But he is very critical
of the arrangements made on the re- opening of the
Exchange. Chapters IX. and XII., in which he
deals with these matters, are among the best in
the book. Incidentally he shows that our habit of
fortnightly settlement and the contango methods,
though extremely convenient in many ways, have
their disadvantages, as Americans have always con-
tended, and certainly proved awkward in this war
crisis (pp. 128-9). It is a point that deserves careful
consideration ; though we are hardly likely to change
our practice. But there will be much sympathy
with Mr. Lawson's general view as to the restrictions.
He complains that from first to last the Stock Ex-
change was treated as though it were a national
danger, instead of an essential piece of the nation's
economic machinery. The re-opening regulations
were unnecessarily drastic. The prohibition of new
issues except by special license (sometimes, as a
recent case has shown, most arbitrarily withheld)
played directly into the hands of Wall Street. In
a later passage, written after three months' experi-
ence of the new rules, he says that, as he had
anticipated, " their effect in stimulating American
competition has been very remarkable" (p. 244).
So in regard to the minimum price rules. He
thinks the fear of German liquidation exaggerated.
"First, the bulk of it was done before the war
BRITISH WAR FINANCE 17
commenced ; second, the completion of it was effected
chiefly through Amsterdam and New York. . . .
Treasury regulations of any kind would have been
futile, and those actually issued were far. more em-
barrassing to our market than to Berlin." The
C.P.R. method of refusing to transfer shares out of
enemy names was an infinitely more effective check
than any Treasury restrictions could be (p. 187).
The provincial Exchanges seem to have been allowed
more freedom. Mr. Lawson says " they faced the
crisis more boldly and wisely than the metropolitan
one was allowed to do. They also offered a stronger
resistance to the encroachments of the Treasury "
(p. 58). It is hard to avoid the conclusion that the
restrictions were excessive, and that not merely the
Exchange, but the country, has suffered in conse-
quence. It is obviously desirable, for instance, to
encourage the sale from this side of anything market-
able on Wall Street. Yet the enforcement of Leeman's
Act and the obstacles to arbitrage have so impeded
free dealing as greatly to obstruct such sales. You
cannot cramp one of the vital organs of an economic
community without impairing its general economic
strength.
The Treasury issue of Currency Notes, which was
one of the earliest emergency measures, has been
the subject of so much, and such divergent, criticism
that it seems to call for special remark here, all the
more as neither Mr. Lawson nor Mr. Withers seems
F.C.P. B
18 PAPERS ON CURRENT FINANCE
quite satisfactory in his handling of the matter.
We have an influential Committee of the British
Association recommending that the issue should be
withdrawn, and that if paper money is required to
replace sovereigns and half-sovereigns it should be
provided by Bank of England notes of these denomi-
nations. It is a curious recommendation because,
as everyone knows, the Bank of England issue is
practically made by the Bank as the mere instrument
of the Treasury. The Directors of the Bank have
no control or discretion whatever in regard to the
issue, which is purely mechanical. Sir Richard
Cooper, on the other hand, demands in the House
of Commons that the Government should take over
the present Bank issue. Now there is, of course,
one important distinction between the two issues as
now conducted. Neither issue is a bank issue in the
ordinary sense of that term. But the Bank of
England issue is made under conditions which are
defined by statute, and which in practice limit its
uncovered element. Even here, however, it must
be observed that the 'Treasury may be and has been
invested by Government with power to suspend the
statutory conditions. But the new Currency Note
issue is at present absolutely undefined. So far as
the Act is concerned, " Currency Notes may be issued
to such persons and in such manner as the Treasury
direct." This may be a reasonable arrangement at
a time of crisis, but, as Mr. Withers objects, is hardly
BRITISH WAR FINANCE 19
defensible as a permanent arrangement. Definite
statutory regulation, however, could easily be pro-
vided. What is still more objectionable than the
absence of regulation is that the actual method of
issue is concealed, and the whole weekly return
" quite incomprehensible except to those who have
privileged access to an understanding of its mysteries'*
(Withers, p. 113). This is one of the many examples
of the policy of secrecy and mystification which
has done so much to undermine public confidence
during the war. It makes useful criticism almost
impossible. As Mr. Lawson says. " The first con-
dition of thorough and effective inquiry is a relaxa-
tion of the severe reticence which characterises most
of our banking returns " (p. 51). But one point
should be clear enough. The Currency Notes are
certainly payable in gold on demand. Why then
does Mr. Lawson speak of " the fiction of their being
gold notes " ? They are as clearly convertible, under
section 3 of the Act of August 6th, as the regular
issues of the Bank are. Indeed, as Mr. Withers
properly observes, this Act imposes a new liability
on the Bank not recognised in its weekly account
(p. 117). It is not so clear whether the Bank has
any control over the gold reserve of 28j millions
now held against the notes. This, again, is not
shown in the Bank return.
But what is, or should be, the purpose of an issue
of this kind ? Some definite conclusion on this
20 PAPERS ON CURRENT FINANCE
point is surely essential before we can pronounce
on the expediency of the issue. It does not seem
to have been duly considered by the critics, and this
may explain their very various utterances. Per-
haps the difficulty partly arises from the extreme
ambiguity of the term " note." This name is given
to a variety of documents which have little in com-
mon but their physical character and their currency.
Some are issued by Governments, some by private
persons : some are legal tender money, some merely
forms of bank credit, like the cheque or the credit
against which the cheque is drawn. Some, like the
gold and silver certificates of the United States, are
really convenient substitutes for coinage, backed by
their face value in metal. Our Bank of England
notes come near to this type. Others, again, are
issued as auxiliary to existing metallic currency,
whether of standard coin or small change. Again,
the occasions of the issue may be quite different :
the notes may be issued to meet quite different pur-
poses. Mr. Conant insists upon three of these as
primary. 1 Notes may be used to meet (a) a seasonal
demand for currency, (b) a crisis or emergency demand,
(c) a demand for the concentration of the stock of
gold. To this one might add that notes may also
be used (d) as the simplest form of bank advances
1 Bankers' Magazine (New York), Sept. 1915." The Modern Field
for the Bank Note: its Service in Emergencies and in the present
War."
BRITISH WAR FINANCE 21
(cf. the early Scottish banks), or (e) as a cheap form
of till-money, an instrument of banking economy ;
and lastly they have too often been used, especially
if inconvertible, (/) as a last resource for financing
Governments, a kind of forced loan. Perhaps we
may assume that there has been no question, so
far, of using currency notes in this last fashion ; and
they clearly cannot serve uses (d) and (e). Coming
back, then, to Mr. Conant's three primary uses, the
currency notes were neither intended nor required
to serve as seasonal currency, after the manner of
the monthly and quarterly issues of the Reichs-
bank. We rely on Bank of England credits to
discharge this function in England.
The real question, then, is between Mr. Conant's
other two uses. Are we to regard the currency
notes as an emergency issue or as a means of con-
centrating our stock of gold ? At the outset, no
doubt, these notes were issued and intended purely
as an emergency issue. The primary object was to
allay the bankers' panic and to prevent the develop-
ment of panic in the general public. Later, too, it
may have been used in somewhat similar fashion to
lessen the strain on the banks caused by the sub-
scriptions to the enormous war loans. But if this
were the real ground for the issue, it ought long ago
to have been withdrawn from circulation. It cer-
tainly was not the purpose for which such an issue
had long been planned. The normal function of
22 PAPERS ON CURRENT FINANCE
the currency notes was to serve as a means of in-
creasing our financial strength by the concentration
of all our available gold at the centre. Germany
had largely effected this before the war by the issue
of smaller Reichsbank notes ; and since the out-
break of war, first Germany, and then France, have
increased their central holding of gold in a quite
remarkable way. For more than a generation past,
some of the ablest Governors of the Bank of Eng-
land had steadily held in view the adoption of
a similar policy in this country. They regarded our
gold currency as our first line of defence in a serious
war. Hence they were opposed to a l note issue
in peace ; because if such an issue had been made
on the ordinary lines, a large part of the coin replaced
would never have been held in reserve, but would
have left the country. But in a war issue, Govern-
ment can control the terms of issue, and might so
have arranged it that by this time some 100 millions
of gold would have found their way from the circu-
lation to the central reserve. A costly gold circu-
lation is one of the first luxuries we should economise
in time of war. But the concentration of gold is
not merely an economy in expense. It is an immense
increase of our economic resources. l in the central
reserve, Lord Goschen used to say, is worth 5 in
the pockets of the people.
From this point of view the Treasury issue has
been very largely a failure. We do not know how
BRITISH WAR FINANCE 23
much additional circulation is required by the heavy
military expenditure and the rise of wages. The
currency notes may have done good service in pre-
venting withdrawals of gold from the Bank for this
purpose. But while in Germany the gold reserve
has increased by some 55 millions since the last
pre-war return, and the French reserve by some 40
millions in the last four months, there is no evidence
that any appreciable amount of gold has reached
the Bank of England. 1 Between July 29th, 1914,
and July 28th, 1915, the Bank lost 22 millions to
the general circulation. Some 15 millions of this
may have come back since ; but the Bank has been
wholly dependent for any increase in its resources
on purchases of imported gold. Meanwhile the
Treasury issue, though it has failed to discharge
the only purpose which could justify its continuance
now that the time of emergency has passed, shows
a steady increase, and has now reached an amount
of 90 millions odd, having doubled in five months.
Where is the gold which this large issue must have
superseded, and would, if rightly managed, have
brought into the national reserves ? With the excep-
tion of the 28,500.000, which has long been set
apart as currency note reserve, we are forced to the
conclusion that most of the gold is being hoarded
1 " So far gold has not been added to the Bank from internal circula-
tion, but rather the reverse." Bankers' Magazine, October, 1915,
p. 485.
24 PAPERS ON CURRENT FINANCE
by the banks or by some of them. It was in the
power of the banks to make the issue a great success.
They might perhaps have been compelled to do so
if suitable conditions had been imposed when assist-
ance was first given them by the Government.
The public behaved well. They gave the currency
notes a good reception, and often voluntarily brought
in gold to the banks. It is not their fault if the issue
has so far failed. Of course, the failure is not com-
plete. If the gold is not yet where it should be, in
the central reserves, large quantities, at any rate,
have been withdrawn from the hands of the public.
This is a step in the right direction. To recall the
Treasury notes, as some advise, would only be a
retrograde movement, even if it were practicable.
What is wanted is to complete the concentration of
gold which the notes make possible.
The question of Ways and Means does not enter
into the scope of Mr. Withers's book. Mr. Lawson
deals with it energetically and at some length. His
chapter on " Our Intricate and Perplexing Taxes "
is full of useful suggestion. What strikes him, and
so many other observers, is the remarkable disregard
of administrative difficulties and indirect consequences
so often shown. A recent illustration of this was
the proposal to make bankers collect income tax on
deposits, and, again, the scheme for levying income
tax on wage receivers by quarterly instalments.
Mr. Lawson considers that it is the lower middle
BRITISH WAR FINANCE 25
class who are most heavily penalised by current taxa-
tion. 1 He strongly disapproves of the Vote of Credit
system. All expenditure under this system is made
on dummy estimates and withdrawn from Parlia-
mentary control. The procedure was condemned
by the Treasury Minute of February 14th, 1880,
which he quotes on p. 313. Mr. Lawson foresees
" the doom of the One-Man Budget "; and apparently
looks forward to the institution of a Standing Com-
mittee on Finance, such as exists in France. His
general criticism may be summed up in a single
sentence : :e The two most essential elements of
sound finance have been very little heard of,
namely, business management and administrative
economy."
The most recent parts of Mr. Lawson's book do
not seem to be later in date than May, 1915 ; and he
does not go into detail as to the methods, outside
taxation, by which money has been raised. But
the outstanding feature of our finance has been the
remarkable success of the Treasury Bill. This applies
more especially to the system of continuous issue
at fixed rates : which has the great merit of suiting
the convenience of the money market, and at the
same time giving the central authority an effective
control over the market rate of discount. These
bills have been current to an amount of 275 millions
1 In his Income Tax Table, p. 298, there is an obvious slip of shillings
for pence in the rates.
26 PAPERS ON CURRENT FINANCE
without any of that disturbance which a loan of the
same amount would cause. It is clearly impossible
to meet the enormous demands of the war without
recourse to longer-dated obligations ; but when we
consider that the greater part of the money borrowed
is being constantly returned by war expenditure, the
presumption seems to be in favour of continuous,
rather than catastrophic, loans. Mr. Drummond Eraser
and Mr. Gibson have advocated the continuous
issue of War Bonds of various amounts and dates,
down even to the value of 5, and period of one year ;
and their arguments seem to be well worthy of con-
sideration. It has often been asked, too, why
the lowest denomination of Treasury Bill should be
1,000. This excludes a great mass of possible
private investors in these bills. Here we touch
closely on another issue which has come very much
to the front in the war finance of all the great coun-
tries. Is it better that Governments should be
directly financed by the public, or mainly by banks
using the money of the public ? Neither Mr. Withers
nor Mr. Lawson touches on this point. Mr. Gibson
has more than once expressed decided views in favour
of direct subscription ; but some of his arguments
are not convincing. Each method seems to have its
own advantages, and it is hardly possible to dogma-
tise on the question. We can all agree in accepting
Mr. Gibson's general account of the problem of war
finance. " The whole art of loan raising is to
BRITISH WAR FINANCE 27
substitute scrip for goods with as little financial
disturbance as possible."
But so far, to use a phrase of Mr. Lawson's, " we
have only been shuffling the cards for the real game
which is to come." We have simply been dealing
with matters of account, with the machinery of
finance. If we were, as Germany now practically
is, a self-sufficient country, the problem of finance
would be fairly simple, though it must necessarily
run into alarming figures. If the production and
consumption of the nation were so adjusted as to
leave a margin above the civil consumption sufficient
to furnish the extra supplies of food, munitions, etc.,
required to carry on the war then the question of
arranging for the postponement of payment for the cost
of the war consumption could be settled without any
great difficulty. It might even prove, as Mr. Gibson
thinks, that the war could be financed at 4 per cent., 1
for, as he says, the success of war loans is more depen-
dent on the right mobilisation of the national industry
than on the rate of interest. But here we come to
the real crux of the situation. The real problem
concerns the economic conditions which lie behind
the Chancellor's figures of account, viz., the balance
of national production and consumption. What is
absolutely essential, and after more than a year of
war we have hardly begun upon it, is the reorgani-
sation of our whole economic life, consumption as
1 Bankers' Magazine, August, 1915, p. 147.
28 PAPEES ON CURRENT FINANCE
well as production, upon a war basis. Production
must be increased, or non-military consumption cut
down, until there is a sufficient balance to meet the
military consumption. When we consider that the
extra consumption due to war (including advances
to Allies) is estimated for the next financial year at
1,625 millions, as against a normal annual con-
sumption of little over 2,000 millions, we can see
how very serious the position is.
The necessary reorganisation ought to have been
put in train at the outset. It must have been, if,
like Germany, we had been a nearly closed State.
But our sea-power enabled us to obtain temporary
assistance from outside. This was a doubtful boon.
The assistance disguised the real position, without
providing any permanent amelioration of it. If it
had been given on terms of long-dated loan, it would
still have increased the weight of debt the country
has to carry ; but it might have been worth our
while to incur this inconvenience rather than to put
severe restrictions on national consumption. But
the neutrals in this war are all borrowing, not lending
nations. Hence our purchases were made on ordi-
nary commercial " cash " terms, that is, by short bills
(sometimes, we are told, actually by cash in advance).
The result is that we now find ourselves faced with
an exchange problem of a much more urgent character
than any question of loan liability. The conse-
quences of failure to meet cash liabilities are well
BRITISH WAR FINANCE 29
understood. They stand on a quite different plane
from the difficulties imposed by borrowing for long
terms. A great business may prosper on borrowed
capital ; but inability to meet its bills is fatal. What
the present amount of our adverse balance on ex-
change is can only be roughly guessed. We have
no definite figures as to our earnings on freights, as
to expenditure of foreigners in England, as to remit-
tances to relations from abroad, as to the value of
our financial and commercial services to foreigners,
nor as to the interest on our foreign investments.
We may be certain that the war has disturbed all
normal estimates for these items. Nor do we know
the exact figures of our advances to our Allies, 1
nor the amount of imports on Government account :
both items of first-rate importance. But six months
ago estimates were made which put the adverse
exchange balance for the year at 500 millions. We
must take this as a minimum figure. Of course,
this adverse balance has been largely set off by
special operations. Apart from the normal adjust-
ments of exports and imports, whether of goods or
services, there are four main methods by which
exchange can be rectified, and we have used them all.
We have exported gold, we have sold securities, our
banks have made private finance arrangements,
and, finally, we have raised a dollar loan in New
York, jointly with France, for 100 millions. We have
1 Lately estimated by Mr.McKenna at 423 millions for the year 1915-16.
30 PAPERS ON CURRENT FINANCE
also cut down rigorously our foreign investments.
How far all these operations have gone towards
reducing the adverse balance can only be matter of
conjecture. What is certain is that all the chief neutral
exchanges are against us, by percentages ranging
from about Ij per cent, to 9 per cent. ; the New
York exchange, most important of all, having dropped
at one time to 7j per cent, discount, and standing
now at about 5 per cent.
The remedial measures were carried out in a way
that is certainly open to criticism. There are two
sides to every exchange question, just as there are
to the question of high prices. There are obvious
objections to low exchange, which makes payment
for imports costly. But on the other hand, it is all
in favour of exports of goods and of the sale of secu-
rities. Hence it is eminently desirable that the
various operations for rectifying exchange should
be carried out by some concerted arrangement, if
not by one authority. Our resources in the way of
securities marketable on Wall Street are limited,
and it is desirable to sell them to best advantage,
i.e. on a low exchange. If the bulk of them could
be sold by a committee of experts, much as Barings'
securities were realised after 1890, then gold exports,
bank finance, and loan operations might be so arranged
as not to clash with the sale of securities. 1 The
1 After these lines were written, we learn from the Press that arrange-
ments of the kind suggested may be made : a year too late.
BRITISH WAR FINANCE 31
American loan itself was only a qualified success,
as might have been expected. Up to the war the
United States had been a great borrower from
Europe. In spite of the stimulus which the war
has given to her trade she cannot suddenly become
a lender upon a large scale. What she was able
and willing to lend might probably have been obtained
with less fuss if special subscriptions to the regular
war loans had been opened in New York, with in-
terest payable in dollars, not subject to British
income tax. If the amount obtained in this way
proved inadequate, it would then be possible to
supplement it by private finance arrangements of
the familiar type, but perhaps for longer terms.
The plan adopted of raising a special loan seems to
have created some political difficulty, and hardly
improved the national credit.
In any case, our resources for rectifying an adverse
exchange balance are strictly limited. None of the
four expedients to which we have resorted can be
continuously available to any considerable extent.
The exchange difficulty is only the symptom of a
more radical difficulty. The real significance of the
adverse exchange is that our national economic life
is very far from being organised on a sound war
basis. The margin between the output of our in-
dustries and the consumption of our civil population
is not sufficient to furnish the military supplies
which we have undertaken, and are obliged, to
32 PAPERS ON CURRENT FINANCE
provide. This is the fundamental issue, and we
ought to have faced it long ago. Our credit is ex-
cellent and our financial methods sound. But the
best finance in the world cannot enable a nation,
situated as we now are, to go on continuously con-
suming greatly in excess of its production.
Our papers are never tired of dwelling on the
weakness and artificiality of German war finance.
Too much can easily be made of this. It will prove
awkward for Germany when the final settlement
comes. But till then, what is important is not so
much the machinery of finance as the national organi-
sation behind it. If Germany, after supplying her
population with bare necessaries, is still able to
produce what is required to keep her armies in
the field, then, however artificial her finance may
be, it will not prevent the carrying on of the war.
There is a passage in the rather flamboyant speech
of Dr. Helfferich on the Third German Loan which
is not without instruction for ourselves. "The
wealth," he says, " to which our success is due is
not the sum of our savings, but rather our whole
economic technical apparatus. It lies, above all, in
the living labour power of our people, who, in war,
work and create for war. . . . We carry victory
within ourselves."
If victory does not lie within us, we certainly
cannot find it elsewhere. The modern English-
man is apt to think he can. The popular trade
BRITISH WAR FINANCE 33
philosophy, which studiously ignores the importance,
almost the very existence, of political frontiers, has
allowed us to drift into a complacent dependence
upon foreign nations. Nothing but our sea supre-
macy makes the position possible, even in time of
peace. But war emphasises the always vital impor-
tance of the nation ; and in a world- wide war like
this, when the only, neutrals are borrowers and not
lenders, it is clear that the belligerent groups must
in the main be self-sufficient. We must rely on our
own resources ; it is high time we began seriously
to organise them. Maximum efficiency, minimum
expenditure : these must be our objectives. Fortu-
nately there are wide margins for economy in both
directions. But they must be utilised to the utmost.
|