Chapter 2

Here, again, we are faced with a psychological question which can only be answered by those who are bold enough to forecast the state of mind in which the majority of people will find themselves when the war is over. If there is a great reaction, and everybody's one desire is to throw this nightmare of war off their chests and go back to the times as they were before it happened, then all that the war has taught us about the production of capital will have been wasted. But I rather doubt whether this will be so. Saving merely means the diversion of a certain proportion of the output of industry into the further equipment of industry. The war has taught us lessons which, if we use them aright, will help us to increase enormously the output of industry. So that if these lessons are used aright, and industry does not waste its time in squabbles over the sharing of its product, its output may be so great that a comparatively smaller amount of saving in relation to the total output may produce a larger amount of capital than was made available in days before the war. There is a further point, that the war has taught a great many people who never saved at all to save a good deal. It was estimated before the war that we in this country were saving about four hundred millions a year. This figure was necessarily a guess, and must be taken for what it is worth. There can be no doubt that the amount of real saving now in progress, voluntary, owing to the patriotic effort of people who think they ought to restrict their own consumption so that the needs of our fighters may be provided, and enforced through the action of the Government in taking taxes and inflating the currency, is very much greater than it was before the war; probably at least twice as much when all allowance has been made for depreciation of the currency. Some people think that this saving lesson will have been learned, will have become a habit, will continue and will grow. If so, if people save a larger proportion of their income than they did before, and if the total output of goods is increased, as it easily may be, it becomes at once evident that there is a possibility of a freer supply of capital for industry than has ever been seen. But in looking at this hopeful and optimistic picture, we must never forget that it can only be painted by those who are prepared to leave out of the canvas all the danger of industrial strife and dislocation, and all the danger of reaction to the old habits of luxurious spending which are so strong a possibility in the other direction. The war has shown us how we can, if we like, increase production, reduce consumption, and so have a larger margin than ever before to be put into providing capital for industry. Whether we really have learned these lessons and will apply them remains to be seen.

There is also a possibility that some people may recognise that saving money and applying it to the re-equipment of the world for peace industry is a patriotically praiseworthy object not less than saving in time of war for the equipment of the Army. It may be that the benefit conferred by those who save, in increasing the output of mankind, will be more generally recognised, and that the supply of capital may, when the war is over, be increased on patriotic grounds, or on grounds even wider than mere patriotism--a desire to help a great stride forward in the material welfare of mankind.

Capital is a very tender plant, and it will be very easy, if mistakes are made, to frighten those who see the benefits of accumulation for themselves and others. Labour troubles and industrial unrest are extremely likely to have the effect of destroying capital by preventing it coming into existence. If we remember that capital can only be created by being saved, it becomes evident that if those who save are threatened with too deep an inroad into their reward for so doing, on the part of labour, they will hesitate to save; and if the action of labour has this effect, labour will be sawing off the bough on which it sits. For it is new capital that sets new industry going, and it is only by a continual supply of new industry that a continual demand for fresh labour can be maintained.

There is also at present much mischievous talk about a great tax on capital for the purpose of redeeming, or hastening the redemption of, war debt. It is clear at once that it is not possible to tax capital if we remember that capital consists of the tools and equipment of industry, or even, in the wider sense of the word, of accumulated assets which have not been consumed. Unless the Government is prepared to take payment in factory chimneys, railway sleepers, houses and fields, or the securities and mortgages that are claims on their product, it is not possible to tax capital. The only thing that the Government can tax is the output, that is to say, the annual income of the people. In other words, a tax on capital is simply a form of income tax assessed, not according to a man's income, but according to the assets of which he is possessed. The effect of such a tax would be that he who has spent everything that he has earned on his own enjoyment would go scot free in the matter of the capital tax, and would be rewarded for his improvidence by being asked to make no sacrifice; while his thrifty brother who, out of a smaller income, has set aside a certain proportion during the last twenty or thirty years, would have to hand over a portion of his current income assessed upon the value of the assets into which he has put his savings. Incidentally, it may be remarked that it would take years to make this necessary valuation, and that it would probably be done in a very inequitable manner by untrained and incompetent officials. But the important point is this, that if the Government shows a tendency to take the possession of assets as a basis for taxation it will be directly encouraging those who spend their whole income in riotous living and frivolous amusement, and discouraging those who help to increase mankind's output by adding to the capital available.

Finally, it may be added that the shyness of the saver will be greatly diminished if he can feel that there is a trustworthy machinery of company promotion, so that he can rely on any savings that he puts into industry having at least a fair chance of yielding him a fair reward. This subject is too vast to enter into at present, but it is one to which those who are responsible for the management of our financial affairs cannot give too much attention. Every time the real investor is swindled out of his money there is more than a chance that he will look upon all forms of saving as a folly to be left to the credulous. It is easy to say that it was his own fault, that he ought to have been more careful, or consulted a better broker; but he will, with equal ease, retort that If honest financiers knew their business better, they would have long ago made things easier for the ignorant investor to know whether he was putting his money into genuine enterprise or throwing it down a sink.

Like all other divagations on the subject of what may happen in the future, this attempt to forecast has necessarily consisted of "dim glimpses into the obvious," as the undergraduate said of Jowett's sermon. All that we can be sure of is this: that if the great opportunities that will lie open to mankind at the end of the war are rightly used, if we use its lessons to increase our production, restrict our frivolous consumption, and put a larger proportion of our larger production into stimulating production still further, there ought to be a great increase in the amount of capital available to supply the great increase which may be expected in the amount of capital demanded. The fact that the chief nations of the world will have enormous debts on which to pay interest is not one that need necessarily terrify us from this point of view. The arranging and imposition of the taxation necessary for meeting the interest on these debts will involve very serious political and social questions; but the payment of this interest need not necessarily diminish production, and it may probably help in checking consumption. It will not impair the total wealth of the world as a whole; it will merely affect its distribution. And since it will mean that a considerable part of the world's output will, for this reason, be handed over to the holders of the various Government debts, who, _ex hypothesi_, will be people who have saved money in the past, it is at least possible that they may devote a considerable amount of the spin so received to further saving or increasing the supply of capital available.

II

LONDON'S FINANCIAL POSITION

_October_, 1917

London after the War--A German View--The Rocks Ahead--Our Relative Position secure--Faulty Finance--The Strength we have shown--The Nature and Limits of American Competition--No other likely Rivals.

Will the prestige of the London money market be maintained when the war is over? This is a question of enormous importance, not only to every one who works in and about the City, but to all who are interested in the maintenance and increase of England's wealth. Like all other questions about what is going to happen some day, the answer to it will depend to a very great extent on what happens between the present moment and the return of peace. To arrive at an answer we have first to consider on what London's financial prestige has been based in the past, and on this subject we are able to cite in evidence the opinion of an enemy. Our own views about the reasons which gave us financial eminence may well be coloured by national and patriotic prejudice, but when we take the opinion of a German we may be pretty sure that it is not warped by any predisposition in favour of English character and achievement.

A little book published this year by Messrs. Macmillan and Co., entitled "England's Financial Supremacy," contains a translation of a series of articles from the _Frankfurter Zeitung_, and from this witness we are able to get some information which may be valuable, and is certainly interesting.

The basis of England's financial supremacy is recapitulated as follows by this devil's advocate:--

"The influence of history, a mighty empire, a cosmopolitan Stock Exchange, intimate business connections throughout the whole world, cheap money, a free gold market, steady exchanges, an almost unlimited market for capital and an excellent credit system, an elastic system of company legislation, a model Insurance organisation and the help of Germans, these are the factors that have created England's financial supremacy. Perhaps we have omitted one other factor, the errors and omissions of other nations."

Coming closer to detail, our critic says, with regard to the international nature of the business done on the London Stock Exchange:--

"In recent years London had almost lost its place as the busiest stock market in the world. New York, as a rule, Berlin on many occasions, could show more dealings than London. But there was no denying the international character of its business. This was due to England's position of company promoter and money lender to the world; to the way in which new capital was issued there; to its Stock Exchange rules, so independent of legislative and Treasury interference; to the international character of its Stock Exchange members, and to the cosmopolitan character of its clients,"

On the subject of our Insurance business and the fair-mindedness and quickness of settlement with which it was conducted, we can cite the same witness as follows:--

"Insurance, again, represented by the well-known organisation of Lloyds, which in form is something between a stock exchange and a co-operative partnership, is nowhere more elastic and adaptable than in London. It must be said, to the credit of Lloyds, that anyone asking to be insured there was never hindered by bureaucratic restrictions, and always found his wishes met to the furthest possible extent. The agencies of Lloyds abroad are also so arranged that both the insured and the insurer can have their claims settled quickly and equitably."

But one of the most remarkable tributes to a quality with which Englishmen are seldom credited, and one of the frankest confessions of a complete absence of this quality in our German rivals, is contained in the following passage:--

"A further bad habit, harmful to our economic development, is narrow-mindedness. This, too, is very prevalent in Germany--and elsewhere as well. And this is not surprising. Even among the generation which is active to-day, the older members grew up at a time when possibilities of development were restricted and environment was narrow. With commendable foresight many of these older men have freed themselves from this petty spirit, and are second to none in enterprise and energy. Germany can be as proud of its 'captains of industry' as America itself. But many commercial circles in Germany are still unable to free themselves from these shackles. The relations between buyer and seller are still often disturbed by petty quibbling. In those industries where cartels and syndicates have not yet been formed, too great a rôle is played by dubious practices of many kinds, by infringements of payment stipulations, by unjustifiable deductions, etc., while, on the other hand, the cartels are often too ruthless in their action. In this field we have very much to learn from the English business man. Long commercial tradition and international business experience have taught him long ago that broad-mindedness is the best business principle. Look at the English form of contract, the methods of insurance companies, the settlement of business disputes! You will find no narrow-mindedness there. Tolerance, another quality which the German lacks, has been of great practical advantage to the Englishman. Until recently the City has never resented the settlement of foreigners, who were soon able to win positions of importance there. Can one imagine that in Berlin an Italian or a South American, with very little knowledge of the German language, would be not only entrusted with the management of leading banks and companies, but would be allowed in German clubs to lay down--in their faulty German--the law as to the way in which Germany should be developed? Impossible! Yet this could be seen again and again in England, and the country gained greatly by it. If the English have now developed a hatred of the foreigner, it only means that the end of England's supremacy is all the nearer."

According to our German critic the great fabric that has been built up on these characteristics and qualities is threatened with ruin by the war; and the heritage which we are supposed to be losing is to fall, by some process which is not made very clear, largely into the hands of Berlin. In order that we may not be accused of taking the laudatory plums out of this German pudding and leaving out all criticisms and accusations, let us quote in full the passage in which he dances in anticipation on London's corpse:--

"Let us sum up. England's reputation for honest business dealing and for trustworthy administration has suffered. Her insular inviolability has been put in question. The ravages of war have undermined the achievements of many generations. Her free gold market has broken down. The flow of capital towards London will fall off, for those who cannot borrow there will no longer send deposits. The surplus shown in her balance-sheet will contract. Foreign trade will also decrease. Hand in hand with this fall, free trade, that mighty agent in the development of England's supremacy, will, in all probability, give place to protection. Stock Exchange business will grow less. Rates of interest will be permanently higher."

How much truth is there in all this? Has our reputation for honest dealing and for trustworthy administration suffered? Surely not in the eyes of any reasonable and unprejudiced observer. In the course of the greatest war in history, fought by Germany with weapons which have involved the violation of the most sacred laws of humanity and civilisation, England has acted with a respect for the interests of neutrals which has been severely criticised by impatient observers at home. As for our "insular inviolability" having been put in question, it certainly has not, so far, suffered any serious damage. Our Fleet has defended us from invasion with complete success, and the damage done by marine and aerial raiders to our property on shore is negligible. Our free gold market is said to have broken down. The proof of the pudding is in the eating. Germany, when the war began, immediately relieved the Reichsbank from any obligation of meeting its notes in gold, and frankly went on to a paper basis. England has already shipped well over 200 millions in gold to America to finance her purchases there and those of her Allies.

It may be true that capital will not flow to London if London is not in a position to lend, but we see no reason why London should not be able to resume her position as an international money lender, not perhaps immediately on the declaration of peace, but as soon as the aftermath of war has been cleared away and the first few months of difficulty and danger have been passed. The prophecy that foreign trade will decrease may also be true for a time owing to the destruction of merchant shipping that the war is causing. This possibility, however, may be remedied between now and the end of the war if the great programmes of merchant shipbuilding which have been undertaken by the British and American Governments are duly carried out. In any case, even if foreign trade decreases, there is no reason whatever to expect that England's will decrease faster than that of other nations.

In all these problems we have to look for the relative answer and to consider not whether England has suffered by the war, for it is most obvious that she has, but whether she will have been found to have suffered more than any competitor who may threaten her after-war position.

"Free trade," says our German Jeremiah, "that mighty agent in the development of England's supremacy, will, in all probability, give place to protection." We venture to think that it will be recognised that the Free Trade policy of the past gave us a well-distributed wealth which was an invaluable weapon in time of war, and that any attempt to impose import duties when peace comes will be admitted, even by the most ardent Tariff Reformers, as untimely when there is likely to be a world-wide scramble for food and raw materials, and the one object of every nation will be to get them wherever they can and as cheaply as they can.

If Stock Exchange business will be less, though this does not by any means follow, there is no reason why it should be relatively less here than in other centres. As to rates of interest being permanently higher, the same answer applies. It may be true, but there is no reason why they should be relatively higher in London than elsewhere; and, if they are high, it will be because there will be a great demand for capital, which will mean a great trade expansion; both in the provision of capital and in meeting the demands of trade expansion England will be doing what she has done with marked success in the past and can, if she works in the right way now and after the war, do again with equal and still greater success.

There is, however, a danger that threatens our financial position after the war, on the subject of which our German critic is discreetly silent, because that danger threatens the position of Germany very much more emphatically. It consists in the way in which our Government is at present meeting the needs of war finance, not by compelling economy on the civilian population through taxation and borrowing direct from investors, but by manufacturing currency for the purposes of the war by means of the printing press and the banking machinery. The effect of this policy is seen in the enormous mass of Treasury notes with which the country has been flooded. Their total is now nearly 180 millions or perhaps 100 millions more than the gold which they were originally designed to replace.

It is also to be seen in the great increase in banking deposits which has been a feature of our financial history since the war began. Some people regard this feature as a phenomenal proof of the growth of our wealth during the war. I am afraid there is little foundation for this pleasant assumption, for these new deposits have been called into being by the banks subscribing to Government securities, whether War Loan, Treasury Bills, Exchequer Bonds or Ways and Means advances or lending their customers the wherewithal to do so. By this process the balance-sheets of the banks are swollen on both sides, by the Government securities and advances to customers among the assets, against which the banks create new deposits, so giving the community as a whole the right to draw more cheques.

Every time the bank makes an advance it gives the borrower a credit in its books, that is to say, the right to draw cheques to that amount; the borrower draws on the credit and hands it to any one to whom he owes money; but as long as the advance is outstanding there will be a deposit out against it in the books of some bank or another.

It is an easy way for the Government to finance the war by getting the banks to manufacture money for it. Nobody feels any poorer for the process, in fact, those who have new money in their pockets or in their bank balance feel richer, but the result of thus multiplying currency without any increase in the supply of goods and services to be bought inevitably helps the rise in prices which makes the war costly, puts the burden of it on to the wrong shoulders, and likewise cheapens the value of the English pound as measured in other currencies. This is why the evils involved by this process become so relevant to the question now at issue.

If the Government is allowed to go on financing the war by increasing the currency with the very reluctant help of the bankers, the difficulties of maintaining our gold standard and keeping the exchanges in favour of London will be very greatly magnified when the war is over and our gold reserves are no longer protected by the submarines and the high cost of shipping gold that they produce. It therefore follows that all who have the true interests of the City at heart should use all the influence they can to force the Government to adopt a sounder financial policy before it is too late.

It is true that our war finance has hitherto been sounder than that of any other warring Power, but it has fallen very short if we apply the rough test of the proportion of the cost of war borne out of taxation and compare our performance with the results achieved by our ancestors in the Napoleonic and Crimean wars.

If we have done better than France, Italy, Russia and Germany in this respect, it must also be remembered that the financial prestige which these countries had to maintain was not nearly so great and well established as ours, with the possible exception of France; and France, being exposed to the ravages of a ruthless invader, was in a position which put special obstacles in the way of the canons of sound finance.

If, then, there are certain dangers that threaten our financial position when the war is over, we must remember, on the other hand, that the war has already done a great deal to maintain our financial prestige and raise it to a height at which it never stood before.