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Papers on current finance - Introduction

1. Contents

2. Introduction

3. British War Finance

4. British War Finance - continue

5. Ways And Means

6. Ways And Means - continue

7. The Nature Of The Industrial Struggle.

8. The Nature Of The Industrial Struggle - continue

9. The Financing Of Industry And Trade

10. The Financing Of Industry And Trade - continue

11. The Banking Reserve

12. The Banking Reserve - continue

13. The American Crisis Of 1907

14. The American Crisis - continue

15. The American Crisis - continue

16. Inflation

17. Inflation - Continue

18. Appendix

19. Appendix II


THE constant requests I receive from university
students and correspondents at home and abroad
for copies of one or other of these papers have led
me to think that their publication in this form might
be convenient ; the more so, as the journals in which
some of them originally appeared are now out of
print. Generally speaking, with only slight excep-
tions, the papers are reprinted without alteration,
and with no attempt to bring the figures up to date.
The progress of events is now so extraordinarily
rapid, and the situation changes so much from day
to day, that only the daily press can keep fully
abreast of the movement.

The connection between the papers may not be
obvious at first sight. But they all relate either to
financial problems directly raised by the war, or
to problems which have gained new interest and
urgency in view of the financial reconstructions
which the war has made inevitable. A few words
by way of introduction may serve to make this
clear, and to summarise the main topics treated in
the volume.

The first paper, mainly historical and critical,
deals with the war crisis and the financial emergency
measures, and may be found a useful compendium
for reference as to the general financial policy followed
in a period which must always figure in world-history.
It also recommends the now-accepted method of
continuous borrowing, and concludes with a general
estimate of the economic and financial outlook.

In the second paper, the question of our financial
resources is considered in more detail. After a brief
sketch of our previous loan policy, the method of
continuous borrowing is further advocated ; and
French experience is given in its support, as well as
in favour of interesting the small investor, and the
people generally, in the war finance. A protest is
made against the discouragement of private thrift,
and the waste in public expenditure : and the paper
concludes with a few words on the necessity of heavy

The next two papers are concerned with the financ-
ing of industry, a problem which must assume immense
importance after the war, when the demand for
capital will be unprecedented. In the first of these,
an attempt is made to indicate some of the most
striking developments of modern business compe-
tition, and to show that they involve an irresistible
trend towards larger industrial organisations, not
only for greater efficiency, but for effective defence
against forms of trade activity closely analogous to
those of war. We are thus able to judge better of
the kind of financial assistance English industry will
require ; and in the next paper the question is
considered in what way this assistance can be best
provided. It is shown that what we regard as " bank-
ing " in England is of a quite peculiar type, and is
prevented, by the very defects of its qualities, from
discharging all the services rendered to industry by
" banking " in some other countries ; but it is con-
tended that, outside what we here call banks, the
English market has unrivalled financial resources,
which only require suitable organisation to make
them able to meet all reasonable demands. The
question is not definitely raised in this fourth paper,
but it will be gathered that the writer is of opinion
that, even for England, the effective financing of her
industries is of more importance than her inter-
national clearing business, and indeed is a primary
condition of her mastery of exchange and her con-
tinued hold of the international position. Precise
estimates of the profits on our international business
are not possible ; but it is safe to say that a loss of
one half of it would be balanced by an increase of
one per cent, in the national income. It can hardly
be doubted that if half the skill and attention now
bestowed on international finance were devoted to
domestic finance, the increase in the national income
might easily be five times that percentage.
The fifth and sixth papers, on Banking Reserve,
and the Crisis of 1907, may not seem to be so directly
concerned with war problems as the rest. Both
were designed to illustrate the question of the national
reserve, and of the functions of the Central Bank.
The immense financial liabilities created by the war
have forced these matters to the front. They are
now under consideration by a Committee, and it
can hardly be doubted that when the Committee
report, they will recommend some radical changes in
existing arrangements. The old Act of 1844, on which
our present system is based, was never defensible, and
has been condemned by experts of all countries, so that
its disappearance may be welcomed ; but so many
wild proposals are in the air as to the changes which
should be made in the constitution and functions
of our great national bank, that a few considerations
on the essential principles of a banking reserve,
always fundamental in finance, seem to be in place
here. The question had been constantly under dis-
cussion in the ten or fifteen years preceding the war ;
and we are given to understand that just before
the war broke out the leading clearing bankers had
agreed upon a scheme of reform, and submitted it
for consideration to the Bank. It was, unfortunately,
just too late ; and we had to face the war strain
unprepared. Experts were agreed that our reserve
position was deplorably inadequate for such an
emergency, but the most pessimistic hardly expected
to see a general moratorium. It is now admitted
that this was unnecessary, except as a concession to
panic ; which panic, again, was really due to the
general sense that we were caught unprepared.
However, the events of the crisis of 1907 led to
a complete reconstruction of the American banking
system, under the Federal Eeserve Act, to which
the brilliant financial achievements of the United
States during the war are mainly due ; and it
may be hoped that reflection on the history of the
war crisis will have equally salutary effects here.
There is certainly a revived interest in the subject,
particularly evident on the part of the Chambers of
Commerce, but by no means confined to these bodies ;
and this has led me to think that the inclusion of these
two papers may not be found altogether untimely.

The seventh paper deals with the question of the
alleged inflation of our currency. Perhaps there is
nothing in our war finance which has provoked more
discussion, or given rise to so much anxiety. The
view taken in the paper is on the whole optimistic.
The rise in prices is held to be caused, in the main,
not by operations originating in the currency, but
by the enormous increase of Government expendi-
ture ; which, in so far as it is really required for the
effective prosecution of the war, no one would dream
of restricting. The effect has been to more than
double the total national expenditure ; and it stands
to reason that the currency by which the payments
are handled must increase to something like the same
extent. That this necessary or minimum expansion
of currency has been gratuitously exceeded, in conse-
quence of wasteful expenditure, and particularly
of extraordinary advances in wages conceded to
pressure, I entirely agree. But here we are brought
up against questions of politics, which lie outside the
limits of a financial study. Great stress has been
laid in very well informed quarters upon the diffi-
culties we shall have to meet in returning to an
effective gold standard, and in rectifying and main-
taining the foreign exchanges. The difficulties will
be serious ; but here, again, I must remain an opti-
mist. The resources of civilisation in this regard
have by no means been exhausted; they have
indeed been enlarged in some respects by certain
developments of the war finance : and with the co-
operation of the United States these monetary diffi-
culties will soon yield to treatment. But this is not
to say, and I hope nothing in these papers will be
construed as saying, that the strictest economy is
not essential. On the contrary, the whole argument
assumes that every possible check is imposed upon
some quite indefensible waste and recklessness in
expenditure. The War Bonus policy, for instance,
with its endless reaction on prices, might easily be
carried to a point which would make financial recovery
nearly impossible, to say nothing of the grave pro-
blems it is leaving us to face on the return to peace
As is stated in the paper itself, the Address on
Inflation was designedly prepared to start a discussion
on the subject, in which, as was expected, the con-
clusions of the author were acutely criticised. It
is thought, therefore, that the reader will welcome
a reprint of these interesting criticisms, all the more
as they may serve to correct any undue emphasis or
bias in the opening statement.

In an Appendix will be found a short paper on
Monopolies, written thirty years ago, and a letter
upon the question of Fixed Exchange. The paper
may have some interest as a very early defence of
the movement for the consolidation of business
enterprise, of which so much is said in the third and
fourth papers. Perhaps it will go to confirm the
general contention in these papers that a radical
increase in the scale of business organisations is not
only inevitable, but to be welcomed in the public
interest : in any case it is a proof that the views
expressed there are something more than hasty im-
pressions, or a mere reflection of the fashion of the
day. As to the Letter, it may serve to throw a little
additional light on the very brief reference to the
subject on p. 106 of the text.

Taking the papers as a whole, it may fairly be
claimed that the suggestions they contain have been
justified in the main by the subsequent course of
events. The independent rate for foreign money,
and the .lower rate for bills, recommended in the
second paper, were ultimately adopted, though only
after a delay which has cost the nation dear ; the
war loans have been effectively popularised ; and
some steps have already been taken by certain banks
towards the more disputable suggestion of fixed ex-
change made in the fourth paper. On what are
perhaps the main contentions of the volume, there
is now very general agreement. The Times, in a
leader of Sept. 23, 1918, speaks of continuous
borrowing and the bank amalgamations as " the
two novel features which must always make the
past twelve months a remarkable period in our
domestic financial history," and gives very good
reasons for approving both. Business fusions, of
course, have not been confined to banks, or to this
country. They are in active progress in various
forms of enterprise, and in all the principal coun-
tries, and may fairly be regarded as the most striking
economic feature of our time.

It must be confessed that in one respect the work
of writing these papers has been difficult and un-
satisfactory. Just at the time when a scientific
handling of our finance is most urgently required,
the investigator is deliberately deprived of the neces-
sary statistical basis for his inquiry. It cannot be
for the reason so often assigned, for some of the most
important facts so withheld are known to numbers
of persons, and must certainly be known by the
enemy, if they interest him. The Statistical Abstract
for 1916 is only announced as I write these lines :
the Mint Report for that year has not yet appeared :
even the meagre monthly reports of the banks ceased,
when they would have been most instructive, in the
middle of the year 1915. This policy of secrecy and
mystification is the most ugly feature of our war
regime. It is to be hoped that it will end with the
war. Publicity is the salt without which democracy
(and we may add, bureaucracy) would soon become
rotten ; it is the indispensable condition of the healthy
operation of public opinion.

It only remains to discharge a pleasant duty.
For permission to reprint these papers, most cordially
given to me, I wish to thank the Editor of the Economic
Journal, the Council of the Institute of Secretaries,
and the Council of the Institute of Actuaries. I am
also under obligation to the Editors of the Post
Magazine and the Insurance Record for assistance
derived from excellent reports in their Journals.

CAMBRIDGE, September 25, 1918.

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