arrived at the Bank of England to-morrow with a properly drawn cheque for forty-five millions and asked to have it in pound notes, the Cunliffe limit would present an obstacle. But if that limit were out of the way, the Bank would find no financial difficulty in handing out the notes as soon as they could be printed. Let us then suppose that the Government agent gives the notes away as Easter eggs to every man, woman and child in the country, or that he buys all sorts of things for the Government, or pays for services rendered to the Government. Prices will obviously be raised by the expenditure of this additional money, or rather by the expectation of it, as soon as the fact that it is going to take place becomes known prices being higher, the stocks of money which people require to keep for convenience will be higher, and so the notes once issued will remain out-they will not be paid back by the recipients into their banks and by those banks into the Bank of England.

Of course in real life the Government does not send its agents with cheques to draw notes over the counter from the Bank. But the effects are just the same if it pays the cheques away to all sorts of persons up and down the country, who thereupon pay these cheques into their own accounts with their own banks and subsequently draw out and spend the money. The fact that it is known that the Government is going to spend fortyfive million pounds more without making anyone else spend forty-five million (or any) pounds less inevitably raises prices and pulls out and keeps out the extra currency.

Conversely of the inward pull. If the Government were to put on a special tax or raise a special loan for the purpose of redeeming Currency Notes, while otherwise balancing its

budget," anyone can see that the notes could easily be got and put in the fire, and that prices would be lower because moneyspending power 1 was taken away from the persons who paid the extra tax or subscribed the extra loan without being balanced by extra money-spending exercised by the Government. But exactly the same result follows when, without any special tax or loan being raised, the money raised by the Government (otherwise

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1 May I plead for the introduction of the term "money-spending power " in place of the usual "purchasing power"? Purchasing power" should be used only in the sense in which it is measured by quantity of commodities purchasable. To use it also in a sense in which it is measured by the quantity of money spend. able is confusing. It is, for example, very confusing to say that the purchasing power of the German people was increased when they had trillions of marks to buy with; to say that their mark-spending or money-spending power was increased is lucid enough.

than by issue of notes) does in fact exceed the expenditure (other than in redemption of notes). In the absence of a Government currency, excess of receipts over expenditure would simply mean to the Government, as it does to an individual, an increase of bank balance. As things are, it means notes received by the Bank, and (instead of being held to the credit of the Government) paid into the Currency Note Account and there cancelled.

The truth on this matter is confused by two doctrines which accept the idea that the Treasury can pull the notes in or out, but teach either (1) that the pull is only exercised by the balance of taxes over or under expenditure, or (2) that it is only exercised by the balance of taxes plus money raised by non-floating debt over or under expenditure. Both these doctrines are wrong.

(1) The first is wrong because the money-spending power of the people is diminished when the State borrows from them in order to spend the money borrowed in buying up and cancelling currency just as much as when it raises the same amount for the same purpose by taxes. It is true that when the State borrows, it promises to pay interest in the future, so that the individual lender feels himself better off than if the same amount had been taken from him in taxation; but the whole of the people taken together have no right to any such feeling, inasmuch as the future receipt of interest will be balanced, and a little more than balanced, by the additional taxation required to pay the interest and cost of collection. It is true that the amount borrowed will be more entirely derived from the savings of individuals than an equal amount derived from taxes, but this too makes no difference for the purpose in hand, since the investment of savings means money-expenditure just as much as does expenditure for consumption. The difference between consumption and investment is not that the one means more money spent than the other, but that investment means that the expenditure goes to additional equipment in machinery, houses, etc., and consumption does not. But if the State borrows money from its subjects to redeem and cancel currency, less money will be spent and prices will tend to fall.

(2) The second doctrine is almost obviously wrong, because there is no distinction between "floating" and other debt, except that the floating debt is renewable at earlier dates than the other, and is, in fact, constantly being repaid and renewed by fresh borrowing. "Floating" or not floating is only a question of degree, not of principle, and in fact the distinction in practice is perfectly arbitrary, traditional and unimportant. The debt

held at shortest notice and most frequently repaid and renewed is the very large amount of money owed by the State to the Savings Bank depositors, and this is seldom or never thought of as part of the floating debt at all. The only reasons ever given for making a distinction between the floating and non-floating debt for the purpose in hand seem to be two: (a) first, that possession of Treasury bills enables the holder, if he pleases, to ask for cash when the bill falls due, and (b) second, that the possession of Treasury bills enables the holders to "create credit," so that the people's money-spending power is increased when more Treasury bills are issued, and diminished when the amount of them is reduced.

(a) The first of these reasons is very easily disposed of. No doubt the banks could, if they chose, insist on having Currency Notes when their Treasury bills fall due, but in fact they don't, any more than the Savings Bank depositors with one accord go to the post offices and demand their deposits in cash all at once. Why should they, so long as the Treasury is willing to re-borrow at a rate which makes the new bills profitable for the banks to hold? And if the banks were suddenly seized with a desire to throw profit to the winds and wreck the State, would it be impossible for the Government to get the required notes without printing additional ones? After all, the amount of bills falling due at any one time is not so very large, and presumably about a quarter of them are not held by the banks but by the Government itself in the Currency Note Account and some more by other Government departments. With the assistance of the Bank of England and the individual loyal holders of balances in the other banks, the Government could quite easily beat off this incredible attack. Those who have imagination to conjure up such an attack should also be able to conceive defensive measures. The Government could announce an issue of 8 per cent. threeyear Exchequer Bonds, the amount to be subscribed at once in Currency Notes only, handed over the counter at the Bank of England or sent by post: the list to remain open till the chairmen of the Big Five appeared on the steps of the Treasury dressed in white sheets and prepared to kiss the toe of the boot of the Financial Secretary. The list would soon be closed; for the banks are liable to pay their customers on demand at least ten times as much legal tender money as the Government and the Bank of England are liable to pay the banks at any one moment. Those who live in glass houses cannot afford to throw stones.

(b) The other reason is a little more difficult to deal with in

consequence of the wide prevalence of the very curious delusion that when a bank lends money on Treasury bills to the Government, this enables it to lend more money to other borrowers, so that the more money the Government borrows in that way, the more the banks can lend to their customers, with the result that these customers will spend more money, which will raise prices and draw out notes because the higher price-level requires a larger holding of notes by each individual and institution. Conversely, it is supposed that when the Government reduces the Treasury bills outstanding by paying some off without issuing an equal quantity of new ones, it cuts down the ability of the banks to lend to their customers, diminishes those customers' money-spending, lowers prices, and pulls notes into the Bank of England, which pays them in for cancellation.

It may seem quite incredible that anyone can really believe that when a Government borrows money from a person or body of persons (whether called a "bank" or not), that person or body is thereby rendered more able to lend money to other borrowers; and conversely, that when the Government repays what it has borrowed, the repaid creditor is rendered by the fact of repayment less able to lend to other borrowers. Yet that this has been believed in the very highest circle of British financiers, at any rate not very long ago, is nearly proved by the fact that Mr. Austen Chamberlain, when Chancellor of the Exchequer, with access to all the best advice, complained pathetically that the more he repaid the banks what they had lent during the war, the more they lent to their customers. He had evidently been told that if he repaid the banks they would be able to lend less in other directions, and had imagined it to be true.

To argue against such an absolutely groundless delusion is unnecessary, but it may perhaps be useful to explain that it arises out of the topsy-turvy conception of banking which has unfortunately become fashionable in recent years. In the older and juster view bankers appeared to be intermediaries or middlemen between lenders and borrowers: they re-lent what was lent to them, keeping some cash in hand on all ordinary occasions in order that they might be in no danger of not being able to meet any demand that their creditors might make on them (these creditors being mostly entitled to be paid on demand). In the modern view, popularised in this country by Mr. Hartley Withers, and adopted by Mr. Keynes (pp. 178-81), the large share of the whole valuable property of the community possessed by the holders of credit balances at the banks is completely ignored.

The bankers are thought of as having (by some means which is left in considerable obscurity) got hold of a certain amount of cash, and then, apparently because there is some magic in calling yourself a banker, being able to "create" eight or ten times as much "money" or "deposit-currency." According to this view Treasury bills somehow drop into the banks without being paid for, and consequently without reducing the banks' resources at all; and once there, as they are "cash at one remove," they enable the banks to "create more credit," and thereby increase the money-spending of the people and raise the level of prices and draw out notes. This, of course, is all moonshine every practical banker knows that he is not a creator of credit or money or anything else but a person who facilitates the lending of resources by the people who have them to those who can use them.

The conclusion is that in this country as well as in all other countries, now and always, it is the issuer of inexpensive legal tender currency who has the control of its amount and consequently of its purchasing power; that here and now the Government is this issuer; and that it actually (though very likely without Chancellors of the Exchequer being aware of the fact) exercises its power of control by its policy with regard to total receipts and payments. If it raises from all sources except the issue of notes more than enough to pay all expenses (including repayment of debt), notes will be redeemed and the amount outstanding reduced. If it raises less than enough, additional notes will be issued and the amount outstanding increased. And by this control of currency the Treasury ultimately controls prices.

The importance of the Cunliffe limit, pooh-poohed by Mr. Keynes, depends entirely on the action of the Government in making ends meet. If it insisted on allowing expenses to exceed receipts, it would doubtless withdraw the Minute adopting the limit. If, on the other hand, it makes receipts exceed expenses, it can keep as far below the limit as it likes, and there will be no chance for the limit to " become operative." It is only "actually operative" when the Government keeps receipts equal to or in excess of expenses because the limit is there rather than for other reasons. Mr. Keynes says (pp. 183-4) that the limit has never been actually operative, but it is difficult to believe it could ever under any circumstances be more actually operative than it was in 1920. To ask, as Mr. Keynes does, for its removal at a time when a considerable diminution of the currency is