Part 11 (1/2)
A point on which the commercial world does not seem to have made up its mind, however, is whether there should be a limit at all. Under the old Act there was a limit which could only be pa.s.sed by a breach of the law. Under the Cunliffe proposal the limit could be pa.s.sed with the consent of the Treasury. Sir Edward has not told us of what machinery he proposes for the pa.s.sing of the limit which he lays down; but in view of the great apprehension that an approach to the limit point would, as shown by the Committee, produce, it is clear that there would have to be a way round. In Germany there is no limit; you pay a tax on the excess issue and go on merrily. In America it would seem that the German system has been taken for a model. In his speech on January 29th Sir Edward quoted Senator Robert Owen, who was the princ.i.p.al pioneer of the Federal Reserve Bill through the Senate, as follows:--”The central idea of the system is elastic currency issued against commercial paper and gold, expanding and contracting according to the needs of commerce.... It is of great importance that the volume of these notes should contract when the commerce of the country does not require the notes to be circulation, and the reserve board can require them to be returned by imposing a tax upon the issue.... Under the reserve system a financial panic is impossible. People will not h.o.a.rd currency nor h.o.a.rd gold when they know that they can get currency or get gold when required.... America no longer believes a financial panic possible, and therefore the business men, being perfectly a.s.sured as to the stability of credits, do not hesitate to enter manufacturing and commercial enterprises from which they would be deterred under old conditions of unstable credit.” Well, let us hope the Senator is right and that America is right in believing that a financial panic is no longer possible there. But one cannot help feeling that such a belief may be rather dangerous in the minds of people so ready to take rose-coloured views as our American cousins.
The Federal Reserve system has worked beautifully in a period in which American finance has had nothing to do but rake in the enormous profits of American production at the expense of warring Europe and lend part of them, to be spent in America, to the Allied belligerents.
It may work equally well if and when the problem to be faced is different, but it will be interesting to see--for those of us who live to see--what sort of a tax will be needed to ”require” America, in one of its holiday moods, to return currency that it thinks it needs and the Federal Reserve Board regards as redundant.
Another point on which Sir Edward lays great stress, in his attack on the Bank Act of 1844 and the Committee which supports its main principles, is the beauty of the bill of exchange as backing for a note issue, as opposed to Government securities. ”There is,” he says, ”no automatic system for the redemption of currency notes as would be the case if they were issued against bills of exchange, which in due course would have to be paid off.” Again, ”it seems to me that notes should not be issued against Government securities which may or may not be paid off, but against bills of exchange which must be met at due date.” This advantage about a bill of exchange is a very real one to the individual holder who can always put himself in funds by letting the contents of his portfolio ”run off”; but is there much in it as a safeguard against excessive issue of currency in times of exuberance? In such times bills that fall due are pretty sure to be replaced by new ones drawn against fresh production--since over-production is a common symptom of commercial exuberance--or against a resale of the goods on which the original bills were based.
As long as anyone who can show produce can be certain to get credit and currency, the notion that the maturing of bills of exchange can be relied to restrict currency expansion within safe limits is surely a dangerous a.s.sumption. The principle of a fixed limit, to be broken in case of real need, but only after some ceremony has been gone through giving notice of the fact that a crisis has been reached, seems rather to be required by the psychology of speculative mankind. But even if Sir Edward's preference for bills of exchange as backing for notes has all the merits that he claims that is no reason for urging the repeal of the Bank Act to secure their use. Because the Bank Act does not forbid it: it merely says, ”there shall be transferred, appropriated and set apart by the said governor and company to the Issue Department of the Bank of England securities to the value of,” etc. It is the practice of the Bank to put Government securities into the Issue Department, but the terms of the Act do not compel them to do so, and if an excess issue were needed they would seem to be empowered to put any bills that they discounted into the a.s.sets held against the note issue. On the whole the terms of the Act leaving them freedom in the matter, except with regard to the ”Government debt” of 11 millions, which is specially mentioned as to be transferred to the Issue Department, seem to be preferable to a special stipulation in favour of bills of exchange.
But the most important difference between Sir Edward Holden and the Cunliffe Committee seems to be in their att.i.tude towards the gold reserve and the relation between the Bank of England and the rest of the items that compose the London money market. The Committee, working to restore the conditions which made our market the centre of the world's finance, endeavoured to give back the control of the central gold reserve to the Bank of England by suggesting, among other things, that the other banks should hand over their gold to it. They omitted to discuss the serious question of the greater difficulty that the Bank is likely to find in future in controlling the price of money in the market, owing to the huge size that the chief clearing banks have now reached. But a central gold reserve under central control was evidently the object at which they aimed. Sir Edward will have none of this. He says that if this were done the position of the Joint Stock banks would be weakened, though he does not explain why, since they would obviously hold notes in place of their gold and so would be able to meet their customers' demands, now that the latter are accustomed to the use of notes for pocket money. He points out that ”the gold which was held by the Joint Stock banks before the war proved most useful.... At the beginning of the war the banks paid out gold, satisfied the demands of their customers for small currency, and thus eased the situation until currency notes became available.” He seems to have forgotten that the banks, or most of them, refused to part with their gold, paid their customers in Bank of England notes which, being for 5 at the smallest, were of little use for pocket money, and so drove them to the Bank to get gold; and we had to have a prolonged bank holiday and a moratorium. Sir Edward is in favour of three gold reserves, one to be held by the Government, one by the clearing banks, and one by the Bank of England. If there were differences between the three controllers of the reserve at a time of crisis the consequence might be disastrous.
In view of the admiration expressed by Sir Edward for the new American system which is so clearly based on central control it is rather illogical that he should be so strongly in favour of independence on this side of the water. His opinion is that ”the policy of the Joint Stock banks ought to be to make themselves independent of the Bank of England by maintaining large reserves in their vaults.” Independence and individualism are a great source of strength in most fields of financial activity, but in view of the great problems that our money market has to face there seems to be much to be said for co-operation and central control, at least until we have got back to a normal state of affairs with regard to the foreign exchanges.
XIX
TIGHTENING THE FETTERS OF FINANCE
_March_, 1919
The New Meaning of Licence--The Question of Capital Issues--Text of the Treasury Regulations--Their Scope and Effect--The Position of the Stock Exchange--Wider Issues at Stake--Should Capital be set Free?--The Arguments for and against--Perils of an Excessive Caution--The New Committee and its Terms of Reference--The Absurdity of prohibiting Share-splitting--The Storm in the House of Commons--Disappearance of the Retrospective Clause--A Sample of Bureaucratic Stupidity.
A contrast between liberty and licence is a pleasant alliterative commonplace beloved by political writers, especially those with a reactionary bias. In the light of recent events it seems to be going to take a new meaning. Licence will soon be understood, not as the abuse of liberty, to which democracies are p.r.o.ne, but as a new weapon by which our bureaucracy will do away with liberty by tightening the shackles on our economic and other activities. For imports and exports the licence system is already familiar; if the mines and railways are to be nationalised we may have to be licensed before we can burn coal or go away for a week-end; if the Eugenists have their way a licence will be necessary before we can propagate the species; and before we can get a licence to do anything we shall have to go through an exasperating process of filling in forms innumerable, inconsistent, overlapping and incomprehensible. Finance is the latest victim of this melancholy tendency. Under the guise of an attempt to give greater freedom to it a system has been introduced which makes a Treasury licence necessary, with penalties under the Defence of the Realm Act, for doing many things which have hitherto been possible for those who were prepared to forgo the privilege of a Stock Exchange quotation.
Let the story be told in official language, as uttered through the Press Bureau, on February 24th, in ”Serial No. C. 10917.”
”In view of the changed conditions resulting from the conclusion of the armistice, the Treasury has had under consideration the arrangements which have been in force during the war for the control of New Issues of Capital.
”The work of scrutinising proposals for new Capital Issues has been performed during the war by the Capital Issues Committee, the object being to refuse sanction for all projects not immediately connected with the successful prosecution of the war. The decisions of the Treasury, taken upon the advice of this Committee, have, however, not had any binding force, beyond what is derived from the emergency regulations of the Stock Exchange, which forbids dealings in any new Issues which have not received Treasury consent.
”While it is not possible under existing financial conditions to dispense altogether with the control of Capital Issues, it has clearly become necessary to reconsider the principles upon which sanction has been given or refused in order that no avoidable obstacles may be placed in the way of providing the Capital necessary for the speedy restoration of Commerce and Industry, and the development of public utility services.
”In view of the numbers of the proposals for fresh Issues of Capital which are to be expected, it is necessary to provide further machinery for dealing with them and for making the decisions upon them effective.
”A regulation under the Defence of the Realm Act has accordingly been made prohibiting all Capital Issues except under licence from the Treasury, and the Capital Issues Committee has been reconst.i.tuted with new Terms of Reference, which are as follows:--
”'To consider and advise upon applications received by the Treasury for licences under Defence of the Regulation (30 F) for fresh Issues of Capital, with a view to preserving Capital during the reconstruction period for essential undertakings in the United Kingdom, and to preventing any avoidable drain upon Foreign Exchanges by the export of Capital, except where it is shown to the satisfaction of the Treasury that special circ.u.mstances exist.'
”It will be an instruction to the Committee that, in order that applications may be dealt with expeditiously and to enable oral evidence to be given in support of them when desired by the applicant, that the Committee should sit by Panels consisting of three members, the decision of the Panels to be subject to confirmation by the full Committee.
”All applications for licences most be made, in the first instance, in writing on a Form which can be obtained from the Secretary of the Capital Issues Committee, Treasury, S.W. 1.
”Before any application is refused the Committee will give the applicant an opportunity of giving oral evidence in support of his case.”
The notice then proceeded to recite the terms of D.O.R.A. 30 F, of which more anon. Next day came a supplementary announcement, ”Serial No. C 10938,” as follows:--
”With reference to the recent announcement in the Press that all applications for Treasury licences must be made in writing on a form obtainable from the Secretary of the Capital Issues Committee, Treasury, S.W. 1, delay will be avoided if intending applicants will state which of the following forms they require:--
”Form No. 1. Issue by a proposed New Company to start a fresh business.
”Form No. 2. Issue by an Existing Company (other than for the purpose of capitalising profits).
”Form No. 3. Issue by an Existing Company for the purpose of capitalising profits.