Economics and The Public Welfare

Chapter 22

Great Britain, 1925-1927

Britain’s Unemployment Remains High. The United States had enjoyed, as we have seen, a full industrial recovery between 1921 and 1923. Britain followed, but did not reach full recovery. There remained a heavy body of unemployment. There remained a heavy payment of doles to the unemployed as a burden on the British taxpayer. Britain demonstrated what the present writer believes to be a universal economic law, namely, that any country can have heavy unemployment if it is willing and able to pay for it.

Wages and Prices—United States and Britain. In the discussion of the American price and wage readjustment in 1920-1921, we have seen that neither in the United States or Great Britain did wages drop nearly so much as wholesale prices dropped in the postwar readjustment. In the United States this was due to a supply-and-demand situation. We had an almost absolute cessation of immigration from Europe during the war, and we had by law restricted immigration in the years following the war. We had altered in a manner favorable to labor the relationship between labor on the one hand, and capital and natural resources on the other. Our high postwar wages were a normal and natural result of this supply-and-demand situation.

England, on the contrary, had had no such favorable change in her labor situation. When her wages failed to resume their prewar relationship to prices, it was due primarily to the strength of the trade unions, which forcibly held union wages above the level which supply and demand would have dictated, with the result that there was heavy chronic unemployment.

Britain’s Return to Gold Standard at Par. Britain had straightened out her public finance and had balanced her budget. She had even made a reduction in public debt, and had resumed a great deal of her industrial activity. The pound, which had dropped from the par of $4.8668 to a low of $3.18 in February of 1920, had made a strong recovery and stood in late 1924 and early 1925 at approximately 10% below the gold parity. The British had been hesitant about restoring the pound to par and resuming gold payments. This, as we have seen, made an abnormal situation in which, under Gresham’s Law, we were receiving a very excessive amount of gold, much of which ought to have stayed in London.

The British had tried in 1924 to prevent the new German Reichsbank from going immediately on the gold standard. But informal pressure from the United States, in connection with American participation in the Dawes Plan loan, had forced Germany to go on a fixed gold basis at once. The British thereupon felt that their hand was forced, and both from pride and from business necessity they brought the pound back to par in April of 1925.

Involved a Ten Per Cent Readjustment—Easy for a Flexible Economy. There has been a great deal of discussion since this time as to the wisdom of this move. There is a considerable body of opinion to the effect that the British put the pound too high, and that they would have done much better to stabilize at 90% of the old par, rather than coming all the way back.

Had Britain had anything like her normal flexibility she could have taken this 10% easily in her stride. A readjustment of prices and costs of 10% is not difficult and does not take long if a country is flexible.

We saw in the United States, between the summer of 1925 and the summer of 1927, a decline of 10% in the general average of commodity prices, accompanied by good business, good profits, and the normal rate of growth of industry, with no complaint from anybody except Professor Cassel of Sweden, who thought that commodity price levels ought never to change.1 The adjustment ought not to have been too difficult for England.

But England Had Lost Flexibility—Union Labor. But England had lost her economic flexibility to a startling degree. This loss of flexibility was not due solely to labor. Organized union labor was indeed inflexible. The British financial community in the autumn of 1925 was either fatalistic or sentimental about the question of reduction in money wages. The head of one great British bank said that one should regard it as axiomatic that there could be no reduction in money wages in England. The head of another great British bank, speaking with reference to the same point, said, “But, the poor beggars, they get so little! ”

Rigidity in Industry—Price Fixing Combines. But the development of rigidity seemed to be a British, rather than an exclusively British labor, characteristic. England in 1925 was shot through with price-fixing combines in her industries. The extent of this was emphasized by a statistical expert in one of the great British banks, and confirmation was readily at hand from many others. Sir Josiah Stamp, for example, told of one combine of four establishment which involved price fixing and quota agreements. Three of these establishments were well located and strong, and could have cut prices, increasing their volume and increasing their profits. The fourth was ill located and had inadequate equipment. It would have been ruined if the others had cut their prices. The prices were fixed at a point which enabled the weakest of the four to live. Under British law such an agreement was not illegal. It was, however, voidable, that is to say, it could not be enforced in the courts. England had no Sherman Law. Sir Josiah, when asked why some of the other plants did not end the absurdity, said simply that it was not done. If the agreement were a legally enforceable agreement, some of the stronger ones would force the pace, break the agreement, cut the price, and let the injured weaker mill sue for damages. But since the agreement could not be legally enforced, it became a gentleman’s agreement and of course could not be broken. It was a chivalrous attitude on the part of the stronger British concerns, but one very hard on the economic life of the country. England desperately needed a well-enforced Sherman Law.

Clinging to Old Methods and Obsolete Plant and Equipment. There was, moreover, a sentimental clinging to inadequate methods and to physical plant and equipment which had long since outlived their usefulness. Mr. Charles M. Schwab, the American steelmaster, at about the same time made a survey of the British steel industry with a view to seeing whether a moderate capital investment and a certain degree of renovation might not turn it from an industry losing money to a profitable one. He concluded, however, that it would be better to scrap a great part of the existing plant and equipment and to build afresh, than to try to renovate what was there.

An American banking house had two interesting experiences which were not unique. One involved a German ironmaster, a customer of this American banking institution, who wished to see the actual operation of a British steel mill which also had banking relations with the American institution, and asked to be introduced to the British firm for this purpose. The American banking institution, carefully explaining to its British customer that the German was a competitor and that they well might not wish to show him what he wished to see, made the introduction. The British concern was more than glad to show the German everything. The German ironmaster was aghast at what he saw. With practically the same plant and equipment that the British mill had, he was getting three operations a day, while the British mill was getting only two operations a day. He told the British concern about it, and expressed his willingness to have them send a man over to see his own operations in Germany so that they might see how he got the three operations a day. The management of the British mill thanked him with great courtesy but were not interested. Their way was to get two operations a day. They would adhere to their accustomed procedure.

The second episode took place when British friends asked the American banking institution to interest itself in a British factory of good reputation and fine product, whose financial figures, however, were exceedingly unsatisfactory. It had been unable to pay its preferred dividend for some time. The owners wished, however, additional capital. The American banking institution studied the picture and did not like it. It “declined the opportunity.” It was urged to continue its investigation and then went into the matter more fundamentally. It discovered a very large directorate, the members of which included boys of eighteen in college who were receiving £500 a year each—“guinea pigs,” the British called them. By reducing the directorate and reducing directors’ fees it would be possible to pay the preferred dividend, and it would then be possible to consider the permanent financing which had been requested. The American banking institution naively suggested that this be done. The negotiations abruptly ceased. The business institution was a family affair, and the family was to be taken care of whether the banks were willing to lend money or not.

Appalling Loss of Ablest Leaders Through Volunteer System in World War I. The period of the 1920’s was a period in which British financial and industrial leadership had suffered a great deal. One able American observer, long resident in London, offered an interesting and probably highly significant explanation. He was concerned partly with the change in the financial district, “the City of London.” But his explanation, he said, applied to the industries as well. England, in the first two and a half years of the war, had the terrible volunteer system under which her best and finest rushed first to the battlefield. And this included very many of the younger men and even men no longer young who would normally become, in a short time, the leaders in industry and finance. The result, he said, was that in the City of London in the middle 20’s you would find a few fine old veterans who remembered the ancient wisdom of London, and you would find their grandsons “miseducated by Keynes.” And between the grandsons and the grandfathers was a barrier in ideas such that it was not easy for tradition and practical experience to pass. Meanwhile the sons, who ought to have been ruling the City of London, were dead in France. He may have exaggerated the picture, but there is surely something of pitiful truth in it. England lost an appalling percentage of her finest and best in that cruel war.

The British are not a philosophical people or a people whose practical education comes largely from books. British financial and industrial thinking, to a degree that is probably found in few other modern industrial countries, has been much more a matter of a living tradition passed on from father to son—plastic, modified by experience, but handed down much more by word of mouth than by books. A breach in the continuity of the living tradition would probably be more serious in England than in most other countries.

New Industries Growing in South with Nonunion Labor. The British picture in 1925 was not, however, all black with respect to these points. Both in British industry and in British labor there were flexible elements. The industries of the North and the coal mines might well be depressed, hampered by the rigidities of wages, hampered by price-fixing combines, hampered by antiquated methods. But in the South of England there was going on a new and promising development. New industries were springing up, nonunionized, paying lower wage rates per hour than the stagnant industries, but paying labor much more per year, because giving full employment. These industries were growing, expanding, making money, taking on new labor.

Four of “Big Five” Joint Stock Banks Liquid in 1925. The financial picture in London in the early autumn of 1925 was not a bad one. The head of one of the “Big Five” Joint Stock Banks said that his bank had gone as far as it dared go in extending credit. Its advances stood at 56% of its deposits. Ordinarily the British banks at that time looked on 50% as a deadline which suggested caution. (“Advances,” as distinguished from “discounts,” are slow loans to customers, often in the form of overdrafts. “Discounts” are usually highly liquid bills of exchange.) But only one of the five great banks had reached this position. Sir Felix Schuster, when asked about the matter next day, said. “I know who told you that. He’s always overloaned!” Sir Felix added that his bank, the National Provincial, was in a very comfortable position, and that he would cheerfully go higher in his advances if the credits suited him. He added, “They do not.” Similar information came from the heads of others of the Big Five, and from one or two of the smaller banks.

But All Grew Illiquid During General Strike of 1926. In 1926, however, the British banking position changed radically. The great strike came to England and industrial prostration was extreme. Britain, instead of exporting coal, was importing coal from the Continent of Europe. And the British banks, instead of permitting a liquidation of credit—something that would have been inevitable in the United States, where we had twenty thousand independent unit banks—were able, by virtue of the high degree of concentration of the British banking system, to prevent liquidation. They extended credit on a great scale, and sterling went in large quantities to the Continent of Europe in the purchase of coal and other goods which England ought to have been creating herself and ought to have been exporting herself. Instead of a readjustment of prices and costs in England and a breaking up of the rigidities, England by credit expansion held the fort and continued the rigidities. British banks increased (a) their slow assets, and (b) their quick liabilities in the form of deposits. Ownership of these deposits speedily came into foreign hands, especially on the Continent of Europe.

Concentrated Branch Bank Systems Vulnerable to Governmental Pressure. The British banks acted partly in a spirit of loyalty to the country, but primarily, against their better judgment, under pressure of the government and of public opinion.

A high degree of banking concentration is incompatible with the exercise of free banking judgment, and the substitution of government policy in credit matters for the free exercise of banking judgment is one of the most dangerous things that can come to a country. There are many objections to widespread branch banking. We should preserve competitive banking. Banks should be under pressure all the time to meet their engagements at the clearing house every day, so that the banker may be compelled to keep his bank liquid, to hold slow paper to a minimum, and to limit bank credit to proper bankable transactions. When, however, five hundred to a thousand banking offices are under the jurisdiction of a single central office, there is no such pressure on the individual offices; and if there can be concerted policy among a few great central offices, the competitive pressure is so greatly lessened that unsound policies can be carried very far.

London Times on Bank Expansion and Illiquidity in England in 1927. The London Times of August 8, 1927, said: “The British credit situation . . . remains as tight as a drum. The advances of the ten London clearing banks amount to £934,556,000, equal to 54.4 per cent of the deposits; this is an increase of nearly £200,000,000 in five years; but unfortunately in the same period our reserves have not increased, as they have done in America.”

In 1929 the ratio of advances to deposits had risen still further in the great banks, and stood for all of them around 55% to 56%. In 1925 only one of the great banks had so high a ratio of advances to deposits. Sir Felix Schuster, referring to this, said, “Yes, we are all in that position now. We have yielded against our better judgment to Government pressure and to the sentiment of the City.” When asked if it were possible to expand further, to take care of customers in a crisis, Sir Felix replied, “These are already panic figures.”

• 1This point will be discussed at length in Chap. 34.