The Speeches of the Bank Chairmen: February 1927

The voices of our old friends the Bank chairmen herald the approach of spring. They have spoken this year—with the exception of Sir Harry Goschen, who sees "no reason to be downhearted," and, as in former years, cannot "remember a time when, throughout the industries of the country, there was such a feeling of expectation and, indeed, optimism"—in somewhat chastened tones. Mr. Beaumont Pease has done a useful service by publishing some important figures analysing the business of Lloyds Bank, which inaugurate a new policy of giving information instead of withholding it. Mr. Walter Leaf made some sound observations on the tendency of business towards amalgamation and, at the same time, of shareholdings towards diffusion, and on the necessity of the State taking some responsibility for guiding this inevitable evolution along the right lines. But none of them except Mr. McKenna—and on one point of detail Mr. Goodenough—had anything to say about the future of monetary policy. So leaving Sir Harry Goschen to chirrup in the bushes, let us join Mr. McKenna in an attempt to dig a few inches below the surface of the soil.

Mr. McKenna reminded us of the overwhelming prosperity of the United States as against our own depression during the past five years. He declared that in the "wide divergence between English and American monetary policy, we have at least a partial explanation of the phenomenon." He found the measure of this divergence of policy in the expansion and contraction respectively of the bank deposits in the two countries, namely, as follows:—

He explained in some detail what is fundamental, yet too little understood, that the volume of bank deposits in Great Britain does not depend, except within narrow limits, on the depositors or on the Big Five, but on the policy of the Bank of England. And he concluded that we can scarcely expect a materially increased scale of production and employment in this country until the Bank of England revises its policy.

Whilst I do not agree with Mr. McKenna in every detail of his argument, I am certain that the broad lines of his diagnosis are correct. He has done a service by his persistent efforts to educate the public and his colleagues to the vital importance of some fundamental principles of monetary policy of which the truth is as certain as the day, but to which the City is blind as night.

Nevertheless, he has on this occasion shirked, in my opinion, half the problem. How far and subject to what conditions is a reversal of the Bank of England's policy consistent with maintaining the gold standard? Is the Bank of England in its new-forged golden fetters as free an agent as Mr. McKenna's policy requires?

What matters is, not some abstraction called the general level of prices, but the relationships between the various price levels which measure the value of our money for different purposes. Prosperity, in so far as it is governed by monetary factors, depends on these various price levels being properly adjusted to one another. Unemployment and trade depression in Great Britain have been due to a rupture of the previous equilibrium between the sterling price level of articles of international commerce and the internal value of sterling for the purposes on which the average Englishman spends his money-income. Moreover, in proportion as we are successful in moving towards the new equilibrium of lower sterling prices all round, we increase the burden of the National Debt and aggravate the problem of the Budget. If the Bank of England and the Treasury were to succeed in reducing the sheltered price level to its former equilibrium with the unsheltered price level, they would ipso facto have increased the real burden of the National Debt by about £1,000,000,000 as compared with two years ago.

Now Mr. McKenna seems to assume that the disequilibrium which admittedly existed two years ago has since disappeared. "To-day," he tells us, "such questions have only historic significance." But the evidence does not support this view. So far from having disappeared, the disparity between the price levels is actually greater than it was two years ago.

How, then, have we lived in the meantime? The real ground of the optimism on the lips of the Bank chairmen is to be found, I think, in the fact that there has been no strain on our resources which we have not been able to meet. Is this so great a paradox as it appears? Or so comforting?

We have undoubtedly balanced the difference in our account partly by drawing on the large margin of safety which we used to possess, and partly, during the Coal Strike, by increasing our short-loan indebtedness to the rest of the world. Before the war we probably had a favourable balance on international account, apart from capital transactions, of something like £300,000,000 per annum measured in sterling at its present value. The war and the fall in the value of fixed money payments may have reduced this annual surplus to about £225,000,000; i.e. this is what our surplus would be to-day if our export trades were as flourishing as in 1913. Let us suppose that as the result of our relatively high level of internal prices we have lost £200,000,000 of exports gross, namely, about a quarter of the whole, or (say) £150,000,000 net, i.e. after deducting that part of the lost exports which would have consisted of imported raw material, and that we consequently have unemployed (say) 1,000,000 men who would otherwise, directly or indirectly, have been producing these exports. All these figures are, of course, very rough illustrations of what is reasonably probable, not scientific estimates of statistical facts.

How does our international balance-sheet then stand? We still have a surplus of £75,000,000 per annum. Provided, therefore, we do not invest abroad more than this sum, we are in equilibrium. We can continue permanently with our higher level of sheltered prices, with a quarter of our foreign trade lost, and with a million men unemployed, but also with some surplus still left for the City of London to invest abroad, and, as the crown of all, the gold standard entirely unthreatened. The gold standard may have reduced the national wealth, as compared with an alternative monetary policy, by £150,000,000 a year. Never mind! "Our economic reserves of strength," as Mr. Leaf puts it, "are far greater than any of us supposed." "We are tougher than we thought," in the words of the Chancellor of the Exchequer. In short, we can afford it!

The special losses of the Coal Strike period are not allowed for in the above. They seem to have amounted to round £100,000,000, and to have been met by increasing our short-loan indebtedness, partly with the aid of the usual time-lag in the settlement of adverse balances, and partly by a relatively attractive rate of discount drawing foreign balances to London.

In determining the future of our National Policy, we have three alternatives before us:—

(1) We can seek at all costs to restore the pre-war equilibrium of large exports and large foreign investments. The return to gold has rendered this impossible without an all-round attack on wages, such as the Prime Minister has repudiated, or a considerable rise of external gold prices which we wait for in vain.

(2) We can continue indefinitely in the pseudo-equilibrium described above with trade depressed and a million unemployed. This pseudo-equilibrium has been the result, though probably not the intention, of the Bank of England's policy up to date. I see no convincing reason why it should not be continued for some time yet. Mr. Norman may have an awkward period ahead owing to the delayed results of the Coal Strike. But even if the worst comes, a partial reimposition of the embargo on foreign investments might be enough.

(3) The third course consists in accepting the loss of export trade and a corresponding reduction of foreign investment and in diverting the labour previously employed in the former and the savings previously absorbed in the latter to the task of improving the efficiency of production and the standard of life at home. If the return to gold has the effect in the end of bringing about this result, it may have been a blessing in disguise. For this course has manifold advantages which I must not stop to enumerate at the end of a long article. I believe that a further improvement in the standard of life of the masses is dependent on our taking it.

This brings us back to Mr. McKenna. I assume that his object in advocating an expansion of credit is to absorb the unemployed in a general crescendo of home industry and indirectly to help a little the export industries also by the economies of full-scale production. In short, he favours the third course. For he can hardly hope to lower the sheltered price level or to effect an adequate economy in manufacturing costs by expanding credit. As on some previous occasions, Mr. McKenna has done less than justice to his own ideas by pretending to greater confidence in the effects of the return to gold than he really has.

Now, within the limitations of the gold standard, this is a very difficult policy, and—in view of the £100,000,000 which we may still owe on account of the Coal Strike—possibly a dangerous one. If Mr. McKenna were Governor of the Bank of England with a free hand, I believe it to be probable that he could greatly reduce the numbers of the unemployed whilst maintaining gold parity. But can we expect Mr. Norman to do so, moving within the limitations of his own mentality?