THE SUPPLEMENTARY INFLOW
If there must be in the country, for the benefit of the country’s
trade and commerce, for ensuring its prosperity, a loanable fund, why
should no provision be made for what I call the supplementary inflow?
If no provision of this kind is made by a nation, how can we reconcile
this with national foresight? In carrying on business on the soundest
principles of finance business concerns allow amply for contingencies
by building up reserve funds. If this be sound in individual business,
it should be sound in national business. We cannot logically have
contrary business principles for the nation and the individual, for in
that direction confusion lies.
The nation trades on its capital. It is a vast undertaking, with a
colossal capital. It incurs huge liabilities, but against them it has
huge assets. Why should it not have amongst these assets large hidden
reserves?
Some wealth depreciates, while other wealth appreciates. Some wealth is
destroyed, while new wealth is created. Wealth is not destroyed by war
alone. It is destroyed by new desires, new inventions--which destroy
the wealth brought into existence by former inventions and bring ruin
on some industries and men,--new fashions, and by lack of hope and
diminishing confidence. On the Stock Exchange in recent years we have
seen continual depreciation. But other assets may at the same time have
greatly appreciated.
We cannot get more gold than nature will produce, and every ounce taken
from her store lessens that store. And the store will diminish as the
future needs of the world grow.
The gathering of the gold and the garnering of it, like the garnering
of seed we fear to sow, must be done at the expense of our wealth
production. The harvest of wealth must be less because of the scantier
seed sowing; in other words, because of the diminished capital
employed. Instead, therefore, of the gold coming out of the nation’s
profits, it would come out of the nation’s capital, for unused capital
is not used capital.
Gold is our capital in a fundamental sense. If all the gold in the
world were suddenly destroyed, banks would cease to exist. Whence,
then, could we get the means of multiplying our capital? The productive
machinery of the country would become inert. International trading
would cease, because international exchange would cease. Bills of
exchange would be as worthless as old newspapers, for they would be
unnegotiable. We should have to get a substitute for gold.
We try to attract gold to this country because it is gold that keeps
the capital-multiplying machinery going, as oil keeps other machinery
going. If we always had a sufficiency of it there would be no occasion
for high Bank of England rates. If there be just a sufficiency and no
more, then we cannot spare any for hoarding purposes.
It would be wise of the nation to have at its command a potential
supplementary supply, not of gold, but of legal tender, for legal
tender can perform all the offices of gold as national currency. Gold
is given its potency because it is made legal tender. It has no other
vital potency. Therefore paper, or any other substance, can be given
equal potency by law.
Now, the necessity of having this supplementary supply has been tacitly
acknowledged. The acknowledgment is implied in the provisions of the
Bank Charter Act and the provision of legal tender notes based on
debt and securities. This provision, as I have pointed out already,
is arbitrary. It was fixed at a time when no man had the visionary
power to foresee and forecast the great development of banking in this
country and the vast development of its national and international
trade. It was fixed at a time when the country was groping towards
a greatly improved currency system, a system that has helped in an
incalculable degree the growth and development of our commerce.
But in the recent crisis it was not this potential supply that the
nation actually tapped. Before it could be tapped it was necessary to
suspend the Bank Charter Act. Instead of this happening, a new and
unlooked-for supply was forthcoming in the shape of the Treasury notes.
This issue of Treasury notes brought a new fiduciary currency into
existence, and the issue was on all fours with a free Government
loan--a loan, that is to say, on which no interest was paid. It
provided not only currency for the country, but “silver war-bullets”
for the Government. The issue performed all the essential services
which the supplementary fund I advocate should and would perform.
I am convinced that the alarm felt throughout the country in
those first critical days was magnified. There was certainly some
apprehension; but no good purpose would be served by magnifying it. It
is indisputable, too, that even this moderate apprehension disappeared
the moment it was known that a large amount of legal tender would be
issued in the shape of £1 and 10_s._ Treasury notes.
The notes were based on what we call the credit, or wealth, of the
country. The public placed their confidence in them because they felt
they were placing confidence in the wealth and power of the country, in
themselves as a nation. They could have no sounder basis. The nation
was indifferent to the convertibility or inconvertibility of the notes.
All the country was conscious of was that the notes were legal tender
and as good as gold.
Theorists attach too much importance to the effect upon the public mind
of an issue of inconvertible notes. The great mass of people does not
understand convertibility or inconvertibility, certainly not in the
deep sense critics imagine it does. It understands, however, confidence
in the Government, and this confidence is of greater worth than are
vague ideas of convertibility. The mass of the public is ignorant of
monetary and currency problems, but it is not ignorant of the power
of the Government and the power of the law. When the mass of the
public had these notes--and even postal orders as legal tender--in its
possession, it knew it had purchasing power equal to the denomination
of the notes, and that was all-sufficient. This explains the public’s
satisfaction and calmness. Moreover, it is a phenomenon of deep
psychological importance.
There were sections of the public--merchants, financiers, bankers,
academicians, theorists, and pressmen--who knew that the notes, though
issued as convertible, had behind them no gold backing. But even many
of these were not erudite students of currency. Nevertheless, they
could not help feeling and acknowledging that the right and wise
thing had been done. And as for merchants, bill-brokers, bankers,
and other people who wanted legal tender currency, they cared not
so long as they could get it. This was their chief concern. It was a
matter of indifference to them whether the notes were convertible or
inconvertible.
Perhaps the most fruitful point for controversy at this juncture, now
that we have experienced the benefits of the policy, is whether it
would have been better to have suspended the Bank Act and have issued
Bank of England notes, or to have done what actually was done. Much can
be urged in support of each policy. Bank of England notes would have
obviated any confusion arising from two distinct species of fiduciary
paper currency.
The great virtue and convenience of the new notes was their low
denomination. It would have created needless difficulties, perhaps, to
have given power to the Bank of England to issue such notes. Confusion,
therefore, was greatly lessened by making the Treasury notes of low
denomination and by keeping the Bank of England notes at a high
denomination. As a fiduciary note, currency should be as simple as
possible and not complicated, the distinction between the denominations
should conform to the idea of simplicity.
I think it would be wise to teach the people that the currency of the
country is in reality based upon the wealth of the country, and not
upon an extraneous thing like the capricious production of gold. This
would assist it to grasp more easily currency problems. What would
be the state of this country with a mountain of gold and no wealth?
Currency being issued on a basis of wealth, it is issued on something
solid and durable.
A certain London evening newspaper wrote in this wise several months
after the outbreak of the war: “The puzzled public which draw its
cheques and accepts the cheques of others with a firm and pathetic
belief in the value of ‘a scrap of paper,’ was a little scared at first
when the value of securities tumbled down and it had to accept notes
in place of its accustomed solid coin. People began to ask whether the
alleged wealth of the country was supported by anything solid at all,
or whether we had not been living on a fiction. Fortunately, time has
proved that it is very substantial indeed.”
Quite so. The wealth of this country is the most substantial possession
the country has. But, all the same, there are many fallacies in the
above passage. The public were not puzzled, and there is no pathos
in its belief in the value of cheques. It was not scared, even for
a moment, when it had to accept notes, no more scared than it has
been when it has received Bank of England notes. It took them with
inquisitiveness, but also readily and gladly. People did not ask if the
wealth of the country was “alleged” and whether it was a fiction, and
I think it is foolish to put ideas into the heads of the public which
originally were never there.
Is it absolutely necessary to issue a _limited_ amount of Treasury or
other legal tender notes based on gold? Or may the amount be unlimited?
In a war of world-wide magnitude, the Government and the nation had
to take account of the vital fact that, not only might our commerce
be destroyed by the enemy’s navy, but that it might be impossible to
bring gold over to this country. This had to be foreseen and provided
for. The joint stock banks, however high their gold reserves, could not
alter this. Therefore it was necessary, apart from these reserves, to
meet immediate emergencies by the issue of legal tender notes. Though
afterwards the Bank of England was credited with enormous amounts of
gold, this gold did not come to London. It was placed to the Bank’s
account, or credit, in South Africa, Australia, and Ottawa. This
restricted probably the supply of gold coin at a time when there was an
unprecedented demand for small currency for our military requirements
and in our vast military camps. Though some industries may have slowed
down greatly, others worked at high pressure, thereby probably more
than offsetting the inactivity of others. And allowance must be made
for the thousands called to the colours who might otherwise have been
parasites. By joining the army their aggregate consumptive powers
increased. All these developments had to be pre-calculated, apart from
the positions of the joint stock banks and their preparations for
panic. It was not the time to hoard gold, but to see that legal tender
currency was provided in ample measure.
Ample measure is not superabundance, and if the needs were just met
nothing further was necessary. Assuming, therefore, that they were just
met and no more, we may ask whether or not it would be wise to withdraw
the notes when the war is over and normal conditions are restored. It
is, perhaps, too early to reply in dogmatic fashion.
We must take into consideration that we may never again see a world-war
and never again face a crisis such as we faced in August last. But I
see no powerful objection to the notes remaining. We may regard them
as the nucleus of the nation’s reserve fund, the liquefying of its
hidden credit, or wealth reserve, as the veritable “I believe” in the
immeasurable potential wealth of the country. The War Loan is another
such reserve, a reserve representing the present and future credit, or
wealth, of the country. The country’s potential wealth is the security
behind it. And the Treasury note issue may be regarded as part of the
loan, for the gold “ear-marked” against it has probably come out of
that loan. If the notes were redeemed and the gold released again, the
gold would go into circulation and form part of the banks’ reserves as
before. By retaining the gold the Government would have that store of
gold which critics have been asking for. So far as they are concerned,
therefore, their wishes would be fulfilled. They could gaze with
satisfaction on this store of gold, for the delicate problem has been
solved as to who should buy it and store it and bear the expense of it.
Evidently it is the intention to have a gold reserve equal to 100
per cent. of the notes in issue. I see no urgency in this, no vital
necessity. The notes could be based partly on gold and partly on
Consols. I think a reserve equal to 50 or 60 per cent. in gold would be
ample.
If posterity is to benefit more from the war than the present
generation, why should it not bear a goodly part of the burden?
It may be objected that Consols are a depreciating security. They are
an appreciating security also, and years hence they may have a much
higher value than they have now. Gold also appreciates and depreciates
continually, measured by the prices of securities and commodities.
And the entire wealth of the country is constantly appreciating and
depreciating.
If the credit of the nation years after the war becomes much higher
than it is now, then to secure the notes on the credit of the nation is
to secure them on something that will rise in value.
This issue would not be like the varieties of paper issues in Germany,
whose credit has depreciated and will continue to depreciate as her
wealth diminishes and becomes less negotiable. She cannot, as we
can, pay for goods entirely with goods, owing to the destruction of
her commerce. She must pay in gold; in other words, she must live on
her capital. And she cannot live on her capital and speedily renew
it. There must be considerable destruction, because it cannot quickly
reproduce itself.
I would, therefore, base part of the new issue on a sound security like
Consols, which is representative of the country’s credit, or wealth.
The notes themselves are representative of its wealth, therefore
Consols would be an extra security. I would not advocate the withdrawal
of the notes, because the machinery has now been provided for possible
use at a future crisis. The machinery could be set in motion again
without resorting to the cumbersome process of suspending the Bank
Charter Act. It gives us a provision for unknown contingencies.
To keep a limited amount of Treasury notes in existence should be no
more a potential danger to the future of our financial fabric than the
issue of a huge war loan. On the contrary, they should help us the
better to bear the burden of a war loan if there be no improvident, or
over-issue of them. They should be no greater menace than the sudden,
prodigious output of gold which we could not use. We would not declaim
against the imports of huge quantities of gold each week and the
corresponding increase of currency. If so arbitrary an increase could
do no harm and would be considered beneficial, then a limited supply
of other currency, such as our Treasury notes, should not be harmful.
And if the discounting of millions of unnegotiable pre-moratorium
acceptances, creating currency in such abundance as to make it
exceedingly cheap, is not harmful, then the issue of a limited quantity
of Treasury notes, against which the Government is setting aside an
equal quantity of gold, should not be harmful. To predict that it will
bring economic evil in a distant future that cannot be foreseen, is as
valuable as many another theory that has failed to stand the test of
reality.
It should be no more harmful to the future than the issue of Bank of
England notes has been, based on a book debt and securities, during the
last seventy years.