War-Time Financial Problems

by Hartley Withers

March, 1918

Another Government Committee—The Fallacy of imitating
Germany—Prussianising British Commerce—The Inquiry into the
Companies Acts—Will Labour Influence dominate the Report?—Increased
Production the Great Need—Will it be met by tightening up the
Companies Acts?—The Dangers of too much Strictness—Some Reforms
necessary—Publicity, Education, Higher Ideals the only Lasting
Solution—The Importance of Foreign Investments—Industry cannot take
all Risks and no Profits.

Every week—almost every day—brings with it the announcement of some new committee considering some question that may, or may not, arise now or when the war is over. Especially in the realm of finance has the Government's output of committees been notably prolific of late. We have had a Committee on Currency, a Committee on Banking Amalgamations, and a Committee appointed, humorously enough, by the Ministry of Reconstruction to consider what measures, if any, should be taken to protect the public interest in connection with the policy of industrial combinations—a policy which the Board of Trade has been sedulously fostering. Now comes a Committee to inquire "what amendments are expedient in the Companies Acts, 1908-1917, principally having regard to the circumstances arising out of the war, and to the developments likely to arise on its conclusion, and to report to the Board of Trade and to the Ministry of Reconstruction." It is composed of the Right Hon. Lord Wrenbury (chairman), Mr A.S. Comyns Carr, Sir F. Crisp, Mr G.W. Currie, M.P., Mr F. Gaspard Farrer, Mr Frank Gore-Browne, K.C., Mr James Martin, the Hon. Algernon H. Mills, Mr R.D. Muir, Mr C.T. Needham, M.P., Mr H.A. Payne, Sir Owen Philipps, M.P., Sir William Plender, Mr O.C. Quekett, and Mr A.W. Tait. The secretary is Mr W.W. Coombs, 55, Whitehall, S.W. 1. There are some good names on the Committee. Mr. Gaspard Farrer represents a great issuing house; Sir Frank Crisp, company lawyers; Sir William Plender, the accountants; Mr O.C. Quekett, the Stock Exchange; and Sir Owen Philipps, the shipping interest. Nevertheless, one cannot help shuddering when one considers the dangers that threaten British finance and industry from ill-considered measures which might possibly be recommended by a Committee influenced by the atmosphere of the present outlook on financial and commercial affairs.

One of the interesting features of the present war atmosphere is the fact that, now when we are fighting as hard as we can to defeat all that is meant by Prussianism a great many of our rulers and public men are doing their best to impose Prussianising methods upon this unfortunate country, merely because it is generally assumed that Prussian methods have been shown, during the course of the war, to carry with them a certain amount of efficiency. It is certainly true that Prussian methods do very well as applied to the Prussians and submitted to by other races of Germans. On the other hand, it is at least open to argument that the British method of freedom, individual initiative, elasticity and adaptability have produced results, during the present war, which have so far been paralleled by no other country engaged in the contest. Working on interior lines with the assistance of docile and entirely submissive allies, Germany has certainly done wonderful things in the war, but it by no means follows that the verdict of posterity will not give the palm of achievement to England, who has not only carried out everything that she promised to do before the war, but has incidentally and in the course of it created and equipped an Army on a Continental scale, and otherwise done very much more for the assistance of her Allies than was contemplated before the war began.

It is untrue to say that we were unprepared for the war. We were more than prepared to do all that we promised to do. What we were unprepared for was finding ourselves required to turn ourselves into, not only the greatest naval Power in the world, but one of the greatest military Powers also. This demand was sprang upon us, and we have met it with extraordinary success. The whole idea that Germany's achievement has been such as to warrant any attempt on our part to model our institutions on her pattern seems to me to fall to pieces as soon as one looks calmly at the actual results produced by the different systems. Moreover, even if we were to admit that Germany's achievement in the war has been immeasurably greater than ours, it still would not follow that we could improve matters here by following the German system. It ought not to be necessary to observe that a system which is good for one nation or individual is not necessarily good for another. In the simple matter of diet, for instance, a most scientifically planned diet given to a child who does not happen to like it will not do that child any good. These things ought to be obvious, but unfortunately in these times, which call for eminently practical thought and effort, there is a curious doctrinaire spirit abroad, and the theorist is continually encouraged to imagine how much better things would be if everything were quite different, whereas what we want is the application of practical common sense to practical facts as they are.

In the realm of finance the freedom and individual initiative and elasticity of our English system have long been the envy of the world. Our banking system, as was shown, on an earlier page, has always worked with much less restriction on the part of legislative and official interference than any other, and, with the help of this freedom from official control, English bankers and finance houses had made London the financial centre of the world before the war. The attempt of Parliament to control banking by Peel's Act of 1844 was quietly set aside by the banking machinery through the development of the use of cheques, which made the regulations imposed on the note issue a matter of quite minor importance, except in times of severe crisis, when these regulations could always be set aside by an appeal to the Chancellor of the Exchequer. There was no Government interference in the matter of new issues of securities on the London Stock Exchange or of the quotations granted to new securities by the Committee of the Stock Exchange. Now the Companies Acts are to be revised in view of what may be necessary after the war, and there is only too much reason to fear that mistakes may occur through the imposition of drastic restrictions, which look so easy to work on paper, but are more than likely to have the actual effect of doing much more harm than good.

"Circumstances arising out of the war and developments likely to arise on its conclusion" give this Committee a roving commission to consider all kinds of things, which may or may not happen, in the light of wisdom which may be put before it by interested witnesses, and, worse still, in the light of semi-official pressure to produce a report which will go down well with the House of Commons. Our politicians are at present in a state of extreme servility before the enterprising gentlemen who are now at the head of what is called the Labour Party. Every one will sympathise with the aspirations of this party in so far as they aim at bettering the lot of those who do the hard and uninteresting work of the world, and giving them a larger share of the productions that they help to turn out; but that is not the same thing as giving obsequious attention to the views which their representatives may have concerning the management of financial affairs, on the subject of which their knowledge is necessarily limited and their outlook is likely to be, to a certain extent, prejudiced. A recent manifesto put forward by the leaders of the new Labour Party includes in its programme the acquisition by the nation of the means of production—in other words, the expropriation of private capitalists. The Labour people very probably think that by this simple method they will be able to save the labourer the cost of providing capital and the interest which is paid for its use; and people who are actuated by this fallacy, which implies that the rate paid to capital is thinly disguised robbery, inevitably have warped views concerning the machinery of finance and the earnings of financiers. These views, expressed in practical legislation, might have the most serious effects not only upon England's financial supremacy but also on the industrial activity which that financial supremacy does so much to maintain and foster.

What, after the war, will be the most important need, from the material point of view, for the inhabitants of this country? However the war may end, and whatever may happen between now and the end of it, there can be only one answer to this question, and that answer is greatly increased production. The war has already diminished our capital resources to the extent of the whole amount that we have raised by borrowing abroad, that is to say, by pledging the production of our existing capital, and by selling to foreign countries the foreign securities in which our capitalists had invested during the previous century. No one knows the extent to which our capital resources have been impaired by these two processes, but it may be guessed at as somewhere in the neighbourhood of 1500 millions; that is to say, about 10 per cent. of a liberal estimate of the total accumulated property of the country at the beginning of the war. To this direct diminution in our capital resources we have to add the impossibility, which has existed during the war, of maintaining our factories and industrial equipment in first-class working order by expenditure on account of depreciation of plant. On the other side of the balance-sheet we can put a large amount of new machinery introduced, which may or may not be useful for industrial purposes after the war; greatly improved methods of organisation, the effect of which may or may not be spoilt when the war is over by uncomfortable relations between Capital and Labour; and our loans to Allies and Dominions, some of which may have to be written off, and most of which will return us no interest for some time to come, or will at first pay us interest if we lend our debtors the money to pay it with. What the country will need, above all, on the material side, is an abundant revenue, which can only be produced by vigorous and steady effort in industry, which, again, can only be forthcoming if the machinery of credit and finance is given the fullest possible freedom to provide every one who wants to engage in industry and increase the output of the country with the financial facilities, without which nothing can be done.

Is it, then, wise at such a time to impose restrictions by a drastic tightening up of the Companies Act, upon those who wish by financial activity, to further the efforts of industries and producers? On the contrary, it would seem to be a time to give the greatest possible freedom to the financial machine so that there shall be the least possible delay and difficulty in providing enterprise with the resources that it needs. We can only make good the ravages of war by activity in production and strict economy in consumption. What we want to do is to stimulate the people of this country to work as hard as they can, to produce as much as possible, to consume as little as possible on unnecessary enjoyment and luxury, and, so, by procuring a big balance of production over consumption, to have the largest possible volume of available goods for sale to the rest of the world, in order to rebuild our position as a creditor country, which the war's demands upon us have to some extent impaired.

It is a commonplace that if it had not been for the great mass of foreign securities, which this country held at the beginning of the war, we could not nearly so easily have financed the enormous amount of food and munitions which we have had to provide for our population, for our armies, and for the population and armies of our Allies. If, instead of holding a mass of easily marketable securities, we had had to rely, in order to pay for our purchases of foreign goods, on the productions of our own mines and factories, and on our power to borrow abroad, then we should have had to restrict very greatly the number of men we have put into the firing-line so as to keep them at home for productive work, or, by the enormous amount of our borrowings, we should have cheapened the value of British credit abroad to a much greater extent than has been the case. Our position as a great creditor country was an enormously valuable asset, not only during the war but also before it, both from a financial and industrial point of view. It gave us control of the foreign exchanges by enabling us, at any time, to turn the balance of trade in our favour by ceasing for a time to lend money abroad, and calling upon foreign countries to pay us the interest due from them. The financial connections which it implied were of the greatest possible assistance to us in enhancing British prestige, and so helping our industry and commerce to push the wares that they produced and handled.