THE FIDUCIARY CURRENCY
In speaking of the fiduciary currency of the country I will confine
myself for the moment to that portion of it represented by Bank of
England notes. The war-emergency Treasury note currency I will deal
with later on.
All countries have a fiduciary paper currency. Some have a convertible
currency, others an inconvertible, and others a partially convertible;
but the dimensions of this treatise cannot be expanded by a comparison
of the systems of different countries. Those who desire to be assisted
by comparisons must consult other works.
Moreover, I wish to confine myself to our own fiduciary currency since
the Bank Charter Act of 1844. Prior to then the banks of this country
were permitted to issue their own notes, and to issue them in unlimited
quantities, with the provision that they were payable in gold on demand.
There were people who attributed the various crises that occurred in
different periods prior to 1844 to the over-issue of these notes. It
was contended that this alleged over-issue brought about an inflation
of the currency and encouraged gambling and speculation. Diverse views
were held then, and diverse views are likely always to be held, as to
the true origins and causes of financial crises. But whatever the views
or causes may be there can be little doubt, human nature being what
it is, that many joint stock banks abused the powers with which they
were endowed. This privilege of issuing notes to an unlimited amount
is a dangerous privilege to give to irresponsible institutions, and if
the power be given it must be given to responsible institutions or one
responsible institution.
This view probably was chiefly responsible for the Bank Charter Act
of 1844. This Act provided that the Issue Department of the Bank of
England should be separated forthwith from the Banking Department.
Securities to the value of £14,000,000, which included the Government’s
debt to the Bank, were to be transferred to the Issue Department,
together with so much coin and bullion that the total so transferred
should equal the amount of notes then outstanding. Notes could be
demanded from the Issue Department by any person in exchange for gold
at the rate of £3 17_s._ 9_d._ per standard ounce.
It was further enacted that if any banker, having the power of issue on
May 6, 1844, should relinquish such issue, the Issue Department should
be authorized to increase its issue of notes against securities to the
extent of two-thirds of the relinquished issue.
Bankers having the right to issue their own notes on May 6, 1844,
were allowed to continue the issue under certain conditions, and to
an agreed amount; but no provision was made compelling them to keep
any reserve against their issues either in cash or securities. Should
any issue lapse from any cause, it could not be restored, and no
institutions were allowed to acquire the right of issue in the future.
It will be seen that the fixing of £14,000,000 as the basis of the
note issue against securities, and not against gold, was a purely
arbitrary sum. No matter how it was arrived at, nothing will alter
its arbitrariness, and up to the present there has been no suspicion
of ill, uneconomic results from this arbitrary figure. And being an
arbitrary figure there seems to be no overwhelmingly strong reason why
it should not be extended within judicious limits. We must bear in mind
that in 1844 national and international commerce were not on the mighty
scale they are now. We must bear in mind that the population of this
country and its output of wealth were greatly less than they are now,
and greatly less than they will be in the future, and if this arbitrary
figure was judicious and safe in the first half of the nineteenth
century, and in the second half too, a higher figure should be equally
as judicious and safe half a century hence.
When we deal with a currency system in an arbitrary manner and control
its workings in an arbitrary way, it is opposed to a scientific way.
A scientific method may be an impossible method in a delicate system
like currency, and therefore, if we must rely upon arbitrariness, this
method can be made elastic and adjustable in a cautious, judicious way.
In 1844 banking was in its infancy. It has grown since then, but we
cannot with assurance predict what developments are ahead of it, and
fifty years hence the nation may look back upon the present system in
much the same way as we look back to conditions half a century ago. We
find that during the past fifty or sixty years the currency system of
the country has gone through a tremendous metamorphosis. The banknote
system--excepting the legal tender notes--has practically disappeared,
and another paper currency has taken its place.
This is the cheque currency, the real currency of the country, because
it is representative of the wealth of the country, as currency should
be. It grows with the country’s wealth and shrinks with the country’s
wealth, and this is precisely the automatic function an ideal currency
should perform. A perfect currency should simultaneously expand and
contract with the output and exchange of wealth, because a perfect
currency should be that wealth in liquid form.
Let us for a moment examine what wealth is. Wealth has been defined
by many economists, and the definitions and formulas have differed
greatly. But we can be more in agreement, perhaps, as to how wealth
actually comes into existence. Wealth is the product of two forces,
and it cannot come into existence unless these forces interact. These
forces are production and consumption. Wealth is not the product of
production only, nor of consumption only. We cannot consume what has
not come into existence, what has not been produced. We can produce
without consumption, but it is consumption that converts it into wealth.
Articles of merchandise and raw materials are produced in order that
they may be consumed. They would not be produced if there were no
prospect of consumption. It is consumption that confers value upon
products. If products were not converted into wealth they would
perish; they would be valueless. There must be a desire for them.
If there were no desire for them, labour and capital would not be
spent upon consuming them. A desire must exist before production, or
production must bring a desire into being. And when that desire becomes
active, as distinct from passive, its activity becomes consumption.
We know that in states of trade depression the markets are stocked
with unconsumed and unconsumable commodities, and these commodities
cannot, in the strict sense of the idea, be called wealth. They are
perishing, they are valueless, because no one wants them, and vendors
of these commodities face loss and sometimes ruin. They try every art
known to them to stimulate desire for them in order to get that desire
manifested in purchasing them.
To increase wealth we must necessarily increase production and
consumption; in other words, increase supply and demand. This is the
economic object of all civilized nations. This wealth it is their
object to convert into money, for money is the reproductive product of
wealth. Wealth cannot become reproductive, except in a most limited
sense, unless it is converted into reproductive form, and banks supply
not the entire, but the chief machinery for changing it into this
form. If, therefore, their chief function is to change wealth into
reproductive form, it is not creating credit.
Money is like the fruit ripened into seed. Fruits of the earth must
be ripened into seed before they can reproduce their kind. If they
perish before then, they do not become reproductive. When this new
seed is sown in the earth, to be gathered into ripened fruit at the
next harvest, it performs the same function that money performs when
it circulates. It reproduces and multiplies itself, and the harvest
springing up from it is new wealth.
The more wealth, therefore, that is transformed and reproduced and
that multiplies, the richer, we say, a country becomes. Therefore,
it follows that the transforming machinery should work with pace
equalling the creation of wealth if the country is to reap the best
harvests from its work. For every pound’s worth of wealth coming into
existence the means should be provided for transforming it into a
pound’s worth of money.
So far, the best means discovered is the cheque system. No legal tender
system, based upon gold, could provide these essential means, because
gold is not provided sufficiently, and cannot be provided sufficiently.
The machinery we need can be made with no precious metal. If we desire
perfect machinery, it is indisputable that no machinery could do the
work so efficiently as paper machinery.
The paper currency system is, therefore, a great advance upon the old
banknote system. It is transformed wealth, and as the cheques represent
the deposits, rising and falling in amount with them, then the deposits
must be transformed, reproducible wealth. The note system, based on no
wealth, was credit.
Returning to the Issue Department of the Bank of England, we see that
£11,015,100 of the total note issue is based upon the sum of money
owing by the Government to the Bank, and that £7,434,000 is based upon
other securities of a gilt-edged order, making a total of £18,450,000.
The balance is based pound for pound on gold.
It will be seen, therefore, that if every note was presented to the
Bank to be converted into gold, over £18,000,000 of these notes could
not be converted. Some have suggested that in that event, in order to
provide the gold, the securities could be sold for gold, the Government
debt could be converted into bonds, and they also could be sold. But
as this need could arise only in a panic, when every one clamoured for
gold, and all who had securities were trying to sell them for gold,
the Bank of England would find it impracticable to sell securities for
gold. Such securities, if they are to be sold at all, must be sold at
other times, and the gold must be acquired then if the note issue is to
be made absolutely convertible.
Personally, I think the need is too remote, too much in the realm
of dreams, to be entertained gravely. The gold could perform better
services to the community than to be hoarded in this fashion.
Since the year of the Bank Charter Act we have had three serious panics
in the country. Now the Act was passed to prevent panics. As it did not
prevent panics, the theories on which the legislation was based proved
untenable.
Panics are not automatic. It was probably thought by many that they
were, and that they could be ended in automatic fashion. It is
impossible to foresee how a panic will arise. According to every
plausible theory, a panic should surely have been the immediate
consequence of the European War. Not only should a panic have arisen
then, but it should have been by far the worst panic this country has
ever faced. But no panic resulted, and all plausible theories have been
inoperative.
Previous panics have been allayed by the actual suspension, or by the
potential suspension, of the Bank Act. That is to say, by the knowledge
that the Bank of England would have power to issue note currency to
any amount, unbacked by the deposit of gold. In other words, by the
knowledge that sufficient legal tender would be provided, _at a price_,
for the needs of all solvent people.
The need, then, is currency--just as a person prostrated by fever needs
a tonic to restore him to convalescence. When the need is rightly met,
all is well. To withhold the remedy would feed the disease. Instead of
being checked, the disease would grow.
Panic is a disease of the mind, and it most often proceeds, like
disease of the body, from excessive indulgence in a disease-producing
cause. It will suddenly arise as an offspring of wild gambling and
frenzied speculation, and it will infect people in a healthy condition
who fear they will be victims of the scourge. And it is not only the
duty of the State, but the highest wisdom of the State, to come to the
help of the healthy.
We have seen how the State has performed this duty in the past, in the
days when banking was immature, and we have seen how it has performed
its duty, with perfect and instantaneous success, when the country
became involved in the greatest crisis it has ever faced. And this
is an experience from which, it seems to me, valuable lessons may be
learnt.