My father really did know Lloyd George

That's me on the left, confronting my Dad, in early 1936.  He was a "Lloyd George Liberal", which was the furthest to the Left that the Welsh middle classes dared to go, before WW1.  My Dad was already 21 years of age when Lloyd George became Chancellor of the Exchequer in mid-1908.  He was a loyal foot-soldier in the Liberal cause, and a dedicated local Councillor in Cardiff.

And in 1934, he published his one and only pamphlet A Plan for Currency Reform, as a report to the Cardiff Chamber of Commerce.  This is his work, published on 12 November 1934, and now - word for word - for the first time on the Web...

The Monetary Crisis

Report of Currency Committee based upon

A PLAN FOR CURRENCY REFORM

expounded by

Mr T.C.Warren Evans

FCIS, Cert AIB, FREconS, (Barrister-at-Law)

During the course of the Committee's discussions, many schemes of monetary reform and management have come up for consideration, but all of them, being schemes for regulating the supply of money only, appeared to the Committee to suffer from the same fundamental weakness in that they failed to provide effectively for a balanced economic life which would mitigate the acuity both of booms and depressions, if not eliminate them altogether.

With regard to the great industries of shipping and coal-exporting, these are essentially international, and are dependent largely on international factors which are both difficult and complicated.  But the difficulties are fundamentally due to the fact that there is no such thing, and there can be no such thing, as "international money" in the same sense of "national money".  Money is a matter of law, and laws (particularly monetary laws) are essentially national.  Currency (a better word that "money") is only legally current in its own country, and the development of barter in international trade these days must not be considered strange or unnatural.

The proposals which are to be submitted are purely monetary proposals, and will therefore affect international trade only indirectly, as shown later.

One thing is certain: however important international trade may be to any country, its internal trade must be more important still. Every country must, therefore, put its own internal trade in good order first, and a country with a good and stable internal trade is likely to be at an advantage in  the world's international trade.  Nor are the proposals financial proposals, but rather proposals for a money and a monetary system in which a successful financial policy will be possible.

As the proposals contain elements which may be new and perhaps startling to some, it is right that we should preface them with a brief account of what we think are the root causes of our troubles.

WHAT IS MONEY?

What is this thing we call "money" (or currency)?  To answer this apparently simple question fully would involve answering several others.  For a thing is what it does, and money does so much and so many things.  At this stage, therefore, we will say simply that money is an invention, a man-made invention.  What it made for?  Every invention has some purpose or function.  It was invented in order to overcome the difficulties involved in the barter of commodities, i.e. to facilitate the exchange of goods - it was a medium of exchange - a means to an end.  This is its real, fundamental and primary function, its only raison d'etre.

This means that when we sell goods or services for money, the whole basis of the transaction is that we will expend that money on the purchase of other goods or services.  If we do not, we prevent that money from continuing to perform its real function.  Money is made for the market-place: money and markets are complementary.  No money - no markets. And no markets - no money.

But we are all guilty to some extent of using money for other purposes, particularly for saving, and it is obvious that this formed no part of the original function of money.  Money was never meant to be saved, and what is about to be said of savings refers to savings retained in money and not in any other form whatsoever.

Now: this habit of saving money has grown up because down through the centuries money itself has tended more and more to be better than anything else, i.e. better than those things whose exchange it was designed to promote.  There have been exceptional periods of inflation when it might be said that money was not as good as commodities, and these occasions have always been periods of brisk trade.

THE "QUALITY" OF MONEY

If money is a means to an end, and that end is good trade, it is a strange thing that money has been fashioned on the assumption that it should be better than goods, and thus a thing desirable in itself - a good thing to keep, and therefore an end rather than a means.  So it has come to pass that money is expected to fulfil a function quite different from that of a medium of exchange, viz a store of value - although these two functions are contradictory and mutually exclusive.  Here we see the reason why schemes which aim only at regulating the supply of money must fail.  It is useless to create new money to meet the demands of trade and industry, when people are not only allowed, but even encouraged, to hoard the money i.e. use it as a store of value, and thus negate the effects of the increased quantity.

It is clear, therefore, that the degree of "goodness" which money should possess in relation to commodities, is as important as the amount of that money available.  This is much the same as saying that the rate of circulation is as important as the quantity of money in existence: the rate of circulation is largely influenced by the "goodness" of money.

Gresham's Law, a well-known monetary principle, states that because people always tend to keep the best for themselves, bad money will always be back into circulation, while the good will be saved or hoarded.  It does not seem to have occurred to our economists that the principle applies, not only as between good money and bad money, but also as between money and goods.

Now: the good quality possessed by money which is not possessed by goods, is the quality of non-depreciation.  There are two kinds of depreciation.  The one is that which comes from flooding the market with goods of the same kind i.e. increase of supply in relation to demand.  From this kind of depreciation, money has suffered during our lifetime in the periods of inflation, when markets have been flooded with money.

MONEY IS "TOO GOOD"

The other is the depreciation to which all commodities are subject, whether bread, shoes or motor-cars. All things (with few exceptions) start top depreciate from the very moment we purchase them, whether we use them or not.  From this kind of depreciation, money is exempt - and it is precisely freedom from this kind of depreciation which makes money superior to goods, and therefore "too good" for its job as a medium of exchange.  Relying on its keeping quality, people tend to keep it rather than spend it.  Further, this tendency is encouraged by another factor: under the present order, people can keep their money in a Bank, and it will grow in amount which they keep it there.

• What chance can goods have, against money, when they all depreciate - while money does not only not depreciate but may actually increase?

The result is the general effort to save as much money as possible.  Thrift has come to be reckoned a praiseworthy practice; and the money kept on deposit accounts in the Banks, amounting to some £1,000 million is rarely used in the exchange of goods or services.

• It is "money on strike", year in, year out.

But some will say that the Banks lend this money out to their other customers in various ways.  This is the popular and generally-accepted description of a Bank's activities - but it is not a correct one.  Banks do not received deposits from some customers and lend them out to others.  What the Banks do is to make loans to some customers, and new deposits are thereby created.  It is not a question of "No deposits, no lending", but rather of "No lending, no deposits".

But it is the popular notion of the Banks' business which ought to be be true, and proposals will be made that will have this effect.

SAVING MONEY

Again, some will ask "Why worry about people saving money, so long as there is enough of it?"  That is a fair question, and must answered.

Let us assume that the whole productive and distributive trades of the country re in the hands of one great corporation, and that there is no such thing as foreign trade.  The only source of income of the corporation would be the consuming public, which their only source of income would be the corporation.

Confining ourselves to what are called "consumers' goods", suppose that in one period of a year, £1,000,000-worth are produced, this representing the price to consumers.  The corporation will not pay out, in money, the whole of the £1,000,000 (including dividends, if any, and an allowance for the depreciation of plant).  Suppose they pay out £900,000.  Similarly the consuming public, who will receive this some by way of earned income or dividends - suppose they save £100,000.  It is obvious that only £800,000 will be spent, while £1,000,000-worth of goods will be in the markets for sale....

There is a gap between production and consumption, caused by savings, and unless something happens, some of the goods must remain unsold.  In practice, other things do happen: expenditure on capital goods, instalment purchasing, inflation of the currency, surplus of exports, reduction of prices, and living on past savings, all except the last two of which may succeed in filling the gap for a period, but have the effect of making the position more acute, i.e. of widening the gap in subsequent periods.  In other words, they only postpone and aggravate the breakdown, which is really due to this habit of saving or with-holding, whether on the part of producers or consumers.

Mr Maynard Keynes, in his recent "Treatise on Money", shows that there can only be equilibrium in our economic life when the factor of nett savings is "zero".  Money that is "too good" is, therefore, full of danger, equally with money that is "too bad".

There are two other points which must be dealt with quite shortly, before setting out our proposals.

THE MAKERS OF MONEY

The first is the question as to who should be responsible for the creation of money - and if necessary, its destruction.  There can be little doubt that it should be the State, and the State alone.  "Money" is a matter of law: it is legal tender.  The minting of money has always been the prerogative of the Crown, and the counterfeiting of coins and the forging of banknotes are serious offences under the law.

Where the State prescribes by law the means of payment which creditors must accept from their debtors in discharge of their debts, those means of payment should be created by the State and bear the guarantee of the State.  Insofar as our banknotes are concerned, this is nearly true today, because the Bank of England which issues them is regarded for all practical purposes as a State institution, and a proposal to nationalise it would not be considered revolutionary.

But banknotes form a very small part of the means of payment (i.e. money) used from day-to-day in the settlement of business transactions.  The bulk of those are settled by cheque, which are just transfers of balances at banks from one customer to another; and although cheques may only be "conditional" legal tender in the eyes of the law, they do in fact do all the work of money, just as effectively and efficiently as the banknotes which are absolute legal tender.  They are, therefore, for all practical purposes money themselves (i.e. the balances which the cheques represent).

Now: there are in existence some £2,000 million of these bank balances transferable by cheque, which are capable of doing all the work of money, and the point to be noted is that they have been created not by any action of the State, but by the Banks themselves.  Every time a Bank makes a loan, discounts a bill or purchases securities, new deposits are created - and this comes about because the banks combine the functions of both banking and finance (or "moneylending").

Further, this is done without any external control or interference: the only limits to the creation of this kind of money are self-imposed, by the Banks themselves.  The Committee do not find any fault whatsoever with the Banks in this matter, but it is becoming increasingly clear that, if the money of a country is to be controlled in the best interests of trade and commerce, then its whol supply must be in the hands of one body, a State-controlled one.  We shall make a proposal to this effect.

THE QUANTITY OF MONEY

The other, and last, point is the quantity of money required.  This question can only be decided empirically with this one object in view, viz. the stabilisation of the General Price Level.  We all know that when there is a lot of money "about", prices tend to rise, and when there is a shortage of money "about" they tend to fall.

It is not suggested that the task of regulating the supply of money would be an easy one, especially as the word "stability" must not be taken to mean rigidity.  But we do not consider that it is beyond the capacity of the best brains, and the trained intelligence of our economic leaders, to determine when a movement in the general price level is due to monetary causes and needs a monetary correction.

Bearing those things in mind, the proposals and reforms which the Committee wish to submit to the Chamber for their consideration, and which they consider would bring into existence an economic order freed from the cycle of booms and depressions and unemployment are as follows:-

I  THE GOLD STANDARD

The Final Abandonment of the Gold Standard   It is not proposed to discuss the arguments for and against this proposal beyond saying that the Committee think it must go; and in any case its final abandonment is necessary if the other reforms to be suggested here are to be carried out.  We have now been off the Gold Standard for three years, and as far as one can see we are likely to be off gold for some years to come, and there are eminent thinkers who consider that we should abandon it altogether.

On the other hand, while we are off the Gold Standard officially, gold is still playing a large part in the affairs of the world, and there are large and powerful interests at work to bring about a return to it or to prevent any acknowledgment that we have left it for ever.

As far as internal currency arrangements are concerned, the weight of unbiassed opinion is probably in favour of the view that we do not need it.  The doubts and difficulties arise in connection with international trade, where it seems to supply the want of an international money.  The members of the Committee, however, have had the privilege of hearing Mr Leigh, Secretary of the London Chamber, speak on this matter, and we only want to say that of all the proposals made for the regulation of international exchanges, the best proposed is that of Mr Leigh himself, viz. the fixing of rates of exchange for definite periods of time by bilateral agreements with other countries through the Central or State Banks.  This would finally dispose of the whole question of the Gold Standard, and we should be able to carry on as we are carrying on, not unsuccessfully, at the present time, without it.