The War and Democracy

by R. W. Seton-Watson; Arthur Greenwood; John Dover Wilson; Alfred Zimmern

A. STATE ACTION IN INDUSTRY AND COMMERCE

The Austrian ultimatum to Servia was followed by the paralysis of the world's international system of finance. Before the end of July many important stock exchanges were closed, and by the 31st the London Stock Exchange for the first time in its history was also compelled to close. The remittance market collapsed and with it the fabric of international trade. Widespread bankruptcy and ruin seemed imminent; so serious did the state of affairs become that moratoria were declared not only in several European countries but in parts of America, and in many continental countries specie payments were suspended. In a word, the possibility of war had thrown the delicately poised credit system of the commercial world out of gear; the declaration of war had brought it to a standstill. Into an explanation of its working it is not possible to enter; it is sufficient for our immediate purpose to realise that the foreign exchange machinery by which the supply of commodities from other countries becomes practicable on a large scale was for a time altogether unworkable. London as the financial centre of the world has immense sums owing to it and in its turn owes large sums. The ultimate effect of the collapse of credit, which depends on confidence, was that London could neither receive nor make payment. The big finance houses, who had "accepted" bills of exchange and rendered themselves liable to meet the payments for the things they represented, on the understanding that the means to pay them were to be promptly despatched, found that these means were not forthcoming; their own resources were far from sufficient to meet these payments. Utter ruin stared them in the face. At home also a run on the banks seemed probable, which would have meant ruin to large numbers of people. In this grave crisis the State acted with commendable promptness. The bank holiday was extended; State notes for 10s. and £1 were issued; a moratorium was declared, legalising the postponement of the due payment of debts, with certain exceptions; the Bank of England under a guarantee from the Government that the latter would meet the loss, began discounting, or buying for cash, approved bills of exchange accepted before war was declared, many of which are hardly likely to be met by the people liable for payment. These steps were taken swiftly and boldly and allayed the panic. But more was needed; such measures were not in themselves sufficient to put the machinery of foreign exchange into operation again and the suspension of this method of settling international indebtedness was having serious effects. To carry on international trade, and to supply ourselves with the produce on which the very existence of the community depends, without the machinery, is a thousand times more difficult than to conduct our home trade by means of direct barter. Without going into technical details, it may be said that the purchase of bills by the Bank of England, whilst relieving the last holder from loss, did not extinguish the liability of persons whose names had appeared on the bills as acceptors, endorsers and drawers. This was true of traders and commercial people not only in this country but also in other parts of the world. In the face of these liabilities, in most cases unexpected, it was hardly likely that they would increase their liabilities under new bills. Consequently the remittances coming to London shrank to next to nothing. As bills of exchange—or their equivalent—are the means by which both importers and exporters get paid for their goods, the difficulty of getting paid naturally began to have a serious effect on trade. As the figures of foreign trade during August show, cargoes were being held up. It was clear, therefore, that if this country were to continue to receive supplies of corn and meat, of cotton and wool, of hides and timber, something further must be done. The question the Government had to decide was what steps could be taken to safeguard the food of the people, and to avoid a crushing volume of unemployment through the lack of the raw materials of industry. The produce was there; what was needed was to start the flow of the particular kind of currency—"credit money"—which would expedite exchange. The course taken by the State was to advance money to the large bill bankers or "accepting houses" in London to allow of the due payment of the enormous number of bills falling due in the three months succeeding the outbreak of war. The audacity of the step will be understood when it is realised that probably something like £300,000,000 of bills fall due over a period of three months.[1] The necessary money was lent without security, the Government promising not to demand repayment until twelve months after the end of the war. A proportion of this advance will be in the nature of a loss, though how much it is quite impossible to say. By this measure, in the event of the bills not being met by those who have promised to pay them—the acceptors—the liability which would ordinarily have fallen upon the drawers and endorsers through whose hands the bills had passed has been removed. The State has advanced to the commercial community a huge sum of money, risking the total loss of some part of it, in order to set in motion the machinery of international exchange. Further steps, however, were taken. The general moratorium expired on November 4. Useful as it had been, it still left many traders in financial difficulties because of the impossibility of collecting debts owing to them in enemy and other countries. The Government, therefore, appointed a committee representing the Treasury, the Bank of England, the Joint Stock Banks, and the Association of Chambers of Commerce of the United Kingdom to authorise advances in approved cases to British traders carrying on an export business in respect of debts outstanding in foreign countries and colonies, including unpaid foreign and colonial accepted bills which cannot be collected for the time being. It is safe to say that no Government ever took such gigantic measures to meet a great crisis.[2] The Prime Minister, speaking at the Guildhall on November 9, 1914, summarised as follows the effects of the steps taken: "The foreign exchanges are working in the case of most countries quite satisfactorily, and the gold reserves at the Bank of England, which were 40 millions on July 22, and which had fallen on August 7 to 27 millions, now stand at the unprecedented figure of 69-1/2 millions. The central gold reserve of the country after three months of the war amounts to £80,000,000, almost exactly twice the amount at which it stood at the beginning of the crisis. The bank rate, which rose, as you know, to 10 per cent, has now come down to 5, a figure, I think, not in excess of that at which it stood this time last year. Food prices have been kept at a fairly normal level, and though trade has been curtailed in some directions, unemployment has been rather below than above the average."

[Footnote 1: Mr. J.M. Keynes (Economic Journal, Sept. 1914) estimates the aggregate value of outstanding bills in London at £350,000,000.]

[Footnote 2: In addition to these various financial measures, the State has lent Belgium £10,000,000 and the Union of South Africa £7,000,000, whilst it has also guaranteed £5,000,000 of the new Egyptian cotton loan.]

But this is by no means the only example of State action. The Government has established temporarily a State-aided system of marine insurance, by undertaking 80 per cent of the war risk, in order to encourage overseas trade. It has given substantial aid to the joint-stock banks "for the sole purpose that they might be fit to aid in every way possible the country's trade and finance."[1] It made arrangements for the direct purchase of forage and vegetables, etc., from farmers.[2] It took over the control of the railways. When, owing to panic, there was a rush for the purchase of food-stuffs, which was used to force up prices unduly, the Government intervened to prevent exorbitant charges. Particularly interesting is the action of the State regarding sugar, two-thirds of our supply of which comes from Germany and Austria. In the days immediately following the declaration of war wholesale prices were trebled. The Government, therefore, decided to take upon itself the task of ensuring an adequate supply of sugar, and a Royal Commission was appointed. The leading refiners were approached and an arrangement was made with the whole body of refiners that they should stand aside from the market for raw sugars, leaving it free for the operations of the Government. The Royal Commission pledged the refiners to buy their sugar from the Commission, i.e. from the State; sugar was to be offered to them at a fixed price, and the refiners were to sell the refined product to the dealers also at a fixed price sufficient to yield the refiners a fair profit on manufacture. As a result of the corner, a big rise in the price of sugar, which is not only an important domestic commodity but the raw material of several industries, was averted. This merits the description given of it in The Nation—"a really dashing experiment in State Socialism." [3] On the other hand, it has done nothing to increase the world's supply of sugar, but has merely commandeered a part of the existing stock. The aid of the State has been invoked in other directions. Already the Government has assisted experimental cultivation of beet in this country. The suggestion has been made that the State should build two beet-sugar factories, which would cost about £200,000 each; in this way it is suggested that our home supply of sugar would in the future be assured, and that agriculture would benefit considerably.[4]

[Footnote 1: Round Table, Sept. 1914, p. 705.]

[Footnote 2: This was done through the Board of Agriculture for the War Office. On the other hand, in the purchase of clothing, boots, blankets, etc., the War Office approached the producers directly instead of through the Board of Trade.]

[Footnote 3: It was reported in the Press on October 8, 1914, that the Home Secretary had purchased 900,000 tons of sugar at about £20 per ton, the transaction involving an outlay of about £18,000,000.]

[Footnote 4: See an article by Mr. Robertson Scott in The Nineteenth
Century, October 1914.]

Sir Charles Macara has put forward a scheme of State aid for the cotton industry. Owing to the war, a third of the total cotton crop (usually taken by the continental countries) was thrown on the market. Prices naturally fell, and there was a danger that the cotton planters might not be able to pay the debts they had contracted to enable them to grow their crops, in which case there would be a likelihood of the land being used for other saleable commodities, and the efforts which have been made in the past to increase the cotton crop would be nullified. In the meantime, the surplus cotton on the market created an uncertainty regarding prices, and buying came to a standstill, with the result that the position of the industry as a whole became very critical. The suggestion of Sir Charles Macara is that the Governments of this country and the United States, acting in conjunction, should take the temporarily unsaleable surplus of raw cotton off the market and store it for use in years when the crop is short. In other words, it is proposed to establish a permanent national cotton reserve. It is estimated that the cost of the scheme would mean an outlay of sixty to seventy millions sterling. If the plan were put into operation, however, it is claimed that it would restore confidence, prevent the wholesale stoppage of mills, and at the same time establish a cotton reserve to counteract the fluctuations of crops in the future.[1] These matters need but to be stated as examples of the remarkable adaptability of the State and the possibility of drastic action under the pressure of imperative needs.[2]

[Footnote 1: It should be pointed out that the serious condition of the cotton industry is not due to the war. The overstocking of the Eastern and Indian markets during the trade boom of 1913, together with the financial crisis in India last year, has reduced the demand for cotton goods. The war has merely emphasised a depression which had already fallen on the industry. Sir Charles Macara's scheme, whilst it may be desirable on other grounds, cannot compensate for the shrinkage in the demand for Lancashire products. The Government, it is interesting to note, have commissioned certain firms in Alexandria "to buy cotton extensively from small proprietors at a reasonable rate, on Government account, to be stored until the arrival of more prosperous times." (Press Association Telegram, Daily Press, Nov. 2, 1914).]

[Footnote 2: The voluntary gifts of different parts of the Empire should not be overlooked. Besides these other steps have been taken. The Australian Government, for example, in order to induce farmers to extend the area of cultivation, has guaranteed "a fixed minimum price of 4s." for all wheat grown on the newly cultivated land. (Reuter's Correspondent, Daily Press, Oct. 27, 1914).]

The course of events has shown the temporary collapse of economic individualism in the face of the European crisis. The economic system, which works during times of peace, could not meet successfully the crushing effects of a European war. It lacked not only adequate resources but the necessary power of corporate action and co-ordination. Immediate State action seemed to be the only way to avert disaster. In a month, Britain came nearer than ever before to being a co-operative commonwealth. It has been realised that industry and commerce are not primarily intended as a field for exploitation and profit, but are essential national services in as true a sense as the army and navy. The complexity of the modern economic world and the large individual gains which have been made in it have obscured the fact that the economic structure exists to serve the needs of the community. It was recognised by the Government, at any rate to some extent, that the success of our armies in the field would be nullified if, in the economic sphere, the production of commodities and services were seriously diminished and if their interchange were hampered in a large degree. People have felt that the spinner, the miner, the weaver, the machinist, are all by following their occupations performing a valuable service to the community. How far this attitude of mind will persist after the war, when normal conditions in industry and commerce gradually return, remains to be seen.