Promise to Pay

by Robert McNair Wilson

  Thus IOUs had been brought back at once to the bank by builders and tanners and smiths and other master-tradesmen, who, in their turn, had spent them on wages. They had poured swiftly through the bakers’ and butchers’ and greengrocers’ shops and these retailers had also fetched them back to the bank and then, later, drawn them to pay their bills to the millers and farmers and market gardeners and so on. Almost every day new accounts had been opened with the bank, each of them consisting of statements of the number of IOUs held by the person owning the account.

  The banker knew what these statements really represented. He knew, for example, that the £100 worth of IOUs which he had lent to the glovemaker had been spent by that man in paying £80 to the tanner, £10 to the furrier and £5 each to the horner and the threadmaker. The banker’s account stated that he, the tanner, possessed £80. The furrier’s account stated that he, the furrier, possessed £10, and so on. But what these people actually possessed were his, the banker’s, IOUs. Suppose that the fall in prices alarmed all these good people to the extent of making them wish to possess gold and silver. If that happened an army of clients would appear one morning at the door of the bank, each of them with his hands full of IOUs and each of them demanding coin, hard cash, red gold. The banker, tossing on his bed, resolved that not only must he stop lending; he must shorten sail. He was confirmed in this resolution when he saw that his IOUs were no longer passing so quickly from hand to hand. The slowing down of business had caused a corresponding slowing down in the rate of circulation of money. People were not spending. On the contrary, they were allowing their IOUs to lie in the bank. Thus, the quantity of ‘‘money’’ in the markets was diminishing; there were fewer and fewer bidders at the sales.

  The banker, in these anxious circumstances, bethought him of his loan of £100 to the glovemaker. He called that man into his private office and sat down opposite to him:

  ‘‘I have no wish, of course,’’ he said, ‘‘to embarrass you in the conduct of your business; but I do feel that, in present circumstances, it might be well if you could see your way to pay off your loan.’’

  He spoke in the quiet, firm tones of a man who is asking regretfully for his own. The glovemaker flushed and wiped his brow.

  ‘‘You hold my house,’’ he said, ‘‘as security for the loan. It’s worth £500 if it’s worth a penny.’’

  ‘‘Oh, my dear sir, things in this world unhappily are worth only what they will fetch.’’

  ‘‘What, do you suggest you haven’t got good cover?’’

  ‘‘Not at all. But the loan has been outstanding for six months. Banking, you know, is not exactly money-lending. We are the handmaidens of industry... ’’

  ‘‘What can it matter to you if you have security?’’ The banker shook his head.

  ‘‘It’s difficult to explain. Finance, I find, is a closed book to the majority of men. Well, each to his trade.’’ He paused. ‘‘What about a mortgage on your house? You could borrow enough to repay my loan.’’

  The glovemaker went away. But he did not take the banker’s advice.

  Instead, he called on a shopkeeper who had bought a consignment of his gloves worth £100 and urged that he must be paid at once. The shopkeeper had no option but to advise the tanner, the furrier, the horner and the threadmaker, all of whom had accounts with his shop, that they must immediately pay off their debts.

  Next morning the banker found tanner, furrier, horner and threadmaker standing behind his counter. Each drew out his little stock of money - in the form of IOUs - and closed his account. The sums withdrawn paid the shopkeeper, who paid the glovemaker, who repaid his loan to the banker, who wiped the promises-to-pay out of existence with a stroke of his pen.

  The banker could now look at his ledger with less anxious eyes (because this process of calling in loans had not, of course, been confined to one client only). He saw that he no longer owed anything to the tanner, or the furrier or the horner or the threadmaker! And he was no longer in any danger, by reason of the possible failure and default of the glove maker, of not getting back all the IOUs he had lent to that man. In all he had called up, let us say, half his former loans of IOUs; there were now only £50,000 of these outstanding. In other words his holding of gold and silver amounted to one-fifth instead of one-tenth of his promises-to-pay.

  He was glad that he had, thus, reduced his risk when, soon afterwards, some of the more timid among his clients began to change their IOUs into coin. He ventured to ask one of these timid folk why he was taking such a course.

  ‘‘Because we feel that, with so many people losing their money, you cannot have escaped losses yourself.’’

  While this scene was in progress an old man entered the bank. The banker, with a start, recognised one of his original depositors, a man who had placed £4,000 in gold in his strong-room. The old man came to the counter and put down IOUs to the value of £4,000.

  ‘‘I want my money, please.’’

  The banker’s face became expressionless. He raised his hand as if to wipe his brow but immediately lowered it again.

  ‘‘Certainly.’’

  There were a number of people in the bank. They moved nearer, craning their necks. The banker signed to his clerk and they went down together into the vault. A few minutes later they came back carrying the bags of gold. They placed the bags on the counter. The old man opened one of the bags and poured some of its contents into his hand. The bright gold met his eyes genially. He sighed, bent down and then stood erect. He turned to the other people in the bank.

  ‘‘There you are,’’ he said. ‘‘There’s my money. Who says now that our banker hasn’t got the gold and silver to meet his IOUs?’’ He turned to the banker.

  ‘‘I heard a rumour that you’d had losses like the rest of us. I knew it wasn’t true, mind you; but I thought I’d just put you to the test.’’

  He made a gesture with his long arms.

  ‘‘Take it back where it came from,’’ he cried. ‘‘Your IOUs are good enough for me.’’

  II Economic Law

  The banker was able to congratulate himself now on the steps he had taken. His IOUs had never stood higher in the regard of his fellow citizens. He was able, in the cases in which he felt justified in renewing a loan, to ask for a higher rate of interest., as much as 8 per cent. Thus, although his loans were fewer in number, his income, all things considered, remained wonderfully steady.

  His case, indeed, was in striking contrast to that of his fellow citizens. As the result of the withdrawal of one-half of the IOUs - that is to say of one-half of their accustomed buying power - they found themselves with tumbling markets and slumping prices. The mass of goods created during the boom had become largely unsaleable except at ruinous prices. Firms were closing down and discharging their work-people, or close cutting wages to the bone in an attempt to keep going. There were riots which had to be put down with force. There was hunger in the middle of overflowing plenty. There was bankruptcy of once-prosperous and honoured families. Masters were horrified to find that their men resisted a reduction of wages which, as these men ought to have seen, had become urgently necessary; men stood aghast at the ‘‘savagery’’ of masters who desired, it appeared, to take the bread out of their children’s mouths.

  Nobody, meanwhile, could account for the disaster. What had happened? Why had prices fallen? What blight had descended on their wonderful prosperity? In their deep perplexity men turned to the banker. He, at any rate, had ridden out the storm. In a world where everything was falling in ruins he stood like a rock.

  The banker received a deputation of the chief citizens and entered with them into a consultation about the sickness of the community. The Mayor, who was a businessman, expressed the view that there had been a gross over-production of goods. But one of the Aldermen, a Labour leader, called this opinion in question.

  ‘‘How can there be over-production when half the town is starving, without decent clothes or boots?’’ the Alderman asked
.

  The Mayor could not answer him. A doctor in the deputation proposed the inauguration of relief-works for the unemployed. But the Mayor shook his head.

  ‘‘The town is in debt to our friend the banker,’’ he said. ‘‘We could scarcely ask for a new loan at present.’’

  ‘‘There are the rates.’’

  ‘‘My dear doctor, we are finding the greatest difficulty in collecting the rates.’’

  They all turned to the banker. He waited for silence and then addressed them.

  ‘‘Need I say, Gentlemen,’’ he began, ‘‘that I have given the most anxious thought to the sad plight in which we all find ourselves? Believe me that, if I speak plainly, I do so only from a sense of duty. In my opinion there has been over-production. There has also been over-spending by the public authority. You built a swimming bath, a new school, a play-pond.’’

  The banker watched the Mayor as he spoke. That official looked guilty.

  ‘‘These are luxuries, gentlemen, luxuries; delightful and most proper if one can afford them. You see, when the public authority sets an example of... lavishness, plain citizens are likely to lose their heads. Men dream dreams. They build too many houses, too many factories, too many workshops. A great mass of goods is thrown upon the market. Has anyone asked himself: ‘Where is the money to come from to buy all these delightful things?’’’

  The banker glanced about him. Nobody spoke.

  ‘‘I address you,’’ he went on, ‘‘as the custodian of the savings of my fellow citizens. These hard-earned savings have been entrusted to my care and I regard the trust as a sacred one. My first duty, clearly, is towards my clients. Very well, then, I say that further expenditure by the municipality would certainly not be justified. Where is the money to come from? Capital, as you know, is derived from savings, it is produced by saving, by thrift, by the exercise of frugality and honesty. Are these savings, the provision men and women have made for their old age, to be risked in enterprises which, in any case, are unlikely to achieve their object? Gentlemen, I have a different plan to propose.’’

  The banker leaned across the table.

  ‘‘We, too,’’ he said, ‘‘must save. We must build up more capital resources. We must cut down every item of expenditure, public and private, which cannot be justified. If we do that we shall be able to pay the interest on our debt.’’

  The Alderman: ‘‘To you.’’

  ‘‘Certainly to me, as the custodian of the savings of your fellow townsmen. Let me add, Gentlemen, that I believe that many of our public services are over-staffed... ’’

  ‘‘Would you take the loaf off the table when the children are sitting down to tea?’’ the Alderman exclaimed.

  A growl of anger went round the room. The Mayor called the Alderman to order.

  ‘‘There’s no escaping economic law,’’ the Mayor said.

  ‘‘Ah,’’ the banker cried, ‘‘that’s it. Economic law. Inexorable economic law. We are all the servants of economic law. Yes, my friend, we must deny ourselves, tighten our belts... ’’

  ‘‘Why should we tighten our belts when there’s been over-production?’’ ‘‘We have been living beyond our means.’’

  ‘‘What do you mean by that?’’

  ‘‘The swimming bath, the new school... ’’

  ‘‘We built them. How can it help anybody if we don’t use them?’’ ‘‘They can be sold.’’

  ‘‘Only at ruinous sacrifice.’’

  ‘‘My dear sir, the value of anything is what it will fetch. If we have lived beyond our means, can we go on enjoying luxuries which we cannot afford?’’

  ‘‘I say that it’s ridiculous to tighten your belt in the middle of overflowing plenty.’’

  ‘‘Our prosperity was fictitious.’’

  ‘‘What, bread isn’t bread, is it? Leather isn’t leather? Cloth isn’t cloth? We’ve got them, I tell you; why can’t we make use of them? Look at the unemployed. How can you say a town is poor when it has hundreds of idle craftsmen and masses of raw material? Is an army poor when it has great numbers of reserves? Does a general surrender before he has called up his reserves? And while his supply services are bulging with goods?

  Surely it’s madness in such circumstances to talk about cutting down? Why not use what we’ve got? Why not set our people to work?’’

  The banker shook his head.

  ‘‘Where is the money to come from?’’ he asked, and added: ‘‘What would you say to me if you brought me one of my IOUs only to find that I did not possess the means of cashing it? Ask yourself that question. I could create IOUs in unlimited quantities - by a stroke of the pen. Would you accept them in payment? Would you wish to feel that you had entrusted the fruit of your frugality and hard work to such scraps of paper? Why are my promises-to-pay valuable? Because I can redeem them in gold and silver. If you insist on my issuing IOUs which cannot be redeemed what will happen? Prices may rise for a time. What then? Wages also will rise. That, my dear sir, is what a banker calls inflation.’’

  The last word came in tones which conveyed an impression of finality. The Mayor nodded vigorously.

  ‘‘Oh, no, no,’’ he cried. ‘‘No inflation please. No inflation on any account whatever. I return thanks every day that, whatever else may be weak, our financial system is sound. Sound as a bell.’’ He wiped his brow. ‘‘There’s no doubt that the banker is right. We have been living above our means. Both profits and wages have been too high, Our prosperity was unreal, fictitious, a bubble. The bubble has burst. Well, we must be men. We must tighten our belts and pay our debts no matter at what price. Those of us who are more happily situated must try to help our less fortunate brethren.’’

  He wiped his brow again. A faint smile appeared on his lips.

  ‘‘Meanwhile,’’ he declared, ‘‘I know that I shall be expressing all our thoughts when I say that we feel grateful to our banker for his courage and for the clear and definite manner in which he has explained our trouble and prescribed the appropriate remedy. Our banker, as many of us know, has gone to the extreme limit of safety in order to help us. He has done what he could to temper the wind to the shorn lamb. But there is a limit, the limit set by economic law. No prudent man, no honest man, can go beyond that. I, for one, wish to say that I am thankful that our banker has shown himself both prudent and honest, a worthy custodian of our savings. Our hearts may be troubled; they are troubled. But at least we can say: ‘There has been no inflation’.’’

  The banker spent that evening over his ledger. He saw that he had become possessed of a very large number of business houses and shops, because the owners, who had owed him IOUs, had gone bankrupt in the slump. He reached the conclusion that if, in the near future, he could see his way to extending his loans once more, all this property would inevitably rise in value. He decided to hold the property against that happier day.

  His conscience had ceased to trouble him. But he couldn’t help thinking that whereas he had spread out his loans in the first instance, and so raised prices, every buyer had been compelled to pay him tribute, now, when he had called in his loans and so caused prices to fall, tribute had come to him from the sellers. It was a case, evidently, of heads I win, tails you lose. His earlier fears seemed absurd in the light of what had actually happened. He had begun operations with £10,000, all of which belonged to other people. But here he was now the owner of half the houses and businesses in the town, and therefore of a large proportion even of the gold and silver in his own vaults. Whereas formerly his income had been derived solely from the small fees he charged for keeping other people’s money in his strong-room it was derived now from a long list of Investments, from rents and from the profits of business. He was the richest man in the town and also the most powerful. And every one of his fellow citizens held him in honour.

  III The “Credit Cycle”

  Further consideration showed the banker that he had been able to exert so great an effect upon the lives of his fe
llow townsmen because he had given them buying power, in the form of his promises-to-pay, when they had no need of it and had taken that buying power away at the moment when their need of it was greatest. At the time when he had begun to lend his IOUs there had not been a great quantity of goods in the town’s markets. There had not, therefore, been great need of money to distribute these goods. The sudden flooding of the empty markets with money - a true inflation - had, in consequence, sent prices soaring up and made it worth everybody’s while to produce more goods. Soon the markets had become glutted with goods, so that large quantities of money were needed to distribute them. The sudden draining away of the money, in these circumstances, had necessarily brought all prices down with a thud. His IOUs had given him control of the price-level.

  But he comforted himself with the idea that, even if money had never been invented something of the kind would probably have happened. After all, it was human nature to produce to excess any article for which a brisk demand seemed to exist. And excessive supply is bound, sooner or later to extinguish demand and so to leave producers with their goods in their hands. He made that point to a friend who had offered some criticism of his methods; his friend shook his head, objecting:

  ‘‘Demand was not extinguished in this town. The town is still full of hungry men and women and children.’’

  ‘‘They have no money.’’

  ‘‘We’re not talking about money. You said that what has happened here would have happened if money had never been invented. I say that it would not have happened. It was your loans which caused the boom;

  it was the withdrawal of your loans which caused the slump. There’s all the difference in the world between a population which has satisfied its needs and has, after its needs have been satisfied, a surplus which it cannot use, and a population that is starving among plenty.’’