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 they did, would do so with a sense of grudging injustice that would embitter their hearts against us. If our Government had only then had the sense to make a bonfire of the promises to pay of our Allies, they would not have cost us a Stiver and they would have made a gesture of generosity which would have had a quite immeasurable effect on the economic atmosphere in Europe, in America, in the rest of the world and at home in England.

As it was, the fashionable sentiment, both in international affairs, home politics and in industrial matters, favoured getting as much as possible out of anybody who could be squeezed. Abroad this sentiment was one of the reasons why it took a most unconscionable time to put together a Peace Treaty, which when it was put together produced anything but peace, and that the Reparations problem developed into that dreary mixture of tragedy and farce of which more will have to be said later.

At home the Government instead of telling us, what it ought to have known if it did not, that in some ways the most difficult part of the war began when it was over, encouraged us in the belief, already much too prevalent, that the country's wealth was unlimited and there was a bottomless purse into which everybody could dip for the purpose of carrying out any reform

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 that he thought desirable for himself or for the community apart from any question of the energy and efficiency with which the community did its work. It has been shown above that the war revealed a quite astonishing capacity for production on the part of this country when the working power of the community was really set to work as hard, or nearly as hard, as it could. Under these circumstances we had apparently performed economic miracles, and the very dangerous delusion was rife during the after-war period which taught that economic miracles could be continued without the tremendous effort and whole-hearted co-operation which had marked our productive achievements during the war. If the land was to be made fit for heroes to live in, it could only be made by a continuance of the hard work and goodwill which had made it victorious during the war. The assumption that it could be done at the expense of some fund already in existence and that the rock only had to be struck hard enough in order to produce a stream of prosperity led the working classes of this country along a path which ended in grievous disillusionment.

It was shown only too clearly that the Government's purse very soon reaches bottom unless it is filled by a stream of goods and

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 services provided by the community or by some foreign lender or debtor. We had ceased to borrow abroad and Germany had not begun to pay. It was not really possible for us all to be happy and prosperous by deciding not only to work shorter hours but also to work with much less enthusiasm during the time we spent at our job, and by also insisting on the restoration of many regulations and controls which before the war had hindered the output of industry. A system under which each worker, while making a smaller contribution to the general output, should at the same time receive a larger share of it in return for his lessened work was really too good to be true. These platitudes had to be brought home to the working-class community through a series of disastrous industrial disputes which very seriously hindered the economic recovery of the country.

Here, again, the accusations freely brought against the working classes of some special spice of villainy or of an abysmal ignorance of economic conditions are by no means justified. The inferences that they drew from their war experience were quite reasonable and natural. With the country engaged in a fearful and costly struggle, they had seen a very large number of the employing class amassing

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 enormous profits in spite of taxation designed to prevent their doing so; they had seen amazing things happen in their own class, as when one member of the family faced all the hardships and dangers of exposure and of warfare in a mine sweeper, for pay which left him very little better off than an ordinary seaman before the war, while his brother or his cousin who stayed at home because he was not physically fit to fight, earned wages which may have ranged from £15 to £20 a week in a munition factory, or, if he happened to be a shopkeeper, might amass a fortune which enabled him to start a county family. Such had been some of the economic effects of the war, contrary to all logic or common sense, and largely due to bad war finance.

It is not to be wondered at that having seen such things before their eyes the working classes of the country should come to the conclusion that practical sense did not count in money matters, and that anything was possible for those who only persisted in demanding it with a sufficiently loud voice. They believed, and with good reason, that immeasurable economic injustice had been inflicted during the war especially upon the best men of the community who were fighting its battles at the front; and they argued that it was at any rate

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 worth trying whether they could not, by insisting on a larger share of the national output in return for much less work, put some injustices right by securing for those who did the hard, dirty and uninteresting work of the world a better share of the goods which they helped to produce. They had to find out by bitter experience that it is only by increasing output and making trade prosperous that they could make their demands for better conditions felt. But there is nothing strange about economic mistakes made by uneducated folk, at a time when our leaders, who believed themselves to be the fine flower of the nation's intellect, were wallowing up to their eyebrows in economic and political error, and the mighty brains that directed industry and finance were making enormous miscalculations about the staying power of the after-war demand for goods.

In fact, as we all know, it is human to err; and in the after-war reaction we were all very human indeed and erred with hearty and unanimous vigour, with a few very select exceptions who were not quite human and so did not join in the erroneous orgy. The rest of us, fired by determination to go on beating the enemy after the end of the war, to create an earthly Paradise at home at the expense of

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 somebody else, to pocket big profits, big salaries or big wages while doing as little as possible to earn them, and generally to have a glorious time because peace and plenty had returned and there were cakes and ale, and ginger, by Saint Anne, was hot in the mouth, naturally and inevitably spent, collectively and individually, extravagantly and recklessly.

Any attempt to balance expenditure and revenue was felt to be unsuited to the atmosphere. The national debt, in fact, went on increasing from the Armistice date, November 1918, until the end of December 1919. Even if Mr. Gladstone and Lord Welby had been in charge of the national finances, it would have been impossible, as soon as the war was over, to bring outlay within income. Very heavy expenses were involved by demobilization of the army and by the problem of returning to ordinary industry the millions of men who had been in the fighting line and in the field or on the lines of communication, or who had been employed directly or indirectly on work for war purposes. On the whole it may be said that this business of getting the great majority of them back into ordinary industry was carried out with astonishing rapidity and success, for which the Government, in the midst of the chorus of criticism

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 which began to arise under the pressure of disillusionment, did not receive the credit to which it was entitled. And there can be no doubt that official extravagance, commercial recklessness and miscalculations, private profligacy and the inflation that they all helped to produce, at least did something to ease and quicken the work of demobilization in the widest sense of the word, and the adjustment of industry from war to peace conditions.

So much had to be said about the temper and sentiment that ruled in the after-war period, because their effect upon the monetary matters which are the subject of this inquiry were like Sam Weller's knowledge of London, extensive and peculiar. Under their influence the expansion of currency and credit that have been shown to have been one of the most aggravated symptoms of bad war finance, continued with quickened inflammation, produced at once by the needs of a spendthrift Government, the cravings of industry and commerce, intoxicated by the prospect of a world-wide insatiable demand for goods at any price that might be asked, and the clamours of eager consumers, in full reaction from the privations, enforced and voluntary, of the war period. And so prices, after a momentary dip after the Armistice, went rollicking ahead for nearly a

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 year and a half, before they dropped like a stone in the last three quarters of 1920.

In the Money Market, in the strict sense of the phrase, the outstanding event of the after-war period was the formal abandonment by England of the gold standard in March 1919 by the prohibition of gold exports except under licence. By this measure we went legally and definitely on to the paper currency basis, on which we had actually been standing, or rocking, all through the war. Convertibility of our legal tender currency into gold on demand was and is still the law of the land, but a very interesting example of the enormous power and prestige of the Bank of England is the ease with which on this point it ignores the law and goes scatheless. When a Home Secretary packs off some people to Ireland in the belief that he is acting legally and then finds that he is not, he is made to produce their persons and is put into a very uncomfortable position, from which he has to be rescued by a Bill of Indemnity. When people present a five pound note to the Bank and ask for gold which it is legally bound to pay, it reasons with them kindly and points out the error of their ways, and they go away with no gold in their pockets but a virtuous glow in their hearts, as if they had had their souls shampooed by a bishop.

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 But such attempts to get gold, even if likely to be successful, would be quite futile for practical purposes, unless any gold so secured could be dealt with according to the desires of him who gets it. It is of no use to be able to take gold out of the Bank of England unless one can send it abroad, if this happens to be the cheapest method of paying a debt to a foreign creditor. For purposes of hoarding at home it might offer attractions to a few feeble-minded people; but the practical benefit of the gold standard is the fact that thereby you link your currency with those of other gold standard countries and in effect use the same currency as they do. When once the right to send gold abroad is taken away there is no link between the world's currencies, and variations in the price levels in different countries are no longer restrained by the fact that currency can move from one country to another, raising prices in the country to which it goes and lowering prices in the country which it leaves. And it also follows that when once the golden link is snapped, the prices of different currencies as expressed in one another through rates of exchange, can vary down to zero and up to an astronomical zenith.

It was generally admitted that the Government had no choice in making this regulation.

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 The New York exchange which expresses the sterling price of money in New York had been, as we all remember, "pegged" since January 1916 in the neighbourhood of $4.76½ to the £. This peg was withdrawn in the Spring of 1919 and the American exchange immediately began to move against London owing to the great demand for American goods at high prices, not only in this country but all over Europe—and Europe's demand for dollars was, then as at other times, largely financed through London—and also owing to the rapidity with which inflation was proceeding here. Under such circumstances, since the submarine danger was no longer protecting the English gold standard, it was inevitable that people abroad who had balances in London should want to turn them into gold and send the gold to America to be converted into dollars and so miake the handsome profit which was offered by the rate of exchange. English bankers, when these demands for withdrawal came upon them naturally asked the Government what they were to do and the Government met the situation by prohibiting the export of gold except under licence.

Most people thought that it had to be done, but it is interesting to wonder whether it would not have been possible for England to meet

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 the situation by the good old banking rule for meeting a drain—that is by saying, with a stiff upper lip and an air of calm confidence, "Take your money as fast as you like." It is usually said that if we had attempted to do this all our gold would have immediately left the country and gone over to America; but this is by no means certain. In the first place it could not all have gone at once because even without the submarine danger there are very decided limits to the possibility of insuring gold shipments against ordinary marine risks. It is not possible to dogmatize about this because to a certain extent it is a question of the price that will be paid. I am told by those who ought to know that any shipment of more than £4,000,000 of gold in one bottom would have been very difficult to underwrite in the ordinary course of business in London and other centres, and that the insurance of such a shipment would only have been even considered on a first class liner, of which probably not more than two, and sometimes not so many, would have left a possible port of shipment during a week. Thus the process of draining away our gold supply, which stood at the end of the war at about £150,000,000, would necessarily have been slow. If we had shown that we had meant to allow it, it would certainly have been

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 a cause of considerable apprehension to the authorities of the United States Federal Reserve Board. They were already embarrassed by the great mass of gold which they had accumulated during the war and by the enormous possibilities of credit expansion which their system allowed to be built up upon this basis. Indeed, it may be said that since the war the Federal Reserve Board has been chiefly anxious to prevent America's huge holding of gold from having its natural economic effect, by producing an enormous expansion of credit and currency and so turning the exchanges of the world against America and driving some of the gold out.

Given a mountain of gold and the American temperament, an outburst of Gargantuan consumption indulged in by the latter might soon be relied on to disperse the former, unless artificial checks had been applied, and such an outburst might have been best in the long run for all parties concerned. But the Federal Reserve authorities working an untried machine along an unknown road, with an extremely suspicious and critical public ready to pelt them if they made a mistake, were not at all inclined to take risks. And big risks would have been involved if they had allowed their gold to work its own cure, through an expansion of credit

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 and currency, with an orgy of extravagance and speculation and consumption of the goods and securities of other countries, ending in adverse exchanges and exports of gold.

This natural solution of the question being too exciting a "proposition" for the nerves of the Federal Reserve Board, America has had to sit on an enormous mountain of gold while its financial rulers have done their best to prevent it producing the economic results which its presence would naturally have worked. Their task would evidently have been made much more difficult if gold had begun to come from England at the rate of 8 or 10 millions a week; and it is certainly possible that in any case, if England had shown a sufficiently stiffnecked determination to pursue the policy of allowing gold to go, the result might have been a working agreement between ourselves and America by which exchange equilibrium between the two countries would have been maintained at a point which would have prevented a continuance of the drain of gold.

There is, as least, something to be said for the view that the Government, rather than hauling down its colours on the matter of the gold standard much sooner than it need have done, might have tried a bluff and let a certain amount of gold go, and waited to

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 see what happened. We might possibly have held the gold standard and been brought back, much sooner than we were, to sanity in money matters. As it was, we kept our gold and lost our gold standard definitely though temporarily, when the export of gold was forbidden. At the same time an arrangement by which the output of the South African mines had been taken over by the Bank of England at the mint price was dropped and the market was freed for any gold, for the export of which a licence could be obtained. The consequence of this has been that the gold from the South African mines has gone regularly week by week to New York, except on rare occasions when a demand on account of India or China has diverted a fragment.

Less important changes in the working of the Money Market were the dropping in May 1919 of the system by which the Bank of England borrowed from the Clearing and other banks their surplus cash balances, and later in the same year, in October, the special rate given for foreign money was also dropped. This was a war time measure which could not possibly have been continued into peace. In war time the censorship of telegrams and letters made it more or less possible to trace the actual purpose of financial transactions, and to see that

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 money which earned the higher rate as foreign, really was so. In peace there was no such safeguard, and in any case the differential rate is not wanted in peace time. It was less wanted than ever in the after-war period, since the movements of credits to and from this country was then largely regulated by movements in exchange which were already sufficiently erratic and violent to make the question of the rate earned by sums left here an almost negligible item in the consideration of those who controlled them.

Attention has already been called to the change in the working of our Money Market that had been produced by the enormous total of the floating debt created during the war. The existence at the end of the war of over a thousand million of Treasury Bills outstanding, of which between £300,000,000 and £400,000,000 were probably in the hands of the banks and other professional dealers in credit, clearly made it difficult for the Bank of England to secure real control of the monetary position. If these professional holders of Treasury Bills took it into their heads to want more credit, at a time when the bank wanted them to have less, they had only to present them day by day for payment instead of renewing them on maturity and they could compel the Govern-

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 ment to create the necessary credit for meeting them by borrowing from the Bank of England on Ways and Means advances and so increasing the amount of cash at the Bank of England held by the other banks.

For this and other reasons it seemed that the volume of outstanding Treasury Bills should somehow be reduced, and with this intention a funding loan was offered in June 1919. All the organization and energy which had been so successfully developed during the war for encouraging subscribers to war loans to lend as much as they possibly could and as much more as they could borrow from their bankers was put into commission to secure the success of the funding loan, but this success was conspicuous by its absence. Already the country was decidedly anxious about the scale of Government expenditure and investors had become imbued with the belief that the only way to make the Government economize was to refuse to provide it with money. They were decidedly sceptical as to whether the sums which they lent would be used for the alleged purpose of reducing the floating debt and openly expressed the opinion that the Government was almost certain to expend it upon other objects. This contention was proved to be almost exactly correct by one of the most

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 curious arithmetical coincidences on record, namely, the fact that the amount of cash produced by the loan was £473,000,000 and that £473,000,000 was also the amount of the deficit for the financial year, estimated by Mr. Chamberlain in a speech which he made in the Autumn.

This failure of the funding loan was interesting as the first indication of the growing wrath of the taxpayer concerning Government expenditure and the suspicion of investors concerning official promises. This suspicion was increased by a rather absurd attempt to continue war camouflage into peace finance. Mr. Chamberlain's reputation for an integrity quite unusually high among politicians makes it all the more remarkable that he should have brought pressure on the banks to make the success of this loan look much greater than it was, while at the same time impairing its real effectiveness. The result that was really wanted from the loan was that Treasury Bills in the hands of the banks and other official dealers in credit should be paid off out of money genuinely subscribed by the public for that purpose. Yet when the loan was found not to be going as well as was hoped, pressure was brought upon the banks that they should themselves subscribe money out of which their Treasury Bills were to be

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 paid off with the result that they, instead of holding Treasury Bills, would merely have held a longer dated security. It is true that if they had done so their power to call upon the Government to manufacture fresh money for them would have been reduced; but one of the chief purposes of the loan was to restore order into chaotic money conditions and enable the banks to get back to their real business of financing industry; this was to be done by paying back to them money which they had lent for the war, and this purpose was defeated in so far as the banks themselves were asked to contribute money to pay themselves off with. It was suggested that the banks should underwrite a certain amount of the loan and one of the last acts of Sir Edward Holden, just before he left for the holiday from which he never returned alive, was to refuse to do anything of the kind and at the same time to make application for an amount of the loan which was very much less than the Government had asked him to underwrite. The final result of these proceedings was that out of the £473,000,000 secured by the operation £92,000,000 were provided by the banks.

As the year 1919 went on our rulers began to wake out of the dreams into which they had drugged themselves and the country. In

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 August Mr. Chamberlain made a speech in the House of Commons in which he called emphatic attention to the unsatisfactory state of the Government finances and went so far as to include the phrase "national bankruptcy" in his sketch of what was going to happen if extravagance in expenditure was allowed to proceed at a pace so much faster than the inflow of revenue. The country was startled and alarmed by the statement, and some of us wondered why, if these things were so, the Chancellor of the Exchequer did not either cut down expenditure or raise fresh revenue. But Parliament adjourned with nothing done, and in November there came a rise in Bank Rate and a Treasury Minute. Bank Rate had stood at 5 per cent. ever since the Armistice and was put up to 6 per cent. in November 1919 with a consequent advance in the rate at which Treasury Bills were sold.

The Money Market was bewildered and puzzled by this movement. There would have been no mystery about nt if the Government had found any difficulty in selling Treasury Bills at the current rate and so had thought it necessary to offer a higher rate on them; or if large demands for credit had been made on the Bank of England; but in the previous two weeks the securities in the Bank return had

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 dwindled by £35,000,000, and at the time when the rate was raised Treasury Bills were in fact being sold with quite satisfactory ease, so the effect of putting the rate up was rather to check the demand both for them and for commercial bills, because it was felt that with the Bank Rate rising on this apparently quite illogical system another rise in Bank Rate might happen at any moment. The old reasons for movements in Bank Rate to protect the gold stock, so strongly insisted on by the Cunliffe Committee Report, had all been destroyed for the time being by the prohibition of the export of gold. Consequently, the market had no bearings to steer by in the matter of Bank Rate and could only cherish an uncomfortable feeling that since a rise had taken place when there was apparently nothing special to warrant it, a further rise on equally obscure grounds might be expected at any time. In fact, there was for a time a serious risk of something like panic, because Lombard Street, very naturally under the circumstances, practically retired from its bill discounting business, and a very awkward deadlock was only stopped by special measures taken by the Bank of England, which expressed its readiness to discount sixty days' bills (instead of the customary ten or fifteen days) for the bill brokers if they needed such

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 accommodation, and otherwise coaxed and wheedled them back to business.

At about the same time a Treasury Minute was produced imposing a limit upon the fiduciary issue of Currency Notes, that is to say on the issue of Currency Notes which were not backed by gold or by Bank of England Notes, this limit being fixed at £320,000,000, in accordance with the recommendations of the Final Report of the Cunliffe Committee. The Treasury had no real power to control the note issue because holders of the Treasury Bills could at any time insist upon their repayment, and could thereby secure either Currency Notes or Bank of England notes or a credit at the Bank of England which they could turn into Currency Notes. Nevertheless the issue of this Minute and the raising of Bank Rate probably had a certain amount of psychological effect and brought home to men's minds a few facts which had been forgotten by many people engaged in finance, industry, commerce and politics; such as, that unlimited expansion of currency and credit was not part of the scheme of the universe, that British industry had worked before the war and with considerable success with a monetary system which had been limited by the amount of gold in the country and that the issue of unlimited paper money

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 inconvertible in fact because gold could not be exported—could not be allowed to pursue its riotous way unchecked, unless the country was prepared to face the final result in total worthlessness of the currency.

Thus the Treasury Minute and the rise in Bank Rate, which thus made its first appearance as a sort of moral weapon, to be moved up or down for the good of our souls, were a timely reminder of forgotten truths, but their doctrine had little immediate effect. For several more months extravagance, inflation and hysterical business continued, and when the check came at last in the spring of 1920, it was rather because the pace was too hot for the home and foreign consumer, than because the producer and the merchant were frightened by a rise of a couple of points in the price of money.

In fact, as will be shown, the contraction in credit which is supposed to be caused by a higher price of money and to cause a lower price of goods, did not make its appearance until long after the bottom had fallen out of the price of goods, and some time after the price of money had begun to come down again. Up till the end of 1919 prices and money—as far as we can trace the latter's movements—moved together with a harmony most satisfying to a statistical mind and to constructors of charts

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 and curves. As the Government continually outran the constable, it created new credit by borrowing directly and indirectly from banks, and new currency was poured out as backing for the new credit and prices went, with occasional slight hesitations, steadily ahead. But after 1919 the disagreements and discords between money and prices are as consistent as the previous harmony and need very careful consideration in view of the fashionable belief that credit, contracted and expanded like a concertina by a consortium of banks of issue, will suffice to draw a nice straight line of stabilization across the once untidily see-sawing price chart of human enterprise.

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31, 1919 was the real turning point in our war finance, for it was the date on which our rulers went back to the good old habit of providing for expenditure out of revenue. It is true that for some years more they had to be very generous to themselves in their interpretation of the word revenue in order to achieve this feat, because included in their receipts were huge sums realized by the sale of assets that had been bought with money that had been borrowed during the war; and anyone who likes to be pedantic in book-keeping can argue that these sums were not revenue at all but receipts on capital account, the whole of which ought to have been devoted to debt redemption. Whereas, in fact, out of the £724,000,000 received from special receipts during the financial years ending March 31, 1920, 1921 and 1922, only £276,000,000 were available as surplus to redeem debt and the balance went to the relief of taxation.

It was not until the fiscal year 1922-23 that

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 the amount of debt redeemed was greater than the sum produced by the sale of war assets, and then only by accident. For that was the year in which Sir Robert Horne played a glorious farce with the nation's finances by first proposing, in order to reduce taxation, to pay off debt with borrowed money, and then being smothered by a surplus of £120,000,000, owing to enormous errors in estimating for which he, of course, was not responsible.

But whether the Government paid its way out of revenue, or by selling capital assets, the fact remains that after the end of 1919 it followed the sound doctrine of the Cunliffe Committee and committed no further borrowings, and indeed redeemed debt rapidly. The result was that there was no more expansion of currency and credit due to loans from banks to the Government or to customers wha borrowed money to lend to the Government. A certain amount of temporary inflation happened from time to time, especially at dates when very large interest payments had to be made, because the Treasury, being unable to finance its needs out of ordinary receipts or by the sale of Treasury Bills, had to raise money by Ways and Means advances from the Bank of England, so producing an extra supply of "cash at the Bank of England" for other

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 banks, and expanding not only credit but the basis of credit. But these expansions were soon corrected as revenue came in and the newly made credit was soaked up by the sale of Treasury Bills, and the Bank of England and the Treasury evolved ingenious dodges for modifying their extent and effect. In fact, deflation may be said to have begun by the reduction of the Government's indebtedness to the Bank of England on temporary advances to zero, and by endeavours to keep it there as far as possible. Henceforward if inflation happened, it was not because of bad finance by the Government, but only because of demands for credit by industry and commerce, and other private borrowers.

So here we are at a turning point and may well stop to consider what was the right thing to do with our money in view of the way in which, during and after the war, its buying power had been lessened by the increase in its quantity. Ought it to have been brought back, if possible, to its pre-war value by being drastically and rapidly reduced, or ought it to have been "stabilized"—to use the new word that appeared about this time—or ought we to have joined the ranks of those who quite seriously argued that a depreciating currency is good for trade and makes everybody happy,

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 that Germany was driving us out of the markets of the world because the mark was falling in value, and that more inflation was the statesman-like prescription?

I think there was a feeling among us men in the street, especially those of us who were hoary headed and old-fashioned, that the British pound of which we had been perhaps ridiculously proud, had suffered a most unworthy outrage at the hands of politicians who ought never to have been allowed to meddle with it, and that it was due to the British pound's dignity to try to put it back to something like its old purchasing power, and at least to make it once more a gold certificate and not a mere Governmental shin plaster, with its value at the mercy of political dishonesty and cowardice. It was only by bringing back the gold standard that we could hope to give to our money that degree of steadiness in value that had won our confidence before the war and had encouraged us to lend or invest it in the expectation that when it was repaid or we turned the investment into money again, the money would not cheat its owners by fetching only half as much as before, because the Government had debased it by making too much of it.

Steadiness was what we wanted in the buying

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 power of our money, modified by a very gradual return towards its pre-war value and the restoration of the gold standard. This desire for a return towards pre-war value of money—or pre-war level of prices—was based on the view that the rise in prices had inflicted a great injustice on salary earners and wage earners and owners of fixed incomes who had not been able to expand their incomes as fast as it went, and that the rise had also put unearned and often unsought profits into the pockets of those who from the nature of their business, had to keep a stock of goods in hand. In other words it had, instead of laying the war sacrifice on the shoulders of all in accordance with their ability to bear it, as is roughly done by graduated direct taxation, made its burden unequal, and especially heavy for those least able to carry it. Since this injustice had been done, there was something to be said for the view that it should be partially amended by a reversing of the process by a fall in prices.

My own opinion was that a very gradual fall in prices was wanted for these reasons, but that anything like violent measures was the last thing that the occasion needed. It seemed to me that all that was needed was for the Government to forswear financial sack and live cleanly, paying off debt out of revenue; that artificial

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 efforts to deflate in a hurry might do as much harm as inflation; and that what was wanted was that the volume of currency and credit should be kept steady and that the gradual fall in prices, for which justice seemed to call, should be brought about by an increase in the volume of goods, which should very slowly restore the proportion between goods and money to something like that which had ruled before the war. To Professor Cassel, a Swedish economist who has won world-wide fame by his handling of after-war monetary problems, this method seemed to be a "particularly vain expectation." (World's Monetary Problems, page 63.) But he comes on our scene later.

In the meantime much more drastic measures seemed good to the powers that ruled us, and to an important body of lofty browed opinion among the economic theorists. It has already been recorded, at the end of the last chapter, that in November 1919 the Bank Rate was suddenly put up from 5 per cent. to 6 per cent., with a corresponding advance in the rate of discount at which purchases were invited of Treasury Bills, which were then put up for sale in weekly batches at a rate fixed by the Treasury. No special demands for credit from the Bank of England accounted for an increase in its price for accommodation; no shyness on

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 the part of buyers of Treasury Bills made it necessary to tempt them with the bait of the lower price that is implied by the higher rate of discount. The export of gold having been forbidden, save under licence, fear of a foreign drain on the Bank of England's Reserve could not be alleged as the cause of this eccentric movement.

Bank Rate was thus recognized as a moral weapon to bring back to its senses a country given over to an unwholesome fever of speculation. Rapid deflation was the order of the day. Contraction of credit and currency was to be secured by rising rates for money and was to bring about a rapid fall in prices that seemed to great minds to be the logical sequel and correction of the previous rise. The ideal aimed at had been very forcibly expressed by one of our most distinguished economists, Professor Cannan, who had observed in the Introduction to his Paper Pound of 1797—1821, published in 1919, that "when the scales at last fall from the eyes of the people of Europe, groaning under the rise of prices, they will no longer cry to their Government, 'Hang the profiteers,' but 'Burn your paper money and go on burning it till it will buy as much gold as it used to do!

To minds mathematically inclined and

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 accustomed to weighing abstract problems in the perhaps rarefied atmosphere of an economist's armchair, this conclusion would naturally seem to be impregnable. Inflation and the increase of money by the printing press and the consequent rise in prices had produced chaos. Therefore the way to bring back order was to reverse the process and bring in deflation, the destruction of money by bonfire and a consequent fall in prices.

There were, it is true, some awkward details to be filled in before the scheme could become practical; for instance we had to be told how the Government was to be sure that it would not be obliged to issue new notes as fast as it burnt the old ones, because the consequent stringency in the Money Market was obliging holders of maturing Treasury Bills to insist on their being paid in legal tender. And those of us who had objected to inflation on the ground, among others, that it produced a disease, the cure of which might be as dangerous as its progress, might well ask our theoretical dictators to pause before applying logic too ruthlessly to real life.

The logic of the matter was very ably put by Professor Pigou of Cambridge, who in a letter to the Times printed in its issue of February 12, 1920, urged that the Bank Rate, which

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 was then 6 per cent., should be immediately raised to, and held at, 8 per cent., and that steps should be taken to make this rate effective in the market. He showed that we were suffering from the effects of speculation, credit expansion and high prices and that dear money was a check on all these evils. "That European nations, and England among the number, with the enormous losses they have sustained should have money at 5 per cent. and 6 per cent. while the United States and Japan with an incomparably smaller need for new capital should have very much higher rates is a financial paradox which it is impossible to sustain." And he maintained that "it is useless for the Government to squeeze out the part of the credit expansion for which public borrowing is responsible if money is kept so cheap that a reduction in credits created for Government is balanced by an increase in credits created for private persons." Against the suggestion that the contraction of credit, if necessary, could be much more cheaply brought about if the banks would agree to ration their customers, Professor Pigou urged that it was not possible to expect the banks, at the expense of their own profits to refuse credit to customers of good standing who offered sound security.

Theoretically it was a strong case admirably

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 put and practically the suggestion of a high Bank Rate was a great improvement on Professor Cannan's bonfire, to be continued till the Bradbury was as good as gold. Nevertheless, there was on the other hand a case to be made for the view that violent action through Bank Rate meant the application, at a time when violent measures were not at all wanted, of a remedy which had been, when gently used, a successful cure for overtrading in different days and under different circumstances. Any bill broker's clerk could have told the Professor that the sudden rise of 2 points in Bank Rate which he desired to see, during the last quarter of the financial year when the big tax payments always leave the market cold and shivery like a fleeced lamb, might very likely have produced panic. A rise of more than a point in Bank Rate was quite abnormal, and might easily have led the City to suppose that all kinds of horrors were upon it. He may have thought that panic was the only way to save us, and this was certainly the view at that time, of certain eminent theorists. But panic is easier to start than to stop.

Without panic Bank Rate seemed at that time most unlikely to produce the desired effect. In old days it had been effective in small doses because profits were finely

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 calculated, and all the conditions that entered into the consideration of those who were carrying on business were so well balanced that a marked change in any one of them was sufficient to divert the course of trade and traffic. Then, a rise in Bank Rate from 5 per cent. to 6 per cent. and then to 7 per cent. might really have been an important factor in the calculations of producers and merchants. But in 1919, and in the first quarter of 1920, the rise in prices was so quick and looked so unending, and the profits that it was pouring into the pockets of all who produced or handled goods were so fat, that a rise of a few points in Bank Rate and consequently in the price of the credit that they wanted, was almost an irrelevant detail in the calculations of those who were conducting enterprise.

They had to have money, or thought so, whatever it might cost them, because "the pace was too good to inquire" about a minor item in the prospective balance sheet like the cost of money, when whatever they bought with it soared up fast enough to cover its cost and leave plenty of margin, and when orders were so plentiful at any price that they chose to name that many of them found it necessary to invent ingenious devices for avoiding customers whose needs they could not satisfy.

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 Later on when the wind blew on the other cheek and prices were falling like a stone, and buyers were not in battalions or even in single spies, but had vanished from the face of the earth, the price of money was equally irrelevant for a different reason. Producers and merchants had to have it then, because they could not sell their goods and in all countries the buyers who had bought so gaily were repudiating contracts and refusing to take delivery, and an insatiable demand had given way to glutted stagnation. And so those who had goods in hand had to have money whatever it cost, because they simply could not sell them and were forced to carry them on credit. And so Bank Rate and the Treasury Minute, which was supposed to set a limit on the note issue, had no visible effect according to the testimony of available figures, in contracting credit, because credit could not be contracted until the stock of unsaleable goods was gradually worked off.

Professor Pigou's grievance against the banks they were expanding credits for private persons and so defeating the effect of the Government's action in squeezing out part of the credit expansion due to Government borrowing, was one of which the unfortunate bankers, who had so often before been told

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 that they must cultivate a spirited and venturesome policy during the transition period from war to peace, now heard a good deal. This action of theirs really had a good deal to be said for it. Credit expansion created for the Government's use is, except as a purely temporary measure, bad and cowardly finance, because the Government is not engaged in production and so fresh money made for it cannot, from the nature of the borrower, lead to the making of fresh goods to restore the balance between goods and money, and so is certain to swindle all owners of the money already existing. But when credit made for Government is paid off and the banks' balance sheets are to that extent cleaned and lightened on both sides, it is not necessarily a bad thing for new credits to be given by the banks to private borrowers because there is a good chance that most of the new money will be used in enterprise and production, and this is especially so at a time of abounding trade prosperity when producers are making big profits. By this process deflation of credit is certainly defeated, but on the other hand trade is kept active and the fall in prices which was the object of the deflation is produced in a much more satisfactory manner by an increase in goods accompanied by no increase in money, since the

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 new money merely replaces the Government money that had been cancelled.

Bankers, however, were severely lectured at the time by politicians and officials who thought they knew best about the needs of business, and contrasted, as did Professor Pigou, the highly meritorious action of the Government in reducing, as it began to do after the end of 1919, the credits that had been created for it during and after the war, with the nefarious policy of bankers who made the Government's action "useless" by giving fresh credit to customers. One day a banker turned on one uf these official lecturers and showed that not only were the bankers justified in their policy but if they had not carried it out the Government could not have effected the much boasted contraction. For the margin of revenue over expenditure which enabled the Government to redeem debt and cancel credits was not produced by genuine taxation, but, as shown above, by the sale of assets; and the Government could not have sold these assets if the bankers had not lent their customers the wherewithal to pay for them. So that all these scoldings of the bankers were based on ignorance of what was really happening.

As to Professor Pigou's demonstration that it was hardly possible to produce a contraction

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 of credit by means of rationing, since bankers could not refuse the demands of good customers for advances, especially when it was against their own interests to do so, the fact nevertheless remains that it was just this process which first checked and finally reversed the expansion of credit. There was no definite system of rationing but the banks did succeed in bringing home to their customers the need for moderating their demands for credit and for contracting the accommodation that they had received by reducing advances, as soon as sales of goods began to be possible at a lower level of prices. It was this action by the banks in persuading their customers that unlimited expansion of credit had to stop, that stopped it far more than the rise of a couple of points in Bank Rate. Banking figures went on expanding long after the rise in Bank Rate and only contracted appreciably when Bank Rate was being reduced again. It was not dear money that put the brake on, but recognition by bankers, and their communication of this conviction to their customers, that a brake was needed: though it is quite possible that the rise in Bank Rate helped to produce a state of mind which enabled the banks and their customers to reach and act on these conclusions.

All this had to be recalled firstly because

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 these things are very relevant in view of the now fashionable doctrine of economic salvation through Bank Rate and also because the Bank of England and the Government are often unjustly accused of having produced by means of their dear money policy the depression and unemployment from which we are still suffering. The only certain effect of their dear money policy was that the poor old taxpayer had to pay a few millions more than he need have done, because the authorities saw fit, in order to cure the country of a naughty fit of gambling, to issue Treasury Bills on terms which were more expensive than they need have been. What really stopped the feverish activity of trade and the mad rise in prices—which was partly due to the fact that in order to secure delivery people got into a habit of bidding for two or three times as much stuff as they wanted—was the discovery by the consuming public that it could not stand the pace, and its determination to stop buying until prices had stopped rising.

This "consumers' strike" began in America and was imitated, with less definite organization but with equal determination, in this country; but it was the Far East that first reminded the rest of the world that rising prices were not a necessary part of the scheme of the universe.

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 The Chinese saw fit, on political grounds, to boycott Japanese goods, and there was a quick tumble in the Japanese silk market which reacted on America and brought hope to the hearts of millions of consumers, who for years had been fleeced by the bad finance which had debased the currencies of the world, and now at last saw that lower prices were a possibility. But the trade relations of China and Japan certainly were not influenced by the Bank Rate policy of the Bank of England or the United States Federal Reserve Board.

Very interesting evidence on this point was given by the Hon. Benjamin Strong, Governor of the Federal Reserve Board of New York, before a United States Congress inquiry, held in August 1921, apparently because it was claimed that the policy of the Federal Reserve Board had been injurious to American agriculture. Governor Strong told the inquiring Commission how the speculative tendency had, in 1919, worked up into "a veritable orgy of extravagance, waste and speculation; there was in fact competition to buy anything at almost any price. This culminated in the early summer of 1920. Now the first rumblings of a coming break appeared in March and April of 1920, in Japan, where I happened to be travelling. I was there at the height of their

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 period of liquidation and distress and had opportunity to observe on the ground exactly what was transpiring. It has frequently been said that the percussion cap which started distress in Japan was the sudden cessation of the demand for silk in the United States. I do not think that is quite accurate. The Japanese exporters had suffered misfortune through various causes and a very wide and effective propaganda in China, boycotting Japanese goods. And I was told of vessels that were held up in Chinese ports, not being able to unload their goods; and that was also coincident with the cessation of the buying of silk in this country. This reaction extended from Japan into China, the Dutch Indies, India and Egypt, and the same conditions prevailed generally throughout the East."

This evidence given by the Governor of the New York Federal Reserve Board is, in fact, by far the most interesting and effective defence of the monetary policy which was followed at this critical period, both by the American and British financial authorities. It was usually asserted in the City that New York led the way and that London supported and followed its policy, but I have always inclined to the belief that New York and London acted in

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 that furnish any assistance, unless new sins be committed: let such a one be anathema. For divine grace not only gives the knowledge of what is proper to do, but also inspires us with love, that we may be able to carry out what we know.’ ‘If any one says that the same divine grace, which is about Jesus Christ our Lord, aids us only in keeping us from sinning, since by it is revealed and manifested to us the knowledge of sins, so that we may know what to seek and what to avoid, but that by it are not given to us the love and the power of doing that which we have found good to do: let such a one be anathema. For both are the gifts of God, both the knowledge of what is proper to do, and the love of the good which it is proper to do.’ ‘If any one says that the grace of justification is given to us so that what may be performed by our free will may be more conveniently done through grace, for, without receiving divine grace, we have been able, though inconveniently, to perform the divine commandments: let such a one be anathema. For of the fruits of the commandments the Lord has not said: Without me you will do inconveniently, but he has said: Without me ye can do nothing.’”

That, according to the Theology, is the first error. The second error consists in this, that to some God has given grace and has preordained them to the judgment, while to others he has given grace and has preordained them to salvation. This is the way it has to be considered:

“We believe that the all-good God has preordained to glory those whom he has chosen from eternity; and whom he has rejected he has turned over to the judgment, not, however, because he wishes in this manner to justify some, and leave others and judge them without cause: for that is not characteristic of God, who is common to all, and is not a revengeful Father, who will have all men to be saved, and to come unto the knowledge of the truth (1 Tim. ii. 4); since he foresaw that some will make


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 concert throughout. However this may be, it is most fortunate that the American inquiry produced this evidence of Governor Strong's which will, I think, some day take its place with our Bullion Report of 1810 as an historical document of quite exceptional interest. On our side of the water, we were satisfied with the majestic reticence which at the half-yearly meetings of the Bank of England provides

and Parliamentary discussion of the Treasury Minute of December 15, 1919, was confined to a few back-bench bleatings. Fortunately, our American cousins "wanted to know," and Governor Strong told them all about it. Everyone interested in these matters should read his evidence in full in the "Hearing before the Joint Commission of Agricultural Inquiry, Seventy-Seventh Congress, First Session, Under Senate Concurrent Resolution 4."

Here he must be all too briefly summarized. He said that during the period of speculation and rising prices the Federal Reserve Bank's policy was to endeavour by every means at its command to arrest this development, but the atmosphere of those days created difficulties. "The people had economized for two-and-a-half

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 years and they wanted now to enjoy themselves." Moreover in finance the war was far from over "because we had still ahead of us a loan which at that time we felt would be about $6,000,000,000—the Victory Loan." Governor Strong went on ta describe how in the summer of 1920 when the public stopped buying it was just like closing the outlet of an elastic pipe, with the water being constantly forced in at the other end. "The pipe will certainly expand," and it did. Consumption stopped at the point of retail distribution but production at the point of origin still continued and "during this period goods piled up all along the line." Raw materials immediately fell and "that is the characteristic of periods of depression that the first to suffer collapse in prices is the producer of raw materials." During this period of decline and of "backing up of goods" the loans of the Federal Reserve Bank did not decline. "The curve of prices dropped quite markedly, but the volume of bank loans continued to rise for some time before it began to go down, indicating that the first result of this curtailment of consumption was a pressure upon the banking system for credit to carry these goods and a decline of the curve representing bank loans could only be expected when consumption began and debts

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 were paid." And this continued rise in bank loans was actually encouraged by the Federal Reserve Board. It had to be so because if the banks had not given the necessary helping hand to industry and commerce there must have been widespread disaster. Governor Strong states frankly that during this period of declining prices "our policy was designed to encourage the extension of needed credits."

Thus out of the mouth of this witness whose knowledge of the whole course of events is from the nature of his office unrivalled, we learn that the tumble in prices began in the Far East and spread to the rest of the world, which does not look as if advances in money rates in London and New York had much to do with it; and further, that when the tumble was in progress the New York Federal Reserve Bank was busily encouraging the extension of credits. And this shows very clearly that the fall in prices was not caused by any contraction of credit because credit was officially encouraged to expand, certainly in New York, and probably in London also.

We thus have very valuable evidence for the view that the rise in money rates here and in New York at the end of 1919 and the beginning of 1920 did not cause the fall in prices and the check to speculation, or if it did, it did so through

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 psychological suggestion and not by any means of credit contraction, because credit contraction did not happen. And this evidence is all the more important because it is given by a banker who nevertheless believes that the policy of raising rates was right. He admits that "in many directions we were like prophets crying in the wilderness. We could not stop that rage of speculation by any means at our command, at least so it appeared at that time." Nevertheless, "I believed then, and I believe now, that the basis, the fundamental basis of restraint upon speculation rests upon the cost of credit, and that the policy of raising our rates was necessary and justified, and without the adoption of that policy this expansion which took place would have gone to unparalleled levels."

But surely cost of credit can only restrain speculation by making speculators think that if they have to pay so much for credit the game is not worth the candle and consequently closing their commitments and reducing credit by paying off their loans. But this did not happen either here or in America. As long as prices rose, speculators did not want to close their commitments. When prices fell, they could not close them. And we must always remember when we take measures for checking speculators by means of money rates that we run the risk

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 of checking, at least as effectively, the real producer. If we take the heart out of him, it means a lessening in the effort which increases the real wealth of the world, and he with the strict attention to business details which means so much for his success, seems much more likely to be put off his stroke by an item like the cost of money, than the free and easy speculator who is used to making big guesses on broad lines, and then backing his opinion in glorious self-confidence.

Interesting as is Governor Strong's evidence on the course of events and the purposes aimed at by the Federal Reserve Board, he does not quite convince one that in the exceptional circumstances that prevailed at the end of 1919 and the beginning of 1920, the rise in money rates that was actually brought about was a serious factor in the calculations of business men, or even that at any time "the fundamental basis of restraint upon speculation rests upon the cost of credit." Surely if a man thinks that by buying a security or a commodity or a currency he gets a good chance of being able to sell it in a few months at double its present value, he will be quite ready to pay 20 per cent. or even 50 per cent. for any money that he wants to finance his gamble; and such a movement as a rise in Bank Rate from 5 per cent.

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 to 6 per cent. and then from 6 per cent. to 7 per cent. would have been quite ineffective, had not other events caused speculators suddenly to remember that rising prices sometimes stop.

This point of view was very ably put by another eminent American authority, Mr. Albert Strauss, an ex-Member of the Federal Reserve Board. Speaking in May 1922 he said "Booms and depressions are caused by hope of higher and fear of lower prices, whether of commodities or of securities. The hope of higher prices leads to demands for funds for the purpose of purchasing in anticipation of a rise; the fear of lower prices leads to repayments of loans with the proceeds of sale in anticipation of a fall of prices. No rate, however low, will tempt borrowing for the purpose of purchasing a commodity whose price is believed too high—and broadly speaking, no rate, however high will, by reason of its being high, restrain borrowing intended for the purchase of commodities which are believed certain to rise. A high interest rate will often deter borrowers because it is taken as a warning that commodity prices are regarded as too high or that money may become unobtainable at any price. It will serve as a concrete expression of opinion by those best

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 qualified to judge as to the reasonableness of the general level of prices."

Quite so, and this being so, it should surely have been possible to warn speculators and the public and all other parties concerned that prices are regarded as too high, by some less expensive method than the one which involved selling cheap Treasury Bills at the expense of the taxpayer and making the real producer and trader pay more for money in order to convey a roundabout warning to the speculator which he blandly ignored until a Chinese boycott of Japanese goods upset the silk market and tumbled over the whole house of cards. In old days when Bank Rate went up it meant that a gold drain was occurring or expected and a gold drain meant that there was less money in the country, and that borrowers whatever price they liked to pay, would have to have less. And so it was a very real warning. In 1919 and 1920 there was no question of a gold drain, and rises in Bank Rate, whatever other effects they may have had, certainly did not cause contraction of credit.

Just consider these few facts. Bank Rate was 5 per cent. when the war ended in November 1918. It rose to 6 per cent. in November 1919, 7 per cent. in April 1920 and stayed there until April 1921, then declining

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 by easy stages to 3 per cent., which it reached in July 1922. Prices of commodities reached their highest point in March 1920 and then fell with unparalleled quickness, but gradually slackening pace, until September 1922. The decline, during the last eighteen months of its course, was thus accompanied by a fall in Bank Rate from 7 per cent. to 3 per cent. Bank deposits in the United Kingdom—the nearest approach that we have to a test of the extent of credit—stood at £1,032,000,000 at the end of 1913, according to the Economist's tables, and were £1,988,000,000 in 1918, £2,356,000,000 in 1919, and continued to expand until the end of 1921 when they stood at £2,527,000,000 utterly refusing to obey the behest of Bank Rate and contract when it went up. Contraction happened in 1922, when they came down to £2,362,000,000. And this was the year when they were being urged to expand by Bank Rate, which came down from 5 per cent. to 3 per cent. Surely these facts and figures looked at together make it most difficult to believe that prices and credit, industry and enterprise are merely "a pipe for Bank Rate's finger to sound what stop she please."

Nevertheless, in trying to show that the United States Federal Reserve Board and the Bank of England and the British Treasury

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 had, in raising rates, done something which was largely ineffective, very costly and rather futile, we are much kinder to them than the critics who think that Bank Rate is in fact all powerful and that it was the main cause of the after-war gamble by not having been put up, and of the subsequent depression by not having been put down again. In February 1922 a paper was read before the Royal Statistical Society by Mr. R. G. Hawtrey, distinguished even among the brilliant band of our Treasury officials by reason of his eminent abilities which he has applied to the elucidation of monetary problems in works which are classics as soon as they are published. His paper was headed "The Federal Reserve System of the United States" and has now been republished in a volume entitled Monetary Reconstruction. It was an attack, suave and courteous, but almost impassioned in its earnestness, on the handling of the monetary situation by the Federal Reserve system. He charges it with having tried to cope, in 1919, with a menacing situation by tentative and hesitating steps, and though he thinks that the raising of its rediscount rate to 7 per cent. in June 1920 was at last successful and turned the tide, yet "the ebb had to be proportioned to the flow. In so far as the expansion had got out of hand, the

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 subsequent contraction had to be more severe." Later on he says that "the whole world has been plunged into the most appalling distress for nearly two years by the strain of raising the commodity value of the dollar 80 per cent. . . . How did such a mistake ever come to be made? The explanation is, I think, simply that the working of the 'vicious circle' of deflation was not understood. It was not realized that a deterrent discount rate, once it had taken effect, can safely be reduced."

This is surely a most interesting example of the success with which a really philosophical mind can detach itself from the facts of life, and can isolate certain items that interest it and subject them as if in an imaginary test tube to experiments that have no connexion with practical existence. Anyone reading Mr. Hawtrey's paper might suppose that the war had only inflicted loss on humanity by disarranging the currency system and that all the miseries of the after-war period were due, not to bad temper, a bad peace and the failure of European politicians to let their countries get back to work, but to the slow and tentative steps with which the United States Federal Reserve Board raised its rediscount rate and its failure to see that the rate might come down again much sooner than it did. Surely Mr.

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 Strauss was much nearer the truth when he said "no rate, however low, will tempt borrowing for the purpose of purchasing a commodity whose price is believed too high": and the appalling distress in which the world has lately been plunged was much more due to the bungling of politicians in this hemisphere than to the price of money in the other. If the other countries of the world had been in a normal condition with their industry and finance working smoothly and in good health, no action or inaction with regard to its rate of rediscount on the part of the United States Federal Reserve Board could have plunged them into "the most appalling distress" for nearly two years.

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only did the effects of the war on our currency and banking system stir to fresh efforts those who had always wanted to reform it, they also produced a host of new critics with new suggestions for its improvement. They may be divided roughly into three classes: those who find the way to economic salvation in unlimited issue of paper money which they generally call by some other name; those whose doctrine and intention are vague or incomprehensible; and those who want, either with or without a return to the gold standard, to set up machinery by which the level of prices is to be kept steady through official, and sometimes international, regulation of the volume of credit.

In considering the doctrines put forward by these several classes we are faced with the difficulty that it is not always easy and it is sometimes quite impossible for ordinary folk to understand what currency reformers really want to do, and it is also interesting to note

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 that sometimes they make a definite movement to a new position.

This was the case with the veteran champion of what he believes to be banking reform, Mr. Arthur Kitson. This versatile critic has several embodiments. In one, though he vehemently denies that he is in favour of unlimited credit, he uses expressions that seem inevitably to lead to that ideal. In another—as shown in his Fraudulent Standard, apparently written in 1917—he advocates a system of so regulating the supply of money that "it preserves the uniformity of an invariable index number" (page 132), and so seems to join hands with the stabilizers. In another he declares himself the champion and interpreter of the new economic apostle, Major Douglas, whose scheme he apparently swallows whole. In the last year of the war he had published in the Times Trade Supplement a series of articles on banking and currency problems and I was highly honoured by being asked to reply to them. They, together with my replies and other works of his, have now been published in a little paper book called Money Problems—(Dolby Brothers, High Street, Stamford). In the article published in the June Supplement, Mr. Kitson told us that "if the British public would only grasp the

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 fundamental truths of Economic Science they might learn that a future of boundless wealth and prosperity is theirs, provided they have the will and determination to secure what is well within the bounds of possibilities. . . . We must first decide to break with the past by getting rid of our bankrupt political and economic ideals and methods, our conservatism, our ignorance and superstition."

So far most of us will follow him. "We must rid ourselves," he continued, "of those foolish laws—the relics of the ignorance and prejudices of our forefathers—such as the Bank Charter Act and other parliamentary restrictions." He went on to show that wealth is the product of two prime factors—man and nature—generally termed labour and land, and asked how it is, "with an unlimited or practically unlimited supply of these two factors," that wealth is, or hitherto has been, so comparatively scarce? And he answered the question by saying that "a study of the currency and bank methods of all industrial nations for the past century will convince every unprejudiced person that the scarcity of wealth and the limited amount of production has been due primarily to the legally restricted supply of money" (page 32).

It was indeed a most hopeful theory.

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 Everything else needed for wealth we were alleged to have in practically unlimited supply; all that we lacked was money, and war had shown how easily money could be multiplied. We only had to make Mr. Kitson our Currency Controller, or Currency Creator—for with his theory he would surely have scoffed at the notion of control—and give him a free hand to print, and boundless wealth was within our reach.

And yet one or two points in his argument are not quite clear. Is it really true that we have a practically unlimited supply of "man" and of "nature"? There is indeed quite a large number of men in this country, but how many of us are really well equipped for increasing its wealth, trained to do our jobs as they ought to be done and eager to work as hard as it would be necessary for us to work before boundless wealth began to look like being our portion? Is one in a hundred an optimistic estimate? And as to "nature," there is plenty of it lying about in the world, but much of it is not ploughed or tilled, means of communication are not yet all that they should be, and some considerable additions to plant and machinery seem to be required before we can be sure that lack of money is the only bar to an endless flow of milk and honey.

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 Mr. Kitson, however, has no such doubts. "Since," he says, "sales were limited by the amount of money or credit offered, it followed that production was necessarily limited by the quantity of money and credit available for commercial purposes." It did not seem to occur to him that a larger volume of production might easily have been carried on with the same amount of money by a readjustment of the price level. But after all, what has happened since then has quite sufficiently answered Mr. Kitson. If unlimited money was all that was needed to secure abounding prosperity, it ought now to be evident in Russia, whose inhabitants are in fact living in a state of economic chaos that appals all who contemplate it. Mr. Kitson would doubtless reply that circumstances in Russia were exceptional. In his view "the average business man is growing tired of having to go hat in hand to solicit 'favours (referring to getting accommodation from banks) "which he claims should be given to him as a legal right." This may be so, but most business men of my acquaintance see very clearly that if everybody had a legal right to as much credit from the banks as he thought fit to demand the amount of credit created would in times of optimistic exhilaration so rapidly outstrip the supply of

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 goods, that a wild orgy of competitive buying would almost certainly end in disaster; and that the ultimate end of such a policy is complete worthlessness of money and a return through chaos to the barbarisms of barter.

In 1921, however, Mr. Kitson was dining with some friends, including well-known financiers and merchants. The conversation soon turned on the industrial paralysis that then prevailed which was attributed by various speakers to various causes. As he describes the scene in a preface to a subsequently published work, entitled Unemployment, he seems to have dealt faithfully with his companions. "The writer's turn came last and he expressed himself as being in entire disagreement with every member. Not one of the reasons so far urged for our industrial woes would stand even the most superficial investigation, and consequently the remedies suggested were not only worthless but foolish." He went on to attribute the depression to a deflation policy announced about twelve months before by Mr. Chamberlain, and maintained that industrial and social conditions would grow worse until this policy of credit contraction was reversed. He was finally challenged by his opponents to furnish a remedy for unemployment and industrial depression. The result

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 was a new series of articles, and a new book, as already mentioned, in which Mr. Kitson, after recommending various minor means of credit increase, such as paying pensions and unemployment allowances, not by rates and taxes but by the issue of fresh currency (page 38), and the conversion of the floating debt (which in the early part of 1921 was not far off £1,000,000,000) into legal tender currency (page 43), finally decided that the system suggested by Major Douglas in his remarkable books entitled Economic Democracy and Credit Power and Democracy, would in his judgment "effectively solve the whole problem of unemployment, trade depression, and all their attendant evils, and if adopted universally remove the causes which have been so fruitful in provoking wars and which if not speedily removed must soon give rise to fresh and more desolating wars than any yet waged."

Everyone interested in currency matters had already heard much of Major Douglas and his scheme which was adopted and ventilated at length by the New Age, at that time the well written and interesting organ of the Guild Socialists, led by Mr. Orage. I had made an honest and determined effort to read one of Major Douglas's books, and having failed to understand how the scheme could work, had

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 asked the Major to lunch and spent some very pleasant and interesting hours with him, at the end of which there had been no deflation in my bewilderment. I knew that this was probably my fault, and I was really cheered when Mr. Kitson, having first stated that the problem of unemployment "when properly understood is so simple that the average schoolboy ought to be able to furnish a satisfactory answer," went on to the Douglas scheme as a solution. For it seemed safe to suppose that if the matter was really as simple as it seemed to Mr. Kitson, he would be able to translate the Douglas scheme into something that an ordinary intelligence could grasp. And as he went along in his leisurely discursive manner he certainly let fall by the way some most encouraging gems of assertion, as for instance (on page 33) when he said that "even to-day the labour of less than 10 per cent. of the population will readily suffice to maintain the entire inhabitants of this country in a high state of comfort." But it is when he begins to summarize Major Douglas that the prospect really begins to dazzle (page 55): "The potential wealth of this country is far beyond the dreams of avarice, and under a system of co-operation and goodwill everyone might by contributing a trifling amount of labour, receive a share of all the

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 good things of life sufficient for his well-being, contentment and happiness. Every member might thus receive an income from the State instead of being taxed. By gradually replacing the wage system with a system of dividends, by giving a share to each and every member engaged in an industry in that particular undertaking, the evils now resulting from unemployment would disappear."

It was a mouth-watering prospect. Instead of paying taxes I should dun the Inland Revenue Department for emoluments due to me, and the wage earners would beat their tools, not into ploughshares but the more comfortable shares that have dividends attached. And then came the scheme. What may be described as Major Douglas's major premiss is a belief based on "a system of costings" that "the purchasing power distributed to the public by the industrial system in all countries could not possibly enable them to purchase more than a small proportion of the goods made, even if these were offered at the minimum price of bare costs." If this were so the inevitable results would appear to be a chronic and ever growing glut of unsold goods and the whole of industry in the hands of receivers; and yet somehow industry has managed, in spite of a system which is "inherently suicidal," to sell its

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 output and maintain through some centuries an appearance of chequered but rather ample prosperity. However, "to meet the discrepancy," says Mr. Kitson (page 56), "between prices and purchasing power distributed, Major Douglas proposes that producers shall sell their products below cost at a price which shall bear the same ratio to cost as the total national consumption of all commodities does to the total national production of credit. The difference between such prices and cost of production is to be made good by a draft from the Treasury on the national credit account. Under this scheme, price, instead of being a function of money, becomes a function of production. Hence any over issue of money cannot affect prices and the evils resulting from inflation under our present system are therefore eliminated."

Well, all this must evidently be quite clear and simple to Mr. Kitson, but he surely might have told us what Major Douglas really meant when he said that products were to be sold below cost price at a price bearing the same ratio to cost as the total national consumption of commodities bears to the total national production of credit. For these remarks are not really simple at all except to very clever people, and what we want to know is how the total

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 national consumption of commodities at any given moment is to be estimated, unless almost half the population is kept busy weighing, measuring and checking the consumption of themselves and the other half; and if so, what becomes of the theory that the labour of less than 10 per cent. will suffice to keep us all in a high state of comfort? And what is the total national production of credit, and who is to measure it and how?

As to how the system was to work by which goods were all to be sold below cost price, and the difference between prices realized and cost of production was to be made good by a draft on the national credit account, was another matter that cried aloud to be explained. Apparently, to take a concrete example, a bootmaker who made boots out of materials that cost him fifteen shillings a pair and with the help of labour that cost him five shillings a pair, would have to sell them for something less than a pound a pair and could get back the difference from the Treasury in the shape of a draft on the national credit account, whatever that may mean. He has thus made nothing out of the transaction, but has received with the assistance of the Treasury as much as he paid out. Is he expected to go on carrying on the business of a bootmaker for nothing to the extent of the

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 demands upon him and his neighbours, and what is he to live on in the meantime if he continually receives only as much as he pays out? And if everybody is doing the same thing what has become of that glorious system with which we were so lately dazzled, by which everybody was to be a shareholder living on a comfortable stipend from the State? Nor is confusion on these points lessened by an endeavour to understand the "exemplary scheme" drawn up for special application to the mining industry. In fact, the Douglas scheme as expounded by Mr. Kitson was at least as incomprehensible as when drunk from the original fountain.

Fortunately it was proved that inability to appreciate the Douglas scheme was not necessarily the result of my middle-aged prejudice; for it was weighed in the balance and found wanting by the Labour Party, which in a pamphlet entitled "Labour and Social Credit" subjected it to most effective analysis through a Committee whose distinguished members included such well-known economists as Sidney Webb, G. D. H. Cole, Hugh Dalton, J. A. Hobson, Sir Leo Chiozza Money, R. H. Tawney and Arthur Greenwood. It expressed inability to understand how the aggregate surplus of production over

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 consumption of the whole nation can be computed. "It is impossible to add together yards of cotton, tons of coal, gallons of milk, and additional cottages, schools and factories otherwise than in terms of money; and the money valuation is dependent on the price to be set upon each of the different commodities." This is a very palpable hit for it was part of the Douglas scheme, as noted above, that the cost of each article was to depend on the relation of total consumption to total production.

The Major's amazing proposal to let each manufacturer make good the loss caused by selling goods below cost of production, by a draft from the Treasury on the national credit, seems to the Labour Party critics to be "equivalent to a continuous flooding of the nation with paper money which would rapidly sink in value." This would inevitably take the form of a rise in prices, which no authoritative fixing could prevent. "Major Douglas," they continue, "denies that this issue of paper would inflate prices, on the ground that it is issued against 'real credit' or a 'potential productivity.' But first let it be noted that no provision appears to be made for cancelling any of these notes, which would therefore increase indefinitely. Secondly, the people who receive the notes will presumably wish to spend them,

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 and in the last resort, to spend them on buying goods. In the result, either prices must go up in face of the abundant purchasing power and limited supply of consumable goods, or if all prices could be rigidly controlled by law, the money demand would far outrun available supplies. Short of a bureaucratic rationing system, some parts of the country and some consumers would find themselves with no goods at all. In fact, we should be back in the worst experiences of the war, in soaring prices, inadequate supplies, queues and the rest of it—only very much more so."

Such are the terms, or some of them, in which the Douglas scheme is dismissed by the Labour Party. Those who think that the matter is worth study will find this critical examination useful and, though distinctly severe, quite fair on the whole. In one respect, however, I think that Mr. Webb and his colleagues scored what they thought was a bull's-eye, but was really a miss, because they had not appreciated the true beauty of Major Douglas's intentions. It was in discussing his proposal that a new and special banking company should be set up for each industry, and that this banking company should be given the right by law to furnish, in return for shares, a steady increasing proportion of the additional capital required from time to

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 time by the existing capitalist employers in the industry.

Everyone engaged in the industry was to be, as such, a shareholder in the bank. All wages and salaries were to be paid by the directors of the industry into the bank, and the employees would draw cheques on the bank to meet their living expenses. But the bank having the right to provide a proportion of the new capital required, would in the case of the Miners' Bank—the shareholders in which are all the persons employed in the mining industry—"find itself owning a steadily increasing number of shares in the steadily increasing total share capital of the colliery companies without the miners having had to put up any money at all." "This sounds delightful," say Messrs. Webb and company. "Unfortunately, it overlooks the elementary need for the Miners' Bank to have the capital before it can supply it to the colliery companies in return for their new issue of shares."

But they surely do Major Douglas a rather grave injustice. To such a monetary magician there would be no difficulty about producing the capital simply by another draft from the Treasury on the national credit account, or, perhaps still more simply, by giving all the new banks the right of unlimited note issue and

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 good use of their free will, while others will not, he has preordained some to glory, and others he has condemned. Of the use of freedom we judge in the following manner: since divine goodness has given us the divine grace, which, like the light illuminating the path of those who walk in darkness, guides us all, those who wish freely to submit. to it (for it assists those who have it, and who do not oppose it) and to fulfil its commands, which are absolutely necessary for salvation, for that reason receive a special grace, which, coöperating with them and strengthening and constantly perfecting them in divine love, that is, in those good works, which God demands of us (and which also the premonitory grace has demanded), justifies them and makes them preordained; but those, on the contrary, who will not obey and follow grace, and who therefore do not fulfil the divine commandments, but, following the instigation of Satan, make ill use of their freedom, which God has given them for the purpose of arbitrarily doing good, are given over to eternal condemnation. But what the blasphemous heretics say of God’s preordaining and condemning, without paying any attention to the works of the preordained or the condemned, we regard as madness and ungodliness.” (pp. 255 and 256.)

The error cannot be rendered in one’s own words; here it is:

“In regard to the nature of the sanctification or justification, as taken in its broad meaning, the Protestants assert that it consists: (a) not in that the divine grace acts inwardly on man and actually, on the one hand, purifies him from all sins, and, on the other, cooperates with the renovated, righteous, holy; (b) but in this, that, by God’s will, the sins are pardoned only externally and are not put against the man, though in reality they remain in him,—that Christ’s righteousness is put to his account only in an external manner. Such is the


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 making their note issues legal tender. By this system every industry can have as much capital as it likes without any regard for the needs of others, all of which would be supplied by their own tame banks, and all workers in all the industries, being shareholders in all the banks, would thus become capitalists without having to go through the effort of saving. Major Douglas has perhaps rather spoilt this part of his scheme by saying the bank as such shall pay no dividend. This seems rather mean and cheeseparing, and surely everybody would be much happier if they all had 10 per cent. dividends paid into their accounts. As to what would happen to prices with all the banks ladling out capital as fast as their industries asked for it—but we have Mr. Kitson's assurance that price under the Douglas scheme becomes "a function of production" and "hence any over issue of money cannot affect prices."

Major Douglas's Labour Party critics having dealt faithfully, as shown, with the Major, proceed to lay down that the "social control of credit and the banking system" may best be achieved by the nationalization of the joint stock banking system and the energetic development throughout the country of municipal banks. Well, the cobbler will talk leather

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 and Socialists still talk nationalization and municipalization. But it has already been noted that the several Socialist Governments that have come into power since the war have shown, when it came to practical measures, remarkable unanimity in nationalizing nothing. Bankers point out with some force that their business is the very worst for the State to try to work, because banks managed by Government officials, with the possibility that banking facilities might begin to be influenced by political considerations, might very easily produce a most unsavoury state of affairs. Mr. Kitson's claim to a moral right to credit for everybody who wanted it, would be better than the political right of gentlemen prominent on local caucuses to special tenderness on the part of national and municipal bankers.

It is interesting to note that Mr. Webb in an article published in the Contemporary Review of July 1918, argued that the process of bank amalgamation was preparing the way for the nationalization of the business, therein agreeing with many critics of the process, but only proposed that what may be called the routine half of the matter—taking deposits, issuing cheque books and so on—should be handed over to Government officials, the money lending side of it being still left to private enter-

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 prise, as not yet ripe for nationalization. Since it calls for discrimination, decision, quickness and courage, and all these qualities official training tends to destroy, Mr. Webb was evidently wise in following Solomon's example and proposing to bisect the baby. Bankers maintain that banking could no more work than a baby could live in two separate sections.

Another admirer of the Douglas scheme was Professor Soddy, who, however, only went so far as not to imply "that the scheme might not be a great improvement upon the present one." He might have told us how it was going to work. But he classes it as a temporary palliative, "for no system founded upon usury can be stable," and leaves it, thereby adding to the many disappointments of his pamphlet on "Cartesian Economics, the Bearing of Physical Science upon State Stewardship." As it happened, this reprint of his two lectures to the Student Unions of Birkbeck College and the London School of Economics, delivered in November 1921, came into my hands just after I had been reading again some of Huxley's essays and wishing that we could have in these tangled days some words of counsel from that keen, calm thinker and clear writer. Surely these great scientific men of to-day ought to have something to say about straightening out

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 our economic tangle. And then came this pamphlet with one of our greatest scientific names upon it, and I looked for light at last. Professor Soddy states his intention to try to bring the existing knowledge of the physical sciences to bear upon the question "How do men live?" He says that the modern economist, for whom he evidently has a most hearty contempt, seems to have forgotten that there is such a question.

To illustrate it he asks what makes a railway train go. He admits that in one sense or another the achievement may be claimed by the engine driver, the guard, the signalman, the manager, the capital, the shareholder, the scientific poineers who discovered the nature of fire, the investor who harnessed it, labour which built the railway and the train, but "the fact remains that all of them by their united efforts could not drive the train." This seems to be a sort of fact that an ordinary mind might almost have hit upon without the help of a great scientist, and when Professor Soddy goes on to say that "the real engine driver is the coal" he seems to imply, by contrast, that the coal, by its sole, unaided effort could have driven the train without the assistance of all the other factors. Whereas if the capitalists and the engineers and the navvies had not financed and

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