_February_, 1919
Macaulay on Depreciated Currency--Its Evils To-day--The Plight of the
Rentier--Mr Goodenough's Suggestion--Sir Edward Holden's Criticisms of
the Currency Committee--His Scheme of Reform--Two Departments or One
in the Bank of England?--Not a Vital Question--The Ratio of Notes
to Gold--Objections to a Hard-and-fast Ratio--The Limit on Note
Issues--The Federal Reserve Act and American Optimism--Currency and
Commercial Paper--A Central Gold Reserve with Central Control.
Everyone has read, and most of us have forgotten, the great passage in
Macaulay's history which describes the evils of a disordered currency.
"It may well be doubted," he says, "whether all the misery which had
been inflicted on the English nation in a quarter of a century by bad
Kings, bad Ministers, bad Parliaments and bad judges was equal to the
misery caused in a single year by bad crowns and bad shillings....
While the honour and independence of the State were sold to a foreign
Power, while chartered rights were invaded, while fundamental laws
were violated, hundreds of thousands of quiet, honest and industrious
families laboured and traded, ate their meals and lay down to rest in
comfort and security. Whether Whigs or Tories, Protestants or Jesuits
were uppermost, the grazier drove his beasts to market, the grocer
weighed out his currants, the draper measured out his broadcloth,
the hum of buyers and sellers was as loud as ever in the towns, the
harvest-time was celebrated as joyously as ever in the hamlets, the
cream overflowed the pails of Cheshire, the apple juice foamed in the
presses of Herefordshire, the piles of crockery glowed in the furnaces
of the Trent, and the barrows of coal rolled fast along the timber
railways of the Tyne. But when the great instrument of exchange became
thoroughly deranged, all trade, all industry, were smitten as with a
palsy.... Nothing could be purchased without a dispute. Over every
counter there was wrangling from morning to night. The workman and his
employer had a quarrel as regularly as the Saturday came round. On a
fair-day or a market-day the clamours, the reproaches, the taunts, the
curses, were incessant; and it was well if no booth was overturned,
and no head broken.... The price of the necessaries of life, of shoes,
of ale, of oatmeal, rose fast. The labourer found that the bit of
metal which, when he received it was called a shilling, would hardly,
when he wanted to purchase a pot of beer or a loaf of rye bread, go as
far as sixpence."
From some of the evils thus dazzlingly described we are happily free
in these times. We are not cursed with a currency composed of coins
which are good, bad and indifferent, with the result that the public
gets the bad and indifferent while the nimble bullion dealers absorb
and export the good. There is nothing to choose between one piece of
paper and another, and all that is wrong with them is that there are
too many of them. But the general result as it affects the labourer
who wants to purchase a pot of beer or anyone else who wants to buy
anything is very much the same. A bit of metal that is called a
shilling has about the value of a pre-war sixpence and a bit of paper
that is called a Bradbury fetches half as much as the pound of five
years ago. Compared with what other peoples are suffering from the
same disease arising from the same surfeit of money in one form or
another, this nuisance that we are enduring is not too terribly
severe. It has entailed great hardship on a class that is small
in number, namely, those who have to live on fixed incomes. The
salary-earner and the rentier have borne the brunt, while the
wage-earner and the profit-maker have been able to expand their
earnings, in paper, at least to a point at which the depreciation of
currency have left them no worse off. Seeing that the wage-earners
are those who do the dreariest and dirtiest jobs, and that the
profit-makers are those who take the risks of industry and the
enormous responsibility of organising enterprise, they are the classes
whom it is clearly most desirable to encourage. The rentier in these
days gets less than no sympathy, but we make a great mistake if we
think that we can with impunity crush him between the upper and nether
millstone of fixed income and rising prices. With his help we have
equipped industry at home and abroad. We can, if we choose, by
depreciating the currency still further, lessen still more the reward
that we pay him for that benefit. He may kick, but he cannot abolish
the equipment with which he has already provided industry. But if
we make his life too hard he can strike like the rest of us, and by
refusing to provide for any further expansion in industrial equipment,
he can hold up production until we have devised some new method of
laying up capital. Currency depreciation is good for the debtor and
bad for the creditor; if it goes too far it kills the creditor and
reduces business to chaos.
We are a very long way from the chaos to which many of our Continental
neighbours have already reduced their monetary systems; but there
is fortunately a very general feeling that we are a country with a
reputation and a prestige on this point; and the business world is
growing restive concerning the delay on the part of those responsible
in putting an end to a state of things which may have been justified
by the war's exigencies (though there is much to be said for the view
that in fact it only added to the war's difficulties) but is
now clearly as out of date as the censorship, which, like it,
nevertheless, continues to flourish. This state of things arises from
the arrangement tinder which an unlimited supply of legal tender
currency can be manufactured by the Government, which encouraged to
continue the system by the fact that each note issued is in effect a
loan to itself without interest. At the meeting of Barclays Bank on
January 27th, Mr. Goodenough demanded that the issue of currency notes
by the Government should be stopped forthwith, and that if it were
necessary to provide more currency it would be better for the banks
to be allowed to issue notes themselves. This suggestion involves, of
course, a complete reversal of the principles on which our monetary
system has grown up, since it has long been based on a note-issuing
monopoly in the hands of the Bank of England. But these are
topsy-turvy days, in which greyheaded precedent is very justly at a
heavy discount; and Mr Goodenough's suggestion very practically gets
over a big difficulty that stands in the way of stopping the stream
of Bradburys. This difficulty lies in the fact that if the banks were
pulled at by their customers for currency and could not supply them
with Bradbury notes, they would be forced to take notes from the Bank
of England, with a bad effect on the appearance of its reserve. If
the business of issuing notes were put into the hands of the clearing
banks, their power to do so would be limited by the extent of their
assets, or of such of their assets as were thought fit to rank as
backing for their notes. In other words, the note-issuing business
would once more have to be regulated on banking principles and
controlled by the price asked, for advances, instead of expressing
the helplessness and improvidence of an impecunious and invertebrate
Government. In this manner the new departure might be a convenient
halfway-house on the way from chaos back to sanity. But probably it is
too revolutionary and goes too straight in the teeth of the Bank of
England's privilege to receive much practical consideration; and there
is the question whether the public would take the new paper readily
and whether it could be made legal tender.
Sir Edward Holden, in one of those masterly surveys of world finance
with which he now instructs the shareholders of the London Joint City
and Midland Bank, assembled at their annual meeting, gave much of his
attention to an attack on the report of Lord Cunliffe's Committee on
Currency. This was only to be expected, since the Committee had made
recommendations on lines which were largely conservative and did
not embody any of the reforms or changes which had been previously
advocated by Sir Edward. Being on this occasion chiefly critical, he
did not make very clear in his latest speech the precise proposals
that he favours. For them we have to go back to his speech of a year
ago, as reported in the _Economist_ of February 2, 1918, p. 171, where
he stated that "if the Bank (of England) had been working on the same
principles as other national banks of issue, there would have been
little ground for anxiety," and that these principles are:--