War-Time Financial Problems

by Hartley Withers

"Let us sum up. England's reputation for honest business dealing and for trustworthy administration has suffered. Her insular inviolability has been put in question. The ravages of war have undermined the achievements of many generations. Her free gold market has broken down. The flow of capital towards London will fall off, for those who cannot borrow there will no longer send deposits. The surplus shown in her balance-sheet will contract. Foreign trade will also decrease. Hand in hand with this fall, free trade, that mighty agent in the development of England's supremacy, will, in all probability, give place to protection. Stock Exchange business will grow less. Rates of interest will be permanently higher."

How much truth is there in all this? Has our reputation for honest dealing and for trustworthy administration suffered? Surely not in the eyes of any reasonable and unprejudiced observer. In the course of the greatest war in history, fought by Germany with weapons which have involved the violation of the most sacred laws of humanity and civilisation, England has acted with a respect for the interests of neutrals which has been severely criticised by impatient observers at home. As for our "insular inviolability" having been put in question, it certainly has not, so far, suffered any serious damage. Our Fleet has defended us from invasion with complete success, and the damage done by marine and aerial raiders to our property on shore is negligible. Our free gold market is said to have broken down. The proof of the pudding is in the eating. Germany, when the war began, immediately relieved the Reichsbank from any obligation of meeting its notes in gold, and frankly went on to a paper basis. England has already shipped well over 200 millions in gold to America to finance her purchases there and those of her Allies.

It may be true that capital will not flow to London if London is not in a position to lend, but we see no reason why London should not be able to resume her position as an international money lender, not perhaps immediately on the declaration of peace, but as soon as the aftermath of war has been cleared away and the first few months of difficulty and danger have been passed. The prophecy that foreign trade will decrease may also be true for a time owing to the destruction of merchant shipping that the war is causing. This possibility, however, may be remedied between now and the end of the war if the great programmes of merchant shipbuilding which have been undertaken by the British and American Governments are duly carried out. In any case, even if foreign trade decreases, there is no reason whatever to expect that England's will decrease faster than that of other nations.

In all these problems we have to look for the relative answer and to consider not whether England has suffered by the war, for it is most obvious that she has, but whether she will have been found to have suffered more than any competitor who may threaten her after-war position.

"Free trade," says our German Jeremiah, "that mighty agent in the development of England's supremacy, will, in all probability, give place to protection." We venture to think that it will be recognised that the Free Trade policy of the past gave us a well-distributed wealth which was an invaluable weapon in time of war, and that any attempt to impose import duties when peace comes will be admitted, even by the most ardent Tariff Reformers, as untimely when there is likely to be a world-wide scramble for food and raw materials, and the one object of every nation will be to get them wherever they can and as cheaply as they can.

If Stock Exchange business will be less, though this does not by any means follow, there is no reason why it should be relatively less here than in other centres. As to rates of interest being permanently higher, the same answer applies. It may be true, but there is no reason why they should be relatively higher in London than elsewhere; and, if they are high, it will be because there will be a great demand for capital, which will mean a great trade expansion; both in the provision of capital and in meeting the demands of trade expansion England will be doing what she has done with marked success in the past and can, if she works in the right way now and after the war, do again with equal and still greater success.

There is, however, a danger that threatens our financial position after the war, on the subject of which our German critic is discreetly silent, because that danger threatens the position of Germany very much more emphatically. It consists in the way in which our Government is at present meeting the needs of war finance, not by compelling economy on the civilian population through taxation and borrowing direct from investors, but by manufacturing currency for the purposes of the war by means of the printing press and the banking machinery. The effect of this policy is seen in the enormous mass of Treasury notes with which the country has been flooded. Their total is now nearly 180 millions or perhaps 100 millions more than the gold which they were originally designed to replace.

It is also to be seen in the great increase in banking deposits which has been a feature of our financial history since the war began. Some people regard this feature as a phenomenal proof of the growth of our wealth during the war. I am afraid there is little foundation for this pleasant assumption, for these new deposits have been called into being by the banks subscribing to Government securities, whether War Loan, Treasury Bills, Exchequer Bonds or Ways and Means advances or lending their customers the wherewithal to do so. By this process the balance-sheets of the banks are swollen on both sides, by the Government securities and advances to customers among the assets, against which the banks create new deposits, so giving the community as a whole the right to draw more cheques.

Every time the bank makes an advance it gives the borrower a credit in its books, that is to say, the right to draw cheques to that amount; the borrower draws on the credit and hands it to any one to whom he owes money; but as long as the advance is outstanding there will be a deposit out against it in the books of some bank or another.

It is an easy way for the Government to finance the war by getting the banks to manufacture money for it. Nobody feels any poorer for the process, in fact, those who have new money in their pockets or in their bank balance feel richer, but the result of thus multiplying currency without any increase in the supply of goods and services to be bought inevitably helps the rise in prices which makes the war costly, puts the burden of it on to the wrong shoulders, and likewise cheapens the value of the English pound as measured in other currencies. This is why the evils involved by this process become so relevant to the question now at issue.