Chapter XIV: Part 14

And now you will say that if this is so, you will take particular care to buy nothing but new shares in new companies, sending the money directly to their bankers according to the form enclosed with the prospectus, without allowing any stockbroker or stockjobber to know anything about it, thus making sure that your money will be used to create a new business and add it to the productive resources of your country’s industry. My dear lady, you will lose it all unless you are very careful, very well informed as to the risks involved, and very intelligent in money matters. Company promotion, I am sorry to say, is a most rascally business in its shadier corners. Act after Act of Parliament has been passed, without much effect, to prevent swindlers from forming companies for some excellent object, and, when they have collected as much money as they can by selling shares in it, making no serious attempt to carry out that object, but simply taking offices, ordering goods, appointing themselves directors and managers and secretaries and anything else that carries a salary, taking commissions on all their orders, and, when they have divided all the plunder in this way (which is perfectly legal), winding up the company as a failure. All you can do in that case is to go to the shareholders’ meeting and make a row, being very careful not to tell the swindlers that they are swindlers, because if you do they will immediately take an action against you for slander and get damages out of you. But making a row will not save your money. The amount that is stolen from innocent women every year in this way is appalling; and it has been done as much by sham motor bus companies, which if genuine would have been very sensible and publicly useful investments, as by companies to work bogus gold mines, which are suspect on the face of them.

Even if you escape this swindling by blackguards who know what they are doing, and would be as much disconcerted by the success of their companies as a burglar if he found himself politely received and invited to dinner in a house he had broken into, you may be tempted by the companies founded by genuine enthusiasts who believe in their scheme, who are quite right in believing in it, who are finally justified by its success, and who put all their own spare money and a great deal of hard work into it. But they almost always underestimate its cost. Because it is new, they have no experience to guide them; and they have their own enthusiasm to mislead them. When they are half way to success the share money is all used up; and they are forced to sell out all they have done for an old song to a new company formed expressly to take advantage of them. Sometimes this second company shares the fate of the first, and is bought out by a third. The company which finally succeeds may be built on the money and work of three or four successive sets of pioneers who have run short of the cash needed for completion of the plant. The experienced men of the city know this, and lie in wait until the moment has come for the final success. As one of them has put it “the money is made by coming in on the third reconstruction”. For them it may be a splendid investment; but the original shareholders, who had the intelligence to foresee the successful future of the business, and the enterprise to start it, are cleaned out. They see their hopes fulfilled and their judgment justified; but as they have to look through the workhouse windows, they are a warning rather than an example to later investors.

You can avoid these risks by never meddling with a new company, but calling in your stockbroker to buy shares in a well established old one. You will not do it any good; but at all events you will know that it is neither a bogus company nor one which has started with too little capital and will presently have to sell out at a heavy or total loss. Beware of enterprise: beware of public spirit: beware of conscience and visions of the future. Play for safety. Lend to the Government or the Municipalities if you can, though the income may be less; for there is no investment so safe and useful as a communal investment. And when you find journalists glorifying the Capitalist system as a splendid stimulus to all these qualities against which I have just warned you, restrain the unladylike impulse to imitate the sacristan in the Ingoldsby Legends, who said no word to indicate a doubt, but put his thumb unto his nose, and spread his fingers out.

53

SPECULATION

In the preceding chapter I have been assuming that you are a capitalist. I am now going to assume that you are perhaps a bit of a gambler. Even if you abhor gambling it is a necessary part of your education in modern social conditions to know how most of it is done. Without such knowledge you might, for instance, marry a gambler after having taken the greatest pains to assure yourself that he had never touched a playing card, sat at a roulette table, or backed a horse in his life, and was engaged solely in financial operations on the Stock Exchange. You might find him encouraging you to spend money like water in one week, and in the next protesting that he could not possibly afford you a new hat. In short, you might find yourself that tragic figure, the gambler’s wife who is not by temperament a gambler.

A page or two ago I dropped a remark about a game played on the Stock Exchange and called Speculation, at which phantom prices are offered for imaginary shares. I will explain this game to you, leaving it to your taste and conscience to decide whether you will shun it or plunge into it. It is by far the most widely practised and exciting form of gambling produced by Capitalism.

To understand it you must know that on the London Stock Exchange you can buy a share and not have to pay for it, or sell a share and not have to hand over the share certificate, until next settling day, which may be a fortnight off. You may not see at first what difference that makes. But a great deal may happen in a fortnight. Just recollect what you have learnt about the continual fluctuations in the prices of incomes and of spare subsistence in the Money Market! Think of the hopes and fears raised by the flourishing and decaying of the joint stock companies as their business and prospects grow or shrink according as the harvests are good or bad: rubber harvests, oil harvests, coal harvests, copper harvests, as well as the agricultural harvests: all meaning that there will be more or less money to divide among the shareholders as yearly income, and more or less spare money available to buy shares with. The prices of shares change not only from year to year but from day to day, from hour to hour, and, in moments of excitement on the Stock Exchange, from minute to minute. The share that was obtained years ago or centuries ago by giving £100 spare money to start a new company may bring its owner £5000 a year, or it may bring her thirty shillings, or it may bring her nothing, or it may bring her all three in succession. Consequently that share, which cost somebody £100 spare money when it was new, she may be able to sell for £100,000 at one moment, for £30 at another, whilst at yet another she may be unable to sell it at all, for love or money. As she opens her newspaper in the morning she looks at the city page, with its list of yesterday’s prices of stocks and shares, to see how rich she is today; and she seldom finds that her shares are worth the same price for a week at a time unless she has been prudent enough to lend it to the Government or to a municipality (in which case she has communal security) instead of to private companies.

Now put these two things together: the continual change in the prices of shares, and the London Stock Exchange rule that they need not be paid for nor delivered until next settling day. Suppose you have not a penny of spare cash in your possession, nor a share (carrying an income) to sell! Suppose you believe for some reason or other that the price of shares in a certain company (call it company A) is going to rise in value within the next few days! And suppose you believe that the price of shares in a certain other company (company B) is going to fall. If you are right, all you have to do to make some money by your good guessing is to buy shares in company A and sell shares in company B. You may say “How am I to buy shares without money or sell them without the share certificates?” It is very simple: you need not produce either the money or the certificates until settling day. Before settling day you sell the A shares for more than you bought them for on credit; and you buy the B certificates for less than you pretended to sell them for. On settling day you will get the money from the people you sold to, and the certificates from the people you bought from; and when you have paid for the A shares and handed over the B certificates, you will be in pocket by the difference between their values on the day you bought and sold them and their values on settling day. Simple enough, is it not?

This is the game of speculation. Nobody will blame you for engaging in it; but on the Stock Exchange they will call you a bull for pretending to buy the A shares, and a bear for pretending to sell the B shares. If you pay a small sum to get shares allotted to you in a new company on the chance of selling them at a profit before you have to pay up, they will call you a stag. If you ask why not a cow or a hind, the reply is that as the Stock Exchange was founded by men for men its slang is exclusively masculine.

But, you may say, suppose my guess was wrong! Suppose the price of the A shares goes down instead of up, and the price of the B shares up instead of down! Well, that often happens, either through some unforeseen event affecting the companies, or simply because you guessed badly. But do not be too terrified by this possibility; for all you can lose is the difference between the prices; and as this may be only a matter of five or ten pounds for every hundred you have been dealing in you can pawn your clothes and furniture and try again. You can even have your account “carried over” to next settling day by paying “contango” if you are a bull, or “backwardation” if you are a bear, on the chance of your luck changing in the extra fortnight.

I must warn you, however, that if a great many other bears have guessed just as you have, and sold imaginary shares in great numbers, you may be “cornered”. This means that the bears have sold either more shares than actually exist, or more than the holders will sell except at a great advance in price. Bulls who are cunning enough to foresee this and to buy up the shares which are being beared may make all the money the bears lose. Cornering the bears is a recognized part of the game of speculation.

As the game is one of knowledge and skill and character (or no character) as well as of chance, a good guesser, or one with private (inside) information as to facts likely to affect share prices, can make a living at it; and some speculators have made and lost princely fortunes. Some women play at it just as others back horses. Sometimes they do it intelligently through regular stockbrokers, with a clear understanding of the game. Sometimes they are blindly tempted by circulars sent out from Bucket Shops; so I had better enlighten you as to what a bucket shop is.

You will remember that a speculator does not stand to lose the whole price she offers for a share, or the whole value of the share she pretends to buy. If she loses she loses only the difference between the prices she expected and the prices she has to pay. If she has a sufficient sum in hand to meet this she escapes bankruptcy. This sufficient sum is called “cover”. A bucket shop keeper is one who undertakes to speculate for anyone who will send him cover. His circulars say, in effect, “Send me ten pounds, and the worst that can happen to you is to lose it; but I may be able to double it for you or even double it many times over. I can refer you to clients who have sent me £10 and got back £50 or £100.” A lady, not understanding the business in the least, is tempted to send him £10, and very likely loses it, in which case she usually tries to get it back by risking another £10 note if she has one left. But she may be lucky and pocket some winnings; for bucket shops must let their clients win sometimes or they could hardly exist. But they can generally prevent your winning, if they choose, by taking advantage of some specially low price of shares to shew that your cover has disappeared, or even by selling two or three shares themselves at a low price and quoting it against you. Besides, if you sue them for your winnings they can escape by pleading the Gaming Act. They cannot be mulcted or expelled by the Stock Exchange Committee; for they are not members of the Stock Exchange, and have given no securities. A bucket shop keeper is not necessarily a swindler any more than a bookmaker is necessarily a welsher; but if he fleeces you you have no remedy, whereas if a stockbroker cheats you it may cost him his livelihood.

If you speculate through a regular stockbroker you must bear in mind that he is supposed to deal in genuine investments only: that is, in the buying of shares by clients who have the money to pay for them, and the sale of shares by those who really possess them and wish to exchange them for a lump sum of spare money. The difference is that if you go into a bucket shop and say frankly “Here is a five pound note, which is all I have in the world. Will you take it as cover, and speculate with it for me in stocks of ten times its value”, the bucket shop will oblige you; but if you say this to a stockbroker he must have you shewn out. You must allow him to believe, or pretend to believe, that you really have the spare money or the shares in which you want to deal.

You will now understand what gambling on the London Stock Exchange means. The game can be played with certain variations, called options and double options and so on, which are as easily picked up as the different hazards of the roulette table; and the foreign stock exchanges have rules which are not so convenient for the bears as our rules; but these differences do not change the nature of the game. Every day speculative business is done in Capel Court in London, on Wall Street in New York, in the Bourses on the Continent, to the tune of millions of pounds; and it is literally only a tune: the buyers have no money and the sellers no goods; and their countries are no richer for it all than they are for the gaming tables at Monte Carlo or the bookmakers’ settlements at the end of a horse race. Yet the human energy, audacity, and cunning wasted on it would, if rightly directed, make an end of our slums and epidemics and most of our prisons in fewer hours than it has taken days of Capitalism to produce them.

54

BANKING

The Stock Exchange is only a department of the money market. The commonest way of hiring money for business purposes is to keep an account at a bank, and hire spare money there when you want it. The bank manager will lend it to you if he feels reasonably sure that you will be able to repay him: in fact that is his real business, as we shall see presently. He may do it by letting you overdraw your account. Or if somebody with whom you are doing business has given you a written promise to pay you a sum of money at some future time (this written promise is called a bill of exchange) and the bank manager thinks the promise will be kept, he will give you the money at once, only deducting enough to pay him for its hire until your customer pays it. This is called discounting the bill. All such transactions are forms of hiring spare money; and when you read in the city articles in the papers that money is cheap or money is dear, it means that the price you have to pay your banker for the hire of spare money is low or high as the case may be.

Sometimes you will see a fuss made because the Bank of England has raised or lowered the Bank Rate. This means that the Bank of England is going to charge more or less, as the case may be, for discounting bills of exchange, because spare money has become dearer or cheaper: that is to say, because spare subsistence has become scarcer or more plentiful. If you are overdrawn at your bank, the announcement that the Bank Rate is raised may bring you a letter from the manager to say that you must not overdraw any more, and that he will be obliged to you if you will pay off your overdraft as soon as possible. What he means is that as spare subsistence has become scarce and dear he cannot go on supplying you with it, and would like you to replace what he has already supplied. This may be very inconvenient to you, and may prevent you from extending your business. That is why there is great consternation and lamentation among business people when the Bank Rate goes up, and jubilation when it goes down. For when the terms on which spare money can be hired at the Bank of England go up, they go up everywhere; so that the Bank Rate is an index to the cost of hiring spare money generally.

And now comes the question, where on earth do the banks get all the spare money they deal in? To the Intelligent Woman who is not engaged in business, or who, if she has a bank account, never overdraws it or brings a bill to be discounted, a bank seems only a place where they very kindly pay her cheques and keep her money safe for her for nothing, as if she were paying them a compliment by allowing them to do it. They will even hire money from her when she has more than enough to go on with, provided she will agree not to draw it out without giving them some days’ notice (they call this placing it on deposit). She must ask herself sometimes how they can possibly afford to keep up a big handsomely fitted building and a staff of respectably dressed clerks with a most polite and sympathetic manager to do a lot of her private business for her and charge her nothing for it.

The explanation is that people hardly ever draw as much money from the bank as they put in; and even when they do, it remains in the bank for some time. Suppose you lodge a hundred pounds in the bank on Monday to keep it safe because you will have to draw a cheque for it on Saturday! That cheque will not be presented for payment until the following Monday. Consequently the bank has your hundred pounds in its hands for a week, and can therefore hire it out for a week for a couple of shillings.

But very few bank transactions are as unprofitable as this. Most people keep their bank accounts open all the year round; and instead of paying in every week exactly what they want to spend and drawing it out again by their cheques as they spend it, they keep a round sum always at their call so as to be ready when they may happen to want it. The poorest woman who ever dreams of keeping a bank account at all is not often driven to draw the last half crown out: when her balance falls as low as that, she knows it is time to put in another pound or two. Indeed it is not every bank that will do business on so small a scale as this: the Governor of the Bank of England would turn blue and order the porters to remove you if you offered him an account of that sort. Bank customers are people some of whom keep £20 continually at call, some £100, some £1000, and some many thousands, according to the extent of their business or the rate at which they are living. This means that no matter how much money they may put into the bank or take out, there always remains in the bank a balance that they never draw out; and when all these balances are added up they come to a huge amount of spare money in the hands of the bank. It is by hiring out this money that the banks make their enormous profits. They can well afford to be polite to you.

And now the Intelligent Woman who keeps a bank account, and most conscientiously never lets her balance fall below a certain figure, may ask in some alarm whether her bank, instead of keeping her balance always in the bank ready for her to draw out if she should need it, actually lends it to other people. The reply is, Yes: that is not only what the bank does, but what it was founded to do. But, the Intelligent Woman will exclaim, that means that if I were to draw a cheque for my balance there would be no money in the bank to pay it with. And certainly that would happen if all the other customers of the bank drew cheques for their balances on the same day. But they never do. “Still”, you urge, “they might.” Never mind: the bank does not trouble about what might happen. It is concerned only with what does happen; and what does happen is that if out of every pound lodged with them the bankers keep about three shillings in the till to pay their customers’ cheques it will be quite sufficient.

Only, please remember that the woman who has a bank account should never frighten the others by letting them know this. They would all rush to the bank and draw out their balances; and when the bankers had paid to the first comers all the three shillingses they had kept, they would stop payment and put up the shutters. This sometimes actually happens when a report is spread that some particular bank is not to be trusted. Something or somebody starts a panic; there is “a run on the bank”; the bank is broken; and its customers are very angry with the directors, clamoring to have them prosecuted and sent to prison, which is unreasonable; for they ought to have known that banks, with all the services they give for nothing, can exist only on condition that their customers do not draw out their balances all on the same day.

Perhaps, by the way, you know some woman who not only always draws her full balance, but overdraws it; so that she is always in debt to the bank. Her case is very simple. The bank lends her the other customers’ money to go on with, and charges her for the hire of it. That sort of business pays them very well.

And now that you know what banking is from the inside, and how the bankers get all the spare money they let on hire, may I remind you again, if I am not too tiresome, that this spare money is really spare subsistence, mainly perishable stuff that must be used at once. One of the greatest public dangers of our day is that the bankers do not know this, because they never handle or store the stuff themselves; and the right to take it away and use it which they sell on the hire system is disguised under the name of Credit. Consequently they come to think that credit is something that can be eaten and drunk and worn and made into houses and railways and factories and so on, whereas real credit is only the lender’s opinion that the borrower will be able to pay him.

Now you cannot feed workmen or build houses or butter parsnips with opinions. When you hear of a woman living on credit or building a house on credit or having a car on credit you may rest assured that she is not doing anything of the kind: she is living on real victuals; having her house built of bricks and mortar by men who are eating substantial meals; and driving about in a steel car full of highly explosive petrol. If she has not made them nor paid for them somebody else has; and all that her having them on credit means is that the bank manager believes that at some future time she will replace them with equally substantial equivalent goods of the same value after paying the bank for waiting meanwhile. But when she goes to the bank manager she does not ask for food and bricks and cars: she says she wants credit. And when the bank manager allows her to draw the money that is really an order for so much food and so many bricks and a car, he says nothing about these things. He says, and thinks, that he is giving her credit. And so at last all the bankers and the practical business men come to believe that credit is something eatable, drinkable, and substantial, and that bank managers can increase or diminish the harvest by becoming more credulous or more sceptical as to whether the people to whom they lend money will pay them or not (issuing or restricting credit, as they call it). The city articles in the papers, the addresses of bank chairmen at the annual shareholders’ meetings, the financial debates in Parliament, are full of nonsensical phrases about issuing credit, destroying credit, restricting credit, as if somebody were shovelling credit about with a spade. Clever men put forward wonderful schemes based on the calculation that when a banker lends five thousand pounds worth of spare subsistence he also gives the borrower credit for five thousand pounds, the five thousand credit added to the five thousand spare subsistence making ten thousand altogether! Instead of being immediately rushed into the nearest lunatic asylum, these clever ones find disciples both in Parliament and in the city. They propose to extend our industries (that is, build ships and factories and railway engines and the like) with credit. They believe that you can double the quantity of goods in the country by changing the cipher 2 into the cipher 4. Whenever a scarcity of spare subsistence forces the Bank of England to raise the Bank Rate they accuse the directors of playing them a dirty trick and preventing them from extending their business, as if the Governor and Company of the Bank of England could keep the rate down any more than the barometer can keep the mercury down in fair weather. They think they know, because they are “practical business men”. But for national purposes they are maniacs with dangerous delusions; and the Governments who take their advice soon find themselves on the rocks.

What is it, then, that really fixes the price you have to pay if you hire ready money from your bank, or that you receive for lending it to the bank (on deposit), or to trading companies by buying shares, or to the Government or the Municipalities? In other words, what fixes the so-called price of money, meaning the cost of hiring it? And what fixes the price of incomes when their owners sell them for ready money in the Stock Exchange?

Well, it depends on the proportion between the quantity of spare subsistence (“saved” money) there may be in the market to be hired, and how much the people who want to use it up are able and willing to pay for the hire of it. On the one hand you have the property owners who are living on less than their incomes and therefore want to dispose of their spare stuff before it goes rotten. On the other are the business men who want what the property owners have not consumed to feed the proletarians whose labor they need to start new businesses or extend old ones. Beside these, you have the spendthrift property owners who have lived beyond their incomes, and must therefore sell the incomes (or part of them) for ready money to pay their debts. Between them all, you get a Supply and Demand according to which spare money and incomes are cheap or dear. The price runs up when the supply runs short or the demand becomes more pressing. It runs down when the supply increases or the demand slackens.

By the way, now that we are picking up the terms Supply and Demand, remember that Demand in the money market sense does not mean want alone: it means only the want that the wanter can afford to satisfy. The demand of a hungry child for food is very strong and very loud; but it does not count in business unless the mother has money to buy food for the child. But with this rather inhuman qualification supply and demand (called “effective demand”) settle the price of everything that has a price.

Banks are safe when they lend their money (or rather yours) judiciously. If they make bad investments, or trust the wrong people, or speculate, they may ruin themselves and their customers. This happened occasionally when there were many banks. But now that the big ones have swallowed up the little ones they are so few and so big that they could not afford to let one another break, nor indeed could the Government. So you are fairly safe in keeping your money at a big bank, and need have no scruple about availing yourself of its readiness to oblige you in many ways, including acting as your stockbroker, borrowing from you at interest (on deposit account), and lending you, though at a considerably higher rate, any ready money for the repayment of which you can offer reasonably satisfactory security.

As we now see why the hiring terms for money vary from time to time, sometimes from hour to hour, let us amuse ourselves by working out what would happen at the banks if the Government, misled by the practical business men, or by the millennial amateurs, were to attempt to raise say £30,000 millions by a tax on capital, and another £30,000 millions by a tax on credit.

The announcement of the tax on credit would make an end of that part of the business at once by destroying all credit. The financial magnate who the day before could raise a million at six or seven per cent by raising his finger would not be able to borrow five shillings from his butler unless the butler let him have it for the sake of old times without the least hope of ever seeing it again.

To pay the tax the capitalists would have to draw out every farthing they had in the bank, and instruct their stockbrokers to sell out all their shares and debentures and Government and municipal stock. There would be such a prodigious demand for ready money that the Governor and Company of the Bank of England would meet at eleven o’clock and resolve, after some hesitation, to raise the Bank Rate boldly to ten per cent. After lunch they would be summoned hurriedly to raise it to a hundred per cent; and before they could send out this staggering announcement they would learn that they might save themselves the trouble, as all the banks, after paying out three shillings in the pound, had stopped payment and stuck up a notice on their closed doors that they hoped to be able to pay their customers the rest when they had realized their investments: that is, called in their loans and sold their stocks and shares. But the stockbrokers would report only one price for all stocks, that price being no pounds, no shillings, and no pence, not even farthings. For that is the price in a market where there are all sellers and no buyers.

When the tax collector called for his money, the taxpayer would have to say “I can get no money for you; so instead of paying the tax on my capital, here is the capital itself for you. Here is a bundle of share certificates which you can sell to the waste paper dealer for a halfpenny. Here is a bundle of bonds payable to bearer which you can try your luck with, and a sheet of coupons which in a few years’ time will be as valuable as rare and obsolete postage stamps. Here is a transfer which will authorize the Bank of England to run its pen through my name in the War Loan register and substitute your own. And much good may they all do you! I must shew you out myself, as my servants are in the streets starving because I have no money to pay their wages: in fact, I should not have had anything to eat myself today if I had not pawned my evening clothes; and precious little the pawnbroker would give me on them, as he is short of money and piled up to the ceiling with evening suits. Good morning.”

You may ask what, after all, would that matter? As nine out of every ten people have no capital and no credit in the financial sense (that is to say, though a shopkeeper might trust them until the end of the week, no banker would dream of lending them a sixpence), they could look on and laugh, crying “Let the rich take their turn at being penniless, as we so often are”. But what about the great numbers of poor who live on the rich, the servants, the employers and employed in the luxury trades, the fashionable doctors and solicitors? Even in the productive trades what would happen with the banks all shut up and bankrupt, the money for wages all taken by the Government, no cheque payable and no bill of exchange discountable? Unless the Government were ready instantly to take over and manage every business in the country: that is, to establish complete nationalization of industry in a thunderclap without ever having foreseen or intended such a thing, ruin and starvation would be followed by riot and looting: riot and looting would only make bad worse; and finally the survivors, if there were any, would be only too glad to fall on their knees before any Napoleon or Mussolini who would organize the violence of the mob and re-establish the old state of things, or as much of it as could be rescued from the chaos, by main force applied by a ruthless dictator.

55

MONEY

You now know more than most people about the money market. But it is not enough to know what settles the value of stocks and shares in spare money from day to day. All money is not spare money. Few of us spend as much on shares as on food and clothes and lodging. Most of us, having no spare money, would as soon dream of buying shooting lodges in Scotland as of investing or speculating on the Stock Exchange; yet we use money. Suppose there were no spare money on earth, what would fix the value of money? What is money?

Take a gold coin for instance. You are probably old enough to remember such things before the war swept them away and substituted bits of paper called Treasury notes; and you may be young enough to live until they come back again. What is a gold coin? It is a tool for buying things in exactly the same sense as a silver spoon is a tool for eating an egg. Buying and selling would be impossible without such tools. Suppose they did not exist, and you wanted to go somewhere in a bus! Suppose the only movable property you had was twenty ducks and a donkey! When the bus conductor came round for the fare you would offer him the donkey and ask for the change in potatoes, or offer him a duck and ask for the change in eggs. This would be so troublesome, and the bargaining so prolonged, that next time you would find it cheaper to ride the donkey instead of taking the bus: indeed there would be no buses because there would be nobody willing to take them, unless buses were communized and fares abolished.

Now it is troublesome to take a donkey about, even when it takes you, but quite easy to carry as much gold as a donkey is worth. Accordingly, the Government cuts up gold into conveniently shaped bits weighing a little over 123 grains of standard gold (22 carat) apiece, to be used for buying and selling. For transactions that are too small to be settled by a metal so costly as gold it provides bronze and silver coins, and makes a law that so many of these coins shall pass as worth one of the gold coins. Then buying and selling become quite easy. Instead of offering your donkey to the bus conductor you exchange it for its worth in coins; and with these in your pocket you can pay your bus fare in two seconds without having any words about it.

Thus you see that money is not only a necessary tool for buying and selling, but also a measure of value; for when it is introduced we stop saying that a donkey is worth so many ducks or half a horse, and say instead that it is worth so many pounds or shillings. This enables accounts to be kept, and makes commerce possible.

All this is as easy as A B C. What is not so easy is the question why the donkey should be worth, say, three-quarters of a sovereign (fifteen bob, it would be called at this price), or, to put it the other way, why fifteen bob should be worth a donkey. All you can say is that a buyer at this price is a person with fifteen shillings who wants a donkey more than she wants the fifteen shillings, and a seller at this price a person with a donkey who would rather have fifteen shillings than keep the donkey. The buyer, though she wants a donkey, does not want it badly enough to give more than fifteen shillings for it; and the seller, though she wants money, will not let the donkey go for less than fifteen; and so they exchange. Their respective needs just balance at that figure.

Now a donkey represents just a donkey and nothing else; but fifteen shillings represents fifteen shillingsworth of anything you like, from food and drink to a cheap umbrella. Any fund of money represents subsistence; but do not forget that though you can eat and drink and wear subsistence, you cannot eat or drink or wear Treasury notes and metal coins. Granted that if you have two shillings the dairyman will give you a pound of butter for it; still, a pound of butter is no more a round piece of metal than a cat is a flat iron; and if there were no butter you would have to eat dry bread, even if you had millions and millions of shillings.

Besides, butter is not always two shillings: it is sometimes two and twopence or even two and sixpence. There are people now living who have bought good fresh butter for fourpence a pound, and complained of its being dear at that. It is easy to say that butter is cheap when it is plentiful, and dear when it is scarce; but this is only one side of the bargain. If ten pounds of butter cost a sovereign on Monday and a sovereign and a quarter on Saturday, is that because there is less butter or more gold?

Well, it may be one or the other or both combined. If the Government were to strike off enough new sovereigns at the Mint to double the number in circulation we should have to pay two sovereigns for ten pounds of butter, not because butter would be scarcer but because gold would be more plentiful. But there is no danger of this happening, because gold is so scarce and hard to get that if the Government turned more of it into sovereigns than were needed to conduct our buying and selling, the superfluous ones would be melted down, and the gold used for other purposes, in spite of the law against it; and this would go on until sovereigns were so scarce that you could get more for gold in the form of sovereigns than in the form of watch chains or bracelets. For this reason people feel safe with gold money: the gold in the sovereign keeps its value for other purposes than buying and selling; and if the worst came to the worst, and the British Empire were annexed by the planet Mars, and only Martian money were current, the sovereigns would still be taken in exchange for as much butter or anything else as before, not as money, but as so much gold; so that the British sovereign would buy as much as a Martian gold sovereign of equal weight.

Suppose, however, you had a dishonest Government! Suppose the country and its Mint were ruled by a king who was a thief. Suppose he owed large sums of money, and wished to cheat his creditors. He could do it by paying in sovereigns which were made of lead, with just gold enough in them to make them look genuine. Henry the Eighth did it less crudely by giving short weight in silver coins; and he was not the only ruler who played the same trick when pressed for money. When such frauds are discovered prices go up and wages follow them. The only gainers were those who, like the king, had borrowed heavy money and were paying it in light; and what they gained the creditors lost. But it was a low trick, damaging English as well as royal credit, as all English debtors were inextricably and involuntarily engaged in the swindle as deeply as the king.

The moral is that a dishonest ruler is one of the greatest dangers a nation has to dread. People who do not understand these things make a great fuss because Henry married six wives and had very bad luck with most of them, and because he allowed the nobles to plunder the Church. But we are far more concerned today with his debasement of the coinage; for that is a danger that is hanging over our own heads. Henry’s trick is now played not only by kings, but by republican governments with Socialist majorities and by the Soviets of proletarian States, with the result that innocent women, provided comfortably for by years of self-denial on the part of their parents in paying insurance premiums, find themselves starving; pensions earned by lifetimes of honorable and arduous service lose their value, leaving the pensioners to survive their privations as castaways survive in a boat at sea; and enormous fortunes are made without the least merit by A, B, and C, whilst X, Y, and Z, without the least fault, go bankrupt. The matter is so serious and so menacing that you must summon all your patience while I explain it more particularly.

At present (1927) we do not use sovereigns. We use bits of paper, mostly dirty and smelly, with the words _One Pound_ printed in large letters on them, and a picture of the Houses of Parliament on the back. There is also a printed notice that the bit of paper is a currency note, and that by Act of Parliament IV and V Geo. V, ch. XIV, if you owe anyone a pound you can pay him by handing him the bit of paper, which he must accept as a full discharge of your debt to him whether he likes or not.

Now there is no use pretending that this bit of paper which you can pass as a pound is worth anything at all as paper. It is too small and too crowded with print and pictures to be usable for any of the uses to which paper can be put, except that of a short title deed to a poundsworth of goods. Yet there is no law to prevent the Government, which owes 7700 million pounds to its creditors, from printing off 7700 millions of these one pound Treasury notes, and paying off all its home creditors with them, even though a thousand of them would not buy a cigarette.

You may say that this is too monstrous to be possible. But it has been done, and that quite recently, as I know to my cost. The German Government did it after the war when the conquerors, with insane spite, persisted in demanding sums of money that the Germans had not got. The Austrian Government did it. The Russian Government did it. I was owed by these countries sums sufficient to support me for the rest of my days; and they paid me in paper money, four thousand million pounds of which was worth exactly twopence halfpenny in English money. The British Government thought it was making Germany pay for the war; but it was really making me and all the other creditors of Germany pay for it. Now as I was a foreigner and an alien enemy, the Germans probably do not feel very sorry for me. But the same occurred to the Germans who were owed German money, whether by foreigners or by other Germans. Merchants who had obtained goods for bills payable in six months paid those bills with paper Marks and thus got the goods for nothing. Mortgages on land and houses, and debentures and loan stocks of every redeemable sort, were cleared off in the same way. And one very unexpected result of this was that German employers, relieved of the burden of mortgages and loans such as the English employers were bearing, were able to undersell the English even in the English market. All sorts of extraordinary things happened. Nobody saved money, because its value fell from hour to hour: people went into a restaurant for a five million lunch, and when they came to pay found that the price had gone up to seven millions whilst they were eating. The moment a woman got a scrap of money she rushed to the shops to buy something with it; for the thing she bought would keep its usefulness, but the money that bought it, if she kept it until tomorrow, might not purchase half so much, or a tenth so much, or indeed anything at all. It was better to pay ten million marks for a frying-pan, even if you had two frying-pans already, than to buy nothing; for the frying-pan would remain a frying-pan and fry things (if you had anything to fry) whatever happened; but the ten million marks might not pay a tram fare by five o’clock the same evening.

A still better plan in Germany then was to buy shares if you could get them; for factories and railways will keep as well as frying-pans. Thus, though people were in a frantic hurry to spend their money, they were also in a frantic hurry to invest it: that is, use it as capital; so that there was not only a delusive appearance of an increase in the national capital produced by the simple expedient of calling a spare loaf of bread fifty thousand pounds, but a real increase in the proportion of their subsistence which people were willing to invest instead of spending. But however the money was spent, the object of everyone was to get rid of it instantly by exchanging it for something that would not change in value. They soon began to use foreign money (American dollars mostly); and this expedient, eked out with every possible device for doing without money altogether by bartering, tided them over until the Government was forced to introduce a new gold currency and leave the old notes to be thrown into the waste paper basket or kept to be sold fifty years hence as curiosities, like the famous assignats of the French Revolution.

This process of debasement of the currency by a Government in order that it may cheat its creditors is called by the polite name, which few understand, of Inflation; and the reversal of the process by going back to a currency of precious metal is called Deflation. The worst of it is that the remedy is as painful as the disease, because if Inflation, by raising prices, enables the debtor to cheat the creditor, Deflation, by lowering them, enables the creditor to cheat the debtor. Therefore the most sacred economic duty of a Government is to keep the value of money steady; and it is because Governments can play tricks with the value of money that it is of such vital importance that they should consist of men who are honest, and who understand money thoroughly.

At present there is not a Government in the world that answers fully to this description. Between our own Government, which took advantage of the war to substitute Treasury notes for our gold currency, and the German and Russian Governments, which issued so many notes that a vanload of them would hardly buy a postage stamp, the difference is only one of degree. And this degree was not in the relative honesty of Englishmen, Russians, and Germans, but in the pressure of circumstances on them, and consequently of temptation. Had we been defeated and forced to pay impossible sums to our conquerors, or momentarily wrecked as Russia was by the collapse of the Tsardom, we should not have been any honester; for though the doubling of prices that occurred here seems to have been caused by scarcity of goods and labor rather than by an excessive issue of paper money, we still treat with great respect as high financial authorities gentlemen who recommend Inflation as a means of providing industry with additional capital. Whether these gentlemen really believe that we could double our wealth by simply printing twice as many Treasury notes, or whether they owe so much money that they would be greatly relieved if only they could be let pay it in paper pounds worth only ten shillings, is not always easy to guess. But if you catch your Parliamentary representative advocating Inflation, and ask him, at the risk of being told that you are no lady, whether he is a fool or a rogue, you will give him a salutary shock, and force him to think for a moment instead of merely grabbing at the illusion of enriching the nation by calling a penny twopence.