Then there are certain matters connected with
dealing and distribution which have tended to raise
prices. There has been too much of the amateur in
the market. He generally pays very dear for his
operations. Military purchases, for instance, have
not been of the most economical type. On the other
hand, there has been a certain tendency on the part
of the expert to hold up goods and to exact the full
advantage of his position and his knowledge, and
there has also been a certain amount of hoarding by
consumers. These are small matters, and not so
important as the others I have noticed.

I ought, perhaps, to say a word about the question,
of bank deposits in addition to what I have already
said. I said that the way in which Government
borrowed did make some difference, and it was ad-
visable, as far as possible, to avoid borrowing by the
creation of currency. We have done very little to
create currency in this country in the shape of notes,
practically nothing if you make allowance for the
substitution of notes for sovereigns ; but we have
done a great deal say to the amount of 400,000,000
to create bank currency by bank advances. The
question is whether that could in any way be avoided,
and I am inclined to think that it can be avoided, that
it is very largely connected with the issue of big loans.
These big loans require large operations to finance
them. We talk about raising a loan of l ,000,000,000,
but it is quite certain that there does not exist in
the country at any one time even 400,000,000 of
spare cash, and it is an impossibility to raise a loan
of 1,000,000,000 in the strict sense of the word.
What we do is to finance it by bank advances. Every
big loan means a large expansion of bank deposits.
We cannot tell how much because we cannot get the
returns, but we know very well there must be that
expansion, because we know there is no spare money
in the country to the extent of anything like the sum
raised by a big loan. No country in the world could
raise a loan, I think, of 500,000,000 without recourse
to some method of financing, and that method of
financing practically creates currency. It is for that
reason that I confess myself entirely a partisan of
Mr. Drummond Eraser, the apostle of continuous
borrowing in this country, who argues that the proper
way to borrow is to take up money when the public
have it to spare, by always being open to receive
loans, to receive the spare cash as it comes into the
current accounts. That is practically what we were
doing all through 1916. I admit that there were
reasons for one large regularising loan. We have got
into difficulties with previous loans and previous
rights conveyed by those loans, and it was desirable
to unify the public credit on a single basis as far as
possible, creating a large marketable stock on sound
principles. That was admirably done by the recent
loan. It is likely to be what Consols used to be, a
fine banking security in the future, or at least I hope
so ; and I was very glad to see that it was so admirably
insured by the large contributions made first by War
Savings Certificates, and secondly by the Prudential
Insurance Company and other bodies of that parti-
cular type. I regard this as a very important point,
a bull point for the new stock. In the future and in
general it seems to me that Government can raise
the money it requires with a minimum of disturbance
and with a minimum of inflation if it will avoid placing
these large loans at long intervals and revert to the
system of continuous borrowing to the full extent as
money becomes available. That borrowing should
give a freedom of option to the public ; there should
be bonds of various dates and bills of various dates.
The chart on pp. 242-3 constructed by Mr. Drummond
Eraser shows the effect upon the deposits of the Bank
of England of two kinds of borrowing during the war.
The upper part of the chart shows the pre-war period,
the normal position of the Bank of England deposits
as shown by the Eeturns. When you get into the
war period the deposits rise very rapidly, partly
owing to the panic at the outset of the war and after-
wards owing to the War Loan ; but when in 1916
you come down upon this method of continuous
borrowing, you see how remarkably even the curve
of Bank deposits is, almost at a level from December
to December. I have no doubt that if we could get
the figures for the new Loan we should see a corre-
sponding rise in the bank deposits, if not of the Bank



INFLATION 245

of England yet of the country as a whole, in conse-
quence of the big loan of 1917. It is well to avoid
these disturbances, and also to avoid the creation of
currency which they cause.

The root of the whole matter it seems to me is this :
whether by inflation or otherwise, gold itself has
depreciated, and it is this depreciation of gold
which is expressed in the high level of prices. The
depreciation of gold is the result of the enormous
increase of purchasing power in the hands of Govern-
ments. In some cases the new purchasing power
has been created by methods which have depreciated
currencies in relation to gold. That does not seem
to have been the case here. Our prices are very
high. But we see these high prices in America and
other countries where there is no question of inflation
in any ordinary sense of the term. Thus the problem
is international, and that is a matter of the first im-
portance, because it shows that, unless we are prepared
to revert to what I may call Scandinavian methods to
bring about a local appreciation of gold in our own
country and that is obviously impossible and un-
desirable the rise of prices is beyond the control of
any one country. We can only check it by cutting
ourselves off from a gold standard, which is what we
do not want to do, either by appreciation or deprecia-
tion. Secondly, I think it is important because it
meets an objection raised by Mr. Falk which I confess
rather impressed me at the time I read it that



246 PAPERS ON CURRENT FINANCE

a rise of prices, by creating exchange difficulties,
threatened our international position after the war.
It might if it were peculiar to this country, or even
if it were peculiar to belligerent countries ; but if it
is really universal, if it affects the United States, for
instance, I cannot see how it threatens our inter-
national position. At any rate that consideration
reduces the danger to which Mr. Falk referred. That
is broadly the position that I wish to submit.



ABSTRACT OF THE DISCUSSION.

MR. 0. T. FALK asked members to listen to him for a few
minutes, mainly because he hoped that by taking part in the
discussion he might extract a little more truth from Professor
Foxwell. Professor Foxwell had said that the objectors to
inflation were mainly concerned with the third form of inflation
in his category, the depreciation of gold. That might be so,
but it was not his own experience, possibly because his life
was spent in the City, and lie thought it would be admitted
that, so far as those who lived in the City were concerned,
inflation of the first two kinds was the most important. It
might be because he had not a due allowance of that morbid
timidity which Professor Foxwell ascribed to bankers that lie
disagreed with him with regard to the position in so far as
the first two forms of inflation were concerned. There was
a difficulty about the question and he frankly admitted that,
so far as he knew, those who believed that depreciation or
what he would rather call potential depreciation of the
currency in terms of gold existed, were at present unable to
offer any satisfactory proof of that depreciation. So far as
he was concerned, he suspected it. He did not admit that the
rise of prices in every country was a measure of the depreciation



INFLATION 247

of gold, simply because he did not admit that the prices in
all those Countries were gold prices. He believed they were
admittedly not so in Russia, to take a single example, and he
thought they were not so in other countries also.

He appreciated Professor FoxwelTs point when he said that
there was no cause for alarm with regard to the position of
this country if the rise in gold prices was international and if
the rise in this country was not greater than the rise in other
countries ; but his own idea was that the rise in prices in most
-countries was a rise in currency prices and the rise was measured
in currencies which were admittedly depreciated in terms of
gold. In the case of this country, the currency was supposed
to be on a par with gold. If, therefore, our prices had risen
to as great an extent as the prices of other countries, it was
possible that our currency was depreciated in terms of gold ;
in other words, it was a question as to whether there was
not what might be strictly called relative redundancy of the
currency. It was not possible for him to give any proof of
that relative redundancy, but he would ask the members for
a moment to assume that it existed. He wanted them to
assume it because he wanted them to allow him to criticise the
point of view of those who said that redundancy simply could
not exist, who said that the absence of that redundancy was
proved by certain current conditions. Professor Foxwell had
compared the position in 1810 with that of 1917, and it would
appear that that was a very good starting point for the criti-
cism he himself wished to make. In 1810 the Bullion Com-
mittee and Ricardo and a few others pointed out that the high
price of bullion and the state of the foreign exchanges was a
proof of the depreciation of bank paper, and a proof also of
the over-issue of that paper. He would agree with Professor
Foxwell that the depreciation of the exchanges was not a
conclusive proof in all circumstances of the depreciation of
the currency in terms of gold, but for his purposes that qualifi-
cation was not important, because the point he wished to
make was that, whether those tests were conclusive or not,



248 PAPERS ON CURRENT FINANCE

it was fair to say that it was not possible to state with con-
fidence that, because there was no high price of bullion and
because there was no depreciation of the exchanges, therefore
redundancy was absent.

Comparing the position in 1810 and the position to-day f
in 1810 there was a high price of bullion and there was a
Restriction Act. The objectors to the hypothesis which he
put forward said that to-day there was no Restriction Act
and no high price of bullion. He admitted there was no
Restriction Act, but there was restriction by consent. It
was also said that there was no high price of bullion, but he
did not see how there could be a high price of bullion ; it
was not possible to melt down gold coin or to import bullion
or to export it as a matter of fact bullion could not really
be bought. There was no Lord Stanhope Act, but it was
not legal to pay a premium for British gold coin, and certain
men had been convicted of that offence. So far as he knew,
there was only one case in which a gold premium within the
country could be made evident, and it so happened although
he laid no stress upon the point that in that case a premium
existed. It was legal to purchase foreign coins, not current
coins, and melt them down, and jewellers, because they badly
needed gold, were buying foreign coins and paying a high
premium for them, from 10 to 15 per cent., but it was not a
highly regularised trade, so that the premium probably varied
considerably in different localities. He did not in any way
wish to suggest that the premium paid by those jewellers
was any evidence of a gold premium within the country, but
he did think that it was fair to say that the absence of a gold
premium was not a proof that there was not a premium on
gold, because by consent and by legal restriction there was no
real dealing in bullion or gold coin. Fortunately this country
had been free during the war from individuals of the type of
Lord King, so that we had not really had the point tested as
it might have been.

The second main test of the days of the Bullion Committee



INFLATION 249

was the state of the foreign exchanges. The American
exchange was now at the low gold point, or approximately
so, and he was perfectly prepared to admit that the state of
every other Neutral exchange could be explained away. He
did not want to go in detail into the matter, because he
thought it must be obvious that if this country had been able
to maintain the American exchange at the low gold point
it could have maintained all the other Neutral exchanges at
that point by the same methods, if there had not been special
difficulties. Assuming that all the foreign exchanges were
at the low gold point, could it therefore be argued that the
currency was not potentially depreciated ? He thought not.
The state of the exchanges in the present case proved abso-
lutely nothing. He would ask the members to look for a
moment at the method by which this country was maintaining
the American exchange ; we were not paying for goods with
goods ; we were paying for the adverse balance of trade with
gold, with foreign securities that were acceptable and with
promises to pay gold. Promises to pay gold were not gold,
but promises to pay gold, and that was a point that it was
impossible to escape from. He thought it was fair to say
to borrow a phrase from Professor Jevons that this country
was engaged in selling a gigantic bear of gold. Anyone who
knew what the selling of a bear might result in, especially
when it was on a very large scale, would appreciate what he
felt about the situation. If his hypothesis was correct, this
country was selling gold for future delivery at a price which
might be far below the world's market price, if, as he supposed,
our currency was relatively redundant. He did not say we
were selling below the market price, but he thought it was
possible. It was evident in any case that we could, so long
as we had credit and acceptable foreign securities, go on
maintaining the exchanges independently of the state of
our currency. It might be redundant and yet things might
for a time be kept right.
Personally, therefore, he thought there was some reason



250 PAPERS ON CURRENT FINANCE

for careful enquiry into the situation and possibly for more
prevision than had as yet been exercised. That necessity
became obvious if one looked ahead and saw what would
happen on his hypothesis, namely, if this country was selling
a bear of gold with a redundant currency. Some day we
should have to stop settling an adverse balance of trade by
promises to pay gold, and we should then have to buy goods
with goods, and if we wished to buy goods with goods we
should be at an extraordinary disadvantage if we offered gold
at a lower price than the rest of the world. Gold would then
be the cheapest commodity that we had to offer, and the
foreigners would take our gold first and our commodities
second. He did not mean to say that gold would be the only
thing they would take from us, but gold would be very nearly
the first, if not the first, they would take from us. The
question was How was the problem to be solved ? It could
only be done in one of three- ways, unless we wished our last
ounce of gold to be drained from the country. We could
lower our prices by contracting the currency, which would
be a highly objectionable course one had only to read
Professor Foxwell's admirable preface to the translation of
Andreades' History of the Bank of England to see what
his view about that method would be or we could suspend
specie payments, and, as the financial centre of the world,
that was a solution we did not want to have to face. These
two solutions were within our control. The third was not
within our control, and personally he thought it would be
madness to count upon it. If one could suppose that after
the war some of the main commodities which this country
produced and exported would rise in value relatively to the
other main commodities of the world our position would be
maintained, because relative prices must be adjusted to
relative values, and we should, by the appreciation in value
of our main commodities, be able to support a higher level
of prices. There might be a fallacy there, but he thought
there was not.



INFLATION 251

He did not think there was any disadvantage in discussing
the position, because there was very little harm that could be
done under present circumstances and he was not sure there
was not a great deal of good, but he did wish to emphasise very
strongly that he by no means maintained that a relative
redundancy existed ; he admitted he only suspected it. The
remarks he had made were mainly a plea for a very careful
enquiry, the nature of which there was not time to develop,
but which had really been indicated by Professor Foxwell.
He was hoping that those who had the capacity for under-
taking that work might combine and test the position, so far
as it was possible to do so, by obtaining the necessary infor-
mation from other countries. He understood, from the article
to which Professor Foxwell referred, written by Professor
Nicholson in the last number of the Economic Journal, that
Professor Nicholson was engaged on such an enquiry, and he
trusted that he would get all the support that was necessary.
Also he hoped that it would be possible to induce the City
to take the matter rather more seriously than they appeared
to do at the moment. The City referred the question back
to the tests of the Bullion Committee days and appeared to
have satisfied itself that there was nothing to be alarmed
about.

MB. W. A. KIDDY (Financial Editor of the Morning Post and
Editor of the Bankers 1 Magazine), speaking on the invitation
of the President, said that one thing- that must have struck
everybody that evening was that the subject under considera-
tion was one where proof seemed to be well-nigh impossible ;
that had come out in what Professor Foxwell had said and also
in the remarks of Mr. Falk. The question of inflation had to
be considered from three standpoints : First, whether there
was a premium on gold ; secondly, the position of the ex-
changes ; and, thirdly, the rise in the price of commodities.
In all those three cases it was easy to find simple explanations
of the phenomena, without including inflation. In considering
the question of a premium on gold, Mr. Falk had pointed out



252 PAPERS ON CURRENT FINANCE

quite properly that, while it could not be proved there was a
premium on gold, it would be equally difficult under the
artificial conditions which existed to say that there was not a
premium. With regard to foreign exchanges, as was well known,
there was a great trade balance against all the belligerent
countries which were buying from the neutral countries, at
a time when their own productive power was reduced. Under
those circumstances, how was it possible to have anything but
adverse exchanges ? Therefore there was an ample explana-
tion of the position of the exchanges without going into the
question of inflation.

With regard to the rise in commodities, he had been rather
struck in looking over the record of prices to see how a rise
commenced about the year 1906. When the war period began
there was of course a tremendous bound, but there was quite
a substantial rise between 1906 and 1912, and he suggested
that one reason for that rise was probably to be found in the
greater equalisation of wealth, the manner in which taxation
was changed during those years having caused wealth to be
spread over a greater number of the community : in other
words, he believed that in those years there was a tremendous
increase in the purchasing power of the people, and that fact
was important in connection with the more recent events,
because the rise in wages, the expenditure of belligerents, and
the high wages paid to munition workers, played a great part
in the rise that had taken place in commodities. Wages had
been high all over the world and the purchasing power of the
people had increased, and under those conditions there was
bound to be a great rise in commodities, quite apart from such
circumstances as the cutting off of productive power and the
great demands on the part of the belligerent Governments.
Moreover, in the years from 1906 to the period of the war
there was reason to suppose that in many of the food-producing
countries there had been a tendency to go into manufactures
rather than to increase the area of food stuffs ; in other words,
the cultivation of food stuffs had not kept pace with the growth



INFLATION 253

in population. He only pointed that out because it seemed
that from 1906 to 1912 there was a great rise in the price of
commodities when nobody talked about inflation at all, and
when there were other causes to account for it. All the same
he thought there was inflation to-day, that there must be
inflation. It seemed to him that there was no need to look
further for proof than the fact that, as Professor Foxwell had
pointed out, the Continental banks of Russia and France had
increased their note circulation enormously. How could any-
thing but inflation result from that ? The point was that it
could not be measured because it was so mixed up with the
other and more easily discernible causes, and no measure
could probably be found until after the war, when some of
the other causes had ceased to operate.

With regard to the currency notes of this country, he was
inclined to think there was perhaps rather more concealed
inflation than Professor Foxwell acknowledged. It was well
known that against the 140 millions of Treasury notes there
was 28J millions of gold earmarked, and to that extent there
was of course no inflation. He understood Professor Foxwell
to suggest that the great mass of the remaining Treasury notes
might not be inflation because of the gold it displaced, but he
went on to say that a great deal of that gold had now been
exported to the United States. If that were so, was not that
gold forming a basis for fresh credits which, in considering the
rise of prices of commodities all over the world, must lead to
a still further creation of credit and therefore to inflation ?
He thought that the extent of the Treasury note issue was
undoubtedly another sign of inflation. Was there anything
in all this that could be controlled during the war ? When it
was remembered that the greatest cause of all was the great
enlargement of credit, it would be seen that the problem was
a delicate and difficult one, because we knew very well the
whole war had been carried on by a great expansion of credit.
If that credit were to contract suddenly, a totally different
condition of things might be brought about, and yet in the



254 PAPERS ON CURRENT FINANCE

enlargement of trade in various forms, Government loans,
banking deposits and so forth (inasmuch as increased purchasing
power was involved) was to be found one of the chief explana-
tions of such a phenomenon as the rise in the price of com-
modities. With regard to the question of control, one method
concerned the Government and the other ourselves. It was
admitted that the belligerent Governments were now the
largest buyers of commodities of every kind, and the question
was whether those purchases were being conducted on the
best lines, even after making all allowances for the fact that
things had to be done in a hurry. If they were not, but were
being done in an amateurish fashion, then the evil was un-
necessarily exaggerated. With regard to the public, their
duty consisted in economising in the matter of consumption.
Although the war had been going on for two-and-a-half years,
it was only within the last few months that the question of
personal economy had been really forced home upon the
people by the Government. If the people had not economised
it was not altogether their own fault, the word not having
been clearly given by the Government itself until within quite
recent months.

When the question of controlling the position was really
considered, however, it must be felt how difficult was the task.
It was, perhaps, as regards the form of borrowing and the
manner of regulating the expenditure that opportunities were
chiefly afforded. With regard to borrowing, Professor Foxwell
advocated very strongly Mr. Drummond Eraser's plan for
continuous borrowing by Treasury bills, Exchequer bonds,
etc., rather than a big loan operation, but had the Professor
considered whether that form of borrowing could sufficiently
draw money from the investor himself ? Because, unless
the money was obtained from the investor, and not simply
from banking credits, Professor Foxwell would be the first
to say that there would be undue credit expansion. It was
easy, of course, to "job backwards," as was sometimes said
in the City, but looking at the great success of the new Loan



INFLATION 255

it seemed almost a pity that there could not have been some
scheme devised whereby the Loan could have been made very
much larger with payments made by fortnightly instalments
over a period, say, of two years, the Government having the
right at any time to stop the subscriptions if the war were
suddenly to cease. Spreading the payments over a more
lengthy period would have given the Government probably
two or three times the amount they actually got, and the
public, having been committed to supplying the Government
with funds for perhaps two years, would have felt all the
greater need for economy in the matter of personal expenditure.
Mr. E. W. TOWNLEY wished to make a few remarks on
Professor FoxwelTs third interpretation of inflation, namely,
the depreciation of gold in terms of commodities as measured
by the rise in prices. The real and ultimate cause of the rise, as
had been said that evening, had been the enormous additional
expenditure of the belligerent Governments, which had affected
neutrals as well as themselves, but the difficulties began when
an attempt was made to ascertain to what extent any one of
the more immediate causes was responsible for the rise. Pro-
fessor Foxwell had remarked that even assuming that British
prices depended solely on British currency policy, the expansion
in our currency was quite inadequate to explain the rise, and
he thought everyone would agree with that. But while our
currency expansion was obviously insufficient in itself to
account for the rise, and allowances must be made for other
factors, such as the lack of tonnage and the withdrawal of
millions of men from productive employment, it still seemed
to him that the increase in our currency issues had had a
material effect on the rise in prices. He would like in that
connection to refer to the statistical enquiry which Professor
Shield Nicholson was conducting. Although that enquiry was
not yet finished, Professor Nicholson had already indicated
some of the first approximate results in the following terms :
" There has been a general conformity between the increases
of our note issues and the rise in prices in the United Kingdom*



256 PAPERS ON CURRENT FINANCE

The increase in prices as shown by the index numbers has
followed the increases of notes, and in general, the movement
in prices is of the character associated with over-issues of
inconvertible paper, such as has occurred in the other belligerent
countries." As a matter of curiosity he was led by Professor
Nicholson's remarks to compare the growth of our currency
note issue with the rise in prices as shown by the index numbers
of the Statist and Economist, and for that purpose he divided
the period since the commencement of the war into intervals
of three months. He did not overlook the fact that our
banking deposits were so much potential currency, but, as
Professor Foxwell had pointed out, the miserable monthly
returns formerly published by the Clearing Banks were dis-
continued in June, 1915, and it was not, therefore, possible
to trace the growth of their deposits at short intervals. His
rough analysis, on which too much should not, of course, be
built, indicated two rather interesting features. First, each
of the two quarters in which the emission of Treasury notes
was the largest was followed by a quarter in which the rise
in prices also was specially marked. Secondly, and conversely,
each of the three quarters in which the notes issued remained
more or less stationary was followed by a quarter in which
prices also were practically stationary, or even receded. In
other words, there seemed to be a curious correspondence
between the movement of currency notes in one quarter and
the course of commodity prices in the next. Allowing for the
time which it took currency notes to get into active circulation,
that did seem to support Professor Nicholson's statement that
the rise in prices had been due to a considerable extent to
currency issues. If that view was correct, there was at all
events one factor which it was within the power of the Govern-
ment to control, and as so many other factors which were
contributing to the rise in prices were beyond control, he
thought everyone would agree that the Government ought as
a matter of duty to restrict currency issues as far and as
quickly as possible.



INFLATION 257

The PRESIDENT, in proposing a vote of thanks to the
lecturer, observed that on the question itself he preferred,
for reasons which he gave, to say nothing. His very kind
remarks are therefore not reprinted in this account of the
debate. A complete report of the proceedings will be found
in the Journal of the Institute for October, 1917.

The LECTURER, in reply, said that in the first place he would
like to thank the members of the Institute for the very kind
way in which they had spoken of the few remarks he had
made. The President had rather hinted that although he had
brought forward very little statistical evidence in regard to
the statements he had submitted to them, the statements were
not made at random but really represented the result of a
very considerable amount of inquiry. He could assure them
that he had spent two or three weeks in trying to get some
more definite evidence, but had to abandon the attempt, as
he found he had no figures worthy to present to a body like
the Institute of Actuaries that would really stand the test
of close examination. There were no adequate returns. That
must be his apology for what he was sure must have been
noticed to be a rather obvious defect in a statement of such
a kind the lack of a definite statistical basis. It was not
for want of taking pains.

With regard to the admirable criticisms that had been made,
he might say at the outset that in questioning the existence
of any serious inflation he had had in his mind all through
such inflation as it was within the power of this country to
control. What Mr. Falk had said mainly related to the rise
of prices, due to general inflation all over the world, very
little of which this country could control ; and he did not
indicate any particular measure of control which in his opinion
it would have been wise for the Government to adopt. In
speaking of the exchanges, Mr. Falk said very truly that many
of the other currencies whose exchange rates were quoted
were not currencies at par with gold. That he believed was
true of Germany and Austria and Russia, but it was not true

F.O.F. B



258 PAPERS ON CURRENT FINANCE

of Scandinavia, which had even a super-gold currency, if he
might so term it. It would not be true of the United States,
which was the principal currency with which we had relations-
and with which our relations were on a very fair basis. As
to the case of a premium on gold in this country, Mr. Falk
did not press the point, indeed he appeared to admit that the
position of the goldsmith was very peculiar. The goldsmith
was not buying gold as currency, but as a metal which he
happened to be able just now to sell at exceptionally advan-
tageous rates, and therefore he did not care what he paid for
it. On the other hand, the Government was interested in
stopping the consumption of gold by the goldsmith, and had
imposed certain restrictions on his usual source of supply, and
that made him all the more anxious to obtain it and tended
to cause the premium. Personally, therefore, he did not
attach any importance to a premium if only paid by gold-
smiths ; the very same thing happened in the Napoleonic
wars ; one of the few definite purchases at a premium he had
seen mentioned was a purchase by a goldsmith ; and there
was one conviction, quashed on appeal, for a sale of guineas
at a premium for export. 1 Then Mr. Falk said there was no
real dealing in bullion now. Probably that was so. In any
case, even in time of peace, the bullion market was very
limited, confined, he believed, to about four firms. He did
not understand that those firms had absolutely nothing to do
at the present moment, but he could easily believe that the
dealing might be very restricted. The rate quoted for bar
gold was the lowest possible, namely, 3 17s. 9d., the Bank
price.

Mr. Falk rather deplored the method by which we were
maintaining the exchange. It was in fact unfortunate that the

1 [It is noteworthy that even in Holland, where there is no question
of an inflated currency, and the Bank is glutted with gold, its reserve-
having risen from 12 mlns. to 54 mlns. during the war, the Netherlands
Bank is selling gold at a premium of 38 per cent, to goldsmiths. August,.
1918.]



INFLATION 259

exchange had to be maintained by exporting securities, but
the export of securities was just as legitimate as the export
of goods. There was nothing wrong about the method ; we
were giving value and were extinguishing debt and were not
putting ourselves in a false position ; we were simply sacrificing
a certain amount of our property and selling to a rival country.
We might be in an inferior position as a creditor nation after
peace to some extent, but he did not think that involved any-
thing of a hollow or unsatisfactory kind in relation to the
currency ; it did not argue a depreciated currency, for instance.
It had nothing to do directly with the question of inflation.
What we were suffering from was the failure to balance trade.
Our exports had naturally diminished and our demand for
imports was abnormally high, and that necessarily brought
about a failure to balance, and we were meeting that failure
by the export of securities. He saw nothing in any way
wrong in that ; it was the only course open to us. He
thought, on the whole, Mr. Falk did not say that he was
satisfied that there was inflation so far as this country was
concerned, but that he simply desired an enquiry. There
could be no objection to that, and it would be very desirable
to know under what conditions the currency notes were issued.
He had never come across anyone who could tell him precisely
what those conditions were. That was a very unsatisfactory
state of things, and there was no precedent for it in our history
an issue of currency the conditions of which were not
declared or understood. Even in the Napoleonic war the
Bank had a very clear rule ; they never issued their notes
except on the discount of " good mercantile bills, not exceeding
61 days' date, at the rate of 5 per cent." x

Passing to Mr. Kiddy's remarks, he had pointed out very
well that there were plenty of explanations of the adverse
exchange and of the high prices, without being driven to resort
to the explanation by inflation. That there had been in-
flation internationally no one could doubt, enormous inflation
1 The Usury Law prevented the charge of a higher rate.



260 PAPERS ON CURRENT FINANCE

of currency, especially by notes, and in this country there had
been a certain amount of inflation by bank credits. But the
inflation was mainly an international matter. We, in this
country, must hold our own ; we must provide for Govern-
ment in some way or other a mass of purchasing power equiva-
lent to fcheir needs, relative to the purchasing power enjoyed
by the countries which were our rivals. He did not see that
we could control or diminish in any way the purchasing power
at the disposal of our Government. It was our duty to make
it as large as possible. Mr. Kiddy also suggested that our
currency notes, although they might not have caused inflation
here, had contributed to inflation because they had been the
means of enabling us to export gold to the United States, and
that export of gold to the United States had been one of the
principal causes of the rise of prices. That, of course, was so.
On the other hand, we were driven to export gold to the
United States because we had to maintain the exchange ; it
would be deplorable if we ceased to keep up the tradition of
gold payment in this country, and he did not see how else
we could have acted.

Then there was the question whether the Governments were
buying well. That was a point on which he had no special
knowledge, but his impression was that they had not bought
as well as they might have done, and it was a matter to which
attention ought to be paid. He agreed with Mr. Kiddy that
at bottom the remedy for the rise of prices and any conse-
quential evils lay rather with the public than the Government.
The public must produce more and must consume less. Those
were the radical facts of the position, and they were not entirely
within the control of the Government, although he thought
the Government should give a very distinct lead. The people
were never in a more docile mood than they were to-day ;
they felt they were in the presence of a very difficult situation,
and they believed the Government was better informed than
they were, and they were willing to take the word from the
Government. As to continuous borrowing and the big loan,



INFLATION 261

Mr. Kiddy had suggested that continuous borrowing did not
appeal directly to the investor. That was so, as it was con-
ducted in this country, but it was not as it was conducted in
France. This country had not given the ordinary investor
any chance ; we offered Treasury bills of 1,000 minimum,
which was very nice for financial people but did not appeal
in any way to the ordinary investor. In France one could
buy a bill for as low a value as 100 francs, or say 4. In that
country they thought it politic to open all their loans in all
their different forms to the very smallest subscriber, and he
believed that that was a sound policy, and he would like to
see it done here.

Mr. Townley had spoken of Professor Nicholson's results
and had quoted a sentence which he very well remembered,
but which did not seem to him to be supported by any figures
that Professor Nicholson had hitherto given. Mr. Townley's
own enquiries seemed to have shown a curious correspondence
between currency issues and subsequent prices, but he did
not think Mr. Townley had mentioned quantities, but had
merely referred to the direction of variation, so that that did
not come to very much. It only showed a general sympathy,
but unless the movements were proportional in magnitude
he did not think it could be held to show causal relation.
It was suggested Government could control the currency issue,
but he did not very well see how it could, though he spoke
as most people spoke in the dark. If he thought that Govern-
ment was financing the war by the issue of currency notes he
should deprecate it most strongly, because he held that that
was the worst possible way of financing the war ; but he did
not believe that the note issue represented borrowing by
Government. He did not know whether the suggestion that
the notes ought to be withdrawn was seriously put forward,
or that it was really argued that we should return to gold
circulation. If it was, we should require about another
120,000,000 of gold, and how would it be possible to finance
the American exchange ? The thing seemed to him absolutely



262 PAPEKS ON CURRENT FINANCE

impracticable. The great merit of the currency notes was
that, if properly managed, we substituted for the expensive
circulation of gold an inexpensive circulation of Treasury
notes, and as a result were in possession of 100,000,000 to
120,000,000 of gold which we could use to settle the American
exchange. The whole operation was absolutely defensible
if it stopped there. He was not sure that the issue had not
gone 20,000,000 beyond that limit, i.e. beyond the amount
necessary to make the substitution of paper for gold in circu-
lation.

Note. It should have been stated on p. 223 of this paper that, by
an Order in Council dated May 18, 1918, a new regulation, 30EE, haa
been made, which substantially re-enacts Lord Stanhope's Act.