SOME CONCLUSIONS
In writing this work I need hardly say--for it will be apparent to
all who have laboured through it--that I have had two main purposes
in view. I have written it as a guide to the student of the money
market, and I have written it with the object of learning some
lessons which, I think, are to be learnt from the unique experiences
of the financial world since the outbreak of the war. There is much
contentious matter within its pages, but this is inevitable in dealing
with a subject so profound and intricate, so profound, indeed, as well
nigh to baffle human vision to see clearly, steadily, and wholly its
vast complexities. The financial fabric is something that has grown
up in our midst as a mysterious thing. It has arisen not only out
of our needs, but out of our national character. It is no invention
that has suddenly revolutionized fashion in banking. It has been an
economic evolution, a product of environment, and who will say that
its evolution has reached its final stage? The environment has been
gradually, inevitably, imperceptibly created and modified by national
character, that is to say, by national psychology. This explains its
distinction from other systems. Other systems in the world are likewise
products of national character, products of circumscribed environment.
This is why they differ, and why there is no scientific precision.
There may come a time when the world will have an international banking
system, but that day is far distant. Meanwhile systems must remain
national.
It is important, therefore, for the student to understand that it is a
psychological product, a something that has grown up out of the soul of
the nation. It is difficult to be clearly conscious of this, to regard
it as a something not purely scientific, something not independent of
human nature as are mathematics. Banking is a part of our economic
system. Political economy has been called a dismal science. This is
a delusion. It is neither a science, nor is it dismal. Students of
political economy have made it look dismal because they have regarded
it as a science, in the making of whose laws and in the shaping of
which human nature and constantly changing character have no part.
Political economy is a branch of psychology. The subject is human
nature, in the same way as ethics or religion is human nature. It deals
with temperament and the soul, and the temperament and the soul are not
strictly scientific subjects, like geology and astronomy. We might just
as reasonably describe religion as the science of theological economy,
and ethics as the science of moral economy, as describe social
intercourse as political economy. If political economy means the law of
the State, then laws are made by the citizens of a nation and are being
constantly modified. They are not laws beyond the control of man.
The banking system is in our control and we can make laws to modify it
as we please, and as our wisdom dictates, or counsels. In gold there is
nothing marvellous. The world has given it certain powers through its
laws. One nation has largely imitated another in this respect, until
all the leading nations have adopted it as the basis of their systems.
They have imitated each other in the same way in evolving their naval
and military systems. The day may come when they will look upon gold as
something barbaric, in the same light as we regard the iron currency of
primitive nations. A thousand years hence ours may be spoken of as a
primitive age.
In this work, then, I have endeavoured not only to be analytical and
critical, but to be constructive. Many of the theories that are still
held tenaciously I cannot accept. I cannot accept the theory that banks
are creators of credit and build up an unsubstantial and dangerous
structure. When we talk of banking credit and national credit we
talk of two distinct conceptions. Yet both kinds of credit are based
fundamentally on national wealth and national character. It is said
that banking credit is based on gold and national credit on national
wealth. Why is not national credit also based on gold? We glory in
a towering national credit, because it is something to be proud of,
a monument to our greatness. Why, then, should banking credit raise
strong apprehensions?
Before we talk glibly of banking credit it would be more profitable,
first of all, to get a clear conception of what credit is, and having
got that clear conception to define it clearly. Joint stock companies
talk of other credits. They describe revenue as credit, profits as
credit, debts owing to them as credit, their financial standing as
credit. Ideas of credit, therefore, are greatly complicated, and
no wonder they lead to confusion. We even talk of Germany’s credit
weakening, notwithstanding the great mass of gold she possesses.
It is when we talk of credit and confidence as one and the same thing
that the confusion becomes greater. We talk of the superstructure of
credit raised by banks, and grow dizzy as we strain our gaze towards
its apex; yet we speak in the same breath of the profound confidence we
have in banks. We cannot at the same moment have profound confidence in
them and yet gaze apprehensively upon the system. The repose and the
fear cannot both be rational states of consciousness.
Our confidence in banks reposes in our trust in the wealth they possess
and in the wealth they transform into money. Without that confidence
they could not exist, despite their credit. But without confidence the
nation itself could not exist. It is national confidence that supports
the State. It is national confidence that brings national prosperity.
Destroy confidence and you destroy wealth and prosperity.
As regards bank reserves, I think we can do in the future what we
have done in the past--trust them to keep a fair average proportion.
As things are, we must not expect the system to work with perfect
elasticity. This cannot be done with inelastic gold as a basis. We
cannot have an absolutely safe mathematical ratio. Whatever the
ratio be, it alone will not ensure us against disaster. Only the
Government--that is, the nation--can ensure us against disaster. It
is the duty of the nation to do this, and it is also a prudent course
to take. We had an exemplification of this in the recent crisis.
Experience is a safer guide than theory.
But the Government, in its turn, has the right and the duty to insist
upon sound banking. It should allow no institutions to spring up
calling themselves banks which cannot be conducted soundly. This is not
safeguarding the community. Such institutions should be differentiated,
and should have their proper designations. I think the fewer the banks
the better, therefore I favour amalgamations. This is because I think
they could be brought under more complete control and could be more
soundly and safely administrated. In fact, I would go to the logical
extreme and make them branches of a State Bank and not independent
entities.
It is because they and the Bank of England are independent entities
that we cannot simultaneously have high reserves in the joint stock
banks and high reserves in the Bank of England unless both stop lending
simultaneously. A joint stock bank singly can keep a high proportion
because it can make all its branches conform to the common policy. But
as the banks are not branches of the Bank of England there can be no
common policy. This has its grave disadvantages at times. We may evolve
in time to closer union, to a more consistent and uniform system. This
certainly lies in the path of social evolution.
As to where the reserves should be kept, I do not think, as the
system is at present, that this is a question of vital importance.
The reserves appear to me to be safer in the Bank of England, because
thereby they place greater obligations upon that Bank, and this comes
nearer to our notions of unity. Behind the Bank of England is the
Government, and behind the Government is the State. One thing is
certain. Wherever the reserves be, they will not suffice of themselves
to save the banks in a state of ungovernable panic without the help
of the Government. And all the banks must stand or fall together. And
if they stand or fall together their reserves must be pooled in some
fashion and somewhere.
The Government can save them in these grave, but, happily, remote
circumstances, by setting the machinery at work to produce legal
tender currency. The wisdom and efficacy of this have recently been
strikingly demonstrated.
Many critics have foretold disaster from the inadequacy of the gold
reserves against the liabilities in the Post Office Savings Bank. The
Post Office Savings Bank and the joint stock banks perform distinct
functions. The Savings Bank does not lend. It does not transform wealth
into liquid currency. It is a huge State safe, where public savings are
kept in safety, and it performs the functions of the old silver teapot
in the household. Being a purely State or National institution, it is a
national liability. It has behind it the entire wealth of the nation,
and it is absolutely safe unless the nation be swallowed up in the
seas. And if it were swallowed up the depositors would not need their
money.
Gold, after all, performs but limited functions. It is becoming less
necessary in the internal economy of the State owing to the growth
of cheques. Gold is merely a symbol, and we should not bow before it
in abject obeisance. It is even becoming of less importance in its
international functions, and I think the European war will lessen its
importance still further. European nations have collected it more
for war purposes than for commercial. This has been the case with
Germany, which, in the consciousness of its determination to fight
for world dominion, amassed the gold as a war chest. This gold is not
in circulation, but is lying idle in the Reichsbank, in order that
the Government may flood the country with various sorts of paper
currency. This paper currency will in time be so inflated as to become
greatly depreciated. This is the danger run, the danger of inflation
and depreciation, yet we never dream of the inflation of our cheque
currency, because it grows and contracts with our output of wealth.
The depreciation of paper currency is evidence often that a nation is
living beyond its income. We know the fate awaiting the individual
when he “outruns the constable.” In order to avoid insolvency he must
live more frugally, live well within his income, and liquidate his
debts. Then, in time, he will be free and will not live in dread of his
creditors.
If a nation lived within itself, built a huge rampart around itself,
and had no commercial intercourse with other nations, if it could live
a happy, contented community, on its own resources, then an inflated
currency would have no ill effects. It would not necessarily bring
bankruptcy and ruin. It would be like a private individual living on
his own resources and on the fruits of his own labour, interchanging
nothing with his neighbours. Such a hermit would be indebted to no man.
He would depend on nature alone, and if nature failed him, or sickness
overtook him, then he would die.
But civilized nations are not hermit nations. They live by mutual
help, by mutual trading. They deal with each other and they deal on
the system of barter, in the absence of an international currency.
Gold is a species of barter and passes from nation to nation in all
respects like an ordinary commodity. Imports are paid for by exports,
and exports pay for imports. When, however, a country imports more
than it can pay for in exports, it must either cease to import, or pay
for the excess in gold, securities, or some other form of payment.
If it has to pay in gold it may be living beyond its income and be
paying for its exports out of capital. If the gold be hoarded and the
paper currency be multiplied and inflated an automatic rise in prices
results. This is tantamount to a depreciation of the paper currency,
for this currency can then purchase less. What is called the credit
of the nation falls. That is to say, belief in its soundness weakens.
This encourages imports from foreign countries and discourages exports,
and the indebtedness to foreign countries increases. Should this go
on indefinitely, the country will get deeper and deeper into debt and
nearer to insolvency. It will have to pay for its imports with its
gold, or stop importing. And if it stops importing, it might stop
importing vital products. Powers of production and consumption will
necessarily weaken, and that country will get into the plight Germany
has got into. In time its credit and currency will become so debased
that foreigners will not risk exporting commodities, lest they should
lose more than they gain, for the debtor country’s paper will become of
less value.
In the case of Russia, her currency also became depreciated in terms
of sterling value. This arose from a different cause. Russia’s exports
to England and other countries were stopped by the closing of the
Baltic Sea and the Dardanelles. A little went by the Archangel route,
but, of course, it was wholly inadequate. Russia, therefore, was
unable to liquidate her national indebtedness by her exports, and
the exchange went so greatly against her--that is to say, the rouble
became so greatly depreciated in terms of our gold currency--that it
was impossible for Russian merchants to get remittances to send to this
country to liquidate their indebtedness here.
The war crisis has been invaluable in teaching us deep lessons.
Had there been machinery for the ready provision of legal tender
currency the moment the war was foreseen, a moratorium might have been
unnecessary, with all its complications and confusion. A prolonged
Bank holiday, with its inconveniences, might likewise have been
obviated. The crisis has shown enlightened nations how terrible the
risks and consequences of war are. It has been invaluable in revealing
the spiritual, material, and financial strength of Great Britain and
the Empire, and in setting up precedents for future guidance in the
financial as well as in the military and commercial spheres. And the
heavy financial burdens shouldered by the nation may not in the long
run be so heavy as some fear.
APPENDIX A
The following pre-war Bank of England return, of June 24th, 1914,
may be regarded as a normal return, and it can be compared with the
abnormal return appearing in Chapter IX.
ISSUE DEPARTMENT.
£ £
Notes issued 56,753,275 | Government debt 11,015,100
| Other securities 7,434,900
| Gold coin and bullion 38,303,275
---------- | ----------
56,753,275 | 56,753,275
========== | ==========
BANKING DEPARTMENT.
£ £
Proprietors’ capital 14,553,000 | Government securities 11,046,570
Rest 3,160,254 | Other securities 39,994,619
Public deposits 18,074,214 | Notes 28,050,150
Other deposits 44,915,911 | Gold and silver coin 1,624,988
Seven-day and other |
bills 12,948 |
---------- | ----------
80,716,327 | 80,716,327
========== | ==========
The proportion of the reserve this week was 47⅛ per cent.
APPENDIX B
MR. AUSTEN CHAMBERLAIN AND MR. LLOYD GEORGE ON GOLD RESERVES
While this book was in the press, interesting views upon the note
currency and the gold reserves were expressed in the House of Commons
by Mr. Austen Chamberlain and Mr. Lloyd George. They coincide largely
with my own views. The opinions were expressed during the discussion
on February 23rd on the Chancellor of the Exchequer’s statement on the
financial arrangements made with France and Russia.
Mr. Austen Chamberlain said, to quote from the report in the _Morning
Post_:--
“Mr. D. M. Mason the previous night urged the Government to withdraw
the Treasury notes now in circulation here. He (Mr. Chamberlain) had
held for a long time that gold in the pockets of the people was not a
very useful reserve for any national purpose, that we carried about the
same amount of gold whether it was a time of crisis or not, and that
that gold was not readily made available for the international currency
when the need for it in that capacity arose. Therefore, he held that
the internal circulation of gold was, on the whole, wasteful use of
it, that it was an out of date use of gold, and that the greatest
development of our financial system had been the substitution of paper
for gold. The largest substitution had been in the form of the cheque.
Provided that the issue of notes was not an artificial inflation of the
currency but a response to a real need for currency, then the more they
could substitute notes for gold for internal use the better, and the
more economical, the more civilized, and the more advanced the currency
system became. What he cared about was seeing a large reserve of gold
centralized for use in an emergency, and if they had secured the
reserve of gold and the emergency arose, then the most foolish thing
they could do was to fail to use the gold. The gold was got together
in order that in an emergency, when the exchange went against them,
the adverse balance of the exchanges might be corrected by the use of
the gold, and unless the gold were used in that way it seemed to be a
pure waste of it to hold it in reserve. That was not a doctrine that
was popular in any foreign country that he knew. But it was a sound
doctrine, and he hoped that the whole influence that we could bring,
through the Chancellor of the Exchequer, in the councils of the Allies
would be directed to making them use their gold resources freely when
those gold resources were required. They had to study the psychology
of the people. If the Government used their gold freely they very soon
restored confidence in the public mind. He hoped that our influence
would be used to persuade our Allies that in this matter the boldest
course was the safest course, and that States were as unwise to hoard
gold as individuals within States were.” (Hear, hear.)
Mr. Lloyd George, in the course of his speech, said: “As to the matter
of currency, he was completely in agreement with Mr. Chamberlain,
who put the position so effectively that he could not usefully add
anything. He thought it desirable that there should be considerable
reserves of gold in the Bank of England or in the Treasury, and
equally desirable that it should be freely used whenever the emergency
arose. We were on the road to a much more efficient use of our gold
reserve if we used paper currency within safe limits. Our issues of
paper currency were well within safe limits. (Hear, hear.) Not only
so, but there was no country to be compared with us in this respect.
Foreign countries, he thought, had always been nervous about using
their gold. The fact that we used it freely showed that was not our
view. There was too much disposition even to-day to worship the golden
calf. (Laughter.) This country had always gone on the principle that
the gold was there to use whenever there was a demand for it, and that
practice had never failed us up to the present. It was true that we
had never had such a strain put upon it as during the past few months,
and it was probable that that strain would increase during the next
six or twelve months, when our purchases abroad would be much heavier
than ever before, and our sales to other countries considerably less.
He did not like to prophesy, and he hated bragging, but he did not mind
saying that the resources of gold we had got would carry us through
any emergency that we could possibly foresee. (Cheers.) That was his
firm conviction, not merely from his observation, but from careful
inquiries in the City and elsewhere. He agreed, however, that there was
no special merit in paying debts in gold where paper would do equally
well, and thought it wasteful, burdensome, and not particularly useful.”
PRINTED BY WILLIAM CLOWES AND SONS, LIMITED, LONDON AND BECCLES.
Transcriber’s Notes
Punctuation, hyphenation, and spelling were made consistent when a
predominant preference was found in the original book; otherwise they
were not changed.
Simple typographical errors were corrected; unbalanced quotation
marks were remedied when the change was obvious, and otherwise left
unbalanced.
Ditto marks have been replaced with the actual words.