The Meaning of a Balanced Budget
We are now in a position to examine a fundamental axiom of national finance as at present conducted, which is that budgets must be balanced, by which is meant that all Governmental expenditure must normally be recovered from the individuals in the country by means of taxation.
Now like so many other of the axioms of finance, this proposition seems on the face of it to be incontrovertible. We are all familiar with Charles Dickens's exemplification of it: "Income £20, expenditure £19 19s. 6d., result, happiness. Income £20, expenditure £20 0s. 6d., result, misery." So valuable a piece of financial propaganda, incidentally, is sufficient to have facilitated the success of that author even were it otherwise undeserved.
In the case of the individual, to spend more than you receive is a policy which cannot be pursued with success for any length of time. But when we come to examine the proposition as applied to a nation, in the light of the analysis of the financial system in the foregoing chapters, we find that the cases are not in any sense parallel. In the case of the individual, income is purchasing power which is received from some other source, either for services rendered or for securities held. We are already aware that this purchasing power proceeds from the banks in the form of loans, and has to be repaid to the banks. Therefore it is perfectly true to say that the income of the individual is money which has been issued by the banks on loan and is merely held by the individual on its way back to the banks for a greater or less time according to the rate at which banks are calling in their outstanding loans.
Bearing this in mind, let us consider the meaning of taxation, and for the moment it will be sufficient to consider what is called direct taxation, that is to say, taxation of profit and incomes as distinct from indirect taxation in the form of duty on specific products.
Let us suppose that a manufacturing firm, Messrs. Brown & Co., draws £1,000 from a bank with which to pay wages and salaries, which, for the sake of argument, are all subject to income tax. It is at the moment irrelevant whether this £1,000 does or does not constitute an overdraft. Leaving out of consideration overhead charges this £1,000 produces prices of£1,000 plus Messrs. Brown's profit which we will say is 10 per cent, or a total of £1,100. This £1,100 has to be collected from the public in prices.
Now in the first place the Government collects from Messrs. Brown, let us say 4s. in the £ on £100 profit, or £20. If we assume Messrs. Brown to employ ten individuals, each receiving £100, £20 will be subtracted from each of them, making a total of £220. Each of these ten individuals, who, we will assume, shop exclusively at a departmental store which supplies everything they require, will spend, let us say, £50 in buying goods which cost the departmental store £40. The £10 per person is the profit of the departmental store amounting to £100. Of this profit the Government again takes in taxation £20. making £240. The departmental store pays £10 of the £50 which it receives per person to its own employees as wages, amounting to a further £100, Of this the Government again takes £20 (since this is
income of the employees), making £260. Or to put the matter shortly, every time money passes from one set of hands to another, what is expenditure in the first set of hands becomes income for the second set of hands, and at each transfer it is taxed at, let us say, 20 per cent. Mathematically, the whole of the money will be taken in taxation if it passes through an infinite number of hands. So that ultimately the individuals comprising the nation would have two creditors, each of whom would have a claim on the whole of the purchasing power distributed: firstly, Messrs. Brown, for goods supplied, and secondly, the nation, which in the mathematical limit would collect the whole of it in taxation no matter what the rate of taxation might be.
it be argued that the State had already distributed this sum in wages for national services, then, of course, the reply is that if all the wages and salaries distributed by the Government are taken back in taxation, all Government products should be distributed free and the National Debt
But in fact it is quite easy to ascertain that the individual national has ultimately only one creditor who, apart from interest, doubles every loan made by him. The great spending departments, such as the War Office, the Admiralty, the Office of Works, and others, obtain the money with which to make their monthly payments by means of drafts upon what is called the "Ways and Means Account," which is in fact merely a Governmental overdraft kept with the Bank of England. The Bank of England treats this overdraft of the Government as cash which, since it rests upon the credit of the country, it is clearly entitled to do. The sums received in taxation go to the Reduction of the Government debit on the Ways and Means Account, so that we have the position that the money which the Government spends is created by the Bank of England, is loaned to the Government, arid is repaid by taxation of wages, salaries and dividends, which were originally derived from this and other bank loans, which, in turn, have to be repaid.
The impossibility of a balanced budget within a closed system of credit must be from the foregoing sufficiently obvious. Without going into details which still further complicate the situation, such a proposition means that the only surplus purchasing power at the disposal of the individuals comprising the nation would be the excess of bank loans over bank repayments, i.e. debt, together with the excess of money received for exports over money payments for imports, which is, of course, the explanation of the statement commonly made that Great Britain lives upon its exports. It is an extraordinary instance of the confusion of mind which has been produced by interested propaganda.
It will be clear that the demand for a balanced budget is another form of the claim that all money belongs to the banks, and so far from being a reflection of the physical facts of production, is unrelated to them. Every modern community, so far as physical facts are concerned, is becoming richer year by year, and this increase of riches could be greatly accelerated, a fact which is indicated by a large unemployed population, and a manufacturing system with a capacity which, although already greatly in excess of present possibilities of sale, is daily being improved. It is equally obvious that so long as this demand for a balanced national budget is admitted, there can be no economic security, since it involves continuous application to the financial authorities for permission to live.
Complete repayment would mean that the recipients of State wages and salaries would, in a nationalised State, pay taxes equal to 20s. in the £ and have no purchasing power.
THE GOLD STANDARD AND BANKING POLICY
ill be evident from the examination of the organisation of the price and credit issue system, that the price system as understood by the producer, and the price system as assumed, and in fact operated, by the banking system, are not the same system. The producer carries on business on the assumption that he will be able to add together the whole of his costs, that is to say, disbursements, in one form or another, not merely of wages, but of charges which he must recover in respect of his capital outlay, and put this accumulated cost, plus his own variable remuneration in the form of profit, on to the public. Obviously his ability to do this depends both on the possession by the public of sufficient purchasing power to meet these charges and the psychological wish to acquire the goods which the producer places at its disposal.
But in Chapter III we have seen that ultimately the amount of money in the community depends not on the action of producers, but on the policy of the banking system, and leaving aside for the moment all questions of high politics, the banker, being essentially a dealer in a commodity called money, is fundamentally concerned to make that commodity as valuable as possible. He is normally a deflationist, since low prices mean a high value for the monetary unit, and facilitate not only the internal business of the banks, but their foreign exchange operations which are regarded by them as of greater importance. The producer, therefore, is caught between an inflexible cost system which in Great Britain is rendered particularly rigid by trades union regulations in regard to wage rates and conditions, and a price system which is based on a chronic scarcity of money arising from two sources, the first purely mathematical, and the second a matter of
is obvious that such a state of affairs, cumulative because of the increasing gravity of the mathematical defect involved in the costing of machine production, places the banking system in complete control of the economic system. Before examining the use which has been made of this commanding position, it is perhaps desirable to consider recent developments in banking organisation and their apparent
The fundamental proposition of the modern banking system is that the basis of credit is currency.
So far as the subject is becoming a matter for public controversy, it would be easy to imagine that the point at issue was largely, if not entirely, a question of the merits or demerits of a pure or modified Gold Standard currency system. But in fact, as I trust has emerged from the matter covered by the previous pages, this is not the fundamental problem which arises from the essential nature of money as defined as effective demand. It is not now seriously questioned by any responsible authority, orthodox or otherwise, that the major portion of this effective demand is actually and literally created by the banking system, and is claimed as its property. This amounts to the same thing as claiming (although not necessarily exercising) the ownership of all goods and services, and is, in fact, a return by an ingenious route to the claim that all property, persons, and things, belong to the King, substituting, however, in this case, the financial system for the King. From the standpoint of ethics the position seems untenable, since the contribution towards the general welfare made by the financial system
But in Chapter III we have seen that ultimately the amount of money in the community depends not on the action of producers, but on the policy of the banking system, and leaving aside for the moment all questions of high politics, the banker, being essentially a dealer in a commodity called money, is fundamentally concerned to make that commodity as valuable as possible. He is normally a deflationist, since low prices mean a high value for the monetary unit, and facilitate not only the internal business of the banks, but their foreign exchange operations which are regarded by them as of greater importance. The producer, therefore, is caught between an inflexible cost system which in Great Britain is rendered particularly rigid by trades union regulations in regard to wage rates and conditions, and a price system which is based on a chronic scarcity of money arising from two sources, the first purely mathematical, and the second a matter of policy.
It is obvious that such a state of affairs, cumulative because of the increasing gravity of the mathematical defect involved in the costing of machine production, places the banking system in complete control of the economic system. Before examining the use which has been made of this commanding position, it is perhaps desirable to consider recent developments in banking organisation and their apparent objective.
The fundamental proposition of the modern banking system is that the basis of credit is currency.
So far as the subject is becoming a matter for public controversy, it would be easy to imagine that the point at issue was largely, if not entirely, a question of the merits or demerits of a pure or modified Gold Standard currency system. But in fact, as I trust has emerged from the matter covered by the previous pages, this is not the fundamental problem which arises from the essential nature of money as defined as effective demand. It is not now seriously questioned by any responsible authority, orthodox or otherwise, that the major portion of this effective demand is actually and literally created by the banking system, and is claimed as its property. This amounts to the same thing as claiming (although not necessarily exercising) the ownership of all goods and services, and is, in fact, a return by an ingenious route to the claim that all property, persons, and things, belong to the King, substituting, however, in this case, the financial system for the King. From the standpoint of ethics the position seems untenable, since the contribution towards the general welfare made by the financial system as compared,
let us say, with that made by scientists, engineers, and organisers, would appear to be negligible. And from the pragmatic point of view with which modern ideas are more in sympathy, the claim seems to be still more difficult to sustain. The social unrest, international friction, and the largely unsatisfactory nature of modern civilisation, can be directly traced to it. A system which will not allow the population of the world to obtain goods which are already in existence, without first obtaining money through the making of further goods which are not, and may never be, required, is the direct explanation of the senseless strain and hurry of the modern business
But so far as banking is concerned, there is little doubt that the Gold Standard, so called, is a factor in the policy which it is intended to pursue, and for this reason, if for no other, some examination of it seems desirable.
The difficulty in dealing with the subject arises largely from the fact that it has never at any time been what it pretends to be. Originally gold itself was supposed to represent the only true and universally accepted claim for goods. Previously to 1914 the gold sovereign circulated freely in Great Britain, and the illusion of a gold currency was fairly successful. Within two days of the outbreak of war in 1914, however, the available stocks of gold sovereigns had been withdrawn from the banks by depositors who imagined that in this way they were safeguarding their possessions, with a result that it was necessary to declare a moratorium, during the progress of which, treasury notes of a face value of £1 and 10$. were printed in large numbers and handed over to the banks for issue to their depositors. The fact that the Gold Standard was a fraudulent standard was demonstrated in twenty-four
The smoothness of the transition from the issue of the gold sovereign to that of the paper £ surprised even the bankers who were most concerned. It may be remarked in passing that one of the major tragedies of the War, not less fruitful in human distress and as far-reaching in its results as the War itself, took place when the representatives of the Government * acceded to the demands of the bankers that the treasury note should be issued only through the banks and should be handed over in return for advances of bank credit. The effect of this was, in the first place, to place the credit of sectional and private institutions, such as the banks, higher than that of the Government itself, and still further to intensify the control of finance upon business in general.
During the years 1914-1918, however, this control was not much felt. “ Inter arma silent
The banks and other financial institutions were during that period put in their proper place as agents for the execution of the expressed policy of the country at large, and no question of money was allowed to enter into the desirability of physical action. It need hardly be said, nor is it, I think, astonishing, that the conduct of this financial policy was not free from glaring technical mistakes. It did, however, serve to demonstrate beyond peradventure that the idea that a physical policy cannot be carried out unless there is, as the phrase goes, sufficient money with which to do it is, as it has always been, an illusion fostered for interested purposes.
He did everything we asked of him."—Sir Edward Holden of Mr. Lloyd George.
In 1933 the United States repudiated its liability to redeem its gold certificates, and in 1936 the "gold content" of the dollar is about 13 grains.
The vicissitudes of the Gold Standard in Great Britain are a matter of common knowledge, but certain aspects of it can be grasped conveniently from the curves on page 47.
There have been many critics of this policy, not alone amongst specialists on the question of monetary science, but in the ranks of both industry and banking itself. Parliamentary discussion, industrial protests, and technical criticism, however, have been alike without any apparent influence upon the policy pursued, which in the main has not even been defended. The effect of such criticism, if any, must be sought in the acceleration of the measures taken to increase the strength of bank organisation against this and similar attacks, a major feature being the formation of twenty-eight central banks in the past decade, culminating in the launching of the super-central bank known as the Bank of International Settlements.
This institution opened its doors in May, 1930, ostensibly to deal with the transfer of the large sums of money involved in the International Debts and reparations, which are the legacy of the Peace Treaties. As frequently happens in connection with financial affairs, the ostensible objective of the bank, however, can be recognised as a cover for much larger activities.
The constitution of the bank can be understood by examination of the disposition of its capital, the separation of this capital from voting rights, and the composition of its Board of Directors. It is incorporated under a charter from the Swiss Government, protected by a convention between Switzerland and the Governments principally interested in reparations, which are also, of course, the Governments forming the titular representatives of the major financial interests. Situated in Basle, it is geographically protected from physical or military pressure which would not at the same time involve a violation of Swiss neutrality. It may be noticed that this extraterritoriality, which is, in the case of the Bank of International Settlements, achieved by actual geographical means, is in the case of the smaller central banks previously referred to as having come into existence since the War, claimed as a legal right in their constitutions. Since the shares do not carry any voting rights, and since a bank of this description could obviously, if necessary, dispense with any financial capital, the share-holding is not a matter of any special interest. The constitution of the Board of Directors, however, is a different matter. It consists, first, of the governors of the central banks of Belgium, France, Germany, Great Britain, and Italy, with a nominee of the Bank of Japan, and a representative of United States banking.
While the United States of America would not at first sight appear to be primarily interested, the peculiar position of the Bank of England, whose Governor would appear to be largely the representative of American financial policy, should be noted, as well as the fact that the first President, Mr. Gates McGarrah, is an American closely connected with large American financial interests.
The objects of the Bank are defined in its statutes as being "to promote the co-operation of central banks and to provide additional facilities for international financial operations, and to act as trustee or agent in regard to international financial settlements entrusted to it under agreements with the parties concerned.” Obviously the intention of this was that the B.I.S. should be essentially the Central Bank of central banks, that it should hold reserves of gold as a basis of the cash reserves of the central banks, and that in consequence it should act as the supreme regulator of the world's money supplies. In other words, for instance, the relation of the Bank of England to the B.I.S. would be similar to that of the joint stock banks to the Bank of England, and thus it may be said that the B.I.S. places the final stone upon the pyramid of financial organisation.
There is a sufficiently comprehensive literature upon the organisation and technique of the banking system to make it unnecessary to deal with the matter in detail. The objective of the preceding examination of the constitution of the B.I.S., which may be regarded as the final development of the system, is to afford material by which the general policy of the banking system may be recognised.
While no doubt the working banker would be tempted to deny it, it seems true beyond all reasonable doubt to say that the system is directed to the constitution of a series of bottle- necks in the organisation of the economic system, these bottle-necks operating through the financial system to place both production and distribution under the control of financial interests. In the modern world, the considerable sums of purchasing power which are required to finance industrial undertakings cannot be obtained without access to the mechanism of public credit which has come under the control of this system. The joint stock banks, therefore, may be said to be in control at this point. Their own adherence to the system in Great Britain is insured by their dependency upon the Bank of England for currency, and in other countries by somewhat similar arrangements in regard to the central banks. These central banks in turn are, by the costing system, forced to make provision for considerable transactions in the various national currencies, and these transactions as between nations are destined to come under the control of the Bank of International Settlements, which obviously places the power of veto on the interchange of industrial commodities, as between nations, with this latter institution. It is a marvellous system, and it would be a gross admission of irresponsibility to condemn it without the most careful examination.