by the public before the war, let us say approximately to the amount of 125,000,000l. As the process of substitution was and could only be a gradual one, it was not until the month of November 1916 that this point of equivalence was reached. This will be apparent from the following table of the issues of the Currency Notes : CURRENCY NOTES OUTSTANDING (excluding Currency Note certificates as not being a circulation element). £ 1914 Jan. 13 37,205,079 £ 1916 1917 Jan. 19 99,641,470 June 13 143,933,073 Feb. 16 98,817,317 July 11 148,558,380 Mar. 15 103,442,793 Aug. 15 158,190,505 Apr. 12 110,019,438 Sept. 12 160,560,172 May 17 108,021,607 Nov. 14 170,672,528 June 14 111,311,144 Dec. 12 177,734,306 July 12 114,940,110 1918 Aug. 16 119,718,400 Jan. 2 190,400,950 Sept. 13 120,450,887 Feb. 6 192,609,771 May 12 43,519,019 Oct. 11 122,607,392 June 16 45,641,692 Nov. 15 124,519,970 July 14 49,298,471 Dec. 13 126,510,897 Aug. 18 57,086,446 1917 Sept. 15 67,151,454 Jan. 17 131,200,396 Oct. 13 76,443,513 Nov. 17 88,551,276 Mar 14 130,082,099 Mar. 6 198,379,323 Apr. 3 206,271,192 May 1 212,317,605 June 5 219,145,056 July 3 226,387,516 Feb. 14 132,090,198 Aug. 7 237,814,928 Dec. 15 97,144,775 Apr. 18 136,630,647 Oct. 2 248,318,248 May 16 140,527,655 We are now in a position to draw a general conclusion. After a year of uncertain policy, from August 1914 to August 1915, during which the Currency Note issue was looked upon as a mere emergency relief measure, the State deliberately adopted a paper issue policy, and achieved the transition from a metallic currency within the space of fifteen months from September 1915 to November 1916. When the latter date was reached, the currency of the country was back again to its ante-bellum normal or level, so far as mere quantity is concerned; and it had become entirely paper. A great deal hangs upon the elementary fact which we have thus deduced; but, before going further, I wish to clear the ground of a prevalent and persistent misconception. The advocates of a metallic currency have attacked the Currency Note, and have assailed the policy of the Treasury on the plea or pretext that it has led to inflation, and that the issue of prices of commodities has resulted therefrom. This argument falls to the ground at a glance. For in the period of the twenty-seven months during which the currency was stationary, viz. from August 1914 to November 1916, commodity prices had risen just about 100 per cent. The following table gives the 'Economist' index numbers for England, and the Statist' index numbers for England and for Germany: At this point the 'Statist' figures fail us, but it may be convenient to give the remainder of the Economist' figures so far as published: It is now therefore clear that by November 1916 there had occurred a rise in prices of nearly 100 per cent. ; and this was in the period in which the currency had remained stationary, while gold was being withdrawn with the one hand and paper being substituted with the other, and before ever the Currency Note had exceeded in quantity the gold for which it was being substituted; that is to say, before there was any possibility whatever of asserting that the currency was redundant or inflated. The real reason for the rise in prices is of course not far to seek. The withdrawal of men all over the world from the active work of production brought about a shortage of essential commodities of every kind; and the moment the shortage was felt, the moment existing stocks were exhausted, prices inevitably rose so long, at least, as they were uncontrolled. Surely this will be granted. If so, we can proceed a step further; and the process will be found an illuminating one. Firstly, if prices rise and the volume of the currency media remains stationary, there will be a currency pinch or hunger, for a stationary denominator has to carry a greater numerator. There must inevitably result an irresistible demand for more currency. That is to say, the tendency of increasing prices is to induce an increase in the currency medium, simply to enable it to bear the greater functional or factorial strain. In such a connexion I deliberately ignore the question of cheques. I am thinking only of the ordinary wages-bill payments and wages expenditure or domestic expenditure of the mass of the people; and that is a domain into which the cheque enters very little at any time, and during the war has entered hardly at all, because of the almost universal insistence on cash payments. Secondly, after the first tremor of distrust and uncertainty, the war caused an immense outburst of industrial energy. That energy did not devote itself to the production of commodities essential to consumption, and therefore did nothing to counteract the rise in prices. It was devoted to the production of war material. Now, in its turn, this increased industrial activity became of itself and of necessity a potent factor in the increase of the Currency Note. The wages bill of the country has undoubtedly doubled and may have trebled-no one can say; but the consequent demand for increased currency media was insistent and insatiable, as every banker knows. For it must be borne in mind that, although five or six million men were eventually withdrawn from the production of essentials, they still remain on the national pay-sheet and absorb a great deal of currency; and, further, that their place has not been left vacant in the industrial domain but has been filled by a possibly equal number of women, who are taking similar wages and therefore requiring currency facilities as abundant as these displaced men did before the war. There has therefore been an addition to the national wages sheet on account of these women. Moreover, there has been an immense speeding-up of production, prolonging of hours and intensification of effort, and, as a consequence, a great increase in wage earnings, involving in its turn an increased demand for currency. Finally, when the increased prices became oppressive and the demand for higher wages and war bonuses became irresistible, the net outcome was simply an intensification of the call for currency to carry the greater burden of payments. Thirdly, it is claimed in the Currency Committee's Report that the credit operations of the Government have been a correlated factor in the increased production of the Currency Note. It is certainly safe to say that, with a restricted currency, the immense credit operations of the present war could not have been successfully carried through. But I think that this effect has been secondary and not direct or primary, and that there is here a confusion between currency and credit. Some portion of the unprecedented profit and wage earnings has been saved and has formed bank deposits, which have themselves been made the basis of Government advances through the Bank of England for the purpose of further credit creations. But this cycle of operations reposes on credit, not on currency. All that the Currency Note has done towards it has been to make possible the large earnings which have yielded these bank deposits, and so made possible these still larger credit creations. This is quite a different thing from the German system of Mortgage Bank notes or Darlehenskassenscheine. Beyond the single instance quoted at the outset, that of the 12 millions issued to assist the Loan of 1915, I cannot find any trace in our war finance of an issue of Currency Notes for the specific purpose of assisting any form of lending to the Government. The assistance which has been given for such purpose has been a credit assistance, not a currency creation. Leaving this last item out of account as a very disputable and imponderable one, we can, I think, summarise the life history of the Currency Note in a couple of sentences. By November of 1916 it had completely displaced gold and had drawn level with the ante-bellum gold currency in amount. From that date onwards it has increased in amount, until to-day it is just about double the total of the ante-bellum gold currency. That increase has been automatic, unforced and inevitable, and has been due entirely to an irresistible currency demand on the part of the wage-earner. I do not think that credit creations have had anything to do with the increase. Finally, as to the movement of prices, an increase of 100 per cent. had already taken place by November 1916, while still the currency was normal in amount. Since that date there has been a further increase of 100 per cent. in the Currency Note issue, and a further increase of possibly 60 per cent. (or less) in prices. As to the connexion between the two increases since November 1916, it is safer and more in analogy with facts to say that the rise in prices has produced an increase in Currency Notes than that the increase in Currency Notes has produced the rise of prices. The foregoing historical exposition is intended to clear |