CONFIDENCE AND GREATNESS
Confidence, I have said, is, in the production of economic wealth,
the vitalizing element. In economics it plays the part that faith
plays in religion. Confidence and credit have like derivations, like
connotations. Confidence is a confiding in, credit a believing in. But,
we must ask, a confiding or believing in what? Confidence, the spirit
of economic prosperity, is distinct from what is called Lombard Street
credit. Confidence is vastly more potent than Lombard Street credit.
If confidence be dead Lombard Street credit cannot of itself revive
it. But confidence can revive Lombard Street credit. When the nation
is prostrate and languid confidence alone can revivify it. It is the
economic tonic.
In the money article it would excite derision if we wrote: “In Lombard
Street to-day confidence was again in superabundant supply, and lenders
were offering it on nominal terms. Confidence over the night could be
obtained in liberal quantity from 1½ per cent. downwards, and for a
week at no more than 1¾ per cent. In fact, balances of confidence were
unlendable. Owing to the cheapness of confidence the discount market
was again exceedingly weak, and rates continued to fall.”
Yet, it is said, we have built up in this country a vast superstructure
of confidence, or belief, based on a slight foundation of gold.
Now there may be in Lombard Street, and often is, a vast amount of
“credit,” but merchants and the public have not the confidence to use
it. Why? To quote Mr. Withers: “Credit depends on the assumption that
goods produced will come to market and be sold and that securities that
are based on the earning power of production will fetch a price on
the exchanges of the world.” In other words, if we have no confidence
in the future, we are afraid to spend our money. So we eke it out, or
hoard it, or practise thrift and live in misery. And if we cease to buy
we cease to consume, production diminishes, goods perish in markets,
and men are thrown out of employment.
When we say the credit of the British Government stands high, we do
not mean that the credit-money of the Government has a high value, or
price. We mean that confidence in the British Government--that is, in
the British nation--is exceedingly strong. When, therefore, foreigners
buy British Consols they buy them because they know they can have
strong confidence in British wealth and British character: not because
our joint stock banks have high gold reserves, nor because London is
the world’s banker and a free market for gold. Foreigners know that
our gold reserves are insignificant compared with the gold reserves of
the leading continental countries, but they know that Great Britain is
the richest and the _greatest_ country in the world, and the British
Empire the richest and greatest empire the world has seen.
Confidence, therefore, is based ultimately upon _greatness_, and
our greatness as a nation and an empire was never more strikingly
demonstrated and vindicated than during the war crisis. Greatness can
exist, therefore, apart from gold reserves.
Let us look back upon the years preceding the crisis. Let us go back
to the American crisis in 1907. This crisis was the result of a lack
of confidence in America’s economic and moral greatness. It was the
result of scandalous dishonesty, the kind of dishonesty that we know
to be impossible in this country. Yet London could not but be shaken
by the panic there. London was, indeed, shaken by it more than by the
crisis last August. The United States took gold from London in huge
quantities at a loss, and the Bank of England rate, in order to try to
stop these exports, had to be raised to a high figure for an indefinite
time. Some of our banks were even accused of assisting the United
States to the hurt of our own banking position. But the storm was faced
and weathered. Years before then it had faced and weathered another
great storm in the Baring crisis. These historical happenings show how
mightily strong is that superstructure we have raised in our midst,
whether it be a structure of paper or of iron.
Then came the Morocco crisis, which was the beginning of the Stock
Exchange depression, and which has culminated in the European war.
When I speak of Stock Exchange depression I distinguish it from trade
depression, for depression on the Stock Exchange often coincides with
trade activity. The Morocco crisis brought the fear of war upon the
world. If Germany was prepared one day to fight she began to make
financial preparations for it. There can be little doubt that she
prepared insidiously for this by depressing in recent years values on
the Stock Exchange, selling securities to weaken us and strengthen
herself. This culminated in the colossal selling weeks before the war,
and in the heavy purchases of gold in the London bullion market.
There were, however, other unhappy events. There were the revolution
in Mexico, the financial crises in Argentina and Brazil, the political
and financial crises in France, the Balkan wars, the labour upheavals
in South Africa, the epidemic of strikes in this country, the failure
of the Birkbeck Bank, the Home Rule crisis, and the financial troubles
of our colonies and heavy borrowings on their part. One trouble quickly
followed another, peril succeeded peril, and never, perhaps, has the
world struggled amidst such political and financial trials. They were
years of darkness, and the dawn of a new and a brighter day seemed
remote. The nations were groping, knowing not what new peril would
confront them. Then the greatest peril of all came in the world-wide
catastrophe.
These constantly occurring troubles could not but gradually weaken
confidence in the future. When a man gropes his way in an impenetrable
fog, in a place strewn with snares and pitfalls, ignorant of his
whereabouts, knowing not whether he is progressing or going round in a
dangerous circle, he cannot feel confident of avoiding a fatal end. He
can trust only in hope and in his destiny.
This nation trusted in its destiny. Amidst these multiplying trials and
difficulties it trusted in the strength of its own soul. Therefore,
while prices were falling on the Stock Exchange, trade was growing and
booming. More capital for trade was needed. So wealth in the shape of
securities was turned into cash capital, which helped the downfall in
stocks and shares. There was no lack of confidence evidently in our
economic position and future. Our economic prosperity is not dependent
upon Stock Exchange speculation. The Stock Exchange has often boomed
and flourished during economic depression. This is because, when we
have idle capital or surplus, we gamble with it, or invest it, if we
cannot employ it profitably in business and commerce. We must never,
therefore, assume that when inactivity reigns on the Stock Exchange
and prices fall there, and stocks and shares become depreciated, that
the nation is losing confidence, and that economic stagnation has
come. If prices fall on the Stock Exchange through political and other
causes, and because merchants and others are turning securities into
cash, the aggregate value of the nation’s wealth may be rising and
accumulating far in excess of the depreciation on the Stock Exchange.
It is probable that this has been so in recent years. Banks, for
instance, have had to write down their investments year after year,
yet they have earned large profits and have easily maintained their
dividends. They could not have done this unless their losses in one
direction had been counterbalanced by their gains in another. So it has
been with other great financial institutions. They have easily kept out
of the bankruptcy court.
We have had a remarkable demonstration, then, of the power of
confidence even in recent years and in last year’s crisis. The
measures taken by the Government did not weaken that confidence, but
strengthened it.
Take the moratorium, the first real moratorium this country has
experienced. Had academic critics been told in the beginning of July
that war would break out in the beginning of August, and that the
Government would declare a moratorium, I believe they would unanimously
have predicted disaster, complete and irretrievable. If they foresaw
disaster as the certain end of a steady increase in armaments, nothing
short of the fall of the skies would follow a moratorium. Nothing would
more surely precipitate a panic, for if anything would bring about a
state of bewildering confusion it would be a moratorium.
Once again, then, the imaginative vigour of these prophets was
overrated. It was not equal to the strain of foreseeing the probable
effects of unexperienced causes. The position was tackled, not by
pedants, but by practical minds; not by nervous pedagogues, but by bold
experts. And the shallow-minded and timid amongst us were amazed. We
were veritably awe-stricken by the cool skill of our financial mariners
steering us in safety in the unchartered waters of an unknown sea.
The prolonged Bank holiday, the indefinite closing of the Stock
Exchange, were also decisions that in prior contemplation would have
filled with terror the hearts of pundits, who unhesitatingly would
have pronounced the doom of the mighty British Empire. The closing of
the Stock Exchange would, in their convictions, so have stricken down
confidence that it might never arise.
Then there was the subsequent arrangement made whereby those who had
made loans to the Stock Exchange could obtain from the Bank of England
advances up to 60 per cent. of the value of the securities held by the
lenders against loans outstanding on July 29th. The Bank of England
was not to press for the repayment of these advances until one year
after the conclusion of peace, or after the expiry of the Courts
(Emergency Powers) Act, 1914, whichever should happen first; nor would
it demand in the meantime further margin.
This arrangement has also been highly successful.
The fixing of minimum prices for high-class securities on the Stock
Exchange was another prudent step. It was artificial, but no one will
pretend that the position in this country and throughout the world
was a natural position. Measures of precaution and of defence were
as necessary to protect the financial as the military citadel. Were
they not taken, the consequences that might have followed might in
all probability have been immeasurably worse than the consequences
of restricted liberty. These minimum prices prevented attacks from
the enemy, and, therefore, destruction by the enemy. The defensive
position was greatly strengthened by the further restrictions imposed
by the Treasury when the Stock Exchange reopened. These were designed
to prevent wholesale selling by enemy countries and investors; and
capitalists in this country were thereby saved from the incalculable
losses such sales might have occasioned.
All the measures taken by the Government in this unprecedented crisis
must be tested by their success. Two or three years hence we shall be
able to survey them in clearer perspective and in truer proportion.
But we can say with assurance even now that they have been successful.
The real measure of that success we may calculate with greater
certainty some day.
The banking position and the banking system have stood calm amidst
it all. Even had the banks or the nation possessed that hypothetical
reserve advocated by some, and had it at hand in some safe corner of
London, this would not of itself have made the position more secure.
Other remedial or precautionary measures would still have had to be
taken. Had it not been the particular measures that were actually
conceived and taken, there would have been others. But we happened to
be fortunate in the measures that were adopted, measures that deepened
and strengthened the nation’s confidence.