Part 19

How far, we have next to ask, is it necessary for the best interests of the country to restrict the freedom of capital issues? If we look back at the terms of reference under which the reconstituted Committee is to work, we see that the officially expressed objects are (1) preserving capital for essential undertakings in the United Kingdom, and (2) preventing any avoidable drain upon Foreign Exchanges by the export of capital. There is certainly much to be said for both these objects. When we lend money to foreigners we give them the right to draw on us now in return for their promises to pay some day; in other words, we make an invisible import of foreign securities, and in the present state of our trade balance all imports, whether visible or invisible, need careful watching. It is also very evident that at a time when capital is scarce there is much to be said for keeping it for essential industries, especially those which produce necessaries and goods for export, and not allowing it to be swept up by borrowers who are going to devote it to making expensive fripperies on which big profits are probable.

There remains a very big other side to both these questions. All over the world there is a demand for goods which have not been produced, or only in greatly reduced quantities, during the war. This demand is only effective in so far as willing buyers can pay; some of them have the needful cash in hand or waiting in London or elsewhere to be drawn on, but a great number of would-be buyers want to be financed, and will have to be financed by somebody if the needs that they feel are to be translated into actual purchases. In other words, in order that the wheels of industry are to be set turning as fast as they might, if they had a full chance, somebody has to lend freely. Now, it is surely most of all important in the national interest that those wheels should begin spinning as fast as possible, and the question is whether we are more likely to serve that interest best by keeping a meticulous eye on the course of exchange and buttoning up our pockets to foreign borrowers or by leaving capital free to seek its market, knowing that every time we give the foreigner the right to draw on us we stimulate our export trade, because his drawing must finally mean a demand on us for something--goods, securities or gold--and goods are what people are in these times most anxious to take. If we are going to leave all the financing to be done by America and fear to import promises to pay lest they should be followed by demands on our gold, shall we not be rather in the position of Barry Lyndon, who was given a gold piece by his mother when he went out into the world, with strict injunctions always to keep it in his pocket and never to change it? Regard for our gold standard is most necessary, but the gold standard is not an end in itself, but merely an important part of a machine which only exists to serve our industry. If we are so careful of the machine, which is a mere subsidiary, that we check the industry which it is there to serve, we shall be like the dandy who got wet through because he had not the heart to unfurl his beautifully rolled-tip umbrella.

Again, it looks very sound and sensible to keep capital for purposes that are essential, but, on the other hand, it is so enormously important to set industry going as fast as possible that almost any one who will do anything in that direction is entitled to be given a chance. In war-time, when labour and materials were so scarce that they could not turn out all the munitions that were necessary, such a restriction was clearly inevitable. Now, when labour and materials are becoming more plentiful, and the scarce commodity is the pluck and enterprise that will take the risks involved by getting to work on a peace basis, it may be argued that any one who will take those risks, whatever be the stuff or services that he proposes to produce, should be encouraged rather than checked. It is again a question of the balance of advantage. If we are going to be so careful in seeing that capital is not put to a wrong use that we take all the heart out of those who want to make use of it, we shall do more harm than good. If by leaving capital free to go into any enterprise that it fancies we can give a start to industry and promote a spirit of courage and enterprise among its captains, it will be well worth while to do so at the expense of seeing a certain amount of capital going into the production of articles that the community might, if it made a more reasonable use of its purchasing power, very well do without. The same question arises when we consider the desire of the Government, not expressed in the above statement, but very freely admitted by Mr Bonar Law, in discussing it in the House of Commons, to keep capital to be lent to it rather than expended in, perhaps unnecessary, industry. Here, again, it is clearly in the interest of the taxpayer that Government loans should be raised on the most favourable terms possible. But if, in order to do so, we starve industry of capital that it needs, and so check the production on which all of us, Government and citizens alike, ultimately have to live, we shall be scoring an immediate advantage at the expense of future progress--spoiling a possibly brilliant break by putting down the white ball for a couple of points.

There is thus a good deal to be said for setting capital free, before we have even arrived at the most serious objection to regulating it under Treasury licence. This objection is the exasperation, delay and uncertainty involved by this control. Even if we had an ideally wise and expeditious body to decide about capital issues it might not be the best thing to set it to work. But when we remember that in order to see that the wrong sort of issue is not made, all issues will have to pass through the terribly slow-working process of official selection before the necessary licence is finally granted, it begins to look still more likely that we should do well to run the risk of letting a few goats through the gate, rather than keep all the sheep waiting outside for months, with the probable result that many of them may lose altogether their chance of final salvation. It will be noted from the official statement that the arbitrary methods of the old Committee are to be modified. It has long been a by-word among those who had dealings with it; they abused it in quite sulphurous language and were wont to quote it as an example of all that bureaucratic tyranny is and should not be, thereby doing some injustice to our bureaucrats, seeing that the Committee was manned not by officials but by business men, clothed pro hac vice in the thunder of Whitehall. The new Committee is to sit by panels of three, so as to expedite matters, and so as to allow applicants the privilege of giving oral evidence. This is an innovation that will save some exasperation, but it will hardly accelerate matters, especially as the decision of the panels will be subject to confirmation by the full Committee, so that all the work will have to be done twice over. There is thus much reason to fear that delay, so fatal in business matters, will be an inevitable offspring of the efforts of the new Committee, and the list of different forms on which applications are to be made, given above, shows that all the paraphernalia of red tape will dominate the proceedings.

Now for the terms of the new Regulation under the Defence of the Realm Act.

"1. The following regulation shall be inserted after Regulation 30 EE:--

"30 F. The following provisions shall have effect in respect of new capital issues and to dealings in securities issued for the purpose of raising capital:

"(1) No person shall, except under and in pursuance of a licence granted by the Treasury--

"(a) issue, whether for cash or otherwise, any stock, shares or securities; or

"(b) pay or receive any money on loan on the terms express or implied that the money is to be or may be applied at some future date in payment of any stock, shares or securities to be issued at whatever date to the person making the loan; or

"(c) sub-divide any shares or Debentures into shares or Debentures of a smaller denomination, or consolidate any shares or Debentures of a larger denomination; or

"(d) renew or extend the period of maturity of any securities; or

"(e) purchase, sell or otherwise transfer any stock, shares or securities or any interest therein, or the benefit of any agreement conferring a right to receive any stock, shares or securities, if the stock, shares or securities were issued, sub-divided or consolidated, or renewed or the period of maturity thereof extended, or the agreement was made, as the case may be, at any time between the 18th day of January, 1915, and the 24th day of February, 1919, and the permission of the Treasury was not obtained to the issue, sub-division, consolidation, renewal or extension or the making of the agreement, as the case may be.

"(2) No person shall except under and in pursuance of a licence granted by the Treasury--

"(a) buy or sell any stock, shares or other securities except for cash or when the purchase or sale takes place in any recognised Stock Exchange, subject to the rules or regulations of such exchange.

"(b) buy or sell any stock, shares or other securities which have not remained in physical possession in the United Kingdom since the 30th September, 1914.

"(3) A licence granted under this regulation may be granted subject to any terms and conditions specified therein.

"(4) If any person acts in contravention of this regulation, or if any person to whom a licence has been granted under this regulation subject to any terms or conditions fails to comply with these terms or conditions, he shall be guilty of a summary offence against these regulations.

"(5) In this regulation the expression 'securities' includes Bonds, Debentures, Debenture stock, and marketable securities."

It will be seen at once that the terms of this document, on any interpretation of them, go far beyond the intentions expressed in what may be called the official preamble and in the new Committee's terms of reference. One of the clauses seems, with all deference to its august composers, to be merely silly. This is (1)(c) forbidding sub-division of securities. If a £10 share is split into ten £1 shares this operation cannot make the smallest difference to the supply of capital for essential industries or cause any drain on the Foreign Exchanges. I am assured by those who have delved into the official intention that the reason for the objection of the old Committee to splitting schemes, on which this new prohibition is based, was that splitting made shares more marketable and popular and so more likely to compete with War Bonds. But a mere sale of shares, split small and so popularised, does not absorb any capital. That only happens when, money is put into some new form of industry. If A, who holds ten £20 shares, is enabled to dispose of them to B because they are split into 200 £1 shares, then, A instead of B has got the money and has to invest it in something. The amount of capital available for investment is not diminished by a halfpenny. This regulation is just a piece of short-sighted tyranny which exasperates without doing the smallest good to anybody.

More serious, however, was clause (1)(e) under which any securities that have been issued, split, consolidated or renewed without Treasury sanction since January, 1915, were not to be dealt in, in future, without a licence. The result of this clause, if it had stood, would have been that all loans under which such securities had been pledged would have had to be called in because the collateral became unsaleable, except after all the ceremonies had been gone through and a licence had been got. It was also possible to argue that the prohibition to renew or extend the maturity of any security meant that no loans of any kind could be renewed, and that no commercial bills could be renewed, without a licence. It is true that No. 5 paragraph says what the expression "securities" includes, but it does not state definitely that bonds, Debentures, Debenture stock and marketable securities are the only things included. It was a pretty piece of drafting, and raised a pretty storm in the House of Commons on February 27th, when a somewhat lurid picture of its effects was drawn by Sir H. Dalziel and Mr Macquisten. Mr Chamberlain not being then legally a member of the House, it fell to the lot of Mr Bonar Law to explain that the Government had really meant to give greater freedom, in making new issues, that the evils anticipated had not been intended, that he hoped the House would not judge the Government too harshly for not making unsanctioned issues illegal from the beginning, and that a new Order would be issued removing the retrospective effect of the new regulation. And so amendment was promised of a measure which would have had very awkward and unjust effects. It may be argued that it would only have affected people who had done, during the war, what they were asked not to do, namely, make issues without Treasury sanction. If the old Committee had been a reasonable and expeditious body this argument would have had great weight. But, in view of its caprices and dilatoriness, there was a good deal of excuse for those who decided to do without Treasury sanction and take the consequence of being unable to market their securities on the Stock Exchange. To propose to add a new penalty and cause the cancelling of all the financial arrangements made in connexion with such issues during four years was simply piling blunder on blunder. Luckily, the protests of the Government's own supporters sufficed to undo the worst of the mischief; but the whole affair is only another argument in favour of the earliest possible ridding of finance and industry from control that is so clumsily exercised.

MONEY OR GOODS?

December, 1918

"Boundless Wealth"--Money and the Volume of Trade--The Quantity Theory--The Gold Standard--How is the Volume of Paper to be regulated?--Mr Kitson's Ideal.

In the November Trade Supplement an endeavour was made to answer Mr Kitson's rather vague and general insinuations and charges against our bankers concerning the manner in which they do their business. Now let us examine the larger and more interesting problem raised by his criticism of our currency system.

In his article in the June Supplement he told us that "if the British public had any grasp of the fundamental truths of economic science they would know that a future of boundless wealth and prosperity is theirs." This is a cheery and encouraging view and, let us hope, a true one. But, that boundless wealth can only be got if we work for it in the right way. Can Mr Kitson show it to us, and what are these "fundamental truths of economic science"? It is easier to talk about them than to find any two economists who would give an exactly--or even nearly--similar list of them. Mr Kitson glances "at a few elementary truths." "Wealth," he says, "is the product of two prime factors, man and Nature, generally termed labour and land. With an unlimited, or practically unlimited, supply of these two factors, how is it that wealth is and has been hitherto so comparatively scarce?" But is the supply of "man" unlimited in the sense of man able, willing, and properly trained to work? And is the supply of "Nature" unlimited in the sense of land, mines, and factories fully equipped with the right machinery and served and supplied by adequate means of transport? Surely the failure In production on which Mr Kitson so rightly lays stress is due, at least partly, to lack of good workers, good organisers, good machinery, and good transport facilities. Workers who restrict output, employers who despise science and cling to antiquated methods, the opposition of both classes to new and efficient equipment, and large tracts, even of our own land, still without reasonable transport facilities, have something to do with it. And lack of capital--this answer to the question Mr Kitson flouts because, he says, "since capital is wealth," to say that "wealth is scarce because capital is scarce is the same as saying that wealth is scarce because it is scarce." But is it not a "fundamental truth of economic science" that capital is wealth applied to production? Wealth and capital are by no means identical. When a well-known shipbuilding magnate laid waste several Surrey farms to make himself a deer-park, the ground that he thus abused was still wealth, but it is no longer capital because it has ceased to produce good food and is merely a pleasant lounging-place for his lordship. May not the failure of production be partly due to the fact that, owing to the extravagant and stupid expenditure of so many of the rich, too much work is put into providing luxuries--of which the above-mentioned deer-park is an example--and too little into the equipment of industry with the plant that it needs for its due expansion?

Mr Kitson's answer is much easier. According to him, instead of working better, organising better, and putting more of our output into plant and equipment and less into self-indulgence and vulgarity all that we have to do to work the necessary reform is to provide more money and credit. Since, he says, under the industrial era--

"All goods were made primarily for exchange or rather for sale ... it followed, therefore, that production could only continue so long as sales could be effected; and since sales were limited by the amount of money or credit offered, it followed that production was necessarily limited by the quantity of money or credit available for commercial purposes."