The Guernsey Market House Scheme

By D. M. SHERWOOD

THE financial experiment known as the Guernsey Market House Scheme was started over 100 years ago and, although of modest proportions, since it was confined to a small island of 25 square miles, it contained so many fundamental principles that everybody should know of it.

At the beginning of the nineteenth century, as a result of the Napoleonic wars, the trade of Guernsey was practically extinguished and the people were in despair. Unemployment was rife, the sea defences were breaking down, there were practically no roads, public buildings were in disrepair and, above all, a new market house, where the islanders could exchange their produce, was urgently needed.

It was impossible for the Government to finance these necessary improvements out of revenue, as this only amounted to £3,000 yearly, all of which was required for ordinary expenses and the interest charges on the island's debt of £19,000. Nor could the necessary finance be obtained by borrowing; the Government sought indeed to raise a loan, but such was the poor state of the island's assets that the only would-be lenders demanded the prohibitive rate of 17 per cent. per annum.

"Necessity is the mother of invention"; and in this case the idea put forward that the State should issue its own money daily gained ground. It was argued that, as labour and materials were both available, it was absurd for improvements to be held up simply through lack of money, and as conditions became even worse, this plan served to provide the only solution. Finally, after various setbacks and considerable opposition, the adherents of State money carried the day and, in 1816, 4,000 notes of £1 each were printed by the Government and paid out for the most urgent repairs.

By the success of this issue the principle was established and during the next 20 years the Government authorised notes to the extent of £80,000, which were utilised in building the new Market House, schools in every parish, roads all over the island, St. Elizabeth's Cottage, etc. These Government notes were redeemed, as the economic circumstances of the island justified, from earnings derived from the collection of market rents, customs duties, etc., and in 1836, when the scheme ended, there was a balance outstanding of £55,000 Government notes.

OPPOSITION

It is sad to relate that in spite of its eminent success this experiment was deliberately brought to an end. Although, after the first issue of the notes, there had been little active opposition to it in Guernsey itself, there were two outside bodies violently opposed to it. First, the inhabitants of the neighbouring island of Jersey became so jealous of Guernsey's prosperity that, in 1819, they obtained from Westminster an Order in Privy Council to the effect that the Government of Guernsey should not in any year exceed the amount of its annual income without Royal Consent. The Guernsey Government, however, took no notice of this and continued issuing notes as and when required.*

[*It would be interesting to know by whose advice Jersey was induced to appeal to the Privy Council.]

A few years later, however, opposition came from another quarter, the banking community in England. Although there had been no bank in Guernsey since 1810, there is reason to believe that the English bankers were becoming more and more apprehensive as the success of the Guernsey State money became more widely known.

BANKS INTERVENE

It was in 1827 that a bank was established in the island and started issuing notes, which circulated side by side with those of the State. Two years later the directors of this bank complained to Westminster that the Government, by issuing its own notes, had exceeded its powers as defined by the Privy Council some ten years earlier. The Privy Council wrote to the Guernsey Government for an explanation, and such a logical and determined reply was sent that no further action was taken at that time.

In 1835 a second bank was started and more bank notes were issued to an extent to produce inflation, and by 1836 there was something akin to panic in the island. The Guernsey Parliament met and hurriedly appointed a Committee to discuss, with the bankers, the steps necessary to control the position. The members of this Committee were not all fully sympathetic to the issue of Government notes and the bankers won the day, for an agreement was reached whereby the Government was to convert £15,000 of their notes into a bank loan at 3 per cent. interest, and to cease issuing further notes, whilst, on the other hand, no limit was placed on the issue of notes by the banks.

This was the end of what was commonly known as the Market House scheme, the balance of the original Government notes, amounting to £40,000, being still outstanding today. Although since 1914 the Guernsey Government has again issued its own notes, these are now always covered by the Government deposits with the banks, and as today Guernsey currency is linked with sterling, these notes are issued or withdrawn in conformity with orthodox principles.

In considering the Market House experiment the following points should be borne in mind.

Orthodox finance could do nothing to get the people out of the depression caused by the Napoleonic wars. The Government could not obtain the necessary funds, either by taxation or by borrowing, and provided that labour and materials were available, as they were, there was nothing to prevent the Government issuing its own money. This it did, with the result that the appearance of the island changed out of all recognition. From its backward and depressed state it became, within 20 years, renowned for its well-being.

Moreover, by issuing State money, this transformation was carried out without increasing the island's national debt and without incurring interest charges. In fact if interest had been payable on the capital sums for these improvements, they could not possibly have been carried

It is interesting to note that up to 1914 the Government of Guernsey had collected in taxes over £35,000 to pay the interest on the £15,000 of State notes which were converted into a bank loan by the agreement of 1836.

THE BOGEY OF INFLATION

The opponents of State issuance of money can usually be relied upon to raise the bogey of inflation. It must be remembered that inflation depends on the amount of money issued relative to the goods for sale, and does not depend on who issues the money. In the case of Guernsey, when the State first issued money, if it had been inflation there would have been either a shortage of commodities or else a rise in prices, and there is no record of either of these until 1836. Up to that year the Government had gradually and continuously increased the note issue, and it is reasonable to suppose that the net increase of money approximately corresponded with the island's increasing productivity. In that year, however, the banks deliberately brought about inflation, flooding the island with notes, with the inevitable result that, as there was no corresponding increase in goods for sale, prices began to rise and a panic ensued.

Let us compare the conditions of Guernsey and its need a century ago, with the condition and need of England today. When we hear arguments against slum clearance, against building new schools or hospitals or providing better roads, or even against providing everybody with a sufficient income to keep themselves decently, on the grounds that we have not the money, if we remember the Guernsey Market House experiment, we realise how specious such arguments are.