Promise to Pay

by Robert McNair Wilson

  VIII The Gold Standard

  The Home Minister’s letter brought a reply from a Bishop which was published a few days later.

  ‘‘It must,’’ the Bishop wrote, ‘‘be a matter of regret to many Christian people that the former Home Minister should have chosen to mingle religion with his politics. He has accused us all, and notably perhaps, by implication, the Churches, of having surrendered both faith and morality in obedience to those whom he calls our financial masters. An accusation so sweeping and so violent must always be difficult to refute but it may be allowed to one who has no expert knowledge of finance and but little knowledge of politics, to say that a cause is scarcely likely to be advanced in public regard by methods which, in effect, cast a doubt upon the sincerity of all who oppose it. Is our Chief Minister, are his colleagues, then, mere dupes of the financial interest? Is the Parliament of the Nation, likewise, a dupe? Does the whole body of public opinion in this, and all other lands, incline fatuously towards what is, according to the former Home Minister, at best a swindle and at worst a crime against God and man?

  ‘‘It is only necessary, as I believe, to state the question in this way in order to reach a sound conclusion. It is easy for the former Home Minister to write that the foreign exchanges ought to be allowed to take care of themselves; but that means that those among our people who may have invested their savings abroad are to receive a premium over those who, on grounds possibly of conscience, have chosen to invest at home. If I buy French rentes when £1 is worth 100 francs and sell them when 50 francs are able to purchase £1, I have doubled my capital. But my gain is being paid for surely by those of my fellow countrymen who are compelled to buy French goods. A fixed exchange, as it seems to me, guarantees that justice shall be done as between buyer and seller, the owner of investments and the purchaser of goods.

  ‘‘It has now, as I understand, been agreed that when gold leaves this country a corresponding amount of money in the form of notes shall be removed from circulation. This is likely to cause a fall of prices and so of wages. But the wage-earner ought to remember that his present sacrifice will be made good to him in cheaper foodstuffs. The value of a wage, after all, consists in its buying-power. To suggest therefore that a fall in the wage-level means a fall in the standard of living is both unfair and untrue. It need mean nothing of the sort.

  ‘‘We enjoy today, in this our beloved land, the inestimable blessings of an ordered liberty. The fact that the former Home Minister is able to write as he has done about those that he calls ‘conquerors’ and ‘tyrants’ seems to me to disprove his accusations. Do conquerors and tyrants permit criticism of their actions? Our Press is free; we are entitled to express our opinions openly, and freely; we can come and go as we choose. Have ‘slaves’ ever, anywhere, enjoyed such advantages? I say, without hesitation or fear of contradiction, that this land of ours is governed according to Christian principles. Our people are immeasurably better off than any other people have ever been at any earlier time. In sobriety and peace they are leading lives which, from year to year, are being enriched by the good gifts of science and of education. A Christian, even in days of anxiety, cannot but rejoice at these manifestations of Providence. Sursum Corda. It is so fatally easy to criticise; but the critic, as a very wise man has reminded us, reveals himself.’’

  The Home Minister, on reading this letter, went to the Bishop’s palace. He laid a copy of the paper containing the Bishop’s letter on the Bishop’s desk.

  ‘‘I’ve come to answer you,’’ he declared, ‘‘as man to man. These letters to the newspapers are futile.’’

  The Bishop looked startled. But he extended a welcoming hand.

  ‘‘By all means,’’ he said in tones that were not free from anxiety. ‘‘This question of a fixed exchange? You say it guarantees justice as between buyer and seller, the owner of investments and the purchaser of goods.’’

  The Home Minister paused. An inclination of the Bishop’s white head answered him.

  ‘‘That is exactly, believe me, what a fixed exchange does not guarantee. Let us take buyer and seller first. If the exchange is fixed and the price-level allowed to fluctuate their contracts with one another may be changed in the sense that one or other may obtain an uncovenanted benefit. If I buy an article at £1 and, before the article can be delivered to me, the cost of producing it has fallen to 10s, the seller will get the advantage.

  Had the cost risen to 30s instead of falling, the advantage would have come to me. This is, more or less, exactly what happens when the exchange is allowed to fluctuate and prices are fixed. In other words buyers and sellers suffer under either system. If it is not the exchange that they have to watch it is the price-level; and if it is not the price-level it is the exchange. This applies to investors in foreign businesses who buy ordinary shares in these businesses. But it does not apply when exchanges are fixed to the holders of rentes and other Government bonds.’’

  The Home Minister leaned forward.

  ‘‘What is the difference between an ordinary share in a business and a debenture?’’ he asked.

  ‘‘The debenture is safer than the ordinary share, isn’t it?’’ ‘‘Why is it safer?’’

  The Bishop shook his head.

  ‘‘I’m afraid,’’ he said, ‘‘that I am not well up in these matters.’’

  ‘‘I’ll tell you. Because a debenture is not a share at all. The shareholder in a company is a partner in the business. He takes risks. If the company earns no profits he gets no dividend; if the company goes bankrupt he loses his whole investment. Compare this with the position of the debenture holder. A debenture holder has no share in the business. He has merely lent money to the business. If the company loses, he does not share in the loss. If the company goes bankrupt, he seizes its lands, its buildings, all it has. In other words a debenture holder is a money-lender. He takes security for his loans just as a banker does. In consequence what he is interested in is not the price-level but the value of money. He wants goods to be cheap so that his money may buy more and more of them. He wants his money to be dear.

  ‘‘There are many kinds of debentures. By far the most important kind are loans made to Governments on the security of the national income. These gilt-edged securities, as they are called, carry a fixed rate of interest. If Governments are poor, weak, desperate, they are still under the necessity of paying the same sums of money to their bondholders as in more prosperous days. And these bondholders will, if they can, wring out of those Governments the very last drop of blood.

  ‘‘It is obvious, therefore, that bondholders, debenture holders, and also mortgage-holders stand in an entirely different category from ordinary shareholders. They are moneylenders whereas shareholders are merchants. Merchants, as we have seen, have nothing to lose from a free exchange. Changes as between the values of, say, French and German money or English and French money, need not trouble them more than changes as between the values of money and goods. If you give them a guarantee that the £1 will maintain a more or less constant buying power in the home market, they can make allowances for ups and downs as between the home markets and foreign markets. Under a fixed foreign exchange they have to watch price movements; under a controlled price level they will have to watch foreign exchange movements. It is six of one and half a dozen of the other.

  But the position of the holders of debts (government debts, debentures, mortgages) is different. If the exchange is fixed these people can invest where they choose and rest assured that when they bring their money home again it will have lost nothing of its value.’’

  ‘‘And gained nothing... ’’

  ‘‘Quite. It works both ways, of course. The point I am coming to is that the bankers of the world are money-lenders and not merchants. They lend their promises-to-pay not as partners, but as creditors. The securities which they hold against their IOUs are, generally speaking, Government bonds, debentures or mortgages.’’

  The Bishop held up his hand.

&n
bsp; ‘‘But surely, my dear sir,’’ he exclaimed, ‘‘that is only reasonable? A banker, as the trustee of other men’s savings, cannot take risks.’’

  ‘‘Bankers take such risks all the time as is not dreamed of by one in a million of their clients. What you have mentioned is, of course, the official explanation of the banker’s preference for debts as opposed to partnerships. But there is another explanation which nobody ever hears about. These bonds and debentures and mortgages have one supreme merit in the eyes of money-lenders. They have to be repaid in full and they carry a fixed rate of interest. In other words they are, more or less, independent of the price level. If prices fall, shareholders may be ruined; but bondholders will be better off than before because their money will buy more. They will go on gaining until a point is reached at which payment of interest by borrowers can no longer be made. At that point the bondholders are able to seize the lands or buildings which have been pledged to them. In the case of Governments they are able to demand increased taxation and diminished expenditure on public services and works.’’

  ‘‘A debt is a debt, you know.’’

  ‘‘Quite. I am not denying that. If a debt has been incurred it ought, certainly, to be repaid. That is not what I am driving at. What I am concerned to show you is that the bondholders, the financial system, is in a position, when and if it chooses, to ruin its debtors and seize their property. Let me give you an example. I am a banker. I lend John Smith £1,000 on the security of his factory and the land on which it is standing. Next I call up some of my other loans and so diminish buying power inn the area in which John Smith conducts his business. In consequence of this shrinkage of buying power, or ‘demand’, prices fall and John Smith can no longer earn a profit. As he must pay me the interest on my loan, he now proceeds to cut down his staff of employees and to install labour-saving machinery. But I continue, day after day, to call up loans and to refuse to make new loans. Prices go on falling and, at last, John Smith comes to the end of his resources. He cannot reduce his staff any further without closing down. And he cannot afford to close down. He has to intimate to me that he will be unable to meet the interest on his debentures.

  ‘‘I now seize his business and put it up for sale. The best bid is £800. So I take the business myself as payment for my loan. A little later I begin to lend again and prices begin to rise. John Smith’s factory and plant are now worth having because there is a growing demand for the kind of goods he used to make. So I sell the business for £5,000 and put £4,200 in my own pocket. Do you follow?’’

  The Bishop’s face wore a new, anxious expression.

  ‘‘It cannot be as bad as that,’’ he exclaimed in a whisper.

  ‘‘It’s quite as bad as that. But my example does not present the whole picture. An important element has been omitted. I have spoken as if the banker, in such a deal, was a free agent. He is not.’’

  ‘‘Oh!’’

  ‘‘The free agent is not the Home Banker but the International Banker. It is when the International Banker finds that he can get higher rates of interest in some foreign country that the procession of disasters which I have described begins. For, unless exports increase to keep pace with the outflow of IOUs... ’’

  ‘‘Forgive me, I don’t follow you.’’

  ‘‘When a loan of money is made abroad that is equivalent to an increase of imports into the country from which the loan has been made.’’

  ‘‘Why?’’

  ‘‘A loan does not pay for imports.’’

  The Bishop shook his head.

  ‘‘I never could understand these extremely complicated ideas,’’ he declared hopelessly.

  ‘‘It isn’t difficult if you remember that under the present system every country tries to balance, and so pay for, its imports with its exports and thus to avoid sending money, in the form of gold, abroad. The point about a loan made to foreigners is that it upsets the balance of trade. If the loan goes out in the form of goods all will be well; but if it goes out in the form of gold... ’’

  ‘‘It can’t go out in the form of goods unless the foreigners want the goods.’’

  ‘‘Quite so. But the foreigners would not borrow unless they wanted goods. The real question is: are our goods as cheap as other people’s goods? If not, the foreigner who has asked for the loan will take gold and use it to buy goods elsewhere. In that case exactly the same position will have arisen as arises when exports do not balance and so pay for imports. The bankers making the foreign loan will be asked to pay, not IOUs, but money, gold. As they possess only one-tenth of the money they have promised to pay they cannot, of course, meet such a demand. In fact, however, the mere threat that gold may be asked for is enough to bring prices down - for at this threat all lenders at once begin to shorten sail.

  Consequently the loan to the foreigners which was made because better terms were offered abroad than were being offered at home, has, as its first effect, enforced a fall of prices in the home market and so of course - a fall of wages. Exports are thus increased and the loan goes abroad not in the form of gold but in the form of goods; the loan, in other words, acts like an import. It has to be ‘met’ by exports. Hence the name ‘invisible import’, which is usually applied to it. There is no import in actual fact; on the contrary, there is danger of an export of gold. That danger is avoided by so far reducing wages that a larger volume of exports of goods can be sent out of the country.’’

  The Home Minister paused for a moment.

  ‘‘I do hope I am making myself clear,’’ he went on. ‘‘The mere fact that gold leaves a country matters nothing to anybody since nobody eats the metal. But it matters tremendously to a man who is lending promises to pay ten times the quantity of gold which he possesses. The real anxiety about an export of gold is not the fact of export but the fact that the gold has been asked for. Not one of the International Bankers can stand such a demand for any length of time because not one of them holds more than a tenth part of the money he has promised to pay.

  ‘‘In other words the whole trouble resides in the private creation of IOUs to serve as money. The banker is trying to convince the world that a lie - namely, that he can fulfil his promises to pay ten times as much money as he possesses, is true. The only way in which he can make the lie look like truth is to prevent the holders of his IOUs from asking for their money. Our present banking system is therefore designed primarily to prevent demands being made for real money whether inside of the country or outside of it, whether in the form of notes of the national bank or of gold.

  Bankers keep urging their clients to use more cheques, that is IOUs, and by implication less money. No bank can stand a ‘run’ which means that no bank can make good more than a very small proportion of its promises.

  ‘‘At the same time every banker wants to get as much for these false promises of his as the world will give him. He wants therefore to be able to change his IOUs from one kind of money into another kind of money at a moment’s notice. If, for example, I have lent IOUs for £1,000 in England and find that there is a borrower in France who will pay me a higher rate of interest than my English borrower, I want to be able to call up my loan and change it, instantly, into IOUs for, say, 100,000 francs. But I don’t want to be asked to honour my IOUs in the process by giving gold for

  them. I want the movement of goods to follow my loans in such a way that, no matter what I may do exports everywhere will pay for imports and no demands will therefore be made upon me for gold.’’

  ‘‘Please explain to me,’’ the Bishop interrupted, ‘‘how these demands for gold arise. If I make a loan to France don’t I pay that loan in pounds?’’

  ‘‘No. If the worst comes to the worst you buy francs with pounds. You part with your pounds for gold and use the gold to buy francs.’’

  ‘‘The worst comes to the worst?’’

  ‘‘I mean if the French don’t use their loan to buy goods in England.’’ ‘‘What happens if they do buy goods in England?�
��’

  ‘‘Then you pay the makers of the goods. You pay them by means of cheques drawn on yourself; by means, in other words, of promises-to-pay, of IOUs. That, of course, costs you nothing.’’

  ‘‘What!’’

  ‘‘My dear Bishop, the whole object of international usury is to compel governments and peoples to compete with one another for the IOUs of the financiers. People will not compete for loans unless they need them. How can people be made to need loans? In what circumstances does a man or a company usually borrow? Surely when that man or that company lacks money either to carry on or to develop his business. Men with ample capital of their own do not borrow. Very well then, it is the aim of the financial system to prevent good borrowers from accumulating money of their own. That may be said to be the financial system’s first and most important aim. Ask yourself in what circumstances men tend to accumulate capital. ‘Is it not when prices are rising or when, having risen, prices are remaining more or less stable?’ This is the position of affairs during an ordinary period of prosperity in trade. Obviously the financial system cannot allow such a state of affairs to continue indefinitely. What would happen if such a state of affairs did continue would be that many credit-worthy borrowers would become too rich to want to borrow at all and that, in consequence, loans would have to be made to less and less desirable recipients.

  ‘‘The financial system protects those who live by it against this danger. As prices rise, more and more actual money is needed in shops and markets. Bankers are compelled, to a greater and greater extent, to honour their promises to pay. Their customers present cheques and ask for cash. Their stores of real money become depleted and they begin, in consequence, to stop lending and to call in loans so that they may not be caught out by a ‘run’. When they stop lending prices of course fall and the men with money soon lose it and become good borrowers once more.