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: SeeEconomist, August 4, 1917, p. 151.]
It is not possible nowadays, now that the working classes are conscious of their strength, to apply taxation to ordinary articles of general consumption with anything like the ruthlessness which in former days produced such widespread misery. Indirect taxation of this kind carries with it this inherent weakness that its burden falls most heavily on those who are least able to bear it, consequently it is bound to break in the hand of those who attempt to apply it with anything like vigour to a community which is prepared to stand up for fair treatment. A tax on bread or salt obviously hits the wage-earner at 30s. a week infinitely harder than it hits the millionaire, and so the country would not tolerate taxes on bread or salt. Direct taxes, such as Income Tax and Death Duties, have this enormous advantage, that they can really be regulated so as to press with continually increasing severity upon those who are best able to bear them. Unfortunately our Income Tax is still so unjustly imposed that it was clearly impossible to make full use of it without its being first reformed. That two men, each earning £1000 a year, should pay the same Income Tax, in spite of one having a wife and five children, while the other is a careless bachelor, is such a blot upon this otherwise excellent tax that it is generally agreed that the present rate of 5s. is as high as it can be made to go unless some reform is introduced into its incidence. The need for its reform is made the excuse for a sparing use of the tax, and we have been on several occasions assured that, as soon as the war is over, this reform will be set about.
In the meantime the Government falls back on funding about 80 per cent. of its requirements of the war on a system of borrowing. In so far as the money subscribed to its loans is money that is being genuinely saved by investors this process has exactly the same effect as taxation, that is to say, somebody goes without goods and services and hands over his power to buy them to the State to be used for the war. Borrowing of this kind consequently does everything that is needed for the solution of the immediate war problem, and the only objection to it is that it leaves later on the difficulties involved by raising taxes when the war is over, and economic problems are much more complicated in times of peace than in war, for meeting the interest and redemption of debt. But, in fact, it is well known that by no means all that the Government has borrowed for war purposes has been provided in this way. Much of the money that the Government has obtained for war purposes has been got not out of genuine savings of investors, but by arrangements of various kinds with the banking machinery of the country, or by the simple use of the printing-press, with the result that the Government has provided itself with an enormous mass of new currency which has not been taken out of anybody else's pocket, but has been manufactured by or for the Government.
The consequence of the profligate use of this dishonest process is that general rise in prices, which is in effect an indirect tax on the necessaries of life, involving all the injustice and ill-feeling which arises from such a measure. It is inevitable that the working classes, finding themselves subjected to a rise in prices, the cause of which they do not understand, but the result of which they see to be a great decrease in the buying power of their wages, should believe that they are being exploited by profiteers, that the rich classes are growing richer at their expense out of the war, and that they and the country are being bled by a set of unpatriotic capitalist blood-suckers. It is also natural that the property-owning classes, who find themselves paying an Income Tax which they regard as extortionate, should consider that the working classes by their continuous demands for higher wages to meet higher cost of living, are trying to exploit the country in their own interests in a time of national crisis, and displaying a most unedifying spirit. The social result of this evil policy of inflation, in embittering class against class, is a matter which it is difficult to exaggerate. Some people think that it was inevitable. This is too wide a question to be entered into now, but at least it must be contended that if it is inevitable the extent to which it is being practised might have been very greatly diminished.
Do we mean to go on to the end of the war with this muddling policy of bad finance? If we still insist on believing that the war cannot last another six months, and there is therefore no need to pull ourselves up short financially and put things in order, then we certainly shall do so. But we should surely recognise that there is at least a chance that the war may go on for years, that if so our present financial methods will leave us with a burden of debt which is appalling to consider, and that in any case, whether the war lasts another six months or another six years, a reform of our financial methods is long overdue, is inevitable some time, and will pay us better the sooner it is set about.
December, 1917
The Changed Spirit of the Country—A Great Opportunity thrown away—What Taxation might have done—The Perils of Inflation—Drifting stupidly along the Line of Least Resistance—It is we who pay, not "Posterity."
In the November number ofSperling's JournalI 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.
January, 1918
The Objects of the Levy—Its Origin and History—How it would work inPractice—The Attitude of the Chancellor—The Effects of the Schemein discouraging Thrift—Its Fallacies and Injustices—The InsuperableObstacles to its Application—Its Influence on Production—One of theTests 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 theDaily Newsof 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 theRound 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 theRound Tablecheerfully, "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; theRound Tableplumps 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 theEconomistof 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," TheRound Table'ssuggestion 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 theRound 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 theNew Statesmanwell 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 theNew 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, theStatesmanwas 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 theNew Statesmanin a recent issue. It argued that, because ordinary income tax would still be exacted, the contrast between the successful barrister with an Income of £20,000 a year and no savings, who would consequently escape the capital levy, and the poor clergyman who had saved £1000 and would consequently be liable to it, fell to the ground. In other words, because both lawyer and parson paid income tax, it was fair that the former should escape the capital levy while the latter should have to pay it!
But needs must when the devil drives, and in a crisis of this kind it is not always possible to look too closely into questions of equity in raising money. It is necessary, however, to look very closely into the probable economic effects of any suggested form of taxation, and, if we find that it is likely to diminish the future wealth production of the nation, to reject it, however attractive it may seem to be at first sight. A levy on capital which would certainly check the incentive to save, by the fear that, if such a thing were once successfully put through, it might very likely be repeated, would dry up the springs of that supply of capital which is absolutely essential to the increase of the nation's productive power. Moreover, business men who suddenly found themselves shorn of 10 to 20 per cent. of their available capital would find their ability to enter into fresh enterprise seriously diminished just at the very time when it is essential that all the organisers of production and commerce in this country should be most actively engaged in every possible form of enterprise, in order to make good the ravages of war.
February, 1918
The Recent Amalgamations—Will the Provinces suffer?—Consolidation not a New Movement—The Figures of the Past Three Decades—Reduction of Competition not yet a Danger—The Alleged Neglect of Local Interests—Shall we ultimately have One Huge Banking Monopoly?—The Suggested Repeal of the Bank Act—Sir E. Holden's Proposal.
Banking problems have lately loomed large in the financial landscape. It will be remembered that about a year and a half ago a Committee was appointed to consider the creation of a new institution specially adapted for financing overseas trade and for the encouragement of industrial and other ventures through their years of infancy, and that the charter which was finally granted to the British Trade Corporation, as this institution was ultimately called, roused a great deal of opposition both on the part of banks and of traders who thought that a Government institution with a monopoly character was going to cut into their business with the help of a Government subsidy. In fact, there was no subsidy at all in question, and the fears of the trading world of competition on the part of the new chartered institution only arose owing to its unfortunate name, which was given to it in order to allay the apprehensions of the banks which had been provoked by the title originally designed for it, namely, the British Trade Bank. There seems no reason why this Company should not do good work for British trade without treading on the toes of anybody. Although naturally its activities cannot be developed on any substantial scale until the war is over, its Chairman assured the shareholders at the end of January that its preliminary spadework was being carefully attended to.
After this small storm in a teacup had died down those interested in our banking efficiency were again excited by the rapid progress made by the process of amalgamation among our great banks, which began to show acute activity again in the last months of 1917. The suddenly announced amalgamation of the London and South-Western and London and Provincial Banks led to a whole host of rumours as to other amalgamations which were to follow; and though most of these proved to be untrue a fresh sensation was aroused when the union was announced of the National Provincial Bank of England and the Union of London and Smith's Bank. All the old arguments were heard again on the subject of the objections, from the point of view of industry in the provinces, to the formation of great banking institutions, with enormous figures on both sides of the balance-sheet, working from London, often, it was alleged, with no consideration for the needs of the provincial users of credit. These latest amalgamations, which have united banks which already had head offices in London, gave less cause than usual for these provincial apprehensions, which had far more solid reason behind them when purely provincial banks were amalgamated with institutions whose head office was in London. Nevertheless, the argument was heard that the great size and scale on which these amalgamated banks were bound to work would necessarily make them more monopolistic and bureaucratic in their outlook, and less elastic and adaptable in their dealings with their local customers.
It seems to me that there is so far very little solid ground for any apprehension on the part of the business community that the recent development of banking evolution will tend to any damage to their interests. The banks have grown in size with the growth of industry. As industry has tended more and more to be worked by big battalions, it became necessary to have banking institutions with sufficiently large resources at their command to meet the great requirements of the huge industrial organisations that they had to serve. Nevertheless, the tendency towards fewer banks and bigger figures has grown with extraordinary celerity, as the following table shows:—
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 theEconomist. It will be noticed that in 1886 there were in England 109 joint-stock banks with 1547 offices, whose accounts were tabulated in theEconomist'sannual 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:—
Notes Issued .. £76,076,000 Gold ……………… £57,626,000Government Debt ……. 11,015,000Other Securities …… 7,435,000—————- —————-£76,076,000 £76,076,000Ratio of Gold to Notes Issued = 75.7 per cent.
Capital ……. £14,553,000 Government Securities …… £56,768,000 Rest ………. 3,363,000 Other Securities ……….. 92,278,000 Deposits— Notes ………. £30,750,000 Public £41,416,000 Gold and Silver 1,143,000 Other 121,589,000 —————- 163,005,000 ——————- 31,893,000 Other Liabilities … 18,000 —————- —————- £180,939,000 £180,939,000
Ratio of Cash Balance to Liabilities = 19.6 per cent.
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.