_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 fresh
business.
"Form No. 2. Issue by an Existing Company (other than for the
purpose of capitalising profits).
"Form No. 3. Issue by an Existing Company for the purpose of
capitalising profits.
"Form No. 4. Conversion of a Firm into a Limited Company which does
Not involve the introduction of fresh capital.
"Form No. 5. Conversion of a Firm into a Limited Company which Does
involve 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, clothed _pro hac vice_ in 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 Realm
Act.
"1. The following regulation shall be inserted after Regulation 30
EE:--
"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 _£1_
shares this operation cannot make the smallest difference to the
supply of capital for essential industries or cause any drain on the
Foreign Exchanges. I am 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.