III
As regards Great Britain, the gold standard is yet preserved for all practical purposes. To her credit be it said that she has not fallen into the error of borrowing by excessive issues of paper money; so far she has not confused the fiscal with the monetary functions of the Treasury. She resorted at once to fiscal operations in the form of heavy taxation and loans in the form of short-time Treasury bills and longer-term bonds. The issue of government paper money is, indeed, a new departure; but its purpose has been more distinctly monetary than fiscal.
The currency notes are emergency notes, issued under the act of August 6, 1914, directly by the Treasury, and not by the Bank of England, although authorized by the same act which suspended the Bank Act in regard to additional issues of bank notes not covered by gold. In other crises the act of 1844 has been suspended to allow more notes based on consols than permitted by the act (i. e., above the £18,750,000). In August, 1914, such a suspension was in the future made legal, if authorized by the Treasury, thus avoiding the old resort to a bill of indemnity by Parliament.
But in spite of the usual suspension of the Bank Act, no use was made of it. That is, a demand for more currency in the hands of the public could have been supplied by the bank, but was not. In truth, the Lloyd George currency notes need not have been issued. Nevertheless, when once issued, they made unnecessary any resort to additional Bank of England notes. There was no need of both. But in one respect the currency notes helped to maintain the country's gold standard. By issuing them in small denominations of one pound, and ten shillings, they replaced the gold in general use for these denominations, and allowed it to be used as reserves. Yet, it must be remembered that sound policy required a gold reserve (which has been generally kept at about 40 per cent.) behind these currency notes, so that the whole amount of gold replaced was not, in fact, a gain.
As all know, the question of gold for Great Britain pivots on the reserves of the Bank of England, which is the agent for the Government, receiving its taxes and paying out its expenses, as well as the holder of reserves for other banks—being thus a bankers' bank, as well as a national agent. Moreover, the reserves mentioned, and which are of prime importance, are those of the banking department—and these are chiefly Bank of England notes (not gold). The percentage of reserves to deposits, which marks the safety line for England, refers to the items in the banking department. These notes, however, are protected (except the bottom layer of £18,750,000 covered by consols), pound for pound, by gold in the issue department. Hence, they can be turned into gold at any moment.
Then, to what do these facts lead us? Simply that gold has increased just in proportion to the issue of bank notes. In addition, the currency notes of the Government served in the place pro tanto of the Bank of England notes. Hence, at the end of the war, the provision for redemption of Bank of England notes will work automatically. Nor can there be any question as to the gold being there to redeem them; for they cannot get out without a previous deposit of gold. Indeed, the questions of difficulty cannot arise regarding the basic currency of Great Britain; they will arise, if at all, in connection with the assets in the loan item of the banking department, since they will determine the safety of the deposits chiefly created as the result of loans. The bank discounted large sums of pre-moratorium acceptances and paper; and yet even in these assets it is protected by the guarantee of the Government.