March, 1919
The New Meaning of Licence—The Question of Capital Issues—Text of the Treasury Regulations—Their Scope and Effect—The Position of the Stock Exchange—Wider Issues at Stake—Should Capital be set Free?—The Arguments for and against—Perils of an Excessive Caution—The New Committee and its Terms of Reference—The Absurdity of prohibiting Share-splitting—The Storm in the House of Commons—Disappearance of the Retrospective Clause—A Sample of Bureaucratic Stupidity.
A contrast between liberty and licence is a pleasant alliterative commonplace beloved by political writers, especially those with a reactionary bias. In the light of recent events it seems to be going to take a new meaning. Licence will soon be understood, not as the abuse of liberty, to which democracies are prone, but as a new weapon by which our bureaucracy will do away with liberty by tightening the shackles on our economic and other activities. For imports and exports the licence system is already familiar; if the mines and railways are to be nationalised we may have to be licensed before we can burn coal or go away for a week-end; if the Eugenists have their way a licence will be necessary before we can propagate the species; and before we can get a licence to do anything we shall have to go through an exasperating process of filling in forms innumerable, inconsistent, overlapping and incomprehensible. Finance is the latest victim of this melancholy tendency. Under the guise of an attempt to give greater freedom to it a system has been introduced which makes a Treasury licence necessary, with penalties under the Defence of the Realm Act, for doing many things which have hitherto been possible for those who were prepared to forgo the privilege of a Stock Exchange quotation. Let the story be told in official language, as uttered through the Press Bureau, on February 24th, in "Serial No. C. 10917."
"In view of the changed conditions resulting from the conclusion of the armistice, the Treasury has had under consideration the arrangements which have been in force during the war for the control of New Issues of Capital.
"The work of scrutinising proposals for new Capital Issues has been performed during the war by the Capital Issues Committee, the object being to refuse sanction for all projects not immediately connected with the successful prosecution of the war. The decisions of the Treasury, taken upon the advice of this Committee, have, however, not had any binding force, beyond what is derived from the emergency regulations of the Stock Exchange, which forbids dealings in any new Issues which have not received Treasury consent.
"While it is not possible under existing financial conditions to dispense altogether with the control of Capital Issues, it has clearly become necessary to reconsider the principles upon which sanction has been given or refused in order that no avoidable obstacles may be placed in the way of providing the Capital necessary for the speedy restoration of Commerce and Industry, and the development of public utility services.
"In view of the numbers of the proposals for fresh Issues of Capital which are to be expected, it is necessary to provide further machinery for dealing with them and for making the decisions upon them effective.
"A regulation under the Defence of the Realm Act has accordingly been made prohibiting all Capital Issues except under licence from the Treasury, and the Capital Issues Committee has been reconstituted with new Terms of Reference, which are as follows:—
"'To consider and advise upon applications received by the Treasury for licences under Defence of the Regulation (30 F) for fresh Issues of Capital, with a view to preserving Capital during the reconstruction period for essential undertakings in the United Kingdom, and to preventing any avoidable drain upon Foreign Exchanges by the export of Capital, except where it is shown to the satisfaction of the Treasury that special circumstances exist.'
"It will be an instruction to the Committee that, in order that applications may be dealt with expeditiously and to enable oral evidence to be given in support of them when desired by the applicant, that the Committee should sit by Panels consisting of three members, the decision of the Panels to be subject to confirmation by the full Committee.
"All applications for licences most be made, in the first instance, in writing on a Form which can be obtained from the Secretary of the Capital Issues Committee, Treasury, S.W. 1.
"Before any application is refused the Committee will give the applicant an opportunity of giving oral evidence in support of his case."
The notice then proceeded to recite the terms of D.O.R.A. 30 F, of which more anon. Next day came a supplementary announcement, "Serial No. C 10938," as follows:—
"With reference to the recent announcement in the Press that all applications for Treasury licences must be made in writing on a form obtainable from the Secretary of the Capital Issues Committee, Treasury, S.W. 1, delay will be avoided if intending applicants will state which of the following forms they require:—
"Form No. 1. Issue by a proposed New Company to start a freshbusiness.
"Form No. 2. Issue by an Existing Company (other than for thepurpose of capitalising profits).
"Form No. 3. Issue by an Existing Company for the purpose ofcapitalising profits.
"Form No. 4. Conversion of a Firm into a Limited Company which doesNot involve the introduction of fresh capital.
"Form No. 5. Conversion of a Firm into a Limited Company which Doesinvolve the introduction of fresh capital.
"If none of the above Forms appears to be applicable (as, e.g., in amalgamations, sub-divisions of shares, etc.), a statement of the facts should be submitted in writing."
Before we go on to consider the new regulation, 30 F, let us try to see what is the real effect of the document above quoted. It was evidently intended to be a relaxation of the control of finance. This is shown by the sentence which says that the matter was to be reconsidered "in order that no avoidable obstacle may be placed in the way of providing the capital necessary for the speedy restoration of commerce and industry, and the development of public utility services." And yet it was thought necessary to give legal force and attach penalties to regulations that have worked during the war quite sufficiently well to secure a much stricter control than is now required. The explanation of this apparent inconsistency is probably to be found in the desire of the Government to meet a grievance of the Stock Exchange. Hitherto the only penalty that befell those who made a new issue without getting Treasury sanction was that the securities issued could not be dealt in on the Stock Exchange. The practical effect of this was that those who acted without Treasury sanction could only issue securities subject to this serious drawback, and so an effective but not altogether prohibitive bar was put on the process. If this bar was not strong enough in war-time it ought clearly to have been strengthened long ago; if it was strong enough, then why should it be strengthened now?
From the Stock Exchange point of view it is easy to make out a good case for working through licence and penalty rather than through the banning, of the securities effected, from sanction for dealings. By thus being used as an official weapon the Stock Exchange penalised itself and its members. By saying "no security not sanctioned by the Treasury shall be dealt in here," its Committee restricted business in the House and drove it outside. This grievance was obvious and was plentifully commented on during the war. If the Committee had pressed the point vigorously it could probably have forced the Government long ago to abolish the grievance by making all dealings in new issues that appeared without Treasury sanction illegal and liable to penalty. A patriotic readiness to fall in with the Government's desires was probably the reason why the Stock Exchange refrained from embarrassing it, during the war, by too active protests against a grievance that was then more or less real; though it should be noted that even if the grievance had been amended, the Stock Exchange would not necessarily have got any more business, but would only have succeeded in stopping a very moderate amount of business that was being done by outsiders. But when all is said that can be said for the justice of the case that can be made by the Stock Exchange, the question still arises whether it was advisable, at a time when relaxation of restrictions was desirable in the interests of the revival of industry, to draw tighter bonds which had been found tight enough to do their work. That the Stock Exchange should suffer from limitations from which outside dealers were exempt was certainly a hardship. On the other hand, since the armistice there has been a considerable expansion in Stock Exchange business. Oil shares, Mexican securities, industrial shares, insurance shares, and others in which capitalisation of reserves and bonus issues have been used as an effective lever for speculation, have enjoyed spells of considerable activity. With this revival in progress, in spite of many obvious bear points, such as industrial unrest at home, Bolshevism abroad, the continuance of heavy expenditure by the Government, and the hardly slackened growth of the national debt, it seems to have been scarcely necessary in the interests of the House to have made regulations which, though perhaps demanded by abstract justice, imposed new ties on enterprise at a time when complete freedom, as far as it was consistent with the best interests of the country, was most of all desirable.
How far, we have next to ask, is it necessary for the best interests of the country to restrict the freedom of capital issues? If we look back at the terms of reference under which the reconstituted Committee is to work, we see that the officially expressed objects are (1) preserving capital for essential undertakings in the United Kingdom, and (2) preventing any avoidable drain upon Foreign Exchanges by the export of capital. There is certainly much to be said for both these objects. When we lend money to foreigners we give them the right to draw on us now in return for their promises to pay some day; in other words, we make an invisible import of foreign securities, and in the present state of our trade balance all imports, whether visible or invisible, need careful watching. It is also very evident that at a time when capital is scarce there is much to be said for keeping it for essential industries, especially those which produce necessaries and goods for export, and not allowing it to be swept up by borrowers who are going to devote it to making expensive fripperies on which big profits are probable.
There remains a very big other side to both these questions. All over the world there is a demand for goods which have not been produced, or only in greatly reduced quantities, during the war. This demand is only effective in so far as willing buyers can pay; some of them have the needful cash in hand or waiting in London or elsewhere to be drawn on, but a great number of would-be buyers want to be financed, and will have to be financed by somebody if the needs that they feel are to be translated into actual purchases. In other words, in order that the wheels of industry are to be set turning as fast as they might, if they had a full chance, somebody has to lend freely. Now, it is surely most of all important in the national interest that those wheels should begin spinning as fast as possible, and the question is whether we are more likely to serve that interest best by keeping a meticulous eye on the course of exchange and buttoning up our pockets to foreign borrowers or by leaving capital free to seek its market, knowing that every time we give the foreigner the right to draw on us we stimulate our export trade, because his drawing must finally mean a demand on us for something—goods, securities or gold—and goods are what people are in these times most anxious to take. If we are going to leave all the financing to be done by America and fear to import promises to pay lest they should be followed by demands on our gold, shall we not be rather in the position of Barry Lyndon, who was given a gold piece by his mother when he went out into the world, with strict injunctions always to keep it in his pocket and never to change it? Regard for our gold standard is most necessary, but the gold standard is not an end in itself, but merely an important part of a machine which only exists to serve our industry. If we are so careful of the machine, which is a mere subsidiary, that we check the industry which it is there to serve, we shall be like the dandy who got wet through because he had not the heart to unfurl his beautifully rolled-tip umbrella.
Again, it looks very sound and sensible to keep capital for purposes that are essential, but, on the other hand, it is so enormously important to set industry going as fast as possible that almost any one who will do anything in that direction is entitled to be given a chance. In war-time, when labour and materials were so scarce that they could not turn out all the munitions that were necessary, such a restriction was clearly inevitable. Now, when labour and materials are becoming more plentiful, and the scarce commodity is the pluck and enterprise that will take the risks involved by getting to work on a peace basis, it may be argued that any one who will take those risks, whatever be the stuff or services that he proposes to produce, should be encouraged rather than checked. It is again a question of the balance of advantage. If we are going to be so careful in seeing that capital is not put to a wrong use that we take all the heart out of those who want to make use of it, we shall do more harm than good. If by leaving capital free to go into any enterprise that it fancies we can give a start to industry and promote a spirit of courage and enterprise among its captains, it will be well worth while to do so at the expense of seeing a certain amount of capital going into the production of articles that the community might, if it made a more reasonable use of its purchasing power, very well do without. The same question arises when we consider the desire of the Government, not expressed in the above statement, but very freely admitted by Mr Bonar Law, in discussing it in the House of Commons, to keep capital to be lent to it rather than expended in, perhaps unnecessary, industry. Here, again, it is clearly in the interest of the taxpayer that Government loans should be raised on the most favourable terms possible. But if, in order to do so, we starve industry of capital that it needs, and so check the production on which all of us, Government and citizens alike, ultimately have to live, we shall be scoring an immediate advantage at the expense of future progress—spoiling a possibly brilliant break by putting down the white ball for a couple of points.
There is thus a good deal to be said for setting capital free, before we have even arrived at the most serious objection to regulating it under Treasury licence. This objection is the exasperation, delay and uncertainty involved by this control. Even if we had an ideally wise and expeditious body to decide about capital issues it might not be the best thing to set it to work. But when we remember that in order to see that the wrong sort of issue is not made, all issues will have to pass through the terribly slow-working process of official selection before the necessary licence is finally granted, it begins to look still more likely that we should do well to run the risk of letting a few goats through the gate, rather than keep all the sheep waiting outside for months, with the probable result that many of them may lose altogether their chance of final salvation. It will be noted from the official statement that the arbitrary methods of the old Committee are to be modified. It has long been a by-word among those who had dealings with it; they abused it in quite sulphurous language and were wont to quote it as an example of all that bureaucratic tyranny is and should not be, thereby doing some injustice to our bureaucrats, seeing that the Committee was manned not by officials but by business men, clothedpro hac vicein the thunder of Whitehall. The new Committee is to sit by panels of three, so as to expedite matters, and so as to allow applicants the privilege of giving oral evidence. This is an innovation that will save some exasperation, but it will hardly accelerate matters, especially as the decision of the panels will be subject to confirmation by the full Committee, so that all the work will have to be done twice over. There is thus much reason to fear that delay, so fatal in business matters, will be an inevitable offspring of the efforts of the new Committee, and the list of different forms on which applications are to be made, given above, shows that all the paraphernalia of red tape will dominate the proceedings.
Now for the terms of the new Regulation under the Defence of the RealmAct.
"1. The following regulation shall be inserted after Regulation 30EE:—
"30 F. The following provisions shall have effect in respect of new capital issues and to dealings in securities issued for the purpose of raising capital:
"(1) No person shall, except under and in pursuance of a licence granted by the Treasury—
"(a) issue, whether for cash or otherwise, any stock, shares or securities; or
"(b) pay or receive any money on loan on the terms express or implied that the money is to be or may be applied at some future date in payment of any stock, shares or securities to be issued at whatever date to the person making the loan; or
"(c) sub-divide any shares or Debentures into shares or Debentures of a smaller denomination, or consolidate any shares or Debentures of a larger denomination; or
"(d) renew or extend the period of maturity of any securities; or
"(e) purchase, sell or otherwise transfer any stock, shares or securities or any interest therein, or the benefit of any agreement conferring a right to receive any stock, shares or securities, if the stock, shares or securities were issued, sub-divided or consolidated, or renewed or the period of maturity thereof extended, or the agreement was made, as the case may be, at any time between the 18th day of January, 1915, and the 24th day of February, 1919, and the permission of the Treasury was not obtained to the issue, sub-division, consolidation, renewal or extension or the making of the agreement, as the case may be.
"(2) No person shall except under and in pursuance of a licence granted by the Treasury—
"(a) buy or sell any stock, shares or other securities except for cash or when the purchase or sale takes place in any recognised Stock Exchange, subject to the rules or regulations of such exchange.
"(b) buy or sell any stock, shares or other securities which have not remained in physical possession in the United Kingdom since the 30th September, 1914.
"(3) A licence granted under this regulation may be granted subject to any terms and conditions specified therein.
"(4) If any person acts in contravention of this regulation, or if any person to whom a licence has been granted under this regulation subject to any terms or conditions fails to comply with these terms or conditions, he shall be guilty of a summary offence against these regulations.
"(5) In this regulation the expression 'securities' includes Bonds, Debentures, Debenture stock, and marketable securities."
It will be seen at once that the terms of this document, on any interpretation of them, go far beyond the intentions expressed in what may be called the official preamble and in the new Committee's terms of reference. One of the clauses seems, with all deference to its august composers, to be merely silly. This is (1)(c) forbidding sub-division of securities. If a £10 share is split into ten£1shares this operation cannot make the smallest difference to the supply of capital for essential industries or cause any drain on the Foreign Exchanges. I am assured by those who have delved into the official intention that the reason for the objection of the old Committee to splitting schemes, on which this new prohibition is based, was that splitting made shares more marketable and popular and so more likely to compete with War Bonds. But a mere sale of shares, split small and so popularised, does not absorb any capital. That only happens when, money is put into some new form of industry. If A, who holds ten £20 shares, is enabled to dispose of them to B because they are split into 200 £1 shares, then, A instead of B has got the money and has to invest it in something. The amount of capital available for investment is not diminished by a halfpenny. This regulation is just a piece of short-sighted tyranny which exasperates without doing the smallest good to anybody.
More serious, however, was clause (1)(e) under which any securities that have been issued, split, consolidated or renewed without Treasury sanction since January, 1915, were not to be dealt in, in future, without a licence. The result of this clause, if it had stood, would have been that all loans under which such securities had been pledged would have had to be called in because the collateral became unsaleable, except after all the ceremonies had been gone through and a licence had been got. It was also possible to argue that the prohibition to renew or extend the maturity of any security meant that no loans of any kind could be renewed, and that no commercial bills could be renewed, without a licence. It is true that No. 5 paragraph says what the expression "securities" includes, but it does not state definitely that bonds, Debentures, Debenture stock and marketable securities are the only things included. It was a pretty piece of drafting, and raised a pretty storm in the House of Commons on February 27th, when a somewhat lurid picture of its effects was drawn by Sir H. Dalziel and Mr Macquisten. Mr Chamberlain not being then legally a member of the House, it fell to the lot of Mr Bonar Law to explain that the Government had really meant to give greater freedom, in making new issues, that the evils anticipated had not been intended, that he hoped the House would not judge the Government too harshly for not making unsanctioned issues illegal from the beginning, and that a new Order would be issued removing the retrospective effect of the new regulation. And so amendment was promised of a measure which would have had very awkward and unjust effects. It may be argued that it would only have affected people who had done, during the war, what they were asked not to do, namely, make issues without Treasury sanction. If the old Committee had been a reasonable and expeditious body this argument would have had great weight. But, in view of its caprices and dilatoriness, there was a good deal of excuse for those who decided to do without Treasury sanction and take the consequence of being unable to market their securities on the Stock Exchange. To propose to add a new penalty and cause the cancelling of all the financial arrangements made in connexion with such issues during four years was simply piling blunder on blunder. Luckily, the protests of the Government's own supporters sufficed to undo the worst of the mischief; but the whole affair is only another argument in favour of the earliest possible ridding of finance and industry from control that is so clumsily exercised.
December, 1918
[Footnote 1: This was the latter of two articles contributed to theTimes Trade Supplementin answer to a series in which Mr Arthur Kitson had attacked our banking and currency system suggested an inconvertible paper currency.]
"Boundless Wealth"—Money and the Volume of Trade—The Quantity Theory—The Gold Standard—How is the Volume of Paper to be regulated?—Mr Kitson's Ideal.
In the NovemberTrade Supplementan endeavour was made to answer Mr Kitson's rather vague and general insinuations and charges against our bankers concerning the manner in which they do their business. Now let us examine the larger and more interesting problem raised by his criticism of our currency system.
In his article in the JuneSupplementhe told us that "if the British public had any grasp of the fundamental truths of economic science they would know that a future of boundless wealth and prosperity is theirs." This is a cheery and encouraging view and, let us hope, a true one. But, that boundless wealth can only be got if we work for it in the right way. Can Mr Kitson show it to us, and what are these "fundamental truths of economic science"? It is easier to talk about them than to find any two economists who would give an exactly—or even nearly—similar list of them. Mr Kitson glances "at a few elementary truths." "Wealth," he says, "is the product of two prime factors, man and Nature, generally termed labour and land. With an unlimited, or practically unlimited, supply of these two factors, how is it that wealth is and has been hitherto so comparatively scarce?" But is the supply of "man" unlimited in the sense of man able, willing, and properly trained to work? And is the supply of "Nature" unlimited in the sense of land, mines, and factories fully equipped with the right machinery and served and supplied by adequate means of transport? Surely the failure In production on which Mr Kitson so rightly lays stress is due, at least partly, to lack of good workers, good organisers, good machinery, and good transport facilities. Workers who restrict output, employers who despise science and cling to antiquated methods, the opposition of both classes to new and efficient equipment, and large tracts, even of our own land, still without reasonable transport facilities, have something to do with it. And lack of capital—this answer to the question Mr Kitson flouts because, he says, "since capital is wealth," to say that "wealth is scarce because capital is scarce is the same as saying that wealth is scarce because it is scarce." But is it not a "fundamental truth of economic science" that capital is wealth applied to production? Wealth and capital are by no means identical. When a well-known shipbuilding magnate laid waste several Surrey farms to make himself a deer-park, the ground that he thus abused was still wealth, but it is no longer capital because it has ceased to produce good food and is merely a pleasant lounging-place for his lordship. May not the failure of production be partly due to the fact that, owing to the extravagant and stupid expenditure of so many of the rich, too much work is put into providing luxuries—of which the above-mentioned deer-park is an example—and too little into the equipment of industry with the plant that it needs for its due expansion?
Mr Kitson's answer is much easier. According to him, instead of working better, organising better, and putting more of our output into plant and equipment and less into self-indulgence and vulgarity all that we have to do to work the necessary reform is to provide more money and credit. Since, he says, under the industrial era—
"All goods were made primarily for exchange or rather for sale … it followed, therefore, that production could only continue so long as sales could be effected; and since sales were limited by the amount of money or credit offered, it followed that production was necessarily limited by the quantity of money or credit available for commercial purposes."
But is this so? If goods are produced more rapidly than money, it does not follow that they could not be sold, but only that they would have been sold for less money. The producer would have made a smaller profit, but on the other hand the cheapening of the product would have improved the position of the consumer, the cheapening of materials would have benefited the manufacturer, and it is just possible that production, instead of being limited, might have been stimulated by cheapness due to scarcity of currency and credit, or, at least, might have gone on just as well on a lower all-round level of prices. On the whole, it is perhaps more probable that a steady rise in prices caused by a gradual increase in the volume of currency and credit would have the more beneficial effect in stimulating the energies of producers. But Mr Kitson's argument that the volume of currency and credit imposes an absolute limit on the volume of production is surely much too clean-cut an assumption. This absolute limit may be true, if currency cannot be increased, with regard to the aggregate value in money of the goods produced. But money value and volume are two quite different things. If our credit system had not been developed as it has, and we had had to rely on actual gold and silver for carrying on all production and trade, it does not by any means follow that trade and production might not have been on something like their present scale in the matter of volume and turnover; but the money value would have been much smaller because prices would have been all round at a much, lower level.
This contention is based on what is called the "Quantity Theory of Money." This theory Mr Kitson wholeheartedly believes, so that this is not a point that has to be argued with him. "The value of money," he says, "as every student of economics knows, is determined by the quantity of money in use and its velocity of circulation." Quite so. If you increase the amount of money faster than that of goods, more money has to be given for less goods; the value, or buying power, of money is depreciated and prices go up. The present war has given an excellent example of this process at work. All the warring Governments have printed acres of paper money, and have worked the credit system with profligate energy; and so we have a huge increase in currency and credit, along with little or no increase (probably a decrease) in consumable goods, and prices have soared like rockets all over the world. In neutral countries the rise has been as bad as anywhere, because the neutrals have been choked with the gold that the warring Powers exported, putting paper in its place. So we see that the volume of money, on the theory so emphatically expounded by Mr Kitson and endorsed by common-sense—as long as we are careful to include all forms of money that are taken in exchange for goods in the definition—reflects itself at once in prices. If money does not increase in quantity and goods do, then prices go down, and after the necessary adjustments are made in rates of wages and salaries, a larger trade can be done with the same amount of money at a lower level of values. The volume of money thus limits the aggregate value of trade, but not its aggregate volume. Periods of falling prices are not encouraging to producers, and they put too much advantage into the hands of therentier—the man who lives on fixed interest; on the other hand, they are generally believed to be in favour of the working classes, since reductions in wages generally lag behind the fall in prices, which means increased buying power to the wage-earner.
Mr Kitson's view that the volume of trade is limited by the quantity of currency and credit is thus based on confusion between volume and value. Moreover, it follows also from the "Quantity Theory of Money," which he holds, that if he applies his remedy and multiplies currency and credit as fast as he appears to want to, the result will be a still further depreciation in the buying power of money, and a further rise in prices and an increase in all the bitterness, discontent, suspicion, and strikes that the rise in prices has already caused during the war. Is this a prospect to pray for? Surely if we want to enjoy "boundless wealth and prosperity" the way to do so is to turn out goods—things to eat and wear and enjoy—and not to multiply money, thereby merely depreciating its value, on Mr Kitson's own admission. He thinks that "nothing but an abundant supply of currency in the shape of legal tender notes and bank credit, could have enabled us to undertake successfully such unprecedented burdens" as we have borne during the war. But it may equally well be argued that we have borne these burdens because we worked harder than ever before to turn out the needed stuff, organised better, used our machinery to its full power, and spent less of our product on luxuries; and that the abundant currency, by forcing up prices, immensely increased the cost of the war and produced industrial friction which several times brought us unpleasantly close to disaster.
Mr Kitson, however, uses the "Quantity Theory of Money"—the doctrine that the value or buying power of money varies according to its quantity in relation to that of the goods that it buys—chiefly as a stick wherewith to beat the Gold Standard. He shows, very easily and truly, that it is absurd to suppose that the value of the monetary gold standard is invariable. Thereby he is only beating a dead horse, for no such argument is nowadays put forward. The variability of the gold standard of value is acknowledged, whenever a fluctuation in the general level of commodity prices is recorded. But gold is the basis of our credit system, and of those of all the economically civilised countries of the world, not because its value is believed to be invariable, but because it is the commodity which is universally accepted, in such countries and in normal times, in payment of debts. This quality of acceptability it has got largely by custom and convention. Mr Kitson speaks of the "selection of gold by the world's bankers as the basis for money and credit." But it was selected as currency by common custom long before bankers were heard of. And it was selected because of its permanence, ductility and other qualities, especially its beauty as ornament, which made man, eager to adorn himself, his women-kind, and the temples of his gods, always ready to accept it in payment, knowing also that, because of this acceptability, he would always be able to exchange it into any goods that he wanted.
Any other commodity that earned this quality of universal acceptability could do the work of gold just as well. But until one has been found, gold, as long as it keeps that quality, holds the field. And bankers use it as the basis for money and credit, not because, as Mr Kitson says, they selected it owing to its scarcity, but because this quality of universal acceptability made it the thing in which all debts, both at home and abroad, could be paid. "Given," says Mr Kitson, "a self-contained trading community with a certain quantity of legal tender, just sufficient for its commercial needs, and it makes no difference either to the value or efficiency of the money or to the trade affected whether it be made of metal or paper." Quite so, but trading communities are not self-contained. Their currency has to be convertible into something acceptable abroad, and that something is, at present, gold. It is possible that the world may some day evolve an international paper currency that will be everywhere acceptable. But such an ideal requires a growth of honesty and mutual confidence among the nations that puts it a long way off. And how is its volume to be regulated?
This question is all-important, whether the currency be national or international. Mr Kitson speaks of a currency "just sufficient" for the community's commercial needs. Who is to decide when the currency is just sufficient? The Government? A sweet world we should live in, if among other party questions, Parliament had to consider multiplying or contracting the currency every year or every month, with all the interests that would be affected by the consequent rise or fall in prices, lobbying, speech-making, and pulling strings to work the oracle to suit their pockets. And, according to Mr Kitson's view, that the volume of trade is limited by the supply of currency, this volume would then depend on the whims of the House of Commons, half the members of which would probably be innocent of a glimmering of understanding of the enormously important question that they were deciding. The gold standard, which makes the course of prices depend, more or less, on the chances of digging up a capricious metal from the bowels of the earth, has its obvious drawbacks; but it is a clean and sensible business compared with making them depend on the caprices of Parliament, complicated by the political corruption that would be only too likely to follow the putting of such a question into the hands of our elected and hereditary representatives and rulers.
Such, however, seems to be the Promised Land to which Mr Kitson wants to lead us. Thus he propounds his remedy. "The remedy is surely obvious. Divorce our legal tender from its alliance with gold entirely, so that the supply of money and credit for our home trade is no longer dependent upon our foreign trade rivals. Base our currency upon the national credit … treat gold as a commodity only, for the settlement of foreign trade balances."
This passage in his article in the SeptemberSupplementtells us what to do. Keep gold, out of deference for foreign prejudice, for the settlement of foreign trade balances, but make as much paper money as you like for home use. As our legal tender money is to be "divorced entirely from its alliance with gold" it clearly cannot be convertible into gold. So that apparently we shall have a paper pound and a gold pound (the latter for foreign use) with no connection between them. This stage of economic barbarism has been left behind now even by some of the South American republics. The paper pound, based on the national credit, can be multiplied as fast as our legislators think fit. If they do not multiply it fast enough, Mr Kitson will tell them that they are strangling trade, because the volume of production is limited by the amount of money available. At the same time bank credits will be multiplied indefinitely because, as was shown in the NovemberSupplement, Mr Kitson supports a view that the average business man holds (according to him) that he ought to have a legal right to as much credit as he wants. With the Government printing paper to please its supporters, with the banks obliged by law to give credit to every one who asks for it, and with prices soaring on every addition to currency and credit, what a country this will be to live in, and what a life will be led by those who have to compile and work out the index numbers of the prices of commodities! Some of us, perhaps, will prefer the jog-trot conservatism of Lord Cunliffe's Currency Committee, who in their recently issued report[1] (which every one ought to read) recommend that gold should not be used for circulation at present, but that endeavours should be made towards the cautious reduction of our swollen paper currency, and that its convertibility into gold should be maintained.
[Footnote 1: Cd. 9182,2d.]
Addis, Sir Charles, on banking,Aërated Bread Co., and bonus issues,Allies, loans to,America, effect of war on,War finance of,
Bank Act: its purpose,Its suggested repeal,Its working,Bank Amalgamations, progress of,Bechhofer, Mr, on Guild Socialism,Bills of Exchange, as basis of issue,Bonar Law, Mr, on after-war position,On capital levy,On sale of securities,British Trade Corporation, formation of,Brunner, Mond, and bonus shares,Budget, in 1918,
Canadian Pacific, and bonus issues,Capital, foreign,Levy on,Meaning of,Supply of,War's destruction of,Capital Issues, Committee on,Licence required for,Need to restrict,Stock Exchange and,Cole, Mr, on Guild Socialism,Cunliffe Committee, report ofCurrency: inflation of,International,Metals as,Origin of,Quantity theory of,Report on,
Daily News, on capital levy,
Expenditure, Committee on,
France, after-war position of,Free Trade and British supremacy,
Germany, after-war position of,Our claims against,War finance of,Gold standard: affected by war,Faults of,Reasons for,Goodenough, Mr, on note issue,
Hoare, Mr Alfred, on taxation,Holden, Sir Edward, and the Bank Act,
Inflation, working of,Interest, rate of,
Kitson, Mr, on currency,
Labour, example set by,Lawrence, Mr Pethick, on capital levy,Lees, Mr Edward, on debt redemption,Lloyds, elasticity of,London, prestige of,
Macaulay, Lord, on bad money,
New Statesman, on capital levy,
Owen, Senator, on American system,
"Quantity Theory," of currency,
Reserves, capitalising,Round Table, on capital levy,
Socialism, and bank amalgamations,In light of war,Guild,Stilwell, Mr, on paying for war,
Taxation, as war weapon,Increase of, in war,
"War Emergency Workers," on capital levy,Webb, Mr, on State banking,