EQUITABLE RESPONSIBILITY
If gold reserves alone are to be the test of sound banking, and if
gold reserves alone are to save banks in the hour of crisis or panic,
then the obligations of banks towards the highest interests of the
community are weakened. If their wealth, their investments are to be
valueless in a time of crisis, to be so ignored, that is, as to be
worthless, to be taken no account of, are not to keep them solvent and
safe, then on what grounds of reason and justice should the community
demand that banks should confine their trading to the highest class of
wealth? On what grounds can the community demand that they should in
all seasons and in all times do that great work for trade and commerce
which neither the Government nor any other institution does? Why should
the banks be asked to do all the sacrificing within the limitations
imposed by the community and the community not come to their help,
sacrifice nothing at all, in the hour of the community’s troubles?
For the crisis, when it comes, is the nation’s and not solely the
banks’ crisis. If the crisis be none of the nation’s seeking, it will
certainly be none of the banks’ seeking. If, however, the crisis be the
effect of over-speculation on the part of the community, it would be
mean action on the part of the community to appeal to the banks to save
it from the consequences of its own folly.
I urge that, in a time of national crisis, which has taken the
nation by surprise, which is no consequence of its own folly, the
responsibility should be shared by the nation and the banks. It is
possible that it was this high sense of justice, this high sense of
equity, that inspired the measures that were taken last August, and
that brought the country safely through the crisis. Had it not been for
this higher inspiration and deeper vision, and had we trusted alone to
narrow instinct and lack of insight, confusion might have reigned, and
the consequences might have been as serious as those foretold by the
prophets.
If we are to lay it down as a rigid, unwritten law, a law existing
only in the conscience of an irresponsible community, that banks must
save themselves only by their gold reserves, then by what divine
or earthly sense of justice shall we demand that banks shall not
speculate? Are the banks to be the keepers of our consciences, as well
as of our purses? The banks must live. And if instead of building up
their deposits on sound wealth, they build them up on unsound wealth,
and keep that proportion of reserves which critics demand they shall
keep, then they will have fulfilled their duty from the standpoint of
this narrow conception. Suppose they speculated and kept even higher
reserves than those laid down by the mathematicians, content with the
higher profits made from speculation, by whose standards of equity are
they to be judged?
If high gold reserves alone can save them, or should save them, and
they possess these high reserves, then they can be saved even if they
speculated. If the oracles say so, it must be so. If sound wealth be
useless to them, then unsound wealth could not be more useless. If they
could not get legal tender for sound wealth, for gilt-edged securities,
they would be no worse off with brass-edged securities.
As I have already insisted, it is something beyond lack of reason
to ask banks in the same moment to lend freely and to save their
gold reserves. It is as unreasonable as asking an ordinary man to be
generous and prodigal and at the same time close-fisted and thrifty.
Take that measure of the Government whereby it arranged with the Bank
of England to discount, without recourse to the holder, all approved
bills accepted before the declaration of the moratorium, guaranteeing
the Bank against any loss it might incur. This was, of course, placing
a burden on the shoulders of the community which was a perfectly
equitable burden. But quite apart from its equity, it was, in its
lowest aspect, an expedient burden. That is to say, if the nation had
refused to shoulder this burden, it would have had a far greater burden
to bear in the dislocation of trade and its incalculable losses.
It would not have been just to place this burden entirely on the
shoulders of the banks. In such a crisis the entire community had to
face the perils as a whole, and sink or swim as a whole.
When in the end the gains and losses are weighed, perhaps we shall find
that the gains, moral and material, greatly outweigh the losses.
What was the duty of the banks, when this measure was proclaimed,
towards the nation and towards themselves? Looking at it from the low
standpoint of self-preservation, what was their duty? From a low and a
high standpoint alike it was their duty to help the Government, help
the nation, through the Bank of England. They could not give that
effective help by hoarding their gold, by getting it from the Bank of
England, by sending borrowers to the Bank of England, by refusing help
to legitimate needs. Yet this is what some critics counselled them to
do--counselled them to increase and not ease the difficulties of the
Bank of England.
If the country could depend calmly and securely on the Bank of England,
with the Government behind it, then the banks also could depend upon
it. The Bank of England was the bulwark of England. That bulwark
could be weakened and not strengthened by the hoarding of gold. If the
Press and others admonished, and wisely admonished, the citizens not
to hoard gold, then it was illogical to ask the banks to hoard it, for
they would be hoarding the citizens’ gold. These contrary counsels were
opposed to all reason, and yet to this hour I see them advocated in
some quarters in the Press.
The Bank of England needed all the gold it could get as a basis
for the discounting of this huge mass of pre-moratorium paper.
Gold subsequently poured in from the gold mines and elsewhere, yet
notwithstanding this mighty inflow, the proportion of the Bank’s
reserve to the ever-growing deposits kept comparatively low, far below
the normal proportion. It was in the interests of the country that
the Bank should get this gold from any quarters to enable it to make
a success of the remedial measure and to ease the country’s financial
burdens. How, then, could it at the same time be in the interests of
the nation for the joint stock banks to take gold from the Bank, to
hoard it and not to send it there?
Such action as this would have been inconsistent with the fervent
gratitude the bank chairmen and the country have felt towards the
Government and its advisers.
Furthermore, what made it additionally ill-advised on the part of the
banks to hoard gold and pile up their reserves, was the subsequent
proclamation by the Government to the effect that the Bank of England,
on the authority of the Government, would advance the necessary funds
to meet acceptances for which cover was not duly forthcoming from
clients, until one year after the close of the war. This removed all
necessity to hoard gold and to pile up reserves, and it justified the
rebuke of the Chancellor of the Exchequer to those banks that refused
necessary accommodation to legitimate business. It was also a rebuke
to those critics who have seen no refuge for the country in the dark
hour of trouble except in hoarding by the banks and parting by the
public. That is to say, they counsel the public not to demand gold, and
they counsel the banks to keep it. If, therefore, the public are not
to demand gold, and if the banks are to accumulate it in their vaults,
then it means that in a crisis we can do without gold, and that, after
all, the credit which the banks are said to create will alone save us.
They are told that if they will only go on creating this credit they
will enable us to pass safely through the crisis. It comes to this,
that the advice given places us in mental confusion. Actual experience,
therefore, seems to be trustier than illogical advice.
What has been the direct consequence of this discounting of
pre-moratorium bills and this great inflow of gold, despite the issue
of a War Loan to the prodigious amount of £350,000,000? In the words
of the money article, day by day and week by week, money has been a
glut on the market, and has been lent on nominal terms, while discount
rates have also fallen to nominal quotations. In other words, the
great joint stock banks, in spite of themselves, have seen their gold
reserves rising to an unprecedented extent. Of what benefit to the
country is this great mass of idle gold? It is unproductive. It serves
no useful purpose if it cannot be employed. It is like the grain in the
barns perishing because it cannot be consumed. Yet in spite of this
state of things, due to the supply of liquid capital exceeding the
output of wealth, there have been those who have lamented the fall in
discount rates lest this should turn the exchanges against us, and gold
should be taken to New York or elsewhere. Would it not be beneficial if
some of the gold did go? If it went in payment of wealth received, the
gold would then become productive. The right service of gold is to help
to produce wealth, and if it does this it performs the services deputed
to it by the community. When gold passes from one nation to another
in exchange for wealth it never passes permanently. I might just as
reasonably urge that when I pay gold to my tailor for my dress suit I
part with the gold for ever. I should part with it only in the event of
my immediate decease, or if I became a non-producer, or in other ways
were deprived of all claims on the general wealth of the community. An
idle man, with pockets filled with gold, is a burden on the community.
He is no helper, no benefactor. So a nation, idle, with mighty safes
filled with gold, will become stagnant if this gold is not scattered
broadcast in the shape of capital that energizes the productive and
consumptive capacity of man and the land.
The value of gold will ever inhere in its wise use, not in its non-use.
“It has been well said,” remarked Sir Felix Schuster, in his recent
annual address, “that it is one of the paradoxes of finance, that at
the moment when the world’s capital is being squandered in war the
value of loanable capital in Lombard Street has actually depreciated.”
Sir Felix meant, of course, that there was no great demand for capital,
that it was greatly in excess of needs, that loans consequently were
cheap, and that banks could hardly lend profitably. I see no paradox in
this. If the creation of bank money is to be regulated by the supply
of gold only, it is an orthodox consequence. Since the outbreak of
the war the inflow of gold has been greater than ever experienced.
This has given the banks power to lend more, to liquefy more wealth,
because their reserves have increased, and the proportion of these to
the liabilities has correspondingly risen. But though a great deal of
wealth has come into existence, it must not be overlooked that a great
portion of it is not the kind of wealth banks lend on. This was partly
due to the closing of the Stock Exchange, the subsequent restrictions
on business there, and the destruction of trade between the belligerent
and other countries. Securities of a high class were scarce, and
bills of exchange became scarce, and while many industries, notably
the cotton industry, severely suffered, other industries, especially
war-provisioning industries, became abnormally busy. There was deadlock
for months in some of the foreign exchanges, especially the New York
and Russian exchanges. While the kind of wealth on which banks lend
fell off, the mines continued to produce gold, thus showing again how
independent this output is of real wealth production. Had the gold
mines also ceased working at the beginning of the war, have suspended
operations for many months, we should not have seen, perhaps, loanable
capital in Lombard Street so excessive and so depreciated as it was.
Sir Felix saw a great danger in this great mass of money and its
cheapness: the danger of its turning the exchanges against us. But this
danger could have done no more harm than the stoppage of the gold mines
had the rebellion spread in South Africa. The danger can be easily
exaggerated, especially at a moment when we can see far ahead, and see
the gold still coming to us in an uninterrupted stream from the mines.
Even had the New York exchange turned against us, it would turn round
again in due course, as it always has done and always will do so long
as international commerce proceeds.
By no jugglery can we, in the existing system, make cheap money
dear, any more than we can make cheap apples dear. It can be done by
cornering; but no cornering of money is possible. If banks cannot lend
at 1 per cent., they certainly cannot lend at 2 per cent. Human nature
must be re-created first. If men will not part with bills of discount
at 1½ per cent., they will not part with them at 1¾ per cent., and
there is no law, written or unwritten, that will compel them to do
this. The law of supply and demand operates as irresistibly in this
case as when we buy apples at an old lady’s stall.
If there be great danger in a great abundance and cheapness of money,
then there must be a great danger in an abundance of gold, which is
the source of the cheap money. Logic teaches us this. Reduce the gold,
hoard it or throw it in the ocean, then the supply of Lombard Street
money will decrease and loanable rates will rise.