Promise to Pay

by Robert McNair Wilson

  ‘‘High prices at home, therefore, threaten the Home Bankers by forcing them to part with real money. And that threat is soon passed on to the International Bankers because high-priced goods cannot be sold abroad. Exports fall and no longer pay for imports and International Bankers, in their turn, are asked to make good their promises in money - in gold. Both Home and International Bankers therefore must, on pain of catastrophe, bring any rise of prices to an end or (it amounts to the same thing) compel a fall of prices if somebody else in the world is producing more cheaply.

  ‘‘In a sense the system works automatically. If prices are too high in any country, that country will not be able to export. Goods will therefore pile up at home and prices will break. But we must be careful not to be led away by this aspect of the matter for it is obvious that, if the foreign exchange was free to move, high prices at home would not constitute an obstacle to the export trade. Our money would lose value the moment our exports did not pay for our imports. This fall in the value of our money would enable us to sell still in foreign markets because what cost £1 at home would be selling for, say, 15s. [75 pence - ed] abroad. (Owing to the fact that our £1 was worth now, in other countries, only 15s.)’’

  The Bishop shook his head.

  ‘‘Surely that would suit the bankers better than the present system?’’ he said. ‘‘If the exchanges were allowed to fluctuate, they could not be asked to pay gold for their IOUs.’’

  ‘‘No. But then their control of the price level would be gone. The moment it was discovered that a fluctuating exchange unpegged in any way, is harmless to trade, price-levels would be maintained by public agitation against anything which moneylenders might say. Would businessmen, who knew that they had nothing to fear, even as exporters, from a home market which was possessed of a high degree of buying power, allow their home market to be emptied of that buying power? Of course not. On the contrary it would soon be insisted that, as more goods were produced, more money should be issued to ensure their distribution. Money, remember, costs nothing. If the bankers tried to resist, they would be sidetracked by the government which would issue money on its own account. And even if it escaped that danger the financial system would perish from want of good borrowers. For producers would soon be in possession of enough capital to finance their own developments.’’

  ‘‘I see.’’

  ‘‘Therefore the financial system will never part with fixed exchanges or with gold, which is the most convenient and most satisfactory ‘peg’ for these exchanges that has so far been devised. This golden ‘peg’ of the foreign exchanges is the lever whereby the price level in every country can be raised or lowered and whereby, therefore, the supply of good borrowers can be maintained.’’

  The Home Minister rose and began to walk about the room.

  ‘‘In theory, as you know,’’ he went on, ‘‘the exchanges reflect the movements of goods and services. Exports pay for imports. If one exports more goods than one imports, one receives gold to make up the difference; if one imports more than one exports one pays gold out. And so on. Actually, however, as we have seen, it is possible by means of loans to foreigners to tip the balance one way or the other. The International Bankers, in other words, can create ‘invisible imports’ or ‘invisible exports’ by means of finance bills and other devices and so compel rapid and drastic changes in the price-levels and thus, also, in wage-levels. Think what the power means when one is dealing with a reluctant government. If the government in question refuses to grant the terms asked for, the International Bankers can put the exchanges against it, draw off its gold and compel it to cut wages and reduce public expenditure. Thus, the negotiating Government may find itself with a political crisis on its hands accompanied perhaps by strikes and riots.’’

  The Home Minister approached the Bishop’s desk and stood in front of it.

  ‘‘So here is the process as it is now in operation. The International Banker lends promises to pay to those countries whose production is cheapest and where, therefore, the highest rates of interest are available. He lends these IOUs on the security of National incomes (bonds), of land (mortgages), of debentures and of cargoes of readily saleable commodities. By lending, he causes rises of bank rates in the countries from which the IOUs have been taken, each Home Banker being anxious to protect himself against a possible ‘run’ upon him if gold should begin to leave the country and if, in consequence, a sharp break in prices should occur. The rises in bank rates causes a falling off of borrowing and hence a gradual decline in buying power. Prices sag. Wages fall. Firms fail to pay the interest due on debentures and mortgages and Governments find themselves, owing to difficulty in collecting taxes, with unbalanced budgets. The market values of mortgages, debentures and Government bonds fall sharply. Bankers begin to sell the securities, the land and factories and workshops and even the government bonds against which they lend their IOUs. These securities naturally fetch very little and large amounts of them pass into the hands of the bankers themselves at ‘rubbish’ prices.

  ‘‘The time has now come when the ‘deflated’ country is ripe for a new expansion of credit; for prices are low, wages are low and stocks are depleted. Back come the IOUs. Up go the prices. Soon the bankers are able to sell off the bonds, and land and factories and workshops and cargoes to new owners (or even to the old owners by means of loans from the bankers themselves) at a substantial profit. The sheep have been sheared. It is time to think about a new crop of wool.’’

  ‘‘Terrible, terrible!’’

  The Bishop’s voice was charged with a lively distress.

  ‘‘And this,’’ he said, ‘‘is the system of which I made myself the defender. You are quite right. The root of the evil is the lie that a man who has promised to pay ten times what he possesses can possibly fulfil his promises. The system, as you have shown me, marches from lie to lie - the lie that a loss of gold is disastrous, the lie that foreign exchanges must be kept fixed, the lie that a country lives by its export trade, the lie that purchasing power in the home market is an evil if it interferes with exports, the lie that high wages are a danger, the lie that a country which does not export more than it imports is living above its means, the lie that the remedy for over-production is economy in consumption. What a hideous pyramid of falsehood! And what a spectacle; a world glutted with goods on the one side and with hungry paupers on the other!’’

  The Bishop remained silent for a moment. Then he rose and stood facing his visitor.

  ‘‘This system of IOUs,’’ he asked, ‘‘was established, was it not, about the time that the power of the Christian Church in Europe began to weaken?’’

  ‘‘Yes. In the eighteenth century. The Christian Church absolutely forbade usury.’’

  The old man nodded.

  ‘‘I begin to see a war,’’ he said, ‘‘of principalities and powers rather than of bankers and their victims.’’

  He held out his hand to the Home Minister.

  ‘‘I was an army chaplain,’’ he said. ‘‘I saw so many men lay down their lives for what they believed to be righteousness. And so I lift up my heart. If the Christian civilization of Europe has not perished that is only because the spirit of its Founder dwells still in millions of hearts. Go out and tell the people. When that task has been accomplished fully, the fields will be white towards the harvest.’’

  Notes and Quotes

  First of all, the Quotes

  ‘‘I am afraid the ordinary citizen will not like to be told that the banks can, and do, create money. The amount of money in existence varies only with the action of the banks in increasing and decreasing deposits and bank purchases. Every loan, overdraft or bank purchase creates a deposit and every repayment of a loan, overdraft or bank sale destroys a deposit. And they who control the credit of a nation direct the policy of Governments and hold in the hollow of their hands the destiny of the people.’’

  The Rt. Hon. Reginald McKenna, Chairman of the Midland Bank at a meeting of the M
idland Bank, January 1924.

  ‘‘Today the nation returns to the noble metal, Gold.’’

  The Rt. Hon. Winston Churchill, as Chancellor of the Exchequer, announcing the return to the Gold Standard in the House of Commons in April, 1925.

  ‘‘Gold has been cornered, scrambled for, and hoarded. It has risen enormously in price, and the value of everything we have or earn has been diminished accordingly. This monstrous process has only to be continued long enough to shatter the civilisation, as it has already broken the prosperity, of the world as we have known it.’’

  The Rt. Hon. Winston Churchill, speaking in the House of Commons on the evil effects of the Gold Standard. February 1932.

  And now the Notes MOROTORIUM

  When the First World War broke out in 1914, the Bank of England possessed only 9 million sterling in gold reserves and this sum constituted the effective legal tender reserve of all the banks in Great Britain.

  The bank managers became seriously alarmed that the depositing public would demand their legal money. The public did demand gold coins in exchange for the banks’ privately-issued notes, in many cases, and a run on the Bank of England followed.

  After the nine million of gold sovereigns had been handed over the counters to the waiting crowds, in exchange for notes, the whole money system collapsed and it became necessary for the Government to declare a Bank Holiday, or Moratorium, for several days.

  When the banks reopened, the public discovered that instead of getting their money back in gold, they were paid in a new legal tender of Treasury notes of £1 and 10/- [editor’s note: 10/ - is ten shillings, or fifty pence in modern money].

  This new legal tender currency amounting to £300,000,000 [editor’s note: yes, three hundred million pounds as opposed to just nine million that has been held by the entire banking system in gold] had been issued by the State to the banks to save them from collapse. Had this new money not been issued, the private banking houses of Britain would have been compelled to default to their customers in a week’s time.

  CURRENCY

  This means legal tender money whether notes or gold. This money is issued under the authority of Government.

  CREDIT

  This consists of the promises of bankers to pay currency. These promises-to-pay amount to about ten times the total of the currency. Credit is not legal tender money but, since it is used daily to buy goods and services and to pay debts, it performs the functions of money and is, in fact, indistinguishable from it.

  Thus if the total was some £3,000,000,000 in use in this country:

  £350,000,000 would be money issued by Government and £2,650,000,000 would consist of promises to pay issued by private individuals.

  These promises to pay are issued only as loans repayable with interest. They can be withdrawn. So that the bankers actually have it in their power to remove nine-tenths of the buying power of the country whenever they choose to do so. Actually, of course, they content themselves with much smaller fluctuations of their credit because quite small fluctuations are enough to cause those changes in the level of prices, upwards or downwards, by which they live.

  BANKERS

  Bankers are lenders not of money but of promises to pay money. They lend promises-to-pay ten times the quantity of legal tender money which they possess. Consequently they live in permanent fear of ‘‘runs’’ upon them - that is to say of demands by the holders of their promises-to-pay for actual payment in legal tender money. The financial system is so designed as to reduce the danger of ‘‘runs’’ to the smallest possible dimensions.

  A BANKER’S BALANCE SHEET

  This shows how much legal tender money he possesses under the heading of ‘‘Cash and Deposits at the Central Bank’’.

  The next item is always given as ‘‘Deposits’’ and these deposits are divided into ‘‘Advances’’ and ‘‘Securities’’. This means:

  CASH

  Legal tender money in the till and in the strong room.

  DEPOSITS AT THE CENTRAL BANK

  These are loans from the Central Bank given to private banks and secured by ‘‘collateral’’ - that is to say by government bonds, and other forms of high-class securities.

  Deposits at the Central Bank count as cash in the sense that they can be changed immediately into legal tender money. The Central Bank, in other words, as the issuer, for the Government, of legal tender money, will always pay legal tender money on demand to those who have claims upon it. Private bankers therefore lend their clients promises-to-pay ten times the quantity of the deposits they, the private Bankers, possess at the Central Bank just as they lend promises-to-pay ten times the quantity of cash they possess. Cash and deposits at the Central Bank are really one and the same thing.

  Nevertheless a difference between them does exist. Cash is cash. It is legal tender money. But, as has been said, deposits at the Central Bank are loans from the Central Bank. The Central Bank, like all banks, in other words, issues promises to pay legal tender money. It can, nevertheless, call up its loans and shorten sail like all other banks. It does this in several ways. The effect is to reduce every private bank’s ‘‘deposits at the Central Bank’’ and so every private bank’s holding of legal tender money.

  When a private bank loses legal tender money it, too, has to shorten sail and call in its loans so that it may not, at any time, be lending promises-to-pay to a greater amount than ten times its holding of legal tender money. For example:

  A private bank has:

  Cash

  £100

  Deposits at the Central Bank

  £100

  =====

  Total

  £200

  It will lend promises-to-pay to the amount of £2,000.

  But the Central Bank now calls up £50 of its loan, and so the private bank has:

  Cash

  £100

  Deposits at the Central Bank

  £ 50

  ===

  Total

  £150

  The private bank will now lend promises-to-pay to the amount only of £1,500.

  Thus the system by which private banks borrow from the Central Bank enables the Central Bank to control them by increasing or decreasing the amounts of their legal tender money.

  But the Central Bank itself is controlled by the movements of gold because, when the gold standard is working, it is compelled to withdraw notes to the full value of any gold which it may be exporting from the country. An export of gold, therefore, causes the Central Bank to ‘‘retire’’ notes and this may force it to reduce its loans (‘‘deposits at the Central Bank’’) to the private banks.

  Movements of gold are determined by the relationship existing between exports and imports. If exports do not pay for imports gold will leave the country to settle the bill. If exports exceed imports gold will come into the country to settle to bill. But it is possible for international bankers to ‘‘tip’’ this balance of exports and imports by making loans across the exchanges in such a way that gold may be demanded by the borrowers of the money. The International Bankers, therefore, really do control the movements of gold.

  And so we have:

  Employment and profits depend on the price level. The price level depends on the quantity of money.

  The quantity of money depends on private bankers’ loans.

  Private bankers’ loans depend on Deposits at the Central Bank. Deposits at the Central Bank depend on Central Bank loans.

  Central Bank loans depend on movements of gold. Movements of gold depend on the Foreign Exchanges.

  The Foreign Exchanges can be made to depend on the operations of International Finance.

  Consequently the old nursery rhyme can be applied with accuracy thus:

  ‘‘The International Banker began to lend his promises-to-pay across the Exchanges. His promises-to-pay began to lead to an export of gold. The export of gold began to make the Central Bank call in its loans. The calling in of the Central Bank’s loans bega
n to make the private bankers call in their loans. The calling in of the private bankers’ loans began to cause prices to fall. The fall in prices began to cause a fall in profits. The fall in profits began to cause a fall in wages and unemployment. And then the country produced more cheaply and the International Banker didn’t have to honour his promises-to-pay by giving money for them after all.

  And so he got 8 per cent in a far country without having to part with a penny piece. Which was as well, seeing that he possessed no money.’’

  DEPOSITS

  It is important to distinguish between:

  ‘‘Deposits at the Central Bank’’ and ‘‘Deposits’’. The former are loans to the private banker, the latter are loans made by him.

  Deposits, in fact, mean loans of promises to pay legal tender. Deposits therefore amount as a rule to ten times the private bankers’ holding of ‘‘Cash and Deposits at the Central Bank’’.

  ADVANCES

  Private bankers divide their deposits into ‘‘Advances’’ and ‘‘Securities’’. Advances are loans of promises-to-pay industrialists, farmers, manufacturers and so on. They are, therefore, money in the market. When a private banker is taking in sail it is his advances which will shrink.

  SECURITIES

  When private bankers do not wish to lend their promises-to-pay to producers they buy securities, for example War Loan, with them. Thus in times of boom ‘‘advances’’ are increased; in times of slump an increase in ‘‘securities’’ takes place. This merely means that, when trade is bad, bankers like to have the government itself for their borrower. Hence the cry that governments must balance their budget.

  LOANS TO THE MONEY MARKET

  Private bankers always lend some of their promises to the Money Market, that is to say, to the International Bankers. These are short term loans, and hence readily available in case of need. Thus a private banker might have: