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DOCUMENT 18 TEE PROPERTY 0? HIS BRITANNIC MAJESTY S GOVERhDHNT)
!
255
COPY HO,
(51).
6*
C A B I N E T
rn
UE FINANCIAL AND ECONOMIC POSITION CF THE UNITED KINGDOM,
N o t e "by t h e
circulated
Secretary,
The a t t a c h e d Memorandum b y S i r
Warren F i s h e r
t o t h e Cabinet by i n s t r u c t i o n s
Prom t h e
Prime
Minister.
(Signed)
M,P A
t
e
HANKEY
Secretary,
Whitehall Gardens,
September
14th,
S W. 1.
0
1931.
s
Cabinet,
is
The s e r i o u s n e s s
are
engaging p u b l i c
because
"gold
of
1
use of
eleiiientary
fa ots
technical
et c
11
which
realised
t e r m s such a s
currency",
" e x cha nge s
may t h e r e f o r e
difficulties
i s perhaps not f u l l y
"depreciated
' i n f l a t i on",
It
the f i n a n c i a l
attention
the constant
standard",
p ound",
of
"flight
from
the
the
0
be u s e f u l b r i e f l y
to
set
out
the
0
Great B r i t a i n
90;000 square m i l e s
is
a very
small country
with a very
of
under
large population cf
about
45,000,000.
With the e x c e p t i o n
resources
rely
coal the
w i t h i n her own b o r d e r s
on o t h e r
countries
required
for
cn o t h e r
countries
fact
of
that
her
for
for
industries;
for
food
is
scarcity
such t h a t
the bulk cf
the
of
natural
she has
raw
materials
and t h e m e a s u r e o f h e r
s u p p l i e s may b e
to
dependence
i l l u s t r a t e d by
t e n months i n t h e y e a r h e r b r e a d comes
the
from
abroad
I n o t h e r words G r e a t
populatlon
may l i v e
at a l l ,
the b a s i c
necessaries
nature
this
quite
of
of
in
order that
her
has t o o b t a i n f r o m o t h e r
existence.,
d e p e n d e n c e on o t h e r
And i n t h e
countries
countries
extent
and
Great B r i t a i n
is
unique.
These other c o u n t r i e s
for
Britain,
the
require
c o m m o d i t i e s we n e e d f r o m
Originally
the
dicta.' t t h i e v e )
person s
handiwork or produce f o r
gradual
development
production
and t r a d e
and t h e r e f o r e
at
national
this
So i t
or exchange o f
grew,
one
another sj
but w i t h
increasing
intricacy
1
home - and l a t e r ,
countries
adequate,.
paid
them.
was t h e b a r t e r
between d i f f e r e n t
trade -
course t o be
o n l y method o f payment known t o man
(when he
1
of
of
to
of
intercourse
what we now c a l l
simple system of
was f o u n d n e c e s s a r y
as
the
inter­
exchange p r o v e d
introduce a
in­
special
intermediary
which we c a l l
money and t h i s
token came to he
known as c o i n s and l a t e r , more c o m p r e h e n s i v e l y ,
It
s e r v e d the
and of
double purpose
opening up l i m i t l e s s
( b u y i n g and s e l l i n g ) ;
effected
metals
internally
copper
with
degrees
it
coinage).
and medium of
exchange.
trade,
and e s p e c i a l l y
Its
difficult
of
to pay - which of
p a p e r but only
values
in goods
country has i t s
very
in
(or
bank n o t e s
own currency
or cheques
accepted i n t e r n a t i o n a l l y
v a l u e i n goods or
these three c u r r e n c i e s ,
e.g.
of
as the
exactly
and in time
notes,
as mere
it
real
francs,
Each
pounds
of
of
its
exchange)
of g o l d o r
t h a t country
is
its
to
paper undertaking
had a c t u a l
g o l d to
­
i n the form
at p r e s e n t the case with
the c a p a c i t y
the same as i f
of
in
bits
in g o l d .
(whether
equivalent
as i s
the
i s undertakings
dollars,
a country
purchase abroad on the s t r e n g t h
pay i s
that
and u l t i m a t e l y
-
however,
trade,
tokenB such as bank
and o t h e r b i l l s
services,
measure
as they c o r r e s p o n d with
services)
by
everyday use as
c o u r s e have no v a l u e
so f a r
gold
scarcity,
international
exchange -
and so l o n g as the c u r r e n c y
of
of
and t h e r e f o r e
as t h a t t r a d e d e v e l o p e d ;
cheques and o t h e r b i l l s
of
of
came to be r e p l a c e d by p a p e r
writing
circulate
The s c a r c i t y
and more s t a b l e v a l u e ,
metals,
(Other
came to be a c c e p t e d as the i n t e r n a t i o n a l
increasingly
it
-
or
were
t h e s e two m a t e r i a l s .
c o u p l e d with i t s w e i g h t and bulk made i t s
medium of
intermediary,
the p r e c i o u s
- o r more r e c e n t l y n i c k e l
as a s u b s i d i a r y
the h i g h e r
values
special
and f o r many c e n t u r i e s purchases
gave i t
of
exchange
trading.
time t h i s
w i t h c o i n s made of
like
of
value
i t made p o s s i b l e a
e x c h a n g e , became i d e n t i f i e d
and s i l v e r ;
currencies.
a measure of
opportunities
and easy
I n the c o u r s e of
gold
providing
in o t h e r words
g e n e r a l l y understood p r i c e
medium of
of
as
ship.
to
This
and o t h e r
actions
not
practice
hills
of
e x c h a n g e -- o r
hank n o t e s
he a l l o w e d
t o us by
to
payment f o r
abroad.
-
for
in
effecting
t o b l i n d us t o
other
we s u p p l y
of using p i e c e s
countries
are
interest
these
g o l d has * t o
us w i t h
goods
really
their
commands
Other
the paper
Of
Important
part
is
to
as a s o r t
we r e c e i v e
currency
currency
aa o r d i n a r y
financing
This use
all
of
all
and xs f a r more
people
these
of
supplied
goods
represent
by us a r e
will
actually
only
paper.,
us
except
and
is,
other
bank o r
savings
of
it
at
countries
to
the
International
very
large
on r e c e i p t
ban Is: u s e s
a profit
sums o f
just
for
the
than
livelihood
the business;
great
for
it
value
should
to
do w i t h o u t
them i f
this
particular
type
export''
as i t
paying f o r
retaining
that
the
and we
of
lost.
This " i n v i s i b l e
o u r ways o f
us
enables
for
8.
to
for
to ho p a i d
were
its
purpose
requirements
have
same
transactions.
of
engaged i n
converted
the
money banked h e r e i s
a means o f
in
foreign
t h e money o f
c o m m e r c i a l and o t h s r
just
hanker,
by u s ,
in
an
our i m p o r t
means
of
therefore
of
our
supply
however
£60,000^000
business
not
ingredients
values
which
investments.­
countries
and we u s e t h e money
hinds
foreign
of
on d e p o s i t
c u s t o m e r s , namely we r e - l e n d
of
real
however,
them o r
anything f o r
represents
act
This f o r e i g n
English
way as
secure
trans ­
the goods
provided
pieces
t h e work which we do f o r
capacity
moneyo
into
terms, w i l l
snail
exchange f o r
combined v a l u e o f
cheques
confluence..
7,
which
that
in
end s e r v i c e s
be p a i d .
to the
of
them to us on our
p u r c h a s i n g power and no amount o f
that
case
like
payments m u s t ,
the f a c t
due from
goods
enough,
extent
the
paper
them o r work which we do f o r
If
binding
of
i m p o r t s , but i t s
the c o n f i d e n c e
t h e y must f e e l
money back I n f u l l
they
of
sura
is
called
is
one
contJ.nua.ace depends on
our f o r e i g n
depositors.
t h a t whenever
they want
can be c e r t a i n
of
of
getting
it
This
their
184
(reconverted of course into t h e i r own currency).
Here again
we see the comparison w i t h a bank or savings bank;
for,
the i n s t i t u t i o n i s sound in i t s e l f , no d i f f i c u l t i e s
arise uh­
l e s s the depositors get doubtful or frightened aoout
if
the
safety of t h e i r deposits in the bank, when at once a "run"
commences and the bank has to put up i t s
shutters, as the
proportion of the money which the bank has kept in hand, i. e.
does not put to p r o f i t a b l e use by lending', i s quite
to meet the demands of i t s customers for
insufficient
immediate repayment
of t h e i r deposits in f u l l .
In other words the foundation cf a l l banking business
i s the confidence of the customers in the bank's
it
stability;
i s this confidence which leaves the bank free to -put most
cf the money entrusted to i t s care to p r o f i t a b l e use.
The moment that the owners of the foreign
deposits
in London begin to f e e l any doubt about the safety of their
money, they want to have t h e i r money back and a "run" commences.
And, as they of course want that money in the currency of t h e i r
own country,
i t i s no use offering them £ 1 or 1 0 s / - notes or
. . . . . . .
.
..
..
.
.
cheques drawn in our currency, for these are (or may become)
from their point of view mere pieces of paper.
9.
Nov.' the self-same reason which makes the foreign
depositor nervous about the security of h i s money here makes
it difficult
for us to obtain the necessary amount of
currency ( e . g .
d o l l a r s or francs)
foreign
to repay him on demand.
That reason i s that the combined aggregate of the
ingredients of purchasing power (other than gold) mentioned in
paragraph 6 above by means of which we pay for the goods we
have ordered from abroad i s i n s u f f i c i e n t
to pay f o r the goods
ordered, and therefore we have been buying goods "on tick".
This means that we owe foreigners on balance more than they owe
-4-
:
"
' '
'
us,
and t h a t
c o n s e q u e n t l y we a r e s h o r t
Such a s t a t e
on t h e
raise
of
foreign
affairs,
in
b a c k h i s money
t h e mind o f
(in his
A "run"
therefore
"down"
on b a l a n c e
debt),
we c a n n o t
owing
lay
to
that,
for
it
whenever
t o us ( b u t
stop
total
even
if
of
begins
of
it.
our
being
a r e no
contrary
we a r e
currencies
who a r e
of
the " r u n "
the r e s u l t
in
and
calling
been b i l k e d
of
It
depositor
all
will
cause
of
i s the
of
deposits
in
events
ounce
quite unable
in d o l l a r s
12,
creditors.
in
should
of
this
our l i v i n g
their
money.
of
the
printing
to
of
our owing t o o t h e r
foreign
budgets
the
continued
and i n s t e a d
expedient
of
countries
sterling.
in the
foreign
After
t o have
the war
difficulties
of p u l l i n g
in
meeting d e f i c i t s
i n n u m e r a b l e bank o r c u r r e n c y n o t e s .
- 5 ­
than we
owe t o us i n
cur n a t i o n a l Budget.
countries
that
our means as
associated with this fact
a c e r t a i n number o f
resorted
on t h e
c o u n t r y w o u l d have
beyond
than t h e y
as
have
on t h e p a r t
and f r a n c s
their
so
the "run"
mind i s t h e q u e s t i o n
in balancing
time
p e o p l e who had r e l i e d
some o f
and t h e r e f o r e
is
in
s e e n from p a r a g r a p h 9 a b o v e
of
is
our
have been
fact
Closely
of
it
to repay
e v i d e n c e d b y o u r o r d e r i n g f r o m a b r o a d more g o o d s
c o u l d pay f o r ,
here
g o l d pounds,
w o u l d be t h a t we
name and c r e d i t
at
foreign
can be r e c t i f i e d
and t h e s e u n f o r t u n a t e
fair
root
be
our f o r e i g n
the p o s i t i o n
11.
these
we p a r t e d w i t h t h e l a s t
we s h o u l d s t i l l
traditional
belts
to
there
foreign
hundred m i l l i o n s
Unless
defaulted
more
resets
he w a n t s
1
trade
on t h e
g o l d to t h e f o r e i g n e r s
trie m a j o r i t y
10.
the
eventually
and as i n c o n s e q u e n c e
hands on t h e s e
several
gold reserve,
to
francs.
deposits.
equivalent
full
or
t h e d e p o s i t o r w h e t h e r he can g e t
i n our i n t e r n a t i o n a l
And a s t h e
clear
continues,
own c u r r e n c y )
starts;
or f r a n c s
h a v e t o pay out
their
it
dollars
d e p o s i t s banked, w i t h u s ;
a doubt
dollars
if
of
their
by
V/henever
this
was d o n e ,
i,e.,
the national
purchasing power,
prices
hardship,
time the f o r e i g n
o f h i s money.
before
the
even hunger,
investor
citiaens
in the
assistance
rise
most
if
than
balancing
in
same
all
countries
from o t h e r
ourselves
in
not
countrie
c o u l d be i n d u c e d t o
country
value
its
lend,
budget.
preaching
doctrine.
touchstone
of
the case at
trade with
B u d g e t has t h u s come t o
a country's
importance t o
its
w i t h u s , we a r e
countries,
the
not
Budget
is
really
l o o k as t h o u g h i t
ture
is
of
taxation)
it
a scope
taking
were;
were r e c u r r e n t
s o u n d n e s s w o u l d be
asset,
The
of
picture
a densely
i.e.,
our
involve
we might
if
d r e s s e d up
expendi­
( b y means
and s p e n d i n g
abroad of
(except
importing food
continue
destruction
in the
in the
populated country
without
coal)
of
it
as
our
final
of
on a
inter­
collapse
of
preceding
paragraphs
practically
and t h e r e f o r e
devoid
unable t o
and t h i s
a b r o a d more g o o d s t h a n i t
can pay f o r ,
repay
deposits
the f o r e i g n
country
ordering
being c a l l e d
entrusted to
it,
s
from
on t o
and
of
exist
and raw m a t e r i a l s w h i c h h a v e t o be
other countries -
in f u l l
of
credit.
described
resources
from
And
the national
distrust
and t h u s r e s u l t
natural
bought
as
intensified.
confidence
our g r e a t e s t
that
if
p r o g r e s s " would complete t h e
national
i s merely
saved, up c a p i t a l
income, the
and i f ,
our B u d g e t .
such as t o
And any e x p e c t a t i o n t h a t
"rake's
of t r a d e ;
in
t o whom we owe money
but
or again
and t y p e
people's
on t o
balanced,
second only
" d o w n " on our b a l a n c e
foreigners
turn a microscope
be r e g a r d e d as a
stability
i n t e r n a t i o n a l balance
present
other
financial
automatically
is
lost
its
At t h e
when any o f t h e s e
on t h e b o r r o w i n g
A national
if
country
of the l a t t e r
And no one was more e m p h a t i c
to
of
was w i d e s p r e a d .
desired financial
insisted
this
l o s t jnuch o r a l l
and w i t h t h e c o r r e s p o n d i n g
Consequently,
subsequently
they
currency
simultaneously
indulging in an unsound Budget.
A country consequently with i t s international
credit
undermined.
Up to this time i t s currency (or medium of exchange
as described in paragraph 6 above), v i z : the pound s t e r l i n g ,
has f o r
international
purposes been valued and accepted as the
equivalent of a gold pound or of 4. OS d o l l a r s or ,124 francs.
Once, however, the f a c t s
of our international
trading
p o s i t i o n make it c l e a r to f o r e i g n countries that the 17th
century taunt
"In matters of commerce the f a u l t
" I s giving too l i t t l e
of the hutch
and asking too much"
is coming home to roost, ana that neither as traders nor as
hankers are we any longer able to pay in f u l l what we owe to
foreigners,
there w i l l be a drain on our gold reserves
until
we cease to be able to supply gold to meet the balance of
our l i a b i l i t i e s .
Then the l i n k between s t e r l i n g and other
currencies w i l l be broken ana the value of the pound in r e l a t i o n
to those currencies w i l l f a l l .
off the gold standard).
this f a l l
(This i s what is c a l l e d going
I t w i l l not be possible to stop
so long as we s t i l l have to pay foreigners more than
they have to pay us;
while i t s pace w i l l be accentuated hy the
l e g i t i m a t e desire on the part of foreigners with deposits or
other convertible assets in s t e r l i n g to change them into
currencies which have a s t a b l e value, such as d o l l a r s or francs.
The point or points to which the pound w i l l he­
written down w i l l depend on a combination of f a c t o r s ;
(say)
i t were to sink to a value of 2.43 d o l l a r s
in effect
but,
if
(or 62 francs)
a nominal hi w i l l as a measure of value have become
an actual 10s/-,
Thus?
example 5 A m e r i c a n s would f i n d
for
pound t h a t
they have
would
g e t hack
only
on d e p o s i t
the
here
equivalent
n a t u r a l l y he r e l u c t a n t
to
(at
of
that
for
4=86 t o t h e p o u n d )
2,43 d o l l a r s ,
run t h e r i s k
every
of
th03
r
and t h e y woul
a similar
experience
in
future.
15o
With
value,
the £ s t e r l i n g
its
purchasing
reduced by h a l f
power o v e r
and t h e r e f o r e ,
whereas h i t h e r t o
worth
the
cf
goods
60 d o l l a r s '
of
for
conditions
t h e pound i s
of
a
as w e l l ;
not
us a l l
depreciation)
to
us t w i c e
of
halved:
dollars'
only
The
-. i s
to continue working f o r
the
as much; h u t
in Savings C e r t i f i c a t e s
5
slide
only
In I t s
that
the
of
the
important
the
s
of
the r e a d i n e s s
value
food
by
these
on
same number
of
(called
equivalent
clothing
etc;
e v e r y o n e who h a s put h i s
or on d e p o s i t
will
and
extant
Mow suppose £ 1 becomes
that
security
doubled
t h e most
sink t o nothing
had commenced.-
form o f
is
from
e a c h pound may be I n f l u e n c e d
and one o f
t o 1 0 / - t h i s would mean n o t
any o t h e r
120
on i m p o r t s
pound i s h a l v e d -
n o m i n a l pounds as b e f o r e
cost
also
pounds w o u l d now s e c u r e
our e x i s t e n c e
i n t h e p u r c h a s i n g power
the p a r t
is
secure
such c o m m o d i t i e s h e r e
amount we can buy f o r
if
goods
£25 would
same number o f
dependent
abroad t h e p r i c e
other
foreign
of
worths.
A s we a r e
drop
as a measure
will
savings
at S a v i n g s Banks o r
have been d e p r i v e d
of
in
half
its
valuec
If
i n an a t t e m p t
proceeded to p r i n t
to r e l i e v e
sufficient
o f u s s h o u l d have £2 f o r
dollars
of £ ' s
of
(i,e*
required, t o
accordingly;
t h e £ would
additional
at t h e
£ notes
the
reduced
each
had.
equivalent
of
in relation
gold)
o b t a i n g o o d s a b r o a d would be
same t i m e
again r i s e ,
so t h a t
we s h o u l d m e r e l y make m a t t e r s
s
t h e £ m i g h t be f u r t h e r
or francs
p o s i t i o n we
e v e r y £ 1 w h i c h we p r e v i o u s l y
p r o c e s s known as i n f l a t i o n )
the v a l u e
this
the p r i c e
and c o n s e q u e n t l y
of
and the
(a
worsej
to
number
increased
articles
i n terms
the purchasing
power
of
of
the
16c
pound w o u l d
The remedy
responsible
living
at
goods
sink
is
for
which has
to pay
more g o o d s
and t h i s
entailed
"services")
to cut
standard
living
must be r e d u c e d
t h a t we do
unsound B u d g e t s
-
the
this
-
international
and,
reckoned
terms of
pounds w i l l
has been,
may b e
of
ready
having
offset
t o buy more
of
t o pay
4 o 8 6
to
abroad
doing,
of
1 2 4
from
the £ w i l l
of
our
higher
fact
than
that
the
than b e f o r e
francs
for
or
This
foreign
latter
result
countries
not
they might
18.
Two v e r y
Included
however,
in
is,
of
regard
as
important
u
foreigner
as
instead
worth
£ 1 ' s
of
2 o 4 3
their
conditional
tariff
heads
of
our
Lank
"invisible
on d e p o s i t
very
b e e n put t o
profitable
£ 6 0 , 0 0 0 , 0 0 0
a year
i n paragraph
safe),
large
preve:
sums o f
t h e payment
probably
will
for
ever.
as a
capacity
sort
has
money w h i c h
and h a v e e a r n e d
our
9
London
the world
foreign
of
(which
exports")
and i n t h a t
use by r e - l e r x l i n g
towards
so as t o
trade
7 above,
b e e n r e g a r d e d by
(or
walls
export
any e v e n t h a v e b e e n c r i p p l e d ,
many g e n e r a t i o n s
on
dumping"o
i n the e x p r e s s i o n
international
received
however,
raising
As a l r e a d y m e n t i o n e d
has f o r
hitherto
6 2 francs.
what
are
not
imports
commoditier3, he w i l l n o t h a v e t o pay more t h a n ( c a y )
dollars
our
and our
abstain
continue
by t h e
or
abroad,
of
more
and s e l l
cost
our e x p o r t s
dollars
abroad
our o r d e r s
value
although the
t h i s may b e
instead
accordingly.,
and a l s o
further;
it
ordering
down our o r d e r s
deteriorate
in
on.
t h a n we h a v e b e e n
forced
Provided
And s o
means t h a t ?
we must r e l a t e
wo s h a l l be
IV.
5/-.
And u n l e s s we can p r o d u c e
a
(including
of
to
the p r o c e s s which has been
trouble,
t h a n we can pay f o r ,
capacity
(say)
to reverse
the
a level
again
imports^
have
some
Obviously
if
.ve f a i l
T
o r o n l y r e p a y him p a r t o f
g o i n g to
rather
to
repay
the
his deposit,
e n t r u s t h i s money t o u s ;
than l a t e r ,
foreign
he w i l l
depositor,
he i s n o t
in
future
and "by d e g r e e s , and
choose
a centre,
P a r i s , w h e r e b e c a n l e a v e h i s money w i t h o u t
e,g,
sooner
hew Y o r k
the r i s k o f
or
being
defrauded,,
19,
The o t h e r p a r t
is
the i n t e r e s t
has h e l p e d i n
to
an e x t e n t
investments
therefore
our e x p o r t
due to us f r o m o u r
are i n the form o f
calculated
20.
t h e i m p o r t s we n e e d
As tract o f
0
and t h e
i n pounds, the immediate
commodities to
capacity
value
of
the v a l u e
£160,000,000 a y e a r
if
these
we f a i l e d
t h r o u g h o u r own f a u l t )
our £
these
interest
result
of
is
a
fall
the £ would b e
of
little
t o purcha.se what we n e e d
abroad would be r e d u c e d , under
that
more
than
than
from
two h e a d s a l o n e : , by
(and i t
to maintain the
w o u l d ha^e
about
been
international
value
of
sterling.
Therefore
higher
our
than t h a t
standard o f
banking
services
were to
s u c c e e d by
of
trade
living
i n Europe l a r g e l y
a b r o a d on a c c o u n t o f
"balance o f
21.
sterling,
This
worth,
Thus o u r
c
investments o v e r s e a s ,
some o f
i n the i n t e r n a t i o n a l
to
what we h i t h e r t o h a v e h a d , p e r h e p s n o t much more
£100,000,000
i e.
just referred
exceeding £200,000,000 a y e a r
we s h o u l d r e c e i v e
from
trade
the p a s t t o pay f o r
( s a y ) by h a l f
half
of
because o f
our p a s t
loans
- w o u l d change f o r
self-denial
i n the
-- w h i c h h a s
these
and o f
our
receipts
special
t h e w o r s e , cm-n t h o u g h we
in diminishing
sphere o f
been
visible
the
experts
adverse
arm! i m p o r t s
commodities.
And o u r p r e s t i g e
centuries
t h a t we a r e
due t o
the u n i v e r s a l b e l i e f
eommerci a l l y
and f i n a n c i a l l y
over
the
honest
will
have b e e n d e s t r o y e d f o r
to-day w i l l
words
ever
Act
2,
Scene l )
" E n g l a n d , bound i n w i t h
"v/hose r o c k y
"With inky b l o t s
"That England,
come i n
­
triumphant
and r o t t e n parchment
t h a t was wont t o
sea,
T r e a sury Ch amb e r s ,
1931.
siege
bonds:
conquer
conquest o f
itself
others,
c
"
of
Shakespeare'
i s now bound i n -with shame,
' H a t h made a s h a m e f u l
11th,
the
to
us E n g l i s h
shore b e a t s back the e n v i o u s
"Of w a t e r y N e p t u n e ,
September
The e p i t a p h o f
be w r i t t e n by h i s t o r i a n s
(Richard I I ,
!
0