HC Deb 14 May 1928 vol 217 cc695-752

Order for Second Reading read.

The FINANCIAL SECRETARY to the TREASURY (Mr. Arthur Michael Samuel)

I beg to move, "That the Bill be now read a- Second time."

4.0 p.m.

This Bill proposes, in accordance with the policy laid down by my right hon. Friend the Chancellor of the Exchequer in his Budget speech, to give effect to the long foreshadowed amalgamation of the Treasury currency note with the Bank of England note. The House will not wish that I should trace at any length the past history of our banking conditions. The House is aware that the Bank of England issue for 70 years before the War, from 1844 to 1914, was governed by the provisions of Peel's Bank Charter Act of 1844. The basis of that Act was that it established a fixed fiduciary issue, beyond which no notes could he issued except in exchange for gold. With the outbreak of War, however, face to face with a catastrophe and difficulties of unforeseeable magnitude, it was necessary for us to abandon temporarily, and, as time has proved, fortunately only temporarily, some of the most vital principles of the 1844 Act. May I refer to some of the vital principles which had to be abandoned? In the first place, the paper currency, which in England and Wales was limited, up to the outbreak of War, to Bank of England notes of£5 and upwards, was, at the outbreak of War, supplemented by an issue of £1 and 10s. currency notes. There was no statutory regulation as to the amount of the issue, nor was there any statutory provision as to the gold reserves to be held against those notes. Secondly, power was given to the Treasury to suspend temporarily the fiduciary limit of the Bank of England notes. The gold standard itself was maintained in operation until the end of the War. But gold movements were so hampered, and the world market in gold so disordered, that the gold standard had ceased to work. In 1919, the export of gold was prohibited; that prohibition was prolonged until 1925. But it has been all along the policy of His Majesty's Government to restore the whole organisation of credit—an organisation which had been temporarily impaired by the War—at the earliest possible moment.

The action of my right hon. Friend the Chancellor of the Exchequer brought us back to gold in 1925 by the Gold Standard Act. It now only remains for us to take the final administrative step which he foreshadowed in 1925, and we propose to amalgamate the Treasury currency notes with the Bank of England note issue. I will, later on in my remarks, if the House will grant me its patience, say a few words about the Clauses of the Bill, and the manner in which provision is made for variations in the tide of commerce. But, perhaps, it might be acceptable to the House if I were to turn aside for a moment and endeavour to answer a question which may possibly rise to the minds of hon. Members. It may -be asked, why not leave the Treasury note as it is, or, if not, why amalgamate it with the Bank of England note issue? I will try to give the reasons why the Treasury notes ate to be handed over to the Bank. The existing system of our paper currency is the outcome of the emergency of 1914. But certain wide powers then given by Parliament to the Treasury are no longer used. The Treasury was empowered by law to issue and control the Treasury currency notes. As a matter of fact, only the Bank of England issue these notes, and they can only be obtained by drawing upon a deposit at the Bank of England. There was an alternative method, which was necessary at the crisis in the early part of the War, namely, that of direct advances from the Treasury to banks. That method, however, soon fell into abeyance, and in 1919 was abrogated.

Then, again, the Treasury Minute of December, 1919, limited the fiduciary issue in accordance with the recommendations of the Cunliffe Committee. Thus the actual maximum reached one year became the allowed maximum for the next. This was avowedly a transitory measure. Consequently the law governing the currency notes was unsatisfactory in itself, although the practice was good and sound. As neither the law nor the practice has any claim to remain permanent, we seek to regularise the mat- ter, and therefore bring in this Bill. There are further reasons. As I have already explained, currency notes can only be obtained by drawing on deposits at the Bank of England. Consequently, the position is that the regulation of the volume of the currency has been dependent upon—and solely dependent upon—the regulation of credits. Now the regulation of credit has rested with the Bank of England. It must rest with the Bank of England, and will continue to rest with the Bank of England.




Perhaps the hon. Member will allow me to pursue my argument. This is a very complex matter, and if I lose the thread, it will probably make my meaning obscure. The Bill merely proceeds to the logical conclusion. It places the legal responsibility for the note issue where the actual responsibility already lies, and must continue to lie, with the Bank of England, because the Bank of England controls credit. Even in 1844 the desirability of central control over the note issue was recognised. If hon. Members will turn to the splendid speech of Sir Robert Peel on 6th May, 1844, they will sec that this desirability of placing the note issue under the control of a central bank was dealt with on that occasion. I have had great pleasure myself last week re-reading that Bank Charter Debate before making my speech to-day. It was recognised, as I say, as long ago as 1844, that the note issue should be in the hands of a central bank, and one may say that the Bank of England was the first of all central banks.

Since the American crisis of 1907, this principle of central control has been more widely accepted, and the American Federal Reserve Act, 1913, was based upon that principle. Since then we have had the Brussels Conference of 1920 and the Genoa Conference of 1922. Both of these conferences emphasised the desirability of placing the control of currency and credit in the hands of central banks. Both recommended that central banks should be made completely independent of political interference. This Bill, which I have the privilege to introduce, recognises those principles. Before I pass from the reasons why we are entrusting the currency note issue to the Bank of England, I hope the House will give me permission to read a passage out of that Bank Charter speech of Sir Robert Peel—one of the most celebrated speeches ever delivered in the House of Commons. He said on 6th May, 1844—there had been negotiations on the subject with the Bank of England— I must, in justice to the gentlemen who have conducted negotiations on the part of the Bank, namely, the governor and deputy governor, declare that I never saw men influenced by mare disinterested or by more public-spirited motives than they have evinced through our communications with them. They have reconciled their duties as managers of a great instition bound to consult the interests of the proprietors, with enlightened and comprehensive views of the public interest. Although nearly a century has elapsed since those words were spoken, there have been occasions time after time which have proved their complete truth. No man who has studied the economic development of Britain during the 19th century can have failed to notice the position which the Bank of England has established for itself in the respect of the nation. The country is very proud of the Bank of England. It is with complete confidence that His Majesty's Government have decided by this Bill to entrust the management of the currency note issue to it. But while the Bank of England must assume responsibility for the currency, Parliament, in legislating, as it is now, on the subject of currency, lays down the principles which will guide the Bank of England in carrying out its duties. One such principle is absolutely beyond all dispute. Convertibility into gold in accordance with the Gold Standard Act., 1925, must be maintained. The credit policy of the Bank must always be governed by this obligation. This principle is essential. Circumstances to-day are in several respects very different from those which obtained during the period of 70 years up to the outbreak of war. The fiduciary issue of the Bank of England, which is now £19,750,000, could hardly have remained so low as it did in the 70 years before the War but for the growth of the use of the cheque. The effect of the enormous economic and financial growth of the country upon the active circulation of bank notes was offset by the growth of the cheque. But it is not certain that the need for an increase in currency will always be met so adequately by other developments of banking methods.

A further new circumstance is this. It is now generally recognised that no country can either absorb or set free gold for monetary purposes without affecting its neighbours. A purely fixed note issue might fetter the Bank of England in a manner inconsistent with the resolutions adopted at the Genoa Conference in 1922. We are keeping the resolutions of the Genoa Conference well in mind together with the two considerations of (a) natural alterations in the currency needs of the community, and (b) the adaptation of our reserve limits to the state of the world markets in gold and gold currency.

Consequently provision is made in the Bill for variations in the fiduciary issue, either downward or upward, by the action of the Treasury, at the instance of the Bank. By variations upwards I mean of course expansion, and by variations downwards I mean reduction. Variations downwards are authorised because they may be needed to enable the country to absorb an abnormal inflow of gold without the evils of an excessive expansion of credit. It will be authorised under the Bill to vary downwards by permission of the Treasury acting at the instance of the Bank of England, and the Treasury can impose limits as to extent and period. Variations upwards of the fiduciary issue cannot he authorised for more than six months at a time, and they cannot be renewed to cover a total period of more than two years, without the direct authority of Parliament. To sum up, the existing emergency system has lasted long enough. It will make way in future under this Bill for a fixed fiduciary issue variable upwards only on good cause by the Bank and the Treasury acting in unison. The ultimate word will rest with Parliament. In this manner we seek to obtain the advantages without incurring the dangers of elasticity.

I have dealt with the transfer of the legal responsibility for the note issue to the Bank and the provision for a fixed fiduciary issue, subject to variation, by the joint action of the Bank and the Treasury. May I now proceed to explain the Bill?


I have been following the argument of the hon. Member very closely and I am anxious to learn all there is to be learned on this somewhat complicated subject. Will he explain to me, having regard to his statement that the last word will lie with Parliament, how the banking system then is free of the political control which in an earlier period of his speech he insisted upon as necessary?


That point is dealt with by one of the Clauses in the Bill. If the hon. Member will turn to Clause 8, he will see there that that question is partly answered.



Will the hon. Member allow me to proceed? It is a very difficult matter, and in moving the Second Reading I am desirous of giving a full explanation. The hon. Member will have an opportunity later to ask questions. At the present time, the Bank of England has no power to issue notes of a smaller denomination than £5. Clause 1 empowers the Bank to issue notes of and 10s. and makes bank notes legal tender for all payments in England instead of only for payments of £5 and over. It also makes the £1 and 10s. notes legal tender in Scotland and Northern Ireland, as well as in England and Wales. Sub-section (3) provides that so long as the Gold Standard Act remains in operation, the new notes for and 10s. will be legal tender in payments by the Bank itself. The Gold standard Act relieved the Bank from any obligation to pay in gold coin but required it to sell gold bullion at the coinage price. In order that that arrangement may continue in force, the Bank must have the same right to pay its depositors and creditors in its own notes as it now has to pay them in currency notes.

Clause 2, which is probably the most difficult Clause in the Bill to explain, defines the future fiduciary note issue and fixes it at £260,000,000. This £260,000,000 is arrived at in this way: following the recommendations of the Cunliffe Report, the Treasury has fixed the actual maximum of 1927 to be the permitted maximum fiduciary issue of currency notes for 1928. The maximum of 1927 was £244.94 millions. To that should be added the Bank of England fiduciary note issue of £19.75 millions. The total is thus £264.69 millions. The amount of our currency notes in use in the Irish Free State is estimated, roughly, at £6,000,000. The Free State is about to replace our notes by an issue of Free State notes; therefore, £6,000,000 should be deducted from our total. That reduces our total to £258.69 millions, which has been rounded up to £260,000,000, the figure in the Bill. The Clause proceeds to give power to the Treasury, at the request of the Bank, to reduce the fiduciary issue. In Clause 8, power is given to increase the fiduciary issue.

Clause 3 deals with the cover for the fiduciary issue. It requires the Bank to hold securities in the Issue Department sufficient to cover the fiduciary issue. Up to a limit of £5,500,000 it allows silver coin, which has for some years been held in the Currency Note Account, to be held as a security. The limit is fixed with reference to the amount of silver now held by the Currency Note Redemption Account. The figure has come down from £7,000,000 to £5,500,000 and is in course of constant reduction, which will continue. Clause 4 provides for the transfer to the Bank of the responsibility for the currency notes outstanding on the appointed day. Clause 5 provides for the transfer of the securities held against the outstanding notes. As the securities held in the Currency Note Redemption Account exceed by a good margin the value of notes outstanding, provision is made for the disposal of the balance. The Clause directs that they be realised and the proceeds, estimated at £13,200,000, paid into the Exchequer, in conformity with the announcement made by my right hon. Friend in his Budget speech.

Clause 6 provides that the whole profits of the issue, both the profits on the new £1 and 10s. notes and the profits on the notes for £5 and upwards issued by the Bank of England shall accrue to the State. In Clause 8 power is given to increase the fiduciary note issue. Clause 8 (3) provides that: Any minute of the Treasury authorising an increase of the fiduciary note issue … shall be laid forthwith before both Houses of Parliament. The remaining Clauses, except Clause 11, deal with subsidiary matters. Clause 11 has been framed for the purpose of ensuring the concentration of the gold reserves of the country in the hands of the Bank of England. The Clause enables the Bank to buy any holding of gold coin or bullion in excess of £10,000 compulsorily, with the important exception of gold which is bona-fide held for immediate export or which is bona-fide required for industrial purposes. This exception is devised to leave the activities of the London bullion market entirely untouched. Such are the provisions of the Bill. It returns to the principles of the Bank Act of 1844, but by the use of methods more adjustable to the needs of change and development. The whole essence of the Bill is recognition of the vital importance of providing the nation with an adequate volume of currency, and of maintaining its value stable. No State can exist and remain solvent, and least of all a State like ours which depends for its livelihood upon overseas trade, without a safe, stable currency. The measuring rod of commerce must be stable. In our case the measuring rod is the pound sterling, which has already been linked to gold by the Gold Standard Act of 1925. It has, however, been proved that the internal circulation of gold coins is in these times both unnecessary and wasteful. This Bill, therefore, will lay down for the Bank of England limits and safeguards subject to which it may issue notes to replace and represent gold coins for internal circulation. The return to gold has been a potent factor in the restoration of British international credit—


It has done a lot of harm.


Marked though it has been by economic jolts and jerks, it has, on the whole, been beneficial for us.


It has been bad for the miners.


It is evident on all sides that the trade of the country is steadily and surely on the upward grade. It needs a stable currency to support it. The restoration of the national wealth destroyed by the War and the refilling of the reservoir of capital by savings so indispensable to industrial recovery will be assisted by the provisions of this Bill, following on the return to gold. I can, therefore, with confidence, recommend its favourable acceptance by the House.


I beg to move, to leave out from the word "That" to the end of the Question, and to add instead thereof the words: this House cannot assent to the Second Reading of a Bill amending the Law relating to currency and bank notes and transferring to the Bank of England the issue of currency notes in the absence of any policy for putting into operation the resolutions of the International Conference held at Genoa in 1922, and until an investigation has been made into the constitution, powers, and policy of the Bank of England in the light of modern developments in finance and industry. The hon. Gentleman has devoted the greater part of his speech to an explanation of the provisions of the Bill, but that part of his speech which was not so concerned would have been much more appropriate if delivered in support of the Amendment than in defence of the provisions of the Bill. The question of currency and credit is undoubtedly one of great importance and the House of Commons has not many opportunities of discussing these abstruse and difficult problems. We are submitting our Amendment in order to give the House an opportunity for a frank consideration of these matters. The vital importance of credit and currency are, I think, being increasingly recognised, but, there is no subject upon which there is such a wide difference of opinion, so many theories, and upon which even experts hold such diverse views. The last thing we wish to do is to make this a party question or to throw the controversy into the cockpit of political conflict. It will be noted that our Amendment does not express any opposition to the amalgamation of the notes issue. There are obvious advantages in that, but we submit that there are two conditions, and very important conditions, which should be fulfilled precedent to an amalgamation of the note issues. These two conditions are the implementing in full of the Genoa Conference Resolutions and a review of the position of the Bank of England in view of modern financial conditions. I will deal with the latter of these two points first.

Our demand is in no sense a censure upon the Bank of England. Speaking with what knowledge I may possess, I believe that the Bank of England discharges its great powers and functions with a full sense of its great public responsibilities. The Governor of the Bank of England is a man who is universally respected and trusted. Europe is now happily emerging from the state of economic and financial chaos which followed the War, and no man has done more towards the rehabilitation of the financial life of Europe than the Governor of the Bank of England. His work in this respect will probably never be fully known or acknowledged, but it has been inestimable. But the Bank of England is hampered by an archaic constitution which is not fitted to deal with modern financial conditions and the needs of industry, and we think the time has come when this constitution should be reviewed in the light of modern needs and modern conditions. This demand for a review of the Bank Charter is by no means confined to credit and currency cranks. There is a vast amount of financial and commercial support for it, from people who certainly do not hold the views, or many of the views, which we hold upon economic questions. The late chairman of the Westminster Bank a few days before he died wrote these words: When the time comes for the issue system to be placed on a sound footing by the transfer of the present Note issue to the Bank of England and the consequent entire remodelling of the Bank Charter Act it will have to be on lines similar to those which have received such a volume of approval from all the chief banking experts of the world. We see that Dr. Leaf took it as a matter of course that before Parliament was asked to agree to the amalgamation of the issues there would be an entire remodelling of the Bank Charter Act of 1844, and hon. Members will know that Mr. McKenna, the chairman of the Midland Bank, a man whom the Prime Minister was very anxious to make Chancellor of the Exchequer in a Conservative Government, has repeatedly within the last few years expressed views in agreement with those stated by Dr. Leaf. The Secretary of State for War, who I believe is going to take part later in this Debate, was at the Genoa Conference and he came back full of enthusiasm in regard to its Resolutions. I am not quite sure that he did not say that they had established a new Justinian Code. Therefore, in asking for an inquiry into the Bank Charter and for a review of the present functions and powers of the Bank of England, we have very high financial authority to support us. The Financial Secretary, in moving the Second Reading of this Bill, made a reference to the Report of the Cunliffe Committee. The Government of the day evidently considered that the time had come when such an inquiry should be made into the functions of the Bank of England, for some time after the Committee had been appointed, and while it was still at work, its terms of reference were extended by the insertion of these words: To consider the working of the Bank Charter Act, 1844, and the constitution and functions of the Bank of England with a view to recommending any alteration which appears to thorn to be necessary or desirable. That is precisely what we are asking this afternoon. We are asking for what the Government ten years ago regarded at that time to be an urgent need. The Cunliffe Committee never went into this part of their terms of reference beyond making a suggestion that when the amalgamation took place there might be some change in the form of the weekly bank return. The need for this inquiry arises from the revolutionary changes which have taken place in banking methods, and in industry, during the last 80 years. Conditions have wholly changed since 1844. Private banks hate practically disappeared and huge joint stock banks now conduct the whole of the commercial business of the country. As the Financial Secretary has pointed out, the greatest change of all in its effect upon credit and currency, is the introduction of the widespread issue of the cheque system. Eighty years ago the questions of currency and credit were very little understood. The banking system was hardly developed outside this country. As far as the world was influenced by world price levels it was largely under the control of this country. International trade and international finance were in their infancy.

In those days, when the Bank Charter Act was passed, under which the operations of the Bank of England are conducted, the working of the central bank system was infinitesimal compared with its world-wide ramifications of to-day. A system which worked well 80 years ago is just as much suited for the entirely different conditions of to-day as a rail- way engine of 80 years ago would be for the railway conditions to-day. There is one further fact to be considered, and that is the recent emergence of America as a lender in the international market and the great reform of her banking system which culminated in the Federal Reserve Act of 1913. These are results which we submit make it very urgent that an inquiry, a non-party inquiry, a nonpolitical inquiry, should be held for the purpose of reviewing the Bank Charter and ascertaining what modifications and changes might with advantage be adopted in order to make it more adaptable to present conditions. It is not for me at the moment to submit suggestions as to what changes in the functions and policy of the Bank are desirable. All we are asking at the moment is that such an inquiry should be held.

The importance of central banks being in close touch with each other, as was recommended by the Genoa Conference, cannot be exaggerated. I believe something of the sort is being carried on privately at the present time. We see mysterious paragraphs in the newspapers about meetings of the heads of the Federal Reserve Board and the Bank of England, the German Banks and, sometimes, the heads of the French National Bank, but we do not know what goes on. I believe a great deal of co-operation is going on, but it is not being carried out in accordance with the recommendations of the Genoa Conference. However able these men may be, however disinterested they may be, they cannot always be possessed of sufficient knowledge to enable them to come to the best conclusion. I do not say a word against the Directors of the Bank of England. They are very estimable gentlemen. Their duties are, I believe, not very onerous. They meet, I believe, for luncheon once a week and decide whether the Bank Rate should be raised or lowered or should remain at the existing level. But they are not men who can be said to be in close touch with the needs of the industry of the country. With one thing that the Financial Secretary said, I do most heartily agree, and that is this. I have no desire at all to see a central bank under political interference. I think it should be a public corporation, composed of the very best men, representatives of finance and industry, and that the Board of Trade should be represented as well as the great co-operative movement and labour. If we had a body so constituted, it would command universal public confidence and support. I need not have said that because our Amendment is limited to the inquiry, and those are matters which would have to be considered by the Commission or Committee which might be appointed to conduct such an inquiry.

I now come to the other part of our Amendment which says that the resolutions of the Genoa Conference ought to have been implemented before a step was taken for amalgamating the note issue. Every one of the resolutions of the Genoa Conference was carried unanimously I believe. That Conference met at a time when chaos reigned in Europe. Budget deficits and currencies which were worthless were, I was going to say, the order of the day; rather were they the disorder of the day. A good deal has been done on the lines of the recommendations of the Genoa Conference. Countries on the Continent have to a very great extent put their financial houses in order. Budgets are now being balanced; currencies are stabilised, and all the countries, with the exception of France, have returned to one or other of the gold standards. The Genoa Conference, in one of its resolutions, stated that if currencies were stabilised on a gold basis, and if the full gold standard system were universally adopted and if gold coins and bullion were held as cover, then there would be a general scramble for gold, and the result would be the appreciation of the value of gold and a general fall of prices, with disastrous industrial results. Therefore, in order to avoid that danger, the Genoa Conference made a number of recommendations. Perhaps the most important of them was international cooperation in the use of gold. The second was the regulation of its distribution; and the third, very important, the regulation of its value so as to maintain a stable price level.

I have said that most of the countries of Europe have returned to the gold standard since the Genoa Conference. Fifteen of them have done so. But they have not all returned to the same form of the gold standard. I hope the House will excuse me if I explain in a very few words the three different forms of the gold standard which are in operation to- day. I cannot for the moment call to mind any country where the full gold standard is in operation. Perhaps the United States is the exception. The full gold standard, of course, means a gold coinage and the convertibility of paper money into gold coins. Then we have the bullion system, which is the system under which the Bank of England is operating to-day. There is no gold coinage, but the bank buys bullion and sells bars, and that modification of the full gold standard was introduced in order to economise the use of gold and to increase the gold reserve so as to serve a larger volume of currency. Then there is the gold exchange system, which is now more generally in use on the Continent of Europe than any of the other forms. This system further economises the use of gold by substituting liquid resources. These liquid resources are held to maintain a parity in the currency and exchange.

It might appear that there are very many great advantages in the gold exchange system over either of the two others. It lessens the amount of sterilised gold and it saves the expense of bullion movements. It tends to lessen fluctuations in the value of gold and dislocation of prices. The old idea of a huge gold cover never had any more substantial foundation than convention or superstition. Countries are working quite safely on the gold exchange plan, and they are following out the recommendations of the Genoa Conference to adopt means for the economising of gold. I have here a further statement made by Mr. Leaf which bears both upon the amount of amalgamation issue and upon this gold exchange plan. It is a very interesting and very important statement. Mr. Leaf said: It can hardly be long before some fresh arrangement is made by which the sole power of note issue will be given back to the Bank of England. The whole system of currency regulation will then have to be re-opened. The choice will be between a return to the strictly limited and mechanical system of the Bank Act Charter, with largely extended powers of fiduciary issue …, or some sort of arrangement as that which in one form or another exists in most foreign countries—an arrangement under which the Central Bank is allowed to issue a certain proportion of currency against the discount of approved commercial paper and/or Government securities, in place of the deposit of actual gold which our present system demands. This plan has the great advantage of elasticity. It is in fact the means adopted by the United States in the reform of their issue system just before the War. The withdrawal of gold coins has altered the convention in regard to the value of gold. No huge gold hoarding for the purpose of covering paper issues is any longer necessary. The only real use of the gold reserve now is to meet the needs of foreign exchange. This need should be reduced to a minimum by adopting one other of the recommendations of the Genoa Conference, namely, that certain selected central banks should act as the custodians of the gold holding of all the central banks. As a matter of fact I was reading recently an article written by a very eminent American economist—an article written on behalf of one of the American national banks. The point of the article was to rebut the charge that America is hoarding gold for her own purposes. The point was that she was holding it, or at any rate a large proportion of it, on behalf of creditors among the other central banks.

I want to consider this Bill in relation to these projects. I have already said that our Amendment does not disapprove of amalgamation, provided that these preliminary and essential conditions have first been carried out. It may be mentioned, in the course of the Debate, that I was responsible, when I was in office for a short time, for the appointment of a Committee to consider this question of Note amalgamation. It is quite true that I did appoint such a Committee, but I was not committed to the acceptance of any recommendations which such a Committee might make. As a matter of fact that Committee, when it did report, devoted 16 pages to dealing with other matters, and something less than half a page to dealing with the matter which had been remitted to it. The central point that we have to bear in mind in the consideration of this Bill is the matter of elasticity. The Chancellor of the Exchequer referred to this subject in one sentence only in his Budget speech. He said that this Bill when it appeared, would provide for greater elasticity in the matter of the Note issue. From that some of us hoped that when the Bill did make its appearance it would be much more elastic than it now happens to be.

5.0 p.m.

Our objection to the fixing of the fiduciary limit of £260,000,000 is one that is snared by bankers, financiers and traders. I want to be quite uncontroversial. Not in the least do I wish to be offensive. But I may perhaps be allowed to say that the Government have had a particularly bad financial press for this Measure. I have not seen in the comments that a single financial writer has given whole-hearted support to this Bill. Most writers have been very severely critical. There is common agreement upon this—that currency should be sufficient to meet legitimate demand. It should be sufficient to prevent both inflation and deflation. I believe the Prime Minister on one occasion said he was neither an inflationist nor a deflationist; he was a non-flationist. That is exactly what we ought to strive for—neither deflation nor inflation. The expansion of currency or credit, ought not to precede but ought to accompany the legitimate expansion of trade. How far does the Bill give that elasticity? I have taken the trouble to work it out, from the figures of the bank return of last Friday, and this is the result at which I have arrived:—Bank notes £180,000,000; currency, £294,442,000, making a total of £474,442,000. The banknote security against this is £56,200,000; gold holding, £160,326,000. Therefore already the fiduciary issue, last Friday was £258,000,000. The issue not covered by gold allowed by this Bill is thus only £2,000,000 more than the present figure. At present there is no seasonal call for any increase in currency but last Christmas the figure rose as high as £263,000,000. The Treasury limit this year is over 2264,000,000, and last year it fluctuated between £243.7 millions and £264.7 millions.

It will be seen from these figures that, if the fiduciary limit laid down by the Bill is sufficient for the present, it certainly is not sufficient to meet a legitimate expansion of trade, or any exceptional but perfectly legitimate call for an increase in currency notes. The hon. Gentleman referred to the Irish Free State. When they get their new currency note issue into operation there will be a release of the currency notes which are in use there at the present time; but I was surprised to hear him put the figure as high as £6,000,000. I have never before seen it put higher than £5,000,000. The Bill provides that this maximum of £260,000,000 may be reduced or increased by consultation between the Bank of England and the Treasury, but the initiative is to come from the Bank of England. There is a most important point to which the hon. Gentleman did not call attention—that if, after consultation between the Bank of England and the Treasury, permission is given to increase the fiduciary issue for not more than six months, any increase allowed must be in the form of bank notes covered by gold. That may create a very difficult position. The gold position is very strong at present. I believe it has never been so strong in the history of the bank; but, if the need should arise to increase currency, and the gold position requires to be strengthened, then there would be an increased scramble for gold and a heavy increase in the bank rate, and that would defeat the very purpose for which the increased currency was required. The result would be further depression in trade.

It seems to me that this provision is intended to deal only with temporary emergencies, and is not to be permanent. Under the Bank Charter Act, the Bank of England may, with the permission of the Chancellor of the Exchequer, increase the note issue, but the Chancellor of the Exchequer has to go to Parliament to get an indemnity and it seems to me this proposal leaves things very much as they are under the Bank Charter, except slightly modifying the procedure and getting rid of the necessity of going to Parliament for an indemnity. This part of the Bill will make the currency static within very rigid and narrow limits. It may be said that it provides for an increase for six months, and that that increase may be permitted for two years, and then, if circumstances demand it, Parliament may be asked to continue it. But that is not a satisfactory way of dealing with it at all. Once, however, you have fixed these things down by law it is very difficult to alter them, and there should, therefore, be given to the controlling authority—the central bank—very large powers to meet a demand for an increase of currency within wide but, of course, quite reasonable limits. Otherwise, what we are doing by this Bill is to make currency not the servant but the master of trade and industry.

Therefore, when we get to Committee we shall ask that Clause 8 should be remodelled, and that it should be made clear that greater powers of elasticity should be given to the central bank. If I may be allowed to say so, there is another very important criticism to be brought against this rigid limitation. It seems to be based on the idea that there is never going to be an improvement in trade. We have at the present time 1,000,000 unemployed. Supposing trade did improve and absorbed half of these men. The increase in the demand for currency which would follow would require, as far as I can calculate it, an expansion of currency of at least £10,000,000. But surely we are looking for something more than the absorption of half a million men. We are looking not merely for an increase in employment. There is also the question of increase in population, and these may lead to very great expansion and to a great increase in the purchasing power of the wage-earning classes. If this fiduciary issue be fixed at this rigid figure, it makes no provision whatever for an increase of wages and a corresponding increase in the consuming power of the great mass of the people.

This question of note currency is mainly of importance to the wage-earning classes. They only use currency notes. Every Member of this House pays by far the greater part of his expenditure not in paper notes, but in cheques. Therefore, from the personal point of view, the limitation of currency is less serious to those who have bank accounts and cheque books than to those whose means of purchase are confined solely to currency notes. These are the two points in our Amendment. They are, first, I will not say the reform of, but an inquiry into the Bank Charter, and the powers and constitution of the Bank of England; and, secondly, this question of gold and the influence of gold hoarding upon currency and upon credit. I have submitted these observations, as I say, in no dogmatic spirit. In such a difficult question as this, the wisest are as learners. In this spirit I submit this Amendment to the fair and impartial consideration of the House of Commons.


There are at least two, if not more observations, made by the right hon. Gentleman who has just sat down, in which he will carry with him the whole House. The first was his tribute to the services rendered to the nation and, indeed, to the whole of Europe, by the present Governor of the Bank of England, who has so brilliantly—if I may say so without assumption—discharged those functions which were laid upon our financial leader in such matters by the Conference of Genoa. The second observation in which the right hon. Gentleman will carry the House with him was his aspiration that this question might be raised above party politics. We have only had to listen to the Debate so far—to the clear exposition and historical illumination which has been given to the subject in the able speech of the Financial Secretary to the Treasury and the interesting speech of the right hon. Gentleman the Member for Colne Valley (Mr. Snowden)—to realise, in spite of the lucidity with which it has been treated, that this is an extraordinarily complex question, and that we are likely to get little help by turning on to it the merely wrathful forces of party controversy.

As I followed the right hon. Gentleman's arguments in favour of his Amendment, I found some difficulty in persuading myself that he had made a good case for the Amendment. If I may take his arguments in the reverse order to that in which they were developed, would say, first, that we are all eager to find out in what respects the Resolutions passed at Genoa have not been carried out by this country. I do not think I heard anything which went to show that they had not been carried out. Genoa was in favour of the co-operation of the central banks. It has been the brilliant work of the present Governor of the Bank of England, to which the right hon. Gentleman himself paid tribute, to have advanced that co-operation as fast as it could be advanced. Genoa was in favour of a return to the gold standard. We have returned to the gold standard—not entirely with the approbation of the hon. Gentlemen opposite. Genoa was in favour of the economisation of gold. As the right hon. Gentleman has so clearly pointed out, gold is economised by the use of the exchange standard, and that is the standard which we have adopted. If I found one point in which the right hon. Gentleman seemed to think we had fallen short of the standards of Genoa, it was, what I understood to be his contention, that it was unnecessary at the present time and in the present stage of civilisation, to keep such large gold supplies as we keep for the purposes of internal security as apart from the purposes of international payment.

On this point, I find myself at variance with the right hon. Gentleman. I cannot think that it would yet be safe for us to rely on any other support for our paper currency than an adequate reserve of gold for the purpose of dealing with crises in the matter of internal confidence. After all, and in the last resort, it is to gold that people turn in moments of danger and anxiety. We know so well that that was so at the beginning of the great War. When the minds of men are disturbed, they are content with no other form of property as a store of values than hard red gold. The second branch of the right hon. Gentleman's argument was in favour of inquiry before proceeding with this Measure. With this argument I find myself in a large measure of sympathy, but not, if I may say so, as a preliminary to proceeding with this Measure. I cannot see why this Measure should wait for an inquiry. The things on which we require inquiry have nothing to do with this Measure.

The truth is that this Measure is smaller in importance than is sometimes supposed. Our paper currency is in this country of comparatively small importance, in comparison, that is, with Continental countries which use only paper currency for payments. Our paper currency is used for rather less than 1 per cent. of the total payments made in this country; the rest is made by cheques, or bankers' money. It is sometimes argued that the whole structure of credit is built upon a sufficiency of paper currency. Many will agree that that is an illusion. It is the supply of credit that determines the supply of paper currency, and not the other way about. The supply of credit depends in this country, not upon the supply of paper notes, but upon the engine which controls bankers' money. That is the Bank Rate, and the Bank's open market policy.

We are discussing to-day a consequential step only upon the return to gold. It is a necessary measure, as all know who have interested themselves in the subject, for any sound system of currency which involves a paper circulation. You must have a fixed ratio between the paper circulation and the gold reserves. Two things are needed for a sound system. First, the paper currency must be convertible at some fixed ratio into metallic gold. Secondly, there must be a fixed relation between the gold reserves and the supply of paper currency; fixed, that is, by some law or rule that is observed. In the erection of our modern currency standard, we have taken the first step of fixing the ratio of paper currency to gold, but we have not yet taken, in any scientific or sound form, the second step of fixing the relation between our total paper circulation and our gold reserve. All that we have had is a Treasury Minute saying that the actual maximum of the preceding year shall be the legal maximum in the following year. That was not enough. It was a bad example to the world to have no more binding rule connecting our reserves and our paper currency than that.

This Bill takes the second necessary step and gives us a currency system of which we need not be ashamed in the eyes of the world. It is very important that we should have one, because we have to remember that owing to our position, we have to stand in the position of the schoolmaster, as regards currency systems, before the world. If we are to be the world's schoolmaster and indoctrinate sound currency principles, we must have sound currency principles ourselves. We should not hesitate to make our existing system as sound as it can be, and then perhaps leave for subsequent discussion the question whether some other system might not be better. We have built the house up to the roof, and we ought not to stop putting on the last tile while we discuss whether or not we ought to build some other sort of house.

The right hon. Gentleman raised three separate topics. At the back of his mind, or rather at the back of the bench on which he sits, there is agitated the question as to whether or not we ought to have returned to the gold standard when we did, and whether we ought not to have some other standard. I agree with him that I should like to see a general inquiry into that problem on the widest basis, availing itself of every possible means of knowledge and information, because I believe it will serve that high end, to which he has referred, of removing this topic from party politics. I do not myself feel any doubt about the result of the inquiry, but that is a different matter. I think I can understand the reluctance on the part of the Government to allow an inquiry into that matter, a reluctance which is no doubt due to disinclination to suggest any doubt at all in the mind of the world at large whether we are going to retain gold as our standard of currency. I think, even so, there are greater advantages to be gained by a free and enlarged inquiry into that topic, which will set this matter at rest.

The other topic which the right hon. Gentleman raises is one which I think lies nearer to his heart and which he argued with more direct approval. That is an inquiry into the constitution of the Bank of England. I doubt whether an inquiry of the sort would lead to any useful results. We are blessed at present with an institution which, although it may be theoretically hard to defend, is practically unsurpassed. Like so many other institutions in this country, it is an illustration of the practical genius of this people, which gives us exactly the institution which we want. There are very few attractions in the institution which the right hon. Gentleman sketched, an institution in which the governing body was composed of representatives of conflicting interests. That is not the way in which to arrive at wise decisions in such an important matter as the supply of credit.

The right body to give the right decision is a body which is in an arbitral position above interest. I know hon. Members opposite will not be inclined to admit the proposition that the Bank of England is a body whose governing body is above interest. Nevertheless, I think, taking this bad world for what it is and men for what they are, you have there a body which is ideally situate to be impartial in decisions about the credit supply of the country. They know, because they are the people who hold all the threads of industry and financial interest that are drawn together in a single knot in the City of London. Their very interests put them in an impartial place as between those who supply credit and those who use it. Those are the two qualifications that you most need.

This Bill, as the Financial Secretary justly said, fulfils the purpose of bringing under a single control the two forms of authority which have to be exercised in this matter—authority for the supply of credit and authority for the supply of currency. It is thoroughly unsatisfactory to have two branches of what is really one business carried out by two bodies, the Treasury and the Bank of England.

No occasion of this sort ought to be allowed to pass by one who has experience of countries in which there has been acute inflation without emphasising that almost the highest of all points of statecraft in relation to the organisation of the supply of currency and credit is to take every conceivable measure to fortify the machine of currency and credit against any influence on the part of the State in the direction of inflation. Again and again we have seen the disastrous consequences which were experienced by many nations in Europe after the War in consequence of that fatal lesson, which they had learned during the War, how to make money by the printing press for the temporary purposes of government. It is sometimes thought, and in particular by hon. Members opposite, that that inflation tax is a tax which particularly works harm only to the middle classes, to those who have accumulated capital. But those who have been in close contact with the effects of inflation upon great industrial communities know only too well that the most disastrous of all consequences that it had upon any area of the social structure was the ruin and misery which it brought to the wage-earner, through the paralysis of industry, prolonged unemployment, and strikes, leading to the worst of all forms of disaster, civil strife, and the break up of the old social order. This was the result of the evaporation of working capital and the mad, circular race in which wages and cost of living chased each other round and round. Those are the worst of all evils which the community can suffer, and the best protections against them are, first, a sound gold standard, and, secondly, an impartial authority to control the supply of credit, as strongly fortified, in some institution like the Bank of England, from any form of political pressure as it can possibly be.

The right hon. Gentleman's third topic was that of elasticity, and that is a matter on which the House, I am sure, would be inclined to follow him in a most anxious and careful scrutiny of this Measure. The gold standard and the constitution of the Bank of England have not to be decided on this occasion, but this matter of a standard which will give us adequate elasticity has to be decided here and now, and it is, therefore, a matter on which we are bound to ask for the most full explanation. The right hon. Gentleman has advanced with great force, and expressed with great clearness those doubts and apprehensions which have been expressed in some quarters as to the provisions of this Bill, whether or not the elasticity which it provides for our industrial and mercantile system is sufficient. I imagine that the orthodox answer to the right hon. Gentleman is that a measure of elasticity will be sufficiently provided by the normal working of the exchange standard and the attraction of gold to our shores when there is an expansion of trade here. In pre-War days that mechanism was no doubt adequate to provide us with the elasticity which we required, but there may well be some doubt, about the present time. We must remember that in pre-War days we had a very much more powerful position as regards the rest of the world than we have now. We were then a much bigger creditor and could much more easily turn exchanges in our favour and call gold here when we wanted it. It may well be that a greater measure of immediate elasticity may be required now to meet our somewhat enfeebled position in that respect.

There are those who have argued very strongly in favour of the system, which is now commonly adopted on the Continent, of the percentage basis for the note issue, instead of the fixed fiduciary issue. No doubt this would provide a more elastic system. I do not think that there would be any great shock throughout the commercial and financial community if such a system were adopted in this country. But our strong traditional adherence to what has been found effective in the past has, no doubt, had some influence in prevailing upon the authorities to prefer a system of fixed fiduciary issue. There is the provision in the Bill, to which the right hon. Gentleman referred, which would no doubt be adequate, and more than adequate, to make the fixed fiduciary basis provide sufficient elasticity for all our purposes, if it were used in an effective way. This raises a question which it is our business to ask on the present occasion. With what intention is there introduced into the Bill this provision under which, on the application of the Bank of England, the Treasury may permit an expansion of the note issue? Is it simply to provide for great crises, such as those under which the Bank Charter Act was suspended? If it is, it will be of no use at all for the purpose of furnishing elasticity for seasonal movements. Is it, on the other hand, introduced for the purpose of providing for seasonal expansions? If it is, there are some of its provisions which seem to be cumbrous and which might be rendered more convenient.

That may be a matter for revision in Committee, but I am confident that it will give the greatest possible reassurance to those who have some doubt whether this Bill really provides for sufficient elasticity, if it is explained to us that this provision is introduced for the purpose, not only of letting the stitches out in grave crises, but of actually allowing for seasonal expansions, which are necessary in order to finance fluctuations in the trade of the country. If this provision is meant for normal use, I think the Bill will meet with little effective criticism. It makes the provision necessary in order to complete the structure of the gold standard, and with the single reservation that the provisions relating to elasticity are made for use and not only for show, the Bill leaves not much to be desired.


I shall be expressing the feelings of the House when I say that we welcome the right hon. Gentleman back again. He always speaks with authority on these matters, and I trust that he will excuse me if I do not follow him on the lines which he adopted. The right hon. Gentleman the Member for Colne Valley (Mr. Snowden) always speaks with profound conviction, but I am sorry that I cannot agree with him. I do not wish to offer any opinion with regard to an inquiry. I am not a banker, and I do not pretend to know anything about the mysteries of banking, but I should like to ask him in what country there is a better banking system than the system in this country. This Bill contains very technical matters which at first sight make one think that it is a Measure simply concerned with banking, but a Measure that deals with the proper regulation of the currency of this country affects the traders of this country more than any other section of the community, and it is as a trader, and not as a banker, that I wish to make a few observations. There is some confusion in the minds of people as to what is the proper function of money, especially of gold. In considering this Bill, we must not lose sight of the fact that money is simply an instrument for the purpose of exchange. Therefore, what we as traders, who are occupied with international trade, desire above everything is a stable currency, a stable measure of exchange. Gold is the only commodity that does not fluctuate very much.

I have heard people remark that our return to the gold standard was the cause of all the dislocation in trade. We cannot close our eyes to the fact that, when we adopted it again, a great deal of suffering and unemployment was caused. The criticism which I would offer is that we were rather in a hurry in returning to the gold standard. It was not a case of an old man in a hurry, but of a young man in a hurry, and I think that, if it had been done more gradually, and not so suddenly, we should not have had the unemployment that we have experienced. I fully agree with the right hon. Member for Colne Valley that the Resolutions passed at Genoa are most excellent, but I think that it will take some time, probably some years, before they materialise. I only trust that, in the meantime, every finance Minister in the world will study them, and take them to heart. I have the greatest admiration for a clever politician, but the last thing I desire to see in this country is the ordinary working of our financial arrangements, upon which trade and industry depend, made the subject of political controversy. I am old-fashioned enough to think—and I feel that I am not far wrong—that the more we keep finance, trade and industry outside the arena of party politics, the better it is for all of us. I should like to give an object lesson of what I mean. At the present time, a great controversy is raging in the United States with regard to the Federal Reserve system. We all know that the United States has more gold than any other country in the world, but you can borrow money at a lower rate of interest in London than in New York. That speaks volumes for our banking system. I am told that the reason money is scarce in the United States is that a great boom is being engineered in that country for political purposes, in order favourably to influence the electorate in the forthcoming Presidential election. The introduction of political considerations into finance has a most corrupting influence, and I am glad to think that we in this country are free from such things.

When this Bill reaches the Statute Book, I am glad to say that it will be impossible for those gentlemen in power in the Treasury to increase the volume or the quantity of oar currency at wilt by means of the printing press. Nothing is more disastrous for a commercial country than to create an artificial prosperity, an artificial wealth by means of inflation. We have had some very bitter experience of inflation, but, I am glad to think, not so bitter and far-reaching as in some other European countries. I believe that when this Bill reaches the Statute Book, it will act as a rampart against an attack of inflated currency. We never know who the next Chancellor of the Exchequer may be. We may have a Chancellor the prototype of the hon. and gallant Baronet the Member for Bournemouth (Sir H. Croft). or the prototype of the right hon. Gentleman the Member for Shettleston (Mr. Wheatley), but whoever the future Chancellor may be, we want to make it as difficult as possible for him to meet his financial difficulties by means of inflation.


I have been in doubt as to whether I should intervene in this Debate at all, because, presumably, if the right hon. Gentleman the Member for Colne Valley (Mr. Snowden) has this inquiry, I shall be under trial, as well as other people. At the same time, if this Bill goes through. I shall certainly be under trial in another place for surrendering profits of the stockholders to the Government. At first, I was inclined to think that this Bill would meet with little interest in the country, because it seems to be merely the consequential result of the return to gold in 1925. To the man-in-the-street, the only difference would appear to be that the, piece of paper which he is lucky enough to have, will be a Bank of England bit of paper, instead of what was called a "Bradbury" or a Treasury note. He will see no difference, except that, I can assure the House, the signature on the Bank of England note will be much more legible than that of the high official ruling over the Treasury. It is very important that everyone should have a much greater interest in these currency matters than that. We must remember that when first the Bolsheviks came into control in Russia, they saw the value of depreciating and destroying all faith in currency, and they spared no pains to do so. They felt sure that, in order to produce anarchy, the destruction of all faith in currency would be more helpful than anything else. After the way in which this Amendment was introduced, no one must imagine that I am going to introduce a political question into this matter, but it was well understood in the world that this was one of the objects of the Bolshevist propaganda at the time.


What about the German mark?


That followed, and was extraordinarily successful. It very nearly produced a revolution, which might have done the same amount of harm as was done to the Russians. I think we must all agree that to-day and in Committee this matter ought to be left free from all political partisanship. What is the history of this inquiry into the Bank of England and into the 1844 Act? It is not a new thing at all. There was a discussion on this question in 1866; there have been discussions ever since when anything has appeared to go wrong. If we look back to what happened in the last few years, we see that the first committee, the Cunliffe Committee as it was called, was appointed at a time when we had not emerged from out active War troubles early in 1918. That committee consisted mainly of bankers and of people closely connected with the banking business, and yet they were able to present an almost unanimous report. They had been asked to look into the 1844 Act and the constitution and the functions of the Bank of England. The first speaker to-day remarked that it was difficult to get experts to be unanimous, but this Committee of Bankers was unanimous. I must take up the time of the House for a moment by making a quotation from the interim report of that committee, because it has a bearing on tins issue, and a few sentences in it fully explain the situation with which we are dealing to-day: The pre-War gold reserves were about £38,500,000 in the Bank of England and an amount estimated at £123,000,000 in the hanks and in the pockets of the people. If the actual circulation of gold coin ceases and the whole of the gold is concentrated in the central institution some economy is permissible in view of its increased mobility. On the other hand, the aggregate amount of currency required will undoubtedly be larger. We accordingly recommend that the amount to be aimed at in the first instance as the normal minimum amount of the central gold reserve should be £150,000,000 and that until this amount has been reached and maintained concurrently with a satisfactory foreign exchange position for a period of at least a year, the policy of reducing the uncovered note issue as and when opportunity offers should be consistently followed. In view of the economic conditions which are likely to follow the restoration of peace it will be necessary to apply this policy with extreme caution and without undue rigidity. When the exchanges are working normally on t he basis of a minimum reserve of £150,000,000, the position should again he reviewed in the light of the dimensions of the fiduciary issue as it then exists. That is from the interim report published at the end of 1918. It indicates the foresight of those bankers. In the light of the situation which arose after the War, hardly any words of that report need be altered. It was acted on by a Treasury Minute which recommended the reduction of the note issue "with extreme caution and without undue rigidity." After that, as we know, the Genoa Conference met, and the late Chancellor of the Exchequer appointed another committee, not a committee of bankers, as in the previous case, but a committee consisting of one ex-Treasury official, Lord Bradbury, one foreign merchant banker, the permanent head of the Treasury, Sir Otto Niemeyer, and the Cambridge Professor of Political Economy. That was a totally different sort of committee from that which was appointed in 1918. It took evidence from all the most prominent institutions which wished to come before it, and from some of those who to-day are our critics. They examined the Governor of the Bank of England, Mr. McKenna, Sir Robert Horne, Mr. Keynes and representatives of the clearing banks, the Association of Chambers of Commerce and the Federation of British Industries. The terms of reference of that committee were similar to those of the committee appointed in 1918, and in the end their recommendation was: We anticipate that if the free gold market is restored at the end of 1925 the experience necessary to enable the amount of the fiduciary issue to be definitely fixed will have been obtained by the end of 1927. The transfer of the issue could then take place early in 1928. But it may well be possible to accelerate those dates in the light of experience. Both those committees seemed to have laid down rules for a time-table to which we are working very closely. In each case it was recommended that gold should be centralised in the Bank of England, that there should be no alteration in the issue or form of issue of the accounts of the Bank of England, and, though they were asked to make recommendations as regards the Bank of England, they have made none, except that it should continue as it has been. I am by no means maintaining that the management of the Bank of England has been or is entirely perfect. Both these committees have recommended that we should take the course which the Bank of England is now taking, and if any discussion is to take place and any committee is to be appointed, I think it should take its time and do its work leisurely, and that this Bill should not be held up for such an inquiry. Two committees not composed of the same type of men have reported unanimously, and I believe that such an inquiry as may be suggested now would also be able to report in the same sense. There is no reason for hanging up this Bill on that account.

I was struck by the manner in which the right hon. Gentleman the Member for Colne Valley introduced this Amendment. If the other eminent Members associated with that Amendment take the same line, I think some working arrangement will be possible which will enable this Bill to be passed without Amend- meat. It would be a great pity if a subject of such complexity were to be bandied about and written about in the Press in a manner calculated to bring odium on the bankers, or whoever may be resronsible for this Measure. As the amendment makes a distinct attack on the lack of action taken on the Genoa Conference and the Genoa resolutions, I would like to point out that no conference since the War that I have heard of, and no international meeting to make a treaty, has had such a successful result as was attained at Genoa. Hardly any resolutions were passed at Genoa which have not been acted upon in whole or in part. In the majority of cases we find that the unanimous report of Genoa has been followed by unanimous action in Europe generally, which is an achievement of which the people who drew up that report may be justly proud. The right hon. Member for Colne Valley raises the point that a Convention should have been called by the Bank of England. If such a Convention had been called and had come to a unanimous resolution, it would have been all to the good, but I think anyone who is conversant with what has gone on in the past six years would also be aware that there have been so many dissensions among the different countries before they got on their financial feet, and afterwards, that it was believed no good result would come from calling a meeting. If there was the possibility of a further quarrel arising, I think the powers that be, whether the Bank of England or someone else, were wise in avoiding a meeting which could have no good result.

There is one other question which has been the subject of criticism regarding the Genoa resolution and that is with regard to the fixing of prices. That is a very difficult thing to do. I doubt whether there is any agreement between the principal countries or the principal banks on that question. It is a dangerous thing to tackle unless you are perfectly sure of having absolute agreement all round. I welcome the way in which this Amendment has been moved, and I hope it will not be pressed, but in view of the good feeling likely to be engendered by the speech of the Mover of the Amendment and if the Bill is passed without criticism,, I should he ready to meet any inquiry.


I rise to support the Amendment and to oppose the Bill. In common with the hon. Member for the City of London (Mr. E. C. Grenfell), and in common, I think, with all those who have hitherto taken part in this Debate, I realise the very great importance of this question, and I hope that what he has said is true, and that this is not to be regarded as a party difference of opinion. I hope the Government will recognise that by taking off the Whips and allowing Members to vote freely. Of course, as a back bencher, I am not in a position to pledge the Whips on this side of the House, but if the Government were prepared to take off their Whips I have no doubt that our party would follow suit, so leaving the question to the free judgment of Members in all parts of the House.

6.0 p.m.

This Bill has been represented by its promoters as a forward move in accordance with the declared policy of this country. In my judgment, on the contrary, it is a backward and a disastrous move. I consider it is a return to out-of-date conditions, and at variance with the best international views on currency. The consequences are so momentous that they may outweigh altogether any possible relief which may come to industry from the Chancellor of the Exchequer's rating scheme, assuming that that scheme has the merits which he alleges it has. I believe that this Bill jeopardises the recovery of trade and the ending of that terrible problem of unemployment which hon. Members in all parts of the House unite in deploring. If my diagnosis be correct, I submit that this Bill ought to meet with implacable hostility not merely from right hon. Gentleman on the Front Opposition Bench and my hon. Friends behind me but from all industrialists in every part of this House.

I am aware that those of us who take an active part in opposition to this Bill are likely to be called currency faddists and charged with being heterodox in matters of finance. I remember the Chancellor of the Exchequer, when I called attention to a statement by a member of his own Commission—perhaps the most eminent statistician in this country, I allude to Sir Josiah Stamp—the right hon. Gentleman made the remark that this eminent statistician had con- tracted currency fever. No doubt the Chancellor of the Exchequer had he been present would have tried to laugh our opposition out of court by some equally picturesque if inapt metaphor applied to our views. In common with my right hon. Friend who moved this Amendment, I say that we have a complete answer to that charge and we take our stand upon the Conference at Genoa. The hon. Member for the City of London referred to the Cunliffe Committee, but, of course, the point is that subsequent to the Can-life Committee we have had the Resolutions passed at Genoa which very much modified the decisions of the Cunliffe Committee. At Genoa we had not merely the currency experts of this country but we also had the best financial advisers of all the countries in Europe, and their decisions are perhaps the most important that have ever been arrived at by any financial body of opinion in the world. It is quite possible that the Chancellor of the Exchequer might deride the findings of the International Conference at Genoa, but I am sure the Minister for War cannot deride those decisions because not merely was he the British representative at that Conference, but he was the Chairman of the Finance Commission, and, to a large extent, the resolutions at Genoa are actually his resolutions. The line which the Secretary of State for War will very likely take is that the decisions at Genoa have actually been carried out. Assuming that is his case let us examine what those decisions were. One decision was that there ought to be a conference of central banks, but the resolution which was passed said more than that because it stated that this conference of central banks ought to draw up a convention and one of the salient proposals of that convention are contained in Resolution 9 which at its conclusion uses these significant words: The Convention should embody some means of economising the use of gold by maintaining reserves in the form of foreign balances such, for example, as the gold exchange standard or an international clearing system. When the right hon. Gentleman the Member for Norwich (Sir H. Young) says that the resolutions of the Conference at Genoa have been carried out or most of them, I wish to point out that this most significant proposal at Genoa that the central banks should summon this conference and that it should carry out this most important provision has not been implemented at all. Further, so far as I am aware the Bank of England even apart from this Conference has not carried out the proposal referred to in the extract which I have read from the resolution. If they have carried it out they have not mentioned it and it can only have been done without anyone knowing anything about it. If they have carried it out that will be something to their credit. Instead of carrying out these Genoa proposals, the Government in this Bill are reverting to a policy envisaged before Genoa and they are doing this without taking into account any of the events of the last seven years which have been rich in object lessons which should have taught us to modify the course of action which we should take.

I come now to this particular Bill which proposes to fix the fiduciary note issue at £260,000,000. This covers our immediate requirements but it provides no slack and the whole basis of our criticism is the necessity of providing adequate slack for dealing with a revival of trade and industry and a reduction of unemployment. No matter how much industry may expand, no matter how many additional workers become employed; no matter what increases of wages or increase of purchasing power takes place, when all these things come into operation the cash of this country necessary to meet them cannot be increased in any natural way. I will come presently to the more or less unnatural ways by which cash can be increased, but before I come to that part of the subject, let us see what this failure to provide the means by which the cash can reasonably be increased involves. It means the encasement of the life of a nation in a strait jacket.

Let me put it in another way. A little while before the War it was the fashion for the women of Western civilisation to encase themselves so tightly in steel or whalebone that the natural expansion of their lungs was rendered difficult. Since that period, the effect of sport and the inculcation of sound medical ideas has ended that practice. Now the Government have decided by this Bill to revert to tight lacing in the matter of money, and just when the lungs of industry are seeking to expand, we shall find them constricted by the limits which the Government are going to put on. In spite of the fact that more men will be employed and more cash will be required for wages, and in spite of the fact that the number of transactions multiply, the additional cash will not be available under this Bill.

It will no doubt be said that there are means by which this cash can expand. I propose to consider those means. It will be said, in the first place, that the amount of available cash can be made to expand by getting more gold. What are the conditions for getting more gold? The Bank of England will have to attract it, and how can that be done? The Bank of England can only attract gold by raising the bank rate and contracting credit, and by taking steps to bring about such a fall in prices that it would pay a foreign country to send gold to this country instead of commodities. To use my metaphor again, that is like saying that the lady need not be aware of her own restraint if she be given a drug to compel her to take small breaths. The contraction of credit and the fall in prices are the two things which bring any revival of industry to a rapid close. If we are to have a real revival of trade and a real absorption of the unemployed, those reforms cannot be brought about in that way.

But it may be said that in addition to those methods the Bank of England will be able to avail itself of the plan proposed in Clause 8, which enables greater elasticity to take place. It is perfectly clear to me from the text of the Bill—and this is my answer to the right hon. Gentleman the Member for Norwich—that this provision is not to he applied in the case of a normal healthy development whenever there are signs of real expansion of trade, but that it is only intended as an emergency provision. The principles of that provision and the terms in which they are expressed are a purely temporary measure for six months at first, and then a further six months, but in no case can it exceed two years without a special Act of Parliament giving power for this to be done. In my view the past history of the Bank of England and the Treasury, act -ing in conjunction, is not such as to justify us in thinking that they will adopt this necessary expansion until they have tried other methods of meeting the situation.

I have no intention of going into the question of the restoration of the gold standard. I realise that the gold standard was a right standard to adopt, and that the step taken in 1925 is an irrevocable step. I have always maintained that that step was taken at the wrong time and in the wrong way, just because the Bank of England and the Treasury, acting in conjunction, did not visualise to the extent that they should have done the amount of injury they were inflicting upon industry and employment. Anyone who has studied this matter must admit that, whatever may have been the total effect of returning to the gold standard in 1925, it did have a grave effect, as Sir Josiah Stamp pointed out, in hindering industry at that time. If the Bank of England and the Treasury had defended their action on the lines that they knew it was going to injure industry, but that the other consequences were more important, we should have had more confidence that they would be likely to use their powers under this Bill to a better advantage.

The line which the Chancellor of the Exchequer has always taken, I imagine on the authority of the Treasury, is that the return to the gold standard, and the deflation which that involved, had no serious effect upon industry at all, and that the two things were utterly unconnected. If that be the view of the Treasury, I have very grave fears that this so-called elastic Clause in the Bill, Clause 8, will not be used in the way that the right hon. Gentleman the Member for Norwich recommends, and I am rather sorry that the hon. Member for the City of London did not attempt, in part at any rate, to clear up this question when he spoke. It would have been of great interest if he could have told us that, as far as he was concerned at any rate, he understood Clause 8 to be, not a provision for a temporary emergency, but a provision which was intended to be used when industry showed legitimate signs of expansion.

In order to make it clear that I am not speaking merely for myself in this matter, I should like to read a very short sentence from an important paper which deals with finance, namely, the "Statist." These words appear in an article on page 815 of the current issue: It will be open to the Bank, of course, to apply to the Treasury for an extension of the fiduciary circulation"— that is, when trade revives. It stands to reason that the Bank will only avail itself of this recourse with the greatest diffidence, and only after having attempted by all available restrictive means to avoid this damaging admission of a weak position. Much harm would by then have been done. A normal expansion of currency would have been fought, to the inevitable detriment of our trade and industry. That is our position. It seems to me to be perfectly clear, from the express words used in this Bill, that this elastic provision is not intended to meet the normal requirements of trade, and that the Bank will not so interpret it, but will take every other action to contract the currency, to restrict credit, and injure industry, and only in some extraordinary crisis will this provision be actually put into operation. In other words, to go back to my metaphor, only when the lady is in extremis will the doctor or the maid be called in to cut the lacing and set her temporarily free, to revert to her pernicious practice next day.

I come to another aspect of the question, and that is the danger of a foreign withdrawal of gold. We saw only a little while back the very grave effects of a French demand for gold from this country, and the way in which that French demand prejudiced the margin of the bankers' gold. I have seen statements—if they are wrong, no doubt I shall be corrected—that the balance in the Bank of England on which the French have a right to call at the present time probably exceeds the whole margin of free gold which will be provided if this Bill comes into effect. Therefore, the French Government—the French bankers—will have it in their power, not only to call up the whole of the free gold which is available, but a considerably larger sum than that. Suppose that they, or some other country which happened to have credit here, took that course, and chose to come upon the Bank of England for a considerable part of the sum to which they were entitled, saying, "We want to take our balance in gold. It is no business of yours; it is our business; we have a right to claim gold if we want it, and we intend to take it." Is it not perfectly clear that, if this Bill be law then, that will seriously derange our credit, seriously jeopardise the amount of cash which is available, alter our price level, and bring grave trouble to this country?

I am quite aware that those who, like myself, are opposed to this Bill, will be charged with being inflationists. The hon. Member for Southwark North (Mr. Strauss) spoke about inflation, and seemed to suggest that anyone who disagreed with him on this Bill was an inflationist. Cannot we get away from the absurd idea that, if you are not at one extreme, you must. be at the other—that, if you are not for Oxford, you must be for Cambridge in the Boat Race, because in that case there are only those two crews; that, if everything is not black, it must be white? In this question of currency there is, surely, a sound course between these two extremes. I certainly am not an inflationist. I am entirely opposed to inflation, and I recognise the grave importance of putting such limits as to prevent inflation. That does not mean that I am a deflationist. I am equally against that. What I want is stability, and that seems to me to be the only sound thing. I want a yard measure which is a yard measure, and which remains of one length and does not vary. In just the same way I want a fixed unit of time, of weight, and of volume. If you do not have that, you are going to deal most unfairly and unjustly with respective interests in this country. Suppose that the yard measure were changed in length. Suppose that the yard measure were to shrink between the time when the shopkeeper bought his goods and the time when he sold them. Then, every time that the yard measure shrank, he would cheat his customers, and not only so, but the yard measure would gradually go down and down until it became ridiculous. On the other hand, if it were to increase, the shopkeeper would be put out of business because he would be utterly unable to meet the demand constantly to supply retail a larger measure of cloth than he had bought at a certain price from the wholesaler.

It is precisely the same in this matter of money. If you are going to have inflation, that means a continual rise in prices, and you get all sorts of difficulties, which hon. Members who support this Bill have rightly quoted; but, quite equally, if you are going to have deflation, if you are going to have prices tumbling, you are going to ruin industry and cause unemployment. The Promoters of this Bill—and this is the point—seem to think that, so long as you tie down your currency to gold, you are going to have neither inflation nor deflation. That is not my view, and I do not think it is the view that was taken at Genoa. If, while your currency is practically limited, industry expands, you are going to get a fall in prices, which fall in prices has been brought about by an artificial financial restriction, and, therefore, is deflation. It is not at all necessary that you should actually reduce your currency in order to get deflation; if the proportion of currency to the needs of industry is reduced, you have deflation, you have a fall in prices, and, as a result of that fall in prices, and also, incidentally, a fall in credit, your industries are going to be ruined and your unemployment increased.

It may be said, and it was said, I think by the hon. Gentleman who moved the Second, Reading of the Bill, that this did not happen before the War—that before the War there was prosperity after the Bank Charter Act; and he gave as the reason the very large expansion of paper in the shape of cheques. It might be that, if some entirely new method for assisting the expansion of currency as needed by industry were invented, even this Bill might not check a revival of trade, but we have no right to assume that anything of that kind will happen. What we have to do is to make provision for expanding trade, and we have to do that by making some provision for expanding currency. There is no ground for thinking that the supplies of gold will come in very rapidly. If anything, they are falling off. The demands for gold in India and elsewhere are, if anything, increasing. Therefore, this Bill, in its normal operation, will limit the growth of currency below what will be required in order to finance trade, and I think that it is likely to do the very gravest injury. I should like, before sitting down, to quote one phrase that was used by the Secretary of State for War in supporting the Resolutions at Genoa. He said: The Resolutions come to by the Commission, which this Conference is asked to adopt, constitute a financial code not less important to the world to-day than was the Civil Code of Justinian. He also said, speaking of these general proposals: The scheme is based on the most modern and scientific method of economising the use of gold as currency. That method has not been implemented by the Government. Instead, they are introducing this Bill, which, in spite of what the hon. Member for the City of London said, could perfectly well wait until the Conference suggested at Genoa has been held and the Convention has been passed. It could perfectly well wait until proper inquiry has been made, and, therefore, in my judgment, it ought to be opposed; and it ought to be opposed, not only by Members on this side of the House in the interests of employment, but by all Members on the Conservative and Liberal benches who care for the revival of industry. I believe that some of those industrial Members who sit on the opposite benches have been rather jocularly referred to as "The Forty Thieves." If they do not go into the Lobby against this Bill, they will not be the Forty Thieves, but the Forty Fools.

The SECRETARY of STATE for WAR (Sir Laming Worthington-Evans)

I regret sincerely that the Chancellor of the Exchequer is not standing at this Box to make a reply to the Amendment which has been moved on behalf of the Labour party. The right hon. Gentleman the Member for Colne Valley (Mr. Snowden) who moved the Amendment did so in studiously moderate terms, and disclaimed from the first any intention of making a party speech or a party attack; and he did, undoubtedly, confine himself to the economic and financial aspects of the case that he was trying to put forward, and succeeded in avoiding anything in the nature of a party attack. As I expected, however, the hon. Member for West Leicester (Mr. Pethick-Lawrence) was a little less diplomatic, and declared his implacable hostility to the Bill in almost the first sentence that he uttered.

Let me ask the House to consider the actual reasoned Amend- ment that has been put down. It is that the Second Reading should not be assented to by the House in the absence of any policy for putting into operation the resolutions of Genoa, and until an investigation has been made into the constitution, powers and policy of the Bank of England. Let me first deal with that part of it which relates to the resolutions at Genoa. There the hon. Gentleman who spoke last placed too high a value on my services. [HON. MEMBERS: "No!"] I was there only as assistant to the then Chancellor of the Exchequer, my right hon. Friend the Member for Hillhead (Sir R. Home), so long as he was at Genoa, and subsequently as substitute for him when he was obliged to come home. It is true that I had to propose those resolutions to the Conference, but that was because my right hon. Friend was not able to be there. What is the complaint? I am very fond of those Genoa Resolutions; I will not withdraw a word of what I said about them. I believe that they have been of great value to the whole of Europe in the last three or four years as pointing the way to a restitution of sound economic and financial conditions. They have been largely carried out so far as this country is concerned. The right hon. Gentleman is anxious to know what the policy of the Government is. The policy of the Government is to carry out those resolutions. Let me remind him what the resolutions were. The first said that The essential requisite for the economic reconstruction of Europe is the achievement by each country of stability in the value of its currency. The Government have carried that out by basing our currency on gold, and so ensuring stability. The second resolution, which is of immense importance, is: Banks, and especially banks of issue, should be free from political pressure and should be conducted solely on lines of prudent finance. In countries where there is no central bank of issue one should he established. This Bill will remove the currency notes from the control of the Government for the time being and place them under a hank entirely free from political pressure. The next two resolutions were that there should he a common standard for the currencies of all countries and that this standard should be gold, resolutions which we for our part have carried out. Not only have we carried these resolutions out, but we have lent all our powerful financial aid to other countries in Europe so that they should also carry them out, and we find that Holland, Belgium, Italy, Poland, Austria, Hungary, Greece and Norway all have their currencies allied to, or based upon, a gold standard, and in practice Germany and France are also so situated. Other resolutions called attention to the necessity for balancing the Budgets in order that no deficits should be made up by the issue of currency notes. In this country, we have not only balanced our Budget for years, but we have succeeded in adding to our reserves. Another resolution is that each country should fix a gold value for its monetary unit. Fortunately for us, we have not had to consider that question seriously, because our monetary unit is of the same value now as it was before the War.

The right hon. Gentleman and the Seconder of the Amendment have called attention to Resolution 9. That resolution requires a little further consideration than they gave it. Perhaps for greater accuracy I had better read it. Referring to the eight previous resolutions it says: These steps might by themselves suffice to establish a gold standard, but its successful maintenance would he materially promoted not only by the proposed collaboration of central banks but by an international convention to be adopted at a suitable time. The purpose of the convention would be to centralise and coordinate the demand for gold and so to avoid those wide fluctuations in the purchasing power of gold which might otherwise result from the simultaneous and competitive efforts of a number of countries to secure metallic reserves. The convention should embody some means of economising the use of gold by maintaining reserves in the form of foreign balances such, for example, as the gold exchange standard or an international clearing system. The right hon. Gentleman complains that he does not know the policy of the Government, and I tell him the policy of the Government is to carry out that resolution, as they have already carried out the other resolutions of Genoa, at the proper time, for he will remember that the resolutions did not contemplate that it would be possible to have an international convention immediately. It was contemplated that when the other nations had set up the central banks, had stabilised their currency, had set up a gold standard, and had carried out the other resolutions, at the proper time such an international convention would be called in order to see how far it would be possible to economise gold. But the right hon. Gentleman must remember that any convention depends, not upon this Government or upon the Bank of England; it depends upon other countries as well as ours, for it takes, in this case, more than two to make an international convention of value in the sense that Genoa advised. In due course I have no doubt such a convention will be carried out. There have in the meanwhile been, as is well known, very frequent meetings between the controllers of the central banks, and I am certain the Bank of England and the Governor of the Bank can be trusted to promote international co-operation at the earliest possible moment. But it should be remembered that no Government can compel a convention. Indeed, the resolutions themselves are based upon the central banks being free from Government control and left to carry out international conventions and other things at their own time and on their own volition without political pressure. I am indebted to the right hon. Gentleman himself for the quotation I am going to read. In a very interesting article in "The Banker" he quoted the evidence given by Mr. Montague Norman, the Governor of the Bank, with regard to his policy in connection with central banks. I quote this in support of my statement that we can rely upon the Bank of England forwarding and furthering resolution 9 as they have already forwarded and furthered the other resolutions of the Genoa Conference. Mr. Norman was giving evidence. This is the quotation: When all the European currencies have been stabilised it may not be long before the banking resolutions approved by the Powers at the Genoa Conference come into play. A deliberate and concerted attempt will then be made by the central banks of Europe to prevent undue fluctuations in the future value of gold. That is the undertaking in evidence, to carry out, as far as he can, the final resolution, which has not yet been completely implemented, of the Genoa Conference. So much for the right hon. Gentleman's demand to know what the policy of the Government is with regard to the Genoa Resolutions. It is to carry them out.

Secondly, the Amendment is based upon a desire to have an investigation into the powers and constitution and policy of the Bank of England. I ask myself what case has been made by the Opposition for such an investigation. After all, if you are going to have an investigation, the onus is upon you to say on what ground you think an investigation is necessary. Is it that the Bank of England has abused its powers? [HON. MEMBERS: "Yes."] Some hon. Members think "Yes," but not the right hon. Gentleman. He, on the contrary, paid a very well-deserved compliment to the governor of the Bank of England for the immense value he has been, not only to this country but to Europe. Where has been the failure? Is it that they have failed in carrying out the powers they have? There really has been no case whatever made out for this investigation. Of course, as a political manœuvre I can understand this part of the Amendment. The right hon. Gentleman's party is not agreed. He has been speaking to-day in a way on which I would willingly compliment him, but there are others in the party who do not in the least agree with him.


The right hon. Gentleman is not entitled to draw from a cry or two of dissent that hon. Members on these benches disagree with the opinions of the Front Bench in toto when they only disagree over details.


I did not want to trouble the House with any quotations, but it is really quite simple, because the hon. Member's party has produced a Labour Year Book, in which their policy in regard to banks has been quite clearly laid down. I will read one sentence: The course of events immediately preceding the beginning of the trade depression is one of the strongest arguments for the transference of the key industry of banking to national ownership and control. That is not the policy the right hon. Gentleman has been putting before the House to-day.


The policy my right hon. Friend has been putting forward is outlined in the Amendment, which I do not think is exclusive of the resolution which the right hon. Gentleman has just read.


I listened very carefully to the right hon. Gentleman's speech. He did say he did not like putting the notes in the hands of the Bank of England as at present constituted. He did indicate that there should be a body upon which labour, and the Board of Trade, and co-operative societies, should be represented, but I understood him to disclaim absolutely that there should be a national bank, a bank nationalised, as the policy apparently of the Labour Year Book indicated. A public corporation from which political pressure should be removed entirely and over which the Government as such should have no control—that, of course, is quite different. If there is any doubt about it, I will read some more. The power of finance is the stream that makes the mills of industry go round, and whoever controls it controls them. A banking system attached to the State is essential. That is from the "Story of the I.L.P.," upon which the photograph of the Leader of the Opposition is placed, and there is a foreword to that valuable document written by the Leader of the Labour party. If my memory serves me right, the right hon. Gentleman himself has a difference of opinion with or is no longer a member of the Independent Labour party. I was saving that the right hon. Gentleman the Member for Colne Valley wisely says that he would rather not make this a party matter. I was complimenting him upon the ability with which this Amendment was framed, for it is a sort of cover intended to bring in all his followers, whether nationalisers or not. And since then we have had the Member for West Leicester inviting 40 of my friends whom he called by opprobrious names to come in and join them. So it was intended as a Parliamentary blanket to cover quite different opinions. Of course, when the hon. Gentleman the Member for West Leicester deals with this question, I cannot help thinking that he does not want an investigation. He cannot want an investigation, for he seems to have made up his mind long ago, and he is the financial expert, I understand, of the Independent Labour party—[HON. MEMBERS: "No!"]. Here is a little document called "Socialism and Finance," by F. W. Pethick-Lawrence, M.P., and it contains 10 studies which are to be used as the basis of the study circles of the Independent Labour party. I will not trouble the House with the first nine, although one of them does tempt me, for it is headed, "Public Ownership of Banks." But I must, in case I do him an injustice, remind him of the tenth one. He says—it is after nine lectures; this is the tenth, called, "Constructive proposals": One of the early actions of a Socialist Government will therefore be to secure that all decisions of the Bank of England which are of vital national concern, notably alterations in the Bank Rate, shall be subject to consultation with, and control by, the Treasury. [HON. MEMBERS: "Hear, hear!"] And now he cheers that statement. He supports an Amendment refusing to go on with the Second Reading of this Bill because the Government have not carried out the Genoa resolutions. The second resolution, which I read in detail to the House, was that the central banks should be free from political control. Now, he is cheering his own statement that the decisions of the Bank of England should be subject to Treasury control.


Does the right hon. Gentleman himself suggest that the decisions of the Bank of England with regard to the Bank Rate should not be subject to consultation with the Treasury.


That is not at all the hon. Gentleman's lecture. He really must go to his own classes. Not subject only to consultation with, but to control by the Treasury, and that is precisely the political control which, the House can take it from me, we agreed at Genoa was not to be exercised. I say, therefore, that there is no necessity for any further inquiry at this moment into the control of the Bank of England, for an inquiry has already taken place, and the right hon. Gentleman forgot the fact when he called our attention to the addition made to the reference of the Cunliffe Committee. He called our attention to the fact that there was an addition made to the reference of the Cunliffe Committee, that addition being to consider the working of the Bank Act and the constitution and functions of the Bank of England with a view to recommending any alterations which might appear to them necessary or desirable. I understood him to say that the only report in answer to that reference was that the form of return by the Bank of England should be altered. I understood him to say that. I did not understand him to tell the House that there was a report, not the interim report but the final report, by the Cunliffe Committee which dealt with that reference, and as he did not make that clear to the House, I propose to read it. It is only a short paragraph. I will read what the Cunliffe Committee said in their final report. Under paragraph 4, "Bank of England," they say: The principles of the Bank Charter Act of 1844 were fully considered by us in our Interim Report. We have examined with care the opinions there expressed in the light of certain criticisms which have been made with regard to them. We see, however, no reason to alter our conclusions. We have again considered the principles governing the banking systems of the principal foreign countries, and we are satisfied that they are not so well adapted to the needs of this country as those contained in the Act of 1844. Certain important alterations which experience suggested to be desirable have been made in the constitution and management of the Bank during the War, and we do not now think it necessary to make any further recommendation. Therefore, what actually happened was that there was, as the right hon. Gentleman said, an addition to the reference of the Cunliffe Committee. The Cunliffe Committee took that matter into consideration and reported that the Bank Charter Act, 1844, was the line upon which they recommended action, and that is the recommendation which we have followed. It is said that that was before the Genoa Conference. It was. The subject was again considered by the Bradbury Committee set up by the right hon. Gentleman himself in 1924, which reported in 1925. The broad effect of their report was to confirm the advice given by the Cunliffe Committee. If any further investigation were entered into now, it would merely delay action upon this Bill. It would create uncertainty when, in fact, what is wanted is a policy of continuity and stability, and this Bill is the completion of the action already taken.

If I may, for a moment, I will answer questions which have been put to me and deal with arguments which have been advanced from the other side, on what is really the centre of this Bill, that is, Clause 8—the question of elasticity. The right hon. Gentleman objected to the figure of £260,000,000 being fixed as the figure in the Bill. He said that, while not being an inflationist or deflationist, he thought it left no margin, and he was afraid that it would be found to be restrictive. He went on to state that any increase in the fiduciary issue must be covered by gold and that if there were an increase under Clause 8 that would lead to a scramble for gold. I am stating that correctly, I hope. [Interruption.] That is very good. If that were really so, if the fiduciary issue had to be covered by gold, I could understand the objection, but that is a mistake.


Perhaps I did not explain myself very clearly to the House. If there had been any increase, it must be in the form of bank notes which are covered by the gold.


That is, of course, exactly the same thing. Bank notes covered by gold or gold are synonymous. But that is the mistake. If the fiduciary issue is increased under Clause 8, it will not be covered by gold. It will be a fiduciary issue covered by securities in precisely the same way as the £260,000,000, and that mistake really explains a great deal of the opposition that the right hon. Gentleman feels. If the only way of increasing the fiduciary issue was in collecting more gold, then indeed there might be the restriction which the hon. Gentleman feared, but that is not so. As regards the margin, my hon. Friend explained and gave the figures as to how the £260,000,000 was arrived at. That £260,000,000 in itself shows a margin of about £1,250,000. That is, deducting the estimated £6,000,000 of Irish issue from the gross total of £264,750,000, we get down to a margin of £1,250,000 in the £260,000,000. It must be remembered that that is the margin on the maximum of the year. The margin on last week's account, I think, is between £7,000,000 and £8,000,000. The margin on the 2nd May—I have the return for that week more accurately in my mind—was 29,000,000. What we have, therefore, in the figure of £260,000,000 is a margin of from £7,000,000 to £9,000,000 on the last two weeks issue of currency notes, and upon the maximum we have £1,250,000. If that, was all, I would at once say that it was insufficient. I do not for a moment claim that it would be safe to pass this Bill upon that margin alone, but that is not the position.

There is a power given under Clause 8 for the Bank of England to apply for leave to increase the fiduciary issue, and for the Treasury, if it so agrees, to increase it beyond £260,000,000. I want to emphasise the fact that that power is not a mere substitute for the old crisis letter. In order to emphasise that, let me remind the House of the conditions under which the crisis letter was issued. There were four occasions—in 1847, in 1857, in 1866 and in 1914—when crisis letters were issued. In 1847 and in 1866, although the letter was issued, it was not, in fact, acted upon. The mere fact that the Bank were authorised to continue to pay deposits in notes even though the payment would involve an excess of notes over the authorised issue, was enough to still the panic, and the letters were not, in fact, acted upon. In 1857, the letter was acted upon, and the statutory maximum was exceeded by, I believe, about a couple of million pounds. In 1914, the letter was issued, and there were, in fact, two days on which the legal maximum was exceeded. On the 7th and 8th August, 1914, notes were issued in excess of the Bank's limit.

7.0 p.m.

As a matter of fact, at that time the Currency and Bank Notes Act had been passed and that gave the Treasury the right to give statutory authority to the letter. If you search the Bank Return, you will not find that there was an increase in that period, because the increase was made good by currency notes. Upon each occasion, when that letter was applied for, there was an actual and existing crisis, and it was always recognised that the letter should not be asked for except in an emergency. That is perfectly natural. I will tell the House what the letter was. It was a request to the Governor of the Bank to continue to pay the Bank's depositors in notes and to break the law by issuing more notes, irrespective of the restrictions placed upon the Bank by the Bank Charter Act, and an under- taking by the Prime Minister and the Chancellor of the day that they would bring in a Bill to the House of Commons to indemnify the Governor of the Bank for breach of the law. One can imagine the hesitancy with which the Governor of the Bank and the Prime Minister and the Chancellor of the day asked for and agreed to the issue of such a letter. But Clause 8 of the Bill makes a statutory provision intended to be used, not reluctantly and with hesitation in time of crisis, but whenever the Governor of the Bank feels that the present limit on the fiduciary limit is unduly restrictive, to be used, not in defiance of the law, but in accordance with the statutory provisions intended for the purpose.


You are conniving at an illegality.


Not at all. The hon. Member is missing the point. We are replacing an illegality by a legal power intended to be used, not in a crisis, but before the crisis arrives. I do not pretend to be able to forecast every contingency which may cause the Governor of the Bank to make the application, and which may make the Chancellor of the Exchequer of the day agree to an increase in the fiduciary issue; but let me examine some of the possible eventualities, some of which have been indicated by the hon. Member for West Leicester and others. An emergency of the type of the crises of 1847, 1857 and 1866 may never recur. Just as in 1847 and 1866 the knowledge that the letter had been issued to the Bank prevented a run upon the Bank, so the provision made in Clause 8 may itself prevent the panic from which these crises arose.

But a new kind of emergency has become possible. Now that the foreign banks have adopted the practice of accumulating a large reserve of sterling bills, it is always possible that, owing to a change in policy upon the part of those banks, a large sum of gold might be withdrawn in a short time by the realisation of those balances. The probability is that such a measure would be avoided by co-operation amongst the central banks, as was indeed advised in the Genoa resolutions. But if the withdrawal of gold was insisted upon, it might become necessary to extend the fiduciary issue, and that would be an occasion which would justify the Governor of the Bank in asking for that expansion, and the Treasury in granting it.

A third contingency is the possible competition for gold among the central banks. It is quite true that the absorption of gold by any country of considerable economic importance is a matter of international concern. The supply of gold for monetary purposes can only change very gradually, and the value of gold in terms of commodities is principally governed by the demand. The demand is created by the currency legislation of the various countries. If the central banks were to absorb gold without regard to each other's actions they would find themselves competing for a limited supply, and a rise in the value of gold, or, in other words, a fall in the price level calculated in any gold currency, would inevitably ensue. Should the Bank of England find that, owing to a world demand for gold, credit would be unduly restricted, not as a check on speculation, but to the injury of legitimate requirements, then the Bank can request the Treasury to extend the fiduciary issue and so free gold in the hands of the Bank for further credit operations.

Moreover, the principle of a fixed fiduciary issue itself necessitates some provision being made for normal growth. It was only by an accidental combination of circumstances that the Act of 1844 did not require an expansion of the fiduciary issue from time to time.

As my hon. Friend pointed out, at the time when the Bank Charter Act was passed the bank note was the principal credit instrument of commerce and had it remained so the natural development might easily have raised the paper circulation of £30,000,000 to £150,000,000 or even to £200,000,000 in 1914, and the old fiduciary limit would have become manifestly inadequate. The rise was only saved by the gradual displacement of bank notes by cheques. The net circulation in fact never appreciably exceeded £30,000,000. It remained practically constant for 70 years notwithstanding the immense industrial and commercial development and it may be that in the course of the years to come with an increased population and, as we hope, greater employment, greater earnings, greater expenditure and a higher standard of comfort of the people, the currency of the country will require a permanent expansion. The provision in the Bill for increasing the fiduciary issue is not intended therefore to be a mere legislative substitute for the crisis letter. On the contrary it is intended to be used not in a crisis but before it and to prevent undue stringency arising from any of the causes I have mentioned.

The Bill has this advantage. It allows a tentative change in the first instance before Parliament is called upon to legislate. A period of two years during which temporary changes can be tried and the results watched is allowed and if the reasons for the increase appear to be permanent Parliament can be so advised and by legislation the fiduciary limit of £260,000,000 can be extended. I ought also when I am dealing with elasticity to call attention to the power given under Clause 2 to reduce the maximum of £260,000,000 by the Treasury upon being requested by the Bank of England. Of course though it does not seem likely at the present moment it may be that too much gold may come to London. If at a time when credit conditions were easy there was a large influx of gold an unnecessary number of notes would be issued. In order to check the unnecessary creation of credit the Bank would have to sell securities to take the place of the notes, and it is obvious that the Bank cannot be expected to do this on a large scale or for a long time, and it is in order to relieve such a position that the Bank may apply and the Treasury may agree to a reduction of the fiduciary note issue. I do not want in a matter of this sort to dogmatise in the least but I do think that those who are afraid that this Bill is going to cause restriction on legitimate credit operations and so affect employment have a completely erroneous conception of Clause 8. Of course if the fear of the right hon. Gentleman that the fiduciary issue can only be increased by a gold backing is generally held then I can understand the opposition, but that is really not the case. Gold has not to be found for the increased fiduciary issue. There would be no object in increasing the fiduciary issue if that were the case and, as Clause 8 is sufficiently elastic to cover all the fears which have been expressed in this Debate I recommend therefore the House to re- ject the Amendment which has been put down and to give the Bill a Second Reading.


The speech of the right hon. Gentleman and the answer he has given to us on the Clause that has been so much discussed show at once the extraordinary difference that there is between the problem as he is looking at it and the problem as we have been facing and criticising it this afternoon. One of the things in his speech that amazed me was the fact that he justified the measures proposed by the Government for an appeal by the Governor to the Treasury for relief at a certain time by taking as an illustration the period in the history of the Bank of England when, in the old days, they went to the Government at a time of great crisis and asked for special help from the Government because there was a great panic in the country. He has compared the emergency that might arise when more notes were required, but he seems entitrely to have thought of it only in the terms of panic conditions. I would say to him at once that that is not the idea we have in our minds, and it was not in our minds that the fiduciary issue, if its enlargement was sanctioned by the Treasury, had to be covered in the form of notes but rather, as far as I am concerned, by securities of some kind.

The right hon. Gentleman assumes that there is going to be a panic whenever a fresh demand is made on the Treasury for permission to issue a larger number of notes. I should like the right hon. Gentleman to understand that what we have in mind is a gradual expansion of trade, a tide slowly advancing year by year which, with improved trade, will mean that a larger number of notes are required year by year, just as we have seen in the last few years a diminution in the circulation of currency notes. Consequently, one day we might come to a period when it would be obvious that enough currency notes had not been circulated for the purpose, and a request would be made to the Government for an increased issue simply to meet the necessities of trade. The right hon. Gentleman has not in any way dealt with that emergency, nor has he shown any appreciation of the position that we are taking up.

The right hon. Gentleman and hon. Members opposite have failed entirely to understand that the basis of our opposition to these changes is that we are frightened of further deflation. That is the outstanding cause of our opposition. It does not very much matter whether we are justified in this fear or not; the point is that the fear which we are voicing is a fear which is held by a far greater volume of opinion than may perhaps be represented on these Benches. It is mentioned in the memorandum which was recently circulated by what is known as the Mond-Turner group of negotiators. They, also, are frightened of deflation. We feel that we are voicing an opinion which is largely held in the country, in many quarters, that the recent policy of deflation carried out by the Bank of England and the Government, whether it was a wise policy or not, has gone hand in hand with an increase in unemployment. Therefore, when the Government have an opportunity, they ought to take steps to allay these fears, in the interests of the Government and also in the interests of the banking community.

I was disappointed with the speech of the Financial Secretary to the Treasury in introducing the Bill. It seemed to me that he was dwelling much more in the region of 1844 than the present time. Although the hon. Member has been looked upon as one who thinks in modern terms, he seems entirely to have been unaware of the great changes that have taken place in the world in connection with the whole principle of central banks. As I understand it, there are two great problems before us in connection with this Bill, and that is why we ask for an inquiry. Hon. Members opposite always turn down any suggestion of what is called political control over the Bank, and one might think from their observations that the general principle in connection with a State bank is to have no political control whatever. The Bank of England has been almost unique amongst the banks of the world in having no connection whatever, practically, with the Government of the country.

There have been two principles in connection with State banks, one has been the principle of the Bank of England and the other has been the principle connected with the United States system. As evidence of the connection between Governments and State banks, I would point out that the head committee of the Federal Reserve Board in the United States is entirely appointed by the Government. If we go to our own Dominions, we find that in New Zealand the majority of the directors of the Bank of New Zealand, although it is a private concern, are appointed by the Government. The Commonwealth bank directorate is appointed entirely by the Government, who have a State bank. We have many other instances. The Southern States of America have reorganised their banking system a good deal on the lines of the United States plan and in every case you find State connection with the banks by the appointments of directors, or otherwise. In connection with the Bank of Italy and the new banks which have been formed on the Continent, in almost every case we find that the Government of the country in question has some voice in regard to the management and control of the State banks.

The reason we consider this point so very important—apart from the question of nationalisation, which I have not time to go into to-night—is that those who sit on these Benches feel that when the Bank of England is considering monetary policy, the problem of unemployment is not sufficiently considered. Perhaps the House can recall the policy carried out by the French Government and the Italian Government in connection with their financial problems. At certain periods when they began to deflate, the Governments in each case came to the conclusion that the price they were paying in regard to unemployment and the handicap upon industry were too great and, therefore, they altered their policy. The point which we make is that, if you have a State bank absolutely and entirely divorced from Government connection, will it bear these factors in-mind? Theories that may have been excellent at other times may have to be altered to meet the circumstances of abnormal times, and that is where some representative of the State ought to have a voice in the management of the Bank when these very important questions have to be considered. At this time, when we are making this transfer of currency notes to the Bank of England and we are laying down broad lines upon which the policy of the Bank is to be conducted for many years, we have an opportunity of considering the problem which I have indicated.

The questions that come before us are, first, the problem of the Genoa Resolutions and, secondly, the elasticity of the note issue. The right hon. Gentleman said that the question of a meeting of the representatives of the nations as recommended at Genoa was left to the State banks. The Resolution refers not only to the co-operation of the central banks but to "an international Convention, to be adopted at a suitable time." Therefore, it seems to me that not only was the question of the gold supply of the world referred to the central banks, but that it was the intention that some sort of Convention would be called, the representatives to which, I imagine, would he appointed by the Governments of the States themselves.


I think I am right in my recollection that it was understood that the Bank of England would call a meeting of certain banks, and that the central banks themselves should enter into a convention for the purpose of economising loans.


The point that we are anxious about is, that when these powers are being conferred on the Bank of England, the question of the world's supply of gold ought to be very carefully considered, and that that is a point which the Government have now an opportunity of raising. The problem of the gold supply of the world is, that it is thought there will be a diminution in coming years, that there will not be sufficient to meet the needs of the world, and that unless we have some great authorities getting to work upon this problem and trying to think out what is going to happen to the gold supplies, we are in danger of finding that our level of prices will be altered as a result of the shortage of the gold supply of the world. That is the first point we make in our Amendment, and that is why we attach supreme importance to this question. We suggest that before this transfer of notes is made, this question ought to have been considered.

My further point deals with the question of the securities that are to be placed behind the currency notes. Nothing was said by the right hon. Gentleman as to the kind of securities that are to be used as cover for the note reserve, nor was anything said as to whether the system adopted by some other countries of using bills of exchange for cover, had been considered by the Government and the Bank of England. One fundamental difference between our system and the system in the United States of America is that practically the increased circulation of notes is met by the discounting of bills. I would have liked the Government to consider this point. Instead of fixing a definite limit of £260,000,000 and saying that immediately that limit has been reached the permission of the Government must be sought for any increase, is it not possible that an expansion could be automatically allowed to the Bank beyond the £260,000,000, providing the cover that was put in was not Government security but bills of exchange?


What class of bills?


Proved bills of exchange. If you have an expansion of trade, it usually goes hand in hand with an increase of the number of your bills of exchange. Therefore at the time when trade was expanding and you want an increased number of notes, you might have these hills of exchange as cover for your notes. There is an additional advantage in connection with this proposal that if you have bills of exchange limited to 90 days, it means that at the end of 90 days the Bank of England has to consider whether the Bill is to be renewed. If the Bills are not renewed the notes have to be withdrawn, but if the notes are still in circulation then the bills could serve as cover. Instead of looking upon the expansion of the fiduciary issue of notes as something that needs to be dealt with when you are face to face with a panic, or when you are in some other great difficulty, I suggest that by considering cover by bills, there might be a quite gradual expansion, say, for another £15,000,000, and if the Government were unwilling to make a larger extension, then the Treasury could be approached in the way indicated.

One of the things from which we are suffering in connection with the whole problem of the Bank of England is that the policy of the Bank of England is known to so few people. At the present time when the Bank of England has such tremendous directive effect in the money market of this country, it is remarkable that nobody really knows what their policy is. Unlike some of the other State Banks, they never issue a statement of policy, nor do the Government make a statement of policy. If we approach the Chancellor of the Exchequer and ask him certain questions on the subject, he says that it is the business of the Bank of England and, therefore, he cannot give us any information. I believe that a good deal of the misapprehension which has arisen in the City of London and other quarters is due to the fact that we know practically nothing of what the Bank of England is doing. There are other questions which I think the Government should consider—

It being Half-past Seven of the Clock and there being Private Business set down by the direction of the CHAIRMAN OF WAYS AND MEANS under Standing Order No. 8, further Proceeding was postponed without Question put.