The remedy, therefore, is to maintain a constant relationship between the quantity of money and the quantity of goods. Nobody knows better than you how easily that can be done. Remember that our method of inventing Promises-to-pay is no longer a secret. Everybody knows that an IOU is not gold and that the number of IOUs exceeds the amount of gold and silver in your vaults. What you can do the Government can do also.’’
‘‘The Government does not possess gold and silver.’’
‘‘What! My dear sir, the Government possesses the power to impose taxation. And it can demand that the taxes shall be paid in gold and silver. How long could you stand up to a demand of that sort?’’
The International Banker waved his hand.
‘‘Believe me,’’ he added, ‘‘one or other of the Commissions or Committees would propose a fixed or regulated price-level. Why, look at the books and papers written by the currency-cranks, as we choose to call them. There are a hundred and one schemes in these books and papers, but each of the hundred and one contains the same bed-rock demand - namely that prices shall be controlled. That is the real meaning of the price-index scheme, of the ‘rubber’ or ‘commodity money’ scheme, of the schemes for public works in times of trade depression, of the schemes for raising wages, of the Social Credit scheme. All these reformers are concerned, first and foremost, to counteract our power to raise or lower the price-level. They want to give the proper conditions in which he can get out of debt and stay out of debt. They want, in other words, to put an end to money-lending.
‘‘Now it is obvious that if money-lending comes to an end we come to an end with it. Our business therefore is to see that this country, and the whole world, is kept full of good borrowers and that these good borrowers are not allowed to become capitalists of independent means, able to finance their own undertakings. We have to fix our burden of debt on their shoulders in such a way that it can never be shaken off. The true secret of money-lending is to lend in such a way that the debt can never be repaid except by contracting a new debt. That can only be accomplished if the price-level remains free to rise or fall as we may determine. Clearly, therefore, some element which can be relied upon to bewilder the minds of producers and reformers is necessary to the safety, and indeed to the existence, of our system. What is that element?’’
The International Banker leaned forward again in his big armchair.
‘‘It is,’’ he declared, ‘‘the element of foreign trade. Once the element of foreign trade is firmly fixed in people’s minds there can be no more talk about fixing the price-level. Do not forget that a stable price-level means a stable level of wages. Wages and costs, let me repeat, are nearly the same thing. If our wage-level is higher than that of, say, Germany, how can we hope to sell our goods in foreign markets against German goods? We must therefore keep wages down. But if we keep wages down we are also keeping buying-power down. Hence we shall have a surplus of goods always, which cannot possibly be sold in the home market. These goods must go into foreign markets or else remain at home to depress further the level of prices. Every producer will live in fear of these surplus goods.
Every producer will desire to see these surplus goods sold abroad so that they may not remain at home to destroy his market. Every producer will therefore be in favour of low wages, of low buying-power in the home market and of a price-level capable of being adjusted to meet the needs of the export trade. It will become an axiom of our economy that we live by our export trade. We shall be able to ask the reformers and the cranks how they propose to export if our goods exceed in price those of our competitors. ‘What?’ we shall say, ‘you wish to fix prices! Do you realise that if, having done so, you happen to be faced by lower prices in some foreign country, you will be compelled either to change your price-level or to lose the whole of your export trade?’ When we ask that question they will see, looming before them, the spectre of markets glutted with goods which cannot be sent abroad. For do not forget that, by that time, our industry will have been organised for foreign rather than for home trade and our agriculture will have been diverted into such channels as the breeding of pedigree stock and the production of milk.
‘‘We shall be importing most of our food to pay the interest on loans made abroad. We cam alarm the politicians, if need be, by asking them how they propose to pay for people’s food if they do not export more than they import. Believe me, my dear sir, those arguments and questions will effectually silence any kind of opposition to our wishes. Everybody, the Government, the Political Parties, the manufacturers, the merchants, even the farmers themselves, will be convinced of the absolute necessity of maintaining the export trade. They will be convinced therefore of the necessity of keeping our money stable with the monies of foreign countries, that is to say of maintaining a fixed foreign exchange by the use of gold as the international currency. They will all exert themselves to keep costs and wages as low as possible and thus to deprive the home market of the power to buy the home products. You will be assured, for ever, of a freely movable price-level.’’
Our banker shook his head.
‘‘But, so far as I can see,’’ he objected, ‘‘we shall not ourselves be allowed by you and the other International Bankers, to move that freely movable price-level.’’
‘‘Oh, yes, you will. Indeed, we shall move it for you if you don’t move it for yourselves. Our interests and your interests are the same. We are money-lenders, or rather lenders of promises to pay money. We need a plentiful supply of good, honest, hard working borrowers. The only way, as I have said, to secure such a supply is to induce men of the right type to embark upon industrial enterprises which require large amounts of capital for their initiation. How can we induce good borrowers to undertake such enterprises? You have already answered that question. By offering them the chance of a profit. In other words by making it clear that prices are going to rise. How can we make that clear? By giving loans to people, no matter where, who wish to build something, to make something.
‘‘Let me give you an illustration. Business has slumped in this and other countries. Prices are low and labour, by reason of unemployment, is cheap. We, the International Bankers, have IOUs on our hands which we are anxious to lend. We know that the people of the Argentine are anxious to build a railway and are only waiting till they think prices have reached bottom in order to begin the work. We approach the Argentine government and offer it a loan. Our loan is accepted. As prices are very low in this country the order comes here. We begin to pay out money to steel works and other construction firms in this country. More labour is employed.
There is more buying-power, at once, in the home market. Prices, therefore, turn upward. It soon occurs to the local builder that there is likely to be an improved demand for small houses. He gets out plans and comes to you, the Home Bankers, with a proposition for a loan. And so on.’’
The International Banker rose and stood in front of the fire.
‘‘And so,’’ he said, ‘‘the boom begins. You get your IOUs working for you until a point is reached when prices and wages in this country have risen so high that it is no longer possible to export to foreign countries. Exports fall off, therefore, and fail to pay for imports. We, who are lending our IOUs to finance foreign trade become aware that, very soon, merchants will be asking us for gold to send abroad in payment for imported goods. We begin therefore to raise our rates of interest so as to stop borrowing. That is the signal to you to raise your rates also - for you know that if you go on lending at the old rates, in spite of our signal, exports will fall still further by reason of a further rise in home prices. We will be compelled in that case to part with still more gold and the outflow of gold will result in the withdrawal from yourselves of a corresponding quantity of notes of the National Bank which, under the system I am proposing, you will be allowed to count as equivalent to gold and on which, therefore, you will have lent ten times their value of IOUs.
‘‘In other words disregard of our signal will infl
ict on you and on your clients the heavy penalty of a catastrophic fall in prices, which is likely, as you know, to cause a panic and lead to demands by your clients for real money far in excess of your holdings. Obviously you will wish to avoid that danger. You will therefore act at once on our signal and begin, gently at first, to raise your rates of interest to borrowers and to call in some of your loans.
As a result the fall in prices will be slow and gradual. You will profit by the higher rates of interest and you will be able to lend to us the IOUs you can no longer lend at home - for, with falling prices and costs, exporting will have begun again. This gradual rise and gradual fall of prices will not produce effects such as are produced by wild booms and violent slumps. There will be no panic when the fall takes place and consequently we shall not be plagued by Committees of Inquiry or by the attentions of currency cranks. The system will be semi-automatic. And there is another point... ’’
The International Banker held up his hand in a gesture which recalled that of a clergyman bestowing a blessing.
‘‘There will be large numbers of people,’’ he declared, ‘‘to whom this close linking together of all the nations of the world will make strong appeal on sentimental and humanitarian grounds. If we are attacked, we can reply that the foreign exchanges are the charter of internationalism. We can say that the world has become one in trade and commerce as it must, ultimately, become one in sympathy and in brotherhood. We can insist that the day has gone by when any nation, even the greatest, can live to itself. We can extol the blessings of a league of nations and speak with horror of nationalism and economic nationalism. We can proceed to discussions on disarmament. We shall, thus, rally to our support all the liberal elements of the community, all the humanitarian elements, all the pacifist elements, all the socialists. Our money will seem to be the cement of peoples, the enemy of war, the sure means to the world-state.’’
The International Banker’s face expressed a lively satisfaction.
‘‘Believe me,’’ he concluded, ‘‘I mean what I say. Men are but animals, after all, greedy, hungry, selfish, of such nature that it is by their self-interest alone that you can hope to lead them. If we hold them in our debt, and make borrowers of them all, that is only the better to serve their highest and truest interests. Our power will be absolute, for there will be no escape from us. We shall use that power to unite the peoples, to reorganise industry and trade on a more remunerative basis and to combat everywhere the individualism which constitutes so serious a menace to human progress and human happiness.’’
VI Remember The Moratorium
The International Banker developed further his humanitarian views when he was called by the Government to advise them about the crisis and the way of preventing trouble in the future.
‘‘The lesson,’’ he said, ‘‘that I draw from the recent financial panic in this country is that we have been trying to grow rich at the expense of the rest of the world. We saw a chance of profit and seized it without regard to the needs of our neighbours. There was a wild orgy of spending, of borrowing; prices rose to fantastic heights and expectations of profit assumed grotesque proportions. Wages mounted up and a standard of living far above our means was indulged in. Now that the bubble has burst we are realising that no nation can afford to get out of touch, out of step, with its neighbours.’’
The Chief Minister nodded approval but the Home Minister displayed a less accommodating temper.
‘‘If the banks had refused to lend so much money,’’ he said, ‘‘the boom would not have attained such dimensions.’’
‘‘I agree. The Home Bankers ought to have raised their rates of interest long before they did.’’
The Home Minister frowned.
‘‘On the other hand lending stopped just when a great mass of goods was coming on to the market, that is to say, when more, and not less, money was needed.’’
‘‘There had been gross over-production. The goods could not, by any means, have been sold at home. It was essential to bring about a fall in prices in order to get the goods into foreign markets and so save the producers from ruin.’’
‘‘Suppose you had created more buying power for the home markets... ’’
‘‘No, sir. Allow me, sir, to question your assertion that bankers create money. What we lend is our credit, the good name which honest dealing has built up and advertised. This credit is valuable only so long as we refrain from any action likely to shake it. It is valuable by reason of our knowledge of borrowers and their businesses, a knowledge difficult to acquire and costing much money in its acquisition. Why, sir, any man may set up as a banker. Any man may lend his credit. But there is credit and credit. Why does the public seek eagerly for one man’s credit, give goods and service for it and take it in exchange for debt? Clearly because that credit is big with value. Why is another man’s credit worthless? Because it has no value. Surely a man may sell the field he has tilled or the business he has created for what it is worth to his fellows?’’
This speech won the approval of the Chief Minister who nodded gravely. But the Home Minister frowned once more.
‘‘People borrow your IOUs,’’ he said, ‘‘solely because they believe these promises can be converted into gold.’’
‘‘No, sir. Everybody knows that a big run on a bank must break it.’’
‘‘You are suggesting that what you lend is well worth the price asked for it.’’ ‘‘Evidently, since people continue to pay the price we ask.’’
The Home Minister leaned across the table.
‘‘Any roguery could be justified in that way,’’ he declared. ‘‘In fact there is next to no gold behind your promises. We can therefore exclude that metal from our discussion. What are you lending, then? Your skill, you say; your good name; your business experience. But no borrower wants these things. What borrowers want is money - something with which they can buy things or pay wages.’’
‘‘Quite so, we lend the means of buying and paying.’’
‘‘It is the public which honours your promises by giving goods for them.’’
‘‘You are saying that the public trusts, and so coverts, our promises. Would the public accept Mr X’s promises? Of course not.’’
‘‘Wait a moment. What the public is getting in exchange for its goods are your promises to pay what you do not possess and never have possessed. Your skill and experience in the circumstances in which they are exercised are worth nothing to the public. Do you suggest that the banks which failed in the recent crisis had less skill and experience than you have? Everyone of you would have failed if we, the Government, had refused you the Moratorium. You told us that yourself. I say again that what you are lending is essentially worthless and has been proved to be worthless. But you are able to palm it off on the public because we, the Government, have, in fact, if not in name, given you the Nation’s credit to play with.’’
The International Banker shrugged his shoulders. ‘‘How so?’’ he asked.
‘‘The credit of any nation depends on its character and its resources. A nation without courage, without discipline, without skill or without honesty can possess no credit. Nobody could or would lend anything to such a nation.’’
‘‘I agree cordially, my dear Home Minister.’’
‘‘It follows, does it not, that what gives value to your promises-to-pay is the credit of the nations to whom these promises are issued?’’
‘‘What?’’
‘‘How much gold is there actually behind every £10 of your IOUs?’’
The International Banker hesitated. The Home Minister made a quick gesture.
‘‘Before the National Bank was allowed to issue notes to replace gold,’’ the Home Minister said, ‘‘there was £1 in gold behind £10 of your IOUs. Today, since the new notes have appeared, there is considerably less. The National Bank will issue three £1 notes, roughly, for every £1 in gold it possesses. You will lend £10 of IOUs for every National Bank Note you possess
. Consequently the gold backing behind your IOUs for £10 will be 6s 8d [about 33 pence - ed]. Do you agree?’’
‘‘Oh, yes.’’
‘‘What would you say to a man who tried to pay a debt of £10 with six shillings and eight pence?’’
‘‘What has this got to do with banking?’’
‘‘Everything. The fact is that your IOUs are worth almost nothing.’’ ‘‘They buy anything you like to buy with them.’’
‘‘Exactly. Because the public thinks they possess real value.’’
‘‘The public knows that we lend more promises to pay money than the actual amount of money in our hands.’’
‘‘Not at all. What the public thinks is that you are lending good money, money earned by other people but entrusted to you for lending purposes. The idea that you are engaged in creating money out of nothing... ’’
‘‘I deny that. We do not create money. What we do is to distribute goods.’’ ‘‘How?’’
‘‘By lending our good name so that these goods may be disposed of.’’
‘‘You mean by lending your promises to pay money, your IOUs?’’
‘‘These are our goods. You are at liberty, if you wish, to lend your good name in the same way. Our good name, it may be, would command a higher price than your good name.’’
This was spoken with a charming smile. But there was no answering smile on the Home Secretary’s lips.
‘‘What you are really saying,’’ he exclaimed, ‘‘is that the public believes that you have money to lend, but does not believe that I am in that happy position.’’
‘‘Well?’’
‘‘Whereas, in fact, you have no money to lend. You do not lend money at all. You lend only your promises to pay money and the moment any large number of persons asks for the fulfilment of these promises you come yelping to us for a Moratorium.’’
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