TOPICS OF THE DAY.
MR. McKENNA'S SPEECH. THE more Mr. McKenna's speech at the London Joint City and Midland Bank is studied, the more clearly it is seen to be a very important contribution to the solution of the financial problems which now perplex the nation. These are true riddles of the Sphinx. If we cannot find the answers, then assuredly our doom is sealed.
The world is so accustomed to pessimistic exaggera- tions that our use of such language will seem to most people conventional or merely rhetorical. They will reflect that they often heard the same kind of talk about extravagance and waste before the war and nothing very dreadful happened. Therefore there is probably no very great risk of anything happening now. Here, of course, is the eternal danger. At last the cry of " Wolf ! " is a true cry, and the fateful question of whether we shall recognize it as true or give it the go-by as sham is trembling in the balance. If we recognize it as a true cry and kill the wolf, all may still be well. If not, the fate which will come upon us, not perhaps so quickly or so dramatically as the pessimists think, but none the less surely, will be destruction like that which overwhelmed Nineveh.
Mr. McKenna, it is clear, fully realizes this. He gave us a peep into the danger, though evidently he felt that it was no more wise to dwell on it than for men in Switzerland to think about the precipices on each side of them when walking along an artte. . They must reflect not upon what would happen if they fell, or if the rope broke, but upon the necessity for avoiding carelessness, want of energy, want of determination, and want of that final vitamine of the mind—the belief that those will conquer who believe they can. Mr. McKenna's speech was valuable in two directions. First he gave us a certain amount of very clear and easily understood positive advice, and next he illuminated the whole plain of finance and showed us what the Government were doing, or contemplating doing, and how warily we must walk and what were the reasons for such careful- ness. The chief point in his practical advice is : Whatever happens, limit your taxation in such a way that you will tot take from the pockets of the people more than L950,000,000 a year. With that as the datum line, the Government of the day must be responsible for the alloca- tion of the money raised, provided, of course, that faith is kept with the State creditor and the State pensioner.
The next piece of practical advice implicit in Mr. McKenna's speech is that the Bank Rate should not bo placed high and kept high in order to produce a more rapid and what he would probably call an artificial deflation. Rather it should be kept as low as it can reasonably be kepi. Mr. McKenna's reasons are impressive. When you come to the bed-rock of the situation, what is wanted from every point of view for the poor, bruised world is more of everything. We want more bread, more meat, more clothes, more houses—in a word, more production and a greater number of exchanges. Remember, exchange is the thing which makes production vital and trebles or quadruples its utility. In insisting, however, that production is the essential we must never forget that if production is to satisfy our demands and so be of use to us, it must be cheap production. The cost of production must be lowered. But in modern commerce, in one form or another, produc- tion is carried on on borrowed money. When this borrowed money is cheap the cost of production is reduced. There- fore, other things being equal, cheap money is a great advantage to the producer, and of course also to the consumer. It is one of those bonds of kinship, too often unseen or ignored, which unite the twin brothers who, alas ! are always forgetting their brotherhood. Naturally, there is a limit to the cheapness of money as to everything else. Money made artificially cheap would have a demoralizing effect upon trade. Under ordinary circumstances, however, there is no fear of that. Cheapness stimulates demand so much that the price of money would soon go up. At present we have to admit that this safety valve is not working because the price of money in London is now not fixed by the commercial world, but by the Government owing to the fact that Government borrowings dominate the market. It seems unhappily unquestionable that at the present moment the Government, like the rest of the world, are paying more for their loans than they need pay. That is a misfortune from the tax- payers' point of view. In the first place temporary Treasury borrowings are unduly. expensive, and in the next place the number of unemployed who have in one way or another to be supported by the State is greater. When money can be obtained cheaply, the cost of production is lowered and employment increased. The less positive portion of Mr. McKenna's speech touched on another aspect of the Bank Rate and cheap money. We all know that the life-blood of commerce is what for want of a better term we must call speculation. Speculation has got a bad name through bad uses, but properly it means looking ahead and providing in advance for the needs of the world. That this is a most beneficial function will be universally allowed. But the trader is not a philanthropist. He runs risks, which in the case of many speculations are most serious, in the hope of a profit. Profit is the carrot in front of his nose. Now profit can be calculated and earned in a stable market—that is, where the conditions may be expected to remain unaltered between the preparations for meeting public wants and the actual satisfying of them. When there is a rising market things are still better. Then a man manufactures under one set of conditions and sells under conditions which are more advantageous for him. On the other hand, a falling market is apt to bring the speculator to ruin. The result is that when men see a rising market they are keen to anticipate the world's desire, and to do as much trade as possible. When they see, or think they see, signs of a falling market, they want to restrict their operations as much as possible. "Nothing doing." Indeed, but for the fact that times are sure to change some day for the better, men, contemplating a falling market, are inclined to say that they will got out and leave the whole thing alone for ever. But, says Mr. McKenna, the Government, by their policy of monetary deflation in order to force down prices by means of dear money, are not only securing but advertising a falling market, and so preventing the develop- ment of trade.
" A declared policy of monetary deflation is a public warning to the trader that he must be prepared to lose on every contract for the future delivery of goods. Owing to the general fall in prices the market price of the goods when he gets them will be lower than at the time when his contract was made. A policy of gradual monetary deflation, but deflation so guarded as not to interfere with production, is a policy impossible of execution. Trade is never good when prices are declining, but the consequence of a continuous fall in prices entailed by dear money and restriction of credit, and accentuated by heavy taxation, must be complete stagnation of business. We have to recognize the fact that trade is carried on for profit, and if business men know that loss is inevitable they will restrict their activities to the utmost."
This brings us to another point on the practical side of Mr. McKenna's speech. He points out that the only way in which monetary deflation can be properly and safely accomplished is by paying off a part of the National Debt. But this, he points out, could not be done except by imposing additional taxation, which must bring immedi- ate ruin upon our commerce and manufacture. We quote the passage. It shows that, in whatever way we explore the financia; situation, we always come back to the essential point—we must reduce taxation or be ruined :— " I do not want to discuss here the evils of over-taxation, but our experience during the last year has taught us that there is a limit beyond which trade and industry cannot be burdened without grave danger to their strength and perman- ence. That limit is passed when traders are forced to borrow from their banks in order to meet their liabilities to the tax- collector, and it is a fact that no inconsiderable part of the j expansion of credit during the year which has just elapsed was due to this cause. In present circumstances the only source from which funds can be obtained for repayment of the National Debt is by economy in expenditure, and by this means alone can monetary deflation be effected, or even attempted, without permanent injury to our trade."
Here we should like, by way of parenthesis, to throw out a suggestion which we have made before in these columns. Would it not be much better for us frankly to abandon at the present time the attempt to pay off any- thing in the nature of internal debt, since the effort to do so is only too likely to prove beyond our financial strength I Instead, why not try to get rid of the burden of the debt by, as we suggested last spring, converting the debt from permanent to terminable annuities ? We believe that the thing can be done either at no sacrifice at all, or at any rate at a very small one. That is a matter upon which Mr. McKenna will, we hope, some day enlighten us. The consideration of the Debt leads to another very important point, which, curiously enough, seems to be constantly forgotten by the deflationists. For good or ill we adopted a policy of monetary inflation which has lowered the purchasing power of the pound sterling by a half, and doubled the rates of interest, and so halved the value of all existing stocks and shares. That great revolution had great evils for the individual if great apparent advantages for the State. At all events, it took place and cannot now be altered. And for this very good reason. Under the con- ditions of inflation we have borrowed a very large part of our seven thousand millions of debt. We borrowed them, that is, in terms of depreciated money. If now by Government action we deflate, the result must be more than to double the burden of the debt. We shall in many cases have borrowed ten shill; g pieces and be paying back sovereigns. It comes to this—what we have got to aim at is not deflation any more than increased inflation, but stabilization. Though deflation may wear a more serious and prim face and may look more like virtue than her gay and reckless sister, inflation, she is really quite as dangerous. What we want to do is to maintain the existing conditions, or, at any rate, take no violent means to alter them. It is quite possible, provided wo act as wise men instead of fools, that a new prosperity may overtake us in the course of the next ten or twelve years—a prosperity due to new inventions, new schemes for avoiding waste, and, above all, a larger amount of skilful and determined work. If this were to happen we should reach the equivalent to deflation through our increase of prosperity. To reach the benefits of deflation gradually and by these legitimate means is a different matter altogether from deflation obtained by revolutionary and arbitrary processes.
If ever there was a moment when we ought to leave trade alone, it is now. If only they are left to themselves, our workmen would, as of old, prove able and ingenious, our merchants daring, resourceful, and honest. Between them, and unhampered by the blundering interventions of officials, they would, we believe, once more conquer the world of trade. If, however, we are to have perpetual Government tinkering, coupled with the inevitable con- dition of increases in taxation instead of decrease, there can be no improvement. Taxes are the fetters with which commerce is bound. Every time a new tax is put on or increased the burden of the shackles becomes more intolerable. Every time a tax is taken off, the prisoner responds in health, strength, and, above all, in the spirit, which is essential to prosperity. Already the taking off of the Excess Profits Duty has set some of the hitherto dried-up streams of production flowing once more. No doubt they are only tnckles, but if let alone these trickles may grow first into brooks and then into rivers. We should be doing a wrong to our readers and to Mr. McKenna if we forgot to note that he puts European peace, by which he means not peace protocols but real peace, among the essentials for the improvement of trade. We are not only heartily with him, but we think he did not go far enough. We wish he had insisted that though the German people probably played a more evil part than any nation has ever played in the history of the world, first in letting the Emperor begin the war and then in letting him maintain it almost without protest, we cannot possibly afford to give them, in the concrete, the punishment which we are quite prepared to admit they deserve in the abstract. The world in general, and England in particular, is actually in the position of the schoolmaster who says, " This hurts me more than it does you." We have got not merely to let Germany off a great deal of her punishment, we have got to do more in order to save ourselves. We have got to build up German coin- merce. We must do this because wealth is the product of exchange, and exchange is not a tax or a swindle, but a union of forces. Germany must be allowed to play .her part in that union of forces, or else we must all go worse housed, worse shod, worse fed, worse clothed. It is not too much to say that Mr. McKenna's speech ought to raise, and we believe will raise, him in the eyes of his countrymen as one of the ablest financial statesmen of the day. Feeling as we do, we hope he will not think that we are showing a disagreeable form of gratitude if we add another conundrum to that which we have already proposed for his elucidation. Is not the question of foreign exchanges, with all the great disturbance that they are making, in reality nothing more than the revenge which the Goddess of Economics is taking on us for our foolish attempts to manipulate, get round, or reverse the essential laws of her science ? We see the amazing .paradox that while low exchange apparently prevents the nation blessed therewith from buying goods from the nation with a high exchange, the nation with the low exchange is in possession of an automatic export bounty of a tremendous kind. Indeed, if we adopt the full theories of the Protectionists and of the neo-commercial system, it seems actually better business to lose a war than to win it.
Is not this in reality the way in which the aforesaid Goddess of Economics shows us that money is not wealth, but is, in fact, nothing but tickets for bread, mutton, beef (i.e., Petunia) ? Some people have a passion for collecting these tickets. America is stuffed full of them at this moment, but finds that she cannot eat them, and that they are a sort of dainnosa hereditaa. Always behind this ticket business stands the essential fact that trade is barter, that we pay for corn with pig-iron, or with some other material product, and that whenever a mass of goods is sent here from abroad it is in effect an active order for our goods to be sent in exchange.
We admit, of course, that in addition to all this comes the disturbing fact that gold, besides being the medium of exchange, is also the standard of value. We admit, further, that we are not equal to tracing what is and what ought to be the effect of that fact upon the question of foreign exchanges. We invite Mr. McKenna to tell us, for as far as we can see the matter has never been properly thought out by the Philosophic Economists. At present we are at times inclined to wonder, with Disraeli's Sidonia in Coningsby :— " There is no less treasure in the world,' said Sidonia,' because we use paper currency.' " Is that a meaningless remark, or is it a hint of a great if hidden truth ? *
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