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to make people disbelieve in the working of the quantity theory, and induces them to deny that the issue of more and more currency is having its effect. They see no exact correspondence between the issue and the depreciation, and find that the depreciation generally precedes the issue in point of time. Then, forgetting that the correspondence between the greater plentifulness of a commodity and its depreciation never is exact, and that the value of a commodity which has become more plentiful necessarily falls before rather than after it is all sold, they declare roundly that “the issue of notes has nothing to do with their depreciation.” The majority of experts did so in every European country, belligerent and neutral alike, during the war, and in many countries they do so still. Even in Germany the late President of the Reichsbank is said to have believed it to the day of his death, when the paper mark had sunk to near a billionth of the value of a gold mark.

He could not have thought so, if he had borne in mind that the issue of trillions of paper marks had meant the expenditure of trillions of marks in the purchase of commodities and services; and we shall all be spared many similar delusions if we continually ask ourselves, "How does this affect the spending of money?

With this preface let us look more narrowly at this matter of control. Let any reader ask himself what he would do if the State were foolish enough to give him power to print and spend or lend as many Currency Notes, “ legal tender for any amount,” as he pleased. He would begin with small amounts, distrustful at first of his new and amazing power. Finding the thing work, he would issue more, and trade would boom. Then he would find every possible reason, good and bad, for saying that it was not his action that was raising prices. “There is," he would say, “a revival of trade (shown to be due by the relation between wholesale and retail prices), and it is caused by the good industrial policy which the newspapers which I subsidise have advocated. This is causing a legitimate demand for currency, and my issue is only just satisfying it. I am not forcing my currency on anyone. People accept it gladly when I buy from them, and the demand by borrowers is so enormous that my fifteen printing works can scarcely turn out enough notes. Surely you would not have me penalise industry and damp down the revival by charging six per cent. ? What have you to complain of?In this case I think everyone will agree that control could best be exercised by taking away our reader's power to create currency rather than by watching and controlling his creation of credit.

So far as I know, no such power has ever been given to a private individual. It was, however, in one famous historical case given to a body of private persons, the Governor and Company of the Bank of England, during the Napoleonic struggle, and I daresay that it has been given to similar corporations in various countries since 1914, but information on such subjects is curiously deficient. The Bank of England acted just as we have supposed the individual would act, except that it moved more slowly, and, being a corporation which never dies, it had more regard for the future, and was therefore kept in check to a great extent by the probability that it would be asked in a few years to redeem its notes in gold. There is no reason to suppose that any corporation of shareholders working for profit would act differently. It is sometimes thought that a bank is in a fundamentally different position from an individual, inasmuch as it is the business of the bank to lend, and it is supposed to be less tempting to print notes to lend than to print them to spend. This is clearly wrong if the interest of the fleeting shareholders is thought of. The shareholder can expend his dividends on buying land, houses, and other property, so that if he gets great amounts now he need not fear a lean future. But there is some force in the notion, all the same. The bank as a corporation, if it confines itself entirely or principally to monetary obligations, will have an interest in not depreciating these obligations, and so, if its managers, working for the institution rather than the shareholders, are enlightened and able to disregard the shareholders, they will not create enough currency to depreciate it. They will refuse to lend at a rate low enough to take out more and more notes, and perhaps somebody may like to call this “control of the creation of credit,” though it is more natural to call it control of the creation of currency.

But the probability is that in very few countries these managers would be enlightened and firm enough. Elsewhere they would yield to pressure, and notes would gradually leak out. The obvious way for the community to stop the rot would be to take away the bank's power of creating inexpensive legal tender. But this again would be controlling the creation of currency rather than the creation of credit.

Very naturally, the grossest cases of depreciation of currency have occurred where Governments have reserved to themselves such gains as were to be got by it, either by manufacturing the inexpensive legal tender themselves, or by giving the power to a State bank which is bound by some arrangement to hand over the profits of the issue. The second is the commonest method and also at present the most prominent, as it was adopted by Germany. Under it, being able to borrow from the State bank without paying any interest (since, if it does nominally pay, it recovers the amount immediately), the Government does so borrow. The bank must issue more notes to satisfy this demand for money, the notes depreciate, so that the Government has to borrow more, and still more, and more and more as the depreciation increases at a more and more rapid rate. The welldisposed foreigner, looking on from afar, adjures the Government to “ balance its budget,” meaning not what is conveyed by the words in their strict sense, but merely“ make ends meet without resorting to this fictitious borrowing, which is only in reality the printing of notes.” The Government says plaintively that it cannot, because the depreciation is so rapid that taxes cannot be made to keep up with it, though expenses rise faster, and nobody will help with a loan. Sooner or later, however, the situation becomes understood, even if only dimly, by the people of the country itself, and then the Government is obliged to accomplish the absolutely impossible and “stop the printing press.” Once more the creation of currency is controlled, and the “ creation of credit follows suit." I scarcely think anyone will allege that what was wanted in Germany was control of credit : obviously the real need was for control of currency. Could the German Government have been stopped from borrowing by interest of 1000 per cent. per day, so long as that interest was immediately recoverable from the bank ?

No reader of Mr. Keynes' book will have any difficulty in seeing the beam in Germany's eye: we all recommended her to pluck it out. But it is much more difficult, apparently, for us to see the comparative mote in our own eye, and I doubt if one reader in a thousand of those who will receive Mr. Keynes' gospel gladly will realise that what is sauce for the goose is sauce for the gander, so that “ balance your budget " is as good a maxim in London as it is in Berlin.

Yet no fact of elementary arithmetic is more certain than that when more Currency notes are issued than are cancelled, the British Government's capacity to dispense with taxes and borrowing at interest in the ordinary way is increased, and when more are cancelled than are issued, its capacity to dispense with taxes and borrowing is diminished. The fact is concealed from the public by the existence of the peculiar bank of issue set up under the Currency and Bank Notes Act, 1914, called the “ Currency Note Account.” At the beginning of the war, confronted with want of an emergency currency, the State might have permitted the existing Issue Department of the Bank of England to issue small notes and increase its fiduciary issue beyond the limit allowed by the Bank Charter Act. Instead of that, and without in the least foreseeing the enormous consequences, it empowered the Treasury to issue £1 and 10s. notes and to issue them ad libitum. Whatever the Act may have intended, the Currency Note Account became a “ Government Department " under the Treasury, though located at the Bank of England, and issues notes to the Bank of England alone in exchange for coin, Bank of England notes, and simple credit in the books of the Bank. The coin and bank notes it keeps in reserve “ against ” the issue, and the credit it draws out and “invests in Government securities," which in practice means Treasury Bills and “ Government Department Ways and Means Advances.” 1 That is, the issue has made the Government able to dispense with taxes and loans and all other receipts to the extent of the whole issue minus the part covered by coin and bank notes. To that extent the United Kingdom has not " balanced its budget" in the sense in which that phrase is used in regard to Germany and other countries.

The fact is little recognised because successive Chancellors of the Exchequer have resolutely refused to let the amount appear in the national accounts, as it would do if the Treasury Bills held by the Currency Note Account were shown separately from those held by banks and others, and if the Ways and Means Advances obtained from the Account were separated from those obtained from the Savings Bank and other“ Government Departments.” It is further obscured by the fact that the Bank of England refuses to hold any reserve of Currency Notes. It receives them from its customers, and pays them out to anyone who has a right to ask it for “pounds sterling” and does not want Bank of England notes, but it alone of all the banks in the country keeps no store or reserve of the principal currency used by the inhabitants. When a Currency Note is paid in over the counter, it is promptly carried to the Currency Note Account Department, and paid in there. Then the balance held by that fictitious person (in reality the Government itself) is debited by the amount of the note. Conversely, when a customer or other person who has a right to demand pounds from the Bank asks for Currency Notes, they are fetched from the department, and the Account's balance is credited with the amount. So each Wednesday when the Bank Return is published, never a Currency Note is to be seen in it, though half-a-dozen millions may have passed in and out of the Bank in the week. The result of this practice is that seasonal and other fluctuations in the amount of currency which the other banks and the public find it convenient to keep in their tills and pockets are no longer, as they were in pre-war times, made very obvious by reciprocal fluctuations in the Bank's reserve. They appear instead in corresponding fluctuations in the amount of Currency Notes outstanding. At the beginning of the summer holidays, for instance, large numbers of people are known by their banks to be about to want to hold unusually large pocketfuls of cash because they will have to pay for railway tickets and other things for which cheques are not taken. To meet their demands, their banks draw on their own balances at the Bank of England, taking out sufficient cash for the purpose. Before the war this action pulled on the Bank of England's gold : now it pulls on the Currency Note issue, and increases the amount of that issue outstanding. Hence superficial observers are very naturally led to believe that notes are issued and cancelled as required by “the legitimate demands of the public,” and to overlook altogether the much more important continuous pull outward or inward exerted all the time by Treasury policy.

1 Mr. Keynes seems to have forgotten this when he writes on p. 181: “A change in the amount of what the Treasury borrows from the Currency Note Reserve is reflected by a corresponding change in the opposite sense in what it borrows in Ways and Means Advances or in Treasury Bills." Apparently this should read : “A change in the amount of what the Treasury borrows from the Currency Note Account is reflected by a corresponding change in the opposite sense in what it borrows in Ways and Means Advances and Treasury Bills not advanced by or taken up by the Currency Note Account itself." But even then it would be quite incorrect : it implies that all the money raised by issuing notes is necessarily utilised to pay off other floating debt, which is palpably not the case; there is nothing to show that the fact that £230,000,000 have been raised by the Currency Note issue has caused the other floating debt to be that much less than it would otherwise have been.

Down to 1920 this pull was outward, but in December 1919 the Treasury, by the adoption of the Cunliffe limit, undertook not to increase the fiduciary issue beyond its amount at that time, and the outward pull disappeared in the fiscal year 1920–1. In the next two fiscal years there was a strong pull inwards, but this seems to have ceased with the beginning of 1923–4.

There is no mystery whatever about the nature and working of the Treasury pull. The complications of the Currency Note Account only cover its nakedness with a very transparent veil. If the agent of some spending department of the Government

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