PAPERS ON CUEEENT FINANCE MACMILLAN AND CO., LIMITED LONDON BOMBAY CALCUTTA MADRAS MELBOURNE THE MACMILLAN COMPANY NEW YORK BOSTON CHICAGO DALLAS SAN FRANCISCO THE MACMILLAN CO. OF CANADA, LTD. TORONTO PAPERS ON CURRENT FINANCE BY H. S. FOXWELL, M.A. FELLOW OF THE BRITISH ACADEMY PROFESSOR OF POLITICAL ECONOMY IN THE UNIVERSITY OF LONDON MACMILLAN AND CO., LIMITED ST. MARTIN'S STREET, LONDON 1919 COPYRIGHT GLASGOW : PRINTED AT THK UNIVERSITY PRESS BY ROBERT MACLEHOSE AND CO. LTD, CONTENTS PAGES INTRODUCTION - - ix PAPER I BBITISH WAB FINANCE. Article in Economic Journal, Dec. 1910 1-33 The financial position on the outbreak of war : relatively weak reserve, shortage of internal currency, inconverti- bility of international currency, bankers' " liquid " assets frozen, 1-8. The emergency relief measures, excessive, 8-13. Services of the Bank of England, 14. The Stock Exchange, 14-17. The Currency Notes : as emergency currency, and as a means of concentrating gold, 17-24. Our financial methods : remarkable success of the Treasury Bill, the system of continuous borrowing, 24-27. Real problem behind the machinery of finance, the balance of production and consumption, not adequately adjusted, 27, 28. Hence exchange difficulties, met in various ways, 28-30. The only final remedy must be found in maximum efficiency, minimum consumption, 30-33. PAPER II WAYS AND MEANS. Article in Economic Journal, Mar. 1916 - 34-68 The financial outlook in February 1916, 34-37. The pre-war system of raising loans has undergone a remark- able transformation, 37-39. Continuous Borrowing : its success in Great Britain and France, certain adjustments required, preferable to financing by big loans, 39-51. Loans must be raised abroad to correct the exchanges, 51-55. Vital importance of the Stock Exchange, now paralysed by restrictions, 55-57. War borrowing should be popularised, as in France, 67-59. Thrift, long dis- couraged in this country, requires to be stimulated, 59-62. Premium Bonds, 62, 63. Public waste, 64. Taxation as a means of enforcing Economy, 64-68. 417173 vi CONTENTS PAPER III PAGES THE NATUKE OP THE INDUSTRIAL STRUGGLE. A Lecture at the Royal Institution, Apr. 19, 1917. Reprinted from the Economic Journal, Sept. 1917 69-96 Various conceptions of business competition : is it War, or Mutual Service, 69-73. Forms of business practice infinitely varied, as to aims, methods, rules and standards of honour, may be roughly grouped under three heads, 73. Competition for efficiency, 73-75. Unfair and fraudulent competition, 75-79. Predatory competition, aiming at the capture of the market, 79-84. The State obliged to regu- late the competitive contest, and sometimes takes a hand in it, 84, 85. Organisation and scientific control the order of the day, 85-88. A certain prejudice against both in this country, but the presumptions in their favour irre- sistible, 88-91. Trade war as waged by Germany, 91-94. Need not be imitated here, but the predatory element in business will remain, and what is urgent is to raise the standards of conflict, whether military or commercial, 94-96. PAPER IV THE FINANCING or INDUSTRY AND TRADE. A Lecture at the Royal Institution, Apr. 26, 1917. Reprinted from the Economic Journal, Dec. 1917 97-134 The industrial bank a French creation, developed in Ger- many, 97-98. Attention called to the question in England, 98-100. Is industrial finance too " adventurous " for our banks ? 100-104. English banking is quite peculiar in its type, 104-106. It is first-rate of its kind, and has carried remittance and clearing to perfection, but these services involve enormous call liabilities, 106-109. Hence a ten- dency to financial rather than industrial banking, because assets more "liquid," 109-112. Assistance to industry mainly limited to short finance, 112, 113. German banking, in structure and scale much like our own, is very different in its financial policy, 113-118. Its intimate connection with German industry, 118-121. Encroaches unduly on the Stock Exchange, 121, 122. Is elaborately organised for promoting over-seas trade, and for " peaceful penetra- tion," 122-125. Our resources for work of this kind quite unrivalled, but not adequately organised, 125-128. We need Issue Houses which will devote themselves to domestic industry rather than to international issues, 128-132. Recent developments : the British Trade Corporation, 132- 134. CONTENTS vii PAPER V PAGES THE BANKING RESERVE. A Lecture to the Chartered Institute of Secretaries, Feb. 24, 1909. Reprinted from The Secre- tary for Mar. 1909 135-170 The question urgent, and of national concern, 135-138. Banking Reserve defined : does not strictly include money at call, nor till-money, nor even all " cash," 138-144. Nor is locked -up money reserve, hence the failure of the old reserve law of the United States, 144, 145. The reserve position in Great Britain, 145-148. Some specially danger- ous forms of liability, 148-152. The position in case of a first-class war, 152, 153. Reasons for deeming our reserve insufficient, 153-156. Alternative expedients : pull of the discount rate, purchase of gold at a premium, sale of securities, etc., collective guarantee, emergency note issues ; all open to objection or inadequate, 156-160. Some suggested reforms : fuller publicity and better returns, 160-162. The whole responsibility can hardly be thrown on the Bank of England, though there must be unity in the discount policy, 162-164. There might be a second reserve con- tributed by the Clearing Banks, and an ultimate reserve contributed by the State, these new reserves to be succes- sively available as the pressure in the .market increased, 164-170. PAPER VI THB AMERICAN CRISIS OP 1907. A Lecture to the Chartered Institute of Secretaries , Mar. 31, 1909. Reprinted from The Secretary, April and May, 1909 171-219 Essentially a banking crisis, it illustrates the question of reserve, 171-173. Neither the industrial nor the financial conditions were specially unsound in Oct. 1907, 173-178. The fault lay in the banking system, 178-180. The United States system described, and contrasted with our own, 180-186. The Reserve Law, how it worked, 186-192. History of the crisis : speculation engineered by bank and trust control, 192-196. Run on the banks, intensified by expectation of the usual premium on currency, 196-198. Banks suspend payment and hoard, 198-202. Legal holidays, 202. Irregular currency issues, 203, 204. Government relief measures, and shipments of gold from London, 204-206. Some effects of the crisis, 206-208. Remedial legislation: the A Urich : Vreeland Bill, 208-211. Elastic banking, not elastic currency, what was needed, 211-213. This implied central control, such as was exercised by the great national banks in Europe, though there were difficulties in establishing such control in the United States, 213-219. viii CONTENTS PAPER VII PAGES INFLATION : IN WHAT SENSE rr EXISTS ; How PAR IT CAN BE CONTROLLED. An Address to the Institute of Actuaries, Mar. 26, 1917. With an account of the Discussion and a Reply to some of the Criticisms. Reprinted from the Journal of the Institute, No. 268, Oct. 1917 - - 220-262 General concern on the subject of inflation, 220-222. Different meanings attached to the term : First, loss of parity with standard coin, 222-224. Secondly, loss of parity with a foreign currency, 224, 225. The present state of the exchanges, 225-229. Thirdly, the rise of prices, 229. This rise is international, and means that gold itself is depreciated, 229-232. It is due to the enormous increase in the purchasing power of Governments, 232-236, shown here in the rise in bank deposits, 236-238, and also to a certain shortage in productive power, 238-240. Borrowing by big loans creates more inflation than continuous borrow- ing, as Mr. Drummond Fraser's charts show, 240-245. The depreciation is not so much in our currency, as in gold itself, 245, 246. Abstract of the discussion at the Institute of Actuaries, 246-262. APPENDIX I THE GROWTH OP MONOPOLY, AND ITS BEARING ON THE FUNC- TIONS OF THE STATE. A Paper read at the Bath Meeting of the British Association, Sept. 7, 1888 - - - 263-277 Contrary to the expectation of Adam Smith and his con- temporaries, we find competition tending to result in monopoly, 263, 264. Competition is a selective and tran- sitional, not a settled or permanent state, 264. Modern developments of transport, etc., all favourable to the growth of monopolies, 265. But this growth has certain limitations, 265, 266. Monopoly defined, 266. Monopolies classified, 267. Combination not so enduring a basis of monopoly as fusion, 267. Monopolies of local service inevitable, 267, 268. The reasonable attitude towards the new monopolies, 269, 270. Their advantages, to the public, to those employed, 270, 271. Certain dangers, 271, 272. State administration open to more objection, 273, 274. But public control and enforced publicity are essential, 274, 275. If excessive profits are made, they can be taxed, or shared with the consumer or with the employed, 275, 276. The alternative to State Control is State Socialism, 277. APPENDIX II FIXED EXCHANGE WITHIN THE EMPIRE. A Letter to the Bankers' Magazine, Feb. 15, 1918 278-280 INTRODUCTION THE constant requests I receive from university students and correspondents at home and abroad for copies of one or other of these papers have led me to think that their publication in this form might be convenient ; the more so, as the journals in which some of them originally appeared are now out of print. Generally speaking, with only slight excep- tions, the papers are reprinted without alteration, and with no attempt to bring the figures up to date. The progress of events is now so extraordinarily rapid, and the situation changes so much from day to day, that only the daily press can keep fully abreast of the movement. The connection between the papers may not be obvious at first sight. But they all relate either to financial problems directly raised by the war, or to problems which have gained new interest and urgency in view of the financial reconstructions which the war has made inevitable. A few words by way of introduction may serve to make this clear, and to summarise the main topics treated in the volume. ix x INTRODUCTION The first paper, mainly historical and critical, deals with the war crisis and the financial emergency measures, and may be found a useful compendium for reference as to the general financial policy followed in a period which must always figure in world-history. It also recommends the now-accepted method of continuous borrowing, and concludes with a general estimate of the economic and financial outlook. In the second paper, the question of our financial resources is considered in more detail. After a brief sketch of our previous loan policy, the method of continuous borrowing is further advocated ; and French experience is given in its support, as well as in favour of interesting the small investor, and the people generally, in the war finance. A protest is made against the discouragement of private thrift, and the waste in public expenditure : and the paper concludes with a few words on the necessity of heavy taxation. The next two papers are concerned with the financ- ing of industry, a problem which must assume immense importance after the war, when the demand for capital will be unprecedented. In the first of these, an attempt is made to indicate some of the most striking developments of modern business compe- tition, and to show that they involve an irresistible trend towards larger industrial organisations, not only for greater efficiency, but for effective defence against forms of trade activity closely analogous to INTRODUCTION xi those of war. We are thus able to judge better of the kind of financial assistance English industry will require ; and in the next paper the question is considered in what way this assistance can be best provided. It is shown that what we regard as " bank- ing " in England is of a quite peculiar type, and is prevented, by the very defects of its qualities, from discharging all the services rendered to industry by " banking " in some other countries ; but it is con- tended that, outside what we here call banks, the English market has unrivalled financial resources, which only require suitable organisation to make them able to meet all reasonable demands. The question is not definitely raised in this fourth paper, but it will be gathered that the writer is of opinion that, even for England, the effective financing of her industries is of more importance than her inter- national clearing business, and indeed is a primary condition of her mastery of exchange and her con- tinued hold of the international position. Precise estimates of the profits on our international business are not possible ; but it is safe to say that a loss of one half of it would be balanced by an increase of one per cent, in the national income. It can hardly be doubted that if half the skill and attention now bestowed on international finance were devoted to domestic finance, the increase in the national income might easily be five times that percentage. The fifth and sixth papers, on Banking Reserve, xii INTRODUCTION and the Crisis of 1907, may not seem to be so directly concerned with war problems as the rest. Both were designed to illustrate the question of the national reserve, and of the functions of the Central Bank. The immense financial liabilities created by the war have forced these matters to the front. They are now under consideration by a Committee, and it can hardly be doubted that when the Committee report, they will recommend some radical changes in existing arrangements. The old Act of 1844, on which our present system is based, was never defensible, and has been condemned by experts of all countries, so that its disappearance may be welcomed ; but so many wild proposals are in the air as to the changes which should be made in the constitution and functions of our great national bank, that a few considerations on the essential principles of a banking reserve, always fundamental in finance, seem to be in place here. The question had been constantly under dis- cussion in the ten or fifteen years preceding the war ; and we are given to understand that just before the war broke out the leading clearing bankers had agreed upon a scheme of reform, and submitted it for consideration to the Bank. It was, unfortunately, just too late ; and we had to face the war strain unprepared. Experts were agreed that our reserve position was deplorably inadequate for such an emergency, but the most pessimistic hardly expected to see a general moratorium. It is now admitted INTRODUCTION xiii that this was unnecessary, except as a concession to panic ; which panic, again, was really due to the general sense that we were caught unprepared. However, the events of the crisis of 1907 led to a complete reconstruction of the American banking system, under the Federal Eeserve Act, to which the brilliant financial achievements of the United States during the war are mainly due ; and it may be hoped that reflection on the history of the war crisis will have equally salutary effects here. There is certainly a revived interest in the subject, particularly evident on the part of the Chambers of Commerce, but by no means confined to these bodies ; and this has led me to think that the inclusion of these two papers may not be found altogether untimely. The seventh paper deals with the question of the alleged inflation of our currency. Perhaps there is nothing in our war finance which has provoked more discussion, or given rise to so much anxiety. The view taken in the paper is on the whole optimistic. The rise in prices is held to be caused, in the main, not by operations originating in the currency, but by the enormous increase of Government expendi- ture ; which, in so far as it is really required for the effective prosecution of the war, no one would dream of restricting. The effect has been to more than double the total national expenditure ; and it stands to reason that the currency by which the payments are handled must increase to something like the same xiv INTRODUCTION extent. That this necessary or minimum expansion of currency has been gratuitously exceeded, in conse- quence of wasteful expenditure, and particularly of extraordinary advances in wages conceded to pressure, I entirely agree. But here we are brought up against questions of politics, which lie outside the limits of a financial study. Great stress has been laid in very well informed quarters upon the diffi- culties we shall have to meet in returning to an effective gold standard, and in rectifying and main- taining the foreign exchanges. The difficulties will be serious ; but here, again, I must remain an opti- mist. The resources of civilisation in this regard have by no means been exhausted; they have indeed been enlarged in some respects by certain developments of the war finance : and with the co- operation of the United States these monetary diffi- culties will soon yield to treatment. But this is not to say, and I hope nothing in these papers will be construed as saying, that the strictest economy is not essential. On the contrary, the whole argument assumes that every possible check is imposed upon some quite indefensible waste and recklessness in expenditure. The War Bonus policy, for instance, with its endless reaction on prices, might easily be carried to a point which would make financial recovery nearly impossible, to say nothing of the grave pro- blems it is leaving us to face on the return to peace conditions. INTRODUCTION rv As is stated in the paper itself, the Address on Inflation was designedly prepared to start a discussion on the subject, in which, as was expected, the con- clusions of the author were acutely criticised. It is thought, therefore, that the reader will welcome a reprint of these interesting criticisms, all the more as they may serve to correct any undue emphasis or bias in the opening statement. In an Appendix will be found a short paper on Monopolies, written thirty years ago, and a letter upon the question of Fixed Exchange. The paper may have some interest as a very early defence of the movement for the consolidation of business enterprise, of which so much is said in the third and fourth papers. Perhaps it will go to confirm the general contention in these papers that a radical increase in the scale of business organisations is not only inevitable, but to be welcomed in the public interest : in any case it is a proof that the views expressed there are something more than hasty im- pressions, or a mere reflection of the fashion of the day. As to the Letter, it may serve to throw a little additional light on the very brief reference to the subject on p. 106 of the text. Taking the papers as a whole, it may fairly be claimed that the suggestions they contain have been justified in the main by the subsequent course of events. The independent rate for foreign money, and the .lower rate for bills, recommended in the xvi INTRODUCTION second paper, were ultimately adopted, though only after a delay which has cost the nation dear ; the war loans have been effectively popularised ; and some steps have already been taken by certain banks towards the more disputable suggestion of fixed ex- change made in the fourth paper. On what are perhaps the main contentions of the volume, there is now very general agreement. The Times, in a leader of Sept. 23, 1918, speaks of continuous borrowing and the bank amalgamations as " the two novel features which must always make the past twelve months a remarkable period in our domestic financial history," and gives very good reasons for approving both. Business fusions, of course, have not been confined to banks, or to this country. They are in active progress in various forms of enterprise, and in all the principal coun- tries, and may fairly be regarded as the most striking economic feature of our time. It must be confessed that in one respect the work of writing these papers has been difficult and un- satisfactory. Just at the time when a scientific handling of our finance is most urgently required, the investigator is deliberately deprived of the neces- sary statistical basis for his inquiry. It cannot be for the reason so often assigned, for some of the most important facts so withheld are known to numbers of persons, and must certainly be known by the enemy, if they interest him. The Statistical Abstract INTRODUCTION xvii for 1916 is only announced as I write these lines : the Mint Report for that year has not yet appeared : even the meagre monthly reports of the banks ceased, when they would have been most instructive, in the middle of the year 1915. This policy of secrecy and mystification is the most ugly feature of our war regime. It is to be hoped that it will end with the war. Publicity is the salt without which democracy (and we may add, bureaucracy) would soon become rotten ; it is the indispensable condition of the healthy operation of public opinion. It only remains to discharge a pleasant duty. For permission to reprint these papers, most cordially given to me, I wish to thank the Editor of the Economic Journal, the Council of the Institute of Secretaries, and the Council of the Institute of Actuaries. I am also under obligation to the Editors of the Post Magazine and the Insurance Record for assistance derived from excellent reports in their Journals. CAMBRIDGE, September 25, 1918. I. BRITISH WAR FINANCE. 1 British War Finance, 1914-15. By W. R. LAWSON. (London: Constable and Co. 1915. Pp. vi + 367.) War and Lombard Street. By HARTLEY WITHERS. (London : Smith, Elder and Co. 1915. Pp. viii + 171.) Manual of Emergency Legislation. Financial Edition. To June 4th, 1915. Pp. 205. Edited by Alexander Pulling, C.B. Published by Authority. (London : Darling and Son. June, 1915. Price Is.) " THE financial position to-day is serious." This declaration of the Prime Minister, made in circum- stances of more than usual formality, on November 2nd, 1915, suggests that a brief survey of the war finance, and of the financial problems that now con- front us, may not be altogether untimely. Three weeks earlier the Financial Secretary, in a remarkable speech on the Finance Bill, had given what to the public generally was the first official intimation of the real nature of the situation, and of the uncom- promising transformation of our ordinary economic life which it demands. It is further convenient for 1 An article contributed to the Economic Journal for December, 1915. F.C.F. A 2 PAPE&S ON CURRENT FINANCE a review of the whole position that we have in the Chancellor's recent Budget speech authoritative figures and estimates which bring the necessary data for discussion nearly up to date. Many similar reviews have already appeared, and anyone writing on the subject must, in particular, be under obligation to the works of Mr. Lawson and Mr. Withers mentioned at the head of this page, as well as to the admirable compendium of war legis- lation, edited by Mr. Pulling, the financial volume especially. Mr. Lawson and Mr. Withers both deal with the past rather than with the future : with the war crisis rather than with the fundamental finance problems caused by the war expenditure. But the history they have sketched so admirably, and the acute criticisms with which the books abound, are full of instruction for fuller inquiry. Their work will serve as a text for a good deal of what can here be said. Mr. Withers's book may be first noticed as the earlier of the two. It seems to have been written in December, 1914, and naturally is almost exclu- sively concerned with the war crisis and the various emergency measures by which it was met. It is an oft-told tale, now pretty familiar to the public ; but Mr. Withers's account, especially the part that deals with the bill market, will have permanent value. The position at the eve of the declaration of war was tersely summed up by Mr. Asquith last BRITISH WAR FINANCE 3 March. 1 " We were confronted at that moment with the double risk the risk of a shortage of internal, and of a general discredit of international, currency. " The shortage of internal currency was more or less universally experienced, by neutrals as well as belli- gerents. But international currency means, for the most part, the London bill : and the discredit of this currency, involving as it did a mass of paper estimated at 350 millions sterling, was a special danger of the gravest kind for the London market. The shortage of internal currency was met in most countries by an expansion of the note circulation, sometimes of regular, sometimes of emergency issues. There seems generally to have been a run on the banks, as well as a remarkable scarcity of small change. On the Continent we find Governments, Banks, Municipalities, and even Chambers of Com- merce issuing small notes ; in some cases for values as low as a mark or a krona or a franc ; even quarter franc notes were issued in France. 2 This scarcity of small change, it is said, was due partly to mobilisation needs, but mainly to hoarding. It does not seem to have been seriously felt in this country. Nor was there, so far as can be judged, any appreciable run on the banks, 3 apart from the 1 The whole statement will be found in Lawson, pp. 11, 12. 2 M. Thery tells us (12th Nov., 1915), that the scarcity of small change continues in France, in spite of issues of 1 and 2 franc notes to the amount of 43,567,500 francs by sixty-six Chambers of Commerce. 8 " Not even on a savings bank." Lawson, p. 103. 4 PAPERS ON CURRENT FINANCE inevitable demands of an August Bank Holiday, though contrary statements have been made. There is, at any rate, no trace of any such movement in the Monthly Bank Keturns. The proportion of " cash " shown for the month of August was 20*1 against 15 '2 for July; and the amount 125 millions as against 91j millions. The July figures were quite normal, showing exactly the same proportion of cash as the previous year. Too much must not be made of these figures. Our bank returns are deplorably inadequate, concealing precisely what it is most important to know : " dim candles, lit to make darkness visible," as Mr. Withers aptly puts it. 1 Keturns apart, however, it seems that so far as can be discovered by inquiry, there was nothing deserving to be called a and even as high as 12s. 6d. later. The ex- planation seems to be partly that the cost of insurance rose, owing to the large consignments .of gold going out in a single vessel (the Lusitania).* This gold is I 1 Now world-historical.] 206 PAPERS ON CURRENT FINANCE only just returning to England. The shipment of 280,000 to the London City and Midland Bank, and other shipments received about the same time, estimated to amount to nearly a million sterling, were said to be the first made direct to this country from New York since June, 1907. I see we are getting a large shipment of eagles this week, and the Bank reserve is rapidly improving. I cannot pretend to follow out the effects of the crisis to-night. They are world-wide in their range and are far from exhausted yet. My interest is rather in the causes which provoked and aggravated it. But I may note some of the immediate results. Monsieur Thery estimates the total failures in the United States as about 90,000,000, the trading failures amounting to more than 40,000,000, and the bank failures to nearly 50,000,000. In New York State alone twelve banks failed for 20,000,000. According to the Railway Magazine, March 1909, " no less than twenty-three railroads went under, the aggregate mileage of the lines being over eight thousand miles. The funded debit of the defaulting roads was well over 54,000,000, whilst the stock capital exceeded 65,000,000 hence the interest on about 120,000,000 of capital was in default." Still the United States railways have seen worse times. The slump in securities was perhaps unprecedented, though much of it had taken place before the crisis of 1907 broke out. Some of the largest railway stocks THE AMERICAN CRISIS 207 fell fifty per cent., many more from twenty to thirty per cent. ; and the total fall in the securities listed on the New York Stock Exchange is estimated at 1,000,000,000. This fall bore no relation to move- ments in intrinsic values ; it was almost entirely due to monetary causes, and the greater part of it has already been recovered. I have not time to discuss the most important consequences of the panic I mean the enormous increase of unemployment, and the general disturbance of trade. But I should ima- gine that the damage sustained by the world through the general industrial dislocation was at least ten times as large as the part of it represented by actual failures in the United States. The Unions reported thirty-four per cent, of their members as out of work in December 1907, as against 12*8 per cent, in December 1906, when they were also suffering from financial stringency. Six hundred thousand steerage passengers went eastward in the winter. There are always a certain number who go eastward at that season, but this was more than double the usual number. On April 7th, 1908, it was estimated that no less than 4,750,000 mechanics and labourers (not including agricultural hands) were out of work in the United States ; that is, about twenty per cent, of the total male adult population ; 750,000 in New York State alone. It is difficult to realise, impossible to exaggerate, the mass of misery implied by these figures. If it is the case, as I certainly think it is the 208 PAPERS ON CURRENT FINANCE case, that the greater part of this wreckage was pre- ventible, it must clearly be the duty of all concerned to discover and apply the necessary remedies. REMEDIAL LEGISLATION. In considering remedial measures, the first place is due to those proposed by the American authorities. The actual life of a nation, and the practical working of its institutions, are so complicated by inheritance of past experience and tradition, and so coloured by the special genius of the people, that it is rarely possible for foreigners to form a sound judgment as to the precise forms which any necessary develop- ments should take. As against this, the foreigner may have a certain advantage in his detachment from national customs ; and he may be permitted to say how the situation strikes him from his outside point of view. The experience of his own country in deal- ing with problems not essentially different will in- evitably provoke suggestions ; and if these are made in the more general sense, leaving questions of detail for the national expert, they may not be altogether impertinent and valueless. First, then, let me note the trend of the reforms proposed, and the legislation actually put into force, in the United States. The majority of reformers have sought in one way or another to extend the note issue, and especially to make it more elastic. It would seem THE AMERICAN CRISIS 209 that they feel the rigidity of the reserve law, and seek to compensate it by giving elasticity to the currency. Others fix on the redepositing of the re- serves as a main source of weakness, and propose various methods of checking this practice. Others, again, aim at encouraging banks to organise ; and, finally, there are some who advocate a Central Bank, though they seem doubtful whether the proposal would be acceptable. Special interest attaches to the first and only im- portant legislation passed since the crisis, which may be taken as some index to the points on which reform was felt to be most urgently needed. As Mr. Shaw had predicted, the panic was hardly over before a temporary measure was under discussion. This took the shape of a compromise, the Aldrich-Vreeland Bill, which passed May 30th, 1908. 1 The Act contains a mass of administrative detail which cannot be here reproduced ; but, broadly, it has two main objects first to provide for an emergency note issue, and, secondly, to encourage organisation of the individual banks on the basis of locality. The first section provides for the formation of " National Currency Associations" of National Banks for the purpose of extended note issue. Other sections provide for the issue of additional notes by individual banks upon 1 A reprint of this Act will be found in the Quarterly Journal of Economics, Boston, August, 1908. The essential clauses are given in Mr. Mason's paper before the Institute of Bankers : Journal, April, 1909. F.C.F. o 210 PAPERS ON CURRENT FINANCE the deposit of other than Government bonds, and by associations of banks upon the pledge of commercial paper ; such issues to be taxed at the rate of 5 per cent, for the first month, with an additional tax of 1 per cent, for each later month, until 10 per cent. is reached. Such issues, if made on commercial paper, must not be in excess of 30 per cent, of the " unim- paired capital and surplus (i.e. reserve fund) " of the banks. Thus we get an elastic issue, somewhat on the German principle, but with what seems the im- provement that the banks have, in the increasing time tax, a strong interest in reducing the issue to normal limits as soon as possible. The Act further provides that the banks shall pay not less than 1 per cent, on Government deposits ; but they are exempted from reserve requirements in respect of such deposits. Lastly, the Act creates a National Monetary Com- mission of eighteen members nine from the Senate, nine from the House of Representatives to recom- mend further changes dn the currency laws of the country during the six-year period to which the Act is limited. The Commission, I believe, is not ex- pected to report for about three years. It has already visited Europe, and is making an exhaustive study of European banking systems. We are told that the part of the Act that deals with national currency associations has not been well taken up. The individual banks seem to be reluc- tant to assume the joint liability imposed by the Act. THE AMEKICAN CRISIS 211 It is, indeed, as our own experience shows, very diffi- cult to secure co-operation between really independent banks, even for what are admitted to be the most necessary purposes. The main result of the Act, then, apart from the appointment of the Commission, is to enable individual national banks, under certain conditions, to make emergency note issues. If, subject to the reserves above made, one may venture to criticise this Act, conceived as a remedy for the weakness disclosed by the crisis, one would be inclined to say that too much stress is laid on the question of currency, when the real fault lies in the region of banking, and more particularly in the attitude of the banks towards their reserves. This has occurred to many foreign observers. As long ago as January 1903, Mr. Lawson wrote in the Bankers' Magazine that " elastic banking is required rather than elastic currency." This seemed to me exactly to hit the point. Mr. Boissevain, too, in the study to which I have referred, says that he does not think " the alleged inelasticity of the note issue is the main- spring of the evil." It may be granted that when notes are legal tender, elasticity of issues always has a certain value in cases of general internal panic, and in cases of exceptional foreign drains of gold. Yet it is not so absolutely indispensable in countries like the United States and Great Britain, where cheques are so current. But elasticity of banking accommodation is essential, whatever the system, in order to deal 212 PAPERS ON CURRENT FINANCE with the ebb and flow of business and speculative tides. To most of us it seems that the United States reserve law prevents this elasticity by accustoming bankers to regard their reserve as bearing a nearly constant, regular proportion to their liabilities. Mr. Boissevain holds that the legal requirement should only be regarded as the absolute minimum, and that there should be ordinarily a large surplus over this minimum forming the real banking reserve. He observes that people who constantly refer to the elastic cause regulating the issue of the Reichsbank often forget that, though at times, as on December 31st, 1907, it may have an excess issue of some thirty millions sterling, its reserve is always well above the legal minimum of 33| per cent. But it is asking too much of ordinary human nature to expect individual private banks to interpret legislation in this large and expensive spirit. Nor does it seem to be necessary for ordinary banks always to hold as a minimum reserves on a 25 per cent, scale. I doubt whether really elastic banking can ever be enforced by legislation. The practice has gradu- ally been established in this country, perhaps only within the last sixty years, by a series of painful experiences which have shown that only by the liberal use of the reserves can incipient panic be allayed. Where you have a mass of twenty thousand indepen- dent banks, and no possibility of joint action, it is even doubtful whether individual banks would be THE AMERICAN CRISIS 213 justified in adopting such a policy. It will never be really safe for them to do so until they are so far organised or consolidated as to be able to reckon on general co-operation in supporting the market. This is one of the many arguments for the association of banks which the Aldrich-Vreeland Act endeavoured to secure. Canada, with its thirty great banks, and Scotland, with its ten banks, owe much of their bank- ing solidity to this power of co-operation. There are obvious drawbacks from the public point of view ; but in banking relations security is primary, and worth paying for. It is noteworthy that the latest news from Canada is that " the tendency towards concentration of the banking business is not to be ignored." Yet we are told that just across the frontier the people of the United States are wedded to their system of small local banks, and that banks of the Scottish and Canadian type would not be possible there. It is difficult to find any difference in the general commercial conditions in the two countries which would justify this opposition of views. The greater scale of finance in the United States should point the other way. This brings me to the great fundamental issue, upon which most European students of American banking will be agreed I mean the supreme need of some central banking institution, to do for the United States what the great National banks do for Europe. Many minor improvements are possible in 214 PAPERS ON CURRENT FINANCE the United States system as it stands. The reserve law might be made more elastic, the rate of interest on redeposited reserves abolished or reduced, and the whole system of redepositing modified ; the Trust companies might be brought under stricter regulation. But none of these reforms would touch the root of the trouble. To put it briefly, American financiers are too big, and her financial institutions too small. The banks, which should control the big operators, are too often controlled and exploited by them. The central and authoritative control which is considered necessary in London, Paris, and Berlin is certainly not less necessary in New York. No market requires it more. It is exceptionally liable to be swept by waves of emotion, whether of panic or adventure; its financial operations are unprecedented, both for scale and audacity ; nowhere is speculation carried to greater lengths. To the American financier, says M. Thery, commerce and industry appear merely as the material for his speculations. These conditions seem to indicate the necessity for powerful banks, organised under, or in some relation to, a central controlling bank. Plans for such a bank have been put forward from time to time in the United States. Thus the Special Currency Committee of the New York Chamber, in October 1906, made this one of their alternative recommendations. Their central bank was to be jointly owned by the banks and the Government ; to THE AMERICAN CRISIS 215 have the functions of the present Treasury, and to rediscount for other banks. But in presenting the report, the chairman observed that, " while the ideal solution would be the establishment of a central bank of issue, it was not likely that Congress would adopt such a course." The difficulties are great ; we can only hope it may be found possible to overcome them. There seems to be a constitutional objection to a central Federal bank. I used to think that the question of State right was decided by the Civil War. But it is clear that there is still a strong reluctance to assent to the extension of Federal powers, and to all those forms of centralisation which modern progress seems to make inevitable. A feeling of this kind destroyed the Second Bank of the United States, and it may be strong enough still to prevent the foundation of a Third Bank. Many persons consider that the des- truction of the Second Bank was a great mistake, at least from the banking point of view. But whatever may have been the arguments in favour of a central bank at that time, they are incomparably stronger to-day. Now, as then, we want what Mr. Boissevain 1 calls a pivot for the whole system a bankers' bank, dominating and leading the money market, a rallying point in times of difficulty. But since 1834 new and more urgent reasons for such a bank have become 1 Mr. Boissevain's whole argument and plan for a central bank in the United States are well worth consideration. Mr. Boissevain writes with the twofold authority of a practical banker and an economist. 216 PAPERS ON CURRENT FINANCE apparent. The huge scale upon which modern busi- ness is organised, to say nothing of the dangerous licence of modern speculation, calls for a correspond- ing development in the banking system. Moreover, modern banking, and the problems of the modern money market, are increasingly international. They cannot be adequately handled from an insular, or merely domestic point of view. It is a special func- tion of great central banks, admirably discharged by the National Banks of Europe, to consider the international relations of the national banking and finance. The occasion of the crisis of 1907 naturally reminded many persons of the crisis of 1893. The two greatest monetary squeezes of recent times occurred in imme- diate proximity to a presidential election, an election turning in each case upon issues affecting powerful interests. It is not surprising that in both cases it has been asserted that the crisis was not a pure acci- dent. After all, these world-resounding catastrophes only repeat on a larger scale the minor market collapses to which we are so well accustomed, and which are every day and frankly attributed to an artificial origin. But however this may be, for both in 1893 and 1907 there was much in the general situation that exposed it to accidental disturbance, it is enough for us to recognise that the power exists to cause monetary stringency ; and that, however caused, such a stringency may have effects, neither intended nor THE AMERICAN CRISIS 217 convenient, which it is the business of sound banking to avert. Panic is a dangerous force to unloose ; it soon gets out of hand ; it is the first duty of the banker to prevent its inception. To do this, however, is beyond the power of the individual ; it requires organisation. Powerful disturbing forces must be controlled by institutions of proportional strength. The simple, ingenuous harmonies of old-fashioned political economy were built upon the assumption that the competitors in the business struggle were a crowd of individuals of something like the same order of magnitude, fighting upon terms of rough equality. I do not know whether there ever was an actual state of society of which this was true ; it never was less true than in the world of to-day. The assumption has broken down all round, alike in industry, com- merce, and finance. Everywhere increased inequality has led to the revival of powerful organisations, strong enough to exert control in the general interest. Trade unions, employers' associations, chambers of commerce, the great markets, trusts, and cartels but I need not attempt to enumerate them all. It would be strange if banking were to be the only exception to the rule, and not less unsafe than strange. But banking is not an exception. Throughout almost the whole Western world we find the banks increasing in size, becoming more closely organised, and headed by gigantic institutions representing the 218 PAPERS ON CURRENT FINANCE national interests. The United States is not able to resist the general tendency. Though her banks are still rigidly localised, and she has recently permitted banks of smaller size than before, some of the banks in the central reserve cities are of very respectable proportions. A certain control is exercised by the Secretary of the Treasury. In normal times he en- forces a somewhat minute and mechanical law on the individual banks, and keeps a fatherly eye on the whole system. When things come to the worst he appears as the deus ex machina, and empties the coffers of the State into the tills of the helpless banks. What more could be desired ? The answer is that this action of the United States Treasury, though it is a testimony to the need for a central bank, does not in any degree supply the place of such a bank. The Treasury is not a bank, but a Department of State. It is only connected with the banks through its duties as controlling the currency, and the insti- tutions which (and so far as they) issue currency. By virtue of holding the Government deposits it has a certain control over the market ; but this can only be exercised by arbitrary measures of a kind which seem open to much objection. It does not, and cannot, act as a central reserve bank, nor can it control the reserve policy of the banks. In short, it cannot attempt to discharge the most important functions of the ordinary European National Bank, nor would it be expedient that such functions should THE AMERICAN CRISIS 219 be discharged by a Department of State, even if it were possible. Larger banks, less localised, with more organisa- tion and a more elastic reserve policy, centring in, and under the leadership of, a great central bank these would seem to be the sort of reforms required to deal with the existing situation in the United States. In this way she might obtain a powerful banking system, able to keep in check the huge financial forces of the present day, and to see that the public interest receives no hurt. Whether such changes are practicable or not we shall probably learn before long. Meanwhile, the crisis of 1907 has a plain lesson for us. It is clear that at present the United States is the great storm centre of the financial world. We should see to it that our own reserves are strong enough to be proof against the cyclones that may originate there. VII. INFLATION: IN WHAT SENSE IT EXISTS; HOW FAK IT CAN BE CONTROLLED. 1 MY rdle to-night, as I conceive it, is a very modest one. I am here, by the invitation of your President, on the understanding that the Institute desires to discuss the question of Inflation, and that I am to make a statement, as methodically as I can, to open the discussion. My purpose, then, is mainly to clear the issues for debate ; and if I add an expression of my own opinion on some of these issues it may serve perhaps to present a target for the attacks which I am sure will follow, and thus to set the ball rolling. There is no doubt that considerable anxiety exists, an anxiety which has been expressed in very com- petent quarters, upon what is called inflation. I may refer, for instance, to a very able article by Mr. Oswald Falk in the Nineteenth Century for July 1916, in which he not obscurely hints that the international position of London itself may possibly be involved if some- thing is not done to check this inflation. Mr. Hartley 1 An Address delivered to the Institute of Actuaries on 26th March, 1917. 220 INFLATION 221 Withers in the Economist has continually returned to this subject. Professor Nicholson has introduced it, although his study is not completed yet, in the Economic Journal for last December. We are wait- ing for the figures upon which his statement is based, and consequently I cannot now deal with his position. 1 I might refer also to the references which have appeared from time to time from the pen of the dis- tinguished City Editor of the Morning Post, who has several times drawn our attention to the same point. Mr. Withers says in The Economist : " We believe that inflation has already done much harm by raising discontent in the country and increasing the cost of the war, owing to the rise of prices that it has helped to cause, and that everything should be done to check it." Well, we may admit perhaps that the rise of prices is to be deplored, though I should like to point out what is, of course, very obvious that the rise of prices is an effective check upon consumption, and at the same time a very valuable stimulus to pro- duction, and not only to production, but, if we are thinking of the case of this country, to supply from other countries. In fact, there is a natural harmony about the action of the rise of prices when the rise of prices is due to scarcity. What precisely is meant when it is suggested, as Mr. Withers suggests, that 1 The figures were afterwards published in a paper on Statistical Aspects of Inflation, read before the Royal Statistical Society, June 19th, 1917, and printed in the Society's Journal for July, 1917. 222 PAPERS ON CURRENT FINANCE this rise of prices is partly due to inflation I do not know. Mr. Withers is cautious ; lie says " partly " due to inflation. He specifies particularly the Trea- sury note issue and the advances that have been made by banks in various countries, not only the advances made by State banks, but the increase in bank deposits, so far as it represents advances to the public, an increase of what we regard in this country as currency bankers' money. I think it will be convenient before going further to make a more or less formal distinction between the different senses in which the word " inflation " has been used. I make no apology for introducing what some people would call an academic discussion to an audience of this kind. First, I think we have what may be called legal or internal depreciation, depre- ciation as known to law ; that is, loss of parity of either coins or notes or other legal tender currency in comparison with the standard unit, the standard unit in this country being the gold sovereign (not bar gold). If there were an inflation and a conse- quent depreciation of this kind, it would be mea- sured at once by the depreciation of the particular element of currency in terms of the standard unit. Supposing, for instance, that element were Treasury notes, we should find them at a discount in terms of the sovereign. Further, it might, if it went far enough, result in what William Cobbett used to call two prices : we should have a double price quotation INFLATION 223 for everything a gold price, and a currency price representing the element of the currency which was inflated and depreciated. I am not aware that there has been any depreciation of this kind in Great Britain. I have been on the look-out for it inces- santly, but I have not come across even an isolated case, although it is difficult to prove negatives, and it is conceivable that somebody may have offered a premium on the sovereign. I cannot speak so posi- tively for France ; I have been told that in France there is a premium on gold, but I do not think there is any quotation. That may again be owing to an act of State. We do not know how far the markets are free. In Germany we know there cannot be two prices. Germany enacted a law on the 23rd Novem- ber, 1914, which exactly corresponds to our Lord Stanhope's Act, which was passed during the Napoleonic Wars in 1811, an Act which made it penal to buy or sell gold coin at a higher price than its face value. That law was passed to put a stop to a bullion agitation promoted by Lord King, who had ordered his tenants to pay him either in gold or in paper to the value of the gold. The Act was abso- lutely effective. We do not know that two prices ever existed after the passing of Lord Stanhope's Act. The Americans tried a gold Act of the same kind in 1864, and were absolutely unsuccessful, the only result being that their paper at once jumped 40 points higher discount. Lord Stanhope's Act was 224 PAPERS ON CURRENT FINANCE effective, and the German Act apparently is effective. We find no quotations of gold in Germany, and we do not find double prices ; prices there are presumably paper prices. Let me now pass to a second sense in which a currency may be said to be depreciated. It may be depreciated in an external sense as a whole. It may lose its parity in terms of some foreign currency. In that case this international depreciation would be shown by the exchange rate, but for my part I do not admit that the exchange rate is a proof of the depre- ciation of the currency. I do not think it holds, vice versa, that we can infer depreciation of currency from the exchange rate. For instance, the American ex- change was depreciated in the most extraordinary manner in the first week of August 1914. I was told that exchange on London was actually sold at 7 dollars instead of 4'86 dollars. Nobody ever sug- gested that that argued a depreciation of the American currency in that ratio. There certainly was no infla- tion of the American currency. At any rate, nobody I suppose imagines that the American currency was in any way depreciated. The high exchange rate arose from circumstances mainly accidental the refusal on our part of accommodation which we had been usually ready to extend to America at that time. Many other examples of the same sort might be given. I could never agree with the Bullion Report of 1810 in holding that the premium on INFLATION 225 exchange was a necessary proof of the depreciation of our currency ; and it is worth observing that most of the very eminent Cambists who gave evidence before that Bullion Committee were opposed to the Eeport of the Committee on that point. They were, perhaps, in the best position to know what accidental circumstances will sometimes disturb the exchange, and they held that the discount on exchange could not be taken as proof of the depreciation of our paper. It is worth while, however, to see what the rates are at the present time. There are no exchange dealings with enemy countries. I will divide the remaining exchanges into three groups : first, the more im- portant Neutral exchanges, secondly the exchanges with our chief Allies, and thirdly the Scandinavian exchanges. Our most important Neutral ex- change is with the United States, and we know that that exchange dropped rather unfortunately in September 1915 ; but for the last fifteen months or so it has remained remarkably steady at 4*76 instead of 4*866, a discount of a little more than 2 per cent. It is difficult to know for certain whether it is a discount at all, because we do not know what the gold point is. We do know that owing to the high freights and the high insurance rate the range of the gold points has been very greatly widened during the war. I have tried many times to get a statement in regard to the actual gold point, but it F.O.F. 226 PAPERS ON CURRENT FINANCE is not forthcoming. Perhaps there is no very definite market. But I am told that practically the 2 per cent, does not represent much more than the distance between the gold point and the par ; at any rate the United States exchange is fairly steady. With Amsterdam, another important exchange, at the present moment the position is fairly favourable, 2^ per cent, discount. I do not lay much stress upon the discount on the Amsterdam exchange, because it is conceivable that there are objections to settling that exchange by the export of gold, as Amsterdam is dangerously near to the Enemy ; so that even if it were a discount of 10 per cent. I do not think that would prove any depreciation in our currency. It might be interesting as a sign that we were restrict- ing the export of gold to Holland, and nothing more. When we come to South American countries there is a rather unpleasant discount in those exchanges. Roughly, averaging the countries, the discount is about 7j per cent. With Spain the discount is nearly 11 \ per cent., and with Switzerland nearly 5 per cent. The Spanish and the Swiss exchanges are, perhaps, not very important to us, but the South American is more important. It may be held, of course, that the freight and insurance are extremely high on the South American exchange, and that that explains the slump, as it were, in the rate. When we come to the exchanges with our Allies our position is most favourable. However depre- INFLATION 227 ciated our own currency may be, it is clear that, if the rate of exchange is a test, their currencies are in a worse position. The exchange on Paris is 10 per cent, premium, Petrograd 76| per cent., and Italy nearly 48 per cent. I do not want to lay stress on that position; we should be glad to see these ex- changes at par. Passing to Scandinavia we find that all the Scandi- navian exchanges, taking them as a whole, are 7j per cent, against us, but that is very easily explained. Scandinavia, at the present moment, is not on a gold basis ; it is true she is using gold, but she has appre- ciated gold deliberately, and 7j discount there largely represents the extent to which gold in Scandinavia is appreciated beyond the value which it has in other parts of the world. They have done that after de- liberate reflection, with a view to stopping the rise of prices in their own countries ; because they conceive that after the war there will be a fall in prices, and they want to cut off the upper peak of the movement, to stop the rise and so to lessen the distance from which they can see there will be a fall afterwards. It may be good policy. Of course there are a great many complicated reactions in the operation of ex- change rates, and it must be rather difficult to sum up the net result of this exchange policy on the whole. 1 [ l The policy seems to have been abandoned, at least so far as re- mittances from the Netherlands Bank are concerned. Cf. the Report of this Bank, for the year ending March 31st, 1918.] 228 PAPERS ON CURRENT FINANCE However that may be, it is obvious that is a remedy we never could apply here. We do not wish to keep gold out of the country far from it. We have to make such enormous payments to New York, to say nothing of any other centre, that we want all the gold we can get. We cannot make a formal and deliberate appreciation of gold here as compared with other countries. As to the German exchange, about the only test of it the most important test at any rate is the New York exchange, a discount of 30*7 per cent, as compared with our 2 per cent, on New York. But it must be observed in regard to all this matter of exchanges that the exchanges are not working freely; first, because trade itself is restricted, both exports and imports, and secondly, because the ordi- nary arrangement by which the balance of trade is adjusted by gold movements is almost completely paralysed by the action of the belligerent Govern- ments. Gold cannot move freely. As Mr. Withers very neatly put it some time ago : " The world is now divided into two classes of countries : those which refuse gold and those which refuse to part with it." I think it is clear from the rates of exchange that even Great Britain does not go out of its way to facilitate the export of gold. I will leave it at that. I do not agree with Professor Cassel, 1 that we can argue from discount on exchange that the 1 Cf. his articles in the Economic Journal, March and September, 1916. INFLATION 229 currency of the country whose foreign exchange is at a discount is depreciated. Present circumstances are too exceptional for us to draw any inference of that kind. Even in peace time, the inference would be doubtful, and open to such exceptions as in the case of the American exchange, already noticed. Upon the whole, then, I do not admit that a depreciation of our currency is proved by the present state of the foreign exchanges. Now I come to what I think is probably at the bottom of people's minds when they speak of inflation. They are not thinking so much of the parity between our currency and some other, or the parity between one element in our currency and our standard. They are really thinking of the rise of prices. It is that in their minds that argues inflation ; at any rate, it is the rise of prices that they wish to correct. This, of course, is entirely to change the point of view. Here we are considering, not the depreciation of something in terms of gold, but the depreciation of gold itself ; and that is extremely important, be- cause it is clear that the depreciation of gold itself is not a local question, but a world- wide question ; it is not a question that we can control here, even if we wish to. Gold is depreciated nearly as much in the United States as it is in Great Britain. It would be quite as much if trade were absolutely free between Great Britain and the United States, and every kind of article was in exchange between the two countries. 230 PAPERS ON CURRENT FINANCE I have been unable to get a formal index number from the United States, although I ordered it more than five months ago. As far as I can judge from isolated quotations and remarks, the level of prices in the United States is about as high as here. Two days ago I had a letter from Dr. Irving Fisher, who is the greatest authority on this point, and according to a chart which he sent me I make out that prices in the United States have risen 60 per cent, since the war began. It must be remembered that they were very much higher than our prices before the war I cannot say how much at the moment, as we have no precise measure of the difference but everyone knows that prices in the United States were, on the whole, much higher than our prices. Therefore a 60 per cent, rise would probably bring them some- where near the level of our prices now, which have risen 100 per cent. There is probably no important difference between the average levels in the two countries. We have no doubt what the rise has been in this country. We have accurate index num- bers, more particularly the number established by Mr. Sauerbeck and now published by the Statist newspaper, which I think would be correct within a limit of error of about 5 per cent. According to that number, prices have exactly doubled since war broke out. I ought to say, however, that when the war broke out in July prices were rather lower than they had been ; they had fallen from 85 in the INFLATION 231 previous three years to 81, and in the opinion of many experts we were then on the eve of a crisis, or rather a depression of trade one of the ordinary periodic depressions of trade there being a general depre- ciation not only in the prices of commodities but in the prices of securities. Possibly in the case of securities the war was casting its shadows before, to some extent. There had been a drop in prices in any case, so that it is perhaps hardly fair to take the figure for July as a base when we are calculating the rise due to the war. It would make a difference of some 4 points. But, broadly speaking, prices have not risen more in this country than in other countries, certainly other European and western countries. I have been trying to make out accurate figures, but they have no index numbers in most countries, and one can only judge from estimates made from time to time ; but it is quite clear that prices are higher in Germany, that they are about half as high again in Austria, and about three times as high in Hungary. The prices there are prodigious, according to the only returns I have been able to see. In the case of meat the prices are seven times as high as they were before the war. I do not know very accurately what the prices are in Scandinavia ; they have been deliberately lowered now. Complaints come from all countries of the rise of prices. It must be so, because it is gold itself that has depreciated, and as all these countries are on a gold basis, or else on the 232 PAPERS ON CURRENT FINANCE basis of currency which is at a discount on gold, prices in all countries will be similarly affected, though in different degrees. It may be asked what would have been the course of prices but for the war ? Prices have been rising on the average ever since 1896, at about the rate of 2 per cent, per annum. That rise is explained by the large increase in the gold supplies ; but I do not suppose that the gold supplies alone would account for much more than this 2 per cent, rise on the average. Perhaps I ought to say a word here about the theory of prices. Price is a function of two variables : it varies directly in proportion to the supply of money of all kinds and inversely in proportion to the quantity of goods or transactions requiring to be handled by money. The more you increase the quantity of goods handled by money, money remaining the same, the more prices fall ; the more you increase money, the goods remain- ing the same, the more prices rise. The general re- lation admits of simple statement, although in work- ing it out we are often faced with complications of detail. For instance, what is money ? You have to take account of bank deposits, cheques, and the various forms of purchasing power, and that is not a particularly simple thing. But in fundamental principle nothing could be clearer or plainer. Dr. Johnson put it very well. He was told that in the Island of Skye twenty eggs might be bought for a penny, whereupon he observed : " Sir, I do not INFLATION 233 gather from this that eggs are plenty in your miser- able island, but that pence are few." To what, then, is due this rise of prices that has undoubtedly taken place since the war ? In the first place, to the large production of gold which is the basis of all our credit, but mainly to the enormous increase of purchasing power which has been created by the various belligerent Governments, quite apart from the form which that purchasing power has taken. Our own expenditure is about 6,000,000 a day, and I think the total expenditure may be esti- mated at about 20,000,000 a day for all belligerents. The war expenditure of the five principal belligerents is known to be 18| millions a day, so that it can hardly be under 20 millions for the whole of the belligerent Powers ; say, 7,300 millions a year, or if we allow for double entry in connection with loans, roughly 7,000 millions a year. In our case the additional expen- diture of Government is more than as large as the total expenditure of the nation in peace time. No one proposes to restrict that expenditure of Govern- ment, I suppose. The various belligerent Govern- ments are struggling to obtain the military material and other necessaries for carrying on the war, and it would be absurd to attempt to restrict their power of obtaining that material. I do not think it makes very much difference by what precise machinery they exercise that power. For instance, if the belligerent Governments were able to buy merely in exchange 234 PAPERS ON CURRENT FINANCE for their own scrip, their own credit, without using currency at all, I do not think we should have a much smaller rise of prices. They would be still in the market for the same amount, and would be com- peting with the same intensity. Is there any reason for supposing, therefore, that the level of prices would be much lower ? My own belief is that there is not. The level of prices is really the result of the enormous expenditure of the Governments, and as long as that expenditure is maintained and exerted the level of price will roughly be maintained. This is the root fact, I maintain, at the bottom of the rise of prices. But I do think it makes some difference by what machinery the purchases are made. In the act of purchase the effect will be the same, but if you make the purchase by means of an increase of currency you leave behind after the purchase the purchasing power you have created, and I think that constitutes a real difference in the position. You are left with a mass of purchasing power in the hands of the general public which would not have been in their hands in that form but for the particular way in which the Government made its purchases. It would be better, for instance, as far as that is concerned, if the Government could make all its purchases by forced loans without using currency at all. By what means have the purchases been actually made ? They have been made, in the first place, taking the INFLATION 235 world broadly, by enormously increased issues of notes. The French note issue was trebled and the Russian note issue increased four times. Our own note issue has only increased slightly, and the issue of bank notes hardly at all. The new currency note issue has altogether reached the amount of more than 140,000,000 ; but against that must be set the value of the gold whose place has been taken by the currency note, most of which gold has been exported to the United States. I think it will be found that the excess issue of currency notes over the gold displaced by the currency notes is, after all, a very small matter, not in any way comparable with the rise of prices, nor an increase that would have con- tributed very much to that rise of prices. Then in certain countries enormous advances have been made by the State Banks. The Bank of France advanced 400,000,000 to the Government, most of it gratui- tously and none of it at more than 1 per cent. It behaved in the way it always does behave in times of crisis, admirably. The State is under very great obligation to that bank, so much so that meetings have been held in France of merchants and finan- ciers calling on the Government to extend the bank monopoly for thirty years without asking for any concessions from the bank. The extension of the monopoly is usually made an occasion for asking for concessions, but on this occasion the feeling is that the State owes so much to the Bank of France that 236 PAPERS ON CURRENT FINANCE the bank has earned its monopoly for another thirty years without further consideration. Then in all countries there has been a very great increase of divisional money, silver and other forms of small change. Perhaps that does not count for very much, but I think it has some effect. In this country in normal times the circulation of silver is about one- fourth in value of the circulation of gold, so that it really is a considerable element in our price basis. What is most important for this country but not so important I think for many others is the increase in bank deposits. We are accustomed to consider the draft upon a bank as the very best form of money, cash in the highest sense of the word, especially if that bank happens to be the Bank of England. A draft on the Bank of England would be considered cash, perhaps, in any part of the civilised world. In this country we make a very large use of Bank of England advances when we are in difficulties for want of currency. I have found very great difficulty in estimating what has been the precise increase of bank deposits in this country. Our banking returns are always miserably inadequate and unworthy of the country ; but during the war, ever since the large loan of 1915, they have been suspended alto- gether, so that we only have the annual account made up for a particular day, and everyone knows what that means as a basis for an estimate. We have, in fact, no scientific basis at all. I think it is INFLATION 237 a matter to be very much deplored. You will re- member what was said about Austria when the Austrian Bank suspended its returns. I am sorry that we should have in any degree followed an ex- ample of that kind, because I think myself there was no reason whatever for it. I cannot see that the banks have anything to be ashamed of. It is a sort of morbid timidity that seems to cause the withholding of these returns without which there can be no proper basis for scientific action. However, as far as I can make out, the bank deposits have not increased more than some 250,000,000 during the war, to which may be added about 120,000,000 for the Bank of England, or under 400,000,000 alto- gether for the whole banking system. Compare that with the total of deposits before the war of something like 1,200,000,000. There is a 33 per cent, increase of bank deposits, and that is the most serious figure relating to inflation that can be found in our accounts the expansion of bank deposits by something like 33 per cent. But that will not account for 100 per cent, rise in prices ; nor is it anything like so large as the correlative forms of expansion in other countries, the expansion of notes and State bank advances and so forth. The State bank advances have been very small here as far as one knows. I do not know what the advances may be at any given time, but supposing them to be 70,000,000 or 80,000,000, we have no figure that 238 PAPERS ON CURRENT FINANCE can be classed as a figure of expansion here that at all corresponds to the great movement of prices. It must be observed that in some foreign countries they have been increasing the use of cheques, and that has been another cause of rise of prices. In France, Russia and Germany the greatest efforts have been made to extend the use of the cheque, and that has had just the same effect as the expansion of the note issue. Generally speaking, I am inclined to think there has been an economy in the use of metallic money and in the use of notes all over the world that there has been a more rapid circulation of money. During the Napoleonic wars it was proved that the rapidity of circulation of the bank note doubled during some ten years. I admit the case is not quite parallel. The fact was that we were just beginning to under- stand banking economy at that time; our clearing house had been established only twenty years before, and we had just begun new experiments in the machi- nery of cheque banking ; and it is possible, therefore, that the increased velocity was not due to the war but to the natural development of our banking system. But I am inclined to think that the pres- sure caused by war does make the sixpence a little more nimble than it otherwise would be. Then there is the question of the emptying of hoards. Large amounts have been brought from hoards in France and in Germany. I do not know if we shall get any in India from the new Indian Loan, from INFLATION 239 the great hoards there, or through ornaments being melted down. This has been an addition to the amount of gold available for currency, and just as important, in its effect on prices, as if new gold had come from the mines. These are the general causes, on the money side, of the rise of prices. Passing to the side of commodities, there has been a shortage in productive power tending so far to make commodities scarce, but of course this has been com- pensated very largely by increased effort and by women's labour, and by the labour of other persons not usually employed in normal times. I am bound to say there has been in this country a great margin for an increase in productivity. When you hear that women coming fresh to an industry were able to turn out five times the previous output of a skilled workman, it is impossible not to feel that we were working well within our power when the war broke out. I would also refer to the decrease of available tonnage, and the rise of freights. High freight rates do not, strictly speaking, I think, restrict the supply of commodities generally, but they may restrict it locally. They may prevent us, for instance, from bringing goods from the United States which we might otherwise have had, and they may bring about a local scarcity here and therefore cause local high prices. There has been a certain failure in the harvest, partly due to the shortage of fertilisers. Those, I think, are the principal causes on the side of commodities. 240 PAPERS ON CURRENT FINANCE Then there are certain matters connected with dealing and distribution which have tended to raise prices. There has been too much of the amateur in the market. He generally pays very dear for his operations. Military purchases, for instance, have not been of the most economical type. On the other hand, there has been a certain tendency on the part of the expert to hold up goods and to exact the full advantage of his position and his knowledge, and there has also been a certain amount of hoarding by consumers. These are small matters, and not so important as the others I have noticed. I ought, perhaps, to say a word about the question, of bank deposits in addition to what I have already said. I said that the way in which Government borrowed did make some difference, and it was ad- visable, as far as possible, to avoid borrowing by the creation of currency. We have done very little to create currency in this country in the shape of notes, practically nothing if you make allowance for the substitution of notes for sovereigns ; but we have done a great deal say to the amount of 400,000,000 to create bank currency by bank advances. The question is whether that could in any way be avoided, and I am inclined to think that it can be avoided, that it is very largely connected with the issue of big loans. These big loans require large operations to finance them. We talk about raising a loan of l ,000,000,000, but it is quite certain that there does not exist in INFLATION 241 the country at any one time even 400,000,000 of spare cash, and it is an impossibility to raise a loan of 1,000,000,000 in the strict sense of the word. What we do is to finance it by bank advances. Every big loan means a large expansion of bank deposits. We cannot tell how much because we cannot get the returns, but we know very well there must be that expansion, because we know there is no spare money in the country to the extent of anything like the sum raised by a big loan. No country in the world could raise a loan, I think, of 500,000,000 without recourse to some method of financing, and that method of financing practically creates currency. It is for that reason that I confess myself entirely a partisan of Mr. Drummond Eraser, the apostle of continuous borrowing in this country, who argues that the proper way to borrow is to take up money when the public have it to spare, by always being open to receive loans, to receive the spare cash as it comes into the current accounts. That is practically what we were doing all through 1916. I admit that there were reasons for one large regularising loan. We have got into difficulties with previous loans and previous rights conveyed by those loans, and it was desirable to unify the public credit on a single basis as far as possible, creating a large marketable stock on sound principles. That was admirably done by the recent loan. It is likely to be what Consols used to be, a fine banking security in the future, or at least I hope F.C.F. UJ 244 PAPERS ON CURRENT FINANCE so ; and I was very glad to see that it was so admirably insured by the large contributions made first by War Savings Certificates, and secondly by the Prudential Insurance Company and other bodies of that parti- cular type. I regard this as a very important point, a bull point for the new stock. In the future and in general it seems to me that Government can raise the money it requires with a minimum of disturbance and with a minimum of inflation if it will avoid placing these large loans at long intervals and revert to the system of continuous borrowing to the full extent as money becomes available. That borrowing should give a freedom of option to the public ; there should be bonds of various dates and bills of various dates. The chart on pp. 242-3 constructed by Mr. Drummond Eraser shows the effect upon the deposits of the Bank of England of two kinds of borrowing during the war. The upper part of the chart shows the pre-war period, the normal position of the Bank of England deposits as shown by the Eeturns. When you get into the war period the deposits rise very rapidly, partly owing to the panic at the outset of the war and after- wards owing to the War Loan ; but when in 1916 you come down upon this method of continuous borrowing, you see how remarkably even the curve of Bank deposits is, almost at a level from December to December. I have no doubt that if we could get the figures for the new Loan we should see a corre- sponding rise in the bank deposits, if not of the Bank INFLATION 245 of England yet of the country as a whole, in conse- quence of the big loan of 1917. It is well to avoid these disturbances, and also to avoid the creation of currency which they cause. The root of the whole matter it seems to me is this : whether by inflation or otherwise, gold itself has depreciated, and it is this depreciation of gold which is expressed in the high level of prices. The depreciation of gold is the result of the enormous increase of purchasing power in the hands of Govern- ments. In some cases the new purchasing power has been created by methods which have depreciated currencies in relation to gold. That does not seem to have been the case here. Our prices are very high. But we see these high prices in America and other countries where there is no question of inflation in any ordinary sense of the term. Thus the problem is international, and that is a matter of the first im- portance, because it shows that, unless we are prepared to revert to what I may call Scandinavian methods to bring about a local appreciation of gold in our own country and that is obviously impossible and un- desirable the rise of prices is beyond the control of any one country. We can only check it by cutting ourselves off from a gold standard, which is what we do not want to do, either by appreciation or deprecia- tion. Secondly, I think it is important because it meets an objection raised by Mr. Falk which I confess rather impressed me at the time I read it that 246 PAPERS ON CURRENT FINANCE a rise of prices, by creating exchange difficulties, threatened our international position after the war. It might if it were peculiar to this country, or even if it were peculiar to belligerent countries ; but if it is really universal, if it affects the United States, for instance, I cannot see how it threatens our inter- national position. At any rate that consideration reduces the danger to which Mr. Falk referred. That is broadly the position that I wish to submit. ABSTRACT OF THE DISCUSSION. MR. 0. T. FALK asked members to listen to him for a few minutes, mainly because he hoped that by taking part in the discussion he might extract a little more truth from Professor Foxwell. Professor Foxwell had said that the objectors to inflation were mainly concerned with the third form of inflation in his category, the depreciation of gold. That might be so, but it was not his own experience, possibly because his life was spent in the City, and lie thought it would be admitted that, so far as those who lived in the City were concerned, inflation of the first two kinds was the most important. It might be because he had not a due allowance of that morbid timidity which Professor Foxwell ascribed to bankers that lie disagreed with him with regard to the position in so far as the first two forms of inflation were concerned. There was a difficulty about the question and he frankly admitted that, so far as he knew, those who believed that depreciation or what he would rather call potential depreciation of the currency in terms of gold existed, were at present unable to offer any satisfactory proof of that depreciation. So far as he was concerned, he suspected it. He did not admit that the rise of prices in every country was a measure of the depreciation INFLATION 247 of gold, simply because he did not admit that the prices in all those Countries were gold prices. He believed they were admittedly not so in Russia, to take a single example, and he thought they were not so in other countries also. He appreciated Professor FoxwelTs point when he said that there was no cause for alarm with regard to the position of this country if the rise in gold prices was international and if the rise in this country was not greater than the rise in other countries ; but his own idea was that the rise in prices in most -countries was a rise in currency prices and the rise was measured in currencies which were admittedly depreciated in terms of gold. In the case of this country, the currency was supposed to be on a par with gold. If, therefore, our prices had risen to as great an extent as the prices of other countries, it was possible that our currency was depreciated in terms of gold ; in other words, it was a question as to whether there was not what might be strictly called relative redundancy of the currency. It was not possible for him to give any proof of that relative redundancy, but he would ask the members for a moment to assume that it existed. He wanted them to assume it because he wanted them to allow him to criticise the point of view of those who said that redundancy simply could not exist, who said that the absence of that redundancy was proved by certain current conditions. Professor Foxwell had compared the position in 1810 with that of 1917, and it would appear that that was a very good starting point for the criti- cism he himself wished to make. In 1810 the Bullion Com- mittee and Ricardo and a few others pointed out that the high price of bullion and the state of the foreign exchanges was a proof of the depreciation of bank paper, and a proof also of the over-issue of that paper. He would agree with Professor Foxwell that the depreciation of the exchanges was not a conclusive proof in all circumstances of the depreciation of the currency in terms of gold, but for his purposes that qualifi- cation was not important, because the point he wished to make was that, whether those tests were conclusive or not, 248 PAPERS ON CURRENT FINANCE it was fair to say that it was not possible to state with con- fidence that, because there was no high price of bullion and because there was no depreciation of the exchanges, therefore redundancy was absent. Comparing the position in 1810 and the position to-day f in 1810 there was a high price of bullion and there was a Restriction Act. The objectors to the hypothesis which he put forward said that to-day there was no Restriction Act and no high price of bullion. He admitted there was no Restriction Act, but there was restriction by consent. It was also said that there was no high price of bullion, but he did not see how there could be a high price of bullion ; it was not possible to melt down gold coin or to import bullion or to export it as a matter of fact bullion could not really be bought. There was no Lord Stanhope Act, but it was not legal to pay a premium for British gold coin, and certain men had been convicted of that offence. So far as he knew, there was only one case in which a gold premium within the country could be made evident, and it so happened although he laid no stress upon the point that in that case a premium existed. It was legal to purchase foreign coins, not current coins, and melt them down, and jewellers, because they badly needed gold, were buying foreign coins and paying a high premium for them, from 10 to 15 per cent., but it was not a highly regularised trade, so that the premium probably varied considerably in different localities. He did not in any way wish to suggest that the premium paid by those jewellers was any evidence of a gold premium within the country, but he did think that it was fair to say that the absence of a gold premium was not a proof that there was not a premium on gold, because by consent and by legal restriction there was no real dealing in bullion or gold coin. Fortunately this country had been free during the war from individuals of the type of Lord King, so that we had not really had the point tested as it might have been. The second main test of the days of the Bullion Committee INFLATION 249 was the state of the foreign exchanges. The American exchange was now at the low gold point, or approximately so, and he was perfectly prepared to admit that the state of every other Neutral exchange could be explained away. He did not want to go in detail into the matter, because he thought it must be obvious that if this country had been able to maintain the American exchange at the low gold point it could have maintained all the other Neutral exchanges at that point by the same methods, if there had not been special difficulties. Assuming that all the foreign exchanges were at the low gold point, could it therefore be argued that the currency was not potentially depreciated ? He thought not. The state of the exchanges in the present case proved abso- lutely nothing. He would ask the members to look for a moment at the method by which this country was maintaining the American exchange ; we were not paying for goods with goods ; we were paying for the adverse balance of trade with gold, with foreign securities that were acceptable and with promises to pay gold. Promises to pay gold were not gold, but promises to pay gold, and that was a point that it was impossible to escape from. He thought it was fair to say to borrow a phrase from Professor Jevons that this country was engaged in selling a gigantic bear of gold. Anyone who knew what the selling of a bear might result in, especially when it was on a very large scale, would appreciate what he felt about the situation. If his hypothesis was correct, this country was selling gold for future delivery at a price which might be far below the world's market price, if, as he supposed, our currency was relatively redundant. He did not say we were selling below the market price, but he thought it was possible. It was evident in any case that we could, so long as we had credit and acceptable foreign securities, go on maintaining the exchanges independently of the state of our currency. It might be redundant and yet things might for a time be kept right. Personally, therefore, he thought there was some reason 250 PAPERS ON CURRENT FINANCE for careful enquiry into the situation and possibly for more prevision than had as yet been exercised. That necessity became obvious if one looked ahead and saw what would happen on his hypothesis, namely, if this country was selling a bear of gold with a redundant currency. Some day we should have to stop settling an adverse balance of trade by promises to pay gold, and we should then have to buy goods with goods, and if we wished to buy goods with goods we should be at an extraordinary disadvantage if we offered gold at a lower price than the rest of the world. Gold would then be the cheapest commodity that we had to offer, and the foreigners would take our gold first and our commodities second. He did not mean to say that gold would be the only thing they would take from us, but gold would be very nearly the first, if not the first, they would take from us. The question was How was the problem to be solved ? It could only be done in one of three- ways, unless we wished our last ounce of gold to be drained from the country. We could lower our prices by contracting the currency, which would be a highly objectionable course one had only to read Professor Foxwell's admirable preface to the translation of Andreades' History of the Bank of England to see what his view about that method would be or we could suspend specie payments, and, as the financial centre of the world, that was a solution we did not want to have to face. These two solutions were within our control. The third was not within our control, and personally he thought it would be madness to count upon it. If one could suppose that after the war some of the main commodities which this country produced and exported would rise in value relatively to the other main commodities of the world our position would be maintained, because relative prices must be adjusted to relative values, and we should, by the appreciation in value of our main commodities, be able to support a higher level of prices. There might be a fallacy there, but he thought there was not. INFLATION 251 He did not think there was any disadvantage in discussing the position, because there was very little harm that could be done under present circumstances and he was not sure there was not a great deal of good, but he did wish to emphasise very strongly that he by no means maintained that a relative redundancy existed ; he admitted he only suspected it. The remarks he had made were mainly a plea for a very careful enquiry, the nature of which there was not time to develop, but which had really been indicated by Professor Foxwell. He was hoping that those who had the capacity for under- taking that work might combine and test the position, so far as it was possible to do so, by obtaining the necessary infor- mation from other countries. He understood, from the article to which Professor Foxwell referred, written by Professor Nicholson in the last number of the Economic Journal, that Professor Nicholson was engaged on such an enquiry, and he trusted that he would get all the support that was necessary. Also he hoped that it would be possible to induce the City to take the matter rather more seriously than they appeared to do at the moment. The City referred the question back to the tests of the Bullion Committee days and appeared to have satisfied itself that there was nothing to be alarmed about. MB. W. A. KIDDY (Financial Editor of the Morning Post and Editor of the Bankers 1 Magazine), speaking on the invitation of the President, said that one thing- that must have struck everybody that evening was that the subject under considera- tion was one where proof seemed to be well-nigh impossible ; that had come out in what Professor Foxwell had said and also in the remarks of Mr. Falk. The question of inflation had to be considered from three standpoints : First, whether there was a premium on gold ; secondly, the position of the ex- changes ; and, thirdly, the rise in the price of commodities. In all those three cases it was easy to find simple explanations of the phenomena, without including inflation. In considering the question of a premium on gold, Mr. Falk had pointed out 252 PAPERS ON CURRENT FINANCE quite properly that, while it could not be proved there was a premium on gold, it would be equally difficult under the artificial conditions which existed to say that there was not a premium. With regard to foreign exchanges, as was well known, there was a great trade balance against all the belligerent countries which were buying from the neutral countries, at a time when their own productive power was reduced. Under those circumstances, how was it possible to have anything but adverse exchanges ? Therefore there was an ample explana- tion of the position of the exchanges without going into the question of inflation. With regard to the rise in commodities, he had been rather struck in looking over the record of prices to see how a rise commenced about the year 1906. When the war period began there was of course a tremendous bound, but there was quite a substantial rise between 1906 and 1912, and he suggested that one reason for that rise was probably to be found in the greater equalisation of wealth, the manner in which taxation was changed during those years having caused wealth to be spread over a greater number of the community : in other words, he believed that in those years there was a tremendous increase in the purchasing power of the people, and that fact was important in connection with the more recent events, because the rise in wages, the expenditure of belligerents, and the high wages paid to munition workers, played a great part in the rise that had taken place in commodities. Wages had been high all over the world and the purchasing power of the people had increased, and under those conditions there was bound to be a great rise in commodities, quite apart from such circumstances as the cutting off of productive power and the great demands on the part of the belligerent Governments. Moreover, in the years from 1906 to the period of the war there was reason to suppose that in many of the food-producing countries there had been a tendency to go into manufactures rather than to increase the area of food stuffs ; in other words, the cultivation of food stuffs had not kept pace with the growth INFLATION 253 in population. He only pointed that out because it seemed that from 1906 to 1912 there was a great rise in the price of commodities when nobody talked about inflation at all, and when there were other causes to account for it. All the same he thought there was inflation to-day, that there must be inflation. It seemed to him that there was no need to look further for proof than the fact that, as Professor Foxwell had pointed out, the Continental banks of Russia and France had increased their note circulation enormously. How could any- thing but inflation result from that ? The point was that it could not be measured because it was so mixed up with the other and more easily discernible causes, and no measure could probably be found until after the war, when some of the other causes had ceased to operate. With regard to the currency notes of this country, he was inclined to think there was perhaps rather more concealed inflation than Professor Foxwell acknowledged. It was well known that against the 140 millions of Treasury notes there was 28J millions of gold earmarked, and to that extent there was of course no inflation. He understood Professor Foxwell to suggest that the great mass of the remaining Treasury notes might not be inflation because of the gold it displaced, but he went on to say that a great deal of that gold had now been exported to the United States. If that were so, was not that gold forming a basis for fresh credits which, in considering the rise of prices of commodities all over the world, must lead to a still further creation of credit and therefore to inflation ? He thought that the extent of the Treasury note issue was undoubtedly another sign of inflation. Was there anything in all this that could be controlled during the war ? When it was remembered that the greatest cause of all was the great enlargement of credit, it would be seen that the problem was a delicate and difficult one, because we knew very well the whole war had been carried on by a great expansion of credit. If that credit were to contract suddenly, a totally different condition of things might be brought about, and yet in the 254 PAPERS ON CURRENT FINANCE enlargement of trade in various forms, Government loans, banking deposits and so forth (inasmuch as increased purchasing power was involved) was to be found one of the chief explana- tions of such a phenomenon as the rise in the price of com- modities. With regard to the question of control, one method concerned the Government and the other ourselves. It was admitted that the belligerent Governments were now the largest buyers of commodities of every kind, and the question was whether those purchases were being conducted on the best lines, even after making all allowances for the fact that things had to be done in a hurry. If they were not, but were being done in an amateurish fashion, then the evil was un- necessarily exaggerated. With regard to the public, their duty consisted in economising in the matter of consumption. Although the war had been going on for two-and-a-half years, it was only within the last few months that the question of personal economy had been really forced home upon the people by the Government. If the people had not economised it was not altogether their own fault, the word not having been clearly given by the Government itself until within quite recent months. When the question of controlling the position was really considered, however, it must be felt how difficult was the task. It was, perhaps, as regards the form of borrowing and the manner of regulating the expenditure that opportunities were chiefly afforded. With regard to borrowing, Professor Foxwell advocated very strongly Mr. Drummond Eraser's plan for continuous borrowing by Treasury bills, Exchequer bonds, etc., rather than a big loan operation, but had the Professor considered whether that form of borrowing could sufficiently draw money from the investor himself ? Because, unless the money was obtained from the investor, and not simply from banking credits, Professor Foxwell would be the first to say that there would be undue credit expansion. It was easy, of course, to "job backwards," as was sometimes said in the City, but looking at the great success of the new Loan INFLATION 255 it seemed almost a pity that there could not have been some scheme devised whereby the Loan could have been made very much larger with payments made by fortnightly instalments over a period, say, of two years, the Government having the right at any time to stop the subscriptions if the war were suddenly to cease. Spreading the payments over a more lengthy period would have given the Government probably two or three times the amount they actually got, and the public, having been committed to supplying the Government with funds for perhaps two years, would have felt all the greater need for economy in the matter of personal expenditure. Mr. E. W. TOWNLEY wished to make a few remarks on Professor FoxwelTs third interpretation of inflation, namely, the depreciation of gold in terms of commodities as measured by the rise in prices. The real and ultimate cause of the rise, as had been said that evening, had been the enormous additional expenditure of the belligerent Governments, which had affected neutrals as well as themselves, but the difficulties began when an attempt was made to ascertain to what extent any one of the more immediate causes was responsible for the rise. Pro- fessor Foxwell had remarked that even assuming that British prices depended solely on British currency policy, the expansion in our currency was quite inadequate to explain the rise, and he thought everyone would agree with that. But while our currency expansion was obviously insufficient in itself to account for the rise, and allowances must be made for other factors, such as the lack of tonnage and the withdrawal of millions of men from productive employment, it still seemed to him that the increase in our currency issues had had a material effect on the rise in prices. He would like in that connection to refer to the statistical enquiry which Professor Shield Nicholson was conducting. Although that enquiry was not yet finished, Professor Nicholson had already indicated some of the first approximate results in the following terms : " There has been a general conformity between the increases of our note issues and the rise in prices in the United Kingdom* 256 PAPERS ON CURRENT FINANCE The increase in prices as shown by the index numbers has followed the increases of notes, and in general, the movement in prices is of the character associated with over-issues of inconvertible paper, such as has occurred in the other belligerent countries." As a matter of curiosity he was led by Professor Nicholson's remarks to compare the growth of our currency note issue with the rise in prices as shown by the index numbers of the Statist and Economist, and for that purpose he divided the period since the commencement of the war into intervals of three months. He did not overlook the fact that our banking deposits were so much potential currency, but, as Professor Foxwell had pointed out, the miserable monthly returns formerly published by the Clearing Banks were dis- continued in June, 1915, and it was not, therefore, possible to trace the growth of their deposits at short intervals. His rough analysis, on which too much should not, of course, be built, indicated two rather interesting features. First, each of the two quarters in which the emission of Treasury notes was the largest was followed by a quarter in which the rise in prices also was specially marked. Secondly, and conversely, each of the three quarters in which the notes issued remained more or less stationary was followed by a quarter in which prices also were practically stationary, or even receded. In other words, there seemed to be a curious correspondence between the movement of currency notes in one quarter and the course of commodity prices in the next. Allowing for the time which it took currency notes to get into active circulation, that did seem to support Professor Nicholson's statement that the rise in prices had been due to a considerable extent to currency issues. If that view was correct, there was at all events one factor which it was within the power of the Govern- ment to control, and as so many other factors which were contributing to the rise in prices were beyond control, he thought everyone would agree that the Government ought as a matter of duty to restrict currency issues as far and as quickly as possible. INFLATION 257 The PRESIDENT, in proposing a vote of thanks to the lecturer, observed that on the question itself he preferred, for reasons which he gave, to say nothing. His very kind remarks are therefore not reprinted in this account of the debate. A complete report of the proceedings will be found in the Journal of the Institute for October, 1917. The LECTURER, in reply, said that in the first place he would like to thank the members of the Institute for the very kind way in which they had spoken of the few remarks he had made. The President had rather hinted that although he had brought forward very little statistical evidence in regard to the statements he had submitted to them, the statements were not made at random but really represented the result of a very considerable amount of inquiry. He could assure them that he had spent two or three weeks in trying to get some more definite evidence, but had to abandon the attempt, as he found he had no figures worthy to present to a body like the Institute of Actuaries that would really stand the test of close examination. There were no adequate returns. That must be his apology for what he was sure must have been noticed to be a rather obvious defect in a statement of such a kind the lack of a definite statistical basis. It was not for want of taking pains. With regard to the admirable criticisms that had been made, he might say at the outset that in questioning the existence of any serious inflation he had had in his mind all through such inflation as it was within the power of this country to control. What Mr. Falk had said mainly related to the rise of prices, due to general inflation all over the world, very little of which this country could control ; and he did not indicate any particular measure of control which in his opinion it would have been wise for the Government to adopt. In speaking of the exchanges, Mr. Falk said very truly that many of the other currencies whose exchange rates were quoted were not currencies at par with gold. That he believed was true of Germany and Austria and Russia, but it was not true F.O.F. B 258 PAPERS ON CURRENT FINANCE of Scandinavia, which had even a super-gold currency, if he might so term it. It would not be true of the United States, which was the principal currency with which we had relations- and with which our relations were on a very fair basis. As to the case of a premium on gold in this country, Mr. Falk did not press the point, indeed he appeared to admit that the position of the goldsmith was very peculiar. The goldsmith was not buying gold as currency, but as a metal which he happened to be able just now to sell at exceptionally advan- tageous rates, and therefore he did not care what he paid for it. On the other hand, the Government was interested in stopping the consumption of gold by the goldsmith, and had imposed certain restrictions on his usual source of supply, and that made him all the more anxious to obtain it and tended to cause the premium. Personally, therefore, he did not attach any importance to a premium if only paid by gold- smiths ; the very same thing happened in the Napoleonic wars ; one of the few definite purchases at a premium he had seen mentioned was a purchase by a goldsmith ; and there was one conviction, quashed on appeal, for a sale of guineas at a premium for export. 1 Then Mr. Falk said there was no real dealing in bullion now. Probably that was so. In any case, even in time of peace, the bullion market was very limited, confined, he believed, to about four firms. He did not understand that those firms had absolutely nothing to do at the present moment, but he could easily believe that the dealing might be very restricted. The rate quoted for bar gold was the lowest possible, namely, 3 17s. 9d., the Bank price. Mr. Falk rather deplored the method by which we were maintaining the exchange. It was in fact unfortunate that the 1 [It is noteworthy that even in Holland, where there is no question of an inflated currency, and the Bank is glutted with gold, its reserve- having risen from 12 mlns. to 54 mlns. during the war, the Netherlands Bank is selling gold at a premium of 38 per cent, to goldsmiths. August,. 1918.] INFLATION 259 exchange had to be maintained by exporting securities, but the export of securities was just as legitimate as the export of goods. There was nothing wrong about the method ; we were giving value and were extinguishing debt and were not putting ourselves in a false position ; we were simply sacrificing a certain amount of our property and selling to a rival country. We might be in an inferior position as a creditor nation after peace to some extent, but he did not think that involved any- thing of a hollow or unsatisfactory kind in relation to the currency ; it did not argue a depreciated currency, for instance. It had nothing to do directly with the question of inflation. What we were suffering from was the failure to balance trade. Our exports had naturally diminished and our demand for imports was abnormally high, and that necessarily brought about a failure to balance, and we were meeting that failure by the export of securities. He saw nothing in any way wrong in that ; it was the only course open to us. He thought, on the whole, Mr. Falk did not say that he was satisfied that there was inflation so far as this country was concerned, but that he simply desired an enquiry. There could be no objection to that, and it would be very desirable to know under what conditions the currency notes were issued. He had never come across anyone who could tell him precisely what those conditions were. That was a very unsatisfactory state of things, and there was no precedent for it in our history an issue of currency the conditions of which were not declared or understood. Even in the Napoleonic war the Bank had a very clear rule ; they never issued their notes except on the discount of " good mercantile bills, not exceeding 61 days' date, at the rate of 5 per cent." x Passing to Mr. Kiddy's remarks, he had pointed out very well that there were plenty of explanations of the adverse exchange and of the high prices, without being driven to resort to the explanation by inflation. That there had been in- flation internationally no one could doubt, enormous inflation 1 The Usury Law prevented the charge of a higher rate. 260 PAPERS ON CURRENT FINANCE of currency, especially by notes, and in this country there had been a certain amount of inflation by bank credits. But the inflation was mainly an international matter. We, in this country, must hold our own ; we must provide for Govern- ment in some way or other a mass of purchasing power equiva- lent to fcheir needs, relative to the purchasing power enjoyed by the countries which were our rivals. He did not see that we could control or diminish in any way the purchasing power at the disposal of our Government. It was our duty to make it as large as possible. Mr. Kiddy also suggested that our currency notes, although they might not have caused inflation here, had contributed to inflation because they had been the means of enabling us to export gold to the United States, and that export of gold to the United States had been one of the principal causes of the rise of prices. That, of course, was so. On the other hand, we were driven to export gold to the United States because we had to maintain the exchange ; it would be deplorable if we ceased to keep up the tradition of gold payment in this country, and he did not see how else we could have acted. Then there was the question whether the Governments were buying well. That was a point on which he had no special knowledge, but his impression was that they had not bought as well as they might have done, and it was a matter to which attention ought to be paid. He agreed with Mr. Kiddy that at bottom the remedy for the rise of prices and any conse- quential evils lay rather with the public than the Government. The public must produce more and must consume less. Those were the radical facts of the position, and they were not entirely within the control of the Government, although he thought the Government should give a very distinct lead. The people were never in a more docile mood than they were to-day ; they felt they were in the presence of a very difficult situation, and they believed the Government was better informed than they were, and they were willing to take the word from the Government. As to continuous borrowing and the big loan, INFLATION 261 Mr. Kiddy had suggested that continuous borrowing did not appeal directly to the investor. That was so, as it was con- ducted in this country, but it was not as it was conducted in France. This country had not given the ordinary investor any chance ; we offered Treasury bills of 1,000 minimum, which was very nice for financial people but did not appeal in any way to the ordinary investor. In France one could buy a bill for as low a value as 100 francs, or say 4. In that country they thought it politic to open all their loans in all their different forms to the very smallest subscriber, and he believed that that was a sound policy, and he would like to see it done here. Mr. Townley had spoken of Professor Nicholson's results and had quoted a sentence which he very well remembered, but which did not seem to him to be supported by any figures that Professor Nicholson had hitherto given. Mr. Townley's own enquiries seemed to have shown a curious correspondence between currency issues and subsequent prices, but he did not think Mr. Townley had mentioned quantities, but had merely referred to the direction of variation, so that that did not come to very much. It only showed a general sympathy, but unless the movements were proportional in magnitude he did not think it could be held to show causal relation. It was suggested Government could control the currency issue, but he did not very well see how it could, though he spoke as most people spoke in the dark. If he thought that Govern- ment was financing the war by the issue of currency notes he should deprecate it most strongly, because he held that that was the worst possible way of financing the war ; but he did not believe that the note issue represented borrowing by Government. He did not know whether the suggestion that the notes ought to be withdrawn was seriously put forward, or that it was really argued that we should return to gold circulation. If it was, we should require about another 120,000,000 of gold, and how would it be possible to finance the American exchange ? The thing seemed to him absolutely 262 PAPEKS ON CURRENT FINANCE impracticable. The great merit of the currency notes was that, if properly managed, we substituted for the expensive circulation of gold an inexpensive circulation of Treasury notes, and as a result were in possession of 100,000,000 to 120,000,000 of gold which we could use to settle the American exchange. The whole operation was absolutely defensible if it stopped there. He was not sure that the issue had not gone 20,000,000 beyond that limit, i.e. beyond the amount necessary to make the substitution of paper for gold in circu- lation. Note. It should have been stated on p. 223 of this paper that, by an Order in Council dated May 18, 1918, a new regulation, 30EE, haa been made, which substantially re-enacts Lord Stanhope's Act. APPENDIX. I. THE GROWTH OF MONOPOLY, AND ITS BEARING ON THE FUNCTIONS OF THE STATE. 1 AFTER a century of the keenest and most unbridled com- petition the industrial world has ever known, economists find some of their gravest problems in the consideration of the growth and future of monopolies. It is difficult to picture the astonishment with which the contemporaries of Adam Smith would regard this outcome of the reforms they did so much to set on foot. They imagined that we were passing out of an age of monopoly into an age of competition, the distinguishing mark of which would be equal opportunity and equal remuneration. Abolish artificial restrictions, they urged, and natural equality will prevail. By nature, said Adam Smith, there is little difference between a philosopher and a coalheaver. Let the careers be free to all without favour, and competition will prevent inequality. Liberty granted, in short, equality was a necessary conse- quence. It is easy now to see how great was the mistake they made, and how they came to make it. The obvious, conspicuous 1 A Paper read at the British Association, Bath Meeting, September 7th, 1888. Reprinted from the Municipal Review, October 13th, 1888. Afterwards translated by Professor Gide, and published in the Revue tftfconomie Politique, September, 1889. 264 PAPERS ON CURRENT FINANCE causes of inequality and monopoly in their day were privilege, corporate and private, and governmental activity by military, fiscal, and industrial measures. These causes of monopoly, which they called artificial, were largely swept away in the first half of this century. But more permanent, and as they would have said, natural, causes remained. The reforms of that age were very destructive, but they could not destroy monopoly. What they actually did was to shift its basis, and give it freer play. The industrial advantage which formerly rested largely on privilege, and was limited to loca- lities, now rests on abilities, opportunities, and possessions, and has the world for its sphere of action. It is in fact a mistake to suppose that a state of competition can be a final permanent state a state of stable equilibrium. Where one man is as good as another, competition ensures that men shall be indifferently and equally remunerated. But this is not its main office. The points in which a man is on a level with his fellows are of small importance to society in comparison with those in which he has a superiority, however small. The main function of competition is that of selection. It is an industrial war, more or less honourably carried on, leading to the more or less disguised supremacy, the com- mercial monopoly, of the victorious firm, whose initial advan- tage is strengthened by every victory. From this point of view it is competition which is transitional ; and monopoly presents itself, not as something accidental, a stage through which we pass in a backward age, but as something more permanent, more fundamental, than competition itself. We begin and end with it. We start with private property, the monopoly every individual has of his abilities, opportunities, and possessions ; and we end with the impregnable com- mercial position which is the result of a fortunate (or possibly a fraudulent) use of these advantages. What is more, the more perfect the competition the more certain and strong is the resulting monopoly. Where com- petition is very keen, and the markets of the world are open APPENDIX 265 to the competitors, an initial difference of one or two per cent, in efficiency might be sufficient to give the control of the market. This control once gained, the expansion of the business rapidly increases the advantage, until a practical monopoly is secured. Though this tendency to monopolies of ability is nothing new, it is clear that it has assumed a new importance since the great advances in communication. In past times artists have furnished the most conspicuous examples of it, because great artists have always had the civilised world for their market. But such has been the advance of transport, that the heaviest manufactures now enjoy the same advan- tage. The products of Armstrong and Krupp command the markets of the Antipodes as easily as those of their own capitals, and the facility with which this control is exercised increases every day. In the case of articles of general con- sumption the tendency is greatly strengthened by the develop- ment of the parcel post, money order, and cash on delivery systems. A similar effect is produced by the system of dis- counts and of uniform retail prices. These devices, by placing all localities on the same footing, extend the market of the monopolist, depriving local competitors of the advan- tage of their geographical position. The development of banking and joint-stock enterprise has removed all difficulty in obtaining capital, once so severely felt by private employers. So abundant is the supply of capital, that it forms a temptation to monopolise instead of a check upon it. Thus the expansion of undertakings passes all previous bounds, stimulated by the well-known advantages of division of labour and large scale of production. Of course there are practical limits to the extent to which an industrial monopoly can be thus developed. There is a limit to the size of an enterprise in the difficulty the master finds either in supervising it himself or in obtaining efficient responsible assistance. Personal friendships, too, and local considerations, though weaker than formerly, still count for something in dividing custom which would otherwise be 266 PAPERS ON CURRENT FINANCE concentrated. Then there is a constant change in the economic situation, giving new men a chance. The rapid progress of science, the incalculable caprices of fashion, the altered habits of the public, all disturb the routine of business, and help to dislodge the monopolist. The imperfection of heredity, too, places a term on the most successful enterprises. A father may leave his property to his son ; it is a very different matter to leave him his business. But in the main it is true that everything which is most characteristic of our age, from the consolidation of Empires down to the quackeries of advertisement, is favourable to the growth of these monopolies of efficiency. Nor is there anything, as has been sometimes assumed, in the progress of education, or of political equality, to arrest this tendency. Education does not level natural advantages ; it merely enables their possessors to use them with greater effect. The slow progress of co-operative production, and the gradual extinction of the small employer, force us to accept the conclusion of President Walker. " Whatever," he says. " may be true in politics, the industry of the world is not tending towards democracy, but in the opposite direction." The significant fact of modern industry is the increasing value and importance of business ability. When, therefore, we are considering the principles that should determine the future dealings of the State with industry, I think that monopolies of efficiency deserve our closest atten- tion. They are not, however, the first to catch the public eye ; and it might be objected that, strictly speaking, they are not monopolies at all. I should, therefore, explain that by a monopoly I understand an enterprise which, no matter for what reason, is so established as to be practically unassail- able by competition : and the only monopolies we need specially consider here are such as by virtue of this secured advantage become undertakings of exceptional size and power. Now, if we disregard such minor monopolies of patent and copyright as are now secured by law, and which are really APPENDIX 267 forms of property in the product of labour, the principal varieties of monopoly may be classed under three heads. These are monopolies by efficiency, monopolies by combination, and monopolies of local service. Of the first class, which I regard as the monopolies of the future, I have already spoken. It remains to say a word on the other two, and more familiar kinds. Robert Stephenson, in his evidence before the Railway Committee of 1853, laid down that " where combination is possible competition is impossible." 1 And it would certainly seem that where competition has been unrestrained, there is a strong tendency for it to end in agreement of a more or less comprehensive kind. But the difficulties in the way of making and maintaining such agreements are so formidable that they are not likely to make much headway in general industry, until industry is much more highly organised. Most of the great trading corners have been failures. The few industrial combinations, such as the steel-rail ring, seem to have been unable to hold together long. The greatest successes are to be found in the history of railway enterprise. But this really falls more properly under the third head. It is the force of considerations of locality which accounts for the persistence of railway combinations. Otherwise we may say generally that combination, as distinguished from amalga- mation of interests, is not a fruitful source of enduring monopolies. The third class of monopolies maybe said to hold an accepted and recognised position in the economic world. It has long been admitted that competition in the ordinary sense of the word is out of the question when we have to deal with certain cases of local supply and of communication or transport. The geographical facts are too strong for the theorists of free competition. Mr. Chadwick, in one of his admirable reports, gives a drawing of a section of a London street under the old 1 Report Select Committee Railway and Canal Bills, 1853. Qns, 885-6. 268 PAPERS ON CURRENT FINANCE regime of competing gas and water companies. No one could forget the lesson given by that simple picture. The waste, danger, and inefficiency of that preposterous maze of pipes was too obvious to be tolerated. For such purposes unity of administration is essential. The case is similar, though not so strong, with the services of transport and communication. There is enormous waste, sometimes physical impossibility, in so multiplying these services as to admit of competition ; and even then there is no means of preventing the termination of competition by agreement, which local conditions make it easy to enforce. Mr. 0. F. Adams, in his very able book, Railroads : Their Origin and Problems (New York, 1878), tells us that " railroad competition has been tried all over the world, and everywhere, consciously or unconsciously, but with ene consent, it is slowly but surely being abandoned. In its place the principle of responsibility and regulated monopoly is asserting itself" (pp. 204, 205). His general conclusion seems to be that in this, and presumably in similar cases, the best policy is to allow amalgamation, not so much on account of its obvious economies, as because the larger the concern the more easily responsibility is fixed, and the more easily the pressure of public opinion is brought to bear upon and control it. About these monopolies of service, indeed, the common sense of the business world seems to have at last arrived at a settled opinion. In America, sometimes supposed to be pre- eminently the land of competition, the most thoughtful writers agree with our own in accepting monopoly as inevit- able and economical, and in occupying themselves with the legislation necessary to prevent that monopoly from becoming mischievous. It must be added that monopolies, once established, have a tendency to beget other monopolies. It is convenient for a railway company that its traffic should be in the hands of the smallest possible number of shippers. By giving special rates, it creates big traders, economises its yards and sidings, APPENDIX 269 and simplifies its book-keeping. At its heart, it creates huge works for the construction of its plant ; along its arteries, news and refreshment monopolies ; at its extremities, great delivery systems and monster hotels. The same thing goes on, less obviously, over the whole face of industry, greatly stimulated by the growth of municipal and joint-stock enter- prise. It must be apparent, then, that really effective competition is a much rarer phenomenon in the greater forms of enterprise than people sometimes suppose. It is very commonly assumed that competition exists wherever the State does not interfere. This is a very loose and misleading abuse of words. The mere absence of State interference has never given us compe- tition in any real sense of the term. On the contrary, nothing has been more favourable to the growth of practical mono- polies than the regime of laissez faire. A century's experience of even a partial application of this regime finds us everywhere confronted with growing monopoly. Monopoly, in short, seems to be nearly as significant a feature of our time as com- petition was of the time of Adam Smith. It is possible, there- fore, that the political economy and industrial legislation which suited the earlier period may require some adjustment or development in view of the new force. At any rate, the new force deserves our careful and unprejudiced study. What is the reasonable position to adopt towards industrial monopoly ? The very name monopoly is, by long usage, dyslogistic ; it seems to carry censure with it. Lord Coke said that " Monopolies were ever without law, but never with- out friends." Certainly it is only of late they have had any friends in the camp of the economists. The old monopolies of which he spoke were granted by favour, at the public expense, and against the common law presumption of free dealing. Those who sold them, and the individuals or cor- porations who fattened on them, were their friends ; but they had no others. They were execrated by the public whom they plundered, and the jealousy aroused by their privileges 270 PAPERS ON CURRENT FINANCE blinded the people to the real services they sometimes rendered. The cry was for competition, for competition presented itself as the abolition of privilege. The monopoly we have to deal with is of a different origin, and the temper of the public towards monopoly is sensibly changing. Modern monopoly does not spring from privilege or legislation, but from competition itself. It is competition which now comes in for popular odium ; even monopoly, with its order and permanence, seems a welcome relief from the iron rule and terrible uncertainties of so-called free competition. Besides, monopoly is gaining ground, and Darwin has taught us to be respectful in presence of success. Perhaps most of us feel towards monopoly much as we do towards popular government. Its evils are obvious enough, but we have to reckon with it. Our wise course is to make the most of its possibilities for good, and to exert ourselves to minimise its. powers of mischief. It cannot be denied that whatever evils may be attendant on monopoly, it has enormous advantages ; advantages which suffice to explain its success, and to induce us to view that success with a certain degree of sympathy. There are the enormous economies in administration and division of labour, the concentration of knowledge and skill, the unbroken tradi- tion of trade mysteries and crafts, the esprit de corps, which go with great firms. The monopolist, says Proudhon, centralises, capitalises, and consolidates the victories of industry. We save, too, the wasteful rivalries of competitive firms, the costly litigation of rival schemes, the utterly useless expenditure on advertisement. The consumer profits by the guarantee of quality, by the uniform, easily ascertainable price, by the absence of temptations to adulteration, by the greater variety of choice. Within limits, too, monopoly gives low prices. This is the American experience in the matter of railway freights. The amalgamations of 1869 to 1882 resulted in a reduction of freightage charge of 60 per cent., according to Mr. Ed. Atkinson. " Modern industry," says Mr. Seligman, APPENDIX 271 another American authority, " is a period of industrial anarchy. Combinations are designed to put an end to this anarchy. They do away with the excessive fluctuations of prices, per- forming much the same functions as legitimate speculation." Probably no class gains more by the rise of these huge firms than the employes. The larger the firm, the more effective is the public opinion of the employed. Their loyalty is of greater consequence to the employer. The adminis- tration is on regular and generally better principles. The master lives in face of the public. He pays the penalty of greatness in his exposure to criticism. The name of his firm is a household word, and its reputation must be above suspicion. It is hardly necessary to point out the very im- portant bearing of this upon the problem of State control. It is in the smaller, fiercely competing workshops that State control is most required, and by common consent it is almost an entire failure. In the larger concerns inspection is ex- tremely easy, and nearly superfluous. It is replaced by the public opinion of the employed, and the honour of the employer. It is, of course, equally true that monopolies have their special dangers, and are peculiarly open to abuse in certain directions. In some cases the monopolists may take advantage of their monopoly to enforce excessive rates or prices. But a due regard to their own interest will generally check this to a greater extent than is always supposed. There is more probability that though charges may be reasonable enough, the net profits may be indefensibly large, and the public may ask that in some way or other they should share in a gain partly due to an exceptional position. There are worse evils too than high rates, flowing from the enormous power wielded by a great industrial organisation. The Americans have found discrimination or personal prefer- ences, whether or not for value received, to be a more formid- able evil than high rates. Great corporations boast that they can make or ruin not only individuals but whole towns. They 272 PAPERS ON CURRENT FINANCE may tyrannise over their employes, socially and politically. There is an English Railway Company [the West Lancashire] which will not allow alcoholic liquors to be sold on its premises, and will employ no one who has not been for some years a total abstainer. Only teetotallers will be allowed to travel next. Nor is it to be supposed that such powers will always be used in the interest of the Corporation itself. Corruption is rife throughout the length and breadth of modern business. Privileges are sold by subordinates. Commissions are freely given : double tenders submitted. In fact, corruption is emphatically the curse of the age. Measured by every one of Bentham's tests, it is the most serious of modern offences. The temptations are strong ; the direct public injury very grave ; the indirect effects are all-pervading ; the whole tone of business life is lowered, and the respect for success and for property, as in general the reward of merit, is palpably weakened. These defects are brought out strongly in proportion as an undertaking approaches the character of a monopoly ; but it is a mistake to suppose that competition is any remedy for them. The competition of brewers does not prevent their control over the licensed houses, with all its mischievous restriction of the consumer's choice, and attendant abuses. Mr. Seligman tells us that on American railways " personal discriminations are most glaring where competition is most active during the railway wars." He adds that "the surest method of preventing them is universal combination or monopoly, in other words State ownership." " This," he says, " was one great reason why the railways were bought up by the Prussian Government." Time will not permit me to make a special reference to monopolies of raw material and to trading corners, which have often been worked so as to inflict grave injury on the public. It is unnecessary to dwell on the evil thus caused ; but it ia only fair to notice that it is not solely due to the fact of mono- APPENDIX 273 poly. It is largely due to the speculative mania which infests all forms of modern business. Moreover, the power of such monopolies to injure the public is very limited, if the mono- polists study their own interest, and have no indirect means of profiting by their operations. What, then, should be the policy of the State in view of this new tendency of industry to assume more or less com- pletely the character of monopoly ? I have tried to show that monopoly is inevitable, and in many respects of public advantage. It is a natural outgrowth of industrial freedom. It would be idle, therefore, for the State to attempt to repress it. For some time it was thought, especially in the typical case of the railways, that the State could keep it in check by promoting competition. The best authorities on State railway policy have everywhere abandoned this idea. It is recognised that competition will be both ineffective and wasteful ; and the tendency everywhere is towards what I may call the English policy of regulation. In fact, as soon as it is clearly seen that effective competition is impossible, the only alternatives are State control or State administration. The experience of Anglo-Saxon countries is, in my opinion, strongly against the policy of extending State administration. Industry can never be efficiently organised by popular suffrage. But the Anglo-Saxon race would tolerate no other principle, if the organisation is to be - governmental. The greatest danger of modern industry is corruption. State administra- tion is no remedy for this. It may itself become a new source of corruption in politics. I believe that the economical efficiency of State administration has been greatly overrated. We have not always clearly distinguished between the advan- tages due to monopoly, and those due to State direction. I see no reason to believe that the Post Office would be less efficient, if it were farmed by a private corporation, and merely controlled by the State. It is almost certain that this system could be applied with great profit to the work of the dockyards. Nor does the position of labour seem to be better in State F.C.F. 9 274 PAPERS ON CURRENT FINANCE than in private service, except, perhaps, in the one important matter of regularity of employment. The State is sometimes urged to acquire the railways. Jevons, in my opinion, has shown that there are very few economies to be secured by further railway concentration. And whatever the grievances of railway servants, their position will compare favourably with that of the men in the dockyards or the Post Office. The possible gains in the change to State enterprise are small ; the indirect injuries by the stifling of private enterprise are enormous. If, then, the State is not to administer industry directly, what are to be its relations towards the individuals or cor- porations who do administer it ? If competition is to land us in monopolies, laissez faire is out of the question. A few writers have been found, of whom only Bastiat and Mr. Herbert Spencer deserve mention, to pretend that, by some preordained magic, competition will give us universal harmony of interests and greatest possible happiness to the body politic. No one has ever yet viewed the action of monopoly with this happy-go-lucky complacency. Though it may be granted that the monopolist and the public have some common in- terests, it is absurd to pretend that monopoly is self-regulating, whatever may be said of competition. Those, therefore, who oppose some kind of public control for the great industrial monopolies are simply playing into the hands of the collec- tivists. They are the true apostles of socialism. Most of us will desire to see public control applied in such a way as to minimise the amount required, to avoid unnecessary detail, to leave the maximum of freedom to enterprise, and to secure the utmost intelligence and knowledge where limita- tions must be imposed. A large consensus of opinion among practical men seems to point to two principles of policy as best calculated to secure these ends. First, there should be every possible form of publicity in regard to all transactions affecting public interests, that is to say, in regard to nearly all economic transactions. With APPENDIX 275 due publicity, self-help would be far easier, and public opinion would come in to aid the right, and would largely dispense with the necessity for direct legal control. Secondly, where control is found to be called for, it should be as far as possible delegated to local or trade bodies familiar with the practical details of the case, and subject only to a mild revision from the central authority. Precise and rigid legislation should be avoided as far as possible. Most practical questions are questions of degree. These cannot well be dealt with by law. They are best referred to commissions or other bodies with a large lay element, and partaking of the character of a jury. In this way we might get over the main difficulties which arise in the administration of industry. But the knotty question of the distribution of wealth would remain to be attacked. The competition of the various monopolies for labour would ensure a certain proportionality of remuneration as between different employments. But what is to prevent the governing corporations or individuals from making ex- cessive profits by means of their exceptional position ? First, I think, the potential competition of rival monopolists ; for a monopoly is seldom absolute. Secondly, it is by no means certain that the profits must be large. The railway companies, for instance, though they compete very little with one another, cannot charge more than the traffic will bear, and have to compete with other modes of carriage. Hence, on the average, they only make a modest 4 per cent. Thirdly, when excessive profits could and would be made, it is open to the State to insist on profit-sharing, either with the nation, the consumers, or the employes. The former modes have been followed in dealing with the London gas companies and some Indian railways ; the latter mode has been adopted by the Paris Municipality in all contracts under its control. Either plan would seem to be preferable to a severely progressive income tax, or other impost on property ; for such taxes act as a direct discouragement to saving and premium on improvi- 276 PAPERS ON CURRENT FINANCE dence. It is conceivable, too, that public opinion may develop until it is considered as shameful for a man to make 30 per cent, in business as by usury, unless his gains are liberally shared with those he employs. Whatever is done, we must be careful not unduly to hamper the operations of self-interest, a motive power of enormous force, which we cannot at present replace by any equally effective impulse. We must also beware of stereotyping industrial methods. The best market must be provided for inventors, and the fullest opportunity afforded to that tendency to variation upon which the selection of the fittest, and consequently progress itself, really depends. In order to present a general view of the subject, I have been obliged to treat very broadly of questions each of them presenting grave difficulties, and deserving very detailed examination. What I have sought to show is, that in the growth of mono- poly we have an economic fact of the first importance, which must modify views as to State control founded on the assump- tion that perfect competition prevails. I agree with Mr. John Rae that the action of the State thus rendered necessary need not proceed on different principles nor with wider objects than those prescribed by Adam Smith. But it will necessarily take somewhat different forms. Hitherto the tendency has been to an increase in the complexity of the State control ; and Mr. Rae thinks we must expect this complexity to con- tinue increasing. I see many features in modern industrial progress, however, which tend to lighten the burdens of the central government ; and among them I think we may reckon this tendency to monopoly. For if it renders control more necessary, it also renders it more easy ; and it is possible that such control as is required may be very largely secured by the simple expedient of publicity. In any case, and whatever be the amount of control required, whether to prevent oppression by monopoly, or waste and degradation by competition, it behoves us to see that that APPENDIX 277 control is provided. It is no longer a question between laisser faire and regulation, but between wise and unwise regulation, or worse, between regulation and collectivism. Supreme power has been placed in the hands of a class not too much given to reflect, and especially familiar with the seamy side of the present regime. If the shoe pinches them too painfully they will be apt to fling it off, without asking whether a new one would be more comfortable, or even forthcoming at all. " The State may become social reformer without becoming Socialist," says Mr. Rae, one of our ablest writers on this question. I entirely agree with him. I will only add, in conclusion, that if the State does not become social reformer, it inevitably will become Socialist. II. FIXED EXCHANGE WITHIN THE EMPIRE. To the Editor of the " Bankers' Magazine." SIR, The proposal to establish fixed rates of exchange within the British Empire, made by the chairman of Barclays Bank in his address on January 24, seems to me to have received less public attention than it deserves. So far as I have noticed, it does not appear to have been formally con- sidered except in a letter from Mr. Frank Morris to the Morning Post, where that gentleman, with less than his accustomed acuteness, makes it the subject of an uncompromising attack. But what Mr. Goodenough proposes would really be a great advance in the development of our banking system, as I have tried to show for many years past ; and it is encouraging to hear that so high an authority regards the question as one of practical business. Mr. Morris says that to fix exchange within the Empire (it is already fixed within the United Kingdom) is " to make water run up-hill." The illustration is unfortunate. If the water companies did not make water run up-hill, our domestic life in large cities would be impossible. The editorial com- ment on Mr. Morris's letter, though it expresses sympathy with Mr. Goodenough's proposal, makes the reserve that the fixed exchange would be clearly artificial. No doubt ; but could not every step which civilisation makes in controlling to our convenience the irregularities of nature be condemned on the same ground ? 278 APPENDIX 279 Mr. Goodenough is really only asking us to go a little further on well-proved lines. He proposes to extend to the whole Empire the service of free remittance which the later develop- ment of our banking system has made so perfect within the United Kingdom. Why should I be able to make a payment to Edinburgh without any question of exchange rate, while that question at once arises in the case of a payment to Montreal or Melbourne ? Some will say because the first case is one of internal, the second of foreign exchange. Even so, this explains nothing ; but in neither case is there a " foreign " exchange. If for " foreign " we substitute the term " overseas," we are no nearer an explanation. The question of exchange arises whenever the cost of remittance has to be paid for by individuals, on the basis of a particular set of conditions. It is not necessarily a question of payments over-seas, or even of payments to foreign countries ; in fact it is a misfortune that the term foreign has become associated with exchange. The real distinction is found in the fact that in the last century our banks developed a machinery of free remittance within the limits of their system ; but that as soon as we cross the frontiers of that system we have to make special exchange arrangements for remittance. In the eighteenth century such arrangements had to be made in every case of inland remittance. How heavy these inland exchange rates were may be seen by a reference to Boase's Century of Banlving in Dundee (pp. 53, 274, etc.). Inland exchange rates, though small, still remain in the United States. The Federal Reserve Board are now trying to abolish internal exchange there. Would Mr. Morris think that their action also is due to "an unconscious phase of socialistic leaven " ? If not, at what precise point does the provision of parity of exchange incur his censure ? There is no magic connected with remittance over- seas. At present it usually involves crossing the frontier of a banking system. This need not necessarily be the case. Our banks are extending their frontiers. In the last fifteen years they 280 PAPERS ON CURRENT FINANCE have established direct banking connections over-seas to a remarkable extent ; one of the latest examples being the arrangement between Barclays Bank and the Colonial Bank. We have had a striking object-lesson, too, in the Ottawa Deposit system of the methods by which over-seas remittance may be economised. It is really a question for the banks whether they should or should not add to the many services they render the public the further service of free remittance at fixed parity between the various parts of the British Empire. This service need not, on balance, be very costly ; nothing like so costly, if one may guess, as the cashing and crediting of coupons which they now undertake. Such a development would be most timely. Our position as the international clearing-house will be subject to competition from more quarters than one after the war. New York and Amsterdam have both developed an acceptance business, and the Central Powers are not likely to be less active in their rivalry. Would not our long-standing financial supremacy be dis- tinctly fortified against the new attacks if we were able to say that exchange on London meant exchange on any part of the British Empire ? Exchange on London, since 1820 or thereabouts, has meant exchange on any part of Great Britain. Why not, after 1920, exchange on any part of Greater Britain ? H. S. FOXWELL. 1 HARVEY KOAD, CAMBRIDGE, February 15, 1918. GLASGOW: PRINTED AT THE UNIVERSITY PRESS BY ROBERT MACJ.EHOSE AND co. LTD 14 DAY USE RETURN TO DESK FROM WHICH BORROWED LOAN DEPT. This book is due on the last date stamped below, or on the date to which renewed. Renewed books are subject to immediate recall. JNTER-LIBRAR LOAM DEC 3 01964 LD 21A-60m-4,'64 (E4555slO)476B General Library University of California Berkeley U 417173 UNIVERSITY OF CALIFORNIA LIBRARY