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War-Time Financial Problems - XX


2. I

3. II

4. III

5. IV

6. V

7. VI

8. VII


10. IX

11. X

12. XI

13. XII

14. XIII

15. XIV

16. XV

17. XVI

18. XVII


20. XIX

21. XX



_December_, 1918

[Footnote 1: This was the latter of two articles contributed to the
_Times Trade Supplement_ in answer to a series in which Mr Arthur
Kitson had attacked our banking and currency system suggested an
inconvertible paper currency.]

"Boundless Wealth"--Money and the Volume of Trade--The Quantity
Theory--The Gold Standard--How is the Volume of Paper to be
regulated?--Mr Kitson's Ideal.

In the November _Trade Supplement_ an endeavour was made to answer Mr
Kitson's rather vague and general insinuations and charges against our
bankers concerning the manner in which they do their business. Now
let us examine the larger and more interesting problem raised by his
criticism of our currency system.

In his article in the June _Supplement_ he told us that "if the
British public had any grasp of the fundamental truths of economic
science they would know that a future of boundless wealth and
prosperity is theirs." This is a cheery and encouraging view and, let
us hope, a true one. But, that boundless wealth can only be got if we
work for it in the right way. Can Mr Kitson show it to us, and what
are these "fundamental truths of economic science"? It is easier to
talk about them than to find any two economists who would give an
exactly--or even nearly--similar list of them. Mr Kitson glances "at
a few elementary truths." "Wealth," he says, "is the product of two
prime factors, man and Nature, generally termed labour and land. With
an unlimited, or practically unlimited, supply of these two factors,
how is it that wealth is and has been hitherto so comparatively
scarce?" But is the supply of "man" unlimited in the sense of man
able, willing, and properly trained to work? And is the supply of
"Nature" unlimited in the sense of land, mines, and factories fully
equipped with the right machinery and served and supplied by adequate
means of transport? Surely the failure In production on which Mr
Kitson so rightly lays stress is due, at least partly, to lack of
good workers, good organisers, good machinery, and good transport
facilities. Workers who restrict output, employers who despise science
and cling to antiquated methods, the opposition of both classes to new
and efficient equipment, and large tracts, even of our own land, still
without reasonable transport facilities, have something to do with
it. And lack of capital--this answer to the question Mr Kitson flouts
because, he says, "since capital is wealth," to say that "wealth is
scarce because capital is scarce is the same as saying that wealth is
scarce because it is scarce." But is it not a "fundamental truth of
economic science" that capital is wealth applied to production? Wealth
and capital are by no means identical. When a well-known shipbuilding
magnate laid waste several Surrey farms to make himself a deer-park,
the ground that he thus abused was still wealth, but it is no longer
capital because it has ceased to produce good food and is merely a
pleasant lounging-place for his lordship. May not the failure of
production be partly due to the fact that, owing to the extravagant
and stupid expenditure of so many of the rich, too much work is put
into providing luxuries--of which the above-mentioned deer-park is an
example--and too little into the equipment of industry with the plant
that it needs for its due expansion?

Mr Kitson's answer is much easier. According to him, instead of
working better, organising better, and putting more of our output into
plant and equipment and less into self-indulgence and vulgarity all
that we have to do to work the necessary reform is to provide more
money and credit. Since, he says, under the industrial era--

"All goods were made primarily for exchange or rather for sale ... it
followed, therefore, that production could only continue so long as
sales could be effected; and since sales were limited by the amount of
money or credit offered, it followed that production was necessarily
limited by the quantity of money or credit available for commercial

But is this so? If goods are produced more rapidly than money, it does
not follow that they could not be sold, but only that they would have
been sold for less money. The producer would have made a smaller
profit, but on the other hand the cheapening of the product would have
improved the position of the consumer, the cheapening of materials
would have benefited the manufacturer, and it is just possible that
production, instead of being limited, might have been stimulated by
cheapness due to scarcity of currency and credit, or, at least, might
have gone on just as well on a lower all-round level of prices. On the
whole, it is perhaps more probable that a steady rise in prices caused
by a gradual increase in the volume of currency and credit would have
the more beneficial effect in stimulating the energies of producers.
But Mr Kitson's argument that the volume of currency and credit
imposes an absolute limit on the volume of production is surely much
too clean-cut an assumption. This absolute limit may be true, if
currency cannot be increased, with regard to the aggregate value in
money of the goods produced. But money value and volume are two quite
different things. If our credit system had not been developed as it
has, and we had had to rely on actual gold and silver for carrying on
all production and trade, it does not by any means follow that trade
and production might not have been on something like their present
scale in the matter of volume and turnover; but the money value would
have been much smaller because prices would have been all round at a
much, lower level.

This contention is based on what is called the "Quantity Theory of
Money." This theory Mr Kitson wholeheartedly believes, so that this is
not a point that has to be argued with him. "The value of money,"
he says, "as every student of economics knows, is determined by the
quantity of money in use and its velocity of circulation." Quite so.
If you increase the amount of money faster than that of goods, more
money has to be given for less goods; the value, or buying power, of
money is depreciated and prices go up. The present war has given an
excellent example of this process at work. All the warring Governments
have printed acres of paper money, and have worked the credit system
with profligate energy; and so we have a huge increase in currency
and credit, along with little or no increase (probably a decrease) in
consumable goods, and prices have soared like rockets all over the
world. In neutral countries the rise has been as bad as anywhere,
because the neutrals have been choked with the gold that the warring
Powers exported, putting paper in its place. So we see that the volume
of money, on the theory so emphatically expounded by Mr Kitson and
endorsed by common-sense--as long as we are careful to include
all forms of money that are taken in exchange for goods in the
definition--reflects itself at once in prices. If money does not
increase in quantity and goods do, then prices go down, and after
the necessary adjustments are made in rates of wages and salaries,
a larger trade can be done with the same amount of money at a lower
level of values. The volume of money thus limits the aggregate value
of trade, but not its aggregate volume. Periods of falling prices are
not encouraging to producers, and they put too much advantage into the
hands of the _rentier_--the man who lives on fixed interest; on the
other hand, they are generally believed to be in favour of the working
classes, since reductions in wages generally lag behind the fall in
prices, which means increased buying power to the wage-earner.

Mr Kitson's view that the volume of trade is limited by the quantity
of currency and credit is thus based on confusion between volume and
value. Moreover, it follows also from the "Quantity Theory of Money,"
which he holds, that if he applies his remedy and multiplies currency
and credit as fast as he appears to want to, the result will be a
still further depreciation in the buying power of money, and a further
rise in prices and an increase in all the bitterness, discontent,
suspicion, and strikes that the rise in prices has already caused
during the war. Is this a prospect to pray for? Surely if we want to
enjoy "boundless wealth and prosperity" the way to do so is to turn
out goods--things to eat and wear and enjoy--and not to multiply
money, thereby merely depreciating its value, on Mr Kitson's own
admission. He thinks that "nothing but an abundant supply of currency
in the shape of legal tender notes and bank credit, could have enabled
us to undertake successfully such unprecedented burdens" as we have
borne during the war. But it may equally well be argued that we have
borne these burdens because we worked harder than ever before to turn
out the needed stuff, organised better, used our machinery to its
full power, and spent less of our product on luxuries; and that the
abundant currency, by forcing up prices, immensely increased the
cost of the war and produced industrial friction which several times
brought us unpleasantly close to disaster.

Mr Kitson, however, uses the "Quantity Theory of Money"--the doctrine
that the value or buying power of money varies according to its
quantity in relation to that of the goods that it buys--chiefly as a
stick wherewith to beat the Gold Standard. He shows, very easily and
truly, that it is absurd to suppose that the value of the monetary
gold standard is invariable. Thereby he is only beating a dead horse,
for no such argument is nowadays put forward. The variability of the
gold standard of value is acknowledged, whenever a fluctuation in the
general level of commodity prices is recorded. But gold is the basis
of our credit system, and of those of all the economically civilised
countries of the world, not because its value is believed to be
invariable, but because it is the commodity which is universally
accepted, in such countries and in normal times, in payment of debts.
This quality of acceptability it has got largely by custom and
convention. Mr Kitson speaks of the "selection of gold by the world's
bankers as the basis for money and credit." But it was selected as
currency by common custom long before bankers were heard of. And it
was selected because of its permanence, ductility and other qualities,
especially its beauty as ornament, which made man, eager to adorn
himself, his women-kind, and the temples of his gods, always ready
to accept it in payment, knowing also that, because of this
acceptability, he would always be able to exchange it into any goods
that he wanted.

Any other commodity that earned this quality of universal
acceptability could do the work of gold just as well. But until one
has been found, gold, as long as it keeps that quality, holds the
field. And bankers use it as the basis for money and credit, not
because, as Mr Kitson says, they selected it owing to its scarcity,
but because this quality of universal acceptability made it the thing
in which all debts, both at home and abroad, could be paid. "Given,"
says Mr Kitson, "a self-contained trading community with a certain
quantity of legal tender, just sufficient for its commercial needs,
and it makes no difference either to the value or efficiency of the
money or to the trade affected whether it be made of metal or paper."
Quite so, but trading communities are not self-contained. Their
currency has to be convertible into something acceptable abroad, and
that something is, at present, gold. It is possible that the world
may some day evolve an international paper currency that will be
everywhere acceptable. But such an ideal requires a growth of honesty
and mutual confidence among the nations that puts it a long way off.
And how is its volume to be regulated?

This question is all-important, whether the currency be national or
international. Mr Kitson speaks of a currency "just sufficient" for
the community's commercial needs. Who is to decide when the currency
is just sufficient? The Government? A sweet world we should live in,
if among other party questions, Parliament had to consider multiplying
or contracting the currency every year or every month, with all the
interests that would be affected by the consequent rise or fall in
prices, lobbying, speech-making, and pulling strings to work the
oracle to suit their pockets. And, according to Mr Kitson's view, that
the volume of trade is limited by the supply of currency, this volume
would then depend on the whims of the House of Commons, half the
members of which would probably be innocent of a glimmering of
understanding of the enormously important question that they were
deciding. The gold standard, which makes the course of prices depend,
more or less, on the chances of digging up a capricious metal from the
bowels of the earth, has its obvious drawbacks; but it is a clean and
sensible business compared with making them depend on the caprices of
Parliament, complicated by the political corruption that would be only
too likely to follow the putting of such a question into the hands of
our elected and hereditary representatives and rulers.

Such, however, seems to be the Promised Land to which Mr Kitson wants
to lead us. Thus he propounds his remedy. "The remedy is surely
obvious. Divorce our legal tender from its alliance with gold
entirely, so that the supply of money and credit for our home trade is
no longer dependent upon our foreign trade rivals. Base our currency
upon the national credit ... treat gold as a commodity only, for the
settlement of foreign trade balances."

This passage in his article in the September _Supplement_ tells us
what to do. Keep gold, out of deference for foreign prejudice, for the
settlement of foreign trade balances, but make as much paper money as
you like for home use. As our legal tender money is to be "divorced
entirely from its alliance with gold" it clearly cannot be convertible
into gold. So that apparently we shall have a paper pound and a gold
pound (the latter for foreign use) with no connection between them.
This stage of economic barbarism has been left behind now even by
some of the South American republics. The paper pound, based on the
national credit, can be multiplied as fast as our legislators think
fit. If they do not multiply it fast enough, Mr Kitson will tell them
that they are strangling trade, because the volume of production
is limited by the amount of money available. At the same time bank
credits will be multiplied indefinitely because, as was shown in the
November _Supplement_, Mr Kitson supports a view that the average
business man holds (according to him) that he ought to have a legal
right to as much credit as he wants. With the Government printing
paper to please its supporters, with the banks obliged by law to give
credit to every one who asks for it, and with prices soaring on every
addition to currency and credit, what a country this will be to live
in, and what a life will be led by those who have to compile and
work out the index numbers of the prices of commodities! Some of us,
perhaps, will prefer the jog-trot conservatism of Lord Cunliffe's
Currency Committee, who in their recently issued report[1] (which
every one ought to read) recommend that gold should not be used for
circulation at present, but that endeavours should be made towards
the cautious reduction of our swollen paper currency, and that its
convertibility into gold should be maintained.

[Footnote 1: Cd. 9182, _2d_.]

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