policy are in
+    the hands, in practice, of a very small group of salaried general
+    managers, only partially in consultation with an equally small
+    group of chairmen of boards of directors, themselves usually
+    drawing not inconsiderable salaries."
+
+It seems to me that Mr Webb exaggerates in rather a dangerous degree
+the reduction, through amalgamation, of the necessity which obliges
+a bank to keep a considerable reserve of cash. It is quite true that
+under normal circumstances cash withdrawn from one bank finds its way
+in due course to another, and that with regard to these mere "till
+money" transfers there might be a considerable reduction in the amount
+of cash required if all the banking of the country were in the hands
+of one business, so that what was withdrawn from one branch would
+be paid into another. But this fact would not alter the need which
+compels a bank to keep considerable reserves in cash in order to
+provide against the possibility of a run. A State bank, if the public
+takes it into its head that it prefers to have a larger proportion of
+currency in its own pocket rather than in its bank, may find itself
+pulled at for cash just as vigorously as a bank managed by private
+enterprise. This was shown in August, 1914, when very large sums were
+withdrawn from the Post Office Savings Bank during the crisis which
+then impelled many members of the public to hoard money, or compelled
+them to take it out of their banks because they did not find that the
+ordinary system of payment by cheques was working with its usual ease.
+
+Moreover, Mr Webb's point about what he calls disinterested
+management--that is to say, the management of banks by officers whose
+remuneration bears no relation to the profit made on each piece of
+business transacted--is one of the matters in which English banking
+seems likely at least to be modified. Sir Charles Addis, in the
+article already referred to, calls attention in a very striking
+passage to the efficiency of the administration of German and English
+banks, and makes a comparison between the remuneration given to the
+banking boards of the two countries. The passage is as follows:--
+
+    "Scarcely second in importance to the financial strength of a
+    bank is the efficiency of its administration. The German board of
+    direction is composed, to an extent unknown in England, of men
+    possessed of professional and technical knowledge. No one who has
+    been present at a meeting of German bank directors in Berlin, when
+    some foreign enterprise has been under consideration, can have
+    failed to be impressed by the animation with which it was
+    discussed, and by the expert and comparative knowledge displayed
+    by individual directors of the enterprise itself and of the
+    conditions prevailing in the foreign country in which it was
+    proposed to undertake it. He may have been led to reflect ruefully
+    upon the different reception his project met with in his own
+    country. He will recall the meeting of the London board; the
+    difficulty of withdrawing its members even temporarily from their
+    country pursuits and their obvious anxiety to lose no time in
+    returning to them; most of them old men, many of them long retired
+    from business; some of them ex-Government officials and the like,
+    who have never been in business; a few ornamental titled persons;
+    only one or two here and there who have no train to catch and are
+    willing to discuss the matter in hand with attention, and, it may
+    be, with understanding.
+
+    "It would be idle to pretend that a board of this kind constitutes
+    anything like the nexus between industry and finance which obtains
+    in Germany, and which is very much to be desired in this country.
+    It may be that we do not pay our men enough. A London director has
+    to be content with an honorific position, a fee of a few hundred
+    pounds a year, and, it must be added, a very exiguous degree of
+    responsibility. That is not enough to attract men in the prime of
+    life with expert or technical knowledge of industry and finance,
+    who would have to submit to a reduction in the large incomes they
+    are earning by the exercise of their special abilities if they
+    were to accept a seat on the board of a bank. There are two things
+    which a good man, in the business sense of the term, will not
+    do without--pay and responsibility. Give him sufficient of the
+    former, and you may saddle him with as much of the latter as you
+    like. You may not always get good men by offering them good pay,
+    but you will certainly not get them without doing so. Apparently
+    shareholders are content so long as their profits are not reduced
+    by more than nominal directors' fees. At a recent meeting of a
+    bank with deposits of over L200,000,000 the proposal to increase
+    the directors' fees to L1000 a year was met by the rejoinder from
+    one of the shareholders present that he did not know what the
+    directors would do with such a sum.
+
+    "They manage these things differently in Germany. In the three
+    banks to which we have already referred, after payment by the
+    Deutsche Bank of 5 per cent. of the net profits to reserve, and
+    of the ordinary dividend of 6 per cent., and by the
+    Disconto-Gesellschaft and the Dresdner Bank of 4 per cent., the
+    directors receive respectively 7 per cent., 7-1/2 per cent., and
+    4 per cent. (the Disconto's personally liable partners receive 16
+    per cent.) out of the remainder. The directors are bound by law
+    to supervise all the details of the bank's business, and to keep
+    themselves well informed as to its general policy and methods of
+    management. They are bound by law to exercise the caution of
+    a careful business man, and are liable to be sued for damages
+    arising out of the crime or negligence of their employees. If
+    cases of this kind are seldom brought to public notice, it is not
+    because they do not occur, but because the directors, as a rule,
+    prefer to pay up for the laches of their employees, as they can
+    well afford to do out of their profits, rather than be haled
+    before the Court."
+
+When Mr Webb comes to the question of the dangers resulting from
+monopoly, he finds that they lie chiefly in a restriction of
+facilities, and in raising the price exacted for them, and that in
+both respects the danger appears to be great. There is, he says, every
+reason to expect that the banker, as the nearest approach to the
+"economic man," will take the opportunity of raising his charges
+either by increasing the frequency and the rate of the commission
+exacted for the keeping of a small account, or by reducing the rate of
+interest allowed on balances, or adopting the common London practice
+of refusing it altogether. "The banker, who is not in business for his
+health, may be expected, on this side of his enterprise, to pursue the
+policy of 'charging all that the traffic will bear.' It would probably
+pay the banker actually to refuse small accounts, and to penalise the
+employment of cheques for small sums. This would be a social loss."
+
+With regard to the other side of his business, lending to the
+borrowers, Mr Webb thinks it need not be assumed that the monopolist
+banker will actually lend less, because he will seek at all times to
+employ all the capital or credit that he can safely dispose of, but Mr
+Webb thinks that he is likely, as the result of being relieved of the
+fear of competition; to feel free to be more arbitrary in his choice
+of borrowers, and therefore able to indulge in discrimination against
+persons or kinds of business that he may dislike; that he will raise
+his charges generally for all accommodation, again, theoretically
+to "all that the traffic will bear"; and, finally, that in times of
+stress with regard to all applicants, and at all times with regard to
+any applicant who was "in a tight place," that he will extort as the
+price of indispensable help a theoretically unlimited ransom.
+
+Such are the effects which Mr Webb fears from the process which has
+already put the control of the greater part of the banking facilities
+of England into the hands of five huge banks. He thinks that these
+things may happen long before it is a question of an absolute monopoly
+in one hand. A monopoly, he says, may be more or less complete, and
+the economic effects of monopoly may be produced to a greater or less
+degree at a point far below a complete monopolisation in a single
+hand. There is much truth in this contention of his. Amalgamation has
+now come to such a point that every new one not only brings absolute
+monopoly more closely in sight, but increases the ease with which
+agreements among the huge banks might suffice to produce the effects
+of monopoly without further amalgamations. Mr Webb goes on to
+argue that it is impossible to stop by legislative prohibition or
+restriction the progress towards economic monopoly where such progress
+is financially advantageous to those concerned, and that the only
+remedy ultimately by which the community can be protected from the
+dangers which he sees threatening it is for the community to take the
+monopoly into its own hands, and so to get rid, not of the monopoly,
+which, from the standpoint of national organisation, he thinks is
+advantageous, but of the motives leading to extortion. If, he says,
+"no shareholders are in control with their perpetual and insatiable
+desire for profit, there is no inducement to take advantage of the
+needs or helplessness of the customers by restricting service or
+raising prices." In this sentence, of course, he begs the whole
+question between the advantage of private enterprise and of
+Socialistic organisation. Private enterprise works for profit, and
+therefore makes as much profit as it can out of its customers. It is,
+therefore, according to Mr Webb's argument, probable that if private
+enterprise in banking is able to establish monopoly it will squeeze
+the public to the point of restricting banking facilities and making
+them dearer. No one can deny that there is some truth in this
+contention, but, on the other hand, it may very fairly be argued that
+modern business has perceived the great advantages of a big turnover
+and small profits on each transaction. The experience of the great
+insurance companies, and of great catering companies, and of enormous
+private organisations such as the Imperial Tobacco Company, has shown
+the enormous advantage of providing cheap facilities to the largest
+possible number of customers; so that fears of natural restriction of
+banking facilities, through monopoly, if they cannot be set altogether
+aside, are not by any means a certain consequence even of the
+establishment of monopoly in private enterprise.
+
+Still weaker is Mr Webb's assumption that if the interests of the
+shareholders with "their perpetual and insatiable desire for profit"
+were eliminated, cheap and plentiful banking facilities would
+inevitably result from bureaucratic management. The contrary has
+been shown to be the case in the examples of the Post Office, of the
+Telephone Service, and the London Water Supply. In the case of the
+telegraph and the telephones, the Government took over prosperous
+businesses, and has managed them at a loss. In the matter of the Post
+Office it is not possible to compare the Government with individual
+enterprise, but it will generally be admitted that the Telephone
+Service has by no means been improved since the Government took it
+over. Mr Webb points out that nationalisation, whether of banks or of
+other forms of enterprise, does not necessarily mean government under
+a Minister by a branch of the Civil Service. But it is impossible to
+ignore the fact that as soon as nationalisation takes place those who
+are responsible for the management of the enterprise are practically
+certain to develop the qualities and idiosyncrasies of civil servants,
+which are so unlikely to tend to elasticity, rapidity and efficiency
+in business management.
+
+In fact, Mr Webb practically grants this point by the very interesting
+development he suggests by which the two chief functions of banking
+should be differentiated, and one of them should be nationalised
+and the other should remain in the hands of private enterprise. He
+develops this truly ingenious suggestion as follows:--
+
+    "Just as we have (except for some obsolescent survivals) separated
+    the function of issuing paper money from that of keeping current
+    accounts, so we shall separate the function of keeping current
+    accounts from that of money-lending. The habit of the British
+    banker of combining in one and the same concern (_a_) the
+    essentially routine business of keeping current accounts or
+    receiving deposits; and (_b_) the much more difficult and
+    hazardous business of lending capital to private traders, is not
+    a necessary characteristic of banking organisation; and, whilst
+    possibly the most profitable to the profit-seeking banker, this
+    combination may not be the most advantageous from the standpoint
+    of the community.
+
+    "It may accordingly be suggested that the business of banking, as
+    understood in this country, is destined to be further divided into
+    two parts, one of which is ripe for immediate nationalisation, and
+    need no longer be carried on for private profit, whilst the
+    other should be the sphere of a number of separate and diversely
+    specialised organisations catering for particular needs. The whole
+    of the deposit and current account side of banking--with its
+    services in the way of keeping securities, collecting dividends,
+    meeting calls, making regular payments, and carrying through the
+    purchase and sale of securities--ought to be united with the Post
+    Office and Trustee Savings Banks and the money order and other
+    postal remittance business, and run as a national service for the
+    receipt and custody of cash, for the utmost possible development
+    of the cheque system, and for the cheapest possible organisation
+    of remittances. There is no longer any reason why this important
+    branch of social organisation should be abandoned to the
+    profit-maker, should be made the instrument of levying an
+    unnecessarily heavy toll on the customers for the benefit of
+    shareholders, and should now be exposed to the imminent danger of
+    monopoly.
+
+    "If the receipt and custody of deposits and the keeping of current
+    accounts were made a public service the Government might invest
+    the funds thus placed at its disposal in a variety of ways. A
+    certain proportion, perhaps corresponding to what is now held
+    as savings, would be invested, as at present, in Government
+    securities--not Consols, but such as are repayable at par at fixed
+    dates, including Treasury Bills and Terminable Annuities; and any
+    increase in this amount would, in effect, release so much capital
+    for other uses, by paying off part of the National Debt. But the
+    bulk of the amount, corresponding with the proportion of their
+    resources that the bankers now lend for business purposes, might
+    be advanced, for terms of varying duration, partly to Government
+    Departments and local authorities for all their great and rapidly
+    extending enterprises, formerly abandoned to the profit-maker; and
+    partly to a series of financial concerns, whose business it should
+    be to discount the bills and satisfy the requests for loans of
+    those profit-makers who now appeal to the bankers. But these
+    financial concerns should be organised, it is suggested, very
+    largely by trades and industries, specialising in particular
+    lines, and devoted, so far as possible, to meeting the business
+    needs of the different occupations. Whether they should be
+    financial concerns, owned and directed by shareholders, and ran
+    for their profit; or whether they might not, in some cases, be
+    owned and directed by the great industrial associations and
+    combinations that the Government is now promoting in the various
+    industries, and be run for the advantage of the industries as
+    wholes, may be a matter for consideration and possible experiment.
+    In either case, the concerns to which the Government would lend
+    its capital would, of course, have to be of undoubted financial
+    stability to be secured, it may be, by large uncalled capital,
+    or by the joint and several guarantees of a numerous membership;
+    coupled, possibly, with a charge on the assets."
+
+At first sight this proposal to differentiate the functions of banking
+is somewhat startling, and one wonders whether it could possibly
+work. On consideration, however, there seems to be nothing actually
+impracticable about the scheme. The Government would presumably take
+over all the offices and branches of the banks of the country, and
+would therein accept money on deposit and current account, making
+itself liable to pay the money out on demand or at notice, as the
+case may be, just as is done by the existing banks; it would hold
+the necessary cash reserve, and it would apparently itself invest a
+certain proportion of the money in Government securities, as the banks
+do at present. The more difficult part of the banking business, the
+advancing of money to borrowing customers, it would hand over to
+financial institutions, created for this purpose presumably out of the
+ashes of the nationalised banking business. These institutions would
+make themselves responsible for the lending side of banking, and would
+obviously, and naturally, be allowed to make a profit on this side of
+the business. In this differentiation Mr Webb's ingenuity is seen at
+its very best. He reserves for the State that part of banking which is
+purely a matter of routine, and he leaves to private enterprise that
+part of it which requiries the elasticity and judgment and quickness
+in which the average bureaucrat is most likely to fail. A certain
+amount of friction may easily arise from this differentiation. The
+interest that the State would be enabled to allow to depositors would
+clearly depend to a great extent on the interest which it would be
+able to receive from the financial institutions engaged in lending
+the money. These institutions could naturally pay the State interest
+according to the rate which they were able to charge their borrowing
+customers, leaving themselves a margin for profit and for protection
+against the risk that their business would involve. It is obvious that
+there might at times be considerable difficulty in adjusting these two
+different points of view, and anybody who knows anything about the
+length of time and argument involved in inducing officials to make up
+their minds can only fear that occasional jarring in this connecting
+link between the two sides of banking might sometimes produce effects
+which would be awkward for the industry of the country.
+
+But apart from this obvious difficulty, can we contemplate with
+equanimity the prospect of the State monopoly of the ordinary banking
+facilities as they present themselves to the man in the street,
+namely, the provision of bank branches, the use of the cheque book,
+the custody of securities and any other articles that the customer
+wishes to leave with his bank? At present the ease and quickness with
+which these routine matters of banking are carried out in England are
+developed to a point which is the envy of foreign visitors. How would
+it be if every cashier of every bank were converted by the process of
+nationalisation from the kindly, businesslike human being as we know
+him into the kind of person who ministers to our wants behind the
+counters of the Post Office? As it is, we go into our bank, to present
+a cheque in order to provide ourselves with cash for the daily
+purposes of life; the cashier looks at the signature, recognises
+the customer, hands him over the money. If that cashier became
+a Government official how long would it take him to verify the
+signature, to see whether the customer really had a balance to his
+credit, and finally furnish him with what he wanted? It is obvious
+that the change suggested by Mr Webb, though it might work, could
+only work to the detriment of the convenience of the public, and his
+hopeful view that the elimination of the profits of the shareholders
+would mean that these profits would go into the pockets of the
+community in the form of cheapened facilities for banking customers
+is an ideal largely based on the assumption, that has so often been
+proved to be incorrect, that the State can do business as well and as
+cheaply as private enterprise. It is much more likely that after a
+few years' time the public would find the business of paying in and
+getting out its money a very much more tedious and irritating process
+than it is at present, and that the expenses of the matter would
+have grown to such an extent that the taxpayer might be called upon
+annually to make good a considerable loss.
+
+
+
+
+XIII
+
+FOREIGN CAPITAL
+
+_September_, 1918
+
+The Difference between Aims and Acts--Should Foreign Capital be
+allowed in British Industry?--The Supremacy of London and National
+Trade--No Need to fear German Capital--We shall need all we can
+get--Foreign Shares in British Companies--Can and should the
+Disclosure of Foreign Ownership be forced?--The Difficulties of
+the Problem--Aliens and British Shipping--The Position of "Key"
+Industries--Freedom to Import and Export Capital our Best Policy.
+
+
+Many things that are now happening must be tickling the sardonic
+humour of the Muse of History. The majority of the civilised Powers
+are banded together to overthrow a menace to civilisation, carrying
+on a war which, it is hoped, is to produce a state of things in which
+mankind, purged of the evil spirits of militarism and aggression, is
+to start on a new order of co-operation. At the same time, while
+we are engaged in fighting under banners with these noble ideals
+inscribed on them, a large number of citizens of this country are
+airing proposals aimed at restrictions upon our intercourse with other
+nations, especially in the economic sphere. In last month's issue of
+this Journal a very interesting article, signed "Veritas," discussed
+the question as to how far it was in the power of the Allies to make
+use of the economic weapon against their enemies after the war. That
+such a question should even be mooted as an end to a war undertaken
+with these objects, shows what a number of queer cross-currents are
+at work in the minds of many of us to-day. But some people go much
+further than that, and are advocating policies by which we should
+even restrict our commercial and economic intercourse with our
+brothers-in-arms. If the clamour for Imperial preference is to have
+any practical result, it can only tend to cultivate trade within the
+British Empire, protected by an economic ring-fence at the expense
+of the trade which, before the war, we carried on with our present
+Allies. And a large number of people who, under the cover of Imperial
+preference, are agitating also for Protection for this country, would
+endeavour to make the British Isles as far as possible self-sufficient
+at the expense of their trade, not only with all their present Allies,
+but even with their brethren overseas.
+
+It is fortunately probable that the very muddle-headed reasoning which
+is producing such curious results as these, at a time when the world
+is preparing to enter on a period of closer co-operation and improved
+and extended relations between one country and another, is confined,
+in fact, to a few noisy people who possess in a high degree the
+faculty of successful self-advertisement. I do not believe that the
+country as a whole is prepared to relinquish the economic policy which
+gave it such an enormous increase in material resources during the
+past century, and has enabled it to stand forward as the industrial
+and financial champion of the Allied cause during the difficult early
+years of the war. Our rulers seem to be sitting very carefully on the
+top of the fence, waiting to see which way the cat is going to
+jump. They have made brave statements about abrogating all treaties
+involving the most-favoured nation clause and about adopting the
+principle of Imperial preference; but when their eager followers press
+them to do something besides talking about what they are going to do,
+they then have a tendency to return to the domain of common-sense and
+to point out that it is above all desirable that our economic policy
+should be in unison with that of the United States.
+
+Whatever may happen in the realm of trade and commercial policy, it
+would seem to be self-evident that with regard to capital it would be
+still more difficult and undesirable to impose restrictions than with
+regard to the entry of goods; and above all, it seems to be obvious
+that at any rate the free entry of capital into this country is a
+matter which should be specially encouraged when the war is over. At
+that difficult period we have to secure, if possible, that British
+industry shall be entirely unhampered in its endeavours to carry out
+the very puzzling operations involved by transferring its energies
+from war activities to peace production. However well the thing may
+be managed, it will be an exceedingly difficult and complicated
+operation. In certain industries, especially in shipbuilding and
+engineering, the building trade and all the allied enterprises, those
+who are responsible for their efficient management ought to be able to
+count upon a keen and widely-spread demand for their products. But in
+many industries there will necessarily be a good deal of doubt as to
+the kind of article which the consuming public at home and abroad is
+likely to want. There will be the great difficulty of sorting out the
+right kind of labour, of obtaining the necessary raw materials, and of
+getting the necessary credit and capital.
+
+That this huge problem can be solved, and solved so well that the
+country can go ahead to a great period of increased productivity and
+prosperity, I fully believe; but this can only be done if it is able
+to command the most efficient co-operation of all the various factors
+in production--if employers put their best brains and if workers put
+their best energy into the business, and if everything is done to make
+the whole machinery work with the utmost possible smoothness. One
+element in the machinery, and a highly important one, is the question
+of capital. During the war the citizens of this country have been
+trained to save and to put their money at the disposal of the
+Government with a success which could hardly have been expected
+when the war began. Whether they will continue to exercise the same
+self-denial when the war is over Is a very open question. At any rate,
+there can be no doubt that there will be a tendency among a very large
+number of people who have answered the appeal to save money for the
+war to listen with considerable indifference to any appeals that
+may be made to them to save money in order to provide industry with
+capital. All the capital that industry can get, it will certainly
+want. If, besides what it can get at home, it can also get a
+considerable amount from foreign countries, then its ability to resume
+work on a prosperous and profitable basis when the war is over will be
+very greatly helped. This would seem to be so obvious that one might
+have thought that even a Government which is believed to be flirting
+with what is called Tariff Reform would think twice before it imposed
+any restrictions on the free flow of foreign capital into British
+industry. In so far as foreigners lend to us we shall be able to
+import raw materials, to be worked up to the profit of British
+industry, in return for promises to pay--very timely convenience at a
+critical moment.
+
+Nevertheless, it would appear that obviousness of the desirability of
+foreign capital, from whatever source it comes, is by no means evident
+to those who are now in charge of the nation's destinies. At any rate,
+the Company Law Amendment Committee, which was appointed last February
+"to inquire what amendments are expedient in the Companies Acts, 1908
+to 1917, particularly having regard to circumstances arising out of
+the war and of the developments likely to arise on its conclusion,"
+seems to have thought it necessary to provide the Government with
+schemes by which alien capital could, if the Government thought
+necessary, be kept out of the country. It was a powerful and
+representative Committee, and it is very satisfactory to note that its
+own view concerning the policy to be pursued was strongly in favour of
+freedom. It points out in its Report that the question which lay in
+the forefront of its investigations was that of the employment of
+foreign capital in British industries. On the preliminary question
+of whether it was desirable that foreign capital should be freely
+attracted to this country, there was little, if any, difference of
+opinion. For this very sensible conclusion the Committee gives rather
+a curious reason. It states that the maintenance of London as the
+financial centre of the world is of the first importance for the
+well-being of the Empire, and that anything which could impede or
+restrict the free flow of capital to the United Kingdom would, in
+itself, be prejudicial to Imperial interests.
+
+Now, of course, if is entirely true that the maintenance of London
+as a financial centre is very important, but I venture to think that
+those who are most jealous concerning the prestige of London and the
+importance of its financial operations would say that it ranks only
+second to the industrial efficiency of the country as a whole and
+cannot, in fact, be long maintained unless there is that industrial
+efficiency behind it, providing a surplus out of which London may be
+able to finance the world and so, incidentally, and as a side issue,
+be to a great extent helped by foreign capital to do so. It is surely
+evident that a financial supremacy which was based merely on a jobbing
+business, gathering in capital from one nation and lending it to
+another, would be an extremely precarious and artificial structure,
+the continuance of which could not be relied on for many decades.
+Finance can only flourish healthily and wholesomely in a country which
+produces a considerable surplus of goods and services which it
+is prepared to place at the disposal of the world. Owing to the
+possession of this surplus it becomes a market in capital, and so gets
+a considerable jobbing business, but the backbone and foundation of
+its position must be, in the end, industrial activity in the widest
+sense of the word. It therefore seems that the Committee's argument
+that the free flow of capital is essential to the maintenance of
+London's finance might have been reinforced by the very much stronger
+one that it is essential to the recuperative power of British
+industry, which will need every assistance it can get in order to
+re-establish itself after the war.
+
+The Committee points out that "any legislation which would tend
+to impede or restrict the free flow of capital here by imposing
+restrictions or creating impediments ought to be jealously watched,
+lest in the endeavour to prevent what has come to be called 'peaceful
+penetration' the normal course of commercial development should be
+arrested," and it goes on to observe that at the end of the war, "if
+it should be concluded upon such terms as we hope and anticipate,"
+it is not likely that our present enemies will be in possession of
+capital looking for employment abroad. This is certainly very true. By
+the time the Germans have made the reparations, which will involve so
+much rebuilding in Belgium and in the parts of France that they
+have overrun and swept clean of industrial plant, and have in other
+respects made good the damage which their ruthless and uncivilised
+methods of warfare have inflicted, not only on their enemies, but on
+neutrals, it does not seem likely that they will have much to spare
+for capital expansion in foreign countries, especially when we
+consider how many problems of reconstruction they will themselves have
+to face at home. "To impose restrictions upon the influx of capital,"
+the Report continues, "aimed at our present enemies, with the result
+of deterring the flow of capital from (say) America, would be a policy
+highly injurious to the economic recovery and renewed prosperity of
+this country after the war. For these reasons we are of opinion
+that in all amendments of the law falling within the scope of our
+reference, the expediency of the attraction of foreign capital should
+be steadily borne in mind." The Committee thus seems to have thought
+it necessary to administer comfort to anybody who might fear that the
+unrestricted flow of capital from abroad might involve this country in
+the terrible danger of being assisted in its industrial recovery by
+capital from Germany.
+
+If there were, in fact, any possibility of this assistance being
+given, it would seem to be extremely short-sighted not to allow
+British industry to make use of it. In the matter of "peaceful
+penetration," we have ourselves in the past done perhaps as much as
+all the rest of the countries of the world put together, with the
+result that we have greatly stimulated the development of economic
+prosperity all over the world; in fact, it may be argued that the
+great progress made in the last century in man's power over the forces
+of Nature has been to a great extent due to the freedom with which we
+invested capital abroad and opened a free market to the products
+of all other countries. At a time when, owing to exceptional
+circumstances, we ourselves happen to be in need of capital, it would
+appear to be an extremely short-sighted policy to refuse to admit it,
+wherever it came from. We have excellent reason to known that, when
+capital is once invested in a foreign country, it is largely in the
+power of the inhabitants and Government of that country to control its
+working. Any foreigner, even an enemy, who set up a factory in England
+after the war would be doing just the very thing which we most of
+all want to be done, namely, setting the wheels of industry going,
+relieving the labour market from a possible glut after demobilisation,
+and helping that difficult stage of transition from war work to peace
+work.
+
+The Committee, however, considers that "at the root of the whole
+matter lies a question which is not one of Company Law amendment at
+all, but one of high political and economic policy." It does not fall
+within its province "to inquire whether the traditional policy of
+this country to admit and welcome all who seek our shores and submit
+themselves loyally to our laws ought, in the case of some and what
+aliens, to be revised"; or whether discrimination ought to be made
+between an alien of one nationality and an alien of another. "As
+regards aliens who are now our enemies, it may be that the British
+Empire may adopt the policy that a special stigma ought to be attached
+to the German, and that neither as an individual nor as a firm, nor
+as a corporation, ought he, for a time at any rate, to be admitted to
+commercial fellowship or to any fellowship with the civilised nations
+of the world." It need not be said that any attempt to apply this
+stigma in practice would be extremely difficult to carry out, would
+involve all kinds of difficulties and complications in trade and in
+finance, and that the threat of it is more likely than anything else
+to stiffen the resistance of the Germans and to force them to rely on
+their militarist leaders as their only hope of salvation. However,
+the Committee points out that recent legislation shows a desire to
+ascertain and record the extent to which aliens are active in
+commerce here, and thinks it necessary to make provision to meet the
+requirements of the Government in case our rulers should decide to
+impose the restrictions which its own common-sense shows it are so
+undesirable.
+
+If, it says, foreign capital is to be attracted here, it must be
+represented either by shares or by debentures. "The question,
+therefore, is whether restrictions ought to be imposed upon the extent
+to which the control of the company shall be allowed to reside in
+aliens, either by reason of their holding a majority of the shares, or
+of the debentures, or by reason of their obtaining a majority upon
+the Board of Directors; and, if so, how disclosure of their alien
+character is to be enforced." It goes on to point out the great
+difficulties which present themselves in the way of securing
+disclosure of nationality and ensuring that aliens shall not command
+the control. "The law of trusts," it says, "is firmly established in
+this country. If A, be the registered holder of a share, he is not
+necessarily the beneficial owner. He may be a trustee for B. To enact
+that the registered holder must be a British subject effects nothing,
+for B. may be an alien and an enemy. Suppose, however, that you enact
+that A., when his share is allotted or transferred to him, shall make
+a declaration that he holds in his own right, or that he holds in
+trust for B., and that both A. and B. are British subjects. There is
+nothing to prevent the creation of a new trust the next day, under
+which C., an alien enemy, will be the person beneficially entitled.
+Further, at the earlier date (the date of allotment or transfer) the
+facts may be that A. (a British subject) is trustee for B. (a British
+subject), but that B. (unknown to A.) is a trustee for C., an alien
+enemy. The fact that B. is trustee for C. would be purposely withheld
+from A., and A.'s declaration that he was simply trustee for B. would
+be perfectly true. To require that A. should make a declaration at
+short intervals (say once a month), or that A., B., C., and so on,
+should all make declarations would be, of course, so harassing and so
+detrimental as to be, as a matter of business, impossible. The only
+effectual way of dealing with the matter would be by a provision that
+the share might be forfeited, or might be sold and the proceeds paid
+to the owner, if an alien should be, or become beneficially entitled
+to or interested in the share. Such a provision does not in the
+general case commend itself to us as practical or desirable." Any
+endeavour to control the nationality of the Board of Directors
+produces similar difficulties. It is easy to ensure that they shall be
+all, or a majority of them, British subjects, but there is no means of
+ensuring that their actions shall not be controlled by aliens whose
+nationality is not disclosed.
+
+Having pointed out these difficulties, which seem in effect to reduce
+the whole question to the domain of farce, the Committee goes on to
+inquire whether it is desirable to legislate in the direction of
+forbidding the employment of foreign capital here in Joint Stock
+Companies, unless:--
+
+    (1) There is disclosure of the alien character of the foreign
+    owner; (2) Not more than a certain proportion of the Company's
+    shares are held by aliens; (3) The Board, or a certain proportion
+    of the Board, shall not be alien;
+
+and, further, whether it is desirable to discriminate between one
+alien and another, and to legislate in that direction in the case of
+certain aliens and not of others.
+
+In answering these questions, the Committee decided that it was
+necessary to discriminate between certain classes of companies--Class
+A being companies in general, Class B being companies owning British
+shipping, and Class C companies engaged in "key" industries. With
+regard to companies in Class A, they recommend that no restrictions
+at all be imposed, but, nevertheless, they elaborate a scheme of
+enforcing disclosure of alien ownership if that policy seems to
+the legislature to be right. This scheme, the Committee admits, is
+necessarily detailed and laborious; it puts difficulties in the way of
+investment in English securities, whether by British subject or alien.
+It would supply, no doubt, to the Board of Trade useful information
+as to the extent of foreign investment in English industries, but the
+price paid for this advantage would, in the Committee's opinion, be
+too great. If adopted, the scheme could be evaded. And, with regard to
+companies in general, the Committee's recommendations go the length
+of allowing complete freedom as to the nationality both of the
+corporators and of the Board. They would allow, for instance, American
+capitalists to come here and establish themselves as a British
+corporation in which all the corporators and all the directors were
+American, and so with every other nationality. They would make no
+discrimination between aliens of different nationality, for, if
+there is to be such discrimination, there must be the machinery of
+disclosure, involving a deterrent effect and acting prejudicially
+in the case of all investors. But, if any such discrimination were
+adopted, the Committee thinks that at any rate it should be limited to
+some short period, say, three or five years after the end of the war.
+
+If, however, the legislature should decide upon the necessity of
+disclosure of alien ownership, the Committee draws up the following
+scheme for securing it in Paragraph 15 of its Report:
+
+    15. For reasons already given, it is not possible efficiently to
+    ensure full disclosure, but the following suggestions would, in
+    the absence of deliberate and intentional evasion (which would be
+    quite possible), meet the point and in the large majority of cases
+    would disclose the extent of alien interests and control:--
+
+    (a) Every allottee of shares upon allotment and every transferee
+    upon transfer should be required to make a declaration disclosing
+    his nationality and whether he is the beneficial owner of the
+    shares, and, if not, for whom he is trustee, and what is the
+    nationality of the beneficial owner, and should undertake within
+    a limited time, after any change in the beneficial ownership, to
+    communicate the new facts to the company. In default of compliance
+    with the above, the shares should, at the option of the company,
+    either (1) be liable to sale by the company and the holder be
+    entitled only to the proceeds; or (2) be liable to forfeiture and
+    the holder be entitled to receive payment from the company of 10
+    per cent. less than the market value of the share, or if there be
+    no market value, then 10 per cent. less than the value at which
+    the share would be taken for _ad valorem_ stamp duty if it were
+    the subject of transfer. In case the company made default in
+    exercising its power, the Board of Trade should be authorised to
+    require the above sale to be made.
+
+    (b) Every director, upon coming into office, should be required to
+    make a declaration disclosing his nationality and stating whether
+    in his office he is wholly free from the control or influence of
+    any alien, and if he is not so free, stating by whose directions
+    or under whose control or influence he is to act and what is the
+    nationality of that person, and should undertake within a limited
+    time after any change in that state of things to communicate the
+    facts to the Board and procure a statement of the facts to be
+    entered in the Board minutes. Any breach of these obligations to
+    be visited with a penalty which should be severe.
+
+    (c) The company should be required to enter in the register
+    of members, against the name of every registered member, his
+    nationality as disclosed by the declaration. In the case where the
+    registered member is not the beneficial owner, the company should
+    be required to record, not in the register, but in another book,
+    the nationality of the beneficial owner as disclosed by the
+    declaration, and, as regards the latter book, to record the
+    nationality of any new beneficial owner when and as disclosed by
+    the registered member. These particulars should be required to be
+    included in the annual list under Section 26 of the Act of 1908.
+    That list would thus become not a list of members only, but a list
+    of members with the addition of beneficial owners. The company
+    should, further, be required to add to the annual list a summary
+    of the result as regards nationality showing (1) as regards
+    registered members, how many are British subjects and how many
+    shares they hold, and how many are aliens and how many shares they
+    hold, subdividing the number of the aliens and their holdings
+    under their respective nationalities; and (2) as regards the
+    registered members who are British subjects; (a) how many of them
+    are the beneficial owners and how many shares they hold, and (b)
+    as regards the rest, what are the nationalities and holdings of
+    the beneficial owners.
+
+With regard to companies owning British shipping, the Committee is
+satisfied that the total exclusion of aliens from ownership of British
+ships is not essential for national safety and is not expedient. It
+therefore considers that in these companies it will be sufficient to
+ensure that not more than 20 per cent. of the power of control should
+be in alien hands. It thinks that there should be this, limit of 20
+per cent., that not more than 20 per cent. of the share capital should
+be held by aliens, and that those shares should carry no more than 20
+per cent. of the voting power. Alternatively, it considers that the
+alien holdings should carry no vote at all, but that is a point of
+detail deserving further consideration. It follows that in this
+class there must, in the opinion of the Committee, be disclosure of
+nationality, which should be enforced in the manner detailed above,
+which, on its own admission, is not proof against deliberate evasion.
+
+With regard to companies carrying on "key" industries, a very
+complicated system is recommended. In the first place, the question
+whether a company is one to carry on a "key" industry would seldom or
+never arise at the time of its registration. The modern Memorandum of
+Association includes so many things that a "key" industry might be
+within the powers of almost any company. The question would thus arise
+when the company has got to work. And so the Committee thinks that
+the Board of Trade should be empowered at any time to make an inquiry
+whether any company is carrying on a "key" industry and, if it finds
+that it is, then the company shall, at the direction of the Board of
+Trade, require every registered member to make a declaration such as,
+under the disclosure procedure already described, he would have had
+to make if he were at the date of the notice about to receive an
+allotment or become a transferee. Further, the holders of share
+warrants to bearer would be required to surrender their warrants for
+cancellation and have their names entered in the register, and
+all subsequent allottees and transferees would be subject to the
+obligation of disclosure, as already described, and the limits of 20
+per cent. recommended in the case of merchant shipping would then be
+made applicable. Under the system of disclosure it follows that bearer
+shares are impossible, but, if disclosure be negatived, the opinion of
+the Committee is in favour of the maintenance of the bearer share.
+
+It should be mentioned that one member of the Committee produced a
+reservation strongly combating even the very moderate views expressed
+by the Committee on the subject of British shipping and "key"
+industries. It should be noted, however, that he attended very few
+meetings of the Committee. He points out that, with regard to the
+registration of ships as British when they are owned by a company
+which has alien shareholders, "it is not usually a question of
+permitting a ship which would in any case be British to be under the
+control of aliens; the question is whether, if a number of persons,
+some or all of whom are aliens, own a ship, they should be permitted
+to register it as a British ship by forming themselves into a British
+company and establishing an office in the British Dominions. If," he
+observes, "they were not allowed to do so they would still own the
+ship, but register it as a foreign ship in some other country. It
+appears that a number of ships were registered here before the war by
+companies with alien shareholders (some even with enemy shareholders).
+They were managed in this country; the profits earned by them
+were subject to our taxation; they were obliged to conform to the
+regulations of our Merchant Shipping Acts; they carried officers and
+men who were members of the Royal Naval Reserve; on the outbreak of
+war our Government was able to requisition the ships owing to their
+British registration and without regard to the nationality of the
+shareholders in the companies owning them." It appears to this
+recalcitrant member--and there is much to be said for his view--that
+all these consequences have been highly advantageous to this country.
+On the subject of "key" industries he is equally unconvinced. It
+appears to him that "the important thing is to get the industries
+established in this country, and that the question of their ownership
+is of secondary consequence."
+
+It is very satisfactory to note, in view of wild talk that has lately
+been current with regard to restrictions on our power to export
+capital, that the Committee has not a word to say for any continuance,
+after the war, of the supervision now exercised over new issues. The
+restrictions which it did recommend, while admitting their futility,
+on imports of capital into our shipping and "key" industries were
+evidently based on fears of possible war in future. The moral is that
+this war has to be brought to such an end that war and its barbarisms
+shall be "spurlos versenkt," and that humanity shall be able to
+go about its business unimpeded by all the stupid bothers and
+complications that arise from its possibility.
+
+
+
+
+XIV
+
+NATIONAL GUILDS
+
+_October_, 1918
+
+The Present Economic Structure--Its Weaknesses and Injustices--Were
+things ever better?--The Aim of State Socialism--A Rival
+Theory--The New Movement of Guild Socialism--Its Doctrines and
+Assumptions--Payment "as Human Beings"--The "Degradation" of earning
+Wages--Production irrespective of Demand--Is that the Real Meaning
+of Freedom?--The Old Evils under a New Name--A Conceivably Practical
+Scheme for some other World.
+
+
+Most people will admit that there are many glaring faults in the
+present economic structure of society. Wealth has been increased at an
+exhilarating pace during the last century, and yet the war has shown
+us that we had not nearly realised how great is the productive power
+of a nation when it is in earnest, and that the pace at which wealth
+has been multiplied may, if we make the right use of our plant and
+experience, be very greatly quickened in the next. The great increase
+in wealth that has taken place has been certainly accompanied by some
+improvement in its distribution; but it must be admitted that in this
+respect we are very far from satisfactory results, and that a system
+which produces bloated luxury plus extreme boredom at one end of the
+scale and destitution and despair at the other, can hardly be called
+the last word, or even the first, in civilisation. The career has been
+opened, more or less, to talent. But the handicap is so uneven and
+capricious that only exceptional talent or exceptional luck can fight
+its way from the bottom to the top, the process by which it does so
+is not always altogether edifying, and the result, when the thing
+has been done, is not always entirely satisfactory either to the
+victorious individual or to the community at whose expense he has won
+his spoils. The prize of victory is wealth and buying power, and the
+means to victory is, in the main, providing an ignorant and gullible
+public with some article or service that it wants or can be persuaded
+to believe that it wants. The kind of person that is most successful
+in winning this kind of victory is not always one who is likely to
+make the best possible use of the enormous power that wealth now puts
+into the hands of its owner.
+
+Those who are fond of amusing themselves by looking back, through
+rose-coloured spectacles, at more or less imaginary pictures of the good
+old mediaeval times, can make out a fair case for the argument that in
+those days the spoils were won by a better kind of conqueror, who was
+likely to make a better use of his victory. In times when man was
+chiefly a predatory animal and the way to success in life was by
+military prowess, readiness in attack and a downright stroke in defence,
+it is easy to fancy that the folk who came to the top of the world, or
+maintained a position there, were necessarily possessed of courage and
+bodily vigour and of all the rough virtues associated with the ideal of
+chivalry. Perhaps it was so in some cases, and there is certainly
+something more romantic about the career of a man who fought his way to
+success than about that of the fortunate speculator in production or
+trade, to say nothing of the lucky gambler who can in these times found
+a fortune on market tips in the Kaffir circus or the industrial "penny
+bazaar," Nevertheless, it is likely enough that even in the best of the
+mediaeval days success was not only to the strong and brave, but also
+went often to the cunning, fawning schemer who pulled the brawny leg of
+the burly fighting-man. However that may be, there can be no doubt that
+now the prizes of fortune often go to those who cannot be trusted to
+make good use of them or even to enjoy them, that Mr Wells's great
+satire on our financial upstarts--"Tono-Bungay"--has plenty of truth in
+it, and that our present system, by its shocking waste of millions of
+good brains that never get a chance of development, is an economic
+blunder as well as an injustice that calls for remedy.
+
+This being so, it is the business of all who want to see things made
+better to examine with most respectful attention any schemes that are
+put forward for the reconstruction of society, however strongly we may
+feel that real improvement is only to be got, not by reconstructing
+society but by improving the bodily and mental health and efficiency
+of its members. The advocates of Socialism have had a patient and
+interested hearing for many decades, except among those to whom
+anything new is necessarily anathema. There was something attractive
+in the notion that if all men worked for the good of the community and
+not for their own individual profit, the work of the world might
+be done much better, because all the waste of competition and
+advertisement would be cut out, machinery would be given its full
+chance because it would be making work easier instead of causing
+unemployment, and a greater output, more evenly distributed, would
+enable the nation to breed a race, each generation of which would
+come nearer to perfection. So splendid if true; but one always felt
+misgivings as to whether the general standard of work might not
+deteriorate instead of improve if the stimulus of individual gain were
+withdrawn; and that the net result might probably be a diminished
+output consumed by a discontented people, less happy under a possibly
+stupid and short-sighted bureaucracy, than it is now when the chances
+of life at least give it the glorious uncertainty of cricket. Since
+the war our experiences of official control, even when working on
+a nation trained in individual initiative, have increased those
+misgivings manifold; and hundreds of people who were Socialistically
+inclined in 1914 will now say that any system which handed over the
+regulation of production and distribution to the State could end only
+in disaster, unless we could first build up a new machinery of State
+and a new people for it to work on.
+
+Partly, perhaps, owing to this discredit into which the doctrines of
+State Socialism have lately fallen, increasing attention has been
+given to a body of theory that was already active before the war and
+advocates a system of what it calls Guild Socialism, under which
+industry is to be worked by National Guilds, embracing all the
+workers, both by brain and by hand, in the various kinds of
+production. Its advocates are, as far as I have been able to study
+their pronouncements, decidedly hostile to State Socialism and
+needlessly rode to some of its most prominent preachers, such as Mr
+and Mrs Webb, who at least merit the respect due to those who have
+given lives of work to supporting a cause which they believe to be
+sound and in the best interests of mankind. But in spite of their
+chronic and sometimes ill-mannered facetiousness at the expense of
+State Socialism and its advocates, the Guild Socialists, as we shall
+see, have to rely on State control for very important wheels in
+their machinery and leave gaps in it which, as far as disinterested
+observers can see, can only be filled by still further help from the
+discredited State. It is no disparagement of the efforts of these
+writers and thinkers to say that their sketch of the system that they
+hope to see built up is somewhat hazy. That is inevitable. They are
+groping towards a new social and economic order which, in their hope
+and belief, would be an improvement. To expect them to work it out in
+every detail would be to ask them to commit an absurdity. The thing
+would have to grow as it developed, and we can only ask them to show
+us a main outline. This has been done in many publications, among
+which I have studied, with as much care as these distracting times
+allow, "Self-Government in Industry," by G.D.H. Cole, "National
+Guilds," by A.R. Orage (so described on the back of the book, but the
+title-page says that it is by S.G. Hobson, edited by A.R. Orage), and
+"The Meaning of National Guilds," by C.E. Bechhofer and M.B. Reckitt.
+
+These authorities seem to agree in thinking (1) that the capitalist is
+a thief, (2) that the manual worker is a wage slave, (3) that freedom
+(in the sense of being able to work as he likes) is every man's
+rightful birthright, and (4) that this freedom is to be achieved
+through the establishment of National Guilds. As to (1) Messrs
+Bechhofer and Reckitt speak on page 99 of their book of the "felony of
+Capitalism" as a matter that need not be argued about. Mr Cole makes
+the same assumption by observing on page 235 of the work already
+mentioned that "to do good work for a capitalist employer is merely,
+if we view the situation rationally, to help a thief to steal more
+successfully." Well, this view of capital and the capitalist may be
+true. Mr Cole is a highly educated and gifted gentleman, and a Fellow
+of Magdalen. He may have expounded and proved this point in some work
+that I have not been fortunate enough to read. But as the abolition of
+the capitalist is one of the chief aims put forward by these writers
+it seems a pity that they should thus first assert that he is a thief
+to be stamped out, instead of explaining the matter to old-fashioned
+folk who believe that capitalists are, in the main, the people (or
+representatives of the people) who have equipped industry, and
+enormously multiplied its efficiency and output, and so have enabled
+the greater part of the existing population of this country (and most
+others) to come into being. But to the Guild Socialists the identity
+of robbery with capitalism seems to be so self-evident that it needs
+no proof. Next, as to the wage system. They seem to think that to earn
+a wage is slavery and degradation, but to receive pay is freedom. With
+the best will in the world I have tried to see where this immense
+difference between the use of two words, which seem to me to mean much
+the same thing, comes in in their view, but I have not succeeded.
+Perhaps you will be able to if I give you Mr Cole's own words.
+
+
+On page 154 of the book cited, he says that the wage system is "the
+root of the whole tyranny of capitalism," and then continues:
+
+"There are four distinguishing marks of the wage system upon which
+National Guildsmen are accustomed to fix their attention. Let me set
+them out clearly in the simplest terms,
+
+"1. The wage system abstracts 'labour' from the labourer, so that the
+one can be bought and sold apart from the other.
+
+"2. Consequently, wages are paid to the wage worker only when it is
+profitable to the capitalist to employ his labour.
+
+"3. The wage worker, in return for his wage, surrenders all control
+over the organisation of production.
+
+"4. The wage worker, in return for his wage, surrenders all claim upon
+the product of his labour.
+
+"If the wage system is to be abolished, all these four marks of
+degraded status must be removed. National Guilds, then, must assure to
+the worker, at least, the following things:--
+
+"1. Recognition and payment as a human being, and not merely as a
+mortal tenement of so much labour power for which an efficient demand
+exists.
+
+"2. Consequently, payment in employment and in unemployment, in
+sickness and in health alike.
+
+"3. Control of the organisation of production in co-operation with his
+fellows.
+
+"4. A claim upon the product of his work, also exercised in
+co-operation with his fellows."
+
+Now, looking with a most dispassionate eye and an eager desire to find
+out what it is that Labour and its spokesmen are grouping after, can
+one find in these "marks of degraded status" any serious evil, or
+anything that is capable of remedy under any conceivable economic
+system? In all of them the wage-earner is on exactly the same footing
+as the salary-earner or the professional piece-worker. The labour of
+the manager of the works can also be abstracted from the manager, and
+can be bought and sold apart from him. One would have thought
+that this fact is rather in favour of the manager and of the
+wage-earner--or would Mr. Cole prefer that the latter should be bought
+and sold himself? The salary-earner and the professional are only
+employed when somebody wants them. The manager's term of employment is
+longer, but the professional pieceworker, such as I am when I write
+this article, has usually no contracted term, and is only paid for
+actual work done. I also have no control over the organisation of the
+production of _Sperling's Journal_ or any other paper for which I do
+piecework. I am very glad that it is so, for organising production is
+a very difficult and complicated and risky business, and from all
+the risks of it the wage-earner is saved. The salary-earner or the
+professional, when once his product is turned out and paid for, also
+surrenders all claim upon the product. What else could any reasonable
+wage-earner or professional expect or desire? The brickmaker or the
+doctor cannot, after being paid for making bricks or mending a broken
+leg, expect still to have the bricks or the leg for his very own. And
+how much use would they be to him if he could? Unless he were to be
+allowed to sell them again to somebody else, which, after being once
+paid for them, would merely be absurd.
+
+But when we come to the remedies that Mr. Cole suggests for these
+"marks of degraded status," we find in the forefront of them that the
+worker must be secured "payment as a human being, and not merely as a
+mortal tenement of so much labour power for which an efficient demand
+exists." This, especially to an incurably lazy person like myself, is
+an extremely attractive programme. To be paid, and paid well, merely
+in return for having "taken the trouble to be born," is an ideal
+towards which my happiest dreams have ever struggled in vain. But
+would it work as a practical scheme? Speaking for myself, I can
+guarantee that under such circumstances I should potter about with
+many activities that would amuse my delicious leisure, but I doubt
+whether any of them would be regarded by society as a fit return for
+the pleasant livelihood that it gave me. And human society can only be
+supplied with the things that it needs if its members turn out, not
+what it amuses them to make or produce, but what other people want.
+And It is here that the National Guildsmen's idea of freedom seems, in
+my humble judgment, to be entirely unsocial As things are, nobody can
+make money unless he produces what somebody wants and will pay for.
+Even the capitalist, if he puts his capital into producing an article
+for which there is no demand, will get no return on it. In other
+words, we can only earn economic freedom by doing something that our
+fellows want us to do, and so co-operating in the work of supplying
+man's need. (That many of man's needs are stupid and vulgar is most
+true, but the only way to cure that is to teach him to want something
+better.) The Guildsmen seem to think that this necessity to make or do
+something that is wanted implies slavery, and ought to be abolished.
+They are fond of quoting Rousseau's remark that "man is born free and
+is everywhere in chains." But is man born free to work as and on what
+he likes? In a state of Nature man is born--in most climates--under
+the sternest necessity to work hard to catch or grow his food, to make
+himself clothes and build himself shelter. And If he ignores this
+necessity the penalty is death. The notion that man is born with a
+"right to live" is totally belied by the facts of natural existence.
+It is encouraged by humanitarian sentiment which, rightly makes
+society responsible for the subsistence of all those born under its
+wing; but it is not part of the scheme of the universe.
+
+Such are a few of the weaknesses involved by the theoretical basis
+on which Guild Socialism is built. When we come to its practical
+application we find the creed still more unsatisfactory. Even if
+we grant--an enormous and quite unjustified assumption--that the
+Guildsman, if he is to be paid merely for being alive, will work hard
+enough to pay the community for paying him, we have then to ask how
+and whether he will achieve greater freedom under the Guilds than
+he has now. Now, freedom is only to be got by work of a kind that
+somebody wants, and wants enough to pay for it. And so the consumer
+ultimately decides what work shall be done. The Guildsman says that
+the producer ought to decide what he shall produce and what is to be
+done with it when he has produced it. "Under Guild Socialism," says
+Mr Cole,[1] "as under Syndicalism, the State stands apart from
+production, and the worker is placed in control." Very well, but what
+one wants to know is what will happen if the Guilds choose to produce
+things that nobody wants. Will they and their members be paid all the
+same? Presumably, since they are to be paid "as human beings" and not
+because there is a demand for their work. But if so, what will happen
+to the Guildsman as consumer? There will be no freedom about his
+choice of things that he would like to enjoy. And what about admission
+to membership of a Guild, the price at which the Guilds will exchange
+products one with another, and the provision of capital? The nearest
+approach to an answer to these questions is given by Messrs Bechhofer
+and Reckitt in Chapter VIII, of the "Meaning of National Guilds." This
+chapter describes "National Guilds in Being." It tells us that "each
+man will be free to choose his Guild," which sounds very pleasant,
+but is completely spoilt by the end of the sentence, which says "and
+actual entrance will depend on the demand for labour." It sounds just
+like a capitalistic factory. And then--"Labour in dirty industries,
+sewaging, etc.--will probably be in the main of a temporary character,
+and will be undertaken by those who are for the time unable to obtain
+an entry elsewhere." Most sensible, but where is the freedom? The
+Guildsman will not be able to do the work that he wants to do unless
+there is a demand for that kind of labour, and in the meantime,
+just like the unemployed in the days of darkness, he will be set to
+cleaning the streets and flushing the drains. Messrs. Bechhofer and
+Reckitt are, in fact, so sensible and practical that they abandon
+altogether the freedom of the producer to produce what he likes.
+"Indeed," they write, "a query often brought to confound National
+Guildsmen is this: What would happen to a National Guild that began to
+work wholly according to its own pleasure without regard to the other
+Guilds and the rest of the community? We may reply, first, that
+this spirit would be as unnatural among the Guilds as it is natural
+nowadays with the present anti-communal, capitalist system of
+industry" (but under the present system any one who worked without
+regard to the rest of the community would very soon be in the hands of
+a Receiver); "secondly, if it did arise in any Guild, this contempt
+for the rest of the community would be met by the concerted action
+of the other Guilds. The dependence of any individual Guild upon the
+others would be necessarily so great that a recalcitrant Guild would
+find itself at once in a most difficult position, and a Guild that
+pressed forward demands that were generally felt by the rest of the
+community to be impossible or unreasonable would soon be brought back
+into line again."
+
+[Footnote 1: "The Meaning of Industrial Freedom," page 39.]
+
+Of course; but if so, where is the Guildsman's alleged freedom? Every
+Guild and every Guildsman would have to adapt himself to the wants of
+the community, just as all of us who work for our living have to do
+now. He would be no more free than I am, and I am no more free than
+the person who is sometimes described as a "wage slave." The Guildsman
+might be happier in the feeling that he worked for a Guild rather than
+a capitalist employer, but this is by no means certain. The writers
+just quoted show with much frankness and good sense that there would
+be plenty of opening for friction, suspicion, discontent and strikes.
+"A Guild," they say, "that thought itself ill-used by its fellows
+would be able to signify its displeasure by the threat of a strike."
+The officials of the Guild are to be chosen by the "men best qualified
+to judge" of their ability, whoever they may be, and every such choice
+would be ratified by the workers who are to be affected by it. "The
+Guild would build up in this way a pyramid of officers, each chosen by
+the grade immediately below that which he is to occupy," Did not the
+Bolsheviks try something like this system, with results that were not
+conducive to efficient production? And to meet the danger that the
+officials as a whole might combine "in a huge conspiracy against
+the rank and file," Messrs Bechhofer and Reckitt can only suggest
+vigilance committees within the Guilds. In a word, Guild Socialism
+seems to be a system that might possibly be worked by a set of ideally
+perfect beings; but as folk are in this workaday world one can only
+doubt whether it would be conducive either to freedom, efficiency or a
+pleasant life for those who lived under it.
+
+
+
+
+XV
+
+POST-WAR FINANCE
+
+_November_, 1918
+
+Taxation after the War--Mr. Hoare's Scheme described and analysed--The
+Position of the Rentier--Estimates of the Post-War Debt--The
+Compulsory Loan Proposal--What Advantages has it over a Levy on
+Capital?--The Argument from Social Justice--Questions still to be
+answered--The Choice between a Levy and Stiff Taxation--Are we still
+a Creditor Nation?--Our Debt not a Hopeless Problem--Suggestions for
+solving it.
+
+
+Under this heading two very interesting articles were contributed to
+the October issue of _Sperling's Journal_ by Mr Alfred Hoare and an
+"Ex-M.P.," and the subject is clearly one to which, now that the end
+of the war has been brought appreciably nearer by the feats of the
+Allied armies, too much thought and discussion can hardly be given.
+How are we going to face the problem that has been built up for us by
+the bad finance of the war, the low proportion of its cost that has
+been paid for out of taxation, and the consequent huge debt with
+which--it is already over L7000 millions gross--the State will be
+saddled? Mr. Hoare answered the question by proposing a scheme of
+taxation of what he called Rente, by which he meant all forms of
+"unearned income"--"rentals from freehold and leasehold property,
+interest upon loans whether public or private, and dividends on joint
+stock companies or sleeping partnerships." He added that in his
+opinion earned income above a certain figure might reasonably be added
+to this category on the ground that it has, in some instances, very
+much the same characteristics as unearned; the income of a "successful
+professional man or clown or jockey or opera star" being due to
+peculiar qualities; "and it would be no great hardship if earned
+income above, say, a thousand a year for a married couple, with an
+additional three hundred for every child under twenty-five years of
+age were regarded as unearned, and taxed accordingly." Income was
+thus the basis of Mr Hoare's scheme. Rente he regards as an agency
+regulating distribution, and requiring to be constantly checked. "It
+is," he says, "an elementary principle of social health, and economic
+prosperity that the share of the national wealth enjoyed by the
+Rentier, by the owner, that is, of unearned income, should not be
+excessive," Most people who can follow his admirable example and take
+a detached and unbiassed view of questions which affect their pocket
+so closely, will agree with him In this opinion. The Rentier lives on
+the proceeds of work done in the past by him or by some other person;
+and it is not good for our economic health that he should grow too
+fat at the expense of those who are working now, lest the latter be
+discouraged and work with less spirit.
+
+At the same time we have to remember that the work done in the past by
+the Rentier or those whom he represents, has given us the plant and
+equipment (in the widest sense of the phrase) with which we are now
+working. If, therefore, we penalise the Rentier too severely we shall
+discourage his future creation; the present race of earners, if they
+see that those who are living on past savings are shorn too close
+will be deterred from saving, will put their surplus earnings into
+extravagant spending instead of into plant and equipment, and the
+economic future of the nation, and of the world, will be _pro tanto_
+less hopeful. If once our fiscal system is going to propagate the
+view--already so rampant among the happy-go-lucky citizens of this
+unthrifty people--that the worst thing to do with money is to save it
+there will be bad times ahead for our industry and commerce, which can
+only get the capital that it needs if somebody saves it. Mr Hoare's
+elaborate calculations led him to conclusions involving a tax of
+11s. 6d. in the pound on unearned income. This figure is, I hope,
+needlessly high. To arrive at it he assumed that peace might be
+concluded towards the end of 1919, and that when peace conditions are
+fully re-established--which will take, he thinks, three years, the
+National Debt will amount to L10,000 millions, involving annual
+interest of L500 millions, which, added to the total Rente of the
+country in 1913 (which he made out to be L520 millions), will make a
+total Rente in 1923 of L1020 millions. His view is that the burden of
+the National Debt should be thrown by means of the income tax upon the
+national Rente, not taxing it out of existence, but by such a scale of
+taxation as would reduce the net Rente of the country to approximately
+the level at which it stood before the war.
+
+There is good reason to hope that Mr Hoare's figures will not be
+reached. He took L10,000 millions merely as a round sum. Mr Bonar Law,
+it will be remembered, worked out our net debt on March 31st next at
+L6856 millions, taking credit for half the estimated amount of loans
+to Allies as a good asset. If we prefer as sounder bookkeeping to
+write off the whole of our loans to Allies for the time being and
+to apply anything that we may hereafter receive on that account to
+Sinking Fund, the debt, on the Chancellor's figures, will amount on
+March 31st (if the war goes on till that date) to L7672 millions. Even
+if the war went on for six months more it ought not to bring the debt
+up to more than L9000 millions at the outside. It is quite true, as
+Mr Hoare says, that the return to peace conditions will be a gradual
+process, and that expenditure will not come back to a peace basis all
+at once. Demobilisation and other matters which were left, by our
+cheery Chancellor, out of the airy after-war balance-sheet that he so
+light-heartedly constructed, may cost L1000 millions or more before
+we have done with them. But against them we can set a string of
+recoverable assets which, in the Chancellor's hands, footed up a total
+of L1172 millions--balances in agents' hands, due debts (apart from
+loans to Allies), land, securities, ships, buildings, stores In
+Munitions Department, arrears of taxation, and so on. With his 11s.
+6d. in the pound on unearned and 6s. in the pound on earned incomes,
+Mr Hoare expects a revenue of L620 millions, "or enough to provide for
+the interest of the debt with a 1 per cent. Sinking Fund, and
+leave L20 millions towards the Supply Services." But Mr Bonar Law
+anticipated a total peace Budget (if the war ended by March 31st next)
+of L650 millions. This was probably too low, but we may at least hope
+that Mr Hoare has gone rather further than was necessary to be on the
+safe side.
+
+In the other article on the subject of post-war debt contributed to
+the last number of this Journal, an "Ex-M.P." plumped for a somewhat
+novel variety of the Levy on Capital, in the shape of a Compulsory
+Loan, bearing no interest and repayable in 100 years. Each individual
+citizen to be made to subscribe to the extent of 20 per cent. of
+his possessions. Ten per cent. of the amount due to be paid on
+application, 10 per cent. six months after allotment, and 80 per cent.
+on January 1st of the following year. When desired, the Government to
+advance at 5 per cent. the money necessary for the payment subsequent
+to allotment, full repayment of such advances to be made within
+eight years. A Sinking Fund to be established to redeem the loan at
+maturity. But is there any real advantage in this scheme over the Levy
+on Capital, from which it only differs by the receipt by the payer of
+a promise to repay in 100 years' time? The approximate value of
+L1000 nominal of the Compulsory Loan stock would be, according to
+"Ex-M.P.'s" calculation, in the year of issue L7 12s., money being
+worth 5 per cent. and assuming that rate to be current during the
+remainder of the term. The claim that there is no confiscation,
+because "a perfectly good security is given for the money received,"
+would seem rather futile to those who paid L1000 and received a
+security, the present value of which might be below L10. They might
+very likely think that outright confiscation (since confiscation
+originally means nothing but "putting into the Treasury") is really a
+simpler way of dealing with the problem. "Ex-M.P.," however, estimates
+that the immediate redemption of L2800 millions of debt (which he,
+rather modestly, expects to be the result of his 20 per cent. levy)
+would enable the balance of the War Debt to be converted into 3-1/2
+per cent. stock. This may be true, but if so it is equally true if a
+similar or larger amount of debt is cancelled by means of an outright
+Levy on Capital.
+
+The merits and demerits of a Levy on Capital have already been dealt
+with in the pages of this Journal "Ex-M.P.," however, brought forward
+a slightly novel form of argument in its favour. He pointed out that
+the money constituting the great increase in debt that has taken place
+during the war will have been, in the main, contributed by people who
+have worked at home under the protection of the Army and Navy, while
+the soldiers and sailors have been prevented by the duty which sent
+them out to risk their lives from subscribing a proportionate share to
+the National Debt. Hence "a class that deserves most of the State will
+find itself indebted to a class which--if it does not deserve least of
+the State--has, at any rate, turned a national emergency to personal
+profit." This is a strong argument, which, has been used frequently
+in the course of the war in the pages of the _Economist_, against
+borrowing for war purposes to the large extent to which our timid
+rulers have adopted the policy. "To be really just," the writer
+continued, "the process of taxation ... must be applied with greatest
+force to those who have accumulated their money since the outbreak of
+war, and only to a less degree to those whose fortunes have not been
+built upon their country's necessity. The difficulty of separating
+these two classes of wealth is great, and must, in the writer's
+opinion, be effected by separate legislation--legislation which might
+justly be based upon the increase in post-1913 incomes, a record of
+which should now be in preparation at Somerset House." Everyone will
+agree that everything possible should be done to take the burden of
+the war debt off the shoulders of those who have fought for us; but it
+is equally clear that now that the mischief of this huge debt has been
+done, it will be exceedingly difficult to repair it by any ingenuities
+of this kind. For instance, if the kind of taxation--in the shape of
+a Compulsory Loan--proposed by "Ex-M.P." were enforced, how can we be
+sure that it would not take a large slice off capital, the next heir
+to which is a soldier or a sailor? Bad finance is so much easier to
+perpetrate than to remedy that one is almost certain to come across
+such objections as this to any scheme for making the war profiteers
+"cough up" some of their gains.
+
+Moreover, we have to remember that by no means the whole of the
+war debt represents the gains of those who "have turned a national
+emergency to personal profit." Some people whose incomes have been
+actually decreased by the war, especially when currency depreciation
+is taken into account, have, in response to the appeals of the
+War Savings Committee, saved more than they ever saved before by
+patriotically stinting themselves. And even the savers who have saved
+out of war profits were so far more patriotic than the war profiteers
+who did not save but squandered. In all the discussion concerning
+the Levy on Capital I have not seen any answer (even in Mr Pethick
+Lawrence's very persuasive little book in its favour) to the three
+great objections to it (1) that it lets off the squanderer and
+penalises the saver; (2) that the difficulty, trouble and expense
+involved by the necessary valuation, and the iniquities and frauds
+that are almost certain to arise out of it, will be enormous; and
+(3) that its economic effect may be very serious in discouraging
+accumulation. "Why should any one save," the unthrifty soul will most
+naturally ask, "if his savings are liable to have a slice cut out of
+them by a levy at any time?" The advocates of the Levy, and "Ex-M.P."
+in his advocacy of a Compulsory Loan for repayment of debt; assume
+that it can be done once and for all and never again. "Take one-fifth
+of a man's savings away as an emergency measure not to be repeated,
+and he will at once endeavour to save it back again." But how will you
+persuade him that it is an emergency measure not to be repeated? How
+can you be sure that it is so? I have heard a very distinguished
+Socialist, discussing in private the beauties of the Levy on Capital,
+point out that it is the sort of thing which, when once the ice has
+been broken, can be done again so easily. From the Socialist point of
+view the Levy on Capital is, of course, a simple means of getting, by
+repetitions of it at regular intervals, all the means of production
+into the hands of the State; but would the State make a good use of
+them?
+
+Another assumption about the Levy on Capital that seems to me to be
+the merest will o' the wisp is the delusion that the whole saving that
+it would entail by reducing the debt charge would necessarily and
+certainly go to the relief of income tax. On this assumption Mr
+Pethick Lawrence bases his most persuasive appeal to the smaller
+income-tax payer, by showing that he would be better off after a Levy
+on Capital than before it, thanks to the reduction in income tax,
+which is assumed as axiomatically arising in its train. But is
+this certain or even likely? Is it not much more probable that our
+Government, finding its post-war Budget greatly lightened by a Levy on
+Capital or a Compulsory Loan to redeem debt, will think itself free to
+indulge in extravagance, maintaining a considerable part of the war
+income tax and wasting it on rash experiments? All these weaknesses,
+which appear to be inherent alike in the Levy on Capital or in the
+scheme which gilds the pill by calling it a Compulsory Loan, seem to
+be ignored or neglected (perhaps because they are unanswerable) by
+their advocates. On the other hand, there are certain psychological
+arguments on the other side. If the well-to-do, who would have to pay
+the Levy or subscribe to the Compulsory Loan, would prefer that system
+to a high income tax, there is no more to be said. A tax that is
+popular with the payer, as compared with other modes of shearing
+his fleece, needs no further recommendation. But, in view of the
+probability of the experiment, once tried, being shortly and
+frequently repeated, I Very much doubt whether this is so; as far as I
+have been able by personal inquiry to test opinion on the point I have
+found it almost unanimously adverse among those whom the Levy would
+most seriously affect. If, as is much more likely, the imposition of
+a Levy created better feeling among the working classes and the
+returning soldiers and tended to more harmonious co-operation in
+after-war tasks of reconstruction, it might be worth while to face its
+evils and its dangers. But here again it is quite probable that if the
+burden of war debt were clearly and palpably put on the shoulders best
+able to bear it, that is, on those who are lifted by the gifts
+of fortune--either in inherited money or unusual brainpower or
+faculties--by an equitably graded income tax, the effect might be just
+as good on the minds of those who suspect that the rich have battened
+throughout the war on exploitation of the poor.
+
+This much at least seems to be agreed by most reasonable people about
+the debt charge--that it will have to be raised, either by a Levy on
+Capital or by income tax or some other form of direct taxation, from
+those who are blessed with a margin. We are not likely to repeat our
+ancestors' mistake, after the Napoleonic War, of throwing the whole
+burden on to the general consumer by indirect taxation of necessaries
+and of articles of general consumption. Even Tariff "Reformers" say
+little about the revenue that their fiscal schemes would bring in. And
+with good reason. For in so far as they secured Protection they would
+bring in no revenue; we cannot at once keep out foreign goods and tax
+them; and any revenue that they brought in would be most expensively
+raised, because a large part of the extra price paid by the consumer
+would go not to the State but into the pockets of the home producer.
+Nor is it likely that any of the many schemes--of which Mr Stilwell's
+"Great Plan, How to Pay for the War," is a particularly bold
+example--for paying off debt by a huge issue of inconvertible
+currency, will achieve any practical result. Not only would they
+defraud the debt-holder by paying him off in currency enormously
+depreciated by the multiplication of it that would be involved; but
+they would also, by that depreciation, throw the burden of the debt
+on the shoulders of the general consumer through a further disastrous
+rise in prices, and so would accentuate the bitterness and discontent
+already rife owing to the war-time dearness and all the suspicions of
+profiteering and exploitation that it has engendered.
+
+After all, this problem of the war debt, in so far as it is held at
+home, is not one that ought to terrify us if we look at it steadily.
+People talk and write as if when the war is over the business of
+paying for it will begin. That is not really so. The war has been paid
+for as it went on, and, except in so far as it has been financed by
+borrowing abroad, it has been paid for by us as a nation. Whatever we
+have used for the war we have paid for as it went on, partly with
+the help of loans from America and from other countries--Argentina,
+Holland, Switzerland, etc.--that have lent us money. These loans
+amount, as far as they can be traced from the official figures,
+to about L1300 millions. Against them we can set our loans to our
+Dominions, over L200 millions (a perfectly good asset), and our loans
+to our Allies, perhaps L1500 millions, which the Chancellor proposes
+to write down by 50 per cent., and might perhaps treat still more
+drastically. To meet this foreign debt we shall have to turn out so
+much stuff--goods and services of all kinds--for sale abroad to meet
+the interest and repayment. We have further impoverished ourselves by
+selling our foreign securities abroad No figure has been published
+giving any clue to the amount of these sales, and we may perhaps guess
+them at L1000 millions. If the pre-war estimates of our overseas
+investments at L4000 millions were anywhere near the mark. It thus
+appears that we shall end the war still a great creditor nation.
+
+In so far as the debt was raised at home, the war was paid for by
+those who bought the securities offered, and we have now to pay them
+interest and set about repaying them the capital. This process
+will not diminish the national wealth, but will only affect its
+distribution. It will not diminish the amount of available capital,
+but may even rather increase it by gathering into the hands of the
+debt-holders--who are ex-hypothesi folk with an inclination for
+saving--money that might, if left in the hands of those from whom it
+is collected, have been squandered. The payment of the debt charge
+merely means that those who came forward with their money when they
+were asked to subscribe to war loans, have, according to the extent
+of the effort that they then made, a set-off against the subsequent
+taxation involved by the war debt. It would have been a much simpler
+and more businesslike proceeding to have taken, instead of borrowing,
+a much larger proportion of the war's cost during the war; but it is
+too late now to rub in this platitude which is now pretty generally
+admitted. Mr Hoare showed in last month's Journal that the creation
+of the War Debt has caused a huge addition to what he has called
+Rente--the gross income of the propertied classes; and there is much
+logic in his contention that this income is the source from which the
+debt charge should be met. At the same time both justice and economic
+expediency seem to demand that his wider interpretation of Rente, to
+make it include the earnings of those whose special qualifications
+(or, we may add, special luck) put them in a position to earn more
+easily than the struggling majority, should be applied to taxation
+involved by the debt charge.
+
+How, then, shall we deal with the debt? In the first place we want
+a good Sinking Fund--1 per cent. at least--and all realisations of
+assets in the shape of loans repaid, ships, etc., sold, should be
+used for reduction of our foreign debt. For the home charge we want a
+special form of income tax that will fall as lightly and indirectly
+as possible on industry; that is, that it should be imposed on the
+individual taxpayer direct. So that what we want is an extended,
+reformed and better graduated form of the super-tax brought down so
+low that every one who is not merely rich but comfortable should pay
+his share, For example, any single man or woman with any excess over
+L500 a year of unearned income, or over L800 a year of earned income
+might well pay super-tax on that excess. The exemption limit might
+well be raised by 50 per cent. for married couples (if their joint
+incomes are still to be counted as one), and by L100 a year for each
+child between the age of five and twenty-five. But all these figures
+are mere suggestions, and the details of the scheme would have to be
+worked out by Inland Revenue officials, whose experience and knowledge
+of the practical working of such matters qualifies them for the task.
+The broad principle is a special tax for the debt charge to be raised
+direct from individual incomes with skilful differentiation, according
+to the circumstances of the taxpayer, in the matter of the number
+of his dependants, and also according to the source of the income,
+whether it is being earned by exertions which illness might terminate
+or received from invested funds, and therefore beyond the reach of the
+"slings and arrows of outrageous fortune." That portion of the tax
+that is required for Sinking Fund might be made payable, at the option
+of the taxpayer, in Government securities at prices giving some
+advantage to the holder. This form of special debt-charge super-tax
+would enable the ordinary income tax to be reduced considerably at
+once. Mr Edward Lees, secretary to the Manchester and County Bank, has
+put forward a scheme by which taxpayers can buy in advance immunity
+for so many years from so much annual income tax. If this suggestion
+could be worked it might provide a means of quickening the debt's
+repayment, though it looks rather like exchanging one form of debt for
+another. But, in any case, it is urgent that the long promised reform
+of income tax should be set in hand at once, so that it may be purged
+of its present inequities and anomalies and set to work in peace to
+redeem debt on a new and more scientific basis.
+
+
+
+
+XVI
+
+THE CURRENCY REPORT _December_, 1918
+
+Currency Policy during the War--Its Disastrous Mediaevalism--The
+Report of the Cunliffe Committee--A Blast of Common Sense--The
+Condemnation of our War Finance--Inflation and the Rise in Prices--The
+Figures of the Present Position--The Break in the Old Relation between
+Legal Tender and Gold--How to restore it--Stop Borrowing and reduce
+the Floating Debt--Return to the Old System--The Committee's Sane
+Conservatism--A Sound Currency vital to National Recovery.
+
+
+Among the many features of the late war (how comfortable it is to talk
+about the "late war"!) that seem likely to astonish the historian
+of the future, perhaps the thing that will surprise him most is the
+behaviour of the warring Governments in currency matters. It is
+surely, a most extraordinary thing after all that has been thought,
+said and written about monetary policy since money was invented that
+as soon as a great economic effort was necessary on the part of the
+leading civilised Powers, they should all have fallen back on the old
+mediaeval dodge of depreciating the currency, varied to suit modern
+needs, in order to pay part of their war bill, and should have
+continued this policy throughout the course of the war, in spite of
+the obvious results that it was producing in the shape of unrest,
+suspicion and bitterness on the part of the working classes, who very
+naturally thought that the consequent rise in prices was due to the
+machinations of unscrupulous capitalists who were exploiting them. It
+is even possible that the historian of a century hence may ascribe to
+this cause the beginning of the end of our present economic system,
+based on the private ownership of capital, for it is very evident that
+we have not yet seen the end of the harvest that this bitterness and
+discontent are producing.
+
+A less important but still very objectionable consequence of the flood
+of currency and credit that the Government has poured out to fill a
+gap in its war finance is the encouragement that it has given to a
+host of monetary quacks who believe that all the financial ills of
+the world can be saved if only you give it enough money to handle,
+oblivious of the effect on prices of mere multiplication of claims to
+goods without a corresponding increase in the volume of goods. These
+enthusiasts have seen that during war a Government can produce money
+as fast as it likes, and since they think that producing money makes
+every one happy they propose to adopt this simple method for paying
+off war debt, restarting trade and generally creating a monetary
+millennium. How far their nostrums are likely to be adopted, no
+one can yet say, but some of the utterances of our rulers make one
+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 costs but
+twopence; it is only a dozen pages long, and it is described (if you
+want to order it) as Cd. 9182. In view of the many attacks that have
+been made on our banking system--especially the Bank Act of 1844--by
+Chambers of Commerce and others before the war, it is rather
+surprising that so little criticism should have been heard of this
+Report, which practically advocates a return, as rapidly as possible,
+to the practice and principles imposed by that Act. It may be that
+peace, and all the preoccupations that have followed it, have absorbed
+men's minds so entirely that questions of currency seem to be an
+untimely irrelevance; or possibly the very heavy weight of the
+Committee's authority may have silenced the opposition to its
+recommendations. Presided over by Lord Cunliffe, the late Governor of
+the Bank, and including Sir John Bradbury and Professor Pigou and an
+imposing list of notable bankers, it was a body whose opinion
+could only be challenged by critics gifted with the most serene
+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 Government for funds
+wherewith to finance the war in excess of the amounts raised by
+taxation or by loans from the public has made necessary the creation
+of credits in their favour with the Bank of England.... The balances
+created by these operations passing by means of payments to
+contractors and others to the Joint Stock banks have formed the
+foundation of a great growth in their deposits, which have also
+been swelled by the creation of credits in connection with the
+subscriptions to the various War Loans.... The greatly increased
+volume of bank deposits, representing a corresponding increase of
+purchasing power and, therefore, tending in conjunction with other
+causes to a great rise of prices, has brought about a corresponding
+demand for legal tender currency which could not have been satisfied
+under the stringent provisions of the Act of 1844." Here we have the
+story of bad war finance put as clearly as it can be. Because the
+Government was not able to raise all the money needed for the war on
+sound lines--that is, by taxation and loans to it of money saved by
+investors--it had recourse to credits raised for it by the Bank of
+England and the other banks against Treasury Bills, Ways and Means
+Advances, War Loans, War Bonds, and loans to customers who were taking
+up War Loans, etc. Thereby as these credits created fresh deposits
+there was a huge increase in the community's purchasing power; and
+since the supply of goods to be purchased was stationary or reduced,
+the only result was a great increase in prices which made the war,
+perhaps, nearly twice as costly as it need have been and produced
+all the suspicion and unrest that has already been referred to.
+Considering that the Committee included an ex-Governor of the Bank
+and the Permanent Secretary to the Treasury it could hardly have been
+expected to use much plainer language concerning the failure of our
+rulers to get money out of us in the right way for the war and
+the vigour with which they made use of the demoralising weapon of
+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 (page 5): "Given the necessity for the creation of bank
+credits in favour of the Government for the purpose of financing war
+expenditure, these issues could not be avoided. If they had not been
+made, the banks would have been unable to obtain legal tender with
+which to meet cheques drawn for cash on their customers' accounts. The
+unlimited issue of currency notes in exchange for credits at the Bank
+of England is at once a consequence and an essential condition of the
+methods which the Government have found necessary to adopt in order to
+meet their war expenditure."
+
+The effect of these causes upon the amount of legal tender currency
+(other than subsidiary coin) in the banks and in circulation is
+summarised by the Committee in the following table:--
+
+"The amounts on June 30, 1914, may be estimated as follows:--
+
+"Fiduciary Issue of the Bank of England   L18,450,000
+
+"Bank of England Notes issued against
+   gold coin or bullion                    38,476,000
+
+"Estimated amount of gold coin held
+by Banks (excluding gold coin held
+in the Issue Department of the
+Bank of England) and in public
+circulation                                123,000,000
+                                           ___________
+"Grand total                              L179,926,000
+                                           ___________
+
+"The corresponding figures on July 10, 1918, as nearly as they can be
+estimated, were:--
+
+"Fiduciary Issue of the Bank of England    18,450,000
+Currency Notes not covered by gold        230,412,000
+                                          ___________
+"Total Fiduciary Issues [1]              L248,862,000
+Bank of England Notes issued against
+   coin and bullion                        65,368,000
+Currency Notes covered by gold             28,500,000
+Estimated amount of gold coin held
+   by Banks (excluding gold coin held
+   by Issue Department of Bank of
+   England), say                           40,000,000
+                                          ___________
+"Grand total                             L382,730,000
+
+"[Footnote 1: The notes issued by Scottish and Irish banks which have
+been made legal tender during the war have not been included in the
+foregoing figures. Strictly the amount (about L5,000,000) by which
+these issues exceed the amount of gold and currency notes held by
+those banks should be added to the figures of the present fiduciary
+issues given above.]
+
+"There is also a certain amount of gold coin still in the hands of the
+public which ought to be added to the last-mentioned figure, but the
+amount is unknown."
+
+It will be noted that the gold held by the banks (other than the Bank
+of England) and by the public has declined from L123 to L40 millions,
+according to the Committee's estimate, while, on the other hand, the
+circulation of bank notes has risen by L27 millions and the issue of
+currency notes has taken place to the tune of L259 millions (at the
+date of the Report; it is now nearly L300 millions), making a net
+addition to legal tender currency of over L200 millions. When we
+also remember that there has been a very heavy coinage of silver and
+copper, that the Bank of England's deposits have risen by over L100
+millions and the deposits of the other banks by nearly L700 millions,
+and all this at a time when most of the industrial activity of the
+country was going into the production of destructive weapons and the
+support of those who were using them, the behaviour of commodities of
+ordinary use in rising by nearly 100 per cent. seems to be an example
+of remarkable moderation. With all this new buying power in the hands
+of the community there is little wonder that some people should
+think that we have enormously increased our wealth during this most
+destructive and costly war, and should then feel hurt and disappointed
+when they find that this new buying power is robbed of all its
+beauty by the fact that its efficiency as buying power is seriously
+diminished by its mere quantity.
+
+Such being the state of affairs--a great mass of new credit and
+currency based on securities--it is clear that our currency has been
+deprived for the time being of that direct relation with its gold
+basis that used in former time to regulate its volume according to
+world prices and our international trade position. As the Committee
+says, "It is not possible to judge to what extent legal tender
+currency may in fact be depreciated in terms of bullion. But it is
+practically certain that there has been some depreciation, and to this
+extent therefore the gold standard has ceased to be effective." Very
+well, then, what has to be done to get back to the old state of things
+under which there was a more or less automatic check on the creation
+of credit and the issue of currency? This check worked by a system
+which was elastic and simple. It was not entirely automatic, because
+its working had to be controlled by the Bank of England, which, by the
+action of its discount rate, could, more or less, quicken or check the
+working of the machine. Legal tender currency could only be increased
+by imports of gold; and exports of gold reduced the available amount
+of legal tender currency; and since a stock of legal tender currency
+was essential to meet the demands upon them that bankers made
+possible by creating credits, there was thus an Indirect and variable
+connection between the country's gold stock and the extent to which
+bankers would think it prudent to multiply credits. If credits were
+multiplied too fast, our currency was depreciated in value as compared
+with those of other countries and the exchanges went against us and
+gold either was exported or began to look as if it might be exported.
+If it was exported the legal tender basis of credit was reduced and
+the creation of credit was checked. If the Directors of the Bank of
+England thought it inadvisable that gold should be exported they
+could, by raising the rate of discount and taking artificial measures
+to control the supply of credit, produce, without the actual loss of
+gold, the effects which that loss would have brought about.
+
+The keystone of the system was the rigid link between legal tender
+currency and gold. This was secured by the provisions of the Bank Act
+of 1844, which laid down that above a certain line--which was before
+the war roughly L18-1/2 millions--every Bank of England note issued
+should have gold behind it, pound for pound. In other words, the Bank
+of England note was, for practical purposes, a bullion certificate.
+The legal limit on the fiduciary issue (that is, the issue of L18-1/2
+millions against securities, not gold) could only be exceeded by a
+breach of the law. The many critics of our banking system seized on
+this hard-and-fast restriction and accused it of making our system
+inelastic as compared with the German arrangement, under which the
+legal limit could at any time be exceeded on payment of a tax or fine
+on any excess perpetrated. These critics might have been right if
+legal tender currency had been the only, or even the predominant,
+means of payment in England. But, as every office boy knows, it was
+not. Legal tender--gold and Bank of England notes--was hardly ever
+seen in commercial and financial transactions on a serious scale. We
+paid, sometimes, our retail purchases of goods and services in gold;
+and Bank notes were a popular mode of payment on racecourses and in
+other places where transactions took place between people who were not
+very certain of one another's standing or good faith. But the great
+bulk of payments was made in the cheque currency which our bankers had
+developed outside of the law and could create as fast as prudence--and
+an eye to the supply of legal tender which every holder of a cheque
+had a right to demand--allowed them to do so. While cheques provided
+the currency of commerce, another form of "money" was produced, again
+without any restriction by the Act, by the pleasant convention which
+caused a credit in the Bank of England's books to be regarded as
+"cash" for balance-sheet purposes by the banks. These advantages
+gave the English system a freedom and elasticity, in spite of the
+strictness of the law that regulated the issue of paper currency, that
+enabled it to work in a manner that, judged by the test of practical
+results, had one great advantage over that of any of the rival
+centres. It alone in days before the war fulfilled the functions of an
+international banker by being ready at all times and without question
+to pay out the gold that was, in the last resort, the final means of
+settling international balances.
+
+It is the object of Lord Cunliffe's Committee to restore as quickly
+as possible the system which, has thus been tried by the test of
+experience, "After the war," they say in their Report, "our gold
+holdings will no longer be protected by the submarine danger, and it
+will not be possible indefinitely to continue to support the exchanges
+with foreign countries by borrowing abroad. Unless the machinery which
+long experience has shown to be the only effective remedy for an
+adverse balance of trade and an undue growth of credit is once
+more brought into play there will be very grave danger of a credit
+expansion in this country and a foreign drain of gold which might
+jeopardise the convertibility of our note issues and the international
+trade position of the country.... We are glad to find that there was
+no difference of opinion among the witnesses who appeared before us as
+to the vital importance of these matters." The first measure that they
+put forward as essential to this end is the cessation at the earliest
+possible moment of Government borrowings. "A large part of the credit
+expansion arises, as we have shown, from the fact that the expenditure
+of the Government during the war has exceeded the amounts which they
+have been able to raise by taxation or by loans from the actual
+savings of the people. They have been obliged therefore to obtain
+money through the creation of credits by the Bank of England and the
+Joint Stock banks, with the result that the growth of purchasing power
+has exceeded that of purchasable goods and services." It is therefore
+essential that as soon as possible the State should not only live
+within its income but should begin to reduce indebtedness, especially
+the floating debt, which, being largely held by the banks, has been
+a cause of credit creation on a great scale. "The shortage of real
+capital must be made good by genuine savings. It cannot be met by the
+creation of fresh purchasing power in the form of bank advances to
+the Government or to manufacturers under Government guarantee or
+otherwise, and any resort to such expedients can only aggravate the
+evil and retard, possibly for generations, the recovery of the country
+from the losses sustained during the war." With these weighty words
+the Committee brushes aside a host of schemes that have been urged for
+putting everything right by devising new machinery for the manufacture
+of new credit. That new credits will be needed for industry after war
+is obvious, but what else are our banks for, if not to provide it?
+They can only be set free to provide it on the scale required if, by
+the necessary reduction of the floating debt, they are relieved of the
+locking up of their funds in Government securities, which has been one
+of the bad results of our bad war finance.
+
+It goes without saying that the Committee does not recommend the
+continuance in peace of the differential rates for home and foreign
+money that were introduced as a war measure with a view to lowering
+a rate at which the Government borrowed at home for war purposes. It
+would evidently be too severe a strain on human nature to attempt to
+work such a system, except in war-time, when the artificial conditions
+by which the market was surrounded made it both feasible and desirable
+to do so. With regard to the note issue, the Committee proposes a
+return to the old system and a strictly drawn line for the amount of
+the fiduciary note issue, the whole note issue (with the exception of
+the few surviving private note issues) being put into the hands of the
+Bank of England, all notes being payable in gold in London only
+and being made legal tender throughout the United Kingdom. These
+suggestions are subject to any special arrangements that may be made
+with regard to Scotland and Ireland. An early resumption of the
+circulation of gold for internal purposes is not contemplated. The
+public has become used to paper money, which is in some ways more
+convenient and cheaper; and the luxury of a gold circulation is one
+that we can hardly afford at present. Gold will be kept by the Bank of
+England in a central reserve, and all the other banks should, it is
+suggested, transfer to it the whole of their present holdings of the
+metal. In order to give the Bank of England a closer control of the
+bullion market the Committee thinks it desirable that the export of
+gold coin or bullion should, in future, be subject to the condition
+that such coin or bullion had been obtained from the Bank for the
+purpose. This measure would give the Bank of England a very close
+control of the bullion market, so close that there is a danger that
+if this control were too rigorously exercised, gold that now comes to
+this country might be diverted, with a view to more advantageous sale,
+to other centres. The amount of the fiduciary issue is a matter
+that the Committee leaves open to be determined after experience of
+post-war conditions. They "think that the stringent principles of
+the Act (of 1844) have often had the effect of preventing dangerous
+developments, and the fact that they have had to be temporarily
+suspended on certain rare and exceptional occasions (and those limited
+to the earlier years of the Act's operation, when experience of
+working the system was still immature) does not," in their opinion,
+invalidate this conclusion. So they propose that the separation of the
+Issue or Banking Departments should be maintained, but that in future
+if an emergency arose requiring an increase in the amount of fiduciary
+currency, this should not involve a breach of the law, but should be
+made legal (as it is now under the Currency and Bank Notes Act of
+1914), subject to the consent of the Treasury.
+
+It is not proposed at present to secure the circulation of paper
+instead of gold by legislation. The Committee considers that "informal
+action on the part of the banks may be expected to accomplish all
+that is required." If necessary, however, it points out that
+the circulation of gold could be prevented by making the notes
+convertible, at the discretion of the Bank of England, into coin or
+bar gold. The amount which, in the opinion of the Committee, should be
+aimed at for the central gold reserve is L150 millions (a sum which is
+already almost in sight on its figures quoted above); and "until
+this amount has been reached and maintained concurrently with a
+satisfactory foreign exchange position for a period of at least a
+year," it thinks that the policy of reducing the uncovered note issue
+"as and when opportunity offers" should be consistently followed. How
+this opportunity is going to "offer" is not made clear; but presumably
+a reflow of notes from circulation can only happen through a fall in
+prices or a reduction in bank deposits by the liquidation of advances
+made to the Government, directly or indirectly, by the banks.
+
+Concerning the difficult problem of replacing the Bradbury notes by
+Bank of England notes of L1 and 10s., an ingenious suggestion is made
+by the Committee. It observes that there would be some awkwardness
+in transferring the issue to the Bank of England before the future
+dimensions of the fiduciary issue have been arrived at; and it
+suggests that during the transitional period any expansion in Treasury
+notes that may take place should be covered, not as now, by Government
+securities, but by Bank of England notes taken from the Bank. By this
+means any demands for new currency would operate in the normal way to
+reduce the reserve of the Banking Department, "which would have to be
+restored by raising money rates and encouraging gold imports," and so
+a step would have been taken to getting back to a business basis in
+the currency system and away from the profligate printing-press policy
+of the war period.
+
+Such are the suggestions made by this distinguished body for the
+restoration of our currency. Little has been said against them in the
+way of serious criticism, but their conservative tendency and the
+fact that they practically recommend a return to the _status quo_ has
+caused some impatience among the financial Hotspurs who proposed to
+begin to build a new world by turning everything upside down. In
+matters of finance this process is questionable, interesting as the
+result would undoubtedly be. To get to work on tried lines and then,
+when once industry and finance have recovered their old activity, to
+amend the machine whenever it is creaking seems to be a more sensible
+plan than to delay our start until we have fashioned a new heaven
+and earth, and then very probably find that they do not work. If the
+machine is to be set moving, it can only be done by close co-operation
+between the Bank of England and the other banks which have grown by
+amalgamation into institutions the size of which seem likely to
+make the task of central control more difficult than ever. On this
+important point the Committee is curiously silent. But it recommends
+the adoption of a suggestion made by a Committee of Bankers, who
+proposed that banks should in future be required "to publish a monthly
+statement showing the average of their weekly balance-sheets during
+the month." (Will this requisition apply to the Bank of England?) This
+is a welcome suggestion as far as it goes, but unless something is
+done by co-operative action to make the Bank rate more automatic in
+its influence on the actions of the other banks, the difficulty of
+making it effective seems likely to be considerable.
+
+Getting the currency right is a most important matter for the future
+of our financial position. Another is the question of our debt to
+foreigners. Most of this debt we owe to America, and we only owe it
+because we had to finance our Allies. We surely ought to be able to
+arrange with America that anything that we have to do in giving our
+Allies time before asking for repayment they also should do for
+us--within limits, say, up to thirty years. In view of all that they
+have made and we have lost by this war waged for the cause of all
+mankind, this would seem to be reasonable concession on America's
+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 L8612
+millions sterling. From this we have to deduct an estimate of the
+amount that the Government would have spent if there had not been a
+war, so that we are at once landed in the realm of conjecture. The
+last pre-war financial year saw an expenditure of L198 millions, and
+it is safe to assume that this figure would have swollen by a few
+millions a year if peace had continued, so that we may take at least
+L860 millions from the above total as normal peace expenditure for the
+4-1/2 years. This gives us L7752 millions as the gross cost of the
+war, as far as the period of actual fighting is concerned. From this
+figure, however, we are able to make some big deductions. There are
+loans to Allies and Dominions, and some other much more readily
+realisable assets than these. We do not know the actual figure of the
+loans to Allies and Dominions during the war period, because they are
+not included in the weekly financial statements. The amount that we
+borrow abroad is set out week by week--at least, that is believed to
+be the meaning of the cryptic item "Other Debt"--but the amount that
+we lend to Allies and Dominions is hidden away in the Supply Services
+or somewhere, and we only get occasional information about it from the
+Chancellor in the course of his speeches on the Budget or on Votes of
+Credit. In his last Vote of Credit speech, on November 12, 1918, Mr
+Bonar Law gave the chief items of the loans to Allies, and a very
+interesting list it was. The totals up to October 19, 1918, were L1465
+millions to Allies and L218-1/2 millions to Dominions. The Allies
+were indebted to us as follows:--Russia, L568 millions; France, L425
+millions; Italy, L345 millions; smaller States, L127 millions.[1]
+
+[Footnote 1: Parliamentary Debates, Vol. 110, No. 114, p. 2560.]
+
+Some of these debts may be written off at once, and that cheerfully,
+seeing that they have been lent brothers-in-arms who have been
+hit much harder than we have by the war, and had nothing like our
+financial strength. The question is, what figure ought we to put on
+this asset in deducting it from gross war expenditure in order to
+arrive at a guess at the real cost? We take our loans to Dominions, of
+course, as good to the last penny. Mr Bonar Law, in his Budget speech
+last April, took our loans to Allies at half their face value. Strict
+bookkeeping would probably demand a lower figure than 50 per cent.;
+but let us follow the ex-Chancellor's example and take loans to
+Allies, which we will estimate at L1480 millions up to November 9th,
+as good for L740 millions, and loans to Dominions at L220 millions up
+to the same date, a total of L960 millions, to be deducted from gross
+war cost. Concerning L740 millions of this sum, however, there is a
+certain amount of doubt. No one questions for a moment the solvency
+of France and Italy, but in view of the pressure that the war has
+exercised on their producing power, and, in the case of France, the
+complication added by the uncertainties of the position in Russia, in
+which French investors are so deeply interested, one cannot feel sure
+that they will be able at once to make interest payments. Much will
+depend on the sums that they are able to recover from Germany against
+their bill of damages, on which more anon. But in any case it seems
+likely that a general scheme of interest funding, as between the
+Allies, may have to be adopted for some years to come.
+
+As to the other assets that we have to set against our gross
+expenditure during the fighting period, they were enumerated by the
+Chancellor in his Budget speech last April in the following terms;--
+
+  Balances in agents' hands, debts
+    due, foodstuffs, etc                      L375 millions.
+  Land, securities, buildings and ships         97    "
+  Stores in Munitions Department
+    (cost price 325 millions) taken at         100    "
+  Additions this financial year                100    "
+  Arrears of taxation                          500    "
+                                               ---
+               Total[1]                      L1172
+
+[Footnote 1: Parliamentary Debates, Vol. 105, No. 33, pp. 698-699.]
+
+It will be remembered that in his Budget speech the Chancellor was
+proceeding on the assumption that the war would last till March 31st
+next--the date at which our financial year ends--and would then be
+convenient enough to stop. Happily for us, the valour of our soldiers
+and those of our Allies, the splendid success of our Fleet and our
+merchantmen In bringing over American troops and their food and
+equipment with astonishing speed, and the straightforward diplomacy
+of President Wilson, combined to achieve victory nearly five months
+earlier than the most sanguine had dared to expect. With the very
+pleasant result--though it is a small matter when compared with the
+end of the killing of the best of our manhood--that the financial
+position is very greatly improved. With regard to the figures given
+above, it should be observed that the "debts" are advances to
+Dominions, but on quite a different basis from our loans to them,
+being money owed by them against goods and services supplied.[1] They
+and the balances in the hands of agents are both as good as gold.
+Concerning the others, one is entitled at first sight to feel a good
+deal of scepticism, since such articles as land, buildings, ships and
+stores, bought or built by Government during a war, are likely to find
+an extremely sluggish demand when the war is over. However, Mr Bonar
+Law assured the House that his valuation of these amounts had been
+arrived at on a conservative basis, and, what is better still, in his
+Vote of Credit speech on November 12th, he was able to state that
+revised estimates had shown that their value would be "far greater"
+than he had previously expected. So perhaps we are entitled to take
+them at L1300 millions.
+
+[Footnote 1: Parliamentary Debates, Vol. 105, No. 33, p. 698.]
+
+If so, we get the following results for the cost of the fighting
+period:--
+
+  Total Government expenditure,
+    August 1, 1914, to November
+    9, 1918                                      L8612 millions.
+  Less estimate of normal peace expenditure        860    "
+                                                 -----
+                                                  7752    "
+  Less Loans to Dominions     220 millions.
+  Less Loans to Allies
+    (half face value)         740    "
+  Realisable assets          1300    "
+                             ----
+                                                  2260    "
+                                                  ----
+  Net cost of period                             L5492    "
+
+If war cost would be good enough to cease with the fighting we should
+thus now be able to see, more or less, how we stand. During the
+fighting period the Government raised by taxation the sum of L2120
+millions,[1] from which we have again to deduct L860 millions as an
+estimate for normal peace taxation, if the war had not happened,
+leaving L1350 millions as the net war taxation, and L4142 millions as
+the net addition to debt from the war.
+
+[Footnote 1: _Economist_, Nov. 16, 1918.]
+
+But, of course, there are still some large and uncertain sums to come
+in to both sides of the account. There is the cost of maintaining our
+Army and Navy during the armistice period, the cost of demobilisation,
+and the cost of putting an end to war munitions contracts running for
+many months ahead, holders of which will have to be compensated. Who
+has enough assurance to venture on an estimate of the cost of these
+items? Shall we guess them at something between L1000 and L1500
+millions? And when we have made this guess are we at the end of the
+war's cost? Ought we not to include pensions to be paid, and if so, at
+what figure? Fifty millions a year for thirty years? If so, there is
+another L1500 millions. And interest on war debt, and for how long?
+
+On the other side of the balance-sheet, the only asset that has not
+yet been included in the calculation is the sum that we are going to
+receive from Germany, Some cheery optimists think that it is possible
+for us and for the Allies to make Germany pay the whole of our war
+cost. If so, we have halcyon days ahead, for not only shall we be able
+to repay the whole war debt but also to pay back to the taxpayer all
+the L1350 millions that he produced during the war, unless, as seems
+more likely, the Government finds other uses, or abuses, for the
+money, and sets its motley horde of wasters to work again. But this
+problem, of course, is not going to arise. It would not be physically
+possible for Germany to pay the whole of the Allies' war cost, except
+in the course of many generations, and, moreover, the Allies have
+bound themselves not to make any such demand by the rider that they
+added to President Wilson's peace terms, in giving their assent to
+them as the basis on which they were prepared to make peace. Early
+in November they stated that President Wilson's reference to
+"restoration" of invaded countries should, in their view, be expanded
+into a claim for compensation "for all damage done to the civilian
+population of the Allies and to their property by the aggression of
+Germany by land, by sea, and from the air."[1] This is letting Germany
+off lightly; but, after stating their readiness to make peace on the
+basis of the fourteen points, if amended as above (and also with
+regard to the Freedom of the Seas question) it is not possible for
+the European Allies, as the Prime Minister's late manifesto says they
+propose to do[2] to expand this claim for civilian damage into a
+demand for the whole of their war cost up to the limit of the capacity
+of the Central Powers to pay, without a serious breach of faith. So
+that the question of how much we can get out of Germany is complicated
+by the further uncertainty of the size of the bill for damages that we
+can present. It will be big enough. We know that the Germans have sunk
+8-1/2 million tons of British ships during the war. As to the price
+at which, for "restoration" purposes, we shall value those ships and
+their cargoes, and all the civilian property damaged by aircraft and
+bombardment, this is a matter which it would be obviously improper
+to discuss; but we may be sure that the bill will mount up to many
+hundreds of millions, and it remains to be seen whether, after Belgium
+and France have presented their account, it will be possible for us to
+secure payment even for all the civilian damage that we have suffered.
+
+[Footnote 1: _Times_, November 7, 1918.]
+
+[Footnote 2: _Times_, December 6, 1918.]
+
+It thus appears that the net cost of the fighting period has been
+somewhere in the neighbourhood of L5500 millions, taking our loans
+to Allies at half their face value; and that the armistice and
+demobilisation period is likely to cost another L1000 to L1500
+millions more, to say nothing of pensions and debt charge that will go
+on for years (unless the supporters of Levy on Capital have their way
+and wipe the debt out), and that against this further expenditure we
+can set whatever sum is recovered from Germany.
+
+Seeing that our total pre-war debt was L710-1/2 millions, or, omitting
+what the Government returns call the Other Capital Liabilities,
+L653-1/2 millions, these figures of war debt and war cost are at first
+sight somewhat appalling. But there is no reason why they should
+terrify us, and there are several reasons why they are, when looked at
+with a discriminating eye, much less frightening than when we first
+set them out.
+
+In the first place, we have always to remember that these figures are
+in after-war pounds, and that the after-war pound is, thanks to the
+profligate use by our war Governments of the printing-press and the
+banking machine, just about half the size, when measured in actual
+buying power, of the pre-war pound. Any one who pays L100 in taxes
+to-day thereby surrenders claims to about the same amount of goods and
+service as he did if he paid L50 in taxes before the war. So that in
+making any comparison between the position now and the position then
+we have to divide the figures of to-day by two.
+
+In the second, we need not be misled by the Jeremiahs who tell us that
+now that we have won the war we have before us the task of paying for
+it. This is not true, or true only to a small extent--to the extent,
+that is to say, to which we shall, when all these assets and
+liabilities have been settled up and balanced, be afflicted with a
+foreign debt. Let us leave this question on one side for the time
+being, and consider what the position really is with regard to that
+part of the war's cost that has been raised at home. In so far as that
+has been done, the war cost has been raised by us while the war went
+on. In fact, all the war cost has to be raised by somebody while
+the war goes on, because the war is fought with stuff and services
+produced at the time and paid for at the time. But when Americans lend
+us money to pay for some of the stuff that they send us, they pay at
+the time and we, or our posterity, have to pay them back later on;
+this is the only way in which we can make posterity pay for the war,
+and then it only means that our posterity pays America's. It is not
+possible to carry on war with wealth that is going to be produced some
+day. The effort of self-sacrifice that war demands has to be made by
+somebody during its progress--otherwise the war could not be fought.
+
+That effort of self-sacrifice we have already made in so far as we
+have paid for our war cost out of money raised at home. That money has
+been raised in three ways--by taxation, by borrowing saved money, and
+by inflation. When it is raised by taxation the sacrifice is obvious,
+and, in nearly all cases, inevitable: we pay our larger war taxes and
+so we have less to spend on ourselves, and so we go without things. A
+few people raise money to pay taxes during war by borrowing or drafts
+on capital, but they are probably so exceptional that their case need
+not be considered. We transfer our buying power to the Government to
+be used for the fighters, and so we set free the labour and material
+that used to go in providing us with comforts and pleasures; our
+competition for goods is reduced, and so the Government is able to get
+what it needs out of the nation's production, which is _pro tanto_
+relieved of our demand. The same thing happens when the Government
+gets money for the war by borrowing money that we save. We reduce
+expenditure, and transfer buying power to the State and diminish our
+demand on the nation's production, or that of its foreign supplies. If
+the whole war cost had been met by these two methods there need have
+been little or no increase in prices here, and the cost of the war
+would have been about half what it has been. Of the two methods,
+taxation is obviously the cleaner, simpler and more honest. By
+borrowing, the State hires those who have a margin to put part of it
+at the disposal of the State at a time of national crisis, instead of
+taking it from them outright. As most of the taxation involved by
+the subsequent debt charge falls on those who have a margin (as it
+obviously should) the result is that the people who subscribed to the
+loans are afterwards taxed to pay themselves interest and to repay
+themselves their debt.
+
+This subsequent taxation falls on them all alike in proportion to
+their ability to pay, or would if the income tax was more equitably
+imposed; those who have subscribed their fair share to the loans have
+an offset, in the interest that they receive, against the taxation;
+those who subscribed less are properly penalised, those who subscribed
+more are properly benefited. If only the income tax did not make the
+position of fathers of families so unjust, the whole arrangement would
+look, at first sight, quite fair, though rather absurd and clumsy,
+involving all this subscribing and taxing and paying back instead of
+an outright tax and having done with it. But in fact a very grave
+inequity is involved by this business of borrowing for war, and laid
+upon just the people whom we ought, above all, to treat most fairly,
+namely, those who fight for us. The soldiers and sailors risk their
+lives for a pittance during the war, while their brothers and sisters
+and cousins and uncles and aunts, left at home in security and
+comfort, earn bloated profits and wages, and put them, or part of
+them, into War Loans; then when the fighters come back, very likely
+with their business and connection ruined or lost, they are expected
+to contribute to the taxation that goes into the pockets of
+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 being noticed,
+and so is particularly dear to the adroit politician. By it nobody
+transfers buying power to the Government, but the Government and
+the bankers, who are generally most reluctant accessories to the
+transaction, between them create new buying power, which, coming into
+a restricted market for goods in addition to all the existing buying
+power, simply forces everybody to consume less because the money in
+their pockets fetches less goods owing to the rise in prices.
+
+The evil attached to this system is obvious enough. It amounts to a
+tax on the general consumer in proportion to his consumption, and so
+it lays the sacrifice on the shoulders of those least able to bear it.
+No Government would have the courage to impose such a tax openly and
+frankly. All the warring Governments in varying degrees have used this
+roundabout device of imposing it, very likely being quite unaware
+of the fraud on the consumer that they were perpetrating. Our own
+Government, in fact, having first added by this process to a rise in
+the price of bread, then reduced it by a special subsidy--a pleasant
+touch of Alice in Wonderland finance. This mode of taxing by raising
+prices hits, of course, all those who live on fixed incomes and
+salaries and wages. Those who can strike, or take more out of the
+consumer, can evade it, and so it falls on the weakest shoulders and
+incidentally produces friction, discontent and dangerous suspicion.
+But even it works at the time when it happens. Each creation of new
+buying power gives the Government, for the moment, control of so much
+in goods and services at the expense of the consumer; but when once
+the new buying power has been distributed by the State's payments it
+is in the hands of the nation as a whole. If the process ceased, the
+nation would still have control of the whole of its output, which is
+its income, though the injustice involved, to those who are not strong
+enough to resist the effects of higher prices, would continue.
+
+Thus, whatever means--straightforward or devious--are used for
+financing war, it is paid for while it goes on by the warring country
+if the financing is done at home, or by its foreign creditors if the
+financing is done abroad. And it is, necessarily, almost entirely paid
+for out of income, that is, out of current production. It is curious
+to find that many people still seem to think that the whole cost of
+the war has come out of capital. Luckily for us it could not be done,
+or only to a very small extent. Our capital mostly consisted of
+railways, factories, ships, roads, agricultural land, machinery,
+houses and other things that could not be taken and shot out of a gun.
+These things we have still got, and though many of them are not in
+such good shape as they were, some of them are much better equipped
+and organised. We have drawn on our stocks of materials and goods--how
+far it is impossible to say; we have lost 8-1/2 million tons of
+shipping by war losses; in the meantime we have built, bought and
+captured 5-1/2 millions of new tonnage, and we have a claim against
+the Germans for such tonnage. On capital account we have suffered by
+wear and tear in so far as our upkeep has been neglected owing to lack
+of labour during the war, and by depletion of materials and stocks,
+and also, of course, by the fact that if the war had not happened,
+we should, if pre-war calculations were correct, have put some L1700
+millions into new investments at home and abroad during the 4-1/4
+years of fighting and some more hundreds of millions during the
+after-war period of Government borrowing and restriction on private
+investment. But a very large part of the money that went into victory
+would otherwise have gone not to capital account but into the pleasant
+frivolities, embellishments and vulgarities that made life an amusing
+absurdity in days before the war.
+
+If, then, the war sacrifice was made during the war, in so far as its
+cost was raised at home, how far is it true that we are now faced with
+the business of paying for it? If taxation were equitable it would
+only be to the extent that those who ought to have made the sacrifice
+and did not, will in future have to pay interest to those who did, or
+their representatives. So that the first thing we have to do is to
+make taxation equitable, that is, lay it on the taxpayer in proportion
+to his ability to pay. There will still remain the injustice to those
+who have fought for us, which might be cured, or amended, by special
+exemptions. With taxation on a really sound basis no further sacrifice
+would be involved by the debt charge, and no diminution of the
+nation's wealth or consuming power, which will depend, as always, on
+its output of goods and services; but only a transfer of consuming
+power from taxpayers to debt-holders in accordance with the sacrifice
+made by the latter during the war. What we produce as a nation we
+shall consume as a nation, subject to the extent that we financed the
+war during its course by operations abroad.
+
+These operations were twofold. We sold to foreigners part of our
+holdings of foreign securities, thereby and to this extent paying for
+war cost out of capital--out of the investments made by ourselves
+and our forbears in America and elsewhere. Mr Bonar Law, in a recent
+interview in the _Observer_, stated that we had sent back to the
+United States practically the whole of our holdings of American
+securities to be sold or pledged as collateral for loans, and that the
+value of them was three billion dollars--L600 millions sterling. Any
+of them that have only been pledged can presumably be used to meet the
+loans raised as they fall due, and so will lighten our burden in the
+matter of repayment. These loans raised abroad are the second mode of
+foreign financing. By it we had raised up to November 9th nearly L1300
+millions, as shown by the _Economist's_ table, and to that extent we
+have pledged our future production and that of our posterity, to meet
+the annual service for interest and repayment. On the other hand, all
+this sum and more we have (as shown above) lent to our Allies and
+Dominions, so that the ex-Chancellor was well justified in his boast
+that we had only borrowed to finance our Allies, and that we had been
+self-sufficient for our own war cost.[1]
+
+[Footnote 1: Budget Speech, Parliamentary Debates, vol. 105, No. 33.]
+
+In other words, all that we needed for the war we were able to produce
+ourselves, or to obtain in exchange for our produce and assets. On
+paper, therefore, our position as a creditor country is only impaired
+by our sales of securities. But that is only so on paper. In fact, the
+loans that we have raised abroad are good debts that have to be met to
+the last penny, and are a first charge on our future output, but the
+advances that we have made to our Allies, much harder hit than we are
+by the war, are assets on which we cannot depend. They were taken in
+our balance-sheet above at half their face value, but there is much to
+be said for writing them off altogether and tearing up the I.O.U.'s
+of our foreign brothers-in-arms. Their need is greater than ours, it
+would be little satisfaction to receive interest and repayment from
+them, and the payment due from them, involving difficult problems of
+taxation for them, would not help the good relations with them which,
+we hope, may be a lasting effect of the war. And such an act of
+renunciation on our part would do something towards a restoration
+of the spirit with which we entered on war, a spirit which has been
+seriously demoralised during its course, largely owing to the results
+of our faulty finance, which encouraged profiteering in all classes.
+
+In any case, there is our position. We have a big debt to meet at
+home and abroad, and we are weakened on capital account by foreign
+indebtedness, wear and tear of plant and dimunition of stocks and
+materials. Wear and tear and depletion we can soon make good if we set
+to work and work hard, if our bureaucracy takes away the fetters of
+its restrictions and controls (instead of making further additions
+to the "Black List" even after the armistice!), and if our ruling
+wiseacres will refrain from trying to stimulate industry by taxing raw
+and half-raw materials. For the debt charge many pleasant and
+simple fancy strokes are suggested. The Levy on Capital is popular,
+especially with those who do not own any, but its advocacy is by no
+means confined to them. Mr Pethick Lawrence has published a persuasive
+little book about it, but I cannot see that he meets the objections
+to it. These are, the difficulty of valuation, the fact that in many
+cases it would have to be paid by instalments, and so would be merely
+another form of income tax, its sparing of the waster and penalising
+of the saver, and, consequently, the grave danger that it would check
+accumulation and so dry up the springs of capital. Mr Stilwell
+has produced a "Great Plan to Pay for the War," by which all the
+belligerents and neutrals who have been involved in expense by the war
+would receive World Bonds from an International Congress for what
+they have spent owing to the war, and would then pay one another any
+international debts by exchanging these World Bonds, and deal with the
+home debt by paying it off in new currency raised on the World Bonds.
+But, surely, to pay off war debt with a huge addition to currency,
+making war's inflation many times worse, would be a disastrous
+beginning to that new era which is alleged to be dawning.
+
+By hard work, sparing consumption of luxuries, and a big industrial
+output, we can soon make the debt charge look smaller and smaller as
+compared with our aggregate income. Our foreign debt we can only meet
+by shipping goods and rendering services. But since it was all raised
+to be lent to our Allies and our lending of it was essential to a
+victory which has rid mankind of a terrible menace, it is surely
+reasonable that our creditors should not press for repayment in the
+first few difficult years, but should fund our short-dated debts into
+loans with twenty-five or thirty years to run. As to the home debt,
+we can only lighten its burden on the taxpayer by making taxation
+equitable. To this end reform of the income tax is an urgent need. We
+have to lighten its pressure much more effectively on those who are
+bringing up families, and by collecting it through employers make it
+an effective and just tax on those of the working class whose earnings
+and family liabilities make them fairly subject to it.
+
+
+
+
+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 independence of the State were sold to a foreign
+Power, while chartered rights were invaded, while fundamental laws
+were violated, hundreds of thousands of quiet, honest and industrious
+families laboured and traded, ate their meals and lay down to rest in
+comfort and security. Whether Whigs or Tories, Protestants or Jesuits
+were uppermost, the grazier drove his beasts to market, the grocer
+weighed out his currants, the draper measured out his broadcloth,
+the hum of buyers and sellers was as loud as ever in the towns, the
+harvest-time was celebrated as joyously as ever in the hamlets, the
+cream overflowed the pails of Cheshire, the apple juice foamed in the
+presses of Herefordshire, the piles of crockery glowed in the furnaces
+of the Trent, and the barrows of coal rolled fast along the timber
+railways of the Tyne. But when the great instrument of exchange became
+thoroughly deranged, all trade, all industry, were smitten as with a
+palsy.... Nothing could be purchased without a dispute. Over every
+counter there was wrangling from morning to night. The workman and his
+employer had a quarrel as regularly as the Saturday came round. On a
+fair-day or a market-day the clamours, the reproaches, the taunts, the
+curses, were incessant; and it was well if no booth was overturned,
+and no head broken.... The price of the necessaries of life, of shoes,
+of ale, of oatmeal, rose fast. The labourer found that the bit of
+metal which, when he received it was called a shilling, would hardly,
+when he wanted to purchase a pot of beer or a loaf of rye bread, go as
+far as sixpence."
+
+From some of the evils thus dazzlingly described we are happily free
+in these times. We are not cursed with a currency composed of coins
+which are good, bad and indifferent, with the result that the public
+gets the bad and indifferent while the nimble bullion dealers absorb
+and export the good. There is nothing to choose between one piece of
+paper and another, and all that is wrong with them is that there are
+too many of them. But the general result as it affects the labourer
+who wants to purchase a pot of beer or anyone else who wants to buy
+anything is very much the same. A bit of metal that is called a
+shilling has about the value of a pre-war sixpence and a bit of paper
+that is called a Bradbury fetches half as much as the pound of five
+years ago. Compared with what other peoples are suffering from the
+same disease arising from the same surfeit of money in one form or
+another, this nuisance that we are enduring is not too terribly
+severe. It has entailed great hardship on a class that is small
+in number, namely, those who have to live on fixed incomes. The
+salary-earner and the rentier have borne the brunt, while the
+wage-earner and the profit-maker have been able to expand their
+earnings, in paper, at least to a point at which the depreciation of
+currency have left them no worse off. Seeing that the wage-earners
+are those who do the dreariest and dirtiest jobs, and that the
+profit-makers are those who take the risks of industry and the
+enormous responsibility of organising enterprise, they are the classes
+whom it is clearly most desirable to encourage. The rentier in these
+days gets less than no sympathy, but we make a great mistake if we
+think that we can with impunity crush him between the upper and nether
+millstone of fixed income and rising prices. With his help we have
+equipped industry at home and abroad. We can, if we choose, by
+depreciating the currency still further, lessen still more the reward
+that we pay him for that benefit. He may kick, but he cannot abolish
+the equipment with which he has already provided industry. But if
+we make his life too hard he can strike like the rest of us, and by
+refusing to provide for any further expansion in industrial equipment,
+he can hold up production until we have devised some new method of
+laying up capital. Currency depreciation is good for the debtor and
+bad for the creditor; if it goes too far it kills the creditor and
+reduces business to chaos.
+
+We are a very long way from the chaos to which many of our Continental
+neighbours have already reduced their monetary systems; but there
+is fortunately a very general feeling that we are a country with a
+reputation and a prestige on this point; and the business world is
+growing restive concerning the delay on the part of those responsible
+in putting an end to a state of things which may have been justified
+by the war's exigencies (though there is much to be said for the view
+that in fact it only added to the war's difficulties) but is
+now clearly as out of date as the censorship, which, like it,
+nevertheless, continues to flourish. This state of things arises from
+the arrangement tinder which an unlimited supply of legal tender
+currency can be manufactured by the Government, which encouraged to
+continue the system by the fact that each note issued is in effect a
+loan to itself without interest. At the meeting of Barclays Bank on
+January 27th, Mr. Goodenough demanded that the issue of currency notes
+by the Government should be stopped forthwith, and that if it were
+necessary to provide more currency it would be better for the banks
+to be allowed to issue notes themselves. This suggestion involves, of
+course, a complete reversal of the principles on which our monetary
+system has grown up, since it has long been based on a note-issuing
+monopoly in the hands of the Bank of England. But these are
+topsy-turvy days, in which greyheaded precedent is very justly at a
+heavy discount; and Mr Goodenough's suggestion very practically gets
+over a big difficulty that stands in the way of stopping the stream
+of Bradburys. This difficulty lies in the fact that if the banks were
+pulled at by their customers for currency and could not supply them
+with Bradbury notes, they would be forced to take notes from the Bank
+of England, with a bad effect on the appearance of its reserve. If
+the business of issuing notes were put into the hands of the clearing
+banks, their power to do so would be limited by the extent of their
+assets, or of such of their assets as were thought fit to rank as
+backing for their notes. In other words, the note-issuing business
+would once more have to be regulated on banking principles and
+controlled by the price asked, for advances, instead of expressing
+the helplessness and improvidence of an impecunious and invertebrate
+Government. In this manner the new departure might be a convenient
+halfway-house on the way from chaos back to sanity. But probably it is
+too revolutionary and goes too straight in the teeth of the Bank of
+England's privilege to receive much practical consideration; and there
+is the question whether the public would take the new paper readily
+and whether it could be made legal tender.
+
+Sir Edward Holden, in one of those masterly surveys of world finance
+with which he now instructs the shareholders of the London Joint City
+and Midland Bank, assembled at their annual meeting, gave much of his
+attention to an attack on the report of Lord Cunliffe's Committee on
+Currency. This was only to be expected, since the Committee had made
+recommendations on lines which were largely conservative and did
+not embody any of the reforms or changes which had been previously
+advocated by Sir Edward. Being on this occasion chiefly critical, he
+did not make very clear in his latest speech the precise proposals
+that he favours. For them we have to go back to his speech of a year
+ago, as reported in the _Economist_ of February 2, 1918, p. 171, where
+he stated that "if the Bank (of England) had been working on the same
+principles as other national banks of issue, there would have been
+little ground for anxiety," and that these principles are:--
+
+1. One bank of issue and not divided into departments.
+
+2. Notes are created and issued on the security of bills of exchange
+and on the cash balance, so that a relation is established between the
+notes issued and the discounts.
+
+3. The notes issued are controlled by a fixed ratio of gold to notes
+or of the cash balance to notes.
+
+4. This fixed ratio may be lowered by the payment of a tax.
+
+5. The notes should not exceed three times the gold or the cash
+balance.
+
+As will be remembered, the Cunliffe Committee recommended that the
+division of the Bank of England into an Issue Department and a Banking
+Department, should be retained; that the old principle by which above
+a certain fixed limit all notes should be backed by gold, should also
+be retained, but that if at any time a breach of this rule should
+be found necessary it should be possible, with the consent of the
+Treasury, and that Bank rate "should be raised to a rate sufficiently
+high to secure the earliest possible retirement of the excess issue."
+Since it was formerly only possible to exceed the limit on the
+fiduciary issue by a breach of the law, under the Chancellor of the
+Exchequer's promise to get an indemnity for it from Parliament, and
+since Treasury tradition insisted on a 10 per cent. Bank rate whenever
+such a breach was permitted or contemplated, it will be seen that the
+Cunliffe Committee proposed some considerable modifications in our
+system and hardly justified Sir Edward's assertion that it "proposed
+that the Bank should continue to work under the Act of 1844 as
+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 convincing. Sir Edward
+wants only one account, because he thinks the consequence would be a
+stronger reserve and fewer changes in bank rate. But a mere change of
+bookkeeping such as the amalgamation of the two accounts would not
+make a half-pennyworth of difference to the extent of the Bank's
+responsibilities and its ability to meet them, and it is on variations
+in these factors that movements in bank rate are in most cases
+decided. On the other hand, Lord Cunliffe and his colleagues argue
+that the main effect of putting the two departments into one would be
+to place deposits with the Bank of England in the same position as
+regards convertibility into gold as is now held by the note. On this
+point Sir Edward's answer is telling: "In reply to this statement, I
+say that the depositors at the present time can always get gold by
+drawing out notes from the reserve and taking gold from the Issue
+Department. There seems to be little difference between the depositors
+attacking gold direct and attacking the gold through the notes in the
+reserve. If the Bank cannot pay the notes when demanded the whole
+machinery stops." Quite so. The notion that the holder of a Bank of
+England note has now a stronger hold over the Bank's gold than the
+depositor seems to be baseless. He can exercise his hold more quickly
+perhaps, though even this is doubtful. Since banknotes are not
+legal tender at the Bank of England, it is not quite clear that the
+depositor would even have to take the trouble to go first to the
+Banking Department for notes and then to the Issue Department for
+gold. He might be able to insist on gold in immediate payment of his
+deposit. Still less convincing is the Committee's argument that "the
+amalgamation of the two departments would inevitably lead in the end
+to State control of the creation of banking credit generally." Their
+report might have explained why this should be so, for to the ordinary
+mind the chain of consequence is not apparent. On the whole it is hard
+to see much good or harm to be achieved by changing the form of the
+Bank return. It might make the Bank's position look stronger, but it
+could not make it really stronger. Nor would it really impair the
+strength of the note-holder's position as against the depositor,
+because even now there is no essential difference. It would substitute
+a more businesslike and simple statement for a form of accounts which
+is cumbrous and stupid and Early Victorian--a relic of an age which
+produced the crinoline, the Crystal Palace and the Albert Memorial. On
+the other hand, to alter a statistical record merely for the sake of
+simplicity and symmetry is questionable. Unless we are getting more
+and truer information, it is a pity to make comparisons between one
+year and another difficult by changing the form in which figures are
+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 Committee's support of the old fixed line system. By the
+latter, if gold comes in, notes to the same extent can be created,
+and if gold goes out notes to the amount of the export have to be
+cancelled. Under Sir Edward's policy the influx and efflux of gold
+would have an effect on the note issue which would be three times the
+amount of the gold that came in or went out. This at least is the
+logical effect of his statement that "the notes should not exceed
+three times the gold or the cash balance." This law does not seem to
+be quite consistent with his view that the fixed ratio of gold to
+notes may be lowered by the payment of a tax; but presumably the tax
+would come into operation before the three to one part was reached,
+and at three to one there would be a firm line drawn. On this
+assumption the Committee's argument is a very strong one. "If,"
+says its report (Cd. 9182, p. 8), "the actual note issue is really
+controlled by the proportion, the arrangement is liable to bring about
+very violent disturbances. Suppose, for example, that the proportion
+of gold to notes is actually fixed at one-third and is operative.
+Then, if the withdrawal of gold for export reduces the proportion
+below the prescribed limit, it is necessary to withdraw notes in the
+ratio of three to one. Any approach to the conditions under which the
+restriction would become actually operative would then be likely to
+cause even greater apprehension than the limitation of the Act of
+1844." Certainly if, during a foreign drain, for every million of gold
+that went out, another two millions of credit, over and above, had
+to be cancelled, it is easy to imagine a very jumpy state of mind in
+Lombard Street and on the Stock Exchange. Sir Edward and the Committee
+seem to be agreed as to a limit on the note issue, but of the two
+limiting systems the old one advocated by the Committee, though
+apparently more severe, would seem to have much less alarming
+possibilities behind it.
+
+A point on which the commercial world does not seem to have made up
+its mind, however, is whether there should be a limit at all. Under
+the old Act there was a limit which could only be passed by a breach
+of the law. Under the Cunliffe proposal the limit could be passed
+with the consent of the Treasury. Sir Edward has not told us of what
+machinery he proposes for the passing of the limit which he lays down;
+but in view of the great apprehension that an approach to the limit
+point would, as shown by the Committee, produce, it is clear that
+there would have to be a way round. In Germany there is no limit; you
+pay a tax on the excess issue and go on merrily. In America it would
+seem that the German system has been taken for a model. In his speech
+on January 29th Sir Edward quoted Senator Robert Owen, who was the
+principal pioneer of the Federal Reserve Bill through the Senate, as
+follows:--"The central idea of the system is elastic currency issued
+against commercial paper and gold, expanding and contracting according
+to the needs of commerce.... It is of great importance that the volume
+of these notes should contract when the commerce of the country does
+not require the notes to be circulation, and the reserve board can
+require them to be returned by imposing a tax upon the issue.... Under
+the reserve system a financial panic is impossible. People will
+not hoard currency nor hoard gold when they know that they can get
+currency or get gold when required.... America no longer believes
+a financial panic possible, and therefore the business men, being
+perfectly assured as to the stability of credits, do not hesitate to
+enter manufacturing and commercial enterprises from which they would
+be deterred under old conditions of unstable credit." Well, let us
+hope the Senator is right and that America is right in believing that
+a financial panic is no longer possible there. But one cannot help
+feeling that such a belief may be rather dangerous in the minds of
+people so ready to take rose-coloured views as our American cousins.
+The Federal Reserve system has worked beautifully in a period in
+which American finance has had nothing to do but rake in the enormous
+profits of American production at the expense of warring Europe and
+lend part of them, to be spent in America, to the Allied belligerents.
+It may work equally well if and when the problem to be faced is
+different, but it will be interesting to see--for those of us who live
+to see--what sort of a tax will be needed to "require" America, in one
+of its holiday moods, to return currency that it thinks it needs and
+the Federal Reserve Board regards as redundant.
+
+Another point on which Sir Edward lays great stress, in his attack
+on the Bank Act of 1844 and the Committee which supports its main
+principles, is the beauty of the bill of exchange as backing for a
+note issue, as opposed to Government securities. "There is," he says,
+"no automatic system for the redemption of currency notes as would be
+the case if they were issued against bills of exchange, which in due
+course would have to be paid off." Again, "it seems to me that notes
+should not be issued against Government securities which may or may
+not be paid off, but against bills of exchange which must be met at
+due date." This advantage about a bill of exchange is a very real
+one to the individual holder who can always put himself in funds by
+letting the contents of his portfolio "run off"; but is there much
+in it as a safeguard against excessive issue of currency in times of
+exuberance? In such times bills that fall due are pretty sure to
+be replaced by new ones drawn against fresh production--since
+over-production is a common symptom of commercial exuberance--or
+against a resale of the goods on which the original bills were based.
+As long as anyone who can show produce can be certain to get credit
+and currency, the notion that the maturing of bills of exchange can be
+relied to restrict currency expansion within safe limits is surely a
+dangerous assumption. The principle of a fixed limit, to be broken in
+case of real need, but only after some ceremony has been gone through
+giving notice of the fact that a crisis has been reached, seems rather
+to be required by the psychology of speculative mankind. But even if
+Sir Edward's preference for bills of exchange as backing for notes has
+all the merits that he claims that is no reason for urging the repeal
+of the Bank Act to secure their use. Because the Bank Act does not
+forbid it: it merely says, "there shall be transferred, appropriated
+and set apart by the said governor and company to the Issue Department
+of the Bank of England securities to the value of," etc. It is the
+practice of the Bank to put Government securities into the Issue
+Department, but the terms of the Act do not compel them to do so, and
+if an excess issue were needed they would seem to be empowered to put
+any bills that they discounted into the assets held against the note
+issue. On the whole the terms of the Act leaving them freedom in the
+matter, except with regard to the "Government debt" of L11 millions,
+which is specially mentioned as to be transferred to the Issue
+Department, seem to be preferable to a special stipulation in favour
+of bills of exchange.
+
+But the most important difference between Sir Edward Holden and the
+Cunliffe Committee seems to be in their attitude towards the gold
+reserve and the relation between the Bank of England and the rest of
+the items that compose the London money market. The Committee, working
+to restore the conditions which made our market the centre of the
+world's finance, endeavoured to give back the control of the central
+gold reserve to the Bank of England by suggesting, among other things,
+that the other banks should hand over their gold to it. They omitted
+to discuss the serious question of the greater difficulty that the
+Bank is likely to find in future in controlling the price of money in
+the market, owing to the huge size that the chief clearing banks have
+now reached. But a central gold reserve under central control was
+evidently the object at which they aimed. Sir Edward will have none of
+this. He says that if this were done the position of the Joint Stock
+banks would be weakened, though he does not explain why, since they
+would obviously hold notes in place of their gold and so would be able
+to meet their customers' demands, now that the latter are accustomed
+to the use of notes for pocket money. He points out that "the gold
+which was held by the Joint Stock banks before the war proved most
+useful.... At the beginning of the war the banks paid out gold,
+satisfied the demands of their customers for small currency, and thus
+eased the situation until currency notes became available." He seems
+to have forgotten that the banks, or most of them, refused to part
+with their gold, paid their customers in Bank of England notes which,
+being for L5 at the smallest, were of little use for pocket money, and
+so drove them to the Bank to get gold; and we had to have a prolonged
+bank holiday and a moratorium. Sir Edward is in favour of three gold
+reserves, one to be held by the Government, one by the clearing banks,
+and one by the Bank of England. If there were differences between the
+three controllers of the reserve at a time of crisis the consequence
+might be disastrous.
+
+In view of the admiration expressed by Sir Edward for the new American
+system which is so clearly based on central control it is rather
+illogical that he should be so strongly in favour of independence on
+this side of the water. His opinion is that "the policy of the Joint
+Stock banks ought to be to make themselves independent of the Bank of
+England by maintaining large reserves in their vaults." Independence
+and individualism are a great source of strength in most fields of
+financial activity, but in view of the great problems that our money
+market has to face there seems to be much to be said for co-operation
+and central control, at least until we have got back to a normal state
+of affairs with regard to the foreign exchanges.
+
+
+
+
+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 nationalised we may have to be licensed before we can burn coal
+or go away for a week-end; if the Eugenists have their way a licence
+will be necessary before we can propagate the species; and before
+we can get a licence to do anything we shall have to go through an
+exasperating process of filling in forms innumerable, inconsistent,
+overlapping and incomprehensible. Finance is the latest victim of this
+melancholy tendency. Under the guise of an attempt to give greater
+freedom to it a system has been introduced which makes a Treasury
+licence necessary, with penalties under the Defence of the Realm Act,
+for doing many things which have hitherto been possible for those who
+were prepared to forgo the privilege of a Stock Exchange quotation.
+Let the story be told in official language, as uttered through the
+Press Bureau, on February 24th, in "Serial No. C. 10917."
+
+"In view of the changed conditions resulting from the conclusion
+of the armistice, the Treasury has had under consideration the
+arrangements which have been in force during the war for the control
+of New Issues of Capital.
+
+"The work of scrutinising proposals for new Capital Issues has been
+performed during the war by the Capital Issues Committee, the object
+being to refuse sanction for all projects not immediately connected
+with the successful prosecution of the war. The decisions of the
+Treasury, taken upon the advice of this Committee, have, however,
+not had any binding force, beyond what is derived from the emergency
+regulations of the Stock Exchange, which forbids dealings in any new
+Issues which have not received Treasury consent.
+
+"While it is not possible under existing financial conditions to
+dispense altogether with the control of Capital Issues, it has clearly
+become necessary to reconsider the principles upon which sanction has
+been given or refused in order that no avoidable obstacles may be
+placed in the way of providing the Capital necessary for the speedy
+restoration of Commerce and Industry, and the development of public
+utility services.
+
+"In view of the numbers of the proposals for fresh Issues of Capital
+which are to be expected, it is necessary to provide further machinery
+for dealing with them and for making the decisions upon them
+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:--
+
+"'To consider and advise upon applications received by the Treasury
+for licences under Defence of the Regulation (30 F) for fresh
+Issues of Capital, with a view to preserving Capital during the
+reconstruction period for essential undertakings in the United
+Kingdom, and to preventing any avoidable drain upon Foreign Exchanges
+by the export of Capital, except where it is shown to the satisfaction
+of the Treasury that special circumstances exist.'
+
+"It will be an instruction to the Committee that, in order that
+applications may be dealt with expeditiously and to enable oral
+evidence to be given in support of them when desired by the applicant,
+that the Committee should sit by Panels consisting of three members,
+the decision of the Panels to be subject to confirmation by the full
+Committee.
+
+"All applications for licences most be made, in the first instance,
+in writing on a Form which can be obtained from the Secretary of the
+Capital Issues Committee, Treasury, S.W. 1.
+
+"Before any application is refused the Committee will give the
+applicant an opportunity of giving oral evidence in support of his
+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 Does
+    involve the introduction of fresh capital.
+
+"If none of the above Forms appears to be applicable (as, e.g., in
+amalgamations, sub-divisions of shares, etc.), a statement of the
+facts should be submitted in writing."
+
+Before we go on to consider the new regulation, 30 F, let us try to
+see what is the real effect of the document above quoted. It was
+evidently intended to be a relaxation of the control of finance.
+This is shown by the sentence which says that the matter was to be
+reconsidered "in order that no avoidable obstacle may be placed in the
+way of providing the capital necessary for the speedy restoration
+of commerce and industry, and the development of public utility
+services." And yet it was thought necessary to give legal force and
+attach penalties to regulations that have worked during the war quite
+sufficiently well to secure a much stricter control than is now
+required. The explanation of this apparent inconsistency is probably
+to be found in the desire of the Government to meet a grievance of the
+Stock Exchange. Hitherto the only penalty that befell those who made
+a new issue without getting Treasury sanction was that the securities
+issued could not be dealt in on the Stock Exchange. The practical
+effect of this was that those who acted without Treasury sanction
+could only issue securities subject to this serious drawback, and
+so an effective but not altogether prohibitive bar was put on the
+process. If this bar was not strong enough in war-time it ought
+clearly to have been strengthened long ago; if it was strong enough,
+then why should it be strengthened now?
+
+From the Stock Exchange point of view it is easy to make out a good
+case for working through licence and penalty rather than through the
+banning, of the securities effected, from sanction for dealings. By
+thus being used as an official weapon the Stock Exchange penalised
+itself and its members. By saying "no security not sanctioned by the
+Treasury shall be dealt in here," its Committee restricted business
+in the House and drove it outside. This grievance was obvious and was
+plentifully commented on during the war. If the Committee had pressed
+the point vigorously it could probably have forced the Government long
+ago to abolish the grievance by making all dealings in new issues that
+appeared without Treasury sanction illegal and liable to penalty.
+A patriotic readiness to fall in with the Government's desires was
+probably the reason why the Stock Exchange refrained from embarrassing
+it, during the war, by too active protests against a grievance that
+was then more or less real; though it should be noted that even if the
+grievance had been amended, the Stock Exchange would not necessarily
+have got any more business, but would only have succeeded in stopping
+a very moderate amount of business that was being done by outsiders.
+But when all is said that can be said for the justice of the case that
+can be made by the Stock Exchange, the question still arises whether
+it was advisable, at a time when relaxation of restrictions was
+desirable in the interests of the revival of industry, to draw tighter
+bonds which had been found tight enough to do their work. That the
+Stock Exchange should suffer from limitations from which outside
+dealers were exempt was certainly a hardship. On the other hand,
+since the armistice there has been a considerable expansion in Stock
+Exchange business. Oil shares, Mexican securities, industrial shares,
+insurance shares, and others in which capitalisation of reserves and
+bonus issues have been used as an effective lever for speculation,
+have enjoyed spells of considerable activity. With this revival in
+progress, in spite of many obvious bear points, such as industrial
+unrest at home, Bolshevism abroad, the continuance of heavy
+expenditure by the Government, and the hardly slackened growth of
+the national debt, it seems to have been scarcely necessary in the
+interests of the House to have made regulations which, though perhaps
+demanded by abstract justice, imposed new ties on enterprise at a
+time when complete freedom, as far as it was consistent with the best
+interests of the country, was most of all desirable.
+
+How far, we have next to ask, is it necessary for the best interests
+of the country to restrict the freedom of capital issues? If we look
+back at the terms of reference under which the reconstituted Committee
+is to work, we see that the officially expressed objects are (1)
+preserving capital for essential undertakings in the United Kingdom,
+and (2) preventing any avoidable drain upon Foreign Exchanges by the
+export of capital. There is certainly much to be said for both these
+objects. When we lend money to foreigners we give them the right to
+draw on us now in return for their promises to pay some day; in other
+words, we make an invisible import of foreign securities, and in the
+present state of our trade balance all imports, whether visible or
+invisible, need careful watching. It is also very evident that at a
+time when capital is scarce there is much to be said for keeping it
+for essential industries, especially those which produce necessaries
+and goods for export, and not allowing it to be swept up by borrowers
+who are going to devote it to making expensive fripperies on which big
+profits are probable.
+
+There remains a very big other side to both these questions. All over
+the world there is a demand for goods which have not been produced,
+or only in greatly reduced quantities, during the war. This demand is
+only effective in so far as willing buyers can pay; some of them have
+the needful cash in hand or waiting in London or elsewhere to be drawn
+on, but a great number of would-be buyers want to be financed, and
+will have to be financed by somebody if the needs that they feel are
+to be translated into actual purchases. In other words, in order that
+the wheels of industry are to be set turning as fast as they might, if
+they had a full chance, somebody has to lend freely. Now, it is surely
+most of all important in the national interest that those wheels
+should begin spinning as fast as possible, and the question is whether
+we are more likely to serve that interest best by keeping a meticulous
+eye on the course of exchange and buttoning up our pockets to foreign
+borrowers or by leaving capital free to seek its market, knowing that
+every time we give the foreigner the right to draw on us we stimulate
+our export trade, because his drawing must finally mean a demand on us
+for something--goods, securities or gold--and goods are what people
+are in these times most anxious to take. If we are going to leave all
+the financing to be done by America and fear to import promises to pay
+lest they should be followed by demands on our gold, shall we not be
+rather in the position of Barry Lyndon, who was given a gold piece by
+his mother when he went out into the world, with strict injunctions
+always to keep it in his pocket and never to change it? Regard for our
+gold standard is most necessary, but the gold standard is not an end
+in itself, but merely an important part of a machine which only exists
+to serve our industry. If we are so careful of the machine, which is
+a mere subsidiary, that we check the industry which it is there to
+serve, we shall be like the dandy who got wet through because he had
+not the heart to unfurl his beautifully rolled-tip umbrella.
+
+Again, it looks very sound and sensible to keep capital for purposes
+that are essential, but, on the other hand, it is so enormously
+important to set industry going as fast as possible that almost any
+one who will do anything in that direction is entitled to be given a
+chance. In war-time, when labour and materials were so scarce that
+they could not turn out all the munitions that were necessary, such a
+restriction was clearly inevitable. Now, when labour and materials are
+becoming more plentiful, and the scarce commodity is the pluck and
+enterprise that will take the risks involved by getting to work on a
+peace basis, it may be argued that any one who will take those risks,
+whatever be the stuff or services that he proposes to produce, should
+be encouraged rather than checked. It is again a question of the
+balance of advantage. If we are going to be so careful in seeing that
+capital is not put to a wrong use that we take all the heart out of
+those who want to make use of it, we shall do more harm than good. If
+by leaving capital free to go into any enterprise that it fancies
+we can give a start to industry and promote a spirit of courage and
+enterprise among its captains, it will be well worth while to do so
+at the expense of seeing a certain amount of capital going into the
+production of articles that the community might, if it made a more
+reasonable use of its purchasing power, very well do without. The same
+question arises when we consider the desire of the Government, not
+expressed in the above statement, but very freely admitted by Mr Bonar
+Law, in discussing it in the House of Commons, to keep capital to be
+lent to it rather than expended in, perhaps unnecessary, industry.
+Here, again, it is clearly in the interest of the taxpayer that
+Government loans should be raised on the most favourable terms
+possible. But if, in order to do so, we starve industry of capital
+that it needs, and so check the production on which all of us,
+Government and citizens alike, ultimately have to live, we shall
+be scoring an immediate advantage at the expense of future
+progress--spoiling a possibly brilliant break by putting down the
+white ball for a couple of points.
+
+There is thus a good deal to be said for setting capital free, before
+we have even arrived at the most serious objection to regulating it
+under Treasury licence. This objection is the exasperation, delay and
+uncertainty involved by this control. Even if we had an ideally wise
+and expeditious body to decide about capital issues it might not be
+the best thing to set it to work. But when we remember that in order
+to see that the wrong sort of issue is not made, all issues will
+have to pass through the terribly slow-working process of official
+selection before the necessary licence is finally granted, it begins
+to look still more likely that we should do well to run the risk of
+letting a few goats through the gate, rather than keep all the sheep
+waiting outside for months, with the probable result that many of them
+may lose altogether their chance of final salvation. It will be noted
+from the official statement that the arbitrary methods of the old
+Committee are to be modified. It has long been a by-word among those
+who had dealings with it; they abused it in quite sulphurous language
+and were wont to quote it as an example of all that bureaucratic
+tyranny is and should not be, thereby doing some injustice to our
+bureaucrats, seeing that the Committee was manned not by officials but
+by business men, clothed _pro hac vice_ in the thunder of Whitehall.
+The new Committee is to sit by panels of three, so as to expedite
+matters, and so as to allow applicants the privilege of giving oral
+evidence. This is an innovation that will save some exasperation, but
+it will hardly accelerate matters, especially as the decision of the
+panels will be subject to confirmation by the full Committee, so that
+all the work will have to be done twice over. There is thus much
+reason to fear that delay, so fatal in business matters, will be an
+inevitable offspring of the efforts of the new Committee, and the list
+of different forms on which applications are to be made, given above,
+shows that all the paraphernalia of red tape will dominate the
+proceedings.
+
+Now for the terms of the new Regulation under the Defence of the Realm
+Act.
+
+    "1. The following regulation shall be inserted after Regulation 30
+    EE:--
+
+    "30 F. The following provisions shall have effect in respect of
+    new capital issues and to dealings in securities issued for the
+    purpose of raising capital:
+
+    "(1) No person shall, except under and in pursuance of a licence
+    granted by the Treasury--
+
+    "(a) issue, whether for cash or otherwise, any stock, shares or
+    securities; or
+
+    "(b) pay or receive any money on loan on the terms express or
+    implied that the money is to be or may be applied at some future
+    date in payment of any stock, shares or securities to be issued at
+    whatever date to the person making the loan; or
+
+    "(c) sub-divide any shares or Debentures into shares or Debentures
+    of a smaller denomination, or consolidate any shares or Debentures
+    of a larger denomination; or
+
+    "(d) renew or extend the period of maturity of any securities; or
+
+    "(e) purchase, sell or otherwise transfer any stock, shares
+    or securities or any interest therein, or the benefit of any
+    agreement conferring a right to receive any stock, shares or
+    securities, if the stock, shares or securities were issued,
+    sub-divided or consolidated, or renewed or the period of maturity
+    thereof extended, or the agreement was made, as the case may be,
+    at any time between the 18th day of January, 1915, and the 24th
+    day of February, 1919, and the permission of the Treasury was not
+    obtained to the issue, sub-division, consolidation, renewal or
+    extension or the making of the agreement, as the case may be.
+
+    "(2) No person shall except under and in pursuance of a licence
+    granted by the Treasury--
+
+    "(a) buy or sell any stock, shares or other securities except for
+    cash or when the purchase or sale takes place in any recognised
+    Stock Exchange, subject to the rules or regulations of such
+    exchange.
+
+    "(b) buy or sell any stock, shares or other securities which have
+    not remained in physical possession in the United Kingdom since
+    the 30th September, 1914.
+
+    "(3) A licence granted under this regulation may be granted
+    subject to any terms and conditions specified therein.
+
+    "(4) If any person acts in contravention of this regulation, or
+    if any person to whom a licence has been granted under this
+    regulation subject to any terms or conditions fails to comply with
+    these terms or conditions, he shall be guilty of a summary offence
+    against these regulations.
+
+    "(5) In this regulation the expression 'securities' includes
+    Bonds, Debentures, Debenture stock, and marketable securities."
+
+It will be seen at once that the terms of this document, on any
+interpretation of them, go far beyond the intentions expressed in what
+may be called the official preamble and in the new Committee's terms
+of reference. One of the clauses seems, with all deference to its
+august composers, to be merely silly. This is (1)(c) forbidding
+sub-division of securities. If a L10 share is split into ten _L1_
+shares this operation cannot make the smallest difference to the
+supply of capital for essential industries or cause any drain on the
+Foreign Exchanges. I am assured by those who have delved into the
+official intention that the reason for the objection of the old
+Committee to splitting schemes, on which this new prohibition is
+based, was that splitting made shares more marketable and popular and
+so more likely to compete with War Bonds. But a mere sale of shares,
+split small and so popularised, does not absorb any capital. That only
+happens when, money is put into some new form of industry. If A, who
+holds ten L20 shares, is enabled to dispose of them to B because they
+are split into 200 L1 shares, then, A instead of B has got the money
+and has to invest it in something. The amount of capital available for
+investment is not diminished by a halfpenny. This regulation is just
+a piece of short-sighted tyranny which exasperates without doing the
+smallest good to anybody.
+
+More serious, however, was clause (1)(e) under which any securities
+that have been issued, split, consolidated or renewed without Treasury
+sanction since January, 1915, were not to be dealt in, in future,
+without a licence. The result of this clause, if it had stood, would
+have been that all loans under which such securities had been
+pledged would have had to be called in because the collateral became
+unsaleable, except after all the ceremonies had been gone through
+and a licence had been got. It was also possible to argue that the
+prohibition to renew or extend the maturity of any security meant that
+no loans of any kind could be renewed, and that no commercial bills
+could be renewed, without a licence. It is true that No. 5 paragraph
+says what the expression "securities" includes, but it does not state
+definitely that bonds, Debentures, Debenture stock and marketable
+securities are the only things included. It was a pretty piece of
+drafting, and raised a pretty storm in the House of Commons on
+February 27th, when a somewhat lurid picture of its effects was drawn
+by Sir H. Dalziel and Mr Macquisten. Mr Chamberlain not being then
+legally a member of the House, it fell to the lot of Mr Bonar Law to
+explain that the Government had really meant to give greater freedom,
+in making new issues, that the evils anticipated had not been
+intended, that he hoped the House would not judge the Government too
+harshly for not making unsanctioned issues illegal from the beginning,
+and that a new Order would be issued removing the retrospective effect
+of the new regulation. And so amendment was promised of a measure
+which would have had very awkward and unjust effects. It may be argued
+that it would only have affected people who had done, during the war,
+what they were asked not to do, namely, make issues without Treasury
+sanction. If the old Committee had been a reasonable and expeditious
+body this argument would have had great weight. But, in view of its
+caprices and dilatoriness, there was a good deal of excuse for those
+who decided to do without Treasury sanction and take the consequence
+of being unable to market their securities on the Stock Exchange.
+To propose to add a new penalty and cause the cancelling of all the
+financial arrangements made in connexion with such issues during four
+years was simply piling blunder on blunder. Luckily, the protests of
+the Government's own supporters sufficed to undo the worst of the
+mischief; but the whole affair is only another argument in favour of
+the earliest possible ridding of finance and industry from control
+that is so clumsily exercised.
+
+
+
+
+XX
+
+MONEY OR GOODS?[1]
+
+_December_, 1918
+
+[Footnote 1: This was the latter of two articles contributed to the
+_Times Trade Supplement_ in answer to a series in which Mr Arthur
+Kitson had attacked our banking and currency system suggested an
+inconvertible paper currency.]
+
+"Boundless Wealth"--Money and the Volume of Trade--The Quantity
+Theory--The Gold Standard--How is the Volume of Paper to be
+regulated?--Mr Kitson's Ideal.
+
+
+In the November _Trade Supplement_ an endeavour was made to answer Mr
+Kitson's rather vague and general insinuations and charges against our
+bankers concerning the manner in which they do their business. Now
+let us examine the larger and more interesting problem raised by his
+criticism of our currency system.
+
+In his article in the June _Supplement_ he told us that "if the
+British public had any grasp of the fundamental truths of economic
+science they would know that a future of boundless wealth and
+prosperity is theirs." This is a cheery and encouraging view and, let
+us hope, a true one. But, that boundless wealth can only be got if we
+work for it in the right way. Can Mr Kitson show it to us, and what
+are these "fundamental truths of economic science"? It is easier to
+talk about them than to find any two economists who would give an
+exactly--or even nearly--similar list of them. Mr Kitson glances "at
+a few elementary truths." "Wealth," he says, "is the product of two
+prime factors, man and Nature, generally termed labour and land. With
+an unlimited, or practically unlimited, supply of these two factors,
+how is it that wealth is and has been hitherto so comparatively
+scarce?" But is the supply of "man" unlimited in the sense of man
+able, willing, and properly trained to work? And is the supply of
+"Nature" unlimited in the sense of land, mines, and factories fully
+equipped with the right machinery and served and supplied by adequate
+means of transport? Surely the failure In production on which Mr
+Kitson so rightly lays stress is due, at least partly, to lack of
+good workers, good organisers, good machinery, and good transport
+facilities. Workers who restrict output, employers who despise science
+and cling to antiquated methods, the opposition of both classes to new
+and efficient equipment, and large tracts, even of our own land, still
+without reasonable transport facilities, have something to do with
+it. And lack of capital--this answer to the question Mr Kitson flouts
+because, he says, "since capital is wealth," to say that "wealth is
+scarce because capital is scarce is the same as saying that wealth is
+scarce because it is scarce." But is it not a "fundamental truth of
+economic science" that capital is wealth applied to production? Wealth
+and capital are by no means identical. When a well-known shipbuilding
+magnate laid waste several Surrey farms to make himself a deer-park,
+the ground that he thus abused was still wealth, but it is no longer
+capital because it has ceased to produce good food and is merely a
+pleasant lounging-place for his lordship. May not the failure of
+production be partly due to the fact that, owing to the extravagant
+and stupid expenditure of so many of the rich, too much work is put
+into providing luxuries--of which the above-mentioned deer-park is an
+example--and too little into the equipment of industry with the plant
+that it needs for its due expansion?
+
+Mr Kitson's answer is much easier. According to him, instead of
+working better, organising better, and putting more of our output into
+plant and equipment and less into self-indulgence and vulgarity all
+that we have to do to work the necessary reform is to provide more
+money and credit. Since, he says, under the industrial era--
+
+"All goods were made primarily for exchange or rather for sale ... it
+followed, therefore, that production could only continue so long as
+sales could be effected; and since sales were limited by the amount of
+money or credit offered, it followed that production was necessarily
+limited by the quantity of money or credit available for commercial
+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 materials
+would have benefited the manufacturer, and it is just possible that
+production, instead of being limited, might have been stimulated by
+cheapness due to scarcity of currency and credit, or, at least, might
+have gone on just as well on a lower all-round level of prices. On the
+whole, it is perhaps more probable that a steady rise in prices caused
+by a gradual increase in the volume of currency and credit would have
+the more beneficial effect in stimulating the energies of producers.
+But Mr Kitson's argument that the volume of currency and credit
+imposes an absolute limit on the volume of production is surely much
+too clean-cut an assumption. This absolute limit may be true, if
+currency cannot be increased, with regard to the aggregate value in
+money of the goods produced. But money value and volume are two quite
+different things. If our credit system had not been developed as it
+has, and we had had to rely on actual gold and silver for carrying on
+all production and trade, it does not by any means follow that trade
+and production might not have been on something like their present
+scale in the matter of volume and turnover; but the money value would
+have been much smaller because prices would have been all round at a
+much, lower level.
+
+This contention is based on what is called the "Quantity Theory of
+Money." This theory Mr Kitson wholeheartedly believes, so that this is
+not a point that has to be argued with him. "The value of money,"
+he says, "as every student of economics knows, is determined by the
+quantity of money in use and its velocity of circulation." Quite so.
+If you increase the amount of money faster than that of goods, more
+money has to be given for less goods; the value, or buying power, of
+money is depreciated and prices go up. The present war has given an
+excellent example of this process at work. All the warring Governments
+have printed acres of paper money, and have worked the credit system
+with profligate energy; and so we have a huge increase in currency
+and credit, along with little or no increase (probably a decrease) in
+consumable goods, and prices have soared like rockets all over the
+world. In neutral countries the rise has been as bad as anywhere,
+because the neutrals have been choked with the gold that the warring
+Powers exported, putting paper in its place. So we see that the volume
+of money, on the theory so emphatically expounded by Mr Kitson and
+endorsed by common-sense--as long as we are careful to include
+all forms of money that are taken in exchange for goods in the
+definition--reflects itself at once in prices. If money does not
+increase in quantity and goods do, then prices go down, and after
+the necessary adjustments are made in rates of wages and salaries,
+a larger trade can be done with the same amount of money at a lower
+level of values. The volume of money thus limits the aggregate value
+of trade, but not its aggregate volume. Periods of falling prices are
+not encouraging to producers, and they put too much advantage into the
+hands of the _rentier_--the man who lives on fixed interest; on the
+other hand, they are generally believed to be in favour of the working
+classes, since reductions in wages generally lag behind the fall in
+prices, which means increased buying power to the wage-earner.
+
+Mr Kitson's view that the volume of trade is limited by the quantity
+of currency and credit is thus based on confusion between volume and
+value. Moreover, it follows also from the "Quantity Theory of Money,"
+which he holds, that if he applies his remedy and multiplies currency
+and credit as fast as he appears to want to, the result will be a
+still further depreciation in the buying power of money, and a further
+rise in prices and an increase in all the bitterness, discontent,
+suspicion, and strikes that the rise in prices has already caused
+during the war. Is this a prospect to pray for? Surely if we want to
+enjoy "boundless wealth and prosperity" the way to do so is to turn
+out goods--things to eat and wear and enjoy--and not to multiply
+money, thereby merely depreciating its value, on Mr Kitson's own
+admission. He thinks that "nothing but an abundant supply of currency
+in the shape of legal tender notes and bank credit, could have enabled
+us to undertake successfully such unprecedented burdens" as we have
+borne during the war. But it may equally well be argued that we have
+borne these burdens because we worked harder than ever before to turn
+out the needed stuff, organised better, used our machinery to its
+full power, and spent less of our product on luxuries; and that the
+abundant currency, by forcing up prices, immensely increased the
+cost of the war and produced industrial friction which several times
+brought us unpleasantly close to disaster.
+
+Mr Kitson, however, uses the "Quantity Theory of Money"--the doctrine
+that the value or buying power of money varies according to its
+quantity in relation to that of the goods that it buys--chiefly as a
+stick wherewith to beat the Gold Standard. He shows, very easily and
+truly, that it is absurd to suppose that the value of the monetary
+gold standard is invariable. Thereby he is only beating a dead horse,
+for no such argument is nowadays put forward. The variability of the
+gold standard of value is acknowledged, whenever a fluctuation in the
+general level of commodity prices is recorded. But gold is the basis
+of our credit system, and of those of all the economically civilised
+countries of the world, not because its value is believed to be
+invariable, but because it is the commodity which is universally
+accepted, in such countries and in normal times, in payment of debts.
+This quality of acceptability it has got largely by custom and
+convention. Mr Kitson speaks of the "selection of gold by the world's
+bankers as the basis for money and credit." But it was selected as
+currency by common custom long before bankers were heard of. And it
+was selected because of its permanence, ductility and other qualities,
+especially its beauty as ornament, which made man, eager to adorn
+himself, his women-kind, and the temples of his gods, always ready
+to accept it in payment, knowing also that, because of this
+acceptability, he would always be able to exchange it into any goods
+that he wanted.
+
+Any other commodity that earned this quality of universal
+acceptability could do the work of gold just as well. But until one
+has been found, gold, as long as it keeps that quality, holds the
+field. And bankers use it as the basis for money and credit, not
+because, as Mr Kitson says, they selected it owing to its scarcity,
+but because this quality of universal acceptability made it the thing
+in which all debts, both at home and abroad, could be paid. "Given,"
+says Mr Kitson, "a self-contained trading community with a certain
+quantity of legal tender, just sufficient for its commercial needs,
+and it makes no difference either to the value or efficiency of the
+money or to the trade affected whether it be made of metal or paper."
+Quite so, but trading communities are not self-contained. Their
+currency has to be convertible into something acceptable abroad, and
+that something is, at present, gold. It is possible that the world
+may some day evolve an international paper currency that will be
+everywhere acceptable. But such an ideal requires a growth of honesty
+and mutual confidence among the nations that puts it a long way off.
+And how is its volume to be regulated?
+
+This question is all-important, whether the currency be national or
+international. Mr Kitson speaks of a currency "just sufficient" for
+the community's commercial needs. Who is to decide when the currency
+is just sufficient? The Government? A sweet world we should live in,
+if among other party questions, Parliament had to consider multiplying
+or contracting the currency every year or every month, with all the
+interests that would be affected by the consequent rise or fall in
+prices, lobbying, speech-making, and pulling strings to work the
+oracle to suit their pockets. And, according to Mr Kitson's view, that
+the volume of trade is limited by the supply of currency, this volume
+would then depend on the whims of the House of Commons, half the
+members of which would probably be innocent of a glimmering of
+understanding of the enormously important question that they were
+deciding. The gold standard, which makes the course of prices depend,
+more or less, on the chances of digging up a capricious metal from the
+bowels of the earth, has its obvious drawbacks; but it is a clean and
+sensible business compared with making them depend on the caprices of
+Parliament, complicated by the political corruption that would be only
+too likely to follow the putting of such a question into the hands of
+our elected and hereditary representatives and rulers.
+
+Such, however, seems to be the Promised Land to which Mr Kitson wants
+to lead us. Thus he propounds his remedy. "The remedy is surely
+obvious. Divorce our legal tender from its alliance with gold
+entirely, so that the supply of money and credit for our home trade is
+no longer dependent upon our foreign trade rivals. Base our currency
+upon the national credit ... treat gold as a commodity only, for the
+settlement of foreign trade balances."
+
+This passage in his article in the September _Supplement_ tells us
+what to do. Keep gold, out of deference for foreign prejudice, for the
+settlement of foreign trade balances, but make as much paper money as
+you like for home use. As our legal tender money is to be "divorced
+entirely from its alliance with gold" it clearly cannot be convertible
+into gold. So that apparently we shall have a paper pound and a gold
+pound (the latter for foreign use) with no connection between them.
+This stage of economic barbarism has been left behind now even by
+some of the South American republics. The paper pound, based on the
+national credit, can be multiplied as fast as our legislators think
+fit. If they do not multiply it fast enough, Mr Kitson will tell them
+that they are strangling trade, because the volume of production
+is limited by the amount of money available. At the same time bank
+credits will be multiplied indefinitely because, as was shown in the
+November _Supplement_, Mr Kitson supports a view that the average
+business man holds (according to him) that he ought to have a legal
+right to as much credit as he wants. With the Government printing
+paper to please its supporters, with the banks obliged by law to give
+credit to every one who asks for it, and with prices soaring on every
+addition to currency and credit, what a country this will be to live
+in, and what a life will be led by those who have to compile and
+work out the index numbers of the prices of commodities! Some of us,
+perhaps, will prefer the jog-trot conservatism of Lord Cunliffe's
+Currency Committee, who in their recently issued report[1] (which
+every one ought to read) recommend that gold should not be used for
+circulation at present, but that endeavours should be made towards
+the cautious reduction of our swollen paper currency, and that its
+convertibility into gold should be maintained.
+
+[Footnote 1: Cd. 9182, _2d_.]
+
+
+
+
+INDEX
+
+
+Addis, Sir Charles, on banking,
+Aerated Bread Co., and bonus issues,
+Allies, loans to,
+America, effect of war on,
+  War finance of,
+
+Bank Act: its purpose,
+  Its suggested repeal,
+  Its working,
+Bank Amalgamations, progress of,
+Bechhofer, Mr, on Guild Socialism,
+Bills of Exchange, as basis of issue,
+Bonar Law, Mr, on after-war position,
+  On capital levy,
+  On sale of securities,
+British Trade Corporation, formation of,
+Brunner, Mond, and bonus shares,
+Budget, in 1918,
+
+Canadian Pacific, and bonus issues,
+Capital, foreign,
+  Levy on,
+  Meaning of,
+  Supply of,
+  War's destruction of,
+Capital Issues, Committee on,
+  Licence required for,
+  Need to restrict,
+  Stock Exchange and,
+Cole, Mr, on Guild Socialism,
+Cunliffe Committee, report of
+Currency: inflation of,
+  International,
+  Metals as,
+  Origin of,
+  Quantity theory of,
+  Report on,
+
+_Daily News_, on capital levy,
+
+Expenditure, Committee on,
+
+France, after-war position of,
+Free Trade and British supremacy,
+
+Germany, after-war position of,
+  Our claims against,
+  War finance of,
+Gold standard: affected by war,
+  Faults of,
+  Reasons for,
+Goodenough, Mr, on note issue,
+
+Hoare, Mr Alfred, on taxation,
+Holden, Sir Edward, and the Bank Act,
+
+Inflation, working of,
+Interest, rate of,
+
+Kitson, Mr, on currency,
+
+Labour, example set by,
+Lawrence, Mr Pethick, on capital levy,
+Lees, Mr Edward, on debt redemption,
+Lloyds, elasticity of,
+London, prestige of,
+
+Macaulay, Lord, on bad money,
+
+_New Statesman_, on capital levy,
+
+Owen, Senator, on American system,
+
+"Quantity Theory," of currency,
+
+Reserves, capitalising,
+_Round Table_, on capital levy,
+
+Socialism, and bank amalgamations,
+  In light of war,
+  Guild,
+Stilwell, Mr, on paying for war,
+
+Taxation, as war weapon,
+  Increase of, in war,
+
+"War Emergency Workers," on capital levy,
+Webb, Mr, on State banking,
+
+
+
+***END OF THE PROJECT GUTENBERG EBOOK WAR-TIME FINANCIAL PROBLEMS***
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