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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. 

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. 





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. 


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- 




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, 


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, 




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. 


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, 



Magazine, Feb. 15, 1918 278-280 


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. 



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 

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 


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, 


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 


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 


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 


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 


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 


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. 



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 


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 

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 


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. 


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 <run upon the banks. The 
public fortunately had entire confidence in them. 
It was the bankers, not the public, who were panic- 
stricken, and who, like the United States banks in 
1907, did most of the hoarding. Some of them seem 
to have obliged their customers to take notes instead 
of gold, and so caused pressure on the Bank of Eng- 
land which might have had serious effects. The 
old tradition against direct re-discount with the Bank 
seems to have been thrown over. Mr. Lawson speaks 
euphemistically of the " extreme prudence " of " some 
of the clearing banks, who joined in the rush to the 

1 Even these meagre returns have been suspended since June last. 
Nothing could be more calculated to destroy public confidence. 


Bank of England, and dumped their own bills upon 
it " (p. 19). 

When we consider the absolute inadequacy of our 
reserve position, even for ordinary emergencies, the 
bankers' panic is intelligible enough. They were well 
aware that if the public generally had demanded in 
gold 5 per cent, of the sums standing to their credit, 
whether for purposes of export or hoarding, or even 
for extra pocket-money, the whole system would 
have collapsed. It would have been impossible at 
that time to obtain assistance from the Bank of 
France, as on three recent occasions. Again, we 
stand alone among the great commercial countries 
in having no provision for emergency issues of legal 
tender money. In other countries the National 
Bank can make such issues. The absurd Act of 
1844 makes this impossible in England, and thus 
deprives our note of that elasticity which is the 
special virtue and raison d'etre of this form of currency. 
In France, Germany, and the United States further 
provisions had been made. In the United States 
the Aldrich-Vreeland notes were ready, and were 
issued to the amount of over 75 millions, besides a 
Treasury issue of nearly 25 millions, and the usual 
Clearing House certificates. In Germany notes which 
could replace gold coin had been introduced before 
the war. As early as 1912, 15 millions worth of 
50- and 20-mark notes had been issued. In France, 
they were ready for the emergency. Notes of 20 


francs and 5 francs had been prepared in advance 
and sent out in good time ; the actual issue began 
on July 31st. Nothing of the kind existed here, 
though it had long been foreseen that it would be 
required. We were as unprepared financially as in 
a military sense. 

The abler bankers had constantly protested that 
more substantial reserves were necessary. It was con- 
sidered enough to say in reply that the Bank of Eng- 
land, in virtue of its peculiar position in the market, 
could always create credits amply sufficient to meet 
internal requirements, and that England, as a creditor 
country, could always command gold from abroad. 
But it is obvious that the Bank of England credits 
could not meet a run on the banks for gold. No 
doubt a great creditor country can always meet a 
sudden strain by withdrawing accommodation from 
those whom it has taught to expect it. But this is 
not usually considered good banking. It is certainly 
bad business. Here it is hard to agree with Mr. 
Withers. He assumes that our banks acted in this 
way, and finds in the deadlock thus produced the 
best proof of London's supremacy in finance (p. 78). 
To others it will seem a proof of weakness. Nothing 
is more likely to endanger that supremacy than action 
of this kind : two or three such financial victories 
would be fatal. We may be fairly sure that nothing 
but extreme necessity would have driven English 
bankers to such a shift. Even creditor countries 


require strong reserves if their banking reputation 
is to be maintained. There was a smart set of city 
writers who went still further in their opposition to 
larger reserves. If prudent banking, they said, meant 
sitting on a heap of gold, then any fool could be a 
banker. The real art of banking consisted in the 
economy of gold. There seems confusion here. By 
all means economise gold in the circulation and in 
the outlying banks. The last place for such economy 
is the central reserve. But these were the views 
which have prevailed in the City. 1 

Thus the outbreak of war found us with a banking 
reserve so cleverly " economised " that, as just stated, 
a 5 per cent, run on their huge deposits would have 
broken the banks. The situation would have been 
an anxious one in any case. But it was made in- 
comparably more serious by the complete collapse 
of the great markets which are so intimately con- 
nected with the banks, and which, as Mr. Conant so 
justly maintains, it is a primary function of the 
banking reserve to support. Next to their " cash," 
the banks rely chiefly on three lines of resources. 
There is the money at call, their holdings of bills, 

1 It is only fair to mention that leading bankers are believed to have 
agreed on a scheme, a few weeks before war broke out, which if it 
had been adopted would have distinctly improved the position, though 
not perhaps in quite the best way. But this scheme, of course, required 
the assent of the Bank of England, and the reform of the Act of 1844. 
Nor would it have been really effective until it had been in operation 
for two years or so, nor unless more adequate banking returns had 
been set up. It was too late. 


and their securities. As to their securities, the 
London Stock Exchange closed on July 31st. Wall 
Street " did not open." Most other bourses were 
already closed. It was clearly impossible to realise 
securities. The bill market too was paralysed. The 
Bank of England acted with its customary public 
spirit, but could obviously only deal with a fraction 
of the bills current. As for the call money, it has 
always been an open secret that the short loan market 
is the danger point in times of general crisis. 1 The 
system is only possible on the assumption that what 
one bank calls, either another bank or the Bank of 
England will be ready to lend. It must inevitably 
break down whenever there is general pressure. 
Thus the bankers found that what they usually re- 
gard as their liquid assets were now, in Sir Edward 
Holden's phrase, frozen. 

It was a desperate position, and it was not eased 
from the bankers' point of view by the fact that 
Government had conceded a Bill Moratorium. This 
Bill Moratorium was probably an inevitable measure. 
It seems in some form or degree to have been every- 
where adopted. But it did not improve the banking 
situation, except in so far as the banks were acceptors. 
The bankers not unnaturally came to Government 
for relief. What their demands were we can only 
conjecture. The concessions they obtained were 

1 Lord Goschen insisted upon this in his speeches on the Baring 
difficulty in 1891. 


stupendous. First the Government very wisely ex- 
tended the August Bank Holiday by three days : 
a period not so long as to cause alarm, and yet long 
enough to give time for consideration. It then pro- 
ceeded to provide emergency currency on a scale never 
before dreamt of. The Treasury were to issue full 
legal tender notes for l and 10s., payable in gold 
at the Bank ; and the bankers might obtain advances 
of these notes, at Bank rate, up to an amount not 
exceeding 20 per cent, of their deposit liabilities 
say a total sum of 225 millions. The same Act 
empowered the Bank " so far as temporarily autho- 
rised by the Treasury ... to issue notes in excess 
of any limit fixed by law." Postal orders were put 
on the same basis as to legal tender and redemption 
at the Bank as the currency notes. Further, Scottish 
and Irish notes were made full legal tender, and banks 
in Scotland and Ireland were not under obligation 
to pay their notes except at their head offices, and 
might pay, if they thought fit, in the currency 

These provisions might have been thought amply 
sufficient to maintain cash payments. But on the 
same date (August 6th) as they were enacted, the 
moratorium already granted in regard to bills was made 
with certain exceptions general. Thus cash payment 
became optional, not only from banks, but generally ; 
the only important exception from the banking point 
of view being that notes were still payable in cash. 


'' The flag was lowered," as Mr. Withers has it : " for 
the first time since the Eestoration," Mr. Lawson 
says, " the collection of current debts was interfered 
with." The general moratorium was undoubtedly 
the most unfortunate of our emergency measures, 
and in all probability we shall not be allowed to forget 
it. 1 In comparison with it, the suspension of cash 
payments by the Bank in 1797 seems a comparatively 
modest precaution. It may, of course, have been ne- 
cessary : but the necessity is not apparent to observers 
who have only the ordinary means of information. 
Mr. Lawson (on p. Ill) states very fairly the argu- 
ments for and against the measure. Though he 
abstains from passing a final judgment, it is pretty 
clear what his judgment would be. 

It can hardly be doubted that the relief measures 
erred by excess rather than defect. Out of the 225 
millions offered to the banks, the banks actually 
borrowed less than 13 millions, which was soon 
repaid. Some of the greatest banks made no use 
of the moratorium. Mr. Lawson says : " Without 
declaring a moratorium the Americans gave them- 
selves the benefit of it. On the other hand, we de- 
clared a moratorium, but most of us paid our debts 
all the same." There is a good deal of truth in this. 

1 Cf. Mr. A. D. Noyes's article in the Yale Review for October, 1915. 
He speaks of the " stupendous loss in economic prestige which London 
has already suffered." The language is somewhat over-coloured, and 
perhaps reflects the known aspirations of New York to displace London 
as the world's financial centre : but it deserves note. 


But why did the New York exchange rise to $7, if 
Americans were not trying to pay their debts ? 

But whether the relief measures were or were not 
excessive, the huge scale on which they were granted 
is some indication of the kind of provision the banks 
thought necessary for the situation created by a 
European war. Why had no approach to an ade- 
quate provision been made ? The war could have 
been no surprise to bankers. It had long been 
expected and prepared for in the great European 
centres ; and after the experience of the summer 
of 1911 our bankers could have been under no 
illusions. Innumerable warnings had been given : 
the very date of the declaration of war had been 
foretold by well-placed observers. By Mr. Lawson, 
at any rate, war was seen to be inevitable two years 
before the actual outbreak. Writing in 1912, he 
said : "It is no longer any secret that we are drift- 
ing into a trial of strength with the most powerful 
of European States." 1 But here a question has been 
raised which seems to deserve more consideration 
than has been given to it by either Mr. Lawson or 
Mr. Withers. Would any reserve provision that 
could reasonably have been made in advance have 
appreciably strengthened our position in view of a 
war crisis ? There are some who think it would. 
They think that reasonable reserve and emergency 
provision would have made a general moratorium 

1 Modern War and War Taxes, p. 138. 


unnecessary. Granting that a bill moratorium was 
inevitable, they think it open to question whether 
it would have been necessary to suspend all the 
usual finance and acceptance business, or even to 
make a prolonged suspension of the stock market 
(subject, of course, to the necessary restrictions on 
trading with the enemy). The question is bound up 
with another. Did the collapse of the great markets 
paralyse the action of the banks, or was it the with- 
drawal of adequate banking accommodation that 
paralysed the markets ? x The absolute suspension of 
the markets was a heavy blow, not only to the banks, 
but to the general business of the country. Might 
they not have been kept alive, though with their 
functions restricted, if due and timely preparation 
had been made ? It is a difficult question on which 
no one could be anxious to dogmatise. One thing 
may fairly be said. The object was so vitally im- 
portant that it was worth while to have made a 
determined effort to secure it. No such effort was 

Mr. Lawson's book throws valuable light on these 
matters. The position of the great bill and stock 
markets during the crisis, and under the emergency 

X A competent observer, Mr. Spalding, says, "The consensus of 
opinion, outside banking circles, seems to be that the action by the 
banks, in calling up all their loans from the discount brokers and other 
similar borrowers, to some extent precipitated the crisis." Foreign 
Exchanges, p. 98. 

The main purpose of a banking reserve is to make such pressure 


measures, is very fully treated by him. His book is 
much wider in scope and more fully documented 
than Mr. Withers's sketch, and brings the history 
down to a later date. What that date is does not 
always clearly appear. The impression one gets is 
that the book is to some extent a collection of articles 
written at different times. But the whole is well 
arranged and forms by far the most important con- 
tribution to the critical history of the war crisis 
which is at present available. The bill market is 
not so prominent in his pages as in those of Mr. 
Withers : but Mr. Lawson gives a useful account of 
the estimates that have been made of the bills in 
circulation at various times. Both writers accept 
the general opinion that at the time of the crisis 
something like 350 millions of bills were current 
in the London market. Both writers, again, find 
that the value of the earlier forms of relief was over- 
rated. Mr. Withers endorses the very general view 
that the banks might have " shown greater readiness 
to assist in the task of reorganising exchange " 
(p. 74). Mr. Lawson is less inclined to criticise the 
banks, but justly lays stress on the supreme services 
rendered by the Bank of England. It was, as he 
truly says, the mainspring of all the emergency 
measures. ' Without it there could have been no 
heroic bill-discounting, no conjuring with Treasury 
guarantees for all sorts of financial and commercial 
debtors. The Bank of England furnished the 


talisman, and the Chancellor of the Exchequer 
applied it " (p. 13). 

The services rendered by the Bank were certainly 
remarkable. The White Paper recently issued shows 
that in the five days ending July 1st the Bank had 
made general advances to the amount of 27 millions ; 
while its total advances to bill-brokers are estimated 
at 30 millions. In the week ending August 5th 
its gold reserve declined 17 millions, notwithstand- 
ing a receipt of 5j millions, leaving the amount 
as low as 11 millions. The proportion dropped in 
a fortnight from 52 per cent, to 15 per cent. The 
Bank state that they had refused no legitimate 
applications for assistance. The whole mass of 
liability on account of relief measures, nominally 
assumed by Government, of course fell in the first 
instance on the Bank. Some idea of the amount 
of this liability may be gathered from the statement 
in the Eevenue returns that 160 millions had already 
been repaid. It is clear that the Bank Directors 
showed their usual courage and did all that could 
possibly have been expected of them. 

Passing to the Stock Exchange position, we find 
Mr. Lawson here at his best. He is not satisfied 
that this market need have been closed. Securities 
had been depreciating for a long time before the war, 
and in the ten days before the House closed there 
was a further fall of no less than 188 millions (or 
6 per cent.) in the representative securities scheduled 


by the Bankers' Magazine. The open account, too, 
was small. So Mr. Withers (p. 121) : " It was gener- 
ally agreed by most active stock-brokers in the 
middle of July that they had never seen the Stock 
Exchange account so small." Subsequent returns 
showed it to be about 80 millions for London 
and 12 millions for the country ; hardly one- 
quarter of the liability in the bill-market. Mr. 
Lawson thinks that the banks had much more 
at stake than the members of the Exchange, 1 and 
that they exerted their influence in favour of closing, 
a step which he does not believe the Committee 
would have taken on their own responsibility. But 
he admits that direct pressure was put upon the Com- 
mittee by a section of the members. " The Stock 
Exchange was made the scapegoat of the more 
powerful and higher-placed offenders. . . . After 
hours on July 30th, forty large firms are said to have 
notified the Committee that if the House re- opened 
they would have to hammer themselves " (p. 54). 
There we must leave the matter. Of the provisions 
made .for immediate relief to the Exchange, and for 
facilitating the postponed settlement of November 
18th, Mr. Lawson seems to approve. The under- 
taking of the " banks to which currency facilities 
are open" not to press for repayment of loans 

1 " It is estimated that the banks had lent 250 millions to their 
customers against stock exchange securities as collateral." Withers, 
p. 122. 


until after the war seems, as lie says, to have been of 
the nature of a quid pro quo. But he is very critical 
of the arrangements made on the re- opening of the 
Exchange. Chapters IX. and XII., in which he 
deals with these matters, are among the best in 
the book. Incidentally he shows that our habit of 
fortnightly settlement and the contango methods, 
though extremely convenient in many ways, have 
their disadvantages, as Americans have always con- 
tended, and certainly proved awkward in this war 
crisis (pp. 128-9). It is a point that deserves careful 
consideration ; though we are hardly likely to change 
our practice. But there will be much sympathy 
with Mr. Lawson's general view as to the restrictions. 
He complains that from first to last the Stock Ex- 
change was treated as though it were a national 
danger, instead of an essential piece of the nation's 
economic machinery. The re-opening regulations 
were unnecessarily drastic. The prohibition of new 
issues except by special license (sometimes, as a 
recent case has shown, most arbitrarily withheld) 
played directly into the hands of Wall Street. In 
a later passage, written after three months' experi- 
ence of the new rules, he says that, as he had 
anticipated, " their effect in stimulating American 
competition has been very remarkable" (p. 244). 
So in regard to the minimum price rules. He 
thinks the fear of German liquidation exaggerated. 
"First, the bulk of it was done before the war 


commenced ; second, the completion of it was effected 
chiefly through Amsterdam and New York. . . . 
Treasury regulations of any kind would have been 
futile, and those actually issued were far. more em- 
barrassing to our market than to Berlin." The 
C.P.R. method of refusing to transfer shares out of 
enemy names was an infinitely more effective check 
than any Treasury restrictions could be (p. 187). 
The provincial Exchanges seem to have been allowed 
more freedom. Mr. Lawson says " they faced the 
crisis more boldly and wisely than the metropolitan 
one was allowed to do. They also offered a stronger 
resistance to the encroachments of the Treasury " 
(p. 58). It is hard to avoid the conclusion that the 
restrictions were excessive, and that not merely the 
Exchange, but the country, has suffered in conse- 
quence. It is obviously desirable, for instance, to 
encourage the sale from this side of anything market- 
able on Wall Street. Yet the enforcement of Leeman's 
Act and the obstacles to arbitrage have so impeded 
free dealing as greatly to obstruct such sales. You 
cannot cramp one of the vital organs of an economic 
community without impairing its general economic 

The Treasury issue of Currency Notes, which was 
one of the earliest emergency measures, has been 
the subject of so much, and such divergent, criticism 
that it seems to call for special remark here, all the 
more as neither Mr. Lawson nor Mr. Withers seems 

F.C.P. B 


quite satisfactory in his handling of the matter. 
We have an influential Committee of the British 
Association recommending that the issue should be 
withdrawn, and that if paper money is required to 
replace sovereigns and half-sovereigns it should be 
provided by Bank of England notes of these denomi- 
nations. It is a curious recommendation because, 
as everyone knows, the Bank of England issue is 
practically made by the Bank as the mere instrument 
of the Treasury. The Directors of the Bank have 
no control or discretion whatever in regard to the 
issue, which is purely mechanical. Sir Richard 
Cooper, on the other hand, demands in the House 
of Commons that the Government should take over 
the present Bank issue. Now there is, of course, 
one important distinction between the two issues as 
now conducted. Neither issue is a bank issue in the 
ordinary sense of that term. But the Bank of 
England issue is made under conditions which are 
defined by statute, and which in practice limit its 
uncovered element. Even here, however, it must 
be observed that the 'Treasury may be and has been 
invested by Government with power to suspend the 
statutory conditions. But the new Currency Note 
issue is at present absolutely undefined. So far as 
the Act is concerned, " Currency Notes may be issued 
to such persons and in such manner as the Treasury 
direct." This may be a reasonable arrangement at 
a time of crisis, but, as Mr. Withers objects, is hardly 


defensible as a permanent arrangement. Definite 
statutory regulation, however, could easily be pro- 
vided. What is still more objectionable than the 
absence of regulation is that the actual method of 
issue is concealed, and the whole weekly return 
" quite incomprehensible except to those who have 
privileged access to an understanding of its mysteries'* 
(Withers, p. 113). This is one of the many examples 
of the policy of secrecy and mystification which 
has done so much to undermine public confidence 
during the war. It makes useful criticism almost 
impossible. As Mr. Lawson says. " The first con- 
dition of thorough and effective inquiry is a relaxa- 
tion of the severe reticence which characterises most 
of our banking returns " (p. 51). But one point 
should be clear enough. The Currency Notes are 
certainly payable in gold on demand. Why then 
does Mr. Lawson speak of " the fiction of their being 
gold notes " ? They are as clearly convertible, under 
section 3 of the Act of August 6th, as the regular 
issues of the Bank are. Indeed, as Mr. Withers 
properly observes, this Act imposes a new liability 
on the Bank not recognised in its weekly account 
(p. 117). It is not so clear whether the Bank has 
any control over the gold reserve of 28j millions 
now held against the notes. This, again, is not 
shown in the Bank return. 

But what is, or should be, the purpose of an issue 
of this kind ? Some definite conclusion on this 


point is surely essential before we can pronounce 
on the expediency of the issue. It does not seem 
to have been duly considered by the critics, and this 
may explain their very various utterances. Per- 
haps the difficulty partly arises from the extreme 
ambiguity of the term " note." This name is given 
to a variety of documents which have little in com- 
mon but their physical character and their currency. 
Some are issued by Governments, some by private 
persons : some are legal tender money, some merely 
forms of bank credit, like the cheque or the credit 
against which the cheque is drawn. Some, like the 
gold and silver certificates of the United States, are 
really convenient substitutes for coinage, backed by 
their face value in metal. Our Bank of England 
notes come near to this type. Others, again, are 
issued as auxiliary to existing metallic currency, 
whether of standard coin or small change. Again, 
the occasions of the issue may be quite different : 
the notes may be issued to meet quite different pur- 
poses. Mr. Conant insists upon three of these as 
primary. 1 Notes may be used to meet (a) a seasonal 
demand for currency, (b) a crisis or emergency demand, 
(c) a demand for the concentration of the stock of 
gold. To this one might add that notes may also 
be used (d) as the simplest form of bank advances 

1 Bankers' Magazine (New York), Sept. 1915." The Modern Field 
for the Bank Note: its Service in Emergencies and in the present 


(cf. the early Scottish banks), or (e) as a cheap form 
of till-money, an instrument of banking economy ; 
and lastly they have too often been used, especially 
if inconvertible, (/) as a last resource for financing 
Governments, a kind of forced loan. Perhaps we 
may assume that there has been no question, so 
far, of using currency notes in this last fashion ; and 
they clearly cannot serve uses (d) and (e). Coming 
back, then, to Mr. Conant's three primary uses, the 
currency notes were neither intended nor required 
to serve as seasonal currency, after the manner of 
the monthly and quarterly issues of the Reichs- 
bank. We rely on Bank of England credits to 
discharge this function in England. 

The real question, then, is between Mr. Conant's 
other two uses. Are we to regard the currency 
notes as an emergency issue or as a means of con- 
centrating our stock of gold ? At the outset, no 
doubt, these notes were issued and intended purely 
as an emergency issue. The primary object was to 
allay the bankers' panic and to prevent the develop- 
ment of panic in the general public. Later, too, it 
may have been used in somewhat similar fashion to 
lessen the strain on the banks caused by the sub- 
scriptions to the enormous war loans. But if this 
were the real ground for the issue, it ought long ago 
to have been withdrawn from circulation. It cer- 
tainly was not the purpose for which such an issue 
had long been planned. The normal function of 


the currency notes was to serve as a means of in- 
creasing our financial strength by the concentration 
of all our available gold at the centre. Germany 
had largely effected this before the war by the issue 
of smaller Reichsbank notes ; and since the out- 
break of war, first Germany, and then France, have 
increased their central holding of gold in a quite 
remarkable way. For more than a generation past, 
some of the ablest Governors of the Bank of Eng- 
land had steadily held in view the adoption of 
a similar policy in this country. They regarded our 
gold currency as our first line of defence in a serious 
war. Hence they were opposed to a l note issue 
in peace ; because if such an issue had been made 
on the ordinary lines, a large part of the coin replaced 
would never have been held in reserve, but would 
have left the country. But in a war issue, Govern- 
ment can control the terms of issue, and might so 
have arranged it that by this time some 100 millions 
of gold would have found their way from the circu- 
lation to the central reserve. A costly gold circu- 
lation is one of the first luxuries we should economise 
in time of war. But the concentration of gold is 
not merely an economy in expense. It is an immense 
increase of our economic resources. l in the central 
reserve, Lord Goschen used to say, is worth 5 in 
the pockets of the people. 

From this point of view the Treasury issue has 
been very largely a failure. We do not know how 


much additional circulation is required by the heavy 
military expenditure and the rise of wages. The 
currency notes may have done good service in pre- 
venting withdrawals of gold from the Bank for this 
purpose. But while in Germany the gold reserve 
has increased by some 55 millions since the last 
pre-war return, and the French reserve by some 40 
millions in the last four months, there is no evidence 
that any appreciable amount of gold has reached 
the Bank of England. 1 Between July 29th, 1914, 
and July 28th, 1915, the Bank lost 22 millions to 
the general circulation. Some 15 millions of this 
may have come back since ; but the Bank has been 
wholly dependent for any increase in its resources 
on purchases of imported gold. Meanwhile the 
Treasury issue, though it has failed to discharge 
the only purpose which could justify its continuance 
now that the time of emergency has passed, shows 
a steady increase, and has now reached an amount 
of 90 millions odd, having doubled in five months. 
Where is the gold which this large issue must have 
superseded, and would, if rightly managed, have 
brought into the national reserves ? With the excep- 
tion of the 28,500.000, which has long been set 
apart as currency note reserve, we are forced to the 
conclusion that most of the gold is being hoarded 

1 " So far gold has not been added to the Bank from internal circula- 
tion, but rather the reverse." Bankers' Magazine, October, 1915, 
p. 485. 


by the banks or by some of them. It was in the 
power of the banks to make the issue a great success. 
They might perhaps have been compelled to do so 
if suitable conditions had been imposed when assist- 
ance was first given them by the Government. 
The public behaved well. They gave the currency 
notes a good reception, and often voluntarily brought 
in gold to the banks. It is not their fault if the issue 
has so far failed. Of course, the failure is not com- 
plete. If the gold is not yet where it should be, in 
the central reserves, large quantities, at any rate, 
have been withdrawn from the hands of the public. 
This is a step in the right direction. To recall the 
Treasury notes, as some advise, would only be a 
retrograde movement, even if it were practicable. 
What is wanted is to complete the concentration of 
gold which the notes make possible. 

The question of Ways and Means does not enter 
into the scope of Mr. Withers's book. Mr. Lawson 
deals with it energetically and at some length. His 
chapter on " Our Intricate and Perplexing Taxes " 
is full of useful suggestion. What strikes him, and 
so many other observers, is the remarkable disregard 
of administrative difficulties and indirect consequences 
so often shown. A recent illustration of this was 
the proposal to make bankers collect income tax on 
deposits, and, again, the scheme for levying income 
tax on wage receivers by quarterly instalments. 
Mr. Lawson considers that it is the lower middle 


class who are most heavily penalised by current taxa- 
tion. 1 He strongly disapproves of the Vote of Credit 
system. All expenditure under this system is made 
on dummy estimates and withdrawn from Parlia- 
mentary control. The procedure was condemned 
by the Treasury Minute of February 14th, 1880, 
which he quotes on p. 313. Mr. Lawson foresees 
" the doom of the One-Man Budget "; and apparently 
looks forward to the institution of a Standing Com- 
mittee on Finance, such as exists in France. His 
general criticism may be summed up in a single 
sentence : :e The two most essential elements of 
sound finance have been very little heard of, 
namely, business management and administrative 

The most recent parts of Mr. Lawson's book do 
not seem to be later in date than May, 1915 ; and he 
does not go into detail as to the methods, outside 
taxation, by which money has been raised. But 
the outstanding feature of our finance has been the 
remarkable success of the Treasury Bill. This applies 
more especially to the system of continuous issue 
at fixed rates : which has the great merit of suiting 
the convenience of the money market, and at the 
same time giving the central authority an effective 
control over the market rate of discount. These 
bills have been current to an amount of 275 millions 

1 In his Income Tax Table, p. 298, there is an obvious slip of shillings 
for pence in the rates. 


without any of that disturbance which a loan of the 
same amount would cause. It is clearly impossible 
to meet the enormous demands of the war without 
recourse to longer-dated obligations ; but when we 
consider that the greater part of the money borrowed 
is being constantly returned by war expenditure, the 
presumption seems to be in favour of continuous, 
rather than catastrophic, loans. Mr. Drummond Eraser 
and Mr. Gibson have advocated the continuous 
issue of War Bonds of various amounts and dates, 
down even to the value of 5, and period of one year ; 
and their arguments seem to be well worthy of con- 
sideration. It has often been asked, too, why 
the lowest denomination of Treasury Bill should be 
1,000. This excludes a great mass of possible 
private investors in these bills. Here we touch 
closely on another issue which has come very much 
to the front in the war finance of all the great coun- 
tries. Is it better that Governments should be 
directly financed by the public, or mainly by banks 
using the money of the public ? Neither Mr. Withers 
nor Mr. Lawson touches on this point. Mr. Gibson 
has more than once expressed decided views in favour 
of direct subscription ; but some of his arguments 
are not convincing. Each method seems to have its 
own advantages, and it is hardly possible to dogma- 
tise on the question. We can all agree in accepting 
Mr. Gibson's general account of the problem of war 
finance. " The whole art of loan raising is to 


substitute scrip for goods with as little financial 
disturbance as possible." 

But so far, to use a phrase of Mr. Lawson's, " we 
have only been shuffling the cards for the real game 
which is to come." We have simply been dealing 
with matters of account, with the machinery of 
finance. If we were, as Germany now practically 
is, a self-sufficient country, the problem of finance 
would be fairly simple, though it must necessarily 
run into alarming figures. If the production and 
consumption of the nation were so adjusted as to 
leave a margin above the civil consumption sufficient 
to furnish the extra supplies of food, munitions, etc., 
required to carry on the war then the question of 
arranging for the postponement of payment for the cost 
of the war consumption could be settled without any 
great difficulty. It might even prove, as Mr. Gibson 
thinks, that the war could be financed at 4 per cent., 1 
for, as he says, the success of war loans is more depen- 
dent on the right mobilisation of the national industry 
than on the rate of interest. But here we come to 
the real crux of the situation. The real problem 
concerns the economic conditions which lie behind 
the Chancellor's figures of account, viz., the balance 
of national production and consumption. What is 
absolutely essential, and after more than a year of 
war we have hardly begun upon it, is the reorgani- 
sation of our whole economic life, consumption as 

1 Bankers' Magazine, August, 1915, p. 147. 


well as production, upon a war basis. Production 
must be increased, or non-military consumption cut 
down, until there is a sufficient balance to meet the 
military consumption. When we consider that the 
extra consumption due to war (including advances 
to Allies) is estimated for the next financial year at 
1,625 millions, as against a normal annual con- 
sumption of little over 2,000 millions, we can see 
how very serious the position is. 

The necessary reorganisation ought to have been 
put in train at the outset. It must have been, if, 
like Germany, we had been a nearly closed State. 
But our sea-power enabled us to obtain temporary 
assistance from outside. This was a doubtful boon. 
The assistance disguised the real position, without 
providing any permanent amelioration of it. If it 
had been given on terms of long-dated loan, it would 
still have increased the weight of debt the country 
has to carry ; but it might have been worth our 
while to incur this inconvenience rather than to put 
severe restrictions on national consumption. But 
the neutrals in this war are all borrowing, not lending 
nations. Hence our purchases were made on ordi- 
nary commercial " cash " terms, that is, by short bills 
(sometimes, we are told, actually by cash in advance). 
The result is that we now find ourselves faced with 
an exchange problem of a much more urgent character 
than any question of loan liability. The conse- 
quences of failure to meet cash liabilities are well 


understood. They stand on a quite different plane 
from the difficulties imposed by borrowing for long 
terms. A great business may prosper on borrowed 
capital ; but inability to meet its bills is fatal. What 
the present amount of our adverse balance on ex- 
change is can only be roughly guessed. We have 
no definite figures as to our earnings on freights, as 
to expenditure of foreigners in England, as to remit- 
tances to relations from abroad, as to the value of 
our financial and commercial services to foreigners, 
nor as to the interest on our foreign investments. 
We may be certain that the war has disturbed all 
normal estimates for these items. Nor do we know 
the exact figures of our advances to our Allies, 1 
nor the amount of imports on Government account : 
both items of first-rate importance. But six months 
ago estimates were made which put the adverse 
exchange balance for the year at 500 millions. We 
must take this as a minimum figure. Of course, 
this adverse balance has been largely set off by 
special operations. Apart from the normal adjust- 
ments of exports and imports, whether of goods or 
services, there are four main methods by which 
exchange can be rectified, and we have used them all. 
We have exported gold, we have sold securities, our 
banks have made private finance arrangements, 
and, finally, we have raised a dollar loan in New 
York, jointly with France, for 100 millions. We have 

1 Lately estimated by Mr.McKenna at 423 millions for the year 1915-16. 


also cut down rigorously our foreign investments. 
How far all these operations have gone towards 
reducing the adverse balance can only be matter of 
conjecture. What is certain is that all the chief neutral 
exchanges are against us, by percentages ranging 
from about Ij per cent, to 9 per cent. ; the New 
York exchange, most important of all, having dropped 
at one time to 7j per cent, discount, and standing 
now at about 5 per cent. 

The remedial measures were carried out in a way 
that is certainly open to criticism. There are two 
sides to every exchange question, just as there are 
to the question of high prices. There are obvious 
objections to low exchange, which makes payment 
for imports costly. But on the other hand, it is all 
in favour of exports of goods and of the sale of secu- 
rities. Hence it is eminently desirable that the 
various operations for rectifying exchange should 
be carried out by some concerted arrangement, if 
not by one authority. Our resources in the way of 
securities marketable on Wall Street are limited, 
and it is desirable to sell them to best advantage, 
i.e. on a low exchange. If the bulk of them could 
be sold by a committee of experts, much as Barings' 
securities were realised after 1890, then gold exports, 
bank finance, and loan operations might be so arranged 
as not to clash with the sale of securities. 1 The 

1 After these lines were written, we learn from the Press that arrange- 
ments of the kind suggested may be made : a year too late. 


American loan itself was only a qualified success, 
as might have been expected. Up to the war the 
United States had been a great borrower from 
Europe. In spite of the stimulus which the war 
has given to her trade she cannot suddenly become 
a lender upon a large scale. What she was able 
and willing to lend might probably have been obtained 
with less fuss if special subscriptions to the regular 
war loans had been opened in New York, with in- 
terest payable in dollars, not subject to British 
income tax. If the amount obtained in this way 
proved inadequate, it would then be possible to 
supplement it by private finance arrangements of 
the familiar type, but perhaps for longer terms. 
The plan adopted of raising a special loan seems to 
have created some political difficulty, and hardly 
improved the national credit. 

In any case, our resources for rectifying an adverse 
exchange balance are strictly limited. None of the 
four expedients to which we have resorted can be 
continuously available to any considerable extent. 
The exchange difficulty is only the symptom of a 
more radical difficulty. The real significance of the 
adverse exchange is that our national economic life 
is very far from being organised on a sound war 
basis. The margin between the output of our in- 
dustries and the consumption of our civil population 
is not sufficient to furnish the military supplies 
which we have undertaken, and are obliged, to 


provide. This is the fundamental issue, and we 
ought to have faced it long ago. Our credit is ex- 
cellent and our financial methods sound. But the 
best finance in the world cannot enable a nation, 
situated as we now are, to go on continuously con- 
suming greatly in excess of its production. 

Our papers are never tired of dwelling on the 
weakness and artificiality of German war finance. 
Too much can easily be made of this. It will prove 
awkward for Germany when the final settlement 
comes. But till then, what is important is not so 
much the machinery of finance as the national organi- 
sation behind it. If Germany, after supplying her 
population with bare necessaries, is still able to 
produce what is required to keep her armies in 
the field, then, however artificial her finance may 
be, it will not prevent the carrying on of the war. 
There is a passage in the rather flamboyant speech 
of Dr. Helfferich on the Third German Loan which 
is not without instruction for ourselves. "The 
wealth," he says, " to which our success is due is 
not the sum of our savings, but rather our whole 
economic technical apparatus. It lies, above all, in 
the living labour power of our people, who, in war, 
work and create for war. . . . We carry victory 
within ourselves." 

If victory does not lie within us, we certainly 
cannot find it elsewhere. The modern English- 
man is apt to think he can. The popular trade 


philosophy, which studiously ignores the importance, 
almost the very existence, of political frontiers, has 
allowed us to drift into a complacent dependence 
upon foreign nations. Nothing but our sea supre- 
macy makes the position possible, even in time of 
peace. But war emphasises the always vital impor- 
tance of the nation ; and in a world- wide war like 
this, when the only, neutrals are borrowers and not 
lenders, it is clear that the belligerent groups must 
in the main be self-sufficient. We must rely on our 
own resources ; it is high time we began seriously 
to organise them. Maximum efficiency, minimum 
expenditure : these must be our objectives. Fortu- 
nately there are wide margins for economy in both 
directions. But they must be utilised to the utmost. 




THE financial position remains serious enough, but 
it has improved in certain respects during the last 
three months. Broadly, one may say that while 
the pressure of the enormous war expenditure con- 
tinues to increase, our machinery for dealing with it 
has received important developments, and is work- 
ing as smoothly as could be expected. The purpose 
of this article is to consider one or two points of 
immediate interest, upon which more or less differ- 
ence of opinion exists, in regard to the details of this 

A glance at such estimates as are available will 
give some idea of the burden the nation has to bear, 
and may help us to judge how far it can be met by 
taxation, and what will remain to be raised by borrow- 
ing. We shall begin the next financial year with our 
debt more than trebled by the war, at about 2,400 
millions, subject to an interest charge increased to 
fourfold, say 80 millions, or, perhaps, if adequate 

1 An article contributed to the Economic Journal for March, 1916. 



sinking funds are provided, standing at 100 millions. 
For the current year, 1915-16, the national expen- 
diture is estimated at 1,590 millions, of which about 
one-fifth may come from taxation. The estimate 
is for a revenue of 305 millions, but this may be 
exceeded by some 20 millions. For the next fiscal 
year the expenditure is estimated at 1,825 millions ; 
some think it will reach 2,000 millions. Taxation, 
as at present fixed, is expected to account for 387 
millions, or hardly one-fifth of the increased charge. 
If revenue continues to be in excess of estimate, 1 
this figure might be put at 400 millions. It should 
be noted that more than one-fourth of the current 
year's expenditure represents loans to Allies, and 
that similar loans enter into the estimates for next 

The figures may be given per day and week, which 
for some purposes is more convenient. In 1916-17 
we shall probably spend from 5 to 5| millions a day, 
35 to 40 millions a week. An increase of 15 per cent, 
in the taxation now arranged for that year would 
give us 460 millions, or Ij millions a day, say 
9 millions a week as an outside estimate. If 
taxation could be increased 37 per cent., say to 
550 millions a year, it would give us Ij millions a 
day, or 10 J millions a week. Perhaps this is more 
than we can expect at present : but we ought not 

1 Both revenue and expenditure may be expected to increase above 
estimates in consequence of rising prices. 


to be content with much less. For if the war lasts 
till the close of the year 1917-18 the gross debt 1 
will be about 5,000 millions, and the total charge to 
be defrayed out of revenue, when interest, sinking 
funds, pensions, etc., are taken into account, hardly 
less than 600 millions. Whatever the necessary 
taxation may be, the limit must be reached before 
the artificial prosperity of the war ends. It will be 
impossible to increase taxation in the trying period 
of the transition to peace conditions. 

These figures are necessarily very rough, and will 
no doubt be made more precise in the coming Budget 
statement. But they go to show that we shall not 
be safe in assuming that the amount remaining to 
be raised, otherwise than by taxation, will be less 
than 26 millions a week in the next fiscal year. 
It may very well be 30 millions. There seem to be 
only three ways in which this sum can be raised 
(for a favourable balance of trade is out of the ques- 
tion). It must be raised by loans placed at home, 
by loans placed abroad, or by the sale of securities. 
It is estimated that the balance of international 
indebtedness will be 600 millions against us for 
next year. To rectify the exchanges, then, we 
must raise loans abroad, or sell securities, to the 
extent of 600 millions. This is probably the ex- 
treme limit of what can be obtained. Of this sum 

1 Loans to Allies must be deducted to get at net debt, but Great 
Britain is immediately responsible for the gross amount. 


it lias been estimated that not more than 250,000,000 
will be available for Government, as distinguished 
from commercial, purposes. Call it 5 millions a 
week. We are thus left with from 21 to 25 millions 
a week to be financed at home. 

The national savings before the war were supposed 
to reach 400 millions a year. Some think that in 
the current fiscal year they will reach double that 
amount, or, say, 16 millions a week. It is not clear 
whether in this estimate the sale of securities to 
purchase War Loan is regarded as " saving." Per- 
haps, for our present purpose, it may be. We are 
certainly able to save more than was saved last year. 
But the margin to be made up in the next fiscal 
year, if these estimates are at all correct, is from 5 
to 9 millions a week, or nearly as much as our total 
savings in normal times. It comes to this, then, 
that next year's saving, like next year's taxation, 
must increase by the whole amount obtained in 
normal years. It seems well within our power to 
secure each result, but only by a very serious 
exertion of economy and thrift. The available 
machinery, both of loan and taxation, requires 
careful consideration. 

The methods by which the English Government 
usually borrows are well known. Important sums 
were raised by issues of funded debt, carrying no 
obligation of repayment ; really, in fact, permanent 
annuities. Smaller amounts, which it was not desired 


to fund, were raised by Exchequer Bonds (five-year, 
as a rule) ; and temporary deficiencies in Supply by 
Treasury Bills, of which there were seldom more than 
20 millions running. At the time of the South 
African War, Lord St. Aldwyn (then Sir Michael 
Hicks-Beach) made a new development, more on 
French lines, by issuing a 30-million ten-year loan, 
redeemable at par, taking the form, at the option 
of subscribers, of either inscribed stock or bonds 
to bearer. This loan was a great success, and was 
subscribed more than eleven times over. In 1910 
its place was taken by Exchequer Bonds, which 
reached a maximum of 26 millions in 1911. Even 
these maxima for Treasury Bills and Exchequer 
Bonds, modest as they now seem, were considered 
by many to be excessive. The normal method of 
borrowing was assumed to be by way of Funded 

In the course of the present war this system of 
borrowing has undergone changes of the utmost im- 
portance, amounting almost to a complete trans- 
formation of our financial machinery. Borrowing 
on Perpetual Annuities has been discarded for good, 
let us hope and its place taken by redeemable 
loans (1925-8 and 1925-45) ; there has been a very 
large resort to Bills and Bonds ; large advances have 
been obtained from banksj especially from the Bank 
of England ; the convenience of the investor has 
been considered in the variety of options offered ; 


and for the first time appeal has been made to those 
of small income, by whom in France the national 
Rentes are so largely supported. Above all, the 
plan of continuous borrowing has largely superseded 
the old methods of borrowing by large loans at long 
intervals. This latter change deserves careful con- 

In the early months of the war it was financed 
either by Treasury Bills or advances from the Bank. 
The Treasury Bills, in the absence of the usual supply 
of commercial and international paper, were readily 
taken up. By November 14th, 1914, over 100 
millions were current. The issue of the First War 
Loan, on November 17th, 1914, made further sales 
of Bills unnecessary for the time, and the amount 
dwindled a little ; but it was over 100 millions 
again on February 25th, 1915. The issue of some 
30 millions (net) of five-year Exchequer Bonds, on 
March 6th, 1915, brought with it a second decline in 
the amount of Bills ; but on April 13th they again 
exceeded 100 millions. On April 14th a radical 
change was made in the method of issue. Hitherto 
Bills had been issued at irregular intervals, in fixed 
amounts and maturities, and sold by tender. After 
April 14th, 1915, they have been issued continuously 
and without limit, at rates of discount announced 
by the Bank, and subject to variation at intervals. 
At first only three months', six months', and nine 
months' maturities were offered ; on May 8th, 1915, 


twelve months' maturities were added. The new mode 
of issue was very well received. In the first three 
months, up to July 10th, 1915, the amount of Bills 
current had increased to over 250 millions : at the 
rate therefore of 1*65 millions a day, or 11 J millions 
a week. The issue of the Second War Loan on this 
date naturally caused a decline ; but the lowest 
point reached (in October, 1915) was only 30 millions 
below the previous maximum. In November and 
December the applications increased rapidly, and the 
year 1915 ended with a total issue of nearly 400 
millions (395,565,000). 

Here we must stop to notice a further application 
of the same principle of continuous borrowing. On 
December 16th, 1915, the Bank announced a new 
issue of 5 per cent. Exchequer Bonds, for which 
applications would be received until further notice, 
in denominations of 100, 200, 500, 1,000, and 
5,000 ; such Bonds to be receivable at their face 
value for subscription to any further loan, and to 
be repayable at par December 1st, 1920. Thus a 
five-year security is now put on the same footing 
as the Treasury Bills ; and there is no reason why 
ten-year bonds should not be offered in the same 
way, if longer term loans are desired. 

Both Bills and Bonds have been well taken up. 
In the forty-three weeks from their first issue to 
February 12th, 1916, the Bills, notwithstanding the 
set-back caused by the second War Loan, have 


brought in 428| millions, say 10 millions a week : 
while the Bonds up to the same date have realised 
lOOf millions in eight weeks, say 12 J millions a 
week. The issue of the Bonds in December seems 
to have somewhat checked the issue of Bills, and 
both had to contend against exceptionally heavy 
revenue collections in January and February of this 
year. Still, if we take the total yields of each since 
the Bond issue began, we find that in the eight weeks 
ending February 12th the Bills yielded 57^ millions, 
or 7^ millions a week ; and the Bonds lOOf millions, 
or 12 J millions a week. This gives a joint yield of 
about 19 millions a week, or 1,027 millions a year ; 
supposing that the issues proceed at present rates. 

In view of this remarkable result of the system 
of continuous borrowing, it must be admitted that 
it is working very well ; it is hardly too much to 
claim that it is the most successful financial device 
yet adopted. We have seen that the revenue re- 
quired to be raised by loan at home, supposing that 
we can increase the yield of taxation by 37 per cent., 
is from 21 to 25 millions a week. It looks as if we 
might depend on the system of continuous borrowing 
to provide this amount, and that in a fashion most 
convenient to investors, and causing the minimum 
of disturbance to the banking system. 1 

1 As these sheets are passing through the press (Feb. 1916), both 
Bill and Bond subscriptions are declining. But this seems to be largely 
due to anticipations of a New Loan at higher rates. It furnishes another 
example of the unfortunate effects of the big loan system. 


Yet we hear talk on all sides of the necessity for a 
new War Loan ; and it is not obscurely hinted that, 
if the new loan is to succeed, it must be offered at 
a higher rate than the last : which means, of course, 
that this higher rate will also apply to the Second 
War Loan and to the new Bonds, for these may be 
subscribed as cash for their par value into any new 
loan. It also means that we should see another 
heavy depreciation in securities. These and other 
objections to a new loan are so serious that one ex- 
pects to find some solid considerations in its favour. 
Hitherto these have not been forthcoming. Sir 
Felix Schuster made an interesting reference to the 
subject in his address on January 27th, 1916. He 
thought that " if the public response to the issue 
of Exchequer Bonds now being made was large, a 
further loan might be delayed for a little while ; 
but the amount of Treasury Bills now in circulation 
was so considerable that it would hardly seem advis- 
able to add to that form of indebtedness, convenient 
though it might be to both the Government and the 
market. The probabilities, then, pointed to the issue 
of another large loan." The rate should be " attrac- 
tive/' and the instalments spread over a long period. 
In other words, the amount of short paper now issued 
is excessive, and it is desirable to convert some of 
it into Bonds or funded debt running for longer 
terms. But if this be so, and Sir Felix Schuster's 
opinion naturally carries great weight, the difficulty 


can surely be met without disturbing the system 
of continuous issue. 

The fact is, that while the system is sound, the 
present terms of issue are open to criticism : they 
are exactly calculated to bring about the result of 
which Sir Felix Schuster complains. Since November 
12th, 1915, the Bills have been issued at a "flat 
rate " of 5 per cent, for all maturities, and the same 
nominal rate is payable on the new Bonds. If the 
rate really were as " flat " as it looks, the three-months' 
Bill would still be a more eligible investment for 
bankers and financiers than the five-year Bond. 
But owing to the way in which the discount is cal- 
culated, the nominal 5 per cent, rate yields 5 Is. 4d. 
on a three-months' Bill, 5 2s. 7d. on a six-months' 
Bill, 5 5s. 3d. on a twelve-months' Bill. What is 
much more important, while income-tax is deducted 
at the source on the Bonds, it is only the profits 
made on investments in Bills which are liable to 
tax ; and these profits may very well be only half, 
or less, of the gross yield. This adds at least J per 
cent, to the nominal yield of the Bills, and increases 
their real cost to the State by the same amount. 
It is clear, then, that the present " flat " rate puts 
a heavy premium on investment in the shorter paper ; 
and there have been signs lately that even the small 
investor, who cannot directly buy a 1,000 Bill, 
has contrived to make indirect investments in them 
to secure the advantages they offer over Bonds. 


No wonder if the amount of the Bills is excessive. 
But it would be easy to correct any excess by a 
suitable adjustment of the rates. A British Govern- 
ment Treasury Bill has always ranked as the most 
coveted banking investment in the world. Four 
and a half per cent., or even 4 per cent., would be 
an ample rate for these Bills. At 4| per cent, the 
twelve-months' Bill would yield 4 14s. 3d. ; at 4 
per cent., 4 3s. 4d. Even so, with income-tax at 
present rates, the Bill would probably be preferred 
to the Bond by large classes of investors. 

But when it is proposed to lower Bill rates, objec- 
tion may be made. One of the objects aimed at 
when the continuous issue was first introduced was 
the control of the market rate of discount. In the 
early part of 1915 that rate had been unduly low. 
The terms conceded to subscribers to the First War 
Loan had put the Bank at the mercy of the market. 1 
On February 23rd, 1915, 20 millions of six-months' 
Treasury Bills were allotted at an average rate of 
l 12s. 4d., having been tendered for three times 
over. The exchanges, which had been in our favour 
in 1914, were beginning to set against us, and it 
was obvious that the market rate indicated by such 
a tender was dangerously low and required to be 
raised. But it does not follow that we need now 

1 Subscribers to this Loan were given the right, extending to 
March 1, 1918, to obtain advances from the Bank, to the amount of 
the issue price of Loan stock deposited, at 1 per cent, below bank rate. 


maintain a minimum rate, for the shortest Govern- 
ment paper, of over 5 per cent. This is to go to the 
opposite extreme. New York rates seem to be 
fully a point below ours. On December 24th, 1915, 
ten days' paper was at three per cent., ninety days' 
at 4 per cent. 1 On January 27th, 1916, 25 million 
dollars of New York State 4 per cent. Bonds were 
placed at a price yielding only 3*85 per cent, to the 
investor, though here the low rate may be partly 
due to considerations connected with domestic taxa- 
tion. 2 Again, it is just cabled as we write that an 
issue of some 3J millions of Argentine One- Year 
Treasury Notes has been well received in New York 
on a 4*70 per cent, basis. On the other hand, we have 
the suggestion by the City Editor of the Morning Post 
that in October, 1915, American balances had been 
withdrawn in gold because 4 per cent, investments 
were not obtainable (presumably for call money, 
since 4J per cent, was then obtainable on Treasury 
Bills). So, too, Mr. E. F. Davies stated (November 
30th, 1915) that there was reason to think that a 
recovery of the exchanges had been due " to a cer- 
tain extent " to remittances for the purchase of 
Treasury Bills. Neither statement is very positive. 
Evidently caution is required ; but it is a question 
of the amount of remittances affected and of the 
balance of advantage. Upon the whole this seems 

1 National City Bank Circular, January, 1916. 

2 Ibid. February, 1916. 


in favour of a lower rate for short paper ; in fact, 
for all Treasury Bills. 1 

Many would prefer that any necessary adjustment 
should be made by raising the rate on the Bonds ; 
and it seems to be assumed by most people that 
the rate offered must rise for every successive loan. 
It would be difficult to find any solid basis for this 
assumption. It is certain that if rates are raised, 
either for the continuous loans or a new large loan, 
there will be a corresponding depreciation of all 
existing securities, except in the case of those which 
carry conversion rights, and here another heavy 
burden would be thrown on the taxpayer. It does 
not appear that anything would be gained. Foreign 
money will certainly not be subscribed to loans 
liable to unlimited income-tax. Nor is it easy to 
see how home savings or home investment will be 
increased. As new issues are very properly under 
control, there is no question of the competition of 
alternative forms of investment. Indeed, it might 
be doubted whether the present 5 per cent, rate was 
really necessary. It is probable that, if the con- 
tinuous system had been introduced at the outset, 
all the requirements of the country could have been 

1 It is, moreover, open to question whether large holdings of short 
London paper in foreign hands are desirable. There were great com- 
plaints on this score after the South African War. It was said that 
the market was persistently depressed because so large an amount of 
Treasury Bills was held abroad, in regard to which it was difficult ta 
judge whether or not they would be renewed at maturity. 


financed at a maximum of 4j per cent., or even, 
as Mr. Gibson holds, of 4 per cent. But a 5 per cent, 
rate should in any case be offered for one year and 
longer small Post Office investments, not only for 
simplicity of calculation, but because the sacrifice 
of saving is far greater in the case of those with 
small means, who require stronger inducements to 
make it. Our present system gives the easiest 
terms to the haute finance. But we are now com- 
mitted to the 5 per cent, rate for five-year Bonds. 
Surely we may stop there, and neither increase the 
rate on the Bonds nor extend the Bond rate to a 
colossal loan. The better policy would seem to be 
to lower the rate on the shorter paper until five- 
year or longer Bonds are taken up in the desired 
proportion. Foreign money requires independent 
treatment. It can only be attracted by loans placed 
abroad, in foreign currency, free of all British taxes, 
and issued at whatever may be found the necessary 
rates. If we depreciate the national credit by rais- 
ing our home rates this will only further raise the 
rates we shall have to offer abroad. 

If we suppose that rates have been properly ad- 
justed, so as to secure the right proportion of longer 
paper or Bonds, does any reason remain for a big 
spectacular loan ? It may be said that our friends 
the French, excellent financiers as they are, thought 
it necessary to have a large consolidating loan in 
November last. But the history of French war 


finance, viewed as a whole, seems to confirm the 
argument for continuous borrowing. It is note- 
worthy that the Loan of Victory was the first raised 
by France in this war. Up to November 16th, 
1915, France had raised about 1,040 millions sterling, 
or 69 millions a month, without resort to loans : 
276 millions by advances from the Banque de 
France, 487 millions by continuous issues of Bonds 
and Bills, 220 millions out of revenue or " unused 
credits," 60 millions from foreign loans (the Anglo- 
Franco-American loan not included). Of this only 
one-sixth, or 180 millions, was spent abroad. 1 The 
great bulk of what was lent, then, so far as the 
question of account is concerned, was returned to the 
country by the Government expenditure, in what M. 
Thery calls a " mouvement giratoire" so that banking 
disturbance was reduced to a minimum. M. Thery 
gives figures which go far to support his claim that 
the amount of floating money and power of sub- 
scription increased in proportion to the military 
expenditure. The Victory Loan absorbed some of 
the floating fund ; but Government expenditure will 
soon restore it, when the " mouvement giratoire " 
will resume its old proportions. It must always be 
remembered that there was a special reason for a 
consolidating loan in France. The outbreak of war 
not only struck an exceptionally heavy blow at 

1 In November, 1914, Mr. Lloyd George said that four-fifths of our 
war expenditure would be spent in the country. 


French finance, but it caught her market at a most 
inconvenient time. A new loan had just been 
issued, but not yet transferred to permanent holders. 
The position required regularisation in many respects. 
Nor was it so much the short as the long French 
paper which was absorbed in the Loan. Out of 
some 150 millions sterling of Bonds, 127| millions, 
or nearly 84 per cent., were converted. Out of 
360 millions sterling of Bills, only 89 millions, or 
about 25 per cent., were converted. This, though 
the Bonds yielded 5*60 per cent., the Bills only 5 per 
cent. Short paper is so attractive that we cannot 
trust to a big loan to reduce the proportion taken 
up. Here, in London, we have already had two 
large loans, the last of which was a consolidating 
loan, giving conversion facilities. Things are now 
running smoothly with us, and no special reason 
exists for a third loan. 

It may be said, however, that the five-year Bond 
is too short. If so, Bonds of longer date should be 
offered. Mr. Drummond Fraser, one of the earliest 
advocates of continuous borrowing, recommended 
the issue of Bonds for three, five, seven, and ten 
years ; and there is much to be said for giving this 
wider option. The French Bonds are redeemable in 
five or ten years at the option of the Government. 
The fourth German Loan just issued consists of 
4j per cent. Imperial Treasury Bonds at 95, divided 
into ten series, redeemable by yearly drawings from 



1923 to 1932 ; and also of a 5 per cent. Imperial 
Loan issued at 98*50, and not redeemable before 
1924. The Germans have good reason for preferring 
longer bonds. They expect financial trouble when 
the war ends. We need not. But whatever term 
for redemption may be considered desirable, this 
term can be applied as easily to continuously 
issued bonds as to a new funded loan. Even a loan 
must be redeemable at some not distant fixed date. 
The risk of depreciation must be limited. 

There are some who advocate the big loan on the 
ground that if a really colossal issue could be made 
it would stimulate investment at home and have a 
useful political effect abroad. The political effect 
is doubtful : for it is well understood that the larger 
the loan, the more artificial it must necessarily be. 
The kind of advertisement required to stimulate 
investors is being well arranged by bankers and 
brokers. Their timely hints to customers will in 
the long run be more effective than the nine days' 
wonder caused by the splash of a big loan. The 
big loan, too, will require heavy subscriptions by 
the banks, and corresponding creations of bank 
credit. This will cause inflation and further rise 
of prices, thus increasing the cost of the war, and 
involving the country in a kind of rake's progress. 
Each successive large loan, too, seems to make an 
epoch, and is held to imply a rise in the loan rate. 
The continuous system, with its absence of definite 


breaks, is free from this costly defect. In short, 
the continuous form of issue seems to hold the 
field. Its various options are convenient to the 
investor, and therefore cheap to the State ; it is 
smooth in its working, putting the minimum pressure 
and loss on the banks ; it enables Government, 
by the adjustment of rates, to obtain loans for 
precisely the terms which from time to time seem 
desirable ; above all, it tends to base our loan sub- 
scriptions on real economies rather than on artificial 
finance. 1 

Reference has been made to the point that a cer- 
tain amount of loan may have to be raised abroad, 
if only to rectify exchange. The exchange position 
has greatly improved in the last three or four months. 
Large sales of securities have been made, and much 
has been done to centralise the various operations 
affecting the exchange. 2 The result is encouraging. 
The Dutch exchange, which fell heavily at the turn 
of the year, is still some 5 J per cent, against us ; 
but the more important New York exchange seems 
well in hand. This state of things can only be 
maintained, however, by continued efforts on our 
part. We must either raise further foreign loans, 
or, preferably, further sales of securities must be 

1 It need hardly be said that the more artificial the loan, the more 
certain it is to depreciate. 

2 Similar concentration has taken place in Austria- Hungary and 
Germany, and, as we now learn (February 22nd), in Petrograd. 


made and private credits arranged. We may, and 
should, diminish our imports ; we can hardly expect 
to increase our exports. In the first eleven months 
of 1915 the Bank of England exported between 80 
and 90 millions of gold ; * almost the whole of the 
world's supply for the period (say 97 millions a 
year). Perhaps 50 millions of the 1916 supply may 
be exported this year. But it would be doubtful 
policy to seriously reduce our modest store of gold. 
The national reserve still carries huge responsibilities, 
and we do not know what further liabilities may 
be incurred. The French call upon us to correct 
the Dutch exchange by a gold export. They do 
not take similar steps to correct the Paris exchange 
on London. If they were to remit direct to Holland 
they could at the same time right both exchanges. 
It is not certain that this would be wise. The Bank 
of France, in its Annual Report, gave good reasons 
why it might not be. Similarly with our New 
York exchange, heavy exports of gold might be mis- 
chievous. New York is already glutted with gold, 
and further exports would only raise prices against 
usjpn our large balance of imports. The import- 
ance of correcting exchange is very much a question 
of the volume and the character of the transactions 
affected by the exchange. It is perhaps most im- 
portant to us, because, if the loss of parity goes too 
far, it may interfere with the freedom of our gold 

1 Morning Post, December 2nd, 1915. 


market, which we desire to maintain. To other 
nations this consideration does not appeal. In 
estimating their position too much is usually made 
of the discount on their exchange, perhaps because 
it is always clearly in evidence and quotable. Under 
war conditions it cannot be held to prove either 
decline of national credit or depreciation of currency. 
A striking example of the exaggeration of exchange 
indications is seen in the contention of a distin- 
guished writer that we should relax the blockade 
on German imports in order to increase the discount 
on the mark exchange. The blockade may be vital 
to the issue of the war. The discount on exchange 
is evidently not considered of such importance 
in Germany as to warrant the export of gold to 
correct it. 

But in our case exchange operations are very 
large ; and, as has been said, the rate is otherwise 
important. Sir George Paish, who will not be 
accused of pessimism, estimates our adverse balance 
for next year at 600 millions. 1 If we could finance 
so much of this as relates to Government expendi- 
ture, say 250 millions, by loans or credits secured 
abroad, we might perhaps make up the balance by 
sales of securities. 2 It is, however, doubtful if we 

1 Statist, January 8th, 1916. 

2 Sir George Paish estimates that we hold some 1,770 millions of 
securities (South American and Canadian are included in this figure) 
which American investors might conceivably be willing to buy. The 
Times of January 24th, 1916, mentions a New York estimate that the 


can depend on the United States to finance the 
whole of this huge sum. That country has surprised 
the world by the unexpected financial strength it 
has shown under the strain of the war : but we need 
not look solely to New York. Very large profits 
have been made in Holland and Scandinavia. The 
Bank of the Netherlands has a gold reserve of more 
than 80 per cent, against its note issue, treble the 
amount held in normal times (nearly 39 as against 
12| millions sterling). 1 The Bank of Sweden is so 
glutted with gold that it has obtained the repeal 
of the law obliging it to buy all gold offered at a fixed 
price. We are not without powerful friends in these 
countries. They are all in close relation with the 
Amsterdam market. Why not offer them a loan 
with interest payable in florins in Amsterdam, and 
of course tax free ? At present we hear that the 
New York loan is being bought for Dutch account. 
It would be a fitting compliment to the strength and 
international importance of Amsterdam if the next 
foreign placement were made there. The hoarded 
wealth of India has been proverbial for ages. Is 
it impossible that a well-planned rupee loan should 
be floated in that country ? Japan, the only other 
possible lender, whose recent prosperity is remarkable, 

United States has absorbed 350 millions sterling of securities since 
May 1st, 1914. 

1 The consortium of Dutch banks lowered their deposit rates to | per 
cent., " the lowest figure ever known in Holland," February 24th, 


is now rendering effective service to the Allies by 
financing Kussia, and by buying back the 4j per 
cent, loans she raised in London. She can hardly 
be expected to do more. 

In regard to the sale of securities abroad, as in so 
many other respects, our national finance largely 
depends for its success on the efficiency of the Stock 
Exchange. It is still necessary to insist on the import- 
ance of freeing this great market from arbitrary 
restrictions. Much has been done in the last three 
months by way of removing minimum prices ; but 
while each successive removal has left the market 
stronger, it has emphasised the unfairness of such 
minima as remain. This has been especially felt by 
the unfortunate payers of death duties. The pres- 
sure of this tax, always difficult to finance, has been 
trebly increased. The war has multiplied the occa- 
sions for its imposition (in direct proportion to the 
public sacrifices of the families concerned) ; the rate 
has been raised ; and, owing to the minimum prices 
enforced, although a partial allowance has been made, 
it is often found that the securities passing have 
been assessed above real market values. What is 
gained by this artificial system ? Bankers and others 
may be concerned at having to write down securities 
in their balance-sheets. But official minimum prices 
do not alter real values ; they only destroy market- 
ability on the official market. It is notorious that 
transactions are being carried on at prices nearer 


to real values by outside dealers, who are not subject 
to any of the rules imposed in the public interest on 
members of the " House." Is it really desired to 
drive the public into the hands of these outside firms ? 
After all, and in spite of the partial abolition of 
minimum prices, the fall in values has been remark- 
ably small. The 3,000 odd millions' worth of securi- 
ties scheduled every month in the Bankers' Magazine 
only lost 6*6 per cent, in value between January 20th, 
1915, and December 17th, 1915. Half of this fall was 
consequent upon the issue of the 4| per cent. War 
Loan, which radically altered the basis of valuation. 1 

If we consider the change in the rate of interest 
caused by the immense war loans, the fall in capital 
values is astonishingly small. Indeed, if we reckoned 
our holdings, as the French do their Rentes, by their 
yield, it is doubtful whether, on average, there 
would be any serious loss to bring to account : for 
there have been profitable exchanges from American 
securities into war loans, and large conversions from 
older loans into loans at higher rates. Whatever 
the loss, it is more than set off by the immense advan- 
tages of an effective, active market, with real instead 
of merely nominal values. 

An able American writer has said that it is im- 
possible to conceive the modern banking system in 

1 By the return just to hand, it appears that, in the two months since 
the last return of December 17th, 1915, the fall in aggregate values 
has only been 0*6 per cent., in spite of the removal of minima from 
Colonial Government Stocks. 


the absence of an effective stock exchange. 1 To no 
banking system is it more important than to our own, 
which makes so large a use of securities as collateral. 
Nor is it less essential to public finance. Some of 
the earliest and ablest defences of the London Stock 
Exchange contend that it was absolutely indispen- 
sable to our system of funded loans, by the help of 
which the British Empire was built up in the eighteenth 
century. Pinto, and other experts, held that its 
efficiency, and the volume of its business, were a 
principal reason of the transference of financial 
supremacy from Amsterdam to London. In view 
of the huge and unprecedented financial operations 
now confronting us, it is surely desirable to give all 
possible facilities for the free working of what is still 
the world's greatest market for securities. The part 
it has to play in maintaining the Empire at this crisis 
in our fortunes is hardly less vital than the part it 
played in its creation. 

When the position of the Stock market is regu- 
larised, our loan machinery will be in good order ; 
at any rate, so far as the ordinary investing classes 
are concerned. But a difficult problem remains. 
The people as a whole must be brought in ; the War 
Loans must become national institutions. The differ- 
ence in this respect between Consols and Rentes is 
extraordinary. Men at the university, attending 

1 Of. Prof. H. C. Emery, Speculation on the Stock and Produce Exchanges 
of the United States, 1896, p. 157. 


lectures on economics, have been known to ask what 
Consols were. Rentes are a household word to the 
humblest Frenchman. They serve as a savings bank 
to the peasant, and the middle class go in and out 
of Rentes instead of keeping a current account with 
a banker. They can be bought and sold in the 
smallest amounts at every Post Office ; in fact, 
down to the sum of three francs (i.e. 100 francs, or 
4, stock). It is a very old maxim in this country 
that the best way to attract gold is to give every 
facility for taking it away again. The French have 
applied this sound rule to savings. By their con- 
sideration for the small investor they have made 
their Rentes the best held funds in the world. In 
1908 there were 4,631,857 holders of Rentes against 
255,112 holders of Consols ; and if we do not take 
into account Consol certificates, the average size of 
the holding of Rentes is one-nineteenth the average 
size of the holding of Consols. Their funds, like 
their National Bank, are thoroughly democratic ; 
and they are taking care that it shall be the same 
with the new War Loans. French Treasury Bills 
(three months at 4 per cent., six months and twelve 
months at 5 per cent.) are being issued down to 100 
francs (say, 4 : our limit is 1,000 !). Bonds can be 
bought in amounts as small as 5 francs and 20 francs 
at every Post Office, where they are at once handed 
over against cash. 1 As M. Thery well says, the 

1 Econ. Eur. February 18th, 1916, p. 105. 


creation of these Bonds answers rather to political 
than financial considerations ; but it is certainly 
worth while. Small savings are thus enlisted in the 
finance of national defence ; and the reflex effect 
on economy is equally important. We have lately 
taken useful steps in the same direction. Much 
has been done to reach the small investor through 
the Post Office, the only kind of financial machinery 
he understands. The arrangement for the custody 
of Bonds by the Post Office is excellent. Best of 
all are the provisions recently announced making the 
new Certificates and Scrip Vouchers under 5 payable 
in cash on demand. It would be well if this system 
were extended, so that amounts of War Loan under 
100 might be dealt in at the Post Office at just 
remunerative commissions. The institution of 
savings banks, and still more of the Post Office 
banks, gave an immense stimulus to thrift. Perhaps 
a still greater advance would be made if we could 
give our national funds something of the position 
and popularity the Rentes enjoy in France. 

Thrift, it may be hoped, is now coming into its 
own again. The War has found out many weak 
points in our policy, none more glaring than our 
recent attitude towards thrift. It has been the 
fashion, even with some of our economists, to decry 
it as a sordid and mischievous vice. Politicians 
have held it up to odium, and punished it by 
extra taxation. Worse still, the State has described 


income derived from saving as " unearned," a term 
which to most men carries the meaning of undeserved. 
Income derived from saving is really twice earned. 
To the majority, people of small means, the effort 
of saving is much harder than the original earning 
of what is saved. The exercise of faculty in earning 
wages, salaries, and profits is often agreeable ; and 
some day, when labour is ideally organised, we may 
hope it will be agreeable to all of us. But saving 
will always involve self-control and self-sacrifice. 
It ought not to be too hardly felt ; every facility 
should be offered, and all possible concessions made, 
to small savings. Like every other useful habit, 
saving may be carried to excess. But in due degree 
it contributes a very necessary element to character ; 
and we should have less waste, and a more thorough 
utilisation of wages and incomes, if saving were 
more common. Nor has there ever been a time in 
history when saving was more imperatively neces- 
sary. Even before the War there had been a serious 
rise in the rate of interest, which went far to com- 
pensate the saver, in automatic fashion, for the 
burdens imposed on him by the politician. But 
there must be an unprecedented shortage of capital 
after the War. To establish habits of economy 
should now be the first concern of the statesman. 1 

1 Even in the United States, to which the War has brought nothing 
but prosperity, a Thrift Campaign has just been inaugurated by the 
American Bankers' Association. 


It will be extremely difficult to make England 
thrifty. Thrift involves intelligence no less than 
self-control. Above all, it requires what is really 
the highest quality of mind, I mean imagination. 
Nothing is harder than to actualise the future ; to 
realise that its wants will be as urgent as those felt 
in the present, and for older persons, more expen- 
sive to provide. It is their education, spirit, and 
intellectuality which have made those two brilliant 
peoples, the Scotch and the French, the most thrifty 
of European nations. Perhaps this explains why 
the English do not take so kindly to saving. So 
it has been for centuries past. There was no better 
judge of national psychology than the great Daniel 
De Foe. Here is his estimate of us in 1704. " Good 
husbandry is no English vertue, it may have been 
brought over, & in some places where it has been 
planted it has thriven well enough, but 'tis a forreign 
species, it neither loves, nor is belov'd by an English- 
man. . . . Tho' this be a fault, yet I observe from 
it something of the natural temper & genius of the 
nation ; generally speaking, they cannot save their 
money. 'Tis generally said, the English get estates, 
& the Dutch save them. . . . English labouring 
people eat & drink, but especially the latter, three 
times as much in value as any sort of forreigners of 
the same dimensions in the world." * Another 
brilliant observer, M. Taine, says that the Englishman 

1 De Foe, Giving Alms no Charity. 1704. 


provides for the future, not by his savings, but 
by his expenses. There is something to be said for 
this solution, for we must never encourage people 
to starve themselves into inefficiency. But it does 
not establish the habit of thrift, nor meet the need 
of the hour. 

There is, however, another equally well-marked 
trait of our national character which might be turned 
to account. Sentiment apart, there seems no solid 
objection to utilising for the national profit the in- 
veterate and irrepressible desire to " try one's luck," 
which is so often found in healthy, and therefore 
optimistic, human beings. In spite of our prudery 
on this point, there is no country in the world where 
this desire is so strong as in Great Britain, or so 
grossly exploited by rascality. Very much of what 
is euphemistically called " sport " is really gambling, 
and sometimes worse. As things are, the gambling 
instinct cannot be suppressed, and often leads to 
ruin. Why not furnish an innocent means of grati- 
fying it, which will actually develop habits of thrift, 
and where the result of the stake, so far as it is un- 
certain, will be due to pure chance, and not to a 
mixture of chance and fraud ? This seems to be 
the object of the proposal to issue premium or bonus 
bonds. These bonds would carry 2j or 3 per cent, 
interest in any case, together with rights to a chance 
of a bonus in addition. Thus the " sportsman " 
would become a " rentier malgre lui" ; and, perhaps, 


in due time, the unfailing virtue of interest might 
come to be held more substantial than the mere 
chance of luck. Such an issue by the Government 
has been declared perfectly legal. It seems the only 
way to get hold of the spare cash of a large class who 
squander most freely. 

In any case a popular campaign will be required. 
The imagination must be stirred. The people are 
everywhere waiting for a lead. Except for the 
invaluable example of H.M. the King, they have 
not had one that makes an adequate appeal. They 
see waste everywhere, and on such a huge scale that 
their small private economies seem useless ; for they 
cannot appreciate the magic of large numbers. If 
one-tenth the energy ordinarily spent on party 
struggles were devoted to the advocacy of economy, 
our financial problems would be solved. 

It is in the public service that waste is most 
flagrant, and its example most discouraging. It 
looks as if all the old checks on expenditure were in 
abeyance, or at least ineffective. Army supply 
officers have been heard to say that the whole popu- 
lation of Belgium could be supported on the waste 
of the British army in France. After allowance for 
the vigour of expression which we like and expect 
to find in the soldier, it is certain that not only 
abroad, but at home, expenditure has been reckless. 
Everyone you meet can give you a score of examples 
of it from personal observation. It is startling to 


hear that at a single stroke the expenditure on shells 
could be cut down by 400,000 a week ! Another 
source of serious loss is the imperfect utilisation by 
the State of requisitioned resources, as, for instance, 
in matters of transport ; and the failure to find work 
for so many highly skilled men ; engineers, for example, 
when others are being heavily overworked. Abun- 
dant supplies of funds to huge bureaux of officials 
is another cause of waste. If it be true of the English 
generally that they are apt to take the amount of 
their incomes as a kind of indication of what they 
are justified in spending, this is still more true of 
English officials, public or municipal. They seem 
bound to justify their existence by some kind of 
activity, sometimes merely obstructive, sometimes, 
as where there are Works Departments, seriously 
wasteful. Local authorities, with less excuse, have 
been almost as bad as the central authorities. Local 
rates have doubled in twenty years. The " unpro- 
ductive " local debt has more than doubled in the 
same time. The only way to check these abuses 
is to cut down the supplies. Grants from national 
funds to local authorities should be withdrawn 
during the war. Officials will spend all they can get 
without provoking a kick from the tax-paying 
Issachar. But they know when it is wise to stop. 
They will in general cut their coat according to their 
cloth, and avoid unduly raising rates. 

Example and appeal should be used for all they 


are worth ; but you cannot extemporise national 
habits. It must come to pressure in the end, before 
the necessary economy will be secured. Either 
high prices or taxation might serve the purpose. 
It would seem that in Germany they have mainly 
relied on the effect of high prices, aided in certain 
cases by the system of rations. The consumption 
of the masses, whose wages have not risen in propor- 
tion, has thus been reduced. Certain classes have 
made large profits, but these are the classes who 
naturally save. Moreover, their increased resources 
are easily visible in bank balances, etc., and means 
are found to induce the investment of these resources 
in the German loans. It used to be said that medi- 
aeval sovereigns used the Jews as a financial sponge. 
They were allowed to absorb wealth from the people, 
to be periodically squeezed into the coffers of the 
prince. Germany seems to be using her wealthy 
classes, and Austria-Hungary her bankers, in similar 
fashion. This policy is not open to us. While a 
certain number of employers have made large profits, 
the bulk of the classes who normally save have been 
hard hit by the war. The working classes, who are 
unusually prosperous, are not as a rule savers other- 
wise than by subscriptions to societies. The best way 
to tap the extra earnings of both employers and 
employed is by taxation. 

It is generally more equitable to tax by diminish- 
ing incomes than by raising prices ; but it will be 



difficult to tax wage incomes directly. Commodi- 
ties, especially certain imports, must be taxed, and 
prices will rise in consequence. But every effort 
should be made to check any avoidable cause of a 
rise of prices. They should not be allowed to rise 
through disorganisation of transport, or artificial 
finance, for example. The rise aggravates our 
financial burdens, upsets all estimates, and causes 
social friction. It is already excessive. Prices 
have risen 46 per cent, since the war began, and 
10| per cent, in the two months, December, 1915, 
and January, 1916. Not more than 3 per cent, of 
this rise is due to gold supplies. A large part is due 
to the increase of purchasing power (either currency 
or bank credits) caused by the abnormal war demands. 
Much of this is inevitable, though it can be reduced 
to a minimum by continuous borrowing. Sir George 
Paish thinks nearly one-half of the rise is due to 
rise of freights. This urgently requires correction. 
It is only in so far as prices are raised by methods 
that create revenue that we can regard them as a 
useful instrument of finance. 

To taxation, then, and heavy taxation, we find 
ourselves driven at last. The raising of loans is 
connected in so many ways with the nature and 
amount of taxation that neither question can be 
satisfactorily handled without reference to the other. 
But limits of space, already strained, prevent a dis- 
cussion of tax-policy here. A few brief suggestions 


only can be made. True economy, whether in 
time of peace or war, rests on a rational adjust- 
ment of values. Taxation can do something to 
enforce this. Such expenses as are merely ostentatious 
or conventional form the best possible subjects of 
taxation ; there is no loss of essential utilities, and 
the labour released is urgently needed for necessary 
services. There is no economy within the reach of 
the middle classes at all comparable with what 
would be gained by the reduction of domestic service. 
Heavy taxes might be imposed on all servants (the 
necessary exemptions made for the sick, young 
children, hotels, etc.). Indeed, all licences should 
be raised, and re-transferred, for the period of the 
war, to the Consolidated Fund. If these taxes 
proved prohibitive, large savings would at once be 
possible ; if not, they would at least raise revenue 
with a minimum of hardship. Consumption of all 
but the poorest may be substantially reduced. 
Professors Hopkins and Wood, after a careful study, 
estimate that 60 millions might be saved in food 
by those earning more than 30s. (say, now, 35s.) a 
week. It is certain we should be none the worse if 
100 millions were saved on alcohol. The heavy 
taxation of spirits is obviously indicated on all 
grounds. Lifelong smokers have found that it is 
possible to dispense with tobacco. The consump- 
tion of cigarettes is enormous. Here an expensive 
import might be checked. The expenditure on 


amusements, which seems higher than ever, should 
be taxed ; so, too, advertisements and photographs. 
The Italians have a tax on men of military age 
exempted from military service. This tax is said 
to have met with general approval. Taxes on war 
profits are in all countries recognised as obvious 
and equitable. 

Whatever special taxes are selected, certain general 
aims must be kept steadily in view. Taxation has 
seldom been what Adam Smith said it should be, 
a mere instrument of revenue. The great Colbert 
used the tax-system as a sort of davepin, or keyboard, 
by the manipulation of which he could control the 
direction and development of the national industry. 
Afterwards it was used to foster colonies and extend 
empire. In modern times it has become the fashion 
to use it as a means for redressing inequalities in 
the distribution of wealth. To-day the question 
of revenue is certainly urgent ; but the main objec- 
tives of taxation must be to check unnecessary 
consumption, and especially unnecessary imports ; 
and generally to enforce economy and promote thrift. 
Relatively, our resources are good if we are willing 
to use them to the full, and intelligently. Nothing 
less will serve. 



THIS time last year I had the pleasure of inviting 
your attention to the financing of the War. I propose 
this year to treat of another form of finance : the 
financing of business. 

This is obviously a question of the first importance, 
and the active discussions to which it has given rise 
of late show that its importance is recognised. One 
may fairly say, too, that they reveal a certain doubt 
whether the particular methods of business finance 
in vogue here are as complete and effective as they 
might be, or perhaps are in other countries. Now it 
is beyond question that at the conclusion of peace the 
demands of business for financial assistance will be 
quite unprecedented in their extent and their urgency. 
It seems desirable, then,. in spite of our natural pre- 
occupation with the War, that this form of finance, and 
our provision for it, should receive a share of public 

1 The first of two lectures delivered at the Royal Institution on April 
19th and 26th, 1917 ; afterwards printed in the Economic Journal 
for September, 1917. 


I had originally intended to deal in these lectures 
exclusively with the machinery of this business finance, 
itself a more than ample subject for the time available. 
But it has been borne in upon me of late, in reading 
certain public utterances, that the utmost diversity 
of opinion prevails as to the nature of the struggle for 
which business is to be equipped. It seems idle to 
discuss machinery without some definite conception 
of the general purpose it is designed to serve. I have 
thought it might be better, therefore, in this first 
lecture to take a bird's-eye view of the business 
struggle itself before passing in the second to consider 
the best methods of financing it. 

What, then, is the general character of economic or 
business competition as it exists to-day ? Nothing, it 
may be said, is more familiar to Englishmen than 
competition, whether as a scientific conception or as 
a feature of our social life. The fact of competition 
sums up a large part of our economic activities, and 
on the concept is built up most of our economic theory. 
Yet we shall find that very opposite opinions are held 
as to the nature of the competitive struggle, and that 
very few careful attempts have been made by econo- 
mists to define the term in its scientific use. What 
is most familiar is not always most accurately known ; 
it is too often taken for granted. 

I do not propose to-day to consider competition 
in its theoretical aspect, as an assumption or postulate 
of economic science. I want to consider the thing 


itself as it figures in tlie social life of the time : the 
system of business habits, business methods, forms 
of business rivalry in short, the general welter of 
business activities, which, subject to restraints 
imposed by the law, constitutes the modern struggle 
for wealth. 

There is the widest possible difference of opinion 
as to the essential character of this struggle. Adam 
Smith, a very shrewd observer of the world, described 
it as a " species of warfare, of which the operations 
are continually changing." His estimate would be 
widely endorsed, and the conditions of the time 
perhaps predispose us to adopt it. But we are often 
presented, more or less authoritatively, with an 
entirely different view. Take this pronouncement 
from a memorandum of the Garton Foundation 
issued last October, 1916 : c The conflict of war 
and the competition of trade are different in land, 
as well as in degree. The object of conflict is to 
inflict injury. The object of business competition 
is to serve a customer." To oblige, in short, as the 
retailer would say. To the ingenuous Garton writer 
and his school, competition is a generous emulation 
in good works, where every transaction confers a 
benefit on both parties ; like mercy, twice blessed. 
Adam Smith, whose realism gives a spice of cynicism 
to his judgment, regards it as a struggle for supremacy, 
carried oh by methods devised to damage the economic 
power of rivals, whether rival firms or rival nations. 


To others again, like Carlyle and Robert Owen, 
competition is essentially unmoral and anarchical. 
Carlyle views its turmoil with aversion and contempt, 
and regards it as a baser form of war. You remember 
how he figures it in Sartor Resartus. " Weltering, shall 
I say, like an Egyptian pitcher of tamed vipers, each 
striving to get his head above the rest " ; and again, 
" Where each, isolated, regardless of his neighbour, 
turned against his neighbour, clutches what he can 
get, and cries c Mine ! ' and calls it Peace, because 
in the cut-purse and cut-throat Scramble, no steel 
knives, but only a far cunninger sort, can be em- 
ployed." The man in the street has no very definite 
or considered view. Perhaps we may say that to 
him competition is something of which everyone 
complains in his own case, while he has a vague 
feeling that somehow or other it may be good for 
other people. 

Here are views differing radically as to what may 
be called the essential character of modern business 
activity. We can hardly expect to agree as to the 
principles of trade policy until we come to some 
understanding as to where the truth lies in this 
divergence of opinion. 

The question is, after all, one of fact. Difference 
of opinion, here as elsewhere, is due to first impressions 
based on incomplete observation. It can only be 
reduced by that method of patient induction, of which 
the history of this Royal Institution shows so many 


brilliant achievements. The field to be surveyed is 
immense, embracing a very large fraction of human 
activity ; hence the answer cannot be a very simple 

The forms of business practice are of infinite variety. 
They differ in their objects, their methods, their rules 
of conduct, their standards of honour ; in no two 
occupations, perhaps, are these precisely similar. We 
may group them, for convenience of view, under three 
general heads, broadly distinguishable, though the 
distinction is often only in degree, and hence not so 
easy to draw in practice : 

1. All business activity counts on profit as an 
ultimate return. But in some cases profit is pursued 
through efficiency ; the immediate objective is effi- 
ciency ; profit is expected as the result of efficiency. 

2. In other cases the aim is profit at all costs, by 
fair means or foul. Profit is the primary objective ; 
efficiency only one of many means to the end. 

3. In a third group of cases competitors fairly 
matched in efficiency devote themselves frankly to 
the destruction of the economic power of their rivals 
and the capture of their markets. 

These forms of competition are so different in their 
nature and social effects that it is evidently hopeless 
to bring them all under any general characterisation. 

Take, first, the competition aiming honestly at 
efficiency in production or service, the kind so many 
English economists presume to be typical, not to say 


universal. Probably a great part of tlie activity of 
producers and manufacturers is really of this type- 
that is, a genuine attempt to give good work or good 
service. Even here, however, we have vital differ- 
ences in practice. Some are intelligent and scientific, 
others mere slaves of habit and routine. Some are 
equipped with the necessary capital and plant ; 
some, notably amongst our smaller industries and 
in agriculture, are not. Some have only the crudest 
notions as to the organisation and handling of labour ; 
others may fairly claim to be capable captains of 
industry. It may seem incredible, but many English 
business men are ignorant of the very elements of 
scientific accounting. I was told by a very high 
authority that a large proportion of the firms in one 
of our greatest industrial cities " did not know whether 
they had made a profit or a loss on the year's working 
until they had called in a professional accountant." 
On some of these deficiencies the war experience 
has thrown a vivid light. Even granted, then, that 
much of modern competition is aimed at efficiency 
in production, it certainly does not guarantee it. 
Competitors seem to be able to hold their own in spite 
of striking defects in efficiency. 1 

But further, though the aim may be efficiency, there 

1 Sometimes, perhaps, because shortcomings in efficiency are made 
good at the expense of labour, or by imposing on the consumer. But 
it is doubtful whether these considerations entirely account for the 
economic paradox, which deserves more attention than it has yet 


is a wide difference in the conventional methods of 
competition in various callings, very important to the 
national interest. Take two brothers brought up 
under similar influences. One becomes a doctor or 
a man of science. All his discoveries are made 
matter of common knowledge, placed at the disposal 
of his profession and the public ; though he might 
have made great personal profit by monopolising 
them. The other brother goes into a great manu- 
facturing firm, where he makes inventions of similar 
value. As a matter of course these are reserved, so 
long as the law allows, for the profit of the individual 
firm. You may have shades between the extremes : 
where valuable knowledge is pooled with associations 
or contributed to trade journals. I do not want 
to praise or blame ; my object is simply to insist on 
the fact that under the vague term " free competition " 
are included practices very different in tendency, very 
different in their effect on the public interest. 

This kind of honest competition for efficiency is 
often assumed to lead to " the survival of the fittest." 
No doubt it tends this way. If the assumption were 
rigorously true we should have to regard competition 
as merely a transitional selective process, logically 
ending in monopoly. For the fittest should become a 
monopolist. 1 [In practice, of course, this theoretical 
limit is seldom, if ever, reached, for reasons I need 
not notice here.] 

1 See the paper on Monopoly in the Appendix. 


There is, unfortunately, a second type of com- 
petition to be considered, in which efficiency is quite 
subordinated to profit. Its objective is profit at all 
costs, by any means, fair or foul, subject, as the 
American phrase puts it, to " keeping outside prison 
bars." Competition of this kind sometimes cloaks its 
operations under the pretence of affording cheaper 
products ; but cheapness and real economy are 
usually the poles asunder. Let us glance at some 
of its methods. 

Adulteration is so extensively practised that the 
Courts often have difficulty in deciding what a good 
delivery means. Falsification is so easy, and so 
difficult for the consumer to detect, that this dishonest 
practice often succeeds. Read the very notable 
book, Food and its Adulterations, containing the 
Reports of the Analytical Commission of the Lancet 
in 1851-4. Thousands of products are analysed ; 
adulteration is shown to be rampant. What is 
worse, many of those who then adulterated largely 
are now among the best-known firms ; many firma 
whose products at that time were described as 
" commercially pure " are now unknown, at least to 
me. The fittest have not survived. Short measure of 
all kinds is another trick having similar effects ; and 
still more serious is the resort to degradation of 
quality both in materials and in work. When the 
Exhibition of 1851 was held, people were astonished 
to see how far this degradation of quality and craft 


had gone as a result of half a century of unbridled 
competition. Again, patents are stolen, trade- 
marks are falsified, agents are bribed ; but time 
will not allow me even to hint at the innumerable 
forms this perverse type of business activity has 

There is quite a large literature of works on dis- 
honourable competition in German, French, and 
Italian, and not a few by English writers. I may 
refer those who are interested to one of the latest 
of these, the valuable Report of the U.S. Bureau of 
Corporations just issued on " Trust Laws and Unfair 
Competition." More than 400 pages of this Report 
are concerned with unfair competition and the various 
attempts made in various countries to deal with it. 
Herbert Spencer was a close observer of the business 
practice of his day. Let me quote two sentences 
from his Morals of Trade (1859) : " Illicit practices 
of every form and shade, from venial deception up to 
all but direct theft, may be brought home to the 
higher grades of the commercial world. Tricks 
innumerable, lies acted or uttered, elaborately devised 
frauds are prevalent, many of them established as 
' customs of the trade ' nay, not only established, 
but defended." " A system of keen competition, 
carried on as it is without adequate moral restraint, 
is very much a system of commercial cannibalism. 
Its alternatives are, ' Use the same weapons as your 
antagonist, or be conquered and devoured.' ' 


Thus at length we come to a state of things in which 
we find two different standards of honour and morals 
at the same time and in the same country. " Between 
gentlemen," is to be a rule confined to private life 
and the professions ; in trade, a critic will be told, 
" Business is business." This would have startled 
our ancestors in the so-called Dark Ages, whose guilds 
were religious no less than business societies. I lay 
stress on this seamy side of competition, because 
nothing is more necessary, if competition is really 
to have the beneficent effects often claimed for it, 
than to maintain the best business standards of 
honour against a certain tendency of inferior practices 
to drag them down. There is a kind of Gresham's 
law at work in business. The best men often find 
their own standards degraded by an irresistible 
pressure of circumstance, as, e.g. in the Russian trade 
when double-invoicing prevailed. This is the " iron 
law " of the business world under unregulated com- 
petition. Legislation and State inspection may do 
something to check these evils ; but I am more 
inclined to rest my hopes upon trade organisation 
and the modern tendency to an increase in the scale 
of business. Large firms are more intelligently 
conducted and less disposed to resort to base tricks. 
They are easier to inspect, and have so much at stake 
that it is not worth while to risk exposure. Publicity 
is even more important than regulation. It is well 
known that many disease germs are sterilised by 


sunlight, and business will be most effectively purged 
of these abuses by publicity. American experience is 
emphatic on this point. Let the facts be known; 
public opinion will do the rest. The larger a business 
is, the more sensitive it is to this control. 

I pass to a third kind of competition, very vital 
for our present problems. This is not concerned 
with production, honest or dishonest, but with sale, 
and, above all, with what is called the capture of the 
market. Superior efficiency is often enough to 
command the market. But when a general level of 
high efficiency prevails, other methods are resorted 
to. The d priori academic economist is very fond 
of saying that products make their own market : 
goods are bought by goods. There is an element of 
truth in the position : but business men know that 
in practice it is often less difficult to make a good 
article than to find a market for it. Jeremy Bentham, 
in one of the most brilliant of his writings, addressed 
to the National Convention of France, advised them 
to set free their colonies. They were not wanted 
as markets, he thought. "It is quantity of capital, 
not extent of market, that determines the quantity 
of trade." This dictum was long a first principle with 
English Free Traders. But however this may have 
been in Bentham's time, it is not in scarcity of capital 
that trade finds its effective limit to-day. Capital 
is now cosmopolitan in its habits ; it is as mobile as 
quicksilver : a sound 10 per cent, profit proposition 


will usually obtain, on terms, whatever capital it 
may require. But markets are jealously guarded, and 
increasingly difficult of access. 

Hence a constantly increasing proportion of business 
energy is being directed to the conquest of markets. 
Where these markets are not new creations, but 
acquired at the expense of rival firms, or rival countries, 
we may call the competition predatory. From the 
point of view of efficiency, this predatory competition 
represents sheer waste, though it may sometimes be 
important, and even necessary, from a national or 
political standpoint. In Adam Smith's phrase, it 
is " a species of warfare." It is a warfare which 
enters largely into modern economic life. As Pro- 
fessor Mackenzie says, ' When a State becomes 
industrial, it remains military. The difference is 
that the war has become civil : it is a helium omnium 
contra omnes." But it cannot be limited in this 
way. This predatory competition has never been 
confined within national boundaries. It is avowedly 
international in its scope to-day. 

What are its methods ? " Sound production," says 
a German writer, " is largely subordinated to success- 
ful sale. This again is found to depend largely on 
advertisements, commissions, discounts, anything 
except genuine excellence of products." Let us 
glance at these expedients. Advertisement, with 
its " damnable iteration," if I may use a Shake- 
spearean phrase, is one of the most wasteful and 


mischievous. Our forefathers had a saying that 
" Good wine needs no bush." It will sound to many 
hopelessly behind the times. But there are firms 
to-day whose products have world-wide sale, and 
who never seem to advertise. I was brought up to 
believe that an advertised article was probably 
inferior or a fraud ; and such experience as I have had 
has shown me my teachers were not far wrong. It 
may be that a more ignorant public is in the market 
to-day, which confuses notoriety with reputation ; 
anyhow, different views seem to prevail. Mr. Lowes 
Dickinson tells us that, even in China, " the skin- 
disease of advertisement is beginning to disfigure the 
face of the country, and German art nouveau appears 
in the stations of the railway from Tsinam to Pekin. 
The grip of the West has begun to close, and will 
more and more be felt in the general dissemination 
of ugliness, meanness, and insincerity throughout the 
Empire." Observe that all this semi-fraudulent 
appeal to ignorance absorbs large activities at enor- 
mous cost. I noticed some years ago that a firm, 
in making a return under the Companies Act, showed 
a rapidly increasing expenditure on advertisement, 
which had at last exceeded in amount the whole net 
profits of the business. Mr. Goodall, in one of the 
latest works on advertising, estimates the annual 
expenditure in this country as from 80 millions 
to 100 millions ; enough to pay more than half the 
interest on the war debt. Surely it is the business of 



the honest retailer to inform the public as to the best 
products on the market. If more is wanted, moderate 
advertising in the Press should suffice. Nine-tenths 
of this expenditure might be saved with positive 
advantage to the nation. The public is not inter- 
ested in the transfer of trade from one trader to 

Predatory competition is not exhausted by adver- 
tisement. A whole army of commercial travellers 
is enlisted to push sales with retailers. The main 
objection here is the expense, which might be greatly 
reduced if our producing firms were larger or more 
closely associated. There are less innocent methods 
of pushing trade. Retail prices are fixed, and 
retailers are induced, by the attraction of larger 
discounts, to buy and recommend inferior articles ; 
thus entirely betraying, though under unfair temp- 
tation, the trust placed in them by their customers. 
Worst of all, trade has been subject to a dry-rot of 
direct corruption, by double invoicing, secret com- 
missions, and the like, on the extent and mischief 
of which our highest judges have again and again 
remarked. 1 

1 The Financial Times of Oct. 2nd, 1918, calls attention to a passage 
in a recent circular, issued by the American Exchange National Bank of 
New York, on the prevalence of commercial bribery in the United 
States. The writer says : 

" Bribery of purchasing agents and foremen is an ancient evil which 
was reduced to a scientific system by German salesmen throughout the 
world and formed an essential part of Germany's war for the control 
of international trade which she will attempt to resume after peace is 


I say nothing here of the immorality of such 
action. It is fairly obvious, and has been forcibly 
pointed out by the Courts and the Press in connection 
with a recent legislative measure. What the econo- 
mist should note is that so far as such practices 
prevail the ordinary assumption as to the benefits 
of competition is absolutely reversed. The funda- 
mental advantage of free and healthy competition 
is that it gives room for a variation of methods, out 
of which we may hope for that selection of the fittest, 
whether natural or self-conscious, which is the prime 
cause of progress. But the effect of corruption, as 
of adulteration, is that not the fittest, but the most 
unfit, survive. Instead of progress you get degene- 
ration. Unless the proper measures are taken to 
deal with these forms of dishonourable and predatory 
competition, there is no guarantee whatever that 
the honourable competition for efficiency will succeed. 
There is ample evidence to show that it may fail. 
When, then, we are told, as recently by a great 
iron-master, that all his trade needs is " to be relieved 
of the fostering care of the State," for which he would 

restored. The Federal Trade Commission has found the practice to 
be so common, so unfair and so corrupt that it has asked Congress to 
penalise it. State laws against such bribery are not effective. Com- 
mercial bribery of employees adds to the cost of the goods. In some 
cases employees exact a commission of 20 per cent, and we may be sure 
that it figures in the bills employers pay. The only remedy is to make 
such bribery a crime and punish both briber and receiver of bribes." 

The Financial Times, while it doubts whether the practice is as rife 
here as in the United States, is glad that it is likely to be taken in hand 
on the other side. 


like to see substituted " some wholesome neglect/' 
we are inclined to ask how he proposes to deal with 
these evils. If the trade itself will take them in 
hand, well and good. If not, it is clear that the 
public interest is concerned. The State cannot 
content itself with merely keeping the ring for the 
combatants. It must see that the fight is fairly 
fought. Everything depends on the rules of the 
great competitive struggle. Those who capture and 
control markets can largely impose their own rules. 
If only for this reason, we could not afford to neglect 
attacks on our markets. 

As a matter of fact, the force of these considera- 
tions is generally recognised. All modern States 
do concern themselves, more or less effectively, 
with the regulation of the competitive contest. So 
far as their own subjects are concerned, laissez faire 
has long been abandoned. Some States profess to 
adhere to the old maxim so far as international rela- 
tions are concerned. Others go to the opposite 
extreme, and have embarked on a formidable pre- 
datory competition against the subjects of other 
nations. In practice all States find some sort of 
national trade policy forced upon them, if only by 
way of defence. 

There is another reason to be found for a national 
trade policy in the enormous size of some of the 
competing units, and the consequent increase in 
their power of injuring rivals. Industry, trade, 


and transport are more than ever coming under the 
control of huge combines or cartels, wielding powers 
almost comparable with those of the State. Like 
the old Hanseatic League, they almost rank as States 
themselves, and compel recognition in national policy. 
When the State associates itself with the aims and 
operations of these combinations, and places its 
resources at their disposal, their powers of aggres- 
sion are dangerously increased. (-Srermany furnishes 
the best example of such a national organisation. 

Naumann, in his Mittel-Europa, says with much 
truth that the old individualistic capitalism, of what 
he calls the English type, is giving way to the new, 
more impersonal, group form ; to the disciplined, 
scientific capitalism he claims as German. He de- 
scribes this as " a mechanism of work based on trained 
and educated workers, a spirit of industry inspired 
by reason, a systematic working alliance between 
thought and business ; better organisation ; in short, 
systematised national economy." " Our great mer- 
chants," he says, " are almost economists by pro- 
fession. Into everything to-day there enters less 
of the lucky spirit of discovery than of patient, edu- 
cated industry. To put it otherwise, we believe in 
combined work. The German is at last becoming, 
heart and soul, a political economic citizen. His 
ideal is, and will be, organic unity, and not freedom 
of action ; reason, and not the blind struggle for 
existence. The regulation of production from the 


standpoint of political necessity is the end he has 
in view. This conception of national economic 
business has been imposed on Germany by the war ; 
an event of the first importance in international 
economics. The German spirit has received its 
baptism of fire." l 

It follows, says Naumann, that the period of imi- 
tation of the already declining English economic 
system has gone by. [I may observe that the 
declining English system has given a very fair account 
of itself since these words were penned, as the Ger- 
mans have reason to know.] The new develop- 
ments, he affirms, imply that the future rests with 
Germany. Organisation, especially on scientific lines, 
he thinks foreign to the English genius. This genius 
was supreme when private enterprise was the order of 
the day [say 1780-1880]. But the times have changed. 
The present age is one of methodical, scientific 
organisation, the speciality of Germany, which is 
even regarded with aversion in France and England. 

1 For the latest development of the German conception of " national 
economic business," see " Walter Rathenau et 1' Organisation Indus- 
trielle d'apres- guerre en Allemagne," by Henri Hauser, Revue 
^Economic Politique, Mars-Avril, 1918. 

Hauser calls it a kind of productivist socialism. I should rather 
describe it as militarism in business. But perhaps this is only a verbal 
difference. All socialism must end in militarism : nothing less than 
irresistible force could impose such violent restraints on personal 
liberty and inclination as socialism necessarily involves. 

It seems hardly credible, but the import into this country of German 
books is prohibited. Hence Rathenau's writings, such as Die neue 
Wirthschaft, read everywhere else in Europe, are unobtainable here ! 


There is a certain truth in all this, in spite of 
exaggeration. We shall do well to consider it. After 
all, if individualistic enterprise cannot altogether 
meet the needs of the time, it has at any rate left 
us, as a nation, with a quite exceptional power of 
adapting ourselves to new conditions. We must 
use this power for all it is worth. We have a good 
deal of leeway to make up. 

It is certainly the case that a prejudice against 
science and the expert is characteristic of the English 
business world. English opinion holds that scientific 
ability is of little use in business, and indicates this 
pretty clearly by the miserable remuneration and 
inferior status assigned to such a modicum of scien- 
tific service as it may in some cases employ. Yet a 
scientific training, if a really liberal one, and not 
too specialised, is the best qualification for many 
of the highest forms of business activity. The 
greatest achievements in business, as in science, 
have been due to the faculty of imagination. In 
Germany a large number of her foremost business 
men are scientists and men of high university train- 
ing. There will have to be something like a revo- 
lution in the present attitude of the English business 
world towards science if we are to hold our own. 
The trouble has arisen out of the curious divorce 
between the two worlds in this country. The result 
of this unfortunate insulation is that scientific men 
are unfamiliar with affairs, while business shows a 


quite remarkable neglect of the most obvious and 
assured results of science, or, if you like it better, 
shows a complete freedom from scientific bias. Both 
science and business stand to gain by a more intimate 
association ; if I may judge from my own studies, 
it is hard to say which would gain the most. 

Fortunately the war has brought home to us our 
inadequate use of the resources of science ; and it 
may be hoped, in spite of the long-standing prejudice 
on which Naumann relies, that we shall soon over- 
take Germany in this respect. It is equally impor- 
tant, I think, that we should change our attitude 
on the other matter he emphasises ; I mean the 
question of combination. 

There has been a general hostility to combination 
in this country, and perhaps still more in France. 
English feeling is well expressed in our Common 
Law, the whole spirit of which is adverse to com- 
bination as " in restraint of trade." But it is beyond 
doubt that unregulated competition has destroyed 
more honest trade than all the combinations in the 
world. Even in England, legislation has been more 
occupied in restraining competition than monopoly. 
The social history of the nineteenth century has been 
one long protest, one great legislative reaction, against 
the mischiefs of unregulated competition. I think 
I was perhaps the first English-speaking economist 
to put in a word in defence of business combinations. 
In a paper read at the Bath meeting of the British 


Association nearly thirty years ago (September 7th, 
1888) l I showed that they were a natural develop- 
ment, and offered certain unique advantages. I have 
watched their growth ever since, and have seen no 
reason to alter my conviction that they have come 
to stay. Organisation on a large scale, whether for 
production or trade, is inevitable and essential, if 
only as a consequence of the immensely increased 
facility of communications. Our age is witnessing a 
Battle of the Giants, in business no less than in war. 
Huge economic combinations, backed by national 
resources, are competing for industrial and trading 
supremacy, on which they count to build up political 
power. Individual competition is outclassed ; in a 
struggle of this kind the individual will be ground 
between the upper and nether millstones, or smashed 
like a crock between iron vessels. It is as absurd 
to think that we can grapple with the scientific 
national trade policy of such a State as Germany, 
for instance, on the old lines of haphazard, untrained, 
individual enterprise, as it would be to defend our- 
selves against a German military attack by a general 
uprising offrancs-tireurs. 

Quite apart from attack or defence, there is still 
much to be said for the big organisations. They 
permit of the fullest use of standardisation, with 
all its outstanding economies and conveniences. 
Again, the useless duplication of the more ordinary 

1 Reprinted in the Appendix to this volume. 


products, which necessarily arises where the pro- 
ducing firms are small and numerous, is avoided, 
and it becomes possible to turn out a wide range 
of grades and varieties. Where a small boot factory 
can only supply half sizes, a large one can as easily 
supply quarter sizes. 1 Large organisations, too, 
tend to attract and consolidate the inventions and 
advances in the industrial arts. They will probably 
be long-lived, and thus they insure a sort of perpetual 
succession and unbroken tradition to the mysteries 
and secrets of a craft. They have obvious advan- 
tages in buying and selling ; not the least of which 
is that they can reduce advertisement to a minimum. 
Their output is so large that it advertises itself. In 
these and other ways, too numerous even to note here, 
they can operate with a maximum economy other- 
wise unapproachable. Above all, they will be more 
likely to appreciate the value of scientific research 
and scientific direction. It will be well worth their 
while to secure the very highest ability in their 
managing staff. If they succeed in this, they will 
probably escape what seems their greatest danger, 
a certain tendency to routine and stagnation. 

Again, high standards of business can only be main- 
tained at home, or imposed on foreign rivals, by 
powerful agencies of this kind. We look to them 

1 Mr. Milton C. Sharp, in his able address to the Bradford Dyers' 
Association, February 28th, 1917, pointed out that so far as dyes 
are concerned, the supply of a very large range of shades is essential, 
if we are to secure our command of the market. 


to do for business to-day what the guilds did for it 
in the Middle Age. Mr. Chamberlain tried to revive 
and modernise the guild. Something may be done 
in this way, especially where the industrial conditions 
indicate production on a small scale ; and I should 
be the last to underrate the value of the services 
rendered by Chambers of Commerce, by the trade Press, 
and by the numerous ably-conducted trade journals. 
But on the whole I expect more from a general increase 
in the scale and organisation of business operations. 
It does not seem to me that the value, nay, the 
urgent necessity, of developments in this direction 
is open to dispute. 

No doubt the thing can be carried too far. When 
nations enter the competitive arena in their collec- 
tive capacity, and these huge combinations are 
manipulated, with all the resources of a great State, 
for the purposes of predatory competition, a situation 
is created which requires to be very seriously studied. 
These immense resources are now directed, not so 
much to the increase of efficiency at home as to the 
capture of markets and the crippling of foreign 

Developed on a scale of this magnitude, predatory 
competition is hard to distinguish, either in aims, 
methods, or results, from war of a military form. 
Indeed, the capture of markets has been the chief 
motive of modern wars. It was the avowed motive 
of the wars of the eighteenth century. The attempt 


to inflict direct injury on the productive power 
of a rival country is certainly not less hostile in 
character than the conquest of its markets. " In 
Germany," says Henri Hauser, " the economic struggle 
is a war, like other wars, subjected also to the rulea 
of Clause witz." He gives ample grounds for his 
statement. 1 

Let us glance at some of the methods of this trade 
war, as waged by Germany. The cartel, or selling 
combine, has been one of its most effective instru- 
ments. [It is not altogether unknown in countries 
which profess free-trade principles.] A German writer, 
just before the war, said that " it is evident Germany 
owes the conquest of foreign markets in large mea- 
sure to her cartels." They have great advantages 
in buying and selling, in regulating production, and 
maintaining output on a large and therefore economic 
scale ; by the well-known weapon of dumping they 
can often strike a heavy blow at less powerful rivals. 
The State itself may take a hand in these cartels. 
Both together may embark on campaigns of whole- 
sale corruption, of espionage in all its forms, of what 
is euphemistically called pacific penetration or per- 
meation. The capture of key industries is an effec- 
tive weapon. It gives power to inflict vital damage 
on a foreign country in critical times. Similarly, 

1 " Germany appears to regard trade and commerce as acts of war, 
and shapes its policy not for competition, but for conquest." The late 
Mr. G. H. Pownall, Presidential Address, Institute of Bankers, 
November 8th, 1916. 


measures are taken to secure control of necessary raw 
material : this has been a great motive of colonial 
enterprises. Great transport agencies are able to 
assist by establishing preferential rates and influenc- 
ing emigration. 

The State has its own special machinery. It 
often controls important forms of transport. In that 
case it can manipulate rates so as to serve the in- 
terests of its nationals as opposed to foreigners, and 
generally to subserve the national trade policy. 
Many authorities regard the railway system as the 
most powerful instrument of the political economy 
of the German Empire. I need only mention the 
Tariff : the importance of this weapon, one way or 
the other, is perhaps unduly stressed by most people. 
The State can exert immense power by its educational 
provisions. Every form of necessary trade technique 
is taught in German State institutions, notably in 
the commercial high schools. I may remark especi- 
ally the elaborate instruction in the technique of 
exportation, and the various export bureaux, which 
latter seem to be used indifferently to obtain infor- 
mation and as channels for corruption. It is well 
known how all these activities are aided and guided 
by the Foreign Office and the Consular Service. I 
do not now refer to the question of finance, because 
I shall deal with this in my second lecture. 

All these and many other formidable trade activi- 
ties are centred in the German State. The American 


economist Cooper used to insist, as our free traders 
so generally imply, that a nation is only a grammatical 
expression, something that has no real existence. 
You will admit that for a nonentity the German 
State has done pretty well. Hauser's estimate is 
more rational. " By means of the concentration of 
all its energies under the State, by this unity of control, 
economic Germany has become a power nearly as 
formidable as military Germany, and of the same 
species : a power of domination and of conquest/' 
Naumann, who ought to know, says " the war was 
only a continuation of our previous life with other 
tools, but based on the same method." According 
to Hauser, " the Imperial German Government con- 
sidered that it would be quicker and cheaper to attempt 
to gain its economic ends by victory on the field of 
battle." If so, they perhaps realise now that they 
made a profound blunder. There was more wisdom 
in the advice given by the Sieur de Bouciquault to 
Louis XIV. He told his sovereign that by a judicious 
trade policy it was possible to " make conquests in 
time of peace." I agree with M. BougarePs dictum : 
" Had the Germans only known how to keep the 
peace, they might easily by their backstairs, under- 
ground methods have conquered the world, the East 
thrown in. Luckily for the world they overrated 
their military power." 

The contrast between War and Peace is greatly 
exaggerated. What is vaguely called competition 


turns out on closer examination to be largely a 
struggle of force. True, the forces engaged are 
styled economic, not military ; but the ends are 
often not very different, and the effect the same. In 
both the weaker go to the wall ; the wreckage is 
sometimes worse in the industrial conflict than in 
war, as General Leonard Wood has shown in his 
Princeton lectures. It depends on the rules of each 
game. Before the Germans debased all the stan- 
dards of military and naval warfare, it had become 
in many respects more honourable, less brutal, than 
some forms of business conflict. It must be the 
mission of the Allies to raise the standards both of Peace 
and War. 

Meanwhile we must be ready for all emergencies. 
Lord Curzon in his Appeal for the School of Oriental 
Studies, published last October, tells us that "it is 
clear that a long and fiercely waged commercial war 
will follow immediately upon the cessation of hosti- 
lities." " Will be resumed," he might have said : 
indeed, there has hardly been any break of con- 
tinuity, for preparations have continued even during 
the war. 

What should our attitude be in face of this pros- 
pect ? We do not want to form our ideals or our 
policy on German lines. I should like to see the pre- 
datory element in competition reduced to a minimum, 
just as I should like to do away with war. But both 
aspirations seem Utopian for the present. So long 


as we are exposed to attack we must prepare the 
necessary means of defence. We must have more 
organisation, on a national scale, supported by a 
national economic policy. But we need not adopt 
economic Prussianism. We need not emphasise the 
predatory aspect of business, or make a Moloch of 
the State. The two vices are closely connected. In 
Germany, at any rate, the morbidly predatory spirit 
is largely due to an excessive exaltation and worship 
of the State. We can avoid their blunder. Let 
our organisation be in the main voluntary, not 
bureaucratic ; controlled by the State, where this 
is necessary, but not administered or managed by 
the State. The caution is required, for the experi- 
ences of the war period, during which the functions 
of the State have necessarily assumed quite abnormal 
proportions, seem to have led many simple and un- 
critical folk to place an almost German trust in the 
State. To the business expert this will appear 
ridiculous. But it can hardly be doubted that when 
the war is over, and the period of reconstruction 
begins, there will be a popular movement for nationali- 
sation of industry on a wide scale. It is impossible 
to discuss the question here. I only mention it to 
say that when I urge the importance of organisation 
it is not the bureaucratisation of business I have in 
view. If the verdict of history counts, this policy 
would lead to disaster. That way lie stagnation 
and decline. 


IN the previous lecture my object was to give you 
a broad sketch of the general nature of the present 
industrial struggle. I tried to show that modern 
competition makes a considerable use of debased 
and predatory methods, and that when its activities 
are international these unfavourable features are often 
developed on a very serious scale, as, for instance, 
in the foreign trade policy of Germany, which is 
not easily distinguishable from economic war. So 
long as such methods were used it was for us to 
defend ourselves against them. For such purposes 
of defence, as well as in the interest of the general 
efficiency of our industry, it seemed clear that we 
should require larger business organisations, more 
scientifically equipped and perhaps linked in wider 
combinations or cartels. 

The question now arises whether we are ready to 
finance the new organisations. To instal thoroughly 

1 The second of two lectures delivered at the Royal Institution on 

April 19th and 26th, 1917 ; afterwards printed in the Economic 
Journal for December, 1917. 

97 G 


up-to-date establishments on the scale now desirable 
must clearly be a very costly matter ; and not only 
for this purpose, but to secure foreign markets, and to 
provide for the reconstruction of industry after the 
war, very large financial provision must be made. 

In one country, at any rate, quite exceptional 
attention has been given to this question of indus- 
trial finance. The German banking system, from 
its first inception in the 'fifties, has devoted its re- 
sources mainly to this purpose, and with remarkable 
success. No doubt, as Kiesser shows, the industrial 
bank was in its origin a French creation ; the move- 
ment sprang from the enterprise of the Pereires and 
their Credit Mobilier, and ultimately from the genius 
of their master Saint Simon. None the less, the 
French idea received its fullest development in the 
banking system of Germany. Germany has gradu- 
ally elaborated her financial organisation until it 
has now become a principal, perhaps the principal, 
instrument in the extension of her foreign trade and 
political power. 

We have now to consider the situation thus created, 
and to inquire how far English traditional banking 
policy is adapted to deal with it, and what new 
developments are most urgently required. 

The question is not new to experts. As long ago 
as 1909 it was raised in the Times by a very able 
article dealing, amongst other matters, with the 
now classical case of the Eand Power Company. 


This was a case in which we lost orders for over two 
million pounds worth of turbines and other electrical 
plant, because German banks undertook to find a 
large proportion of the capital required on condition 
that their associated firms obtained the bulk of the 
orders. It was said that the banks incurred no 
great risk, because they only held the debentures 
themselves, and placed the shares on the English 
market ! The writer recommended the establish- 
ment of " several industrial banks on Continental 
lines, with a paid-up capital of five to ten millions 
each." His concluding paragraph so exactly ex- 
presses my own views that it may well serve me as 
a text. ' There is a saying that ' trade follows the 
Flag/ but it is none the less true that nowadays 
* trade follows the Bank.' Successful commercial 
warfare cannot be carried on by means of small 
independent units, and it is only by strict co-operation 
between the industrial, commercial, and financial 
communities that this country can retain its position 
among the nations of the world." l 

Business was not particularly brisk in 1909 ; the 
world had hardly recovered from the American crisis 
of 1907. But practical men had no time to attend 
to the matter, and the article only served as an 
illustration for academic discourses. There has 
been no lack of similar illustrations in subsequent 

1 The, Times Financial Supplement, October 8th, 1909. 


We owe it to Mr. Runciman, more perhaps than 
to any other single person, that the question has now 
become one of practical politics. Speaking in the 
House of Commons, January 10th, 1916, he ob- 
served : " If we are to do more in the future our 
banks must 'be a little more adventurous. If they 
cannot, in consonance with their present system, 
be more adventurous, let us have some additional 
institutions. At all events, commercial banking must 
play a large part if we are to hold our own against 
Germany." As might have been expected, the 
term "adventurous" acted on our bank boards like 
a red rag on a bull. The annual addresses of bank 
chairmen during the next month were a series of 
protests against the Minister's advice. But it will 
be noticed that Mr. Runciman was careful to speak 
conditionally. In some way or other our banking 
and finance must be more intimately associated with 
our industrial and commercial enterprise ; but not 
necessarily by direct assistance from what we in this 
country call " banks " that is, the great deposit 
or clearing banks. 

Whatever form the connection takes, it must 
involve the system in some share, though not neces- 
sarily a dangerous share, in the " venture " insepar- 
able from enterprise. If we are going to abandon 
adventure to the United States and Germany we may 
look forward confidently to the decline of our com- 
mercial supremacy. It was precisely by adventure 


it was originally won. The famous companies who 
called themselves Merchants Adventurers knew that. 
The extraordinary development of German business 
in the last twenty-five years, both at home and 
overseas, is largely due to the adventure, wisely 
considered and carefully planned, of her great bank- 
ing groups. 

But it does not follow that it is the proper business 
of the English deposit banks to engage in this adven- 
ture, at any rate in a direct fashion. Bagehot, 
writing forty-four years ago, and with our English 
type of bank in view, says : " Adventure is the life 
of commerce, but caution, I had almost said timidity, 
is the life of banking." The dictum has been 
widely approved ; but like most epigrams seems a 
little strained. After all, even the accepted type of 
deposit banking is one great adventure. Jevons's 
famous estimate, in 1876, of the English banking 
position will not soon be forgotten. ' The whole 
fabric of our vast commerce is found to depend upon 
the improbability that the merchants and other 
customers of the banks will ever want, simultaneously 
and suddenly, so much as one-twentieth part of the 
gold money which they have a right to receive on 
demand at any moment during banking hours." * 

There seems a spice of adventure, then, even in 
the present system of deposit banking ; and it 

1 A banker in 1890 put the proportion at ^th : Cobb, Threadneedle 


explains the bankers' panic at the outbreak of war. 
The fact is that banking, no matter of what type, 
is, like insurance, a question of probability. It is 
a question of statistics or " experience," as the 
insurance companies say, whether any given business 
risk may be wisely undertaken. This applies equally 
to deposit banking and to industrial finance. Dr. 
Biesser is inclined to think that the danger to a bank- 
ing system arising from an extension of deposits is 
even greater than that arising from a possible lock- 
up of funds in industrial finance. But perhaps both 
Germans and English tend to over-rate the danger 
of business with which they are less familiar. 

It must be admitted that our deposit banks are 
not equipped so well for the business of industrial 
finance as their Continental, and especially their 
German, rivals. They carry enormous call liabilities 
on a minimum reserve, and they work mainly with 
their customers' capital, not their own. " My own 
brains, and other people's money," was Lord Over- 
stone's pithy description of his business. Lord 
Inchcape recently protested that English banks 
could not engage in industrial finance, because they 
ought not to risk their depositors' money to make 
larger dividends. His protest was very widely en- 
dorsed ; but it seems entirely beside the mark, not 
to put it more strongly. Do the German banks 
trade with their depositors' money to make higher 
dividends ? On the contrary, German bank dividends 


are less than half those declared in this country; 
and for the good reasons that they trade mainly on 
their own resources and hold larger reserves. Biesser 
tells us, as the result of an inquiry into 169 banks, 
that the paid-up capital and reserve of these banks 
was 45 per cent, of their liabilities. The proportion 
in this country at that time was about 9 per cent. ; 
it is now as low as 7 per cent. Hence the German 
banks can extend their industrial and trading ven- 
tures without serious risk to depositors, especially 
as their shareholders are content with modest divi- 
dends. It is possible, as Biesser's criticisms imply, 
that they may have carried their ventures somewhat 
too far ; and it is evident that they were beginning 
to drift into the easier courses of deposit and financial 
banking. But there can be no sort of doubt that 
the older type of industrial banking has been a main 
cause of the remarkable expansion of German trade. 
If we survey the world generally, and the mass 
of economic literature, we shall find that opinion is 
unanimous, except perhaps in this country, that the 
proper and primary business of a banking system 
is to finance * industry and trade. This was emi- 
nently the case with the old Scottish system, which 
has been praised by experts in all countries, and 
often described as the classical banking system. 
How comes it, then, that there should be any doubt 

1 1 use this word in contradistinction to mere discounts and short 


as to the suitability of such work for the English 
banks of to-day ? 

The fact is, and it is very important that we should 
recognise it, that in England we have developed a 
system of banking quite peculiar to ourselves. The 
late Mr. Gr. H. Pownall, whose death at this juncture 
is greatly to be deplored, laid stress on this point 
in his last published work. " The British banking 
system," he tells us, " differs from all others . . . 
and it cannot conform to the conditions of the half- 
bank, half-investment, or pioneering conditions of 
foreign concerns." 1 Even if we accept his inference, 
it only goes to show that our banking system requires 
some supplement, for we cannot afford to neglect 
business which all foreign banks regard as essential ; 
and this is the case of the critics. But what is the 
peculiar character of English banking, and in what 
way does it limit its power of financing industry ? 

When Englishmen speak of their banking system 
they do not include under the term, as a foreigner 
would, the whole financial machinery of the London 
market. They have in view the great deposit banks, 
connected by the Clearing House, in intimate relation 
with the Bill Market and the Stock Exchange, and 
centring in the Bank of England. Outside this 
system lie a large number of firms and institutions 
of the utmost importance for sound industrial finance, 

1 English Banking : Three Lectures at the London School of Economics, 
1914, p. 24. 


but usually ignored in current discussions, because 
these discussions have been almost wholly concerned 
with the " banks." We shall have to return to 
these outside institutions later. Our present ques- 
tion relates to the " banks." What were their 
main activities, the chief economic functions to which 
their resources were devoted ? Their resources were . 
for the most part engaged in the creation and cir- 
culation of two great currencies : one national or 
domestic, the other international, a world currency. 
The first currency is the well-known cheque, or 
bankers' money, in which the bulk of our domestic 
payments are made ; the second, the still more 
widely-known London bill, the great clearing in- 
strument of the financial world. The flotation of 
these currencies involves the banks in the heaviest 
responsibilities, because it is absolutely essential to 
keep each at a rigid parity with gold, convertible on 
demand. How serious the responsibilities are was 
shown to the least expert observer by the events of 
August, 1914. Now it is important to notice that 
neither of these responsibilities has to be borne to 
any important extent by foreign banks. In Europe 
generally the note takes the place of the cheque 
with us, the cheque currency being relatively small. 
The note is, in practice, and generally in law, legal 
tender ; and hence the issuing bank is not subject 
to the danger of a run due to internal panic. It is 
a usual rule that the amount of the issues must not 


exceed three times the " cash " held by the banks 
of issue ; but this cash reserve is not definitely ear- 
marked as issue reserve, as with us, and may carry 
other banking liabilities. It is clear, then, that the 
Continental banks, in consequence of their compara- 
tive freedom from our currency responsibilities, are 
better able to turn their attention to other banking 

But this is not to condemn the policy by which 
English banks have built up these currencies. We 
can hardly exaggerate the services thus rendered by 
them. They have carried the machinery of remit- 
tance to the point of absolute perfection ; it is ex- 
tremely convenient, prompt, and costless. Internal 
exchange rates, the plague of European countries 
even to the end of the eighteenth century, have com- 
pletely disappeared in Great Britain since that time. 1 
It is possible that improvements may not stop here. 
During the war we originated a system of gold deposits 
in foreign centres Ottawa, Cape Town, Bombay, 
etc. which we may hope to see developed after the 
Peace, until, at least within the Empire, external 
exchange may also disappear. 

Of course, remittance is not in these days the most 
important of the services a good banking system is 
expected to render. Still, it is very easy to under- 

1 They still exist, with small charges, in the United States ; though 
the new Federal Reserve Board is promoting measures to abolish them. 

For further illustration of this matter, see the letter on Fixed 
Exchange, in the Appendix. 


rate its value. Remittance was once the merchant's 
greatest difficulty. It caused the rise of modern 
banking expedients. It would be unfair to overlook 
the valuable facilities of our English remittance 
service just because it works so smoothly and cheaply 
that we rather take it for granted. Both our banking 
currencies are of national importance, not only in 
their immediate and obvious effects, but in their 
indirect consequences. This is recognised far beyond 
our shores. Many foreign countries France, Holland, 
Russia, and Germany in particular are making 
great efforts to extend the use of the cheque ; and I 
need hardly say that our position as the world's 
clearing-house, in virtue of the wonderful currency 
of the London bill, is at least equally envied. Both 
currencies have served us well under the stress of 
war. The cheque system has enabled us to avoid 
large issues of notes and to minimise inflation of 
currency ; while the reputation of the London bill 
has greatly facilitated the operations of our colossal 
war finance, and the adjustment of exchange diffi- 

Our banking, in short, is quite first-rate of its 
kind ; but, naturally, it has the defects of its quali- 
ties, and these have much limited its sphere of action. 
I have said that the maintenance of the two cur- 
rencies involves heavy and incalculable responsibi- 
lities. They work with marvellous smoothness in 
fair weather, but they almost presuppose it. If 


the conditions of credit and foreign trade are seriously 
disturbed, as they were in August, 1914, the inter- 
national currency may involve the banks in almost 
insuperable difficulties. The domestic or cheque 
currency weathered that storm remarkably well, 
but the extraordinary measures of relief conceded to 
the bankers may be taken as some measure of their 

Hence the banks which carry these liabilities are 
all for short-term loans on the most easily realisable 
security. They often claim that goods in their pro- 
cess from raw material to the finished product in the 
hands of the consumer at home or abroad will always 
be freely financed by English banks. 1 No doubt ; 
but what they have in view when they say this is 
mainly short loans, not the long and often large loans 
necessary, not only for the inception, but even for 
the extension and reconstruction of an enterprise. 
It is a further consequence of their position that 
our banks must incline to prefer financial to industrial 
business. Stock Exchange loans are usually for 
fourteen days ; bills can be bought in the bill market 
for the shortest maturities ; money can be lent at 
call. What investment could be more ideal than a 
three-months' Treasury Bill ? Millions can be in- 
vested in this way without a moment's thought or 
consideration. What infinite pains and inquiry 

1 1 have heard a great banker say he would advance on anything that 
was marketable, even sardines. But these are short loans, not finance. 


would be necessary to invest the same amount in 
industrial loans ! Again, most financial loans are 
on first-class collateral security, security which can 
be instantly realised, so long as the banks are able 
to rely on an effective and vigorous Stock Exchange. 1 
This is, indeed, an essential condition of financial 
banking, but London is admirably situated in this 

The inevitable consequence of these considerations 
is that there is a natural tendency, not confined to 
this country, but stronger here, for banks to prefer 
financial to industrial banking. This is an old story. 
As long ago as 1797, Sir Francis Baring complained 
that the discounts of commercial paper at the Bank 
of England were very small compared with its finan- 
cial operations. This is perhaps necessary in the case 
of a national bank. But it is the same with the 
joint-stock banks, specially founded to supply in- 
dustrial and commercial needs. A distinguished 
Manchester banker wrote last February that " in 
contradistinction to banks of the German type our 
banks are financial institutions." If the difficulty 
is more acute here, it is felt in some other countries. 
The French Government appointed a Commission 
in May, 1911, to study the question of making 

1 Ceteris paribus securities are more marketable in proportion to the 
amount of the issue. Big foreign loans will therefore be preferred as 
collateral to usually smaller industrials. This is another argument for 
larger industrial combinations. Cf. the German Dyers, with their 
35,000,000 of capital. 


adequate provision for industrial advances. Even in 
the United States, where banking has never been 
afraid of adventure, we find the Wall Street Journal, 
as early as 1904, complaining that " the special 
temptation to which our banks are now subjected 
is the temptation to turn from commercial to 
financial banking." The new Federal Reserve Act 
contains a provision expressly inserted to discourage 
this tendency. Only " commercial paper " is to be 
admitted to rediscount by the Federal Reserve 
Banks. 1 

With us, everything is sacrificed to " liquidity," 
though liquidity must certainly break down under 
any serious strain, as it almost implies fairly normal 
conditions. The net result is that English money 
goes to finance foreign industry instead of our own. 
Mr. Grant tells us that in 1912, out of 191,000,000 
of new issues on our market, only 17,500,000, or 
less than one-eleventh, represented home issues ; in 
1913 the proportion had fallen to one-thirteenth, or, 
according to the Hon. R. H. Brand, to one-seven- 
teenth. It is open to German banks to take up 
unlimited funds in our short-loan market (and simi- 
larly in Paris) to finance German industries, or to 
finance foreigners on terms which rob us of our 
natural share in their trade. Our own money is 
thus used against us because our great banks are 
too timid to take primary risks. They prefer to 

1 There is, however, some talk now of relaxing this regulation. 


give acceptances, as Sir Edward Holden says his bank 
does, of bills " of the leading banks in the world." 
The bills thus accepted can be discounted in London 
ad libitum , and at the lowest rates. The amount 
usually lent on short loan here can hardly be less 
than 150,000,000; while Mr. Keynes put the total 
of London acceptances before the war at 350,000,000. 
It was estimated that in 1912 we were financing 
Germany by acceptances to the extent of 70,000,000 
a year. 1 

Thus our own industries go a-begging, or are driven 
to the tender mercies of the company promoter, 
while we lend large sums through foreign banks, 
on terms which deprive our industrials and merchants 
of trade. 2 It is a great sacrifice to make at the altar 
of Caution. Judicious Adventure might in the long 
run prove a better investment. Some will say 
perhaps that it is unfortunate, but that London 
can only retain its position as the world's clearing- 
house on condition of allowing international finance 

1 The power of the London market is enormous : as was shown by the 
ease with which it carried nearly 1,150,000,000 of Treasury bills in 
December, 1916. 

2 Prof. Henri Hauser says that the position is much the same in 
France, where they have not quite the same excuse. " A French 
merchant may see the counters of one of our credit establishments 
closed to him, while a German banker thereupon opens for him a credit, 
thanks to the resources assured to the German banker by the French 
establishment. This is truly disconcerting." It is, indeed ; for German 
finance means German control, German espionage and " penetration.'* 
See an illustration of this in the Jour. Inst. Bankers, November, 1917, 
p. 342. 


of this type. This may be doubted ; but in any 
case we should not overlook the other side of the 
account. The preference for financial banking is 
intelligible enough. It may conceivably be neces- 
sary for banks of the peculiar English type. But it 
is certainly disastrous for English industry and trade. 
They require long loans and large loans ; and this 
not merely to instal new undertakings, or to equip 
older ones with up-to-date plant, but even in many 
cases to enable going concerns to obtain big compe- 
titive contracts. Our enterprise would equally benefit 
by the skilled advice which a great financial house 
or a bank of the German type is often able to 
give. Neither kind of assistance can be obtained 
from our banks. The only alternatives are resort to 
the company promoter or the sale of debentures to 
a finance or trust company. These are mere make- 
shifts, utterly inadequate. 

After all, the financing of industry and trade 
should be the main business of banking, using that 
term in its broader sense. It is the banking system 
which collects and concentrates the savings of the 
community : it should be its chief care to see that 
these are placed at the disposal of its own industry 
and trade, under the besir possible conditions for 
success. 1 This is precisely what the German banks 

1 It by no means follows, as so many people are now clamouring, that 
these credit facilities should be extended to all kinds of business 
indifferently, big or small. Nothing would be gained by such a policy, 
which might indeed be considered retrograde. A recent report of the 


have done. They have done it with such conspi- 
cuous success, and by methods and machinery so 
radically different from our own, that a study of 
their methods is perhaps the best way by which we 
Englishmen can approach the subject. German 
methods are all the more suggestive for our present 
purpose because German success is mainly due to 
organisation, and it is precisely the organisation of 
our ample existing resources, rather than the creation 
of new institutions, which is our most urgent need. 


The German banking system is in its general 
structure not unlike our own. Unity of control 
and discount policy is secured by the position of 
the Reichsbank, whose influence in the money 
market is at least as great as that of the Bank of 
England, fortified as it is by legal powers which our 

British Chamber in Brazil deserves notice in this reference. The 
Committee reporting agree that there is something to be said for helping 
able young men to set up for themselves. But their general view is 
thus expressed : " They think that at present ample credit facilities 
are obtainable by all well-established British firms in Rio de Janeiro, 
and that these firms would not welcome any desire on the part of the 
banks to give (further) credits. Experience has shown that an increase 
in credit facilities means that third- and fourth-rate firms are thereby 
enabled to compete for business which ought to be in the hands of 
first-rate firms, and excessive speculation and cutting competition are 
the results," etc. Jour. Lond. Chamber, November, 1917, p. 275. 

It would be easy to criticise the view so ingenuously expressed : 
but there is truth in it. It is possible that excessive competition may 
injure business, as I tried to show in a previous article ; and the multi- 
plication of small firms does not make for efficiency. 
F.C.P. H 


Bank does not possess. It is surrounded by joint- 
stock banks which in size are not far behind our 
own. Indeed, one of them, the Deutsche, claimed, 
as the result of its latest amalgamation (February, 
1917) with the Nord-Deutsche Credit-Anstalt and 
the Schlesische Bank, to be the largest bank in the 
world. 1 Taking the mark at its pre-war parity (a 
great concession) the paid-up capital and reserve of 
this bank were (March, 1917) 25,000,000, and its 
total resources 185,000,000. 

Here we may stop to note that in all systems 
there is a tendency to large-scale banks ; even in 
the United States, where legislation has put many 
obstacles in the way of their growth. Big banks 
are the order of the day. It is idle to inquire whether 
the big banks have made big business, or whether 
it is the scale of business that has determined the 
size of the banks. One might as well ask whether 
the egg or the hen came first in time. Big banks 
and big business are necessary consequences of the 
same general trend of development, which makes 
big finance essential. Bagehot foresaw this nearly 
fifty years ago. The days of small banks, he said, 
would soon come to an end. Riesser holds that 

1 It is now left well behind by the London City and Midland Bank, 
which, since its union with the Belfast Banking Company hi June 
last, shows a total of deposits over 200,000,000 ! [The Deutsche 
figures were stated as 283,465,000 on Dec. 31st, 1917 ; the deposits 
of the London City and Midland, since the recent amalgamation, are 
294,797,450. Five clearing banks now hold deposits to the amount 
of over 1160 millions.] 


" banking business, even of a domestic nature, can- 
not be undertaken by establishments of only mode- 
rate size, because heavy risks have to be taken. 
This applies in even greater degree when it is a ques- 
tion of foreign operations, because the risks are still 
more serious." Hence bank amalgamations are in 
progress everywhere. Canada and Sweden present 
some of the latest examples. They have nowhere 
gone further than in this country. The movement 
has been justified by its results. As Mr. Drummond 
Eraser showed ten years ago, it is the big banks 
that progress most rapidly. The smaller banks can 
barely hold their own. 

This question of scale apart, the difference between 
English and German banking is most marked. Orga- 
nisation, elaborate and methodical, is the charac- 
teristic of the German system and the source of its 
power. In banking, as in industry, though individual 
units are often very large, they rely on the method 
of the cartel rather than of the combine. Each of 
the leading banks has a large group of allied banks 
working in general co-operation with it. Thus the 
Deutsche group, even before the last amalgama- 
tions by the Deutsche, had a (paid-up) capital of 
nearly 50,000,000 ; the Disconto group a capital of 
33,000,000 ; the Dresdner more than 16,000,000 ; the 
Berliner Handelsgesellschaft 15,000,000 ; the Darm- 
stadter 13,000,000 ; the Schaafhausen 10,500,000. 
Thus the six leading banks controlled a capital of 


137,500,000. The whole British banking system, 
the Bank of England excluded, only holds paid-up 
capital and reserve to the amount of 110,500,000. 

Further, in addition to this primary grouping, 
the German banks are specially organised in other 
ways to deal with large financial propositions. They 
combine to carry on particular classes of operations ; 
classes based sometimes on geographical and some- 
times on industrial or technical conditions. Thus 
you have combinations for Chinese or for South 
American trade, and, again, combinations for financ- 
ing the electrical or the dyeing industries, or for 
special operations of a technical kind overseas. They 
also form syndicates or Konsortiums for handling 
particular loans or other big financial ventures. 
It need hardly be said that such organisation as our 
banks have is mainly concerned with matters of 
banking practice in the narrow English sense of the 
term, and is not aimed at co-operation in finance. 

The result is that in Germany risks which even 
the largest banks might regard as dangerous are made 
quite manageable by distribution. There is a regular 
standing machinery for underwriting. All risks, too, 
can be more safely t^ken because the capital of the 
German banks is so much larger in proportion to their 
liabilities than in England. Some of our largest 
banks only show a proportion of 5 per cent, as against 
the German 45 per cent. 

The two systems differ still more in the character 


of their business. Where we confine ourselves to 
short loans, they go in for finance. The German 
system has always been in the closest relation with 
German enterprise. The late President of the In- 
stitute of Bankers, Mr. Pownall, voicing the general 
banking tradition in this country, says : " A banker 
ought never to be a partner." Rightly or wrongly, 
this is exactly what the German bank is. German 
banks are partners, often controlling partners, " pre- 
dominant partners/' in many of the largest and 
most successful German enterprises. Many of these 
have been nursed from their earliest beginnings by 
the banks, and largely owe their success to guidance 
received from them. Georges Lachapelle tells us 
that in 1911 the Deutsche bank was represented on 
134 different boards, the Disconto on 114, and the 
Dresdner on 112. Their all-pervading influence is 
well described by Mr. W. R. Lawson. " German 
banking does not stand aloof from industry and 
commerce as ours does. . . . The men who direct 
the German banks are all the time in close touch 
with the iron and coal industries, the manufacturing 
and trading classes, and the ocean steam lines. With 
them finance, industry, and transportation go hand 
in hand, and are regarded as integral parts of the 
same problem. . . . The German banker has a finger 
in everything that is going on. He is represented 
directly or indirectly on the boards of manufacturing, 
trading, shipping, and mining companies. He has 


his eye on all the staple markets. The Bourse is 
an essential part of his domain. Underwriting is 
one of his recognised functions, and Germany is 
thereby spared many of the scandals of British com- 
pany promoting. He has correspondents in every 
foreign city of any consequence. . . . These are no 
trifling advantages in the coming struggle for inter- 
national business. What have our London banks 
to set against them ? Simply the old Lancashire 
maxim of ' Every man to his own job.' " 1 As the 
Economist puts it, " The German banks . . . are stock, 
bill, and exchange brokers and dealers, banker- 
merchants, trust, financial, and promoting com- 
panies, etc. What may be described as their chief 
merit and defect is their intimate connection with 
German industrial life. There are few commercial 
or industrial German ventures, be they private 
concerns or joint-stock companies, which do not 
have at their disposal a fixed credit uncovered 
(Blanko Kredit) or covered by very unliquid 
securities with one or more banks. Not only 
have the banks promoted most of the industrial 
joint-stock companies, and retained part of their 
share capital, but their managing directors remain 
members of the boards of these companies, and 
draw personally large incomes for their services 
in this capacity." 2 Owing to this remarkable 

1 Bankers' Magazine, July, 1906. 
a The Economist, October 21st, 1911. 


variety in their activities, the German banks have 
been styled " allerlei Enterprisen" maids of all work, 
a kind of financial Universal Providers. It is easy 
to jibe at their combination of functions which it 
is the practice with us to specialise ; but it is possible 
to carry specialisation too far, unless it receives its 
necessary supplement in organised reconstitution. 
The intimate connection of German banking with 
German industrial life, while it has elements of 
danger for the banks, is undoubtedly the main cause 
of the success of modern German enterprise. 

In the descriptions of German banking just quoted 
stress is laid on the important part it plays in the 
business of issue and flotation. Here we have one 
of the most striking contrasts with English practice. 
This delicate business, which we leave to the com- 
pany promoter, is the special care of the banks in 
Germany, where the- company promoter scarcely 
-exists. The banks, with their large staff of in- 
dustrial experts, not to speak of the highly trained 
men they have on their boards of directors, are 
able to give the most intelligent examination to all 
schemes put before them ; and to insist, before they 
accept any new proposition, that the necessary 
provisions are made, whether as to capital resources, 
management, or scientific assistance, to ensure that 
the undertaking shall have a fair prospect of success. 
The company promoter, like Gallio, cares for none 
of these things. His concern is simply with the 


profits of the promotion. As soon as he has con- 
trived to get his issue quoted at a premium, and his 
underwriters have unloaded at a profit, his interest 
in the enterprise ceases. " To him," as the Times 
says, " a successful flotation is of more importance 
than a sound venture." When it is remembered 
that our company law is less exacting in its safe- 
guards than that of any other great business com- 
munity, except perhaps the State of New Jersey, 
the result of this type of promotion can easily be 
imagined. Here is a German estimate of the situa- 
tion. " English banks furnish the money for the 
flotation and stock-exchange business without 
thereby securing the slightest control for themselves 
over the business of speculation. Up to this time 
the English deposit banks have not suffered much 
from this, but it is well known that English specu- 
lation is in a very bad way because no influence is 
exerted upon it by the banks. Nowhere are so many 
extravagant speculations launched as on the London 
Stock Exchange. . . . Our banks have been the 
pioneers of industrial development . . . for this our 
thanks are due chiefly to our system of mixed banks, 
and to the proper use of this system." l The German 

1 Dr. Jaffe, 3rd German Bankers' Convention, Hamburg, September, 
1907. There is always a certain arrogance in Dr. Jaffe's criticisms, 
but there is more truth than usual in this one. 

Cf. Adolf Weber. " Wohl kaum ein Land hat hinsichtlich der 
Folgen einer ungesunden Kreditgewahrung so reiche, aber auch so 
bittere Erfahrungen gemacht, wis gerade England." Some of his 


bank issues have been enormous. From 1885 to 
1900 they issued on the German market securities 
for more than 1,200,000,000. The Deutsche alone 
made fifty-eight issues in 1907. In 1906 the banks 
placed 33,000,000 in industrial issues, besides deben- 
tures to the amount of from 5,000,000 to 15,000,000 
annually. That this direct co-operation of expert 
financiers with the promotion of industrial enterprise 
is of the greatest value to industry hardly admits 
of doubt. The German banks have rendered in- 
valuable service in this way. 

In another direction German banking has not 
been so well advised. Not content with undertaking 
the business of issue, which may be called the manu- 
facture of securities, the German banks are also the 
principal dealers in securities. The big banks are 
themselves small stock exchanges. They do not 
use the market, as our banks do, through their 
brokers, but they make a market themselves, dealing 
directly with their own customers. By these en- 
croachments on the proper business of their Stock 
Exchange, already the victim of unintelligent legis- 
lation, they further weaken it very seriously. Their 
Stock Exchange is out of all comparison inferior to 
our own. But an efficient stock exchange is abso- 
lutely essential to financial and banking supremacy. 

examples, however, relate rather to bill finance than to the .financing 
of industry by company promotion. Depositeribanken u. Spekvlations- 
lanken, p. 109, 1902. 


It was largely owing to the efficiency of the English 
Stock Exchange that London took the place of 
Amsterdam as the chief financial centre of Europe. 
No doubt Germans were always able to use the 
London Stock Exchange through the London branches 
of their banks. They may not find the same facilities 
there after the war. German stock-exchange policy 
has been a marked weakness of their system. Our 
own banks are not altogether blameless in this respect. 
In so far as they finance speculative operations 
outside the market, the existence of which is not 
revealed at the usual fortnightly settlements, they 
make the market uncertain and apprehensive. The 
jobbers become timid, uneasy until they have evened 
their books. Thus their work and the efficiency of 
the market generally are impaired. 1 

The German system has many strong points 
which I must only glance at. Their banks have a 
remarkable network of alliances with foreign bank- 
ing houses ; as, for instance, their powerful New 
York connections with firms like those of Morgan, 
Speyer, and Kuhn Loeb. Again, there are many 
important foreign banks which they have either 
founded or brought under German control. This 
was the case with a famous Italian bank, through 
whose agency German banks obtained immense 

1 It was given in evidence, before the Stock Exchange Commission of 
1876, that 300,000 of Consols had been sold, just before closing, 
without putting down the price one-eighth against the seller. Could this 
have been done of late years ? 


power over Italian business. It was much the same 
with the Banco Aleman Transatlantico at Buenos 
Ayres, the Deutsche-Asiatische Bank for the Far 
East, and the Orient Bank for the Near East. In 
every Balkan State there was an institution of this 
kind, working in the closest harmony with Germany's 
financial and political aims. A mere list of these 
institutions would occupy a large folio. In all their 
foreign work, too, the Germans have shown singular 
ingenuity in carrying out their schemes with foreign 
capital. " Germany," says Professor Hauser, " has 
effected the surprising tour de force of securing her 
financial supremacy in foreign countries while lock- 
ing up very little of her own capital." Of the 
5,200,000 capital of the Banca Commerciale Italiana 
in 1914, 1 only 180,000 stood in German names, or 
less than 3| per cent. Yet Germany, at that time, 
held practical control of the bank (the situation has 
since been happily altered). So far as industrial 
undertakings are concerned, it has been estimated 
that Germany contrives to obtain control by an 
investment of not more than one-eighteenth of the 
capital controlled. 

I have referred in a former lecture to the various 
agencies, none too scrupulous, by which Germans 
promote their export trade. The banks furnish the 
necessary financial support, and at the same time 
they utilise the influence thus acquired to capture 

1 Now, July 3rd, 1917, 8,628,000. 


insurance business for the German companies and 
to place in foreign hands shares in the German 
undertakings they have floated. The credit policy 
of German traders is a well-known means by which 
they have contrived to establish themselves in already 
occupied foreign markets. Here, too, it is by the 
aid of their banks they have been able to relax the 
sound but somewhat severe rules of credit practised 
by rivals. Last, but not least, they have in all 
their work the assistance of an elaborate system of 
publicity, usually based on the subsidising of local 
publications and the local Press. 

The machinery thus planned by the banks, and 
in which they play the leading role, is clearly admir- 
ably adapted to its purpose of fostering German 
trade. Suppose a railway is wanted in China. The 
Asiatische Bank, supported by its powerful German 
group, is able to provide the necessary funds, stipu- 
lating that the contract must be placed in German 
hands. The Deutsche, or some other German bank 
with a special railway connection, will take care that 
the contract is placed in competent hands. The 
whole business will have been astutely written up 
in the local Press, and every available means used 
to obtain the concession. The railway may be half 
built before we could have floated a company to 
raise the capital ; and so a valuable contract, with 
all the incidental business connections, is lost to 
Germany. With Germany finance and trade go hand 


in hand. The banks never forget to insist on the 
quid pro quo. The placing of business in German 
hands is the invariable condition of German financial 


What provision have we in London, or are we 
making, to do the sort of work which has been de- 
scribed ? Nothing, it must be said, that is at all 
adequate. Of course, it is true in a sense that every 
kind of financial business can be put through in Lon- 
don, if not by what we call " banks," yet by other 
financial machinery ; and nowhere in the world do 
financial institutions of the highest class abound as 
they do in London. A glance at the Bankers 9 Almanac 
or any similar work will show that the financial 
resources of London are absolutely unrivalled. Any 
kind of finance might be managed in our market, 
most kinds are. The real question is whether the 
business is being done in the best way, on the neces- 
sary scale, with the necessary promptitude, with the 
best use of available experience, and with the proper 
co-ordination of energies and resources. 

The fact is that we had carried specialisation to 
an extreme. Foreign exchange was relegated to special 
firms, largely foreign houses, or, if English houses, 
managed by foreigners ; or else carried on by foreign 
and colonial banks. Bill discounting, again, was mostly 
left to a special body of bill-brokers, hardly to be found 


elsewhere. Foreign trade was largely catered for 
by colonial and foreign banks and by the exchange 
houses. Issue business was principally done by 
merchant bankers or issuing houses, and was for the 
most part on account of foreign countries. Home 
industry was left to the company promoter and the 
various finance and trust companies ; l assisted, no 
doubt in many cases by some of the larger stock- 
broking firms, and particularly by certain firms of 
provincial brokers. 2 I do not say that there was 
not a certain amount of informal co-operation between 
these independent agencies. But in general there 
was no systematic and regular co-ordination of their 
operations. The system, if it deserves the name, 
suffered from excessive specialisation and almost 
complete lack of organisation. 

We have made some progress of late years. Our 
regular banks have greatly enlarged the scope of 
their activities. They have developed foreign ex- 
change departments, often very large and important. 
They are taking a large share in acceptance business, 
as to which much might be said. They have begun 
opening branches, or controlled establishments, in 
foreign countries, notably in France, Spain, and 
Kussia. Better still, they are entering into intimate 

1 Sir George Touche suggests that these latter companies should b 
organised, so as to secure some " unity of action." Mr. Robert Fleming 
puts their aggregate capital at 100,000,000. 

* For instance the firm of George White & Sons, Bristol. 


relations with foreign banks, as, for instance, with 
the two great Italian banks, the Banca Commerciale 
and the Credito. Again, many new banks for foreign 
trade have recently been established, as, e.g. for the 
Russian and Scandinavian trades. 

All this is very good as far as it goes. But it seems 
to me open to a fundamental objection. It lacks 
its natural basis in an intimate connection with the 
national industries. The proper foundation for over- 
seas finance is well-financed home industry. All the 
foreign enterprise of the German banks was based 
upon an intimate knowledge of the resources and 
aptitudes of their own industries, obtained by careful 
study in the course of such preliminary financing. 
Now our colonial and exchange banks are quite 
distinct from our home-banking system, and neither 
are in touch with home industry as the German banks 
are. The regular banks are always ready to accom- 
modate industry with temporary loans on excellent 
terms. But they do not regard it as their province 
to concern themselves with the original equipment 
of large-scale enterprise, whether at home or abroad, 
as, for example, a great issue house would. They 
have not made a special study of industrial tech- 
nique, or industrial problems generally, except so far 
as they affect short-loan business. Industry has thus 
lost the valuable advice a German bank or an issue 
house could offer, advice more valuable often than 
the mere capital loan ; while the banks in their turn 


lose a certain insight into the industrial and trading 
situation which might go far to compensate them 
for any risks inherent in the more difficult type of 

The loss to our home industry is only too obvious. 
It cannot obtain from the banks the means of making 
adequate original installations, or the extensions and 
reconstructions made necessary by the progress of 
industrial technique, or by the developments of rival 
firms in other countries ; nor, again, the large loans 
which are often, in practice, essential to the securing 
of big foreign contracts. Finance of this kind in- 
volves a lock-up of resources which our deposit banks, 
without special supplementary organisations, cannot 
entertain. In most foreign countries this finance 
can be arranged by " banks " of some kind. German 
banks lay themselves out for it, and so do certain 
credit institutions in France. 

If our great Issue Houses would take up this 
business their help would be invaluable. They are 
accustomed to make exhaustive examinations of pro- 
positions submitted to them. They employ expert 
engineers, accountants, and lawyers ; and every per- 
tinent detail in regard to process of manufacture, 
plant management, earnings, labour conditions, and 
past history is taken into account. But the issue 
houses fight shy of ordinary home industrial pro- 
positions. They prefer those put forward by foreign 
Governments, municipalities, or the very largest 


transport companies. As a rule our English indus- 
tries are too small in scale to attract the issue houses ; 
the securities would not be marketable. Thus we 
are involved in a vicious circle which it will want 
some courage to break. Our industries are inade- 
quately capitalised, because they cannot get properly 
financed ; they can't get financed because their 
capital is inadequate. Even if this difficulty were 
removed, as it must and will be, another would 
remain. The English investor does not take kindly 
to industrials. The issue houses would not find it 
so easy to unload those they had become responsible 
for. It seems clear that either by relating them- 
selves to large banks, or to credit institutions of a 
different type, they must endeavour to distribute 
the inevitable risks of having to wait some time 
before the issues are completely taken up. Those 
who ought to know tell us that even in the United 
States issue houses will seldom take up a concern in 
its initial stages. They leave this, curiously enough, 
to the weaker houses ; in proportion as the house 
becomes strong, it tends only to consider going 
concerns. The question hardly arises in London, 
where the issue houses scarcely cater for home in- 
dustry at all. 

The small contribution made by the issue houses 
to industrial finance is a matter for regret. It is 
certain that the experience at the disposal of these 
houses is most valuable, and ought not to remain 

F.C.F. I 


exclusively in the City, to be employed on foreign 
enterprise, but should be made available for the 
guidance and stimulus of our own industries. We 
are told that banks and issue houses alike are waking 
up to the fact that in many respects the manage- 
ment and plant of our home industries are not nearly 
so good as they had assumed them to be ; x and that 
if this condition of things is to be remedied there 
must be greater co-operation between the City and 
Industry than there has been in the past. Banks and 
issue houses should keep in closer touch with our 
industrial establishments, and associate themselves 
to a greater extent with their managements and their 
methods. No one has more to gain by such an 
association than the so-often victimised investor. 
" The real issue/' writes Mr. Lawson (February, 
1916), " is, where do we find the best industrial results ? 
In the slop-work of the British company promoter, 
or in the scientific work of the German bank ? . . . 
There is a widely-felt need for some kind of bank 
or trust company which could guarantee to the in- 
vesting public a reasonable amount of administrative, 
financial, and technical skill in the management of 
new ventures." 

1 As an illustration, a writer in the Round Table for December, 1916, 
makes the following almost incredible statement : "A very large 
proportion of the coal used in this country is still used in plants involving 
a coal consumption from five to fifteen times greater than the best that 
can be done to-day," p. 35. I do not know on what authority these 
figures rest. But that a large proportion of our industrial plant is 
very inefficient is patent to the ordinary observer. 


The establishment of the new British Trade Cor- 
poration, chartered last April, is the latest response 
to this need. Until it has embarked on actual opera- 
tions it will not be easy to ascertain the precise 
functions it will serve. It is to have an Information 
Bureau and an Intelligence Department, much like 
the machinery of an issue house or a firm of merchant 
bankers. There are representatives of commerce and 
industry on its board, and it is to be aided by a staff 
of technical experts. The chief appointments hitherto 
made have been generally approved. Its own initial 
capital is 10,000,000 ; and it hopes to be further aided 
by contributions from the banks. It has taken powers 
to do acceptance business, and it is stated that it is not 
to interfere in any way with the operations of the 
British and colonial banks. From these last, and other 
statements that have been made, I find it difficult to 
conjecture what the precise character of its opera- 
tions will be, and criticism can only be hypothetical. 

It may be said at once that it is a step in the right 
direction, and we hope that its foundation may give 
an effective lead to public opinion. There are some 
indications that it aims primarily at foreign rather 
than home developments. I hope this impression 
may prove to be unfounded. If not, as I have 
already said, we are beginning at the wrong end. 
It was the close union between the financial expert 
and the captain of industry that gave German in- 
dustry its remarkable efficiency, without which its 


foreign trade and overseas competition, however 
ingeniously financed, must have failed. We look 
in vain for financial institutions in England which 
have the knowledge, and are prepared to play the 
part, of these German banks. Mr. Brand tells us 
that " London knows very little of British indus- 
tries " ; that it has " no institutions whose aim it 
is, as it is the aim of the German banks, to act as a 
kind of general staff to industry " ; and that there 
is " a peculiar lack of contact between the chief 
financial centre of the world and the industry of 
its own country." It did not require the revela- 
tions of the war period to show that this isolation of 
industry from finance has been most unfortunate. 

It seems very unlikely that any one institution, 
however ably directed, can do more than a small 
part of what is wanted. It is clearly impossible for 
it to make an adequate survey of all industries, at 
home and abroad. Nor is this necessary. So far 
at least as foreign business is concerned, ample and 
more than ample machinery already exists in London. 
I would rather see the resources of this great cor- 
poration devoted to the organisation of our existing 
institutions than to the addition of a new compe- 
titor with them. So far as home finance is con- 
cerned, for which no doubt new machinery is required, 
I think Mr. Drummond Fraser's new proposals are 
more promising. 1 His idea is to establish local credit 

1 See his Finance After the War, February, 1917, pp. 26, 27. 


associations at great industrial centres ; for instance, 
in such places as Manchester, Bradford, Birmingham, 
etc. He thinks such associations might be largely 
financed by the banks working in the respective 
districts ; and it is believed that a scheme of this 
kind is already on foot in the Manchester district. 
Local credit associations of this type would have 
an intimate knowledge of the industrial conditions 
and personnel such as could hardly be expected in 
the case of a house working in a great international 
market like London. 

We are too apt to ignore existing resources. When 
the British public gradually begins to recognise the 
immense importance of things experts have long been 
trying to do with inadequate means, and no intelli- 
gent support, the cry is always for a brand-new 
institution. It would generally be wiser, and cer- 
tainly in this case, to utilise, and extend, and suitably 
organise, the vast resources that already exist, but 
of which so much more might be made. 

Whatever form our industrial finance may ulti- 
mately take, it will probably be better to provide 
machinery for the purpose outside, though not out 
of relation to, the existing system of deposit banks ; 
and it will be as well to avoid using the term " bank " 
in connection with work of this kind in Great Bri- 
tain, because the term has a specially narrow meaning 
here. As Sir Francis Piggott suggests, the French 
term Credit is more to the point : Credit Fancier 


and Credit Mobilier ; we want them both ; we have 
neither, at least on the scale required. Whatever 
we do, while working in harmony with National 
Policy, let us avoid hampering ourselves by State 
assistance, or even, so far at least as home finance 
is concerned, by State control. 

To sum up a rather long exposition, I am con- 
vinced that the radical fault of our system lies in 
the fact that our financial, as distinguished from our 
banking, institutions are out of touch with our in- 
dustries, with the natural consequence that these 
industries, or the majority of them, are defective in 
their organisation and equipment. If this is so, 
then the value of any proposed reforms must be 
judged by the probability that they will remedy this 

A word in conclusion. If I have spoken a great 
deal of Germany in this lecture, it is because she 
has shown strength precisely where our own system is 
weakest ; and there is much to be learnt from her 
experience, either for adoption or avoidance. But 
I do not fear German rivalry in the future, now that 
the world is awake to her unscrupulous use of financial 
power, and that we are becoming sensible of our own 
deficiencies. There is only one country in the world 
that has a financial future at all comparable with 
our own. While we have been talking she has been 
striding ahead. I refer, of course, to our oldest 
colony and latest ally, the United States. 


I DO not think I need apologise for calling your atten- 
tion to this subject of the banking reserve. I say the 
banking reserve, and not the Bank reserve, because, 
as will presently appear, what I have to say does 
not merely or primarily relate to the Bank of Eng- 
land. It is of the reserve position of our banking 
system as a whole that I desire to speak. 

Now, considering that Mr. Goschen, in his memor- 
able speeches of 1890 and 1891, nearly eighteen years 
ago, regarded this matter as absolutely urgent, while 
the difficulty of the position has certainly not dimi- 
nished since that time ; considering that the present 
Premier during the last two or three years has more 
than once impressed on the banking community the 
necessity of some action ; considering, too, that some 
half-dozen of the most prominent practical bankers 
in the City have in the most formal way called public 
attention to this matter, it is pretty evident, I think, 
that the question is one which presses for some 

1 A lecture delivered by invitation to the Chartered Institute of 
Secretaries, Feb. 24th, 1909. 



practical solution. Bankers are, by habit and by 
tradition, exceedingly cautious, and they would not 
have spoken so strongly as they have on this subject 
unless they felt that it was really imperative that 
something should be done, and done without delay. 

I do not think you could have a more favourable 
opportunity for strengthening the reserve than we 
have to-day. Money has never been more plentiful. 
The gold yield last year was in the neighbourhood of 
eighty-five millions sterling. Kates of discount were 
very easy. Continental banks strengthened their 
position by sixty to seventy millions ; the Bank of 
France alone by over thirty millions. So far as I 
can make out, in this market we did absolutely 
nothing. The reserve at the Bank of England was 
positively lower by about 1,800,000 odd in February, 
1909, than in February, 1908. We lost an exceedingly 
good opportunity. 

This was not for want of due warning. Sir Felix 
Schuster repeatedly insisted on the unique opportu- 
nity which times of easy money offer for increasing 
our gold holdings. But nothing was done in this 
country, whilst in almost every other the great bank- 
ing institutions, including the Treasury of the United 
States, have made large accessions to their reserves. 

Mr. Palgrave, in the Bankers' Magazine of February, 
1904, tells us that " much of the legislation which 
regulates banking in England is now altogether out 
of date, and mischievous where it is not useless." 


I would hardly have ventured, on my own unsupported 
opinion, to put the matter so strongly. But this is 
the verdict of a man who has long been one of the 
highest banking authorities of this country, and who 
is a director of one of the largest joint-stock banks. 

If Mr. Palgrave is right in his estimate, and for 
my part I should entirely agree, there is no reason 
for that excessive reluctance to disturb existing 
arrangements on which foreign observers often re- 
mark. There is plenty of room for the revision of 
our present methods, and for some new departure 
in a system which has been untouched for sixty-five 

It cannot be too clearly recognised that this is 
not a question that merely affects the money market. 
The whole nation is intimately concerned in the 
provision of an effective banking reserve ; and this 
not merely because we are all of us in these days the 
clients of banks. No doubt, anybody with 5 can 
open a banking account, and is, therefore, interested 
in the solvency of the institution with which he is 
thus connected. But the poorest man in the country 
is as greatly interested in this question as the richest 
depositor. The question of unemployment is to the 
front now. It has always seemed to me curious that 
while in the many discussions which it has provoked 
we get all manner of extravagant and Utopian solu- 
tions proposed, from land nationalisation to a stringent 
protective tariff, it does not seem to have occurred 


to the majority of persons who are dealing with the 
subject that the recent abnormal increase in unem- 
ployment was consequent upon the banking crisis 
in the United States. The argument post hoc propter 
hoc requires to be used with great caution in economic 
discussions. But I think it is beyond dispute that the 
sudden increase in the rate of unemployment (the 
percentage in 1908 was double that of 1907 1 ) was 
due almost exclusively to the failure of the banking 
organisation of the United States and the consequent 
effect on the world's trade. I say, then, that the 
whole nation is concerned in this question, and the 
poor, perhaps, more than others, as they have 
smaller resources to fall back upon at such times. 


Those who have addressed the public on this ques- 
tion, though they all agree on its urgency, appear to 
agree on little else. The solutions they propose are 
most divergent. I think that is partly because 
people have not come to terms precisely as to what 
they mean by bank reserve. I must ask you to excuse 
me, then, if I try to define the term " reserve." I 
should be inclined to say that a reserve is " a public 
provision of money, not required in the ordinary 

1 Unemployment is the most notable and distressing of modern 
social facts. Yet we have no adequate official returns of its fluctuations. 
But, so far as the trade union figures show, it was not much above the 
average in 1907. In 1908 the percentage rose from 3*7 to 7-8. 


course of business, held available to meet excep- 
tional emergencies." 

Some will think this rather a strict definition, while 
to others it may appear obvious ; but it rules out a 
large proportion of what is commonly regarded as 
reserve by bankers themselves, and even by the 
legislation of some important countries. Let us go 
into the point a little more fully. A banking reserve 
is not merely sound assets. A bank may have the 
soundest assets in the world, but it is impossible to 
regard all assets which may be good in case of a 
liquidation as necessarily good banking reserve. 
Take the case of the United States. It is not too 
much to say that when the banking system of the 
United States suspended payment in 1907, the banks 
held two thousand millions sterling of tolerably good 
assets : it was not for want of assets that they sus- 
pended payment. Nor can we admit that much of 
the so-called liquid assets is properly banking reserve. 
The term " liquid " is always a doubtful term. 
Securities freely marketable to-day might be prac- 
tically unsaleable to-morrow. The whole question 
of the convertibility of assets is a very difficult one, 
and we must allow very wide margins when we are 
considering the price tolerably good assets will realise 
at the time of stringency. Bankers will probably 
include money at call, if not among their reserve 
resources, at least among their liquid assets. But 
many authorities are of opinion that the large 


amount of money at call is the most dangerous 
feature of our market. I suppose the bankers have 
120 millions at call or at short notice. How much 
of this could they get in in time of crisis ? A very 
small proportion. 

Mr. Pownall tells us, in an interesting paper on 
Bank Reserves, what Viscount Goschen thought on 
this subject in 1890. He says, " The last time we 
had a crisis (in 1890) the then Governor of the Bank 
of England and the Chancellor of the Exchequer 
fixed on this point as the vital one. Their anxiety 
appears to have been that the bankers should stand 
solidly together, and not attempt, by individually 
withdrawing money from the brokers, to protect 
themselves at the danger of a general discredit. 
There was undoubted solidarity of interest ; what 
was needed, and was secured, was solidarity of action. 
If the banks were unable or unwilling to lend, it was 
of the highest importance that they should not de- 
stroy the equilibrium of the short-loan market. To 
do that would have been to force the brokers on to 
the Bank of England, and thus risk a panic of incalcul- 
able calamity. I fear that a Chancellor's letter would 
have availed little." x 

Holding these views, it is not surprising to find 

1 Economic Journal, September, 1899. I may say that the late 
Mr. Lidderdale was radically opposed to applying for a Chancellor's 
letter. He told me more than once about that time that he could not 
conceive circumstances in which he would feel justified in resorting to 
this expedient. 


Lord Goschen saying, at Leeds, in 1891, that " money 
at call is a valuable asset, but it is not an asset which 
constitutes a reserve useful to the general interests 
of the community at large." 

Cash, then, or what will at once be accepted as 
money by those who have a right to demand money, 
is the only real banking reserve ; and the cash must 
be unemployed. Pressure in one part of the market 
may be relieved by withdrawing short money lent 
to another part : but such an operation causes new 
disturbance, and only increases the general pressure. 
An employed reserve is really a contradiction in 
terms, if we are considering the market as a whole. 1 

Coming now to cash, can all cash be counted as 
banking reserve ? First we must notice that the 
term " cash," as used by bankers, is extremely am- 
biguous. Mr. Palgrave gives a list of seven different 
things which are sometimes called cash by bankers. 
Some bankers regard as cash their actual holdings 
of metallic money in their own tills, others include 
Bank of England notes, others notes of other banks, 

1 Thomson Hankey has put this point admirably. " Ready money," 
he says, " is a most valuable thing ; it cannot, from its very essence, 
bear interest ; everyone is therefore constantly endeavouring to make 
it profitable, and at the same time to make it retain its use as ready 
money, which is simply impossible. ... It is the constant attempt 
to perform this miracle which leads to all sorts of confusion with respect 
to credit. 

" The Bank of England has long been expected to assist in performing 
this miracle ; and it is the attempt to force the Bank to do so which 
has led to the greater number of the difficulties which have occurred on 
every occasion of monetary panics during the last twenty years." 
The Principles of Banking, 1867, p. 25. 


others cheques on other banks, others cash balances 
at the Bank of England, others balances at their 
London agents, others money at call and at short 

It is plain that we want much more specific returns 
before we can arrive at any definite knowledge of 
what is meant by and returned under the heading 
of " Cash." 

When we get down to metallic money we seem 
to have got to bedrock ; and there are persons who 
would include every form of metallic money as bank- 
ing reserve. But it is quite clear, I think, that we 
cannot do this. A large portion even of the gold 
held by the banks is necessary till money. At least 
four leading joint-stock bank authorities admit that 
till money cannot be regarded as reserve ; that is to 
say, the money which a bank finds it necessary to 
use to keep its doors open and to carry on its ordi- 
nary business is not money available to meet emer- 
gencies. It cannot be seriously reduced, otherwise 
the bank would have to close its doors. All the 
greatest authorities on banking are agreed on that 
point. The problem, then, is, How much cash is 
held by joint-stock banks other than what is neces- 
sary on the average to carry through the ordinary 
business of the bank ? It is very difficult for an 
outsider to form any opinion on this point. We hear 
representatives of banks sometimes speaking of 
" hoards " which the banks are forming for them- 


selves. On the other hand, Mr. Palgrave says very 
definitely that practically there is nothing held by 
the banks in an unemployed form. He tells us, 
' The tendency of business is to leave no unemployed 
money outside the Bank of England "; * that is to 
say, that there are no hoards of any importance, of 
any magnitude, which are not potentially in use, 
and therefore no money to meet emergencies, outside 
the Bank of England. Moreover, any such unseen 
hoards, because their amount is unknown and their 
existence uncertain, lose much of the power they 
might otherwise have to steady the market. A true 
reserve must be a public provision of money. 

It must be remembered, too, that a large pro- 
portion of our metallic money consists of silver and 
bronze. Neither of these, since 1816, is full legal 
tender, and, though silver might for many purposes 
have been a good remittance before 1873, it cannot 
possibly count as bank reserve here since that date. 
Now, we were told yesterday by the Chancellor of 
the Exchequer that against an estimated amount of 
about 100,000,000 of gold in our currency, there was 
about 24,500,000 of silver and 3,000,000 of bronze. 
Thus, 27,500,000 of " cash," or, say, nearly twenty- 
five per cent., is not gold and not reserve. How much 
of this is in the hands of the banks ? According 
to returns made in June, 1905, they held, say, 
5,250,000 of silver, and their holding had increased 

1 Bank Rate and the Money Market, 1903, p. 225. 


750,000 since a previous return in 1892. We have 
no return of the holdings of bronze, but the silver 
and bronze together must be well over 6.000,000. 
All this counts as part of the " cash in hand " held 
by the banks. But it is certainly not reserve, from 
the point of view of a foreign drain on our market, 
and it can only be available to a very limited extent 
to meet internal demands. The old device of " paying 
in sixpences," resorted to by the Bank itself in 1720 
and 1745, was effectually barred by the Act of 1816. 
But, last of all, no resources, however good, not 
even gold itself, can be counted as reserve unless 
they can be used in an emergency. Locked-up money 
is not reserve. That brings me to the case of the 
United States. The national banks there have re- 
serves of gold which would be an exceedingly valuable 
asset if they went into liquidation. We know that 
they are obliged to hold 25 per cent, reserve against 
their liabilities in the larger or reserve cities, and 
15 per cent, in the country towns. But that is not 
strictly reserve as we have defined it, because they 
cannot part with it. They cannot pay out any part 
of this 25 per cent, without reducing their liabilities 
i.e. their accommodation to the public by four times 
the amount thus paid away. Hence, as their reserve 
dwindles down to 26 per cent, and 25| per cent., 
panic seizes on the public, because they know that 
the next step will be that the banks cannot pay out 
any more. That is one reason why we can never 


establish an effective banking reserve by regulations 
that banks shall hold such and such a proportion 
of gold against total liabilities. Gold held under 
these conditions may be a good asset when the bank 
goes into liquidation, but it is not a banking reserve, 
and will not prevent the necessity of liquidation, 
which it is the purpose of a bank reserve to avert. 

We ought to be quite clear, I think, on that point. 
Mr. Lawson, always witty and incisive, says : 
" Perhaps the American idea of creating money 
simply to lock it up as bank reserves was borrowed 
from the railway stations in Germany, where there 
must always be one cab on the ranks." Well, it 
seems to me that that cab might as well be in the 
stables. The reserve, then, must be available, other- 
wise the gold may as well be in the mines. 1 


What is the actual position in this country, taking 
reserve as above explained ? The total liabilities 
of the banks of the United Kingdom may be put at 
about 1,000 millions sterling. In this sum I do not 
include liabilities on account of capital and reserve, 
which are liabilities to shareholders, not to outsiders. 

1 Since these remarks were made, the reserve ratios mentioned 
have been altered, and the whole reserve position in the U.S. enor- 
mously improved, by the Act of December 23rd, 1913, and its subsequent 
amendments, creating the Federal Reserve System. The argument, 
however, still holds as against any attempt to legislate for reserve on 
the basis of a fixed ratio to liabilities. 
F.C.F. K 


Nor have I included anything on account of the 
liabilities of Foreign and Colonial banks, which it 
would be very difficult to assess for this purpose. 
Savings banks' liability, which seems to me of a quite 
different kind, is also excluded ; as well as insurance 
and other liabilities, which may at times cause a 
very real disturbance of the market. 

What is the reserve held against this 1,000 millions 
odd of liabilities ? I will take first the returns made 
by the banks themselves, and we can afterwards con- 
sider how much these returns must be discounted if 
we take a strict view of what is really effective reserve. 
The Bank of England has for over twenty years kept 
considerably over 45 per cent, reserve against its 
banking liabilities, the note issue being otherwise 
provided for. The exact average rate for the years 
1884-1903 was 46'6 per cent. During the last fifteen 
years the great joint-stock banks publishing returns 
show a ratio of something like 15 per cent., tending 
of late years to rise somewhat. The average for 
1904-6 was 15*5 per cent. ; last January's return 
stands at 17'4. For the smaller and country banks 
we have no complete returns ; but the other day I 
noticed a return by one of the most important of 
the English country banks, one with most ancient 
and honourable traditions. The proportion of re- 
serve to liabilities was 6*2 per cent. I do not think 
we could put the general average holding of this 
class of banks as more than 5 per cent, of liabilities. 


Thus the banks may be divided into three orders, 
holding respectively about 5 per cent., 15 per cent., 
45 per cent, of reserve, the proportion trebling 
as you pass from one order to another on your way 
from the country bank to the Bank of England. 
Remembering that reserve is dead money, and makes 
no contribution to dividend, these figures should be 
noted. Whatever value they may have as indicat- 
ing the proportion of effective reserve on which we 
may rely, they are unimpeachable evidence of the 
relative sacrifices made by different elements in the 
banking community towards the burden of maintain- 
ing dead or unprofitable resources. 

But when we come to examine these returns in 
the light of the exceptions we have been considering, 
we find that very little is left as really effective 
reserve, and that little is mainly confined to the 
holding of the Bank. I put it as twenty millions, or 
twenty-five millions at the outside 2J per cent, of 
the total liabilities. Mr. Palgrave said, in 1902, that 
there was little unemployed money (other than till 
money) outside the Bank. We hear that some un- 
known amount has recently been accumulated by 
the joint-stock banks. On the other hand, as Mr. 
A. C. Cole justly remarked, in his address to the 
Institute of Bankers in Ireland (1905), some of the 
reserve at the Bank must be regarded as till money. 
That reserve, during the last fifteen years, has 
averaged about twenty-five millions. Mr. Cole 


considers that we can only count two-thirds of this as 
true reserve. Add four millions for outside reserves, 
and you get about twenty millions, say, twenty-five 
millions as an extreme figure. 

Is this reserve adequate ? The arithmetical pro- 
portion is small, but no conclusion can be drawn 
merely on that ground. It is a question mainly of 
what the insurance companies call experience. It 
depends on the probable emergencies to be met. One 
can conceive a banking situation in which a reserve 
of one per cent, might be adequate. If we had to 
consider nothing but internal liabilities, and cheques 
were universally used, it is almost conceivable that 
we should want no reserves at all, especially if the 
process of amalgamation had been carried so far 
that there was only one bank. Every internal pay- 
ment might be made by a cheque on that bank. 
In this sense the banks are perhaps justified when 
they urge that a large mass of their liabilities cannot 
fairly be regarded as involving any serious necessity 
for the holding of gold reserves. But we must deal 
with the situation as it is ; and we must note that 
the actual liabilities are of very different kinds, some 
of them involving very serious possibilities. 

Liabilities on current account are probably the least 
dangerous of all to the banking system as a whole. 
They represent the till money, if I may so speak, of 
the general public, other than their pocket money. 
It has often been pointed out, as by Mr. Palgrave, 


that a man cannot very well withdraw his average 
holding on current account. He may move it to 
another bank, but he cannot well do without it in 
this form, otherwise he would invest it. When we 
come to what are called distinctively " deposit " 
accounts, we have a quite different kind of liability. 
The money is placed there because it is not wanted 
at the moment. It only lies there till a better in- 
vestment offers. True, it is nominally under some 
condition of withdrawal subject to notice. But I 
gather that under the stress of competition the con- 
dition of notice tends to vanish, and I am often 
assured that customers can practically move their 
deposit moneys at will. High authorities have held 
that the greatest danger the Scottish banks have 
to provide for is a sudden withdrawal of such deposit 
moneys, which form a large proportion of their 
liabilities. We had a memorable object lesson as 
to this risk in the Australian bank failures of 1893. 
No doubt the difficulty was originally caused by an 
undue inflation of land values, at a time when general 
prices were steadily falling. But the crisis was pre- 
cipitated by the fact that these banks held large 
amounts of money, mainly British, on deposit 
account. There was a rush on the part of the de- 
positors to move their money, and the banks were 
wrecked, a large part of the total loss of fifty-five 
millions falling on this country. 

Observe that these deposits, from the Australian 


point of view, were foreign deposits. It is the 
external liabilities that constitute the really serious 
strain upon well-constituted banking systems like 
our own. In 1826 Mr. Huskisson, comparing the 
relative dangers of a foreign drain and an internal 
panic, put the latter as by far the more serious. 
Nobody, I think, would say so to-day. There is no 
country in the world, I suppose, where banking busi- 
ness is so thoroughly conservative, and takes so few 
industrial risks, as in England. Our modern banks 
are so well organised and so admirably managed 
that I can hardly imagine any panic or run setting 
in on the ground of distrust of a particular institu- 
tion. It is, unfortunately, much easier to imagine 
a general collapse of the market as a whole. Our 
market works under very special and peculiar diffi- 
culties. We are, of course, a free gold market not 
the only free gold market, for I understand that 
neither Amsterdam nor New York puts any obstacle 
on the export of gold but still we are the most 
important free gold market, and the one to which 
resort is most generally made. There can hardly 
be a monetary stringency in any part of the com- 
mercial world which is not felt in London. This 
market is also a kind of clearing-house for inter- 
national payments. It follows that we hold large 
deposits on foreign account as a basis for these 
payments. These deposits have been steadily in- 
creasing. I was astonished to find last year that 


the Australian banks alone had in January twenty- 
five millions sterling in this country. Germany, 
again, has large deposits abroad, a great part of 
which are in this market ; and it is curious that 
one of the effects of the passing of their Exchange 
Act of 1896, which considerably hampered dealings 
on their exchanges, was that additional German 
money was held in London, to facilitate dealings 
on German account in our speculative markets. Per 
contra, I believe that our deposits in foreign markets 
are relatively small, and that we have little hold on 
these markets, otherwise than by the general balance 
of trade and the interest due on our foreign invest- 
ments. Mr. Hansard has often insisted upon this. 
He says that we hold few bills on foreign places, 
and that the kind of securities our banks keep, though 
very good, are usually not of the special class, 
nor in the easily negotiable form, which foreign 
markets prefer. There have been times, he says, 
when it was easier to sell Turkish bonds than Consols 
on foreign markets. The question for the London 
banker is often not how good a security is intrin- 
sically, but how easily it can be turned into cash, 
or sold to check a foreign drain of gold. In 1907 
the President of the Bank of the Netherlands, in his 
annual address, pointed out that, in consequence of 
the stringency in the United States in the autumn 
of 1906, a considerable demand for gold had been 
made on Amsterdam. " We met that demand," 


he said, " without the export of a single florin of 
metal." They simply handed over bills on London, 
thus transferring the pressure to this market. These 
bills had been a good investment for the Dutch bank, 
for rates were high. How many bills do we hold 
that we could use in a similar way ? 

Of all deposits in our market, the most dangerous 
and disturbing are those held for purposes of inter- 
national financiering. Some banks decline to hold 
accounts of this character, but it cannot be doubted 
that others are not so precise. It is matter of 
notoriety that the magnitude and audacity of modern 
finance operations have greatly increased of late, and 
that these operations are necessarily international in 
their range. Thus our liability to sudden and violent 
monetary disturbance, to " bolts from the blue," is 
greater than it ever was. This is a kind of liability 
which calls for a much more substantial reserve pro- 
vision than we have yet made. 

I come last to what seems to me the greatest danger 
that threatens our credit, I mean the position we 
should find ourselves in in case of war between two 
first-class Powers, especially if this country were itself 
actively engaged. To quote Mr. Pownall in 1899 : 
"It is quite possible, with our attenuated gold re- 
serve, that a foreign government might strike its 
most effective blow by aiming at our financial supre- 
macy. The power to act on our few millions of 
gold might be acquired by an enemy able to deplete 


the Bank, and bring on a crisis." Sir Felix Schuster 
has also called attention to this matter on several 
occasions. In March, 1908, Sir Robert Giffen read 
a valuable paper, at the United Service Institute, 
on The Necessity of a War Chest in this Country, or 
a Greatly-Increased Reserve. In the course of the 
interesting debate which followed, Sir Felix Schuster, 
who was in the chair, remarked that " an efficient 
gold reserve in time of war, at the commencement 
of hostilities, is infinitely more important than food 
supplies " ; and it was generally admitted that this 
was a vulnerable point in our resources for defence. 
We should certainly be in a very weak position to 
withstand an attack of this sort. When I look at 
the huge reserves held in some foreign countries I 
can hardly doubt that they are largely held in view 
of contingencies of this kind. What sort of provision 
is made here for this most dangerous of all liabilities ? 


If I conclude, then, that our reserve is inadequate, 
it is not so much on the basis of the small ratio it 
holds to total liabilities as on the consideration of 
the very dangerous character of some of these lia- 
bilities. There are other reasons for this conclusion. 


Much larger reserves are held in other countries, 
whose markets are not exposed to anything like the 
same strain as our own. The Bank of France the 


other day held 145 millions of gold and thirty-five 
millions of silver say, the equivalent, even for 
external purposes, of 160 millions of gold. The 
Bank of Russia held nearly 130 millions, the Reichs- 
bank over fifty millions, to say nothing of the enor- 
mous holdings by the United States banks and their 
Treasury. Three times, too, in seventeen years we 
have only been saved from crisis by the friendly 
assistance of stronger banks. I am far from assum- 
ing that this assistance was entirely disinterested ; 
yet I can conceive political situations in which it might 
have been withheld. Surely it is not wise to leave 
our solvency dependent upon the goodwill of our 
neighbours. Let me remind you of what we risked 
on one of those three occasions, the one known as 
the Baring difficulty of 1890. I give you Lord 
Goschen's account in his famous Leeds speech of 
28th January, 1891 : "No fertile imagination could 
exaggerate the gravity of the crisis I doubt whether 
the public has thoroughly realised the extent of the 
danger I tell you what was at stake, you risked 
the deposition of London as the banking centre of 
the universe, you risked the supremacy of English 
credit, you risked the transfer of the business of this 
country to other European centres, if such a catas- 
trophe had occurred as you were on the eve of 
witnessing. You have escaped from a catastrophe 
to which the famous catastrophe of Overend 
& Gurney would have been child's play." How 


did we escape ? By borrowing three millions from 
France, one and a-half millions from Russia, and 
some smaller sums from other quarters say, five 
millions altogether, or just half of 1 per cent, of 
our total bank liabilities. A story like this defies 

But we need not go to extreme cases like these 
to show the insufficiency of our reserves. They are 
insufficient in ordinary times. I think the main 
ground for holding that our reserves are inadequate 
is the extreme sensitiveness of our market and the 
discount rate to relatively small movements of gold. 
The Governor of the Bank said a few years ago that 
an unexpected export of two millions of gold would 
generally put up the rate of discount one per cent., 
and, perhaps, two, according to the circumstances. 
This means a very heavy tax on trade. I suppose 
there must be about 600 millions usually on loan, in 
the way of discounts and advances ; one per cent, 
on that is six millions. But that is only a small 
part of the tax. We have also to take account of 
the general disturbance of trade and employment. 
It is hardly possible to exaggerate the losses suffered 
by such rises in the rate as took place in 1907. There 
are scores of people to-day who could move a million 
or many millions of gold if they chose to do so. Is 
it right that our trade should be exposed to a tax 
of this kind by reason of such casual operations ? 
Compare the case of France and England in 1907. 


Our rate was 7 per cent, in the last quarter of that 
year, and it was, I believe, an effective market rate. 
The French rate did not rise above 4 per cent. Quite 
apart from the question of unemployment, what an 
advantage is given to the French manufacturer com- 
peting with us in a neutral or in our own market ! 
A larger reserve would make our market less sensi- 
tive, and this, in brief, is the main reason why a larger 
reserve must be formed. 

Those on whom the expense of providing such an 
increased reserve would fall are naturally inclined 
to suggest that our difficulties may be met by other 
expedients. What possible courses are open in case 
of monetary stringency ? I need not speak of a con- 
traction of accommodation, for this is admittedly 
bad banking, and the very danger to be avoided. 
Modern banking has substituted for that the received 
method of raising the discount rate. This is usually 
effective, but it is always costly, and these rises in 
the rate are just what efficient banking arrangements 
would prevent. Moreover, this device has sometimes 
failed, and we are not entitled to place absolute 
reliance upon it. Take the Overend & Gurney crisis. 
I shall never forget the consternation caused by that 
collapse, even in a quiet Somersetshire country town. 
We then had a Bank rate of 10 per cent. The Paris 
rate was never above 4 per cent. There was a six 
per cent, difference between the two rates for three 
months. Yet this failed, for a long time, to attract 


gold to London, no doubt because the crisis had 
caused a general distrust of all English securities. 
When Gurneys had gone, whose name was good ? 
They did not think that our paper at that time was 
good enough to lend upon ; so that the discount rate 
had no attractive power, and this example should 
warn us that we cannot always rely upon drawing 
or keeping money by this method. 1 

Foreign banks frequently resort to another expe- 
dient. They buy gold at a premium. Our Bank 
rarely does this. It is often said that the Bank 
is buying gold at a premium when it buys above 
3 17s. 9d. an oz., the price fixed by the Act of 1844. 
But it is not really buying at a premium unless it 
pays over 3 17s. 10|d. In this latter case, of course, 
it incurs a loss for the public good. Foreign banks 
constantly resort to this method. A State bank may 
well be willing to incur such a loss in order to avoid 
penalising trade by a rise in the rate of discount. 
It would not be so reasonable, all things considered, 

p Not long before the crisis of 1907, a Governor of the Bank was 
reported to have said that " 10 per cent, would draw gold out of the 
earth." It may be doubted whether this panic rate has ever attracted 
gold. It certainly did not at the time of the War crisis. Mr. Thomson 
Hankey, a generation earlier, showed a sounder grasp of the real 
position. " The Bank knows," he said, " that there may be moments 
of sudden alarm, when no one is willing to part with ready money on 
any terms whatever" Mr. Hankey, who was for fifty-one years a 
Director of the Bank, had just steered the market through the 1866 
crisis, and spoke from experience. The fact is, that it is just when a 
reserve is most wanted that the pull of the discount rate is least 


to expect the Bank of England to make similar 
sacrifices. At any rate, it rarely does. 

I need not allude to our power of drawing gold 
by the sale of bills and securities. I have said that 
our market is relatively weak in this respect. We 
are also debarred from placing an export duty, or 
any other obstacle, legal or moral, on the export of 
gold. The tradition of the City does not regard this 
as an open question. But most of the Continental 
banks can, if they wish, and do, not infrequently, 
protect their reserves by measures of this sort. They 
have also, sometimes, resorted to the expedient of 
gold loans. Of course, that is bad finance ; but in 
emergency it is as open to us as to others. It 
would, however, only operate slowly ; and to make 
it really effective the money so imported would 
have to be guaranteed against re-export, as in 
the very remarkable case of the United States 
in 1893. 

Another expedient, often used in the United States, 
is the method of collective guarantee by associated 
banks and collective certification of cheques. We 
have no regular machinery for such operations here, 
and Ldo not think we have ever had cheques collec- 
tively certified, though the Baring case illustrates 
collective guarantee. We might extemporise mea- 
sures of this sort, but they are open to grave objections. 
Moreover, they do not always provide the sort of 
money most needed. There are soaps, I believe, 


which " will not wash clothes." These forms of 
bankers' money " will not pay wages." 

Lastly, there is the resource of elastic or emergency 
note issues, of which the German system provides an 
excellent example. This may, in certain cases, prove 
of the greatest service. The peculiar virtue of a 
note issue, as contrasted with other forms of currency, 
consists in its elasticity, by which it can be safely 
used to relieve many periodic and other demands 
upon our gold resources. But I need not discuss 
that here, because we are completely cut off from 
any relief of this kind by the effect of the mechanical 
Act of 1844. As long as that Act is in force, our 
note issue is absolutely inextensible, except by the 
machinery of a Chancellor's letter. Nobody defends 
the Act now, but to discuss it would raise many 
issues ; and the question of reserve may, at least in 
the first instance, be best considered apart from the 
very debatable question of the regulation of the bank 
note. 1 

On the whole, then, it is clear that our power of 
dealing with emergencies other than by a rise in the 
rate of discount is more restricted than that of our 
neighbours, while our market is infinitely more ex- 
posed to attack. Hence, our market is increasingly 

1 It is, of course, true that within the limits of payments made by 
cheque, an extension of accommodation by the Bank of England may 
serve the same purpose here as an elastic or emergency note issue does 
elsewhere. But only within these limits. It cannot replace gold for 
wages or other payments usually made in cash, or for foreign remittance. 


sensitive, and the variations in the discount rate 
so wide in their range as to impose an unnecessary 
burden on trade. On economic grounds alone, on 
the mere basis of s. d., a substantial increase of the 
reserve seems required. The economy of cash has 
been overdone. " We have refined our methods of 
working until we are spinning a top on a needle- 
point," as Mr. Pownall tells us. 1 Our present 
system is not only too expensive, but doubtfully 


So far I have spoken with considerable confidence. 
There is high authority for the statements I have 
made, and I do not think they will be seriously dis- 
puted, at least by experts. 

When I come to the question, What practical 
measures may be taken for improving the situation ? 
I speak with more diffidence. What I will venture 
to say is only in the way of suggestions, general in 
their form, leaving details to be arranged by those 
whose interests are more immediately concerned. 

One word may be said, in the first place, on the 
need of more publicity. Publicity is a great econo- 
miser of legislation. Many difficulties would arrange 
themselves, if the public had access to the facts. 
This has been recognised as regards company and 
railway legislation ; it is probably equally true of 

1 Econ. Jour. Sept. 1899. It is all right as long as the top continues 
to spin ! 


banking. There are those who think that if the 
essential figures were published, public opinion would 
ensure that the necessary reserve provisions were 
made. Even those who are not so sanguine will 
agree that fuller returns are essential. Lord 
Goschen held, in 1891, that we have an undoubted 
right to this information, and this right becomes 
all the stronger, because it is conceivable that the 
larger banks might trade upon the conviction that 
they were " too big to be let go." This gives the 
public a locus standi, because it practically throws 
the burden of responsibility upon the general market. 
We have no annual report from the Bank itself. 1 
The returns under the Act, invaluable as they are, 
are more meagre than they used to be, and leave 
much to be desired. Since 1877 we have no infor- 
mation on a most vital point, the amount of, and the 
variations in, the bankers' balances. The joint-stock 
banks give no real information as to the nature of 
their cash holdings. Cash in hand should be dis- 
tinguished from money with the Bank, and if there 
are any sums held in reserve, over and above till 
money, this might be stated. I need hardly say that 
the return of the reserve should be an average, not 
a figure for a particular day. The existing practice 
is a cause of disturbance in the money market, and 

1 The Bank of France publishes an admirable Report, full of 
instructive detail, of about 100 pp. 4to. All the great foreign national 
banks issue similar reports. 

F.C.F. L 


not a very creditable proceeding. It would be a 
great gain if a common form of balance sheet could 
be adopted, and if we could have more definite 
specification of the large entry under discounts, 
advances, and loans. Such information would be of 
extreme value, and we ought to have it ; but, even 
so, I doubt if publicity alone would meet present 
requirements. A new departure seems necessary. 

I think I may assume that any reserve, to be 
effective, must be publicly and centrally held, and 
under single or unified direction. When I say it 
must be public, I mean that secret hoards have no 
effect in steadying the market. They cannot inspire 
confidence in a sceptical world. Again, our main 
liabilities are central. They fall on the London 
market, and the resources to meet them must be 
kept there. I think the control must be in some 
way unified, because I do not see how you can have 
a definite and steady discount policy carried out by 
conflicting and possibly in some degree rival autho- 
rities. Hitherto the Bank of England has borne all 
the brunt, and therefore the question of control has 
hardly arisen. This is a state of things which can 
scarcely continue. It was perhaps reasonable when 
the Bank towered above all the other banking in- 
stitutions of the country as a cathedral towered above 
the cottages of a medieval town. But now, just as 
the cathedrals are often walled up by the surround- 
ing warehouses, so the Bank is almost overlooked by 


the soaring joint-stock banks which surround it. 
Out of the 1,000 millions of liabilities nearly one- 
half are held by twelve of these banks, some of which 
hold sixty or seventy millions of deposits. 1 Now, 
the actual deposits in the Bank of England are not 
much above fifty millions. How can it be con- 
tended that in these new conditions the whole burden 
of holding an adequate national reserve should be 
thrown upon the Bank ? The question becomes 
more pertinent when we find that the Bank only 
divides some 9 per cent., and that its dividend rather 
declines ; whereas some of the joint-stock banks 
declare much higher dividends, rising in some cases 
to over 20 per cent. In the face of these figures, 
and remembering that the Bank does not seriously 
compete for the profitable country business, nor 
attempt to attract deposits by allowing interest on 
them, I think the Bank has done its share in con- 
tributing as it does to the national reserve. 

On the other hand, the joint-stock banks may 
fairly demur to leaving more money with the Bank 
on present lines. Money so left in excess of clearing- 
house and other current exigencies will not increase 
the Bank reserve by the sum so left, but only by, 
say, 45 per cent, of that sum, and it will increase 
the resources of an institution which they regard as 
a competitor. This is an argument for constituting 

p Five clearing banks now hold considerably more than half the total 
deposits of the United Kingdom.] 


a second or emergency reserve out of the contribu- 
tions of the joint-stock banks. There are, of course, 
other and very strong arguments for a reserve of this 

What I feel, then, is that we cannot ask the Bank 
to do much more than it already does. We may 
fairly ask it to continue to do as much. But beyond 
the Bank reserve, our first line of defence, we want 
a second or emergency reserve, formed by the other 
banks in the United Kingdom ; and I should also like 
to see a third reserve, against our more serious lia- 
bility, formed at the expense of the nation. This 
might be called the war reserve, though its use need 
not be absolutely limited to war liabilities. 

The second or emergency reserve of, say, twenty 
millions sterling, should only be used in times of 
pressure. It is hardly for me to suggest the basis 
on which contributions to it should be assessed. 
Those concerned are the best judges of such a point. 
The question of control may well give rise to differ- 
ence of opinion. It might be under the regulation 
of a joint committee representing the contributing 
banks and the Bank of England. It would be far 
simpler, if the banks saw no objection, to substitute 
an automatic arrangement. The Bank of England 
might be allowed to have access to the money in the 
second reserve on payment of a tax, the proceeds 
of which would go to the contributing banks. Thus 
for the first five millions so withdrawn the Bank 


might pay a 5 per cent, tax, for the second 6 per 
cent., for the third 7 per cent., for the fourth 8 per 
cent. Thus the Bank would only draw from this 
reserve on condition of establishing successive rises 
in the rate of discount, otherwise the operation would 
result in loss. I have long been persuaded that some 
arrangement of this sort is desirable. On the single 
reserve system you can never be sure that you will 
find your reserve when you want it. You cannot 
prevent those who hold it from trading with it in 
ordinary times. A second reserve on this system 
would not be touched till we had a 5 per cent, rate 
at least, and would not be exhausted till the rate 
was at least 8 per cent. Opinions may differ as to 
when relief should begin. The scale suggested was 
determined by my belief that a rate above 5 per cent, 
begins to put serious pressure upon trade. 

Coming to the Government or national contribu- 
tion, which we may put, say, at ten millions, I 
may say that I have always resisted the contention 
that Government was bound to hold a reserve on 
savings bank account. I have gone into that ques- 
tion very carefully, and it seems to me that these 
banks are amply provided against any banking risks. 
Their operations might conceivably involve the nation 
in loss, but that is an entirely distinct question. 
Even in case of a run upon them, due, say, to pro- 
longed depression of trade, the money would only 
run round the banks ; it would not be taken out of 


the market. Lord Goschen says emphatically : " The 
savings banks deposits are of a totally different 
character to banking or mercantile deposits. There 
has never been a case that I can remember of the 
least difficulty, or of having to sell any large amount 
of securities to meet a run or anything of that kind." 1 
It would be more reasonable to tax the insurance 
companies for such a purpose. The San Francisco 
fire of 1906 caused demands on our insurance com- 
panies, all honourably met, of no less than ten 
millions sterling. You may search the whole annals 
of the world's savings bank operations before you 
will find a disturbance of the money markets which 
is to be compared with this. 

But though it seems to me absurd to suggest that 
Government should hold a reserve of ten millions 
against savings bank risks, the cost of which would 
fall on a class of depositors who are generally of very 
limited means, I think that such a reserve might very 
fairly be held against the extraordinary risks of war. 
I can imagine no greater disturbance than that to 
which our market would be exposed in the event of 
war between two first-rate Powers, more especially if 
this country was itself involved. There would be 
an enormous creation of new securities, a very heavy 
fall in existing securities, and a general rush for money. 

P Even in the War crisis, the net withdrawals only reached 5,000,000, 
an amount amply covered by Government balances ; and the Govern- 
ment always has the resource of making Postal Orders legal tender.] 


Not improbably a special attack would have been 
prepared upon our reserves. Success in the campaign, 
too, might depend largely upon the quantity of cash 
we had available at the outset. There would be no 
question of credit at such a time. Gold, cash down, 
would be essential. You will remember the purchase 
of the Chilian ironclads at the time of the Russo- 
Japanese war. The purchase might conceivably 
have affected the issue of the naval contest. Pur- 
chases of this sort will play an important part on the 
outbreak of a big war. For this and many other 
reasons adequate reserves of cash at such a time 
will be of the very first importance. 

Is it too much to ask the nation to hold a reserve 
of ten millions against an emergency of this kind ? 
The annual loss by way of interest would be 275,000. 
But there are very considerable offsets to be made 
against that. The existence of such a fund would 
help to steady the market, even if it were strictly 
reserved for war risks. But it is quite possible that 
in the event of a serious crisis in times of peace, the 
Bank might be allowed, by Chancellor's letter, to 
have recourse to this fund as a third reserve. The 
condition might be the payment of a tax of not less 
than 9 per cent. Such a resource would have been 
useful in 1866. In any case the losses caused by 
money market disturbances are incomparably greater 
than the cost of the reserves which would prevent 
these losses. The Government would recover more 


than the cost of such a modest reserve out of in- 
creased tax revenue. 

I have quoted Lord Goschen so often in support 
of what has been said to-night that it is only fair 
to say that he was opposed to both the new forms 
of reserve which I advocate. As regards the second 
reserve, he objects that there might be difficulties 
in apportioning the assistance to be given from this 
fund. Would not banks expect to be helped in 
proportion to their contributions ? With respect, 
I think not. The objection cuts at the root of 
every form of insurance. If the assessment were 
equitable, the relief afforded might be left to adjust 
itself in the ordinary way through the rise in the 
discount rate. Banks, like other people, would thus 
obtain assistance in proportion to the urgency of 
their need, measured by the rate they were willing 
to pay. As regards the third or national reserve, 
Lord Goschen, of course, spoke as Chancellor of 
the Exchequer, and would primd facie object to any 
further burdens on the Consolidated Fund. His 
objection does not take very tangible or definite 
shape. He says that such a suggestion is " contrary 
to all our ways. It would be a dangerous power to 
entrust to any political minister," etc. But observe 
that the system of relief by a Chancellor's letter 
exists already, and in a much more questionable 
form. Why should the proposed scheme be more 
dangerous ? If the intervention of an individual is 


not desired, access to the third reserve might be 
automatic, fixed beforehand, on the principle of a 
graduated tax. But as the question of war risk is 
eminently one for the Cabinet, it would seem more 
natural to leave the control of what was primarily 
a war reserve to the Minister. 

I have merely offered suggestions, rough sketches 
of arrangements which I think would conduce to 
greater security, and, for that very reason, to greater 
economy. It will be said that the contemplated 
reserve provision is excessive. Yet, all told, the 
three reserves would be only about equal to that 
held by the Keichsbank, and no one will pretend 
that the liabilities of Germany are as great and as 
pressing as our own. I am well aware, however, 
that schemes of this magnitude would require very 
careful criticism from many different points of view, 
and that any kind of action in this matter is con- 
fronted by obstacles not easy to turn. But I must 
not presume longer on your patience. I will only 
repeat that the real reserve problem is not merely 
the bare avoidance of bankruptcy, but the mini- 
mising of financial strain. Even the simpler ideal 
is not always realised, as witness the United States 
in 1907, and our very narrow escape from a similar 
collapse in 1890. But our real aim should be to be 
prepared to meet any probable demand for cash, 
whether on home or foreign account, in peace or 
in war, without causing any undue or injurious 


pressure on the money market, with the consequent 
disturbance to trade and employment. We are not 
in sight of this latter ideal at present ; it is doubtful 
if we are even secured against insolvency. Can we 
afford to go on in our present happy-go-lucky way, 
merely on the chance that we shall somehow worry 
through ? Is it quite certain, if we continue to 
allow our reserves to dwindle in proportion to those 
of other countries, that we shall retain our position 
as the international clearing-house, and preserve the 
high reputation of the London bill, on which so much 
of our financial pre-eminence depends ? 


THE theme I have taken as my text this evening is 
perhaps too large for the limits of a single lecture. 
It will hardly be possible within these limits to deal 
adequately with such a colossal disturbance as the 
American crisis of 1907. An American professor 
has described this crisis as " the most extensive and 
prolonged breakdown of the country's credit me- 
chanism which has occurred since the establishment 
of the National banking system [in 1863] " ; and 
another writer styles it " the biggest slump in the 
history of the human race." The effects have re- 
sounded throughout the whole financial and com- 
mercial world, which is still suffering serious depression 
nearly eighteen months after the collapse, and is 
likely, I fear, to suffer for many months yet. 


But there is one aspect from which this crisis seems 
specially interesting and instructive. It is a notable 

1 A second lecture to the Institute of Secretaries, delivered on March 7 
31st, 1909. 



illustration of the importance of the question of bank- 
ing reserve, upon which I had the pleasure of address- 
ing you last month. I propose to-night to deal with 
it mainly from this point of view. Speaking broadly, 
the crisis of 1907 stands out unique among modern 
crises, and especially in contrast with European crises, 
|as mainly due, not so much to over-trading, or to 
general over-speculation, as to defective banking. I 
maintain that this crisis was emphatically a banking 
crisis ; and I entirely agree with Professor Sprague, 
who, in concluding an admirable account in the 
Economic Journal for September, 1908, sums up the 
moral of the disaster in the words, "Above all, a 
more intelligent understanding of the purpose of 
banking reserves is required." This view has been 
traversed by high authorities in the City ; but $he 
objectors would probably admit that if the American 
system of banking had been as well organised as the 
ordinary European system, the crisis need not have 
taken place, and the liquidation required by the 
somewhat unsound conditions which prevailed in 
the eighteen months preceding October 1907, need 
not have involved the complete paralysis of general 
credit. This is my case. 

To make the point more clear, we must distinguish 
between financial crisis and trade depression. I am 
afraid that periods of trade depression are at present 
inevitable. It used to be supposed that these periods 
must necessarily be connected with a collapse of 


credit. Jevons, as most of you know, tried to make 
out that a crisis must be expected every ten years ; 
and lie attempted to find a physical connection (through 
the tropical harvests) between financial crises and sun- 
spots, which recur at about the same interval. Right 
or wrong, it was a brilliant example of scientific ima- 
gination ; and Mr. Jevons's son maintains that his 
father's theory is strengthened by recent physical 

Now, though that theory may possibly be true 
with regard to trade depression, it is certainly not 
true with regard to financial collapse. In England 
we still have our periods of excitement and depression 
in trade ; but we have had no crisis, properly so-called 
(though we have had sufficiently narrow escapes), 
since 1866. Improved banking has enabled us to 
pass from our booms to our slumps without any 
general collapse of credit, in which the sound and 
the unsound are all necessarily involved. This has 
not been the case in the United States. The 
financial crisis proper is a regular institution there, 
and I am afraid it becomes more acute as time goes 
on. This points to the inadequacy of their banking 

No doubt a certain strain was put upon the bank- 
ing system by the abnormal activity of business and 
the speculative inflation of 1906-7 ; but there was no 
reason why the banks, if properly organised, should 
not have easily met the strain. I do not think it 


can be said that the general condition of business 
was unsound. There had been remarkable develop- 
ments of production, but they were in the main 
justified by the demand. Nowhere had this activity 
been more marked than in the railway world. But 
the development of the railways can hardly be called 
speculative. They were unable to carry the traffic 
that was coming forward. Hundreds of miles of 
sidings were blocked with cars that could not be got 
through. " To this day," says Mr. Leppington, " by 
far the greater portion of railroad mileage in the 
States is single track. Not long ago complaints were 
loud of a dearth of freight cars. The companies 
were devising ambitious schemes for bringing up their 
equipment to a level capable of coping with the re- 
quirements of an era of unprecedented prosperity. 1 
Lines were to be doubled and regraded, bridges re- 
built, rolling stock renewed." In the general markets 
there was no pronounced accumulation of unsold 
goods, except in the case of coffee ; and the small 
number of business failures arising out of the crisis 
shows that there was no special commercial weakness. 
Professor Sprague says, " It would be difficult to 
find an equally long period of business activity, at 
the close of which the relative development of different 
industries would seem to have been similarly satis- 

1 Even in the height of the panic, November, 1907, traffic receipts 
were 3 per cent, above those of the previous year. 


The financial position was much weaker. This 
very activity of business, however genuine we may 
consider it, had made great demands upon the loan 
markets of the world. Flotations had been overdone, 
and it was difficult to raise capital by normal methods. 
Even New York City had to borrow at 4| per cent., 
as against London's 3 per cent. ; and the railways 
had resorted to an excessive extent to the doubtful 
resource of borrowing on short-term bonds. The 
weakness was most pronounced in regard to Stock 
Exchange operations. Certain stocks and certain 
shares, notably copper shares, had been carried to 
extreme points by means of bank loans; and those 
loans had been very largely financed from this and 
other European markets by the agency of the Finance 
Bill. I admit all that, and I admit the danger of it. 
Stock Exchange loans are specially liable to give way 
when banks find it necessary to contract their ad- 
vances. They can be more easily called in than 
commercial and international loans, because they 
are secured by collateral that can be easily realised 
within the margins imposed on borrowers. If, then, 
there is a very large amount of Stock Exchange 
advances out, it is in the power of the banks to bring 
about a very awkward contraction. The contraction 
goes on increasing, too, because the first effect is 
that securities are thrown on the market, and prices 
are brought down ; and then, margins running off, 
further blocks must be sold, and the position grows 


steadily worse. But these Stock Exchange advances 
had been considerably reduced long before September 
1907, and the prices of stocks were in many cases 
lower at the time when the panic set in than they 
are to-day. Messrs. Henry Clews & Co., in their 
circular for August 1907, while pointing out that 
the bank reserves needed strengthening in view 
of autumnal demands, observe that the security 
market had already had a severe shrinkage, and 
that, " beyond question, many good securities are 
selling below intrinsic values." The Stock Exchange 
position, if still artificial, ought not to have been 

In short, I entirely accept the judgment of 
Professor Sprague, who writes that, " nothing in 
the general economic conditions of the country 
has been disclosed, either during the crisis or in 
the subsequent months of depression, which can be 
regarded as so hopelessly unsound as to have 
rendered the explosion of last autumn (1907) clearly 

It has sometimes happened that where the con- 
ditions were otherwise satisfactory, a crisis has been 
caused by a sudden and unexpected withdrawal of 
gold from a country. This was certainly not the 
case with this particular crisis. There was no scarcity 
either of monetary or purely metallic resources. 
Credits had grown apace, but the monetary basis of 
the credit was not unduly small. In the eleven years, 


1895-1906, the American banks and Treasury com- 
bined are estimated to have increased their gold 
holding by about two hundred millions, and just 
before the panic of October 1907, the stock of gold 
was estimated at 305,000,000. Their position, both 
in legal tender money and gold, was much stronger 
than ours. In December 1907, the National banks 
held legal tender to the extent of 16*7 per cent, of 
their deposits ; the State banks, 8'28 per cent. ; the 
Loan and Trust Companies, 5 per cent. an average 
for the whole of about 11 "3 per cent., of course ex- 
cluding Savings Banks. On the same basis, our 
best showing would not be over 6 per cent. ; or, if we 
are to exclude the Bank of England, as correspond- 
ing in some degree with the United States Treasury, 
not more than 5 per cent. If we take the monetary 
stock per head of population, the United States banks 
held 7^ of legal tender per head, as against our 4. 
Passing to the pure gold holding, the position is still 
better than our own. The United States banks held 
6 per cent, of their deposit liabilities in gold, includ- 
ing certificates represented by bar gold, excluding 
the Treasury holding, against our 3 per cent, exclud- 
ing the Bank of England, or 4 per cent, including it. 
Moreover, it must be remembered that there is no 
demand for gold as circulation in the United States, 
the currency being almost exclusively paper. I have 
only been in the United States once ; but during the 
two months I was on that side of the Atlantic, I 

F.C.F. M 


only once saw a United States gold coin. It was 
shown me as a curiosity. Such gold as they have 
is, therefore, all available for banking purposes. 
Further, the panic and the drain being entirely for 
internal purposes, any form of legal tender would be 
as serviceable as gold. In this respect our own case 
is more difficult. Our difficulties are likely to arise 
from a foreign drain, and could only be met by gold. 
Then we must not pass over the holdings of the United 
States Treasury, though the extent to which they 
will be available is always uncertain. In the August 
preceding the crisis, the Treasury held something like 
354,000,000 of gold ; and, although that was largely 
trust money, money held against various forms of 
legal tender, and earmarked in fact for currency 
purposes, yet much of this was not absolutely 
necessary to be held, and might have been used 
in case of necessity as our own issue reserve has 
been drawn upon at such times. But quite apart 
from this, there was a free reserve in the Treasury 
of over sixty-six millions sterling, not trust money 
or earmarked in any way (except that thirty millions 
is held to guarantee currency parity), which the 
Treasury might, if it thought proper, have used to 
assist the banks. 

It seems clear, then, that the weakness did not lie 
in the monetary position. Their case was the reverse 
of our own. We make the utmost of our little mone- 
tary store, except in so far as we are obstructed by 


the Act of 1844. But it is quite inadequate in 
amount. They had ample monetary resources, but 
could not make effective use of them. The fault lay 
partly in their banking system, and partly in the 
banking habits generated by that system. These 
faults were matter of notoriety. They had often been 
pointed out, both at home and abroad ; and the 
breakdown of the system had been predicted. For 
over twenty years I have been accustomed to use 
the American reserve law as the classical example 
of mistaken banking legislation. The Special Cur- 
rency Committee of the New York Chamber, in 
October 1906, pointed out the want of elasticity in 
the currency, and recommended a central bank of 
issue, dealing exclusively with banks, and controlled 
by the Government. But Americans are like English- 
men. As long as they can make money, they have 
no time for anything else. Reforms have to wait 
till times are bad. Mr. Secretary Shaw, in proposing 
his emergency issue, September 28th, 1905, said : 
" He was convinced that there would be no further 
currency legislation until there was a panic occasioned 
by the want of elasticity. The country did not 
appreciate the danger, and until the danger was fully 
understood no remedy would be applied." Mr. Shaw 
was right. The panic came, and, immediately after 
the panic, you had the Aldrich-Vreeland Act of 1908. 
In March 1907, Mr. Rozenraad, noticing the intro- 
duction of a forerunner of this Act, the Aldrich 


Currency Bill, remarked that " the measure, good as 
it seemed to be, would only temporarily ease the New 
York money market. In the long run it would be 
found that a complete reorganisation of the existing 
Banking system would be necessary." Mr. Hermann 
Schmidt put the case more strongly. After criticis- 
ing our own Bank Act, he said, " After all, England 
is scientific compared to the United States. There 
everything is topsy-turvydom, at least according to 
European ideas. They have no national bank, no 
central reserve fund, only the 15 to 25 per cent, of 
the deposits legally prescribed. The result is periodical 
crisis, when they have to go to the Treasury for 
assistance the trade of the whole country dependent 
upon the decision of a single individual about the 
worst situation possible." 

But I must describe this American system, and 
you may form your own judgment as to the extent 
to which it was responsible for the crisis. Some 
account of it is all the more necessary, because it 
differs so much from our own and from most European 


As a basis for a contrast between the United States 
banking system and our own, let me take the Report 
of the Comptroller of the Currency, December 1907, 
which gives the position up to the June preceding the 



panic. The main figures are found in the table here 
reproduced : 






6,429 National Banks - 




9,967 State Banks 




794 Loan and Trust Com- 





1,415 Savings Banks 




1,141 Private Banks - 




19,746 Banks 




Taking round figures, there are (including savings 
banks) nearly 20,000 different and independent banks 
in the United States, with, say, 225 millions sterling 
of currency, and 2,620 millions sterling of deposits. 
Omitting savings banks, you get 18^ thousand banks, 
with nearly 200 millions sterling of currency, and 
1,920 millions sterling of deposits. The deposits in 
the English banks are almost exactly half this amount. 
But the United States population is just double our 
own ; hence the deposits per head are the same. 
Against these deposits the United States banks hold 
12 per cent, reserve, as against our 5 per cent, or 
6 per cent, (including till-money in each, and allowing 
for redeposited reserves). The total resources of 
these banks are put at 1,600,000,000 for the 
National banks, 800,000,000 for the State banks, 
and 800,000,000 for the Trust companies a total 


of 3,200,000,000, against about 1,150,000,000 for 
the banks of the United Kingdom. Allowing for 
the difference in population, the assets are about 50 
per cent, larger per head in the United States than 
in the United Kingdom. 

The contrast in the number of banks is very re- 
markable. Mr. 1 Palgrave puts the total for the 
United Kingdom at 182 ; one hundred of these have 
no branches, and only the eighty-nine which publish 
accounts can be regarded as important. Even in 
this number are included army agents, and some 
institutions which are mainly discount houses. Mr. 
Boissevain puts the number of effective banks at 
seventy-four. But the total number of bank offices, 
including head offices, is 7,753. This works out at 
about fifty per cent, fewer offices per head of popu- 
lation than in the United States, where, of course, 
the population is more scattered. [The 108 foreign 
and colonial banks are excluded from this calculation.] 
The banks of the United Kingdom are now nearly 
all of them organised upon the Scottish or branch 
bank type. " There are four banks in England and 
Wales which alone direct more offices than all the 
banks in the whole of the United Kingdom possessed 
among them half a century since " (Mr. Palgrave). 
Lloyds, the London City and Midland, Barclays, and 
Capital and Counties control 2,070 offices. The whole 
United Kingdom only had 2,008 bank offices in 1858. 

[ l Now Sir Inglis Palgrave.] 


Now, speaking broadly, American banks have no 
branches. They are forbidden in a great many States, 
and forbidden under the National Bank Act. I need 
hardly add that some of the separate banks in the 
United States are extremely small. 

But there are many different kinds of United States 
banks, and I must say a word on the different types. 
You have, in the first place, some 6,500 National 
Banks. These all come under the National Bank 
Act, passed in 1863-4, and frequently amended. By 
conforming to the provisions of this Act they obtain 
the right of note issue, and certain other privileges. 
Then you have nearly ten thousand State banks, 
coming under the laws of the respective States, not 
always the same. These banks are not allowed to issue 
notes, and they are smaller, as a rule, than the National 
Banks. Then you have the important group called 
loan and trust companies, intimately connected, as 
we shall find, with the origin of the crisis of 1907. 
These must not be confused with the great commercial 
trusts we are so familiar with, such as the Standard 
Oil Company, the Steel Corporation, and the like. 
They are rather trustee companies ; but they have 
added to their trustee business the functions of bank- 
ing, just as our English banks are beginning to add 
the work of trustee companies to their banking busi- 
ness. They have been happily described by M. Arthur 
Raffalovitch as "financial maids- of-all- work," generals, 
in the civilian sense of that word. Their primary 


function was to take charge of securities, and to 
receive deposits as savings banks ; then they under- 
took the execution of trusts of all kinds, much as 
our Official Trustee does ; and to this they added 
the examination of titles, the care of real estate, 
fidelity insurance, and lastly, the practice of limited 
banking. 1 They are not subject to the regulations 
imposed upon the National Banks. 

As to the savings banks, I need only say that 
they are entitled to demand from thirty to sixty 
days' notice of withdrawal of deposits. That is a 
most valuable right at a time of panic, and not an 
unreasonable one when it is remembered that American 
panics are constantly accompanied by a premium on 
currency, so that it becomes a mere matter of interest 
for depositors, whether alarmed or not, to withdraw 
all the deposits they can control. 

Over all these institutions, and at times in very 
vital relation to them, stands the Treasury of the 
United States. It is rather difficult to explain this 
in terms of European institutions. There is nothing 
exactly like it in Europe. But it is in the main a 
currency, rather than a banking institution ; it is 
more like the Issue Department of our Bank of Eng- 
land than like its Banking Department, except, of 
course, that it holds the Government account. In 
this respect it exercises banking functions, and it is 

1 See Mr. Charles E. Smith, Congress of American Bankers, 24th 
September, 1907. 


this side of its operations which is most disturbing 
to the money market, and most open to criticism. 
Its funds necessarily vary with the Government 
balances. At times it becomes possessed of large 
sums of money, drawn off the market by the collec- 
tion of taxes, and, unless it can get rid of these surplus 
reserves, its operations cause a monetary stringency. 
But it has no regular and normal means of getting 
rid of this money, because it is not part of the general 
banking system. It can only be redistributed if the 
Secretary of the Treasury thinks fit to deposit moneys 
in the National banks on Government account. In 
doing this, the Secretary of the Treasury acts in some- 
thing like the way in which our Chancellors of Ex- 
chequer have acted in times of crisis, when they have 
authorised the Bank to have access to the Issue Keserve. 
There is something arbitrary and artificial about this 
procedure which unfits it for normal use, and has 
made some persons object to resort to it in any case. 
No charges, so far as I know, have ever been brought 
against the absolute impartiality of the Secretaries 
of the Treasury in this action ; but still it is not easy 
to defend a system which puts into the hands of a 
single individual the power of making money dear 
or cheap, of throwing twenty millions on the market 
or withholding it, as seems to him fit. 

The primary business of the Treasury is to guarantee 
the parity of all the various forms of money in the 
United States. It is a first principle with the United 


States, in which all parties, whatever their monetary 
policies, have always agreed, that a dollar shall 
always be a dollar. That is to say, whether payment 
is made in silver dollars, gold coin, gold certificates, 
greenbacks, or National bank notes, all are agreed 
that there shall be no discount or premium as between 
the different forms of legal payment. Even their 
subsidiary money can be exchanged for full legal 
tender money. I am bound to say that they have 
been most successful in carrying this out. I have 
never heard of any premium or discount on any 
special form of their money. We have not been so 
successful with our silver, which is often sold at a 
discount. This business of keeping all the moneys 
of the United States at parity is the duty of the 
Treasury. Its huge reserves are maintained chiefly 
for this purpose, and the redemption fund by which 
it is able to guarantee payment of National bank 
notes in case of the failure of any bank may be ranked 
under the same head. 


After this sketch of the United States banking 
system, I come to consider the character of the banks 
and the reserve law. Here is an account from our 
Bankers' Magazine, February, 1903 : " Each of the 
American banks is self-centred, with its own system 
of administration, its own reserve of specie and legal 


tender notes, and, in the case of the National banks, 
with its own note issue. These banks are estab- 
lished sometimes in very small towns, it may be said, 
almost in villages. It is a marvellous proof of the 
natural business ability of the citizens of the United 
States that such a number of banks can be success- 
fully carried on." The National Bank Act of 1900, 
which somewhat relaxed the limits imposed by the 
original Act of 1864, permitted the establishment of 
banks in places of less than three thousand inhabi- 
tants, with a capital as small as 5,000. The Act 
greatly stimulated the formation of National banks ; 
but it is clear that many of them must be very small, 
not large enough to be the principal business interest 
of those who own and manage them. Of late years 
there seems to have been an increasing tendency to 
obtain control of banks, in order to further private 
interests. Except as regards this latter point, the 
system of banking in the country districts of the 
United States strongly resembles the condition of 
English banking before the rise of the joint-stock 
banks, that is to say, in what we consider our worst 
period of banking. Of course, the large National 
banks in New York and the other central reserve 
cities are more like our great joint-stock banks in 
the magnitude of their operations, but they have 
no branches, and no connecting link in a central bank. 
To a European it seems obvious that it would be 
better if the whole system were organised, consolidated, 


and unified, and if the system of branch bank- 
ing was adopted. But American public opinion 
appears to be opposed to such a change. We are 
told by high authorities that the acceptance of branch 
banking is unlikely. Americans tell me that the 
small local bank is of more use to the business man. 
It is more ready to accommodate him. It takes 
business risks in a way that the great joint- stock 
bank, with its hard and fast rules, and its five 
hundred offices uniformly governed from the head 
office will not and could not do. Well, we are not 
unfamiliar with this view, even in England. We 
can understand and respect it. The English form of 
joint-stock banking is safer and more conservative, 
but something is lost, perhaps, in exchange for the 
greater stability. There are those who regret the 
old private banks, though I, for one, think OUT 
modern system necessary, in view of the increasing 
complications of the money market. 

Now I come to the reserve law, which has been 
at the bottom of the trouble in more ways than one. 
For the purpose of this law the National banks are 
divided into three groups : country banks, city banks, 
and central reserve city banks. City banks are re- 
quired to keep as reserve against their deposits 25 
per cent, of legal tender money ; country banks, 
15 per cent. I suppose this was only intended as a 
minimum limit, but, as so often happens in legisla- 
tion, what was intended as a minimum tends to 


become a maximum. As a matter of fact, the banks 
trade very close to the 25 per cent, limit in normal 
times, and when difficulty arises they are soon forced 
down to it, and then they suspend further accommo- 
dation, and the difficulty becomes acute. The re- 
serve, though a good asset in case of liquidation, is 
no good so long as the bank is a going concern. It 
is useless for banking purposes. That would be bad 
in any case, but what makes it worse is that the 
banks are allowed to reinvest portions of their re- 
serves. The country banks may deposit three-fifths 
of their reserves with the banks in the reserve cities ; 
and the banks in the cities may deposit half of their 
reserves with the banks in the central reserve cities. 
There are forty reserve cities, and three central re- 
serve cities, viz. : New York, Chicago, and St. Louis. 
Something very similar existed here before the great 
amalgamations. The country banks invested their 
reserves with their London agents, the London agents 
invested theirs with the Bank. We have got rid of 
one stage of this system for diminishing the ultimate 
reserve. It exists in full force in the United States. 
The following illustration, given by Mr. D. R. Forgan, 
of Chicago, will serve to show how it works out in 
practice : 

" The law requires a National bank in Troy, N.Y., 
to carry 15 per cent, reserve. Only 6 per cent., how- 
ever, need be in its own vault. The other 9 per cent, 
may be with its reserve agent in New York City. 


If the deposits of the Troy bank are $1,000,000, it 
keeps $60,000 at home and $90,000 in New York. 
The $90,000 in New York, however, is not money. 
It is merely a credit on the books of the New York 
bank against which a reserve (allowing for legal 
deductions) of not more than $20,000 is kept by the 
New York bank. 

" When the Troy bank, becoming alarmed, deems 
it prudent to have a larger proportion of its reserve 
at home, it telegraphs the New York correspondent 
to send it, say, $20,000. That does not seem an 
unreasonable request to the Troy banker only 
$20,000 out of $90,000. But when the Troy bank 
withdraws $20,000, it withdraws all the reserve 
there is in the world against its deposits except what 
is in its own safe ; and the New York bank is left 
with a credit on its books of $70,000, against which 
no reserve now exists. When that transaction is 
multiplied by thousands and becomes general, it is 
simply an impossibility for the New York bank to 
stand it." * 

A single institution in New York lately carried 
fifteen millions sterling of interior bank reserves. In 
October 1907, out of the total reserves of 6,178 country 
banks, eighty-five millions sterling was deposited in 
distant banks, and only some forty millions sterling 
kept in hand as cash. Many American authorities 

1 Mr. D. R. Forgan, Chicago, quoted by Mr. Alex. D. Noyes, Bankers' 
Magazine, March, 1908. 


think that these rights of redepositing reserves 
ought to be restricted ; it is also suggested that the 
city banks ought not to be allowed to pay interest 
on bank deposits, which would check the practice. 
But, as things are, it is clear that the central reserve 
cities are liable to a very dangerous drain ; and that 
is exactly what happened at the time of the crisis. 

I have spoken of certain points in the United States 
system which seem to be open to criticism. But 
it has its good points. The statistical information 
is all that can be desired. The returns are very full, 
and apparently universally made by all the banks. 
Mr. 1 Holden, in a very interesting paper on the de- 
preciation of securities, observes that the statistics of 
the United States and Canada are the only statistics 
from which we can get complete comparisons as to 
the relative reserve position in different years, and 
that the absence of such figures for English banks 
was a matter to be regretted. Then, the holding 
of cash by the United States banks is another strong 
point ; I need not repeat the figures already given 
as to this. Their position is at least twice as strong 
as our own in this respect, even apart from the huge 
holdings of their Treasury. 

What does this all point to ? The moral has been 
well expressed by Mr. Boissevain, who sums up a 
very careful estimate in his valuable study of Money 
and Banking in the United States in words worth 

1 Now Sir Edward Holden. 


quoting : " It cannot fail to strike us that the material 
foundations on which the banking fabric is built up 
in the United States need not be considered in any 
way inferior to those of the United Kingdom, nay, 
in more than one respect are even firmer. And yet 
it cannot be gainsaid that whilst, broadly speaking, 
the English banking system may be held up as an 
example of a strong and efficient organisation, the 
banking system of the United States, on the other 
hand, has been proved to suffer from grave defects, 
and in case of emergency to be entirely inadequate." 
The nature of these defects will appear very clearly 
if we glance at the history of the recent crisis. 


Trade in 1906 had been exceptionally active, 
though one cannot say that the development was 
not warranted. But the resources of the market 
had certainly been strained. Private extravagance 
had caused a shortage in the supply of loan capital ; 
indeed, Mr. Noyes 1 says that " a surprisingly large 
portion of the community had got into debt for its 
private expenditure." The worst feature in the 
general situation was the extent to which specula- 
tion had been carried by Wall Street and Chicago 
operators. Ex-Secretary Cortelyou declared that 

1 " A Retrospect of the American Panic," Bankers* Magazine, March, 


" the crux of the situation was that the bankers of 
New York had been using the vast deposits from 
every quarter of the United States to finance opera- 
tions on the Stock Exchange." The result was the 
so-called " Harriman boom," in which record prices 
had been manipulated. The severe stringency of the 
autumn of 1906 had brought prices nearer to normal 
figures, especially in the third quarter of 1907, but 
there had been no adequate liquidation. To quote 
Mr. Noyes : " This extravagant speculation, coming on 
top of a general strain on local capital resources, had 
made possible a situation where at least $400,000,000 
of interior bank money was borrowed by New York, 
and certainly as much more of European capital, 
provided by the Continental bankers in a measure, 
but chiefly by the London banks, in their remarkable 
infatuation of 1906 regarding the American situation. 
When the Bank of England put its foot down, towards 
the end of 1906, and forced the London banks to 
abandon their policy of indefinite expansion of credit 
to America, the resources behind this abnormal use 
of credit began to disappear, but the indebtedness 
remained. Only, it had to be assumed by our own 
banks. Similarly, toward the middle of the year, 
the Western capital placed in New York began to 
go home again. The consequences of such a move- 
ment, under such circumstances, are not difficult to 
understand." It was in a situation thus strained, 
and requiring the most careful handling, that certain 



special abuses became notorious, completely des- 
troyed public confidence in the banks, and precipi- 
tated the worst crisis of our time. I cannot better 
describe these events than by summarising for you 
the graphic account given by Professor Sprague in 
the article to which I have already referred. 

The immediate origin of the crisis may be traced 
to the failure of certain brokerage firms on October 
16th, 1907, who had been attempting to corner the 
stock of a copper company. Mr. F. A. Heinze's 
brother was involved. Now, Mr. Heinze controlled 
the stock of the Mercantile National Bank, of which 
he was president ; and the resources of this bank 
were used to further his copper speculations. Dis- 
trust naturally set in, and deposits were withdrawn. 
The Clearing House intervened, Mr. Heinze resigned, 
and the bank was reorganised, thereafter causing no 
disturbance. But another director of this bank, 
Mr. C. F. Morse, who was a director of seven banks, 
of which he completely controlled three, seems to 
have become suspect ; and, on the 19th October, two 
of these banks had to appeal to the Clearing House. 
Assistance was granted on condition of the retirement 
of Mr. Morse and others. Two millions sterling were 
at once put up, and this difficulty was disposed of 
by October 21st. The total deposits of these banks 
were only six millions sterling. 

The fundamental weakness illustrated by these 
early episodes of the crisis was the fact that it was 


not unusual for a few capitalists, of no great standing, 
actively engaged in speculative industrial schemes of 
their own, to gain control of a group of banks, through 
stock-ownership on a margin. Shares sufficient to 
give a controlling interest in a bank were bought ; 
they were then pawned, and another controlling in- 
terest was bought with the money raised ; and so 
on, until a whole chain of banks was controlled by 
quite a moderate capital. This practice had been 
known to exist for more than six years past, accord- 
ing to a statement in The Nation. The possibilities 
of danger involved were obvious ; but so far the 
banks had acted vigorously and promptly, and the 
disturbance seemed to be localised. 

The real difficulties began the next week in con- 
nection with certain trust companies. These com- 
panies, as I have said, were not subject to National 
bank law. The Clearing House attempted to impose 
conditions on them ; but, sooner than submit, most 
of them left the clearing. It was the troubles of one 
of those which remained, the Knickerbocker Trust, 
that brought on the second stage of the crisis. Its 
president, it may be noted, was associated with the 
Morse enterprises. On Monday, October 21st, the 
National Bank of Commerce refused to continue 
clearing for this trust. Next day the company had 
to suspend, but not before it had paid out 1,600,000, 
nearly one-seventh of its total deposits. It is said 
that this bank might have been saved ; and that, 


if it had been, the crisis would have been averted. 
It reopened in March, 1908, so that its affairs could 
hardly have been hopeless. But there is a general 
irrepressibility about American banks. It used to 
be said of our country banks that, like cats, they 
had nine lives. The same perverse and inexplicable 
vitality seems characteristic of their American counter- 
parts. The whole system suspends payment for over 
two months, and then resumes as if nothing had hap- 
pened. The suspension of this bank, however, proved 
to be critical. The next Wednesday, October 23rd, 
a run began on the Trust Company of North America, 
the second in size of these companies, with deposits 
of 13,000,000. The president of the Knickerbocker 
Trust was one of its directors. It paid out over four 
millions in two days ; and in two weeks nearly seven 
millions, or more than half its deposits. During the 
first two days New York was threatened with a general 
panic. There were a few small bank failures, loans 
were almost unobtainable, and the fall in stock 
exchange prices was alarmingly violent. The trust 
was ultimately assisted, after an examination by a 
committee of trust presidents, and a transfer of the 
control ; but action was unduly slow. It will be 
observed that in cases where assistance was given, 
it was considered necessary to change the control. 

The strain on the New York clearing bankers was 
very severe. The trust and the country reserves 
were placed with them, and they had to find the 


money, and at the same time to move the crops. 
Some writers have complained that New York also 
had to finance Canada ; but this was the natural 
consequence of their habit of holding the call money 
of the Canadian banks. 1 On the other hand, they 
received 5,000,000 of Government deposits, with 
the result that their loss for the critical week ending 
October 26th was only 2,750,000, and they still 
held a reserve of 52,000,000. 

The worst was over so far as New York was con- 
cerned. Savings banks insisted on the sixty days' 
notice, and withdrawals of deposits diminished. Clear- 
ing House loan certificates were issued. Before this, 
brokers could get no money at call. One bank would 
be afraid to lend, because it did not know whether 
others would assist. But as the local troubles began 
to subside, the panic spread to the country, and New 
York, as the chief reserve centre, continued to feel 
the strain. The failure of the Westinghouse com- 
panies seems to have been the occasion of the new 
development. Unable to renew floating indebted- 
ness, they went into the hands of receivers. The 
Pittsburg Stock Exchange closed ; there were runs 
on banks in Montana and Nevada ; and upon a trust 
company in Ehode Island, with deposits of 5,000,000. 

1 The Canadian banks do not appear to draw more than 3,000,000 
as a rule on their foreign bank balances and call money in the autumn. 
The movement of the Canadian crops is mainly financed through bills 
against exports. The necessary circulation is provided by an extra 
issue of some 3,000,000 or 4,000,000 of notes. 


All of these were obliged to suspend payment. There 
was a general lack of confidence in the banks, such 
as we have not seen in England since 1826. It was 
not without foundation. " Seven times during the 
last century the banks suspended payment in some 
measure at least, and there has been a currency pre- 
mium, the last, in 1893. There is a well-grounded 
belief among the people that it will be difficult to 
secure cash during periods of economic disturbance/' 
Hence hoarding sets in, partly for the absolute needs 
of business, partly to secure the premium, " an ever- 
present source of weakness." This, by the way, 
shows the extreme danger of permitting these habi- 
tual suspensions, with currency premiums as their 
inevitable consequence. 

The banks do not seem to have seriously attempted 
to weather the run which now set in. During the 
fortnight ending November 2nd, the New York banks 
had sent 8,500,000 to interior banks. But they had 
engaged 6,000,000 from Europe, with more in pros- 
pect ; and their reserve was still 45,000,000, an 
amount which we should think very large. How- 
ever, they had already ceased to pay depositors 
except at their own discretion. On October 31st, 
3 per cent, was paid for currency in New York, and 
a premium of varying amount, sometimes over 4 per 
cent., continued till the close of the year. Not only 
individuals, but corporations and banks, had to buy 
money at the premium with certified cheques. The 


New York banks reserve figures show how little help 
the banks gave. From November 2nd to November 
23rd their reserves only diminished by some 
2,000,000 ; after November 23rd, they increased week 
by week, until they had reached over 50,000,000, 
when the premium disappeared. In striking con* 
trast to this, we find the reserve of the Bank of Eng- 
land dropping from 24,000,000 to 17,000,000 in 
the first fortnight of this period, and of course 
without a thought of suspension. Thus, in Professor 
Sprague's words, with which it is not easy to disagree, 
" the New York banks proved themselves wholly 
unequal to the duties of their position as the central 
reserve banks of the country." 

It may be conceded that the general anticipation 
of a premium on currency made the position very 
difficult for them. But they seem to have found 
their main excuse for inaction in the Reserve Law ; 
and, strange to say, this excuse was generally accepted 
by American public opinion. As soon as the reserves 
fell below the limits laid down by the Reserve Law, 
they felt justified in suspending payment. At the 
worst point they were 11,000,000 below the legal 
limit ; but they had restricted payment long before 
this point was reached ; and even at the worst they 
held 45,000,000 odd of reserve. Now, the only 
penalty provided by the law was that the Comp- 
troller of the Currency may close a bank which has 
exceeded the legal limit. But he can only do this 


after due notification, and thirty days' grace are 
allowed the bank, after notice, to bring its reserve 
up to the legal requirement. It is practically certain 
that at such a time the Comptroller would have 
ignored any breach of the law brought about by 
carefully considered and organised assistance on the 
part of the banks. Apparently, the requisite organi- 
sation did not exist, and individual banks were 
afraid to act on their own initiative. Suspension 
was really resorted to as a precautionary measure 
before any serious runs had been made on the system 
as a whole. When the reserve movements are studied 
in detail, it appears that as between August 22nd 
and December 3rd, 1907, the country banks increased 
their holdings by more than half the sums lost by 
the reserve banks ; and probably the Trust com- 
panies and State banks absorbed the other half. 
At any rate, we have the astonishing fact that the 
banking system as a whole held more cash at the end 
of a two months' panic than at the beginning. It 
is an axiom in Europe that the only way to allay 
a panic is to pay out freely at the outset. The 
American banks actually hoarded. 

Hoarding, indeed, was one of the most charac- 
teristic features of the crisis. The Secretary of the 
Treasury estimated that 60,000,000 had disappeared 
from the usual channels of currency into hoards ; 
Mr. Noyes thinks 20,000,000 was hoarded in New 
York city alone. " This money was locked up in 


the space of a very few weeks, and the greater part 
of it in the space of a few days." A striking incident 
was the demand for safe deposit boxes. Thirty-three 
companies in New York, from Tuesday to Friday, 
October 22nd-25th, let out 789 safes, or six times 
their usual number. Nine companies suddenly in- 
creased their lettings from 40 to 228. These com- 
panies said that most of the hoarding among their 
customers was done by business men and manufac- 
turers who drew the money for immediate use for 
pay-roll and wage disbursements. The suspension 
of the banks soon put a stop to hoarding, as far as 
the public was concerned ; and in many cities, e.g. 
San Francisco and St. Louis, the safe deposit com- 
panies agreed to rent no more boxes for any purpose. 
But the banks were hoarding all the time. Many 
of the country banks, only required by law to hold 
6 per cent, of their deposits as cash in hand, were 
actually holding more than 15 per cent. The country 
reserves of cash were generally much higher on Decem- 
ber 3rd than on August 22nd. Professor Andrew 
says that " a large proportion of banks outside of 
the three central reserve cities had accumulated 
excessive reserves of cash during the weeks when 
the panic was imminent, and then had protected 
their holdings from withdrawal in the course of the 
panic by the partial suspension of payments generally 
agreed upon throughout the country." The country 
banks increased their cash holdings from 40,000,000 


to nearly 50,000,000 during the crisis ; the banks in 
the forty reserve cities lost 5,600,000, but were still 
above the legal minimum ; the only banks below the 
minimum were those of the central reserve cities. 
The New York national banks, however, held nearly 
22 per cent, reserve. It was all very cautious, but 
it was not banking. 

It is noteworthy that the banks were officially 
encouraged, even instigated, to suspend payment. 
The governors of many Western States actually de- 
clared legal holidays, which put a stop, of course, to 
all monetary claims. In the State of Oregon these 
holidays were proclaimed continuously from October 
28th to December 14th, and in California from October 
31st to December 21st. Incidentally, this suspended 
the operations of the courts, and until Acts were 
passed differentiating between a judicial and a finan- 
cial holiday all judicial business was at a standstill. 

The effects of all this on the public convenience 
can be imagined. Perhaps the Stock Exchange 
suffered most. " Call money reached 100 per cent, 
and even 125 per cent., and was difficult to obtain 
at those figures " [The Times Eeview of 1907]. 
Currency was at a premium from October 31st. 
Even banks were known to have paid over 4 per cent, 
for currency. A curious case was given by the Daily 
Graphic of November 22nd : " One of the banks at 
Boston has entered into a contract to pay a premium 
of $48 per $1,000 for the gate receipts at the football 


match between Harvard and Yale, to be played there 
next Saturday." (If rumour is to be trusted, there 
are English banks who would pay a premium to be 
rid of some of the gate-money that came into their 
hands last year !) But at that time money could 
not always be obtained, even at the premium. A 
newspaper correspondent, whose bankers had sus- 
pended payment, found his gas bill due for $10. He 
begged for time to pay, but was met by a threat to 
cut off the gas. An American senator, who had occa- 
sion to go from New York to San Francisco, told me 
that he could only get from his bank enough to pay 
his railway fare. He arrived at his hotel an absolute 
pauper, and had to beg board, lodging, and pocket- 
money from his host. These things were incon- 
venient ; the really grave side of the situation was 
the difficulty of paying wages and maintaining em- 
ployment. The Steel Corporation paid 80 per cent, 
of its weekly wage bill by cheque. Cash was at 5 per 
cent, premium in Pittsburg ; and within fifty miles 
of the city fifty thousand men had been discharged. 
To meet the scarcity of money all manner of 
irregular, not to say illegal, issues of currency were 
made, amounting altogether, as Professor Andrew 
estimates, to something like 100,000,000. The 
United States are past masters in the art of currency 
extemporisation. More than 50,000,000 of Clearing 
House certificates were issued ; 5,000,000 of small 
denomination, meant to go into currency. Besides 


this, there were some 3,000,000 of Clearing House 
cheques, and large amounts of cashiers' cheques, 
manufacturers' pay cheques, and other forms of 
currency issued by individual banks. " Most of this 
currency," says Professor Andrew, " was illegal, but 
no one thought of prosecuting or interfering with its 
issuers. Much of it was subject to a 10 per cent, 
tax, but no one thought of collecting the tax. In 
plain language, it was an inconvertible paper money 
issued without the sanction of law." 

Meanwhile the Federal authorities were doing their 
share. The Treasury made a Panama bond issue, 
for the express purpose of enabling the National 
banks to extend their note circulation, the money 
subscribed for the bonds being largely redeposited 
with the banks by the Treasury. This expedient 
does not seem to have been a success. Mr. Noyes 
says : " As for the Treasury's actual effort at relief, 
through note and bond issues, nothing could have 
been worse. Let no reader deceive himself into ima- 
gining that they helped the situation. On the con- 
trary, they complicated it : and when it was found 
that the banks themselves were frightened at the 
prospect of paying over their reserve money for 
the new Government securities, when only 75 per 
cent, to 90 per cent, of the cash subscribed would 
be redeposited, the Treasury itself had to call a halt. 
As is now generally known, only $24,631,000 out of 
the $50,000,000 of 2 per cent, bonds offered on 


November 17th were sold, and only $15,436,000 of 
the $100,000,000 offer of 3 per cent, notes. The 
issue was stopped by the Government chiefly because 
of the protest of the banks themselves against it." 
Large additions, too, were made to gold resources. 
All the United States mints, according to a Times 
cable of November 2nd, were working day and night 
coining money to meet the currency demand. The 
Board of Trade estimated that just before Christmas 
1907, when the drain ceased, 18,000,000 had been 
withdrawn from London on United States account ; 
" a conservative estimate," Mr. Leppington says. Here 
we may note that the premium on currency had its 
good side. It enabled New York to import gold 
against an unfavourable exchange. During Novem- 
ber 1907, the exchange on London was almost con- 
stantly above the normal gold export point. Yet 
about 13,000,000 of gold were actually imported 
into the United States in that month from England 
and elsewhere. It is a minor point, but it is curious 
to observe that these large shipments of gold raised 
the cost of transmitting gold, and therefore raised 
the gold point of exchange. According to The Times 
of November 1st, the rate rose from Is. per cent, to 
7s. 6d.> 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.] 


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 


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 


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. 


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 


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 


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. 


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 


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 


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 


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 


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. 


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 

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 


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 

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 


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 


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. 



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, 



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. 


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 


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 


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 


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 

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 



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- 


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.] 


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. 


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. 


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 


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 


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 


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 


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 


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 


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 


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 


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 


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. 


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 


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 




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 


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 


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. 


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 


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, 


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 


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 


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. 


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 

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 


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 


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 


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 


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* 


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. 


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 


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 

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,. 


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. 


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, 


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 


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- 

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. 




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- 

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. 


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 


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 


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 


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 

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 

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, 


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 

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, 


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- 

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 


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, 


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 

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 


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 

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 

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- 


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 


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 

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 


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- 


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 

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 


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. 



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 ? 



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 


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 ? 


February 15, 1918. 





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