HL Deb 26 November 1919 vol 37 cc409-34

LORD D'ABERNON rose to call attention to the influence of currency on the present high prices. The noble Lord said: My Lords, some of your Lordships may perhaps remember that about six months ago I put forward the view that currency disturbance was the main cause of many of the troubles from which the world is now suffering, and more particularly of high prices and of industrial unrest. I do not know whether I was fortunate enough on that occasion to convince any of your Lordships, but in my judgment everything which has since occurred has gone to confirm the general justice of the views I then submitted to the House. Various expedients on lines other than those I suggested have been tried, both in this and other countries, but they have failed signally to bring about either industrial peace or any sense of financial security for the future. They have, above all, failed to produce the fall in prices which was confidently predicted at that time.

I venture, therefore, to return to the subject. In doing so I shall endeavour to throw some light on the problem of the high cost of living, which is, by general admission, the most grievous of the present causes of discontent and one of the causes, I think, of disquietude with regard to the future. It is not only that the cost of living is so high, but that the public does not understand why it is so high. No valid and lucid reason has been put forward, and the public is alarmed not only at the present level but also at the fear that things may yet get worse, notably in the matter of exchange, which at New York is lower than it has ever been. Every day sees a further rise in the price of silver measured in currency, which is equivalent to a fall of currency as measured in silver.

Two main reasons have been assigned in the past for this rise in the cost of living. In the first place, the deficiency of production—in other words, to scarcity; and, secondly, profiteering. I propose to test the first of these views by means of the figures which have just been published by His Majesty's Government and which throw a very interesting light upon the problem. Table II shows that we have to explain the rise of wholesale prices between 1913 and 1919 which amounts to 100 per cent. in the United States, to 150 per cent. in the United Kingdom, and to 230 per cent. in France and Italy. In the case of other countries—namely, Germany, Russia, and Austria—the rise has gone much further. It has attained in Germany something like 600 per cent. and in Russia something like 1,000 per cent. But I will deal particularly with those countries for which accurate figures are obtainable and are contained in the Paper laid on the Table.

I submit that if reduced production was the real cause of this unprecedented dislocation of prices, we should expect to find a very large reduction in the available amount of the larger articles of consumption. This reduction might be anticipated a priori, since a vast number of men have been engaged up to a few months ago on military service, and a further large draft of available labour has been absorbed in the manufacture of munitions.

But instead of the enormous decrease which might have been expected, Table I shows that, in those countries of the world from which particulars are available, the wheat production of 1919 was 99 per cent. of the pre-war average; barley was 104 per cent.; oats, 97 per cent.; maize, 104 per cent.; linseed, 53 per cent.; tobacco, 128 per cent.; cotton, 73 per cent.; sugar, 96 per cent. Roughly speaking, in those countries for which returns are available production is equal to pre-war production.


In 1918.


I quite admit that this Return does not include the whole world. It includes, in different cases, one-half the world, one-third, two-thirds, and three-quarters; but, even allowing for the fact that in those countries for which returns are not included in this Paper the proportion might be slightly reduced, and allowing also for the fact that a given shortage might produce a higher percentage of rise, it seems to me difficult to attribute to scarcity any large portion of the rise which has occurred.

Prices have increased to the extent of 100 per cent. or more in one case, 230 per cent. in another, and 1,000 per cent. in another, and in no case has production decreased to an extent corresponding to such a rise, while, in the case of half the staple articles, production has actually increased. Take coal. The monthly average production of coal in the United Kingdom, the United States, Belgium, the Netherlands, and Germany in 1918 was 99.6 per cent. of the production in 1913. That is practically equal to the pre-war production. Take pig iron. The output of the United Kingdom, the United States, and Germany was 106 per cent. in 1918 as against 100 per cent. in 1913. Steel has increased in a similar proportion. It is true that the output both of coal and pig iron has fallen off during the present year, but this diminution has occurred after the rise in prices to near the present level, and cannot therefore have been the cause of the rise which was antecedent to the diminution. I will deal with the special war demand side of the subject later. The world's production of wool in 1919 is estimated at 91.8 per cent. of the 1913 production.

I will not weary the House with further statements of comparative production. Your Lordships will agree with me that when large staple commodities have been produced as abundantly as is shown by the Tables, we have to look elsewhere for the main cause of the great rise in prices which has taken place. There are two grave defects in the scarcity theory—first, that scarcity does not exist to the required extent to explain the phenomena; and, second, that if it did exist it would not have produced the particular phenomena which we find. It would produce a high price level, but not the widely differing scales of high price which now obtain in different countries.

There are two subsidiary methods of forming an opinion as to the influence that the short supply of commodities has had on prices. Take the prices of articles such as old books, pictures by old masters, jewels, old furniture—that is to say, articles where the question of new production does not come in, or comes in to a very minor extent. You will find that they have gone up practically in the same proportion as articles of annual production such as wheat, meat, sugar, coal. How can this be explained on the diminished production theory? There has been no diminished production. The quantity available for the market has been practically constant throughout the whole period. Take, again, articles of annual production and immediate consumption. Divide them into two classes: articles where short-fall has occurred, and articles where it has not. You will find a comparatively small difference between the rise in one class and the rise in the other—less than the arithmetical proportion of the deficiency to the total. A similar reply may be made to those who allege the special war demand for certain articles, such as iron and steel. The relative rise in these articles compared with others not specially affected by war, though considerable, has been smaller than the enormous special demand would have led one to expect.

Is any explanation of these paradoxical facts possible other than that the action and effect of short supply and of abnormal demand has been snowed under and largely obliterated by the action and effect of a more powerful cause—namely, the depreciation of money which has affected similarly both the plentiful and the deficient, both the articles in exceptional war demand and the rest. I shall deal in a few moments with what I believe to be the true explanation of this phenomena. I will ask the Government to prepare tables of comparative prices to illustrate and test these lines of argument; they will elucidate and illustrate the whole question.

The second popular theory regarding high prices is that they are caused by profiteering. I believe the recent experience of Profiteering Tribunals has convinced all classes that profiteering has existed to a much smaller extent than was supposed. With a steadily rising market like that which has existed for the last five years, and with prices fixed to keep small firms alive, abnormal profits in certain articles are inevitable, but the view of the Supreme Economic Council appears to be that the rise in retail prices since the outbreak of war has been somewhat less than the rise of wholesale prices, and that the rise of wholesale prices has been less than the rise in the price paid to the producer. That is to the credit of Food Control. I note that the Food Controller recently said— If it were possible to abolish profiteering altogether, you would not materially affect the present level of high prices. I have now discussed briefly the two popular explanations of high prices, and have given some reason to think that these explanations are erroneous, or, to put it in the mildest form, quite inadequate to explain the prices that prevail. There is a third theory regarding high prices which is not so widely held, but which has gained credence in very important quarters—namely, that the high prices of commodities are due to the heavy indebtedness of the countries in which these prices prevail. There is even less substance in this theory than in the first two. If those who hold this theory will step across the way to Moscow or Petrograd they would find that the effective abolition of all public debt in Russia is consistent with prices of commodities about ten times as high as they are in this country. In Egypt, in the time of Ismail Pasha, the existence of a gigantic debt, both permanent and floating, was quite consistent with extremely low prices for all the necessaries of life. The theory has only to be examined in the light of history and in the light of well-known facts in other countries to be completely discounted. In addition to the arguments which I have stated, the data given in Table IV completely disprove any connection of cause and effect between increase of indebtedness and increase of retail prices. There is no sort of parallelism between the two columns of figures.

I come now to what is, in my judgment, the main and preponderant cause of the high cost of living—namely, the vast increase which has taken place in currency and paper money. Whether the rise was originally caused by excessive currency issues, or whether these currency issues have merely served to maintain the rise produced by other war causes, is immaterial to the argument. Currency appears unquestionably to be the main cause of high prices to-day. While we have found that the production of commodities in 1918 had not fallen far below the production of 1913, the world amount being probably over 90 per cent. of the pre-war production, we shall find that in the matter of currency in the principal countries of the world the amount now in circulation is about five times as great as that in circulation in 1913. Whereas in 1913 the total amount of paper money in the principal countries of the world was approximately £1,250,000,000, the amount in December, 1918, was £6,000,000,000. This total excludes Russia Austria, and Turkey, who are arch-inflators. It is consequently an under-statement.

Does it not seem probable, therefore, that the real cause of the high prices which now prevail is not deficiency of production—for we have seen that production has been maintained within 10 per cent. of the previous level—but inflation proceeding from the huge currency issues throughout the world which have increased the aggregate amount of paper money in circulation by about 400 per cent. The Tables presented by the Government are strongly confirmatory of this view, for they show that prices in each country have risen very closely in accordance with the excessive issues of paper currency which have been made. If your Lordships will refer to Table II, you will see that where the amount of currency in circulation is highest as in France and Italy, where you have a currency of 365 as compared with 100 in 1913—there prices have risen the most; whereas in the United States, where currency has increased by only 73 per cent. compared with 1913, the rise both in wholesale and retail prices has been considerably less than in other belligerent countries. The progression and parallelism are strangely uniform, allowance being made for the influence of world prices and world currency conditions on local prices in each country. If Table II included the figures for Germany, Russia, and Austria the parallelism would be still more striking. for it would be seen that an expansion of currency—far greater than that in any of the countries contained in the Table—has led in each case to prices infinitely higher than anything we know. I hope that further figures regarding these countries will be obtained by His Majesty's Government. Mr. O'Grady might, perhaps, take advantage of his propinquity to take observations.

In studying Table II it must be borne in mind that world conditions moderate local currency prices, particularly where there is wide divergence between world conditions and local conditions.

This is evident in the case of America at one end of the scale and of Italy at the other end—prices in each case being nearer the average than local conditions alone would have made them.

I turn now to the question of exchange, and would refer your Lordships to Table III, where you will find that precisely the same phenomenon has occurred—namely, that with trifling and unimportant exceptions the order in which countries have expanded their currency is the order in which their rates of exchange on London have fallen. It is impossible not to be impressed by the concurrence between these two facts, and I venture to think that quite insufficient attention has been devoted to the influence of currency upon exchange, while an excessive amount of attention has been devoted to balance of trade and the relation of exports to imports—efforts made to reduce imports and encourage exports—all sorts of steps which in my judgment do not go at all to the root of the matter.

The rate of exchange between two countries is admittedly the expression of the value of the unit of currency of one country in terms of the unit of currency of the other. The usual theory of Foreign Exchanges is that fluctuations of exchange are generally due to a greater or less demand for remittances and payments from one country to the other, due either to fluctuation in the balance of trade, to borrowing, or to some similar cause. But apart from such fluctuations—on which alone attention is generally fixed—it is clear that another cause of fluctuation of prices may arise if anything occurs to alter the value of the currency unit of one or other of the countries in question. This will be made clear if we suppose that between two countries on a metallic basis the coin of one is clipped so as to represent half its original value. No one would expect exchange to remain steady under such conditions.

But between the two countries on a paper issue basis approximately the same result occurs if one of them doubles its paper currency, the other country preserving its currency unchanged. No one would anticipate a steady or normal exchange under such circumstances; the fluctuations caused would be expected to far exceed the usual movements caused by temporary excess demands for remittance proceeding from balance of trade causes. And this is exactly what has occurred in the countries of which I have been speaking. Units of currency in certain countries have declined in value far more than if the original coin had been clipped to half its original size. In Russia, Germany, and Austria the unit of currency has diminished in value through excessive issues to between one-eighth and one-twentieth its original value; in France to one-third or one-fourth; in England to one-half or one-third. In America, and in some neutral countries, the paper issues have been less excessive. There you have the main, though not of course the only, cause of the enormous currency fluctuations which have taken place—a cause so incomparably more powerful than the rise and fall of the balance of trade that to talk of correcting exchange by increasing exports or diminishing imports is as effective and useful as endeavouring to stem a surging tide by creating a contrary wave action through some slight artificial breeze upon the surface of the waters. You are dealing with the superficial and minor cause and leaving the essential cause untouched.

The value of a paper currency is governed by its volume in relation to the requirements for it, and exchange cannot by any trick or device or artificial modification of trade balance escape fluctuating in obedience to the fluctuations in the value of the two units of currency whose relative value at the moment it expresses. During the last century this country has been spoilt by having no currency problems and no large fluctuations in exchange. The result is that even our greatest authorities find themselves in quite novel conditions. The most capable captain accustomed to the tranquil navigation of inland waters may well be perplexed and troubled in a tide-race with a gale blowing. That gives you a true picture of currency conditions in the world as left at the end of the war. There have been currency fluctuations unparallelled in the world's history.

My Lords, the publication of the Tables now before us is an economic event of the highest importance, and I venture to think that the Government deserve the greatest credit for their courage and wisdom in issuing them. The publication of these Tables, which will be improved as further information becomes available, is an event which will exercise very considerable influence upon policy, both here and abroad. The new knowledge in our possession will enable us to get away from the erroneous diagnosis hitherto accepted—a diagnosis so false that it could not by any possibility lead to right action. If you ask what immediate measures should be taken, I reply: In the present condition of public opinion it is too soon to talk of specific measures of reform. We have only just obtained the data. The only practical course is by a full public inquiry and full public discussion to get a truer appreciation of the facts and causes into the minds of the public. Once this is done, the particular measures of reform which should be adopted, the particular remedies which should be applied, will be fairly obvious and will, I believe, be adopted with general consent. I repeat that fuller knowledge must precede specific action, and it is no good wrangling about action until we have come to fuller agreement about causes.

My proposal is first that a new Committee or a Royal Commission be appointed to report on the cause of high prices and the influence of currency policy on them in the light of the new information now available. Secondly, that steps should be taken by the Government to call an International Conference on Currency and Prices. The Tables now published, incomplete as they may be but useful and informing as they unquestionably are, utterly shatter the theory on which most Governments of the world have been acting. It is therefore imperative to discover a new basis on which to work. At first sight it might be replied that the national enquiry I ask for is being carried out by the Cunliffe Committee. But the reference to that Committee was much too narrow, and noticeably did not include the effect of currency issues on prices. Moreover, without impugning the authority of the existing Committee or diminishing the value and the great importance of their findings—with many of which I find myself in agreement—I venture to think that the composition of this Commission is too sectional to command general assent.

If the question is asked, What results may be expected from suitable treatment of the currency problem? I am inclined to answer that six months of appropriate effective currency policy throughout the world would produce a far greater reduction in the cost of living than has been produced during the last three years by the whole of the operations of the Food Control, of the Profiteering Tribunals, and of all the exhortations to greater production and smaller expenditure which have been lavished on the producing and spending classes. Let there be adequate control of currency and you can abolish all the harassing restrictions on the import of goods, all the vexatious prohibitions on the export of money. It is the fashion to talk of high prices as if they were the act of God, and as if human agency was quite powerless to prevent or control them. Nothing could be more false. High prices have been made by definite acts of policy and administration throughout the world—acts which may be defended on the ground that they were commanded by a dire emergency and under pressure of enormous difficulty and were possibly justified by the circumstances, but acts nevertheless of definite volition which, whether they were necessary or not at the time, are clearly reversible and remediable to-day.

My Lords, I beg of you not to turn from this problem on the ground that it is so complicated and technical that only experts can discuss it, or on the other ground that it is so theoretical that it has no practical importance. The main lines of argument on both sides are quite straightforward and well within the understanding of any ordinary man of affairs who will devote a few hours to their study. As to its practical importance, I hold that it is more vital and more urgent than any question now before the country. It transcends and pervades all other problems. Unless right views are attained on this, all efforts towards reform in other directions will be overborne and submerged. The housing reforms and health reforms, all the apparatus for avoiding or composing industrial strife, all the ingenious efforts to restrain prices and to curb profiteering, will be of no lasting benefit if the whole economic fabric is not based upon a sound and steady standard of value.

Most of the great social upheavals in the world's history have been preceded by, or accompanied by, a crisis of prices and a debasement of currency. There is no cause so powerful as this in setting class against class and in sowing suspicion and animosity between those who employ and those who are employed. And in the nature of things it can hardly be otherwise. The French have a saying, "The guillotine follows the paper money press—the two machines are complementary one to the other." The truth of this saying has never been more terribly exemplified than during the last few years in Russia. The revolution was nurtured in currency debasement. What Russia has experienced may well be in store for other countries who are not warned by her example. Take the case of Egypt. If the figures which have been produced lately are correct it would appear undoubted that political unrest has been fomented if not caused by economic causes and by incredible inflation.

My Lords, with many of the causes of social unrest and economic disturbance which darken the future we may be unable to deal quickly and effectively. But in the case of currency, which is not the least powerful or the least menacing of such causes, there is a clear path to follow. I trust, therefore, that your Lordships will demand impartial and immediate inquiry—with full publicity—into the whole problem of high prices, in the light of the data now for the first time brought to the knowledge of the public. I also trust that His Majesty's Government will take international action without undue delay.


My Lords, I feel sure that your Lordships will agree that no more important subject could have been brought before this House for consideration than this matter of high prices. You will also agree as to the necessity of diagnosing the precise causes of those high prices, which are worthy of long and careful study. We are most grateful to the noble Lord for having brought this complicated subject before us in so luminous, so dramatic, and occasionally so poetical a manner. My noble friend has thanked the Government for having issued these documents. Those thanks come rather gratefully, anyhow to the Government Departments concerned, because they received this morning a very severe chastisement, in one organ especially. Therefore I am gratified and the Department will be pleased to know that the figures in this Paper are considered to be of such great value by one so experienced in these matters as my noble friend. As to the suggestion of my noble friend that there should be a further Royal Commission instituted to inquire into the relation of prices and the currency, and his further suggestion of an International Committee to deal with the general world causes, I think he will appreciate the fact that I can promise no more at the present moment than that I will bring the suggestions to the attention of the Chancellor of the Exchequer.

My noble friend has also called attention to the question of production, and, as he says, it is really most remarkable, looking at these figures, to see how up to the end of 1918 there was in these great leading industries practically no diminution. In some industries there was actually an increase, and only in the least important ones a diminution. It is worth observing that in the year 1919—of course, we have not yet come to an end of it—there is a percentage diminution in the United Kingdom, the United States, France, Belgium, the Netherlands, and Germany, both in the output of coal and pig iron and also in the output and in the world's production of steel.

The Notice on the Paper in the name of my noble friend is to call attention to the influence of currency on the present high prices, and the Return he has asked for shows, and is designed to show, that the rise in prices in any country is approximately in proportion to the increase in the quantity of currency in circulation, and that depreciation in the foreign exchanges follows the same law. The Government are ready to admit at once that those relations, which are not unknown, do follow agreeably to those figures. Of course, no one would expect exact proportion, but the general tendency is very clearly brought out. If you put the matter in a crude form you might state it thus, that when currency becomes cheap in terms of commodities and in terms of foreign currencies commodities become dearer, and foreign currencies, as quoted in the foreign exchange market, command a premium. My noble friend has alluded to the fact that there is in ordinary times a certain ebb and flow in the relative value of different currencies, dependent on the balance of trade, but no doubt, as he has said, the tremendous increases and relative depreciations that have taken place in the different currencies of the world really entirely absorb and sweep over this comparatively small cause.

I should like for a moment to point to one or two cases which I think are of some interest. They are to be found in the White Paper. It is rather difficult in speaking of these wide subjects which present so many points of variation to make statements which are absolutely accurate in every respect when you are necessarily speaking with some brevity. But take for a moment the position of currency and prices in the United Kingdom. If you take the United Kingdom currency on the whole—I am taking the figures mentioned in the speech of the Chancellor of the Exchequer on April 30, 1919—the circulation before the war was £214,000,000 and on the latest date then available £540,000,000. Taking the index figure of 1913 as 100, the currency available in August, 1919, was 244; while wholesale prices were 257.2 and retail prices of food 217, (wholesale prices for 1913 and retail prices for 1914 being taken as 100). Therefore it is clear from that that there is apparently a very close proportion between the different amounts of the currency at the different times and of those food prices.

But I think it goes further than that. If you take the 20 leading English banks which had £751,000,000 on deposit on June 30, 1914. (including undivided profits) the same banks, which were reduced, as your Lordships know, by amalgamation to 13, had £1,761,900,000 on deposit on June 30, 1919. Taking 1914 as being 100, that represents 234.6, while on the same comparative basis wholesale prices were 236.8 and retail prices of food were 204 (taking July, 1914, as 100). Therefore you reach the same view if you take two tests—first the test of the actual amount of currency, comparing the two periods, and also the test of deposits in the banks corresponding to the fresh creations of credit during those periods.

Now take for a moment the position in the United States, There the connection between currency and prices is not quite so close or so obvious as it is in the case of the United Kingdom, because the proportional rise in prices is greater than the proportional rise in currency. Of course one might institute a very interesting investigation into every one of these cases; I am only taking one or two to illustrate one or two points. This may be accounted for in part by the increased velocity of circulation and speculation, but the main cause is that the United States and the United Kingdom are connected in the world's market. The prices of goods produced in the United States and partly consumed there and partly exported to the United Kingdom cannot rise in England without causing a corresponding rise in the United States, otherwise export would be stimulated at the cost of domestic consumption. That illustrates the fact that prices in other countries, though they are apparently not so closely connected with the rise of currency in those countries, nevertheless rise in sympathy with the general governing prices in the market, which are themselves controlled by the increase of currency in some of the larger countries. The same cause produces the rise in prices in neutral countries which had very little war expenditure, but in their case the increase of currency is a consequence of high prices and its expansion was necessary for the financing of business. But there again those are due to the same general causes which my noble friend has been discussing.

All this points, therefore, to the conclusion that a high world level of prices is in the main due to the creation of credit by the belligerent Governments for war purposes. That credit takes the form of larger currency and larger borrowing. The goods bought by Government credits were immediately destroyed without producing new goods, and therefore fresh credits had accordingly to be created for the acquisition of additional war supplies, while at each stage the previously created credits remained in existence.

There is one point to notice here which is interesting, and that is the effect of control over prices. In 1917 and 1918 the existence of Government control over prices of many commodities counteracted currency influences, especially by keeping the exchanges steady, but in 1919 the results of comparative freedom are manifest. I notice that my noble friend expressed himself to some extent indifferent as to the precise cause of this very great increase of currency, that is to say, he did not draw a very wide distinction between countries which created currency and paid their debts directly to contractors out of currency, and those countries, like our own, which created credit and the currency was only created by the necessities of the banks, who had to meet larger credits that were established at the banks as the result of this largely inflated credit. My noble friend brushed aside the distinction between the course of policy followed in such countries as Russia and in more prudently conducted places.

May I say one word now as to other causes besides the currency and the inflation of credit causes? As to production and shortage of supply, while credit inflation was the main determinant of the general rise in world prices production factors decided the distribution of the rise among the various groups of commodities. In some cases intensity of demand, in others shortage of supply through lack of labour or shipping caused very sharp rises—for even a small discrepancy between supply and demand has a very great influence on prices, especially when the demand is very urgent. Then, of course, in certain cases Government control, as I have said, did have some effect and placed limits on the increase of cost.

I do not think I need say very much about the increase of debt because I think my noble friend has shown conclusively by the figures that the actual increase of debt in itself, apart from the way that debt is raised and apart from the effect it may have on credit, does not really affect prices very much; and in some cases where there has been no increase of credit there was a very large increase in prices, though I think that was due to the growth of world prices which affected that particular market as it did other markets. No doubt the question of debt does make a great difference when we consider where it is raised—whether it is raised by interest on savings or by the creation of fresh credits. There you get more inflation, more spending power, and more currency and more purchasing power on the part of a large number of persons in the country. The noble Lord also alluded to profiteering causes. I suppose it is pretty clear that profiteering causes are rather more local in their effect on prices and do not have effect on world prices; but the other causes are so more general that large profits being taken by particular individuals in particular cases where there are special shortages cannot affect the wider question of the general balance of prices.

To go for a moment to the question of inflation and of the policy that this country has followed with regard to the creation of credit, and the financing of its large expenditure during the war. The inflation of the currency in war time is a sign of financial strain. The amount of money that can be raised at any time by legitimate methods—that is to say, by taxation and by leans subscribed out of bona fide savings —is limited. If it is not enough to meet the presing needs of war it must be supplemented by artificially created means of payment put into circulation for that purpose. All the European belligerents have suffered in this manner from financial strain. The extent of the strain might be supposed to be proportionately to the increase of debt per head. By this test fir the greatest strain has fallen on this country; but even this test does not do justice to the full effort made by this country. France and Italy include in their debt figures sums which we have lent them, and the strain of raising which has therefore fallen on us. We on the other hand have lent to our Allies more than twice as much as the United States Government have lent to us. We have also raised more money by taxation than any of the Allies. It is a great tribute to our financial strength that we have experienced a smaller rise of prices and a smaller depreciation of the exchanges—great as these have been—than any of our European Allies and even some of the neutrals.

We have had two great advantages in our financial methods. We have raised large sums by taxation, and we have never financed ourselves by printing notes; we have always first drawn on the credit facilities of the City and issued so much paper money as went naturally into circulation as credit extended. The great Continental banks of issue have been used practically as the agents of their Governments for issuing paper money as the direct means of defraying Government expenditure. By issuing interest-bearing securities in whatever form seemed most. likely to attract money, we have endeavoured to ensure that the available financial resources should be drawn upon as far as possible, and that only the residue should be provided by the creation of credit. Unfortunately, as my noble friend knows, that residue has been very large. As compared with the United States we have experienced a large degree of currency inflation, a larger rise of prices, and a larger depreciation of the exchanges. In fact, the American dollar is not technically depreciated at all but is circulating at par with gold. Here, again, the debt figures may be used to measure the financial strain. Even after abating from the total the sums we have borrowed from abroad—chiefly from the United States—our debt works out at £130 per head, or nearly two and a-half times that of America. The Americans have had very severe taxation, but taxation not so severe as ours. When they entered the war they took some of the financial burden off our shoulders, but not all, since it was their policy to limit their advances to Allies to sums required for expenditure in the United States.

Above all, America's entry into the war was preceded by a period of more than two and a-half years of exceedingly prosperous neutrality. No less than £300,000,000 worth of gold was imported into America in part payment of the goods supplied by her to the belligerents, and she was thus placed in a position of unprecedented financial strength. The statistics of prices show that while wholesale prices have risen by no less than 157 per cent. here, they have risen by 106 per cent. in America and 114 per cent. in Japan, both of which countries are enjoying an effective gold standard. This shows that the greater part of the rise in prices is due not to the depreciation of paper money in comparison with gold but to the depreciation of gold itself in comparison with commodities. The problem of deflation is not, of course, that of returning to pre-war prices, but may be said to be limited to such an attraction of credit as will restore our currency to a gold standard. To effect this a mere restriction upon the issue of currency notes would not be enough; the attempt would, indeed, be doomed to failure.

Your Lordships may have read some interesting letters which have appeared in the last few months from the Chairman of Barclay's Bank, Mr. Goodenough, in which he makes some suggestions as to the restriction of currency notes. He fully realises, of course, that they are the result of the inflated credit, but he takes the view that you can operate (as it were) on credit at the other end; that by checking the issue of currency you can gradually check credit, and that by placing a certain proportion of Bank of England notes as cover behind these Treasury Notes then these Treasury Notes would be gradually connected with the reserve at the Bank of England; that the ordinary operations will then affect the supply of Treasury Notes and in that way there may slowly and gradually be the beginning of some deflation of credit. The governing factor in the creation of credit is, of course, credit; and once the credit is there it can be turned into legal tender on demand, and the Banks must be supplied with the money they want. If their requirements are to be reduced the very delicate operation of a contraction of credit must be entered upon. To effect this too suddenly might be disastrous. A collapse of values, bringing widespread bankruptcy and extensive unemployment, would be a very heavy price to pay; but it need not be doubted that with caution we can restore the gold standard in the course of time without bringing about any such catastrophe.

There is only one more point to which I should like to allude—namely, the statement of my noble friend about production. He passed, I think, rather lightly over that aspect of the question, perhaps naturally as he was dealing mainly with the question of currency. But the level of prices is a function not only of the quantity of money but also of several other factors, one of which is the quantity of business to be financed. Therefore I think it is always necessary in these financial discussions to lay very great stress on the question of production; because if every one in the country were to do 10 per cent. or 15 per cent. more work during the year, it is quite clear that more goods would be produced and there would be a fall in price, because the currency would have more to do. No doubt that addition to the work of the country from 10 per cent. to 15 per cent. would have a far greater effect on prices than the mere addition of 10 per cent. or 15 per cent. to production.

I should like to give one instance of how currency may, so to speak, be absorbed, and prices consequently made to fall. After the Civil War the United States ceased to contract the note issue in 1868, and in the succeeding ten years, though there were fluctuations, increased production was the main cause of the "greenback" gradually rising from a discount of 30 per cent. to par. So I should not like, in the consideration of this question, that the subject of production should be put out of mind for a moment, or that the whole matter should be considered to be merely a question of dealing with the currency either by a National Committee or by some International Commission. I think I made it clear, speaking of the general causes, that there is no question that there is a very intimate connection, and a proportionate connection, between high prices and the increase in currency, although, at the same time, it may have been absolutely necessary, for the purpose of financing the war, to have this very large increase of currency. That makes it all the more desirable at the present time to deal with the matter of the inflated and increased currency.


My Lords, my noble friend (Lord D'Abernon) made a very luminous speech. I am quite certain he has given to the Paper which was laid before us so short a time ago a study which most of your Lordships have not been able to give. But I deprecate a little one or two of the observations made by the noble Viscount who has just sat down, because I think he treated this question rather as if it would have to settle itself, as if the Government cannot themselves, to a large extent, control the issue. I have some doubt whether my noble friend's plan of having a Royal Commission is likely to help us very much in this matter, because I have before me the recommendations of a very important city Committee, with the Governor of the Bank of England as Chairman, which sat up to, I think, a year ago. That Committee made very definite recommendations on this question, and so far the Government have not seen fit to take advantage of them.

Take one recommendation which they made. They recommended that there should be a decrease in the currency as soon as possible after the war. The noble Viscount is a master of the art of mashing up together a number of different questions as if they were all equally the result of the war and of what has followed, and as if the Government can have no control over them. Let me take one illustration. The noble Viscount said that the amount raised legitimately by taxation to meet the large charges in past years and in the present year was not sufficient. It was when the Government had to draw on other sources that the difficulty began. Yes; but they have taken the very course which the Committee of experts advised them not to take, in having based the greater part of their increased expenses this year on the very services which involved a great inflation of the currency.

Suppose, for example, they had made a large purchase of wheat in Argentina. That, I apprehend, would not have increased the currency. But in the present year it was quite obvious, with the discharge of five or six millions of persons, all of whom had served the Government and were entitled to considerable sums on retirement from Government service, that already it would be necessary, so to speak, to pay across the counter something like £500,000.000 or £600,000,000—I cannot give the exact amount. I think it would facilitate the comprehension of this Paper if the noble Viscount would consider whether the Government could not add to it a statement of the actual sums paid in what I call donatives, quite legitimately—I am not suggesting that they ought to have been avoided—but still they are nonrecurring payments to those who have served the Government on the one hand and donations in connection with unemployment on the other hand. The latter make comparatively a small amount compared with the first, but it is that amount which the Government have week by week been drawing—I believe to the extent of something like £10,000,000 a week—which accounts for the fact, which otherwise ought not to have been, that there was a greater circulation in the middle of this year than there was even when the war was actually going on.

I want the country to realise the effect if you give a fresh donative. If to-morrow, for some reason, the Government were to say, "Such and such persons have lost heavily by the war; we will begin afresh; there are one million of them and we will give them £20 each, making £20,000,000 in all and go at once to the printing press"—at once they take the step which prevents the Bank of England or the Treasury cancelling more notes. That is really at the bottom of the difficulty—that the Government have continuously throughout this year, until the last few weeks when the House of Commons finally asserted itself, given fresh donatives, having regard solely to what they thought was advisable and leaving the question of currency altogether in the background. That is the first point. The second point I wish to make—I am most anxious to have the noble Viscount's attention—


I am listening.


My second point is this. The noble Viscount says that the one thing which can help us is the increase of output. I agree.


I did not say it was the one thing. I said it ought not to be forgotten.


I agree. On every occasion when the Government have interfered this year, when there has been an increase of output, they have immediately admitted that those who have increased the output have a right to an increased amount of pay, irrespective of whether or not the pay given was commensurate with their services, based on prices now as compared with prices before the war. What is the result of that? We have had, let us say for the sake of argument, one million tons more coal and that product has been gained in seven or eight hours, instead of as before. Immediately there is a demand that all prices should rise in comparison with the extra production. I really think that if the noble Viscount will look back he will see that in the conduct of the Government throughout this year there has been, perforce in some cases but not quite so much perforce in others, a policy which has directly led to the state of panic so well portrayed by Lord D'Abernon a few moments ago.

I wish to make only one more point. If you are going to deal with this question you must lay down as adamant that there is going to be a reduction of the currency, and that people must do with less from this time forth. I would impress on the Government that they should take the Report of the expert Committee, and that they should not hoard their stocks. This is not the occasion to trouble your Lordships, but I could give you facts of what is going on now in France where the Government have men guarding these stocks, lorries running with provisions to the men who are guarding them, and medical officers keeping hospitals for these men. It is a legitimate desire of the Government to save as much for the country in their sales as possible, but this thing is going on in any number of camps in France which the military authorities would gladly disperse but which the Dispersal Board hold up in the hope of better prices. It would be far better to count in all these things together and take the lesser price. These stores will not gain by keeping them during the next winter, and nothing will tend to bring down prices in this country more than the fact that the stocks which the Government can disperse, and all imports which can be brought in without ruining British trade, should be sold at reasonable prices and so restrict the currency.

I do not want to sound a pessimistic note, but if you will look back one hundred years you will find that exactly the same difficulties which beset us now beset our forefathers in those days. They had the same inflation of currency, the same unrest, and the same great increase of prices. They found it difficult to see their way through, but they did so, mainly because they allowed prices to fall to their own level and because they allowed men who were willing to use their industry and intelligence to profit by it. We must be a little hard-hearted in this matter and allow prices to find their proper level. If the Government themselves would only set an example of limiting the occasions of an inflation of the currency they would take a long step towards relieving us from the very difficult position which confronts us.


My Lords, at this hour of the evening I have no wish to trespass long on your patience, but as one of those plain-minded people to whom the noble Lord referred in introducing this matter I have done my best to examine the figures and circumstances affecting our present financial position, and I am anxious to lay before the Government two further considerations which I do not think have been sufficiently dealt with.

The first is this. The noble Viscount who answered for the Government did not, I think, give sufficient effect to the position of our National Debt in connection with this question. It may well be, and I think it is, that the mere existence of the National Debt is not in itself a reason why prices should rise. It depends far more upon the way in which that debt has been incurred than in its existence; and this view finds notable confirmation in the figures which are before us in this valuable White Paper. But when the noble Viscount took some credit to this country for not having resorted to the unwise and unsafe methods of increasing the National Debt which have been adopted by other countries, I do not think he did full justice to the position, because, unless I misunderstood it, this is what occurs.

The Government at the present moment, and I trust only for the present moment, has very largely drawn upon the public credit, and it finds that it is no longer easy to raise money by way of public loan at existing rates of interest. I do not want to put the case more strongly than that, but I think noble Lords will agree that that is true. What are the other methods to which they were bound to have recourse? There is the one of raising money by means of Treasury Bills, which are discounted through the banks and passed into circulation in the ordinary way. But there is another way, which appears to me as the one they most frequently adopt. It is this. They go to the Bank of England and get further credit, against which they draw, and to secure that credit they issue to the Bank of England Treasury Bills which are not necessarily put into circulation but held in reserve as security against overdraft. That, to my mind, speaking again as one of those plain-minded people, is nothing but the ordinary overdraft of a private individual on his bank. You have by that means taken the first step towards the necessary inflation of currency which follows, because that overdraft is always succeeded by an issue of the necessary media of demand, which are represented to-day by our £ and 10s. notes. It is a means of borrowing which is the easiest and, which every one will agree, is by far the worst, and it has no doubt been very considerably resorted to in the last year or two.

There is another way in which the National Debt is associated with our inflated currency—and it is this. It was pointed out by the noble Lord, Viscount Milner, the other day—and every one who heard him must have been struck at once with the truth of what he said—that as the National Debt had been built up upon an inflated currency, and as the rates of interest were all paid in inflated currency, if you proceeded to stabilise and reduce your currency to its normal level you necessarily increase the amount you are paying by way of interest on your National Debt. You do not increase it in figures, but you increase it in the purchasing power of the money you pay. That is a very grave thing indeed, because—of course the noble Viscount himself would have realised what the logical consequence of his argument would be—the more you inflate your currency the less you pay in interest on your debt, and the easiest way to make the country bear the burden of the debt would be to inflate the currency to the highest possible degree. That would be the obvious thing to do; but it is equally obvious that it would have other grave effects. Every one who has given attention to this matter will feel that the currency has sooner or later to be reduced, and we must face this position, that when your currency is reduced you will be paying more than you are to-day for your interest upon the National Debt. Therefore, unless at the same time that you reduce your currency you reduce the interest you are paying on your National Debt you will throw an increased burden on the State by every 10 per cent. that you reduce your inflation.

We are led to this conclusion. By some means or other the Debt has to be reduced, but it is not easy to see what those means should be. It was suggested the other day, when this matter was under discussion, that a very effective reduction might be obtained by means of a levy upon war fortunes. The obvious justice of such a levy, I think, appeals to every one. It seems to me that everybody in this country ought to be thankful that at the end of this war—I was going to say that they are in the enjoyment of their personal liberty—at any rate they have no right to complain if they find themselves in the enjoyment of their personal liberty together with the same amount of possessions which they enjoyed when the war began. On the other hand I doubt the efficacy of this plan. I doubt if you would get enough. It is calculated that you would get a thousand millions. I do not think that is adequate. I think you want two or three thousand millions at least to effect anything vital.

I am sure the noble Viscount will tolerantly receive any humble suggestion, which is put forward for consideration only. Might I suggest this, that if any form of capital levy is to be resorted to—and so many people are discussing it with favour at the present time that it seems probable it will be resorted to—that when the capital valuation which must precede that levy has taken place it would be a much fairer thing that, instead of extracting money from the people in the form of a tax, you should re-distribute the debt among them proportionately to their capital holdings, so that by this means everybody would hold, as indeed he ought to hold, a rateable portion of the national burden. If once it were possible to effect that it would then be possible to reduce the interest on a proportion of that debt, say 25 or 30 or 40 per cent. of it, without any harm to any one, and concurrently with that the deflation of currency would proceed automatically. It could be done without any hardship so far as the capitalists are concerned, because the saving on the interest would he such that at the end of 10 or 15 years it would be possible to provide a sinking fund, to redeem at par the whole capital value of the debt dealt with. I hope I may be pardoned for making that suggestion for consideration on the part of the Government.

I want to say one thing further about the effect of the present inflation, and why, among other reasons, it is so very important that it should be quickly brought down. That it must correspond closely with the rise in prices is I think not only established by these figures but must necessarily result from a consideration of what it means. Supposing a man's wages be a pound a week and it is decided to raise them to two pounds, and that when he came round for his wages it was said: Here are two half sovereigns instead of a pound, and each has a mark upon it which will enable you to use it in any shop as the equivalent of a pound. The result of that, if every one were paid in the same way, would be to increase prices by double, but that is exactly what is meant by the issue of paper money. If this were done everywhere and everybody's means were treated in exactly the same way it might be perfectly possible to say that nobody was hurt, but unfortunately that is not what occurs.

At the present moment there is a body of people in this country who for want of a better definition I will call the Middle Class, and I do it, as your Lordships will understand, merely in order that you may appreciate the people to whom I refer. I mean the people who are engaged as civil servants, doctors, lawyers, writers, schoolmasters, and all the people who earn relatively small incomes, say from £300 to £1,000 a year, and who, I venture to say, are the most thrifty and the most self sacrificing class in the whole community. They are people who stint themselves, sometimes almost of the necessities of life, in order that they may give their sons a, better chance at school and college. They are the class who recruit all our finest people all over the world. They are people whose sons joined up practically without exception in 1914. They are a class who have no union, who never make a fuss, and who have practically no representatives. They are a class whose incomes have not been increased while everybody' else's wages have grown. It means this, that every time the currency is inflated the hand of the State is put into the pockets of these people, and from their small hardwon earnings sums are taken away in order that other people may have more. There are added to that class of people a class who deserve very well from the State—namely, the civil servant on his pension and the people who by very hard lives have just saved enough to keep themselves in their old age, and who depend on fixed immovable incomes for their livelihood. Those are the people who are slowly being ground to powder under the present condition of affairs; and I say, my Lords, that it is a class which represents the live and growing point of the nation, and if this class is once destroyed it will be impossible that it should ever be replaced.


My Lords, there was one point in the very interesting and lucid speech of the noble Lord which could not quite understand. He laid great stress upon the fact that the shortage of production had not caused the rise in prices, and he pointed to the figures of production. I think he forgot that an immense part of this production was absolutely thrown away during the war. Will your Lordships look at Table I. Take coal. That was burnt in huge amounts by sending warships and other ships all over the world for the purposes of the war. That made a very great demand upon the production of coal, and therefore left a shortage for other purposes. Then take pig-iron and steel. Vast amounts of pig-iron and steel were used for the purposes of the war and were all practically thrown away. The worst of it is that where they were not actually fired away we cannot now use for other purposes the material used in the manufacture of guns. It is all lost, and therefore most of this great production was thrown away. Then take wool. We had to use an enormous amount of wool to clothe the men who had to be sent to parts of the world where they required such clothing, but who would not have had to use so much wool for their clothing if they had not had to go to such places. Consequently for the purposes of the war larger amounts of wool had to be used, making a shortage for other purposes. Therefore I contend that there is a very great shortage of production, not because production did not keep up wonderfully during the war but because what was produced was thrown away. It is that shortage of production, and the growing deficiency of materials which we want so much in manufacture which is accountable to a great extent for the high prices that reign in regard to a very large number of necessaries at the present moment.

[From Minutes of November 25].