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THE PAPER MONEYS OF EUROPE

THEIR MORAL AND ECONOMIC SIGNIFICANCE



By

FRANCIS W. HIRST



BOSTON AND NEW YORK
HOUGHTON MIFFLIN COMPANY
The Riverside Press Cambridge
1922

COPYRIGHT, 1922, BY THE REGENTS OF THE
UNIVERSITY OF CALIFORNIA

ALL RIGHTS RESERVED

The Riverside Press
CAMBRIDGE · MASSACHUSETTS
PRINTED IN THE U.S.A.




BARBARA WEINSTOCK
LECTURES ON THE MORALS OF TRADE

This series will contain essays by representative scholars and men of
affairs dealing with the various phases of the moral law in its bearing
on business life under the new economic order, first delivered at the
University of California on the Weinstock foundation.




THE PAPER MONEYS OF EUROPE




THEIR MORAL AND ECONOMIC SIGNIFICANCE


No more severe reflection could be passed upon the moral and political
capacity of the human species than this: Five thousand years after the
invention of _writing_, three thousand after the invention of _money_,
and (nearly) five hundred since the invention of _printing_,
governments all over the world are employing the third invention for
the purpose of debasing the second; thereby robbing millions of
innocent individuals of their property on a scale so extensive that
previous public confiscations of private property through the
adulteration of money--in ancient Rome, in Ireland under James the
Second, in Prussia during the Seven Years' War, in the American
colonies and the United States, in Portugal, in Greece, in various
republics of Central and South America, even the assignats of the
French Revolution--seem pigmy frauds in comparison with the present
vast inundation of counterfeit paper money.

In these times, when so much attention is given to what I may call the
prehistoric history of mankind, it would ill become me, a mere
adventurer in anthropology, to discuss the origin of money or to
attempt an explanation of the curious fact that the art of coining
money was invented and perfected a thousand years before the art of
printing. The coins struck by the best cities of ancient Greece are a
model and a reproach to our modern mints; and being for the most part
of good silver, they fulfilled the two main functions of currency--as a
measure of value and a medium of exchange.

Silver was well adapted for the purposes of currency by its ductility,
durability, divisibility, portability, and value. Its value depended on
three things. In the first place, it was scarce; in the second, it was
much in demand for the arts and manufactures; and in the third place,
its intrinsic value was increased and stabilized by the needs and
demands of the mints.

Gold had similar qualifications, but it was too scarce and too precious
until the nineteenth century, in the course of which (for reasons which
I need not enter upon here), most of the great commercial nations
adopted a gold standard. Copper possessed in a less degree the
qualifications of gold and silver, but it was the first metal to be
coined into money in ancient Rome. The Roman _as_ or _pondo_ weighed a
Roman pound of _good_ copper, therefore possessed the two principal
attributes of good money, a definite weight and a definite fineness. It
was divided like our troy pound into twelve ounces of good copper.

The English Troyes or Troy pound was first used in the English mint in
the time of Henry the Eighth. Edward the First's pound sterling was a
Tower pound of silver of a definite fineness. Charlemagne's livre was a
Troyes[1] pound of silver of definite fineness. The old English Scotch
pence or pennies contained originally a real pennyweight of silver, one
twentieth of an ounce and one two hundred and fortieth of a pound. The
famous pre-war English sovereign, now demonetized and misrepresented by
the depreciated paper pound, was itself also a weight; but the twenty
shillings and two hundred and forty pence which exchanged for it were
token coins depending for their value upon the gold sovereign.

      [1] "The Fair of Troyes in Champaign was at that time frequented
      by all the nations of Europe, and the weights and measures of so
      famous a market were generally known and esteemed." (Adam Smith,
      _Wealth of Nations_, Book I, chap, IV.)

    From the time of Charlemagne among the French, and from that of
    William the Conqueror among the English [wrote Adam Smith in 1776],
    the proportion between the pound, the shilling and the penny, seems
    to have been uniformly the same as at present, though the value of
    each has been very different; for in every country of the world, I
    believe, the avarice and injustice of princes and sovereign states,
    abusing the confidence of their subjects, have by degrees
    diminished the real quantity of metal which had been originally
    contained in their coins. The Roman as, in the latter ages of the
    republic, was reduced to the twenty-fourth part of its original
    value, and, instead of weighing a pound, came to weigh only half an
    ounce. The English pound and penny contain at present about a third
    only; the Scots pound and penny about a thirty-sixth; and the
    French pound and penny about a sixty-sixth part of their original
    value. By means of those operations, the princes and sovereign
    states which performed them were enabled, in appearance, to pay
    their debts and fulfil their engagements with a smaller quantity of
    silver than would otherwise have been requisite. It was indeed in
    appearance only; for their creditors were really defrauded of a
    part of what was due to them. All other debtors in the state were
    allowed the same privilege, and might pay with the same nominal sum
    of the new and debased coin whatever they had borrowed in the old.
    Such operations, therefore, have always proved favourable to the
    debtor, and ruinous to the creditor, and have sometimes produced a
    greater and more universal revolution in the fortunes of private
    persons, than could have been occasioned by a very great public
    calamity.[2]

      [2] _Wealth of Nations_, Book I, chap. IV.

John Stuart Mill follows his master in exposing and denouncing what he
calls this "least covert of all forms of knavery which consists in
calling a shilling a pound." But the opinions of Mill, the saint of
rationalism, deserve and demand citation as they bring us directly to
our subject. He writes:

    When gold and silver had become virtually a medium of exchange, by
    becoming the things for which people generally sold, and with which
    they generally bought, whatever they had to sell or buy; the
    contrivance of coining obviously suggested itself. By this process
    the metal was divided into convenient portions, of any degree of
    smallness, and bearing a recognised proportion to one another; and
    the trouble was saved of weighing and assaying at every change of
    possessors, an inconvenience which on the occasion of small
    purchases would soon have become insupportable.

    Governments found it their interest to take the operation into
    their own hands, and to interdict all coining by private persons;
    indeed, their guarantee was often the only one which would have
    been relied on, a reliance however which very often it ill
    deserved; profligate governments having until a very modern period
    seldom scrupled, for the sake of robbing their creditors, to confer
    on all other debtors a licence to rob theirs, by the shallow and
    impudent artifice of lowering the standard; that least covert of
    all modes of knavery, which consists in calling a shilling a pound,
    that a debt of a hundred pounds may be cancelled by the payment of
    a hundred shillings. It would have been as simple a plan, and would
    have answered just as well, to have enacted that "a hundred" should
    always be interpreted to mean five, which would have effected the
    same reduction in all pecuniary contracts, and would not have been
    at all more shameless. Such strokes of policy have not wholly
    ceased to be recommended, but they have ceased to be practised,
    except occasionally through the medium of paper money, in which
    case the character of the transaction, from the greater obscurity
    of the subject is a little less barefaced.[3]

      [3] Mill, _Political Economy_, Book III, chap. VII.

A few illustrations from the past may help us to a critical
contemplation of the present monetary conditions on the continent of
Europe, which constitute fraud and robbery on the most wholesale scale
ever practised by governments (with the style and title of
democracies!) upon the miserable victims, called citizens, and supposed
to be endowed with the blessings of self-determination.

Those who believe that war, if not a divine institution, is at least an
inevitable feature of human society may plead in extenuation of this
species of fraud that it is usually the last desperate resource of a
government which has pledged all its taxes and credit for war or
armaments.

I remember reading in the Roman historian Sallust of a financial crisis
which was ended by debts contracted in silver being paid off in
copper--_argentum ære solutum est_.

A few years before Adam Smith wrote his chapter on money, Frederick the
Great, during the Seven Years' War, resorted to the Jew, Ephraim, who
coined tin silver:

    Outside noble, inside slim,
    Outside Frederick, inside Ephraim.

But Frederick, wiser and more honest than our European belligerents,
made it his first care after the peace to restore an honest silver
coinage.

A lively example from English, or rather Irish, history is supplied by
Macaulay and belongs to the year 1689. It is one of the incidents in
James the Second's brief and luckless government of Ireland:

    It is remarkable that while the King [James II] was losing the
    confidence and good will of the Irish Commons by faintly defending
    against them, in one quarter, the institution of property, he was
    himself, in another quarter, attacking that institution with a
    violence, if possible more reckless than theirs.

    He soon found that no money came into his Exchequer. The cause was
    sufficiently obvious. Trade was at an end. Floating capital had
    been withdrawn in great masses from the island. Of the fixed
    capital much had been destroyed, and the rest was lying idle.
    Thousands of those Protestants who were the most industrious and
    intelligent part of the population had emigrated to England.
    Thousands had taken refuge in the places which still held out for
    William and Mary. Of the Roman Catholic peasantry, who were in the
    vigor of life, the majority had enlisted in the army or had joined
    gangs of plunderers. The poverty of the treasury was the necessary
    effect of the poverty of the country: public prosperity could be
    restored only by the restoration of private prosperity; and private
    prosperity could be restored only by years of peace and security.
    James was absurd enough to imagine that there was a more speedy and
    efficacious remedy. He could, he conceived, at once extricate
    himself from his financial difficulties by the simple process of
    calling a farthing a shilling.

    The right of coining was undoubtedly a flower of the prerogative;
    and, in his view, the right of coining included the right of
    debasing the coin. Pots, pans, knockers of doors, pieces of
    ordnance which had long been past use, were carried to the mint. In
    a short time lumps of base metal, nominally worth near a million
    sterling, intrinsically worth about a sixtieth part of that sum,
    were in circulation. A royal edict declared these pieces to be
    legal tender in all cases whatsoever. A mortgage for a thousand
    pounds was cleared off by a bag of counters made out of old
    kettles. The creditors who complained to the Court of Chancery were
    told by Fitton to take their money and be gone.

    But of all classes, the tradesmen of Dublin, who were generally
    Protestants, were the greatest losers. At first, of course, they
    raised their demands; but the magistrates of the city took on
    themselves to meet this heretical inclination by putting forth a
    tariff regulating prices. Any man who belonged to the caste now
    dominant might walk into a shop, lay on the counter a bit of brass
    worth threepence, and carry off goods to the value of half a
    guinea. Legal remedies were out of the question. Indeed the
    sufferers thought themselves happy if, by the sacrifice of their
    stock in trade, they could redeem their limbs and their lives.
    There was not a baker's shop in the city round which twenty or
    thirty soldiers were not constantly prowling. Some persons who
    refused the base money were arrested by troopers and carried before
    the Provost Marshal, who cursed them, swore at them, locked them up
    in dark cells, and, by threatening to hang them at their own doors,
    soon overcame their resistance. Of all the plagues of that time
    none made a deeper or a more lasting impression on the minds of the
    Protestants of Dublin than the plague of brass money. To the
    recollection of the confusion and misery which had been produced by
    James' coin must be in part ascribed the strenuous opposition
    which, thirty-five years later, large classes firmly attached to
    the House of Hanover, offered to the government of George the First
    in the affair of Woods' Patent.[4]

      [4] Macaulay, _History of England_, I, chap. XII. "The Affair of
      Woods' Patent" is celebrated in Swift's Drapier letters.

But paper money offers far more extensive facilities to knavery than a
metallic currency. In his _Essays on the Monetary History of the United
States_,[5] Mr. Charles J. Bullock has described in sufficient detail
the "carnival of fraud and corruption" which attended the paper money
coined or rather printed by most of the American colonies in the
century preceding the American Revolution. Thus, about the middle of
the eighteenth century, the paper money of Massachusetts fell to an
eighth of its original value. People were driven to barter, and one
writer observed that "the morals of the people depreciate with the
currency." Parties were divided into debtors and creditors, and a New
England writer in 1749 noted: "The Debtor side has had the ascendant
ever since anno 1741 to the almost utter ruin of the country."[6] To
this writer belongs the credit of discerning, at a time when even
Benjamin Franklin was in error, that "the repeated large emissions of
Paper Money" were responsible for its depreciation.

      [5] Macmillan, 1900.

      [6] Douglass.

"Not worth a Continental" is an expression which brings us to the next
chapter in American experience of inconvertible paper currencies. The
so-called Continental money was the means by which the Continental
Congress and the individual colonies--too timid to tax--endeavored to
finance the Revolutionary War. By 1781, a paper dollar was worth less
than two cents in specie, and soon afterward it became practically
worthless.[7] Robbery was legalized; rogues flourished; and their
frauds were encouraged and protected by a government whose policy
enabled debtors to pay their debts in valueless money. We hear of
creditors running away from their debtors and being paid off "without
mercy." Stories were told of creditors in Rhode Island leaping out of
back windows to escape the attentions of their debtors.[8] In short,
the law became an engine of oppression and destroyed the fortunes of
thousands who had put their confidence in it. In the words of Breck, a
friendly critic, "... the old debts were paid when the paper money was
more than seventy to one ... widows, orphans and others were paid for
money lent in specie with depreciated paper."

      [7] Bullock, _Monetary History of the United States_, chap. V.

      [8] _Ibid._, chap. V. In 1780 Congress actually adopted a plan to
      redeem its paper issues at one fortieth of their pretended or
      nominal value.

The astonishing thing is that all this knavery was devised, or winked
at, not only by low class politicians but by statesmen of renown. The
maxim _salus populi suprema lex_ was relied upon not for the first
or last time as a sufficient excuse for a crime far more pernicious
than that of a private forger. But we have not yet realized, in our
minds or in our penal codes, that public vices ought to be punished at
least as vigorously as private crimes.

That, even as a desperate last resort for financing war, a flood of paper
money defeats its own object was conclusively proved a few years later
during the French Revolution. The French assignats "have taken their
place in history as the classical example of paper money made worthless
by over-issue. After their final collapse in 1796, French finance
reverted perforce to a metallic basis." So Mr. Hawtrey, a British
Treasury official, who has given us recently a lucid and sufficiently
detailed account of this extraordinary incident--extraordinary but no
longer singular, for the same course with the same results has been
pursued during and since the war of 1914-1918 by Russia and Poland, and
in a greater or less degree by most of the European belligerents.

The issue of French assignats began in 1789 because the assembly would
not vote adequate taxation, and Necker, the minister of finance, was
unable to borrow enough to cover the deficit. In the two years from
1789 to 1791, the public revenue was 470 millions, and the public
expenditures, 1719 millions, of livres. The deficit was covered by
assignats, or paper livres, bearing interest, in denominations varying
from 1000 to 5 livres. Thus the assignats may be regarded as a floating
debt currency. In November, 1791, the assignats were worth 52 per cent
of their face value. In June, 1792, after the declaration of war on
Austria, they rose to 57. After the victory of Valmy, in September,
they rose to 72 and remained there till December. In January, 1793, the
king was guillotined, and war was declared on England. By August, after
violent fluctuations, the assignat had fallen to 15 per cent of its
face value. Thereafter the laws enforcing the acceptance of assignats
were strengthened.

    It became an offence to sell coin, or to differentiate between coin
    and assignats in any transaction, or to refuse payment in
    assignats, or to negotiate assignats at a discount. By a decree of
    the 5th of September the death penalty itself was imposed. Here was
    a forced currency indeed.[9]

      [9] R. G. Hawtrey, _Currency and Credit_. Longmans Green & Co.,
      London, 1919.

For a few months an artificial improvement was effected in the value of
the assignat by these ferocious measures; but in 1795, after the
Terror, the system and the paper money collapsed. The gold and silver
money, which had been hoarded, returned to circulation. In June, 1795,
the quotation of the assignat oscillated violently. On one day a louis
of 24 livres would buy 450 paper livres, on another, 1000.[10] Paper
notes which fluctuated so violently were useless as money. They could
not serve either as a medium of exchange or as a measure of value.
Country people expressed their contempt for the assignats by calling
them _l'argent de Paris_.

A new currency of _mandats_ was tried, into which assignats were made
convertible. It was a complete failure. The _assignats_ were wound up
in 1796, and in February, 1797, there was "a general demonetisation of
paper money."[11] The holders got practically nothing. France returned
to hard cash, as Mexico has done recently. In 1918, when Mr. Hawtrey
wrote, he was able to describe the decline and full of the assignats as
an 'almost unique' instance of "the currency of a great nation fading
away into nothing." The Russian paper rouble has performed the same
feat since 1918. So has the Polish mark. And now (December, 1921) the
German paper mark is also fading into nothingness.[12] In Austria and
in most of the new states of Europe, the inconvertible paper legal
tender currency has lost almost the whole of its value, in comparison
with the pre-war coin which it pretends to represent.

      [10] Hawtrey, _op. cit._, chap. XV.

      [11] A _turn_ which even a Polish Chancellor of the Exchequer
      might envy.

      [12] In the second week of November the mark fell to 1300 to the
      paper pound, recovering a day or two later (Wednesday, November
      9) to 980.

The real difference between the present monetary conditions and the
American _continentals_, or the French assignats, is a difference not
of kind, but of degree and extent. The causes and the consequences, the
motives of those who work the mint, the ruin and demoralization of the
victims, the effects upon public and private debts and credit are the
same. But a whole continent populated by four hundred millions of
people is concerned. The commercial and moral fabric of European
civilization is tottering. Three years have passed since the war ended;
but the currencies and exchanges of Europe are in a much worse
condition than when peace was being negotiated.

At the end of June, 1921, I walked from my office in the Strand down to
Messrs. Hands & Co., who deal in foreign money at Charing Cross. On the
way I passed the shop of a tailor, who had placarded on his shop window
the announcement that he would give a hundred thousand roubles to every
customer who bought a suit of clothes from him. He added that at the
pre-war rate of exchange the one hundred thousand roubles would be
worth ten thousand pounds. He did not add that they were at that time
worth only two shillings.[13] On arriving at my destination, I asked to
see specimens of the most debased currencies and eventually laid out
ten shillings,[14] or, to be exact, 9_s_/10_d_. Here is the bill:

    Ten German marks                     cost me one shilling
    A hundred Austrian crowns            cost me one and sixpence
    A hundred Polish marks               cost me sixpence
    Twenty-five Russian (_Czar_)[15]
      roubles (1909)                     cost me sixpence
    Two Italian lire                     cost me eightpence
    Two Greek drachmas                   cost me eightpence
    Two Roumanian lei                    cost me sixpence
    Five Yugoslav dinars[16]             cost me one shilling
    Ten Czechoslovakian crowns           cost me one shilling
    Five Bulgarian levas                 cost me sixpence
    Five Finnish marks                   cost me one shilling
    Five Esthonian marks                 cost me one shilling
    Five Latvian roubles                 cost me sixpence

      [13] A month or two later they were not worth a shilling. The
      Russian Soviet Government was offering two hundred thousand
      roubles for one pre-war silver rouble!

      [14] Two dollars.

      [15] Twenty-five Soviet roubles would have been dear at a
      farthing.

      [16] On this note is stamped 20 _Kruna_ to indicate that five
      dinars exchanged for twenty Austrian crowns.

To show that my friend, the exchange dealer, made a decent profit out
of this retail transaction, I quote some of his selling rates for the
day on which he based his charges:

                               _Rates of
                                Exchange_         _June 29, 1921_
    Austrian paper crowns      2400-2600              for £1
    Finnish marks               220-240               for £1
    German marks                265-275               for £1
    Polish marks               6000 (selling rate)    for £1
    Greek drachmas               62-65                for £1
    Italian lire                 76-77                for £1
    Roumanian lei               230-250               for £1

The last I heard from Vienna was that they had been varying from ten
thousand to fifteen thousand to the paper pound!

The difference in the rates depended, of course, upon whether the
customer was buying or selling the foreign money. If he was buying
Austrian notes, he would get twenty-four hundred paper crowns for a
pound. If he was selling them, he would receive a pound in exchange for
twenty-six hundred paper crowns.

All these paper notes are called after, and profess to represent,
silver coins, which were themselves before the war, tokens, and passed
current at more than their intrinsic value because of their relation to
gold.

Thus the pre-war parity of marks was about twenty to the gold pound; of
Austrian crowns, about twenty-four; of francs, lire, etc., about
twenty-five. On the day of my purchase, therefore, the exchange value
of the German mark was less than one thirteenth, of the Austrian crown
less than one one hundredth, and of the Polish mark, one two hundredth,
of its pre-war status. But this underestimates the depreciation; for
the British pound is no longer a gold sovereign, and even gold has been
depreciated.[17] The paper pound in June, 1921, was, I think, about the
equivalent of twelve pre-war shillings in purchasing power. The gold
dollar, which would only buy a little more than four shillings before
the war, would buy five at the beginning of December, 1921.

      [17] To-day, November 30, 1921, the paper pound is worth about
      four fifths of a gold pound. The purchasing power of gold--say,
      the gold dollar--is perhaps about two thirds of what it was
      before the war.

Although an inconvertible paper currency has no intrinsic value, it can
(in accordance with the quantity theory of money) be maintained at a
fairly stable ratio to gold or commodities by an honest government if
the total issue is fixed, or kept between reasonable maximum and
minimum limits. The rise of prices since the war, in each country where
reliable statistics are available, has been in proportion to the
expansion of the paper currency, allowance being made for the scarcity
of commodities. Of course a decline in purchasing power _follows_
an expansion of circulation. The stability of the British paper pound
since a limit was imposed illustrates the correctness of the quantity
theory of money. Its increase in purchasing power (like that of the
gold dollar) during the first half of 1921 is, of course, due to the
fact that the supply of utilities had overtaken the demand.

At first sight it seems difficult to understand how any government,
however bad, can _deliberately_ issue flood upon flood of inconvertible
paper money, seeing that its printing operations are ruinous to both
public and private credit. To obtain the same amount of revenue, each
new issue, each new dose, has to be much larger than the preceding. In
the course of twelve months, for example, the exchange value of the
Polish mark was divided by ten, that is, at the end of the period, ten
times as much paper money had to be printed as at the beginning, to get
the same revenue. Yet the Polish Government continued upon its course
with the approval and support of the Polish Diet.

The following quotation is from the Warsaw correspondent of the
_London Economist_, who wrote on July 28, 1921:

    The effects of the last collapse of the exchanges are beginning to
    make themselves felt, and the Diet is already preparing fresh
    ground for new currency inflation. By its last vote the limit on
    the note circulation has been increased to 118 milliards, and on
    the advances of the Polish National Bank to the Government to 150
    milliards.

    The depreciation of the Polish mark in June was followed by a rise
    of prices, and this led immediately to a strike movement in almost
    all industries. In the Lodz district 40,000 workmen have gone on
    strike, demanding a wage increase of 120 per cent! The
    manufacturers declare that they cannot raise wages by more than 20
    per cent; that even under present conditions the Polish textile
    industry is in a most difficult position on the foreign markets,
    especially in Roumania, the Baltic States, etc. Posnania was
    menaced by an agrarian strike, but a settlement has been reached.
    The strike of the municipal workers in Warsaw was short-lived.
    Everywhere, however, wages have been increased by more than 50 per
    cent. This naturally will entail a new wave of rising prices, the
    Government will be obliged to double the salaries of its officials,
    and the printing press will work again under a higher pressure.
    This is the vicious circle round which the country has been
    travelling for three years.

_Ex uno disce omnes._ The monetary policy of the Polish Government is
merely a flagrant example of the recent monetary history of all the
states of Europe northeast, southeast, east, of the Rhine and of the
Alps. There is only one real remedy, the reëstablishment of complete
peace, disarmament, the abolition of conscription, the drastic
reduction of bloated bureaucracies, and a wholesale lowering of
tariffs, which will allow the miserable and half-starved populations to
renew the arts of peace and the exchange of their agricultural products
and manufactures.




APPENDIX

THE BRUSSELS CONFERENCE[18]


If all countries were included, a general and proportionate reduction
of the military and naval establishments to one half of their present
cost would set free a fund of probably at least $3,000,000,000 to
$4,000,000,000 annually for the purchase of food and useful
commodities, for the stabilization and partial restoration of debased
paper currencies, for the payment of debt, the removal of public
deficits, the revival of credit, and the reduction of taxes. Thus the
road to recovery lies plain before us. Will it be taken by the
statesmen to whose hands the peoples have intrusted their lives and
fortunes?

      [18] Taken by permission from an article by the author in the
      _Saturday Evening Post_ of November 12, 1921.


DEFICITS THE RULE

In order to show that this view is in conformity with the conclusions
of experts, and even of officials delegated for the purpose of
examining world finance by the governments themselves, I turn to the
conclusions unanimously arrived at by the Brussels conference a year
ago, after eighty-six financial experts from thirty-nine countries had
presented the accounts and balance sheets of their respective
governments. In a general review of the situation they point out that
"the total external debt of the European belligerents, converted into
dollars at par, amounts to about 155 milliard dollars, compared with
about 17 milliard dollars in 1913." They say that the government
expenditures of the European belligerents amount to between 20 and 40
per cent of the total incomes of the peoples. They say emphatically
that the restoration of real peace, with disarmament, is "the first
condition for the world's recovery."

Four commissions were appointed. The first dealt with public finance,
and its resolutions were adopted unanimously by the conference. The
following extract from its resolutions deserves attention:

    Thirty-nine nations have in turn placed before the International
    Financial Conference a statement of their financial position. The
    examination of these statements brings out the extreme gravity of
    the general situation of public finance throughout the world, and
    particularly in Europe. Their import may be summed up in the
    statement that three out of every four of the countries represented
    at this conference and eleven out of twelve of the European
    countries anticipate a budget deficit in the present year. Public
    opinion is largely responsible for this situation. The close
    connection between these budget deficits and the cost of living,
    which is causing such suffering and unrest throughout the world, is
    far from being grasped. Nearly every government is being pressed to
    incur fresh expenditure; largely on palliatives which aggravate the
    very evils against which they are directed. The first step is to
    bring public opinion in every country to realize the essential
    facts of the situation and particularly the need for reëstablishing
    public finances on a sound basis as a preliminary to the execution
    of those social reforms which the world demands.

    Public attention should be especially drawn to the fact that the
    reduction of prices and the restoration of prosperity is dependent
    on the increase of production, and that the continual excess of
    government expenditure over revenue represented by budget deficits
    is one of the most serious obstacles to such increase of
    production, as it must sooner or later involve the following
    consequences:

    (_a_) A further inflation of credit and currency.

    (_b_) A further depreciation in the purchasing power of the
    domestic currency, and a still greater instability of the foreign
    exchanges.

    (_c_) A further rise in prices and in the cost of living.

    The country which accepts the policy of budget deficits is treading
    the slippery path which leads to general ruin; to escape from that
    path no sacrifice is too great. It is therefore imperative that
    every government should, as the first social and financial reform,
    on which all others depend:

    (_a_) Restrict its ordinary recurrent expenditure, including the
    service of the debt, to such an amount as can be covered by its
    ordinary revenue.

    (_b_) Rigidly reduce all expenditure on armaments in so far as such
    reduction is compatible with the preservation of national security.

    (_c_) Abandon all unproductive extraordinary expenditure.

    (_d_) Restrict even productive extraordinary expenditure to the
    lowest possible amount.

    The Supreme Council of the Allied Powers in its pronouncement on
    the eighth of March declared that "armies should everywhere be
    reduced to a peace footing; that armaments should be limited to the
    lowest possible figure compatible with national security and that
    the League of Nations should be invited to consider, as soon as
    possible, proposals to this end."

    The statements presented to the conference show that, on an
    average, some 20 per cent of the national expenditure is still
    being devoted to the maintenance of armaments and the preparations
    for war. The conference desires to affirm with the utmost emphasis
    that the world cannot afford this expenditure. Only by a frank
    policy of mutual coöperation can the nations hope to regain their
    old prosperity, and in order to secure that result, the whole
    resources of each country must be devoted to strictly productive
    purposes.

    The conference accordingly recommends most earnestly to the Council
    of the League of Nations the desirability of conferring at once
    with the several governments concerned, with a view to securing a
    general and agreed reduction of the crushing burdens which on their
    existing scale armaments still impose on the impoverished peoples
    of the world, sapping their resource and imperiling their recovery
    from the ravages of war. The conference hopes that the Assembly of
    the League, which is about to meet, will take energetic action to
    this end.

The above recommendations were ignored by the League of Nations and by
practically all the governments concerned. Consequently the debts and
deficits of most European countries are larger at the present time than
they were a year ago, and most of the paper currencies have
depreciated--some very heavily--during the last twelve months.


THE DANGERS OF INFLATION

I turn next to the resolutions proposed by the second commission which
had to examine problems of currency and foreign exchange.

From its resolutions, which also were adopted unanimously by the
conference, I extract the following:

    The currencies of all belligerent and of many other countries,
    though in greatly varying degrees, have since the beginning of the
    war been expanded artificially, regardless of the usual restraints
    upon such expansion--to which we refer later--and without any
    corresponding increase in the real wealth upon which their
    purchasing power was based; indeed in most cases in spite of a
    serious reduction in such wealth.

    It should be clearly understood that this artificial and
    unrestrained expansion, or inflation, as it is called, of the
    currency or of the titles to immediate purchasing power does not
    and cannot add to the total real purchasing power in existence, so
    that its effect must be to reduce the purchasing power of each unit
    of the currency. It is in fact a form of debasing the currency.

    The effect of it has been to intensify, in terms of the inflated
    currencies, the general rise in prices, so that a greater amount of
    such currency is needed to procure the accustomed supply of goods
    and services. Where this additional currency was procured by
    further inflation--that is, by printing more paper money or
    creating fresh credit--there arose what has been called a vicious
    spiral of constantly rising prices and wages and constantly
    increasing inflation, with the resulting disorganization of all
    business, dislocation of the exchanges, a progressive increase in
    the cost of living, and consequent labor unrest.

    It is of the utmost importance that the growth of inflation should
    be stopped; and this, although no doubt very difficult to do
    immediately in some countries, could quickly be accomplished by
    abstaining from increasing the currency--in its broadest sense, as
    defined above--and by increasing the real wealth upon which such
    currency is based.

    The cessation of increase in the currency should not be achieved
    merely by restricting the issue of legal tender. Such a step, if
    unaccompanied by other measures, would be apt to aggravate the
    situation by causing a monetary crisis. It is necessary to attack
    the causes which lead to the necessity for the additional currency.

    The chief cause in most countries is that the governments, finding
    themselves unable to meet their expenditures out of revenue, have
    been tempted to resort to the artificial creation of fresh
    purchasing power, either by the direct issue of additional
    legal-tender money or more frequently by obtaining--especially from
    the banks of issue, which in some cases are unable and in others
    unwilling to refuse them--credits which must themselves be
    satisfied in legal-tender money. We say, therefore, that
    governments must limit their expenditure to their revenue.

Here again we have excellent doctrines and good practical advice from
these financial experts to the governments which appointed them. But
the doctrines have remained unapplied, and the advice has been honored
in the breach instead of in the observance.


WISE COUNSEL IGNORED

I pass next to the resolutions proposed by the commission on
international trade and adopted unanimously by the conference, from
which the first two paragraphs will be quoted:

    The International Financial Conference affirms that the first
    condition for the resumption of international trade is the
    restoration of real peace, the conclusion of the wars which are
    still being waged and the assured maintenance of peace for the
    future. The continuance of the atmosphere of war and of
    preparations for war is fatal to the development of that mutual
    trust which is essential to the resumption of normal trading
    relations. The security of internal conditions is scarcely less
    important, as foreign trade cannot prosper in a country whose
    internal conditions do not inspire confidence. The conference
    trusts that the League of Nations will lose no opportunity to
    secure the full restoration and continued maintenance of peace.

    The International Financial Conference affirms that the improvement
    of the financial position largely depends on the general
    restoration as soon as possible of good will between the various
    nations; and in particular it indorses the declaration of the
    Supreme Council of the eighth March last "that the States which
    have been created or enlarged as a result of the war should at once
    reëstablish full and friendly coöperation and arrange for the
    unrestricted interchange of commodities in order that the essential
    unity of European economic life may not be impaired by the erection
    of artificial economic barriers."

Here again there is a full recognition of the fact that peace is
necessary to the renewal of prosperity, and that the atmosphere of war
preparations is fatal to the growth of trade. But neither the League of
Nations nor the Supreme Council, so far as I am aware, has made any
effective response to these appeals.

Fourthly and lastly, I come to the commission on international credits.
This commission passed a number of resolutions, all of which were
adopted unanimously by the conference; but it will suffice to cite the
first two:

    The conference recognizes in the first place that the difficulties
    which at present lie in the way of international credit operations
    arise almost exclusively out of the disturbance caused by the war,
    and that the normal working of financial markets cannot be
    completely reëstablished unless peaceful relations are restored
    between all peoples and the outstanding financial questions
    resulting from the war are made the subject of a definite
    settlement which is put into execution.

    The conference is, moreover, of opinion that the revival of credit
    requires as primary conditions the restoration of order in public
    finance, the cessation of inflation, the purging of currencies, and
    the freedom of commercial transactions. The resolutions of the
    commission on international credits are therefore based on the
    resolutions of the other commissions.

My argument then is fully endorsed by the experts at Brussels. All the
facts and figures set forth in the voluminous records of that
remarkable conference indicate the urgency of peace and disarmament. A
year has passed.

The Brussels recommendations have been ignored, and conditions in
Europe as regards its currencies, debts, trade and credit have
deteriorated. The Naval limitations proposed by Mr. Hughes at
Washington, even if they are ratified, will give practically no relief
to Europe.





End of Project Gutenberg's The Paper Moneys of Europe, by Francis W. Hirst