of present issues. Of course, local notes taken from vaults to make up balances would not really require replacement to the full extent. Notes withdrawn from circulation would require to be replaced, other things being equal. The problem is to what extent could we increase the fiduciary issue of the Central Bank so as to provide for this replacement with a margin sufficient to give the necessary elasticity. We have to remember that there would be £30,000,000 against the re-valued gold, which would be entirely free. There is also the velocity in the movement. This is one of the problems that a Committee with full data before them would have to determine. But with £150,000,000 of gold, the fiduciary issue would probably not be greater than would provide us with an Imperial Note with quite a good proportion of gold at the back of it.

66

b. Gold, with commodity Bills of Exchange.-Those of us, and especially we of the Midland Bank, who were privileged to listen to the late Sir Edward Holden as he talked of the superiority of commodity bills of exchange and advocated their use as a currency basis, cannot I think fail to have been impressed by his arguments. One also notices the increasing popularity of the bill of exchange as a basis for currency. The Federal Reserve Bank was the first to adopt it, anyhow on a large scale, but in America they are not able to produce so good an instrument as the British Empire can produce. There bills are eligible for discount, as a currency basis, not only when based on imports or exports of goods, but when "issued or drawn for agricultural, industrial, or commercial purposes, or the pro"ceeds of which have been used, or are to be used, for such purposes." Further, they can be drawn against bonds and notes of the Government of the United States. War paper," as it is called, has represented a large proportion of the bills discounted by the Federal Reserve Banks. South Africa has copied very largely the Federal Reserve system, and its new Reserve bank is to allow bills of exchange as a currency basis, nor are they to be confined to commodity bills. In passing, we may remark that in the absence of a common basis for the currency, there is still no connecting link provided between South Africa and the rest of the Empire. Without that link the exchanges between South Africa and the Empire will continue to fluctuate according to the movement in exports and imports. I believe Australia is also considering bills of exchange as a currency basis.

66

66

Now the British Empire, because for one thing it is so widespread and separated by many seas, entailing much shipping in the movement of its many and varied commodities, and also because of London's long experience in the handling of this business, ought to be able to produce a bill of exchange better suited for a

currency basis than can any country in the world. I am aware there may be difficulties in regard to the terms of certain credits, which may require to be altered. But the Empire has the facilities and London has the adaptability which should enable us to produce a bill drawn against an actual shipment of goods and to prevent more than one bill or set of bills being drawn against the same shipment. Bills of exchange eligible for discount as a currency basis at the Empire Bank could only be accepted by a customer bank or accepting house on whom the responsibility would rest for seeing that the conditions were complied with. But once this bill is accepted and marked and in the hands of another customer bank or discount institution, they should be able to rely on getting credit for it from the Empire Bank just as in the case of gold. The bills should be confined to a shipment of goods inter-Empire or to or from the Empire and a foreign country, and should have not more than three months to run. It would also be desirable to make them payable in London. There would be many bills which would not be eligible as a currency basis and a market would exist for these, though doubtless at a higher rate than for currency paper. These commodity bills of exchange on being discounted with the Empire Bank would be transferred from the Banking Department to the Issue Department and a corresponding amount of notes created, which would be transferred to the reserve of the Banking Department. While, therefore, bankers' balances would be increased by the proceeds of the bills of exchange, the reserve would also be increased by a corresponding amount, the ratio of the reserve to liabilities would be raised, and the Bank's position strengthened. But it is the shortest bills that would be discounted first and none of them would have more than three months to run. As the bills matured the reverse process would take place and there would be no prolonged period of expansion.

The position in regard to this second suggestion for a currency basis would be that on the one hand we would have the reduction in the fiduciary portion of the local note issues through payments in to the Empire Bank to make up balances; on the other, an addition to the issue of Imperial notes through a re-valuation of the Bank of England's gold, while back of that again we would have a further increase against bills of exchange as and when required. This leads us on to distinguish between bills of exchange as a basis for currency and as an instrument for obtaining credit from the Empire Bank, and so to consider the third function of the bank as a Bank of Discount.

3. A Bank of Discount.

The centre round which the multitudinous transactions of the London money market revolve is the Bank of England, because

it is the ultimate source of credit. The Empire Bank would occupy this supreme position for the Empire. Some care would, therefore, be necessary in defining the instruments against which credit is to be granted. Commodity bills of exchange of the character just described could not be open to question, for there can be no finer security. If they are also to be a basis for the currency they would be regarded as "good as gold." We are dealing now, however, with the granting of credit and not with the currency, and if credit by the Central Institution was confined to bills such as we have had under consideration, there would be a lack of elasticity which might unduly hamper both trade and finance. So far as London is concerned, there seems no good reason why the system of selection of bills of exchange in practice at the Bank of England should not continue. These bills would be divided into two classes-one the bills (of the character already described) eligible as a currency basis; the other, the remainder of the bills of the class usually taken by the Bank of England. I am not going to be drawn into a closer definition than that. The one provides both credit and currency; the other only credit. The one, the Bank should undertake to discount; the other, the Bank may discount-just as at present. The one would probably command a lower rate than the other because it has not only a credit, but also a currency basis, value. Further, as goods must be moved and would in most cases be actually sold, before the bills in the first class are created, there would be a direct incentive to move and sell goods. The importance of doing so would be obvious and would be reflected in all likelihood in the comparatively low rate of discount which bills eligible as a currency basis would be able to command.

All parts of the Empire would be engaged in the creation of commodity bills of exchange of the first class to a greater or lesser degree. There would be also a common market for these bills in London equally open to the Empire. But with regard to bills of the second class local conditions in the different countries of the Empire would also have to be considered. This would form another of the questions for an Imperial Conference.

If it could be done, one would like to exclude Government securities, except possibly Treasury Bills within limits. The admission of bills or notes drawn against Government securities is probably the principal reason why the Federal Reserve System has failed to control fully the credit situation in the United States. An exception should, however, be made, although for some time to come there would probably be no necessity for it. Provision having been made for a reasonable elasticity in currency and credit, there should also be provision for drawing off currency in the event of the local issues, reduced although they would be, still proving

с

to be in excess. This could be tested by giving the banks the option to tender local currencies to the Empire Bank to be funded into long-dated loan certificates to be issued by a body representing the Empire. These loan certificates would bear a low rate of interest-perhaps 3 per cent.-but would be free of all taxes in any part of the Empire. The Empire Bank would also be prepared to advance upon them although probably at a higher rate than for discounting eligible bills. They would thus stand in the forefront of investments in the Empire. To the extent that local currency notes were funded, the maximum line of existing issues would be reduced.

The rate of interest.

Nothing has been said so far about the raising of the rate of interest as a check to an excess of imports. One cannot well dogmatise on this point. If necessary, banks would no doubt raise their rate locally so as to aid them in reducing loans. It may also be necessary for the Empire Bank to discriminate in the rate for local discounts. But it would be a pity if the Empire Bank had to differentiate in regard to its rate for discounting eligible bills as a currency basis as between one part of the Empire and another. In fact, this would be difficult to do, nor, so far as I can see, would it be necessary. With regard to a movement in the Bank rate generally, again I am not prepared to dogmatise, but would hazard the opinion that the movements would be less frequent than in pre-war days. There would also be the compensatory influence of the free and unfettered movement of capital, whether for short or long employment, from one part of the Empire to another, from where there may be a plethora to where there may be a scarcity, with London as the centre. This is one of the features of the scheme.

The Ratio between Gold and Notes.

An important point remains to be mentioned. It is the ratio between gold and uncovered notes in the one case and gold and notes against commodity bills of exchange in the other. Great economies in the use of gold are effected through gold being no longer in circulation; there would be further economies through gold being no longer necessary to balance trade within the Empire, which function would be performed by the Empire clearing house. Thus our gold would be available to some considerable extent to correct the foreign exchanges. If used freely for this purpose we would get within measurable distance of an effective gold basis on the new parity between gold and paper. But here again the

American debt blocks the way. It is therefore questionable whether we should tie our currency and credit movement too closely to the gold movement by a ratio, anyhow, for some time to come. This American debt repayment and payment of interest on the debt are not normal operations, and part of our gold holding might be required for these purposes at a time when it would be most undesirable to upset trade and curtail production through an undue restriction of currency and credit. It is, I think, not a question of what is theoretically the best, but what is best in view of the actual and abnormal conditions under which we find ourselves through this burden of foreign debt.

How to pay the American debt.

Exactly three months have elapsed since the Chambers of Commerce Congress at Toronto had this subject before them. During that time one has had many discussions, and the subject has been much in one's mind, and the impression grows on one that we are a very long way from what was the ultimate goal of the Toronto address the old gold parity. The payment of the Debt to the American Government is having formidable proportions and according to the annual report of the Secretary of the United States Treasury the time is approaching when we will be asked to arrange for payment. Bankers of all people must face boldly an adverse situation. Yet light breaks through the clouds. Standing alone, as from the economic standpoint Britain does at this moment, we may experience the greatest difficulty in paying America. But in an economic partnership with the Empire the ability to pay assumes quite a different aspect. This debt can be liquidated by the Empire increasing production and supplying more of its own wants, and by buying less from and selling more to the United States. Great Britain's exports to the United States mainly consist of manufactured articles which tariffs help to block, whereas there are many raw materials produced in the Empire which the United States are eager to receive. In order to bring about this partnership, so beneficial for the Empire, it appears to be necessary that we should recognise a fresh base of values, as expressed by the relationship between gold and sterling. Our sterling paper currency is at a discount of some 29 per cent. compared with gold. When we consider our debt, foreign and domestic, and the weight of taxation, this is by no means surprising. We can in time improve the situation somewhat, but it may be many a long day before we can get back to our former position. Meanwhile, are we to wait for the probably unattainable amidst all the uncertainties of values and exchanges that surround us, or are we to aim at stability within the Empire on a lower level?