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 of seniority being commonly observed by HIS LORDSHIP in these invitations. At dinner he was alike affable and attentive to every one: he ate very sparingly himself; the liver and wing of a fowl, and a small plate of macaroni, in general composing his meal, during which he occasionally took a glass of Champagne. He never exceeded four glasses of wine after dinner, and seldom drank three; and even these were diluted with either Bristol or common water.

Few men subject to the vicissitudes of a naval life, equalled HIS LORDSHIP in an habitual systematic mode of living. He possessed such a wonderful activity of mind, as even prevented him from taking ordinary repose, seldom enjoying two hours of uninterrupted sleep; and on several occasions he did not quit the deck during the whole night. At these times he took no pains to protect himself from the effects of wet, or the night-air; wearing only a thin great coat: and he has frequently, after having his


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 clothes wet through with rain, refused to have them changed, saying that the leather waistcoat which he wore over his flannel one would secure him from complaint. He seldom wore boots, and was consequently very liable to have his feet wet. When this occurred he has often been known to go down to his cabin, throw off his shoes, and walk on the carpet in his stockings for the purpose of drying the feet of them. He chose rather to adopt this uncomfortable expedient, than to give his servants the trouble of assisting him to put on fresh stockings; which, from his having only one hand, he could not himself conveniently effect.

From these circumstances it may be inferred, that though Lord NELSON'S constitution was not of that kind which is generally denominated strong, yet it was not very susceptible of complaint from the common occasional causes of disease necessarily attending a naval life. The only bodily


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 pain which HIS LORDSHIP felt in consequence of his many wounds, was a slight rheumatic affection of the stump of his amputated arm on any sudden variation in the state of the weather; which is generally experienced by those who have the misfortune to lose a limb after the middle age. HIS LORDSHIP usually predicted an alteration in the weather with as much certainty from feeling transient pains in this stump, as he could by his marine barometer; from the indications of which latter he kept a diary of the atmospheric changes, which was written with his own hand.

HIS LORDSHIP had lost his right eye by a contusion which he received at the siege of Calvi, in the island of Corsica. The vision of the other was likewise considerably impaired: he always therefore wore a green shade over his forehead, to defend this eye from the effect of strong light; but as he was in the habit of looking much through a glass while on deck, there is little doubt,


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 that had he lived a few years longer, and continued at sea, he would have lost his sight totally.

The Surgeon had, on the occasion of opening HIS LORDSHIP'S Body, an opportunity of acquiring an accurate knowledge of the sound and healthy state of the thoracic and abdominal viscera, none of which appeared to have ever been the seat of inflammation or disease. There were no morbid indications to be seen; other than those unavoidably attending the human body six weeks after death, even under circumstances more favourable to its preservation. The heart was small, and dense in its substance; its valves, pericardium, and the large vessels, were sound, and firm in their structure. The lungs were sound, and free from adhesions. The liver was very small, in its colour natural, firm in its texture, and every way free from the smallest appearance of disorganization. The stomach, as well as the spleen and other


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iv trine with which the Tracts opened. They were written with the hope of rousing members of our Church to comprehend her alarming position, of helping them to realize the fact of the gradual growth, allowance, and establishment of unsound principles in the management of her internal concerns; and, having this object, they spontaneously used the language of alarm and complaint. They were written, as a man might give notice of a fire or inundation, to startle all who heard him, with only so much of doctrine and argument as might be necessary to account for their publication, or might answer more obvious objections to the views therein advocated.

This peculiarity in their composition has occasioned them to be censured as intemperate and violent. If this be true in such sense that they discover any personal feeling, bitterness, wrath, want of candour, unkindness, or reviling, of course nothing can be said in their defence. Or if they contain an extravagant doctrine, crudely imagined, confusedly or hastily expressed, and unsanctioned by our standard Divines, then, too, they are entitled to very little respect. But if the charge of intemperance simply means that they contain strong expressions upon high and delicate matters, suddenly introduced, unexplained, and therefore obscure and harsh, though not intrinsically erroneous, then by intemperance is meant nothing else than want of judgment. Want of judgment, however, is commonly imputed to proceedings which tend to defeat their object, though allowable in themselves, and based upon true principles; and if so, the style of the Tracts in question is not

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 abdominal contents, was alike free from the traces of disease. Indeed all the vital parts were so perfectly healthy in their appearance, and so small, that they resembled more those of a youth, than of a man who had attained his forty-seventh year; which state of the body, associated with habits of life favourable to health, gives every reason to believe that might have lived to a great age.

The immediate cause of death was a wound of the left pulmonary artery, which poured out its blood into the cavity of the chest. The quantity of blood thus effused did not appear to be very great: but as the hemorrhage was from a vessel so near the heart, and the blood was consequently lost in a very short time, it produced death sooner than would have been effected by a larger quantity of blood lost from an artery in a more remote part of the body. The injury done to the spine must of itself have proved mortal,


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 but might perhaps have survived this alone for two or three days; though his existence protracted even for that short period would have been miserable to himself, and highly distressing to the feelings of all around him.


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Victory, off Cadiz, 10th of October, 1805.

it almost impossible to bring a Fleet of forty sail of the line into a line of battle in variable winds, thick weather, and other circumstances which must occur, without such a loss of time that the opportunity would probably be lost of bringing the Enemy to battle in such a manner as to make the business decisive, I have therefore made up my mind to keep the Fleet in that position of sailing, with the exception of the First and Second in Command, that the order of sailing is to be the order of battle: placing the Fleet in two lines, of sixteen ships each with an advanced squadron of eight of the fast-


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 est-sailing two-decked ships; which will always make, if wanted, a line of twenty-four sail, on whichever line the Commander in Chief may direct.

Second in Command will, after my intentions are made known to him, have the entire direction of his line; to make the attack upon the Enemy, and to follow up the blow until they are captured or destroyed.

the Enemy's Fleet should be seen to windward in line of battle, and that the two lines and advanced squadron could fetch them, they will probably be so extended that their van could not succour their rear. I should therefore probably make the Second in Command's signal to lead through about their twelfth ship from their rear; or wherever he could fetch, if not able to get so far advanced. My line would lead through about their centre: and the advanced squadron to cut three or four ships ahead of their centre, so as to ensure getting at their Commander in Chief, on whom every effort must be made to capture.

whole impression of the British Fleet must be, to overpower from two or three ships ahead of their Commander in Chief (sup-


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 posed to be in the centre) to the rear of their Fleet.

suppose twenty sail of the Enemy's line to be untouched: it must be some time before they could perform a manuvre to bring their force compact to attack any part of the British Fleet engaged, or to succour their own ships; which indeed would be impossible, without mixing with the ships engaged. The Enemy's Fleet is supposed to consist of forty-six sail of the line; British, forty: if either is less, only a proportional number of Enemy's ships are to be cut off; British to be one-fourth superior to the Enemy cut off.

must be left to chance: nothing is sure in a sea-fight, beyond all others; shot will carry away masts and yards of friends as well as foes: but I look with confidence to a victory before the van of the Enemy could succour their rear; and then that the British Fleet would most of them be ready to receive their twenty sail of the line, or to pursue them should they endeavour to make off.


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 the van of the Enemy tack, the captured ships must run to leeward of the British Fleet: if the Enemy wear, the British must place themselves between the Enemy and captured, and disabled British ships: and should the Enemy close, I have no fear for the result.

Second in Command will, in all possible things, direct the movements of his line, by keeping them so compact as the nature of the circumstances will admit. Captains are to look to their particular line as their rallying-point; but in case signals cannot be seen or clearly understood, no Captain can do very wrong if he places his ship alongside that of an Enemy.

of the intended attack from to-windward, the Enemy in line of battle ready to receive an attack:

The divisions of the British Fleet will be brought nearly within gun-shot of the Enemy's centre. The signal will be made for the lee line to bear up together; to set all their sail, even


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, in order to get as quickly as possible to the Enemy's line; and to cut through, beginning from the twelfth ship from the Enemy's rear. Some ships may not get through their exact place, but they will always be at hand to assist their friends. If any are thrown in the rear of the Enemy, they will effectually complete the business of twelve sail of the Enemy.

the Enemy wear together, or bear up and sail large, still the twelve ships composing in the first position the Enemy's rear, are to be the object of attack of the lee line, unless otherwise directed by the Commander in Chief: which is scarcely to be expected; as the entire management of the lee line, after the intentions of the Commander in Chief are signified, is intended to be left to the Admiral commanding that line.

remainder of the Enemy's Fleet, thirty-four sail, are to be left to the management of the Commander in Chief; who will endeavour to take care that the movements of the Second in Command are as little interrupted as possible.

NELSON BRONTE

By Command of the Vice Admiral.


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, September 14th, 1805. At six o'clock arrived at Portsmouth; and having arranged all my business, embarked at the bathing-machines with Mr. and Mr., who dined with me. At two got on board the Victory, at St. Helen's.

, Sept. 25th, 1805. Light airs southerly. Saw the rock of Lisbon S.S.E. ten leagues. At sunset the Captain of the Constance came on board, and sent my letters for England to Lisbon, and wrote to Captain and the Consul. The Enemy's Fleet had not left Cadiz the 18th of this month, therefore I yet hope they will wait my arrival.

, Sept. 28th, 1805. Fresh breezes at N.N.W. At day-light bore up, and made


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 sail. At nine saw the Ætna cruising. At noon saw eighteen sail. Nearly calm. In the evening joined the Fleet under Vice Admiral. Saw the Enemy's Fleet in Cadiz, amounting to thirty-five or thirty-six sail of the line.

, Sept. 29th. Fine weather. Gave out the necessary orders for the Fleet. Sent Euryalus to watch the Enemy with the Hydra off Cadiz.

, October 9th. Fresh breezes easterly. Received an account from, that the French ships had all bent their top-gallant-sails. Sent the Pickle to him, with orders to keep a good look-out. Sent Admiral the  truth. At night wind westerly.

, Oct. 14th. Fine weather: westerly wind. Sent Amphion to Gibraltar and Algiers. Enemy at the harbour's mouth. Placed Defence and Agamemnon from seven to ten leagues west of Cadiz; and Mars and Colossus five leagues east of the Fleet, whose


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Rh injudicious, for their object has not been defeated. Naked statements, which offend the accurate and cautious, are necessary upon occasions to infuse seriousness into the indiiferent.

These are the reasons, whether satisfactory or not in the judgment of others, for the style and manner of the earlier Tracts. When, however, from the circumstances of the times or from other causes, more interest seemed to be excited among Churchmen concerning those doctrines which it was their object to enforce, discussion became more seasonable than the simple statements of doctrine with which the series began; and their character accordingly changed.

It would be unbecoming to go into this detail in this place, were not a prejudice entertained against these Tracts by many who know them only by a few detached sentences, complete indeed in themselves, and on the whole not unfairly selected, but which, so detached, will not be understood in their true sense and bearings by readers unacquainted with the language of our old divinity. Dr. Pusey's valuable Pamphlet in answer to one objector, is, with the kind consent of the Author, appended to this Advertisement.

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 station is from fifteen to twenty west of Cadiz: and by this chain I hope to have a constant communication with the frigates off Cadiz.

, Oct. 16th. Moderate breezes westerly. All the forenoon employed forming the Fleet into the order of sailing. At noon fresh breezes W.S.W. and squally. In the evening fresh gales. The Enemy as before, by signal from Weazle.

, Oct. 17th. Moderate breezes north-westerly. Sent the Donegal to Gibraltar, to get a ground-tier of casks. Received accounts by the Diligent storeship, that Sir was supposed in sight of the French Rochefort squadron; which I hope is true.

, Oct. 18th. Fine weather: wind easterly. The Combined Fleets cannot have finer weather to put to sea.

, Oct. 19th. Fine weather: wind easterly. At half past nine the Mars, being one of the look-out ships, made the signal that the Enemy were coming out of port. Made the signal for a general chace S.E. Wind at south; Cadiz bearing E.S.E. by compass, distance sixteen leagues. At three the Colossus made the signal that the Enemy's Fleet was at sea. In


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 the evening made the signal to observe my motions during the night; for the Britannia, Prince, and Dreadnought, to take stations as most convenient; and for Mars, Orion, Belleisle, Leviathan, Bellerophon, and Polyphemus, to go ahead during the night, and to carry a light, standing for the Straits' mouth.

, Oct. 20th. Fresh breezes S.S.W., and rainy. Communicated with Phbe, Defence, and Colossus, who saw near forty sail of ships of war outside of Cadiz yesterday evening; but the wind being southerly, they could not get to the mouth of the Straits. We were between Trafalgar and Cape Spartel. The frigates made the signal that they saw nine sail outside the harbour. Sent the frigates instructions for their guidance; and placed the Defence, Colossus, and Mars, between me and the frigates. At noon fresh gales, and heavy rain: Cadiz N.E. nine leagues. In the afternoon Captain telegraphed that the Enemy seemed determined to go to the westward;—and that they shall not do, if in the power of  to prevent them. At five telegraphed Captain, that I relied upon his keeping sight of the Enemy. At five o'clock


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 Naiad made the signal for thirty-one sail of the Enemy N.N.E. The frigates and look-out ship kept sight of the Enemy most admirably all night, and told me by signal which tack they were upon. At eight we wore, and stood to the S.W.; and at four wore and stood to the N.E.

, Oct. 21st. At day-light saw Enemy's Combined Fleets from east to E.S.E. Bore away. Made the signal for order of sailing, and to prepare for battle. The Enemy with their heads to the southward. At seven the Enemy wearing in succession.

Then follow the Prayer and Codicil already inserted in pages 14 and 15 of the Narrative, which conclude manuscript.


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The following is Dr. 's answer to an Anonymous Pamphlet, reflecting on these Tracts, which appeared in the end of March 1836. The Pamphlet professed to be a "Pastoral Epistle from the Pope to some Members of the University of Oxford." Dr. 's answer was entitled "An Earnest Remonstrance to the Author of the Pope's Letter," &c. Tract 74 was added to it as an Appendix. Two extracts have been added by the Author in the second reprint.

,—Two reasons induce me to appeal to you, in reference to your recent Letter: First, that I have escaped your censures: Secondly, that (if report speaks right) you are one from whose straight-forwardness, sincerity, and love of truth, I once anticipated much. In both ways, therefore, I am freed from the risk of personal feelings.

I would, then, regard you as the representative of a certain class (as every one is, more or less); and would direct my observations to an evil prevalent in these times, not to you. That evil (and there could scarcely be a greater) is the use of banter and jest in things serious. It is true that the minds of a large portion of our countrymen seem to have become so inured to this, that persons have even despaired of addressing them, except in a tone even lower than that low tone to which they have sunk. It is true, that even among the better-instructed orders, persons, in their degree serious-minded, have often thought themselves obliged to condescend to the conventional language of the day, as their only

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Rh words:—"Thou art the daughter of one that ever chaunteth for hire the praises of others; of one that asketh for charity; of one that accepteth alms; whereas I am the daughter of one that receiveth adorations, of one that giveth, of one that never accepteth anything in gift." These have been the words repeatedly spoken unto me by the proud Sharmishta, the daughter of Vrishaparva, with eyes red in anger. If, O father, I am really the daughter of a hired chaunter of praises, of one that accepteth gifts, I must offer her my adorations in hopes of obtaining her grace. O, of this I have already told her."

"Sukra replied, 'Thou art, O, no daughter of a hired adorer, of one that asketh for alms and accepteth gifts! Thou art the daughter of one that adores none; of one that is adored by all. Vrishaparva himself knoweth it, and Indra, and king Yayati too, that the inconceivable Brahma, the un-opposable God-head, is my strength. The self-create himself, gratified by me, hath said that I am for aye the lord of that which is in all things on earth or in heaven. I tell thee truly that it is I who poureth rain for the good of creatures and who nourisheth the annual plants that sustain all living things.

Vaisampayana continued, "It was by such sweet words of excellent import that the father endeavoured to pacify his daughter afflicted with woe and oppressed by anger."

And so ends the seventy-eighth Section in the Sambhava of the Adi Parva.

( Sambhava Parva continued. )

"Sukra continued, 'Know then, O, that he that regardeth not the evil speeches of others, conquereth everything! The wise say that he is a true charioteer who without slackening holdeth tightly the reins of his horses. He, therefore, is the true man that subdueth, without indulging, his rising wrath. Know thou, O , that by him is everything conquered who calmly subdueth his rising anger.


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 hope to gain a hearing. It is true, also, that the appetite has grown with its unwholesome nourishment; and now, as by a self-created necessity, all seem to be absorbed into the tide; and it is rare to find any cause advocated in the plain, open, straightforward tone which was once the characteristic of our land. Not simply our periodical literature, or our journals, but our courts of law, and that branch of the legislature which is liable to be affected by popular taste, are infected by the mal-aria of this destructive habit. Man's happiness, or God's displeasure, domestic misery or national sin, are continually a jest. Adultery, fornication, theft, drunkenness, lying, are daily matters of sport. If justice is to be perverted, men's minds blinded, sin to escape unpunished, a jest is the refuge; caricatures are the vehicles of public instruction, and "a mock at sin" the source of public amusement.

It is indeed strange, and a lamentable part of this sad merriment, that many right-minded people are so little sickened at it, or so little express their weariness. But so it is with every other prevailing sin; those who live amidst it are, in their several degrees, infected by it: the fineness of our moral perceptions is blunted by the very acquaintance with sin, all mention whereof we at first loathed; our ears become untuned to the chords of Heaven, by listening constantly to the jarring sounds of earth, and are less offended by their discordancy. Most men feel themselves compelled to an over-acquaintance with the things of the day, and so are insensibly inured to its wretchedness, and deem it irremediable. They are indeed mistaken; the more earnest spirit is not fled: it sleeps only, or rather is drugged by these continued poisonous appliances; and brighter days may yet come, when our countrymen shall again be spoken to, not as members of a vast machine, or as the slaves of temporal interests, but as responsible immortal agents, as Christians, as members of Christ the Son of God.

It is one consolation, that if all our outward privileges, yea, every thing except truth, be lost, then the temptation of ap-

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 pealing to any other principle but truth and holiness, will be removed also.

These however have been, in many cases, worldly things, treated of by men of this world: a pernicious principle was admitted; but the source of truth and holy earnestness was not yet poisoned; banter had not yet been employed upon things Divine. This is now inadvertently commenced, and the more dangerously because inadvertently. Hitherto it had scarcely been found except among Infidels.

I would then, Sir, request you for a while to lay aside the thoughts of the amusement which your Letter has caused to yourself or others, and to consider in earnestness some of the evils into which it has betrayed you, and may and must betray others. I will confine myself to three:—

 * 1) Irreverent treatment of holy things.
 * 2) Sacrifice of truth.
 * 3) False insinuation, and consequently slandering.

And these I impute, not to yourself: on the contrary, I think that, in your natural character, you would be very far from them. I would speak of them only as inseparable consequences of the line which you have taken.

I. .—It may sufffice, Sir, to mention some of the subjects which were necessarily brought into your ill-advised jest.
 * 1) Persons' belief as to our Lord's presence in the Communion.
 * 2) The mode in which the Commission ordained for the preaching and maintenance of the everlasting Gospel has been continued to this day.
 * 3) The maintenance of the form of our public worship, and the doctrines therein contained.
 * 4) The comfort which the dying Christian obtains from the provisions of our Church.
 * 5) The unity of the Church of Christ.
 * 6) The authority of His bishops, or of His Church.

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happened to our monetary system during and after the war, some of the things that a crowd of critics and reformers want to do to it now, and the reasons which seem to me to confirm the opinion of our leading bankers, that the first thing to do is to get back to the gold standard on the pre-war basis, are the subject of this book. It cannot claim to have covered all the suggestions of all the monetary reformers, who have been multiplied almost as fast as money by the efforts of our politicians. All that it can hope to do is to cull a few of the brightest flowers of the criticism that has bloomed so freely, and to put before the lay reader, in language that he can understand, some of the ambitions of those who believe that the economic Paradise is to be won by monetary manipulation. Dryden thought that "no Government has ever been,

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 or ever can be, wherein timeservers and blockheads will not be uppermost." Without going all this way with him, we may safely contend that the financial achievements of our war Governments do not encourage us to increase official control of the Money Market.

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Five ways of Raising Money for War—Taxation—Loans Subscribed with saved Money—Loans Raised Abroad—Loans Borrowed from

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 Banks—Notes Printed and Issued—The War-time Debasement—Was it Necessary?—What an Ideal Statesman might have done—France and Germany's Bad Example—The Spirit of the Country—The Tame and Fearful Capitalist—The Patriotic Manual Workers—The Opportunity, missed—War Borrowing made Unnecessarily Dear—Puffed out Banking Figures—The Increase in Currency—And in Cash at the Bank of England—Consequences of the Bulge—In Favour of Producers—And so, at First Sight, to the Community—As long as the Creditor is not Frightened out of Existence—The Wine, the Bottles and the Crowns.

Peace Optimism—General Election Promises—Vindictiveness Maintained—Its Causes—Making Germany Pay—Lack of Generosity to Allies

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 —Bad Spirit at Home and Abroad—Bad Leadership—The Workers' Ambitions—And Natural Mistakes—Expenses of Readjustment—Monetary Effects of Public and Private Profligacy—The Gold Standard Abandoned—Was this Necessary?—Gold could not have gone Quickly—The Federal Reserve Board's Nerves—The Floating Debt—The Funding Loan Failure—Reaction Against Extravagance—Bank Rate Raised—A Treasury Minute.

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one of those pleasant after-dinner occasions when a Chancellor of the Exchequer is expected to unbend and to tell the nation and especially the City how well they are faring under his judicious treatment, Sir Robert Horne quoted Comte's belief that in a well-governed community all political power should be wielded by bankers. He added, however, that we can only arrive at this delectable situation when civilization attains the apex of its achievement, "and for this reason: I am sure we must all realize how hard it is to become a banker. I think I am right in saying that in all history, so far as we know, there is only one great statesman who has succeeded in becoming a banker, and I believe he presides over the London Joint City and Midland Bank." (Laughter and cheers).

Whatever we may think of this doctrine that None

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 bankers are the best political rulers, there can be no doubt that political rulers have lately shown amazing capacity for creating chaos in the world of banking. Under the stress of war they seized and warped for their own purposes the banking and currency system of this country and of all other countries engaged in it and of many of those that were only affected indirectly, with the result that a system which had been brought to something very near to perfection is now

a melancholy mockery of its former beauty and efficiency. Makers of this chaos claim that it was a necessary part of the cost and consequences of war. If so, it is only one more joint in the harness of our so-called civilization, which had not even taught us how to conduct mutual slaughter on a world-wide scale, without very nearly wrecking the means by which we used to buy and sell. In some countries, indeed, the wrecking process may be said to have been complete. In August 1923 the German mark fell to about a two millionth of its pre-war value in sterling, being dealt in, or quoted, at 40 million to the pound.

In England the achievements of our rulers

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 in the matter of currency chaos were much less devastating in their effects. With us the highest point, touched by the prices of commodities, which is the rough measure of the debasement of the buying power of our money, showed, as marked by the Economist Index Number, a multiplication in the course of nearly six years by a mere trifle of 3¼ as compared with the pre-war average, and in the course of the next two years this 3¼ was divided by two. Taking 100 as the figure for the general level of the prices of goods in July 1914, March 1920 recorded 325 and February 1922 showed that the average had come back to 166.

The effect of this rapid backward swing was in some ways much more disconcerting to industry than that of the previous rise, which had, while it lasted, greatly simplified the problems of production and commerce by ensuring a continuous advance in paper profits to all who held a stock of goods. But even the uncomfortable effects of this inconveniently rapid fall were preferable to the sapping of the foundations of the economic fabric that would have been involved by the continued progress of the process of debasement. Indeed, when we think of all that has happened to the

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 English Money Market during and since the war, it seems to have good reason to be surprised, and proud of itself, when it finds itself still in existence and more or less doing its ordinary work. The marvel is, after the terrific shock that crashed upon monetary and all other business, that we have any financial institutions still standing on their legs. This is still more so when we remember that we of the common herd saw only a small part of all that happened. Much of the action took place behind the scenes. Banking statements and balance sheets were always designed rather to veil discreetly the modesty of our monetary institutions than to let the full light of day fall upon the beauties of their figures and proportions. Since the war this has been more than ever so. Much of the information that used to be made public has been withheld, and, owing to the enormous complications and cross currents behind the figures that have been published, it has been impossible to draw more than uncertain and halting inferences concerning their meaning.

We do know, however, that the English Money Market was made an instrument of war, and as such was very roughly handled. It was by no meang the same machine when

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 it tried to take up its usual work when the war was over. Its basis and character had been radically altered. The politicians and officials who had charge of their country's fortunes during the contest found ready to their hand an almost too perfect financial weapon. This weapon they took and worked and overworked and twisted all out of shape. They did so chiefly because they found, in the Money Market's almost unlimited power to create credit, the easiest and most popular way of getting money that was wanted for the war. Money that they took by taxation meant a wrench. Money that they wheedled out of our pockets in subscriptions to loans meant much drum beating and effort. Money that they manufactured with the help of banks, thanks to the ever expanding elasticity of the Money Market, was much more easily come by and seemed at first to touch nobody's pocket.

Small wonder that politicians gleefully seized a weapon which solved for them one of the worst of the war's problems, and used it with a freedom that was only checked by the need for preserving the financial decencies before the critical eyes of neutrals, from whom it might be necessary to borrow. With such effect did they use it that the Money Market,

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 as it was before the war, is now a matter of ancient history. We are trying to struggle back to something like it, through a chorus of obstructive and objurgating critics who would rather try new systems. One of the objects of this book is to remind readers who are not versed in such matters of the benefits that our old system wrought for us, to show how it was twisted out of shape, and to put before them some of the proposals of the critics and reformers.

Before the war then our monetary system was based on gold, and the pieces of paper—notes and cheques—by which most of our large transactions were paid for, were claims to so much gold which the holder could turn into gold if he wanted to do so.

Our "legal tender" money—that is, money in which creditors were obliged to accept payment—consisted of golden sovereigns and half sovereigns and Bank of England notes, which were practically gold certificates. Silver and bronze coins were legal tender up to forty shillings and one shilling respectively.

Though practically a gold certificate, the Bank of England note issue was not wholly backed by gold in the Bank vaults; part of it was what is called "fiduciary," that is,

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 "confidence money," being currency backed not by metal, but by British Government securities. The amount of the fiduciary notes, however, was fixed by the Bank Act of 1844, and for many years before the war had stood at £18,450,000. Above that point for every Bank note in existence there had to be so much gold coin or bullion in the Bank of England's vaults. It is true that under the terms of the Act, a certain amount of silver (one-fifth of the total bullion) was allowed as backing to the note issue. This right to base the Bank of England note on silver, however, had: not been used since 1861, and so, except to the extent of £18,450,000, the Bank of England note was actually a gold certificate. Its holder could always be certain of being able to turn it into gold on presenting it at the Bank of England. And this free and immediate convertibility of the Bank of England note was recognized as one of the chief props of the English monetary system. Anyone who had a Bank of England note, or any number of them, could rely upon being able to turn them into English sovereigns of the recognized weight and fineness without question and without delay, and to send the sovereigns to any country in which he wanted to put them.

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 The Bank of England note, however, was seldom seen in the course of ordinary payments. It used, I believe, to change hands in considerable quantities on race-courses, but as a general rule monetary business in this country was done, when it was a matter of comparatively small sums, by payments in gold, or in the subsidiary currencies of silver or bronze; or when larger amounts were being settled, by means of cheques drawn upon banks. These cheques also, though not legal tender, were always convertible, if the holder wished, into gold. Anyone who held an uncrossed cheque on an English bank and wanted gold for it could either go to it and demand its payment, in which case he would probably be offered the option of receiving payment in gold or Bank of England notes, and so could take gold at once. But if the bank preferred to exercise its legal right of meeting the cheque with Bank of England notes, which we have seen to be legal tender, then our gold seeker could take the notes to the Bank of England and demand sovereigns in exchange for them. Or, he could go to his own bank—and this he would have to do if the cheque which he held had been "crossed," pay the cheque into his account and draw against it. His own bank

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 again would have the option of paying him in gold or in Bank of England notes, but in ordinary times would certainly be prepared to provide its own customer with gold. If for some special reason it stood on its right to pay in notes then the customer would have to go to the Bank of England for the gold that he wanted.

Thus before the war all our money was gold or claims to gold. Since cheques give their holders the right to take gold, the banks could not make themselves liable to meet cheques unless they had a proportion, such as experience had shown to be sufficient, of gold or of claims on the Bank of England's gold against the deposits of their customers. And so our money—in which terms I include coins, notes and cheques—could only be increased in quantity—except within the limits laid down by banking prudence—by bringing in more gold from abroad to be used either in circulation or in reserves against notes or deposits.

This foundation on which the English monetary system rested was taken from under it during and after the war. Its importance is not, at first sight, very evident. To the man in the street it might seem that all he need ask

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 from the money that he takes in payment for his services, and pays out in payment for the goods that he needs, is efficiency in providing him with what he wants. As long as a piece of paper will buy things for him, he is not much cheered by the thought that he can, if he wants to, turn it into gold, which he would never want to do, except in order to turn the gold then, or on some "rainy day," into something else that he wanted. All this is quite true and was very sensibly recognized by most of us in the early days of the war when we were asked to help to win the war by paying all our gold into our banks and using the new Treasury notes instead, so that the gold might be sent abroad to buy things wanted for the fighting men.

Nevertheless, the patriotism of the public was promptly punished for the readiness with which it virtually renounced its right to demand gold and so gave the Government the power to print as much paper as it liked. Then the man in the street found out that money has not only to be freely convertible into goods, but must also, to do its work soundly, remain fairly steady in value and must, if possible, be convertible into the same quantity of goods to-day, and a week hence, and a year hence,

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 and a hundred years hence. For the consequence of giving the Government a free hand with the printing press was that debauch of currency and credit creation which has already been referred to and will have to be more fully described later. It brought in its train a rise in prices that inflicted great injustice on all who were not able to increase their money incomes, and also upon those who had lent money at a fixed rate of interest or had made long contracts, such as are usual when houses are let, by which the user of an article paid a fixed sum each year for its enjoyment. All these unfortunates found that the money they received brought them in a continually diminishing amount of goods when they tried to buy with it—in other words that paper money did not long possess the same efficiency in providing its holders with what they wanted, as was formerly shown by gold. For the simple reason, that gold cannot be multiplied indefinitely, and paper can; and, Governments being what they are, there is always great danger that a people which adopts a paper currency and so gives its Government the power of printing money without limit, will find that the Government is printing too much and is thus lowering the value of all the money in

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 existence, including gold, and causing a rise in prices with the evil consequences above set forth.

Such was the great advantage for purposes of use at home of a money based on a metal which the Government could not multiply at will. Perhaps even greater was its benefit in the field of foreign commerce. If stability of prices is a blessing when we buy and sell goods and services to one another, it is still more so when we buy and Sell abroad, if only because the transactions of foreign trade take a longer time to carry through and so involve longer credits. The merchant who is selling goods to China or Peru and may have to wait months before he gets his money, is not encouraged to do so if he finds that by the time he gets his money, it has so much less buying power than he expected when he shipped the goods, that he has made a loss on the bargain instead of reaping a pleasant profit.

When once the stability of prices is undermined by too much money being printed this may happen even to English merchants who have stipulated for payment in English money. But when payment is made in foreign money and foreign governments are working the printing press even more vigorously than ours,

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 then the problem becomes complicated by violent movements in "exchange," that is in the value of other moneys as expressed in pounds. Instability and uncertainty play a duet with a crescendo movement that ends in a crash of hideous discord. As everyone knows these things have happened on a scale which has reduced foreign trade to a blind gamble and made more evident than ever the blessings that were secured to us by the gold standard, as used by us and the other economically civilized countries.

For they also had currencies which were more or less convertible into gold. It was always the boast of England that only in England did we enjoy ready convertibility, that only here could any holder of a monetary claim rely with certainty on being able to convert it into gold on demand. Nevertleless, though in other centres convertibility may not have been as free and certain and quick as it was here, it was at least the ostensible basis of the monetary System, and when the System was squeezed steadily enough it had to part with gold. When, during the crisis of 1907, the Bank of England put its official rate up to 7 per cent. and so exerted really severe pressure on all the countries of the world to send their gold, which

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 they owed us or were prepared to lend to us, in order to help London to regulate and check the crisis which had been begun in America, the effect of this action was that gold poured into London from no less than seventeen other countries. Thus, though the gold basis of the currency systems of other countries was not as sure and solid as that of England, it was so to a sufficient point to secure that, at least in times of crisis and when sufficient pressure was applied, the principle of convertibility was allowed to work and the gold, when demanded, was surrendered to those who had claims for it and was allowed to leave the country and go to the place where it could be more usefully employed.

This gold backing to our monetary system and that of other countries in effect provided that all the great trading and financial countries were working with the same money. The nations coined the gold into coins of varying denominations and varying fineness, but the same metal was behind the monetary systems of all.

From this fact there came the great advantage that price levels were kept more or less in agreement in one country and another. If prices rose faster here than in other countries,

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 we became a good country to sell to and a bad one to buy from, goods poured in and our exports were checked; if this process went far enough then some of our gold had to be sent abroad to pay for the goods and services which we had been buying abroad beyond the value of those which we were selling. The result of this export of gold was that the basis of our monetary system was narrowed, and we had to put up for the time being with a smaller volume of money, because the loss of gold made it necessary for the banks to contract the volume of deposits and cheque money, so as to keep up their proportion between cash and liabilities. We had less money to spend and prices would tend to fall because there would be so much less money in our pockets and at our banks ready to pay for goods. We thus became for the time being a bad country to sell to and a good country to buy from, and the process by which we had been buying too much was reversed. In this way big movements in prices could only take place in all the gold using countries together, and so the level of prices was kept much more steady than it would have been if each country could perform fancy variations on it without any reference to the tune being played by the rest of the

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 orchestra. So the gold standard, by a beautiful system of checks and balances, maintained price levels in harmony among all the countries that used it and allowed it free play.

Another effect of the use by the chief countries of the same money was that it steadied rates of exchange, which are the prices of their currencies expressed in one another. When claims on England were so plentiful in New York that the price of sterling money in dollars fell below a certain point which was called "gold point," then these claims were in effect sent to London for collection in gold which was shipped to America. The cost of shipping and insuring the gold and the loss of interest involved by its journey were the influences which regulated the gold point. When claims on London were scarce and in demand, the same principle worked in the opposite direction, and so the rate of exchange between London and New York, or between any two countries with monetary systems effectively based on gold, could not, in theory, vary beyond certain limits. Owing to the varying effectiveness of the gold standards of the gold standard countries, fluctuations often exceeded the theoretical limits, but they were very definitely checked and restricted.

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 Such then were the chief blessings that the gold standard gave to us and to other countries that used it:—

1. Stability of prices at home.

2. Parallel movements in our prices and those of other gold using countries.

3. A limit on fluctuations in rates of exchange.

Stability of prices was by no means perfect; but the fluctuations that happened all through the century before the war were not much more than a ripple on the surface as compared with the tidal waves of the war and after-war period. It is only since we have lost these benefits owing to the surrender of a currency based on gold and the adoption of one based on the whims of politicians and the insolvency of Governments that we have fully recognized the beauties of the system that our rulers and those of other countries thought it necessary to wreck.

This system was provided for us partly by the Government, but chiefly by our banking machinery. The Government minted for us gold and subsidiary coins which we used in retail transactions and the Government had, by the Bank of England Charter Act of 1844, settled the terms under which the Bank of

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 England was allowed to issue notes. Since these forms of currency or money were, as has been stated, legal tender, and so by the law of the land had to be accepted in payment by any creditor who had a claim for money, it was clear that they had to be subject to legal restriction. But the Bank of England's ordinary banking business, apart from its strictly regulated note issue, was left entirely to the discretion of its Governor and Directors; and we shall find that they, by the growth of a convenient monetary convention, were able to give quite unregulated elasticity to the otherwise too tight-laced system devised by Parliament. And still further elasticity was provided by the fact that the cheques, which had come to be the form of currency in which nearly all the big commercial transactions of the country were settled, were drawn on the banks by their customers according to mutual arrangements which were subject to no legal regulation, but depended solely on the prudence and sagacity of the bankers in granting credits against which cheques could be drawn.

Thus in the three generations before the war the bankers had taken the manufacture of money, in the widest sense of the word, out of the hands of the Government into their own,

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 The quiet frame of mind of a simple, undisputing Christian.

It is not here the question, whether any of the writers whom you ridicule, over-stated the truth upon any of these points. I am convinced that they have not. But granting that they had, is ridicule a safe, a Christian, a godly, weapon to employ in such matters? Is it possible that those who should have been thereby made ashamed of, or scared from, any of these statements, would approach the consideration of the truth itself with that deep and considerate earnestness and reverence of mind which the subject requires,—if, indeed, you yet hold that there be any truth at all connected even with these subjects? Is it not too probable that the infection of this ridicule will extend to other truths; some of which, I presume, you would not wish to see thus assailed? since the efficacy of Baptism, the strengthening of the believer's soul by the Body and Blood of his Lord in the holy Eucharist, the Divinity of our Redeemer, and His sacrifice for sin, have been, and still are by some, represented as relics of Popery? The Socinians, and, more recently, the Rationalists of Germany, regarded or represented themselves as carrying on the work of the first Reformers, in purging Christianity from Papal corruptions.

Ridicule cannot be employed with impunity as a test of truth: error and truth often lie so closely together, nay, most religious error has so much of truth mingled up with it, that the very love of truth ought to preclude the use of jesting; not to say that the fearfulness of the subject, and the majesty of Almighty God, might well instinctively awe man into sobriety. For, through this close connexion of truth and error, mire cannot be cast at error, without defiling the truth also. To take the most palpable errors,—Could a man jest at Transubstantiation, and not thereby unfit his mind for the reception of the holy mystery of the Communion? or would not a mocking at the false doctrine of the Mediation of the Saints lower men's notions of their high and holy state? or has not the

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 had broken the bands of the strait waistcoat in which business had been officially swaddled and had given it room to grow subject solely to regulation by banking prudence. Government had its revenge when the war came by making the bankers use the machine to suit its own purposes, expanding the elasticity with which they had endowed it into a Gargantuan balloon blown out to meet the exigencies of bad war finance.

The pre-war system can be most simply studied by looking at the balance sheet of one of our English banks, a summarized specimen of which is given below. Among the liabilities the large item of current and deposit accounts represents the extent to which the customers of the bank are able to call upon it to meet cheques drawn upon it. In the case of current accounts the money so held by the customer to his credit can be withdrawn at any moment. In the case of deposit accounts a certain amount of notice, usually a week, is required. But even in this case if the customer wanted money in a hurry he would certainly be able to arrange with his bank, though it might cost him something to do so, to be able to draw against his deposit account forthwith.

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Bankers had to decide in the light of their long experience of these matters, the proportion which prudence required them to maintain between this mass of deposits, which they might be asked to meet in cash, and their holding of cash, on the other side of the balance sheet. A rough and elastic proportion was thus established between their holdings of legal tender cash and credit at the Bank of England, and the extent to which the banks could create deposits by granting credits to the community. It will be seen, when we look again at the balance sheet, that, besides their cash, the banks held assets which, in varying degrees,

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 could be turned into cash. They held loans at call and short notice, which are probably loans granted to bill-brokers and stockbrokers in the City of London, which, in ordinary times, a bank is easily able to call in. They also held a large portfolio of bills discounted, that is to say, bills of exchange or Treasury Bills which are, in most cases, a promise to pay issued by other banks or leading London finance houses, or merchants of established reputation, or the British Treasury, falling due at various dates, and quite certain in the ordinary course of business to be met at the date of maturity. They also hold investments in British Government and other securities, which, in most cases, could only be turned into cash by being sold on the Stock Exchange at the best prices they would fetch. In the case of most of them there is a practical certainty of being able to sell rapidly, and at a price near or above the price at which they stand in the books of the banks which held them.

The largest item on the asset side of the balance sheet consists of the loans and advances to customers, through which the banks of this country perform their function of directly assisting British trade and production, by supplying credit to customers in order to finance the enter-

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 prises in which they are engaged. These advances are clearly less liquid than the rest of the assets held by the bank. Nominally, they are usually repayable at an early date. But a bank which had made an advance to a customer would naturally hesitate much more about pressing him to repay it, if doing so would hamper him in the course of his business, than it would about calling in loans from bill-brokers and stockbrokers, or other professional dealers in credit, or by selling its own investments in the Stock Exchange.

But the most important thing to be noted about the banks' balance sheets is that by making these advances and making these investments the banks create new credit, which becomes expressed in deposits, either in their own books or in those of other banks. Whenever a bank makes a loan, it gives the borrower the right to draw upon it to the extent of the amount of the loan. The borrower, who gets this right, exercises it by drawing a cheque, which he pays out in the course of the transactions for which he had arranged the credit. Whether it is a case of a bill-broker, who borrows to finance a purchase of bills of exchange; or a stockbroker, who borrows to carry securities for his clients who hope to sell

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 them at a profit; or a merchant, who borrows to buy commodities; or a manufacturer, who borrows to pay for raw material; or an ordinary individual, who borrows because he wants to buy an estate and has not yet provided, by the sale of securities or otherwise, the money that he needs for his purchase—whatever the reason for the purpose of the loan may be, the result will be the same. The borrower gets from his bank the right to draw the sum in question, say £20,000. He pays this £20,000 to the seller, to whom he owes money for bills of exchange or securities or raw material, or whatever it may be, and the seller pays the cheque into his own bank. The cheque goes through the clearing house and transfers £20,000 from the credit at the Bank of England of the paying bank to that of the receiving bank. The borrower's bank holds £20,000 less of cash at the Bank of England and £20,000 more in the shape of a loan to customers. The total of its balance sheet is unaltered and there has been a change, almost negligible in the vast total of its whole figures, in the nature of its assets. The seller's bank, on the other hand, has added £20,000 to its balance at the Bank of England and on the other side of its balance sheet the seller's account has been

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 increased by this £20,000. This addition to deposits has been directly caused by the credit created by the borrower's bank.

The same result appears if a bank buys bills of exchange from a bill broker—it parts with so much cash at the Bank of England which the broker transfers to his bank, so increasing both its cash and its deposits. Again, if a bank makes an investment by sending a broker into the Stock Exchange and buying, for example, £100,000 worth of Consols, it pays the seller £100,000 by a draft on its balance at the Bank of England. Its holding of cash is thus reduced by £100,000, its holding of investments is increased by the same amount, but the seller of the Consols pays into his own bank £100,000 of new credit, which has been created by the purchasing bank. The same thing happens when a bank, instead of buying securities on the Stock Exchange, invests by subscribing directly to a new issue made by the Government or any other borrower. The only difference is that in this case it hands over a draft on its balance at the Bank of England to the issuer of the loan instead of to someone who is selling through the market. As before, its cash is depleted, and its investments are increased by the amount of the transaction, but

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 the issuer of the loan has got a cheque which he pays into some bank or other increasing its cash and its deposits. If the final receiver of the money borrowed or invested is a customer of the lending bank, then the lending bank will have increased its own deposits; its cash at the Bank of England will be unchanged, and its advances (or investments) and deposits will both be increased by the sum of the loan.

It is thus of the utmost importance to remember, as will be seen when we go further into our subject, that whenever a bank makes an investment or a loan or discounts a bill it is increasing the deposits, either of itself or of some other bank—of itself if the person to whom its borrowing customer finally pays the money lent is also one of its customers; as in the case of an investment if the seller of the security is one of its customers, or hands on the money received to one of its customers. By this process the banks create buying power or what may be called potential currency. They create the right to draw cheques, which are usually received without question in payment for commercial and financial transactions. But the extent to which they can engage in this currency making business is roughly limited by

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 the extent of their holding of cash—legal tender money—and balance at the Bank of England; since they have to consider the proportion between their cash holding and their liability to their customers on current and deposit account. The amount of their cash holding depended, before the war, on the amount of gold that was in the country, since legal tender was then gold or a Bank of England note; and the amount of their balance at the Bank of England depended largely on the action of the Bank of England in creating credit by lending and investing, which it had been left free to do at its own discretion by the Bank Act of 1844, which had tied its hands so tight in the matter of note issue. And now we have to look at a pre-war specimen of the Weekly Return issued by the Bank of England:—

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It will be seen that the account is divided into two portions—the Issue Department and the Banking Department. As everyone knows, this eccentric and unique arrangement was imposed upon the Bank of England by Parliament, when it devised the Bank Charter Act of 1844. The Issue Department shows the total of the Bank of England notes issued with the assets held against them on the other side. These assets consist of gold coin and bullion to the extent of the whole amount of the note issue, except the £18,450,000, the fiduciary issue which is permitted, as already described, and was in February 1923 raised to £19,750,000. The Government debt is merely a book debt between the Government and the Bank of England—the very much expanded descendant of the £1,200,000 which was lent to the Government of William III, when the Bank of England was originally

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 founded. There are also other securities in the Issue Department, which are, and in fact always have been, securities of the British Government. But it should be noted that nothing in the Bank Act restricted the Bank of England to securities of this kind for the backing of the fiduciary part of its note issue.

When we look at the Banking Department's figures we find it much more similar to the balance sheet of an ordinary bank. Capital of course explains itself. "Rest" is the somewhat eccentric title under which the Bank of England describes its reserve fund, which is also eccentric in the fact that it fluctuates with a frequency and to an extent which is unusual with other reserve funds. In fact this item appears to include both the reserve fund and the profit and loss account.

In the next two items we find the real significance of the Bank of England's position. The Public Deposits are the deposits of Government Departments, and it need not be said that the Bank of England's position, as bank of the British Government, has been in the past the main cause of its great prestige and of its paramount position in the London Money Market. Nowadays, perhaps, the next item is even more important. The Other

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244 He is regarded as a man who by having recourse to forgiveness casteth off his rising anger like a snake casting off his outerskin. He that suppresseth his anger, he that regardeth not the evil speeches of others, he that becometh not angry though there be cause, certainly acquireth the four objects for which we live. (Religion, profit, desire, and salvation.) Between him that performeth without fatigue sacrifices every month for an hundred years, and him that never feeleth wrath in respect of anything, he that feeleth not anger is certainly the higher. Boys and girls, unable to distinguish between right and wrong, quarrel with each other. The wise never imitate them.', hearing this speech of her father, said, 'O father, I know, though a girl, what are our duties and virtues. I know also what the difference is between anger and forgiveness as regards the power of each. But when a disciple behaveth disrespectfully, he should never be forgiven by the preceptor if the latter is realyreally [sic] desirous of benefiting the former. Therefore I do not desire to live any longer in a country where evil behaviour is on the ascendant. The wise man desirous of good, should not dwell among those sinfully-inclined men who [sic]alaways speak ill of good behaviour and high birth. But there should one live,—indeed, that hath been said to be the best of dewelling places,—where good behaviour and purity of birth are known and respected. The cruel words uttered by Vrishaparva's daughter burn my heart even as men desirous of kindling a fire burn the dry fuel. I do not think anything more miserable for a man in the three worlds than for him to adore his enemies blessed with good fortune, himself possessing none. Indeed, it hath been said by the learned that for such a man even death would be better.

And thus ends the seventy-ninth Section in the Sambhava of the Adi Parva.


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 Deposits include the balances of the chief English banks, all of which keep an account at the Bank of England, through which they settle the balances of the huge transactions between one another that are carried through every day by the clearing house, and this balance at the Bank of England is included by the other banks, with their holding of legal tender currency, as "cash" in their balance sheets and statements. It must be noted, however, that the Other Deposits include many accounts besides those of the banks included in the clearing house system, commonly called the clearing banks. They include the balance of the Indian Government, Colonial and Foreign Governments, home and foreign Municipalities, and the many private customers of the Bank of England; and since, as we have seen on looking at the balance sheet of one of the clearing banks, these institutions do not separate their cash at the Bank of England from their holding of legal tender cash, one of the chief clues to the real position of the Money Market, namely the amount of cash at the Bank of England held by other banks, is always veiled from the gaze of the curious.

On the other side of the account we are faced by similar obscurities. Government securities

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 include only promises to pay of the British Government, but they may be in the form of undated or long-dated loans, such as Consols or War Loans, or they may be Treasury Bills, or they may be temporary advances, which the Government secures from the Bank of England in the form of Deficiency Advances for meeting interest due on Government debt; or Ways and Means advances necessitated at a time when the revenue of the country is coming in too slowly to meet the daily payments that the Government has to make. The "Other securities" include every investment or promise to pay that the Bank of England may hold, other than those issued by the British Government. And advances that it may make to banks, though banks very rarely borrow from it, or to bill-brokers, stockbrokers, or its ordinary customers, are here jumbled together in a comprehensive medley, with the result again that inferences drawn from the movement upward or downward of this item are extraordinarily likely to mislead the too curious inquirer.

We saw that any investment or loan made by an ordinary bank increased the deposits in the hands of itself or of some other bank. When the Bank of England makes investments

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 or advances, it increases the deposits that it holds, either "Public" or "Other," either on account of the British Government or of some other customer. Since the Public deposits, the balances held by the public departments, are in normal times a more or less constant quantity, the usual effect of any advances that may be made by the Bank of England, either to the Government or to anybody else, is to increase the total of the "Other" deposits; since what the Government borrows it pays out to individuals or companies to whom it owes money and they pay it into their own banks.

It may happen occasionally that those who are given an advance by the Bank of England may use it in order to withdraw cash, just as a borrower, who borrows from an ordinary bank in order to pay wages to his workmen, may take out coin for that purpose. In either case, however, it is most likely that the coin or notes so taken out will come back in the ordinary course of trade to be deposited with one bank or other in the case of ordinary banks; or with the Bank of England itself in the case of advances made by the Bank of England; but in the latter case there is the exception that demands made upon it for cash may—or might in pre-war days—take the form ultimately of

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 demands upon the Issue Department for gold for purposes of export. When this happened, instead of an addition to its deposits being shown, a decrease in the cash holding of its banking department would follow and the proportion between its reserve and its liabilities declined. Its reserve consists of the last two items on the assets side, by far the larger one being composed of notes—its own notes issued by the Issue Department. Anybody who, by borrowing from the Bank of England, secures credit in its Banking Department can exercise that credit by taking out some of the notes held in that Department's assets. Before the war, he could then go to the Issue Department and take out gold in exchange for his notes, which were forthwith cancelled, because their gold backing had gone. The consequent reduction of the Bank of England's reserve, and of its proportion to liabilities would immediately be noted by the market as likely to cause the Bank, if the process went further than it thought prudent, to raise, by an advance in Bank Rate, the price at which it would grant credit. Bank Rate is the official minimum rate at which the bank will discount bills; and the rate at which it will make advances is usually ½ per cent. above.

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 Thus we see that the Bank of England, like the other banks, creates credit by any advances that it makes; and its action in so doing is of especial importance because the credit that it creates is regarded as cash by the other banks. If it lends money to Government to pay interest on Government debt, the Government draws upon the credit so created, and pays out cheques to the debt holders, which they pay into their banks, and so there is finally an increase in the balances of the Joint Stock banks at the Bank of England and in the amount of the Bank of England's "Other" deposits. On the other side of the account there will be an increase in the Bank of England's holdings of Government securities. The same thing happens if the Bank of England lends money to the Government to pay for a battleship, or to meet the salaries of its officials, or if it lends money to any other borrower for any other purpose. The borrower draws a cheque, which is paid into one bank or another and increases the credits held by the banking community at the Bank of England. And, as has been shown above, other banks include their credits with the Bank of England with their legal tender cash. Thus, whenever the Bank of England lends, it places at the

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 disposal of the other banks, a sum which entitles them to issue for the purposes of the general public, a much larger amount of credit. On the other hand when the Bank of England reduces its securities, either by selling stock or by inducing its borrowers to liquidate their loans by charging them a higher price for them, which it does by raising its official rate of discount, the effect is to contract the basis of credit and to cause a still greater contraction in credit, so that the proportion between cash and credits may be maintained more or less on the usual level.

Thus the system worked in the old days with an efficiency, which roused the envy of the rest of the world, though it was plentifully criticized by those whose withers were galled by its restrictions, which as we now see, had so beneficial an effect in steadying prices. Owing to the terms of the Bank Charter Act it was not possible to increase the volume of legal tender currency in the country, except by attracting gold from abroad in payment either for goods exported, or of debts called in, or of loans raised. Theorists could easily show that a currency system based on gold does not secure perfect stability of prices, because the quantity of gold produced often varies in relation to the

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 quantity of goods coming to market; and the Quantity. Theory of money shows us that steadiness of prices is secured, or assisted, by steadiness in the relation between the volume of money and that of goods. Practical business men, who often want more credit than is good for them, used also to rail at the restriction upon the credit facilities of the country involved by the gold standard. They argued that industry can only expand if any adventurous person who thinks that he can make a profit by starting and organizing "enterprises of great pith and moment" can always be certain by applying to his bank to get as much credit as he wants, and that the limitation on the power of banks to create credit, imposed by the gold standard, made industry most absurdly depend on the amount of gold that was being dug up out of the bowels of the earth and shipped to this country.

Certainly it is easy to make merry over a system based on a metal which was chosen by mankind as a medium of exchange, because of its universal appeal to male and female vanity, and is even now, owing to the hoarding habits of primitive peoples into whose control it comes, often dug up in one quarter of the globe only to be buried in another. But imperfect

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 stability of prices secured by the gold standard has been seen to be much better than the perfect instability produced by the printing-press in the hands of impecunious Governments. And the monetary system of England had in effect very cunningly weakened the restrictions of the Bank Charter Act by establishing, as part of the foundation of our credit system, the principle that a balance at the Bank of England can be ranked as cash with gold or gold certificates. Balances at the Bank of England could be, and were, expanded at moments of exceptional demand to any extent that the Bank of England thought prudent. When demands arose for expansion of credit, and the ordinary banks found that their proportion of cash to liabilities was becoming too low, all that they had to do was to call in part of their loans, which they habitually advanced to the London bill-brokers as their second line of reserve. The bill-brokers, in order to repay these loans, went to the Bank of England to borrow, and it lent them money with which they paid off their loans to the other banks. So the balances at the Bank of England of the other banks were increased, and the cash basis of our credit system expanded with extraordinary ease by a

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 few entries in the Bank of England's books. This easy elasticity, which made our monetary system an almost perfect machine when worked by bankers for financing our production and trade, lent itself only too well to abuse by politicians, when a great war called for sacrifice, but the politicians found it simpler to invite us to make money out of our country's need.

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war comes there are five ways in which a modern Government can provide itself with the sinews thereof:—

1. It can take money, out of the citizens' pockets and bank balances by making them pay taxes.

2. It can get money from them by issuing loans which they subscribe for by saving.

3. It can borrow abroad.

4. It can get money from banks by issuing loans to them which they subscribe for by creating new credits; or it can get money by issuing loans to people who subscribe not by saving but by borrowing from banks which create new credit for this purpose.

5. It can print notes and issue them itself.

The ideal method is obviously number one. With it, the goods and services needed for the war are bought by the Government with money which the citizens, having paid it in taxes, are unable to spend on themselves. There is thus

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 no increase in the aggregate demand for goods and services and there need be no rise in the general price level. Goods wanted for the war go up in price, but articles of luxury and all those commodities and comforts in which people have to stint themselves in order to pay the increased taxes, tend to go down, as happened when the war began. If a war's needs could be wholly met in this way, it would leave the nation with no debt and no debasement of currency. Producers of luxuries would be hit, but only for a time and until they adapted their activities to war production, the demands of which are now so great that they quickly absorb all available energy.

Number two—financing war out of loans subscribed with saved money—also has the great advantage of transferring the buying power of those who save to the Government for buying goods needed for the war. This method also should cause no rise in the general level of prices, because the Government's increased demand for goods would be offset by the reduced demand of those who saved to subscribe. This was the kernel of the doctrine preached, with astonishing success, by the War Savings Committee during the war. The objection to the system is that it leaves a debt

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 behind, the interest and redemption of which have to be met from taxation. It thus postpones taxation and holds it over until after the war. This is not a good thing to do in the case of a people that is prepared to face war's burden at once, because taxation is more easily paid in war-time, when industry is fully occupied with turning out goods to meet an insatiable demand, than it is when peace comes and industry is faced with the difficult task of readjustment. The taxation needed for debt charge, when the debt is held at home, only distributes and does not lessen the nation's wealth; but it is not therefore any more pleasant to those who have to pay it. But from the point of view of politicians who want to make things look pretty, the borrowing system has the advantage that it gulls the nation with the belief that the war is not hurting its pocket very much. The Government hands out promises to pay in the shape of War Loans and the citizens are apt to forget that when the Government promises to pay it can only meet its promises out of their pockets.

This delusion would not do much harm, if all the nation were affected equally. If we preferred to leave the task of paying for the war to those who were patriotic enough to save,

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 and everybody had the same chance of saving, in relation to their wealth, then it would be fair enough that we should all be taxed in relation to our wealth to pay interest to those who had made the patriotic effort when it was called for. But things do not happen so. In war time, the best of us, in strength and courage and endurance and manliness, are risking death and wounds in scenes of indescribable dirt and discomfort and strain, and are doing this for very low pay compared with the salaries and wages earned by those who, not being fit to fight, are left at home. And so the opportunity for subscribing to War Loans is much less for those who, because of the work they are doing at the front, have more right than anybody else to be enriched by the war. When they come back to civil life they find that a war debt, to which they had little chance of subscribing, lays on them a burden of taxation at a time when they have more than enough difficulty in fitting themselves into industrial and professional work.

Number three—borrowing abroad—is a costly and difficult method, because a nation at war naturally has to pay a high rate on loans that it issues in foreign countries, the citizens of which take a detached view of its chance of

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 winning and of its probable solvency at the end of the struggle, and have no patriotic incentive to "feed the guns" that are not fighting their battle. It has the effect, very pleasant for the time being, of inducing the foreign subscribers to the loans to make the necessary sacrifice, in return for a rate of interest which has afterwards to be paid for out of taxation. But with this difference that the subsequent taxation, instead of being paid by the citizens of the borrowing nation and distributed among certain of their members, is paid to people in a foreign country and so is a much more effective drain on the national wealth. The interest and sinking fund, by which the loan is redeemed, can only be paid to the foreign creditors by the debtor nation's either selling abroad so much more of goods and services, or buying abroad so much less of goods and services. In either case its own enjoyment of goods and services is to that extent reduced.

Number four is easy and at first sight pleasant for everybody, but is, in fact, quite the worst way of raising money for war or any other purpose. When a Government borrows from banks it does not take money out of anybody's pocket or anybody's bank balance.

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 In fact it increases bank deposits which have already been described as potential currency because they give their holders the power to draw cheques or to take out cash from the banks. As was shown in the last chapter, whenever the banks make loans they increase the deposits of themselves and of other banks, and when the Bank of England makes loans it increases the balances of the other banks in its books, and so gives them more "cash at the Bank of England" which is part of the foundation on which they build their fabric of credit. In the same way when the Government borrows from investors, not money that they have saved, but money that they have borrowed from their banks, there is again an increase in potential currency. So that what happens is that instead of the Government's spending power for the war being provided by the reduction of other people's spending power, it is provided by a creation of new spending power. By this process nobody is taxed or bothered to save or make any other sacrifice, but in fact a sacrifice is imposed on the community, and is likely to fall on those least able to bear it. When it taxes a Government can regulate the sacrifice required according to the relative wealth of the taxpayers: when it

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 borrows saved money it gives the citizens the choice whether they will make the sacrifice; when it borrows from banks it creates fresh spending power, so lowering the value of all the money already in existence, including its own, and so perpetrating something very like a swindle, which robs those who are unable to increase their incomes and lines the pockets of those who have essential goods and services to sell.

To take a practical example let us suppose that the Government makes an issue of ten million pounds' worth of Treasury Bills which are taken up by the banks. The first result would be that ten millions would be transferred from the banks' balances in the Other Deposits at the Bank of England to the Government's balance in the Public Deposits, and the banks would have ten millions more Government securities or bills discounted, according to their system of book-keeping, and ten millions less cash at the Bank of England. But the Government would forthwith draw on its increased balance at the Bank, to pay for the fighting men's needs, and the contractors and others who received its cheques would pay them into their banks. Thus the ten millions would be transferred back from the Public

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 Deposits to the Other Deposits at the Bank of England, the banks would get back their cash at the Bank of England and would still hold their ten million Treasury Bills with an addition of ten millions to the deposits of their customers. This fresh ten millions will be an addition to the spending power of the community: the contractors who had received it would pay it out in wages to manual workers, in salaries to managers or in payment to merchants and producers for raw material. But at the same time there would be no corresponding increase in the goods to be bought, and so the outpouring of all this new money would merely mean filercer competition for an unaltered mass of goods, on the part of the purchasers with new money in their pockets and purchasers with the previously existing money. And the only possible result is a rise in the prices of the goods, which is to say a fall in the buying power of the money.

The fifth method, by which the Government neither borrows nor taxes but just prints notes and pays its debts with them, produces the same evil results as number four, and more so, because it creates not only new credit but new cash which can be used as a basis for yet more credit; but it also has the great advantage of

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 saving the expense of the interest paid to banks. Our Government printed notes, though to a quite small extent as compared with the thumping figures of war finance, but instead of using them directly for payments, preferred to issue them in response to demands from banks, in exchange for so much credit at the Bank of England, most of which was then lent by the Currency Department, which handled the note issue, to the Exchequer which finally paid it out through the spending departments. By this elaborate machinery and a nicely constructed weekly statement showing a balance sheet with gold, cash at the bank and securities held against the notes, our conscientious officials managed to give an appearance almost approaching respectability to some 300 odd millions of Governmental "shin-plasters."

Thus the ingenuities and elasticities of the Money Market were prostituted for the production of the same result that was achieved by mediaeval monarchs who debased their currency by putting in too much alloy and so making their stock of metal go further. The modern ruler by multiplying banking credits and paper money plays the same confidence trick much more easily and extensively.

So began the dreary and disgusting race

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 between prices and wages, and between profiteers and Excess Profits tax-gatherers, which was to cause so much unrest and bitterness, which added so enormously to the cost of the war and the amount of debt that it left behind, which sowed the seeds of the after-war outburst with its feverish madness and of the subsequent collapse with its bankruptcies and disillusionments, which made it more profitable to squander than to save, which taught business men that economy in production was an irrelevant absurdity because the continuous rise in prices was certain to pour profits into their pockets if only they opened them wide enough, and taught the ignorant multitude to believe that producers, merchants and dealers were a set of ruthless extortioners who were wantonly flaying the skin off the nation in its need and off everybody else who had to buy goods. Mr. W. A. Orton in his very interesting work on Labour in Transition, in describing the workers' suspicions and apprehensions in the early years of the war, says that "by far the most potent factor of all was the question of the profits made by the armament firms; the suspicion—to quote an official report—'that while they (the workers) were called upon to be patriotic and refrain from using the strong

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 economic position they occupied, employers, merchants and traders were being allowed perfect freedom to exploit to the fullest the nation's needs.

Could this disastrous system have been avoided altogether? The official attitude assumes that it was inevitable, and perhaps to a certain extent it was, with the financial leadership that we enjoyed. Neither the Government nor the people understood what was happening. Our rulers were not making Machiavellian use of monetary dodges to delude the people and dilute the currency, but were taking the line of least resistance through a difficult problem, and incidentally making reckless use of a delicate machine which they did not understand and producing consequences which they neither foresaw nor recognized. The public thought the rise in prices was a necessary consequence of war and naturally did not attempt to connect it with the expansion of bank deposits. Indeed, when this feature was noticed it was often hailed, even by men of business who might have known better, as a proof that we were somehow growing richer in spite of the war. If we had had a Government which understood finance and had courage enough to tell the people that war

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 meant sacrifice, and if we, as a people, had had wit to understand, as we had, I believe, the courage and the will to face the sacrifice demanded, then the whole story of our war finance would have been very different.

A real statesman in charge of the war finance of an ideal people would have seen, and seen that the people saw, that, apart from what might be done by borrowing abroad, it could only win the war by its own efforts in producing more and consuming less, so that the goods needed to maintain and equip the fighters might be provided; that industrial effort on the one hand and abstinence in consumption on the other were essentials to success; that what was needed for the fighters must be taken from the citizens, and that the simplest, cheapest and fairest way of doing this was by taxation, so that for every pound spent on the fighters there should be a pound less in the pocket of a civilian. For the devious devices and dodges of borrowing and currency creation do not make the sacrifice a whit less. The fact still remains that whatever the fighters consume the civilians have to go without, always excepting what can be done by borrowing abroad and selling securities and other assets to foreigners. A Government and a

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 people that recognized these things at the beginning of a war and had sense and courage to apply them would pay for the war as it happened.

But neither here nor in any other country was there even a distant likeness to an ideal statesman in charge of war finance:

In France and Germany no attempt was made in the early years of the war to meet any part of its cost by taxation. France with her richest provinces invaded had plenty of excuse. In Germany the docility, discipline and intense patriotism of the people gave a wonderful opportunity to its Government for financing the war soundly: but it was not taken because the Government preferred to finance by borrowing on the assumption that it was certain to win the war and recover its cost, and a great deal more, from its vanquished foes, rather than by "increasing the burdens of the people." Apparently it thought in its wisdom that it could lighten these burdens by bad finance. In fact the event inevitably showed that in Germany, in spite of the absence of taxation

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 for the war, what the fighter needed the people had to provide by stinting.

So it was that our Chancellors of the Exchequer had such examples set them both by friend and foe that whatever they did in the way of war taxation they were able to ascribe to an excess of virtue which made their war finance to that extent sounder than that of Germany or France. Judged by this standard of failure their achievement shone like "a good deed in a naughty world." Judged by what might have been, what ought to have been, and what was actually done in the course of the Napoleonic and Crimean wars, when nearly half the cost of the war was met by taxation it was not a great performance. Mr. Lloyd George was our first War Chancellor and his most ardent admirers will probably admit that he is more successful in distributing the contents of the public purse than in calling on the general tax-paying public to stint themselves in order to fill it. It is difficult to exaggerate the evil effects of the economic crime that he committed when in the Spring of 1915 he imposed no taxation whatever to meet the deficit that faced him. Most eloquently he put the facts of the financial position before the None

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