Facts and Theories of Finance

Facts and Theories of Finance 
by Frank Anstey (1930)
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Financiers are the Dictators of Policies - the Unseen Power in Democracies

The Economists. 

In industry there are no perpetual fixed facts; there is constant mobility, change, transformation. The efforts to base a science upon this ever moving, changing panorama of economic life are repeatedly frustrated by the passing away of the facts upon which the science stood and by the influx of new facts and forces creating entirely new conditions.

The economists of the 18th and 19th centuries were dabblers in definitions. They existed to prove that rent and interest were not charges upon production—that the wage- earner was economically on the same plane as a pig or a cow— that he was a commodity—that his existence and his subsistence were determined by the contents of a tank known as a "wages fund."

In Parliament, on the platform, in the Press, their books and their doctrines were quoted as Holy Writ to prove that the worker was the predestined victim of forces over which he had no control. He was economically damned—a commodity and nothing more.

To-day, for a variety of reasons, those books are no longer quoted. Their doctrines, definitions, theories, and assumptions have passed into the dustbin of discarded and forgotten things. A few years before the war a new school of economists appeared. They discarded the old phraseology, put on a human guise, and served up the old theories in a more digestible form under new names. At the same time, they noted the new factors and forces appearing in industry, and, in the name of science, justified their social and economic consequences— alleged to be as natural as the rising and setting of the sun. This new school and all its alleged science was shattered by the first blast of war, by the economic necessities of nations created by the war. The theories were disproved by facts, and what was alleged would happen under a given set of circumstances did not happen.

The pre-war economists were discredited; the post-war economists coined new phrases, and gave their attention, not to a new force, but to an old force that had become more massive. They gave to banking, to currency, to the monetary system of exchange an attention never previously given, because those factors had become the predominant agents in the economic life of nations.

But the old impulse dominates the study. The new experts are to the banking power what the old economists were to the landed and commercial powers. They surround the subject with a shelter of mysterious words—make it a Holy of Holies, into which the masses may not enter except with bated breath, with unsandalled feet, to accept with reverence and without question the dictum,s of the new economic priesthood. The late Sir Denison Miller, in a lecture, said that the experts dealt with banking- and currency questions in a language not meant to be understood by the public; and Frank Hirst, when editor of the "London Economist," said that the experts "not only mystified the public, but obfuscated themselves with obsolete terms." Moreover, they built their theories, not only upon facts that Had ceased to exist, but on assumptions that never were facts. Sir Felix Schuster, when president of the Smith and Union Bank of England, said:—

"The theory of banking is one thing—the practice is quite another. Banking has evolved far beyond the theory on which it is supposed to he conducted."

Quantity Theory. 

The fundamental theory of modem monetary science is known as "The Quantity Theory of Money." The theory is that prices of commodities rise and fall with the rise and fall of the quantity of money—that if money doubles, the price of commodities doubles—that if the quantity of money diminishes, the price level of commodities falls to the same extent.

The theory presents itself under several aliases. An increase in money is presented as "Inflation"; an increase in anything else is just an increase—nothing more. A decrease in money is "Deflation"; a decrease in anything else is simply a decline—a falling off. Around these surnames of "Inflation" and "Deflation" the experts build their mysteries.

The Quantity Theory also presents itself in the name of ."Purchasing Power of Money"; but, no matter what the name, the object is to teach that prices rise and fall with the money volume—that two shillings in wages is no better than one shilling, and that threepence will buy as much as either. This gospel is specially directed to wages and productive costs.
 It is never mentioned as having any application to money-lenders, money-lending institutions, or the charges they impose upon production. 

Doctors Differ.

The experts are not agreed as to what is meant by "Purchasing Power." Some say it means cash deposits in cheque-paying banks, plus notes in circulation. Some say it should include deposits in Savings Banks; others deny it. Others say all the foregoing is wrong—that the real measure of purchasing power consists of bank advances multiplied by their velocity of turnover, as shown by clearing-house returns. There is no agreement as to what is meant by deflation or inflation. Some say it refers to a Government note issue; others say it refers to Government borrowings; others say it refers to expansion and contraction of bank credit. The Encyclopaedia Britannica says: "The controversies to which this theory has given rise are amongst the most celebrated in political economy," and concludes by saying:—
"The Quantity Theory cannot be established by any appeal to facts." 

This is so because, not only the volume of money, but a dozen other factors enter into the determination of price levels. In its issue of May 3rd of this year the London "Times" points out that from 1919 to 1928 money facilities increased by 60 per cent., trade by 25 per cent., and the "Times" adds,
"according to the quantity theory, the wholesale price index should have risen by 28 1/2 per cent.; it actually fell 30 per cent." 

The United States presents similar illustrations; so does Australia. The Australian banks during the last five years have issued 80 millions, and during the last ten years, 1920 to 1930, 140 millions additional bank credits upon smaller cash reserves; yet wholesale prices have fallen. The facts disprove the theories. The facts prove that increased bank credits do not necessarily mean a corresponding, or any, increase in the price of commodities. Yet this exploded Quantity Theory is the main buttress for the existing system.

"Cash Reserves" 

The theory is that banks must keep a "proper proportion" between their "cash reserves" and—
(a) total liabilities;
(b) liabilities at call;
(c) advances.

The banks are the judges of "proper proportion," and even on that they are not agreed. It varies, not only between countries and periods, but between banks in the one country at the same period. What was "unsafe" and "unsound" before ' the war is now regarded as "safe and sound," and the same variation exists between banks. In Australia there is not among bankers any binding rule, except the common rule as to what shall be charged to the public. The average cash reserves to liabilities at call is 40 per cent.; but the variation between banks is from 25 to 70 per cent. The average advance of credit to the public is £7 of book credit to every £1 of cash reserve; but the variation between banks is from five to nine times per £1 of cash reserve. If the average be taken as the so-called "proper proportion" or the so-called "safety limit," then it is evident that at one end of the banking scale there is reckless lending upon diminishing reserves, and at the other end improper restrictions of credits upon valid securities. Against neither extreme has the industrial life of the country any protection. 

Finally, "cash reserves" has changed its character. Before the war it meant gold. Next it meant notes and gold. Later on it meant notes without a claim on gold as in England at the present time, or payment in "lawful money" as in the United States, which means notes. Finally, "cash in reserve" includes "cash at call" —a book entry in some central bank, as in most countries of the world, including Australia. So "cash reserves" to-day and 25 years ago are two entirely different things. 

Gold. 

The theory is that the banking system is based upon gold, and that the banker charges interest for the right to use the gold commodity in his vaults.

The Answer: Before the war the theory had ceased to be a fact, but it had the appearance of fact. Gold circulated freely among the public, and notes issued were not in excess of gold in the vaults. To-day gold has disappeared as internal currency, and notes issued are far in excess of gold stocks. Gold is no longer internal money. It is a stored product for international use. In most countries the facts have been faced, and the pretence of redemption in gold no longer exists. The first clause of the British Gold Standard Act of 1925 declares that "Any Act which provides that a currency note shall be redeemed in gold is null and void," and that "The Bank of England shall not be bound to pay any note of the bank in legal coin." Clause 1 of the Currency Act of 1928 declares that "holders of £5 notes and upwards may change into £1 or 10/- notes," and "£1 or 10/- notes shall be legal tender by the Bank of England or any branch of the bank." These enactments were part of the well-considered policy of a British Tory Government driven by the force of economic necessity to to do what before the war would have been regarded as revolutionary.

Ratio of Credits to "Cash Reserves 

The theory that obligations must, or can, be redeemable in gold having been destroyed, the economic experts retire to a new position. They affirm that the whole credit structure rests upon the notes in the bank vaults as well as the gold, and that the volume of credits which a bank can issue must diminish with the decrease of the bank reserves. The very reverse has been operating in Australia for years —bank credits have increased and reserves diminished. If that is unsound and unsafe, the banking corporations stand condemned. In this, as in other cases, the theories and the facts do not coincide.

The Bank Rate. 

This is another theory connected with gold.
The theory is that if the bank rate is raised high enough it will be cheaper to bring in gold. During 1929 the Bank of England raised the bank rate 5 - 5 1/2 - 6 - 6 1/2, but gold went out in violation of all theory, and continued until the collapse of the American boom. Mr. Snowden informed the House of Commons that "the increased bank rate had not achieved the object it was supposed to achieve." He pointed out that France and Germany, instead of taking the products of British factories, were taking payment for their goods in gold, in spite of the bank rate. Reginald McKenna, ex-Chancellor of the Exchequer, said, "The theory worked all right before the war, but to-day the Government is the principal debtor and convertor or borrower. It must have money, whatever the rate. To raise the rate is to penalise the Government and the country." The bank rate was reduced, and British newspapers announced that the theory had collapsed beneath the pressure of new economic facts. 

Loans and Deposits. 

The theory is that deposits are the basis of loans—that if there are no deposits there can be no loans. On August 23rd, 1929, Mr. Davidson, General Manager of the Bank of New South Wales, put the theory thus:—
"The Banker's business is founded on deposits. Bankers cannot lend in excess of deposits—NOT NEARLY SO MUCH." 
The answer is that, at the time Mr. Davidson was speaking, bank loans in Australia were in excess of deposits. Five weeks later they were 13 millions, and, by the end of March, 1930, 30 millions in excess of deposits. By the end of June the disparity had increased. In this, as in other cases, the facts and the theories do not fit.

Loans from Bank Capital. 

The theory is that banks draw interest and make profits by the loan of their actual subscribed capital.
The fact is that all bank capital and all accumulated undivided profits massed as "reserves" are held in forms not on loan. They are held in land and buildings, in gold commodity, and Commonwealth notes that are to the banks as gold in reserve. The totality of these cold-storage assets in vaults and buildings in London and Australia equals the totality of capital and accumulated reserves. In this, as in all other cases, the facts and the theories are far apart.

That a bank can come into being, can exist, operate, and develop into power without capital is evidenced by the history of the Commonwealth Bank, and it does not stand alone.
A bank does not lend capital. On the contrary, it is the owners of capital and wealth who pledge their capital—their property, products, and plants—their homes, farms, and factories—and pay interest to secure from the banks circulating symbols of securities deposited by the owners of material wealth. 
In all these cases there is a rush to explain away the facts. If the explorer permits himself to be red-herringed off the main question, he is bushed in a maze of subsidiary issues —exactly where the defenders of the existing system want him, and where they leave him. But the statement of Sir Felix Schuster, himself an eminent banker, stands un- shattered:— "Banking has evolved far beyond the theory on which it is supposed to be conducted." 

What is Modern Banking? 

If we want to know in plain and simple language what modern banking and modern money really are, we can gather our information from the foremost bankers in the world. We gather it from a man like Sir Edward Holden—selected by the British Government in 1915 to raise the 500 million dollars loan in New York. He was then president of one of the great banking companies of Britain. lie said:—
"Banking is little more than a matter of book-keeping. It is a transfer of credit from one person to another. Credits are based on securities lodged by depositors. The transfer is by means of cheques. The cheques are currency. Currency is money. MONEY IS REDEEMED EVERY TIME IT IS EXCHANGED FOR COMMODITIES OR SERVICES." 

Redemption. 

Thus redemption is not done by a bank—it is done by the public. A cheque or note is redeemed every time it is accepted by a member of the public for goods or services. When the cheque or note goes to the bank, it goes for registration to the credit of the depositor. It is redeemed when drawn upon and passed to some other member of the public for goods and services.

Bank Notes and Cheques. 

Forty years ago Sir Robert Giffen, Controller-General of the Statistical Departments of Great Britain, said that, until consideration of gold was put out of the mind, "correct conclusions upon currency questions are impossible." To-day that statement is equally true of Commonwealth notes. They constitute an insignificant fraction of the total currency of the country—mere specks upon the ocean of bank-created money. To-day the currency consists of what Mr. Earle Page in 1924, in his place as Commonwealth Treasurer, described as—
"Bank manufactured cheque currency." 

Last year (1929) cheques passing through the clearing- houses of the capital cities of Australia totalled 2,350,000,000. Add the vast volume of clearances between branches of the one bank and between banks in towns and cities outside the capitals, the grand total is around 4,000,000,000, representing rapid turnovers of bank-manufactured money—all based upon the securities lodged by the people who paid the interest to secure a circulating symbol of their own property, plant, and products.

During the last ten years the banks increased their "advances" upon deposited securities 140 millions.
According to the theorists, prices should have risen, yet we are told they have fallen. We are told that an increase of bank credit means an increase of the Note Issue—yet it is less. We are told than an expansion of bank credit means an increase of notes among the general public—the facts are otherwise: it has decreased. Modern banking is therefore something very different to what the theorists would have the mass believe. How, then, can any man who lives in a world of defunct theories do anything to enable his country to adapt itself to the new facts which thrust themselves upon his race and generation? 

Before the War and Now. 

In 1914, when the war came, our debts totalled 300 millions—at an average interest rate of 3 1/2 per cent.—invested in railways, post offices, water works, and other public utilities. During three years prior to the war, railways not only paid working expenses and interest—they contributed to the reduction of taxation.

Since the outbreak of war, Federal, State, and Local Governments, Boards, and Commissions acting on behalf of those Governments have added 1000 millions to the public debts. Those debts are loaded with the higher interest rates created by the war—those increased rates make the difference between profit and loss on all public services. Production has increased twofold—interest fivefold.

Secondly, all pre-war loans as they fall due are converted into the higher rates. These and the higher rates upon new loans have transformed railways and other public services from profit-making into losing propositions. These deficiencies have to be made up by higher charges and additional taxation.

Thirdly, all forms of private enterprise are afflicted by the higher interest rates created by the war. Every new factory, farm, and home, every new industrial process is loaded with the higher rate, increasing the cost of production and the cost of living.

These higher costs react as higher prices for all material required for public utilities—railways, post offices, water works, lighting, sewerage, road-making—higher costs upon all public services.

The financial consequences of the war impose a burden of not less than 100 millions per annum upon the costs of production, and every increase in the interest bill increases the processes of taxation—national and local.
To all producers, primary or secondary, it must be evident that the more prices fall the more products must they sell to pay the interest bill—that the more incomes diminish the greater must be the percental taxation to raise the same revenue to pay interest—that the efforts to raise wages, to reduce hours, to improve social conditions must be a fruitless task while increasing interest (and taxation to meet the bill) consumes more and more of the substance of human toil. WHAT GOES TO THE PAWN- BROKER CANNOT GO INTO THE HOME. 

Fluctuating Credits. 

For years there has been what is academically known as an inflation of currency— not of Government-created currency, but of "bank-manufactured currency." Under this impetus speculation and development have been encouraged, values have risen, bank profits increased, and the surplus of bank assets over liabilities augmented by many millions.

Suddenly, as at a word of command, the policy is reversed —credits are suspended, refused, or withdrawn. There is not a business man in the land who does not know that the depression is intensified, unemployment increased, values diminished, the home market destroyed, not merely by oversea fall in the price of primary products, but by the refusal of bank facilities to men whose securities are beyond question. There is deflation in work and in production values. There is inflation in poverty, inflation in the values of bonds and bondage, inflation in the purchasing power of interest.

The other day an Australian journal stated that increasing interest bills and increasing taxation were severe blows to industry, and it asked:—
"How can industries be stimulated by increases of this nature?" And it might be asked: How can it be avoided or altered while a nation stands for obsolete processes and defunct theories? How can it solve post-war problems with pre-war methods? As well might it try to win a modern war with Napoleonic weapons. 

"Reorientation." 

Ex-Prime Minister Bruce, speaking in Adelaide last year, said:—
"It may be necessary to reorientate the whole of our national life." 

So far as industry and industrial conditions are concerned, the reorientation has already occurred— what is needed is a reorientation of the financial system to meet the new conditions. 

To-day banking has become a titanic monopoly. It can give or refuse credit, increase or decrease values, raise or ruin men. It has jurisdiction over the livelihood, the savings, the future of the nation. Such vital processes, decisive of the progress of the people and of the safety of the State, should not be committed to the dividend interests of private corporations.

And if anyone imagines this language extreme, I would remind him that on the Banking Bill of 1924 the then Treasurer, Mr. Earle Page, said:—
"The Banks, mindful of their own interests, have no such regard for the public welfare as is undoubtedly required. Their individual outlook and interests render them unsuitable for the exercise of that prevision necessary for the construction of a sound policy." 

Mr. Earle Page was not the advocate of a nation-owned banking system, but he unconsciously furnished arguments for its application and marshalled facts for its support.

The Left Wing. 

The men who stand for a "reorientation" of the financial system do not believe that a nation can grind out wealth with a printing machine. They do not stand for a fiduciary note issue —its utility is overshadowed by the cheque. They do not allege that credit is wealth or capital, or production or the machinery of production; but they do allege that it is a vital essential of the productive and distributive processes of the modern State—that it should be available to all who have the necessary security—that "the limit of credit is the volume of actual wealth available as security"—that a Commonwealth-owned banking system, if it is to really function as an instrument of national safety and progress, must make credit available to all who have cover to offer—that it shall function in reality as a bank of the nation—as an instrument of reconstruction and recovery—and not as a buttress of predatory interests.

Internal Debt. 

Sir Basil Blackett, ex-Controller of Finance in Britain, was asked by a Commission on Taxation if the country could carry the burden of interest without injury to its industries. Sir Basil replied:—
"The burden of interest must be reduced or industry will break beneath the strain."
In Australia the reduction of the annual interest burden and of the taxation which results from it are fundamental to the task of reconstruction. 

We are told that there is an alternative. Cut down all public and private expenditure. Cut wages, cut spendings. Stimulate production by consuming less. Cut old-age pensions, cut soldier pensions. Cut everything and everybody except the bankers and the bondholders. By these means, we are told, our financial credits and conditions will be improved.

If you ask upon what their hope of recovery rests, you are told that they look for an increase of exportable products and an improvement in oversea prices. The last is not a policy—it is only a hope. It is not exclusive to Australia. It is reiterated in every land where millions are destitute and underfed. This year the Australian market for Australian products will be reduced by at least £30,000,000. The financial expert of the Melbourne "Herald" estimates £100,000,000. This equals the income and purchasing power of 400,000 families. To this extent the home market is destroyed. The products our own people cannot buy must be sold overseas or not at all. Thus our export trade is to be reinforced by the inability of our people to buy the things they need. This, we are told, is the way to recover. We are to feed the oversea bondholder by the semi-starvation of our own people.

The internal indebtedness of Australia runs into hundreds of millions. That has been represented as so much fluid capital drawn from industrial processes. If that is so, it no longer fructifies in the field of industry. It is tied up in bonds, hangs as a millstone around existing industry, drives up the rate of interest, augments taxation, makes economic recovery more difficult. It should, therefore, be the mission of a Commonwealth-owned banking system to furnish means for the re-transformation of those bonds into fluid forms of capital.

In 1919, the Melbourne "Argus" said that the banks "made liquid" private property by creating credits in their books against property to enable the owners to take up war bonds. The same thing can now be done with the bonds as they fall due. They are "property" and can be "made liquid" so that credits flow once more into the channels of productive enterprise.

A "banking expert" (Professor Copland), speaking before the Melbourne Chamber of Commerce, stated that if the Commonwealth Bank purchased Commonwealth securities it would increase the supply of floating capital and ease the position.

A Commonwealth Bond in private hands is regarded by private banks in normal times as sound security upon which to advance "bank-manufactured cheque currency." It is equally sound security if taken over by the Commonwealth Bank at date of redemption by the methods and processes of private banks. The interest upon the bonds, instead of going into private hands, will go to the Commonwealth Bank, materialising as bank profits available for annual redemption of the general debt. The debt, to the extent taken over by the bank of a nation, is transformed from interest-bearing, non- circulating- bonds—frozen credits—into non-interest-bearing, liquid credits, redeemed every time they pass from hand to hand in exchange for commodities or services—redeemed by the Government every time accepted in payment of taxes and service of public utilities. The credit frozen in bonds will be "made liquid" to fertilise the fields of industry.

Oversea Obligations. 

One of the causes of the present critical position of Australia overseas—whereby Australia finds itself without sufficient credits in London to meets its foreign obligations—arises not only from the sudden cutting-off of oversea loans, but from the lack of co-ordination between the banks, the lack of any common knowledge of their combined London resources, the lack of any provision for reserves of credit to meet emergencies or to provide an equalisation fund to meet fluctuating circumstances of oversea trade or prices.

A Commonwealth-owned banking system should be made to function for the exclusive handling of foreign obligations. This bank of the nation should be the sole operator in foreign bills, and all international financial operations should be in its hands. It should be the sole collector of all bills payable in foreign States, and by these means sustain Australia's national credit in the country of its principal obligations. Against general exports it should issue internal credits. The private banks, with the aid of Commonwealth notes, financed wheat, meat, and metal pools during the war. The bank of the nation, with its own credit instruments, can perform a similar task to-day, and make a profit for the nation in the process.

New Loans. 

If it be true, as put by Sir Edward Holden, that banking is little more than a matter of book-keeping, that good securities make good credit, that a cheque or note is redeemed every time it is accepted by a citizen in exchange for goods or services, then there is no need for a Commonwealth Government in its future borrowings to drain the resources of private industry. A Commonwealth Bank can do for a Government what the private banks do for their clients—issue book credits against lodged securities, and what previously went in perpetual interest can go in annual liquidation of the principal. In this there is nothing novel. It is the application for national purposes of policies every day applied by private banks for their own profit. If a Government security is good enough security upon which a private bank can build book credits, issue cheques, and draw profits, it is sound for a Commonwealth Bank.

It is alleged that a private bank, in addition to advancing upon public securities, issues upon deeds that represent actual property, or bills representing goods in transit or process of manufacture. That is true—so can the Commonwealth Bank.

But it is said that the totality of goods and property sets the limits upon the credits that can be issued, but that upon the issue of Government securities there is no limit. That is true. It is also not true. There is no limit to the issue. There is a very definite limit to successful flotation. The British banking corporations have already put their limit upon Australian borrowing. They will only renew upon conditions they prescribe. The Australian financial corporations will do likewise when they think the capacity to pay 6 per cent, is gone.

Mr. Buckland, chairman of the Bank of New South Wales, speaking at the last annual meeting, stated that the validity of a loan was dependent upon whether it could meet the annual charges and redemption within an assigned period. That applies not only to private individuals, but to public bodies. It is the principle that must be applied by the administration of a nation-owned bank to applicant Governments for credit. Is there revenue sufficient to meet the annual charges, annual reduction of the principal, and ultimate redemption within an assigned period ?—that is the deciding factor. A real bank of that nation is not only a provider of the instruments of credit, it is the custodian of the national solvency. It alone can say, in the honest application of the principles of banking, where the applicant's capacity to meet his or its obligation is reaching the limit.

If a nation is sufficiently solvent to pay 6 per cent, it is sufficiently solvent to secure goods and services from the public and provide the means for annual redemption. The instruments of re-construction are in its own hands if it cares to use them. 

A nation-owned banking system utilised for national purposes—based upon the principle that security is the key to credit, that the security, whether public or private, if sold, can restore to the bank the medium of payment advanced—is the most powerful agent a nation can possess. It is the most powerful bulwark for the credit, the security, and the industries of its people—for the stability of its internal affairs and international financial relations. It speaks, not in the discordant voices of rival banking companies, but as one nation to another. It is not the all-solvent, but it is one of the essential steps to recovery from the bruises and burdens of war.

If the nation will not take a new road—if it will not adopt new principles and policies—if it will not have "audacity by new ways and methods"—then it must continue to subject itself to processes of self- torture, to increasing loads of interest and taxation until industry crumbles beneath the strain. 

There is a demand that wages be reduced. It is a policy applied in Japan, in India, in the West Indies, upon the same pretence of ultimate benefit. In no country in the world are wages low enough, or labor cheap enough, to satisfy the demands of the "Financiers" who control the destinies of nations, and dictate the policy of their Governments.

France and "Inflation." 

Before the war, during the war, and until March, 1919, the exchange value of the French franc was 25 per £1 sterling. The note issue of France at the outbreak of war in August, 1914, was 240 millions sterling. Between that and March, 1919, the issue was increased fourfold, but the exchange value of the franc remained stationary at 25 per £1 sterling.

From March, 1919, the exchange value of the franc steadily declined. In France this was alleged to be due to a conspiracy of London and New York bankers. By June, 1926, the franc was 175, and on the 28th July, 240, per £1 sterling. France was, in technical terms, internationally bankrupt, and within her own borders faced the largest deficit in her history.

President Poincare did not curtail credits and augment his destitute. By arrangement with the Bank of France, the note issue was increased 280 millions sterling. Part was expended in the purchase of export bills, payable overseas, collected, and utilised in the liquidation of the oversea obligations of France. A portion of the new note issue was utilised in buying up French bonds, thus increasing in France floating capital searching for fresh sources of investment—seeking industrial investment when it could no longer find it in bonds.

According to the theorists, the enormous increase in the note issue should have enormously depreciated the exchange value of the franc. On the contrary, its value increased. By the end of August, 1926, the £1 sterling could only buy 170 francs; October, 160; November, 135; December, 125. Around this figure the Bank of France purchased on the market or at redemption millions of Government bonds, and pushed into the pool of industrial activity corresponding millions of non- interest bearing currency.

By this and allied methods, France has emerged from the bankrupt state of 1926 as the richest country in Europe. Instead of a country with a horde of unemployed, she is now combing Europe for workers to keep her industries going.

Since July, 1929, there has been a remission of taxation of 25 millions. The Bank of France rates have been reduced from 3 2/3 to 3. Existing loans falling due for conversion are standardised at 4 1/2 per cent. During 1929, France imported 80 millions of sterling gold instead of consumable goods. She increased her total gold reserves to 350 millions sterling—200 millions in excess of the gold reserves of the Bank of England.

To explain the prosperity of France, the London "Financial Times" (December 28th, 1929) stated that:—
"France has built up her formidable gold reserves by buying foreign currency with her depreciated paper currency."
If this statement were true, it would be the most potent argument for a depreciated currency. In actual fact, France exported commodities, and took her payments mainly in the commodity gold.

The allegation made by the "Financial Times" against France was, a few years ago, made against Germany—that she undersold Britain on oversea markets by an inflated depreciated currency. If in any country it be true that an inflated depreciated currency sets free the productive forces of a nation, increases products, stimulates exports, builds up over- sea credits—then who could wish more? If, on the contrary, by reason of a deflated appreciated currency the economic life of a nation be shackled, which road shall a man take?

The "Financial Times" (December 28th, 1929) stated that France reduced her internal interest charges, her internal production costs, and increased her hold upon oversea markets by the purchase of a large portion of her bonded debt with inflated depreciated currency. It is stated that, by this policy, French investors lost four-fifths of their capital and income, and that this policy was, in brief, a policy of confiscation. There are two answers.

First. Nowhere in the world are Government securities so widely held by the peasant and artisan classes as in France. Investment in these securities is the popular method of "saving." Any Government confiscating the savings of the masses would have perished, whereas the policy of the French Government saved the masses from the forced sale imposed by unemployment and mass hunger. Under the policy now operating in British territories, thousands of small bondholders will be compelled to sacrifice their holdings in order to exist.

Second. Taking the cost of living in July, 1914, at 100, the cost of living in France was 511 in 1927, and is now below 500. The bonds were re-bought on the basis of 124. The purchasing power was, therefore, the same, even if bought at pre-war price levels.

The London "Spectator" (June 18, 1930) summed up the situation thus:—"The economic situation of France is one of prosperity . . . industry active—almost total absence of unemployed."

 It is alleged that this prosperity is based upon low-paid labor. If this is so, it is evidence that industrial activity and high wages do not go side by side, unless labor power is there to enforce it. Secondly, labor is cheaper in Japan and the West Indies than in France, yet it does not spell prosperity. In both countries industry is stagnant. It is alleged that there is more unemployment in Germany than in England. The German Savings Bank returns are as follow:—

1926: 160 millions sterling
1927: 235    "  "  "
1928: 350    "  "  "
1929: 454    "  "  "

It is, therefore, evident that, however extensive unemployment may be in Germany, the social results are very different to those in Britain and Australia, where increasing unemploy- ment means the increasing drainage upon the resources of the savings banks, and increasing sales of a mass of little assets finally massed in possession of the few.

The Right to Draw and the 1924 Crisis

The War Governments gave the Associated Banks the "Right to Draw" Commonwealth notes without any gold payment or any deposited security. The mechanism of this scheme, and the way it operated, were set forth in detail on June 13, 1924, by the then Treasurer, Earle Page.
For all notes drawn under the schemes, the banks had to pay interest at rates varying between 3 and 4 per cent. Under the Sixth War Loan (1918), 3 per cent. Under Soldiers' Gratuities Scheme, 4 per cent.

For instance, six millions of the War Gratuities had to be paid in "cash." The Government arranged with the banks to pay out and charge to the Government on a 5 per cent, loan basis. For this the banks had "Right to Draw" Commonwealth notes to an amount paid to ex-soldiers. Thus the banks were out nothing, and scooped the difference between the 4 per cent, notes and the 5 per cent. "Loan."

But the banks did not draw notes —they traded on their "Right to Draw" as if the notes were actually in their own vaults. Thereby they avoided interest payments to the Government, but upon these "Rights" they issued credits, and drew interest from the Government and general public.

In 1920, the note issue passed from the Treasury to the "Note Issue Board." The banks continued in exercise of their "Rights," and, on the basis of these "Rights," increased their "bank-manufactured cheque currency."

On June 23, 1923, these "Rights to Draw" totalled £8,000,000. The Board made a demand that the banks should exercise their "Rights"—draw the notes, and pay interest thereon—the banks refused.

Early in 1924, the banks made a demand that these "Rights" should be extended by another £3,000.000. The Chairman of the Board, Mr. John Garvan, stated that these "Rights" were equivalent to an issue of notes to the banks without interest. He described the proposition as "madness." The Treasurer, Mr. Earle Page, upheld the view, but the bank demand was conceded.

Later in the year the banks made a demand for another £5,000,000. It was refused. Thereupon the banks pulled in overdrafts, restricted credits, imposed increased charges on exports, placed a banking boycott on industrial and commercial expansion, and caused a general economic slow-down— unemployment doubled.

In August, 1924, the Associated Banks notified the Wool Councils that sales would not be financed without additional notes or "Rights" to same. They promised released credits and reduced rates. The Note Issue Board capitulated. In September, the "Right to Draw" another £5,000,000 was con- ceded. Credits were not released—they were tightened. Rates were not lowered—they were raised. The newspapers announced that, at the Adelaide sales, "the price of wool dropped, because buyers could not obtain bank credits, no matter on what security." The Sydney "Telegraph" described the situation as— "A Financial Hold Up."

The banks responded to the outcries by a demand for an additional £10,000,000, promising abundant credits and lower rates if conceded.

On October 10, 1924, the Bruce-Page Government "proclaimed" the Commonwealth Bank Act. Under this, the Bank and the Note Issue were combined, under the chairmanship of John Garvan.

Next day, the Bank Board, the Bruce-Page Government, and the Associated Banks went into secret session.

On October 14, the newspapers announced that the Associated Banks had delivered their "Ultimatum," and "won on every point." They announced the terms imposed by the banks:—

1st—Associated Banks to have the "Right to Draw" another £10,000,000.

2nd—No interest to be paid for the "Right to Draw." Four per cent, to be paid on notes actually drawn. On this date (October 14, 1924), the Melbourne "Herald" stated that trades and others were— "Unable to obtain credit, on the most adequate security, at any rate of interest." The apologists for the Associated Banks announced that— "The Associated Banks will now release credit to the public at reduced rates."

The day after securing the £10,000.000 concession, the banks increased their rates by another 10 per cent. This meant an additional levy upon Australian exports of £750,000 per year. The Melbourne "Sun" of October 17 said:
"The demand rate on London is now 77/6 per £100. That is to say, a bank advances money here at that rate, and receives it in London in 30 days' time. The charge, therefore, works out at 46 1/2 per cent, per annum." 

The "Industrial Australian" of November 20, 1924, said the primary producers "for a long time past have been, and still are being, mercilessly exploited . . . and victimised of millions sterling." 

The late Mr. Pratten, Minister for Customs in the Bruce- Page Government, told the Sydney manufacturers (October 27, 1924) that the banks would not part with oversea money arising from exports. Therefore, Australia's oversea interest bill could only be paid from fresh oversea loans. This left the banks with their oversea money to finance the flood of imports.

This accusation of Mr. Pratten's amounted to an indictment of the Associated Banks, as conspirators against the public interest. When the question was put to Mr. Bruce at Lithgow (November 14, 1924), he replied, "I have yet to hear a satisfactory answer." It has never been answered.

In 1924 the banks restricted credit on the allegation that they had too much money overseas. To-day, the restrictions are imposed because the position is reversed.

Wholly Set up and Printed In Australia by Fraser & Jenklnson Pty. Ltd.. Queen St., Melb.