War-Time Financial Problems Part 4

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 circ.u.mstances, 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 c.u.mbrous 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 p.r.o.nounced 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, princ.i.p.ally having regard to the circ.u.mstances 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 s.h.i.+pping 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 a.s.sumed 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 a.s.sistance 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 a.s.sistance 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 inst.i.tutions 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.

"Circ.u.mstances 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 acc.u.mulated 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-cla.s.s 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 ma.s.s 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 ma.s.s 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 a.s.set, 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 a.s.sistance 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 ent.i.tled 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 a.s.siduous 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 fas.h.i.+onable 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 s.h.i.+pbuilding 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 s.h.i.+pped 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 censors.h.i.+p 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 antic.i.p.ated 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:--