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INTERNATIONAL CURRENCY

_June_, 1918

An Inopportune Proposal--What is Currency?--The Primitive System of
Barter--The Advantages possessed by the Precious Metals--Gold as
a Standard of Value--Its Failure to remain Constant--Currency and
Prices--The Complication of other Instruments of Credit--No Substitute
for Gold in Sight--Its Acceptability not shaken by the War--A
Fluctuating Standard not wholly Disadvantageous--An International
Currency fatal to the Task of Reconstruction--Stability and Certainty
the Great Needs.


As if mankind had not enough on its hands at the present moment, a
number of well-meaning people seem to think that this is an opportune
time for raising obscure questions of currency, and trying to make
the public take an interest in schemes for bettering man's lot by
improving the arrangements under which international payments are
carried out. Nobody can deny that some improvement is possible in
this respect, but it may very well be doubted whether, at the present
moment, when very serious problems of rebuilding have inevitably to be
faced and solved, it is advisable to complicate them by introducing
this difficult question which, whenever it is raised, will require the
most careful and earnest consideration.

Since, however, the question is in the air, it may be as well to
consider what is wrong with our present methods, and what sort of
improvements are suggested by the reformers. At present, as every one
knows, international payments are in normal times ultimately settled
by shipments from one country to another of gold. Gold has achieved
this position for reasons which have been described in all the
currency text-books. Mankind proceeded from a state of barter to a
condition in which one particular commodity was used as the chief
means of payment simply because this process was found to be much
more convenient. Under a system of barter an exchange could only be
effected between two people who happened to be possessed each of them
of the thing which the other one wanted, and also at the same time to
want the thing which the other one possessed, and the extent of their
mutual wants had to lit so exactly that they were able to carry out
the desired exchange. It must obviously have been rare that things
happened so fortunately that mutually advantageous exchanges were
possible, and the text-books invariably call attention to the
difficulties of the baker who wanted a hat, but was unable to supply
his need because the hatter did not want bread but fish or some other
commodity.

It thus happened that we find in primitive communities one particular
commodity of general use being selected for the purpose of what is
now called currency. It is very likely that this process arose quite
unconsciously; the hatter who did not want bread may very likely have
observed that the baker had something, such as a hit of leather, which
was more durable than bread, and which the hatter could be quite
certain that either he himself would want at some time, or that
somebody else would want, and he would therefore always be able to
exchange it for something that he wanted. All that is needed for
currency in a primitive or any other kind of people is that it should
be, in the first place, durable, in the second place in universal
demand, and, in the third place, more or less portable. If it also
possessed the quality of being easily able to be sub-divided without
impairing its value, and was such that the various pieces into which
it was sub-divided could be relied on not to vary in desirability,
then it came near to perfection from the point of view of currency.

All these qualities were possessed in an eminent degree by the
precious metals. It is an amusing commentary on the commonly assumed
material outlook of the average man that the article which has won its
way to supremacy as currency by its universal desirability, should be
the precious metals which are practically useless except for purposes
of ornamentation. For inlaying armour and so adorning the person of a
semi-barbarous chief, for making into ornaments for his wives, and for
the embellishment of the temples of his gods, the precious metals had
eminent advantages, so eminent that the practical common sense of
mankind discovered that they could always be relied upon as being
acceptable on the part of anybody who had anything to sell. In
the matter of durability, their power to resist wear and tear was
obviously much greater than that of the hides and tobacco and other
commodities then fulfilling the functions of currency in primitive
communities. They could also be carried about much more conveniently
than the cattle which have been believed to have fulfilled the
functions of currency in certain places, and they were capable of
sub-division without any impairing of their value, that is to say, of
their acceptability. Merely as currency, precious metals thus have
advantages over any other commodity that can be thought of for this
purpose.

So far, however, we have only considered the needs of man for
currency; that is to say, for a medium of exchange for the time
being. It is obvious, however, that any commodity which fulfils this
function, that is to say, is normally taken in payment in the exchange
of commodities and services, also necessarily acquires a still more
important duty, that is, it becomes a standard of value, and it is on
the alleged failure of gold to meet the requirements of the standard
of value that the present attack upon it is based. On this point the
defenders of the gold standard will find a good deal of difficulty in
discovering anything but a negative defence. The ideal standard of
value is one which does not vary, and it cannot be contended that
gold from this point of view has shown any approach to perfection in
fulfilling this function. It could only do so if the supply of it
available as currency could by some miracle be kept in constant
relation with, the supply of all other commodities and services that
are being produced by mankind. That it should be constant with each
one of them is, of course, obviously impossible, since the rate at
which, for example, wheat and pig-iron are being produced necessarily
varies from time to time as compared with one another. Variations in
the price of wheat and pig-iron are thus inevitable, but it can at
least be claimed by idealists in currency matters that some form of
currency might possibly be devised, the amount of which might always
be in agreement with the amount of the total output of saleable goods,
in the widest sense of the word, that is being created for man's use.

It need not be said that this desirability of a constant agreement
between the volume of currency and the volume of goods coming forward
for exchange is based on what is called the quantitative theory of
money. This theory is still occasionally called in question, but is on
the whole accepted by most economists of to-day, and seems to me to
be a mere arithmetical truism if we only make the meaning of the word
"currency" wide enough; that is to say, if we define it as including
all kinds of commodities, including pieces of paper and credit
instruments, which are normally accepted in payment for goods
and services. This addition of credit instruments, however, is a
complication which has considerably confused the problem of gold
as the best means of ultimate payment. Taken simply by itself the
quantitative theory of money merely says that if money of all kinds is
increased more rapidly than goods, then the buying power of money will
decline, and the prices of goods will go up and vice versa. This seems
to be an obvious truism if we make due allowance for what is called
the velocity of circulation. If more money is being produced, but the
larger amount is not turned over as rapidly as the currency which was
in existence before, then the effect of the increase will inevitably
be diminished, and perhaps altogether nullified. But other things
being equal, more money will mean higher prices, and less money will
mean lower prices.

But, as has been said, the question is very greatly complicated by
the addition of credit instruments to the volume of money, and this
complication has been made still more complicated by the fact that
many economists have refused to regard as money anything except actual
metal, or at least such credit instruments as are legal tender, that
is to say, have to be taken in payment for commodities, whether the
seller wishes to do so or not. For example, many people who are
interested in currency questions would regard at the present moment in
this country gold, Bank of England notes, Treasury notes, and silver
and copper up to their legal limits as money, but would deny this
title to cheques. It seems to me, however, that the fact that the
cheque is not and cannot be legal tender does not in practice affect
or in any way impair the effectiveness of its use as money. As a
matter of fact cheques drawn by a good customer of a good bank are
received all over the country day by day in payment for an enormous
volume of goods. In so far as they are so received, their effect upon
prices is exactly the same as that of legal tender currency. This
fact is now so generally recognised that the Committee on National
Expenditure has called attention to the financing of the war by bank
credits as one of the reasons for the inflation of prices which has
done so much to raise the cost of the war. It is, in fact, being
generally recognised that the power of the bankers to give their
customers credits enabling them to draw cheques amounts in fact to
an increase in the currency just as much as the power of the Bank of
England to print legal tender notes, and the power of the Government
to print Treasury notes.

Thus it has happened that by the evolution of the banking system
the use of the precious metals as currency has been reinforced and
expanded by the printing of an enormous mass of pieces of paper,
whether in the form of notes, or in the form of cheques, which
economise the use of gold, but have hitherto always been based on the
fact that they are convertible into gold on demand, and in fact have
only been accepted because of this important proviso. Gold as currency
was so convenient and perfect that its perfection has been improved
upon by this ingenious device, which prevented its actually passing
from hand to hand as currency, and substituted for it an enormous mass
of pieces of paper which were promises to pay it, if ever the holders
of the paper chose to exercise their power to demand it. By this
method gold has been enabled to circulate in the form of paper
substitutes to an extent which its actual amount would have made
altogether impossible if it had had to do its circulation, so to
speak, in its own person. From the application of this great economy
to gold two consequences have followed; the first is that the
effectiveness of gold as a standard of value has been weakened because
this power that banks have given to it of circulating by substitute
has obviously depreciated its value by enormously multiplying the
effective supply of it. Depreciation in the buying power of money, and
a consequent rise in prices, has consequently been a factor which
has been almost constantly at work for centuries with occasional
reactions, during which the process went the other way. Another
consequence has been that people, seeing the ease with which pieces of
paper can be multiplied, representing a right to gold which is only in
exceptional cases exercised, have proceeded to ask whether there is
really any necessity to have gold behind the paper at all, and whether
it would not be possible to evolve some ideal form of super-paper
which could take the place of gold as the basis of the ordinary paper
which is created by the machinery of credit, which would be made
exchangeable into it on demand instead of into gold.

It is difficult to say how far the events of the war have contributed
to the agitation for the substitution for gold of some other form of
international currency. It would seem at first sight that the position
of gold at the centre of the credit system has been shaken owing
to the fact that in Sweden and some other neutral countries the
obligation to receive gold in payment for goods has been for the time
being abrogated. The critics of the gold standard are thus enabled
to say, "See what has happened to your theory of the universal
acceptability of gold. Here are countries which refuse to accept any
more gold in payment for goods. They say, 'We do not want your gold
any more. We want something that we can eat or make into clothes to
put on our backs.'" This is certainly an extremely curious development
that is one of the by-products of war's economic lessons. But I do not
feel quite sure that it has really taught us anything new. All that
has ever been claimed for gold is that it is universally acceptable
when men are buying and selling together under more or less normal
circumstances. It has always been recognised that a shipwrecked crew
on a desert island would be unlikely to exchange the coco-nuts or fish
or any other commodities likely to sustain life which they could find,
for any gold which happened to be in the possession of any of them,
except with a view to their being possibly picked up by a passing
ship, and returning to conditions under which gold would reassume its
old privilege of acceptability.

During the war the shipping conditions have been such that many
countries have been hard put to it, especially if they were contiguous
to nations with which the Entente is at present at war, to get the
commodities which they needed for their subsistence. The Entente, with
its command of the sea, has found it necessary to ration them so that
they should have no available surplus to hand on to the enemy. They
have very naturally endeavoured to resist these measures, and in order
to do so have made use of the power that they exercise by their being
in possession of commodities which the Entente desires. They
have shown a tendency to say that they would not part with these
commodities unless the Entente allowed them to have a larger
proportion of things needed for subsistence than the Entente thought
necessary for them, and it was as part of this battle for larger
imports of necessaries that gold has been to some extent looked upon
askance as means of payment, the preference being given to things
to eat and wear rather than to the metal. These wholly abnormal
circumstances, however, do not seem to me to be any proof that gold
will after the war be any less acceptable as a means of payment than
before. The Germans are usually credited with considerable sagacity in
money matters, with rather more, in fact, I am inclined to think, than
they actually possess; they, at any rate, show a very eager desire to
collect together and hold on to the largest possible store of gold,
obviously with a view to making use of it when the war is over in
payment for raw materials, and other commodities of which they are
likely to find themselves extremely short. America also has shown a
strong tendency to maintain as far as possible within its borders the
enormous amount of gold which the early years of the war poured into
its hands. While such is the conduct of the chief foreign nations, it
is also interesting to note that one comes across a good many people
who, in spite of all the admonitions of the Government to all good
citizens to pay their gold into the banks, still hold on to a small
store of sovereigns in the fear of some chain of circumstances arising
in which only gold would be taken in payment for commodities. On the
whole, I am inclined to think that the power of gold as a desirable
commodity merely because it is believed to be always acceptable has
not been appreciably shaken by the events of the war.

This does not alter the fact that, as has been shown above, gold,
complicated by the paper which has been based upon it, cannot claim
to have risen to full perfection as a standard of value. In
primitive times the question of the standard of value hardly arises.
Transactions are for the most part carried out and concluded at once,
and any seller who takes a piece of metal in payment for his goods
does so with the rough knowledge of what that piece of metal will buy
for him at the moment, and that is the only point which concerns
him. The standard of value only becomes important when under settled
conditions of society long-term contracts bulk large in economic
transactions. A man who makes an investment which entitles him to 5
per cent. interest, and repayment in 30 years' time, begins to be very
seriously interested in the question of what command over commodities
his annual income of 5 per cent. will give him, and whether the
repayment of his money at the end of 30 years will represent the
repayment of anything like the same amount of buying power as his
money now possesses. It is here, of course, that gold has failed
because, as we have seen, the process has been a fairly steady one of
depreciation in the buying power of the alleged standard and a rise in
the prices of other commodities. This means to say that the investor
who has accepted repayment at the end of 30 years of the amount that
he lent, be it L100 or L10,000, has found that the money repaid to him
had by no means the same buying power as the money which he originally
invested.

Within limits this tendency of the standard of value towards
depreciation has possessed considerable advantages, probably much
greater advantages than would have followed from the contrary process
if it had been the other way round. If we can imagine that the
currency history of the world had been such that a constantly
diminished quantity of currency in relation to the output of other
commodities had caused a steady fall in prices, it is obvious that
there might have been a very considerable check to the enthusiasm of
industry. It has indeed been contended that the scarcity of precious
metals which, with the absence of an organised credit system, produced
this result during the later Roman Empire was a very important cause
of the decay into which that Empire fell. I do not feel at all
convinced that this effect would necessarily have followed the cause.
It seems to me that the ingenuity of enterprising man is such that the
producer might, and probably would, have found means for facing the
probability of depreciation in price. But it is always an empty
pastime to try to imagine what would have happened "if things had
been otherwise." What we do know is that a period of rising prices,
especially if the rise does not go too fast, stimulates the enterprise
of producers, and sets business going actively, and consequently it
may at least be claimed that the failure of the gold standard to
maintain that steadiness of value which is an obvious attribute of
the ideal standard has at least been a failure on the right side, by
tending to depreciation of the value of currency, and so to a rise of
the prices of other commodities. Obviously, people will tuck up their
sleeves more readily to the business of production and manufacture if
the course of the market in the product which they hope to sell some
day is likely to be in their favour rather than against them.

And when all is admitted concerning the failure of the existing
standard of value, the question is, what substitute can we find which
will carry with it all the advantages that gold has been shown to
possess, and at the same time maintain that steadiness of value which
gold has certainly lacked? We hear airy talk of an international
currency based on the credit of the nations leagued together to
promote economic peace. It is certainly very obvious that the
diplomatic relations of the world require complete reform, and the
system by which the nations at present settle disputes between
themselves has been found by the experience of the last four years to
be so disgusting, so barbarous and so ridiculous that all the most
civilised nations of the world are determined to go on with it until
it is stopped for ever. Nevertheless, obvious as it is that some kind
of a League of Nations is essential as a form of international police
if civilisation is to be rescued from destruction, it is very doubtful
whether such an organisation could, at least during the first
half-century or so of its existence, be called upon to tackle so
difficult a question as that of the creation of an international
currency based on international credit. In the first place, what will
be required more than anything else after the war in economic matters
will be the elimination of all possible reasons for uncertainty; so
much uncertainty and difficulty will be inevitable that it seems to me
to be almost criminal to add to those uncertainties by an outburst of
eloquence on the part of currency reformers if there were any danger
of their recommendations being accepted. It will be difficult enough
to know where the producers of the world are to get raw material, find
efficient labour, and then find a market for their products, without
at the same time upsetting their minds with doubts concerning some
kind of new-fangled currency that is to be created, and in which they
are to be made to accept payment, with the possibilities of changes
in the system which may have to be effected owing to some quite
unforeseen results happening from its adoption. The gold standard,
with all its failures, we do know; we also know that something may be
done some day to remedy them if mankind can produce a set of rulers
capable of approaching the question with all the knowledge and
experience required; but to substitute this system at a time of great
uncertainty for one which might or might not work would seem to be
tempting Providence in an entirely unnecessary manner at a time when
it is above all necessary to get the economic ship as far as possible
on an even keel.

If the proposed substitute is to succeed it will have to be at least
as acceptable as gold, and at the same time its quantity must be so
regulated as to be at all times constant in relation to the output of
commodities. Can we pretend that the economic enlightenment of mankind
has yet reached a point at which such a currency could be produced and
regulated by the Governments of the world and be accepted by their
citizens?