War-Time Financial Problems Part 12

"(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 doc.u.ment, 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 a.s.sured 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 antic.i.p.ated 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 Quant.i.ty 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 cla.s.ses 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 s.h.i.+pbuilding 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 lords.h.i.+p. 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 quant.i.ty 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 a.s.sumption. 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 "Quant.i.ty 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 quant.i.ty 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 quant.i.ty 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 cla.s.ses, 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 quant.i.ty of currency and credit is thus based on confusion between volume and value. Moreover, it follows also from the "Quant.i.ty 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 "Quant.i.ty Theory of Money"--the doctrine that the value or buying power of money varies according to its quant.i.ty 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 G.o.ds, 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 quant.i.ty 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 pa.s.sage 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_.]