PROMISE TO PAY

REMEMBER THE MORATORIUM

THE International Banker developed further his humanitarian views when he was called by the Government to advise them about the crisis and the way of preventing trouble in the future.

“ The lesson,” he said, “ which I draw from the recent financial panic in this country is that we have been trying to grow rich at the expense of the rest of the world.  We saw a chance of profit and seized it without regard to the needs of our neighbours.  There was a wild orgy of spending, of borrowing ;  prices rose to fantastic heights and expectations of profit assumed grotesque proportions.  Wages mounted up and a standard of living far above our means was indulged in.  Now that the bubble has burst we are realizing that no nation can afford to get out of touch, out of step, with its neighbours.”

The Chief Minister nodded approval but the Home Minister displayed a less accommodating temper.

“ If the banks had refused to lend so much money,” he said, “ the boom would not have attained such dimensions.”

“ I agree.  The Home Bankers ought to have raised their rates of interest long before they did.”

The Home Minister frowned.

“ On the other hand lending stopped just when a great mass of goods was coming on to the market, that is to say, when more, and not less, money was needed.”

“ There had been gross over-production.  The goods could not, by any means, have been sold at home.  It was essential to bring about a fall in pricey in order to get the goods into foreign markets and so save the producers from ruin.”

“ Suppose you had created more buying-power for the home markets. . . .”

“ No, sir.  Allow me, sir, to question your assertion that bankers create money.  What we lend is our credit, the good name which honest dealing has built up and advertised.  This credit is valuable only so long as we refrain from any action likely to shake it.  It is valuable by reason of our knowledge of borrowers and their businesses, a knowledge difficult to acquire and costing much money in its acquisition.  Why, sir, any man may set up as a banker.  Any man may lend his credit.  But there is credit and credit.  Why does the public seek eagerly for one man’s credit, give goods and services for it and take it in exchange for debt ?  Clearly because that credit is big with value.  Why is another man’s credit worthless ?  Because it has no value.  Surely a man may sell the field he has tilled or the business he has created for what it is worth to his fellows ? ”

This speech won the approval of the Chief Minister who nodded gravely.  But the Home Minister frowned once more.

“ People borrow your IOU’s,” he said, “ solely because they believe these promises can be converted into gold.”

“ No, sir.  Everybody knows that a big run on a bank must break it.”

“ You are suggesting that what you lend is well worth the price asked for it.”

“ Evidently, since people continue to pay the price we ask.” The Home Minister leaned across the table.  “ Any roguery could be justified in that way,” he declared.  “ In fact there is next to no gold behind your promises.  We can therefore exclude that metal from our discussion.  What are you lending, then ?  Your skill, you say ;  your good name ;  your business experience.  But no borrower wants these things.  What borrowers want is money—something with which they can buy things or pay wages.”

“ Quite so, we lend the means of buying and paying.”

“ It is the public which honours your promises by giving goods for them.”

“ You are saying that the public trusts, and so covets, our promises.  Would the public accept Mr. X’s promises ?  Of course not.”

“ Wait a moment.  What the public is getting in exchange for its goods are your promises to pay what you do not possess and never have possessed.  Your skill and experience in the circumstances in which they are exercised are worth nothing to the public.  Do you suggest that the banks which failed in the recent crisis had less skill and experience than you have ?  Everyone of you would have failed if we, the Government, had refused you the Moratorium.  You told us that your self.  I say again that what you are lending is essentially worthless and has been proved to be worthless.  But you are able to palm it off on the public because we, the Government, have, in fact, if not in name, given you the Nation’s credit to play with.”

The International Banker shrugged his shoulders.

“ How so ? ” he asked.

“ The credit of any nation depends on its character and its resources.  A nation without courage, without discipline, without skill or without honesty can possess no credit.  Nobody could or would lend anything to such a nation.”

“ I agree cordially, my dear Home Minister.”

“ It follows, does it not, that what gives value to your promises-to-pay is the credit of the nations to whom these promises are issued ? ”

“ What ? ”

“ How much gold is there actually behind every £10 of your IOU’s ? ”

The International Banker hesitated.  The Home Minister made a quick gesture.

“ Before the National Bank was allowed to issue notes to replace gold,” the Home Minister said, “ there was £1 in gold behind £10 of your IOU’s.  To-day, since the new notes have appeared, there is considerably less.  The National Bank will issue three £3 notes, roughly, for every £1 in gold it possesses.  You will lend £10 of IOU’s for every National Bank Note you possess.  Consequently the gold backing behind your IOU’s for £10 will be 6s. 8d.  Do you agree ? ”

“ Oh, yes.”

“ What would you say to a man who tried to pay a debt of £10 with six shillings and eightpence ? ”

“ What has this got to do with banking ? ”

“ Everything.  The fact is that your IOU’s are worth almost nothing.”

“ They buy anything you like to buy with them.”

“ Exactly.  Because the public thinks they possess real value.”

“The public knows that we lend more promises to pay money than the actual amount of money in our hands.”

“ Not at all.  What the public thinks is that you are lending good money, money earned by other people but entrusted to you for lending purposes.  The idea that you are engaged in creating money out of nothing.

“ I deny that.  We do not create money.  What we do is to distribute goods.”

“How ? ”

“ By lending our good name so that these goods may be disposed of.”

“ You mean by lending your promises to pay money, your IOU’s ? ”

“ These are our goods.  You are at liberty, if you wish, to lend your good name in the same way.  Our good name, it may be, would command a higher price than your good name.”

This was spoken with a charming smile.  But there was no answering smile on the Home Secretary’s lips.

“ What you are really saying,” he exclaimed, “ is that the public believes that you have money to lend, but does not believe that I am in that happy position.”

“Well ? ”

“ Whereas, in fact, you have no money to lend.  You do not lend money at all.  You lend only your promises to pay money and the moment any large number of persons asks for the fulfilment of these promises you come yelping to us for a Moratorium.”

“ Need we keep returning to that ? ”

“ We must never for a moment depart from it.  What I am submitting is that you have accomplished a confidence trick by which you have convinced the public that you have money to lend.”

“ The public, as I have told you, knows exactly what we lend.”

“ I say that it knows nothing of the kind.  Do you really suggest that the public is aware that your so-called deposits are in fact, nothing but loans made by you ? ”

“ How can I tell you that ? ”

“ You will agree that it is the public which makes your IOU’s valuable ? ”

“ It is always the consumer who makes goods valuable, is it not ? ”

“ Bogus goods ? ”

“Any goods.  People soon cease to buy what they find to be bogus.”

“ Why, if that is so, do they go on buying your IOU’s, after you have all gone bankrupt ?  How can the promises-to-pay of a body of men who have had to be given a Moratorium, as the alternative to the repudiation of their debts, be worth anything the next morning ? ”

“ The public is judge of that, surely ? ”

“ No, sir.  The public is simply deceived.  You have so bewildered and befogged the public mind that your statements are accepted as gospel.  Thus you are able to lend people their own credit and charge them interest for so doing.  The Moratorium was a gift to you from the Government.  It allowed you to buy Government notes, that is to say Government IOU’s, with your IOU’s.  The Government, in other words, used the nation’s credit to support your promises-to-pay.  It actually a allowed you to buy National Credit with your IOU’s—for nothing that is to say.”

“ But that was only one, conspicuous, example,” the Home Minister continued, “ of what is going on all the time inconspicuously.  You are always, every day, engaged in seizing national credit for nothing.  That is what every coiner and utterer of false notes does.  Money, remember, is a debt of the community to the holder of that money.  When you create your IOU’s you are putting the nation in your debt.  You can go out with these IOU’s and demand payment in goods and services—and get it too.  During the Moratorium you bought National Notes, at other times you buy directly in the shops, or lend directly to borrowers—in both cases you are drawing on the national wealth by the mere process of signing your names.  You are, thus, establishing claims to other people’s goods without having earned these claims.  Worse still you are demanding interest on the unearned claims.  Having secured the booty you are lending it out to its real owners.”

The Home Minister’s face was red.  The International Banker flicked the ash from his cigar.

“ I’ve heard this before,” he declared in a tired voice.

“ And will hear it again, I hope.  The point I am making is that the only backing money can have in this or any other country is goods and services, delivery of which must necessarily depend on the character and resources of the people—the national credit.  Those who manufacture, out of nothing, claims on these goods and services are therefore stealing the national credit.  When you tell me that my IOU’s would not be borrowed or accepted in payment for anything, you are saying only that I am a less expert burglar of the national resources than yourself.  Your IOU’s buy goods.  Therefore they are money.  You are, consequently, creating money no matter how you may try to cover up that fact by pretending that you are giving value . . .”

“ Has our name no value ? ”

“ Only in so far as you possess real goods or genuinely earned money.  In any other circumstances, such value as people may choose to attach to your name is a false value, based on lack of knowledge.  In other words the fact that people can be induced to buy or borrow bogus IOU’s or bogus shares does not make these IOU’s or these shares genuine.”

Silence fell in the room.  The Chief Minister moved uneasily in his chair.  But the Home Minister remained full of fight.

“ You admit, I take it,” he demanded of the International Banker, “ that what you call your ‘deposits’ are in fact loans to your customers ? ”

“ A loan creates a deposit.”

“ Why do you call them ‘deposits’, then ?  The public understands by a ‘deposit’, money placed in a bank for safe keeping.”

“ We have our own technical expressions, you know.”

“In fact every credit account in your ledgers is balanced by an overdraft ? ”

“ That is one way of putting it.”

“ So that if you called up all the overdrafts all the credit accounts would necessarily disappear ?  I mean over the system as a whole ? ”

“ Possibly.”

“ One man’s savings are another man’s debts ? ”

“Well ? ”

“ And all the debts are, finally, debts to you.  All the savings therefore exist solely at your good pleasure.  You have only to stop lending and allow your debtors to pay you back in order to become possessed of the entire wealth of the country, all the savings and consequently all the claims to property of all kinds.”

“ We do not stop lending.”

“ Of course not.  If you did that on any great scale people would find you out.  Prices would fall to nothing and there would be Commissions of Inquiry.” The Home Minister leaned forward.

“ If we, the Government, choose to stabilize prices,” he declared, “ you will be compelled to go on lending on pain of having the lending done for you by the Government ?  Is that so ? ”

“ We always go on lending.”

“ Then why object to a stabilization of prices ? ”

“ Who told you that we object ?  On the contrary stability of the price-level is our chief concern.  After all, we are the guardians of the nation’s savings.”

“ The savings which are balanced by loans ?  The savings which are held in the form of your IOU’s ? ”

“ Why not ? ”

“ Don’t you see that the man who pays money into his bank thinks that it is real, genuine money which he is paying in ?  He has no idea that what he is paying in is merely a handful of your promises to pay money.  Still less does he realize that this handful of promises was created by you in favour of somebody else who still owes it and who must, some day, pay it back.  How can that unknown debtor pay back his debt unless he first of all recovers it from its present owner or owners ? ”

The Home Minister’s eyes flashed.

“ In other words,” he cried, “ no matter what happens, these IOU’s, which we have allowed to become nine-tenths of the money of this country, always belong to you.  No matter who may acquire them temporarily you can always get them back again by refusing to lend and calling up your outstanding loans.  Mr. Smith may think he has £100 in the bank but he will soon find, when you are taking in sail, and calling up your loans, that his £100 like everybody else’s money has been furnished by you, its creators, with most serviceable wings.  As your IOU’s grow scarcer and scarcer prices will fall and as prices fall Mr. Smith’s business will cease to pay.  He will then have to ‘ draw out ’ his little nest egg.  Even if he is living on investments it will be the same.  Dividends will fall.  Taxes upon the incomes of those who have any money left will increase.  So long as everybody uses your IOU’s instead of money and so long as you continue to issue your IOU’s only in the form of loans every soul in the land, rich or poor, creditor or debtor, must remain, for ever, in your power.  The fact that, in a great community there are millions of debtors and creditors and that, in consequence, your activities are well hidden, does not alter the truth by a jot.  You issue all the money in the country.  You issue it all as loans, repayable with interest.  Therefore you can, in theory at least, possess yourself of all the wealth in the country—the whole national credit.  The claims against you, those ‘hard-earned savings’ about which we hear so much, are balanced in every case by your claims against the community. . . .”

“ My dear sir,” the International Banker interrupted, “ don’t you see that you are giving away your own case ?  If our claims on the community are balanced by the community’s claims on us, we can possess nothing at all.”

“ Do you give security for your loans ? ”

“ Security ?  Why should we give security when we are the lenders ? ”

“ I thought you told me a few days ago that every loan from a bank was an exchange of debts ? ”

“Quite.  We take the house, or whatever the security may be ;  we owe that to its owner.  He takes our credit, our promises-to-pay if you like.  He owes that sum of money to us.”

“Don’t you see that what have been exchanged are promises—your promise to pay him ;  his promise to repay you.  He gives security in the shape of his house.  Why should not you give security also ?  Is your word so much better than his ? ”  The Home Minister held up his hand as he spoke.  He added, “ Before you answer please remember the Moratorium.”

“ We are lending money.  Money is its own security.”

“ Remember the Moratorium.  And remember also that what you are lending are promises to pay money and not money itself.” There was no reply.  The Home Minister bit his lip.

“ In fact your promises are not backed by collateral security.  (I mention the Moratorium once more.) Consequently the community’s claims on you are worthless unless you choose to keep your promises to the community.  And we know from experience that you cannot do that in any time of crisis.  You are a ship guaranteed not to sink in fine weather.  Your debtors’ promises, on the contrary, are anything but worthless, for they are supported by houses, land, cargoes, all the wealth of the nation.  In other words the community has no enforcible claims on you whereas you have supplied yourselves with overwhelming claims on it.  Any attempt by your creditors to enforce their so-called claims instantly reveals the fact that you are without substance.  If your creditors become pressing they are punished by losing all their savings.  You shut your doors and so acknowledge that your promises-to-pay are false promises—unless indeed the Government comes to your rescue with the Nation’s credit.”

“ Do you suggest that we could call in all our loans ? ” the International Banker asked. 

“ In theory certainly.  If you did you could not, of course, be paid in money.  But you would be able, legally, to seize all the security left in your hands.  My point is that your creditors, the people who have entrusted their savings to you, have no security-nothing but your promises.  A broken promise has no market value whereas a house can be lived in.”

“ We possess gold.”

“ Six shillings and eightpence worth against £10 of IOU’s.  Thirty IOU’s for every golden pound.  Thirty promises to pay every golden pound.  In the game of musical-chairs only one person fails to secure a seat ;  in your game the number of the dispossessed, supposing each has a claim for one golden pound and all present their claims on the same day, will be twenty-nine.  Talk about lotteries !  Let me tell you, therefore, that the Government is now thinking about a scheme to stabilize the price-level so that for the future there will be neither booms nor slumps, neither sharp rises nor severe falls.”

The Home Minister’s voice carried a note of triumph, which proclaimed the fact that it was he who had persuaded his colleagues in the Cabinet to agree to the reform.  But the International Banker was no longer looking at the Home Minister.  He had turned to the Chief Minister.

“ Is this true ? ” he asked, “ That you propose to fix prices ? ” “ We had some idea of doing something of the sort.  I think, though, that you had better ask the Treasurer.  As a matter of fact I have no expert knowledge about finance.”

“ Evidently not.”

“ The Treasurer,” the Home Secretary interpolated, “ has consented to try stabilizing prices.”

“ Really ? ”

The International Banker no longer looked like a man who has come to argue.  He looked like the President of a Court Martial making ready to promulgate sentence.  He addressed himself once more to the Chief Minister.

“ Surely,” he asked, “ you know something about finance now—after all that we have just heard ? ”

His tones were polite but crisp.  The Chief Minister flapped his hands.

“ Believe me, no.  My brain is political, not financial.  These questions of currency and credit.  It often seems to me that anybody may be right.  Mind you, though, I still think it would be a good thing if we could fix prices—or at any rate steady them a bit—for the sake of the whole country.”

The International Banker drew near.

“ You have considered the effect of your proposal, I take it, on our export trade ? ” he demanded.

“ Oh, we had no idea of trying to fix the price of exports.”

“ How can you fix prices without fixing the price of exports ? ”

The Chief Minister turned to the Home Minister.

“ You said there was some way of doing that, didn’t you ? ” he asked.

“ I said we ought to leave exports to take care of themselves.  If we don’t export enough to pay for our imports the value of our money, as compared with foreign monies, will fall ;  that will prevent us buying so much abroad and so restore the balance between exports and imports.”

“ There’s just one little snag in that pretty picture,” the International Banker told the Chief Minister.

“Well ? ”

“ Prices at home will rise.”

The Chief Minister looked anxious.  “ Why so ? ” he asked.

“ Because imports will have been cut down and exports increased.  There will be less goods in the markets at home.”

“ Then we shall produce more goods.”

“ At higher prices, seeing that you must buy your raw materials abroad.”

The Home Minister shook his head.

“ We are exporting much more than we import at the present moment,” he declared.  “ Quite so, because your money is sound.  Because your money can look other people’s money in the face and you are able, therefore, to buy food and raw materials at world prices.  A country with a debased money cannot do these things.  The very best it can hope to do is to supply its own domestic needs.”

“ Which is the important thing.  What does it matter how much we export if our people are happy and prosperous ? ”

“ You will have to accept a lower standard of living.”

“ Why ? ”

“ Why ?  Because you will be getting less for your debased money.”

The Home Minister bit his lip.

“ Look here, sir, if I wanted to argue as if a nation lived only to ship its wealth out of the country to foreigners, I would say that our debased money, as you call it, ought to help us to export.  If 10s foreign money is worth £1 here then obviously we can afford to sell cheaper than foreigners.  But I don’t want to argue on these lines at all because I do not believe that a nation exists solely to make goods for foreign markets.  What I want to see is a home market capable of buying home products.  We shall have a surplus of certain goods and that super-abundance we can properly exchange for the foreign goods we want.  I know that such a system means getting out of step, as you call it, with the rest of the world.  It means making and buying as many of our own goods as we can make and as we can use at home.  It means a big home market, the industrialists buying from the farmers and the farmers buying from the industrialists.  It means the restoration of agriculture to the position of the most important of our industries. . . .”

“ Agriculture is still our biggest industry.”

“ I was not thinking about bigness.  I was thinking about the association of men with their native soil, about the life of villages, about the breed to which we belong.  I have no hostility to the towns ;  but towns without a setting of tilled fields are trees without roots.”

The International Banker turned again towards the Chief Minister.

“ Are these your views, sir ? ” he asked.

“ I’m not sure.  I dislike the idea of living to ourselves, within narrow limits.  The world, it seems to me, must be treated as a single unit.”

“ I agree with you.”

“ After all,” the Chief Minister went on, “ we are a commonwealth.  The tribes have been merged in the kingdoms ;  the kingdoms have disappeared within the frontiers of empires.  We think now in terms of races and peoples.  We are beginning to think in terms of the human race, the universal people.  All are partners in our world-state, our great commonwealth.  It is for the good of all men that the statesmen of the future must work.”

“ A mutual benefit society.”

“ Precisely.  One law, one peace, one inheritance.”

“ Only finance,” the International Banker said, “ can give the world these blessings.  Money is the guarantor of a just and free distribution of wealth.”  The International Banker approached nearer to the Chief Minister.  “ If the world were one,” he said, “we should grow wheat where wheat may most easily and cheaply be grown.  We should grow cotton where the climate and the soil invite to the cultivation of that crop.  Where the coal fields lie, there we should place our heavy industries.  And so on.  Surely there would be benefit for all in this arrangement, this co-operation ?  It would break down the walls of nationalism, of parochialism, of racial jealousies and class antagonism.  We should recognize our brotherhood.  We should respect each other’s rights as men, the children and offspring of the same earth-mother.  What a vision !  The whole earth developed and cultivated in the best possible way for the benefit of each one of us.  Each of us a partner, a shareholder in the World Ltd., concerned only to see that each of us receives his or her share.  How can nationalism be mentioned in the same breath with this vision ?  What is Nationalism ?  A narrow, greedy living for self.  Disregard of the interests of others.  Contempt of foreigners.  Hostility to the people of the next parish even.  Men, I think, ought to pray to be delivered from such a fate.  If Finance really deserved all the Home Minister has spoken against it and yet was able to defeat the nationalist spirit in the gate, Finance would remain the greatest benefactor of us all.”

He had flushed with the wine of his oratory.  The Chief Minister’s cheeks, too, were glowing.  His eyes were bright.

“I’m bound to say,” he cried, “that I agree with you.  I have spent my whole life contending against the spirit of nationalism and its horrible accompaniment of War.  It seems to me that anything which breaks down the barriers between peoples must be for humanity’s benefit.  Internationalism means disarmament, it means intercourse between men, it means world-friendship.”

The Chief Minister spoke with an ease which made sharp contrast with his diffidence in discussing finance.  He was back again in his element.  He breathed freely.

“The truth, of course, is,” the Home Minister said, “ that it is financial internationalism which breeds war.  Look at the facts.  International Bankers lend their IOU’s in such a way that gold is not, normally, asked for.  In other words the borrowers are not normally in the position of wishing to convert the promises to pay money into money itself—into gold.  But if the balance of trade gets badly upset, if outgoings greatly exceed incomings or incomings outgoings, then a condition of affairs arises in which gold is likely to be asked for.

“ In the case where a country is not exporting enough to pay for its imports, gold will be shipped abroad to pay for the difference and square the bill—for if that is not done the money of the country with a deficiency of exports must fall in value relatively to the money of the country with which it is in business relationship.

“ In other words the Exchange will move against the country with a deficiency of exports because more people will be using its money to buy foreign money than will be using foreign money to buy its money.  The export of gold prevents this fall in the Exchange.  But, since International Bankers, like Home Bankers, are lending promises to pay ten times the quantity of money which they actually possess, it is obvious that strict limits are set to the export of gold.  If the ‘ drain of gold’, as it is called, goes on for any considerable length of time all the International Bankers will be compelled to close their doors.

“ In fact, as we have just seen,” the Home Minister continued, “ the International Bankers protect themselves by refusing to lend and trying to call up as many as possible of their existing loans-just as, in similar circumstances, the Home Bankers do.  The result is that foreign trade stops and huge masses of goods designed for export are thrown on the home market.  Prices crash and panic occurs.  The Home Market, therefore, lives in great fear of a falling off of exports and is even anxious that this should be prevented by some device which will have the effect of preventing a rise of prices at home.  The Home Market, in fact, is ready to submit its buying power to the good pleasure of International Bankers. . . .”

“ How little you understand this matter,” the International Banker exclaimed.  “ What we propose is not a dictatorship over the price-level here at home but a co-ordination of that level with the world price-level.”

“ Of course.  So that nowhere on earth may anyone pay you less for your IOU’s than the largest rate of interest anyone on earth is willing to pay.  If a country is paying high wages and so becoming possessed of buying power in the home market . . .”

“ Why do you always speak as if wages and buying power were the same thing ? ”

“ Because they are the same thing.  It is the wages paid out to the workpeople which buy the products of industry.  If big wages are paid the home market has a big buying power and can absorb large quantities of goods.  When wages are reduced many of these goods cannot any longer be sold at home and must therefore be hurried into foreign markets.  Low wages in other words mean big exports and so a ‘ favourable ’ balance of trade-as you call an excess of exports over imports.  Consequently when wages begin to rise International Finance begins to act.  It takes money out of the home market and so makes both the existing level of prices and the existing level of wages impossible.  Long before there is any substantial loss of export trade—at the very first whisper of rising wages—all the devices so well known to you and your colleagues are brought into operation.  You clamour to have the Bank-rate raised, so that producers at home may be discouraged from further borrowing.  The effect is a fall of prices and a sudden flow of goods towards the ports.  What with your own IOU’s and the IOU’s of the Home Bankers, who can no longer find borrowers at their doors, you are ready to finance any quantity of exports.

“ In other words you have snatched away buying-power from the Home Market to give that buying-power to foreign markets.  The home workers lose part of, or the whole of, their wages ;  what they lose comes at once to you to be lent by you outside of the country.  I spoke a short time ago about the danger to you of fixed prices.  In fact fixed prices imply fixed costs, that is to say fixed wages.  The truth is that stabilization of the Foreign Exchanges—of the value of money—must necessarily be threatened by any attempt to stabilize wages—even by so small an attempt as the payment of ‘ doles’.  If, under your system, wages in one country are reduced wages in all other countries must be reduced also.  For if any country does not, in such circumstances, reduce its wages it will fail to export.  If it fails to export you, the International Bankers operating in that country, will be asked to make good your promises to pay.  You will be asked for gold.  You will resist that demand by bringing foreign trade to an end in the way we have been discussing.  If these measures, which are bound to bring about a fall of prices, fail to bring about a fall of wages also, then you will have to ask for a Moratorium—in other words the country with the high wages will be compelled to come off the gold standard.  For you possess little gold and many people will have claims for gold against you and through you against the National Bank.  The gold standard is a method of keeping money in any one country pegged to the monies of all other countries.  It is the most efficient peg for this purpose which has ever been found.  When prices are fixed, or when wages are fixed, the gold standard must break down sooner or later. …”

The Chief Minister made an impatient gesture.

“ What has that to do with International co-operation ? ” he asked.

“ Everything.  The people whom International Finance is playing off against each other are not merely the merchants and industrialists of the world.  The wage-earners in every country are being pitted against the wage-earners in every other country.  The attack on wages is everlasting and it is conducted by means of the wage-earners themselves who have nothing to hope for unless they can produce cheaply, that is to say unless they will accept lower wages than all their competitors.  ‘ Tighten your belts, my boys, and we shall take their trade away from them,’ is, necessarily, the cry of every industrial leader.  What else can he say ?  If his men refuse to ‘ fight ’—and the parallel with a battle is a close one—he will soon be out of business himself.  In such circumstances a country with highly organized Trade Unions or with a satisfactory scale of unemployment-pay is bound to be left behind while the gold standard remains in operation.  Its people will not cease to feel the foreign knife at their throats.  Hatred and fear will make real soldiers of such people.”

The Home Minister raised his arm and pointed at the International Banker.

“What are you doing just now ? ” he demanded.  “ Everywhere I hear nothing but demands for lower wages so that we may ‘ regain’ our position as an exporting nation.  There are strikes and lockouts.  The men, naturally, blame their masters ;  the masters blame their men.  Both are helpless in your hands, since it is you who control the quantity of money in their markets.  As things stand half the population will soon be unemployed unless wages are cut.  If wages are not cut half the businesses will be bankrupt.  And when wages have been cut the whole hideous cycle will begin once more.  Do you wonder that, in such circumstances, Communism and Socialism, both of them will o’ the wisps, flourish ?  Do you wonder that class is set against class ?  Master against man ?  Nation against nation ?  Nobody suspects the true enemy.  Nobody sees that your worthless IOU’s are the real cause of his troubles or that, if what you were lending was honest money, there would be neither need nor wish for this fixing of Exchanges and for all the frantic efforts you make to prevent a demand for gold on the part of those to whom you have lent promises to pay that metal.  You are breaking up the structure not of homes only but of nations.  You are setting nation against nation and people against people.  Your internationalism is another name for a dreadful scramble for food and shelter by all the races of mankind against all the races of mankind.  It is, as I sincerely believe, the most evil system ever devised.”

INTERNATIONAL FINANCE

FEW days later the public was informed that he Home Minister had resigned his office.  The following letters were published.

From the Home Minister to the Chief Minister.

“ My dear Chief Minister,

“ I think you will agree that our inability to take the same view about the measures necessary for dealing with the present crisis makes it essential that I should place my resignations in your hands.  As you know I am in favour of the nationalization of credit and the use of some system of price control.  This would entail the abandonment of any attempt to stabilize the foreign exchange.  You, for your part, look to stabilization of the exchanges to afford those happier conditions of life which both of us are so anxious to secure.”

“ I am, etc.”

From the Chief Minister to the Home Minister.

“ My dear Colleague,

“ While I regret your decision, I cannot say that I am surprised by it.  For, as you justly observe, the methods that you favour are incompatible with those which, in common with all my present colleagues, I feel to be necessary in our difficult and anxious circumstances.  A fixed and stabilized exchange offers to our merchants and traders the indispensable foundation of business.  It secures the food of the People.  It guarantees the supply of those raw materials without which our industry must come to a standstill.

“ Advantages so great, it seems to me, ought not to be sacrificed to such hopes as may be entertained that an attempt to control prices would raise the standard of living of our people.  A standard of living which cannot be maintained is little better, I fear, than a piece of political window-dressing.  It is likely to inflict cruel disappointment ;  it cannot afford a true basis of progress.

“ Moreover, since no nation to-day can hope to live to itself, any policy which tends towards isolation stands, it seems to me, self-condemned.  We must march with humanity towards the unification of the world.

“ I am, etc.”

“ His fellow-countrymen,” said one important newspaper, “ have reason to be grateful to him for his clear understanding of the issues involved.  This is not solely a financial question.  The recent crisis cannot be ascribed wholly to monetary causes.  The truth is that a system the success of which depends on its elasticity has grown rigid.  If lenders were rash, borrowers were not less so.  Those producers who expected the community to guarantee in perpetuity what was in fact a speculative bubble, an orgy of inflation, displayed not only ignorance about the bases of sound finance but also an astonishing disregard of the necessities of foreign trade.  It is proper therefore to repeat, as the Chief Minister repeats, that a stable exchange guarantees the food of the People and the supply of raw materials.  There is no advantage of class or section which ought, for a moment, to be preferred to this national advantage.  How, if we do not export, can we pay for our imports ?  An inflated standard of living, in face of rising food-prices, is just as impossible to-day as it has ever been in the past.

“ Honest and patriotic men, therefore, will rejoice that the leadership of the nation rests in the hands of a statesman possessed of real courage.  The acid test of democracy, after all, is its readiness to face unpleasant truths and to take such action as will supply the remedy for situations which have become impossible.  We have lived beyond our means ;  we must make ready, at once, to live within them.  We have allowed ourselves to spend what, in fact, we had not earned ;  we must economize ;  we must tighten our belts.  If wages are unjustifiably high they must fall.  If costs are too great to enable us to compete successfully in foreign markets, costs must be reduced.”

Another newspaper, of a more commercial complexion, deplored the levity of the Home Minister’s suggestions.

“ Does he fail to understand,” this journal asked, “ that the interest which we receive from foreign investments and from the financing of foreign trade helps to pay for the food-supply of our People ?  Happily for our beloved country the Chief Minister sees that attempts to buy abroad with unsound money are foredoomed to failure.  In declaring, as in effect he has done, for a speedy return to the gold standard and to the principles of sound finance, he has declared for honesty and for the sanctity of contracts, and City men, at any rate, will thank him.

“ For it cannot be too widely known that the obligation to give gold in exchange for credit instruments, that is to say to honour one’s promise to pay gold upon demand, is the indispensable safeguard of all monetary contracts.  It is because he knows that his clients are entitled to ask him to make good in gold the promises which he has offered them, that a banker is forced, at all times, to keep his position liquid and so to avoid speculation.  This applies to International as well as to Home Bankers.  The moment gold begins to leave the country we have positive proof that our exports are falling below the limits of safety.  From that moment investment in the home market is speculation, because it constitutes a refusal to face the fact that we are consuming more than we produce.”

The former Home Minister ventured to reply to this last newspaper.

“ It boils down to this,” he wrote, “ that since our markets are glutted with goods we must tighten our belts and economize.  And if we consume what we have produced we are living beyond our means.  It is perfectly true, as you say, that the gold standard prevents our money from losing value in terms of foreign currencies.  But this is only another way of saying that the gold standard prevents wages in this country from rising above wages anywhere else or from remaining high when wages anywhere else have fallen.  We are not allowed to consume more of our goods than the lowest paid workers in the world are consuming of their goods.  Consequently we must export what may not be consumed.  If foreign markets cannot absorb the mass of products pouring into them then further cuts in prices and wages will be necessary-or failing that the destruction of the products till a point is reached at which scarcity will begin to make its influence felt.

“ From every point of view, except that of money-lending, the system is crazy.  It would be crazy, even from the money-lender’s standpoint, if money-lending was, in fact, taking place.  For a man who had lent money, and not merely promises to pay it, would have nothing to fear from an expansion of production.  The root of our troubles is the lending of IOU’s by men who do not possess the money necessary to make good these promises to pay.  Our bankers, whether home or international, are all in the same position.  All have lent promises to pay ten times the quantity of legal-tender money in their possession.  All are terrified that demands may be made upon them for the redemption of their promises in such quantity as to exhaust their small holdings of actual money, and so bring them to ruin.  The gold standard and all the other devices for keeping the Foreign Exchanges fixed and stable are, in fact, safeguards against ‘runs’ on banks which, all the time, are in a condition of insolvency.  So long as exports, whether ‘ visible’ or ‘ invisible’ balance and pay for imports there will be no demands for actual money.  This is the true explanation of the passionate interest which the export trade arouses and this is the real reason why it is asserted that a country which is surrendering its goods in exchange, often, for nothing more substantial than paper receipts, is richer and in better case than a country which is consuming its goods.  That the system is enormously profitable to the world’s usurers is, of course, true.  But they are a handful of men;  the mass of mankind is being sold into slavery.

“ I fully admit that a country cannot without resort to dumping possess a ‘ favourable’ balance of trade and a wage-level higher than that of its neighbours.  If we are to export more than we import we must hold our wages down and keep them down.  Rigid exchanges and rigid wages are impossible side by side.  Of the two I prefer the rigid wages, or rather wages high enough to buy all our products except the super-abundance which we cannot consume because we do not want it.  This superabundance is ample, as things now stand, to pay for all the food and raw materials that we require.

“ It is obvious, however, that there is no place for the existing financial system inside the scheme I am advocating.  For, under my scheme, exports would be left to take care of themselves and exchanges would be allowed to fluctuate freely.  The emptying of the home market of buying power would not be tolerated.  In such circumstances the best of the producers would soon get out of debt and cease to need to borrow ;  and usury, in consequence, would fall on evil days.  The existing system, indeed, has only two objects—namely, to secure to usury a continuous supply of credit-worthy borrowers and to make it possible for usurers to lend promises to pay (IOU’s) far in excess of their actual holdings of money.  These two objects, being served, make our bankers our masters and place them in unchallenged control, and even ownership, of the whole of the real wealth of the world.  You may call this by any name you choose—Internationalism or World Trade or human co-operation.  Its real character is slavery.

“ Finance has conquered the universe quite as effectually as the hordes of Ghengis Khan or of Timur the Lame conquered the nations which opposed them.  Not only so, we have developed and are developing the slave-mind.  We glory in our shame and extol the gods of our enemies.  Religion, morality, even the processes of thought, are changing.  The great, basal lie that a society may be founded on false promises is permeating all minds with the corruption of magic.  Our god dwells not in the Heavens but in the counting-house, where, with a pen in his hand any clerk can perform the miracle of trans-substantiation which changes ink into land and houses and food.”