ten people have no capital and no credit in the financial sense (that
is to say, though a shopkeeper might trust them until the end of the
week, no banker would dream of lending them a sixpence), they could
look on and laugh, crying “Let the rich take their turn at being
penniless, as we so often are”. But what about the great numbers of
poor who live on the rich, the servants, the employers and employed
in the luxury trades, the fashionable doctors and solicitors? Even in
the productive trades what would happen with the banks all shut up and
bankrupt, the money for wages all taken by the Government, no cheque
payable and no bill of exchange discountable? Unless the Government
were ready instantly to take over and manage every business in the
country: that is, to establish complete nationalization of industry in
a thunderclap without ever having foreseen or intended such a thing,
ruin and starvation would be followed by riot and looting: riot and
looting would only make bad worse; and finally the survivors, if there
were any, would be only too glad to fall on their knees before any
Napoleon or Mussolini who would organize the violence of the mob and
re-establish the old state of things, or as much of it as could be
rescued from the chaos, by main force applied by a ruthless dictator.
55
MONEY
You now know more than most people about the money market. But it is
not enough to know what settles the value of stocks and shares in spare
money from day to day. All money is not spare money. Few of us spend
as much on shares as on food and clothes and lodging. Most of us,
having no spare money, would as soon dream of buying shooting lodges in
Scotland as of investing or speculating on the Stock Exchange; yet we
use money. Suppose there were no spare money on earth, what would fix
the value of money? What is money?
Take a gold coin for instance. You are probably old enough to remember
such things before the war swept them away and substituted bits of
paper called Treasury notes; and you may be young enough to live until
they come back again. What is a gold coin? It is a tool for buying
things in exactly the same sense as a silver spoon is a tool for
eating an egg. Buying and selling would be impossible without such
tools. Suppose they did not exist, and you wanted to go somewhere in a
bus! Suppose the only movable property you had was twenty ducks and a
donkey! When the bus conductor came round for the fare you would offer
him the donkey and ask for the change in potatoes, or offer him a duck
and ask for the change in eggs. This would be so troublesome, and the
bargaining so prolonged, that next time you would find it cheaper to
ride the donkey instead of taking the bus: indeed there would be no
buses because there would be nobody willing to take them, unless buses
were communized and fares abolished.
Now it is troublesome to take a donkey about, even when it takes you,
but quite easy to carry as much gold as a donkey is worth. Accordingly,
the Government cuts up gold into conveniently shaped bits weighing
a little over 123 grains of standard gold (22 carat) apiece, to be
used for buying and selling. For transactions that are too small to
be settled by a metal so costly as gold it provides bronze and silver
coins, and makes a law that so many of these coins shall pass as worth
one of the gold coins. Then buying and selling become quite easy.
Instead of offering your donkey to the bus conductor you exchange it
for its worth in coins; and with these in your pocket you can pay your
bus fare in two seconds without having any words about it.
Thus you see that money is not only a necessary tool for buying and
selling, but also a measure of value; for when it is introduced we
stop saying that a donkey is worth so many ducks or half a horse, and
say instead that it is worth so many pounds or shillings. This enables
accounts to be kept, and makes commerce possible.
All this is as easy as A B C. What is not so easy is the question why
the donkey should be worth, say, three-quarters of a sovereign (fifteen
bob, it would be called at this price), or, to put it the other way,
why fifteen bob should be worth a donkey. All you can say is that a
buyer at this price is a person with fifteen shillings who wants a
donkey more than she wants the fifteen shillings, and a seller at this
price a person with a donkey who would rather have fifteen shillings
than keep the donkey. The buyer, though she wants a donkey, does not
want it badly enough to give more than fifteen shillings for it; and
the seller, though she wants money, will not let the donkey go for less
than fifteen; and so they exchange. Their respective needs just balance
at that figure.
Now a donkey represents just a donkey and nothing else; but fifteen
shillings represents fifteen shillingsworth of anything you like,
from food and drink to a cheap umbrella. Any fund of money represents
subsistence; but do not forget that though you can eat and drink and
wear subsistence, you cannot eat or drink or wear Treasury notes and
metal coins. Granted that if you have two shillings the dairyman will
give you a pound of butter for it; still, a pound of butter is no more
a round piece of metal than a cat is a flat iron; and if there were no
butter you would have to eat dry bread, even if you had millions and
millions of shillings.
Besides, butter is not always two shillings: it is sometimes two and
twopence or even two and sixpence. There are people now living who have
bought good fresh butter for fourpence a pound, and complained of its
being dear at that. It is easy to say that butter is cheap when it is
plentiful, and dear when it is scarce; but this is only one side of
the bargain. If ten pounds of butter cost a sovereign on Monday and
a sovereign and a quarter on Saturday, is that because there is less
butter or more gold?
Well, it may be one or the other or both combined. If the Government
were to strike off enough new sovereigns at the Mint to double the
number in circulation we should have to pay two sovereigns for ten
pounds of butter, not because butter would be scarcer but because gold
would be more plentiful. But there is no danger of this happening,
because gold is so scarce and hard to get that if the Government turned
more of it into sovereigns than were needed to conduct our buying and
selling, the superfluous ones would be melted down, and the gold used
for other purposes, in spite of the law against it; and this would go
on until sovereigns were so scarce that you could get more for gold in
the form of sovereigns than in the form of watch chains or bracelets.
For this reason people feel safe with gold money: the gold in the
sovereign keeps its value for other purposes than buying and selling;
and if the worst came to the worst, and the British Empire were annexed
by the planet Mars, and only Martian money were current, the sovereigns
would still be taken in exchange for as much butter or anything else
as before, not as money, but as so much gold; so that the British
sovereign would buy as much as a Martian gold sovereign of equal weight.
Suppose, however, you had a dishonest Government! Suppose the country
and its Mint were ruled by a king who was a thief. Suppose he owed
large sums of money, and wished to cheat his creditors. He could do it
by paying in sovereigns which were made of lead, with just gold enough
in them to make them look genuine. Henry the Eighth did it less crudely
by giving short weight in silver coins; and he was not the only ruler
who played the same trick when pressed for money. When such frauds are
discovered prices go up and wages follow them. The only gainers were
those who, like the king, had borrowed heavy money and were paying it
in light; and what they gained the creditors lost. But it was a low
trick, damaging English as well as royal credit, as all English debtors
were inextricably and involuntarily engaged in the swindle as deeply as
the king.
The moral is that a dishonest ruler is one of the greatest dangers a
nation has to dread. People who do not understand these things make a
great fuss because Henry married six wives and had very bad luck with
most of them, and because he allowed the nobles to plunder the Church.
But we are far more concerned today with his debasement of the coinage;
for that is a danger that is hanging over our own heads. Henry’s trick
is now played not only by kings, but by republican governments with
Socialist majorities and by the Soviets of proletarian States, with
the result that innocent women, provided comfortably for by years of
self-denial on the part of their parents in paying insurance premiums,
find themselves starving; pensions earned by lifetimes of honorable and
arduous service lose their value, leaving the pensioners to survive
their privations as castaways survive in a boat at sea; and enormous
fortunes are made without the least merit by A, B, and C, whilst X, Y,
and Z, without the least fault, go bankrupt. The matter is so serious
and so menacing that you must summon all your patience while I explain
it more particularly.
At present (1927) we do not use sovereigns. We use bits of paper,
mostly dirty and smelly, with the words _One Pound_ printed in large
letters on them, and a picture of the Houses of Parliament on the back.
There is also a printed notice that the bit of paper is a currency
note, and that by Act of Parliament IV and V Geo. V, ch. XIV, if you
owe anyone a pound you can pay him by handing him the bit of paper,
which he must accept as a full discharge of your debt to him whether he
likes or not.
Now there is no use pretending that this bit of paper which you can
pass as a pound is worth anything at all as paper. It is too small
and too crowded with print and pictures to be usable for any of the
uses to which paper can be put, except that of a short title deed to a
poundsworth of goods. Yet there is no law to prevent the Government,
which owes 7700 million pounds to its creditors, from printing off 7700
millions of these one pound Treasury notes, and paying off all its home
creditors with them, even though a thousand of them would not buy a
cigarette.
You may say that this is too monstrous to be possible. But it has
been done, and that quite recently, as I know to my cost. The German
Government did it after the war when the conquerors, with insane spite,
persisted in demanding sums of money that the Germans had not got. The
Austrian Government did it. The Russian Government did it. I was owed
by these countries sums sufficient to support me for the rest of my
days; and they paid me in paper money, four thousand million pounds
of which was worth exactly twopence halfpenny in English money. The
British Government thought it was making Germany pay for the war;
but it was really making me and all the other creditors of Germany
pay for it. Now as I was a foreigner and an alien enemy, the Germans
probably do not feel very sorry for me. But the same occurred to the
Germans who were owed German money, whether by foreigners or by other
Germans. Merchants who had obtained goods for bills payable in six
months paid those bills with paper Marks and thus got the goods for
nothing. Mortgages on land and houses, and debentures and loan stocks
of every redeemable sort, were cleared off in the same way. And one
very unexpected result of this was that German employers, relieved of
the burden of mortgages and loans such as the English employers were
bearing, were able to undersell the English even in the English market.
All sorts of extraordinary things happened. Nobody saved money, because
its value fell from hour to hour: people went into a restaurant for a
five million lunch, and when they came to pay found that the price had
gone up to seven millions whilst they were eating. The moment a woman
got a scrap of money she rushed to the shops to buy something with it;
for the thing she bought would keep its usefulness, but the money that
bought it, if she kept it until tomorrow, might not purchase half so
much, or a tenth so much, or indeed anything at all. It was better to
pay ten million marks for a frying-pan, even if you had two frying-pans
already, than to buy nothing; for the frying-pan would remain a
frying-pan and fry things (if you had anything to fry) whatever
happened; but the ten million marks might not pay a tram fare by five
o’clock the same evening.
A still better plan in Germany then was to buy shares if you could get
them; for factories and railways will keep as well as frying-pans.
Thus, though people were in a frantic hurry to spend their money, they
were also in a frantic hurry to invest it: that is, use it as capital;
so that there was not only a delusive appearance of an increase in
the national capital produced by the simple expedient of calling a
spare loaf of bread fifty thousand pounds, but a real increase in the
proportion of their subsistence which people were willing to invest
instead of spending. But however the money was spent, the object of
everyone was to get rid of it instantly by exchanging it for something
that would not change in value. They soon began to use foreign money
(American dollars mostly); and this expedient, eked out with every
possible device for doing without money altogether by bartering, tided
them over until the Government was forced to introduce a new gold
currency and leave the old notes to be thrown into the waste paper
basket or kept to be sold fifty years hence as curiosities, like the
famous assignats of the French Revolution.
This process of debasement of the currency by a Government in order
that it may cheat its creditors is called by the polite name, which few
understand, of Inflation; and the reversal of the process by going back
to a currency of precious metal is called Deflation. The worst of it is
that the remedy is as painful as the disease, because if Inflation, by
raising prices, enables the debtor to cheat the creditor, Deflation, by
lowering them, enables the creditor to cheat the debtor. Therefore the
most sacred economic duty of a Government is to keep the value of money
steady; and it is because Governments can play tricks with the value of
money that it is of such vital importance that they should consist of
men who are honest, and who understand money thoroughly.
At present there is not a Government in the world that answers fully
to this description. Between our own Government, which took advantage
of the war to substitute Treasury notes for our gold currency, and
the German and Russian Governments, which issued so many notes that a
vanload of them would hardly buy a postage stamp, the difference is
only one of degree. And this degree was not in the relative honesty of
Englishmen, Russians, and Germans, but in the pressure of circumstances
on them, and consequently of temptation. Had we been defeated and
forced to pay impossible sums to our conquerors, or momentarily wrecked
as Russia was by the collapse of the Tsardom, we should not have been
any honester; for though the doubling of prices that occurred here
seems to have been caused by scarcity of goods and labor rather than by
an excessive issue of paper money, we still treat with great respect as
high financial authorities gentlemen who recommend Inflation as a means
of providing industry with additional capital. Whether these gentlemen
really believe that we could double our wealth by simply printing twice
as many Treasury notes, or whether they owe so much money that they
would be greatly relieved if only they could be let pay it in paper
pounds worth only ten shillings, is not always easy to guess. But if
you catch your Parliamentary representative advocating Inflation, and
ask him, at the risk of being told that you are no lady, whether he is
a fool or a rogue, you will give him a salutary shock, and force him
to think for a moment instead of merely grabbing at the illusion of
enriching the nation by calling a penny twopence.
And now, if you agree with me that it is the duty of a Government to
keep the value of its money always as nearly as possible at the same
level, we are both up against the question, “What level?” Well, you
may take it as a rule of thumb that the answer always is the existing
level, unless it has been tampered with and has wobbled badly, in which
case the easiest answer is “Whatever level it had before it began to
wobble”. But if you want a real explanation and not a mere rule of
thumb, you must think of coins and notes as useful articles which you
carry about because without them you cannot take a bus or a taxi or a
train, or buy a bun. There must be enough of them to supply you and
all the other people who have purchases to make. In short, coins and
notes are like needles or shovels; and their value is settled in the
same way. If the manufacturers make ten times as many needles as anyone
wants, then their needles will fetch nothing as needles, because no
woman will pay anything for the one needle she wants if there are nine
lying about to be had for nothing. So all that can be done is to take
the nine worthless needles and use the steel in them to make something
else (say steel pens), after which there will be no longer any useless
needles, and the remaining useful ones will be worth at least what it
cost to make them, because sempstresses will want them badly enough
to be willing to pay that price. An intelligent community will try
to regulate the supply of needles so as to keep their value at that
level as nearly as possible. A Capitalist community, on the contrary,
will regulate it so as to make needles yield the utmost profit to the
capitalist. But anyhow the value will depend on the quantity available.
Now just as a needle is for sewing, and is of no legitimate use for
anything else, so coins and notes are for enabling people to buy and
sell, and no use for anything else. And one coin will do for many
sales as it passes from hand to hand, just as one needle will do to
hem many handkerchiefs. This makes it very difficult to find out how
many needles and coins are wanted. You cannot say “There are so many
handkerchiefs in the country which must be hemmed; so we will make a
needle for every one of them”, or “There are so many loaves of bread
to be sold every morning; so we will make coins or issue notes for the
price of every one of them”. No person or Government on earth can say
beforehand how many needles or coins will be enough. You can count
the mouths you have to feed, and say how many loaves will be required
to fill them, because a slice of bread can be eaten only once, and is
destroyed by being eaten; but a needle or a sovereign or a Treasury
note can be used over and over again. One pound may be lying in an
old stocking until the landlord calls for it, whilst another may be
changing hands fifty times a day and effecting a sale every time. How
then is a Government to settle how many coins and notes it shall issue?
And how is a needle manufacturer to decide how many needles he shall
make?
There is only one way of doing it. The needle makers just keep on
making needles at a fancy price until they find they cannot sell them
all without charging less for them; and then they go on charging less
and less, but selling more and more (because of the cheapness), until
the price is so low that they would make less profit if it went any
lower, after which they make no more needles than are necessary to
keep the supply, and consequently the price, just at that point. The
Government has to do the same with gold coins. At first, because gold
is more useful for coins than for anything else, an ounce of gold
coined into sovereigns will be worth more than an ounce of uncoined
gold (called bar or bullion). But if the Government issues more
sovereigns than are needed for our buying and selling there will be
more sovereigns than are wanted; and their value per ounce of gold will
fall below that of gold bullion. This will be shewn by all prices going
up, including that of gold in bars and ingots. The result will be that
gold merchants will find it profitable to melt down sovereigns into
bars of gold to be made into watches and bracelets and other things
than coins. But this melting down reduces the number of sovereigns,
which immediately begin to rise in value as they become scarcer until
gold in the form of sovereigns is worth as much as gold in any other
form. In this way, as long as money consists of gold, and melting down
cannot be prevented as soon as it becomes profitable, the value of the
coinage fixes and maintains itself automatically. It is against the
British law to melt down a British sovereign in the British Empire; but
as this silly law cannot restrain, say, a Dutch goldsmith in Amsterdam
from melting down as many British sovereigns as he pleases, it does not
count.
Though this settles the value of gold money, and all prices can be
fixed in terms of gold, a penny being the two hundred and fortieth part
of a sovereign, half a crown the eighth part of a sovereign, and so on,
yet you cannot have gold pennies or even sixpences: they would be too
small to handle. Also, if you want to make or receive a payment of five
thousand pounds, you would find five thousand sovereigns more than you
would care to carry. We get out of the penny and sixpenny difficulty
by using coins of bronze and silver, making a law that bronze pennies
shall be accepted, provided not more than twelve are offered at a time,
as worth the two hundred and fortieth part of a sovereign, and that
silver coins shall pass up to £2. We get over the five thousand pound
difficulty by allowing the Bank of England to issue promissory notes,
payable at sight in gold at the Bank, for sums of five pounds, ten
pounds, a hundred pounds, and so on. People hand these notes from one
to another in buying and selling, knowing them to be “as good as gold”.
Certain Scottish and Irish banks have the same privilege on condition
that they hold sufficient gold in their cellars to redeem the notes
when presented, and, of course, that they do not pay their debts in
their own notes.
In this way we all get used to paper money as well as to bronze and
silver coins: that is, we get used to pretending that a scrap of paper
with a water mark is worth 615 grains of gold or thereabouts; that a
bit of metal that is only half silver is worth a much larger piece of
pure silver; that 240 bits of bronze are worth a sovereign, and so on.
We find these cheap substitutes do just as well as gold coins; and we
naturally begin to ask what is the use of having any gold money at
all, seeing that we get on quite well without it. Paper is just as
effective as an instrument of exchange, and much less heavy to handle.
We measure prices in quantities of gold; but imaginary gold does for
that as well as real gold, just as you can measure fluids by pints and
quarts without having a drop of beer in the house. If only the honesty
of Governments could be depended on, the use of gold for money would
be a pure luxury, like using gold safety pins and diamond shirt studs
instead of common ones, which fasten quite as well.