‘‘Excuse me, but our business is to finance trade.’’
‘‘Do you deny that you make loans to foreigners? To foreign governments?’’
The International Banker was silent for a moment.
‘‘Money,’’ he said, ‘‘must find its level. It must be allowed to flow into those markets where it can promote the largest possible amounts of wealth.’’
‘‘That means where it can earn the highest rates of interest compatible with safety,’’ our banker exclaimed.
‘‘Well?’’
‘‘Your loans to foreigners may easily upset the exchange so that gold must flow out of this country. Suppose for example that you lend £1,000,000 to the Greek Government to build a railway and suppose, further, that the Germans are producing rails more cheaply than we can produce them. The Greeks will buy their railway in Germany.’’
‘‘Certainly.’’
‘‘And you, the lenders to the Greeks, will therefore have to pay the Germans.’’
‘‘Yes.’’
‘‘In marks.’’
‘‘Of course. Pounds would be no use to the Germans.’’ ‘‘You will have to buy your marks with pounds?’’
The International Banker nodded. He shrugged his shoulders.
‘‘What you are going to say,’’ he remarked, ‘‘is that, if we buy marks with pounds, the marks will grow dearer and the pounds will grow cheaper - on the Foreign Exchange Market. Of course they will. The more the demand the higher the price.’’ He held up his hand to silence our banker who wanted to speak. ‘‘I’ll finish your complaint for you,’’ he exclaimed. ‘‘You were going to say that if marks become too dear in terms of pounds, it will be cheaper to use the pounds to buy gold in the first instance and then to use the gold to buy marks. I admit that, too. Gold will leave the country in these circumstances.’’
‘‘And when gold leaves, if you get your way, notes will be taken out of circulation here at home.’’
‘‘Quite so. That is my proposal.’’ ‘‘And prices will fall?’’
‘‘Yes, and wages also. Then we shall be able to make railways as cheaply as the Germans, more cheaply perhaps. When that happens foreigners will buy in this country, and we shall not need to send our gold away.’’
‘‘It means,’’ the Home Banker said, ‘‘that you can play one country off against another; that you can force the workpeople in all countries to accept the same wages as the lowest-paid workpeople in any country; that in consequence, you can prevent any country from retaining enough buying power to buy its own goods and so can force any country to export its goods in competition with all other countries; it means bitter competition between nations for foreign markets, armaments and preparations for war - perhaps in the end war itself. We, the Home Bankers, will be powerless to resist you because, if you send gold out of the country, we shall automatically be compelled to shorten sail, to call up loans - no banker can expand his loans on a falling market.’’
‘‘My dear sir,’’ the International Banker exclaimed, ‘‘you can lend abroad just as well as we can. If you have IOUs to spare you can invest them with us or you can invest them with foreigners. It will be all to your advantage because you will be getting the highest rates of interest which the world offers and, at the same time, compelling the people at home here, to produce more cheaply and so make better borrowers of themselves. We’re money-lenders, remember, not philanthropists. What’s more, we’re all in the same boat. What we have to secure is that we can create our IOUs and that, having created them, we can lend them at the highest obtainable rate of interest. We can only be sure of doing that if the act of taking money out of a country compels that country to produce more cheaply. Our IOUs must find their level. And they must not, on any account, be replaced without our consent in the countries from which we have withdrawn them. The reason why governments must never be allowed to interfere with our operations is that the interests of governments are nearly always opposed to our interests. Government always wants to avoid a fall of prices and wages and a rise of unemployment and, therefore, a government is always tempted to create money to replace the IOUs we have taken away.’’
V Foreign Exchange
A few days later, at a more intimate gathering, the International Banker explained his view with greater clearness.
‘‘The sap and marrow of this business of money-lending,’’ he declared, ‘‘is a moveable price-level and hence a moveable wage-level. You Home Bankers know perfectly well that if prices or wages were fixed or pegged in any way, if they were even moderately stable, you would soon be out of business. Imagine such a state of affairs. Farmers would know, roughly, what they were likely to get for their crops; manufacturers would know what they could expect to obtain for their goods. They could all, therefore, arrange their businesses with confidence. They could set so much aside for rent, so much for wages, so much for machinery. And they could do this with a good assurance that the sale of their products would enable them, year after year, to pay expenses and put a profit in their pockets. Very soon they would get out of debt.’’
He paused and fixed his eyes on our banker, who was listening uneasily.
‘‘What would be your position then?’’ he asked our banker. ‘‘Your loans paid off; your hands full of your IOUs. To whom could you lend these IOUs? All around you prosperous people, people with credit balances on your books; and no means available any longer for making these people wish to borrow.’’
‘‘Why not?’’
‘‘Why not? My dear sir, I am supposing that the price-level, or, since it comes almost to the same thing, the wage-level, has been fixed or stabilized by the Government. If you withdraw your loans, and prices, in consequence, begin to fall, the Government will step in and, by creating money itself, will raise prices again. If you make too many loans and prices, in consequence, begin to rise, the Government will step in and, by taxation, or some other device, withdraw money from the markets and so lower prices again. Buyers and sellers, therefore, will be assured of their markets and will have nothing to worry about except popular taste and the competition of other buyers and sellers. All the competent producers, that is to say all the good borrowers as things now stand, will, as I have said, get out of debt and acquire their own capital. You will not be able to lend your IOUs. Since you are money-lenders and nothing else you will not have any means of livelihood except the commissions you may earn by looking after other men’s wealth. We shall be back to the old position of keepers of strong-rooms. We shall be clerks, accountants, cashiers - without influence and without power.’’
He paused again. Our banker frowned.
‘‘Possibly,’’ our banker said, ‘‘that might occur if the price-level, or the wage-level, really was pegged by Government. But who today is thinking of fixing the price-level or the wage-level? An odd crank here and there, perhaps; nobody pays any attention to them. Everybody, on the contrary, is firmly convinced that what must, at all costs, be kept fixed, is the rate of exchange between our money and foreign monies. and you know that if the rate of foreign exchange is fixed, neither the price-level nor the wage-level can possibly be fixed as well. What you are trying to make us believe is that, unless we, the Home Bankers, give you the power to make us shorten sail and call up our loans whenever it suits you, all our businesses will be ruined.’’
‘‘Quite so. That is exactly what I am trying to make you believe. And it happens, I may add, to be true. Suppose, for a moment, that you go on as you have been doing. Suppose, for a moment, that such a person as an international banker exists nowhere on earth. Suppose that this country is absolutely self-contained, isolated, shut up within itself so that nobody ever wishes to go outside of it. And suppose, further, that you go on lending your IOUs in the future exactly as you have done in the past. What is going to happen?’’
Our banker shrugged his shoulders.
‘‘Very much what has happened before, I suppose,’’ he said.
‘
‘You think that, do you? You think that boom will go on succeeding slump and slump boom for ever and ever, while you continue to make money both ways? You think that when your neighbours are poor you will be able to lend them your IOUs and that, when they have grown rich, you will be able, by withdrawing these IOUs, to seize their wealth and make them poor again so that, once more, they will be eager to borrow from you? You think that they will go on, from generation to generation, playing the part of a flock of sheep, growing new coats of wool for you to clip? For that’s what it comes to. I can assure you that you’re very much mistaken. I’ll tell you what, on the contrary, will happen.’’
The International Banker lit a cigar and leaned back in his chair.
‘‘This is what will happen,’’ he said. ‘‘For a time, a few years possibly, you will be allowed to get away with it. That will be so because your fellow townsmen will still be ignorant about what is going on. After a time, however, when they have suffered one or two slumps, they will begin to interest themselves in money matters. Committees of Inquiry and probably Government Commissions also will be appointed. And these Committees and Commissions will have as their chief object the support of the price-level because everybody, of course, will be aware that it was the fall in prices which was the immediate cause of the slump and so of the distress and bankruptcy and unemployment which are attending it.
Students of this subject will explain that prices depend on the amount of buying power in the market and that, consequently, if buying power is kept up, prices will remain steady. They will explain, further, that buying power and wages are very nearly the same thing. ‘Pay higher wages,’ they will say, ‘and prices will rise.’’’
‘‘There will be employers of labour on the Committee or Commission and they will at once become very angry and ask how a man can pay higher wages when prices are falling. For a while there will be a wrangle about this. One set of people will declare:
‘‘‘Wages are buying power; raise wages and prices must rise.’
‘‘Another set, the employers who have to pay the wages, will answer:
‘‘‘Prices have fallen although we did not reduce wages. How can we be sure, therefore, that if we raise wages prices will rise?’
‘‘In other words does the wage-level decide and determine the price-level or does the price-level decide and determine the wage-level? We all know how that argument goes. But what you Home Bankers do not seem to realise is that anybody who cares to study the subject must reach the conclusion, on the facts available, that wages, as things are today, always follow prices and never lead them. It is when prices rise that the clamour for higher wages begins and the higher the rise of prices the louder the clamour. In the same way, employers never try to cut wages until the prices of their goods have begun to fall. You may say that this is a natural order and you may try to show that it is over-production on the one hand which brings about the fall in prices, and depletion of stocks, on the other, which causes prices to rise. But I warn you that you will not be believed for very long.
‘‘Why will you not be believed? Because there will be before the eyes of your fellow townsmen, daily, the spectacle of hunger and want in the middle of plenty. The word ‘over-production’ is unconvincing in such circumstances, and so, too, is the word ‘under-consumption’. Everybody will see that what, in fact, is lacking is money.
‘‘At once you will be faced with the question: ‘Why not let the Government print more notes and distribute them?’ You will then be compelled to argue that money created in that fashion cannot be sound money and must ultimately do more harm than good. Think of all the difficulties into which such an argument is sure to lead you. For what, in fact, will you be saying? That gold and silver alone are real money and that money which cannot be converted or changed, at the will of the holder, into gold and silver is unsafe and unsound. Think what that contention really amounts to.’’
The International Banker paused and leaned forward.
‘‘A government,’’ he went on, ‘‘built a theatre and staged a play. But because it was generally believed that the tickets for the theatre ought to be printed on pieces of gold, the government did not, itself, issue any tickets. Instead it applied to the only man in the country who possessed any gold and asked him to undertake the issue of tickets.
‘‘This man, naturally, drove a hard bargain. He soon found that people did not like carrying heavy golden tickets about with them and so supplied, instead, paper tickets each of which bore the words:
‘I promise to pay the bearer on demand a golden ticket.’
‘‘The scheme worked very well except that only enough tickets to fill the Stalls were issued, so that the rest of the House remained permanently empty, although large numbers of people wanted to buy the vacant seats. In these circumstances the Government approached the issuer of the tickets:
‘‘‘Could you not,’ they said, issue enough tickets to fill the house?’ ‘‘He shook his head.
‘‘‘My tickets,’ he said, ‘are IOUs for golden tickets.’
‘‘He said this with great emphasis. Because, in fact, and unbeknown to the Government, he had already issued ten times as many IOUs as he had golden tickets in his safe. He was afraid to issue any more IOUs in case, for any reason, people suddenly began to want golden tickets instead of paper ones. At the same time he was determined that the Government should not find out that paper tickets, which had no golden tickets behind them, served quite well their purposes of filling the seats in the theatre. So when the Government asked, timidly, if it mattered whether or not paper tickets could be changed into golden tickets he flew into a great rage.
‘‘‘What!’ he cried, ‘you want me to print paper tickets without a backing of gold. Are you mad? How can a ticket that cannot be changed into gold give any satisfaction to its holder? How can its holder possibly enjoy your play? How can he be expected to see and hear like a man whose ticket can be changed into gold?’
‘‘So violent and threatening did the issuer of the tickets become that at first the Government was terrified. No doubt he knew more than they did. But after a time a few members of the Cabinet, who regretted deeply the empty seats in the theatre, ventured to approach him again.
‘‘‘Surely,’ they said, ‘the value of the ticket resides not in the material of which it is made or into which it can be changed, but in the theatre and the play.’
‘‘‘You want to inflate, do you?’ the issuer of the tickets shouted. ‘To issue tickets that cannot be changed into gold, let me tell you, is to inflate.’
‘‘‘No, sir. We want to fill the theatre. To use the accommodation we have provided for our fellow citizens. Surely real inflation would be issuing more tickets than there were seats? So long as we have empty seats we can safely issue tickets against them?’
‘‘‘There you are. Unsound tickets. Tickets that cannot be changed into gold. May the public be protected from such men as you! Could you enjoy a play if you felt, all the time, that your ticket was nothing but a piece of dirty paper? I ask you that.’
‘‘‘We should have obtained our seats.’
‘‘‘Seats! What are seats when you have bought them with worthless paper? Can a man sit easily on a seat of that sort?’
‘‘‘My dear sir, our theatre is very well appointed. The seating accommodation is excellent in every way. Besides, you know, one gives up one’s ticket before one takes one’s seat.’
‘‘‘That makes no difference.’
‘‘Suddenly the issuer of the tickets changed his ground.
‘‘‘How can you be sure,’ he asked, ‘that if your tickets cannot be changed into gold, you will not print too many of them - so many that there will be no seats for half the holders?’
‘‘‘We know the number of seats in the theatre.’
‘‘‘That’s no safeguard. You’re politicians, are you not? Politicians cannot be trusted with tickets. They always print too many. Look at Germany.’
‘�
��‘We need not print too many.’
‘‘‘You always do. Always. Always. Always.’
‘‘The issuer of the tickets shouted himself hoarse.
‘‘‘Are we to keep the theatre half empty for ever?’ the members of the Cabinet asked, ‘simply because of the possibility that too many tickets might conceivably be printed.’
‘‘They left the issuer of the tickets and devoted themselves to a study of his methods. They found, very soon, that he was doing himself exactly what he refused to allow them to do - namely, issuing many times more paper tickets than he had gold with which to redeem them. It did not take them long to see that the reason why he was able to do this was that very few people ever wanted to have their paper tickets changed into golden tickets. So long as people could get seats they were quite content.’’
The International Banker paused. He wiped his brow.
‘‘You may preach yourselves hoarse in trying to convince governments that money that cannot be converted into gold is useless or dangerous.
Governments will find out that your own IOUs are an example of this useless and dangerous kind of money. And once they make that discovery they will take away your power to issue IOUs at all. They will provide their own money so that the goods which have been produced may be distributed and used.’’
‘‘But surely,’’ our banker cried, ‘‘you don’t deny that over-production is inherent in human nature? When men see a profit they rush to take it. It is this confidence which makes a boom and it is lack of this confidence... ’’
The International Banker interrupted him with a gesture of impatience.
‘‘Keep that stuff,’’ he snapped, ‘‘for your public meetings. Ask yourself if you would listen to it after a sharp fall in prices had driven you into the bankruptcy court. What you’d be concerned about in that case would be to find a remedy - to discover some means of preventing prices from rushing up or tumbling down. And you would find a remedy because the remedy, once you begin to look for it, is staring you in the face. Prices rise when people are given money to spend; they fall when the money is taken away.
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