§
Motion made, and Question proposed,
That a sum, not exceeding £74,457, be granted to His Majesty, to complete the sum necessary to defray the Charge which will come in course of payment during the year ending on the 31st day of March, 1917, for the Salaries and other Expenses in the Department of His Majesty's Treasury and Subordinate Departments, including Expenses in respect of Advances under the Light Railways Act, 1896." [NOTE.—£47,000 has been voted on account.]
§ Sir C. HENRYI beg to move, "That Item A be reduced by £100."
4.0 P.M.
By questions addressed to the Chancellor of the Exchequer I have sought information respecting the policy of the Government in regard to the issuing of Treasury Bills. In reply to those questions the right hon. Gentleman has informed me that it would not be in the public interest to make a statement. I should be the very last to insist upon any information being given that would be against the public interest, but I think it must be recognised that it is the primary function of the House of Commons to have control over finance, and I cannot see why the Chancellor of the Exchequer should be permitted to embark upon an extensive system of borrowing without this coming under the purview of the House of Commons. I think my right hon. Friend will be the first to admit that the House of Commons has given him every facility for proceeding with his finance proposals. He brought forward a Budget which imposed taxation to the unprecedented amount of £500,000,000, and he received the hearty co-operation 1266 of the House. In anything I am about to say I wish it to be clearly understood that I recognise to the fullest extent the satisfactory financial position of the country. I will go further, and say that I consider our financial position just as invulnerable as the position of our forces. When the Chancellor of the Exchequer introduced his Budget and he made his proposals to tax the country to the extent of £500,000,000, it was always understood that in order to meet the expenditure that taxation would have to be supplemented materially by loans. The last occasion on which my right hon. Friend issued a loan was soon after he assumed his present office in June, 1915, and the response on that occasion I consider was most satisfactory. Since that time, in order to obtain the necessary finance, instead of having recourse to loans for a stated period, he has resorted to what may be called short-date securities, such as Exchequer Bonds payable in five years, or two years, War Expenditure Certificates, payable in five years, War Savings Certificates, and Treasury Bills. It is to the last category that I wish to draw the special attention of the Committee.
Finance by Treasury Bills has for a long time past been recognised, and hitherto it has been fully justified. The Chancellor of the Exchequer has recourse to the issue of Treasury Bills in order to meet the payments necessary to tide him over until the revenue is available. I have always regarded my right hon. Friend as a great purist in finance. I remember that when an hon. Friend of mine and myself brought forward a proposal as regards Premium Bonds, he held up his hands in horror and expressed himself in indignant terms, and stated that it would lower the financial prestige of the country. I am inclined to take the view that his present policy is just as detrimental to the financial position of the country. What is the position to-day? The amount of the Treasury Bills at present outstanding is about £850,000,000. The issue of these Treasury Bills represents a policy of opportunism, temperising, and of financing the country from week to week, and I might almost say from day to day. It may be urged that the Chancellor of the Exchequer is getting the requisite money, but that is not surprising. Behind these Treasury Bills he has the security of the British Government, and the terms which he is offering 1267 on these Treasury Bills are such an inducement that it is no wonder that he is obtaining a response.
He is paying for Treasury Bills to mature in one year at a discount of 6 per cent., which gives a return to the holders of these Treasury Bills of 6⅜ per cent., and it is not surprising that there should be a ready demand for all these Bills. That is not all. There is another objection to this. Whereas in the case of a loan the Treasury has control of the Income Tax and can deduct before the interest is paid; under this system the Income Tax is not deducted at the source, and therefore the Treasury lose control of it. My right hon. Friend stated, in answer to a question, that these Treasury Bills ware subject to Income Tax. I fully realise that banking institutions would regard these profits as subject to Income Tax, but I am not so sure whether private holders of these are compelled to make a return of these profits, because they are discount and not interest. I will not dogmatise on that, but this I will say: A large number of these Treasury Bills are bought by neutral countries. I asked my right hon. Friend last week the amount of these Bills held by neutral countries, and he was unable to give me a reply. My right hon. Friend will have to admit that as these Treasury Bills are bought and sold by neutral countries, the Income Tax is not recoverable.
The result is that the Income Tax today at 5s. on a 6 per cent, basis is worth 1½ per cent., and therefore, instead of getting the money on a 4½ per cent, basis less Income Tax, as was the case in the loan of June, 1915, he is now paying to these neutral countries interest at the rate of 7⅞ per cent. In any event, he loses control of the Income Tax. It may be urged by the Chancellor of the Exchequer that against this large issue of Treasury Bills he has collateral by the loans which he has made to the Allies and to the Dominions. I would be the last to say that these loans are not first-class security, but in a statement made the other day, on the Vote of Credit I think, he said that these loans were renewable and had no definite maturity and no fixed time for repayment. I think that I am right in saying that when the Treasury Bills mature, the money represented by the loans to the Allies and the Dominions will not be available to meet these Treasury Bills. These loans are not what you 1268 might call at present liquid assets. The Chancellor of the Exchequer may say, and say quite rightly, that under the scheme for the compulsory sale of American securities, those who have sold their securities have invested their money in these Treasury Bills. That is largely the case, but I never could understand, why, when he made it compulsory to sell American securities, he did not take a little more courage and make it compulsory to have the payments made by a British Loan. I have been endeavouring to fathom the reason for the course pursued by the Chancellor of the Exchequer, and have come to the following conclusion: When he made this loan in June, 1915, he committed himself to the holders of that loan, quite unnecessarily, as I think, to the pledge that if he made any subsequent loan upon more favourable terms, the holders of the 1915 Loan should be placed upon the same basis; and I have often thought one of the reasons why the Chancellor of the Exchequer has not made any fresh loan in the ordinary course of events is that he was afraid of this additional commitment, and that it would have necessitated redeeming his pledge.
But there may be another reason why the Chancellor of the Exchequer has had recourse to these short-date securities. He may have been somewhat optimistic as regards the duration of the War. I am far from being a pessimist, but I think now that he must recognise that, favourable as the conditions are at the present time, he cannot expect a very early conclusion of the War, if we are to obtain the peace which the country has decided is necessary. Therefore, with ail respect, I say to him that the sooner he recognises that he has made a mistake in that respect the better it will be. My opinion, and the opinion of other people, is that the Chancellor of the Exchequer was of opinion that, if the War came to an end in a reasonable time, he would be able to float a loan on more advantageous terms than he would be able to do so at the present time. I venture to say that that is also a mistake. People have subscribed to loans in the past out of a sense of patriotism, and would have done so again, but after the War that feeling will be considerably reduced, and the public will be inclined to husband their resources for their own financial requirements and business and for different enterprises. It occurs to me that the Chancellor of the Exchequer has proscrastinated somewhat 1269 too long, and has missed his opportunity of obtaining the amount which he required to fund these short-date securities by a voluntary loan, and I consider, though I say it with some hesitation, that the only course open to him now in order to have this enormous amount of Treasury Bills and other short-date securities funded will be a forced loan. I am one who does not think that this will be in any way derogatory to the financial prestige of this country. If you have compulsory Income Tax at its present high level I see no earthly reason, in the condition in which we are at present, why a forced loan should not be instituted. In the circumstances in which we find ourselves, in the entanglement in which the Chancellor is placed, owing to his system of the issue of Treasury Bills, the only outcome will be a compulsory or forced loan.
§ The CHAIRMAN (Mr. Whitley)For fear that this should become the subject of debate, I intervene to point out that it would be a matter of legislation. So far the hon. Baronet has been quite in order in criticising the action of the Chancellor of the Exchequer with regard to Treasury Bills.
§ Sir C. HENRYI will pass from that. I consider that the House of Commons should receive at once from the Chancellor of the Exchequer some idea as to his policy. I think that he should say to what extent he intends to proceed with these Treasury Bills. Will he stop at £1,000,000,000 or £1,500,000,000, or what is the limit? Also he should give us some idea as to when he means to come here with a fixed and permanent loan, by which part of his large total indebtedness may be arranged. There is another matter on which we should have some information—that is the present relations existing between the Treasury and the Bank of England. I know that the Bank of England is a separate institution, and that in normal times the relations between the Bank of England and the Treasury are not so very close; but since the War it is common knowledge that the Treasury act in the closest co-operation with the Bank of England. My right hon. Friend admits that. I would ask my right hon. Friend, Did the Treasury give their sanction four weeks ago to the raising of the Bank rate to 6 per cent.? If they did, I think that it was a great error of judgment. There was absolutely no reason 1270 why the public should be frightened—I am not using too strong a word—by raising the Bank rate to 6 per cent. What was the excuse given? For a very few days there was a temporary flurry in New York, and people anticipated dear money. I think that that lasted three days. Since that time money in New York is cheaper than ever. To-day you can obtain call money in New York at from 2 per cent, to 2½ per cent.
Why, then, did the Treasury give sanction to the Bank rate being raised to 6 per cent.? I think that the reason is this: Having got into this entanglement with Treasury Bills and being forced to continue their sale, in order to make them more attractive, they had to offer a higher rate of discount. But I think that there is another reason why the Bank rate has been raised to 6 per cent. It is this: Whether the Chancellor likes it or not, a loan is inevitable before very long, and a part of that loan will have to be financed by bankers who will have to have recourse to the Bank of England. I believe that the Bank of England persuaded the Treasury, and the right hon. Gentleman permitted the Bank rate to be raised, so that when any financial assistance was required in connection with the loan, and the Bank was asked to give substantial financial assistance, they might obtain an increased rate of interest. I hope there may be some explanation forthcoming from the Chancellor of the Exchequer as regards that. I have moved an Amendment to reduce the Vote, but I trust that the statement which the Chancellor of the Exchequer is to make will render it unnecessary for me to go to a Division. I assure him that I am not bringing forward this criticism in any captious spirit. I recognise the unparalleled difficulties with which he has been and will be confronted, but he is aware that there is a feeling of uneasiness and apprehension prevailing in different financial circles, and I think that it is only fair to the country that the right hon. Gentleman should face these problems, and give some idea of the course of policy he intends to pursue concerning future borrowings. I do not say that his taxing power is at an end, and I will be the last to say that. But, so long as the War lasts, I submit that large amounts will have to be obtained by borrowing, and I do trust that he will not persist in the course of piling up these short-dated 1271 Treasury Bills, which I regard as a menace and danger, and inconsistent with sound finance.
§ Sir F. BANBURYThe hon. Baronet has raised an extremely important question, which I hope will have a well-considered reply from the right hon. Gentleman the Chancellor of the Exchequer. I think that, on the whole, I agree with nearly everything the hon. Baronet has said, with the exception of his remarks about the Bank rate. The question as to whether or not the Bank rate should be raised or lowered is very difficult to discuss, even in the parlour of the Bank of England, and still more difficult in the House of Commons. I do not know, as a matter of fact, how far the power of the Chancellor of the Exchequer extends in regard to any question dealing with the Bank rate. It is to a great extent a Bank of England question, and I do not know how far the Chancellor of the Exchequer would deem it his duty to interfere in the matter. I do not quite agree that the Chancellor of the Exchequer would desire at the time he was issing Treasury Bills that the Bank rate should be raised. My own idea is that he would desire exactly the contrary. I think myself, though it is with a good deal of diffidence, because I am not actually in business in the City at the moment, that the raising of the Bank rate was necessary, though of course it is regrettable that there should be a high Bank rate. It is very often necessary, after a certain period, not to let the high rate go too long, for if you let it go too long a much higher rate has to be imposed later on. I think the hon. Baronet made an extremely good point about the Income Tax charged on Treasury Loans taken by neutrals. I did not quite understand the interruption of the right hon. Gentleman, but I understood him to say that it would apply to short forms of securities. I do not think that is so. In a neutral country the holder of Consols has to pay Income Tax just the same as if he were an Englishman, but as a matter of fact, the hon. Baronet, I think, was quite right when he said that, so far as regards Treasury Bills, the holder in a neutral country has a rate of interest of 7¾ per cent., instead of 4½ per cent, if held by an Englishman. That is a question which must be carefully considered by any Chancellor of the Exchequer.
1272 With regard to the amount of the Treasury Bills outstanding, I believe it to be something like £850,000,000, and I must say that, so far as I know, the general opinion in the City is that this is a very dangerous position. As a rule, what is called the discount market likes a certain amount of Treasury Bills, or what is called floating debt. It provides a convenient means to invest money not required to be invested permanently, but which it is desired to invest for a short time, and there are many other conveniences which I need not go into at the present moment; but it all depends on this fact, that the amount is a negotiable amount and not too large an amount. If you get an enoromus amount like £850,000,000 which all falls due within a year from now, it might be that the Chancellor of the Exchequer would find it extremely difficult to renew that large sum. Of course, I recognise that the position is very different at the present moment from what it was on former occasions, but I do not believe that any Chancellor of the Exchequer would ever have allowed, or that any Chancellor of the Exchequer ever should allow, the floating debt to get to such an enormous amount as it is now. The hon. Baronet said that in his opinion one of the reasons was that if a new loan was issued the holders of War Loan would have a right to higher interest provided the new Loan was issued at a higher rate instead of 4½ per cent. I do not know whether that is so or not. I am not in the confidence of the Chancellor of the Exchequer. I myself think that it was a wrong provision to have introduced into the War Loan. I have spent many years of my life in the City, and I cannot recall a single Loan that contains such a provision, and I think it was a great mistake to introduce it. But, having introduced it, is it not right to abide by it, and are not the people who invested their money on the understanding that if there was a further Loan they should receive a higher rate of interest, entitled to that higher rate? I will not say that the Chancellor of the Exchequer is not treating them quite fairly, but there is no doubt a feeling such as the hon. Baronet has referred to among a large number of people who hold War Loan, that they ought to have an opportunity of subscribing to a permanent Loan, if there was to be a permanent Loan issued.
1273 It seemed to me that there was a very great opportunity for the right hon. Gentleman a short time ago to issue a permanent Loan. I think the right hon. Gentleman will agree with me that if you want to make a Loan a success you must issue it when the public are on the qui vive, as they say in the City, to make investments of money they have lying at the Bank. When the right hon. Gentleman made his proposals with regard to American securities there was a considerable rise in the value of all securities, but the Government did not see that this money was lying at the Bank and that people would immediately proceed to reinvest it. The right hon. Gentleman did not take advantage of that opportunity to issue a Loan. I do not want in any way to contravene the ruling of the Chair by discussing whether or not a Loan should be introduced, or on what terms it should be introduced, for that would not be in order; but I would venture humbly to suggest to the right hon. Gentleman that it is not advisable to put this off too long, in view of what may happen in the future. There may be a very great demand for Loans later on. I do not know whether at the end of the War the country is going to have cheaper money, or going to have more money available, or whether the reverse will take place; but I trust that the right hon. Gentleman will not forget that point, and that he will consider the remarks of the hon. Baronet with which, with the one exception I have stated, I thoroughly agree.
I want to ask the Chancellor of the Exchequer one or two questions on another matter. I think that the right hon. Gentleman is illegally raising Income Tax upon a certain class of the community, namely, the farmers. The right hon. Gentleman is claiming Income Tax from the farmer, and the second instalment was claimed on the first of last month. This claim for Income Tax from the farmer under paragraph (b) is for the whole of the year 1915–16. If the Committee will look at Clause 20 of the Finance Act of 1915–16 they will see what it says:
In order, as far as may be, to provide for the collection of Income Tax for the last six months of the current Income Tax year at rates exceeding by forty per cent, the rates at which it is 1274 charged under the Finance Act, 1915, the following provisions shall have effect.And then a variety of provisions are set out. One of them is paragraph (b):—An assessment of any such Income Tax not already made shall be made for an amount exceeding by twenty per cent, that for which it would have been made if this Act had not passed.Therefore, later on, there is a provision which raises the farmers' assessment from one-third of the whole amount under Schedule (b). My contention is that the whole of this is governed by the first Clause which I have just raised, that is part of Section 20, and, further, that paragraph (b) confirms that statement. I have had a little discussion with the officers of the Inland Revenue upon this point, and I presume I must not say what passed between us, but, from that discussion, I found that a Clause had been introduced into the Act of this year, to the following effect. It was Section 23 in the Act of this year, but it became Clause 37 later on. It is as follows:—It is hereby declared that paragraph (b) of Sub-section (1) of Section twenty of the Finance (No. 2) Act, 1915, does not affect the operation of Section thirty-seven of that Act as respects the application of amendments made by that Act for the current Income Tax year, and that that paragraph is accordingly to be construed as if the words 'if this Section had not passed' were substituted for the words 'if this Act had not passed.'I do not know whether any hon. Member who has listened to me understands what that means. It took me a very long time to understand it, and I find that the Inland Revenue thought my reading of the Act of 1915–16 was correct, and that all that could be taken was the amount of the last six months of that year on the full value, and not for the whole year, and it was to put that right that they put this Clause into the Act of this year. I have looked back into the matter. I may say there is nothing in the Resolution about this, and there was nothing whatever about this Clause in the Chancellor's speech on the Finance Bill. I find that the Clause was passed in Committee on the 21st June without any explanation of any sort or kind. On that date Clauses 22, 23, and 24 were passed without any explanation, and the right 1275 hon. Gentleman said nothing whatever about them on the introduction of the Bill or on the Second Reading. I do say it is not fair to the House to put into a Finance Bill an incomprehensible Clause of this nature which may or may not have a very considerable effect upon the taxpayer, and not saying a word about it, and leave it in the hope that towards the end of the sitting it may creep through without anybody having observed it. I admit I ought to have found it out. An hon. Friend says "Hear, hear!" I make a great many mistakes, and this was one of them. I think it is evident that this Clause was not put in for nothing. It must have been put in for something. I think it was put in—
§ The CHAIRMANThe hon. Baronet is criticising the Act.
§ Sir F. BANBURYThey put it in without any explanation.
§ The CHAIRMANThe House decided that the Clause should stand part, and the hon. Baronet is criticising the Act.
§ Sir F. BANBURYI will not do so, but I will say that the House, trusting in the Chancellor of the Exchequer, did not know what it was doing. I think the Chancellor is doing something illegal, because I do not think that this Clause effects what he desires, and I will give my reasons. I am aware that anything which requires legislation cannot be argued in Committee of Supply, but what I say is that he is doing something which he ought not to do, and exercising administrative provisions to make a Charge which he is not authorised to make by any Act of Parliament. I say that this Clause has no effect, first, because it was not in the Resolution; therefore it did not become law until the Bill became an Act on the 19th July. The right hon. Gentleman has made the charges at the beginning of July before this came into operation, and therefore I say that he has illegally made a charge upon all farmers of double what they ought to pay. I have gone into this matter very carefully and consulted some legal authorities, and I am quite certain I am right with regard to everything except as to whether or not, as the Act did not become law until the 19th July, it gives the Chancellor of the Exchequer any power of action. I do not think it does. My belief is confirmed by a lawyer, an eminent Member of this House, on the 1276 grounds which I have just laid down. This is a very important question because the farmers of this country are paying not only an increased Income Tax, but on two or three times the amount on which they used to pay before. If, as I believe, the right hon. Gentleman makes that charge illegally, I think it is absolutely necessary that a protest should be made in this House, and that the illegal charge should be at once stopped. I hope the right hon. Gentleman will consider this. I do not know whether it is possible to give me a reply now. I think that the matter is of such importance that it ought to be considered by the Law Officers of the Crown.
§ Mr. G. FABERI should like to refer to the questions raised by the hon. Baronet the Member for the Wellington Division of Shropshire (Sir C. Henry). How are we to carry on the War? Without the money this country and its Allies fail. It is no good using the old glasses for examining a question of this kind—scrap them. It is no good talking about how many Treasury Bills we had for the purpose of finance in time of peace. We are face to face with the most terrific catastrophe in the whole history of this globe, and immense questions of finance such as nobody ever dreamt of. We used to talk in thousands and now we talk in millions. We have an expenditure of £5,000,000 per day, and when it will end God knows! It has got to go on. Is the Chancellor right or is he wrong? It is very interesting to know and very important. Is he right or wrong, because I suppose he has a financial policy in the matter, in this policy of hundreds of millions by short-dated securities? What is the danger of short-dated securities? It is that at the end of three, six, nine, or twelve months, as the case may be, the man who has lent the money can say, "Pay me my money." The Chancellor of the Exchequer knows that. Why did he do it? I am rather inclined to think that the hon. Baronet opposite hit the spot. The Chancellor of the Exchequer is an optimist. I am constitutionally and temperamentally a pessimist. I am glad we have some optimists, but an optimist is rather dangerous when he is cast in the person of the Chancellor of the Exchequer. If it is going to be a short war, no doubt he was right, for the reason given by the hon. Baronet, that with a short war there is no necessity for a loan at a high rate of interest, and, if the War 1277 ended, financial conditions would be better, at any rate for the time, and the Chancellor of the Exchequer would be in a better position. It is easy enough to be wise after the event. I am not sure that the Chancellor himself, if he knew what he knows now, would adopt that policy. I rather doubt it. These 850 millions of short-dated securities is not a nice position. It was not easy when the Treasury Bills were started on a large scale—at least I doubt if it was easy—to raise a great loan. And why? Everybody who happens to know the position knows that the banks were immense subscribers to the first and second loans, and, therefore, it was wise to give a time of rest to the banks to collect fresh resources from their customers all over the country.
Now that the Treasury Bills have assumed alarming proportions, what are you going to do? I think it is fair to ask that question. I do not want to inconvenience the Chancellor in his stupendous task, but, if he is able, perhaps he will tell us, though I expect he will not be, whether he intends to go on with this policy of ever increasing and increasing Treasury Bills, or whether the time may come when he will have to have a new loan. I cannot believe the explanation suggested by the hon. Baronet, that the reason why there was not a third loan was that some time ago the holders of the second loan were put in the comparatively happy position of being able to take up a third loan by paying for it with the second loan, and that, therefore, the Chancellor did not want to give the improved terms by the issue of a third loan. That explanation is too small, too petty, and I cannot believe it. The Chancellor must have thought largely, and, viewing the matter largely, with his optimistic temperament, he thought he would get through the War. Now he has got to put on his thinking cap, with the best opinion in this country to help him, as to what the future ought to be. It is easy to be a critic. It is easy to say, "I would have done this, that, or the other." Next to position of Secretary for Ireland, which is the worst position imaginable, I would as little like to be Chancellor of the Exchequer as any other man on earth, to keep on getting the money and at the same time to keep the pockets of the people open. The Chancellor has been very successful in keeping the pockets of the people open. He has appealed to the little man, and the man 1278 with the moderate pocket and the man with the big pocket, and has tapped them all, and has been extraordinarily clever up till now. He may come to this conclusion: that as long as the money keeps flowing in, better stick to that line and not go in for a big loan.
Let me say a few words on another question which is very important—that is, the alliance between the Bank of England and the Chancellor of the Exchequer, at any rate for the period of the War. It is most necessary that they should march hand-in-hand, irrespective of pre-war custom, but I refer to the recent raising of the Bank rate to 6 per cent. Again, it is so easy to be wise after the event. I think we all feel now that it need not have been done. It ought not to have been done; and why was it done? No one wants lightly to upset the Money Market. I think the Governor of the Bank of England had a scare. He saw that there was a rise in the value of money in the United States, and he felt that it was not safe to wait. He played the same tune over here, and raised the Bank rate to 6 per cent. I will not say it was disastrous, because it is no use using such a word at a time like this in regard to an incident of that kind, but it was unfortunate. Stocks were rising, and confidence was rising too. But both stocks and confidence were shattered by the raising of the Bank rate. Stocks went down, and bankers looked at each other, scratched their heads, and wondered what was coming, and what, if the Bank rate was to be 6 per cent., was going to be the rate on Treasury Bills. It affected enormously the Chancellor of the Exchequer himself if he was going to have a new loan, and it was extremely important if he was going on with the policy of Treasury Bills. I forget whether it was at that time that he did raise the rate on Treasury Bills. [Mr. MCKENNA: "It was!"] Why did the right hon. Gentleman do it? Because he had to follow the 6 per cent. Bank rate, and the tap that had flowed freely, stopped. See how prejudicially it reacted on the Treasury. The Chancellor of the Exchequer may say, "How could I tell; things would have been worse if there had been a real lasting stringency in America." But we expect our great financial magnates to see rather further than the ordinary individual. I remember the late Chancellor of the Exchequer calling me, about three weeks before the outbreak of war, a common or garden banker; and only because I 1279 ventured to tell him that if there were a European war it might cost a thousand millions. It is strange to look back upon that now. We expect the Chancellor of the Exchequer and his advisers to know more than the common or garden banker, and ought your advisers in America, therefore, not to have informed you that this was only a temporary matter, and that the money rate there was likely to drop? If they did that the Chancellor was extremely unwise to do as he did, and if they did not he has been very unlucky. That is about all I have to say. Very rarely since the War began have I said anything at all. I have only made one or two speeches, although I may have interrupted during Question Time. I have felt all through that it is human to err, and that in this, the most appalling situation of which humanity ever dreamed, we have to make great allowances, whether in the financial or in any other line.
§ The CHANCELLOR of the EXCHEQUER (Mr. McKenna)My hon. Friend who has just sat down has made a speech showing great sympathy for the difficulties of the task of the Exchequer at the present time. He appreciates, as I think many Members of this House do appreciate, the extraordinarily difficult task with which we are confronted in raising day by day, on the average, £5,000,000. A sum which in a week amounts to £35,000,000, which we should have regarded and did regard at the time of the South African War as in itself a large and alarming loan—we do not have to raise the whole of that amount by loan, week by week, because we have the revenue to assist us. Particularly at this period of the year, as I shall have occasion to mention later, the great bulk of the money has to be found in some form or another by borrowing. My hon. Friend who opened the discussion (Sir C. Henry) thinks that we are running great risks by the policy of borrowing on short-dated securities. I understood that in his opening observations he included Exchequer Bonds under that, but I rather gathered that he did not pursue that argument but confined himself exclusively to Treasury Bills. I will only touch for a moment upon the motives which he suggested guided me in adopting this policy. It is very remarkable how short is the memory of man. I am supposed to have adopted this policy 1280 because he believes me to be an optimist. The immediate answer to that is that I did not adopt it: I found it.
§ Mr. McKENNAI found that hundreds of millions have been borrowed by this method of issuing Treasury Bills on tap before I ever went to the Treasury, or had any idea that I was going to the Treasury. Optimism had, I think, long since vanished by June, 1915, and I think my hon. Friend will agree that that particular period was not the moment to encourage optimistic views.
§ Mr. McKENNAI had a loan. It was not optimism, and so far from adopting this policy on grounds of optimism, I did not adopt it at all. So far from pursuing it at the time when I went to the Treasury in 1915, when there was little time for optimism, I adopted the opposite policy of a big loan. I obtained a big loan, and from that month was able to finance the greater part of the expenditure of the War out of the proceeds of the loan.
The second motive that is said to have guided me is a desire to avoid fulfilling a pledge. I do not think my hon. Friend can seriously put that forward. Surely he must think that at the Treasury it is our object, and our desire, to do the best we can for the country's credit. I cannot conceive why he should suppose that I should have a personal motive in wishing to deprive somebody of the rewards of a promise I had made. If he attributes the adoption of the policy to such a motive, let him remember that I do not pay for it, and on his principle what conceivable inducement have I to fail to fulfil a pledge I have given? No, it is not so.
§ Sir C. HENRYI have never suggested that.
§ Mr. McKENNAI understood my hon. Friend to suggest that it was the result of a desire on my part to evade a pledge I have given. There can only be the interest of the public in my mind, and if I have not asked the public to subscribe to a large loan since June, 1915, a little over a year ago now, my hon. Friend must assume that there are public reasons for it, and not some private desire to evade the fulfilment of a pledge, the fulfilment of which would cost me nothing.
§ Sir C. HENRYQuite so!
§ Mr. McKENNAVery well. Let us dismiss that from our discussion, and only proceed as the hon. Gentleman opposite (Mr. Faber) did, purely and simply from the point of view of the public interest. I have been pressed to take the public more into my confidence. Besides being a man of business, my hon. Friend knows the price on the Stock Exchange at the moment of the War Loan, and he knows that if I announced a date for issuing a new loan it would immediately become the subject of immense speculation on the Stock Exchange. Does he really press me, as a man of business and in the interests of the public, to announce now the date of issue of a new loan to be made which would start gigantic speculation in War Loan stock on the Stock Exchange? Of course he does not. He asked me to take the public more into my confidence. No man knows better than he does the limits of possible communication of business facts to the public. After all, statements of the kind he asks me to make would affect men's private fortunes. Some would make fortunes, others would lose them; and clearly it is not in the public interest for me to make any statement which could be made a basis for Stock Exchange speculations.
§ Sir C. HENRYThere are none.
§ Mr. McKENNAThere would be at once.
§ Sir C. HENRYThere could not be under the Regulations.
§ Mr. McKENNAI think my hon. Friend is a little at fault.
§ Sir C. HENRYNo.
§ Mr. McKENNAI think so. There are means of doing it. You can buy the stock and pay for it, and then sell it at three points higher, and make the difference in profit. There is no difficulty in making a profit if you have sure information as to the probable cost of the stock. But let us put all these questions on one side. I desire to make as clear a statement as I can of what the actual position to-day is with regard to Treasury Bills, and why we feel on the whole that in circumstances like these we are perfectly safe in financing the War—under existing circumstances—with Treasury Bills. I would like to take the time from the beginning of the present financial year, the 1st of April, down to the 29th of July, the latest date for which I have exact figures. During that 1282 time, practically four months, the Treasury Bills have increased by £275,000,000, which I think is the largest, the most rapid increase that has taken place since the policy was first adopted a very long time ago. The increase in Treasury Bills since the 31st March has been £275,000,000. We must examine that account, and split it up into its various heads, and see what the account really means. We issue Treasury Bills in a way which I would like to divide into three categories: short-dated, three months; middling, six and nine months; long-dated, a year. I am dealing now with what we have issued since the 1st April last, the beginning of the financial year. During these four months the actual short-dated Bills, the actual number of short-dated Bills, has been reduced, not increased, but reduced by £46,000,000; so that of the new issue of £275,000,000 not only have we not included therein any new short-dated Bills, but we have reduced the outstanding amount by £46,000,000. My hon. Friend will agree that the Treasury Bills which he regards as dangerous, and the great increase of which alarmed him, were primarily short-dated Bills.
§ Sir C. HENRYAll of them?
§ Mr. McKENNAFrom my hon. Friend's point of view the three months Bills must be the most dangerous. It is all a question of degree.
§ Sir C. HENRYmade a remark which was inaudible in the Reporters' Gallery.
§ 5.0 P.M.
§ Mr. McKENNAWe have reduced them by £46,000,000. The middling bills have been increased by £122,000,000, so that if you take the two together the actual increase in Treasury Bills of nine months and under has been £76,000,000. The increase in the yearly bills over the same period has been £199,000,000.
§ Mr. McKENNANot only that. It is quite true that the yearly bills bear a slightly higher rate of interest than the three months' bills. The yearly bills also appeal to a different class of investor. Yearly bills are regarded, and fairly regarded, with the great bulk of those who invest, as truly invested, and not intended to be drawn in the course of the year for the discounting of bills, and probably intended to be reinvested. The point at 1283 issue is that when any war continues, as this War is continuing, the investor prefers to have his money in a form of security in which his capital is guaranteed. If the War goes on long enough there is a time when all loans depreciate in value, the consequence being that the genuine investor likes yearly Treasury Bills better than any other form of investment. Well, now, that is on the side dealing with the total issue of Treasury Bills. We have had to finance the War during that period. Treasury Bills alone have not done it. We have during that four months sold £154,000,000 of Exchequer Bonds. We have sold £16,000,000 of War Expenditure Certificates. We have sold £13,750,000 of War Savings Certificates. All these securities have at least two years' currency and the great bulk five years' currency. So that we have raised during this period £184,000,000 with a currency of two years and upwards; £199,000,000 with a currency of one year; and £122,000,000 with a currency of six or nine months; and we have paid off £46,000,000 of three months' securities. In addition to the sources that I have named, of course we have the revenue. During these four months the actual revenue received by the Exchequer has been about £100,000,000. I would ask the Committee to bear this very important fact in mind, that the early part of the financial year, the whole of the first half of the financial year—almost the first nine months—is the worst from the Treasury point of view as regards revenue. If, during these four months we had received our revenue at an average we should have obtained not £100,000,000 but £168,000,000. During this period, therefore, we have had to find an additional £68,000,000 by borrowing, but the borrowing of which we shall be in a position to pay off out of the revenue of £68,000,000 additional which we shall obtain when the bills become due for payment. If the Committee have kept well in mind the earlier figures which I gave in regard to the Treasury Bills, and bear this deficit in mind, and the average revenue for the period, it will be seen that the £68,000,000 almost, not quite, but very nearly, covers the whole of our borrowings in any form of Treasury Bills of less than a year. We had a shortage—that is to say, we borrowed the balance at six and nine months; after repaying the three months' Bills we borrowed the excess of £68,000,000, and we had a shortage of 1284 £68,000,000 revenue during the same period. That revenue will come into the Exchequer at a period of the year when these bills become due for payment. The result is that we have been financing ourselves, on a true appreciation of the facts of the case, exclusively, and almost exclusively with yearly Bills, and with securities of a longer maturity than one year.
§ Sir F. BANBURYMay I interrupt the right hon. Gentleman—
§ Mr. McKENNAI like to have criticism, and I like to answer it.
§ Sir F. BANBURYI do not wish to interrupt; I merely said that I thought yearly bills were just as dangerous as three years.
§ Mr. McKENNAThey are not.
§ Sir F. BANBURYThe real point is this: that it all depends on the Money Market when the bill comes due. A three months' bill may become due when the Money Market is easy, and therefore there is no danger. A yearly bill may become due when the Money Market is bad, therefore there is danger. There is no necessary advantage in a yearly bill.
§ Mr. FABERAs the right hon. Gentleman has invited an observation, may I say that I rather agree with the Chancellor of the Exchequer. A yearly bill is held by those who are assumed to be permanent investors. Three months' bills are held more by bankers. If a customer says across the counter, "I want my money," it, has got to be paid to him at par. That is why the banker goes in for three months' bills and as many short-dated loans as he can get. The man who is in as a permanent investor, in view of the continuance of the War, says, "I am going to invest for longer than a year."
§ Mr. McKENNAMy hon. Friend is absolutely right. In present circumstances, in the existing condition of the Money Market, and the state of the country, yearly bills supply a form of investment most satisfactory to the investor.
§ Sir C. HENRYNot with a rate of 6⅜?
§ Mr. McKENNAThat really does not touch the argument. My hon. Friend knows that. How can it?
§ Sir C. HENRYThe yearly bill pays a higher rate of discount.
§ Mr. McKENNASlightly, but when the hon. Member says 6⅜ he does not touch the argument at all. The Bank rate has only been put up during the last few weeks; therefore it does not touch the argument. That is, at any rate, what we have done and what we are doing, and that is our view as to the situation. The question is whether we could' have done better. Hon. Members may think we ought to do better if we issue a long loan. I think the considerations which lie with the Treasury in issuing a long loan are something quite different from those which have been raised by the hon. Member. The main point that we have to take into view, in my judgment, in issuing a loan, is whether or not the state of the Money Market at any given moment discloses a condition of inflation, and if credits are being heaped up which do not really and truly represent real money. If we got a condition of inflation, and if these yearly Treasury Bills were in truth not invested money, but were going to be discounted and made the basis of new credit, we should have to issue a loan, it would not matter what the price. It would not be the price that would determine our judgment: it would be the whole condition of trade and the state of the country. The problem we have to face is not merely the financial problem. Day by day at the present time we are spending—I am not dealing with money—we are consuming in goods of all kinds more than we produce. We can only make good that deficiency by obtaining supplies from some other country which is consuming less than it produces. Our task, however, is not only to obtain from some other country that which makes up our own deficiency, but we have to make good the deficiency in the production of our Allies. That is the real difficulty and the gigantic task which falls upon us. With great respect to my hon. Friend, may I say that all these questions of internal finance, large and difficult as they are, fall into insignificance in comparison with the larger task of financing our foreign supplies. We have to pay out day by day—I do not want to exaggerate—sums of money abroad which are certainly more than £1,000,000 a day, probably nearer £2,000,000. If my hon. Friend will think of the difficulty of that task—
§ Mr. OUTHWAITEAre the figures of the £6,000,000 ourselves and our Allies as well?
§ Mr. McKENNAI am talking of the foreign payments we have to make, whether on our own account or our advances to our Allies, because we have to make good our own deficiency in production in relation to our consumption, and we have to pay for that somewhere abroad. Some other nation has to be induced to supply us with goods. We have to pay for those goods. If it is a difficult task day by day to raise credits in this country, how much more difficult is it likely to be in raising credits day by day in a foreign country? I do not want to go into detail in that, but I would ask my hon. Friend, and hon. Members opposite, when they criticise the rise in the Bank rate to 6 per cent., to remember that we must not look at it as an internal problem of finance, but as a question of what is necessary to ensure our foreign credits. No one can tell—for nobody knows the figures except myself and those who are immediately associated with me—what we have to pay in dollars day by day, and we alone are able to judge what is the effect of putting up the Bank rate. Of course, I cannot take any responsibility for putting up the Bank rate, because that is a matter exclusively in the control of the Bank of England. I would like to say at once that the Governor of the Bank of England spoke to me about an advance, and I entirely agreed with his action. I felt it was necessary to secure ourselves partly against inflation, but much more against the drain upon our dollar funds abroad. My hon. Friend deprecated borrowing abroad on Treasury Bills because we thereby lost the Income Tax. I am afraid he has not considered the difficulty of the problem. I have to raise £2,000,000 a day abroad. Can I expect that the foreign creditor is going to lend me money and have Income Tax deducted from the interest? Does my hon. Friend think the problem can possibly be solved in that way? I asked the House this year to authorise the issue of Exchequer Bonds to be held abroad without payment of Income Tax, and this House recognised the necessity of having a security upon which we can borrow abroad, because you never can borrow abroad on a security on which the holder pays Income Tax. It is one of the merits of the Treasury Bills instead of being a defect.
§ Sir C. HENRYMy ground of criticism was the great cost to the Treasury.
§ Mr. McKENNAI have got to borrow. It is a great cost to the Treasury, it is true, to lose Income Tax on money borrowed from abroad, but does my hon. Friend conceive that I could borrow abroad without remitting the Income Tax?
§ Mr. D. MASONSurely the right hon. Gentleman could borrow at a lower rate of interest. My hon. Friend's point was that the terms were extravagant.
§ Mr. McKENNADoes my hon. Friend conceive that the Dutch Bank is going to lend me money at 5 per cent., from which I proceed to deduct Income Tax, so that the Dutch Bank would then get 3¾ per cent.? If he does, then he is not familiar with the charges for a foreign loan. If we borrow money abroad we have to pay the current rate of interest without deduction of Income Tax. If you ask a Dutch bank, an American bank, or a Scandinavian bank to lend money here, or in Russia, or in France, you will not find one who will look at you under 5 per cent. and upwards. Therefore, the Treasury Bills, as a matter of fact, form a very good security for foreign loans.
§ Mr. McKENNAThat is what we want. My hon. Friend does not understand my point.
§ Mr. McKENNAIf we have to raise abroad a Loan of £2,000,000 a day on some security or other, how does my hon. Friend think it can be done? You have to find a security which the foreigner will take. You have to pay what the creditor insists upon. I should like to understand the point my hon. Friend puts forward, but I can assure him that those who act on behalf of the Treasury, the Bank of England on their own behalf, or the joint stock banks, who are in daily touch with this business, and who are all of them either discounting foreign bills or borrowing money abroad upon securities, will all tell my hon. Friends that the rates at which money can be borrowed to-day abroad is far higher than what they regarded as customary rates in peace times. There is no relation between them. This country is fortunate, inasmuch as we are able to borrow abroad at a cheaper rate than any other of the belligerent Powers.
§ Sir G. YOUNGERThe right hon. Gentleman will perhaps remember also that the rates before the War were much higher than here, and therefore you must not compare the rate at which you borrow now with the rates you pay here.
§ Mr. McKENNAThat is perfectly true. The right hon. Baronet said that we had missed a very good opportunity of issuing a loan when we introduced the scheme of buying American securities, and I understood his argument was that we should have issued a loan in order to lock up the proceeds for the sales of those securities to the British Government. Would that have been of any real serious use to us? What use would the locking up of some £30,000,000, £40,000,000, or even £50,000,000—I do not think more, if as much—have been to us in issuing a great loan? It would have been a mere fleabite. Although that sum would have been useful, in order to get the large sums we require, we have to look to other conditions. Then he raised a legal question on the construction of Section 20 of the Finance Act, 1915–16. I did not know he took that view about that Section, but if the law is against the Inland Revenue we shall not, of course, endeavour to enforce the tax, but if the law is clear, as I understand, the tax will have to be enforced, unless the law is altered. I should be happy to answer any questions that are put to me on this subject of the issue of Treasury Bills, but I am quite unable to name any date as to when we are likely to issue a loan—whether a loan consolidating the short-dated securities only, or whether a loan in which we look for a larger amount of money, but certainly, whenever the opportunity is favourable, and whenever the general conditions of our finance not only warrant it, but indicate that it ought to be done, we shall do it without hesitation, and shall be perfectly ready to fulfil the pledge which we gave of the right of conversion attaching to the holders of existing stocks. I would only like to say in conclusion one word about the total sums. As my hon. Friend the Member for Clapham (Mr. G. Faber) said, our ideas ought all to undergo a radical change in consequence of the War. This figure of £800,000,000, which is now so startling, is not really very startling in relation to the other figures. Our total indebtedness on the 31st of March next, we estimate, will be £3,440,000,000.
§ Mr. McKENNAI can readily calculate it, but the hon. and gallant Gentleman can easily calculate it for himself.
§ Mr. McKENNAThat is the figure. The total indebtedness at the end of March next is estimated, as I have said, at £3,440,000,000. Prom that you may fairly deduct the amount of our advances to Allies and Dominions, which I will put at the same date at £800,000,000, leaving our own indebtedness at the end of March at £2,640,000,000.
§ Mr. McKENNAAt £5,000,000 a day, taking the Budget estimate, which I have not changed. The figure of our total indebtedness on 31st March next is out of proportion to anything we have known or thought of before. Is it a burden which we are unable to meet? Our revenue—I am speaking now not of the Exchequer revenue, but of the national income—may probably be put at about £2,500,000,000, or perhaps £2,600,000,000.
§ Mr. McKENNAI think it is fairly reliable. Higher prices, of course, raise the values, which compensate for the diminution of production. It was estimated by one authority at £2,400,000,000 in 1913–14, and at £2,700,000,000 at the present time, or within a month or two. Another authority has put it as high as £3,000,000,000, but we think that is an exaggerated figure, and that we are fairly Within the mark if we put the figure of national income at the figure I have stated. That is to say, our total national indebtedness on 31st March next would just about equal one year's national income, which, of course;, is not a burden intolerable to contemplate.
§ Sir C. HENRYWill the right hon. Gentleman say what he means by "the national income"? It is rather a vague term.
§ Mr. McKENNAI have always thought it was a very well understood term. It means the aggregate of the income of every person in the country.
§ Sir C. HENRYSupposing I pay employés wages, then my income is included in that sum and theirs also?
§ Mr. McKENNAI do not know my hon. Friend's practice, but I assume he does not regard as income his, gross receipts, out of which he pays his employés.
§ Sir C. HENRYI am speaking of personal service.
§ Mr. McKENNAAll payments for personal service, of course, are counted twice over, but that is not a large proportion of the whole. The great bulk, of course, is not paid in personal wages to my hon. Friend's butler and footman.
§ Mr. McKENNAIt is quite true that allowance must be made for all these things, but the term is thoroughly well understood.