HL Deb 07 June 1928 vol 71 cc309-50

Order of the Day for the Second Reading read.


My Lords, the Bill of which I now desire to move the Second Reading is, of course, of far greater importance than that which has just been before the House. The object and effect of this Bill is to carry out the amalgamation of the Treasury note issue with the Bank of England notes. Those of your Lordships who are familiar with these subjects will remember that from 1844 until 1914 the currency of this country was governed by the Bank Charter Act, 1844. Seventy years after the passing of that Act its principles had to be abandoned temporarily owing to the exigences of the War. Your Lordships will also remember that at that time, in addition to the Bank of England notes of £5 and upwards, Treasury notes of the denominations of £1 and 10s. were issued. It is worth remembering that there was no statutory regulation as to the amount of that issue and there was no regulation of the gold reserve to be held against those notes. In addition, power was given to the Treasury to suspend temporarily the fiduciary limit of the Bank of England notes. I am touching upon the history of this matter as briefly as I can. I may state generally that the gold standard was maintained until the end of the War, but in 1919, owing to those tremendous disturbances in the foreign monetary situation and in foreign currencies with which your Lordships are only too familiar, the export of gold was prohibited and was not permitted again till 1925. This Bill, providing for the transference of the note issue to the Bank of England, is the final step of a series of measures for the reorganisation of credit and currency in this country.

The first question that I should like to put before your Lordships is this: Why should amalgamation take place? Why not allow Treasury notes and Bank of England notes to run together side by side, as they have done for the last few years? In the first place, the change in the law really recognises what was in fact the practice. In practice only the Bank of England issued notes, and they were obtained, and are obtained to-day, by drawing upon deposits at the Bank of England. The method that was made legal in 1914 of making direct advances to the Bank was very soon discontinued, and in 1919 that power was abrogated altogether. Again, the system set up by the Treasury Minute of 1919 was admitted on all hands to be transitory. In that Minute the actual maximum reached in any one year was the permitted maximum for the next. Again, owing to the method by which the notes could be obtained, currency has depended upon the regulation of credit, and by this Bill the legal responsibility for the note issue is placed upon the Bank of England, where the actual responsibility lies, because the Bank controls credit.

If your Lordships wish for authorities upon this subject, I need only refer to two Committees, each of which was presided over by a member of your Lordships' House—the late Lord Cunliffe's Committee, and the Committee presided over by the noble Lord, Lord Bradbury, whom I see in his place to-day. The Bill has even more sanction than that, because it is in harmony with the resolutions of the Brussels Conference of 1920, and also with those of the Genoa Conference of 1922. Both these Conferences recommended, among other things, that control of currency and credit should be in the hands of a central bank, and where there was no central bank they suggested that the establishment of a central bank should take place. The other recommendation was that central banks should be independent of political interference, and I shall show your Lordships in the course of my description of the Bill that the aid of Parliament is invoked only in one case. So much for the reasons for amalgamating the two issues.

A further question which I should like to ask is: Why should the change be made now? The Cunliffe Committee recommended that the fiduciary issue should be so determined that 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 at least a year, the policy of reducing the uncovered note issue as and when opportunity offers should be consistently followed. It was not until April, 1925, that we were able, as your Lordships will remember, to restore the gold standard—an essential step, of course, in the restoration of a satisfactory foreign exchange position. Even then, after 1925 for over two years the exchange on New York rarely touched par, and it never rose appreciably above par. It was only in the latter part of 1927 that a really favourable exchange situation developed. Now that we have had six months of favourable exchanges, and it is two years since our gold reserve fell much below £150,000,000, we are in a position to carry out the recommendations of the Cunliffe Committee.

The next question that I have to discuss is a much more difficult one, and it is what the amount of the fiduciary issue should be—how high it should be fixed. The Act of 1844 required every note in excess of a fixed amount, the fiduciary issue, to be covered by an equivalent amount of gold. The fiduciary issue at the outbreak of War was £19,750,000, and it has always been a subject for remark that it has been possible to keep the fiduciary issue to so comparatively small an amount, having regard to all the changes in commerce and industry which have taken place between 1844 and 1914. Of course, the usual explanation given is that the issue of cheques has so far economised currency. In these altered conditions there is no theoretic standard by which it is possible to decide what that fiduciary issue should be, and we have to be guided almost solely by practical considerations. The fiduciary issue is fixed at £260,000,000. As the gold reserve is now about £160,000,000 this allows for a total note issue of £420,000,000. At the present time the active circulation of notes is £368,000,000, so that if the Bill were in operation the margin would be £52,000,000, and this of course would constitute the reserve in the Banking Department, but we have to look forward to the withdrawal of the £6,000,000 now in the Irish Free State, where, as I have already stated on the previous Bill, the new currency is to be put into circulation during the course of this year. Making allowance for this £6,000,000 the reserve, with the £260,000,000 that I have spoken of, would be raised to £58,000,000.

This is a higher figure than the reserve has been placed at in recent years, and therefore any doubts as to the adequacy of this fiduciary issue would not seem to be very ell founded. Experience, however, has shown that not only do you have to have a stable currency but it must be elastic as well, and it is on that point of elasticity that this Bill diverges on some points rather widely from the Act of 1844. The principle of the Act of 1844 was a fixed fiduciary issue, and there was nothing in that Act which contained any reference to any further legislation. As your Lordships know, it was found impossible in practice to maintain this principle in times of crisis. In 1847, in 1857, and in 1866 it was urgently necessary that the Bank of England should be able and ready to lend without stint to solvent borrowers, and it could not do that without risking an excess over the statutory limit of its note issue. In each case the Government of the day instructed the Bank to take the risk, and promised to indemnify it by Act of Parliament if an Act of Parliament were found to be necessary. In 1847, and in 1866, the mere appearance of the "crisis letter," as it was called, allayed the panic, and no excess of the limit occurred. In 1857, on the other hand, there was an excess of something like £2,000,000, I think, and an indemnifying Act was passed. Then we pass over a number of years until we come to 1914, when a letter again became necessary, and there followed the Currency and Bank Notes Act of that year, which gave the Treasury legal power to suspend the limit of the fiduciary issue. That power still exists, and the Cunliffe Committee were of opinion that it should be made permanent.

The Bill follows the advice of the Cunliffe Committee, with one very important change. The Cunliffe Committee advised that the extension of the fiduciary limit should be for a temporary emergency only, but if your Lordships will look at Clause 8 of the Bill you will see that that clause allows the Treasury, on the initiative of the Bank, and only on the initiative of the Bank, to extend the limit by an amount not exceeding that asked by the Bank for any period up to six months, and to renew or vary the extension from time to time (always at the request of the Bank) up to a maximum period of two years. That is clearly something far more than an emergency measure, and at the end of the clause appear these significant words: "unless Parliament otherwise determines." Thus the new proposal makes it possible to increase the fiduciary currency not only in times of crisis, because we hope there will be no more times of crisis of that kind, but when there is any considerable or disturbing change in the world's monetary situation, or if a necessary and normal growth is required in the currency itself. The question of meeting seasonal fluctuations has also been discussed, but I think your Lordships will see that from the margin that has been allowed there is ample cover for any seasonal fluctuations.

This departure from the advice of the Cunliffe Committee is justified, as I can show, by the developments in monetary doctrine and in monetary practice which have occurred since the War. Elasticity of gold reserve is necessary to prevent the world price level from being disturbed by international monetary demands. A too severely fixed fiduciary issue might fetter the Bank of England in a manner inconsistent with the resolutions of the Genoa Conference, and, farther, we have to take into account the normal growth in the monetary circulation at home. A fixed fiduciary issue therefore does not mean that this fixity should be permanent without regard to the growth of our normal currency demands. But fluctuations in the purchasing power of gold may be caused by redundancy, as well as by scarcity, and power is given in Clause 2 to reduce the amount of the fiduciary currency. An inflow of gold may increase the reserve of the Bank of England, and if an increase of deposits and the danger of increased inflation are to be avoided it may be necessary to decrease the fiduciary issue and to transfer securities from the Issue Department. There is no limitation on the reduction of the fiduciary issue as there is on the increase, and I think I may very shortly state the reason for that, which is that, while an increase might, in certain circumstances, endanger the gold standard, a decrease would not have that effect.

I have now dealt with the general points—the question of the transfer of the notes to the Bank of England, the new figure of £260,000,000 for the fiduciary issue, and the powers to vary that issue. I will non deal very shortly with the clauses in the Bill. Clause 1 empowers the Bank of England to issue notes for £1 or 10s., and these notes will, like the Treasury notes which they replace, be legal tender throughout the United Kingdom, and will also be legal tender by the Bank itself. Clause 2 fixes the new fiduciary issue and deals with the power of varying it downwards, as I have already explained. Clause 3 deals with the cover of the fiduciary issue. The cover is to consist of securities, and that term is sufficiently wide to include commercial bills as well as Government securities. The clause allows silver coin to be held as a security, subject to a strict limit of £5,500,000. That figure is taken merely because it is actually the amount of silver coin now held in the Currency Note Redemption Account, but it is not a fixed sum and is in process of reduction. I ought to dwell, upon that, because some noble Lords might suspect that there was some insidious desire to introduce bimetallism by this silver reserve.

Clause 4 reserves to the Bank of England the responsibility for the currency notes outstanding; and Clause 3 transfers to the Bank the securities held against these notes. The securities at present held, valued at market prices, are more than sufficient to cover the liability, and the surplus of £13,000,000, as your Lordships know already from the statement in the Budget, will be added to the Sinking Fund for the redemption of Debt. Clause 6 provides that the whole profit on the issue, including the profit on the existing Bank of England note issue, will accrue to the State. Clause 8 I have already explained, because that gives power to vary the fiduciary limit upwards. Clause 11 gives powers to the Bank of England in the national interest to require persons in the United Kingdom to make returns of, and, if required, to sell to the Bank, gold in their possession.

It only remains to say, in conclusion, that this Bill is the final stage in a policy recommended by the Committees of Lord Cunliffe and Lord Bradbury, and constantly pursued by successive Governments through all its stages. The Bill does not deal with any great new experiments, but it preserves the well-known and well-tried familiar principles of the Act of 1844. It retains the principle of the fixed fiduciary issue and of any further notes being covered or backed by gold or bullion. It retains also the principle of the separation of the Issue Department and of the Banking Department, which is one of the principles of the Act of 1844. Every country must find it necessary to have a stable and elastic currency, and I think that your Lordships will feel that no country more than this great manufacturing and commercial country has need of a stable and elastic currency. I trust that by the provisions of this Bill and the co-operation of the Bank of England that stability and elasticity will have been secured for the currency of this country. I beg to move.

Moved, That the Bill be now read 2a.—(Viscount Peel.)


My Lords, this Bill, as the noble Viscount said, is an important one, and it may well be that it will have serious effects of an adverse nature upon the prosperity of the country. The Bill is ostensibly put forward, as the noble Viscount has said, for the purpose of amalgamating the two note issues. We of the Labour Party are not objecting to that. The evil does not lie in that; the evil lies in other ways. It lies in the fact that this Bill fixes for the fiduciary note issue a limit of £260,000,000, which, in the opinion not merely of the Labour Party but of many financial and commercial men quite outside our Party, is too low, so that it is likely to cause grave detriment to trade and industry. Not only so, but the proposed plan—I do not say this is in the Bill, but it is the effect of this way of doing things—will lock up a large amount of gold for a purpose for which it is not likely to be needed.

Let us try to be clear about the essentials of the situation. The Bill amalgamates the two note issues, the Treasury note issue and the Bank of England note issue, and that will make a total note issue of £420,000,000. In this amount £160,000,000 will be secured against gold—


Or bullion.


—or bullion, and the balance (that is, the fiduciary note issue which the Bill, as I say, fixes at £260,000,000) has securities against it but not gold. Before I deal with this limit of £260,000,000, which, as I say, we now hold is too low, I want to emphasise what I have just been saying, that the effect of the Government's plan, of this way of doing it, is needlessly to lock up a large amount of gold. The total gold held by the Bank of England is about £160,000,000. That is intended to be a reserve for two purposes. First, as a reserve for the internal note circulation; and, secondly, as a reserve against demands for gold from foreign countries. Certain countries have big credits in London and they can draw against these and, if they want to do so, can draw in gold. As regards internal notes, the present amount, as the noble Viscount said, is, I think, £368,000,000, about £370,000,000. It is usually held that the figure is somewhere about £370,000,000 or £380,000,000. That is the total amount of notes in the hands of the public in one way or the other. Logically speaking, no gold reserve is absolutely required against them because notes are not now exchangeable for gold.

On the other hand, large gold reserves are very desirable for the second purpose; that is, to meet foreign demands. Those demands are certain to come, at any rate in some degree. Indeed, there are foreign credits in London at this moment probably to a considerably larger amount than the whole £160,000,000 of gold which we have. There are, probably, credits to an amount of between £200,000,000 and £300,000,000. Nevertheless, the present position—and if I went through the figures it would be very easy to show it; it will not be disputed I am sure—is that of our total holding of £160,000,000 of gold only about £50,000,000 is available to meet foreign demands and no fess than £110,000,000 is being held as reserve against the internal note circulation; notwithstanding the fact—and I stress it again—that these notes cannot now be exchanged for gold for internal purposes. Therefore, we are in effect immobilising £110,000,000 of gold for a purpose for which it is not really needed, and we are cutting down to the inadequate sum, as I hold, of about £50,000,000 the reserve to meet gold demands from abroad. That is, we are cutting down the reserve which is almost certain to be drawn upon to some extent, while keeping a much bigger reserve which is not likely to be needed.

That is the effect of the proposed plan. That is the way things will work out, and no adequate reason has been given by the Government in the course of the debates and discussions which have taken place upon this very important measure, for this state of affairs. Indeed, it is difficult to see what really tenable defence for this state of affairs can be set up except, perhaps, that it is inherent in the present system. But that is what we complain of. We think the system ought to be altered. We have pressed for an inquiry into these matters and into the whole position of the Bank of England in relation to them. If the system were changed, if matters were arranged differently, say, between the Issue Department and the Banking Department of the Bank of England so that as a result one half of our total holding of gold of £160,000,000—that is to say, 180,000,000—was made available for foreign demands, and the other half, the other £80,000,000, a sum which is probably quite large enough, was held against the internal note circulation—if that were done, if matters were arranged somewhat on those lines the prospect would be much better than it is to-day. As it is, with such a small reserve as the present one for meeting foreign demands, for sending gold abroad, a comparatively small demand of about £20,000,000 may lead to raising the Bank rate so as to check the demand and make it more worth while to keep gold here.

But the raising of the Bank rate, which means dearer money, may have, and often has, highly injurious effects upon our trade and commerce. It is not right to jeopardise things in this way unless there are very much stronger reasons for doing so than have yet been shown. A better plan, as I have said, would be to increase to, say, £80,000,000 the reserve available for meeting foreign demands, making it £80,000,000 instead of £50,000,000. That extra £30,000,000 might well be sufficient to make all the difference between raising the Bank rate and not raising it. I should like the noble Viscount in his reply to deal with this point, and I ask him whether he can make a better defence of the present position than has been made so far, because no really adequate defence, no substantial defence at all has been made by the Government.

I come now to the next point, this limit of £260,000,000 for the fiduciary note issue. We contend that this limit ought to be higher. But the noble Viscount in moving the Second Reading of the Bill said that objections to the limit on the ground that it was not high enough were not well based, or words to that effect. So far from that being the case, it has been proved as a matter of fact almost to the point of mathematical demonstration that this limit is likely to be too low for what may reasonably be expected to be the growing needs of trade and industry. As I say, it is not only the Labour Party which takes that view. Members of all Parties have taken the view in the debates in another place. Not only that, but certain organs of the Press which are usually favourable to the Government have also taken the same view. But the Government are quite unmoved. They do nothing except to say that there is Clause 8, about which I will say something in a moment. Apart from that, they really do nothing apparently because of their horror of inflation, because they are afraid of having too much currency. As a matter of fact nearly everybody objects to inflation. The baffling thing is that whereas the Government are obsessed with the evils of inflation they do not seem to care a scrap about the evils of deflation.

After all, the matter at issue is a comparatively simple one. Let it be assumed that for a certain volume of national production, industry and so forth, a certain amout of currency is required. Very well; if that amount of currency is increased beyond what is really needed there will be inflation leading to higher prices. If, on the other hand, the amount is decreased, or—this is most important—if the amount does not keep pace with real needs, there will be deflation leading to lower prices. It is clear that in order to get stability the amount of currency in a country should remain constant, or be increased or decreased only in accordance with real needs, but, unfortunately, during the past few years, the Government and the Bank of England have not aimed at stability; they have pursued a policy to a large extent of deflation, with the gravest results in bad trade and in great unemployment. There is every probability that the effect of this Bill, with its limit of £260,000,000 for the fiduciary note issue, will also mean deflation. Be it always remembered that deflation is brought about not only by a deliberate contraction of currency or credit, but also by not increasing currency when the growing demands of the country need an increase.

It is particularly on this last point that many of us are very anxious about this Bill and its limit of £260,000,000. We say that that limit is not high enough. It scarcely leaves any margin. We have nearly reached it once or twice already, and there may be an improvement in trade and the absorption into industry of a moderate proportion of the present unemployed of 1,100,000. Are we to take it that the Government have given up all hope of absorbing even a moderate proportion of those unemployed in industry? Are we to take it that they have given up all hope of expanding trade? They have imposed this limit of £260,000,000 in conjunction with the Bank of England. We say it should be higher; at any rate permissively higher, up to at least £275,000,000, so that, without having to put into operation the provisions of Clause 8, the fiduciary note issue could be increased, at any rate, to that limit. The Government adhere simply to Clause 8. Clause 8 has been explained by the noble Viscount. It works in this way. On the initiative of the Bank of England, and only on the initiative of the Bank of England, if the Bank comes to the conclusion that some increase in currency is desirable it can go to the Treasury and ask the Treasury to agree. If the Treasury agrees, then a Minute is laid before Parliament about the matter and that lasts for six months, when, as I understand it, another Minute is laid if the arrangement is to continue for another six months. Altogether this can go on for two years and at the end of two years, if it is still desired to continue the increased limit, whatever it may be, then the approval of Parliament must be obtained. Many of us are very sceptical indeed about this clause. We are afraid it will only be used in times of emergency or crisis, or semi-crisis, and that it will not be put into operation, or at any rate not quickly enough, to meet the growing demands of trade and that in consequence trade prosperity will again be checked by what is in fact deflation.

Nothing which the noble Viscount said really removed the fears which are entertained on this ground. No adequate reason has been given why the limit should not, at any rate permissively, be £275,000,000. This matter was pressed from all sides of the other House, but the Government were adamant. They simply said they would not do it and no sufficient defence against the argument on the other side was set up. The Government monotonously averred: "There is Clause 8 and it will be used on occasions other than those of emergency and crisis." That is the position. It is all very well for the noble Viscount to shake his head.


I was agreeing.


That is the point at issue. It has been said elsewhere, on the authority of the Government and that of the Bank of England, that it is the intention of the Bank to take action under Clause 8 in certain circumstances. But the Governor of the Bank is really committed to nothing. Even if he were a permanent Governor his place might be taken by another Governor at some time. I understand he is really committed to nothing. That is not the way in which I think matters of this vital importance ought to be arranged. Many of us are very far from satisfied on this point. In view of past events we think the Bank of England is bound to regard putting Clause 8 into operation as a serious matter, as an abnormal thing to do and, possibly, as something reflecting in some degree upon the prestige of the Bank. If Clause 8 is not put into operation when it is needed and not put into operation in time when it is needed, then we shall have deflation with its evil consequences. Again, there is the conflict which will arise in the case of a moderate demand for gold for abroad. Every opportunity will be thus given to put into operation Clause 8, but we feel the Bank will be reluctant to do that and will be inclined instead to raise the Bank rate, which is quite a normal thing for them to do, judging from what has happened in the past when the Bank usually has been ready enough to raise the Bank rate and when, in recent years, they have pursued a policy of deflation. He would be a bold man who would say when this conflict comes that it will be Clause 8 which will be put into operation and that there will not be a resort to the old method of raising the Bank rate. It is all the more probable that the latter course will be resorted to, because, apparently, in certain circumstances, it would be against the interest of the Bank to put Clause 8 into operation, and vice versa with Clause 2.

Let us look at Clause 2 about which the noble Viscount has spoken and to which I will refer for a moment. It was the Secretary of State for War himself, who had charge of this Bill in another place, who stressed the fact that if instead of increasing the limit from £260,000,000 to £275,000,000 it was reduced from £260,000,000 to £250,000,000, the effect would be to give the Bank more profit.


And less to the Treasury.


Quite so. The point is as between that Department and the Banking Department. That consideration brings me to one of the weightiest objections against this Bill. It is that this tremendous power of initiative, this power of determining the currency policy of this country—that is what it comes to in the last resort—is being given to a private institution and one whose own interest may conflict with its public duty. I say that in principle that is wrong. After all, you cannot get away from the fact that the Bank of England is a bank and it must surely, to some extent at any rate, have a bias in the direction of viewing things from the point of view of bankers. It often happens that the banker's point of view clashes with and is injurious to industrial and commercial interests, yet it is industrial and commercial interests which may specially suffer from errors in currency policy. Therefore, it is highly desirable that those interests should have full weight when questions of currency policy are being determined. Is there any guarantee under the present system that they have full weight? There is no guarantee that they have full weight. These interests are not directly represented on the Bank of England and it is an anomalous thing to have this vital matter of initiative in currency policy confined solely, as it is confined by this Bill, to the Bank of England.

Be it noted, my Lords, that this initiative applies not only to Clause 8, but also, as the noble Viscount said, to Clause 2, not merely to an increase in the fiduciary note issue but also to a decrease in the fiduciary note issue. But under different conditions, Whereas under Clause 8, which some think may lead to inflation, there are certain provisions which I have already indicated and which the noble Viscount described—the six months and the coming to Parliament, the Treasury Minute and so forth—under Clause 2, which may very well lead to deflation, there are no such provisions. The Bank, under Clause 2, simply has to go to the Treasury, the Treasury agrees and the thing is done. Now in this contrast between the two clauses we get the clearest possible evidence of the bias of the Government in favour of deflation. The thing could not be clearer. The fact is the Government are apparently obsessed with the horrors of inflation but do not care a rap about deflation. The evils of deflation may be equally as great as the evils of inflation, but according to the Government philosophy, whereas inflation is the unpardonable sin you may deflate as much as you like. You may deflate until you are black in the face without turning a hair and without Parliamentary sanction. I say that is most unreasonable. Men not merely of the Labour Party, but of other Parties also, have urged that precisely the same provisions ought to apply in the two clauses. Clause 2 ought to be put on all fours with Clause 8.

I know it is almost an offence to suggest that those who are responsible for the policy of the Bank of England are fallible human beings like the rest of us. On the contrary, this Government is wont to place the Bank of England in a special category apparently immune from the errors and failings of our common human nature. As a matter of fact there is little to support such an attitude in certain experiences which the country has had of the Bank of England during the past few years. Remember we are, by this Bill, giving the most vital powers to the Bank of England and, in fact, specially to the Governor. It is, therefore, only right to consider how far what is going to be done is justified. Let me remind your Lordships of three matters relevant to this. The first is that there is a considerable body of opinion, as I have already indicated, some of it of a very expert and influential nature, which holds that the general policy of the Bank of England since the concluding years of the War has been open to grave criticism. For some time there was considerable inflation, which was bad, and then the Bank of England—no doubt in conjunction with the Treasury, but the Bank of England was largely responsible—pursued a policy of prolonged deflation which has had the most serious effect upon our trade and industry and has been one of the chief causes of the long continued serious unemployment. That is the first matter.

The second is this, and it is an instance from my own experience in a sense. I am not sure, but I think I am the only surviving member of a Sub-Committee of the National Expenditure Committee, a Sub-Committee which was appointed to investigate in 1917 the remuneration paid to the Bank of England for its services in connection with the National Debt. Let me remind your Lordships that this was a time of great stress in the country, when the country was fighting for its life and when nearly all classes were being called upon to make big sacrifices. When first this Sub-Committee began its work the then Governor of the Bank of England gave the impression that there was really little or nothing to inquire into. He said that as regards War profits the object of the Bank was merely to leave itself in the same position at the end of the War as before it. I confess it seems difficult to reconcile that with what we found, except on the assumption that the Bank was losing money in other ways and was, at any rate in part, making this good at the expense of the taxpayers. As a matter of fact we found that the remuneration of the Bank of England for its services in connection with the National Debt was amounting to a sum of about £1,500,000 a year. How excessive that was may be judged by the fact that under pressure, due to this Sub-Committee, the Bank reduced that figure to about £750,000 a year. Personally, I question whether any such reduction would have been effected except under the pressure of a Parliamentary Committee armed with the authority of Parliament. I am hound to say this matter made a most unfavourable impression upon my mind.

The last instance I will give applies more to the Governor of the Bank of England than to the Bank itself. It is well known that the Governor has a great deal to do with determining policy and, under this Bill, he will be, I should say, principally responsible for the currency policy of the country in future. The Governor of the Bank of England, that is the present Governor, cannot, I think, escape at any rate some share of responsibility for the American Debt settlement. It is generally understood—if I am wrong I can be corrected—that that settlement was made with his full concurrence. That settlement saddled this country with an almost intolerable burden for scores of years. It was unquestionably the worst financial bargain which has ever been made between one country and another, and though it was the Government of the day which made the settlement and which has to take responsibility for what was done, I think it is not unfair to suggest that some share of that responsibility really rests upon the Governor of the Bank of England. I will not at the moment make further criticism of the Bank of England or of its Governor, but I think I have said enough to show that the lavish and unstinted encomiums poured by the Government upon the directors of the Bank of England cannot be allowed to pass without question.

In any event, it is an entirely undemocratic proceeding—surely, there cannot be dispute about this—to give the enormous powers which this Bill gives to the Bank of England; that is, to a private institution over which Parliament has no real control. After all, the Bank of England is but a private institution and it has its duty to its own stockholders. I am not saying that it will often be influenced in its decision by questions of its own profits, but it does not leave profits altogether out of account. I think that this was seen in the experience of the Sub-Committee. I consider that it is highly unfortunate that the initiative in this vital matter of currency should rest with a body that has to make a profit and the profits of which may be affected by the advice that it gives to the Government. The Bank of England is really placed in a position where there may be a conflict between its own interests and other interests. That is my point. I will put it no higher than that, but I can put it no lower.

I do not think that the present situation can last or that the present great powers that the Bank of England has will be allowed to remain with them very much longer. I believe that the view is increasingly held that there ought to be a change. For some years now there has been an influential demand for an investigation into the constitution, powers and policy of the Bank of England in the light of modern developments in finance and industry. This demand does not come only from the Labour party. It has been supported by very high authorities, by Mr. McKenna, by Dr. Leaf, the late distinguished Chairman of the Westminster Bank, by Sir Alfred Mond and many other great leaders of industry, and it was particularly pressed at the recent Mond Conference between employers and employed. The demand is, in fact, supported by men of all Parties. What does the Government say in reply? In effect, they say nothing, except that they will not have an inquiry. Surely that is most unfortunate. They ought to give some better reason. Even if an inquiry will do no good—and it is virtually certain that it will do much good—it really could do no harm. The Government have given no satisfactory reason because there is no satisfactory reason to give. If the noble Viscount can give one, let him do so in his reply, but none has been given yet. Many of us are anxious about this Bill and about currency matters, and we shall continue to press our views and to demand this inquiry. It is agreed in many quarters in the City that the inquiry is bound to come, and it is deeply disappointing that the Government have not taken the present occasion to institute such an inquiry.

I will not to-day discuss the Federal Reserve Board of the United States or the things that have been happening in that country in currency matters in the last decade or so. No doubt there are features that can be criticised in the system in force in the United States, but there has been in the last decade or so in that country something that may be called a modernised currency system. It may be described as a managed gold currency, and under it the conditions can be much more readily adapted to the changing needs of trade. There are many people whose opinion is entitled to respect who hold that the remarkable prosperity of the United States since a little after the War is not unconnected with its present currency system. No doubt there are many other contributory factors, but recent happenings in the United States have deeply impressed many financiers and economists all over the world, and the fact that the United States have modernised their currency system, seemingly with good results, furnishes an additional reason for an inquiry into these matters in this country.

There is one specific point on which I should like to ask a question before I sit down. In the debates in another place it was stated that bills of exchange could be lodged—


I dealt with that.


I want to ask the noble Viscount a question if he will allow me. It was stated that bills of exchange could be lodged as part of the security against notes.


In the Issue Department.


Of course. Where else could they be lodged? I do not understand what the noble Viscount means.


I only wanted to be quite clear.


I thought that would be understood. Surely it is elementary.


It is better to be clear, even at the expense of being elementary.


Very well. The Secretary of State for War, who was in charge of the measure, stated in reply to a specific question by Mr. Gillett that the term "securities" covered both ordinary bills of exchange and bills of exchange drawn in a foreign currency on a foreign firm—such, for instance, as a bill drawn in dollars on Morgans of New York. Some further discussion followed on the matter, and the Secretary of State for War hinted at an Amendment dealing with securities being inserted in your Lordships' House. I want to ask whether the Government are going to put down such an Amendment. In any case I presume that we may take it that, as was stated by the Secretary of State for War, both ordinary bills of exchange and those drawn in a foreign currency on a foreign firm can be held as security. The advantage of holding foreign currency bills would be with a view to helping to regulate the foreign exchanges.

I come to my final point. If the Government will do nothing else to meet the various criticisms urged against this Bill and against the limit of £260,000,000—it has been shown that there is really not enough "slack" in the present arrangement—surely they might reduce the twopenny stamp on cheques to one penny. That would lead to a larger use of cheques and would in effect increase the reserve of currency and might make a material difference in avoiding deflation with its consequent evils. I would also plead for an extension of the system of municipal banks, because that would help in the same direction and would in effect increase the volume of currency. While advocating this, I am not unaware of the fact that a Report adverse to municipal banks was recently published, but I know also that when that Report came to be discussed in another place it was very severely criticised. I have endeavoured, without, I hope, an undue trespass upon your Lordships' time, to state certain views upon this Bill and certain reasons why it is not the simple beneficial measure which the noble Viscount would like your Lordships to consider it. I have endeavoured, I hope without taking too much time in dealing with these very difficult and technical matters, to give at any rate some reasons—not all that I should like to give—why we hold that this Bill is both ill-judged and likely to have harmful effects.


My Lords, I trust you will not consider that I am trespassing on your kindness if I crave the indulgence which it is the custom of this House to extend to those who address it for the first time, although on one occasion I ventured to make a trifling suggestion when your Lordships were sitting in Committee. I have looked very carefully into the various clauses of this Bill, and I should like to say at the outset that I feel very strongly that such a Bill is entirely divorced from Party politics, and that it would not be in the interests of the country that one should endeavour to score a point by carping criticism. The Bill probably constitutes the most important piece of banking legislation which has been brought forward since the Act of 1844. It is, I think, constructed in a businesslike manner, and to my mind the most welcome feature of the measure is that the executive control of currency in this country will be restored to the Bank of England and will in future rest entirely in its hands, free now and in the future from any question of political pressure.

Everyone in the City, I feel convinced, has absolute confidence in the ability and integrity of those who are in charge of our official monetary policy. Nevertheless I feel that it would be desirable if the Government would give us more information than it has given up to the present time as to the guiding principles of that policy. To amend the Bill so as to determine the course of that policy would be difficult and perhaps undesir- able. It would be impossible for the Government to indicate the spirit in which future Governors of the Bank will interpret and apply the Act. It is possible, however, to give us information as to the intention of those at present in charge of the management of the currency, who have, doubtless, co-operated in the elaboration of the Bill. In the first place, it is desirable to throw more light upon the spirit in which Clause 2 (the reduction of the fiduciary issue) and Clause 8 (the increase of the fiduciary issue) will be applied.

In moving the Second Reading the noble Viscount said that unlike the "crisis letter" under the old régime, Clause 8 will be applied not merely on the occasion of a crisis, but in order to prevent a crisis, whether that crisis is caused by foreign demand for gold or by increased domestic demand for currency owing to a trade revival. The question is whether its application will be regarded as an emergency measure—though to a less extent than the "crisis letter"—or whether it will be regarded as the normal part of the system to be used whenever desirable as an alternative to the increase of the Bank rate. In other words, is it the intention of those in charge of the official monetary policy to apply first every other means available and fall back upon Clause 8 only if all other weapons have failed to produce the desired effect? Or is it their intention to avail themselves of Clause 8 if they wish to avoid an increase of the Bank rate, whenever such an increase is necessitated by purely monetary conditions and not by economic conditions? I should like to know whether the frequent application of Clause 8—that is, if it is applied more than once a year—would be considered to be in accordance with the spirit of the Bill. It is equally desirable to know what is the spirit in which Clause 2, concerning the reduction of the fiduciary issue, wil be applied.

There is a considerable difference between Clause 2 and Clause 8. While the application of the latter is subject to the approval of Parliament there is no such restriction in the case of the former. While there is a time limit for the increase of the fiduciary issue, there is no time limit for its reduction. Does this difference indicate that the authorities intend to apply Clause 2 more frequently than Clause 8? Is it the intention of those responsible for our monetary policy to counteract the effect of any substantial influx of gold by means of a corresponding reduction of the fiduciary issue? It is highly important to know whether the comparative facility with which the fiduciary issue can be reduced foreshadows a systematic reduction of the fiduciary issue, not with a view to pursuing a policy of deflation, but with a view to increasing the ratio of our gold reserve to the fiduciary issue. This end can be attained by allowing the gold reserve to accumulate without any direct intervention on the part of the Bank. It can be, however, accelerated by means of gold purchases from abroad. Although it would be admittedly difficult for the Government to give precise details as to the intentions of the Bank of England, it would be possible to state whether their aim is to maintain, if possible, the fiduciary issue at £260,000,000, or whether it is considered desirable to reduce this figure without reducing the total note circulation, by means of increasing the gold reserve.

Again, I should like to know whether Clause 2 is intended to be applied to avoid a reduction of the Bank rate to a level at which it cannot be expected to remain for any length of time, and at which it would tend to encourage overproduction or over-speculation. It would be indeed highly desirable if both Clause 2 and Clause 8 were to be interpreted and applied in a liberal spirit. The aim of an ideal monetary policy should be to change the Bank rate only when it is desirable for the purpose of encouraging sound tendencies, and counteracting unsound tendencies, in production and trade. Purely monetary tendencies should be regulated in a way to avoid the unnecessary disturbance of production and trade. The principal source of criticism against the gold standard is that production and trade are at the mercy of the production and international distribution of gold. The adherents of a managed currency use this deficiency of the existing system as the principal argument in favour of the system they advocate. By means of a liberal application of Clauses 2 and 8 it would be possible, however, to eliminate this disadvantage, and to unite the advantages of the system of a gold standard with those of a managed currency. It would be possible to use the Bank rate in accordance with the interests of production and trade; all monetary influences could be regulated by means of increasing and reducing the fiduciary issue. It would be highly desirable to obtain a statement from the Government as to whether these clauses are meant to be applied in the sense that I have indicated.

There is one other point to which I would like to draw special attention. It has been ascertained that at present there is nothing in the Bank Act to prevent the Bank of England from setting aside as security against its note issue commercial bills. This applies equally to such bills as are payable abroad in foreign currency, but I trust that in exercising their powers in this direction they will strictly limit themselves to bills payable in the currency of countries that are on a definitely free gold basis—I mean, where there is no likelihood of any restrictions being put on the export of gold. At the present moment such bills would be practically confined to those payable in dollars. But this may change in time and other countries may come to be on a definite free gold basis. The issue of notes against foreign bills is not a new thing, as many Continental State Banks have been in the habit of holding foreign bill portfolios for many years. In the case of one country sterling bills were held in large quantities, purchased from London banks and bankers of high standing. Each of these banks and bankers was required to give a definite undertaking that if called upon to do so the hills could be returned to them and that they would discount them at Bank rate and remit the proceeds in the form of gold. This option was actually exercised at the commencement of the War. Bills were returned from the State Bank of the country to which I am referring, and gold was sent over in exchange.

One of the reasons why it might be wise to have the undertaking to which I have referred is that we have had in pre-War times many instances of foreign State Banks which, without having definitely forbidden banks or bankers to withdraw gold for export, have yet let it be understood that it would be contrary to their wishes were they to export gold, and in practically every instance that expressed desire on the part of the State Bank had the effect of prohibiting gold export, even when it would have been profitable. Another precaution it would be wise to take would be not to held bills in the foreign currency of a country to such an extent that withdrawal of gold in large amounts would embarrass that country. Some proportion might be established between the total of bills on such a country to be held at any time and the total gold holding of that country. However, the Bank of England can well be trusted to take these precautions, and to attend to all such details. While asking for this information regarding the elasticity of the fiduciary issue, and while drawing attention to these facts regarding the commercial bills which may be held as cover against the issue of notes, I shall support the Second Reading of the Bill.


My Lords, as I was a member of the Cunliffe Committee, on whose Report the Government seems to have based its currency policy, perhaps you will allow me to make a few comments upon this Bill. The noble Lord, Lord Arnold, made the very interesting suggestion that the fiduciary limit should be increased permissively to £275,000,000. I did not quite understand to whom the permission was to be given, because at the present time by Clause 8 there is complete power to increase the fiduciary issue to any extent at the request of the Bank of England and with the consent of the Treasury.


Obviously what I meant was that the limit should be £275,000,000 without bringing into operation the machinery of Clause 8. It would really make the limit of £275,000,000 permissive; you need not necessarily go up to £275, 000, 000.


That is to say £260,000,000 is too low, and £275,000,000 is the proper limit and you need not go up to it; but there must be somebody to decide whether it should be £260,000,000 or £275,000,000. I was wondering who that person or authority was—whether it was a private bank whose Governor and Court do not quite meet with the approval of the noble Lord, or whether it should be the Bank with the consent of the Treasury, as stated in Clause 8. But my criticisms on the noble Lord's interesting suggestion are these: first, that the proposed limit of £275,000,000 will be too high; secondly, that it is, as I think I can show, unnecessary; and, thirdly—and this is by far the most important point—it would impair the action of the Act of 1844. May I, in showing what the position is under this Bill with regard to expansion and contraction, remind the noble Lord that under the Act of 1844 the Bank of England has sole power to reduce the original fiduciary issue, and that by this Bill it has the initiative, it is true, but it has to get the consent of the Treasury before it is done. So the power of contracting the currency would be more controlled under this Bill than it was under the Act of 1844, and therefore I do not think, with all submission to the noble Lord, that it is evidence that the Government are in favour of deflation.

As far as expansion of the currency is concerned, as we all know, no arrangement was made at all by the Act of 1844, but by this Bill the fiduciary issue can be increased to any extent. I must say that in my judgment at least any decision to expand the fiduciary issue under Clause 8 might cause uncertainty abroad as to the position of the £ sterling, and I certainly hope that, for that reason, resort to Clause 8 may be very sparingly made, and never made at all to meet seasonal requirements. I only hope that the noble Lord is right in thinking that that will be the case. I should like to point out, too, that, apart from the suggestion of the noble Lord of an increase to £275,000,000, and apart from Clause 8, we still have considerable reserve for emergencies. At the present moment the Bank of England hold in the Banking Department a certain number of notes as a reserve against their deposits which is presumably sufficient, at all events for the time being. If this Bill is passed, and if the conditions remain the same, the Bank will have an estimated addition to its note reserve of £6,000,000 or £7,000,000 when the Free State notes are returned to the Bank. Therefore, it may be presumed that this addition will be available, to meet any seasonal or temporary demands.

Again, I remember that when I served on a Gold Reserve Committee in 1909 we were informed that the big banks held large amounts of currency in addition to their ordinary reserves in the Bank of England. I have no doubt that they follow the same policy now, and hold a considerable amount of notes, not as till money but as reserve. There, again, we have a potential expansion of currency to meet, seasonal or temporary requirements. Thus we have in the conditions which I have described a considerable power of expansion, apart from the Bill, and in the Bill itself we have complete power. In addition, we have the unlimited power of increasing the notes which are based on gold. Therefore I think the noble Lord's suggestion is unnecessary.

There is another point which I think is relevant to this discussion, and that is the increased amount of legal tender which we now hold, as compared with the period before the War. Taking the best advice available, the Cunliffe Committee estimated that, exclusive of subsidiary coin, the total amount of legal tender money in the country on June 30, 1914, was £180,000,000; and if we make the necessary allowances for the increase of Population and prices since that date I estimate that we should now require £330,000,000. But we have now, or shall have by this Bill, £420,000,000. There may be, of course, certain adjustments to make in my calculation, and special reasons for this excess, but it certainly does not look as if we had any shortage of currency at the present moment. Moreover, the proposed figure of £260,000,000 for the fiduciary issue, or the noble Lord's proposed figure of £275,000,000, is a large proportion of the £330,000,000, which appears on the basis of the figures of 1914 to be our real requirement. And therefore it would not seem desirable to increase it, as suggested by the noble Lord, until we have had more experience of present conditions.

If it were not for the fact that the request of the Bank of England is necessary before any expansion or contraction of the currency can take place, and that they must realise the beneficial effects of a fixed fiduciary issue and would, therefore, be loath in the absence of real need to recommend any alterations, I should regard this Bill not as being deficient in elasticity, as the noble Lord suggests, but as giving a dangerous amount of elasticity to the currency. For, as was explained with great lucidity in the earlier paragraphs of the Cunliffe Report which dealt with the currency system before the War, the provisions of the Act of 1844, with its fixed fiduciary issue, operated both to correct unfavourable exchanges and to check undue expansion of credit.

What happened was this. Leaving out of account any new money invested abroad, when our exports increased so that the balance of trade was favourable to this country gold flowed in and provided the currency necessary to the expansion of trade. Therefore, the ideal of the noble Lord was carried out and there was exactly sufficient—I have forgotten the exact word he used—for the needs of trade. When our imports increased so that the balance of trade was unfavourable events took place in this sequence: Gold was exported by means of notes drawn from the Bank of England, the ratio of the Bank of England's note reserve to liabilities fell, consequently the Bank rate was raised, prices fell and imports were consequently checked and the unfavourable balance of trade was redressed. Thus with a fixed fiduciary issue we had a practically automatic system which provided currency for a genuine expansion of trade and checked excessive imports. The key to the whole position and the only factor which was not automatic was the maintenance of the due proportion between the note reserve and the deposits in the Banking Department of the Bank of England; and that was a perfectly simple and natural banking transaction.

Before 1844 we used to have a panic about every ten years. When the Act of 1844 was passed its proper working was not understood, with the result that we had the three panics of 1847, 1857 and 1866. Then in the period 1873–4, when Mr. Greene was Governor, disquieting symptoms again showed themselves, and the Bank, though they lent money as freely as before, simultaneously raised the Bank rate with the result that as money was paid out gold flowed in from abroad and the plague was stayed. If I might say so, I remember these circumstances because my father was Deputy-Governor during that period, and I have always followed with great interest the subsequent action of the Bank in these matters. Since that period Mr. Greene's policy has been consistently followed, with the result that though we passed through very difficult times, there were no panics and no suspension of the Act of 1844 for 48 years; that is to say, until the Great War, in face of which any system of currency which we might have adopted would have broken down.

I do not say that the Act of 1844 is the last word in currency systems; still less do I say that gold is the best standard to adopt. Indeed, I hope in the future that a broader and more stable standard of value may be devised by international agreement. I entirely agree with the noble Lord that stability in the standard is almost of incalculable importance not only to the economic but to the social life of this country. But with the world as it is and with the difficulties in which we still find ourselves, I believe that the safest plan is to get back to the principles of the Act of 1844 with a fixed fiduciary issue, with two reservations, which are in this Bill—that the fiduciary issue could be expanded in any crisis caused by a sudden demand for gold or other reasons; and that if circumstances changed, as they probably will, it should be possible again to fix the amount of the issue to correspond with the changed conditions. But I should deprecate very greatly that any changes in the fiduciary issue should be made to meet other temporary or seasonal requirements, as such action would impair the salutary automatic checks of the Act of 1844.

There is a question which remains, and that is whether since 1914 conditions have changed so materially that the Act of 1844 has become obsolete. It did not become obsolete before that date although the great changes which have been referred to in the banking facilities were made. The reason was, I think, because the principles upon which it was founded were absolutely sound. But since 1914 things have changed. It is certainly true that our position as a great creditor country has been weakened by the War and that our balance of trade is, to say the least of it, much less favourable than it was. Therefore, the old plan of raising the Bank rate would not only operate more slowly than formerly in causing an inflow of gold, but it might have the effect of increasing our short-dated foreign indebtedness with dangerous results. The remedy for this is not, I think, in any manipulation of the currency but in reducing the costs of our exports to a figure at which we can successfully compete with foreign nations. Unless we do that this country cannot live whatever currency policy it may adopt.


My Lords, I should like to take this opportunity of thanking the Government for having brought in a sound and businesslike measure. I do not know that I should have risen had it not been for some remarks made by the noble Lord opposite, Lord Arnold. I did not hear the whole of his speech, but it seemed to me that the chief part of his attack upon the Bill was really an attack upon the Bank of England and upon the Governors of the Bank of England. The noble Lord said that the present Governor el the Bank of England was responsible to a certain extent for the agreement with America which, unless I am misquoting him, was one of the worst things that had ever been done in the history of this country. I must say that I cannot follow the noble Lord. I have always been brought up to understand that I must fulfil my bargain. The then Prime Minister, Mr. Lloyd George, having entered into, as I thought, a very improvident bargain with America, that they should advance him money at 5 per cent. at, I think, six months' notice, the present Prime Minister and the Governor of the Bank of England arranged to extend that to sixty years—I am not quite certain whether I am right in the period—at the rate of 3 per cent, rising after a certain time to 3½ per cent. I call that a very good bargain. What other bargain could you make? The only other possible answer to America was to say: "We have entered into a bargain with you to borrow money and to repay it. We do not want to do it. It is inconvenient. It is not that we have not the money, not that we cannot do it, but we would rather not." That may be the morals of the Labour Party, but not, I hope, the morals of England. England has always carried out her bargains. All we did was to carry out an improvident bargain and to make a good one in return, honouring our obligations at the same time.


If the noble Lord will allow me to say so, we did not carry out the bargain in the sense he represents. We did not pay the rate of interest which he said we were liable to pay.


No, we did not, but we made an arrangement with our creditors to do certain things, to pay them what we could.


Not a good enough arrangement.


The noble Lord appears to think we made too generous a bargain and that we ought to have said: "We cannot pay that particular rate of interest and, therefore, we are going to pay less or nothing at all." I venture to say we could pay the 3 and 3½ cent. and we have done it. With regard to the other point of the noble Lord, he objected to the Bank of England because it was a private institution. He would like municipal banks—a most startling proposition. What do municipal banks know about the ethics of banking? If we are to put the financial future of this country into the hands of municipal corporations I am sorry for the financial future of the country.


My Lords, I do not jut myself forward as being in a position to recommend to your Lordships that £260,000,000 or £275,000,000 should be the extent of our fiduciary issue. There are few members of your Lordships' House qualified to express an opinion upon that. I rose merely, in supporting the Bill, to ask for information about one or two quite minor points. Reference has been made to the question about foreign bills being held as cover for the fiduciary issue. If, as I assume, the noble Viscount is going to confirm what the Secretary of State for War said, that that does fall within the terms of the Bill, I would like to refer him to subsection (3) of Clause 3, which provides that the Bank shill from time to time give to the Treasury such information as the Treasury may require with respect to the securities held in the Issue Department. I should like to say to the noble Viscount that that is information which would also be of very great interest to the money market, and I would ask him to consider whether it would not be possible to make a provision whereby that information might be published, say in the London Gazette, at intervals of three months or something of that sort to enable us to form an opinion as to what is going on. I believe the possession of that information by the money market would enable that market better to fulfil its function as a very important cog in the financial machine of London upon which so much of our prosperity depends. I do not think it is very happy that the Bank of England return is going to go on in the same rather uncommunicative form. The Cunliffe Committee did recommend a certain set form of balance sheet which the banks should adopt, but, so far, I do not think any of the banks has adopted it. I do not see how they can be expected to adopt it unless the Bank of England itself sets an example of giving a little more information. I think this information which the Bank of England might very well be asked to give would be of very great service to the money market.

The other small point that I want to raise is on Clause 11. Clause 11 provides, as the noble Viscount said, that any person owning gold may be called upon in the national interest to make returns of it and, if necessary, sell it to the Bank. I would like to ask the noble Viscount, first, whether "person" in that clause means a limited company—if not a bank owning gold does not come under the clause—and secondly, assuming that "person" does mean a limited company, whether he thinks the clause would not be of more use if it had a penalty. There is no penalty provided, although in the next clause a penalty is provided for defacing bank notes. If a national emergency arises and it is desirable that gold should be sent into the Bank respectable institutions will send in their gold as they did to the Bank of England formerly. But, if there are recalcitrants, I think this clause to be effective requires a penalty. If a person is going to refuse to send in gold I do not see how a clause which has no penalty will be effective in making him do so. I would like to ask the noble Viscount whether he thinks the clause is effective in its present form, or whether some penalty should be added?


My Lords, I intervene in this debate only because, through my official experience during and since the War and in connection with the various Currency Committees, I may be supposed to have some practical acquaintance with our currency system and the various shocks which it has undergone. The Bill itself appears to me to be a very small measure. To all intents and purposes it leaves the status quo unchanged. Under the system at present in force we have a note issue of which approximately £250,000,000 is fiduciary and £160,000,000 secured against gold. Part of those notes are notes for which technically the Treasury is responsible but they are notes which are actually issued by the Bank of England. The issue of small notes is practically at the present moment a Bank of England issue. The reserves held against them are, in substance, already amalgamated with the Bank of England reserves. All this Bill does is to give statutory effect to what has already been done by administrative action, and it also affects administrative action and administration far more than it affects economics.

We have heard a great deal about the dimensions of the fiduciary issue. The critics of the Bill, it appears to me, criticise it not so much for what it does, but because in their opinion it neglects a favourable opportunity of doing something. They are not satisfied with the existing currency arrangements of the country and they think that this opportunity might have been taken to improve them. Those critics may be divided perhaps into three categories. First, there are those who object to the gold standard as such and think we could have a better standard than the gold standard. That issue was settled by Parliament in 1925 when we passed the Gold Standard Act and it does not appear to arise in any sense on this Bill. Since 1925 other countries have moved more and more in the direction of the return to gold as a basis of international trade, with the result that probably for the next decade the question of whether the gold standard is or is not a desirable thing will be a question suitable for debating society discussion rather than a question of practical politics. I do not, therefore, propose to go into the question of whether we should or should not have a gold standard.

Secondly, there is the school of critics who say: "Yes, a gold standard is all very well, but there are dangers in the gold standard which ought to be and can be met by international agreement." There, I think, you will find a very large measure of agreement amongst all parties. We all, I think, welcome the resolutions at Genoa. We all approve, action by and a possible convention between the Central Banks of the world with a view to stabilising the purchasing price of gold, but a great deal has already been done in that direction and mare will be done. That issue also seems to me not to be raised on this Bill. Then we come to the third school of critics, who say: "Yes, given the gold standard, given the present international situation as regards gold, it is still possible to have a better system by purely domestic legislation than the system enshrined in this Bill." I do not think that all this group of critics are really inclined to take the same line. I think some of the speakers in another place on behalf of the Labour Party, and the noble Lord, Lord Arnold, who made such an interesting speech this afternoon, when they claim the support of financial authorities, such as Mr. McKenna, are not really out after the same thing. They both want a larger fiduciary issue. Why do some of them want, a larger fiduciary issue? It is in order that credit may be extended and purchasing power enlarged. That is, I take it, the root contention of the Labour Party.

If you asked Mr. McKenna why he wanted a larger fiduciary note issue he would say, I think, that he wanted it in order to increase the reserve in the Banking Department of the Bank of England, to increase the proportion of that reserve to its liabilities, to increase the cash in the hands of the joint stock banks and enable them to increase the proportion that they hold against their liabilities, no doubt with a view to being in a position to extend credit if and when conditions were suitable to the extension of credit, but not with a view to the immediate extension of credit for the purpose of stimulating industry. There is that great difference between the two contentions. For the contention which I have attributed, rightly or wrongly, to Mr. MeKenna, I think an arguable case may be made out. On the other hand, my own impression is that it is much more a matter of form than of substance. The ratios of credit to currency on which we have worked in the past—the Bank of England with a varying ratio in the Banking Department but aiming at 40 per cent., and the joint stock banks with a ratio of cash in hand and at the Bank of England of something like 11 per cent—are consecrated by usage and in practice have proved sufficient. I am not sure that larger reserves may not from their very unfamiliarity lead to danger in practice. I am not at all sure that the conventional standard is not a better standard, but arguments can be put forward in favour of that, too.

When we come to the question of using currency as a stimulant to trade, there, think, we—I speak now for people who hold what I regard as sound views on currency—join issue with the other camp. It was said, and rather finely said, I think, that currency and credit should be the servant and not the master of trade. You can apply the same simile perhaps to another very useful and very pleasant commodity, alcohol. It is desirable that alcohol should be the servant and not the master of man. In order that alcohol may perform its proper function it must be used in strict moderation and under proper conditions. That is the relation which currency must always hear to trade. The use of currency as a stimulant for the purpose of encouraging trade will always be foredoomed to failure. Currency will become the master instead of the servant of trade.

We have heard a great deal of inflation and deflation. The gold standard is a security and in its proper working is an absolute security, against excessive inflation or deflation. Microscopic inflation or deflation must inevitably be always going on. The only method yet discovered for keeping the international trade balance, which in a country situated like Great Britain is a matter of industrial life and death, the only method of keeping imports and exports at their proper relative dimensions, is by perpetual adjustments upward or downwards of the price-level in this country. These are not absolute adjustments. There is no given level of domestic prices which is the right or correct level. That level is one which can only be found by trial and error. There is a level at which equilibrium will be established of relative prices in this country and abroad, a level at which we shall sell sufficient of our goods to pay for our imports from abroad. The gold standard, as was so well pointed out by the noble Lord, Lord Hunsdon, auto- matically, if properly administered, finds that level.

We hear a great deal of an elastic currency. Can anything be more elastic than the currency of this country working normally under the gold standard? You have a given level of currency. You have, roughly speaking, in the form of purchasing power at the present time in this country, I suppose, £420,000,000 we will say of legal tender money, and some £2,000,000,000 of bank credit, a total, we will say, of potential purchasing power of something like £2,500,000,000—indeed rather less since some £160,000,000 of the legal tender forms the backing of the bank credit and ought not to be counted twice over. The whole of that is not purchasing power which is bidding for commodities. It includes the whole of the deposits, time deposits as well as call deposits, in the banks, part of it represents, so to speak, investments and a good deal of the currency represents the idle money of the people. The purchasing power of the people is something very much below £2,500,000,000. Take the effect of the import of just £5,000,000 of gold when the exchanges are favourable. The Bank of England, on the basis of that £5,000,000 of gold, could, if it saw fit—I am talking of potential purchasing power—create credit, bankers' money, to about two and a half times the amount. Then when that bankers' money went into the hands of the joint stock banks they could again multiply that sum by nine. That five millions of gold can be the basis of the extension of purchasing power of something like twenty to twenty-five times. Put it at the lower figure, twenty. There you get increased credit and currency of £100,000,000—on the basis of £2,500,000,000, say, not less than four per cent. If that is not an elastic currency I do not know what an elastic currency is.

Whenever the exchanges are favourable and gold is flowing into this country you can have all the credit and all the currency you want for the encouragement of trade and industry, indeed more than you want. As a rule some measure of restriction becomes necessary. The only question is can you, when the exchanges are not favourable, when if you are not actually losing gold you are in danger of losing gold, when the barometer says the price level is too high, can you then say we will have an extension of credit, an extension of currency, and we all hope that the increase of production will counteract the addition to purchasing power. We may hope it but, my Lords, it will not happen. What will happen if under those conditions you extend credit or enlarge credit, will be that you will get a rise in your price level, you will lose the balance of your foreign exchanges and your gold standard, and you will get into the position of all countries who go down the slippery slope of inflation. It seems to me, therefore, that the only sound line is to stick to the gold standard and to rely for your credit and currency on the gold which the proper operation of the gold standard supplies.

We might, of course, amend this Bill, if it is within the power of this House to do so, by substituting £275,000,000 for £260,000,000 as the fiduciary issue. I am not at all sure that we should do any very serious damage if we did this, but I am perfectly certain that we should not effect the object which the noble Lord, Lord Arnold, has in view. What would happen? We should at the moment have £15,000,000 more currency in the country than we require. That, in the first instance, would go into the reserve in the Banking Department of the Bank of England. If the Bank of England said: "We think the extension of credit is unwise," and if it chose to put up with the cost of maintaining that amount of currency idle in the reserve, then, of course, the increase in the fiduciary issue would be sterilised and nothing would happen. If, on the other hand, the Bank of England's proportion having gone up from 40 per cent. to 55 per cent., the Bank said: "The position of the Banking Department is stronger and it is now possible to extend credit, to purchase, perhaps, on the market securities to replace in the Banking Department those that have been passed into the Issue Department to cover the new fiduciary issue," there would be further bankers' cash and a possible extension of bankers' credit, and the £15,000,000 would operate in precisely the same way as would the import of £15,000,000 of gold under the operation of the gold standard.

But this would happen at a time when ex hypothesi a rise in prices was undesirable. If a rise in prices had been desirable, gold would be coming into the country. We should therefore have an excess of currency and an undue rise in prices, and £15,000,000 of gold would be expelled. We should lose £15,000,000 of gold reserve, the Bank of England banking reserve would sink to its original figure and the only difference made by the amendment suggested by the noble Lord, Lord Arnold, would be that we should have gone through two commercial crises, which I agree with him in regarding as eminently undesirable, and we should remain at the end exactly where we started, except that we should have lost £15,000,000 of gold. That would be the result of that operation. It seems to me better on the whole to take the well-tried system which we had under the Act of 1844.

I confess that, though I am prepared to support Clause 8 of the Bill, I was just a little alarmed at the explanation given by the noble Viscount of the circumstances in which it was proposed to use it. I think that there are certain circumstances in which Clause 8 could with advantage be used, and that there are also circumstances in which the corresponding power to contract given by Clause 2 (2) could be used—in those cases, for instance, as the noble Lord, Lord Swaythling, pointed out, where you have a currency movement that has nothing to do with trade and nothing to do with prices. Take, for instance, the case of a central bank that has been establishing a gold standard in its own country, has accumulated a reserve of sterling bills in London as a substitute for a gold reserve and then quite suddenly, as a matter of policy, desires to take £20,000,000, £30,000,000 or £40,000,000 of gold and have its reserve in its own country. There no one but a pedant would suggest an immediate attempt to recover that gold by high bank rates or anything of that kind. The event has really little relation to the economic conditions at the moment at which it takes place, and if, in that case, we can extend the fiduciary issue for the purpose of replacing the gold withdrawn for political reasons, that seems to me to be a perfectly proper operation.

Then, again, take the question of contraction. Assume for the moment that there is a plethora of world gold and assume that the United States, as the other great free market for gold, is doing what I believe the United States has done for a series of years—namely, sterilising gold because she has too much of it as a basis of credit. It might be desirable for the maintenance of a real gold standard that we in this country should imitate that policy and should to some extent sterilise the imports of gold and not allow them to have their full effect in forming the basis of credit. In that case, of course, the thing could be done by the Bank of England by allowing the reserve in the Banking Department resulting from the import of gold to accumulate and not to become the basis of credit. If the action were taken as a matter of public policy in the interests of the country generally, it might be unfair that the Bank of England should be allowed to bear the whole of the cost of that operation. Indeed, it might be that the Bank of England, being undoubtedly a commercial undertaking, would feel that, desirable as it might think the policy, the cost was prohibitive from the point of view of its own shareholders. This clause gives the Treasury an opportunity of stepping in to assist. By reducing the fiduciary issue, the additional gold goes into the Issue Department in place of securities, and the securities are liberated to the Bank of England. Those securities can pass into the Banking Department of the Bank of England and provide the revenue which would be lost under the alternative arrangement of maintaining an abnormal proportion of currency in the reserve in the Banking Department.

These, to my mind, are the sort of circumstances in which these exceptional clauses could properly be used. I think it very desirable that they should be in the Bill, but if there were any serious danger—I believe that there is none—of their being used merely for the purpose of inflating the volume, of currency for the artificial protection of credit, then I think this would be a very dangerous power to give to the Treasury and to the Bank of England; but I have sufficient confidence in the traditions of the Treasury and of the Bank of England not to fear such a use of those clauses, and accordingly I can give my wholehearted support to the Bill as a whole.


My Lords, I will not keels your Lordships two minutes, but there is one practical que- stion that I should like to ask. Up to this time, under the various Acts that were in force, any one possessing gold could take it to the Mint and have it coined into sovereigns at the rate of £3 17s. 10½d. per oz., or could sell it to the Bank of England for £3 17s. 9d. per oz. Now I understand that you can no longer take gold to the Mint and have it coined, nor can you receive gold in payment in the form of coins, but you will be paid in bank notes. The question that I want to ask is whether, when you sell an ounce of gold for bank notes, you will be paid £3 17s. 9d. or £3 17s. 10½d.


My Lords, I think that this question has been very fully debated, and it is perhaps hardly necessary for me to say much on the general principle of the Bill, because I think that, with the exception of Lord Arnold, the Bill has been generally very well received in this House. I really rise only to answer one or two ponts which have been put to me. One question, which was put by Lord Arnold, and was reinforced in a very interesting statement by Lord Swaythling, was as to the meaning of the word "securities." It was suggested that some amendment would be required, in order to enable "securities" to have the larger meaning, I think, of not only commercial bills, but possibly bills which were drawn, we will say, on a bank in New York in dollar currency. On that point the noble Lord made some interesting observations as to the wisdom of excluding bills drawn on countries where there was a possibility of the export of gold being stopped. I do not think I need go into that question at the present moment, because the short answer to the question is that the word "securities" does include both those classes of Bills, and so there is no necessity for introducing any amendment into the Bill in order to give that wider power to the Bank of England.

Then I think there was another question asked me by Lord Balfour of Burleigh—namely, as to whether when the return or information is given to the Treasury as to the class of securities held against the fiduciary issue, any sort of publication is to be made of it. I shall be very glad to consider that point. The same noble Lord also asked me whether, under Clause 11, a "person" included a company. I am advised that it does, and so possibly any anxiety on that point is removed.


My only other point was with regard to penalty.


I am not sure whether any penalty is required. I think it is stated definitely in Clause 11 that a person (or company) is required to sell to the Bank of England, but I will enquire whether a penalty is required. It seems that as the clause is drawn it is not required. I will not go into the questions, which can be discussed and have been discussed at very great length, as to whether the fiduciary issue is enough, or whether there is a sufficient amount of play in the fiduciary issue, or whether the Bank of England reserve is sufficient to meet the demands on gold. Really I think that the gist of Lord Arnold's criticisms was dissatisfaction with the Bank of England. His criticisms of Clauses 2 and 8 all seemed to turn upon the point that this discretion and power vested in the Bank of England would not be wisely used, and in order to prove the point he went back to several points in the history of the Bank of England on which he dwelt at some length. He referred to an incident during the War, in 1917, and said that the Bank of England had been charging too much for its services in the management of the Debt. I am not familiar with the details of that business. I had the general impression that the way in which the Bank of England behaved with regard to war profits was on a very generous scale indeed, but as to its charge for the management of the Debt I have not the details at my command.

Really the whole question of whether Clause 8 will be used or mis-used, or of the noble Lord's fears that there is going to be too much deflation, all turns upon the fact that the noble Lord is not satisfied with the composition of the governing body of the Bank of England, and suggested that an inquiry should be held. He said that the Government gave no reasons for refusing such an inquiry, but merely introduced a blank negative. I am bound to say that the way in which the noble Lord presented his case for an inquiry did not seem to me to be favourable to his getting such an inquiry, because it really consisted of an attack upon the Bank of England for its finance, and I understood that the demand for such an inquiry made in another place was not based upon any delinquencies of the Bank, so much as on a desire to democratise the government of the Bank, and to introduce other elements such as members of co-operative societies, and so on.

Again, there was the suggestion, which I think is very much beside the mark, expressed certainly in another place and much more guardedly by the noble Lord here, that there was some kind of division of interests between the financial interest and the manufacturing and commercial interests, and that they were to some extent pulling apart. If the noble Lord were to study those monthly bulletins issued by the great banks—Barclays and the Midland, and so on—he would see how closely the fortunes of all manufacturing and commercial interests were followed by those great banks, and how closely financial, commercial and industrial interests were bound up together. I am bound to say that I thought Lord Arnold was proceeding a little further in this criticism of the Bank of England, and that he was going to express his dissatisfaction so far as to advocate a policy which is advocated by his Party—namely, the nationalisation of the banks. I was very glad indeed the noble Lord stopped short of that.


Only through lack of time.


I am glad to know that, because the whole of the speech of the noble Lord led up to nationalisation, and it was really disappointing that he did not finish the building of his edifice by outlining his scheme for the nationalisation of the banks. We are now left lamenting that his scheme has not been put before us. That has really been the gist of the whole of his criticism of the Bank of England—namely, that it will not properly exercise its powers under Clauses 2 and 8. It was, however, really interesting to observe that the power of lowering and raising the Bank rate, which is to be left in the hands of the Bank or England, did not meet with his disapproval. I think the majority of your Lordships have shown yourselves to be strongly in favour of this Bill, and therefore I hope that you will now proceed to give it a Second Reading.

On Question, Bill read 2a, and committed to a Committee of the Whole House.