HC Deb 29 June 1915 vol 72 cc1749-60

In accordance with Sub-section (4), Section one, of the Currency and Bank Notes Act, 1914, the further issue of currency notes shall be stopped and all currency notes now outstanding shall be redeemed within a period of twelve months from the passing of this Act.

Clause brought up, and read the first time.


I beg to move, "That the Clause be read a second time."

I hope I shall not weary the House with speaking on a somewhat complicated and dry subject. I will endeavour to be as clear and, at the same time, as brief as possible. When these currency notes were first issued—in August last—the then Chancellor of the Exchequer, the present Minister of Munitions, indicated to the House that it was an emergency matter, and when he was asked whether provision was made for the retirement of these notes he answered that when the occasion for them had passed the notes would be retired. The outstanding amount of notes is now £44,897,000. In the last few weeks there has been some reduction, but last week there was an addition of a quarter of a million, so that the total outstanding to-day may be put at £45,800,000. I asked the late Chancellor of the Exchequer some few weeks ago, having regard to his statement in August, whether he proposed to redeem them now that the occasion had passed for their being issued. He replied that it was public policy not to retire these notes. I endeavoured to get the right hon. Gentleman to meet me in Debate upon that point. I was unable to do so. I raised the matter on the Adjournment, and the Secretary to the Treasury replied, but I venture to think that he did not meet the points submitted by another Member and myself. I am glad now to have this opportunity of putting my argument before the present Chancellor of the Exchequer, in the hope that he with his great financial ability will endeavour to meet them.

I am moving this Clause because I believe that the remaining outstanding of these notes is a menace to the financial position in the City of London to-day. There are two evils resulting from their remaining outstanding. I should like to say, before I develop my argument, that, personally, I am not in opposition to the issue of bank notes. When we discussed this question on the previous occasion the late Chancellor of the Exchequer and the Member for West Birmingham seemed to be under the impression that I was personally opposed to bank notes. I am in no sense opposed to the issue of bank notes, but the difficulty here is that this is an issue by the Treasury. It is Government paper money, and there is all the difference in the world between that and notes issued by bankers who are responsible for them and take precaution not to extend the issue indefinitely and to hold the proper reserves against them. There are many things that tend to give bank notes a character which does not appertain to the issue of paper money by the Government. I propose to refer to two evils which results from the excessive issue, as I believe this is, of paper money by the Government. There is, first, the rise in the price of commodities, and, secondly, the effect on foreign exchange.

On a former occasion we discussed at considerable length in this House the rise in the price of commodities, and when that Debate took place I laid an argument before the House that this was one of the contributing causes, though not, of course, the sole one. There are many causes which have brought about the present rise in the price of commodities and the cost of living. I submit that this is one of the most important of the contributing causes. I propose to submit arguments in proof of that, and I hope I may be allowed to quote one authority in proof of that assertion. It is that of a great French authority, M. Frederic Bastiat, who, I think, very consistently points out how this effect is brought about. He is referring to the issue of paper money by the Government, and he says:— Clever persons will take care not to part with their goods unless for a larger number of notes—in other words, they will ask 40 francs for what they would formerly have sold for 20, but simple persons will be taken in. Many years must pass before all the values will find their proper level. Under the influence of ignorance and custom the day's pay of a country labourer will remain for a long time at a franc, while the saleable price of all the articles of consumption around him will be rising. He will sink into destitution without being able to discover the cause. In short, once you wish me to finish, I must beg you, before we separate, to fix your whole attention on this essential point—when once false money (under whatever form it may take) is put into circulation, depreciation will ensue and manifest itself by the universal rise of everything which is capable of being sold. But this rise in prices is not instantaneous and equal for all things. Sharp men, brokers, and men of business will not suffer by it; for it is their trade to watch fluctuation of prices, to observe the cause and even to speculate upon it. But little tradesmen, countrymen, and workmen will bear the whole weight of it. The rich man is not any the richer for it, but the poor man becomes poorer by it. Therefore expedients of this kind have the effect of increasing the distance which separates wealth from poverty and paralysing the social tendencies which are incessantly bringing men to the same level, and it will require centuries for the suffering classes to regain the ground which they have lost in their advance towards equality of condition. I must ask the indulgence of the Committee for making so long a quotation, but this subject is so complicated that one has to refer to authorities in the hope that such an authority as Bastiat may carry weight with the Committee when, perhaps, my arguments would not bring about that effect. We know that great economists have told us this over and over again. When we realise that if you take the amount of paper money in circulation today as compared with a year ago, when I think I am right in saying that approximately the Bank of England issues represented £35,000,000, that to-day there is an increase in the Bank of England circulation, and that with this issue of £45,000,000 of Treasury Notes we have an increase in paper money of something like £80,000,000, we must feel that that is bound to have an effect on the prices of commodities. While that is not the only contributing cause, we do see evidence of it every day. It may, perhaps, be argued that the authority of a Frenchman is not sufficient to convince this Committee. I therefore call in another authority, that of a former illustrious Member of this House, the late Lord Goschen. He showed in his book on "Foreign Exchanges" how the same effect is brought about, and, if Members are anxious to confirm my argument, they will find ample evidence in Lord Goschen's book confirming what I have said. There is just one passage which briefly puts the point, which is so apt at the present day, with regard to the issue of paper money by the Government that, perhaps, the Committee will allow me to read it. He says:— Sometimes Governments, simply for their own purposes, issue a quantity of paper money; the natural consequence will be over-importation. That is what we are seeing to-day. The excess of imports over exports to-day is something like £264,000,000. That is, possibly, largely made up of purchases on munitions of war, but it is not entirely due to that. I would ask the Committee to remember that they may possibly be misled by the belief that it is entirely due to that. I think I shall be able to show that the over-issue of paper money accentuates this adverse foreign exchange which is creating great uneasiness in the City, which is leading to a steady outflow of gold from this country, and which, if it goes on, may produce panic and disaster. On the question of over-importation Lord Goschen goes on to say:— Prices will rise in consequence of the increase in circulation"— That is exactly what is taking place to-day— and accordingly attract commodities from other markets It follows, if you have a rise in prices, it will naturally attract an excessive amount of imports to this country. The quotation goes on:— Or, over-importation takes place in the first instance, and governments in order to remedy artificially and apparently what can only actually be remedied by the cessation of the real primary cause, commit the fatal error of increasing the circulation by an issue of paper money. I think I have read sufficient. I am very sorry to have to quote at length these authorities, but I hope the Committee will understand that in order to deal properly with a subject of this character one has to go to the fountain head for the arguments which underlie the Clause I am asking the Committee to accept. It may rightly be asked, why does this excessive issue of paper money lead to an increase in the prices of commodities? My answer to that is, that as a result of the War there has been an immense shrinkage in the general trade of this country. I happened to come across this quotation the other day in a newspaper:— For the week ending 14th June, we find the returns of the Bankers' Clearing House for last week gives a total of £225,000,000, showing a decrease of £104,000,000. If you have a decrease of £104,000,000 in the commercial transactions of this country in one week, with an increasing amount of paper circulation, one of two things must happen. You have, of course, redundant currency, very largely increased, as it is, week by week. The result is that it forces prices to rise still further week by week. You have at the Treasury practically a printing press turning out these notes at the rate of £500,000 a week. They do not represent the work which the ordinary sovereign does when it passes from hand to hand. They are manufactured at the Treasury. No doubt the Treasury uses them in part payment of its liabilities at the Admiralty and elsewhere. It is a very easy way of paying your debts. All of us would probably be very pleased, indeed, if we had printing presses in our libraries, and, when we wanted to pay our debts, we had simply to turn a handle and issue these promises to pay. The same thing applies to the community as applies to an individual. When you find a State engaged in this most insidious of diseases as the use of printing presses, with an idea, if one may judge from the official announcements, of that going on permanently, I am justified in saying a warning word in regard to it. I do not argue for a moment that we are in the same position, for example, as Germany, which, of course, has pursued this policy to an extraordinary extent. We also know that the rouble is inconvertible, and that our Ally, France, has pursued the same policy.

In view of the awful extent to which the nations of Europe have indulged in this most insidious and unsound policy in a time of war, one is appalled by the enormous liquidations which must ensue when they come to redeem this enormous mass of paper. I do not suggest, for a moment, that Great Britain is on a par with these other nations, but there is no doubt it is having an effect upon our foreign exchange. I come now to that point, which is the second point in my argument, of the evil which accrues from this issue of paper money. It is better to raise one's voice before that evil becomes too excessive. It is better we should utter a warning note now than when, perhaps, panic and great disaster has come upon the country, which may come if this is not stopped in time. Let me give a few figures with regard to the position of foreign exchange. I will concentrate on the foreign exchange with the United States of America, that great neutral country with which we are still carrying on a vast trade, and I am sure those hon. Members acquainted with the position there will confirm what I say. I observe opposite an hon. Member, bearing an honoured name, who must know something of finance, and who will confirm me when I say that the rate of exchange between New York and London has lately been at a figure which has hitherto been unknown in the history of this country, of course leading to a steady outflow of gold. It might be asked what effect has this issue of Treasury currency notes upon the rate of exchange. It is very easy to follow what effect it has. We all know what action is taken by the Bank of England when you find an excessive outflow of gold from this country. It endeavours, either by raising the rate of discount or contracting the currency, to turn the exchange in our favour. But it will be readily seen that it is practically impossible for the Bank of England to have any effect upon the rate of exchange or to contract the currency if you have a competitor in the Treasury turning out these notes at the rate of half a million a week. It is self-evident to anyone, without taking any trouble to study the position.

That is precisely what is taking place today. The Bank of England has made efforts over and over again, but its efforts are futile. Money is more or less unlendable, though certainly lately it has risen to a certain extent owing to the Loan operation. It is hoped that the Loan operation, by offering a high rate of interest, will tempt the British investor to get rid of his American securities, and hon. Members have probably followed that within the last week or so the exchange has come a little in our favour as the result of sales of American securities back to America, I believe, rather than purchases by Americans of our Loan. But that is more or less temporary. If this course persists the fact of this continuous issue of paper money, and the effect it has in depreciating credit and in creating artificially cheap money, undoubtedly tends to make it impossible for the Bank of England to have any effect upon the rate of exchange, with the result, I believe, that if gold continues to leave this country at the present rate it may perhaps lead to some very serious disaster. When I am asked what benefit this Clause confers, I submit that while it is not the only remedy—perhaps economy is the most important; the reduction of our imports from America as much as we possibly can, and a sense of economy here in the purchase of certain commodities which we get from America—I believe it will unquestionably help very materially to alleviate this acute situation by giving the Bank of England the power to raise the rates for money and to turn the exchange in our favour by attracting American capital to this centre. If the rate of money is higher here than in New York capital will tend to flow from New York to this side, and when capital comes in on this side it has the same effect as if we were exporting commodities to America and creating a more favourable exchange. I believe that may be brought about by such action as I propose in this Clause.

It might be argued by some that banks and others who have grown accustomed to these notes might say, "we want to be provided against the recurrence of panic. We want, if credit should dry up and there should be another possible crisis in the City of London, to have something available in the way of a credit instrument." I submit that that already exists in the power which we have to suspend the Bank Charter Act, and that, I believe, is ample power, should it be necessary, which Heaven forbid—I do not anticipate that it should be; we have got over the most serious part, I hope, of the crisis which obtained last August—to provide for any possibility of a recurrence of panic or of trouble in the Money Market; but this insidious power in the hands of the Treasury to continually issue these currency notes and to debase and dilute our currency, if persisted in, will, I believe, lead to and build up an amount of disaster and misery, and it is already creating great suffering, particularly to the working classes. The Labour Members are continually asking the Government to pass measures for fixing the prices of commodities, an almost impossible thing, because you cannot control all the forces of nature or trade which go to create those commodities, but you can do something here because this is something for which we are responsible. Their support might be appealed for, as I am appealing for it now, and here I believe is one cause which has undoubtedly led to the enormous increase in the prices of commodities. Therefore I think if by their agitation and the agitation of others legitimate pressure is brought to bear upon the Government, they may see their way to accept this Clause. This is a dry and complicated subject, but I hope I have put the case clearly and that it will receive, as I have no doubt it will, fair consideration from the Chancellor of the Exchequer.


I have had the advantage of hearing arguments very similar to those which my hon Friend has adduced this evening from him on previous occasions, and I have heard them argued and answered by the Minister of Munitions and my predecessor, the late Financial Secretary to the Treasury. If they failed to explain to him that the extract which he read to us from Lord Goschen, and those sound maxims of political economy from Professor Bastiat were wholly irrelevant to this topic because they dealt with the subject of inconvertible paper money while we are now discussing paper money which can now be exchanged into gold, I am perfectly certain that I am not competent to bring home to him our views when those who preceded me in this difficult task signally failed. I am perfectly certain of this, that if my hon. Friend took a canvass of the City now and said, "Prices have risen because of the issue of these currency notes, and the American Exchange is in its present position because of the issue of these currency notes, and I propose to use all my influence to get the Treasury to withdraw them and to substitute for them the gold sovereign, in order that we may have less gold to export to right the situation," he would find the City almost unanimously against him. The fact of the matter is that these notes are not only convertible, but we have built up against an issue of £45,000,000 a gold reserve of £28,500,000, and if my hon. Friend's policy had been adopted in its entirety last February the gold in the central reserve against an emergency would be no less than £28,500,000 less than it is to-day.


My right hon. Friend is well aware that the reserve to which he refers has nothing whatever to do with the Bank of England reserve. It does not meet the emergency at all. It is not available for it. It is simply there for the purpose of converting these notes.


Because it is there to meet these notes the whole of my hon. Friend's argument with regard to the increase in prices and the American Exchange, owing to the inflation of the currency by this paper, falls completely to the ground. The true fact of the matter is that the American Exchanges, as he himself was forced to admit, have come to their present position by the enormous increase of our imports from America and the necessity of paying for them, that prices have risen by the tremendous inflation of credit which has been necessary to tide over the financial crisis, by the very large payment of separation allowances to soldiers' and sailors' families, and the general increase of consumption due to the prosperity of a large proportion of the working classes. I am perfectly certain he will find on investigation that his complaint against this currency is due to the fact that he has forgotten that it was convertible, and I am perfectly certain that anyone engaged in commerce would far rather leave the matter as it is now, with a gold reserve against it—and the issue has been practically stationary for a long time pact—than to have any definite and statutory limit.


Although my name is also connected with this new Clause, I do not propose to keep the House for any length of time, because one recognises that although one raises these points, and we are entitled to raise them, we do not press them unduly. I think that is a fair way to look at the matter, and that is the way in which to get matters amicably settled. I always like to follow the Financial Secretary to the Treasury, because I recollect my first conflict with him a long time ago when we were both students, he at Cambridge and I at Edinburgh, and we took part in an inter-University debate. It was not on bank notes. He has said that his Friend and colleague the Minister of Munitions has already effectively disposed of my hon. Friend the Member for Coventry. I do not know how far the Financial Secretary to the Treasury reads the speeches of the late Chancellor of the Exchequer, but I have a quotation from the speech in which, according to the Financial Secretary to the Treasury, the present Minister of Munitions demolished my hon. Friend the Member for Coventry. Here is how he did it, and I commend it to the present Chancellor of the Exchequer to see what he thinks about it. There is, first of all, the paper bridge, what is known as the dilution of currency. Diagnose it, disguise it as they will, there are many girders in the German financial bridge which are made of paper and no amount of paint and varnish will disguise that fact. It is a very easy method and a very tempting method. You appear to get over your difficulties in the simplest way, and it is very difficult for anyone to point out where yon are going wrong for the moment or for some time. But looking at it most carefully, it is simply an indirect method of levying taxes upon the income of the people. Is it true that a paper currency in Germany is inconvertible for all time?


made an observation which was inaudible in the Reporters' Gallery.


Then let us split the difference. You water the currency and prices go up. A country which has no foreign trade, and that is the position in which Germany is at present, can do it, but a country which has still a great international trade cannot do it. If you do it gold would vanish, and there would be an advance in prices which would be of a most serious character. That is a course which would be a false one for a Chancellor of the Exchequer to take in order to get over his difficulties in making a gold deficiency. On the question of convertibility and inconvertibility, I have yet to be persuaded on the point raised by the Financial Secretary to the Treasury. The right hon. Gentleman said that there is a certain amount of gold reserve earmarked for these particular notes, but if everyone who holds these notes came to the Bank of England and asked for gold, I believe there would be an emergency Bill in the House of Commons next day. That is perfectly certain. He would not like us to do that. I take it that the right hon. Gentleman agrees on that point. I do not, however, press it too far, but I do say that we have a right to make this point. What I am concerned about is not so much the present situation as the situation immediately following the declaration of peace, when we have secured a victory over Germany. I am certain of this, that at that time there will be great dislocation of trade. There will be a great amount of unemployment owing to the difficulty of re-absorbing the millions of men into the-industry of the country. The Chancellor of the Exchequer will, at any rate, agree that whether these notes are convertible or inconvertible, so long as you have these notes they do influence prices, and they make the prices higher than they ought to be. High prices at the end of the War mean, unless the people have the wherewithal to make the demand, that the supply will be limited, and a limited supply means unemployment. I think the hon. Member for Coventry and myself will be perfectly content if the Chancellor of the Exchequer would give us an assurance, which I am sure he is prepared to do, that he has that matter in view. It is quite a real and important point to get into employment as many people in this country as you can in that period of transition which will follow the declaration of peace, until we have our usual industrial conditions restored. If prices are high for any reason, and if one of the reasons is the amount of currency, it is perfectly obvious that to get them low prices must come down, and therefore the demand will be greater and employment will be greater. If the Chancellor of the Exchequer will keep that in mind I have no doubt that my hon. Friend will not pursue the matter further. Having raised it on previous occasions, and on this occasion we shall be content.


indicated assent.


As the right hon. Gentleman has given us that assurance I will not pursue that matter further, but I would like to reply to the argument of the Financial Secretary to the Treasury. He is quite wrong in stating that Lord Goschen was referring to the paper being inconvertible. When similar circumstances arose that are arising to-day, this is what he said, speaking of the large efflux of gold:— When, during a period of apprehension caused by a large efflux of gold from England to America, views were expressed in Manchester and Liverpool, that a much larger issue of banknotes ought to be permitted, this opinion tends manifestly to a depreciation of our currency. But as the consequence of the depreciation of the currency in any country is to offer inducement for further importation, by creating an appearance of high prices, and at the same time to increase the difficulty of paying for such importations, how is the filial balance to be paid? The efflux of specie shows that the balance of trade is against that country for the time; the equilibrium must be restored, when the specie is exhausted, by slackening importation and consumption. There is no proof at all as to Lord Goschen referring to the paper being inconvertible. He is referring to the augmentation of paper money in the country and the shrinkage of trade. The best proof, if any further proof is needed, of depreciation of currency, is the state of the foreign exchanges. The Chancellor of the Exchequer shakes his head.


May I suggest to the hon. Member that we should not go over the same ground again. We have listened very carefully to everything he has said, and he is now restating his case. Is it worth while?


I do not wish to weary the House, but I wish to emphasise that point.


I think we know the point.

Motion and Clause, by leave, withdrawn.