CHAPTER XXI

CONFIDENCE AND GREATNESS

Confidence, I have said, is, in the production of economic wealth, the vitalizing element. In economics it plays the part that faith plays in religion. Confidence and credit have like derivations, like connotations. Confidence is a confiding in, credit a believing in. But, we must ask, a confiding or believing in what? Confidence, the spirit of economic prosperity, is distinct from what is called Lombard Street credit. Confidence is vastly more potent than Lombard Street credit. If confidence be dead Lombard Street credit cannot of itself revive it. But confidence can revive Lombard Street credit. When the nation is prostrate and languid confidence alone can revivify it. It is the economic tonic.

In the money article it would excite derision if we wrote: “In Lombard Street to-day confidence was again in superabundant supply, and lenders were offering it on nominal terms. Confidence over the night could be obtained in liberal quantity from 1½ per cent. downwards, and for a week at no more than 1¾ per cent. In fact, balances of confidence were unlendable. Owing to the cheapness of confidence the discount market was again exceedingly weak, and rates continued to fall.”

Yet, it is said, we have built up in this country a vast superstructure of confidence, or belief, based on a slight foundation of gold.

Now there may be in Lombard Street, and often is, a vast amount of “credit,” but merchants and the public have not the confidence to use it. Why? To quote Mr. Withers: “Credit depends on the assumption that goods produced will come to market and be sold and that securities that are based on the earning power of production will fetch a price on the exchanges of the world.” In other words, if we have no confidence in the future, we are afraid to spend our money. So we eke it out, or hoard it, or practise thrift and live in misery. And if we cease to buy we cease to consume, production diminishes, goods perish in markets, and men are thrown out of employment.

When we say the credit of the British Government stands high, we do not mean that the credit-money of the Government has a high value, or price. We mean that confidence in the British Government--that is, in the British nation--is exceedingly strong. When, therefore, foreigners buy British Consols they buy them because they know they can have strong confidence in British wealth and British character: not because our joint stock banks have high gold reserves, nor because London is the world’s banker and a free market for gold. Foreigners know that our gold reserves are insignificant compared with the gold reserves of the leading continental countries, but they know that Great Britain is the richest and the _greatest_ country in the world, and the British Empire the richest and greatest empire the world has seen.

Confidence, therefore, is based ultimately upon _greatness_, and our greatness as a nation and an empire was never more strikingly demonstrated and vindicated than during the war crisis. Greatness can exist, therefore, apart from gold reserves.

Let us look back upon the years preceding the crisis. Let us go back to the American crisis in 1907. This crisis was the result of a lack of confidence in America’s economic and moral greatness. It was the result of scandalous dishonesty, the kind of dishonesty that we know to be impossible in this country. Yet London could not but be shaken by the panic there. London was, indeed, shaken by it more than by the crisis last August. The United States took gold from London in huge quantities at a loss, and the Bank of England rate, in order to try to stop these exports, had to be raised to a high figure for an indefinite time. Some of our banks were even accused of assisting the United States to the hurt of our own banking position. But the storm was faced and weathered. Years before then it had faced and weathered another great storm in the Baring crisis. These historical happenings show how mightily strong is that superstructure we have raised in our midst, whether it be a structure of paper or of iron.

Then came the Morocco crisis, which was the beginning of the Stock Exchange depression, and which has culminated in the European war. When I speak of Stock Exchange depression I distinguish it from trade depression, for depression on the Stock Exchange often coincides with trade activity. The Morocco crisis brought the fear of war upon the world. If Germany was prepared one day to fight she began to make financial preparations for it. There can be little doubt that she prepared insidiously for this by depressing in recent years values on the Stock Exchange, selling securities to weaken us and strengthen herself. This culminated in the colossal selling weeks before the war, and in the heavy purchases of gold in the London bullion market.

There were, however, other unhappy events. There were the revolution in Mexico, the financial crises in Argentina and Brazil, the political and financial crises in France, the Balkan wars, the labour upheavals in South Africa, the epidemic of strikes in this country, the failure of the Birkbeck Bank, the Home Rule crisis, and the financial troubles of our colonies and heavy borrowings on their part. One trouble quickly followed another, peril succeeded peril, and never, perhaps, has the world struggled amidst such political and financial trials. They were years of darkness, and the dawn of a new and a brighter day seemed remote. The nations were groping, knowing not what new peril would confront them. Then the greatest peril of all came in the world-wide catastrophe.

These constantly occurring troubles could not but gradually weaken confidence in the future. When a man gropes his way in an impenetrable fog, in a place strewn with snares and pitfalls, ignorant of his whereabouts, knowing not whether he is progressing or going round in a dangerous circle, he cannot feel confident of avoiding a fatal end. He can trust only in hope and in his destiny.

This nation trusted in its destiny. Amidst these multiplying trials and difficulties it trusted in the strength of its own soul. Therefore, while prices were falling on the Stock Exchange, trade was growing and booming. More capital for trade was needed. So wealth in the shape of securities was turned into cash capital, which helped the downfall in stocks and shares. There was no lack of confidence evidently in our economic position and future. Our economic prosperity is not dependent upon Stock Exchange speculation. The Stock Exchange has often boomed and flourished during economic depression. This is because, when we have idle capital or surplus, we gamble with it, or invest it, if we cannot employ it profitably in business and commerce. We must never, therefore, assume that when inactivity reigns on the Stock Exchange and prices fall there, and stocks and shares become depreciated, that the nation is losing confidence, and that economic stagnation has come. If prices fall on the Stock Exchange through political and other causes, and because merchants and others are turning securities into cash, the aggregate value of the nation’s wealth may be rising and accumulating far in excess of the depreciation on the Stock Exchange. It is probable that this has been so in recent years. Banks, for instance, have had to write down their investments year after year, yet they have earned large profits and have easily maintained their dividends. They could not have done this unless their losses in one direction had been counterbalanced by their gains in another. So it has been with other great financial institutions. They have easily kept out of the bankruptcy court.

We have had a remarkable demonstration, then, of the power of confidence even in recent years and in last year’s crisis. The measures taken by the Government did not weaken that confidence, but strengthened it.

Take the moratorium, the first real moratorium this country has experienced. Had academic critics been told in the beginning of July that war would break out in the beginning of August, and that the Government would declare a moratorium, I believe they would unanimously have predicted disaster, complete and irretrievable. If they foresaw disaster as the certain end of a steady increase in armaments, nothing short of the fall of the skies would follow a moratorium. Nothing would more surely precipitate a panic, for if anything would bring about a state of bewildering confusion it would be a moratorium.

Once again, then, the imaginative vigour of these prophets was overrated. It was not equal to the strain of foreseeing the probable effects of unexperienced causes. The position was tackled, not by pedants, but by practical minds; not by nervous pedagogues, but by bold experts. And the shallow-minded and timid amongst us were amazed. We were veritably awe-stricken by the cool skill of our financial mariners steering us in safety in the unchartered waters of an unknown sea.

The prolonged Bank holiday, the indefinite closing of the Stock Exchange, were also decisions that in prior contemplation would have filled with terror the hearts of pundits, who unhesitatingly would have pronounced the doom of the mighty British Empire. The closing of the Stock Exchange would, in their convictions, so have stricken down confidence that it might never arise.

Then there was the subsequent arrangement made whereby those who had made loans to the Stock Exchange could obtain from the Bank of England advances up to 60 per cent. of the value of the securities held by the lenders against loans outstanding on July 29th. The Bank of England was not to press for the repayment of these advances until one year after the conclusion of peace, or after the expiry of the Courts (Emergency Powers) Act, 1914, whichever should happen first; nor would it demand in the meantime further margin.

This arrangement has also been highly successful.

The fixing of minimum prices for high-class securities on the Stock Exchange was another prudent step. It was artificial, but no one will pretend that the position in this country and throughout the world was a natural position. Measures of precaution and of defence were as necessary to protect the financial as the military citadel. Were they not taken, the consequences that might have followed might in all probability have been immeasurably worse than the consequences of restricted liberty. These minimum prices prevented attacks from the enemy, and, therefore, destruction by the enemy. The defensive position was greatly strengthened by the further restrictions imposed by the Treasury when the Stock Exchange reopened. These were designed to prevent wholesale selling by enemy countries and investors; and capitalists in this country were thereby saved from the incalculable losses such sales might have occasioned.

All the measures taken by the Government in this unprecedented crisis must be tested by their success. Two or three years hence we shall be able to survey them in clearer perspective and in truer proportion. But we can say with assurance even now that they have been successful. The real measure of that success we may calculate with greater certainty some day.

The banking position and the banking system have stood calm amidst it all. Even had the banks or the nation possessed that hypothetical reserve advocated by some, and had it at hand in some safe corner of London, this would not of itself have made the position more secure. Other remedial or precautionary measures would still have had to be taken. Had it not been the particular measures that were actually conceived and taken, there would have been others. But we happened to be fortunate in the measures that were adopted, measures that deepened and strengthened the nation’s confidence.