Readings in Money and Banking / Selected and Adapted

by Chester Arthur Phillips

It does not change the principle that this increase of paper money was not made solely by Imperial Treasury notes, but by a very large addition to the circulation in the form of Reichsbank notes and Darlehnskassen notes. It was the loans by the Reichsbank to the Government which undoubtedly caused the main increase in the notes of this bank (just as was true of the Bank of France), and the reduction of these issues, and their redemption in gold, will depend directly on the power and readiness of the Government to pay off its obligations to the Reichsbank after the war.

The amount of borrowing by processes which led to an increase of the circulation was necessarily limited; and very soon borrowing through issues of paper money had to be followed by regular fiscal operations in the form of long- or short-term bonds which would not affect the quantity of the circulation. Expenses could not well be met to any extent by current taxation, because taxes were already high, and in the few years before the war, no doubt in anticipation of it, some four or five hundred million dollars in taxes over and above normal taxation had already been levied. In 1913 a non-recurring tax of $250,000,000 had been imposed on the wealthier classes.

In addition a bonded debt, since the war, has been floated to the amount of $10,000,000,000 over and above the existing public debt before the war of about $1,200,000,000. But all these fiscal operations should be, for our present purposes, separated from monetary operations. The carrying of these heavy government debts is a question of the future production of goods, of commerce, and of saving.

Whatever the burden of debts, the gold question is concerned with the mechanism of exchange by which taxes, subscriptions to loans, payments by the Government for munitions and supplies, current purchases of goods by the public, payments to and by banks, are made. At present this medium is paper money depreciated, as in the case of the Reichsbank notes, by nearly 30 per cent. Of course, the Darlehnskassen issues would follow the value set by the notes of the Reichsbank.

It is interesting to mention that the increase of paper money has not been in answer to any need of the public for additional media of exchange; for ordinary business transactions have decreased, and would require a less quantity of money. It was an error not to separate borrowing entirely from monetary issues.

Moreover, as bearing on the maintenance of the gold standard after the war, it is worth noting that the rule requiring the Reichsbank to keep one-third of its note issues covered by gold has not been violated. At last reports (February, 1916) the gold item stood at $613,750,000, as against $1,612,500,000 notes, or about 38.1 per cent. That is, the greatest efforts have been made to concentrate the gold holdings of the nation, including the "war chest" of about $30,000,000, in the reserves of the Reichsbank.

At the same time no gold is paid out in redemption of notes, nor is it allowed to be exported. Some sums have been sent to Holland in a vain attempt to support German exchange in that country; but the difficulty in exchange rates lies deeper than the relative supply of and demand for bills, since the depreciation of German paper money determines the general level about which the fluctuations of exchange due to demand and supply range. In fact, wherever gold is not freely moved in international exchange there are no shipping points, and hence no limits to which exchange can fall short of the discount of the paper in terms of gold.

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.