22 
LAND 6sf WATER 
November 7, 1918 
Currency Reconstruction : By Hartley Withers 
ONE of the most importan,t of our after- war 
problems will be the question of getting our 
financial system back to a normal wo; king basis. 
It is not the most important of all our material 
problems, for the bedrock of the whole matter is 
our industrial output in the widest sense of the phrase. If 
we can turn out a great mass of stuff for our own use and for 
sale abroad, then we shall be well off (if we also distribute the 
stuff well), and shall be able to set about paying off the 
foreign debt that we liave built up, to the tune of some 1,300 
millions, during the war. If we do not produce a good 
output, no financial jugglery or new-fangled currency dodges 
will make us well off. Being well off is not everything, but 
it is a great help. 
• Finance being the hand-maid of industry, the revival of 
industry on a peace basis will be greatly helped if our financial 
system is in good trim ; and to get our financial system into 
good trim, it is first of all necessary to put our currency right. 
To this end, a very strong committee was appointed last 
January "to consider the various problems which will arise in 
connection with currency and the foreign exchanges during 
the period of reconstruction and report upon the steps required 
to bring about the restoration of normal conditions in due 
course." In the chair was Lord Cunliffe, then Governor of the 
Bank of England, and he was supported by a briUiant galaxy 
of bankers and financiers, reinforced by Sir John Bradbury, 
most ably representing the Treasury and the store of fine 
ability that it contains, and Professor Pigou, of Cambridge, 
holding aloft the torch of economic theory. This committee 
has now produced its first interim report, which is unanimous, 
and is, in tone and judgment, worthy of its composers. It 
will not satisfy everybody — perhaps no report that ever was 
issued quite satisfied anybody. It will probably cause a 
storm of criticism from all the Artful Dodgers of the currency 
world who want to stand the whole system on its head at a 
time when, owing to the many inevitable uncertainties, it is 
most of all desirable that the delicate mechanism of credit 
shall work, as far as possible, on lines that are familiar, and 
can be relied on. The gist of the report is strongly conserva- 
tive, and it embodies an effort to get back as near and as 
fast as we can to the old lines that worked well before the 
war, with such modifications as are inevitable. Such con- 
servatism will bfe disappointing to reformers in a hurry. 
But the crux that we have to face is getting back to work 
as quickly as ever we can. 
The Value of the Cheque 
The report begins with a sketch of the working of our 
.currency system before the war. This system was, on the 
■whole, highly successfulr It enabled us alone among the 
.great financial countries of the world to perform the obvious 
banker's duty of meeting demands on us in gold at once and 
without question. Since the war, the United States have 
.reformed their currency system, and may now be able to 
.carry out this task without the periodical crises, the last of 
which was in 1907, which used to demonstrate the weakness 
.of their monetary arrangements. This has yet to be proved. 
.Ours is the only one which, judged by this test, has worked. 
It was based on an apparently hard-and-fast and quite 
inelastic law which laid down that every note issued by the 
Bank of England above £18,450,000 worth, which might be 
backed by the British Government securities, should be 
represented by so much gold in its vaults. (The Act allowed 
, a proportion of silver, but this permission was never exercised.) 
But the cast-iron severity of the law was luckily toned down 
by a development which was already in its infancy when 
the Act of 1844 was passed — namely, the use of cheques as 
.currency. The framers of the Act seem to have thought 
that if they regulated the note issue they had regulated the 
. currency issue. Bankers and their customers took to using 
cheques as currency, and so this highly convenient form of 
money, which was only indirectly affected by the law, supplied 
the elasticity and ease which the law denied, and made the 
English money market an extraordinarily efficient machine. 
The supply of legal currency, notes and gold, could only be 
increased by additions to our stock of gold. On that supph' 
the banks built up a fabric of credit, in the shape of 
bank deposits operated on by cheque, which could be in- 
, creased within any limits that they thought prudent. The 
connection between the fabric and its basis was caused 
by the fact that the banks, unless they had enough legal 
. currency to meet demands on them, could not increase 
credit beyond a point. As to that point, they were left 
to judge. 
Since the war, the creation of Treasury Notes has severed 
the connection between our credit system and its gold backing. 
The Treasury Notes are payable on demand in gold, but 
patriotism and common sense have prevented people from 
wanting to cash them, and they have been multiplied without 
any regard to the stock of gold. This great increase in legal 
paper currency has been accompanied by a still greater 
increase in bank deposits, which, since they represent power 
to draw cheques, are potential currency, though they are 
not, of course, legal tender — that is, no one can be forced to 
take a cheque in payment. There has thus been a huge 
increase in the country's money, and if money is increased 
faster than goods it obviously follows that the buying power 
of rnoney goes down and prices go up. 
This increase in currency was directly due to the evil 
methods adopted by our own Government in getting money 
for the war. " The need of the Government for funds where- 
with to finance the war in excess of the amounts raised by 
taxation and by loans from the public has made necessary 
the creation of credits in their favour with the Bank of 
England. . . . The balances created by these operations 
passing, by means of payments to contractors and others, 
•to the joint stock banks, have formed the foundation of a 
great growth of their deposits which have also been swelled 
by the creation of credits in connection with the subscriptions 
to the various War Loans. Under the operation of these 
causes the total deposits of the banks of the United Kingdom 
(other than the Bank of England) increased from 
£1,070,681,000 on December 31st, 1913, to £1,742,902,000 
on December 31st, 1917." This increase of 670 millions in 
bank deposits was accompanied by an increase in legal 
tender currency of over 200 millions, from 180 to 382 millions. 
Small wonder that prices soared 1 And this system of 
meeting an emergency by kite-flying and the financial devices 
of Dick Swiveller, is what Mr. Stilwell, in his Great Plan : 
How to Pay for the War, and many others like him, propose 
to adopt in order to solve our after-war problems. 
Happily, the 'Currency Committee preaches a sounder 
doctrine. It recommends that the Treasury Notes shall be 
cautiously reduced and shall ultimately be taken over by the 
Bank of England as part of its own issue, and shall then be 
regulated by law on the same lines as those of the Bank Act 
of 1844. That is, that above a certain level — to be arrived 
at by experiment during the period of transition — every note 
issued shall be backed by gold. If some special need makes 
it necessary to exceed this limit, though it is recommended 
that this should be done with the consent of the Treasury, 
instead of, as heretofore, on a letter from the Chancellor of 
the Exchequer promising to get an indemnity from Parlia- 
ment for the Bank of England for a breach of the law. It 
is further suggested that for the present we should not use 
gold for circulation purposes (now that we have grown used 
to notes, few of us will want to carry sovereigns), but that 
all the country's gold should be held by the Bank of England 
until a reserve of 150 millions has been established and 
maintained. This sum is already practically in sight, as the 
Bank of England has about 73 millions, the Government 
holds 28 J millions against its currency note issue, the joint 
stock banks are believed to hold about 40 millions, and there 
is probably still a certain amount in the hands of the public. 
Further, the Committee lays strong stress on the need for 
remedial measures to make our gold standard once more 
effective. " If," it says, "a sound monetary position is to be 
re-established ... it is, in our judgment, essential that 
Government borrowings should cease at the earliest possible 
moment after the war. ... A primary condition of the 
restoration of a sound credit position is the repayment of a 
large portion of the enormous amount of Government securi- 
ties now held by the banks. It is essential that as soon as 
possible the State should not only live within its income, 
but should begin to reduce its indebtedness. We accordingly 
recommend that at the earliest possible moment an adequate 
sinking fund should be provided out of revenue, so that 
there may be a regular annual reduction of capital liabilities, 
more especially those which constitute the floating debts. 
. . . The sjiortage of real capit;d must be made good by 
genuine saMugs." How, far the Government will follow 
this good advice remains .to be seen. In the meantime, 
every one who is interested in the country's finance should 
study this admirable report. It costs twopence, is described 
as "Cd. 9182," and can be got from any bookseller. 
