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War-Time Financial Problems - VII


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



_March_, 1918

Another Government Committee--The Fallacy of imitating
Germany--Prussianising British Commerce--The Inquiry into the
Companies Acts--Will Labour Influence dominate the Report?--Increased
Production the Great Need--Will it be met by tightening up the
Companies Acts?--The Dangers of too much Strictness--Some Reforms
necessary--Publicity, Education, Higher Ideals the only Lasting
Solution--The Importance of Foreign Investments--Industry cannot take
all Risks and no Profits.

Every week--almost every day--brings with it the announcement of some
new committee considering some question that may, or may not, arise
now or when the war is over. Especially in the realm of finance has
the Government's output of committees been notably prolific of
late. We have had a Committee on Currency, a Committee on Banking
Amalgamations, and a Committee appointed, humorously enough, by the
Ministry of Reconstruction to consider what measures, if any, should
be taken to protect the public interest in connection with the policy
of industrial combinations--a policy which the Board of Trade has
been sedulously fostering. Now comes a Committee to inquire "what
amendments are expedient in the Companies Acts, 1908-1917, principally
having regard to the circumstances arising out of the war, and to the
developments likely to arise on its conclusion, and to report to the
Board of Trade and to the Ministry of Reconstruction." It is composed
of the Right Hon. Lord Wrenbury (chairman), Mr A.S. Comyns Carr,
Sir F. Crisp, Mr G.W. Currie, M.P., Mr F. Gaspard Farrer, Mr Frank
Gore-Browne, K.C., Mr James Martin, the Hon. Algernon H. Mills, Mr
R.D. Muir, Mr C.T. Needham, M.P., Mr H.A. Payne, Sir Owen Philipps,
M.P., Sir William Plender, Mr O.C. Quekett, and Mr A.W. Tait. The
secretary is Mr W.W. Coombs, 55, Whitehall, S.W. 1. There are some
good names on the Committee. Mr. Gaspard Farrer represents a great
issuing house; Sir Frank Crisp, company lawyers; Sir William Plender,
the accountants; Mr O.C. Quekett, the Stock Exchange; and Sir Owen
Philipps, the shipping interest. Nevertheless, one cannot help
shuddering when one considers the dangers that threaten British
finance and industry from ill-considered measures which might possibly
be recommended by a Committee influenced by the atmosphere of the
present outlook on financial and commercial affairs.

One of the interesting features of the present war atmosphere is the
fact that, now when we are fighting as hard as we can to defeat all
that is meant by Prussianism a great many of our rulers and public
men are doing their best to impose Prussianising methods upon this
unfortunate country, merely because it is generally assumed that
Prussian methods have been shown, during the course of the war, to
carry with them a certain amount of efficiency. It is certainly true
that Prussian methods do very well as applied to the Prussians and
submitted to by other races of Germans. On the other hand, it is at
least open to argument that the British method of freedom, individual
initiative, elasticity and adaptability have produced results, during
the present war, which have so far been paralleled by no other country
engaged in the contest. Working on interior lines with the assistance
of docile and entirely submissive allies, Germany has certainly done
wonderful things in the war, but it by no means follows that the
verdict of posterity will not give the palm of achievement to England,
who has not only carried out everything that she promised to do before
the war, but has incidentally and in the course of it created and
equipped an Army on a Continental scale, and otherwise done very much
more for the assistance of her Allies than was contemplated before the
war began.

It is untrue to say that we were unprepared for the war. We were
more than prepared to do all that we promised to do. What we were
unprepared for was finding ourselves required to turn ourselves
into, not only the greatest naval Power in the world, but one of the
greatest military Powers also. This demand was sprang upon us, and we
have met it with extraordinary success. The whole idea that Germany's
achievement has been such as to warrant any attempt on our part to
model our institutions on her pattern seems to me to fall to pieces
as soon as one looks calmly at the actual results produced by the
different systems. Moreover, even if we were to admit that Germany's
achievement in the war has been immeasurably greater than ours, it
still would not follow that we could improve matters here by following
the German system. It ought not to be necessary to observe that a
system which is good for one nation or individual is not necessarily
good for another. In the simple matter of diet, for instance, a most
scientifically planned diet given to a child who does not happen to
like it will not do that child any good. These things ought to be
obvious, but unfortunately in these times, which call for eminently
practical thought and effort, there is a curious doctrinaire spirit
abroad, and the theorist is continually encouraged to imagine how much
better things would be if everything were quite different, whereas
what we want is the application of practical common sense to practical
facts as they are.

In the realm of finance the freedom and individual initiative and
elasticity of our English system have long been the envy of the world.
Our banking system, as was shown, on an earlier page, has always
worked with much less restriction on the part of legislative and
official interference than any other, and, with the help of this
freedom from official control, English bankers and finance houses had
made London the financial centre of the world before the war. The
attempt of Parliament to control banking by Peel's Act of 1844 was
quietly set aside by the banking machinery through the development of
the use of cheques, which made the regulations imposed on the note
issue a matter of quite minor importance, except in times of severe
crisis, when these regulations could always be set aside by an
appeal to the Chancellor of the Exchequer. There was no Government
interference in the matter of new issues of securities on the London
Stock Exchange or of the quotations granted to new securities by the
Committee of the Stock Exchange. Now the Companies Acts are to be
revised in view of what may be necessary after the war, and there
is only too much reason to fear that mistakes may occur through the
imposition of drastic restrictions, which look so easy to work on
paper, but are more than likely to have the actual effect of doing
much more harm than good.

"Circumstances arising out of the war and developments likely to arise
on its conclusion" give this Committee a roving commission to consider
all kinds of things, which may or may not happen, in the light of
wisdom which may be put before it by interested witnesses, and, worse
still, in the light of semi-official pressure to produce a report
which will go down well with the House of Commons. Our politicians are
at present in a state of extreme servility before the enterprising
gentlemen who are now at the head of what is called the Labour Party.
Every one will sympathise with the aspirations of this party in so
far as they aim at bettering the lot of those who do the hard and
uninteresting work of the world, and giving them a larger share of the
productions that they help to turn out; but that is not the same
thing as giving obsequious attention to the views which their
representatives may have concerning the management of financial
affairs, on the subject of which their knowledge is necessarily
limited and their outlook is likely to be, to a certain extent,
prejudiced. A recent manifesto put forward by the leaders of the new
Labour Party includes in its programme the acquisition by the nation
of the means of production--in other words, the expropriation of
private capitalists. The Labour people very probably think that by
this simple method they will be able to save the labourer the cost
of providing capital and the interest which is paid for its use; and
people who are actuated by this fallacy, which implies that the rate
paid to capital is thinly disguised robbery, inevitably have warped
views concerning the machinery of finance and the earnings of
financiers. These views, expressed in practical legislation, might
have the most serious effects not only upon England's financial
supremacy but also on the industrial activity which that financial
supremacy does so much to maintain and foster.

What, after the war, will be the most important need, from the
material point of view, for the inhabitants of this country? However
the war may end, and whatever may happen between now and the end of
it, there can be only one answer to this question, and that answer
is greatly increased production. The war has already diminished our
capital resources to the extent of the whole amount that we have
raised by borrowing abroad, that is to say, by pledging the production
of our existing capital, and by selling to foreign countries the
foreign securities in which our capitalists had invested during
the previous century. No one knows the extent to which our capital
resources have been impaired by these two processes, but it may be
guessed at as somewhere in the neighbourhood of 1500 millions; that
is to say, about 10 per cent. of a liberal estimate of the total
accumulated property of the country at the beginning of the war. To
this direct diminution in our capital resources we have to add the
impossibility, which has existed during the war, of maintaining our
factories and industrial equipment in first-class working order by
expenditure on account of depreciation of plant. On the other side
of the balance-sheet we can put a large amount of new machinery
introduced, which may or may not be useful for industrial purposes
after the war; greatly improved methods of organisation, the effect of
which may or may not be spoilt when the war is over by uncomfortable
relations between Capital and Labour; and our loans to Allies and
Dominions, some of which may have to be written off, and most of which
will return us no interest for some time to come, or will at first pay
us interest if we lend our debtors the money to pay it with. What the
country will need, above all, on the material side, is an abundant
revenue, which can only be produced by vigorous and steady effort in
industry, which, again, can only be forthcoming if the machinery of
credit and finance is given the fullest possible freedom to provide
every one who wants to engage in industry and increase the output of
the country with the financial facilities, without which nothing can
be done.

Is it, then, wise at such a time to impose restrictions by a drastic
tightening up of the Companies Act, upon those who wish by financial
activity, to further the efforts of industries and producers? On the
contrary, it would seem to be a time to give the greatest possible
freedom to the financial machine so that there shall be the least
possible delay and difficulty in providing enterprise with the
resources that it needs. We can only make good the ravages of war by
activity in production and strict economy in consumption. What we want
to do is to stimulate the people of this country to work as hard as
they can, to produce as much as possible, to consume as little as
possible on unnecessary enjoyment and luxury, and, so, by procuring
a big balance of production over consumption, to have the largest
possible volume of available goods for sale to the rest of the world,
in order to rebuild our position as a creditor country, which the
war's demands upon us have to some extent impaired.

It is a commonplace that if it had not been for the great mass of
foreign securities, which this country held at the beginning of the
war, we could not nearly so easily have financed the enormous amount
of food and munitions which we have had to provide for our population,
for our armies, and for the population and armies of our Allies. If,
instead of holding a mass of easily marketable securities, we had had
to rely, in order to pay for our purchases of foreign goods, on the
productions of our own mines and factories, and on our power to borrow
abroad, then we should have had to restrict very greatly the number of
men we have put into the firing-line so as to keep them at home for
productive work, or, by the enormous amount of our borrowings, we
should have cheapened the value of British credit abroad to a much
greater extent than has been the case. Our position as a great
creditor country was an enormously valuable asset, not only during the
war but also before it, both from a financial and industrial point of
view. It gave us control of the foreign exchanges by enabling us, at
any time, to turn the balance of trade in our favour by ceasing for a
time to lend money abroad, and calling upon foreign countries to pay
us the interest due from them. The financial connections which it
implied were of the greatest possible assistance to us in enhancing
British prestige, and so helping our industry and commerce to push the
wares that they produced and handled.

Reform of the Companies Acts has often before the war been a more or
less burning question. Whenever the public thought that it had been
swindled by the company promoting machinery, it used to write letters
to the newspapers and point out that it was a scandal that the sharks
of the City should be allowed to prey upon the ignorant public,
and that something ought to be done by Parliament to insure that
investments offered to the public should somehow or other be made
absolutely watertight and safe, while by some unexplained method the
public would still be somehow able to derive large benefits from
fortunate speculations in enterprises which turned out right. Every
one must admit there have been some black pages in the history
of British company promoting, and that many swindles have been
perpetrated by which the public has lost its money and dishonest and
third-rate promoters have retired with the spoil. The question is,
however, what is the remedy for this admitted and glaring evil? Is it
to be found by making the Companies Laws so strict that no respectable
citizen would venture to become a director owing to the fear of penal
servitude if the company on whose board he sat did not happen to pay a
dividend, and that no prospectus could be issued except in the case of
a concern which had already stood so severe a test that its earning
capacity was placed beyond doubt? It would certainly be possible by
legislative enactment to make any security that was offered as safe as
Consols, and less subject to fluctuation in value. But when this had
been done the effect would be very much like the effect upon rabbits
of the recent fixing of their price. No more securities would be

It is certainly extremely important for the future financial and
industrial development of this country that the machinery of finance
and company promotion should be made as clean as possible. What we
want to do is to make everybody see that a great increase in output is
required, that this great increase in output can only be brought about
if there is a great increase in the available amount of capital, that
capital can only be brought into being by being saved, and that it is
therefore everybody's business, both for his own sake and that of the
country, to earn as much as he can and save as much as he can so that
the country's capital fund can be increased; so that industry, which
will have many difficult problems to face when the war is over, shall
be as far as possible relieved from any difficulty of finding all the
capital that it needs. To produce these results it is highly necessary
to increase the confidence of the public in the machinery of the Stock
Exchange, in company promotion and all financial issues. Any one who
sincerely believes that these results can be produced by tightening up
the Companies Acts is not only entitled but bound to press as hard as
he can for the securing of this object. But is this the right way to
do it? There is much to be said at first sight for making more strict
the regulations under which prospectuses have to be issued under the
Companies Acts, demanding a franker statement of the profits in the
past, a fuller statement concerning the prices paid to vendors, and
the prices paid by vendors to sub-vendors, and so forth. Any one who
sits down with a pre-war industrial prospectus in his hand can find
many openings for the hand of the reformer. The accounts published by
public companies might also be made fuller and more informing with
advantage. But even if these obviously beneficial reforms were carried
out, there would always be danger of their evasion. They might tend to
the placing of securities by hole-and-corner methods without the issue
of prospectuses at all, and to all the endless devices for dodging the
law which are so readily provided as soon as any attempt is made
by legislation to go too far ahead of public education and public

This is the real solution of this problem--publicity, the education of
the public, and a higher ideal among financiers. As long as the public
likes to speculate and is greedy and ignorant enough to be taken in by
the wiles of the fraudulent promoter, attempts by legislation to check
this gentleman's enterprise will be defeated by his ingenuity and the
public's eagerness to be gulled. The ignorance of the public on the
subject of its investments is abysmal, as anybody knows who is brought
into practical touch with it. Just as the cure for the production of
rotten and fraudulent patent medicines thrust down the public's throat
by assiduous advertising is the education of the public concerning the
things of its stomach, so the real cure for financial swindles is the
education of the public concerning money matters, and its recognition
of the fact that it is impossible to make a fortune in the City
without running risks which involve the possible, not to say probable,
loss of all the money with which the speculator starts. When once
the public has learnt to distinguish between a speculation and an
investment, and has also learnt honesty enough to be able to know
whether it wants to speculate or invest, it will have gone much
further towards checking the activity of the fraudulent promoter
than any measure that can be recommended by the most respectable and
industrious of committees. At the same time, it must be recognised
by those responsible for our finance, that it is their business,
and their interest, to keep the City's back premises clean; because
insanitary conditions in the back yard raise a stink which fouls the
whole City.

In the meantime, if gossip is to be believed, some of the members of
the Government have the most disquieting intentions concerning the
kind of regulations which they wish to impose on the activities of the
City, especially in its financial branch. It is believed that some of
the bright young gentlemen who now rule us are in favour of Government
control over the investment of money placed at home, and the
prohibition of the issue of foreign securities; and it is even
whispered that a fantastic scheme for controlling the profits of all
industrial companies, by which anything earned above a certain level
is to be seized for the benefit of the nation, is now a fashionable
project in influential Parliamentary circles. Every one must, of
course, admit that a certain amount of control will be necessary for
some time after the war. It may not be possible at once to throw open
the London Money Market to all borrowers, leaving them and it to
decide between them who is to be first favoured with a supply of the
capital for which there will be so large a demand when the war is
over. Certain industries, those especially on which our export trade
depends, will have to be first served in the matter of the provision
of capital. If it is a choice between the engineering or shipbuilding
trades and a company that wants to start an aeroplane service between
London and Brighton for the idle rich, it would not be reasonable,
during the first few months after the war, that the unproductive
project should be able, by bidding a high price for capital, to
forestall the demand of the more useful producer. And with regard
to the issue of foreign securities, there is this to be said, that
foreign securities placed in London have the same effect upon foreign
exchange as the import into England of goods shipped from any country;
that is to say, for the time being they turn the exchange against us.
On the other hand, it is a well-known commonplace that imports of
securities have to be balanced by exports of goods or services; and
as the times when our export trade is most active are those when most
foreign securities are being placed in London, it follows that any
restrictions placed upon the issue of foreign securities in London
will hinder rather than help that recovery in our export trade which
is so essential to the restoration of our position as a creditor

Moreover, our rulers must remember this, that in War-time, when all
the letters sent abroad are subject to the eye of the Censor, it is
possible to control the export of British funds abroad; but that in
peace time (unless the censorship is to continue), it will not be
possible to check foreign investment by restricting the issuing of
foreign securities in London. If people see better rates to be
earned abroad and more favourable prospects offered by the price
of securities on foreign Stock Exchanges, they will invest abroad,
whether securities are issued in London or not. As for the curious
suggestion that the profits of industrial companies are henceforward
to be limited and the whole balance above a statutory rate to be taken
over by the State for the public good, this would be, in effect, the
continuance on stricter lines of the Excess Profits Duty. As a war
measure the Excess Profits Duty has much to be said for it at a time
when the Government, by its inflationary policy, is putting large
windfalls of profit into the hands of most people who have to hold a
stock of goods and have only to hold them to see them rise in value.
The argument that the State should take back a large proportion of
this artificially produced profit is sound enough; but, if it is
really to be the case that industry is to be asked for the future to
take all the risk of enterprise and handover all the profit above
a certain level to the Government, the reply of industry to such a
proposition would inevitably be short, emphatic, unprintable, and by
no means productive of revenue to the State.

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