190 ADDENDUM I. Proposals relating to Domestic Monetary Policy to meet the present emergency. 1. We have signed the Report of the Committee without reserva- tion.* But in our opinion it is incomplete without certain further observations. Rightly or wrongly, we conceive it our duty to consider possible methods of incressing the ability of the banking aystem to put into effective operation the principles of action which we have recommended above. For if the situation remains un- changed in other respects, we doubt whether it lies within the Power ofthe banking ysiem to restore employment toa satisfactory level. ‘Due Expansion oF Cunprr ror Domusrio Ponroses. 2. The upshot of the preceding chapters may be summarised as follows. For the world as @ whole the best hope of a remedy lies in a monetary policy designed to increase the volume of purchasing power, to increase the ease of borrowing if necessary by guarantees, fo diminish tho rate of interest long-term as well a3 short-term, and to stimulate in every possible way the spirit of enterprise and the volume of investment. 3. If Great Britain were, like the world, a closed system, the same monetary remedies would be equally applicable here. | But unfortunately this is less true of us than of any other country. Our economic affairs are intricately bound up with an international tem. Consequently the power of the Bank of England to initiate an independent policy, irrespective of what is going on abroad, is strictly limited. 4. Whether it is as limited ae—to judge from its policy over recent years—the Bank of England has believed, is open to debate. Mr. Hawtrey has expressed in evidence most forcible and interest- ing views to the contrary. He urges that the power of the Bank to influence the rest of the world, and to refuse to be led by it, whilst not what it was before the War, is nevertheless great. He contends that the amount of foreign balances, which we run the risk of losing if we make money relatively cheap in London, is not 0 large as is commonly supposed. Whatever may have veen true a little time back, we are not prepared to accept Mr. Hawtre} views as fully applicable to the present very abnormal circum- stances, where confidence is liable to be disturbed; and it would, we think, be asking too much to expect the Bank of England to make an experiment of uncertain ontcome in the existing environ- * except in the cate of Sir T. Allon and Mr. B ment. I time the of argum the posit fornishin its empl safe for | without not be u reasonab enterpris directed banks ar whole Ie this 1 ‘on their addition: and the when ar natural when it domestic be stary some ev are not ‘years. 6. Towithin the pantstctory jmmarised as remedy lies purchasing guarantees, short-term, Herprise and \eystem, the "here. ” But pantry. Our international ‘England to is going on licy over Bio debate 4 interest of the Bank p led by it, great; He Re run the hdon, is not ‘ veen true Hawtrey’s pal circum: it wonld, England to hhg environ- | 191 ment. It is ite duty to put absolute safety first. At the same ‘time there may be much wore force in Mr. Hawtrey's general line of argument than is usually admitted. We do not believe that the position abroad need always prevent the Bank of England from furnishing additional credit, provided there is a real opening for its employment in increased domestic enterprise. Tt would be un- safe for the Bank to increase materially the total volume of credit without considering how it will be employed. But this should not be urged as an argument applicable to cases where there is a reasonable prospect of the new money finding its way into domestic enterprise. 5. Moreover the risks of expanding credit would be much diminished if the Bank of England would take the clearing banks moro into its confidence, in the way in which it has traditionally confided in the leading secepting houses, and invite their co-opera- tion, We desire to state this conclusion with some emphasi While the quantity of money is controlled by the Bank of England, the way in which additional supplies aro used can be largely directed by the clearing banks, and co-operation between these banks and the Bank of England is essential. ‘The Committee as a whole have recommended in para. 872 that this should be done. If this recommendation is acted upon, so that the clearing banks ‘on their side can make it clesr when they are in a position to direct additional credit into domestic channels and when they are not, and the Bank of England on its side can tell the clearing banks ‘when an expansion or contraction of credit is intended to bave its natural repercussions on the foreign short-term loan position and ‘when it is not, it will be much easier than it is now to ensure that domestic enterprise and investment of whatever kind shall never be starved of the accommodation which it requires. In spite of ‘some evidence to the contrary which has been offered to us, we fare not convinced that this has invariably been the case in recent years, 6. To-day, however, the main trouble is not limitation on the amount of available bank credit, but the reluctance of acceptable borrowers to come forward. Thus the first step must probably be some kind of direct stimulus, for example, a considerable fall in the long-term rate of interest payable by typical borrowers, or some kind of State action. Either of these conditions here, with- ‘out corresponding conditions elsewhere, can scarcely avoid putting some strain on the international position of the Bank of England. To meet this strain a strengthening of the country’s surplus on the balance of trade is required. It is also true that the Bank would be in a better position to exercise its full moral influence internationally if its power to retain its gold was beyond question. 7. Thus we are led inevitably to consider whether any other measures are practicable which wonld restore or inereaso the Bank 1a es192 of England’s ability to employ its monetary power in a construc- tive way—though some of these measures may seem to lead us away from monetary policy proper. Aw ANALYSIS oF THE ALTERNATIVES. 8. We know no way in which the initial impetus to increased employment can be given except by (i) an increase of exports, i) the substitution of home-produced goods for goods now im- ported, or (iii) an increase of investment at home—though once the vicious circle can be broken in any of these ways the increased purchasing power of the men put back into work will further increase employment in supplying their needs. 9. This may be put quite shortly by saying that we must either increase our favourable balance of internationsl payments, or find an outlet for more of our savings at home, or, better still, do both. Indeed the whole problem may be made to centre round the balance of trade.* We can increas our surplus by exporting more or importing less. We can export more only if world trade revives, or if wo reduce our gold-costs faster than our competitors reduce theirs, or if we give the export industries some kind ot special advantages. Similarly we can import less only by a rela~ tive reduction of our own costs or by some restriction on imports. Finally we can only find employment for more of our savings ‘at home by increasing the enterprise of borrowers or by somehow subsidising the cost of borrowing. 10. In practice, therefore—putting on one side the increase of our efficiency relatively to that of our foreign competitors, the desirability of which, if we can do it, is obvious and common ground between all parties—the practical courses open to us come down to threo :— () A reduction of salaries and wages; Gi) Control of imports and aids to the export industries ; (ii) Domestic enterprise assisted by State action, or subsi- dies to private investment at home. jonal rurplus which we currently need for net foreign lending depends on how much of our eaving ie trying to nd aa outlet abroad. ‘The greater the amount which finds an outlet at home, the tmaller. tho international aurplus which we require in order to be in equilibrium, Thue to restore our position and to mab full ‘employment on squire both to increase our surplus on the balance of trade and fino to find increased outlets for our savings at home, When the excess of ur total savings over that part of them which wo can employ at home is there nood be no monetary 2 profitable employmont of all our resources of mou fenablee us to natrow down the alternatives, ‘Therein omg sidered 4 toy sone eh and those ¥ expressed by that there is: plication a aight of (i), in the long 1 namely, that and wages a that it might they believe { under (i) anc that nothing trate public @ 11. We no tous, The! situation prin enlarging the embarrassmer abroad; while investment b, increasing at than our forei I-A BI 1. Tam N 12. Certain woidance of is eubject tov ties, it is essa mobility in th others are reai been establish power of mone increase, the f¢ whose money-i to the new att evile must nee rigidity of vark This is just aa of the rigidity ‘hat it would by with which we] 1281