Ebook A history of money from ancient times to the present day: Phần 2 – Glun Davies

8 British Monetary Development in the Twentieth Century Introduction: a century of extremes Every success and every failure experienced in all previous monetary history have been repeated, with additions and on a vaster scale, in the twentieth century. In money as in economic, social and political life in general, this has been a century of extremes. Only in the case of money, however, have the violent oscillations repeated themselves quite so faithfully in their familiar reversible pattern in the advanced countries of the world. Primitive commodity moneys were still in use over large tracts of the ‘undeveloped’ world as recently as the 1960s, as described in chapter 2; while throughout the developed world the most successful and traditional of all commodity moneys – gold – reached its highest peak of operational perfection at the beginning of the twentieth century. It remained a dazzling ideal to which governments sought to return until the outbreak of the Second World War and was again being flirted with as a potential international price stabilizer, in theory if not in actual practice, in the last decades of the century. Despite such outstanding examples of the appeal of stable money, inflation of unprecedented proportions repeatedly interrupted attempts to adopt sensible monetary policies. Monetary management, with mismanagement the beguiling obverse of the same coin, became a tool universally available to all governments as the century unfolded; a management no longer physically constrained by the supply of gold. In these circumstances it might at first be assumed that at least one of the recurrent failures of earlier history, namely an actual shortage of money, would not be repeated. Not so: in the 1930s a dire monetary scarcity, brought about directly by 368 BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY governmental mismanagement, intensified and was a strong con-tributory cause of the world’s most severe economic depression. Nevertheless the bias in twentieth-century financial policy has undoubtedly been in the opposite direction, that is towards excessive money creation, so much so that some form of gold or general commodity anchor was again being internationally investigated as the twentieth century drew to a close. Against this violent background the swings of the monetary pendulum between quality and quantity and the changing monetary theories behind actual policies have also been alternating to an extreme degree. Apart from a precious few examples of long-term stability, notably in small, traditionally neutral countries like Switzerland and Sweden, extreme fluctuations have held global sway. Even Britain, with its long tradition of political moderation, has experienced swings to an unprecedented degree, from price stability to deflation with mass unemployment and to inflation, first with over-full employment and then mass unemployment again; and with the associated theories which acted as the explanation or excuse for policy lurching suddenly from stolid classicism through confident Keynesianism and defiant Friedmanism back to an uncertain but more realistic pragmatism. Given Britain’s influence on both monetary practice and theory, stemming in turn from its vital role in the operation of the international gold standard, the export of its commercial and central banking expertise, the prestige and following of Keynes, the bold embodiment of Friedmanism in the Thatcher experiment, the City’s irresistible attraction for foreign banks and the stubborn eminence of London’s foreign exchange market, the financial development of Britain in the twentieth century, notwithstanding the decline of its empire and the erosion of its lion’s share of world trade, still remains of central importance in world monetary history Financing the First World War, 1914–1918 Despite relatively minor conflicts such as the Crimean War (1854–6) and the Boer War (1899–1902), the national debt had been modestly reduced in nominal terms, and very significantly reduced as a percentage of national income, in the century after 1815, falling from £830 million in 1815 to £650 million in 1913. Such reductions had been brought about by the generous use of frequent budget surpluses, the result of good housekeeping by Victorian Chancellors, some of whom also took advantage of recurring spells of cheap money-market rates to convert large chunks of the debt into lower rates. Thus Goschen in 1888 BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY 369 converted the 3 per cent stock to 23/ per cent, a rate which was to fall to 21/ per cent in 1903. Edwardian Chancellors were bolder and bigger spenders, though Asquith in his three budgets between 1906 and 1908 managed to redeem much of the debt incurred during the South African war. Lloyd George’s budgets of 1909–11, ‘which may not unfairly be described as the most revolutionary series of proposals ever laid before a British Parliament’ (Muir 1947, II, 757) introduced far greater progression into the fiscal system, tapping far more copiously the wealth of the rich. Although the purpose of Lloyd George’s fiscal policy was for financing social welfare benefits, the fiscal framework had thereby been fundamentally transformed on the eve of the First World War into a much more buoyant source of revenue, ripe for the insatiable demands of the military machine. What had been introduced, at the cost of a seething constitutional crisis, for welfare thus became a timely godsend for warfare. The tax base which had fortuitously been put in place to support the First World War was much more progressive, buoyant and effective than that which had been available to finance the French wars of 1793–1815. Nevertheless borrowing had to be resorted to still more drastically, so that the national debt rose tenfold during the four years of the First World War, compared with just a trebling during the twenty years of war from 1793 to 1815. It was not until March 1920, some sixteen months after the war ended, that the national debt rose to its peak of £7,830 million. Some £1,230 million or 15.7 per cent was owed to people abroad. Only a very small amount, £315 million or just 4.0 per cent was permanently funded or very long term, while around £5,000 million or 63.9 per cent had varying maturity dates, mostly of medium term, a feature which was to cause considerable re-funding problems in the inter-war period. As much as 16 per cent or £1,250 million consisted of the highly liquid ‘floating debt’, mostly made up of three-month Treasury Bills. In short, the borrowing and taxable capacity of the country had been put under immense strain, yet both at the time and subsequently considerable controversy has raged concerning whether the correct balance had been struck between borrowing and taxing, and as to whether the best available methods for fund-raising had been put into practice. Keynes, writing twelve years after the end of the war, was too pessimistic in fearing that ‘perhaps the financial history of the war will never be written in any adequate way’ because ‘too many of the essential statistics’ were unavailable; but, given his close involvement as Treasury adviser and his analytical genius, he was quite right when, modestly including himself in the condemnation, he admitted that 370 BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY ‘looking back he was struck by the inadequacy of the theoretical views we held at the time as to what was going on and the crudity of our applications of the Quantity Theory of Money’ (1930, II, 170–1). Theoretical refinement was a luxury that had to await the peace. Keynes’s pessimism – a characteristic not unknown among the profession – was not confined to worrying about statistical deficiencies. In September 1915 he circulated what Lloyd George has called an ‘alarmist and jargonish paper’ to the Cabinet in which he gave his considered opinion that ‘it is certain that our present scale of expenditure is only possible as a violent spurt to be followed by a strong reaction: the limitations of our resources are in sight’. He went on to warn of British bankruptcy by the spring of 1916 (Lloyd George 1938, I, 409). Fortunately although McKenna, the new Chancellor, was frightened stiff by the gloomy forecast of his chief adviser, Lloyd George, in his typically modest way, ‘knew more about the credit resources of this country’ than either the current Chancellor or his ‘pessimistic, mercurial and acrobatic economist’. Keynes was ‘much too impulsive a counsellor for a great emergency’: he was ‘an entertaining economist whose bright but shallow dissertations on finance and political economy, when not taken seriously, always provide a source of innocent merriment to his readers’ (Lloyd George 1938, I, 410). Keynes himself returned similarly effusive compliments about Lloyd George: ‘a Welsh witch . . . rooted in nothing, void and without content; a prism which collects light and distorts it; this syren, this goat-footed bard, this half-human visitor to our age from the hag-ridden magic and enchanted woods of Celtic antiquity’ (1933b, 35–6). Keynes was not alone in considering the rate of expenditure reached in the early part of the war to be unsustainable. As early as the autumn of 1914 The Economist assured its readers of ‘the economic and financial impossibility of carrying on hostilities on the present scale’ (Mackenzie 1954, 240). Before turning to see how such an ‘impossible’ rate of expenditure was substantially exceeded and how the rising balance between taxation and borrowing was managed, we must first consider briefly how the immediate crisis facing the country’s financial institutions in August 1914 was successfully overcome. The first financial reaction to the assassinations of Archduke Ferdinand and his wife in Sarajevo on 28 June 1914 was a series of banking panics in Europe, intensified as the Balkan conflict widened. So far as Britain was concerned, the initial effect was to increase the flow of hot money into the traditional safe haven of London. However, by the end of July the growing probability that Britain would become directly involved frightened the City so much that the vastly increased BRITISH MONETARY DEVELOPMENT IN THE TWENTIETH CENTURY 371 desire for firms and persons to make their assets more liquid than normal, particularly by selling vast quantities of securities, brought about the closure of the Stock Exchange, temporarily, on 31 July. Bank rate was raised from 3 to 4 per cent on 30 July, to 8 per cent on 31 July, and to the panic rate of 10 per cent on 1 August, when, accompanying the announcement, the Chancellor’s letter to the Governor of the Bank of England permitted an excess issue of fiduciary notes if this were to prove necessary. Fortunately for the deliberations of the monetary authorities, Monday 3 August was a normally scheduled Bank Holiday. To gain time to decide on their plans three additional days, up to and including Thursday, were also declared to be Bank Holidays. To stem any pre-emptive drain of gold the Chancellor announced that specie payments were not to be suspended. A series of steps were taken to avoid the possible domino effect of bankruptcies. On 3 August Parliament passed a ‘moratorium’ in the form of a Postponement of Payments Act followed by a Royal Proclamation deferring the maturity of bills of exchange for a month with government guarantees following later to enable the Bank of England to advance virtually all the funds required by the discount houses and the banks to deal smoothly with the increased volume of bills. A Currency and Bank Notes Act, rushed through both Houses of Parliament on 6 August, empowered the Treasury to issue notes of £1 and 10s. denominations, and granted temporary legal tender status not only to Scottish and Irish banknotes but also to Postal Orders, which latter became negotiable instruments despite still having the words ‘not negotiable’ plainly printed across them. A Courts (Emergency Powers) Act was passed on 31 August to relieve debtors in general who were not able to pay because of war circumstances, thus complementing the earlier special Acts of moratorium; and a Government (War Obligations) Act was passed on 27 November to indemnify government ministers for the emergency measures they felt forced to take. This urgently arranged and costly battery of protective devices saved the City from any further signs of panic, and business quickly returned to normal, except of course for trading with the enemy, aspects of which could be cunningly concealed through third parties. It was the need for someone with long experience of discerning the true origins of trade bills, and so able to prevent London’s first-rate services being used to finance enemy trade, that brought Montagu Norman in April 1915 from Brown Shipley full-time into the Bank of England (where he had been a director from 1902) as adviser to the Deputy Governor. Because of the four-day Bank Holiday the panic 10 per cent bank rate was in operation for only a single working day and was quickly brought down ... - tailieumienphi.vn