T. 
AND AXD \VATER. 
December 30, 1915 
THE FINANCIAL FACTOR. 
By Arthur Kitson. 
NOTWITHSTANDIN'C. its enormous econoiinc 
and social •importance to every member of the 
rommuriitv. Finance is not a particularly 
popular subject for discussion. Moreover, any 
attempt to deal with/it in the space of a comparatively 
short article wiiich will be comprehensible to the ordinary 
reader, presents many diHiculties. The subject itself is 
somewhat abstruse and hi;^hly technical, and its discussion 
in\olves the use of terms which often convey different 
meaniiiKs to different minds. For we are dealing with a 
bruncii of a science wliich is not yet classified as exact. 
Further, the average man's ideas of mone\- and credit are 
usually based on partial i<nowledi,'e. prejudice, and super- 
stition. 
One whose iinancial knowledge and experience are 
confined to the bank notes and coins he carries in his 
))ockets'is verv apt to believe in the existence of some 
special virt>:e or mvsterioyis power lurking within the 
metal and pajier of which thev are composed. On the 
other hand, the man who has been behind the scenes 
has learned the true nature of currency, has watched its 
progress in efi'ecting exchanges, and knows its history past 
aftd present in all lands, will agree with John Stuart Mill 
when he wrote : " There cannot, in short, be intrinsically 
a more insignificant thing in the economy of society than 
money, except in the character of a contrivance for 
sparing time and 'labour. It is a machine for doing 
<|uickly and commodiousl\- what would be done, though 
less <piickly and comniodiously without it." In endea- 
vouring to make the subject comprehensible to the least 
in>-tructed. I shall be compelled to de;d with certain parts 
in a manner which, to the more enlightened, may seem 
very elementary. 
Money Supply. 
Next to the problem of furnishing men and munitions 
necessary to win the war, that of the money supply has 
loomed the largest in the public eye. In one respect the 
importance of the financial factor has been very [much 
exaggerated. In another sense, its importance cannot be 
overestimated. .\nd partly from ignorance and partly 
from confusion of thought, most writers on this subject 
have insisted on its indispensability where it was least 
essential, and have failed to point out certain dangers 
where they really exist. At the beginning of the war 
more than one journalist confidently predicted that the 
Central Powers would collapse within a year^— through 
the exhaustion of their gold supplies. Others are con- 
tinually harping on the fact that the financial resources 
(meaning gold) possessed by the Allies ensure victory. 
These assertions are strengthened by the unfortunate 
use of such catch phrases as " beating the enemy with gold 
and silver bullets." All this is sheer exaggeration and 
displavs a lamentable ignorance of the real nature and 
functions of money. 
The old economists had far clearer ideas of the 
functions of money than many of our modern writers. 
F'or example, the theory that money must possess what is 
called " intrinsic value " did not serve to confuse the 
minds of students of monetary science in the days when 
the only money circulating was the so-called inconvertible 
paper notes and token coins. No one at that time would 
have had the impudence to announce that " a currency 
system is impossible unless based on and backed by 
gold." as I have heard from the lips of a Professor of 
ICconomics. The mistake made by writers on war Finance 
—whose knowledge is confined to our modern banking 
practice in the City of I^)ndon — is in failing to remember 
that money is, after all. merely an artificial device, an 
invention, a contrivance for accomplishing certain ends 
which, under the stress of changing conditions, may be 
obtained in wirious ways, ^foney was defined by the 
(vonomists of a century or more ago as " a ticket," " an 
order." " a token." " a counter." But after mono- 
metallism was forced upon the world by Parliamentary 
.■\cts through the influence of international bankers- 
money and gold becann^ synonymous terms, and the true 
functions of monev were confused with those of the 
preciou:. metals, although they are absolutely distmct.* 
Hence the average man is unable to unders^tand how a 
nation like (iermanv- can continue the war after her gold 
reserves are exhausted. Apart from the settlement of 
Foreign Exchange balances, and payments for foreign 
propaganda work, gold is of comparative!}' little importance 
to C.erman\- at the liresont time. 
Significance of Production. 
If the Central Powers were to lose every ounce of 
gold and silver thev have amassed, it would have little 
or no effect on the war— so long as their foreign trade is 
cut off The supreme economic factor ts produchon not 
fnuntce Finance is merely the artificial aid to production 
and exchange. So long as the enemy can furnish men 
enoutih can raise enough food and raw material, can 
manufacture sufficient guns, munition and clothing, and 
maintain his transportation facilities to keep his armies 
going, sf) long will the war last, in a closed self-supjiorting 
Empire- which the Central Powers may be said, within 
certain limits, to occupv— its entire business can be as 
easily, as satisfactorilv. and far more economically carried 
on. by a State Bank" Paper Currency System than with 
a Gold and Silver ( urrencv. So long as the paper mone\- 
is made legal tender throughout the Empire for all debts, 
public and private, so long as the Government itself 
honours it and keeps the amounts issued within certain 
bounds, there is no reason why such a system should 
not enable the enemy to develop his resources as the 
United States developed hers so successfully for the 
whole of the greenback period. 
Tiie real need for gold or some such valuable com- 
modity in connection with Foreign Exchange, arises 
because paper currency loses its legal tender qualities 
the moment it leaves its own country. In this respect 
monev is like a monarch. Whilst it is all-powerful on 
its own soil, it loses its power and ceases to function the 
moment it crosses beyond its frontiers. Strictly speaking 
money — meaning legal tender — never goes abroad. The 
commodity of which it is composed may travel, in which 
case it becomes a piece of metal of certain weight and 
fineness. But this is no more money, in the strict sense 
of the word, than the gold button of the miner is so many 
sovereigns. If the entire commercial world were under 
one supreme ruler, all the bullion and coin of the world 
might be scrapped and buried, and a universal paper 
currency cstalilished, which would maintain and facilitate 
trade and production far more easily and with infinitely 
less cost and friction than at present. 
Conflicting Standpoints. 
The financial factor presents itself from two distinct 
and entirely opposite and conflicting standpoints.. The 
one is the bankers' and moneylenders', and the other is 
the producers'. To the banker, monev presents itself as a 
valuable commodity from which he must needs draw 
dividends in the shape of interest. Hence cheapness in 
money is as hateful to the moneylender as cheap clothing 
is to the sweater. For this reason the banking interest's 
have waged unceasing warfare against State banking and 
w'hat they term "cheap money expedients." Moreover, 
the histories of cheap currency experiments have mostly 
been written by bankers, their employees, or hired pro- 
fessors who have invariably presented the subject from 
this interested class's point "of view. It is for this reason 
that so much importance has been attached to .gold for 
currency purposes. Its scarcity, its dearness, .gives 
weight to the demand for high interest charges. On the 
other hand, tlit producer regards money more from the 
standpoint of its utility, his interests require the cheapest 
form obtainable— consistent with its ability to perform 
its work. 
There are just three ways in which a nation can 
obtain Its war supplies. First, by producing them : 
secondly, by purchasing them from Neutrals; thirdly, 
• -^^Por, a complete- historv of this subject I inav refer tlio rc.-\(loi- 
o mv book The Monrj/ PrMr-m (C. \V. Daniel. Piternoster Row.) 
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