CREDIT AND CONFIDENCE
Credit, which banks are said to create, has several connotations.
It has a social, an ethical, and a financial connotation, and it is
necessary to examine awhile these connotations. From the derivation, or
original conception of the word, or idea, it is an expression of belief
or trust, as distinct from disbelief and distrust.
In the social world, when we say a person stands in high credit, what
is it we imply? That he is a rich man, a man of great wealth? By no
means. He may be a poor man, that is to say poor relatively to the
position he occupies. In the social sphere he can carry considerable
weight even though he may be dishonest, dishonourable and immoral. We
ignore his vices, yet hold him in high esteem. His credit is based less
on his character than on our snobbery. We bow before title and caste,
irrespective of the merits of the individual. A lord of bad character
will be more sought after, receive more flattery and deference, than
a no-titled man of noble character. If we were not snobbish we should
despise him as he deserves.
From this springs the desire of men to gain title, no matter what
means and methods they employ to this end. They know that a title in
some potent way aggrandizes them, and they can enter an assembly with
greater assurance and confidence and pomposity than they could if their
names were still as plain as in their humble days.
The conferring of a title is not necessarily a recognition of high
moral worth. But a title can be a national recognition of intellectual
merits, or ability. The credit of those who receive this distinction
is strengthened. We have greater confidence than before in their
intellectual ability and power. We have deeper trust in their wisdom
and sagacity and in their counsel. We have the less hesitation in
following their guidance in those paths with which they are presumed
to be intimately familiar. In this greater, but still restricted,
knowledge of theirs we repose our trust.
We know that moral credit is distinct from this. It is based upon
character solely, irrespective of social position or means. A poor
man may be a man of high nobility. We may despise his poverty, but we
honour his spirit. We are conscious that he is far beyond us, that we
cannot reach the moral plane upon which he stands. He is a man in whose
honesty, integrity, and conscientiousness we would place unquestioning
trust. We know that in no circumstances would he disabuse that trust.
We know that he would have the moral power to resist all temptation.
Such a man may have great strength of character, high moral worth,
but he may be weak intellectually. He may be no scholar, no man of
erudition, no man of imagination, and possess no exceptional ability.
His intellectual limitations may be the cause of his poverty. But
in whatever position he may be placed, according to his limited
qualifications, we know that he will discharge his duties faithfully,
conscientiously, to the best of his ability, and will not swerve a
moment from the path of honesty and uprightness. Such a man could be no
thief and could tell no lie.
He lessens our anxieties. We say we can trust him as readily and as
confidently as we can trust ourselves. It is a matter for thankfulness
that we have such a servant in whom we can place our trust.
Here, therefore, are illustrations of intellectual and moral credit
which men are said to possess.
Financial credit is another kind of credit. With this, perhaps, mankind
is more familiar. The economic standing and welfare, as distinct from
the purely moral standing, of a nation is dependent upon what we call
financial credit. If I lend money to a friend it is immaterial to me
what his abilities or his morals may be, so long as I know he will be
in a position to repay that loan. If his moral credit be bad, he will,
perhaps, not repay it if he has the means; but even if his moral
credit be bad he may pay it from motives of expediency. He may want a
further loan later, and it would not be to his material interests for
me to propagate the fact that he will not repay his debts. His credit
is worth too much to him to be placed in jeopardy of this kind. He must
redeem the debt if only from the business motive of expediency.
Tradesmen are said to live on credit. They declare that if they refused
to grant credit to their customers they would speedily be in the
bankruptcy court. By granting such credit they run grave risks. They
have to trust to the honesty of their customers and to their future
means. Therefore they have to face the risks of incurring losses by bad
debts, phenomena inseparable from such business. On the other hand,
they believe that by granting such credit and running such risks they
extend their custom and compete with hopes of greater success against
their rivals. What they may lose in the way of bad debts they may more
than recoup in the larger profits they make on the growth of their
business.
It may be, from an ethical standpoint, a degrading and deplorable way
of living on each other in a highly civilized community, but the fact
serves the purpose of illustrating our ideas of financial credit.
We have to live by trusting in each other, trusting in each other’s
financial means and financial honesty. A man may be highly moral and
respectable in his life, a worthy husband, father and citizen, an able
and faithful servant, thoroughly trustworthy, yet may be mean and
financially dishonest. Or he may be the victim of misfortune and cannot
redeem his debts to the tradesman and others even if he would.
Looking more closely into the credit on which a tradesman relies we
find it altogether different from the credit which, it is declared,
banks create and prosper on. We can, perhaps, contend that a tradesman
lends cheese, butter, and eggs, in the hope that he will be paid for
them eventually.
I am the customer. I ask him to let me have cheese, butter, and eggs
for a month, and I will pay for them at the end of the month. Were I a
stranger to him he might demur. But if he has known me for years and
knows that I am a man of my word, a man to be trusted, he will gladly
let me have the goods on the credit of the reputation I hold with him.
What is the tradesman’s security? Simply my word and my reputation.
Simply his trust in me. I do not leave with him my watch, my
securities, or my works on political economy. If, however, I failed to
pay for the goods I received of him and had left some of my valuable
possessions with him, he could sell these possessions in the market,
and indirectly be paid for his goods.
If he were indirectly paid for them, would he be granting me credit? He
would certainly not be granting that kind of credit which the man in
the street understands as credit. Political economists and financiers
may be distinct from men in the street, but the simple-minded, the man
unversed in the theories of political economy, would see no difference
between this and barter. In fact, it looks exactly like the barter so
beautifully and so fascinatingly described in primers on political
economy. However, we do not pledge our watches with the grocer for eggs
and bacon. We pledge our words and our character only, and at the end
of the month we hand him over a cheque, the national currency, and once
more demonstrate to him the value of _our_ credit, not _his_.
Perhaps it is now less difficult for the simple-minded to comprehend
why political economists, financiers, bank managers, and those highly
gifted men, financial journalists, cannot come to a common agreement
as to what it is banks create. There is more agreement amongst them
that banks do really lend than there is as to the actual thing banks do
lend, credit or money.
Perhaps they do not lend at all, neither credit nor money? Perhaps they
no more lend than my employer lends when he pays me my weekly cheque
for services rendered. We call them lenders, because it would seem
absurd to call them converters. Yet it seems obvious that they do
quite a large business in conversion, akin to what the Bank of England
does when it converts gold into notes. The latter converts one species
of wealth into one species of currency; the joint stock banks convert
another species of wealth into another species of currency.
My employer pays me a cheque for services rendered. I am presumed to
have produced some kind of wealth, which is converted into liquid and
current capital when I receive the cheque and put it in circulation.
When he gives me the cheque he does not give me credit. He pays me for
the wealth I have produced and which the community has consumed, and
that wealth goes to the common store.
If a banker lends me, as it is said, £200 on Consols--to put it in
round, simple figures--does he sell me his credit, or do I sell him
mine? Or is it, after all, barter? If it be bartering wealth, then it
cannot be credit. If he lends me £200 and takes my Consols, he takes my
wealth from me. It is no longer in my possession. He has it, and if I
leave that £200 on deposit and do not withdraw a single sovereign, he
is wealthier to the extent of £200 than he was before.
If he be so much wealthier, what has he exchanged with me? What has he
sold to me? If he lends me £200 on my credit, plus the Consols, and I
borrow £200 from him on his credit, less the Consols, then we seem to
exchange credit for credit. If credit be a species of wealth and credit
be exchanged for credit, then wealth is exchanged for wealth.
But, I repeat, this is not the sort of credit the tradesman understands
and lives on, nor is it the man in the street’s conception of credit.
Yet it is declared by those who pretend to a deep knowledge of human
psychology and temperament, that the stability of banks depends upon
the credit they enjoy amongst the members of the community, and that
that credit, in its turn, is dependent entirely on the proportion of
gold the banks hold to their deposit and current accounts. It is quite
possible that this is a delusion. Financiers may have misread the
public and may not be completely acquainted with their arithmetical
preoccupations. I do not believe that one man in 100,000 deliberately
and seriously sits down each evening and works out the proportion of
gold held by his particular bank in its last balance sheet.
The ordinary individual believes that he can use his leisure moments
more profitably and more pleasantly than in this occupation. I do not
believe that one man in 500,000 could say off-hand approximately what
is the proportion of his own bank or the average proportion of all
banks. He doesn’t trouble to know, and he doesn’t bother himself about
it. He will tell you that he is burdened with quite enough anxieties
to trouble himself with this unnecessary anxiety.
This is my experience of my fellow-men, and I shall not put greater
faith in financiers than in my own experience until they have
cross-examined every individual depositor in the country and given me
each one’s answer.
If, therefore, it be a delusion that confidence resides in individual
knowledge of the exact proportion of gold banks hold to their
liabilities on deposit and current account, then what is the basis of
the national confidence? It is not an individual confidence, but a
general confidence.
I believe that this confidence is based, and justly based, on the
belief that our banks are soundly managed. This belief is a tradition,
a habit, a custom. We inherit it as a nation, and the inheritance is
handed on from generation to generation. We can, indeed, say that it is
in our blood, in our system.
Years have rolled on and this confidence has not been abused. There
have been times, of course, when the country has found itself face to
face with a financial crisis, but it has been saved from disaster by
the wisdom of men in high financial stations and by the common-sense of
the nation. And this confidence has been further strengthened by the
manner in which we have faced the greatest war in which the nation has
been involved.
I shall analyse the phenomenon further in later chapters, but I will
say here that the manner in which the general public received, as a
mere matter of course, the creation of the emergency currency notes
revealed a psychological trait, or characteristic, of tremendous
importance.
It is my belief, then--in fact, it is my conviction--that, so far as
the general public is concerned, its confidence in banks rests more in
the belief of their honest and sound management than in the knowledge
of the exact amount of gold they have in their reserves, or where they
actually hold their reserves. And I believe, too, that if all were
interrogated, forty-four millions and more out of forty-five millions,
including some of our shrewd bank managers, would say they believed
that that confidence would be strengthened if the public were assured
that all the reserves were held at the Bank of England than in the
safes of the joint stock banks.
When the man in the street says that a something is “as safe as the
Bank of England,” it is no empty phrase. The safety of the Bank of
England is ultimate, absolute safety. He associates the safety of the
Bank of England with the safety of the nation itself. The Bank of
England could fall only when the Empire itself fell. And that fall, in
his conception, seems as remote as the fall of the skies.
He would tell you, and tell you with all solemnity and earnestness,
that he would rather have his money at the Bank of England than
elsewhere. And if he were told that that is the very place where the
joint stock banks keep their gold reserves, he would say, with equal
seriousness: “That’s right.” His mind would then be at rest that all
was absolutely right in the best of all banking worlds.