LETTERS TO THE EDITOR.
DEFLATION AND UNEMPLOYMENT.
[To the Editor of the Scncr/vron.] Sin,—May I first of all point out that there is a defla- tionary factor at work to which perhaps you have not given adequate attention, but which strengthens your ease for a change of policy ? You truly say that by borrowing from the public to pay off floating debt held by the banks deposits are diminished. But what is even more important, a diminution also takes place in the very liquid reserves of the banks held against the remaining deposits. The actual cash held by the London clearing banks averages now only some 11 per cent., being considerably less than in pre-War days. This cash is probably not much more than is necessary for the actual working reserves. But behind the cash reserves there is a reservoir from which the working reserves are fed. It is the real reserve, and is composed for the greater part of Treasury bills. It is the level of this credit reservoir which is so important.
The deflationary policy has, therefore, a dual action. It reduces the deposits of the banks, and also—and in undue pro- portion—the liquid reserves held against the remaining deposits. To begin with the effect was perhaps not felt because of the superabundance of floating debt, and up to a point may even have been salutary, but as the process goes on it must inevitably be felt and with ever-increasing severity. Judging by the fact that Treasury bonds are still being offered for sale every week, the policy of reducing floating debt still obtains, although for the moment it may be inoperative. That this policy should be definitely stopped I am in entire accord.
But you propose to go further and actually to reverse the policy by increasing the floating debt, which in turn would increase deposits and also raise the level of the liquid reserve reservoir. At first this sounds logical—a mere replacement of a portion of what has been taken away. But without adequate safeguards, which at present do not exist, I must confess that one's banking instinct shrinks from embarking on such a policy. It is easy to embark upon it, but not so easy to get back to land, and there is no saying on to what quicksands we might ultimately be driven.
You further stress—and again I am in entire accord—the paramount importance of a stable standard of value. In this floating debt, or anyhow in the Treasury bill portion of it, which is convertible into curreney at the will of the holder, either at once or at the outside in three months, we have a standard of value, but the mischief is that it is not stable. If the floating debt is diminished prices tend downward ; if it is increased prices tend upward. I venture, therefore, to suggest that stability would be attained if we were to stabilize the existing floating debt, or anyhow the greater part of it, in such a way that all debts, including any subsequent floating debt, would-be-subordinate-to it That is to say, this portion of Ake
floating debt would be made not only a basis of credit, which indeed it is at present, but the sole basis of credit. Then any subsequent floating debt, such as you propose for your unem- ployment scheme, would become a part of the credit structure built upon that basis, as, in fact, floating debt used to be in the days of the gold standard.
Now this stabilization is perhaps a difficult operation for a country to perform alone and unaided. It is difficult for a country to make an absolutely binding contract with itself. The operation enters the realm of practical politics, however, if several countries to whom the sanctity of contract is simply beyond question were to agree upon a common policy.
I suggest, therefore, that the Imperial and Economic Con- ferences, if their members are prepared to co-operate, possess the power to give to the Empire the inestimable boon of a stable standard of value. Surely there can be no more fun- damental and important question before these Conferences ? Considerations of space prevent me from describing in detail what is now known as the Empire Currency Bill Scheme, which has been referred to the Economic Conference. In a word, the scheme seeks to stabilize, in the form of an issue of Empire Currency bills, an agreed upon proportion of the floating or short-dated debts of the countries of the Empire, against which, but against nothing else (except gold), the par- ticipating countries would agree to issue currency. By a stroke this portion of the Empire's debt would be placed in a separate category from all other debt, and would become the supreme source of credit to which all other debt and all other contracts must conform so long as the agreement between the countries lasted. Thus, as I venture to think, we would become possessed of a stable standard of value—an Empire standard and an Empire basis of credit.
We can now consider for a moment the operation of this Empire standard, with its safeguards and automatic checks, upon the Spectator's scheme of unemployment finance. Sup- pose that for the purposes of that scheme the British Govern merit decided to issue £50,000,000 of Treasury bills which were taken up by the banks. Other things being equal, the deposits would be increased by £50,000,000, but the base on which the deposits rest would not be increased. If this base—this reserve of cash plus Empire Currency bills—was normally, let us say, 20 per cent. of the deposits, then the reserves of the banks would be 110,000,000 below normal as the result of the above operation. Thus, the demand for British Treasury bills would decrease through a diminution in the power to take them up, while the demand for Empire Currency bills would increase because of the desire of the banks to augment their reserves. The rate for the former would therefore tend upward and the rate for the latter would tend downward. If, later on, resort were made to the Bank of England with Treasury bills for discount, or by the Government for a loan wherewith to pay Treasury bills off, the result would also depend upon the extent of the Bank of England's holding of Empire Currency bills, for against nothing else could it issue currency ; nor, for that matter, could the British Government issue Currency notes except against these bills. If the expan- sion of credit increased considerably, the Bank Rate would have to be raised in self-protection. In short, the checks to which we were accustomed - under the gold standard would be applied, and applied not in an arbitrary manner, but auto- matically. Of course it would be desirable that the total issue of Empire Currency bills should be fixed at a figure large enough to allow for considerable elasticity in credit. But the point is that this could be done with safety under the Empire standard, which provides an interest-bearing basis for credit and always under automatic control.
Under these safeguards, which would be provided by the Empire standard of value, there is, I think, much to be said for the Spectator's policy of regulating the payment off of debt according to the state of unemployment, and with that policy I am also in accord.—I am, Sir, &e.,
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