Labour policy—false and true

5. GUARANTEE OF LOANS

The Trade Facilities Act, 1921, represents the most important of the constructive proposals which resulted from the conferences held by the Prime Minister at Gairloch in the autumn of 1921. The general opinion of the experts summoned to those conferences was that a large amount of new constructional work (extension and electrification of railways, construction of docks, extension of manufacturing works, etc.), which would normally have taken place during the war, still required to be carried out, but that such work was being held up by the high costs of manufacture and the high rates which had to be paid for money. It was felt that although much of this work was urgently needed for the proper service of the public handling of trade, the placing of orders might be deferred indefinitely in the hope of a fall in prices, and meanwhile the Government would be compelled to go on paying unemployment doles. If, however, cheap money could be provided, one at least of the main obstacles would be overcome, and this might in many cases afford sufficient inducement to commence the works immediately.

The Trade Facilities Act, 1921

Under the Trade Facilities Act, the Treasury is empowered to give a guarantee of principal and/or interest on a loan to be raised “by any government, any public authority, or any corporation or other body of persons,” the proceeds of which loan are “applied towards or in connection with the carrying out of any capital undertaking or in, or in connection with, the purchase of articles, other than munitions of war, manufactured or produced in the United Kingdom required for the purposes of any such undertaking, provided that the aggregate capital amount of the loans, the principal or interest of which is guaranteed under this section, shall not exceed the sum of twenty-five million pounds.” An Advisory Committee—Sir Robert Kindersley, G.B.E., Sir William Plender, G.B.E., and Colonel Schuster, M.C.—was appointed to recommend to the Treasury, the cases in which, in its opinion, a guarantee should be given.

The Committee’s power is limited in two ways. In the first place it can only recommend a guarantee on a loan (i.e. it cannot guarantee an issue of shares). In the second place, the Committee has no power to recommend a guarantee “except for the purpose of a capital undertaking”(i.e. it cannot guarantee “working capital”). Many manufacturers in the country have orders on hand from foreign purchasers which they are unable to execute because they cannot finance themselves for the period between the date on which the orders are put in hand and the date on which payment is received from the foreign purchaser. Cases of this sort come under the Export Credits Scheme, and not under this scheme. The Act empowers the Committee to recommend a guarantee of a loan by a foreign Government, municipality or company, even though the articles (e.g. steel rails) manufactured with the proceeds of the guaranteed Joan were to be erected or used outside this country, provided always that the proceeds of the guaranteed loan itself were spent on goods manufactured in the United Kingdom.

The Trade Facilities Act thus enables new works to be undertaken which would otherwise have been postponed indefinitely. This on the one hand provides work directly and indirectly, and so avoids the demoralizing influence of the dole. On the other hand, if the scheme is wisely administered, no liability should fall on the Government, that is to say on the individual taxpayers. An assurance as to the wisdom of its administration was afforded by the composition of the Committee itself, combined with the pledge given by the Chancellor in the House of Commons that the Government would not interfere with the Committee’s discretion. It was thereby made certain that sound business considerations rather than political expediency would be the guide to the Committee’s activities.

Policy of Advisory Committee

While the greater part of the guarantees are given to companies and undertakings operating in Great Britain, the Committee considers that (subject, of course, to the material being bought in this country) it would help to advance general economic restoration if part of the fund were allotted to enterprises abroad, e.g. in the extension and improvement of foreign railways. By that means the foreign country’s productive and purchasing power would be increased and she would resume her place as a supplier of the world’s necessities and as a purchaser of the world’s—and Great Britain’s—manufactured goods. The difficulty, however, of dealing with foreign loans is that the countries which chiefly require assistance are those suffering from a heavily depreciated currency, and accordingly the service of a sterling loan would place so onerous a burden on them that it would be more than doubtful whether they could bear it and meet their obligations. To find adequate security in such cases is, therefore, a great difficulty, to which there is added the unwillingness of such countries to pledge even the inadequate security which it is within their power to give, and the record of many of these countries as regards their past obligations has not been such as to inspire confidence. The Committee keeps always before it the fact that it is a custodian of the Public Purse, and that much more harm than good would be done by recommending guarantees in cases in which the risks are greater than the principles of sound commercial prudence would accept.

The principles on which the Committee acts are these:

First, that its principal duty is to assist in the extension of sound undertakings with proved good management which are deferring well-thought-out plans of extensions or new works owing to the difficulty of raising money on reasonable terms under present abnormal conditions. It does not feel that it is called upon to recommend a guarantee in cases of a speculative nature for which, even in normal times, the promoters would have found difficulty in raising money. Nor does it think that it ought to recommend guarantees to relieve undertakings from financial embarrassments incurred through lack of ordinary commercial foresight on the part of those responsible for their management. A guiding rule is that the Government’s liability should be as small as possible, and that a good commercial Security should be obtained in every case. In the second place, the Committee, realizing the gravity of the unemployment problem and the demoralizing effect of the continued receipt of doles, prefers those schemes which can be put in operation immediately rather than schemes which would take some considerable time to mature. In the third place, the Committee favours schemes of public utility. These fall into two classes. In the first place, there is a public utility undertaking as ordinarily understood, i.e. a corporation working under statutory powers and not trading for profit. In the second place are the companies, such as railway companies, which carry out an indispensable national service, and which in actual practice cannot earn excessive dividends for their shareholders. The reason for this preference has been partly the direct benefit to the general community from the improved facilities for the public thereby rendered possible, and partly the feeling that the guarantee could more properly be given to undertakings in respect of which it was unlikely that Government assistance would result in the earning of a large profit for private promoters and shareholders. In the fourth place, the Committee insists that all contracts must be on the basis of competitive prices. It feels that it would be wrong for the Government guarantee to be given in any case in which an unreasonably high price was going to be paid for the materials. Not only would such a course be unjust to the taxpayer by making the Government responsible for money going, not into wages and materials, but in paying high profits to manufacturers; it would be against the best interests of the country as a whole, since it would be impeding the return to a level of prices on which this country could meet foreign competition.

Difficulties of the Committee

The Committee has encountered many difficulties. The most important of these has been the lengthy negotiations necessary in every case. Frequently, the application when submitted is not on lines which the Committee feels justified in approving, and protracted discussions are required to reduce it to a business-like and acceptable form. The Committee in fact has been in the position practically of an issuing house which had to issue £25,000,000 worth of securities of every possible kind and variety in a very short time. Every one with experience of this class of business will realize what that means. As the Committee’s power is limited to recommending the guarantee of loans, it has found a difficulty in the fact that many companies, at the time of making their application, have not possessed the necessary borrowing powers. Meetings of shareholders and debenture holders have frequently been necessary in order that these powers might be sanctioned. In other cases, the companies have required Parliamentary approval for an increase in their loan capital. All of these difficulties have taken time to surmount, but the Committee has always instructed applicants to start the preliminary work of obtaining their tenders, etc., as soon as it has decided the broad lines on which a guarantee could be given, so that real work can be commenced and men employed from the very moment that the necessary formalities are completed.

Guarantees already Given

Guarantees have been given in numerous cases. Work which otherwise would not have been done has been provided in the shipbuilding and repairing business, in the construction and improvement of docks and canals, in the extension of railways, in the electrification of railways, and in the extension of a number of electrical undertakings. This has facilitated the employment of direct labour in a number of places, and in addition, orders for the manufactured goods, principally cement and iron, have been placed in the manufacturing towns of the North and Midlands. To take a concrete instance, a guarantee has been given to the London Underground Railways for extensions. This means an immense amount of direct employment; it entails the placing of large orders for new locomotives and rolling stock. The men for whom employment has been found would otherwise have been living on the dole. Not only is their moral improved, but their purchasing power is increased, and the prosperity of industries as a whole has been fostered. Further, new tracts of country will be opened up for the Londoner and an impetus given to the construction of houses in suburban areas. This example, which is chosen at random from a number of others, shows the beneficial effect for the community as a whole, of the guarantees which have been given under the Trade Facilities Act.

Two White Papers (1922)—62 and 121—state that up to June 29, 1922, the Treasury has stated its willingness to guarantee principal and interest on loans of an amount of £17,042,143 for periods of years varying from four to twenty-five in respect of a number of enterprises of which the following are typical: Harland & Wolff (£1,493,345), ship repairing works on Thames and dock and wharf on Clyde; South Eastern & Chatham Railway Company’s Managing Committee (£6,500,000), electrification of suburban lines; London Electric Railways Company (£6,000,000), enlargement of tunnel of City and South London Railway, and extension of London Electric Railway from Golders Green to Edgware; Calcutta Electric Supply Corporation (£500,000), purchase of generating and transforming plant and cables; Rhymney Valley Sewerage Board (£250,000), sewage disposal and sewerage scheme for urban districts in Rhymney Valley.

6. THE EXPORT CREDITS SCHEME

Under the Overseas Trade (Credits and Insurance) Act, 1920, the Overseas (Credits and Insurance) Amendment Act, 1921, and the Trade Facilities Act, 1921, the Government has done much to relieve unemployment by assisting the manufacturer to export his goods from the United Kingdom. The Government’s plan is known as the “Export Credits Scheme”; it is administered by the Department of Overseas Trade. Its main essential is that the Government will guarantee bills drawn by United Kingdom exporters on customers abroad as against shipment of goods exported from the United Kingdom, when such bills are submitted through the exporter’s banker with the banker’s recommendation for guarantee attached, and the circumstances are such as bring the case within the scheme. The goods must be commodities (other than arms and ammunition) wholly or partly produced or manufactured in the United Kingdom, and include coal; but the Government will not assist to finance goods to be shipped on consignment, or the carrying of stocks either in the United Kingdom or elsewhere. The sum of outstanding credits must not at any one time exceed twenty-six millions sterling. The sum now outstanding is sixteen millions.

A lucid statement of the history, nature and working of the scheme by Sir Philip Lloyd-Greame, M.P., the Parliamentary Secretary to the Department of Overseas Trade, appears in the Accountant for February 4, 1922. The scheme does not supplant, but supplements, the ordinary commercial machinery of finance by providing credit in cases where, although the trade involved is inherently sound, bankers and financial houses are not disposed, or in a position, to supply the necessary accommodation. The closest co-operation is maintained with the banks. By letter of October 14, 1921, from the Bankers’ Clearing House to the President of the Board of Trade, which appears in the Accountant, the Committee of London Clearing House Bankers expressed their willingness “to take all such steps as lay within their power to encourage the operation of the scheme, especially having regard to the object which the Government had in view, that of ameliorating the present conditions of unemployment.” The Department of Overseas Trade is assisted by an expert and experienced business committee representative of the Joint Stock Banks, the Eastern Banks, the Accepting and Discount Houses, and manufacturers and merchants.

The scheme now applies to all countries in the world, but not to British India, Ceylon and the Straits Settlements, where there are large unabsorbed stocks and in respect of which adequate banking facilities exist, nor to Russia. New credits may be granted up to September 8, 1923, but all credits must be liquidated by September 8, 1927. Credits of two kinds are granted—“specific credits,” and “general credits.” The former are given in respect of particular transactions, for example, the completion of a large engineering or constructional contract abroad; the latter are credits up to specified amounts for specified countries and for specified periods in respect of goods not necessarily sold at the time the credits are given, and are intended to meet the convenience of merchants doing business abroad on short term credits. A United Kingdom merchant selling small quantities of commodities abroad through some travelling representative finds it quite impossible to submit each transaction to the approval of the Export Credits Department. The merchant can thus enter into transactions abroad up to the amount of the general credit without any reference to the Department, while the latter undertakes to guarantee the bills drawn within the agreed period for the goods that are shipped. The bills carrying the Department’s guarantee are regarded in the discount market as “first-class bills.” The Department prefers that the bills should be of as short duration as possible, but permits renewals provided that the credit is not extended beyond twelve months. With the Government guarantee that the bill drawn by the foreign customer or his agent will be met, the United Kingdom exporting merchant can thus borrow on the security of the bill at the ordinary market rate in the customary way.

Specific Guarantees or Credits

In case of specific credits the Department will guarantee up to 100 per cent. of the bills drawn against the shipment where the credit does not exceed twelve months, and up to 85 per cent. in cases where the credit exceeds twelve months. Two bills, in the latter case, are usually drawn, one for 85 per cent. of the transaction which is guaranteed for the full amount of the draft, and the second for the balance of 15 per cent. which is not guaranteed. The Department does not require a bill to be accepted before guaranteeing it. If security is to be deposited by the importer, the Department requires a letter of guarantee from the importer’s bank, which must be an approved bank, that the bill will be accepted and that approved security will be deposited immediately upon the first presentation of the documents to the importer, and the Department assesses the value of the security so deposited. If no security is to be deposited, the Department requires a similar letter of guarantee, or some other satisfactory evidence that the bill will be accepted.

In case of default by the importer to accept or meet the bill when due, the Government has no recourse against the United Kingdom exporter where the importer, in the first instance, deposited security assessed as sufficient by the Department to cover the whole amount guaranteed. The importer may, however, have put up some security, but security not deemed enough by the Department to cover the whole amount guaranteed. In that event, the Department retains recourse against the United Kingdom exporter for 50 per cent. (when 85 per cent. or less of the bill has been guaranteed), or for 57½ per cent. (when 100 per cent. of the bill has been guaranteed) of the difference between the amount guaranteed, on the one hand, and, on the other, the total of the amount (if any) paid by the importer, plus the amount which the security was accepted as sufficient to cover or which the security, when realized, yields, whichever is the greater. When the importer puts up no security the Government retains recourse against the United Kingdom exporter for 50 per cent. of the difference between the amount guaranteed and the amount (if any) paid by the importer, where 85 per cent. or less of the amount of the bill has been guaranteed; where 100 per cent. has been guaranteed—for 57½ per cent. of that difference.

General Guarantees or Credits

In the case of general credits, when the Government accedes to an application made through a bank, say, to guarantee for six months bills up to a sum of £10,000 drawn by some particular United Kingdom exporter as against shipment of goods to Rumania, the Government would guarantee each bill up to its total value at such rate of commission as the Department may fix. At the end of the six months, if the amount of the guaranteed bills totals up to, say, £9,000, that represents the liability of the Government. When afterwards the bills fall due, and there is any loss, the Government has recourse on the United Kingdom exporter for 57½ per cent. of the ultimate loss. The Government does not require that any security shall be put up by the importer, but is prepared to consider the offering of special terms when security is put up.

The Government is also prepared to make arrangements with approved banks, banking houses, and credit associations under which, for an agreed premium, the Government will assume responsibility for a share not exceeding 70 per cent. of any loss incurred by such banks, etc., in respect of transactions carried through by them for United Kingdom exporters, which comply with the same conditions as to the nature of the goods as those prescribed under the Export Credits Scheme.

7. OTHER MISCELLANEOUS SCHEMES

Money has been allocated by the Government to assist schemes of land improvement, drainage and farm water-supplies so as to provide employment for agricultural workers, also forestry schemes and light railways:

In the sum of £5,500,000 set aside during the winter 1921-22 for general unemployment relief, provision was made for assistance to approved light railway schemes. Up to June, 1922, two such schemes had been approved for grants from the Treasury equal to half the total cost, subject to maximum grants of £162,500 in all.

From time to time steps have been taken to assist in relieving the situation by special measures operating in Government industrial establishments. A short-time system was introduced into War Office and Admiralty establishments to spread employment. The highest number of additional men thus engaged was 9,900. No additional men are now employed. Alternative work, e.g. waggon repairing, manufacture of medals, coin-blanks, locomotives, new wagons and miscellaneous articles for the Post Office and for private firms, has been carried out in War Office and Admiralty establishments. The highest number of men employed thereon was 8,800. The Office of Works undertook an emergency programme of decorative and repair work in Government Departments during the winter 1920-21, when the highest number of additional men thus engaged was 2,600. During the winter 1921-22, this Department also undertook relief work in the Royal Parks, the highest number of additional men employed on this work being 390. The expenditure in both classes of scheme was about £127,000. The sum of £563,000 was also set aside during the winter 1921-22 for accelerating Government contracts whereby employment was found for some 600 men.

Summary of National Expenditure

As between the Armistice and May 19, 1922, there has been devoted to the relief of unemployment out of public funds the total sum of £281,216,460, under the following heads:

In addition, local authorities have initiated, without Government assistance, relief works on which, between the commencement of trade depression in September 1920, and May 19, 1922, an aggregate of wages of at least £450,000 has been paid. Guardians have during the same period expended at least £60,000,000 on out-door relief. The above figures exclude the temporary loans by the Ministry of Health to embarrassed Guardians.

The really critical time in regard to unemployment will be the forthcoming winter, 1922-23. Trade Union out-of-work benefits have shrunk and dwindled through lack of funds. Homes and furniture, utensils, etc., with two winters’ hard times have wasted down to the bare bone, clothing is worn out, and there is little or no reserve of resources; in some districts conditions fill one with apprehension. Added to the natural gravity—social and economic—of the situation, is the quite definite attempt of the Communists to exploit subterraneously these unhappy circumstances for revolutionary purposes.