The Speeches of the Bank Chairmen: February 1925

Once more the Bank chairmen have held up for our inspection their financial fashion-plates. The captions vary; but the plates are mostly the same. The first displays marriage with the gold standard as the most desired, the most urgent, the most honourable, the most virtuous, the most prosperous, and the most blessed of all possible states. The other is designed to remind the intending bridegroom that matrimony means heavy burdens from which he is now free; that it is for better, for worse; that it will be for him to honour and obey; that the happy days, when he could have the prices and the bank-rate which suited the housekeeping of his bachelor establishment, will be over—though, of course, he will be asked out more when he is married; that Miss G. happens to be an American, so that in future the prices of grape-fruit and pop-corn are likely to be more important to him than those of eggs and bacon; and, in short, that he had better not be too precipitate. Some of our chairmen were like him who, being asked whether he believed that, when he was dead, he would enjoy perfect bliss eternally, replied that of course he did, but would rather not discuss such an unpleasant subject.

Like last year there are two distinct issues,—the abstract merits of the gold standard, and the date and the mode of our return to it. The first is a question about which, as Mr. McKenna justly said, "we are still in the stage of inquiry rather than of positive opinion, and there is no formulated body of doctrine generally regarded as orthodox." The supporters of Monetary Reform, of which I, after further study and reflection, am a more convinced adherent than before, as the most important and significant measure we can take to increase economic welfare, must expound their arguments more fully, more clearly, and more simply, before they can overwhelm the forces of old custom and general ignorance. This is not a battle which can be won or lost in a day. Those who think that it can be finally settled by a sharp hustle back to gold mistake the situation. That will be only the beginning. The issue will be determined, not by the official decisions of the coming year, but by the combined effects of the actual experience of what happens after that and the relative clearness and completeness of the arguments of the opposing parties. Readers of the works, for example, of the great Lord Overstone, will remember how many years it took, and what bitter and disastrous experiences, before the monetary reformers of a hundred years ago established the pre-war policy of bank-rate and bank-reserves (which, in its day, was a great advance), in the teeth of the opposition of the Bank of England.

The other issue is of practical and immediate importance. Last year it was a question of whether it was prudent to hasten matters by deliberate Deflation; this year it is a question of whether it is prudent to hasten matters by a removal of the embargo against the export of gold. This year, like last year, the bankers, faced with the practical problem, are a little nervous. I think that this nervousness is justified for the following reasons.

In common with many others, I have long held the opinion that monetary conditions in the United States were likely, sooner or later, to bring about a rising price level and an incipient boom; and also that it would be our right policy in such circumstances to employ the usual methods to curb our own price level and to prevent credit conditions here from following in the wake of those in America. The result of this policy, if it was successful, would be a gradual improvement of the sterling exchange; and it would not need a very violent boom in America to justify a rise of the sterling exchange at least as high as the pre-war parity. I have, therefore, maintained for two years past that a return of sterling, sooner or later, towards its pre-war parity would be both a desirable and a probable consequence of a sound monetary policy on the part of the Bank of England coupled with a less sound one on the part of the Federal Reserve Board.

What has actually happened? In the spring of 1923 boom conditions in the United States seemed to be developing; but largely through the action of the Federal Reserve Board, the movement was stopped. Since July 1924, however, there has been a strong and sustained upward movement, which—subject always to the policy of the Federal Reserve Board—is expected to go further. The earlier upward movement of American prices was duly followed by an improvement in sterling exchange; and the relapse by a relapse. Similarly, the movement of American prices during the past six months has been accompanied by the improvement in sterling exchange, which has caught the popular attention. As Mr. McKenna pointed out, sterling prices have been a little steadier than dollar prices, and this greater steadiness has involved, as its necessary counterpart, some unsteadiness in the exchange.

The movement of the past six months, however, has been complicated by abnormal factors. The improvement in sterling exchange is more than can be accounted for by our monetary policy. It is true that short-money rates have been maintained at an effective ½ per cent above those in New York, and that British prices have risen somewhat less than American prices. But it is generally agreed that these influences have not been strong enough to account for everything. The Board of Trade returns indicate that there has been a movement of funds on capital account in the past year (and most of it, probably, in the second half of the year) from New York to London of the order of magnitude of £100,000,000. This is due (in proportions difficult to calculate) to the return of foreign balances previously held in London, to American investment in Europe resulting from the greater confidence engendered by the Dawes Scheme coming on the top of an investment boom in Wall Street, and to speculative purchases of sterling in the expectation of its improving in value relatively to the dollar. This unprecedented movement introduces a precarious element into the situation;—we cannot expect that it will continue on the same scale, and it may, at any time, be partly reversed. We require an interval, therefore, to readjust our liabilities either by a recovery of exports relatively to imports or by establishing a rate of interest on permanent loans high enough to check the present (in my judgement excessive) flow of new foreign investment outwards. At present we are in danger of lending long (e.g. to Australia) what we have borrowed short from New York. The strength of our pre-war position lay in the fact that (through the bill market) we had lent large sums short, which we could call in. At the present time this position is partly, though perhaps only temporarily, reversed;—which, in itself, is one reason for caution.

What is going to happen next? There are two leading alternatives. It may be that the Federal Reserve Board will come to the conclusion that the incipient boom conditions in the United States are getting dangerous, and will take the position firmly in hand, just as they did two years ago. This, almost certainly, is what the Board ought to do. In this event, the situation would be back again very nearly where it was eighteen months ago, and we should be faced, as we were then, with the alternative of relatively steady sterling prices with the dollar exchange below parity, or of stern Deflation in the effort to keep exchange at parity. A premature announcement of the removal of the embargo on the free export of gold would commit us in advance to the latter alternative,—the alternative which we deliberately rejected two years ago. This is what the fanatics desire. But with our unemployment figures what they still are, it would not be wise.

The other alternative is that the Federal Reserve Board will allow matters to pursue their present course, in which event we may expect that dollar prices will advance a good deal further. During part of 1924 the Board's open-market policy was decidedly inflationary, and has been largely responsible for the sharp rise of prices already experienced. At the present moment their policy is more cautious; but there is no clear indication that they have any steady or considered policy. It may be that misplaced sympathy with our efforts to raise the sterling exchange will be a factor tending to postpone action on their part; and if they delay much longer, boom conditions may become definitely established. In this event we need have no difficulty in raising sterling to pre-war parity. A firm monetary policy, designed to check a sympathetic rise of sterling prices, ought, without any positive Deflation, to do the trick. But it does not follow that the embargo should, therefore, be removed. To link sterling prices to dollar prices at a moment in the credit cycle when the latter were near their peak as the result of a boom which we had not fully shared would ask for trouble. For when the American boom broke we should bear the full force of the slump. The conditions in which we can link sterling prices to dollar prices without immediate risk to our own welfare will only exist when the mean level of dollar prices appears to be stabilised at a somewhat higher level than in recent times.

The removal of the embargo amounts to an announcement that sterling is at parity with the dollar and will remain so. I suggest that the right order of procedure is to establish the fact first and to announce it afterwards, rather than to make the announcement first and to chance the fact. Thus the removal of the embargo should be the last stage in the restoration of pre-war conditions, not the first one. The only prudent announcement on the subject would be to the effect that the embargo will not be removed until after sterling has been at parity for some considerable time, and until all the fundamental adjustments consequent upon this have duly taken place. At the same time—if we want to return to parity—steps should be taken to achieve the fact by raising bank-rate and checking foreign issues. I—without attaching any importance whatever to a return to parity—believe that there is much to be said for these measures in the interests of the stabilisation of our own situation. I do not believe that a somewhat higher bank-rate would do any harm, in view of the present tendencies of the price level, to the volume of trade and employment, and that, in any case, the maintenance of our own equilibrium will soon require the support of a higher rate. Several of the bankers declared that they were in favour of removing the embargo, provided this did not involve a risk of raising the bank-rate. Unless this was merely a polite way of saying that they were not in favour of removing the embargo, I do not follow their analysis of the present situation.

It would be useless for me to attempt in the space at my disposal to give the reasons for wishing to maintain permanently a Managed Currency. The most important of them flow from my belief that fluctuations of trade and employment are at the same time the greatest and the most remediable of the economic diseases of modern society, that they are mainly diseases of our credit and banking system, and that it will be easier to apply the remedies if we retain the control of our currency in our own hands. But whilst avoiding these fundamental questions I may mention, in conclusion, one practical argument which is also connected with what I have said above.

A gold standard means, in practice, nothing but to have the same price level and the same money rates (broadly speaking) as the United States. The whole object is to link rigidly the City and Wall Street. I beg the Chancellor of the Exchequer and the Governor of the Bank of England and the nameless others who settle our destiny in secret to reflect that this may be a dangerous proceeding.

The United States lives in a vast and unceasing crescendo. Wide fluctuations, which spell unemployment and misery for us, are swamped for them in the general upward movement. A country, the whole of whose economic activities are expanding, year in, year out, by several per cent per annum, cannot avoid, and at the same time can afford, temporary maladjustments. This was our own state during a considerable part of the nineteenth century. Our rate of progress was so great that stability in detail was neither possible nor essential. This is not our state now. Our rate of progress is slow at the best, and faults in our economic structure, which we could afford to overlook whilst we were racing forward and which the United States can still afford to overlook, are now fatal. The slump of 1921 was even more violent in the United States than here, but by the end of 1922 recovery was practically complete. We still, in 1925, drag on with a million unemployed. The United States may suffer industrial and financial tempests in the years to come, and they will scarcely matter to her; but we, if we share them, may almost drown.

And there is a further consideration. Before the war we had lent great sums to the whole world which we could call in at short notice; our American investments made us the creditors of the United States; we had a surplus available for foreign investment far greater than that of any other country; with no Federal Reserve system, American banking was weak and disorganised. We, in fact, were the predominant partner in the Gold Standard Alliance. But those who think that a return to the gold standard means a return to these conditions are fools and blind. We are now the debtors of the United States. Their foreign investments last year were double ours, and their true net balance available for such investment was probably ten times ours. They hold six times as much gold as we do. The mere increase in the deposits of the banks of the Federal Reserve System in the past year has been not far short of half our total deposits. A movement of gold or of short credits either way between London and New York, which is only a ripple for them, will be an Atlantic roller for us. A change of fashion on the part of American bankers and investors towards foreign loans, of but little consequence to them, may shake us. If gold and short credits and foreign bonds can flow without restriction or risk of loss backwards and forwards across the Atlantic, fluctuations of given magnitude will produce on us effects altogether disproportionate to the effects on them. It suits the United States that we should return to gold, and they will be ready to oblige us in the early stages. But it would be a mistake to believe that in the long run they will, or ought to, manage their affairs to suit our convenience.

What solid advantages will there be to set against these risks? I do not know. Our bankers speak of "psychological" advantages. But it will be poor consolation that "nine people out of ten" expected advantages, if none in fact arrive.

That our Bank chairmen should have nothing better to cry than "Back to 1914," and that they should believe that this represents the best attainable, is not satisfactory. The majority of those who are studying the matter are becoming agreed that faults in our credit system are at least partly responsible for the confusions which result in the paradox of unemployment amidst dearth. The "Big Five" have vast responsibilities towards the public. But they are so huge and, in some ways, so vulnerable, that there is a great temptation to them to cling to maxims, conventions, and routine; and when their chairmen debate fundamental economic problems, they are most of them on ground with which they are unfamiliar. It is doubtful, nevertheless, whether too much conservatism on these matters and too little of the spirit of inquiry will redound, in the long run, to their peace or security. Individualistic Capitalism in England has come to the point when it can no longer depend on the momentum of mere expansion; and it must apply itself to the scientific task of improving the structure of its economic machine.