CHAPTER XIX

THE SUPPLEMENTARY INFLOW

If there must be in the country, for the benefit of the country’s trade and commerce, for ensuring its prosperity, a loanable fund, why should no provision be made for what I call the supplementary inflow? If no provision of this kind is made by a nation, how can we reconcile this with national foresight? In carrying on business on the soundest principles of finance business concerns allow amply for contingencies by building up reserve funds. If this be sound in individual business, it should be sound in national business. We cannot logically have contrary business principles for the nation and the individual, for in that direction confusion lies.

The nation trades on its capital. It is a vast undertaking, with a colossal capital. It incurs huge liabilities, but against them it has huge assets. Why should it not have amongst these assets large hidden reserves?

Some wealth depreciates, while other wealth appreciates. Some wealth is destroyed, while new wealth is created. Wealth is not destroyed by war alone. It is destroyed by new desires, new inventions--which destroy the wealth brought into existence by former inventions and bring ruin on some industries and men,--new fashions, and by lack of hope and diminishing confidence. On the Stock Exchange in recent years we have seen continual depreciation. But other assets may at the same time have greatly appreciated.

We cannot get more gold than nature will produce, and every ounce taken from her store lessens that store. And the store will diminish as the future needs of the world grow.

The gathering of the gold and the garnering of it, like the garnering of seed we fear to sow, must be done at the expense of our wealth production. The harvest of wealth must be less because of the scantier seed sowing; in other words, because of the diminished capital employed. Instead, therefore, of the gold coming out of the nation’s profits, it would come out of the nation’s capital, for unused capital is not used capital.

Gold is our capital in a fundamental sense. If all the gold in the world were suddenly destroyed, banks would cease to exist. Whence, then, could we get the means of multiplying our capital? The productive machinery of the country would become inert. International trading would cease, because international exchange would cease. Bills of exchange would be as worthless as old newspapers, for they would be unnegotiable. We should have to get a substitute for gold.

We try to attract gold to this country because it is gold that keeps the capital-multiplying machinery going, as oil keeps other machinery going. If we always had a sufficiency of it there would be no occasion for high Bank of England rates. If there be just a sufficiency and no more, then we cannot spare any for hoarding purposes.

It would be wise of the nation to have at its command a potential supplementary supply, not of gold, but of legal tender, for legal tender can perform all the offices of gold as national currency. Gold is given its potency because it is made legal tender. It has no other vital potency. Therefore paper, or any other substance, can be given equal potency by law.

Now, the necessity of having this supplementary supply has been tacitly acknowledged. The acknowledgment is implied in the provisions of the Bank Charter Act and the provision of legal tender notes based on debt and securities. This provision, as I have pointed out already, is arbitrary. It was fixed at a time when no man had the visionary power to foresee and forecast the great development of banking in this country and the vast development of its national and international trade. It was fixed at a time when the country was groping towards a greatly improved currency system, a system that has helped in an incalculable degree the growth and development of our commerce.

But in the recent crisis it was not this potential supply that the nation actually tapped. Before it could be tapped it was necessary to suspend the Bank Charter Act. Instead of this happening, a new and unlooked-for supply was forthcoming in the shape of the Treasury notes.

This issue of Treasury notes brought a new fiduciary currency into existence, and the issue was on all fours with a free Government loan--a loan, that is to say, on which no interest was paid. It provided not only currency for the country, but “silver war-bullets” for the Government. The issue performed all the essential services which the supplementary fund I advocate should and would perform.

I am convinced that the alarm felt throughout the country in those first critical days was magnified. There was certainly some apprehension; but no good purpose would be served by magnifying it. It is indisputable, too, that even this moderate apprehension disappeared the moment it was known that a large amount of legal tender would be issued in the shape of £1 and 10_s._ Treasury notes.

The notes were based on what we call the credit, or wealth, of the country. The public placed their confidence in them because they felt they were placing confidence in the wealth and power of the country, in themselves as a nation. They could have no sounder basis. The nation was indifferent to the convertibility or inconvertibility of the notes. All the country was conscious of was that the notes were legal tender and as good as gold.

Theorists attach too much importance to the effect upon the public mind of an issue of inconvertible notes. The great mass of people does not understand convertibility or inconvertibility, certainly not in the deep sense critics imagine it does. It understands, however, confidence in the Government, and this confidence is of greater worth than are vague ideas of convertibility. The mass of the public is ignorant of monetary and currency problems, but it is not ignorant of the power of the Government and the power of the law. When the mass of the public had these notes--and even postal orders as legal tender--in its possession, it knew it had purchasing power equal to the denomination of the notes, and that was all-sufficient. This explains the public’s satisfaction and calmness. Moreover, it is a phenomenon of deep psychological importance.

There were sections of the public--merchants, financiers, bankers, academicians, theorists, and pressmen--who knew that the notes, though issued as convertible, had behind them no gold backing. But even many of these were not erudite students of currency. Nevertheless, they could not help feeling and acknowledging that the right and wise thing had been done. And as for merchants, bill-brokers, bankers, and other people who wanted legal tender currency, they cared not so long as they could get it. This was their chief concern. It was a matter of indifference to them whether the notes were convertible or inconvertible.

Perhaps the most fruitful point for controversy at this juncture, now that we have experienced the benefits of the policy, is whether it would have been better to have suspended the Bank Act and have issued Bank of England notes, or to have done what actually was done. Much can be urged in support of each policy. Bank of England notes would have obviated any confusion arising from two distinct species of fiduciary paper currency.

The great virtue and convenience of the new notes was their low denomination. It would have created needless difficulties, perhaps, to have given power to the Bank of England to issue such notes. Confusion, therefore, was greatly lessened by making the Treasury notes of low denomination and by keeping the Bank of England notes at a high denomination. As a fiduciary note, currency should be as simple as possible and not complicated, the distinction between the denominations should conform to the idea of simplicity.

I think it would be wise to teach the people that the currency of the country is in reality based upon the wealth of the country, and not upon an extraneous thing like the capricious production of gold. This would assist it to grasp more easily currency problems. What would be the state of this country with a mountain of gold and no wealth? Currency being issued on a basis of wealth, it is issued on something solid and durable.

A certain London evening newspaper wrote in this wise several months after the outbreak of the war: “The puzzled public which draw its cheques and accepts the cheques of others with a firm and pathetic belief in the value of ‘a scrap of paper,’ was a little scared at first when the value of securities tumbled down and it had to accept notes in place of its accustomed solid coin. People began to ask whether the alleged wealth of the country was supported by anything solid at all, or whether we had not been living on a fiction. Fortunately, time has proved that it is very substantial indeed.”

Quite so. The wealth of this country is the most substantial possession the country has. But, all the same, there are many fallacies in the above passage. The public were not puzzled, and there is no pathos in its belief in the value of cheques. It was not scared, even for a moment, when it had to accept notes, no more scared than it has been when it has received Bank of England notes. It took them with inquisitiveness, but also readily and gladly. People did not ask if the wealth of the country was “alleged” and whether it was a fiction, and I think it is foolish to put ideas into the heads of the public which originally were never there.

Is it absolutely necessary to issue a _limited_ amount of Treasury or other legal tender notes based on gold? Or may the amount be unlimited? In a war of world-wide magnitude, the Government and the nation had to take account of the vital fact that, not only might our commerce be destroyed by the enemy’s navy, but that it might be impossible to bring gold over to this country. This had to be foreseen and provided for. The joint stock banks, however high their gold reserves, could not alter this. Therefore it was necessary, apart from these reserves, to meet immediate emergencies by the issue of legal tender notes. Though afterwards the Bank of England was credited with enormous amounts of gold, this gold did not come to London. It was placed to the Bank’s account, or credit, in South Africa, Australia, and Ottawa. This restricted probably the supply of gold coin at a time when there was an unprecedented demand for small currency for our military requirements and in our vast military camps. Though some industries may have slowed down greatly, others worked at high pressure, thereby probably more than offsetting the inactivity of others. And allowance must be made for the thousands called to the colours who might otherwise have been parasites. By joining the army their aggregate consumptive powers increased. All these developments had to be pre-calculated, apart from the positions of the joint stock banks and their preparations for panic. It was not the time to hoard gold, but to see that legal tender currency was provided in ample measure.

Ample measure is not superabundance, and if the needs were just met nothing further was necessary. Assuming, therefore, that they were just met and no more, we may ask whether or not it would be wise to withdraw the notes when the war is over and normal conditions are restored. It is, perhaps, too early to reply in dogmatic fashion.

We must take into consideration that we may never again see a world-war and never again face a crisis such as we faced in August last. But I see no powerful objection to the notes remaining. We may regard them as the nucleus of the nation’s reserve fund, the liquefying of its hidden credit, or wealth reserve, as the veritable “I believe” in the immeasurable potential wealth of the country. The War Loan is another such reserve, a reserve representing the present and future credit, or wealth, of the country. The country’s potential wealth is the security behind it. And the Treasury note issue may be regarded as part of the loan, for the gold “ear-marked” against it has probably come out of that loan. If the notes were redeemed and the gold released again, the gold would go into circulation and form part of the banks’ reserves as before. By retaining the gold the Government would have that store of gold which critics have been asking for. So far as they are concerned, therefore, their wishes would be fulfilled. They could gaze with satisfaction on this store of gold, for the delicate problem has been solved as to who should buy it and store it and bear the expense of it.

Evidently it is the intention to have a gold reserve equal to 100 per cent. of the notes in issue. I see no urgency in this, no vital necessity. The notes could be based partly on gold and partly on Consols. I think a reserve equal to 50 or 60 per cent. in gold would be ample.

If posterity is to benefit more from the war than the present generation, why should it not bear a goodly part of the burden?

It may be objected that Consols are a depreciating security. They are an appreciating security also, and years hence they may have a much higher value than they have now. Gold also appreciates and depreciates continually, measured by the prices of securities and commodities. And the entire wealth of the country is constantly appreciating and depreciating.

If the credit of the nation years after the war becomes much higher than it is now, then to secure the notes on the credit of the nation is to secure them on something that will rise in value.

This issue would not be like the varieties of paper issues in Germany, whose credit has depreciated and will continue to depreciate as her wealth diminishes and becomes less negotiable. She cannot, as we can, pay for goods entirely with goods, owing to the destruction of her commerce. She must pay in gold; in other words, she must live on her capital. And she cannot live on her capital and speedily renew it. There must be considerable destruction, because it cannot quickly reproduce itself.

I would, therefore, base part of the new issue on a sound security like Consols, which is representative of the country’s credit, or wealth. The notes themselves are representative of its wealth, therefore Consols would be an extra security. I would not advocate the withdrawal of the notes, because the machinery has now been provided for possible use at a future crisis. The machinery could be set in motion again without resorting to the cumbersome process of suspending the Bank Charter Act. It gives us a provision for unknown contingencies.

To keep a limited amount of Treasury notes in existence should be no more a potential danger to the future of our financial fabric than the issue of a huge war loan. On the contrary, they should help us the better to bear the burden of a war loan if there be no improvident, or over-issue of them. They should be no greater menace than the sudden, prodigious output of gold which we could not use. We would not declaim against the imports of huge quantities of gold each week and the corresponding increase of currency. If so arbitrary an increase could do no harm and would be considered beneficial, then a limited supply of other currency, such as our Treasury notes, should not be harmful. And if the discounting of millions of unnegotiable pre-moratorium acceptances, creating currency in such abundance as to make it exceedingly cheap, is not harmful, then the issue of a limited quantity of Treasury notes, against which the Government is setting aside an equal quantity of gold, should not be harmful. To predict that it will bring economic evil in a distant future that cannot be foreseen, is as valuable as many another theory that has failed to stand the test of reality.

It should be no more harmful to the future than the issue of Bank of England notes has been, based on a book debt and securities, during the last seventy years.