PROMISE TO PAY

THE BALANCE OF TRADE

HE explained to his clients next morning that the crisis was over.

“ What has happened,” he said, “ is that a gold famine was produced by the inconsiderate action of a few selfish hoarders.  Though we possessed claims on gold we could not obtain the metal.  And so the Government has stepped in and said flat, till things right themselves, the notes it is about to issue through the National Bank will be counted as gold.  They will be the same as gold.  They will be legal tender.  I hope to have a supply of these notes to-day when I shall begin at once to pay them out to those who feel doubtful about the value of my IOU’s.”

As soon as people knew that the Government was standing in behind the banks they ceased to feel frightened.  Within a few weeks our banker had his gold back again on his shelves and had begun, once more, to build up his fortune.  He had not done so badly.  If he had sold many of his assets at a heavy loss, he had many more assets in his hands for which he could count on getting reasonable prices.  His losses, moreover, were losses not of money but of promises to pay it.  These promises had cost him nothing.  Now that he had the gold back on his shelves he could begin to invent more of them.  The boom was over ;  the town wallowed in the succeeding slump.  People with credit balances on his books, therefore, would have to withdraw them in order to pay their debts and since many of these debts were owed to borrowers from himself he would soon be able to cancel a substantial number of his IOUs.

He set his house in order and then lent the IOU’s he did not wish to use at home to the International Banker, who had also, thanks to the fall in prices, got out of his difficulties.  The goods which could no longer be sold at a profit at home were being rushed into foreign markets.  Exports were rising high enough to balance and pay for imports.  The demands for gold to send abroad were no longer being made.  But the International Banker, nevertheless, was very much shaken.  He and his colleagues called a meeting of the Home Bankers in the Capital City.

“ Gentlemen,” said the International Banker, “ you must now see that this state of affairs cannot be allowed to continue.  Look what has happened.  There was a chance of making big profits in railway construction.  What did you all do ?  You rushed in, headlong, with your IOU’s and lent everything you could lend in the hope of getting high rates of interest.  Up soared prices in consequence ;  up went wages.  There was so much buying power in the home market that nobody had any wish to export—even supposing that it had been possible, in view of the high wages and therefore of the high costs of production, to sell anything outside of the country.

“What was the result ?  Not enough exports to balance and pay for imports.  A demand by foreigners with claims against this country for payment in gold.  Like yourselves we, the International Bankers, lend our IOU’s to the extent of ten times our holding of gold.  The demands upon us were far greater than our means of meeting these demands.  We had to stop lending.  We had to call up every available loan.  Foreign trade came to a standstill.  That reacted back on you because it threw on to the home market the goods which could no longer be shipped abroad.  Home prices also fell.  You know the rest.”

The speaker paused for a moment.  When he saw that he had produced the effect he wanted, he added :

“ Those of us who have weathered the storm were saved by the action of the Government in declaring the moratorium and giving leave to issue notes.  But the Government is profoundly uneasy and the public is panic stricken.  If this sort of thing happens again it is as likely as not that the Government will take the banking system out of our hands.  We will be turned into mere agents, forbidden to create private promises-to-pay and compelled to handle instead the Government’s promises.  There will be small profit for any of us in that arrangement.  So it follows, evidently, that we must add safeguards to our system, such safeguards as will make it impossible for any boom in the country to reach such dimensions as to interfere seriously with the export trade.  I have to propose . . .”

Here the International Banker assumed almost a threatening expression.

“ I have to propose that, in future, when a golden coin leaves this country a National Bank note to the value of that coin shall be removed from circulation—in other words that buying power to the amount of the departing gold shall be taken from the home market.  Such a withdrawal of buying power as you know, will at once produce a fall in prices and bring the boom to an end before it has become a danger to all of us.”

Our banker rose and glanced about him uneasily. “ You are asking us,” he said, “ to consent to an arrangement which places us wholly in the hands of yourself and your colleagues—of International Finance.  And not us only.  Our clients as well.  The whole nation.”

“ No, sir.”

“ Yes, sir.  Because it comes to this :  if you, the International Bankers, choose to make large loans of your IOU’s to foreigners, and if, in consequence, gold leaves this country .  . .”

“ Excuse me, but our business is to finance trade.”

“ Do you deny that you make loans to foreigners ?  To foreign governments ? ”

The International Banker was silent for a moment.

“ Money,” he said, “ must find its level.  It must be allowed to flow into those markets where it can promote the largest possible amounts of wealth.”

“ That means where it can earn the highest rates of interest compatible with safety,” our banker exclaimed.

“Well ?”

“ Your loans to foreigners may easily upset the exchange so that gold must flow out of this country.  Suppose for example that you lend £1,000,000 to the Greek Government to build a railway and suppose, further, that the Germans are producing rails more cheaply than we can produce them.  The Greeks will buy their railway in Germany.”

“ Certainly.”

“ And you, the lenders to the Greeks, will therefore have to pay the Germans.”

“ Yes.”

“ In marks.”

“ Of course.  Pounds would be no use to the Germans.”

“You will have to buy marks with pounds ?”

The International  Banker nodded.  He shrugged his shoulders.

“ What you are going to say,” he remarked, “ is that, if we buy marks with pounds, the marks will grow dearer and the pounds will grow cheaper—on the Foreign Exchange Market.  Of course they will.  The more the demand the higher the price.” He held up his hand to silence our banker who wanted to speak.  “ I’ll finish your complaint for you,” he exclaimed.  “ You were going to say that if marks become too dear in terms of pounds, it will be cheaper to use the pounds to buy gold in the first instance and then to use the gold to buy marks.  I admit that, too.  Gold will leave the country in these circumstances.”

“ And when gold leaves, if you get your way, notes will be taken out of circulation here at home.”

“ Quite so.  That is my proposal.”  “ And prices will fall ? ”

“ Yes, and wages also.  Then we shall be able to make railways as cheaply as the Germans, more cheaply perhaps.  When that happens foreigners will buy in this country and we shall not need to send our gold away.”

“ It means,” the Home Banker said, “ that you can play one country off against another ;  that you can force the workpeople in all countries to accept the same wages as the lowest-paid workpeople in any country ;  that in consequence, you can prevent any country from retaining enough buying power to buy its own goods and so can force any country to export its goods in competition with all other countries ;  it means bitter competition between nations for foreign markets, armaments and preparations for war-perhaps in the end war itself.  We, the Home Bankers, will be powerless to resist you because, if you send gold out of the country, we shall automatically be compelled to shorten sail, to call up loans—no banker can expand his loans on a falling market.”

“ My dear sir,” the International Banker exclaimed, “ you can lend abroad just as well as we can.  If you have IOU’s to spare you can invest them with us or you can invest them with foreigners.  It will be all to your advantage because you will be getting the highest rates of interest which the world offers and, at the same time, compelling the people at home here, to produce more cheaply and so make better borrowers of themselves.  We’re money-lenders, remember, not philanthropists.  What’s more, we’re all in the same boat.  What we have to secure is that we can create our IOU’s and that, having created them, we can lend them at the highest obtainable rate of interest.  We can only be sure of doing that if the act of taking money out of a country compels that country to produce more cheaply.  Our IOU’s must find their level.  And they must not, on any account, be replaced without our consent in the countries from which we have withdrawn them.  The reason why governments must never be allowed to interfere with our operations is that the interests of governments are nearly always opposed to our interests.  A government always wants to avoid a fall of prices and wages and a rise of unemployment and, therefore, a government is always tempted to create money to replace the IOU’s we have taken away.”

FOREIGN EXCHANGE

A FEW days later, at a more intimate gathering the International Banker explained his view with greater clearness.

“ The sap and marrow of this business of money-lending,” he declared, “ is a movable price-level and hence a movable wage-level.  You Home Bankers know perfectly well that if prices or wages were fixed or pegged in any way, if they were even moderately stable, you would soon be out of business.  Imagine such a state of affairs.  Farmers would know, roughly, what they were likely to get for their crops ;  manufacturers would know what they could expect to obtain for their goods.  They could all, therefore, arrange their businesses with confidence.  They could set so much aside for rent, so much for wages, so much for machinery.  And they could do this with a good assurance that the sale of their products would enable them, year after year, to pay expenses and put a profit in their pockets.  Very soon they would get out of debt.”

He paused and fixed his eyes on our banker who was listening uneasily.

“ What would be your position, then ? ” he asked our banker.  “ Your loans paid off ;  your hands full of your IOU’s.  To whom could you lend these IOU’s ?  All around you prosperous people, people with credit balances on your books ;  and no means available any longer for making these people wish to borrow.”

“ Why not ? ”

“ Why not ?  My dear sir, I am supposing that the price-level, or, since it comes almost to the same thing, the wage-level, has been fixed or stabilized by the Government.  If you withdraw your loans, and prices, in consequence begin to fall, the Government will step in and, by creating money itself, will raise prices again.  If you make too many loans and prices, in consequence, begin to rise, the Government will step in and, by taxation, or some other device, withdraw money from the markets and so lower prices again.  Buyers and sellers, therefore, will be assured of their markets and will have nothing to worry about except popular taste and the competition of other buyers and sellers.  All the competent producers, that is to say all the good borrowers as things now stand, will, as I have said, get out of debt and acquire their own capital.  You will not be able to lend your IOU’s.  Since you are money-lenders and nothing else you will not have any means of livelihood except the commissions you may earn by looking after other men’s wealth.  We shall be back to the old position of keepers of strongrooms.  We shall be clerks, accountants, cashiers—without influence and without power.”

He paused again.  Our banker frowned.

“ Possibly,” our banker said, “ that might occur if the price-level, or the wage-level, really was pegged by Government.  But who to-day is thinking of fixing the price-level or the wage-level ?  An odd crank here and there, perhaps ;  nobody pays any attention to them.  Everybody, on the contrary, is firmly convinced that what must, at all costs, be kept fixed is the rate of exchange between our money and foreign monies, and you know that if the rate of foreign exchange is fixed, neither the price-level nor the wage-level can possibly be fixed as well.  What you are trying to make us believe is that, unless we, the Home Bankers, give you the power to make us shorten sail and call up our loans whenever it suits you, all our businesses will be ruined.”

“Quite so.  That is exactly what I am trying to make you believe.  And it happens, I may add, to be true.  Suppose, for a moment, that you go on as you have been doing.  Suppose, for a moment, that such a person as an international banker exists nowhere on earth.  Suppose that this country is absolutely self-contained, isolated, shut up within itself so that nobody ever wishes to go outside of it.  And suppose, further, that you go on lending your IOU’s in the future exactly as you have done in the past.  What is going to happen ? ”

Our banker shrugged his shoulders.

“ Very much what has happened before I suppose,” he said.

“ You think that, do you ?  You think that boom will go on succeeding slump and slump boom for ever and ever, while you continue to make money both ways ?  You think that when your neighbours are poor you will be able to lend them your IOU’s and that, when they have grown rich, you will be able, by withdrawing these IOU’s, to seize their wealth and make them poor again so that, once more, they will be eager to borrow from you ?  You think that they will go on, from generation to generation, playing the part of a flock of sheep, growing new coats of wool for you to clip ?  For that’s what it comes to.  I can assure you that you’re very much mistaken.  I’ll tell you what, on the contrary, will happen.”

The International Banker lit a cigar and leaned back in his chair.

“ This is what will happen,” he said.  “ For a time, a few years possibly, you will be allowed to get away with it.  That will be so because your fellow townsmen will still be ignorant about what is going on.  After a time, however, when they have suffered one or two slumps, they will begin to interest themselves in money matters.  Committees of Inquiry and probably Government Commissions also will be appointed.  And these Committees and Commissions will have as their chief object the support of the price-level because everybody, of course, will be aware that it was the fall in prices which was the immediate cause of the slump and so of the distress and bankruptcy and unemployment which are attending it.  Students of this subject will explain that prices depend on the amount of buying power in the market and that, consequently, if buying power is kept up, prices will remain steady.  They will explain, further, that buying power and wages are very nearly the same thing.  ‘ Pay higher wages,’ they will say, ‘and prices will rise.’ ”

“ There will be employers of labour on the Committee or Commission and they will at once become very angry and ask how a man can pay higher wages when prices are falling.  For a while there will be a wrangle about this.  One set of people will declare :

“ ‘ Wages are buying power ;  raise wages and prices must rise.’

“ Another set, the employers who have to pay the wages, will answer :

“ ‘ Prices have fallen although we did not reduce wages.  How can we be sure, therefore, that if we raise wages prices will rise ? ’

“ In other words does the wage-level decide and determine the price-level or does the price-level decide and determine the wage-level ?  We all know how that argument goes.  But what you Home Bankers do not seem to realize is that anybody who cares to study the subject must reach the conclusion, on the facts available, that wages, as things are to-day, always follow prices and never lead them.  It is when prices rise that the clamour for higher wages begins and the higher the rise of prices the louder the clamour.  In the same way, employers never try to cut wages until the prices of their goods have begun to fall.  You may say that this is a natural order and you may try to show that it is over-production on the one hand which brings about the fall in prices, and depletion of stocks, on the other, which causes prices to rise.  But I warn you that you will not be believed for very long.

“ Why will you not be believed ?  Because there will be before the eyes of your fellow townsmen, daily, the spectacle of hunger and want in the middle of plenty.  The word ‘ over-production’ is unconvincing in such circumstances, and so, too, is the word ‘ under-consumption’.  Everybody will see that what, in fact, is lacking is money.

“At once, you will be faced with the question :  ‘ Why not let the Government print more notes and distribute them ?  ’ You will then be compelled to argue that money created in that fashion cannot be sound money and must, ultimately, do more harm than good.  Think of all the difficulties into which such an argument is sure to lead you.  For what, in fact, will you be saying ?  That gold and silver alone are real money and that money which cannot be converted or changed, at the will of the holder, into gold and silver is unsafe and unsound.  Think what that contention really amounts to.”

The International Banker paused and leaned forward.

“ A government,” he went on, “built a theatre and staged a play.  But because it was generally believed that the tickets for the theatre ought to be printed on pieces of gold, the government did not, itself, issue any tickets.  Instead it applied to the only man in the country who possessed any gold and asked him to undertake the issue of tickets.

“ This man, naturally, drove a hard bargain.  He soon found that people did not like carrying heavy golden tickets about with them and so supplied, instead, paper tickets each of which bore the words

“ ‘ I promise to pay the bearer on demand a golden ticket.’

“ The scheme worked very well except that only enough tickets to fill the Stalls were issued, so that the rest of the House remained permanently empty, although large number of people wanted to buy the vacant seats.  In these circumstances the Government approached the issuer of the tickets :

“ ‘ Could you not,’ they said, ‘issue enough tickets to fill the house ? ’

“ He shook his head.

“ ‘ My tickets,’ he said, ‘ are IOU’s for golden tickets.’

“ He said this with great emphasis.  Because, in fact, and unbeknown to the Government, he had already issued ten times as many IOU’s as he had golden tickets in his safe.  He was afraid to issue any more IOU’s in case, for any reason, people suddenly began to want golden tickets instead of paper ones.  At the same time he was determined that the Government should not find out that paper tickets, which had no golden tickets behind them, served quite well their purpose of filling the seats in the theatre.  So when the Government asked, timidly, if it mattered whether or not paper tickets could be changed into golden tickets he flew into a great rage.

“ ‘ What ! ’ he cried, ‘ you want me to print paper tickets without a backing of gold.  Are you mad ?  How can a ticket which cannot be changed into gold give any satisfaction to its holder ?  How can its holder possibly enjoy your play ?  How can he be expected to see and hear like a man whose ticket can be changed into gold ? ’

“ So violent and threatening did the issuer of the tickets become that at first the Government was terrified.  No doubt he knew more than they did.  But after a time a few members of the Cabinet, who regretted deeply the empty seats in the theatre, ventured to approach him again.

“ ‘ Surely,’ they said, ‘ the value of the ticket resides not in the material of which it is made or into which it can be changed but in the theatre and the play.’

“ ‘ You want to inflate, do you ? ’ the issuer of the tickets shouted.  ‘ To issue tickets which cannot be changed into gold, let me tell you, is to inflate.’

“ ‘ No, sir.  We want to fill the theatre.  To use the accommodation we have provided for our fellow citizens.  Surely real inflation would be issuing more tickets than there were seats ?  So long as we have empty seats we can safely issue tickets against them ? ’

“ ‘ There you are.  Unsound tickets.  Tickets that cannot be changed into gold.  May the public be protected from such men as you! Could you enjoy a play if you felt, all the time, that your ticket was nothing but a piece of dirty paper ?  I ask you that ? ’

“ ‘ We should have obtained our seats.’

“ ‘ Seats! What are seats when you have bought them with worthless paper ?  Can a man sit easily on a seat of that sort ? ’

“ ‘ My dear sir, our theatre is very well appointed.  The seating accommodation is excellent in every way.  Besides, you know, one gives up one’s ticket before one takes one’s seat.’

“ ‘ That makes no difference.’

“ Suddenly the issuer of the tickets changed his ground.

“ ‘ How can you be sure,’ he asked, ‘that if your tickets cannot be changed into gold, you will not print too many of them-so many that there will be no seats for half the holders ? ’

“ ‘ We know the number of seats in the theatre.’

“ ‘ That’s no safeguard.  You’re politicians, are you not ?  Politicians cannot be trusted with tickets.  They always print too many.  Look at Germany.’

“ ‘ We need not print too many.’

“ ‘ You always do.  Always.  Always.  Always.’

“ The issuer of the tickets shouted himself hoarse.

“ ' Are we to keep the theatre half empty for ever ?’ the members of the Cabinet asked, ‘ simply because of the possibility that too many tickets might conceivably be printed.’

“ They left the issuer of the tickets and devoted themselves to a study of his methods.  They found, very soon, that he was doing himself exactly what he refused to allow them to do—namely, issuing many times more paper tickets than he had gold with which to redeem them.  It did not take them long to see that the reason why he was able to do this was that very few people ever wanted to have their paper tickets changed into golden tickets.  So long as people could get seats they were quite content.”

The International Banker paused.  He wiped his brow.

“ You may preach yourselves hoarse in trying to convince governments that money that cannot be converted into gold is useless or dangerous.  Governments will find out that your own IOU’s are an example of this useless and dangerous kind of money.  And once they make that discovery they will take away your power to issue IOU’s at all.  They will provide their own money so that the goods which have been produced may be distributed and used.”

“ But surely,” our banker cried, “ you don’t deny that over-production is inherent it human nature ?  When men see a profit they rush to take it.  It is this confidence which makes a boom and it is lack of this confidence …”

The International Banker interrupted him with a gesture of impatience.

“ Keep that stuff,” he snapped, “ for you :  public meetings.  Ask yourself if you would listen to it after a sharp fall in prices had driven you into the bankruptcy court.  What you’d be concerned about in that case would be to find a remedy—to discover some means of preventing prices from rushing up or tumbling down.  And you would find a remedy because the remedy, once you begin to look for it, is staring you in the face.  Prices rise when people are given money to spend ;  they fall when the money is taken away.  The remedy, therefore, is to maintain a constant relationship between the quantity of money and the quantity of goods.  Nobody knows better than you how easily that can be done.  Remember that our method of inverting promises-to-pay is no longer a secret.  Everybody knows that an IOU is not gold and that the number of IOU’s exceeds the amount of gold and silver in your vaults.  What you can do the Government can do also.”

“ The Government does not possess gold and silver.”

“ What! My dear sir, the Government possesses the power to impose taxation.  And it can demand that the taxes shall be paid in gold and silver.  How long could you stand up to a demand of that sort ? ”

The International Banker waved his hand.

“ Believe me,” he added, “ one or other of the Commissions or Committees would propose a fixed or regulated price-level.  Why, look at the books and papers written by the currency-cranks, as we choose to call them.  There are a hundred and one schemes in these books and papers, but each of the hundred and one contains the same bed-rock demand—namely, that prices shall be controlled.  That is the real meaning of the price-index scheme, of the ‘rubber’ or ‘commodity money’ scheme, of the schemes for public works in times of trade depression, of the schemes for raising wages, of the Social Credit scheme.  All these reformers are concerned, first and foremost, to counteract our power to raise or lower the price-level.  They want to give the producer conditions in which he can get out of debt and stay out of debt.  They want, in other words, to put an end to money-lending.

“ Now it is obvious that if money-lending comes to an end we come to an end with it.  Our business therefore is to see that this country, and the whole world, is kept full of good borrowers and that these good borrowers are not allowed to become capitalists of independent means, able to finance their own undertakings.  We have to fix our burden of debt on their shoulders in such a way that it can never be shaken off.  The true secret of money-lending is to lend in such a way that the debt can never be repaid except by contracting a new debt.  That can only be accomplished if the price-level remains free to rise or fall as we may determine.  Clearly, therefore, some element which can be relied upon to bewilder the minds of producers and reformers is necessary to the safety, and indeed to the existence, of our system.  What is that element ? ”

The International Banker leaned forward again in his big armchair.

“ It is,” he declared, “ the element of foreign trade.  Once the idea of foreign trade is firmly fixed in people’s minds there can be no more talk about fixing the price-level.  Do not forget that a stable price-level means a stable level of wages.  Wages and costs, let me repeat, are nearly the same thing.  If our wage-level is higher than that of, say, Germany, how can we hope to sell our goods in foreign markets against German goods ?  We must therefore keep wages down.  But if we keep wages down we are also keeping buying-power down.  Hence we shall have a surplus of goods always, which cannot possibly be sold in the home market.  These goods must go into foreign markets or else remain at home to depress further the level of prices.  Every producer will live in fear of these surplus goods.  Every producer will desire to see these surplus goods sold abroad so that they may not remain at home to destroy his market.  Every producer will therefore be in favour of low wages, of low buying-power in the home market and of a price-level capable of being adjusted to meet the needs of the export trade.  It will become an axiom of our economy that we live by our export trade.  We shall be able to ask the reformers and the cranks how they propose to export if our goods exceed in price those of our competitors.  ‘ What,’ we shall say, ‘ you wish to fix prices! Do you realize that if, having done so, you happen to be faced by lower prices in some foreign country, you will be compelled either to change your price-level or to lose the whole of your export trade ?  ’ When we ask that question they will see, looming before them, the spectre of markets glutted with goods which cannot be sent abroad.  For do not forget that, by that time, our industry will have been organized for foreign rather than for home trade and our agriculture will have been diverted into such channels as the breeding of pedigree stock and the production of milk.

“ We shall be importing most of our food to pay the interest on loans made abroad.  We can alarm the politicians, if need be, by asking them how they propose to pay for the People’s food if they do not export more than they import.  Believe me, my dear sir, those arguments and questions will effectually silence any kind of opposition to our wishes.  Everybody, the Government, the Political Parties, the manufacturers, the merchants, even the farmers themselves, will be convinced of the absolute necessity of maintaining the export trade.  They will be convinced therefore of the necessity of keeping our money stable with the monies of foreign countries, that is to say of maintaining a fixed foreign exchange by the use of gold as the international currency.  They will all exert themselves to keep costs and wages as low as possible and thus to deprive the home market of the power to buy the home products.  You will be assured, for ever, of a freely movable price-level.”

Our banker shook his head.

“ But, so far as I can see,” he objected, “ we shall not ourselves be allowed by you and the other International Bankers, to move that freely movable price-level.”

“ Oh, yes, you will.  Indeed we shall move it for you if you don’t move it for yourselves.  Our interests and your interests are the same.  We are money-lenders or rather lenders of promises to pay money.  We need a plentiful supply of good, honest, hard working borrowers.  The only way, as I have said, to secure such a supply is to induce men of the right type to embark upon industrial enterprises which require large amounts of capital for their initiation.  How can we induce good borrowers to undertake such enterprises ?  You have already answered that question.  By offering them the chance of a profit.  In other words by making it clear that prices are going to rise.  How can we make that clear ?  By giving loans to people, no matter where, who wish to build something, to make something.

“ Let me give you an illustration.  Business has slumped in this and other countries.  Prices are low and labour, by reason of unemployment, is cheap.  We, the International Bankers, have IOU’s on our hands which we are anxious to lend.  We know that the people of the Argentine are anxious to build a railway and are only waiting till they think prices have reached bottom in order to begin the work.  We approach the Argentine government and offer it a loan.  Our loan is accepted.  As prices are very low in this country the order comes here.  We begin to pay out money to steel works and other construction firms in this country.  More labour is employed.  There is more buying power, at once, in the home market.  Prices, therefore, turn upwards.  It soon occurs to the local builder that there is likely to be an improved demand for small houses.  He gets out plans and comes to you, the Home Bankers, with a proposition for a loan.  And so on.”

The International Banker rose and stood in front of the fire.

“And so,” he said, “the boom begins.  You get your IOU’s working for you until a point is reached when prices and wages in this country have risen so high that it is no longer possible to export to foreign countries.  Exports fall off, therefore, and fail to pay for imports.  We, who are lending our IOU’s to finance foreign trade become aware that, very soon, merchants will be asking us for gold to send abroad in payment for imported goods.  We begin therefore to raise our rates of interest so as to stop borrowing.  That is the signal to you to raise your rates also-for you know that if you go on lending at the old rates, in spite of our signal, exports will fall still farther by reason of a further rise in home prices.  We will be compelled in that case to part with still more gold and the outflow of gold will result in the withdrawal from yourselves of a corresponding quantity of notes of the National Bank which, under the system I am proposing, you will be allowed to count as equivalent to gold and on which, therefore, you will have lent ten times their value of IOU’s.

“ In other words disregard of our signal will inflict on you and on your clients the heavy penalty of a catastrophic fall in prices, which is likely, as you know, to cause a panic and lead to demands by your clients for real money far in excess of your holdings.  Obviously you will wish to avoid that danger.  You will therefore act at once on our signal and begin, gently at first, to raise your rates of interest to borrowers and to call in some of your loans.  As a result the fall in prices will be slow and gradual.  You will profit by the higher rates of interest and you will be able to lend to us the IOU’s you can no longer lend at home—for, with falling prices and costs, exporting will have begun again.  This gradual rise and gradual fall of prices will not produce effects such as are produced by wild booms and violent slumps.  There will be no panic when the fall takes place and consequently we shall not be plagued by Committees of Inquiry or by the attentions of currency cranks.  The system will be semiautomatic.  And there is another point .  . .”

The International Banker held up his hand in a gesture which recalled that of a clergyman bestowing a blessing.

“ There will be large numbers of people,” he declared, “ to whom this close linking together of all the nations of the world will make strong appeal on sentimental and humanitarian grounds.  If we are attacked, we can reply that the foreign exchanges are the charter of internationalism.  We can say that the world has become one in trade and commerce as it must, ultimately, become one in sympathy and in brotherhood.  We can insist that the day has gone by when any nation, even the greatest, can live to itself.  We can extol the blessings of a league of nations and speak with horror of nationalism and economic nationalism.  We can proceed to discussions on disarmament.  We shall, thus, rally to our support all the liberal elements of the community, all the humanitarian elements, all the pacifist elements, all the socialists.  Our money will seem to be the cement of peoples, the enemy of war, the sure means to the world-state.”

The International Banker’s face expressed a lively satisfaction.

“ Believe me,” he concluded, “ I mean what I say.  Men are but animals, after all, greedy, hungry, selfish, of such nature that it is by their self-interest alone that you can hope to lead them.  If we hold them in our debt, and make borrowers of them all, that is only the better to serve their highest and truest interests.  Our power will be absolute, for there will be no escape from us.  We shall use that power to unite the peoples, to reorganize industry and trade on a more remunerative basis and to combat everywhere the individualism which constitutes so serious a menace to human progress and human happiness.”