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 country but made no attempt to apply even a moderate dose of the true remedy. And yet the bad eminence that he then reached as a War Chancellor defaulting in his evident duty was perhaps overtopped by Mr. Bonar Law in 1917 when he brought in a Budget which was expected to add £1,600,000,000 to the debt and added only £6,000,000 to permanent taxation. (He got £20,000,000 more from Excess Profits tax, which was then supposed to be an impost which would cease with the war.) Which of these two efforts was the worse, we may leave the two champions who achieved them to decide. Mr. Lloyd George did not tax at all. But he had an excuse (rather weak on its legs) in that he had taxed a good deal in the Budget that he brought in in the previous autumn, and a still feebler one in the belief, which most of us then cherished, that the war would be short. Mr. Bonar Law, whose contribution to taxation was so pitiful in comparison to his addition to debt, had neither of these excuses. On the contrary, between his rule and that of Mr. Lloyd George, Mr. McKenna had really tried to do all that he could to finance by taxation. The effort that he made was not too heroic, brilliant as it was when compared with those of our other War Chancellors. His Budget

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 speeches generally produced a sense of relief in the House of Commons and among the income tax paying class because he had not made a greater addition than he did to the income tax; and it may surely be argued that in war time it is not the business of a Chancellor to produce a sense of relief but to brace the taxpayers to an effort which might at least be a faint reflection of what the fighting men were doing for them at the front.

It may be that the taxpayer would have jibbed and kicked if Mr. McKenna, who at least set a sound standard of aiming each year at covering out of taxation the service of the anticipated addition to debt, had tried to do more. The view has been expressed by experienced tax-gatherers that the great industrial effort which was certainly made by our people was only possible because the wage earners were stimulated by high wages and the organizers by big profits. But as everyone now knows industrial unrest was almost chronic in the later years of the war, partly because the wage earners believed that their high wages were fully offset by high prices and partly because they knew that their employers were making enormous profits, as shown by the passage quoted above.

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 Danger of an upheaval which would have reduced output and led to defeat, was a sinister possibility, but surely it would not have been increased but lessened if the war had been paid for, as it might have been, out of the current income of the nation, and out of the sale or pledge of existing assets abroad. To suppose that there are funds which can be tapped by borrowing but are sealed to the tax-gatherer is a slur on the efficiency of the latter which our Inland Revenue Office does not deserve. You cannot get more out of a nation than it can produce in goods and services, an¢ if you deal bravely and intelligently with a brave and intelligent nation you get from it, for a great national purpose, all that it produces except what it must have to keep it alive. We could have met the whole cost of the war, which would not have been nearly so great if it had been better financed, without calling on ourselves to stint to that point. When we remember what the spirit of the country was like in the early days of the war, it is clear that if the right attempt had then been made to put the facts of war finance before the people they would have understood and accepted them and been prepared to face them, instead of being deluded by monetary will-o'-the-wisps, which

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 were quite useless for lessening sacrifice but only too effective in distributing it unjustly and enabling a small minority to make fortunes out of the war that was bringing ruin to many, especially of those who were fighting for us.

These results were so far from being expected when the war began that the arrangement made by the Government with the railway companies, under which they were to be guaranteed their pre-war net revenue, was viewed with envy by the shipowning, coalowning and engineering firms and companies which afterwards wallowed up to their chins in the war profits in which bad war finance immersed them, but then saw nothing but bad times ahead. The capitalist class was fearful and tame and quite ready to be told, what it already believed, that war meant sacrifice and stinting, and probably ready to be convinced that taxation was the cheapest and fairest way of imposing and distributing the burden. I remember being told by a stockbroker in the first week of the war that of course the whole Stock Exchange saw nothing but ruin ahead of it. "But we don't care a damn," he added. "We know this war had to happen and we know we're going to win and that's all that matters."

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 jesting, even at the most unreal delusions of the imagination, injured men's faith in the influences of God's Blessed Spirit? Throughout, Sir, we are standing upon holy ground; and it beseems us to pull the shoes from off our feet, and tread reverently. Let error be removed as a disease, gently handling those who suffer under it, or repressing those who wilfully propagate it; but let us not sport with the Enemy of men's souls.

This subject, however, has been handled by one to whose talents you would perhaps pay deference,—Bp. Warburton; and to him I would refer you. He has not indeed the earnestness or depth of the writers of the seventeenth century, yet he states facts which it were well for this age to lay to heart. For we are now reaping the harvest which the infidels of his day sowed; only in his times men yet looked to principles—in these they regard only their practical efficiency in carrying a point: then the evil was without, now it is admitted within the Church. I will now, then, request your attention to a few extracts only from his address to the Freethinkers, to whom he dedicates the first three books of The Divine Legation.

"Your writers offer your considerations to the world, either under the character of petitioners for oppressed and injured truth, or of teachers to ignorant and erring men. These sure are characters that, if any, require seriousness and gravity to support them. But so great strangers are we to decorum on our entry on the stage of life, that, for the most part, we run giddily on, in a mixed and jumbled character; but have most an end, a strong inclination to make a farce of it, and mingle buffoonery with the most serious scenes. Hence, even in religious controversy, while the great cause of eternal happiness is trying, and men and angels, as it were, attending the issue of the conflict, we can find room for a merry story.—

"This quality [of making men laugh] causing the writer to be so well received, yours have been tempted to dispense with the solemnity of their character, as thinking it of much importance to get the laugh on their side. Hence ridicule is become their favourite figure of speech.—It is inconceivable what havoc false wit makes in a foolish head. 'The rabble of mankind,' as an excellent writer [Addison] well observes, 'being very apt to think, that every thing which is laughed at, with any mixture of wit, is ridiculous in itself.' Few reflect on what a great wit [ Wycherly ] has so ingeniously owned, 'that wit is generally false reasoning.'—

"To see what little good is to be expected in this way of wit and humour,

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 At the same time the spirit of the manual workers was an example to the rest of us. Mr. Orton tells us that, "despite widespread unemployment and distress among the rank-and-file of labour and the many practical difficulties with which its leaders had as best they could to contend, not these things but the universal tide of active patriotism will remain the dominant impression of this momentous autumn.autumn." [sic] Volunteers from all trades and classes were enlisting at the rate of nearly 100,000 a week: 174,901 during the first week of September; so that many a regiment would make a favour of it to put your name on a long waiting list, and many a depot had to close its doors on a press of volunteers much as in peace time the dock gates used to close on a press of willing labourers. Outstanding industrial disputes were broken off, compromised, referred to arbitration or waived altogether. Already in the first fortnight of August, employers and trade unionists on Clyde and Tyne had mutually agreed to assist in every possible way the execution of all work essential to the war—in the latter area, had even recommended the removal of "all working restrictions." Other unions were taking up a similar attitude; and the Labour Conference of August 25, before

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 it approached the Government for assistance for the union funds, had embodied the general opinion in a resolution, "that an immediate effort be made to terminate all existing disputes, whether strikes or lock-outs, and whenever new points of difficulty arise during the war-period, a serious attempt should be made by all concerned to reach an amicable settlement before resorting to a strike or lock-out." From 72,000 men involved in various disputes in mid-July the number fell to "practically nil "by the following February: for 99 new disputes originating in July there were only 14 in August. This was the industrial truce, loyally observed in spite of grave provocation during the first winter.

"And lest it be thought that this was a small matter, an obvious and unimportant concession, let it be recalled that the three years preceding the war were years of intense industrial struggle in which for the unions principles as well as pence were at stake; and that, even as regards wages alone, the truce involved spontaneous surrender of the essential factor in their bargaining power, in sheer reliance on the goodwill of employers and the State. Whatever amelioration of the average working-class standard of living the next few years might

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 have brought was thus staked on the hazard; and it was a stake that the war-bonus principle of subsequent wage advances did not in fact redeem."

Such was the spirit of all classes in the first six months of the war. Such was the chance that Mr. Lloyd George missed in his 1915 Budget. Instead of a financial statesman we had an adroit politician who, seeing the people through the eyes of political agents and party wirepullers, thought it advisable not to ask them to pay any more taxes at present. Then, as so often throughout the war, the Government completely misunderstood the readiness of the people to bear the war's burdens and so undermined and impaired that readiness. Bad war finance, then introduced, and the consequent rise in prices brought with them competition among employers to make as much as possible out of the country's need and so invited the workers to join the game of grab; and so came suspicion and envy and bitterness, smouldering industrial unrest which seriously hampered the nation's productive effort, spendthrift extravagance, public and private, which wasted its resources and antagonism between classes of which the end is not yet.

During the war period, August 1 to

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 November 16, the total spent by the Government, according to the Economist's weekly summary of war-time finance, published in its issue of November 23, 1918, was £8,656,000,000 and the amount that it raised by revenue was £2,220,000,000. Even if we could assume that the whole of the expenditure was for the war, and that the whole of the revenue was provided by war taxation, the latter is little better than 25 per cent. of the former, a sorry percentage compared with the 47 per cent. shown, according to Sir Bernard Mallet's calculation, in the Napoleonic and Crimean wars. But we are bound, of course, to deduct from each side the peace expenditure and revenue. If we assume this at £850,000,000 for the 4¼ years—a low estimate but therefore understating our case—the war expenditure becomes £7,806,000,000 and the war revenue £1,370,000,000, a percentage of just over 17½.

It need not be said that this is nothing like an exact calculation; war revenue and war expenditure went on long after the war period and it will probably never be possible to get two economists to agree as to the sum that was spent by our Government on the war. But at least it can be claimed that the financial effort

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 made by our rulers through taxation was very much below the results achieved by their predecessors at times when the country was much poorer and much less united in its determination. And yet we know that these earlier and better precedents were in their minds. For in the speech which opened Mr. Lloyd George's Budget that imposed not one half-pennyworth of taxation he went out of his way, after calling the country's attention to the huge gulf between revenue and expenditure, to say that he could have filled it by taking less of the country's income than was taken at the end of the Napoleonic war. Thus he was of those that rebel against the light; for one can surely contend without being charged with idealistic rainbow-chasing, that what we did at the beginning of the nineteenth century we could have done again at the beginning of the twentieth.

It is not possible to guess how much of the money that the Government got by borrowing was real saved money contributed by investors and how much was new spending created by banks either through direct advances to Government or through loans to customers for the purpose of lending. Banking figures, ever discreet in their reticences, naturally drew no

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 distinction between advances made to customers for purposes of production and those made to furnish them with funds to lend to Government. The figures of the Bank of England's return were more than usually obscure during the war period owing to a system then adopted by which any surplus balances that the other banks held were taken from them by the Bank of England and lent to the Government in the form of Ways and Means advances. According to strict book-keeping these operations should have been shown in the weekly return and would have greatly increased the Bank of England's liabilities and assets. But in fact this was not done and so the Bank return was more than ever a cryptogram rather than a guide, and those who patiently week by week worked out the proportion of its cash Reserve and its liabilities were at once the victims and publishers of a deception which was, if it effected anything towards maintaining our financial prestige abroad, justified by the seriousness of the struggle and the importance of financial prestige to its winning.

A more important effect of anxiety to maintain our financial prestige abroad was the necessity that it was believed to impose on

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 those who guided our monetary policy to keep up the price of money in Lombard Street, when its cheapness would have enabled the Government to borrow at much lower rates and so would have left a much less onerous debt charge. The natural effect of the big creations of new credit involved by the war was to make money cheap and in the early months of 1915 the market rate of discount was below 1½ per cent. Since as the war went on the Government was practically the only borrower, exports of capital being forbidden and new issues at home being only permitted with the sanction of a most exacting Committee, it is clear that if the Government had chosen to adopt this policy it could have helped itself to all the available capital at any price that it chose to offer, especially if it had at the same time administered to capitalists the very broad hint of compulsion if they did not subscribe, to which they were treated by Mr. Bonar Law—as good a borrower as he was a bad taxer—when he was appealing to them to support his great and successful War Loan of 1917. But our rulers feared that if money was too cheap in Lombard Street, foreigners would withdraw their balances from London and so turn the exchanges against us by offers of sterling in foreign centres,

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 though in fact the New York exchange, and others to a less extent, were kept "pegged" by borrowing for that purpose. And so money was made artificially dear by the rates at which Treasury Bills were offered and also by the measure already referred to by which the banks' surplus balances were borrowed by the Bank of England for the Government. And it was only in the last year of the war that a special rate was allowed on foreign balances and the market rate for home money was allowed to slacken slightly.

Another influence that made our war borrowing dearer than it need have been was a curious delusion long cherished by our financial rulers which made them think that in war time each loan issued by the Government must necessarily be offered with a higher rate of interest attached. In spite of the fact that the German Government was borrowing steadily with 5 per cent. loans issued in the neighbourhood of 98, our wiseacres insisted on an ever rising rate which culminated in the Autumn of 1916 when some 6 per cent. Exchequer bonds scored the high-water mark of this absurdity, and gave a quite unnecessary handle to well-meaning enthusiasts who were arguing that the capitalists were "doing their bit" by battening

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 on the nation's life blood. In fact the capitalists were quite good and tame, as was shown in the following January when Mr. Bonar Law renounced this expensive delusion in a speech at the Guildhall, calling for support for his great 5 per cent. loan offered at 95, and so yielding 5¼ per cent.; he said that "the terms offered were as good as the Government was justified in giving; that as long as there was money in the country the conduct of the war would not be hindered for lack of it; that if the loan failed, which it would not, the resources of civilization would not be exhausted; and that if other measures were taken, the rate would certainly not be 5¼ per cent. The enthusiasm with which this frank threat of financial compulsion was received by the Guildhall audience was remarkable evidence of the readiness of the City to suffer all things for victory." (Economist, January 13, 1917).

On this occasion the banks were not bullied into subscribing to the loan themselves but, as was done whenever a loan was offered, everybody was urged to borrow from his bank in order to apply. Clearly this had to be done in order to secure the great success of the loan, which brought in over £1,000,000,000 in cash. But unless the advances were repaid as fast

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 as the Government spent the money—which certainly did not happen—the result of this system was another addition to the volume of credit, expressed in increased bank deposits or potential spending power. The effects of the use made of our banking machine for war finance on banking figures may be studied by the curious in statistical compilations. Here it may be noted that the total deposits of the Bank of England which stood at £71,000,000 at the end of 1913, were £155,000,000 at the end of 1914, and £241,000,000 at the end of 1918; the figures of the total securities at the same dates being £65,000,000, £145,000,000 and £231,000,000. The other banks of the United Kingdom showed the following movements:—

Thus was the bladder of credit blown out till it was, like Falstaff and his lies, "gross as a mountain," and might have seemed to be at bursting point had it not shown powers of still greater expansion in the after-war period, which None

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 clapped another £500,000,000 on to both sides of the balance sheet.

It may safely be assumed that most of the increase in investments was due to subscriptions by the banks to various forms of Government securities issued for war purposes and likewise a large part of the increase in discounts and advances, because many of them included their holdings of Treasury Bills under discounts. Treasury Bills grew from £21,000,000 at the end of 1913 to £1,095,000,000 at the end of 1918, and though many of the new bills were placed with shipowners, munition makers and others who wanted a liquid form of investment for the huge profits that they were earning, the banks also took a big share of them. Owing to these huge profits that the industrialists were earning they had little need to rely on their banks for credit, so that the increase in discounts and advances was probably due, apart from Treasury Bills, to loans to customers for taking up war loans.

Both these processes by which the banks were used to finance the war—direct investment, and loans to customers for investment, in war loans—were bad for the country and for the banks. For the country because they meant the production of fresh spending power instead of spending power being taken

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 out of somebody's pocket, and for the banks because, except when the securities that they took were Treasury Bills or other investments with an early date of maturity, they were "locked up." When they subscribed to War Loans, as they were urged if not practically forced to do in the case of the earlier issues, they took over assets that they would not for patriotic reasons be able to dispose of as readily as they would wish, when the time came for them to return, after the war, to their real business of financing the requirements of trade. By lending to their customers to enable them to subscribe, they also got a more or less frozen security, because investors who had been stimulated to borrow from their banks in order to subscribe to War Loans could not well be pressed very hard to pay the loans off. If they were obliged to do so and had to throw stocks they had purchased upon the market in order to redeem the loans, the effect upon the market for Government securities and therefore upon bank balance sheets would not have been comfortable.

The question of the increase in the banks' holding of cash and money at call and short notice brings us to the currency expansion which was required to support this jerry-built addition to the fabric of credit. As was shown

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 in Chapter I, the banks for their own safety maintained a certain proportion between their liabilities in the form of deposits and their holding of legal tender cash, plus "cash" at the Bank of England, which meant a credit in its books. Before the war legal tender cash could only be increased (apart from the inward and outward flow of the home circulation) by additions to the country's stock of gold. Cash at the Bank of England could be increased as fast as it chose to make loans and discount bills and this gave our system the necessary elasticity. The great expansion has already been shown (page 65) in the Bank of England's holding of securities and also in its deposits, by which its power to create credit was used for war purposes, and it was also shown that the figures did not do full justice to its achievement. The expansion in legal tender currency was as follows:—

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 These figures show that whereas bank deposits were roughly doubled during the war period, cash currency was multiplied by very nearly three, its relatively greater increase being probably due to the shifting of income into the hands of manual workers and others who did not keep accounts at banks. It will be noted that an entirely new form of currency was introduced. This is the Currency note, or Treasury note, which was invented in the first week of the war, in order to meet the banking crisis which began, and reached its worst point before we were actually at war. We do not yet know why it happened that in England alone the currency expansion which was thought to be necessary owing to war took this special form. In France and Germany the increase in legal tender currency was carried out through the official banks. They made advances to the Governments and the Governments took the advances in the notes of the Reichsbank or the Bank of France and paid them out to meet the demands of war. It has never been explained why the same thing did not happen in England. We do know that a committee of bankers long before the war had told the Treasury that in case of a banking crisis in this country we should need some

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 form of legal tender paper currency of smaller denomination than the Bank of England note which, as everybody knows, was not uttered in amounts below five pounds. We also know that this recommendation slept peacefully in a Treasury pigeon-hole; and though we were fully prepared on the naval and military side to carry out all that we had promised, and all the details of shipping the expeditionary force to France had been thought out with the closest care by committees of railway and shipping men appointed by Lord Haldane, the financial side of the matter did not appear to have been got ready with the same foresight.

Gossip says that the necessary committee which was to deal with this matter was just about to get to work upon it when the war broke out, but this story seems too good to be true. In any case when the threat of war happened certain excitable folk wanted more currency—some because they were stupid enough to think it would be safer in their own custody than in that of their bankers, others because they expected a rapid rise in prices and wanted a store of money ready to lay in a stock of food. Consequently the banks were asked to hand out cash to an extent that they found inconvenient and fell back on their

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 undoubted right to pay the customers who made these demands in Bank of England notes; and because Bank of England notes were not in smaller denominations than five pounds the public went to the Bank of England to turn notes into sovereigns. As everybody remembers, this crisis was met by a four days' Bank holiday and a banking moratorium and by the issue of Treasury notes of one pound and ten shillings.

It might have been thought that the more obvious course would have been to permit the Bank of England (if it had not the power, which is uncertain,) to issue notes of one pound and ten shillings and to have suspended for the course of the war the restriction upon the note issue imposed by the Bank Charter Act. This suspension was in fact made under the Currency Notes Act of 1914. But perhaps it was just as well that this course was not taken; as it was the Bank of England only availed itself of the suspension of the limit on its note issue during a few days (as was stated by Mr. Asquith in Parliament in November 1915) and in none of its published weekly returns is it apparent. In all of the Bank Returns issued None

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 during the war you find the £18,450,000 of Bank of England fiduciary issue maintaining its dignified immobility, while, at the same time the country was gradually being bespattered with a mass of paper money issued not by the Bank of England but by the Government. From the point of view of the Bank of England's prestige and even of the English Money Market as a whole it is possible that this fact may have been to some extent useful. Mankind wears such queer blinkers in looking at monetary matters that it is quite possible that some day the London Money Market may be able to point with pride to the fact that although paper money was poured out with a wanton hand during war it was a liability of the Government, and the Bank of England and the Money Market really had nothing to do with it. In fact this legend is already extant. So well informed an authority as Mr. Benjamin Strong, Governor of the Federal Reserve Bank of New York, told a Commission of the American Congress in August 1921, that "the Bank Act was not suspended in England" at the beginning of the war. None

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 The new notes were originally designed to be issued in the form of loans to bankers, who were empowered to borrow up to 20 per cent. of their liability on deposits in the form of Treasury notes, giving a floating charge upon their assets and paying 5 per cent. for the accommodation. (See the Currency and Bank Notes Act 1914, and explanatory Treasury Memorandum.) Naturally borrowing currency on these terms was not a process which the great English banks wished to carry on longer or to a greater extent than was necessary, and some of them never made use of it at all. From the beginning some of them did not borrow Treasury notes but paid for them with a draft upon their balances at the Bank of England, and in a very short time those which had borrowed paid the loans off from the same source, and simply held Treasury notes in place of so much credit at the Bank of England.

Thus the amount of Treasury notes that could be issued was without limit, seeing that the Bank of England's power to create credits in its books, described in our first chapter, was still more unlimited than it had been before. As was there shown the Bank of England's power to create credit was not

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 in any way restricted by law and was only controlled by the effect that it had, directly and indirectly, on the proportion between its Reserve and liabilities and on foreign rates of exchange, and consequently upon foreign demands for gold. During the war these controls no longer had any but a sentimental effect. It is true that the gold standard was in law maintained; the Treasury note was convertible into gold on demand at the Bank of England, the convertibility of the Bank of England note into gold had not been in any way modified by the Currency and Bank Notes Act of 1914, and the right to export gold was not, in law, taken away. Ostensibly and on paper, anybody who had a claim on England could still turn that claim into gold and take the gold away without question. And these facts were of some use for propaganda purposes when put before neutral countries as an example of England's overwhelming financial strength, in that she had been able to maintain convertibility and her gold standard, as compared with the action of Germany, which immediately on the outbreak of war relieved the Reichsbank of the duty of meeting its notes in gold.

In fact this was all "eyewash"; the British public was appealed to on patriotic grounds not

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 only not to ask for gold, but to pay all of its gold into the banks, and did so to a great extent. Anybody who had gone to the Bank of England with a £1,000,000 worth of Treasury notes or Bank of England notes would have found very great difficulty indeed in turning them into sovereigns and would probably never have succeeded in doing so. If he had, he would have had still more difficulty in sending the gold abroad. In the first place he would have known that even to attempt to do so would have marked him as a suspected person. In the second, the cost of doing so was so great, thanks to the activities of Admiral Tirpitz and his submarines, which made the risk very expensive to insure, that it would not have been worth his while at the rates of exchange which were current during the war and were officially maintained by borrowing operations carried out for that purpose. Though convertibility and the gold standard were thus ostensibly and officially maintained they did not count as part of the practical problem. There was thus no reason why the Bank of England should not multiply the figures in its books to any extent that was required of it, by increasing its holding of securities on one side of its Banking Depart-

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 ment's balance sheet and its Public and Other Deposits on the other; and the convention by which Bank of England money had come to be regarded as just as good as cash, presented to the British Government a simple and easy method of financing the war. The Government borrowed from the Bank of England on Ways and Means advances and also by selling to it Treasury Bills, War Loans and other forms of securities created during the war. In so far as the Bank of England took these Government obligations it gave the Government a credit in its books which the Government passed on to shipowners, contractors and others to whom it owed money, and it was thus added to the amount of other deposits included in the balances of other banks. By this method not only did the Government get a certain amount of money in hand to meet current payments, but also, by increasing the volume of cash at the Bank of England which the other banks used as part of the basis of their operations it enabled the other banks to carry huge increases in their deposits without diminishing their proportion between cash and liabilities.

Other banks used this increased credit at the Bank of England either by leaving it there in their balance or by taking it out in the form

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 of currency notes or Bank notes. Obviously, there are limits to which the ordinary joint stock banks can regard a credit with the Bank of England as just as good as cash. It is only so because they can rely, if sudden demands for cash come upon them, on turning this cash at the Bank of England into legal tender currency with which they can meet these demands. But this is a process which takes time and it is necessary for the other banks to be able to meet demands upon them on the spot. Consequently, it is true that the great expansion in bank deposits could not have been carried out if the increase in legal tender currency, provided through the issue of over £300,000,000 of currency notes, had not been available. To this extent it is true that the expansion of credit could not have been carried out without the expansion of currency and to this extent those people are right who maintain that the increase in currency, provided by the Treasury note issue, was the real cause of the credit expansion, which together with the currency increase had such a stimulating effect upon prices and consequently upon the cost of the war. But it is surely idle to spend time in arguing whether the credit increase or the currency increase was the real cause of the rise in prices.

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 They were both causes, and, as the system was worked, neither could have happened without the other.

Such was the effect of the war on the London Money Market. The gold standard was a fiction and it worked on a basis of cash provided by the Government's borrowing from the Bank of England and the printing of Government paper currency. The evil effects upon the community were a great addition, through the consequent rise in prices, to the cost of the war, the violent redistribution of income that follows from the same cause, and the suspicion, suffering and misunderstanding that thence arose. On the other hand it was in favour of producers and of all who use borrowed money and may have helped to stimulate their efforts for war production.

This fact that rising prices are in favour of producers is, within very strict limits, unquestionably an argument on the side of currency expansion and a reason why most producers who think about currency matters are in favour of it. To make the matter clear let us consider what would happen if the volume of currency of all kinds were doubled over-night and the consequent doubled competition for an unchanged volume of goods doubled prices all

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 round. Anybody who had borrowed a thousand pounds the day before this alteration happened would be very greatly benefited. If he were a bootmaker or a merchant or a retail dealer in boots he would find that, his stock of boots having doubled in price, he would only have to hand over half the amount which he would otherwise have calculated upon in order to satisfy his debt. The creditor, on the other hand, would inevitably to the same extent be at a disadvantage, because he would be paid back in money that had lost half its value. Thus currency depreciation is an advantage to debtors and is bad for creditors, while currency appreciation—or a fall in prices—has the contrary effect of putting a bonus into the pockets of creditors who are paid back, or receive interest, in money that has greater buying power than the money that they lent. As a general rule debtors are those who are engaged in active enterprise, production and distribution, industry and commerce. It is part of their business to work on borrowed money, while the creditor class are people who have saved money and rely on its interest to secure the support of themselves and their dependents in their old age, or the representatives of others who have carried out this saving principle in

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 the past and have handed on the proceeds to their heirs.

At first sight the economic advantage of the community lies in making things comfortable for producers and distributors, in other words, for debtors, and if we cannot achieve perfect stability a moderate amount of currency depreciation has something to be said for it, as long as we can be certain of putting on the brake at the right time and as long as we do not inflict too much hardship upon the creditor class and frighten them out of existence. For though the economic service which they render to the community is less obvious than that of the producers and distributors—so much so that many of the rather hasty "reformers" of our economic system blandly dub the capitalist a thief—the fact remains that without the accumulation of capital economic progress is impossible; and it will not be wise to frighten the private capitalist out of existence until we are quite sure that we have secured a substitute that will do the work equally well of providing capital for the further expansion of industry.

Moreover, as will be seen later, the process of currency depreciation, once started, is very difficult to check, and if it is reversed with a jerk is likely to produce even worse disasters

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 than when it was proceeding. If it cannot be checked it leads finally to economic chaos, as exemplified by a story, lately told by Mr. Lloyd George to a Lancashire deputation, of two men in Vienna, each of whom had 10,000 Kronen (Austrian crowns). "One paid 10,000 Kronen into the bank; the other put his into wine. He drank all the wine, but the empty bottles are now worth more than the 10,000 Kronen put into the bank." (Times, July 7, 1922.) Or is this another argument in favour of currency depreciation? Falstaff, that "globe of sinful continents" would swear very heartily that it is.

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the meantime the disorganization of our monetary system had given a new chance to those who had, in days before the war, charged it with lack of elasticity and thought it should now be rebuilt on a new plan. These schemes of reform ranged, as will be shown, from a remodelling of our system according to the pattern devised in Germany and copied in America, to proposals which were based on visions too vague and shadowy to be grasped by an ordinary mind. To sucha mind it would naturally seem that the machinery of business had already been turned upside down quite far enough and that there was no need to make confusion worse confounded by monetary changes the results of which might be surprising to their authors; but it must be remembered that towards the end of the war there was still a very general hope that peace would bring with it a new world, which would be more comfortably arranged for all its members than the one

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 in which we had struggled for an existence in the old Victorian times.

These dreams and aspirations were not altogether as foolish as they seem to be now, when a return to pre-war prosperity looks like a far distant goal, which we can only win with a great effort. We have to remember that the war had astonished us all by showing us how great had been the increase in man's power of production, and in his control over the forces of nature. In this country we had shown that we were able to do far more than everything which we had contracted to do before the war happened, namely, to maintain the mastery of the Allies at sea, to finance our poorer comrades in arms, and to supply an expeditionary force to act on the flank of the French Army. Not only had we done all these things, but we had also created and put into the field an army on a Continental scale; we had provided it with equipment and munitions to an extent that had never been dreamt of as necessary when the war began; and at the same time there had been an appreciable improvement in the standard of living of the working classes.

These things had not been done without making considerable drafts on our capital resources. We had borrowed abroad, though not nearly as much as we had lent to our Allies.

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 We had sold perhaps a thousand millions' worth of the investments which our thrifty forefathers had made in the previous century, by lending money to foreign Governments, by financing the building of railways abroad, and by generally stimulating the production of the whole world by providing it with capital. We had also seriously impaired the efficiency of our industrial and distributive machinery, by being unable, largely owing to lack of labour and material, to maintain the usual rate of maintenance and up-keep that is year by year put into our industrial plant under the item of depreciation.

But after making allowance for all these facts, which account for much of the apparent economic miracle that we had worked during the war, it still remains true that we had shown that there were capacities and powers in this country, and in others, which had not been fully developed in the pre-war period. Perhaps this was because for the first time since the industrial revolution, machinery had been allowed to do its work as well as it possibly could, unhindered by restrictive regulations on the part of trade unions, and by the desire to control output, in order to maintain prices, on the part of producers and distributors. We had worked really hard, some few much harder

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 than was good for them, nearly all of us a great deal harder than we had before the war, in order to provide the goods and services needed for the defeat of the enemy and the maintenance of the population at home. And the result had been that, in spite of the general belief when the war began that it could not last more than a few months owing to the financial exhaustion that it would inevitably bring with it, it had actually lasted for four years, though the demands that it had made on human production had been immeasurably greater than anybody imagined when it began.

There was then this solid material basis for the dreamings of those who had hoped for a new world when the war was over. Productive capacity was very much greater than anybody had believed, and, since man lives on what he produces, life might evidently have been made more generally comfortable, if, when the war was over, all nations and classes had worked together for production and exchange as well as they had worked together, or against one another, for destruction and slaughter. It was a question of good or bad temper, and bad temper won, as was perhaps inevitable after the trials to the temper of the human race which the war had inflicted on it. Bad temper kept the war spirit alive long after it had done its

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 work and gave us neither peace nor war but chaos accompanied by a snarling obligato; and so disillusionment and disenchantment have made us look fools who cherished, during and after the war, hopes that the war would have taught us something. But in their day these hopes were not only real, but had as much justification as many of those with which we comfort ourselves. Moreover some of them may yet come true.

Like a trumpet call they stirred the blood of enthusiasts who thought that this was a good time for reforming our monetary system. Common sense with its stuffy conservatism might suggest that we should first restore our credit machine to its old-time health and efficiency, and then see what could be done towards improving it. But this humdrum policy did not commend itself to the many critics who had always complained of its inelasticity and rigidity. The attack was opened by the late Sir Edward Holden, in his speech to the Shareholders of the London Joint City and Midland Bank, on January 29, 1918. He called the admiring attention of his audience to the principles on which the United States had arranged their monetary system under the new Federal Reserve Banks. Before doing so, he stated that he wished to

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 congratulate the Federal Reserve Board and the bankers of America on having succeeded in creating and building up a banking system which "surpasses in strength and in excellence any other banking system in the world." He showed that before the Reserve System was established national banks in New York, Chicago and St. Louis were required to maintain a minimum ratio of cash to liabilities of 25 per cent. "Under the new system the minimum was reduced to 18 per cent., and in June 1917 by an amendment to the Federal Reserve Act the required ratio was further reduced to 13 per cent. It was also provided that this minimum legal reserve of 13 per cent. should be held as a deposit in the Federal Reserve Bank, as against 7 per cent. formerly, and that cash in the hands of national banks in these cities should no longer rank as legal reserve for the purpose of calculating the ratio." These measures, as Sir Edward observed, very greatly increased the deposits and gold reserves of the Reserve Banks; and he added that, just as the Germans foresaw the alterations that were necessary in their banking law, and proceeded to make them without hesitation when war broke out, so the Americans have not hesitated to make alterations in their banking law since they joined the Allies in the war.

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 The fact that really roused his enthusiasm, when he contemplated the Federal Reserve system, was the huge possibility of expansion that it brought with it.

After analysing the balance sheet of the Federal Reserve Banks, "Let us see," he said, "how much further the banks can extend their loans and create credits on their present cash reserves. The Law requires the notes to be covered by a minimum of 40 per cent. in gold, and the deposits by at least 35 per cent. in gold or lawful money. By reducing the present ratios to the legal minima of 4o per cent. and 35 per cent. respectively, the Reserve Banks would be able to create additional loans for member banks to the extent of about £400,000,000. These additional credits of £400,000,000 would form the base for the creation of additional loans and credits by the member banks of over £3,000,000,000, thus placing them in a position of being able to assist to a marvellous extent in the financing of the industries and any future War Loans."

Certainly, if the creation of more banking credit really makes it possible just by book-keeping entries in the banks of a country to increase its wealth and happiness, the system of the Federal Reserve Board seemed to offer most attractive possibilities; and as will be

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 shown later, theirthere [sic] came a time in the after-war period when those who maintain this simple proposition that continued multiplication and consequent depreciation of the currency really tends to a country's prosperity, in other words that bad money makes us all rich and happy, really had some practical experience to which they were able to point as bearing out this view; and the question whether bad money pays is one which will have to be quite seriously discussed before we have done with the subject.

Sir Edward Holden, of course, would not have admitted that the huge expansion made possible by the Federal Reserve system would have involved anything like bad money, even if it had been carried out to its full extent. He proceeded to argue that since Germany at the beginning of the war altered her Bank Act, and during the war America altered hers, we should do the same thing and repeal the Bank Act which," he said, "has been notorious for increasing our troubles" and has had to be suspended on four occasions. The rather relevant fact, that the last date before the war on which the Act had been suspended was in 1866, he did not mention. The principles for which he contended are those on which other national banks of issue, according to his

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 account of them, worked. These principles are:—

"1. One bank of issue not divided into departments.

"2. Notes are created and issued on the security of bills of exchange and on the cash balance, so that a relation is established between the notes issued and the discounts.

"3. The notes are controlled by a fixed ratio of gold to notes, or of the cash balance to notes.

"4. This fixed ratio may be lowered on payment of a tax.

"5. The notes should not exceed three times the gold or the cash balance."

It will be seen that on these principles indefinite expansion can be secured. The basis of your note issue is not to be as it was in our case before the war—gold except for a fiduciary issue, the amount of which was fixed—but bills of exchange with a certain proportion of gold (one-third in Sir Edward's view), which proportion, again, can be reduced apparently at will by the payment of a tax. Thus, if the community will only draw enough bills of exchange and pay a certain amount of tax, it can have as much legal tender currency as it thinks it wants. Much was said, in the discussion that Sir Edward's proposal aroused.

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 ( Sambhava Parva continued. )

Vaisampayana said, "Then Kavya the foremost of Bhrigu's line became angry himself. And approaching Vrishaparva where the latter was seated, began to address him without weighing his words. 'O king,' he said, 'sinful acts do not, like the earth, bear fruit immediately. But gradually and secretly do they cut away the roots of their doer. Such fruit is seen either in one's own self, in one's son, or in one's grandson. Sins must bear their fruit. Like rich food they can never be digested. And because ye slew the Brahmana Kacha, the grand-son of Angira, who was virtuous, acquainted with the precepts of religion, and attentive to his duties, while residing in my abode, even for this act of slaughter—unfit as he was for it—and for the mal-treatment of my daughter too, know, O Vrishaparva, I shall leave thee and thy relatives. Indeed, O king, for this I can no longer stay with thee! Dost thou, O Asura chief, think that I am a raving liar? Thou makest little of thy offence without seeking to correct it.'

"Vrishaparva then said, 'O son of Bhrigu, never have I attributed want of virtue or falsehooodfalsehood [sic] to thee! Indeed, virtue and truth ever dwell in thee! Be graceful unto me! O Bhargava, if leaving us thou really goest hence, we shall then go into the depths of the ocean. Indeed, there is nothing else for us to do.'

"Sukra then replied, 'Ye Asuras, whether ye go into the depths of the ocean or fly away in all directions, I care little. I am unable to bear my daughter's grief. My daughter is ever dear to me. My life dependeth on her. Seek ye to please her. As Vrihaspati ever seeketh the good of Indra, so do I always seek thine by my ascetic merits.'

"Vrishaparva then said, 'O Bhargava, thou art the absolute master of whatever is possessed by the Asura chiefs in this world, their elephants, kine, and horses, of even my own self.'

"Sukra then answered, 'If it is true, O great Asura, that I am the lord of all the wealth of the Asuras, then go and gratify.


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 about the beauties of the bill of exchange as a "self liquidating" instrument; and it is true that a bill drawn on a solvent acceptor against goods on the way to market has outstanding merits as a short investment. But it was not quite right to assume, as happened, that currency based on bills of exchange cannot be multiplied to excess because there must necessarily be goods behind every bill, and so currency could not increase faster than goods. In fact bills are often drawn without goods behind them, on the credit of the parties; and even if it were possible to exclude such kites from being used as the basis of currency it is still possible that several bills might be drawn against one parcel of goods. Goods generally change hands many times on their way from the producer to the final consumer and if they are paid for each time that they are sold by the drawing of a bill at three months and all these bills could be discounted at the Bank and new notes created against them, a ship load of cotton or copper might easily have ten times its value in notes outstanding on its responsibility. And sometimes when goods do not find a final market bills drawn against them are renewed; and when this does not happen there could always be fresh batches coming forward produced in the same way.

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 Under these arrangements, if carried to their logical conclusion, the task of those who have to maintain the country's gold reserve, on the assumption that a gold reserve is a necessary basis of a monetary system, would be extremely difficult. In one of its exuberant moods the commercial community could demand the creation of fresh currency as fast as it liked, continually forcing up prices, and so putting further nominal profits into its pocket as the process continued. The question of the effect of such a development on the foreign exchanges is a consideration which any individual producer might consider less important than the maintenance of activity and rising prices which were making his profits look so comfortable, and enabling him to make everybody happy by maintaining and increasing the employment that he was giving. The arguments for a Paradise based on unlimited credit expansion are extremely attractive, as long as one does not look at the end of them. The end, when the system is worked to its logical conclusion, has been shown in Russia, and other countries where the currency has become practically worthless.

As it happened, at the very time when Sir Edward was making this attack upon the old system on which the country's monetary

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 arrangements were based, a Committee had already been appointed under the Chairmanship of Lord Cunliffe, who was Governor of the Bank of England during the early period of the war, to consider "the various problems which will arise in connexion with currency and the foreign exchanges during the period of reconstruction, and to report upon the steps required to bring about the restoration of normal conditions in due course," and the following words were subsequently added to the terms of reference:— "and to consider the working of the Bank Act of 1844 and the constitution and functions of the Bank of England with a view to recommending any alterations which may appear to them to be necessary or desirable."

This Committee signed on August 18, 1918, its first interim report which was, in fact, the most important document that it produced. It practically recommended that the Bank Act of 1844 should be restored to full working order, with very slight modifications to meet the altered conditions. It did not admit any need whatever for altering the principles on which the Bank Act had been based.

After giving an interesting survey of the currency system before the war, in which it rather ignored the difficulty which, since the introduction of the Act, the Bank of England

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 had experienced in maintaining its control of the market; and having touched on the changes which have affected the gold standard during the war, laying stress on the great increase in the volume of bank deposits and of legal tender currency; and pointing out that these issues could not be avoided, "given the necessity for the creation of bank credits in favour of the Government, for the purpose of financing war expenditure;" it then proceeded to discuss the measures for the restoration of conditions necessary to the maintenance of the gold standard.

"It will be clear," says the report, "that the conditions necessary to the maintenance of an effective gold standard in this country no longer exist, and it is imperative that they should be restored without delay. After the war our gold holdings will no longer be affected by the submarine danger, and it will not be possible indefinitely to continue to support the exchanges with foreign countries by borrowing abroad. Unless the machinery which long experience has shown to be the only effective remedy for an adverse balance of trade and an undue growth of credit is once more brought into play, there will be a very grave danger of a credit expansion in this country, and a foreign drain of gold, which might jeopardize the converti-

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 bility of our note issue and the international trade position of the country."

It will be noticed that in this and many other passages in the Committee's Report, it assumes that the right to export gold, which was ostensibly still existent during the war, would be maintained. This is an important point to bear in mind, because the trade depression of recent years is often laid at the door of the Cunliffe Committee and the policy that it is alleged to have recommended. In fact the right to export gold except under licence was abrogated by law in the Spring of 1919, and by this measure the whole basis of the policy of the Cunliffe Report was cut away.

The Committee proceeded to recommend that Government borrowings should cease at the earliest possible moment after the war, and that as soon as possible repayment should be begun of a large portion of the enormous amount of Government securities held by the banks. It accordingly recommended that at the earliest possible moment an adequate Sinking Fund should be provided out of revenue, so that there might be a regular annual reduction of capital liabilities, more especially of those which constitute the Floating Debt, and it went out of its way to remark that it was of the utmost importance that such repayment should not

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 be offset by fresh borrowings for capital expenditure, that it was essential to the restoration of the effective gold standard that the money for such expenditure should not be provided by the creation of new credit, and that, in so far as this expenditure was undertaken at all, it should be undertaken with great caution, that this caution was particularly applicable to far-reaching programmes of housing and other development schemes. "The shortage of real capital must be made good by genuine savings, it cannot be met by the creation of fresh purchasing power in the form of bank advances to the Government, or to manufacturers under Government guarantee or otherwise, and any resort to such expedients can only aggravate the evil and retard possibly for generations the recovery of the country from the losses sustained during the war."

"Under an effective gold standard all export demands for gold must be freely met." This observation once more shows that the Committee's whole basis was free export of gold. It went on to point out that some machinery must exist to check foreign drains when they threaten to deplete the gold reserves; that the recognized machinery for this purpose is the Bank of England discount rate; and that when the exchanges are adverse, and gold is being

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 drawn away, it is essential that the rate of discount in this country should be raised relatively to the rates ruling in other countries. It also sat heavily upon the suggestion that the differential rate for foreign money might be maintained after the war, so that money might be made cheap during the reconstruction period for the purpose of home development. Obviously, this differential rate was a war-time measure, which could not possibly be worked or justified under normal conditions.

The Report then went on to discuss the question of limitation of note issue, pointing out that it had been urged in some quarters that in order to secure the provision of a liberal supply of money at low rates during the period of reconstruction further new currency notes should be created, "with the object of enabling banks to make large loans to industry without the risk of finding themselves short of cash to meet the requirements of the public for legal tender money." This also, as the Committee very easily showed, was incompatible with the maintenance of an effective gold standard.

It next proceeded to consider the particular machinery in regard to the control of the note issue, and what modification, if any, might be desirable in the system in force before the war. In the first place, it considered that, though the

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 obligation to pay both Bank of England notes and currency notes in gold on demand should, in its judgment, be maintained, it was not necessary or desirable that there should be an early resumption of the internal circulation of gold coin. It did not think that any legislation on this subject would be required, since the public have become so accustomed to handling paper money that it would not be likely to want to handle gold as long as it was made clear to it through informal action on the part of the banks that it would not be desirable to do so. If necessary, however, the Committee said that the circulation of gold coin could be prevented by making the notes convertible at the discretion of the Bank of England into either gold coin or into bar gold. It also suggested that the gold reserves of the country should be held by our one central institution, and that all banks should transfer any gold then held by them to the Bank of England. This recommendation was actually carried out, more or less completely, in the spring of 1920.

A more questionable suggestion was to the effect that, while the import of gold should be free from all restrictions, "it is not necessary to allow gold coin or bullion obtained otherwise than from the Bank of England to be exported." This provision would have given the Bank of

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 England a control over the bullion market rather inconsistent with London's old claim to be a free gold market.

The most interesting part of the Cunliffe Report, however, was that in which it, in effect, answered Sir Edward Holden's criticisms and discussed the changes that he recommended. It did not mention Sir Edward by name, but observed that the Committee had carefully considered various proposals laid before it concerning the basis upon which the fiduciary note issue should in future be fixed. It had been urged that under the rigid restrictions of the Act of 1844 a famine of legal tender money might ensue, and that it was consequently desirable that these rigid restrictions should be transformed into something more elastic, and that the following principal proposals, either separately or in combination, had been put before it by various witnesses:—

"1. That the Banking and Issue Departments of the Bank of England should be amalgamated.

"2. That the issue of additional notes instead of being required to be covered pound for pound by gold should be freely allowed, subject only to the condition that a prescribed percentage of the total issue should be so covered.

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 "3. That while either an absolute figure for the maximum fiduciary issue, or a maximum determined on a proportionate basis, should be prescribed by law, provision should be made for increases beyond this maximum on condition of a tax being paid by the bank to the Government."

These suggestions the Committee proceeded to discuss, dismissing the proposal for the amalgamation of the two departments of the Bank of England on rather curious grounds. It argued that the effect of the amalgamation of the two departments would be to place deposits with the Bank of England in the same position as regards convertibility into gold as is now held by the note. Presumably there must be something in this argument, or the assembly of very learned and practical gentlemen who signed the Report would not have put it forward; but to the ordinary mind it seems to have very little validity. At present any depositor in the Bank of England can go and draw out his balance in cash, if he desires to do so. In normal times the bank will presumably give him notes or gold to suit his convenience. If the bank exercised its right of paying him in its banking department in its own notes, all that he would have to do would be to go to the issue department and turn the notes into gold.

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 In the opinion of the Committee it is desirable that the issue of currency, by which presumably they mean legal tender currency, should be subject to strict legal regulation, wherein everybody will agree with them. If a nation says that a certain kind of money must be accepted by all creditors in payment of all debts, it certainly has to see to it that that currency is made as good as regulation can make it. But the Report went on to say that the management of banking should be left as free as possible from State interference. Here also it will carry with it the opinion of the great majority of people, especially since experience during and since the war has had the effect of disgusting most people with the results of Government control of everything. But naturally State socialists and others who believe in State control are in favour of putting the whole banking machinery into the hands of the Government, and this is now said to be one of the recognized planks in the platform of the Labour Party. Continental experience, however, seems to show that the last thing which Socialist Governments do is to nationalize anything.

The Committee stated its belief that the amalgamation of the two departments would inevitably lead in the end to State control of

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 the creation of banking credit generally, "a contingency which we are convinced would actually hamper the elasticity and efficiency with which the banks are able to meet the requirements of industry." It is rather difficult to see why the amalgamation of the two departments of the Bank of England should necessarily promote the institution of State control over the creation of credit, but, as has been said, most people will agree with the Committee's view that any such control would have a hampering effect. It is, in fact, very difficult to rouse much enthusiasm on either side concerning this question of the amalgamation of the two departments of the Bank of England. Their existence makes the Bank of England's return rather clumsy and eccentric, but the mere amalgamation would not make the return any more illuminating, unless it were accompanied by very great modification in the direction of more detail and fullness. On the whole it may be said that since the return has been published in its double form for more than three-quarters of a century, and since the proposed change would increase the difficulties of those who have to use it by way of statistical record and would produce little or no practical result, there is a good deal to be said for leaving the statement in its old form.

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 The much more important question of allowing the issue of fiduciary notes without limit, subject only to a fixed percentage of the total issue being held in gold, was argued as follows by the Committee. "If," it said, "the actual note issue is really controlled by the proportion, the arrangement is liable to bring about very violent disturbances. Suppose, for example, that the proportion of gold to notes is actually fixed at one-third and is operative. Then, if the withdrawal of gold for export reduces the proportion below the prescribed limit, it is necessary to withdraw notes in the ratio of three to one. Any approach to the conditions under which the restriction would become actually operative would then be likely to cause even greater apprehension than the limitations of the Act of 1844." It therefore unanimously decided that there were substantial objections to basing the note issue of this country on any proportionate holding of gold.

With regard to the plan of fixing a maximum absolute limit subject to the condition that this limit might be exceeded on payment of a tax, the Committee argued that unless the tax were fixed at a sufficiently penal rate to secure that the normal fiduciary issue is not exceeded except in the circumstances of real emergency,

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 and then only for a strictly limited period, the system might afford dangerous possibilities of excessive speculation and lend itself to the development of crises which more stringent safeguards might have averted altogether.

Criticism on these lines had often before been applied to the German plan and also to the arrangements recently adopted by the United States. The Committee pointed out that the latter had not yet been tested by experience, and that it was impossible to say how they would actually operate. Certainly most people will agree that the argument from the experience of the Federal Reserve Board of the United States is not yet one which could be admitted as a practical one for English purposes. Since the Federal Reserve Board came into existence America's financial position has been quite abnormal, owing to the huge profits that were poured into the country by the clamouring demand of the warring powers for goods and services that America was able to produce at an enormous profit to herself. In payment for these goods and services a mountain of gold has been piled up by the United States, and the chief pre-occupation of the Federal Reserve Board now appears to be to prevent the expansion of credit which this great addition to the country's gold store makes possible and would

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 have brought into being if its effect had not been checked by deliberate control.

The Committee also observed that, in view of the comparison with the systems prevailing in foreign countries which have been put forward by various witnesses, it wished to point out that these countries did not in practice maintain the absolutely free gold market which this country by reason of the vital importance of its position in international finance was bound to do.

It then summed up strongly in favour of the old system—absolute restriction of legal tender except in so far as it could be increased by an addition to the gold stock of the country by imports from abroad. In doing so it decided in favour of a policy which is naturally disconcerting to bankers, producers and distributors in so far as they regard their own convenience merely. Those who want to do business and finance business could do so much more comfortably if it is always possible to expand the supply of currency and credit whenever their convenience makes it desirable to do so. On the other hand unlimited expansion when carried to its logical conclusion produces economic chaos, and therefore obviously some sort of regulation is essential. The convention by which mankind used the precious metals

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 as a medium of payment imposed the rough and ready regulation arising from the limit on their supply. By the use of paper money convertible into metal, it has been possible to combine this regulation with great expansion and elasticity; and as long as convertibility is retained as the foundation stone of the monetary edifice, the only question that is open to argument is the extent to which this expansion and elasticity should be allowed to proceed.

Sir Edward Holden wanted a greater degree of expansion to be secured by a note issue, not limited absolutely by the amount of gold in the country, but expanding in proportion to the amount of gold. As the Committee was able to show, this system, if really effectively working, raises possibilities of disturbance and dislocation much greater than under the system of an absolute limit. With an absolute limit as we had before the war, if a million pounds' worth of gold is taken from the Bank of England a million pounds' worth of notes have to be cancelled. Under Sir Edward's proposal of a three to one proportion, if a million pounds' worth of gold were exported three million pounds' worth of notes would have to be cancelled. The Committee were surely right in pointing out that the apprehension of this

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 possibility would be very much more disturbing to the business community.

Sir Edward's further suggestion that the proportion of gold to notes might be lowered by the payment of a tax takes away regulation altogether, except the regulation implied by expense, which at times of exuberant gaiety or desperate need is a negligible consideration; this system allows the community to insist on the creation of legal tender currency to any extent that it is prepared to pay for.

On the whole it seems that the arguments used by the Committee in favour of the absolute limit have a balance in their favour, especially when we remember that by the altogether uncontrolled right of the Bank of England to create credit in its books for any borrowers to whom it chooses to lend, and the convention which allows the other banks to regard a credit at the Bank of England as "cash," the apparently hard and fast restrictions of the Bank Charter Act have been made much less tyrannical in their working than they might appear to be on paper to those who do not understand the true inwardness of the British monetary system.

Having thus decided in favour of the maintenance of the principle of the Act of 1844, the Committee proceeded to recommend that the

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 Act should be modified so as to make provision for the issue of emergency currency in times of acute difficulty, and it came to the conclusion that the provisions of the Currency and Bank Notes Act of 1914 should be continued in force, under which the Bank of England may, with the consent of the Treasury, temporarily issue notes in excess of the legal limit. Thus, instead of the Bank of England being unable to issue any un-covered notes beyond the statutory limit without breaking an Act of Parliament, and consequently having to get a letter from the Chancellor of the Exchequer promising them that he would secure for them an indemnity from Parliament for so doing, they will in future only have to get the consent of the Treasury. There seems to be very little real meaning in this alteration, seeing that under the existing system the Chancellor would naturally not meet the request of the Bank of England for the power to break the law, without consulting his official advisers at the Treasury. This change is therefore merely one of form rather than of principle. The essential thing is that before the Bank can break the statutory limit it will still have to get permission from Whitehall. This necessity, we may be sure, it will move heaven and earth to avoid.

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 The Committee also observed that it will of course be necessary "that the Bank Rate should be raised to and maintained at a figure sufficiently high to secure the earliest possible retirement of the excess issue." It will be remembered that before the war began the nerves of the public, already quite sufficiently harassed by the closing of the Stock Exchange and other untoward events, were disagreeably startled by a sensational rise in the Bank Rate from 4 per cent. to 10 per cent. in the course of a week. This was because according to precedent the Bank Act could not be suspended without a 10 per cent. Bank Rate, and so, though the rise in Bank Rate did not do anybody any good at the time, and had not the smallest effect in checking demands for credit, it had to be carried out, in order to fulfil the requirements of the dreamy archeologists in whose eyes it was above all important, when Europe rocked, that a monetary crisis should be carried out strictly according to precedent and with due observance of the ceremonial hallowed by tradition.

After prolonged calculations the Committee came to the conclusion that the normal minimum amount of the central gold reserve to be aimed at in the first instance in the after-war period should be £150,000,000—an amount

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 which was at that time already practically available in the hands of the Bank of England, the currency note department and of the other banks—and that until this amount had been reached and maintained concurrently with a satisfactory foreign exchange position for at least a year, the policy of reducing the un-covered note issue as and when opportunity offered should be consistently followed; that the currency note issue should be finally replaced by a Bank of England issue, but not until the future dimensions of the fiduciary issue had been ascertained; that during the transitional period the issue should remain a Government issue, but new notes should be issued, not against Government securities, but against Bank of England notes; and furthermore that when opportunity arose for providing cover for existing un-covered notes, Bank of England notes should be used for this purpose also. Demands for new currency would then fall in the normal way on the banking department of the Bank of England. Finally, when the fiduciary portion of the issue had been reduced to an amount which experience showed to be consistent with the maintenance of a central gold reserve of £150,000,000, the outstanding currency notes should be retired and replaced by Bank of England notes of low denomination.

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 Just after the issue of the Cunliffe Committee Report another important Report was produced by a Committee appointed at the end of 1917 to consider whether the normal arrangements for the provision of financial facilities for trade by the existing banking and other financial institutions would be adequate to meet the needs of British industry during the period immediately following the end of the war, and, if not, by what emergency arrangement they should be supplemented. This Committee's report was dated November 21, 1918, and it made some interesting observations concerning the working, not of our monetary system as a whole as regulated by the Bank Charter Act, but of our banking system in its relation to the provision of the needs of its customers for credit.

"Having regard," it said, "to the fact that the very great expansion in credit which has taken place during the war will probably persist for a considerable period after its termination, we are unanimously of opinion that, if the of industry and commerce is to be achieved on permanent and sound economic lines, some restriction must be imposed at as early a date as possible upon the creation of additional credit by the restoration of an effective gold standard. To attempt to re-build

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 industry by means of a further indiscriminate expansion of credit would not only endanger our position as the financial centre of the world, but would inevitably lead before long to grave disaster."

It also laid stress on the need for the immediate cessation of State borrowing after the end of the war. It pointed out that commercial capital issues had been largely in abeyance since the beginning of the war, and that consequently there would be a very heavy demand by trade and industry for new capital, and that State borrowing could only be undertaken in competition with these demands. It further expressed the opinion that any Government guarantee to bankers to enable them to provide by means of credit the fixed capital expenditure necessary for the of industry was undesirable as being likely to cause a further expansion of credit, together with an additional rise in prices.

This Committee by laying down these principles thus took a firm stand against the many prophets who were proposing to lead us into a new economic Paradise, merely by the unlimited expansion of credit. It pointed out that for capital purposes what was required was not credit but capital, and that capital could best be provided, not by making entries in the

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 books of bankers, but by somebody saving money and handing it over to industry to be used for purposes of development. As to banking facilities, it defined them as the normal requirements for carrying on the ordinary business of the country, "which assumes the granting of loans which do not constitute a lock-up of funds such as would impair the liquidity of the resources of the banks." For this purpose it was informed that the banks would be able to provide all the necessary facilities during the transition period. In fact, only the most embittered critics of the English banking system have maintained that it showed any inability to provide credits of this kind, that is to say, real banking credit involving no long lock-up. His more moderate assailants have only charged the English banker with being too much inclined to insist on confining his activity to this kind of business, though it is clearly the right business for a banker who has an enormous amount of liability in the shape of current and deposit accounts, which may be called from him on demand or on short notice. For such a banker to indulge in giving long credit and so locking up his funds in enterprises which cannot be called liquid is clearly a policy involving very great danger. The critics of the English banks have never been tired of

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 proclaiming that the German banks, for example, have been able to assist industry much more readily and extensively than their English rivals, by making advances to it on terms which were not strictly of a banking character, according to English ideas. The German banks work with their own capital, as opposed to their customers' deposits, much more than the English. In so far as they do so they are not doing what we call banking, the essence of which is that you borrow money, repayable practically at call, and lend it. Lending shareholders' money which you have got for all time is quite a different business.

This contention was dealt with and to a certain extent admitted by the Financial Facilities Committee. Under the heading of Extended Credit Facilities it included "loans involving a lock-up of funds for a more or less extended period and secured upon assets not readily realizable, including loans required for giving long trading credit, either at home or abroad, and loans secured against capital goods which are either dependent upon future profits for repayment, or will be replaced ultimately by an issue of new capital."

It considered that the banks as at present constituted, however willing they might be, would only be able to provide credit of this kind to

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 a limited extent owing to the necessity for keeping a large part of their funds in a liquid state. It accordingly suggested that it would be necessary for the banks "to exercise discretion upon rather broader lines," and in order to enable them to do this with some safety and confidence, it was strongly of opinion that the banks should make a considerable increase in their paid-up capital. The Committee also made the curious suggestion that bankers should make more widely known their willingness to accept deposits for long periods at fixed rates of interest, and expressed the belief that if they were encouraged to do so a number of depositors would be willing to deposit their money at fixed rates of interest at periods of from one to five years without the right of withdrawal.

Presumably the Committee had some good ground for making this statement, but it seems that any depositor who was asked to lock his money up definitely for five years, during which time he would have no opportunity of getting his cash back in case of an emergency, unless somehow or other a market could be established in bankers' deposit receipts, would think twice or thrice before he did so. The Committee also considered that the principal manufacturing establishments of the country should

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 increase their capitals by appeals to the public for subscription, thus enabling themselves to rely less upon banking credit for their operations. But, besides all this, it thought that institutions to provide additional assistance for trade and industry by developing similar facilities to those which have been given by the German banks were necessary. In this connection it noted the formation of the British Trade Corporation, whose career has since provided the City, always suspicious of semi-official enterprise, with some malicious satisfaction. Launched on a career of expansion in the after-war fever, with no solid mass of sound old business to lean on, with no hidden reserves to be used for concealing unfortunate slips, it showed some considerable losses when the fever gave way to anemic debility.

The Committee also made some sound and practical suggestions for an improvement in the machinery for promoting enterprise, and offering for public subscription new issues of capital. It pointed to the machinery already in existence, consisting of a group of financial houses, comprising investment trust companies, well-known issuing houses, merchant bankers and others, and it thought that it was within the power of this important group to render further assistance by identifying themselves with pro-

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 ductive industries in this country, and rendering financial support in the early stages of development, ultimately undertaking the placing of the issue of new capital with the investor, and that the institution of a system of working arrangements between the members of this group and the various joint stock banks would be of great assistance.

These two documents, the Cunliffe Report and the Financial Facilities Report, thus pointed the way back to sanity in money matters along safe and cautious lines. In effect they told the Government to leave off the manufacture of new currency and credit and to re-establish our legal tender currency on the foundation laid by the Bank Act of 1844, and they told industry that the capital that it required should be found through the process of saving and investment instead of through the extension of bank credits. But they were very far from preaching drastic deflation and rapid contraction of credits. The Financial Facilities Report, as quoted above, only urged "some restriction" upon the creation of additional credit. The Cunliffe Report spoke of an "interim period beginning after the completion of demobilization, during which it is probable that the present issue of Currency Notes will have to be gradually reduced." It

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 referred to a suggestion put before it in evidence that the un-covered issue should be reduced at the rate of not less than 3 per cent. per annum of the outstanding amount, and doubted whether it would be possible to work to any precise rule. It concurred however in the suggestion that, when reductions have taken place, the actual maximum fiduciary circulation in any year should become the legal maximum for the following year, subject only to the emergency regulations already described, by which in future what used to be called suspensions of the Bank Act would be carried out with the permission of the Treasury.

The Cunliffe Report was dated August 15, and the Financial Facilities Report November 21, 1918. Thus by the time the Armistice came a body of sound doctrine was in existence, reminding us of some of the common sense facts that had once been regarded as platitudes, but had been lifted into the position of almost forgotten ideals by the financial crimes and futilities committed by our War Governments.

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need hardly be said that the doctrine preached by the Cunliffe Committee and the Financial Facilities Report was not put into practice as soon as the war was ended. This could not have been expected, even if war's strained excitement had not been followed by an outburst of peace hysteria that was perhaps still more virulent. If we had all been sane and sober as judges, it would have taken some time to adjust our financial system to the circumstances involved by the rearrangement of industry on a peace basis. As it was there was an amazing outburst of political and economic optimism, followed by violent reaction; and these changes of sentiment were accompanied by monetary measures the effects of which are of special interest for the light that they throw on a monetary theory which has since become fashionable.

For this reason it is necessary to remind our-

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 selves of the outlines of this curious and interesting chapter in our history.

As everyone knows the war was followed by a spell of delirious trade activity accompanied by a violent rise in prices, high wages, large profits and rampant extravagance on the part both of the Government and of the individuals composing the nation. The consequent collapse came much sooner than was generally expected and was so violent and headlong in its course that it left most of our financial institutions amazedly gasping at their own dexterity, or good fortune, in having survived it. It is easy to be wise in the light of what has since happened concerning the folly of the behaviour of most people during the after-war period, but in fact it was just a very human and natural reaction after the strain of the war, quickened and exaggerated by the promises held out by the Government during the General Election of 1918. During the course of this contest the country was persuaded that, if the Government which had won the war were returned to power, it would secure a just peace under which Germany up to the limit of her capacity should be made to pay for the whole cost of the war, that the Kaiser and those chiefly responsible for outrages during the war should be punished and that social and

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 domestic reform should be carried out with a generous hand so as to make this country fit to be lived in by the heroes who had served it so well on the field of battle.

A great programme of reconstruction was thus to be taken in hand, largely at the expense of our defeated enemies, against whom a strongly vindictive feeling was still prevalent. The old-fashioned English habit of hammering your enemy as hard as ever you can when fighting, and then, when you have beaten him "thorough and thorough," of picking him up and shaking his hand and letting him off much too lightly was gone, except in the minds of a small minority, and had given place to a feeling of lingering hostility and vindictiveness.

Here again we have to remember the special circumstances of the war out of which we had emerged. Former wars had been fought by a comparatively small number of the population of countries engaged, with comparatively little interruption to the ordinary life of the greater part of the nation. This time the horrors of war had been brought home to nearly every inhabitant of the countries concerned owing to the enormous number of the combatants engaged and the consequent bereavement and loss spread over the whole population owing to the high proportion of casualties, also by the

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 privation inflicted even upon the most prosperous members of the community by the impossibility of securing many comforts, necessaries and luxuries to which they had usually been accustomed, and finally by the effect of air raids which had inflicted actual physical suffering upon many civilians who had risked their lives without the satisfaction of being able to feel that they had a chance of endangering somebody else's. For these reasons it was evidently much more difficult to leave off the war spirit as soon as the war was over than it had been when war was a more or less gentlemanly business, with its most uncomfortable effects largely confined to the fighting forces, which at least had the pleasure of inflicting what they suffered. Moreover it was felt that the Germans in the matter of poison gas and many other things had introduced new and unnecessary beastlinesses into war, and that the destruction—much of it quite wanton—wrought by them in France and Belgium made it essential in the interests of international justice that retribution should be strict and severe.

Thus justice and vindictiveness joined together to show that Germany ought to pay every penny that could be wrung out of her. It is true that the Allies had agreed, before

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 granting the Armistice, that the indemnity was only to cover damage to civilian property by land, sea and air. But legal ingenuity combined with poetic imagination in following out chains of consequential damage due to consequential losses and so ad infinitum could evidently put as many noughts on to the bill as would suffice to appease the groundlings. Nevertheless the inclusion of the cost of pensions in the Reparations bill always seemed to me to be an ugly blot on the scutcheons of the Allies; though it has been supported by authorities whose judgment and integrity are above question.

For this vindictiveness against the beaten enemy, un-English as it was, there was, as has been shown, a good deal of excuse, but the amazing thing is that there was so little readiness to show more forbearance to our Allies. On this point I am not, as we say in the City, "jobbing backwards," for before the end of 1918 I expressed in print the view that it would be a generous act, which would cost us nothing, to clean the slate of international indebtedness as far as we could by wiping out the whole of the debts due to us from our Continental Allies. They were poorer than we when the war began, had suffered much more from the war, were most unlikely ever to pay us a shilling, and if

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