ADEQUATE AND INADEQUATE CURRENCY IN PRACTICE.

ON November 13th, 1872, that indomitable septuagenarian, Louis Adolphe Thiers, as Chief Executive, read to the National Assembly his Message containing this striking paragraph :— . " Ainsi, apres In guerre la plus malheureuse, apres in guerre 2ivile In plus terrible, apeZ..s recroulement d'un Wine qu'on ayait ern solide, la France a vu toutes les nations empressees de lui offrir leurs capitaux, son credit mieux etabli que jamais, huit milliards acquittes en deux ans, la plus grande partie de ces sommes trans- portees au dehors sans trouble dans la circulation, le billet de Banque aecepte comme argent, les impots, quoique accrus d'un tiers, acquittes sans ruine pour le contribuable, l'equilibre financier rcitabli ou pros de rare, deux cents millions consacres Li l'amortisse- ment, et l'industrie, le commerce s'augmentant de plus de sept cents millions en une seule annee ! Ces resultats que nous n'oserions pas remettre sous yos yeux, s'ils n'etaient in preuye frappante de in force vitale du pays, quoi les deyons-nous, Mes- sieurs 7 Nous les devons Li une cause, A une senile, au maintien eaergetique de l'ordre."

On the same day that Thiers was able to congratulate the grudging and fractious Assembly on France's libera- tion from the toils, the Bank of England raised the Bank Rate to 7 per cent., while the French Bank Rate was 5 per cent.

England had not just emerged from a disastrous war, she was not recovering from a desperate civil conflict, she had not been saddled with a huge indemnity, her constitution was in excellent repair, and order was as firmly established in Britain as in France. Yet England's monetary position was in a parlous condition, and the few traders who could secure accommodation had to pay a terrible price for it, while their French competitors had no difficulty in securing credit at a much lower rate.

How France came at this juncture to the assistance of England is told by M. Thiers in his memoirs. Thiers offered through Lord Lyons—British Ambassador at Paris—to advance one hundred to two hundred millions of francs to the Bank of England. The Bank refused the offer. M. de Maintenant, the French Government Financial Agent in London, was then instructed to delay remitting to Paris two hundred millions of francs in his possession and to leave this sum deposited with the Bank of England in order to relieve the Bank of its embarrassment.

Incidentally, it may be suggested it was due to his lack of business knowledge, which Thiers admits in his memoirs, that led him to believe the Bank of England would welcome a loan which would relieve it of the pleasing necessity of charging British trade and industry 7 per cent, for accommodation.

Just fifty years later, five years after France had emerged victorious from a war that had cost her more than all of her losing wars combined, the Economist thus describes her trade position :— "The outstanding features of the economic conditions of Fran& during 1922 included a remarkable revival of trade and of industry, largely increased production all round (except as regards wheat), a total disappearance of „unemployment, an unusual absence of industrial crises and serious strikes, an exceptionally low number of business failures, a notable recovery of investment business on the Bourse accompanied by a substantial rise in wholesale commodity prices, while retail prices have remained approximately steady."

There is no need to quote records as to the condition of British trade daring the past year, but reference may be made to the fact as to why it was not much worse than was actually the case. Providence rendered our two most serious competitors (Germany and the United States) unable, during the greater part of the year, to supply even their own needs of coal and those articles largely dependent on cheap and abundant supplies of coal.

It is interesting to inquire into the cause of this extraordinary power of recovery shown by France as contrasted with the evidences of quite other character- istics exhibited by Britain. The reason is, however, so obvious, when sought in the right direction, that had these effects not resulted from this cause there would have been good grounds for astonishment.

Since money is the most essential tool of trade, and the French system provides for an 'adequate supply of currency, while the British system is mainly dependent on the precarious supply of gold and is p :rated by those whose interests are in favour of inadequate supplies of money, it can be safely assumed that this difference of system is the main cause of most of British trade troubles.

The note issues of the Bank of France are decreed by law and fixed at a figure that is deemed adequate for the needs of the nation. The note issues of the Bank of England are, as everyone knows, limited by the amount of gold held by the Bank plus the sum of £18,450,000 owed by the Government to the Bank.

One cannot conceive Thiers committing the colossal blunder made half a century later by the British Treasury, which, in order to secure a reduction in the annual amount payable to the United States, adopted, at the recommendation of the Committee of Bankers, presided over by Lord Cunliffe, a course which probably cost Britain every year almost as much as the total amount of the American debt.

Turning to Britain in 1872 the position of the Bank of England on November 13th, when it extorted 7 per cent. from trade and industry, was that the Issue Depart- ment showed a riote issue of £33,979,380 and coin of £18,979,380, while the Banking Department had at credit £9,243,830 ! There were in addition; issued by private British banks, further notes of a 'total value of about £5,000,000, and a considerable—though unknown —.amount in gold coins in addition to the sums held or issued by the Bank of England.

The Bank of France had in issue on this same day notes of a value of more than one hundred million sterling and cash in hand of more than thirty millions ! The "outside " cash holdings were probably about the same in both countries. There seems to have been but a small supply of gold on offer in London in November, but there were good supplies of gold obtainable at par in October, and as usual the Bank of England made no special effort to strengthen its position before the autumn drain commenced. Seven years earlier Jevons, feigning to suffer from the same delusion as Thiers in the courteous assumption that the Bank had nothing to gain in main- taining Britain ill a perpetually " under-currencied " condition, wrote, with regard to the failure of the Bank to provide for the normal autumn stringency and its action in raising the rate of discount, in spite of the knowledge that the funds withdrawn would infallibly return to the Bank in a fortnight : ." It would have been only prudent for the Bank directors to strengthen their position _somewhat earlier than they did. When the expected run in the beginning of October came, it would have been unnecessary to put on so violent a. pressure as a rise of 2i per cent. in the rate of discount in ten days." Of course, Jevons knew, whereas Thiers probably did not know, that the Bank was not in danger. The worst that could happen from the point of view of that institution—and always the best from the point of view of the public—would have been the suspension of Peel's pernicious Act of folly of 1844.

The suspension actually took place a year after Jevons wrote as above. When the rate had for two years varied from 9 to _7 per cent.—for short periods it was - even lower !—the Government insisted when suspending the Act that the rate should be maintained- at 10 per cent. so that the Bank would be forced to secure a more or less adequate supply of gold.

The rapid changes of the Bank Rate have naturally a most harassing effect on-British trade, and the number of alterations made by the Bank of England in the thirty years ending 1906 were—if the British Encyclo- paedia is correct-j-183, as against 27 alterations made by the Bank of France.

Coming to just half a century later—namely, 1922— the position of British as compared with French banking and trade conditions has many points of resemblance to those in the respective countries in 1872.

The Bank of France had by -the end of last year in- creased her note issues to F.36,359,000,000, and her bullion holdings amounted to F.5,535,000,000, while deposits in French banks amounted to F.29,627,000,000. The note circulation in England amounted to £398,800,000 and the bullion to £154,500,000. British bank deposits amounted to £3,078,200,000. Thus the legal tender in France largely exceeds the bank deposits, while in Britain the bank deposits are about seven times as great as the legal tender. The "big five" banks could not meet a quarter of their cash liabilities if they drained the country dry of legal tender. It is common to suppose that only a very small fraction of the business of France is carried on through the banks, and it will probably come as a surprise to learn that the French bank clearings during 1922 amounted to F.760,035,000,000, as against 437,261,461,000 in Britain. At the average rate of exchange for 1922 the French deposits were 414,050,000,000—thus amounting to 37 per cent. of the British total.

As a result of the War the free gold market, that has in the past cost British indu.stry ten millions of pounds for every million of profit it has produced for the few individuals and their dependents who benefited by it, was closed, gold was withdrawn from circulation, and Treasury notes were substituted for sovereigns. Another natural result of the War was that prices rose (they rose nearly 100 per cent, before the issue of currency notes exceeded in value the amount of gold withdrawn from circulation), and as Dr. Shaw stated in an illuminat- ing article in the Quarterly Review :- "It is safer and more in analogy with facts to say that the rirdC in

pribes has produced an increase in currency notes than that the increase in currency notes has produced the rise in prices."

The resultant inflation of currency to keep pace with the inflation of prices facilitated trade in such a manner as to prove how extraordinarily Britain had been " under- eurrencied "in the past and, incidentally, as the Treasury insisted on payment in full for every note issued, a fruitful source of revenue from the dividends earned by the Treasury note guarantee fund was discovered.

In consequence of the report of the "Bankers' Com- mittee" the Government determined to inflict on the country all the well-known evils arising from inadequate currency, and the policy of reducing the Treasury note circulation by 80 per cent. was inaugurated at a time when the Goverrunent was warned by a Committee— chiefly, but not solely, composed of metal-maniacs- appointed in 1917 that abnormal demands would arise owing to :-

(a) The increased cost of labour and materials.

(b) The necessity for giving longer credit. (c) The higher cost of replacing machinery and plant and in many cases of converting war plant.

(d) The -demand for credit facilities for new capital requirements in respect of permanent outlay.

The adoption of this policy, which it can only be supposed was aimed at the strangulation of British industry, became effective in 1922, as proved by the unemploy- ment returns.

Undoubtedly this mad and drastic deflation policy had some effect in reducing prices, but the chief factor in the reduction of prices was the gradual conversion of the means of supply of military demands into the source of supply of domestic demand.

Prices fell continuously in Britain for nine months before deflationary operations began, and the greatest fall in prices (17.5 per cent.) in any quarter in Britain occurred during the last three months of 1920, and it was in this quarter . the maximum circulation was reached, while during the nine months ending March 31st, 1921, prices fell 39.5 per cent., though during these nine months deflation to the extent of 6.6 only occurred. The only quarter during the past two years when inflation has occurred was marked by the greatest fall in prices. In France a fall in prices of no less than 31.5 per cent. during the first quarter of 1920 accom- panied slight inflation—viz., 1.8 per cent.—while during the next two years deflation to the extent of 6.6 was accompanied by a trifling increase in prices. France, in fact, secured her fall in prices without destruction ot her means of employment, just as every G-ther country that followed her wise financial policy has done, and Britain would have done had her statesmen not aimed at reimposing on her industry the overwhelming handicap of an inadequate supply of currency.

Reference has already been made to the amazingly prosperous condition of French trade in 1922. It is noteworthy that her trade figures for 1923 show a sub- stantial improvement on those of 1922, while it seems practically certain that ,British -trade will go from bad to worse until some—even any—policy which provides for adequate currency is adopted. Though the French policy has served the country well—to it is due the fact that the market for labour and for goods has never been so strong, taxes are tolerable and the - Bank of France is in a position to supply the Government with immense cash resources at low rates (at the end of 1922 the advances of the Bank of France to the Government stood at F.23,800,000,000)—yet the financial policy adopted by the Egyptian Government in 1915, with its automatic supply of currency and its absolutely stable exchange, has certain undeniable advantages over the French system.

With regard to the present policy of Britain, it is only possible to say that the most caustic remark that could be addressed to an Englishman would be the gibe that every country has the system of currency it deserves I A. S. BAXENDALE.