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Title: Essays in Persuasion
Author: Keynes, John Maynard (1883-1946)
Date of first publication: 1931
Edition used as base for this ebook:
   London: Macmillan, 1931
   [first edition]
Date first posted: 7 August 2011
Date last updated: 7 August 2011
Project Gutenberg Canada ebook #833

This ebook was produced by
Marcia Brooks, Ross Cooling, Mark Akrigg
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  BY THE SAME AUTHOR

  INDIAN CURRENCY AND FINANCE.
    Pp. viii + 263.  1913.
            7s. 6d.

  THE ECONOMIC CONSEQUENCES OF THE PEACE.
    Pp. vii + 279.  1919.
            8s. 6d.

  A TREATISE ON PROBABILITY.
    Pp. xi + 466.  1921.
            18s.

  A REVISION OF THE TREATY.
    Pp. viii + 223.  1922.
            7s. 6d.

  A TRACT ON MONETARY REFORM.
    Pp. viii + 209.  1923.
            7s. 6d.

      A TREATISE ON MONEY.
  Vol. I.--Pp. xvii + 363.  1930.
  Vol. II.--Pp. viii + 424.  1930.
            15s. each.




  ESSAYS IN PERSUASION




  MACMILLAN AND CO., Limited

  LONDON  BOMBAY  CALCUTTA  MADRAS  MELBOURNE




  ESSAYS
  IN
  PERSUASION

  BY

  JOHN MAYNARD KEYNES

  FELLOW OF KING'S COLLEGE, CAMBRIDGE


  MACMILLAN AND CO., LIMITED
  ST. MARTIN'S STREET, LONDON
  1931




  COPYRIGHT

  PRINTED IN GREAT BRITAIN
  BY R. & R. CLARK, LIMITED, EDINBURGH




  PREFACE


Here are collected the croakings of twelve years--the croakings of a
Cassandra who could never influence the course of events in time. The
volume might have been entitled "Essays in Prophecy and Persuasion," for
the _Prophecy_, unfortunately, has been more successful than the
_Persuasion_. But it was in a spirit of persuasion that most of these
essays were written, in an attempt to influence opinion. They were
regarded at the time, many of them, as extreme and reckless utterances.
But I think that the reader, looking through them to-day, will admit
that this was because they often ran directly counter to the
overwhelming weight of contemporary sentiment and opinion, and not
because of their character in themselves. On the contrary, I
feel--reading them again, though I am a prejudiced witness--that they
contain more understatement than overstatement, as judged by
after-events. That this should be their tendency, is a natural
consequence of the circumstances in which they were written. For I wrote
many of these essays painfully conscious that a cloud of witnesses
would rise up against me and very few in my support, and that I must,
therefore, be at great pains to say nothing which I could not
substantiate. I was constantly on my guard--as I well remember, looking
back--to be as moderate as my convictions and the argument would permit.

All this applies to the first three of the five books into which these
essays naturally group themselves, rather than to the last two; that is
to say, to the three great controversies of the past decade, into which
I plunged myself without reserve,--the Treaty of Peace and the War
Debts, the Policy of Deflation, and the Return to the Gold Standard,[1]
of which the last two, and indeed in some respects all three, were
closely interconnected. In these essays the author was _in a hurry_,
desperately anxious to convince his audience in time. But in the last
two books time's chariots make a less disturbing noise. The author is
looking into the more distant future, and is ruminating matters which
need a slow course of evolution to determine them. He is more free to be
leisurely and philosophical. And here emerges more clearly what is in
truth his central thesis throughout,--the profound conviction that the
Economic Problem, as one may call it for short, the problem of want and
poverty and the economic struggle between classes and nations, is
nothing but a frightful muddle, a transitory and an _unnecessary_
muddle. For the Western World already has the resources and the
technique, if we could create the organisation to use them, capable of
reducing the Economic Problem, which now absorbs our moral and material
energies, to a position of secondary importance.

[Footnote 1: I still stand--substantially--by the _Positive Suggestions
for the Future Regulation of Money_, which I wrote in 1923 before our
Return to the Gold Standard and which are here reprinted (p. 213) as the
third Essay of Book III. Whilst we were on the Gold Standard, these
proposals were necessarily in abeyance. But any one who wishes to know
the general outline of how the author would settle our currency Problem,
as it presents itself to-day, will find it in this essay.]

Thus the author of these essays, for all his croakings, still hopes and
believes that the day is not far off when the Economic Problem will take
the back seat where it belongs, and that the arena of the heart and head
will be occupied, or re-occupied, by our real problems--the problems of
life and of human relations, of creation and behaviour and religion. And
it happens that there is a subtle reason drawn from economic analysis
why, in this case, faith may work. For if we consistently act on the
optimistic hypothesis, this hypothesis will tend to be realised; whilst
by acting on the pessimistic hypothesis we can keep ourselves for ever
in the pit of want.

       *     *     *     *     *

The essays have been taken out of the author's printed writings, whether
books or pamphlets or newspaper and magazine articles, indiscriminately.
The method has been to omit freely (without special indications in the
text) anything which appeared to be redundant or unnecessary to the main
line of the argument or to have lost interest with the passage of
events; but to alter nothing in the text which has been retained. New
explanatory footnotes, which have been added in this volume, have been
placed between square brackets. The author has endeavoured to secure
that the omissions shall not be such as to make the balance of argument
to appear in any way different from what it was in the original context.
But for the curious inquirer, if there be any, there is provided on the
last page of the book a table of references showing the source from
which each essay has been taken, and where it can be found in its
complete contemporary setting.

I have thought it convenient to choose this date of publication, because
we are standing at a point of transition. It is called a National
Crisis. But that is not correct--for Great Britain the main crisis is
over. There is a lull in our affairs. We are, in the autumn of 1931,
resting ourselves in a quiet pool between two waterfalls. The main point
is that we have regained our freedom of choice. Scarcely any one in
England now believes in the Treaty of Versailles or in the pre-war Gold
Standard or in the Policy of Deflation. These battles have been
won--mainly by the irresistible pressure of events and only secondarily
by the slow undermining of old prejudices. But most of us have, as yet,
only a vague idea of what we are going to do next, of how we are going
to use our regained freedom of choice. So I should like to clinch the
past, as it were, by reminding the reader of what we have been through,
and how it appeared at the time, and the nature of the mistakes we made.

  J. M. Keynes

_November 8, 1931._




  CONTENTS

                                                                       PAGE

  I. THE TREATY OF PEACE

  1. Paris (1919)                                                         3

  2. The Capacity of Germany to pay Reparations (1919)                    7

  3. Proposals for the Reconstruction of Europe (1919)                   19

  4. The Change of Opinion (1921)                                        46

  5. War Debts and the United States                                     52
        (i) _Cancellation_ (1921).
       (ii) _The Balfour Note_ (1925).
      (iii) _Cancellation_ (1928).


  II. INFLATION AND DEFLATION

  1. Inflation (1919)                                                    77

  2. Social Consequences of Changes in the Value of Money (1923)         80

  3. The French Franc                                                   105
        (i) _An open letter to the French Minister of Finance_ (1926).
       (ii) _The Stabilisation of the Franc_ (1928).

  4. A Programme of Expansion (General Election, May 1929)              118

  5. The Great Slump of 1930 (Dec. 1930)                                135

  6. Economy (1931)                                                     148
        (i) _Saving and Spending_ (Jan. 1931).
       (ii) _The Economy Report_ (Aug. 15, 1931).
      (iii) _The Economy Bill_ (Sept. 19, 1931).

  7. The Consequences to the Banks of the Collapse of Money Values
  (Aug. 1931)                                                           168


  III. THE RETURN TO THE GOLD STANDARD

  1. Auri Sacra Fames (1930)                                            181

  2. Alternative Aims in Monetary Policy (1923)                         186

  3. Positive Suggestions for the Future Regulation of Money (1923)     213

  4. The Speeches of the Bank Chairmen                                  220
        (i) February 1924.
       (ii) February 1925.
      (iii) February 1927.

  5. The Economic Consequences of Mr. Churchill (1925)                  244
        (i) _The Misleading of Mr. Churchill._
       (ii) _The Balance of Trade and the Bank of England._
      (iii) _Is there a Remedy?_

  6. Mitigation by Tariff                                               271
        (i) _Proposals for a Revenue Tariff_ (March 7, 1931).
       (ii) _On the Eve of Gold Suspension_ (Sept. 10, 1931).
      (iii) _After the Suspension of Gold_ (Sept. 28, 1931).

  7. The End of the Gold Standard (Sept. 27, 1931)                      288


  IV. POLITICS

  1. A Short View of Russia (1925)                                      297
        (i) _What is the Communist Faith?_
       (ii) _Communism's Power to Survive._

  2. The End of Laissez-faire (1926)                                    312

  3. Am I a Liberal? (1925)                                             323

  4. Liberalism and Labour (1926)                                       339


  V. THE FUTURE

  1. Clissold (1927)                                                    349

  2. Economic Possibilities for our Grandchildren (1930)                358

  References                                                            375




  I

  THE TREATY OF PEACE




  THE TREATY OF PEACE

  1. Paris (1919)


The power to become habituated to his surroundings is a marked
characteristic of mankind. Very few of us realise with conviction the
intensely unusual, unstable, complicated, unreliable, temporary nature
of the economic organisation by which Western Europe has lived for the
last half-century. We assume some of the most peculiar and temporary of
our late advantages as natural, permanent, and to be depended on, and we
lay our plans accordingly. On this sandy and false foundation we scheme
for social improvement and dress our political platforms, pursue our
animosities and particular ambitions, and feel ourselves with enough
margin in hand to foster, not assuage, civil conflict in the European
family. Moved by insane delusion and reckless self-regard, the German
people overturned the foundations on which we all lived and built. But
the spokesmen of the French and British people have run the risk of
completing the ruin, which Germany began, by a Peace which, if it is
carried into effect, must impair yet further, when it might have
restored, the delicate, complicated organisation, already shaken and
broken by war, through which alone the European peoples can employ
themselves and live.

In England the outward aspect of life does not yet teach us to feel or
realise in the least that an age is over. We are busy picking up the
threads of our life where we dropped them, with this difference only,
that many of us seem a good deal richer than we were before. Where we
spent millions before the war, we have now learnt that we can spend
hundreds of millions and apparently not suffer for it. Evidently we did
not exploit to the utmost the possibilities of our economic life. We
look, therefore, not only to a return to the comforts of 1914, but to an
immense broadening and intensification of them. All classes alike thus
build their plans, the rich to spend more and save less, the poor to
spend more and work less.

But perhaps it is only in England (and America) that it is possible to
be so unconscious. In continental Europe the earth heaves and no one but
is aware of the rumblings. There it is not just a matter of extravagance
or "labour troubles"; but of life and death, of starvation and
existence, and of the fearful convulsions of a dying civilisation.

       *     *     *     *     *

For one who spent in Paris the greater part of the six months which
succeeded the Armistice, an occasional visit to London was a strange
experience. England still stands outside Europe. Europe's voiceless
tremors do not reach her. Europe is apart and England is not of her
flesh and body. But Europe is solid with herself. France, Germany,
Italy, Austria, and Holland, Russia and Roumania and Poland, throb
together, and their structure and civilisation are essentially one. They
flourished together, they have rocked together in a war, which we, in
spite of our enormous contributions and sacrifices, (like though in a
less degree than America) economically stood outside, and they may fall
together. In this lies the destructive significance of the Peace of
Paris. If the European Civil War is to end with France and Italy abusing
their momentary victorious power to destroy Germany and Austria-Hungary
now prostrate, they invite their own destruction also, being so deeply
and inextricably intertwined with their victims by hidden psychic and
economic bonds. At any rate an Englishman who took part in the
Conference of Paris and was during those months a member of the Supreme
Economic Council of the Allied Powers, was bound to become, for him a
new experience, a European in his cares and outlook. There, at the nerve
centre of the European system, his British preoccupations must largely
fall away and he must be haunted by other and more dreadful spectres.
Paris was a nightmare, and every one there was morbid. A sense of
impending catastrophe overhung the frivolous scene; the futility and
smallness of man before the great events confronting him; the mingled
significance and unreality of the decisions; levity, blindness,
insolence, confused cries from without,--all the elements of ancient
tragedy were there. Seated indeed amid the theatrical trappings of the
French Saloons of State, one could wonder if the extraordinary visages
of Wilson and of Clemenceau, with their fixed hue and unchanging
characterisation, were really faces at all and not the tragic-comic
masks of some strange drama or puppet-show.

The proceedings of Paris all had this air of extraordinary importance
and unimportance at the same time. The decisions seemed charged with
consequences to the future of human society; yet the air whispered that
the word was not flesh, that it was futile, insignificant, of no effect,
dissociated from events; and one felt most strongly the impression,
described by Tolstoy in _War and Peace_ or by Hardy in _The Dynasts_, of
events marching on to their fated conclusion uninfluenced and unaffected
by the cerebrations of Statesmen in Council:

  SPIRIT OF THE YEARS

  Observe that all wide sight and self-command
  Desert these throngs now driven to demonry
  By the Immanent Unrecking. Nought remains
  But vindictiveness here amid the strong,
  And there amid the weak an impotent rage.


  SPIRIT OF THE PITIES

  Why prompts the Will so senseless-shaped a doing?


  SPIRIT OF THE YEARS

  I have told thee that It works unwittingly,
  As one possessed, not judging.




  2. The Capacity of Germany to pay Reparations (1919)


It is evident that Germany's pre-war capacity to pay an annual foreign
tribute has not been unaffected by the almost total loss of her
colonies, her overseas connections, her mercantile marine, and her
foreign properties, by the cession of ten per cent of her territory and
population, of one-third of her coal and of three-quarters of her iron
ore, by two million casualties amongst men in the prime of life, by the
starvation of her people for four years, by the burden of a vast war
debt, by the depreciation of her currency to less than one-seventh its
former value, by the disruption of her allies and their territories, by
Revolution at home and Bolshevism on her borders, and by all the
unmeasured ruin in strength and hope of four years of all-swallowing war
and final defeat.

All this, one would have supposed, is evident. Yet most estimates of a
great indemnity from Germany depend on the assumption that she is in a
position to conduct in the future a vastly greater trade than ever she
has had in the past.

For the purpose of arriving at a figure it is of no great consequence
whether payment takes the form of cash (or rather of foreign exchange)
or is partly effected in kind (coal, dyes, timber, etc.), as
contemplated by the Treaty. In any event, it is only by the export of
specific commodities that Germany can pay, and the method of turning the
value of these exports to account for Reparation purposes is,
comparatively, a matter of detail.

We shall lose ourselves in mere hypothesis unless we return in some
degree to first principles, and, whenever we can, to such statistics as
there are. It is certain that an annual payment can only be made by
Germany over a series of years by diminishing her imports and increasing
her exports, thus enlarging the balance in her favour which is available
for effecting payments abroad. Germany can pay in the long run in goods,
and in goods only, whether these goods are furnished direct to the
Allies, or whether they are sold to neutrals and the neutral credits so
arising are then made over to the Allies. The most solid basis for
estimating the extent to which this process can be carried is to be
found, therefore, in an analysis of her trade returns before the war.
Only on the basis of such an analysis, supplemented by some general data
as to the aggregate wealth-producing capacity of the country, can a
rational guess be made as to the maximum degree to which the exports of
Germany could be brought to exceed her imports.

In the year 1913 Germany's imports amounted to 538,000,000 and her
exports to 505,000,000, exclusive of transit trade and bullion. That is
to say, imports exceeded exports by about 33,000,000. On the average of
the five years ending 1913, however, her imports exceeded her exports by
a substantially larger amount, namely, 74,000,000. It follows,
therefore, that more than the whole of Germany's pre-war balance for new
foreign investment was derived from the interest on her existing
foreign securities, and from the profits of her shipping, foreign
banking, etc. As her foreign properties and her mercantile marine are
now to be taken from her, and as her foreign banking and other
miscellaneous sources of revenue from abroad have been largely
destroyed, it appears that, on the pre-war basis of exports and imports,
Germany, so far from having a surplus wherewith to make a foreign
payment, would be not nearly self-supporting. Her first task, therefore,
must be to effect a readjustment of consumption and production to cover
this deficit. Any further economy she can effect in the use of imported
commodities, and any further stimulation of exports will then be
available for Reparation.

Let us run over the chief items of export: (1) Iron goods. In view of
Germany's loss of resources, an increased net export seems impossible
and a large decrease probable. (2) Machinery. Some increase is possible.
(3) Coal and coke. The value of Germany's net export before the war was
22,000,000; the Allies have agreed that for the time being 20,000,000
tons is the maximum possible export with a problematic (and in fact)
impossible increase to 40,000,000 tons at some future time; even on the
basis of 20,000,000 tons we have virtually no increase of value,
measured in pre-war prices; whilst, if this amount is exacted, there
must be a decrease of far greater value in the export of manufactured
articles requiring coal for their production. (4) Woollen goods. An
increase is impossible without the raw wool, and, having regard to the
other claims on supplies of raw wool, a decrease is likely. (5) Cotton
goods. The same considerations apply as to wool. (6) Cereals. There
never was and never can be a net export. (7) Leather goods. The same
considerations apply as to wool.

We have now covered nearly half of Germany's pre-war exports, and there
is no other commodity which formerly represented as much as 3 per cent
of her exports. In what commodity is she to pay? Dyes?--their total
value in 1913 was 10,000,000. Toys? Potash?--1913 exports were worth
3,000,000. And even if the commodities could be specified, in what
markets are they to be sold?--remembering that we have in mind goods to
the value not of tens of millions annually, but of hundreds of millions.

On the side of imports, rather more is possible. By lowering the
standard of life, an appreciable reduction of expenditure on imported
commodities may be possible. But, as we have already seen, many large
items are incapable of reduction without reacting on the volume of
exports.

Let us put our guess as high as we can without being foolish, and
suppose that after a time Germany will be able, in spite of the
reduction of her resources, her facilities, her markets, and her
productive power, to increase her exports and diminish her imports so as
to improve her trade balance altogether by 100,000,000 annually,
measured in pre-war prices. This adjustment is first required to
liquidate the adverse trade balance, which in the five years before the
war averaged 74,000,000; but we will assume that after allowing for
this, she is left with a favourable trade balance of 50,000,000 a year.
Doubling this to allow for the rise in post-war prices, we have a figure
of 100,000,000. Having regard to the political, social, and human
factors, as well as to the purely economic, I doubt if Germany could be
made to pay this sum annually over a period of 30 years; but it would
not be foolish to assert or to hope that she could.

Such a figure, allowing 5 per cent for interest, and 1 per cent for
repayment of capital, represents a capital sum having a present value of
about 1700 million.

I reach, therefore, the final conclusion that, including all methods of
payment--immediately transferable wealth, ceded property, and an annual
tribute--2,000,000,000 is a safe maximum figure of Germany's capacity
to pay. In all the actual circumstances, I do not believe that she can
pay as much.

There is only one head under which I see a possibility of adding to the
figure reached on the line of argument adopted above; that is, if German
labour is actually transported to the devastated areas and there
engaged in the work of reconstruction. I have heard that a limited
scheme of this kind is actually in view. The additional contribution
thus obtainable depends on the number of labourers which the German
Government could contrive to maintain in this way and also on the number
which, over a period of years, the Belgian and French inhabitants would
tolerate in their midst. In any case, it would seem very difficult to
employ on the actual work of reconstruction, even over a number of
years, imported labour having a net present value exceeding (say)
250,000,000; and even this would not prove in practice a net addition
to the annual contributions obtainable in other ways.

A capacity of 8,000,000,000 or even of 5,000,000,000 is, therefore,
not within the limits of reasonable possibility. It is for those who
believe that Germany can make an annual payment amounting to hundreds of
millions sterling to say _in what specific commodities_ they intend this
payment to be made, and _in what markets_ the goods are to be sold.
Until they proceed to some degree of detail, and are able to produce
some tangible argument in favour of their conclusions, they do not
deserve to be believed.

I make three provisos only, none of which affect the force of my
argument for immediate practical purposes.

_First_: If the Allies were to "nurse" the trade and industry of Germany
for a period of five or ten years, supplying her with large loans, and
with ample shipping, food, and raw materials during that period,
building up markets for her, and deliberately applying all their
resources and goodwill to making her the greatest industrial nation in
Europe, if not in the world, a substantially larger sum could probably
be extracted thereafter; for Germany is capable of very great
productivity.

_Second_: Whilst I estimate in terms of money, I assume that there is no
revolutionary change in the purchasing power of our unit of value. If
the value of gold were to sink to a half or a tenth of its present
value, the real burden of a payment fixed in terms of gold would be
reduced proportionately. If a gold sovereign comes to be worth what a
shilling is worth now, then, of course, Germany can pay a larger sum
than I have named, measured in gold sovereigns.

_Third_: I assume that there is no revolutionary change in the yield of
Nature and material to man's labour. It is not _impossible_ that the
progress of science should bring within our reach methods and devices by
which the whole standard of life would be raised immeasurably, and a
given volume of products would represent but a portion of the human
effort which it represents now. In this case all standards of "capacity"
would be changed everywhere. But the fact that all things are _possible_
is no excuse for talking foolishly.

It is true that in 1870 no man could have predicted Germany's capacity
in 1910. We cannot expect to legislate for a generation or more. The
secular changes in man's economic condition and the liability of human
forecast to error are as likely to lead to mistake in one direction as
in another. We cannot as reasonable men do better than base our policy
on the evidence we have and adapt it to the five or ten years over which
we may suppose ourselves to have some measure of prevision; and we are
not at fault if we leave on one side the extreme chances of human
existence and of revolutionary changes in the order of Nature or of
man's relations to her. The fact that we have no adequate knowledge of
Germany's capacity to pay over a long period of years is no
justification (as I have heard some people claim that it is) for the
statement that she can pay ten thousand million pounds.

Why has the world been so credulous of the unveracities of politicians?
If an explanation is needed, I attribute this particular credulity to
the following influences in part.

In the first place, the vast expenditures of the war, the inflation of
prices, and the depreciation of currency, leading up to a complete
instability of the unit of value, have made us lose all sense of number
and magnitude in matters of finance. What we believed to be the limits
of possibility have been so enormously exceeded, and those who founded
their expectations on the past have been so often wrong, that the man in
the street is now prepared to believe anything which is told him with
some show of authority, and the larger the figure the more readily he
swallows it.

But those who look into the matter more deeply are sometimes misled by a
fallacy, much more plausible to reasonable persons. Such a one might
base his conclusions on Germany's total surplus of annual productivity
as distinct from her export surplus. Helfferich's estimate of Germany's
annual increment of wealth in 1913 was 400,000,000 to 425,000,000
(exclusive of increased money value of existing land and property).
Before the war, Germany spent between 50,000,000 and 100,000,000 on
armaments, with which she can now dispense. Why, therefore, should she
not pay over to the Allies an annual sum of 500,000,000? This puts the
crude argument in its strongest and most plausible form.

But there are two errors in it. First of all, Germany's annual savings,
after what she has suffered in the war and by the Peace, will fall far
short of what they were before, and, if they are taken from her year by
year in future, they cannot again reach their previous level. The loss
of Alsace-Lorraine, Poland, and Upper Silesia could not be assessed in
terms of surplus productivity at less than 50,000,000 annually. Germany
is supposed to have profited about 100,000,000 per annum from her
ships, her foreign investments, and her foreign banking and connections,
all of which have now been taken from her. Her saving on armaments is
far more than balanced by her annual charge for pensions now estimated
at 250,000,000,[2] which represents a real loss of productive
capacity. And even if we put on one side the burden of the internal
debt, which amounts to 240 milliards of marks, as being a question of
internal distribution rather than of productivity, we must still allow
for the foreign debt incurred by Germany during the war, the exhaustion
of her stock of raw materials, the depletion of her live-stock, the
impaired productivity of her soil from lack of manures and of labour,
and the diminution in her wealth from the failure to keep up many
repairs and renewals over a period of nearly five years. Germany is not
as rich as she was before the war, and the diminution in her future
savings for these reasons, quite apart from the factors previously
allowed for, could hardly be put at less than ten per cent, that is
40,000,000 annually.

[Footnote 2: The conversion at par of 5000 million marks overstates by
reason of the existing depreciation of the mark, the present money
burden of the actual pensions payments, but not, in all probability, the
real loss of national productivity as a result of the casualties
suffered in the war.]

These factors have already reduced Germany's annual surplus to less than
the 100,000,000 at which we arrived on other grounds as the maximum of
her annual payments. But even if the rejoinder be made, that we have not
yet allowed for the lowering of the standard of life and comfort in
Germany which may reasonably be imposed on a defeated enemy, there is
still a fundamental fallacy in the method of calculation. An annual
surplus available for home investment can only be converted into a
surplus available for export abroad by a radical change in the kind of
work performed. Labour, while it may be available and efficient for
domestic services in Germany, may yet be able to find no outlet in
foreign trade. We are back on the same question which faced us in our
examination of the export trade--in _what_ export trade is German labour
going to find a greatly increased outlet? Labour can only be diverted
into new channels with loss of efficiency, and a large expenditure of
capital. The annual surplus which German labour can produce for capital
improvements at home is no measure, either theoretically or practically,
of the annual tribute which she can pay abroad.

       *     *     *     *     *

I cannot leave this subject as though its just treatment wholly depended
either on our own pledges or on economic facts. The policy of reducing
Germany to servitude for a generation, of degrading the lives of
millions of human beings, and of depriving a whole nation of happiness
should be abhorrent and detestable,--abhorrent and detestable, even if
it were possible, even if it enriched ourselves, even if it did not sow
the decay of the whole civilised life of Europe. Some preach it in the
name of Justice. In the great events of man's history, in the unwinding
of the complex fates of nations Justice is not so simple. And if it
were, nations are not authorised, by religion or by natural morals, to
visit on the children of their enemies the misdoings of parents or of
rulers.




  3. Proposals for the Reconstruction of Europe (1919)

  (i) _The Revision of the Treaty_


Are any constitutional means open to us for altering the Treaty?
President Wilson and General Smuts, who believe that to have secured the
Covenant of the League of Nations outweighs much evil in the rest of the
Treaty, have indicated that we must look to the League for the gradual
evolution of a more tolerable life for Europe. "There are territorial
settlements," General Smuts wrote in his statement on signing the Peace
Treaty, "which will need revision. There are guarantees laid down which
we all hope will soon be found out of harmony with the new peaceful
temper and unarmed state of our former enemies. There are punishments
foreshadowed over most of which a calmer mood may yet prefer to pass the
sponge of oblivion. There are indemnities stipulated which cannot be
exacted without grave injury to the industrial revival of Europe, and
which it will be in the interests of all to render more tolerable and
moderate. . . . I am confident that the League of Nations will yet prove
the path of escape for Europe out of the ruin brought about by this
war." Without the League, President Wilson informed the Senate when he
presented the Treaty to them early in July 1919, ". . . long-continued
supervision of the task of reparation which Germany was to undertake to
complete within the next generation might entirely break down; the
reconsideration and revision of administrative arrangements and
restrictions which the Treaty prescribed, but which it recognised might
not provide lasting advantage or be entirely fair if too long enforced,
would be impracticable."

Can we look forward with fair hopes to securing from the operation of
the League those benefits which two of its principal begetters thus
encourage us to expect from it? The relevant passage is to be found in
Article XIX. of the Covenant, which runs as follows:

   The Assembly may from time to time advise the reconsideration by
   Members of the League of treaties which have become inapplicable
   and the consideration of international conditions whose
   continuance might endanger the peace of the world.

But alas! Article V. provides that "Except where otherwise expressly
provided in this Covenant or by the terms of the present Treaty,
decisions at any meeting of the Assembly or of the Council shall require
the agreement of all the Members of the League represented at the
meeting." Does not this provision reduce the League, so far as concerns
an early reconsideration of any of the terms of the Peace Treaty, into a
body merely for wasting time? If all the parties to the Treaty are
unanimously of opinion that it requires alteration in a particular
sense, it does not need a League and a Covenant to put the business
through. Even when the Assembly of the League is unanimous it can only
"advise" reconsideration by the members specially affected.

But the League will operate, say its supporters, by its influence on the
public opinion of the world, and the view of the majority will carry
decisive weight in practice, even though constitutionally it is of no
effect. Let us pray that this be so. Yet the League in the hands of the
trained European diplomatist may become an unequalled instrument for
obstruction and delay. The revision of Treaties is entrusted primarily,
not to the Council, which meets frequently, but to the Assembly, which
will meet more rarely and must become, as any one with an experience of
large Inter-Ally Conferences must know, an unwieldy polyglot debating
society in which the greatest resolution and the best management may
fail altogether to bring issues to a head against an opposition in
favour of the _status quo_. There are indeed two disastrous blots on the
Covenant,--Article V., which prescribes unanimity, and the
much-criticised Article X., by which "The Members of the League
undertake to respect and preserve as against external aggression the
territorial integrity and existing political independence of all Members
of the League." These two Articles together go some way to destroy the
conception of the League as an instrument of progress, and to equip it
from the outset with an almost fatal bias towards the _status quo_. It
is these Articles which have reconciled to the League some of its
original opponents, who now hope to make of it another Holy Alliance for
the perpetuation of the economic ruin of their enemies and the Balance
of Power in their own interests which they believe themselves to have
established by the Peace.

But while it would be wrong and foolish to conceal from ourselves in the
interests of "idealism" the real difficulties of the position in the
special matter of revising treaties, that is no reason for any of us to
decry the League, which the wisdom of the world may yet transform into a
powerful instrument of peace, and which in Articles XI.-XVII.[3] has
already accomplished a great and beneficent achievement. I agree,
therefore, that our first efforts for the Revision of the Treaty must be
made through the League rather than in any other way, in the hope that
the force of general opinion, and if necessary, the use of financial
pressure and financial inducements, may be enough to prevent a
recalcitrant minority from exercising their right of veto. We must trust
the new Governments, whose existence I premise in the principal Allied
countries, to show a profounder wisdom and a greater magnanimity than
their predecessors.

[Footnote 3: These Articles, which provide safeguards against the
outbreak of war between members of the League and also between members
and non-members, are the solid achievement of the Covenant. These
Articles make substantially less probable a war between organised Great
Powers such as that of 1914. This alone should commend the League to all
men.]

I do not intend to enter here into details, or to attempt a revision of
the Treaty clause by clause. I limit myself to three great changes which
are necessary for the economic life of Europe, relating to Reparation,
to Coal and Iron, and to Tariffs.

_Reparation._--If the sum demanded for Reparation is less than what the
Allies are entitled to on a strict interpretation of their engagements,
it is unnecessary to particularise the items it represents or to hear
arguments about its compilation. I suggest, therefore, the following
settlement:

(1) The amount of the payment to be made by Germany in respect of
Reparation and the costs of the Armies of Occupation might be fixed at
2000 million.

(2) The surrender of merchant ships and submarine cables under the
Treaty, of war material under the Armistice, of State property in ceded
territory, of claims against such territory in respect of public debt,
and of Germany's claims against her former Allies, should be reckoned as
worth the lump sum of 500 million, without any attempt being made to
evaluate them item by item.

(3) The balance of 1500 million should not carry interest pending its
repayment, and should be paid by Germany in thirty annual instalments of
50 million, beginning in 1923.

(4) The Reparation Commission should be dissolved, or, if any duties
remain for it to perform, it should become an appanage of the League of
Nations and should include representatives of Germany and of the neutral
States.

(5) Germany would be left to meet the annual instalments in such manner
as she might see fit, any complaint against her for non-fulfilment of
her obligations being lodged with the League of Nations. That is to say,
there would be no further expropriation of German private property
abroad, except so far as is required to meet private German obligations
out of the proceeds of such property already liquidated or in the hands
of Public Trustees and Enemy-Property Custodians in the Allied countries
and in the United States; and, in particular, Article 260 (which
provides for the expropriation of German interests in public utility
enterprises) would be abrogated.

(6) No attempt should be made to extract Reparation payments from
Austria.

_Coal and Iron._--(1) The Allies' options on coal under Annex V. should
be abandoned, but Germany's obligation to make good France's loss of
coal through the destruction of her mines should remain. This obligation
should lapse, nevertheless, in the event of the coal districts of Upper
Silesia being taken from Germany in the final settlement consequent on
the plebiscite.

(2) The arrangement as to the Saar should hold good, except that, on the
one hand, Germany should receive no credit for the mines, and, on the
other should receive back both the mines and the territory without
payment and unconditionally after ten years. But this should be
conditional on France's entering into an agreement for the same period
to supply Germany from Lorraine with at least 50 per cent of the iron
ore which was carried from Lorraine into Germany proper before the war,
in return for an undertaking from Germany to supply Lorraine with an
amount of coal equal to the whole amount formerly sent to Lorraine from
Germany proper, after allowing for the output of the Saar.

(3) The arrangement as to Upper Silesia should hold good. That is to
say, a plebiscite should be held, and in coming to a final decision
"regard will be paid (by the principal Allied and Associated Powers) to
the wishes of the inhabitants as shown by the vote, and to the
geographical and economic conditions of the locality." But the Allies
should declare that in their judgement "economic conditions" require the
inclusion of the coal districts in Germany unless the wishes of the
inhabitants are decidedly to the contrary.

Tariffs.--A Free Trade Union should be established under the auspices of
the League of Nations of countries undertaking to impose no
protectionist tariffs[4] whatever against the produce of other members
of the Union. Germany, Poland, the new States which formerly composed
the Austro-Hungarian and Turkish Empires, and the Mandated States should
be compelled to adhere to this Union for ten years, after which time
adherence would be voluntary. The adherence of other States would be
voluntary from the outset. But it is to be hoped that the United
Kingdom, at any rate, would become an original member.

[Footnote 4: It would be expedient so to define a "protectionist tariff"
as to permit (_a_) the total prohibition of certain imports; (_b_) the
imposition of sumptuary or revenue customs duties on commodities not
produced at home; (_c_) the imposition of customs duties which did not
exceed by more than five per cent a countervailing excise on similar
commodities produced at home; (_d_) export duties. Further, special
exceptions might be permitted by a majority vote of the countries
entering the Union. Duties which had existed for five years prior to a
country's entering the Union might be allowed to disappear gradually by
equal instalments spread over the five years subsequent to joining the
Union.]

       *     *     *     *     *

By fixing the Reparation payments well within Germany's capacity to pay,
we make possible the renewal of hope and enterprise within her
territory, we avoid the perpetual friction and opportunity of improper
pressure arising out of Treaty clauses which are impossible of
fulfilment, and we render unnecessary the intolerable powers of the
Reparation Commission.

By a moderation of the clauses relating directly or indirectly to coal,
and by the exchange of iron ore, we permit the continuance of Germany's
industrial life, and put limits on the loss of productivity which would
be brought about otherwise by the interference of political frontiers
with the natural localisation of the iron and steel industry.

By the proposed Free Trade Union some part of the loss of organisation
and economic efficiency may be retrieved, which must otherwise result
from the innumerable new political frontiers now created between greedy,
jealous, immature, and economically incomplete, nationalist States.
Economic frontiers were tolerable so long as an immense territory was
included in a few great Empires; but they will not be tolerable when the
Empires of Germany, Austria-Hungary, Russia, and Turkey have been
partitioned between some twenty independent authorities. A Free Trade
Union, comprising the whole of Central, Eastern, and South-Eastern
Europe, Siberia, Turkey, and (I should hope) the United Kingdom, Egypt,
and India, might do as much for the peace and prosperity of the world as
the League of Nations itself. Belgium, Holland, Scandinavia, and
Switzerland might be expected to adhere to it shortly. And it would be
greatly to be desired by their friends that France and Italy also should
see their way to adhesion.

It would be objected, I suppose, by some critics that such an
arrangement might go some way in effect towards realising the former
German dream of Mittel-Europa. If other countries were so foolish as to
remain outside the Union and to leave to Germany all its advantages,
there might be some truth in this. But an economic system, to which
every one had the opportunity of belonging and which gave special
privilege to none, is surely absolutely free from the objections of a
privileged and avowedly imperialistic scheme of exclusion and
discrimination. Our attitude to these criticisms must be determined by
our whole moral and emotional reaction to the future of international
relations and the Peace of the World. If we take the view that for at
least a generation to come Germany cannot be trusted with even a modicum
of prosperity, that while all our recent Allies are angels of light,
all our recent enemies, Germans, Austrians, Hungarians, and the rest,
are children of the devil, that year by year Germany must be kept
impoverished and her children starved and crippled, and that she must be
ringed round by enemies; then we shall reject all the proposals of this
chapter, and particularly those which may assist Germany to regain a
part of her former material prosperity and find a means of livelihood
for the industrial population of her towns. But if this view of nations
and of their relation to one another is adopted by the democracies of
Western Europe, and is financed by the United States, heaven help us
all. If we aim deliberately at the impoverishment of Central Europe,
vengeance, I dare predict, will not limp. Nothing can then delay for
very long that final civil war between the forces of Reaction and the
despairing convulsions of Revolution, before which the horrors of the
late German war will fade into nothing, and which will destroy, whoever
is victor, the civilisation and the progress of our generation. Even
though the result disappoint us, must we not base our actions on better
expectations, and believe that the prosperity and happiness of one
country promotes that of others, that the solidarity of man is not a
fiction, and that nations can still afford to treat other nations as
fellow-creatures?

Such changes as I have proposed above might do something appreciable to
enable the industrial populations of Europe to continue to earn a
livelihood. But they would not be enough by themselves. In particular,
France would be a loser on paper (on paper only, for she will never
secure the actual fulfilment of her present claims), and an escape from
her embarrassments must be shown her in some other direction. I proceed,
therefore, to proposals, first, for the adjustment of the claims of
America and the Allies amongst themselves; and second, for the provision
of sufficient credit to enable Europe to re-create her stock of
circulating capital.

  (ii) _The Settlement of Inter-Ally Indebtedness_

In proposing a modification of the Reparation terms, I have considered
them so far only in relation to Germany. But fairness requires that so
great a reduction in the amount should be accompanied by a readjustment
of its apportionment between the Allies themselves. The professions
which our statesmen made on every platform during the war, as well as
other considerations, surely require that the areas damaged by the
enemy's invasion should receive a priority of compensation. While this
was one of the ultimate objects for which we said we were fighting, we
never included the recovery of separation allowances amongst our war
aims. I suggest, therefore, that we should by our acts prove ourselves
sincere and trustworthy, and that accordingly Great Britain should
waive altogether her claims for cash payment, in favour of Belgium,
Serbia, and France. The whole of the payments made by Germany would then
be subject to the prior charge of repairing the material injury done to
those countries and provinces which suffered actual invasion by the
enemy; and I believe that the sum of 1,500,000,000 thus available would
be adequate to cover entirely the actual costs of restoration. Further,
it is only by a complete subordination of her own claims for cash
compensation that Great Britain can ask with clean hands for a revision
of the Treaty and clear her honour from the breach of faith for which
she bears the main responsibility, as a result of the policy to which
the General Election of 1918 pledged her representatives.

With the Reparation problem thus cleared up it would be possible to
bring forward with a better grace and more hope of success two other
financial proposals, each of which involves an appeal to the generosity
of the United States.

The first is for the entire cancellation of Inter-Ally indebtedness
(that is to say, indebtedness between the Governments of the Allied and
Associated countries) incurred for the purposes of the war. This
proposal, which has been put forward already in certain quarters, is one
which I believe to be absolutely essential to the future prosperity of
the world. It would be an act of far-seeing statesmanship for the United
Kingdom and the United States, the two Powers chiefly concerned, to
adopt it. The sums of money which are involved are shown approximately
in the following table:[5]

[Footnote 5: The figures in this table are partly estimated, and are
probably not completely accurate in detail.]

  +------------+-------------+-------------+------------+-------------+
  |  Loans to  |  By United  |  By United  | By France. |   Total.    |
  |            |   States.   |   Kingdom.  |            |             |
  +------------+-------------+-------------+------------+-------------+
  |            |            |            |           |            |
  |United      |             |             |            |             |
  | Kingdom    |  842,000,000|     . .     |    . .     |  842,000,000|
  |France      |  550,000,000|  508,000,000|    . .     |1,058,000,000|
  |Italy       |  325,000,000|  467,000,000|  35,000,000|  827,000,000|
  |Russia      |   38,000,000|  568,000,000| 160,000,000|  766,000,000|
  |Belgium     |   80,000,000|   98,000,000|  90,000,000|  268,000,000|
  |Serbia and  |             |             |            |             |
  | Jugo-Slavia|   20,000,000|   20,000,000|  20,000,000|   60,000,000|
  |Other Allies|   35,000,000|   79,000,000|  50,000,000|  164,000,000|
  +------------+-------------+-------------+------------+-------------+
  |Total       |1,900,000,000|1,740,000,000| 355,000,000|3,995,000,000|
  +------------+-------------+-------------+------------+-------------+

Thus the total volume of Inter-Ally indebtedness, assuming that loans
from one Ally are not set off against loans to another, is nearly
4,000,000,000. The United States is a lender only. The United Kingdom
has lent about twice as much as she has borrowed. France has borrowed
about three times as much as she has lent. The other Allies have been
borrowers only.

If all the above Inter-Ally indebtedness were mutually forgiven, the net
result on paper (i.e. assuming all the loans to be good) would be a
surrender by the United States of about 2,000,000,000 and by the
United Kingdom of about 900,000,000. France would gain about
700,000,000 and Italy about 800,000,000. But these figures overstate
the loss to the United Kingdom and understate the gain to France; for a
large part of the loans made by both these countries has been to Russia
and cannot, by any stretch of imagination, be considered good. If the
loans which the United Kingdom has made to her Allies are reckoned to be
worth 50 per cent of their full value (an arbitrary but convenient
assumption which the Chancellor of the Exchequer has adopted on more
than one occasion as being as good as any other for the purposes of an
approximate national balance sheet), the operation would involve her
neither in loss nor in gain. But in whatever way the net result is
calculated on paper, the relief in anxiety which such a liquidation of
the position would carry with it would be very great. It is from the
United States, therefore, that the proposal asks generosity.

Speaking with a very intimate knowledge of the relations throughout the
war between the British, the American, and the other Allied Treasuries,
I believe this to be an act of generosity for which Europe can fairly
ask, provided Europe is making an honourable attempt in other
directions, not to continue war, economic or otherwise, but to achieve
the economic reconstitution of the whole Continent. The financial
sacrifices of the United States have been, in proportion to her wealth,
immensely less than those of the European States. This could hardly
have been otherwise. It was a European quarrel, in which the United
States Government could not have justified itself before its citizens in
expending the whole national strength, as did the Europeans. After the
United States came into the war her financial assistance was lavish and
unstinted, and without this assistance the Allies could never have won
the war, quite apart from the decisive influence of the arrival of the
American troops.

But in speaking thus as we do of American financial assistance, we
tacitly assume, and America, I believe, assumed it too when she gave the
money, that it was not in the nature of an investment. If Europe is
going to repay the 2,000,000,000 worth of financial assistance which
she has had from the United States with compound interest at 5 per cent,
the matter takes on quite a different complexion. If America's advances
are to be regarded in this light, her relative financial sacrifice has
been very slight indeed.

Failing such a settlement as is now proposed, the war will have ended
with a network of heavy tribute payable from one Ally to another. The
total amount of this tribute is even likely to exceed the amount
obtainable from the enemy; and the war will have ended with the
intolerable result of the Allies paying indemnities to one another
instead of receiving them from the enemy.

For this reason the question of Inter-Allied indebtedness is closely
bound up with the intense popular feeling amongst the European Allies on
the question of indemnities,--a feeling which is based, not on any
reasonable calculation of what Germany can, in fact, pay, but on a
well-founded appreciation of the unbearable financial situation in which
these countries will find themselves unless she pays. Take Italy as an
extreme example. If Italy can reasonably be expected to pay
800,000,000, surely Germany can and ought to pay an immeasurably higher
figure. Or if it is decided (as it must be) that Austria can pay next to
nothing, is it not an intolerable conclusion that Italy should be loaded
with a crushing tribute, while Austria escapes? Or, to put it slightly
differently, how can Italy be expected to submit to payment of this
great sum and see Czecho-Slovakia pay little or nothing? At the other
end of the scale there is the United Kingdom. Here the financial
position is different, since to ask us to pay 800,000,000 is a very
different proposition from asking Italy to pay it. But the sentiment is
much the same. If we have to be satisfied without full compensation from
Germany, how bitter will be the protests against paying it to the United
States. We, it will be said, have to be content with a claim against the
bankrupt estates of Germany, France, Italy, and Russia, whereas the
United States has secured a first mortgage upon us. The case of France
is at least as overwhelming. She can barely secure from Germany the full
measure of the destruction of her countryside. Yet victorious France
must pay her friends and Allies more than four times the indemnity which
in the defeat of 1870 she paid Germany. The hand of Bismarck was light
compared with that of an Ally or of an Associate. A settlement of
Inter-Ally indebtedness is, therefore, an indispensable preliminary to
the peoples of the Allied countries facing, with other than a maddened
and exasperated heart, the inevitable truth about the prospects of an
indemnity from the enemy.

It might be an exaggeration to say that it is impossible for the
European Allies to pay the capital and interest due from them on these
debts, but to make them do so would certainly be to impose a crushing
burden. They may be expected, therefore, to make constant attempts to
evade or escape payment, and these attempts will be a constant source of
international friction and ill-will for many years to come. A debtor
nation does not love its creditor, and it is fruitless to expect
feelings of goodwill from France, Italy, and Russia towards this country
or towards America, if their future development is stifled for many
years to come by the annual tribute which they must pay us. There will
be a great incentive to them to seek their friends in other directions,
and any future rupture of peaceable relations will always carry with it
the enormous advantage of escaping the payment of external debts. If, on
the other hand, these great debts are forgiven, a stimulus will be
given to the solidarity and true friendliness of the nations lately
associated.

The existence of the great war debts is a menace to financial stability
everywhere. There is no European country in which repudiation may not
soon become an important political issue. In the case of internal debt,
however, there are interested parties on both sides, and the question is
one of the internal distribution of wealth. With external debts this is
not so, and the creditor nations may soon find their interest
inconveniently bound up with the maintenance of a particular type of
government or economic organisation in the debtor countries. Entangling
alliances or entangling leagues are nothing to the entanglements of cash
owing.

The final consideration influencing the reader's attitude to this
proposal must, however, depend on his view as to the future place in the
world's progress of the vast paper entanglements which are our legacy
from war finance both at home and abroad. The war has ended with every
one owing every one else immense sums of money. Germany owes a large sum
to the Allies; the Allies owe a large sum to Great Britain; and Great
Britain owes a large sum to the United States. The holders of war loan
in every country are owed a large sum by the State; and the State in its
turn is owed a large sum by these and other taxpayers. The whole
position is in the highest degree artificial, misleading, and vexatious.
We shall never be able to move again, unless we can free our limbs from
these paper shackles. A general bonfire is so great a necessity that
unless we can make of it an orderly and good-tempered affair in which no
serious injustice is done to any one, it will, when it comes at last,
grow into a conflagration that may destroy much else as well. As regards
internal debt, I am one of those who believe that a capital levy for the
extinction of debt is an absolute pre-requisite of sound finance in
every one of the European belligerent countries. But the continuance on
a huge scale of indebtedness between Governments has special dangers of
its own.

Before the middle of the nineteenth century no nation owed payments to a
foreign nation on any considerable scale, except such tributes as were
exacted under the compulsion of actual occupation in force and, at one
time, by absentee princes under the sanctions of feudalism. It is true
that the need for European capitalism to find an outlet in the New World
has led during the past fifty years, though even now on a relatively
modest scale, to such countries as Argentine owing an annual sum to such
countries as England. But the system is fragile; and it has only
survived because its burden on the paying countries has not so far been
oppressive, because this burden is represented by real assets and is
bound up with the property system generally, and because the sums
already lent are not unduly large in relation to those which it is still
hoped to borrow. Bankers are used to this system, and believe it to be
a necessary part of the permanent order of society. They are disposed to
believe, therefore, by analogy with it, that a comparable system between
Governments, on a far vaster and definitely oppressive scale,
represented by no real assets, and less closely associated with the
property system, is natural and reasonable and in conformity with human
nature.

I doubt this view of the world. Even capitalism at home, which engages
many local sympathies, which plays a real part in the daily process of
production, and upon the security of which the present organisation of
Society largely depends, is not very safe. But however this may be, will
the discontented peoples of Europe be willing for a generation to come
so to order their lives that an appreciable part of their daily produce
may be available to meet a foreign payment, the reason of which, whether
as between Europe and America, or as between Germany and the rest of
Europe, does not spring compellingly from their sense of justice or
duty?

On the one hand, Europe must depend in the long run on her own daily
labour and not on the largesse of America; but, on the other hand, she
will not pinch herself in order that the fruit of her daily labour may
go elsewhere. In short, I do not believe that any of these tributes will
continue to be paid, at the best, for more than a very few years. They
do not square with human nature or agree with the spirit of the age.

If there is any force in this mode of thought, expediency and generosity
agree together, and the policy which will best promote immediate
friendship between nations will not conflict with the permanent
interests of the benefactors.


  (iii) _An International Loan_

I pass to a second financial proposal. The requirements of Europe are
_immediate_. The prospect of being relieved of oppressive interest
payments to England and America over the whole life of the next two
generations (and of receiving from Germany some assistance year by year
to the costs of restoration) would free the future from excessive
anxiety. But it would not meet the ills of the immediate present,--the
excess of Europe's imports over her exports, the adverse exchange, and
the disorder of the currency. It will be very difficult for European
production to get started again without a temporary measure of external
assistance. I am therefore a supporter of an international loan in some
shape or form, such as has been advocated in many quarters in France,
Germany, and England, and also in the United States. In whatever way the
ultimate responsibility for repayment is distributed, the burden of
finding the immediate resources must inevitably fall in major part upon
the United States.

The chief objections to all the varieties of this species of project
are, I suppose, the following. The United States is disinclined to
entangle herself further (after recent experiences) in the affairs of
Europe, and, anyhow, has for the time being no more capital to spare for
export on a large scale. There is no guarantee that Europe will put
financial assistance to proper use, or that she will not squander it and
be in just as bad case two or three years hence as she is in now;--M.
Klotz will use the money to put off the day of taxation a little longer,
Italy and Jugo-Slavia will fight one another on the proceeds, Poland
will devote it to fulfilling towards all her neighbours the military
rle which France has designed for her, the governing classes of
Roumania will divide up the booty amongst themselves. In short, America
would have postponed her own capital developments and raised her own
cost of living in order that Europe might continue for another year or
two the practices, the policy, and the men of the past nine months. And
as for assistance to Germany, is it reasonable or at all tolerable that
the European Allies, having stripped Germany of her last vestige of
working capital, in opposition to the arguments and appeals of the
American financial representatives at Paris, should then turn to the
United States for funds to rehabilitate the victim in sufficient measure
to allow the spoliation to recommence in a year or two?

There is no answer to these objections as matters are now. If I had
influence at the United States Treasury, I would not lend a penny to a
single one of the present Governments of Europe. They are not to be
trusted with resources which they would devote to the furtherance of
policies in repugnance to which, in spite of the President's failure to
assert either the might or the ideals of the people of the United
States, the Republican and the Democratic parties are probably united.
But if, as we must pray they will, the souls of the European peoples
turn away this winter from the false idols which have survived the war
that created them, and substitute in their hearts for the hatred and the
nationalism, which now possess them, thoughts and hopes of the happiness
and solidarity of the European family,--then should natural piety and
filial love impel the American people to put on one side all the smaller
objections of private advantage and to complete the work that they began
in saving Europe from the tyranny of organised force, by saving her from
herself. And even if the conversion is not fully accomplished, and some
parties only in each of the European countries have espoused a policy of
reconciliation, America can still point the way and hold up the hands of
the party of peace by having a plan and a condition on which she will
give her aid to the work of renewing life.

The impulse which, we are told, is now strong in the mind of the United
States to be quit of the turmoil, the complication, the violence, the
expense, and, above all, the unintelligibility of the European
problems, is easily understood. No one can feel more intensely than the
writer how natural it is to retort to the folly and impracticability of
the European statesmen,--Rot, then, in your own malice, and we will go
our way--

  Remote from Europe; from her blasted hopes;
  Her fields of carnage, and polluted air.

But if America recalls for a moment what Europe has meant to her and
still means to her, what Europe, the mother of art and of knowledge, in
spite of everything, still is and still will be, will she not reject
these counsels of indifference and isolation, and interest herself in
what may prove decisive issues for the progress and civilisation of all
mankind?

Assuming then, if only to keep our hopes up, that America will be
prepared to contribute to the process of building up the good forces of
Europe, and will not, having completed the destruction of an enemy,
leave us to our misfortunes,--what form should her aid take?

I do not propose to enter on details. But the main outlines of all
schemes for an international loan are much the same. The countries in a
position to lend assistance, the neutrals, the United Kingdom, and, for
the greater portion of the sum required, the United States, must provide
foreign purchasing credits for all the belligerent countries of
continental Europe, allied and ex-enemy alike. The aggregate sum
required might not be so large as is sometimes supposed. Much might be
done, perhaps, with a fund of 200,000,000 in the first instance. This
sum, even if a precedent of a different kind had been established by the
cancellation of Inter-Ally War Debt, should be lent and should be
borrowed with the unequivocal intention of its being repaid in full.
With this object in view, the security for the loan should be the best
obtainable, and the arrangements for its ultimate repayment as complete
as possible. In particular, it should rank, both for payment of interest
and discharge of capital, in front of all Reparation claims, all
Inter-Ally War Debt, all internal war loans, and all other Government
indebtedness of any other kind. Those borrowing countries who will be
entitled to Reparation payments should be required to pledge all such
receipts to repayment of the new loan. And all the borrowing countries
should be required to place their customs duties on a gold basis and to
pledge such receipts to its service.

Expenditure out of the loan should be subject to general, but not
detailed, supervision by the lending countries.

If, in addition to this loan for the purchase of food and materials, a
guarantee fund were established up to an equal amount, namely
200,000,000 (of which it would probably prove necessary to find only a
part in cash), to which all members of the League of Nations would
contribute according to their means, it might be practicable to base
upon it a general reorganisation of the currency.

In this manner Europe might be equipped with the minimum amount of
liquid resources necessary to revive her hopes, to renew her economic
organisation, and to enable her great intrinsic wealth to function for
the benefit of her workers. It is useless at the present time to
elaborate such schemes in further detail. A great change is necessary in
public opinion before the proposals of this chapter can enter the region
of practical politics, and we must await the progress of events as
patiently as we can.

       *     *     *     *     *

I see few signs of sudden or dramatic developments anywhere. Riots and
revolutions there may be, but not such, at present, as to have
fundamental significance. Against political tyranny and injustice
Revolution is a weapon. But what counsels of hope can Revolution offer
to sufferers from economic privation, which does not arise out of the
injustices of distribution but is general? The only safeguard against
revolution in Central Europe is indeed the fact that, even to the minds
of men who are desperate, Revolution offers no prospect of improvement
whatever. There may, therefore, be ahead of us a long, silent process of
semi-starvation, and of a gradual, steady lowering of the standards of
life and comfort. The bankruptcy and decay of Europe, if we allow it to
proceed, will affect every one in the long-run, but perhaps not in a way
that is striking or immediate.

This has one fortunate side. We may still have time to reconsider our
courses and to view the world with new eyes. For the immediate future
events are taking charge, and the near destiny of Europe is no longer in
the hands of any man. The events of the coming year will not be shaped
by the deliberate acts of statesmen, but by the hidden currents, flowing
continually beneath the surface of political history, of which no one
can predict the outcome. In one way only can we influence these hidden
currents,--by setting in motion those forces of instruction and
imagination which change _opinion_. The assertion of truth, the
unveiling of illusion, the dissipation of hate, the enlargement and
instruction of men's hearts and minds, must be the means.




  4. The Change of Opinion (1921)


It is the method of modern statesmen to talk as much folly as the
public demand and to practise no more of it than is compatible with what
they have said, trusting that such folly in action as must wait on folly
in word will soon disclose itself as such, and furnish an opportunity
for slipping back into wisdom,--the Montessori system for the child, the
Public. He who contradicts this child will soon give place to other
tutors. Praise, therefore, the beauty of the flames he wishes to touch,
the music of the breaking toy; even urge him forward; yet waiting with
vigilant care, the wise and kindly saviour of Society, for the right
moment to snatch him back, just singed and now attentive.

I can conceive for this terrifying statesmanship a plausible defence.
Mr. Lloyd George took the responsibility for a Treaty of Peace, which
was not wise, which was partly impossible, and which endangered the life
of Europe. He may defend himself by saying that he knew that it was not
wise and was partly impossible and endangered the life of Europe; but
that public passions and public ignorance play a part in the world of
which he who aspires to lead a democracy must take account; that the
Peace of Versailles was the best momentary settlement which the demands
of the mob and the characters of the chief actors conjoined to permit;
and for the life of Europe, that he has spent his skill and strength for
two years in avoiding or moderating the dangers.

Such claims would be partly true and cannot be brushed away. The private
history of the Peace Conference, as it has been disclosed by French and
American participators, displays Mr. Lloyd George in a partly favourable
light, generally striving against the excesses of the Treaty and doing
what he could, short of risking a personal defeat. The public history of
the two years which have followed it exhibit him as protecting Europe
from as many of the evil consequences of his own Treaty, as it lay in
his power to prevent, with a craft few could have bettered, preserving
the peace, though not the prosperity, of Europe, seldom expressing the
truth, yet often acting under its influence. He would claim, therefore,
that by devious paths, a faithful servant of the possible, he was
serving Man.

He may judge rightly that this is the best of which a democracy is
capable--to be jockeyed, humbugged, cajoled along the right road. A
preference for truth or for sincerity _as a method_ may be a prejudice
based on some aesthetic or personal standard, inconsistent, in politics,
with practical good.

We cannot yet tell. Even the public learns by experience. Will the charm
work still, when the stock of statesmen's credibility, accumulated
before these times, is getting exhausted?

In any event, private individuals are not under the same obligation as
Cabinet Ministers to sacrifice veracity to the public weal. It is a
permitted self-indulgence for a private person to speak and write
freely. Perhaps it may even contribute one ingredient to the congeries
of things which the wands of statesmen cause to work together, so
marvellously, for our ultimate good.

       *     *     *     *     *

For these reasons I do not admit error in having based _The Economic
Consequences of the Peace_ on a literal interpretation of the Treaty of
Versailles, or in having examined the results of actually carrying it
out. I argued that much of it was _impossible_; but I do not agree with
many critics, who held that, for this very reason, it was also harmless.
Inside opinion accepted from the beginning many of my main conclusions
about the Treaty. But it was not therefore unimportant that outside
opinion should accept them also.

For there are, in the present times, two opinions; not, as in former
ages, the true and the false, but the outside and the inside; the
opinion of the public voiced by the politicians and the newspapers, and
the opinion of the politicians, the journalists and the civil servants,
upstairs and backstairs and behind-stairs, expressed in limited circles.

Those who live in the limited circles and share the inside opinion pay
both too much and too little attention to the outside opinion; too much,
because, ready in words and promises to concede to it everything, they
regard open opposition as absurdly futile; too little, because they
believe that these words and promises are so certainly destined to
change in due season, that it is pedantic, tiresome, and inappropriate
to analyse their literal meaning and exact consequences. They know all
this nearly as well as the critic, who wastes, in their view, his time
and his emotions in exciting himself too much over what, on his own
showing, cannot possibly happen. Nevertheless, what is said before the
world, is still of deeper consequence than the subterranean breathings
and well-informed whisperings, knowledge of which allows inside opinion
to feel superior to outside opinion, even at the moment of bowing to it.

But there is a further complication. In England (and perhaps elsewhere
also) there are _two_ outside opinions, that which is expressed in the
newspapers and that which the mass of ordinary men privately suspect to
be true. These two degrees of the outside opinion are much nearer to one
another than they are to the inside, and under some aspects they are
identical; yet there is under the surface a real difference between the
dogmatism and definiteness of the press and the living, indefinite
belief of the individual man. I fancy that even in 1919 the average
Englishman never really believed in the indemnity; he took it always
with a grain of salt, with a measure of intellectual doubt. But it
seemed to him that for the time being there could be little practical
harm in going on the indemnity tack, and also that, in relation to his
feelings at that time, a belief in the possibility of boundless payments
by Germany was in better sentiment, even if less true, than the
contrary. Thus the recent modification in British outside opinion is
only partly intellectual, and is due rather to changed conditions; for
it is seen that perseverance with the indemnity does now involve
practical harm, whilst the claims of sentiment are no longer so
decisive. He is therefore prepared to attend to arguments, of which he
had always been aware out of the corner of his eye.

Foreign observers are apt to heed too little these unspoken
sensibilities, which the voice of the press is bound to express
ultimately. Inside opinion gradually affects them by percolating to
wider and wider circles; and they are susceptible in time to argument,
common sense, or self-interest. It is the business of the modern
politician to be accurately aware of all three degrees; he must have
enough intellect to understand the inside opinion, enough sympathy to
detect the inner outside opinion, and enough brass to express the outer
outside opinion.

Whether this account is true or fanciful, there can be no doubt as to
the immense change in public sentiment over the past two years. The
desire for a quiet life, for reduced commitments, for comfortable terms
with our neighbours is now paramount. The megalomania of war has passed
away, and every one wishes to conform himself with the facts. For these
reasons the Reparation Chapter of the Treaty of Versailles is crumbling.
There is little prospect now of the disastrous consequences of its
fulfilment.




  5. War Debts and the United States

  (i) _Cancellation_ (1921)


Who believes that the Allies will, over a period of one or two
generations, exert adequate force over the German Government, or that
the German Government can exert adequate authority over its subjects, to
extract continuing fruits on a vast scale from forced labour? No one
believes it in his heart; no one at all. There is not the faintest
possibility of our persisting with this affair to the end. But if this
is so, then, most certainly, it will not be worth our while to disorder
our export trades and disturb the equilibrium of our industry for two or
three years; much less to endanger the peace of Europe.

The same principles apply with one modification to the United States and
to the exaction by her of the debts which the Allied Governments owe.
The industries of the United States would suffer, not so much from the
competition of cheap goods from the Allies in their endeavours to pay
their debts, as from the inability of the Allies to purchase from
America their usual proportion of her exports. The Allies would have to
find the money to pay America, not so much by selling more as by buying
less. The farmers of the United States would suffer more than the
manufacturers; if only because increased imports can be kept out by a
tariff, whilst there is no such easy way of stimulating diminished
exports. It is, however, a curious fact that whilst Wall Street and the
manufacturing East are prepared to consider a modification of the debts,
the Middle West and South is reported (I write ignorantly) to be dead
against it. For two years Germany was not required to pay cash to the
Allies, and during that period the manufacturers of Great Britain were
quite blind to what the consequences would be to themselves when the
payments actually began. The Allies have not yet been required to begin
to pay cash to the United States, and the farmers of the latter are
still as blind as were the British manufacturers to the injuries they
will suffer if the Allies ever try seriously to pay in full.

The decisive argument, however, for the United States, as for Great
Britain, is not the damage to particular interests (which would diminish
with time), but the unlikelihood of permanence in the exaction of the
debts, even if they were paid for a short period. I say this, not only
because I doubt the ability of the European Allies to pay, but because
of the great difficulty of the problem which the United States has
before her in any case in balancing her commercial account with the Old
World.

American economists have examined somewhat carefully the statistical
measure of the change from the pre-war position. According to their
estimates, America is now owed more interest on foreign investments than
is due from her, quite apart from the interest on the debts of the
Allied Governments; and her mercantile marine now earns from foreigners
more than she owes them for similar services. Her excess of exports of
commodities over imports approaches $3000 million a year; whilst, on
the other side of the balance, payments, mainly to Europe, in respect of
tourists and of immigrant remittances are estimated at not above $1000
million a year. Thus, in order to balance the account as it now stands,
the United States must lend to the rest of the world, in one shape or
another, not less than $2000 million a year, to which interest and
sinking fund on the European Governmental War Debts would, if they were
paid, add about $600 million.

Recently, therefore, the United States must have been lending to the
rest of the world, mainly Europe, something like $2000 million a year.
Fortunately for Europe, a fair proportion of this was by way of
speculative purchases of depreciated paper currencies. From 1919 to 1921
the losses of American speculators fed Europe; but this source of income
can scarcely be reckoned on permanently. For a time the policy of loans
can meet the situation; but, as the interest on past loans mounts up, it
must in the long run aggravate it.

Mercantile nations have always employed large funds in overseas trade.
But the practice of foreign investment, as we know it now, is a very
modern contrivance, a very unstable one, and only suited to peculiar
circumstances. An old country can in this way develop a new one at a
time when the latter could not possibly do so with its own resources
alone; the arrangement may be mutually advantageous, and out of abundant
profits the lender may hope to be repaid. But the position cannot be
reversed. If European bonds are issued in America on the analogy of the
American bonds issued in Europe during the nineteenth century, the
analogy will be a false one; because, taken in the aggregate, there is
no natural increase, no _real_ sinking fund, out of which they can be
repaid. The interest will be furnished out of new loans, so long as
these are obtainable, and the financial structure will mount always
higher, until it is not worth while to maintain any longer the illusion
that it has foundations. The unwillingness of American investors to buy
European bonds is based on common sense.

At the end of 1919 I advocated (in _The Economic Consequences of the
Peace_) a reconstruction loan from America to Europe, conditioned,
however, on Europe's putting her own house in order. In the past two
years America, in spite of European complaints to the contrary, has, in
fact, made _very large_ loans, much larger than the sum I contemplated,
though not mainly in the form of regular, dollar-bond issues. No
particular conditions were attached to these loans, and much of the
money has been lost. Though wasted in part, they have helped Europe
through the critical days of the post-Armistice period. But a
continuance of them cannot provide a solution for the existing
dis-equilibrium in the balance of indebtedness.

In part the adjustment may be effected by the United States taking the
place hitherto held by England, France, and (on a small scale) Germany
in providing capital for those new parts of the world less developed
than herself--the British Dominions and South America. The Russian
Empire, too, in Europe and Asia, is to be regarded as virgin soil, which
may at a later date provide a suitable outlet for foreign capital. The
American investor will lend more wisely to these countries, on the lines
on which British and French investors used to lend to them, than direct
to the old countries of Europe. But it is not likely that the whole gap
can be bridged thus. Ultimately, and probably soon, there must be a
readjustment of the balance of exports and imports. America must buy
more and sell less. This is the only alternative to her making to Europe
an annual present. Either American prices must rise faster than European
(which will be the case if the Federal Reserve Board allows the gold
influx to produce its natural consequences), or, failing this, the same
result must be brought about by a further depreciation of the European
exchanges, until Europe, by inability to buy, has reduced her purchases
to articles of necessity. At first the American exporter, unable to
scrap all at once the processes of production for export, may meet the
situation by lowering his prices; but when these have continued, say for
two years, below his cost of production, he will be driven inevitably to
curtail or abandon his business.

It is useless for the United States to suppose that an equilibrium
position can be reached on the basis of her exporting at least as much
as at present, and at the same time restricting her imports by a tariff.
Just as the Allies demand vast payments from Germany, and then exercise
their ingenuity to prevent her paying them, so the American
Administration devises, with one hand, schemes for financing exports,
and, with the other, tariffs which will make it as difficult as possible
for such credits to be repaid. Great nations can often act with a degree
of folly which we should not excuse in an individual.

By the shipment to the United States of all the bullion in the world,
and the erection there of a sky-scraping golden calf, a short
postponement may be gained. But a point may even come when the United
States will refuse gold, yet still demand to be paid--a new Midas vainly
asking more succulent fare than the barren metal of her own contract.

In any case the readjustment will be severe, and injurious to important
interests. If, in addition, the United States exacts payment of the
Allied debts, the position will be intolerable. If she persevered to the
bitter end, scrapped her export industries and diverted to other uses
the capital now employed in them, and if her former European associates
decided to meet their obligations at whatever cost to themselves, I do
not deny that the final result might be to America's material interest.
But the project is utterly chimerical. It will not happen. Nothing is
more certain than that America will not pursue such a policy to its
conclusion; she will abandon it as soon as she experiences its first
consequences. Nor, if she did, would the Allies pay the money. The
position is exactly parallel to that of German Reparation. America will
not carry through to a conclusion the collection of Allied debt, any
more than the Allies will carry through the collection of their present
Reparation demands. Neither, in the long run, is serious politics.
Nearly all well-informed persons admit this in private conversation. But
we live in a curious age when utterances in the press are deliberately
designed to be in conformity with the worst-informed, instead of with
the best-informed, opinion, because the former is the wider spread; so
that for comparatively long periods there can be discrepancies,
laughable or monstrous, between the written and the spoken word.

If this is so, it is not good business for America to embitter her
relations with Europe, and to disorder her export industries for two
years, in pursuance of a policy which she is certain to abandon before
it has profited her.

For the benefit of any reader who enjoys an abstract statement, I
summarise the argument thus. The equilibrium of international trade is
based on a complicated balance between the agriculture and the
industries of the different countries of the world, and on a
specialisation by each in the employment of its labour and its capital.
If one country is required to transfer to another without payment great
quantities of goods, for which this equilibrium does not allow, the
balance is destroyed. Since capital and labour are fixed and organised
in certain employments and cannot flow freely into others, the
disturbance of the balance is destructive to the utility of the capital
and labour thus fixed. The _organisation_, on which the wealth of the
modern world so largely depends, suffers injury. In course of time a new
organisation and a new equilibrium can be established. But if the origin
of the disturbance is of temporary duration, the losses from the injury
done to organisation may outweigh the profit of receiving goods without
paying for them. Moreover, since the losses will be concentrated on the
capital and labour employed in particular industries, they will provoke
an outcry out of proportion to the injury inflicted on the community as
a whole.

Most Americans, with whom I have discussed this question, express
themselves as personally favourable to the cancellation of the European
debts, but add that so great a majority of their countrymen think
otherwise that such a proposal is at present outside practical politics.
They think, therefore, that it is premature to discuss it; for the
present, America must pretend she is going to demand the money and
Europe must pretend she is going to pay it. Indeed, the position is much
the same as that of German Reparation in England in the middle of 1921.
Doubtless my informants are right about this public opinion, the
mysterious entity which is the same thing perhaps as Rousseau's General
Will. Yet, all the same, I do not attach, to what they tell me, too
much importance. Public opinion held that Hans Andersen's Emperor wore a
fine suit; and in the United States especially, public opinion changes
sometimes, as it were, _en bloc_.

If, indeed, public opinion were an unalterable thing, it would be a
waste of time to discuss public affairs. And though it may be the chief
business of newsmen and politicians to ascertain its momentary features,
a writer ought to be concerned, rather, with what public opinion should
be. I record these platitudes because many Americans give their advice,
as though it were actually immoral to make suggestions which public
opinion does not now approve. In America, I gather, an act of this kind
is considered so reckless that some improper motive is at once
suspected, and criticism takes the form of an inquiry into the culprit's
personal character and antecedents.

Let us inquire, however, a little more deeply into the sentiments and
emotions which underlie the American attitude to the European debts.
They want to be generous to Europe, both out of good feeling and because
many of them now suspect that any other course would upset their own
economic equilibrium. But they don't want to be "done." They do not want
it to be said that once again the old cynics in Europe have been one too
many for them. Times, too, have been bad and taxation oppressive; and
many parts of America do not feel rich enough at the moment to favour a
light abandonment of a possible asset. Moreover, these arrangements,
between nations warring together, they liken much more closely than we
do to ordinary business transactions between individuals. It is, they
say, as though a bank having made an unsecured advance to a client, in
whom they believe, at a difficult time when he would have gone under
without it, this client were then to cry off paying. To permit such a
thing would be to do an injury to the elementary principles of business
honour.

The average American, I fancy, would like to see the European nations
approaching him with a pathetic light in their eyes and the cash in
their hands, saying, "America, we owe to you our liberty and our life;
here we bring what we can in grateful thanks, money not wrung by
grievous taxation from the widow and orphan, but saved, the best fruits
of victory, out of the abolition of armaments, militarism, Empire, and
internal strife, made possible by the help you freely gave us." And then
the average American would reply: "I honour you for your integrity. It
is what I expected. But I did not enter the war for profit or to invest
my money well. I have had my reward in the words you have just uttered.
The loans are forgiven. Return to your homes and use the resources I
release to uplift the poor and the unfortunate." And it would be an
essential part of the little scene that his reply should come as a
complete and overwhelming surprise.

Alas for the wickedness of the world! It is not in international affairs
that we can secure the sentimental satisfactions which we all love. For
only individuals are good, and all nations are dishonourable, cruel, and
designing. And whilst the various Prime Ministers will telegraph
something suitable, drafted by their private secretaries, to the effect
that America's action makes the moment of writing the most important in
the history of the world and proves that Americans are the noblest
creatures living, America must not expect adequate or appropriate
thanks.


  (ii) _The Balfour Note_ (1925)

The Balfour Note insists that our receipts from Germany _plus_ our
receipts from our Allies must equal our payments to the United States.
When the Note was written, its effect was indeterminate. We did not know
how much it would require France to pay, or the proportion that this
would bear to what Germany would be paying France. Now we can make
limiting estimates of both sums.

We have to pay the United States about 35,000,000 a year, rising to
40,000,000. The Dawes Scheme will yield, if and when it is in _full_
operation, and after allowing for various prior charges, about
100,000,000 a year. France's share of this will be about 54,000,000,
Italy's 10,000,000 (less at first), and ours 24,000,000. (I neglect
the minor Allies because they would complicate the calculation and
hardly affect the result.) Thus the Balfour Note demands that France and
Italy should pay Great Britain not less than 16,000,000 a year. Since
the aggregate debts of these two Powers to ourselves and to the United
States respectively are about equal (our share of Italy's total debt is
greater, and of France's less), we must assume that the United States
will not settle for a smaller sum than what we receive. If the whole of
Italy's share of Reparations is devoted to her debts, France is left, on
these assumptions, with 22,000,000 to pay. In this case the net result
of the Debt Settlements and the Dawes Scheme would be that the receipts
from Germany would be distributed as follows:

  United Kingdom           Nil.
  Italy                    Nil.
  France              32,000,000
  United States[6]    58,000,000

[Footnote 6: Including her own direct share.]

Very improbable things are easier said than done. Who believes that this
will ever be done?

But we have not yet reached the gravamen of my criticism of the Balfour
Note. The above is what would happen if the Dawes Scheme is perfectly
successful. If the Dawes Scheme is only partly successful, then, by the
principle of the Balfour Note, _France must make good the difference_ to
ourselves and the United States. For example, if the Dawes Scheme
produces half its maximum, which, in the opinion of many good judges,
would be a considerable achievement, France will get less than nothing
at all and _more than the whole_ of Germany's payments will go to the
United States. France would become, in fact, a deferred claimant on a
third share of the Dawes Scheme, if the Scheme works very well, and a
guarantor of Germany, if it works less well. Is not any one very silly
who thinks that this can come to pass?

It is obvious that France will never agree to such a settlement. But
suppose _per impossible_ that she did. In this case Great Britain and
the United States have, theoretically, no further interest whatever in
the operation or productivity of the Dawes Scheme. France becomes the
only interested party,--interested not merely as a creditor but as a
guarantor who must make deficiencies good.

This fatal objection is necessarily inherent in the Balfour Note. It is
of the essence of the Note that the less Germany pays, the _more_ France
shall pay;--that is to say, the less France is in a position to pay, the
more she shall pay. Diplomatically and financially alike, this is
topsy-turvy. It would never bring us cash; yet it would destroy our
diplomatic authority as a moderator between France and Germany. The
Foreign Office would have sold its influence for a mess of pottage which
the Treasury would never taste.

The Balfour Note, therefore, is bad in principle. There can be no
working settlement except on the exactly opposite principle, namely
that the less Germany pays, the _less_ France shall pay. The amount of
France's payment must vary in the same direction as Germany's, not in
the opposite direction. This was the principle of the suggestion, which
I offered recently, by which France's payment should be a proportion of
her receipts from Germany. According to current report, France herself
has put forward just this principle through the mouth of M. Clmentel. I
suggested that the proportion be one-third. M. Clmentel's reported
offer would amount, on the assumption that the United States got the
same terms, to about half my figure. But it does not follow that he
would not offer more to obtain a settlement on these lines.

Such a settlement would increase, instead of diminishing, the interest
of ourselves and the United States in the Dawes Scheme. We should have,
between us, a bigger interest than France. We might, in this way, obtain
a moderate contribution towards our American debt, corresponding to that
part of it which we contracted, indirectly, on French account. We should
certainly place ourselves in a strong moral and diplomatic position to
claim a moderating and pacific influence in the Franco-German problems
which still lie ahead.


  (iii) _Cancellation_ (1928)[7]

[Footnote 7: The material for this essay was prepared in connection with
a Broadcast "Talk" given on May 3, 1928.]

Let us remember the origin of the War Debts. Soon after the beginning of
the war it was clear that certain of our Allies--Russia and Belgium in
the first instance, but subsequently all of them--would require
financial assistance. We might have given this in loans or in subsidies.
Loans were preferred to subsidies, in order to preserve a greater sense
of responsibility and economy in the spending of them. But though
financial assistance took the form of loans, it is scarcely to be
supposed that the lending countries regarded them at the time as being
in the nature of ordinary investments. Indeed it would have been very
illogical to do so. For we often gave assistance in the form of money,
precisely because we were less able to assist with men or ships. For
example, when we sent guns to Italy to help her after her first serious
reverse, she had to pay for them by loans. But when matters got worse
still, and we sent not only guns but gunners too to man them and to be
killed, then we charged nothing. Yet in the former case Italy's
contribution was the greater and in the latter ours. In particular,
America's contribution for some time after she came into the war was
mainly financial, because she was not yet ready to help in any other
way. So long as America was sending materials and munitions to be used
by Allied soldiers, she charged us for them, and these charges are the
origin of what we now owe her. But when later on she sent men too, to
use the munitions themselves, then we were charged nothing. Evidently
there is not much logic in a system which causes us to owe money to
America, not because she was able to help us so much, but because at
first she was able to help us, so far at least as man power was
concerned, so little.

This does not mean that the financial help which America gave us was not
of the most extraordinary value to us. By the time that America came
into the war our own resources as a lender were literally at an end. We
were still at that time just about able to finance ourselves, but we had
reached a point when we could no longer finance our Allies as well.
America's financial assistance was therefore quite invaluable. From the
moment she entered the war she undertook to lend whatever was required
for the expenditure of ourselves and our Allies in the United States,
including some contribution to support the Foreign Exchanges. But she
was not prepared to make loans for use outside America. Great Britain
had therefore to go on making loans to her Allies for such
expenditure--with the result that we had to lend our Allies after
America came into the war an amount almost equal to what we ourselves
borrowed. More precisely, we borrowed from the United States, after she
came into the war, 850,000,000, and lent to our Allies during the same
period 750,000,000; so that in effect it was true--what the Americans
have always been concerned to deny--that the loans she made to us were
for the purpose of financing our Allies rather than for ourselves.

The result was that by the end of the war we were owed by our Allies
about 1,600,000,000, whilst we, in our turn, owed to the United States
850,000,000.

Since the war, the question has been constantly debated whether these
sums ought to be treated as investments, just like any other business
transaction, or whether regard should be paid to their origin and to the
circumstances in which they were made. It has been the British view that
they were not made as business transactions and should not be treated as
such. It has been the American view, on the other hand, that they should
be taken at their face value, that is to say, as bonds due and payable,
tempered only by considerations as to the capacity of the debtor to pay,
and, in practice, by a willingness on the part of the United States to
accept a low rate of interest.

During the Peace Conference the British Government urged that the Allied
War Debts should be entirely cancelled. Mr. Lloyd George raised the
matter again with President Wilson in August 1920. Finally, in August
1922, in the famous Note written by Lord Balfour, the considered British
view, from which we have never gone back, was set forth. In this Note
the British Government declared their willingness to cancel the whole of
what their Allies owed them, and also to forgo their own claims on
Germany in favour of the other Allies, if the United States in turn
would relieve them of their debt. By such an arrangement Great Britain
would have been giving up on paper more than twice what she gained. The
offer still holds good.

This policy was not accepted by the United States, and a separate
settlement has been made between each pair of countries in turn. The
settlement made with Great Britain is equivalent to charging a rate of
interest of 33 per cent on the whole amount due. The American
settlement with France is equivalent to repayment at 16 per cent
interest, and that with Italy to repayment at 04 per cent interest.
Thus, the American settlement with Great Britain is twice as onerous as
that with France and eight times as onerous as that with Italy. Great
Britain, in her turn, has made arrangements with France and Italy, and
has in both cases let them off lighter even than has the United
States--the British settlement with France being 10 per cent easier and
that with Italy 33 per cent easier than the corresponding American
settlements. Thus, whilst the other Allies have been largely relieved
this country is left with the task of repaying her whole burden, subject
only to the mitigation that the rate of interest charged, namely, 3.3
per cent, is moderate.

The effect of this settlement is that Great Britain will have to pay to
the United States a sum of about 33,000,000 annually up to 1933,
rising to nearly 38,000,000 annually thereafter from that year until
1984, when the debt will have been discharged. The reality of the weight
of this burden may be illustrated by certain calculations which I made
in the summer of 1923 when the details of Mr. Baldwin's settlement with
Washington were first made public. We shall be paying to the United
States each year for sixty years a sum equivalent to two-thirds of the
cost of our Navy, a sum nearly equal to our State expenditure on
Education, a sum which exceeds the total burden of our pre-war debt.
Looked at from another standpoint, it represents more than the total
normal profits of our coal mines and our mercantile marine added
together. With these sums we could endow and splendidly house _every
month_ for sixty years one new university, one new hospital, one new
institute of research, etc., etc. With an equal sacrifice over an equal
period we could abolish slums and re-house in comfort the half of our
population which is now inadequately sheltered.

On the other hand, we are now receiving from our Allies and from Germany
an important contribution as an offset to what we ourselves pay to the
United States. It will be interesting to establish a rough
balance-sheet.

In 1928 we shall receive from our Allies 12,800,000 and pay the United
States 33,200,000; and by 1933 these figures will have risen to
17,700,000 and 37,800,000. Thus apart from our share of German
Reparations, we shall be paying annually in respect of War Debts about
20,000,000 more than we receive. Now if the Dawes Annuities are paid by
Germany in full, we shall come out just about "all-square." For the
normal Dawes Annuity when it has reached its full figure (less the
service of German loans, etc.) will amount to 117,000,000, of which our
share (excluding the receipts of other parts of the Empire) will be
about 22,000,000. Mr. Churchill has estimated that in the current
financial year, 1928-29, our payments out will be 32,845,000, and our
total receipts nearly 32,000,000.

It is not probable that these receipts will be realised in full. But it
will enable us to summarise the situation if we assume for the moment
that they are so realised. In this case, each Ally would be able to pay
the United States out of their receipts from Germany. When the Allied
Debt payments to the United States have reached their maximum amount
under the existing settlements, they will total 83,000,000 per annum
(the _average_ amount payable annually over the whole period works out
at a total of 61,000,000). If we add to this the direct American share
in German Reparations, the United States will be receiving 78,000,000
annually out of the 117,000,000 receivable by the Allies from Germany,
or 67 per cent, _plus_ 10,000,000 from Italy not covered by
Reparations; or if we take the average payments, in lieu of the maximum,
the United States will be receiving 66,000,000 out of 117,000,000 or
57 per cent. In either case Great Britain would receive, on balance,
nothing.

It follows from the above that if the maximum Dawes Annuities were to be
reduced by one-third--which, in the opinion of many of us, is highly
probable--the United States will, by the time that the Allied payments
to her have reached their full figure, be the sole beneficiary. In this
event the net result of all War Debt settlements would be to leave the
United States--on balance and off-setting receipts against
payments--receiving from Germany 78,000,000 per annum, and no one else
getting anything.

I have put the calculation in this form because it renders it very clear
why, in the minds of the Allies, the question of further relief to
Germany is intimately bound up with the question of their own
obligations to the United States. The official American attitude that
there is no connection between the two, is a very hollow pretence. The
resettlement of the Dawes Scheme is one to which the United States must
be, in one way or another, a party. But--let me add--any concession she
may make will go entirely to the relief of Germany and the European
Allies, Great Britain adhering to her principle of receiving nothing on
balance.

If all, or nearly all, of what Germany pays for Reparations has to be
used, not to repair the damage done, but to repay the United States for
the financial part which she played in the common struggle, many will
feel that this is not an outcome tolerable to the sentiments of mankind
or in reasonable accord with the spoken professions of Americans when
they entered the war or afterwards. Yet it is a delicate matter, however
keenly the public may feel, for any Englishman in authority to take the
initiative in saying such things in an official way. Obviously, we must
pay what we have covenanted to pay, and any proposal, if there is to be
one, must come from the United States. It fell to my lot during the war
to be the official draftsman in the British Treasury of all the
financial agreements with the Allies and with the United States out of
which this situation has arisen. I was intimately familiar, day by day,
with the reasons and motives, which governed the character of the
financial arrangements which were made. In the light of the memories of
those days, I continue to hope that in due course, and in her own time,
America will tell us that she has not spoken her last word.




  II

  INFLATION AND DEFLATION




  INFLATION AND DEFLATION

  1. Inflation (1919)


Lenin is said to have declared that the best way to destroy the
Capitalist System was to debauch the currency. By a continuing process
of inflation, Governments can confiscate, secretly and unobserved, an
important part of the wealth of their citizens. By this method they not
only confiscate, but they confiscate _arbitrarily_; and, while the
process impoverishes many, it actually enriches some. The sight of this
arbitrary rearrangement of riches strikes not only at security, but at
confidence in the equity of the existing distribution of wealth. Those
to whom the system brings windfalls, beyond their deserts and even
beyond their expectations or desires, become "profiteers," who are the
object of the hatred of the bourgeoisie, whom the inflationism has
impoverished, not less than of the proletariat. As the inflation
proceeds and the real value of the currency fluctuates wildly from month
to month, all permanent relations between debtors and creditors, which
form the ultimate foundation of capitalism, become so utterly disordered
as to be almost meaningless; and the process of wealth-getting
degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of
overturning the existing basis of Society than to debauch the currency.
The process engages all the hidden forces of economic law on the side of
destruction, and does it in a manner which not one man in a million is
able to diagnose.

In the latter stages of the war all the belligerent Governments
practised, from necessity or incompetence, what a Bolshevist might have
done from design. Even now, when the war is over, most of them continue
out of weakness the same malpractices. But further, the Governments of
Europe, being many of them at this moment reckless in their methods as
well as weak, seek to direct on to a class known as "profiteers" the
popular indignation against the more obvious consequences of their
vicious methods. These "profiteers" are, broadly speaking, the
entrepreneur class of capitalists, that is to say, the active and
constructive element in the whole capitalist society, who in a period of
rapidly rising prices cannot but get rich quick whether they wish it or
desire it or not. If prices are continually rising, every trader who has
purchased for stock or owns property and plant inevitably makes profits.
By directing hatred against this class, therefore, the European
Governments are carrying a step further the fatal process which the
subtle mind of Lenin had consciously conceived. The profiteers are a
consequence and not a cause of rising prices. By combining a popular
hatred of the class of entrepreneurs with the blow already given to
social security by the violent and arbitrary disturbance of contract and
of the established equilibrium of wealth which is the inevitable result
of inflation, these Governments are fast rendering impossible a
continuance of the social and economic order of the nineteenth century.
But they have no plan for replacing it.




  2. Social Consequences of Changes in the Value of Money (1923)


Money is only important for what it will procure. Thus a change in the
monetary unit, which is uniform in its operation and affects all
transactions equally, has no consequences. If, by a change in the
established standard of value, a man received and owned twice as much
money as he did before in payment for all rights and for all efforts,
and if he also paid out twice as much money for all acquisitions and for
all satisfactions, he would be wholly unaffected.

It follows, therefore, that a change in the value of money, that is to
say in the level of prices, is important to Society only in so far as
its incidence is unequal. Such changes have produced in the past, and
are producing now, the vastest social consequences, because, as we all
know, when the value of money changes, it does _not_ change equally for
all persons or for all purposes. A man's receipts and his outgoings are
not all modified in one uniform proportion. Thus a change in prices and
rewards, as measured in money, generally affects different classes
unequally, transfers wealth from one to another, bestows affluence here
and embarrassment there, and redistributes Fortune's favours so as to
frustrate design and disappoint expectation.

The fluctuations in the value of money since 1914 have been on a scale
so great as to constitute, with all that they involve, one of the most
significant events in the economic history of the modern world. The
fluctuation of the standard, whether gold, silver, or paper, has not
only been of unprecedented violence, but has been visited on a society
of which the economic organisation is more dependent than that of any
earlier epoch on the assumption that the standard of value would be
moderately stable.

During the Napoleonic Wars and the period immediately succeeding them
the extreme fluctuation of English prices within a single year was 22
per cent; and the highest price level reached during the first quarter
of the nineteenth century, which we used to reckon the most disturbed
period of our currency history, was less than double the lowest and with
an interval of thirteen years. Compare with this the extraordinary
movements of the past nine years. From 1914 to 1920 all countries
experienced an expansion in the supply of money to spend relatively to
the supply of things to purchase, that is to say _Inflation_. Since 1920
those countries which have regained control of their financial
situation, not content with bringing the Inflation to an end, have
contracted their supply of money and have experienced the fruits of
_Deflation_. Others have followed inflationary courses more riotously
than before.

Each process, Inflation and Deflation alike, has inflicted great
injuries. Each has an effect in altering the _distribution_ of wealth
between different classes, Inflation in this respect being the worse of
the two. Each has also an effect in overstimulating or retarding the
_production_ of wealth, though here Deflation is the more injurious. The
division of our subject thus indicated is the most convenient for us to
follow,--examining first the effect of changes in the value of money on
the distribution of wealth with most of our attention on Inflation, and
next their effect on the production of wealth with most of our attention
on Deflation.


  (A) CHANGES IN THE VALUE OF MONEY, AS AFFECTING DISTRIBUTION

  (i) _The Investing Class_

Of the various purposes which money serves, some essentially depend upon
the assumption that its real value is nearly constant over a period of
time. The chief of these are those connected, in a wide sense, with
contracts for the _investment of money_. Such contracts--namely, those
which provide for the payment of fixed sums of money over a long period
of time--are the characteristic of what it is convenient to call the
_Investment System_, as distinct from the property system generally.

Under this phase of capitalism, as developed during the nineteenth
century, many arrangements were devised for separating the management of
property from its ownership. These arrangements were of three leading
types: (1) Those in which the proprietor, while parting with the
management of his property, retained his ownership of it--_i.e._ of the
actual land, buildings, and machinery, or of whatever else it consisted
in, this mode of tenure being typified by a holding of ordinary shares
in a joint-stock company; (2) those in which he parted with the property
temporarily, receiving a fixed sum of _money_ annually in the meantime,
but regained his property eventually, as typified by a lease; and (3)
those in which he parted with his real property permanently, in return
either for a perpetual annuity fixed in terms of money, or for a
terminable annuity and the repayment of the principal in money at the
end of the term, as typified by mortgages, bonds, debentures, and
preference shares. This third type represents the full development of
_Investment_.

Contracts to receive fixed sums of money at future dates (made without
provision for possible changes in the real value of money at those
dates) must have existed as long as money has been lent and borrowed. In
the form of leases and mortgages, and also of permanent loans to
Governments and to a few private bodies, such as the East India Company,
they were already frequent in the eighteenth century. But during the
nineteenth century they developed a new and increased importance, and
had, by the beginning of the twentieth, divided the propertied classes
into two groups--the "business men" and the "investors"--with partly
divergent interests. The division was not sharp as between individuals;
for business men might be investors also, and investors might hold
ordinary shares; but the division was nevertheless real, and not the
less important because it was seldom noticed.

By this system the active business class could call to the aid of their
enterprises not only their own wealth but the savings of the whole
community; and the professional and propertied classes, on the other
hand, could find an employment for their resources, which involved them
in little trouble, no responsibility, and (it was believed) small risk.

For a hundred years the system worked, throughout Europe, with an
extraordinary success and facilitated the growth of wealth on an
unprecedented scale. To save and to invest became at once the duty and
the delight of a large class. The savings were seldom drawn on, and,
accumulating at compound interest, made possible the material triumphs
which we now all take for granted. The morals, the politics, the
literature, and the religion of the age joined in a grand conspiracy for
the promotion of saving. God and Mammon were reconciled. Peace on earth
to men of good means. A rich man could, after all, enter into the
Kingdom of Heaven--if only he saved. A new harmony sounded from the
celestial spheres. "It is curious to observe how, through the wise and
beneficent arrangement of Providence, men thus do the greatest service
to the public, when they are thinking of nothing but their own gain";[8]
so sang the angels.

[Footnote 8: _Easy Lessons on Money Matters for the Use of Young
People._ Published by the Society for Promoting Christian Knowledge.
Twelfth Edition, 1850.]

The atmosphere thus created well harmonised the demands of expanding
business and the needs of an expanding population with the growth of a
comfortable non-business class. But amidst the general enjoyment of ease
and progress, the extent to which the system depended on the stability
of the money to which the investing classes had committed their
fortunes, was generally overlooked; and an unquestioning confidence was
apparently felt that this matter would look after itself. Investments
spread and multiplied, until, for the middle classes of the world, the
gilt-edged bonds came to typify all that was most permanent and most
secure. So rooted in our day has been the conventional belief in the
stability and safety of a money contract that, according to English law,
trustees have been encouraged to embark their trust funds exclusively in
such transactions, and are indeed forbidden, except in the case of real
estate (an exception which is itself a survival of the conditions of an
earlier age), to employ them otherwise.[9]

[Footnote 9: German trustees were not released from a similar obligation
until 1923, by which date the value of trust funds invested in titles to
money had entirely disappeared.]

As in other respects, so also in this, the nineteenth century relied on
the future permanence of its own happy experiences and disregarded the
warning of past misfortunes. It chose to forget that there is no
historical warrant for expecting money to be represented even by a
constant quantity of a particular metal, far less by a constant
purchasing power. Yet Money is simply that which the State declares from
time to time to be a good legal discharge of money contracts. In 1914
gold had not been the English standard for a century or the sole
standard of any other country for half a century. There is no record of
a prolonged war or a great social upheaval which has not been
accompanied by a change in the legal tender, but an almost unbroken
chronicle in every country which has a history, back to the earliest
dawn of economic record, of a progressive deterioration in the real
value of the successive legal tenders which have represented money.

Moreover, this progressive deterioration in the value of money through
history is not an accident, and has had behind it two great driving
forces--the impecuniosity of Governments and the superior political
influence of the debtor class.

The power of taxation by currency depreciation is one which has been
inherent in the State since Rome discovered it. The creation of legal
tender has been and is a Government's ultimate reserve; and no State or
Government is likely to decree its own bankruptcy or its own downfall so
long as this instrument still lies at hand unused.

Besides this, as we shall see below, the benefits of a depreciating
currency are not restricted to the Government. Farmers and debtors and
all persons liable to pay fixed money dues share in the advantage. As
now in the persons of business men, so also in former ages these classes
constituted the active and constructive elements in the economic scheme.
Those secular changes, therefore, which in the past have depreciated
money, assisted the new men and emancipated them from the dead hand;
they benefited new wealth at the expense of old, and armed enterprise
against accumulation. The tendency of money to depreciate has been in
past times a weighty counterpoise against the cumulative results of
compound interest and the inheritance of fortunes. It has been a
loosening influence against the rigid distribution of old-won wealth and
the separation of ownership from activity. By this means each generation
can disinherit in part its predecessors' heirs; and the project of
founding a perpetual fortune must be disappointed in this way, unless
the community with conscious deliberation provides against it in some
other way, more equitable and more expedient.

At any rate, under the influence of these two forces--the financial
necessities of Governments and the political influence of the debtor
class--sometimes the one and sometimes the other, the progress of
inflation has been _continuous_, if we consider long periods, ever since
money was first devised in the sixth century B.C. Sometimes the standard
of value has depreciated of itself; failing this, debasements have done
the work.

Nevertheless it is easy at all times, as a result of the way we use
money in daily life, to forget all this and to look on money as itself
the absolute standard of value; and when, besides, the actual events of
a hundred years have not disturbed his illusions, the average man
regards what has been normal for three generations as a part of the
permanent social fabric.

The course of events during the nineteenth century favoured such ideas.
During its first quarter, the very high prices of the Napoleonic Wars
were followed by a somewhat rapid improvement in the value of money. For
the next seventy years, with some temporary fluctuations, the tendency
of prices continued to be downwards, the lowest point being reached in
1896. But while this was the tendency as regards direction, the
remarkable feature of this long period was the relative _stability_ of
the price level. Approximately the _same_ level of price ruled in or
about the years 1826, 1841, 1855, 1862, 1867, 1871, and 1915. Prices
were also level in the years 1844, 1881, and 1914.[10] If we call the
index number of these latter years 100, we find that, for the period of
close on a century from 1826 to the outbreak of war, the maximum
fluctuation in either direction was 30 points, the index number never
rising above 130 and never falling below 70. No wonder that we came to
believe in the stability of money contracts over a long period. The
metal _gold_ might not possess all the theoretical advantages of an
artificially regulated standard, but it could not be tampered with and
had proved reliable in practice.

[Footnote 10: [And again, it is now possible to add, in 1931.]]

At the same time, the investor in Consols in the early part of the
century had done very well in three different ways. The "security" of
his investment had come to be considered as near absolute perfection as
was possible. Its capital value had uniformly appreciated, partly for
the reason just stated, but chiefly because the steady fall in the rate
of interest increased the number of years' purchase of the annual income
which represented the capital.[11] And the annual money income had a
purchasing power which on the whole was increasing. If, for example, we
consider the seventy years from 1826 to 1896 (and ignore the great
improvement immediately after Waterloo), we find that the capital value
of Consols rose steadily, with only temporary set-backs, from 79 to 109
(in spite of Goschen's conversion from a 3 per cent rate to a 2 per
cent rate in 1889 and a 2 per cent rate effective in 1903), while the
purchasing power of the annual dividends, even after allowing for the
reduced rates of interest, had increased 50 per cent. But Consols, too,
had added the virtue of stability to that of improvement. Except in
years of crisis Consols never fell below 90 during the reign of Queen
Victoria; and even in '48, when thrones were crumbling, the mean price
of the year fell but 5 points. Ninety when she ascended the throne, they
reached their maximum with her in the year of Diamond Jubilee. What
wonder that our parents thought Consols a good investment!

[Footnote 11: If, for example, the rate of interest falls from 4 per
cent to 3 per cent, 3 per cent Consols rise in value from 66 to 100.]

Thus there grew up during the nineteenth century a large, powerful, and
greatly respected class of persons, well-to-do individually and very
wealthy in the aggregate, who owned neither buildings, nor land, nor
businesses, nor precious metals, but titles to an annual income in
legal-tender money. In particular, that peculiar creation and pride of
the nineteenth century, the savings of the middle class, had been mainly
thus embarked. Custom and favourable experience had acquired for such
investments an unimpeachable reputation for security.

Before the war these medium fortunes had already begun to suffer some
loss (as compared with the summit of their prosperity in the middle
'nineties) from the rise in prices and also in the rate of interest. But
the monetary events which have accompanied and have followed the war
have taken from them about one-half of their real value in England,
seven-eighths in France, eleven-twelfths in Italy, and virtually the
whole in Germany and in the succession states of Austria-Hungary and
Russia.

Thus the effect of the war, and of the monetary policy which has
accompanied and followed it, has been to take away a large part of the
real value of the possessions of the investing class. The loss has been
so rapid and so intermixed in the time of its occurrence with other
worse losses that its full measure is not yet separately apprehended.
But it has effected, nevertheless, a far-reaching change in the relative
position of different classes. Throughout the Continent the pre-war
savings of the middle class, so far as they were invested in bonds,
mortgages, or bank deposits, have been largely or entirely wiped out.
Nor can it be doubted that this experience must modify social psychology
towards the practice of saving and investment. What was deemed most
secure has proved least so. He who neither spent nor "speculated," who
made "proper provision for his family," who sang hymns to security and
observed most straitly the morals of the edified and the respectable
injunctions of the worldly-wise,--he, indeed, who gave fewest pledges to
Fortune has yet suffered her heaviest visitations.

What moral for our present purpose should we draw from this? Chiefly, I
think, that it is not safe or fair to combine the social organisation
developed during the nineteenth century (and still retained) with a
_laissez-faire_ policy towards the value of money. It is not true that
our former arrangements have worked well. If we are to continue to draw
the voluntary savings of the community into "investments," we must make
it a prime object of deliberate State policy that the standard of value,
in terms of which they are expressed, should be kept stable; adjusting
in other ways (calculated to touch all forms of wealth equally and not
concentrated on the relatively helpless "investors") the redistribution
of the national wealth, if, in course of time, the laws of inheritance
and the rate of accumulation have drained too great a proportion of the
income of the active classes into the spending control of the inactive.


  (ii) _The Business Class_

It has long been recognised, by the business world and by economists
alike, that a period of rising prices acts as a stimulus to enterprise
and is beneficial to business men.

In the first place there is the advantage which is the counterpart of
the loss to the investing class which we have just examined. When the
value of money falls, it is evident that those persons who have engaged
to pay fixed sums of money yearly out of the profits of active business
must benefit, since their fixed money outgoings will bear a smaller
proportion than formerly to their money turnover. This benefit persists
not only during the transitional period of change, but also, so far as
old loans are concerned, when prices have settled down at their new and
higher level. For example, the farmers throughout Europe, who had raised
by mortgage the funds to purchase the land they farmed, now find
themselves almost freed from the burden at the expense of the
mortgagees.

But during the period of change, while prices are rising month by month,
the business man has a further and greater source of windfall. Whether
he is a merchant or a manufacturer, he will generally buy before he
sells, and on at least a part of his stock he will run the risk of price
changes. If, therefore, month after month his stock appreciates on his
hands, he is always selling at a better price than he expected and
securing a windfall profit upon which he had not calculated. In such a
period the business of trade becomes unduly easy. Any one who can borrow
money and is not exceptionally unlucky must make a profit, which he may
have done little to deserve. Thus, when prices are rising, the business
man who borrows money is able to repay the lender with what, in terms of
real value, not only represents no interest, but is even less than the
capital originally advanced.

But if the depreciation of money is a source of gain to the business
man, it is also the occasion of opprobrium. To the consumer the business
man's exceptional profits appear as the cause (instead of the
consequence) of the hated rise of prices. Amidst the rapid fluctuations
of his fortunes he himself loses his conservative instincts, and begins
to think more of the large gains of the moment than of the lesser, but
permanent, profits of normal business. The welfare of his enterprise in
the relatively distant future weighs less with him than before, and
thoughts are excited of a quick fortune and clearing out. His excessive
gains have come to him unsought and without fault or design on his part,
but once acquired he does not lightly surrender them, and will struggle
to retain his booty. With such impulses and so placed, the business man
is himself not free from a suppressed uneasiness. In his heart he loses
his former self-confidence in his relation to Society, in his utility
and necessity in the economic scheme. He fears the future of his
business and his class, and the less secure he feels his fortune to be
the tighter he clings to it. The business man, the prop of Society and
the builder of the future, to whose activities and rewards there had
been accorded, not long ago, an almost religious sanction, he of all men
and classes most respectable, praiseworthy, and necessary, with whom
interference was not only disastrous but almost impious, was now to
suffer sidelong glances, to feel himself suspected and attacked, the
victim of unjust and injurious laws,--to become, and know himself half
guilty, a profiteer.

No man of spirit will consent to remain poor if he believes his betters
to have gained their goods by lucky gambling. To convert the business
man into the profiteer is to strike a blow at capitalism, because it
destroys the psychological equilibrium which permits the perpetuance of
unequal rewards. The economic doctrine of normal profits, vaguely
apprehended by every one, is a necessary condition for the justification
of capitalism. The business man is only tolerable so long as his gains
can be held to bear some relation to what, roughly and in some sense,
his activities have contributed to Society.

This, then, is the second disturbance to the existing economic order for
which the depreciation of money is responsible. If the fall in the value
of money discourages investment, it also discredits enterprise.

Not that the business man was allowed, even during the period of boom,
to retain the whole of his exceptional profits. A host of popular
remedies vainly attempted to cure the evils of the day; which remedies
themselves--subsidies, price and rent fixing, profiteer hunting, and
excess profits duties--eventually became not the least part of the
evils.

In due course came the depression, with falling prices, which operate on
those who hold stocks in a manner exactly opposite to rising prices.
Excessive losses, bearing no relation to the efficiency of the business,
took the place of windfall gains; and the effort of every one to hold as
small stocks as possible brought industry to a standstill, just as
previously their efforts to accumulate stocks had over-stimulated it.
Unemployment succeeded Profiteering as the problem of the hour.


  (iii) _The Earner_

It has been a commonplace of economic textbooks that wages tend to lag
behind prices, with the result that the real earnings of the wage-earner
are diminished during a period of rising prices. This has often been
true in the past, and may be true even now of certain classes of labour
which are ill-placed or ill-organised for improving their position. But
in Great Britain, at any rate, and in the United States also, some
important sections of labour were able to take advantage of the
situation not only to obtain money wages equivalent in purchasing power
to what they had before, but to secure a real improvement, to combine
this with a diminution in their hours of work (and, so far, of the work
done), and to accomplish this (in the case of Great Britain) at a time
when the total wealth of the community as a whole had suffered a
decrease. This reversal of the usual course has not been due to an
accident and is traceable to definite causes.

The organisation of certain classes of labour--railwaymen, miners,
dockers, and others--for the purpose of securing wage increases is
better than it was. Life in the army, perhaps for the first time in the
history of wars, raised in many respects the conventional standard of
requirements,--the soldier was better clothed, better shod, and often
better fed than the labourer, and his wife, adding in war time a
separation allowance to new opportunities to earn, had also enlarged her
ideas.

But these influences, while they would have supplied the motive, might
have lacked the means to the result if it had not been for another
factor--the windfalls of the profiteer. The fact that the business man
had been gaining, and gaining notoriously, considerable windfall
profits in excess of the normal profits of trade, laid him open to
pressure, not only from his employees but from public opinion generally;
and enabled him to meet this pressure without financial difficulty. In
fact, it was worth his while to pay ransom, and to share with his
workmen the good fortune of the day.

Thus the working classes improved their _relative_ position in the years
following the war, as against all other classes except that of the
"profiteers." In some important cases they improved their absolute
position--that is to say, account being taken of shorter hours,
increased money wages, and higher prices, some sections of the working
classes secured for themselves a higher real remuneration for each unit
of effort or work done. But we cannot estimate the _stability_ of this
state of affairs, as contrasted with its desirability, unless we know
the source from which the increased reward of the working classes was
drawn. Was it due to a permanent modification of the economic factors
which determine the distribution of the national product between
different classes? Or was it due to some temporary and exhaustible
influence connected with Inflation and with the resulting disturbance in
the standard of value?

The period of depression has exacted its penalty from the working
classes more in the form of unemployment than by a lowering of real
wages, and State assistance to the unemployed has greatly moderated even
this penalty. Money wages have followed prices downwards. But the
depression of 1921-22 did not reverse or even greatly diminish the
relative advantage gained by the working classes over the middle class
during the previous years. In 1923 British wage rates stood at an
appreciably higher level above the pre-war rates than did the cost of
living, if allowance is made for the shorter hours worked.


  (B) CHANGES IN THE VALUE OF MONEY, AS AFFECTING PRODUCTION

If, for any reason right or wrong, the business world _expects_ that
prices will fall, the processes of production tend to be inhibited; and
if it expects that prices will rise, they tend to be over-stimulated. A
fluctuation in the measuring-rod of value does not alter in the least
the wealth of the world, the needs of the world, or the productive
capacity of the world. It ought not, therefore, to affect the character
or the volume of what is produced. A movement of _relative_ prices, that
is to say of the comparative prices of different commodities, _ought_ to
influence the character of production, because it is an indication that
various commodities are not being produced in the exactly right
proportions. But this is not true of a change, as such, in the _general_
price level.

The fact that the expectation of changes in the _general_ price level
affects the processes of production, is deeply rooted in the
peculiarities of the existing economic organisation of society. We have
already seen that a change in the general level of prices, that is to
say a change in the measuring-rod, which fixes the obligation of the
borrowers of money (who make the decisions which set production in
motion) to the lenders (who are inactive once they have lent their
money), effects a redistribution of real wealth between the two groups.
Furthermore, the active group can, if they foresee such a change, alter
their action in advance in such a way as to minimise their losses to the
other group or to increase their gains from it, if and when the expected
change in the value of money occurs. If they expect a fall, it may pay
them, as a group, to damp production down, although such enforced
idleness impoverishes Society as a whole. If they expect a rise, it may
pay them to increase their borrowings and to swell production beyond the
point where the real return is just sufficient to recompense Society as
a whole for the effort made. Sometimes, of course, a change in the
measuring-rod, especially if it is unforeseen, may benefit one group at
the expense of the other disproportionately to any influence it exerts
on the volume of production; but the tendency, in so far as the active
group anticipate a change, will be as I have described it. This is
simply to say that the intensity of production is largely governed in
existing conditions by the anticipated real profit of the entrepreneur.
Yet this criterion is the right one for the community as a whole only
when the delicate adjustment of interests is not upset by fluctuations
in the standard of value.

There is also a considerable risk directly arising out of instability in
the value of money. During the lengthy process of production the
business world is incurring outgoings in terms of _money_--paying out in
money for wages and other expenses of production--in the expectation of
recouping this outlay by disposing of the product for _money_ at a later
date. That is to say, the business world as a whole must always be in a
position where it stands to gain by a rise of price and to lose by a
fall of price. Whether it likes it or not, the technique of production
under a rgime of money-contract forces the business world always to
carry a big speculative position; and if it is reluctant to carry this
position, the productive process must be slackened. The argument is not
affected by the fact that there is some degree of specialisation of
function within the business world, in so far as the professional
speculator comes to the assistance of the producer proper by taking over
from him a part of his risk.

Now it follows from this, not merely that the _actual occurrence_ of
price changes profits some classes and injures others (which has been
the theme of the first section of this chapter), but that a _general
fear_ of falling prices may inhibit the productive process altogether.
For if prices are expected to fall, not enough risk-takers can be found
who are willing to carry a speculative "bull" position, and this means
that entrepreneurs will be reluctant to embark on lengthy productive
processes involving a money outlay long in advance of money
recoupment,--whence unemployment. The _fact_ of falling prices injures
entrepreneurs; consequently the _fear_ of falling prices causes them to
protect themselves by curtailing their operations; yet it is upon the
aggregate of their individual estimations of the risk, and their
willingness to run the risk, that the activity of production and of
employment mainly depends.

There is a further aggravation of the case, in that an expectation about
the course of prices tends, if it is widely held, to be cumulative in
its results up to a certain point. If prices are expected to rise and
the business world acts on this expectation, that very fact causes them
to rise for a time and, by verifying the expectation, reinforces it; and
similarly, if it expects them to fall. Thus a comparatively weak initial
impetus may be adequate to produce a considerable fluctuation.

The best way to cure this mortal disease of individualism must be to
provide that there shall never exist any confident expectation either
that prices generally are going to fall or that they are going to rise;
and also that there shall be no serious risk that a movement, if it does
occur, will be a big one. If, unexpectedly and accidentally, a moderate
movement were to occur, wealth, though it might be redistributed, would
not be diminished thereby.

To procure this result by removing all possible influences towards an
initial movement would seem to be a hopeless enterprise. The remedy
would lie, rather, in so controlling the standard of value that whenever
something occurred which, left to itself, would create an expectation of
a change in the general level of prices, the controlling authority
should take steps to counteract this expectation by setting in motion
some factor of a contrary tendency. Even if such a policy were not
wholly successful, either in counteracting expectations or in avoiding
actual movements, it would be an improvement on the policy of sitting
quietly by whilst a standard of value, governed by chance causes and
deliberately removed from central control, produces expectations which
paralyse or intoxicate the government of production.

       *     *     *     *     *

We see, therefore, that rising prices and falling prices each have their
characteristic disadvantage. The Inflation which causes the former means
Injustice to individuals and to classes,--particularly to rentiers; and
is therefore unfavourable to saving. The Deflation which causes falling
prices means Impoverishment to labour and to enterprise by leading
entrepreneurs to restrict production, in their endeavour to avoid loss
to themselves; and is therefore disastrous to employment. The
counterparts are, of course, also true,--namely that Deflation means
Injustice to borrowers, and that Inflation leads to the over-stimulation
of industrial activity. But these results are not so marked as those
emphasised above, because borrowers are in a better position to protect
themselves from the worst effects of Deflation than lenders are to
protect themselves from those of Inflation, and because labour is in a
better position to protect itself from overexertion in good times than
from underemployment in bad times.

Thus Inflation is unjust and Deflation is inexpedient. Of the two
perhaps Deflation is, if we rule out exaggerated inflations such as that
of Germany, the worse; because it is worse, in an impoverished world, to
provoke unemployment than to disappoint the rentier. But it is not
necessary that we should weigh one evil against the other. It is easier
to agree that both are evils to be shunned. The Individualistic
Capitalism of to-day, precisely because it entrusts saving to the
individual investor and production to the individual employer,
_presumes_ a stable measuring-rod of value, and cannot be
efficient--perhaps cannot survive--without one.

For these grave causes we must free ourselves from the deep distrust
which exists against allowing the regulation of the standard of value to
be the subject of _deliberate decision_. We can no longer afford to
leave it in the category of which the distinguishing characteristics are
possessed in different degrees by the weather, the birth-rate, and the
Constitution,--matters which are settled by natural causes, or are the
resultant of the separate action of many individuals acting
independently, or require a Revolution to change them.




  3. The French Franc

  (i) _An open letter to the French Minister of Finance_ (_whoever he is
  or may be_) (Jan. 1926)


Monsieur,--When I read in my daily paper the daily projects of yourself
and your predecessors to draft new budgets and to fund old debts, I get
the impression that Paris discusses very little what seems to me in
London to be the technical analysis of your problem. May I, therefore,
divert your attention for a moment from your Sisyphean task of rolling
budgets up Parliament Hill back to certain fundamental calculations?

I have written about the French franc many times in recent years, and I
do not find that I have changed my mind. More than two years ago I
wrote: "The level of the franc is going to be settled in the long run,
not by speculation or the balance of trade, or even the outcome of the
Ruhr adventure, but by the proportion of his earned income which the
French taxpayer will permit to be taken from him to pay the claims of
the French rentier." I still think that this is the root idea from which
your plans ought to develop.

Now it is obvious that there are two methods of attaining the desired
equilibrium. You can increase the burdens on the taxpayer, or you can
diminish the claims of the rentier. If you choose the first alternative,
taxation will absorb nearly a quarter of the national income of France.
Is this feasible? If it is ever safe to speak about the political
atmosphere of another country, I should judge from recent indications
that the French public will certainly refuse to submit to the imposition
of a burden of additional taxation sufficient to satisfy the claims of
the rentier at their present level. And even if such taxation were
politically possible, it would probably break down administratively. The
pressing task of the French Treasury is not to devise additional taxes,
but to construct an administrative machine capable of collecting those
which exist. If, therefore, I were in your place, I should not, as a
politician, give another minute's thought to new taxes, but would
concentrate, so far as concerned the fiscal part of my office, on
consolidating and administering the taxes already voted.

Since this by itself is not enough, your next business--provided you
accept my conclusion as to the mind of the French public--is to consider
coolly how best to reduce the claims of the rentier. Three methods offer
themselves: first, a general capital levy; second, a forced reduction of
the rate of interest on the public debt; third, a rise of prices which
would reduce the real value of the rentier's money claims.
Unquestionably, the first is preferable on grounds of virtue, justice,
and theory. For Britain in a similar fix I should advocate it. But I
think it so probable that such a project would be defeated in France
to-day by the same political and administrative difficulties which stand
in the way of further taxation, that I should not lose my time on it.
The second method is attractive, if only because it offers no
administrative difficulties. I believe that some authorities in France
have favoured it. Nevertheless, I should decline this expedient also,
if I were in your place, because, unlike a general capital levy or a
depreciation of money, this species of discrimination is truly named
Repudiation, and Repudiation of the National Debt is a departure from
financial virtue so extreme and so dangerous as not to be undertaken but
in the last emergency.

We are left, therefore, by a process of the exclusion of alternatives,
with one Exit only--a rise of internal prices; which leads us away from
the fiscal field to the price level, the foreign exchanges, the gold in
the Bank of France, the volume of foreign investment, and the balance of
trade. Here I must invite your particular attention to an interesting
paradox.

Successive Finance Ministers have, in fact, done their utmost to find an
escape through the Exit I indicate. They have inflated magnificently,
and they have brought down the gold value of the franc by progressive
stages with only temporary set-backs. What more could they have done?

I will tell you. The great army of your predecessors have failed, in
spite of all their efforts, to depreciate adequately the _internal
purchasing power_ of the franc. Your present difficulties are due, not
to the inflation of the notes or to the fall of the exchange (for these
events are tending all the time to help you out of your troubles), but
to the failure of these factors to diminish proportionately the
internal purchasing power of the rentier's money claims.

The following figures present the essence of your problem. In December
1925, the gold value of the franc on the foreign exchanges was 19 per
cent of its pre-war parity; world gold prices were about 158 per cent of
their pre-war level; therefore on the pre-war basis a note circulation
and a franc price level amounting to 830 per cent (for 158  19 = 83)
of their pre-war figures would be justified. Now the note circulation,
being about 1000 per cent of its pre-war figure, roughly corresponds to
the level of the foreign exchange--though, allowing for increased
territory and the loss of gold and silver coin from the circulation, it
is probably still too low in relation to the exchange, rather than too
high, on a pre-war comparison.

When we come to the internal franc price level, on the other hand, we
find an entirely different story. Imported raw materials have inevitably
risen to their international parity. But the classes of goods such as
food and other articles entering into the cost-of-living index number,
which are dominated by home production, are far below their equilibrium
value. Wholesale food prices in November 1925 were 490 per cent of
pre-war, retail prices in Paris (thirteen items) were 433 per cent, and
in the third quarter of 1925 the cost-of-living index for Paris stood at
401 per cent. These figures may understate the real rise of prices, but
it certainly seems that French domestic costs are not above five times
their pre-war figure. This means that the prices of purely home produce,
converted at the present rate of exchange, are not much more than _half_
world prices, and are actually below their pre-war level in terms of
gold. Thus the Inflation of the currency has produced its full effect on
the exchanges, and consequently on the prices of imported commodities,
but has largely failed to do so on the prices of home produce.

Now the burden of the rentier on the taxpayer is measured by the
internal purchasing power of the francs which have to be taken from the
latter to be handed to the former. _Thus if internal prices had risen as
fast as the exchange has fallen, the real burden of the national debt
service would be reduced by at least a third._ I suggest to you,
therefore, that, whilst the solution of your fiscal difficulties can
come about in no other way than by a rise in the internal price level,
it is not so clear that this need be accompanied either by further
Inflation or by a further fall in the exchange.

It is for you to decide in your own mind at what level of internal
prices you can hope to balance your budget. Your next step must be to
bring about this rise in as orderly and scientific a way as you are
able. Looking from outside, it appears to me that an internal price
level between eight and nine times pre-war might be high enough. In this
case there is no justification for any considerable further Inflation
or fall in the franc exchange. All you have to do is to stabilise the
note circulation and the franc exchange at near their present level and
to allow time for internal prices to rise correspondingly.

What are the explanations of the present low level of franc prices? I
think that they are: (1) the time element--internal prices move slowly,
but will move as they should in time; (2) the hoarding of bank-notes on
an even greater scale than formerly, leading to a sluggish circulation
of the available currency; (3) excessive foreign investment by
Frenchmen, due to lack of confidence, which drives the exchange down
below the figure appropriate to the trading position; and (4) the legal
restrictions on rents, etc.

These influences should be remediable as regards (1) by the mere lapse
of time, and as regards (2) and (3) by the restoration of internal
confidence. The right strategy, therefore, is to restore confidence and
then just wait. And the way to restore confidence is, surely, not to
heap up taxes, but to stabilise the franc exchange beyond doubt or
criticism near its present level.

How to stabilise the franc exchange? Not so difficult as it is supposed
to be. The balance of trade is strongly in favour of France. The present
level of internal prices encourages exports and discourages imports. The
metallic reserve of the Bank of France is worth (at the present
exchange) nearly 40 per cent of the note issue. Nothing is required, I
expect, but that the Bank of France should declare that for two years
at least it will furnish dollar exchange against francs in unlimited
amounts on terms _not worse_ than some stated rate between dollars and
francs, and that the Bank should be prepared, if necessary, to use its
gold for the purpose. The rate selected should probably lie somewhere
between 1 dollar for 25 francs and 1 dollar for 30 francs, and it would
be safer to choose the latter ratio at first, with just a hope that the
former might be achieved in the end.[12] The success of the scheme
requires no more than that the Bank's undertaking should be believed.
With this background of stability you will be able to borrow enough to
carry you through the transitional period without further Inflation.

[Footnote 12: [This was a happy guess, since the actual figure adopted
two and a half years later was 25.5 francs to the dollar.]]

For the rest you can trust time. As the internal price level gradually
rises to an equilibrium with the exchange and as the machinery for
collecting the taxes is gradually improved, your budget receipts will
grow month by month until they balance the expenses. Those taxes which
are fixed in francs and are not _ad valorem_ should, of course, be
raised _pari passu_ with the rise in prices.

There are two matters on which the Government of France needs to
exercise an iron resolve--to fix the franc exchange at a minimum figure
even if it costs gold to do so, and to collect the taxes in full. These
are the indispensable measures. Heroic efforts to increase the rates of
taxation are, at this stage, efforts in a wrong direction, and will not
be successful.

What are the arguments against these courses? They are entirely
political. A policy which will not be successful unless it raises prices
by a heavy percentage will be open to the universal unpopularity of _la
vie chre_. A policy of bringing about an equilibrium between internal
and external prices must be injurious to the export interests which
flourish on their disequilibrium. It may not be sufficient to reply that
the first must happen in any case unless the taxpayer will sacrifice
himself to the rentier, and that the second must happen some day unless
the franc is to fall for ever.

But there are political considerations of some weight to set on the
other side. A rise in the prices of agricultural produce will not be
unpopular with farmers and peasant producers who have been selling their
output much too cheap. Further, the Government must make it clear that
wage-earners and officials are not intended to suffer, and will, if it
is wise, pass a law providing for automatic quarterly increases of all
wages and salaries throughout the next two years corresponding to every
increase in the cost of living.

Well, I offer these reflections for what they are worth. Whether or not
they commend themselves to your judgement, I am sure that the following
questions are those which you need to ponder:--

1. Would a rise in the level of internal prices solve your
difficulties?

2. Can you solve your difficulties without a rise of prices?

3. Is it not impossible anyhow to prevent a rise in the long run?

4. If so, will you not be judicious to facilitate an orderly rise and to
play for time meanwhile?

5. Whether you choose this course or another, is there any sufficient
objection to using the gold in the Bank of France to anchor the franc
exchange?

  Your obedient servant,

  J. M. Keynes


  (ii) _The Stabilisation of the Franc_ (1928)

One blames politicians, not for inconsistency, but for obstinacy. They
are the interpreters, not the masters, of our fate. It is their job, in
short, to register the _fait accompli_. In this spirit we all applaud M.
Poincar for not allowing himself to be hampered by a regard for
consistency. After declaring for years that it would be an act of
national bankruptcy and shame to devalue the franc, he has fixed it at
about one-fifth of its pre-war gold value, and has retorted with threats
of resignation against anyone who would hinder him in so good a deed.

The figure finally chosen seems about right. There are high authorities
in France who argue that one-sixth of pre-war (150 francs to the )
would be better and safer. But about one-fifth (124.21 francs to the )
has the great advantage of conforming to the rate which has actually
existed for some eighteen months. None of the relevant statistics
suggests that M. Poincar has made the mistake of stabilising at a
figure which involves Deflation. No lower value for the franc (in terms
of gold) than that now chosen has ever existed except during the hectic
twelve months from December 1925 to November 1926, when internal prices
had no time to adjust themselves to the furious fluctuations of the
exchanges. Moreover, the Budget balances with the burden of the _rentes_
on the taxpayer bearable at the present level. I see no sufficient
reason, therefore, to choose a lower figure.

Is the value too low? For that is the line of criticism in France
itself. There are two chief tests. Is it lower than the figure to which
internal prices are adjusted? Does it demand too great a sacrifice from
the rentier? The official Index Numbers, if taken at their face-value,
suggest that prices are in line with a gold value of the franc nearer to
one quarter (100 francs to the ) than to one-fifth of the pre-war
value. But the French Index Numbers are very crude affairs subject to a
wide margin of error, and the two and a half years which has elapsed
since the franc was worth more than the figure now fixed, is a fair time
to allow for an adjustment of prices upward--a much quicker business
than a downward adjustment can be. House rents doubtless must rise, but
it is probable that other prices will trend only a little upward if at
all, compared with gold prices abroad. As for the rentier, a very
drastic capital levy having been brought about _de facto_ and the
awkward consequences surmounted, it is asking too much to undo
gratuitously what is already done. Three other arguments, however, of a
practical order are probably those which have convinced M. Poincar. To
choose a higher value for the franc might disturb the equilibrium of the
Budget which has been so painfully achieved. It would upset the
industrialist exporters--who have their means of exerting political
influence. And--most tangible of all--it would involve the Bank of
France in a loss on the foreign exchange, said to amount to some
300,000,000, which, as an agent of the Government, it has bought up at
the present rate. To fix 100 francs to the , for example, might cost
the Bank of France 60,000,000, of which no mean proportion might accrue
to foreigners. This is just the sort of argument which M. Poincar and
every other Frenchman is able to understand.

The deed, therefore, is done. Since it removes an element of uncertainty
from the Money Markets and Stock Exchanges of the world, and since
French importers and manufacturers need hesitate no longer, a good deal
of purchasing power, which has been lying idle, may be returned to
active employment. M. Poincar has, therefore, done something--perhaps
for the first time in his career--to make the rest of us feel more
cheerful.

It is interesting to compare the several fortunes of France and Great
Britain over the post-war period. In Great Britain our authorities have
never talked such rubbish as their French colleagues or offended so
grossly against all sound principles of finance. But Great Britain has
come out of the transitional period with the weight of her war debt
aggravated, her obligations to the United States unabated, and
deflationary finance still in the ascendant; with the heavy burden of
taxes appropriate to the former and a million unemployed as the outcome
of the latter. France, on the other hand, has written down her internal
war debt by four-fifths, and has persuaded her Allies to let her off
more than half of her external debt; and now she is avoiding the
sacrifices of Deflation. Yet she has contrived to do this without the
slightest loss of reputation for conservative finance and capitalist
principles. The Bank of France emerges much stronger than the Bank of
England; and everyone still feels that France is the last stronghold of
tenacious saving and the rentier mentality. Assuredly it does not pay to
be good.

Perhaps we deserve what we have got. France has abandoned principle and
consistency alike, but she has always refused sacrifices which were
avoidable and has obeyed in the end the teachings of experience. We in
England have not submitted either to the warnings of theory or to the
pressure of facts, obstinately obedient to conventions.




  4. A Programme of Expansion (General Election, May 1929)

  I


Except for a brief recovery in 1924 before the return to the gold
standard, one-tenth or more of the working population of this country
have been unemployed for eight years--a fact unprecedented in our
history. The number of insured persons counted by the Ministry of Labour
as out of work has never been less than one million since the initiation
of their statistics in 1923. To-day (April 1929) 1,140,000 workpeople
are unemployed.

This level of unemployment is costing us out of the Unemployment Fund a
cash disbursement of about 50,000,000 a year. This does not include
poor relief. Since 1921 we have paid out to the unemployed in cash a sum
of about 500,000,000--and have got literally nothing for it. This sum
would have built a million houses; it is nearly double the whole of the
accumulated savings of the Post Office Savings Bank; it would build a
third of all the roads in the country; it far exceeds the total value of
all the mines, of every description, which we possess; it would be
enough to revolutionise the industrial equipment of the country; or to
proceed from what is heavy to what is lighter, it would provide every
third family in the country with a motor car or would furnish a fund
enough to allow the whole population to attend cinemas for nothing to
the end of time.

But this is not nearly all the waste. There is the far greater loss to
the unemployed themselves, represented by the difference between the
dole and a full working wage, and by the loss of strength and morale.
There is the loss in profits to employers and in taxation to the
Chancellor of the Exchequer. There is the incalculable loss of retarding
for a decade the economic progress of the whole country.

The Census of Production of 1924 calculated that the average value of
the net annual output of a British working man when employed is about
220. On this basis the waste through unemployment since 1921 has
mounted up to approximately 2,000,000,000, a sum which would be nearly
sufficient to build all the railways in the country twice over. It would
pay off our debt to America twice over. It is more than the total sum
that the Allies are asking from Germany for Reparations.

It is important to know and appreciate these figures because they put
the possible cost of Mr. Lloyd George's schemes into its true
perspective. He calculates that a development programme of 100,000,000
a year will bring back 500,000 men into employment. This expenditure is
not large in proportion to the waste and loss accruing year by year
through unemployment, as can be seen by comparing it with the figures
quoted above. It only represents 5 per cent of the loss already
accumulated on account of unemployment since 1921. It is equal to about
2 per cent of the national income. If the experiment were to be
continued at the rate of 100,000,000 per annum for three years, and if
the whole of it were to be entirely wasted, the annual interest payable
on it hereafter would increase the Budget by less than 2 per cent. In
short, it is a very modest programme. The idea that it represents a
desperate risk to cure a moderate evil is the reverse of the truth. It
is a negligible risk to cure a monstrous anomaly.

Nothing has been included in the programme which cannot be justified as
worth doing for its own sake. Yet even if half of it were to be wasted,
we should still be better off. Was there ever a stronger case for a
little boldness, for taking a risk if there be one?

It may seem very wise to sit back and wag the head. But while we wait,
the unused labour of the workless is not piling up to our credit in a
bank, ready to be used at some later date. It is running irrevocably to
waste; it is irretrievably lost. Every puff of Mr. Baldwin's pipe costs
us thousands of pounds.

The objection, which is raised more frequently, perhaps, than any other,
is that money raised by the State for financing productive schemes must
diminish _pro tanto_ the supply of capital available for ordinary
industry. If this is true, a policy of national development will not
really increase employment. It will merely substitute employment on
State schemes for ordinary employment. Either that, or (so the argument
often runs) it must mean Inflation. There is, therefore, little or
nothing that the Government can usefully do. The case is hopeless, and
we must just drift along.

This was the contention of the Chancellor of the Exchequer in his
Budget speech. "It is the orthodox Treasury dogma, steadfastly held," he
told the House of Commons, "that whatever might be the political or
social advantages, very little additional employment and no permanent
additional employment can, in fact, and as a general rule, be created by
State borrowing and State expenditure." Some State expenditure, he
concluded, is inevitable, and even wise and right for its own sake, but
not as a cure for unemployment.

In relation to the actual facts of to-day, this argument is, we believe,
quite without foundation.

In the first place, there is nothing in the argument which limits its
applicability to State-promoted undertakings. If it is valid at all, it
must apply equally to a new works started by Morris, or Courtaulds, to
any new business enterprise entailing capital expenditure. If it were
announced that some of our leading captains of industry had decided to
launch out boldly, and were about to sink capital in new industrial
plant to the tune, between them, of 100 millions, we should all expect
to see a great improvement in employment. And, of course, we should be
right. But, if the argument we are dealing with were sound, we should be
wrong. We should have to conclude that these enterprising business men
were merely diverting capital from other uses, and that no real gain to
employment could result. Indeed, we should be driven to a still more
remarkable conclusion. We should have to conclude that it was virtually
out of the question to absorb our unemployed workpeople by any means
whatsoever (other than the unthinkable Inflation), and that the obstacle
which barred the path was no other than an insufficiency of capital.
This, if you please, in Great Britain, who has surplus savings which she
is accustomed to lend abroad on the scale of more than a hundred
millions a year.

The argument is certainly not derived from common sense. No ordinary
man, left to himself, is able to believe that, if there had been no
housing schemes in recent years, there would, nevertheless, have been
just as much employment. And, accordingly, most ordinary men are easily
persuaded by Mr. Lloyd George that, if his schemes for employment are
adopted, more men will be employed.

But the argument is not only unplausible. It is also untrue. There are
three resources which can enable new investment to provide a net
addition to the amount of employment.

The first source of supply comes out of the savings which we are now
disbursing to pay the unemployed.

The second source of supply comes from the savings which now run to
waste through lack of adequate credit.

The third source of supply comes from a reduction in the _net_ amount of
foreign lending.

Let us consider these in turn, beginning with the first source.
Individual saving means that some individuals are _producing_ more than
they are _consuming_. This surplus may, and should, be used to increase
capital equipment. But, unfortunately, this is not the only way in which
it can be used. It can also be used to enable other individuals to
_consume_ more than they _produce_.

This is what happens when there is unemployment. We are using our
savings to pay for unemployment instead of using them to equip the
country. The savings which Mr. Lloyd George's schemes will employ will
be diverted not from financing other capital equipment, but partly from
financing unemployment. From the Unemployment Fund alone we are now
paying out 50,000,000 a year; and this is not the whole of the cost of
supporting the unemployed.

In the second place, the savings of individuals do not necessarily
materialise in investments. The amount of investment in capital
improvements depends, on the one hand, on the amount of credit created
by the Bank of England; and, on the other hand, on the eagerness of
entrepreneurs to invest, of whom the Government itself is nowadays the
most important. So far from the total of investment, as determined by
these factors, being necessarily equal to the total of saving,
disequilibrium between the two is at the root of many of our troubles.

When investment runs ahead of saving we have a boom, intense employment,
and a tendency to Inflation. When investment lags behind, we have a
slump and abnormal unemployment, as at present.

It is commonly objected to this that an expansion of credit necessarily
means Inflation. But not _all_ credit-creation means Inflation.
Inflation only results when we endeavour, as we did in the war and
afterwards, to expand our activities still further after everyone is
already employed and our savings are being used up to the hilt.

The suggestion that a policy of capital expenditure, if it does not take
capital away from ordinary industry, will spell Inflation, would be true
enough if we were dealing with boom conditions. And it would become true
if the policy of capital expenditure were pushed unduly far, so that the
demand for savings began to exceed the supply. But we are far, indeed,
from such a position at the present time. A large amount of deflationary
slack has first to be taken up before there can be the smallest danger
of a development policy leading to Inflation. To bring up the bogy of
Inflation as an objection to capital expenditure at the present time is
like warning a patient who is wasting away from emaciation of the
dangers of excessive corpulence.

The real difficulty hitherto in the way of an easier credit policy by
the Bank of England has been the fear that an expansion of credit might
lead to a loss of gold which the Bank could not afford.

Now if the Bank were to try to increase the volume of credit at a time
when, on account of the depression of home enterprise, no reliance could
be placed on the additional credit being absorbed at home at the
existing rate of interest, this might quite well be true. Since market
rates of interest would fall, a considerable part of the new credit
might find its way to _foreign_ borrowers, with the result of a drain of
gold out of the Bank. Thus it is not safe for the Bank to expand credit
unless it is certain beforehand that there are _home_ borrowers standing
ready to absorb it at the existing rates of interest.

This is the reason why the Liberal plan is exactly suited to the
fundamentals of the present position. It provides the necessary
condition for an expansion of credit to be safe.

It is, of course, essential that the Bank of England should loyally
co-operate with the Government's programme of capital development, and
do its best to make it a success. For, unfortunately, it would lie
within the power of the Bank, provided it were to pursue a deflationary
policy aimed at preventing any expansion in bank-credit, to defeat the
best-laid plans and to ensure that the expenditure financed by the
Treasury _was_ at the expense of other business enterprise.

Thus we accept Mr. McKenna's contention that an expansion of credit is
the key to the situation. But if we were simply to increase credit
without providing a specific use for it at home, we should be nervous
that too much of this extra credit would be lent to foreigners and taken
away in gold. We conclude, therefore, that, whilst an increased volume
of bank-credit is probably a _sine qua non_ of increased employment, a
programme of home investment which will absorb this increase is a _sine
qua non_ of the safe expansion of credit.

The third source of the funds required for the Liberal policy will be
found by a net reduction of foreign lending.

An important part of our savings is now finding its outlet in foreign
issues. Granted that a big policy of national development could not be
financed wholly out of the existing expenditure on unemployment and out
of the savings which are at present running to waste, granted that, to
meet the borrowing demands of the State other borrowers must go without,
why should we assume that these other borrowers must be British business
men? The technique of the capital market makes it far more probable that
they would be some of the overseas Governments or municipalities which
London at present finances on so large a scale. It is the bond market
that would be principally affected by a British Government loan.

Now anything which served to diminish the volume of foreign issues would
be welcomed by the Bank of England at the present time for its own sake.
The exchange position is uncomfortable and precarious; the recent rise
in bank-rate is proof of that. A diminution of foreign investment would
ease the strain on the exchanges. Why, it is only a year or two since
the Bank of England, with this end in view, was maintaining a
semi-official embargo on foreign issues. The embargo was a crude
instrument, suitable only for temporary use, and we do not suggest its
renewal. But the need which that embargo was designed to supply still
remains, if in a less acute degree. In relation to our less favourable
balance of foreign trade, we are investing abroad dangerously much; and
we are investing abroad to this dangerous extent partly because there
are insufficient outlets for our savings at home.

It follows, therefore, that a policy of capital expenditure, in so far
as it might go beyond the mere absorption of deflationary slack, would
serve mainly to divert to home development savings which now find their
way abroad, and that this would be a welcome result in the interests of
the Bank of England.

It has been objected that if we lend less abroad, our exports will fall
off. We see no reason to anticipate this. Immediately, as we have said,
the reduction in _net_ foreign lending will relieve the pressure on the
Bank of England's stock of gold. But, ultimately, its main effect will
be realised, not in a reduction of exports, but in an increase of
imports. For the new schemes will require a certain amount of imported
raw materials, whilst those who are now unemployed will consume more
imported food when they are once again earning decent wages.

Here, then, is our answer. The savings which Mr. Lloyd George's schemes
will employ will be diverted, not from financing other capital
equipment, but partly from financing unemployment. A further part will
come from the savings which now run to waste through lack of adequate
credit. Something will be provided by the very prosperity which the new
policy will foster. And the balance will be found by a reduction of
foreign lending.

The whole of the labour of the unemployed is available to increase the
national wealth. It is crazy to believe that we shall ruin ourselves
financially by trying to find means for using it and that "Safety First"
lies in continuing to maintain men in idleness.

It is precisely _with_ our unemployed productive resources that we shall
make the new investments.

We are left with a broad, simple, and surely incontestable proposition.
Whatever real difficulties there may be in the way of absorbing our
unemployed labour in productive work, an inevitable diversion of
resources from other forms of employment is not one of them.


  II

Our whole economic policy during recent years has been dominated by the
preoccupation of the Treasury with their departmental problem of debt
conversion. The less the Government borrows, the better, they argue, are
the chances of converting the National Debt into loans carrying a lower
rate of interest. In the interests of conversion, therefore, they have
exerted themselves to curtail, as far as they can, all public borrowing,
all capital expenditure by the State, no matter how productive and
desirable in itself. We doubt if the general public has any idea how
powerful, persistent, and far-reaching this influence has been.

To all well-laid schemes of progress and enterprise, they have (whenever
they could) barred the door with, No! Now, it is quite true, that
curtailing capital expenditure exerts some tendency towards lower
interest rates for Government loans. But it is no less true that it
makes for increased unemployment and that it leaves the country with a
pre-war outfit.

Even from the Budget point of view, it is a question whether the game is
worth the candle. It is difficult to believe that, if this question were
considered squarely on its merits, any intelligent person could return
an affirmative answer. The capital market is an international market.
All sorts of influences which are outside our control go to determine
the gilt-edged rate of interest; and the effect which the British
Government can exert on it by curtailing or expanding its capital
programme is limited. Suppose, which is putting the case extremely high,
that the effect might be as much as  per cent. This, applied to the
2000 millions of War Loan, which are ripe for conversion, would
represent a difference in the annual debt charge of 5 millions
annually. Compare this with the expenditure of the Unemployment
Fund--over 50 millions last year.

Moreover, in the course of (say) ten years it is not unlikely that a
situation will arise--as used to happen from time to time before the
war--when for world reasons the rate of interest will be abnormally
low--much lower than we could possibly hope for by Treasury contrivances
in the exceptionally unfavourable environment of abnormally high world
rates. This will be the moment for a successful conversion scheme. Even,
therefore, if the Treasury could convert to-day at a saving of  per
cent or  per cent, it might be extremely improvident to do so. A
premature conversion for an inconsiderable saving would be a grave
blunder. We must have the patience to wait for the ideal conjuncture of
conditions, and then the Chancellor of the Exchequer of the day will be
able to pull off something big.

But apart from budgetary advantages and disadvantages, there is a
deep-seated confusion of thought in hindering on these grounds the
capital development of the country. The rate of interest can fall for
either of two opposite reasons. It may fall on account of an abundant
supply of savings, _i.e._ of money available to be spent on investments;
or it may fall on account of a deficient supply of investments, _i.e._
on desirable purposes on which to spend the savings. Now a fall in the
rate of interest for the first reason is, obviously, very much in the
national interest. But a fall for the second reason, if it follows from
a deliberate restriction of outlets for investment, is simply a
disastrous method of impoverishing ourselves.

A country is enriched not by the mere negative act of an individual not
spending all his income on current consumption. It is enriched by the
positive act of using these savings to augment the capital equipment of
the country.

It is not the miser who gets rich; but he who lays out his money in
fruitful investment.

The object of urging people to save is _in order_ to be able to build
houses and roads and the like. Therefore a policy of trying to lower the
rate of interest by suspending new capital improvements and so stopping
up the outlets and purposes of our savings is simply suicidal. No one,
perhaps, would uphold such a policy expressed in so many words. But
this, in fact, is what the Treasury has been doing for several years. In
some cases, the pressure of public opinion or of other Government
Departments or Local Authorities has been too much for them. But
whenever it has been within their power to choke something off, they
have done so.

The futility of their policy and the want of sound reasoning behind it
have been finally demonstrated by its failure even to secure a fall in
the rate of interest. For, as we have seen above, if outlets for
investment at home are stopped up, savings flow abroad on a scale
disproportionate to our favourable balance of trade, with the result
that the Bank of England tends to lose gold. To counteract this
position, the bank-rate has to be raised.

So in the end we have the worst of all worlds. The country is backward
in its equipment, instead of being thoroughly up to date. Business
profits are poor, with the result that the yield of the income tax
disappoints the Chancellor of the Exchequer, and he is unable either to
relieve the taxpayer or to push forward with schemes of social reform.
Unemployment is rampant. This want of prosperity actually diminishes the
rate of saving and thus defeats even the original object of a lower rate
of interest. So rates of interest are, after all, high.

It is not an accident that the Conservative Government have landed us in
the mess where we find ourselves. It is the natural outcome of their
philosophy:

"You must not press on with telephones or electricity, because this will
raise the rate of interest."

"You must not hasten with roads or housing, because this will use up
opportunities for employment which we may need in later years."

"You must not try to employ every one, because this will cause
inflation."

"You must not invest, because how can you know that it will pay?"

"You must not do anything, because this will only mean that you can't do
something else."

"Safety First! The policy of maintaining a million unemployed has now
been pursued for eight years without disaster. Why risk a change?"

"We will not promise more than we can perform. We, therefore, promise
nothing."

This is what we are being fed with.

They are slogans of depression and decay--the timidities and
obstructions and stupidities of a sinking administrative vitality.

Negation, Restriction, Inactivity--these are the Government's
watchwords. Under their leadership we have been forced to button up our
waistcoats and compress our lungs. Fears and doubts and hypochondriac
precautions are keeping us muffled up indoors. But we are not tottering
to our graves. We are healthy children. We need the breath of life.
There is nothing to be afraid of. On the contrary. The future holds in
store for us far more wealth and economic freedom and possibilities of
personal life than the past has ever offered.

There is no reason why we should not feel ourselves free to be bold, to
be open, to experiment, to take action, to try the possibilities of
things. And over against us, standing in the path, there is nothing but
a few old gentlemen tightly buttoned-up in their frock coats, who only
need to be treated with a little friendly disrespect and bowled over
like ninepins.

Quite likely they will enjoy it themselves, when once they have got over
the shock.




  5. The Great Slump of 1930 (1930)

  I


The world has been slow to realise that we are living this year in the
shadow of one of the greatest economic catastrophes of modern history.
But now that the man in the street has become aware of what is
happening, he, not knowing the why and wherefore, is as full to-day of
what may prove excessive fears as, previously, when the trouble was
first coming on, he was lacking in what would have been a reasonable
anxiety. He begins to doubt the future. Is he now awakening from a
pleasant dream to face the darkness of facts? Or dropping off into a
nightmare which will pass away?

He need not be doubtful. The other was _not_ a dream. This _is_ a
nightmare, which will pass away with the morning. For the resources of
Nature and men's devices are just as fertile and productive as they
were. The rate of our progress towards solving the material problems of
life is not less rapid. We are as capable as before of affording for
every one a high standard of life--high, I mean, compared with, say,
twenty years ago--and will soon learn to afford a standard higher still.
We were not previously deceived. But to-day we have involved ourselves
in a colossal muddle, having blundered in the control of a delicate
machine, the working of which we do not understand. The result is that
our possibilities of wealth may run to waste for a time--perhaps for a
long time.

I doubt whether I can hope to bring what is in my mind into fully
effective touch with the mind of the reader. I shall be saying too much
for the layman, too little for the expert. For--though no one will
believe it--economics is a technical and difficult subject. It is even
becoming a science. However, I will do my best--at the cost of leaving
out, because it is too complicated, much that is necessary to a complete
understanding of contemporary events.

First of all, the extreme violence of the slump is to be noticed. In the
three leading industrial countries of the world--the United States,
Great Britain, and Germany--10,000,000 workers stand idle. There is
scarcely an important industry anywhere earning enough profit to make it
expand--which is the test of progress. At the same time, in the
countries of primary production the output of mining and of agriculture
is selling, in the case of almost every important commodity, at a price
which, for many or for the majority of producers, does not cover its
cost. In 1921, when prices fell as heavily, the fall was from a boom
level at which producers were making abnormal profits; and there is no
example in modern history of so great and rapid a fall of prices from a
normal figure as has occurred in the past year. Hence the magnitude of
the catastrophe.

The time which elapses before production ceases and unemployment reaches
its maximum is, for several reasons, much longer in the case of the
primary products than in the case of manufacture. In most cases the
productive units are smaller and less well organised amongst themselves
for enforcing a process of orderly contraction; the length of the
production period, especially in agriculture, is longer; the costs of a
temporary shut-down are greater; men are more often their own employers
and so submit more readily to a contraction of the income for which they
are willing to work; the social problems of throwing men out of
employment are greater in more primitive communities; and the financial
problems of a cessation of production of primary output are more serious
in countries where such primary output is almost the whole sustenance of
the people. Nevertheless we are fast approaching the phase in which the
output of primary producers will be restricted almost as much as that of
manufacturers; and this will have a further adverse reaction on
manufacturers, since the primary producers will have no purchasing power
wherewith to buy manufactured goods; and so on, in a vicious circle.

In this quandary individual producers base illusory hopes on courses of
action which would benefit an individual producer or class of producers
so long as they were alone in pursuing them, but which benefit no one if
every one pursues them. For example, to restrict the output of a
particular primary commodity raises its price, so long as the output of
the industries which use this commodity is unrestricted; but if output
is restricted all round, then the demand for the primary commodity falls
off by just as much as the supply, and no one is further forward. Or
again, if a particular producer or a particular country cuts wages,
then, so long as others do not follow suit, that producer or that
country is able to get more of what trade is going. But if wages are cut
all round, the purchasing power of the community as a whole is reduced
by the same amount as the reduction of costs; and, again, no one is
further forward.

Thus neither the restriction of output nor the reduction of wages serves
in itself to restore equilibrium.

Moreover, even if we were to succeed eventually in re-establishing
output at the lower level of money-wages appropriate to (say) the
pre-war level of prices, our troubles would not be at an end. For since
1914 an immense burden of bonded debt, both national and international,
has been contracted, which is fixed in terms of money. Thus every fall
of prices increases the burden of this debt, because it increases the
value of the money in which it is fixed. For example, if we were to
settle down to the pre-war level of prices, the British National Debt
would be nearly 40 per cent greater than it was in 1924 and double what
it was in 1920; the Young Plan would weigh on Germany much more heavily
than the Dawes Plan, which it was agreed she could not support; the
indebtedness to the United States of her associates in the Great War
would represent 40-50 per cent more goods and services than at the date
when the settlements were made; the obligations of such debtor countries
as those of South America and Australia would become insupportable
without a reduction of their standard of life for the benefit of their
creditors; agriculturists and householders throughout the world, who
have borrowed on mortgage, would find themselves the victims of their
creditors. In such a situation it must be doubtful whether the necessary
adjustments could be made in time to prevent a series of bankruptcies,
defaults, and repudiations which would shake the capitalist order to its
foundations. Here would be a fertile soil for agitation, seditions, and
revolution. It is so already in many quarters of the world. Yet, all the
time, the resources of Nature and men's devices would be just as fertile
and productive as they were. The machine would merely have been jammed
as the result of a muddle. But because we have magneto trouble, we need
not assume that we shall soon be back in a rumbling waggon and that
motoring is over.


  II

We have magneto trouble. How, then, can we start up again? Let us trace
events backwards:--

1. Why are workers and plant unemployed? Because industrialists do not
expect to be able to sell without loss what would be produced if they
were employed.

2. Why cannot industrialists expect to sell without loss? Because prices
have fallen more than costs have fallen--indeed, costs have fallen very
little.

3. How can it be that prices have fallen more than costs? For costs are
what a business man pays out for the production of his commodity, and
prices determine what he gets back when he sells it. It is easy to
understand how for an individual business or an individual commodity
these can be unequal. But surely for the community as a whole the
business men get back the same amount as they pay out, since what the
business men pay out in the course of production constitutes the incomes
of the public which they pay back to the business men in exchange for
the products of the latter? For this is what we understand by the normal
circle of production, exchange, and consumption.

4. No! Unfortunately this is not so; and here is the root of the
trouble. It is not true that what the business men pay out as costs of
production necessarily comes back to them as the sale-proceeds of what
they produce. It is the characteristic of a boom that their
sale-proceeds exceed their costs; and it is the characteristic of a
slump that their costs exceed their sale-proceeds. Moreover, it is a
delusion to suppose that they can necessarily restore equilibrium by
reducing their total costs, whether it be by restricting their output or
cutting rates of remuneration; for the reduction of their outgoings may,
by reducing the purchasing power of the earners who are also their
customers, diminish their sale-proceeds by a nearly equal amount.

5. How, then, can it be that the total costs of production for the
world's business as a whole can be unequal to the total sale-proceeds?
Upon what does the inequality depend? I think that I know the answer.
But it is too complicated and unfamiliar for me to expound it here
satisfactorily. (Elsewhere I have tried to expound it accurately.[13])
So I must be somewhat perfunctory.

[Footnote 13: [In my _Treatise on Money_.]]

Let us take, first of all, the consumption-goods which come on to the
market for sale. Upon what do the profits (or losses) of the producers
of such goods depend? The total costs of production, which are the same
thing as the community's total earnings looked at from another point of
view, are divided in a certain proportion between the cost of
consumption-goods and the cost of capital-goods. The incomes of the
public, which are again the same thing as the community's total
earnings, are also divided in a certain proportion between expenditure
on the purchase of consumption-goods and savings. Now if the first
proportion is larger than the second, producers of consumption-goods
will _lose_ money; for their sale proceeds, which are equal to the
expenditure of the public on consumption-goods, will be less (as a
little thought will show) than what these goods have cost them to
produce. If, on the other hand, the second proportion is larger than
the first, then the producers of consumption-goods will make exceptional
_gains_. It follows that the profits of the producers of
consumption-goods can only be restored, either by the public spending a
larger proportion of their incomes on such goods (which means saving
less), or by a larger proportion of production taking the form of
capital-goods (since this means a smaller proportionate output of
consumption-goods).

But capital-goods will not be produced on a larger scale unless the
producers of such goods are making a profit. So we come to our second
question--upon what do the profits of the producers of capital-goods
depend? They depend on whether the public prefer to keep their savings
liquid in the shape of money or its equivalent or to use them to buy
capital-goods or the equivalent. If the public are reluctant to buy the
latter, then the producers of capital-goods will make a loss;
consequently less capital-goods will be produced; with the result that,
for the reasons given above, producers of consumption-goods will also
make a loss. In other words, _all_ classes of producers will tend to
make a loss; and general unemployment will ensue. By this time a vicious
circle will be set up, and, as the result of a series of actions and
reactions, matters will get worse and worse until something happens to
turn the tide.

This is an unduly simplified picture of a complicated phenomenon. But I
believe that it contains the essential truth. Many variations and fugal
embroideries and orchestrations can be superimposed; but this is the
tune.

If, then, I am right, the fundamental cause of the trouble is the lack
of new enterprise due to an unsatisfactory market for capital
investment. Since trade is international, an insufficient output of new
capital-goods in the world as a whole affects the prices of commodities
everywhere and hence the profits of producers in all countries alike.

Why is there an insufficient output of new capital-goods in the world as
a whole? It is due, in my opinion, to a conjunction of several causes.
In the first instance, it was due to the attitude of lenders--for new
capital-goods are produced to a large extent with borrowed money. Now it
is due to the attitude of borrowers, just as much as to that of lenders.

For several reasons lenders were, and are, asking higher terms for loans
than new enterprise can afford. First, the fact, that enterprise could
afford high rates for some time after the war whilst war wastage was
being made good, accustomed lenders to expect much higher rates than
before the war. Second, the existence of political borrowers to meet
Treaty obligations, of banking borrowers to support newly restored gold
standards, of speculative borrowers to take part in Stock Exchange
booms, and, latterly, of distress borrowers to meet the losses which
they have incurred through the fall of prices, all of whom were ready if
necessary to pay almost any terms, have hitherto enabled lenders to
secure from these various classes of borrowers higher rates than it is
possible for genuine new enterprise to support. Third, the unsettled
state of the world and national investment habits have restricted the
countries in which many lenders are prepared to invest on any reasonable
terms at all. A large proportion of the globe is, for one reason or
another, distrusted by lenders, so that they exact a premium for risk so
great as to strangle new enterprise altogether. For the last two years,
two out of the three principal creditor nations of the world, namely,
France and the United States, have largely withdrawn their resources
from the international market for long-term loans.

Meanwhile, the reluctant attitude of lenders has become matched by a
hardly less reluctant attitude on the part of borrowers. For the fall of
prices has been disastrous to those who have borrowed, and any one who
has postponed new enterprise has gained by his delay. Moreover, the
risks that frighten lenders frighten borrowers too. Finally, in the
United States, the vast scale on which new capital enterprise has been
undertaken in the last five years has somewhat exhausted for the time
being--at any rate so long as the atmosphere of business depression
continues--the profitable opportunities for yet further enterprise. By
the middle of 1929 new capital undertakings were already on an
inadequate scale in the world as a whole, outside the United States. The
culminating blow has been the collapse of new investment inside the
United States, which to-day is probably 20 to 30 per cent less than it
was in 1928. Thus in certain countries the opportunity for new
profitable investment is more limited than it was; whilst in others it
is more risky.

A wide gulf, therefore, is set between the ideas of lenders and the
ideas of borrowers for the purpose of genuine new capital investment;
with the result that the savings of the lenders are being used up in
financing business losses and distress borrowers, instead of financing
new capital works.

At this moment the slump is probably a little overdone for psychological
reasons. A modest upward reaction, therefore, may be due at any time.
But there cannot be a real recovery, in my judgement, until the ideas of
lenders and the ideas of productive borrowers are brought together
again; partly by lenders becoming ready to lend on easier terms and over
a wider geographical field, partly by borrowers recovering their good
spirits and so becoming readier to borrow.

Seldom in modern history has the gap between the two been so wide and so
difficult to bridge. Unless we bend our wills and our intelligences,
energised by a conviction that this diagnosis is right, to find a
solution along these lines, then, if the diagnosis _is_ right, the slump
may pass over into a depression, accompanied by a sagging price level,
which might last for years, with untold damage to the material wealth
and to the social stability of every country alike. Only if we seriously
seek a solution, will the optimism of my opening sentences be
confirmed--at least for the nearer future.

It is beyond the scope of this essay to indicate lines of future policy.
But no one can take the first step except the central banking
authorities of the chief creditor countries; nor can any one Central
Bank do enough acting in isolation. Resolute action by the Federal
Reserve Banks of the United States, the Bank of France, and the Bank of
England might do much more than most people, mistaking symptoms or
aggravating circumstances for the disease itself, will readily believe.
In every way the most effective remedy would be that the Central Banks
of these three great creditor nations should join together in a bold
scheme to restore confidence to the international long-term loan market;
which would serve to revive enterprise and activity everywhere, and to
restore prices and profits, so that in due course the wheels of the
world's commerce would go round again. And even if France, hugging the
supposed security of gold, prefers to stand aside from the adventure of
creating new wealth, I am convinced that Great Britain and the United
States, like-minded and acting together, could start the machine again
within a reasonable time; if, that is to say, they were energised by a
confident conviction as to what was wrong. For it is chiefly the lack of
this conviction which to-day is paralysing the hands of authority on
both sides of the Channel and of the Atlantic.




  6. Economy (1931)

  (i) _Saving and Spending_ (Jan. 1931)[14]

[Footnote 14: A Broadcast Address.]


The slump in trade and employment and the business losses which are
being incurred are as bad as the worst which have ever occurred in the
modern history of the world. No country is exempt. The privation
and--what is sometimes worse--the anxiety which exist to-day in millions
of homes all over the world is extreme. In the three chief industrial
countries of the world, Great Britain, Germany, and the United States, I
estimate that probably 12,000,000 industrial workers stand idle. But I
am not sure that there is not even more human misery to-day in the great
agricultural countries of the world--Canada, Australia, and South
America, where millions of small farmers see themselves ruined by the
fall in the prices of their products, so that their receipts after
harvest bring them in much less than the crops have cost them to
produce. For the fall in the prices of the great staple products of the
world such as wheat, wool, sugar, cotton, and indeed most other
commodities has been simply catastrophic. Most of these prices are now
below their pre-war level; yet costs, as we all know, remain far above
their pre-war level. A week or two ago, it is said, wheat in Liverpool
sold at the lowest price recorded since the reign of Charles II. more
than 250 years ago. How is it possible for farmers to live in such
conditions? Of course it is impossible.

You might suppose--and some austere individuals do in fact believe--that
cheapness must be an advantage. For what the producer loses, the
consumer gains. But it is not so. For those of us who work--and we are
in the great majority--can only consume so long as we produce. So that
anything which interferes with the processes of production necessarily
interferes also with those of consumption.

The reason for this is that there are all kinds of obstacles to the
costs and prices of everything falling equally. For example, the
wages-costs of most manufacturers are practically the same as they were.
See how the vicious process works out. The prices of wool and wheat
fall. Good for the British consumer of wheat and woollen garments--so
one might suppose. But the producers of wool and wheat, since they
receive too little for their products, cannot make their usual purchases
of British goods. Consequently those British consumers who are at the
same time workers who make these goods find themselves out of work. What
is the use of cheapness when incomes are falling?

When Dr. Johnson, visiting the Island of Skye, was told that twenty eggs
might be bought for a penny, he said, "Sir, I don't gather from this
that eggs are plenty in your miserable Island, but that pence are few."

Cheapness which is due to increased efficiency and skill in the arts of
production is indeed a benefit. But cheapness which means the ruin of
the producer is one of the greatest economic disasters which can
possibly occur.

It would not be true to say that we are not taking a grave view of the
case. Yet I doubt whether we are taking a grave enough view. In the
enforced idleness of millions, enough potential wealth is running to
waste to work wonders. Many million pounds' worth of goods could be
produced each day by the workers and the plants which stand idle--and
the workers would be the happier and the better for it. We ought to sit
down to mend matters, in the mood of grave determination and the spirit
of action at all costs, which we should have in a war. Yet a vast
inertia seems to weigh us down. The peculiarity of the position
to-day--to my mind--is that there is something to be said for nearly all
the remedies that any one has proposed, though some, of course, are
better than others. All the rival policies have something to offer. Yet
we adopt none of them.

The worst of it is that we have one excellent excuse for doing nothing.
To a large extent the cure lies outside our own power. The problem is an
international one, and for a country which depends on foreign trade as
much as we do there are narrow limits to what we can achieve by
ourselves. But this is not the only reason why we are inactive. Nor is
it a sufficient reason. For something we can do by ourselves. The other
principal reason, in my opinion, is a serious misunderstanding as to
what kind of action is useful and what kind is not. There are to-day
many well-wishers of their country who believe that the most useful
thing which they and their neighbours can do to mend the situation is
to _save_ more than usual. If they refrain from spending a larger
proportion of their incomes than usual they believe that they will have
helped employment. If they are members of Town or County Councils they
believe that their right course at such a time as this is to oppose
expenditure on new amenities or new public works.

Now, in certain circumstances all this would be quite right, but in
present circumstances, unluckily, it is quite wrong. It is utterly
harmful and misguided--the very opposite of the truth. For the object of
saving is to release labour for employment on producing capital-goods
such as houses, factories, roads, machines, and the like. But if there
is a large unemployed surplus already available for such purposes, then
the effect of saving is merely to add to this surplus and therefore to
increase the number of the unemployed. Moreover, when a man is thrown
out of work in this or any other way, his diminished spending power
causes further unemployment amongst those who would have produced what
he can no longer afford to buy. And so the position gets worse and worse
in a vicious circle.

The best guess I can make is that whenever you save five shillings, you
put a man out of work for a day. Your saving that five shillings adds to
unemployment to the extent of one man for one day--and so on in
proportion. On the other hand, whenever you buy goods you increase
employment--though they must be British, home-produced goods if you are
to increase employment in this country. After all, this is only the
plainest common sense. For if you buy goods, someone will have to make
them. And if you do not buy goods, the shops will not clear their
stocks, they will not give repeat orders, and some one will be thrown
out of work.

Therefore, oh patriotic housewives, sally out to-morrow early into the
streets and go to the wonderful sales which are everywhere advertised.
You will do yourselves good--for never were things so cheap, cheap
beyond your dreams. Lay in a stock of household linen, of sheets and
blankets to satisfy all your needs. And have the added joy that you are
increasing employment, adding to the wealth of the country because you
are setting on foot useful activities, bringing a chance and a hope to
Lancashire, Yorkshire, and Belfast.

These are only examples. Do whatever is necessary to satisfy the most
sensible needs of yourself and your household, make improvements, build.

For what we need now is not to button up our waistcoats tight, but to be
in a mood of expansion, of activity--to do things, to buy things, to
make things. Surely all this is the most obvious common sense. For take
the extreme case. Suppose we were to stop spending our incomes
altogether, and were to save the lot. Why, every one would be out of
work. And before long we should have no incomes to spend. No one would
be a penny the richer, and the end would be that we should all starve
to death--which would surely serve us right for refusing to buy things
from one another, for refusing to take in one another's washing, since
that is how we all live. The same is true, and even more so, of the work
of a local authority. Now is the time for municipalities to be busy and
active with all kinds of sensible improvements.

The patient does not need rest. He needs exercise. You cannot set men to
work by holding back, by refusing to place orders, by inactivity. On the
contrary, activity of one kind or another is the only possible means of
making the wheels of economic progress and of the production of wealth
go round again.

Nationally, too, I should like to see schemes of greatness and
magnificence designed and carried through. I read a few days ago of a
proposal to drive a great new road, a broad boulevard, parallel to the
Strand, on the south side of the Thames, as a new thoroughfare joining
Westminster to the City. That is the right sort of notion. But I should
like to see something bigger still. For example, why not pull down the
whole of South London from Westminster to Greenwich, and make a good job
of it--housing on that convenient area near to their work a much greater
population than at present, in far better buildings with all the
conveniences of modern life, yet at the same time providing hundreds of
acres of squares and avenues, parks and public spaces, having, when it
was finished, something magnificent to the eye, yet useful and
convenient to human life as a monument to our age. Would that employ
men? Why, of course it would! Is it better that the men should stand
idle and miserable, drawing the dole? Of course it is not.

These, then, are the chief observations which I want to leave with you
now--first of all, to emphasise the extreme gravity of the situation,
with about a quarter of our working population standing idle; next, that
the trouble is a world-wide one which we cannot cure by ourselves; and,
third, that we can all the same do something by ourselves and that
something must take the form of activity, of doing things, of spending,
of setting great enterprises afoot.

But I also have one final theme to put before you. I fancy that a reason
why some people may be a little horrified at my suggestions is the fear
that we are much too poor to be able to afford what they consider to be
extravagance. They think that we are poor, much poorer than we were and
that what we chiefly need is to cut our coat according to our cloth, by
which they mean that we must curtail our consumption, reduce our
standard of life, work harder and consume less; and that that is the way
out of the wood. This view is not, in my judgement, in accordance with
the facts. We have plenty of cloth and only lack the courage to cut it
into coats. I want, therefore, to give you some cheerful facts to
dispose you to take an ampler view of the economic strength of this
country.

Let me first of all remind you of the obvious. The great mass of the
population is living much better than it ever lived before. We are
supporting in idleness, at a higher standard of life than is possible
for those who are in work in most other countries, nearly a quarter of
our employable population. Yet at the same time the national wealth is
increasing year by year. After paying wages which are far higher than,
for example, in France or in Germany, after supporting a quarter of our
population in idleness, after adding to the country's equipment of
houses and roads and electrical plant and so forth on a substantial
scale, we still have a surplus available to be lent to foreign
countries, which in 1929 was greater than the surplus for such purposes
of any other country in the world, even of the United States.

How do we do it? If the pessimists were right who believe that we are
terribly inefficient, over-extravagant and getting poorer, obviously it
would be impossible. We can only do it because the pessimists are quite
wrong. We are not nearly so rich as we might be if we could manage our
affairs better and not get them into such a muddle. But we are not
inefficient, we are not poor, we are not living on our capital. Quite
the contrary. Our labour and our plant are enormously more productive
than they used to be. Our national income is going up quite quickly.
That is how we do it.

Let me give you a few figures. As compared with so recent a date as
1924, our productive output per head has probably increased by 10 per
cent. That is to say, we can produce the same amount of wealth with 10
per cent fewer men employed. As compared with pre-war the increase in
output per head is probably as much as 20 per cent. Apart from changes
in the value of money, the national income--even so recently as 1929
with a great mass of unemployment (it cannot, of course, be quite so
good to-day)--was probably increasing by as much as 100,000,000 a year;
and this has been going on year by year for a good many years. At the
same time we have been quietly carrying through almost a revolution in
the distribution of incomes in the direction of equality.

Be confident, therefore, that we are suffering from the growing pains of
youth, not from the rheumatics of old age. We are failing to make full
use of our opportunities, failing to find an outlet for the great
increase in our productive powers and our productive energy. Therefore
we must not draw in our horns; we must push them out. Activity and
boldness and enterprise, both individually and nationally, must be the
cure.


  (ii) _The Economy Report_ (Aug. 15, 1931)

The Report of the Economy Committee can be considered from several
points of view. It is an exceedingly valuable document because it is a
challenge to us to make up our minds one way or the other on certain
vital matters of policy. In particular it invites us to decide whether
it is our intention to make the Deflation effective by transmitting the
reduction of international prices to British salaries and wages; though
if this _is_ our intention, it would be absurd to pretend that the
process can stop with school-teachers and policemen. The Committee's
Report goes too far or not far enough. But this is not the question
which I wish to discuss here. I would like to confine myself to what has
been so far, as it seems to me, a neglected aspect of the Report.

The Committee show no evidence of having given a moment's thought to the
possible repercussions of their programme, either on the volume of
unemployment or on the receipts of taxation. They recommend a reduction
of the purchasing power of British citizens partly by the reduction of
incomes and partly by throwing out of work persons now employed. They
give no reason for supposing that this reduction of purchasing power
will be offset by increases in other directions; for their idea is that
the Government should take advantage of the economies proposed, not to
tax less, but to borrow less. Perhaps at the back of their heads they
have some crude idea that there is a fixed Loan Fund, the whole of which
is always lent, so that, if the Government borrows less, private
enterprise necessarily borrows more. But they could not believe this on
reflection, if they were to try to translate it into definite, concrete
terms.

Their proposals do not even offer the possible advantages to our trade
balance which might ensue on a reduction of industrial wages. For there
is nothing in what they propose calculated to reduce the costs of
production; indeed, on the contrary, they propose to increase them by
raising the employers' insurance contribution.

Let us try, therefore, to write the missing paragraphs of the Report and
to make some guesses as to the probable consequences of reducing
purchasing power in the manner proposed.

Some part of this reduction of purchasing power may be expected to lead
to a reduced buying of foreign goods, _e.g._ if the dole is cut down,
the unemployed will have to tighten their belts and eat less imported
food. To this extent the situation will be helped. Some part will be
economised by saving less; _e.g._ if teachers' salaries are cut down,
teachers will probably save less or even draw on their past savings, to
maintain the standard of life to which they have become accustomed. But
for the rest British producers will find the receipts reaching them from
the expenditure of consumers (policemen, school-teachers, men on the
dole, etc.) reduced by the balance of, say, 70,000,000. They cannot
meet this loss without reducing their own expenditure or discharging
some of their men, or both; _i.e._ they will have to follow the example
of the Government, and this will again set moving the same series of
consequences, and so on.

The net result would necessarily be a substantial increase in the
number of unemployed drawing the dole and a decrease in the receipts of
taxation as a result of the diminished incomes and profits. Indeed the
immediate consequences of the Government's reducing its deficit are the
exact inverse of the consequences of its financing additional capital
works out of loans. One cannot predict with accuracy the exact
quantitative consequences of either, but they are broadly the same.
Several of the Committee's recommendations, _e.g._ those relating to
Roads, to Housing, and to Afforestation, do indeed expressly imply that
the whole theory underlying the principle of Public Works as a remedy
for unemployment is mistaken, and they ask, in effect, for a reversal of
the policies based on this principle. Yet they do not trouble to argue
the case. I suppose that they are such very plain men that the
advantages of not spending money seem obvious to them. They may even be
so plain as to be unaware of the existence of the problem which I am now
discussing. But they are flying in the face of a considerable weight of
opinion. For the main opposition to the Public Works remedy is based on
the practical difficulties of devising a reasonable programme, not on
the principle. But a proposal to reverse measures already in force
involves a denial of the principle as well as of the feasibility.

I should like, though it is rash, to make, if only for purposes of
illustration, a very rough guess as to the magnitudes of the more
immediate consequences of the adoption of economies of 100,000,000,
carried out on the lines of the Committee's recommendations. I should
expect something like the following:

(1) An increase of 250,000-400,000 in the number of the unemployed;

(2) A decrease of, say, 20,000,000 in the excess of our imports over
our exports;

(3) A decrease of 10,000,000 to 15,000,000 in the savings of the
general public;

(4) A decrease of 20,000,000 to 30,000,000 in business profits;

(5) A decrease of 10,000,000 to 15,000,000 in the personal expenditure
of business men and others, who depend on business profits, as a result
of these profits being less;

(6) A decrease of 5,000,000 to 10,000,000 in the aggregate of capital
construction and working capital and other investment at home entered
upon by private enterprise, as a result of the lower level of business
profits, after allowing for any favourable psychological effects on
business "confidence" of the adoption of the Committee's
recommendations;

(7) A _net_ reduction in the Government deficit not exceeding
50,000,000, as a result of the Budget economies of 100,000,000 being
partly offset by the diminished yield of taxation and the cost of the
increased unemployment.

The actual figures I have used are, of course, guess-work. But (2) + (3)
+ (4) - (5) - (6) = (7), where (7) is the net reduction in the
Government deficit, is a necessary truth--as necessary as 2 + 2 = 4.
There is nothing rational to dispute about except the size of the
various items entering into this equation. It might be held by some, for
example, that there would be an _increase_ under (6), instead of a
decrease; and if there were a large increase of this item--which,
however, could not, in my judgement, be maintained with good
reason--this would make all the difference in the world to the
expediency of the policy proposed.

At the present time, all Governments have large deficits. For Government
borrowing of one kind or another is nature's remedy, so to speak, for
preventing business losses from being, in so severe a slump as the
present one, so great as to bring production altogether to a standstill.
It is much better in every way that the borrowing should be for the
purpose of financing capital works, if these works are any use at all,
than for the purpose of paying doles (or veterans' bonuses). But, so
long as the slump lasts on the present scale, this is the only effective
choice which we possess, and Government borrowing for the one purpose or
the other (or a diminished Sinking Fund, which has the same effect) is
practically inevitable. For this is a case, fortunately perhaps, where
the weakness of human nature will, we can be sure, come to the rescue of
human wrong-headedness.

This is not to say that there are not other ways in which we can help
ourselves. I am not concerned here with the possible advantages--for
example--of a Tariff or of Devaluation or of a National Treaty for the
reduction of all money incomes. I am simply analysing the results to be
expected from the recommendations of the Economy Committee adopted as a
means of reducing the uncovered deficit of the Budget. And I should add,
to prevent misunderstanding, that I should prefer some of their
recommendations--for they have done their work in detail with ability
and fair-mindedness--to most kinds of additional taxation other than a
tariff.

My own policy for the Budget, so long as the slump lasts, would be to
suspend the Sinking Fund, to continue to borrow for the Unemployment
Fund, and to impose a Revenue Tariff. To get us out of the slump we must
look to quite other expedients. When the slump is over, when the demands
of private enterprise for new capital have recovered to normal and
employment is good and the yield of taxation is increasing, then is the
time to restore the Sinking Fund and to look critically at the less
productive State enterprises.


  (iii) _The Economy Bill_ (Sept. 19, 1931)

The Budget and the Economy Bill are replete with folly and injustice. It
is a tragedy that the moral energies and enthusiasm of many truly
self-sacrificing and well-wishing people should be so misdirected.

The objects of national policy, so as to meet the emergency, should be
primarily to improve our balance of trade, and secondarily to equalise
the yield of taxation with the normal recurrent expenditure of the
Budget by methods which would increase, rather than diminish, output,
and hence increase the national income and the yield of the revenue,
whilst respecting the principles of social justice. The actual policy of
the Government fails on each of these tests. It will have comparatively
little effect on the balance of trade. It will largely increase
unemployment and diminish the yield of the revenue. And it outrages the
principles of justice to a degree which I should have thought
inconceivable.

To begin with the last. The incomes of well-to-do people have been cut
by 2 to 3 per cent. The school-teachers are cut 15 per cent,[15] in
addition to the extra taxes which they have to pay. It is a monstrous
thing to single out this class and discriminate against them, merely
because they happen to be employees of the Government. It is
particularly outrageous, because efforts have been made in recent years
to attract into the profession teachers of higher qualifications by
holding out to them certain expectations. It is even proposed to take
powers to dissolve existing contracts. That the school-teachers should
have been singled out for sacrifice as an offering to the Moloch of
finance is a sufficient proof of the state of hysteria and
irresponsibility into which Cabinet Ministers have worked themselves.
For it is impossible to represent this cut as one of unavoidable
necessity. The money saved is 6,000,000. At the same time 32,000,000
is going to the Sinking Fund, whilst tea, sugar, and a tariff as sources
of revenue are left untapped. The Prime Minister has offered no
defence, except that some of his former colleagues, who have since
recovered their heads, were temporarily frightened into considering
something of the same kind.

[Footnote 15: [Afterwards reduced to 10 per cent.]]

The school-teachers are the most outstanding case of injustice. But the
same considerations apply in varying degrees to all the attacks on the
standards of Government employees. The principle of discriminating
against persons in the service of the State, because they can be reached
most easily, is not right. At least it would have been more decent in
the circumstances if the phrase "equality of sacrifice" had not been
used.

Moreover, the Government's programme is as foolish as it is wrong. Its
direct effect on employment must be disastrous. It is safe to predict
that it will increase the volume of unemployment by more than the 10 per
cent by which the dole is to be cut. It represents a reckless reversal
of all the partial attempts which have been made hitherto to mitigate
the consequences of the collapse of private investment; and it is a
triumph for the so-called "Treasury View" in its most extreme form. Not
only is purchasing power to be curtailed, but road-building, housing,
and the like are to be retrenched. Local authorities are to follow suit.
If the theory which underlies all this is to be accepted, the end will
be that no one can be employed, except those happy few who grow their
own potatoes, as a result of each of us refusing, for reasons of
economy, to buy the services of any one else. To raid the Road Fund in
order to maintain the Sinking Fund is, in present circumstances, a
policy of Bedlam.

Finally there is the problem of the Balance of Trade, which, after all,
is the main point so far as concerns the emergency. Broadly speaking,
the cost of production is left unchanged. Cutting the school-teachers'
salaries will not help us to recapture the markets of the world. Those
wages and the like which are within the Government's direct control
happen to be just those which it is most useless to cut in the interests
of the export trade. We are told that it is a wicked misrepresentation
to say that all this is a preliminary to a general assault on wages. Yet
it has less than no sense unless it is. But meanwhile the Government
have noticed that there is just one point where their activities raise
the cost of production, namely, the employers' insurance contribution,
which is, in effect, a poll tax on employment. So, in order to prove for
certain that they are quite mad, the Government have decided to
_increase_ it.

There are only two ways in which the Government plan can help the
Balance of Trade. Whenever any one is thrown out of work or otherwise
impoverished, he will perforce consume less. Most of this reduced
consumption will merely cause business losses and unemployment to other
Englishmen. Some part of it, however, perhaps a fifth, will be at the
expense of imports; though even this would not help if those Free
Traders are right who think that a reduction of imports leads to a
corresponding reduction of exports. But it is a wasteful way of setting
about the task of reducing imports. The other way is by increasing both
the quantity of unemployment and also the pains of being unemployed,
since this may slightly increase the chance of wage-reductions being
accepted. Economy can have no other purpose or meaning except to release
resources. A small proportion of what is thus released will relieve the
Balance of Trade. The rest will be resources of domestic plant and
labour, of which we already have a surplus out of use.

Thus the Government's scheme, for the sake of which we are asked to
swallow so much, is in the main misdirected, and will not assist the
solution of our twin problems of unemployment and an adverse balance of
trade.

As regards the latter, which, unremedied, will at no distant date break
the gold standard even if we cut school-teachers' salaries to nothing,
the only remedies now open to us are Devaluation, a drastic restriction
of imports by direct methods, a severe cut, not less than 30 per cent in
my judgement, in wages and salaries, or a decisive change in the
international position. An attack on wages would mean a severe
industrial struggle which would drive us off gold-parity within a few
weeks; so that this is not in practice an alternative to Devaluation.
Thus there are only three lines of policy to which it is worth the
Cabinet's while to direct their minds. The first and mildest is a plan
for the restriction of imports. The second is a plan for getting off
gold-parity without allowing the slide to go too far. The third is a
plan for an International Conference--one that means business of the
most definite kind, quite different from any Conference ever held
hitherto--for giving the gold-standard countries a last opportunity. All
the rest is waste of time. The advantage of the last alternative is that
this alone offers any chance, however slight, of an amelioration of the
international position, without which we are faced with a disappearance
of income from our foreign investments on a scale which neither a Tariff
nor Devaluation could offset.




  7. The Consequences to the Banks of the Collapse of Money Values (Aug.
  1931)


A year ago it was the failure of agriculture, mining, manufactures, and
transport to make normal profits, and the unemployment and waste of
productive resources ensuing on this, which was the leading feature of
the economic situation. To-day, in many parts of the world, it is the
serious embarrassment of the banks which is the cause of our gravest
concern. The shattering German crisis of July 1931, which took the world
more by surprise than it should, was in its essence a banking crisis,
though precipitated, no doubt, by political events and political fears.
That the top-heavy position, which ultimately crumbled to the ground,
should have been built up at all, was, in my judgement, a sin against
the principles of sound banking. One watched its erection with amazement
and terror. But the fact which was primarily responsible for bringing it
down was a factor for which the individual bankers were not responsible
and which very few people foresaw--namely, the enormous change in the
value of gold money and consequently in the burden of indebtedness which
debtors, in all countries adhering to the gold standard, had contracted
to pay in terms of gold.

Let us begin at the beginning of the argument. There is a multitude of
real assets in the world which constitute our capital wealth--buildings,
stocks of commodities, goods in course of manufacture and of transport,
and so forth. The nominal owners of these assets, however, have not
infrequently borrowed _money_ in order to become possessed of them. To a
corresponding extent the actual owners of wealth have claims, not on
real assets, but on money. A considerable part of this "financing" takes
place through the banking system, which interposes its guarantee between
its depositors who lend it money, and its borrowing customers to whom it
loans money wherewith to finance the purchase of real assets. The
interposition of this veil of money between the real asset and the
wealth owner is a specially marked characteristic of the modern world.
Partly as a result of the increasing confidence felt in recent years in
the leading banking systems, the practice has grown to formidable
dimensions. The bank-deposits of all kinds in the United States, for
example, stand in round figures at $50,000,000,000; those of Great
Britain at 2,000,000,000. In addition to this there is the great mass
of bonded and mortgage indebtedness held by individuals.

All this is familiar enough in general terms. We are also familiar with
the idea that a change in the value of money can gravely upset the
relative positions of those who possess claims to money and those who
owe money. For, of course, a fall in prices, which is the same thing as
a rise in the value of claims on money, means that real wealth is
transferred from the debtor in favour of the creditor, so that a larger
proportion of the real asset is represented by the claims of the
depositor, and a smaller proportion belongs to the nominal owner of the
asset who has borrowed in order to buy it. This, we all know, is one of
the reasons why changes in prices are upsetting.

But it is not to this familiar feature of falling prices that I wish to
invite attention. It is to a further development which we can ordinarily
afford to neglect but which leaps to importance when the change in the
value of money is _very large_--when it exceeds a more or less
determinate amount.

Modest fluctuations in the value of money, such as those which we have
frequently experienced in the past, do not vitally concern the banks

which have interposed their guarantee between the depositor and the
debtor. For the banks allow beforehand for some measure of fluctuation
in the value both of particular assets and of real assets in general, by
requiring from the borrower what is conveniently called a "margin." That
is to say, they will only lend him money up to a certain proportion of
the value of the asset which is the "security" offered by the borrower
to the lender. Experience has led to the fixing of conventional
percentages for the "margin" as being reasonably safe in all ordinary
circumstances. The amount will, of course, vary in different cases
within wide limits. But for marketable assets a "margin" of 20 per cent
to 30 per cent is conventionally considered as adequate, and a "margin"
of as much as 50 per cent as highly conservative. Thus provided the
amount of the downward change in the money value of assets is well
within these conventional figures, the direct interest of the banks is
not excessive;--they owe money to their depositors on one side of their
balance-sheet and are owed it on the other, and it is no vital concern
of theirs just what the money is worth. But consider what happens when
the downward change in the money value of assets within a brief period
of time _exceeds_ the amount of the conventional "margin" over a large
part of the assets against which money has been borrowed. The horrible
possibilities to the banks are immediately obvious. Fortunately, this is
a very rare, indeed a unique event. For it had never occurred in the
modern history of the world prior to the year 1931. There have been
large _upward_ movements in the money value of assets in those countries
where inflation has proceeded to great lengths. But this, however
disastrous in other ways, did nothing to jeopardise the position of the
banks; for it increased the amount of their "margins." There was a large
downward movement in the slump of 1921, but that was from an
exceptionally high level of values which had ruled for only a few months
or weeks, so that only a small proportion of the banks' loans had been
based on such values and these values had not lasted long enough to be
trusted. _Never_ before has there been such a world-wide collapse over
almost the whole field of the money values of real assets as we have
experienced in the last two years. And, finally, during the last few
months--so recently that the bankers themselves have, as yet, scarcely
appreciated it--it has come to exceed in very many cases the amount of
the conventional "margins." In the language of the market the "margins"
have run off. The exact details of this are not likely to come to the
notice of the outsider until some special event--perhaps some almost
accidental event--occurs which brings the situation to a dangerous head.
For, so long as a bank is in a position to wait quietly for better times
and to ignore meanwhile the fact that the security against many of its
loans is no longer as good as it was when the loans were first made,
nothing appears on the surface and there is no cause for panic.
Nevertheless, even at this stage the underlying position is likely to
have a very adverse effect on new business. For the banks, being aware
that many of their advances are in fact "frozen" and involve a larger
latent risk than they would voluntarily carry, become particularly
anxious that the remainder of their assets should be as liquid and as
free from risk as it is possible to make them. This reacts in all sorts
of silent and unobserved ways on new enterprise. For it means that the
banks are less willing than they would normally be to finance any
project which may involve a lock-up of their resources.

Now, in estimating the quantitative importance of the factor to which I
am calling attention, we have to consider what has been happening to
the prices of various types of property. There are, first of all, the
principal raw materials and foodstuffs of international commerce. These
are of great importance to the banks, because the stocks of these
commodities, whether in warehouse or in transit or embodied in
half-finished or unsold manufactured articles, are very largely financed
through the banks. In the last eighteen months the prices of these
commodities have fallen _on the average_ by about 25 per cent. But this
is an average, and banks cannot average the security of one customer
with that of another. Many individual commodities of the greatest
commercial importance have fallen in price by 40 to 50 per cent or even
more.

Next come the ordinary or common shares of the great companies and
corporations which are the market leaders in the Stock Exchanges of the
world. In most countries the average fall amounts to 40 to 50 per cent;
and, this again, is an average which means that individual shares, even
amongst those which would have been considered of good quality two years
ago, have fallen enormously more. Then there are the bonds and the fixed
interest securities. Those of the very highest grade have, indeed, risen
slightly, or, at the worst, not fallen by more than 5 per cent, which
has been of material assistance in some quarters. But many other fixed
interest securities, which, while not of the highest grade, were, and
are, good securities, have fallen from 10 to 15 per cent; whilst foreign
government bonds have, as is well known, suffered prodigious falls.
These declines, even where they are more moderate, may be scarcely less
serious, because such bonds (though not in Great Britain) are often
owned by the banks themselves outright, so that there is no "margin" to
protect them from loss.

The declines in the prices of commodities and of securities have,
broadly speaking, affected most countries alike. When we come to the
next category of property--and one of great quantitative
importance--namely, real estate, the facts are more various as between
one country and another. A great element of stability in Great Britain,
and, I believe, in France also, has been the continued comparative
firmness in real estate values:--no slump has been experienced in this
quarter, with the result that mortgage business is sound and the
multitude of loans granted on the security of real estate are
unimpaired. But in many other countries the slump has affected this
class of property also; and particularly, perhaps, in the United States,
where farm values have suffered a great decline, and also city property
of modern construction, much of which would not fetch to-day more than
60 to 70 per cent of its original cost of construction, and not
infrequently much less. This is an immense aggravation of the problem,
where it has occurred, both because of the very large sums involved and
because such property is ordinarily regarded as relatively free from
risk.

Finally, there are the loans and advances which banks have made to their
customers for the purposes of their customers' business. These are, in
many cases, in the worst condition of all. The security in these cases
is primarily the profit, actual and prospective, of the business which
is being financed; and in present circumstances for many classes of
producers of raw materials, of farmers and of manufacturers, there are
no profits and every prospect of insolvencies, if matters do not soon
take a turn for the better.

To sum up, there is scarcely any class of property, except real estate,
however useful and important to the welfare of the community, the
current money value of which has not suffered an enormous and scarcely
precedented decline. This has happened in a community which is so
organised that a veil of money is, as I have said, interposed over a
wide field between the actual asset and the wealth owner. The ostensible
proprietor of the actual asset has financed it by borrowing money from
the actual owner of wealth. Furthermore, it is largely through the
banking system that all this has been arranged. That is to say, the
banks have, for a consideration, interposed their guarantee. They stand
between the real borrower and the real lender. They have given their
guarantee to the real lender; and this guarantee is only good if the
money value of the asset belonging to the real borrower is worth the
money which has been advanced on it.

It is for this reason that a decline in money values so severe as that
which we are now experiencing threatens the solidity of the whole
financial structure. Banks and bankers are by nature blind. They have
not seen what was coming. Some of them have even welcomed the fall of
prices towards what, in their innocence, they have deemed the just and
"natural" and inevitable level of pre-war, that is to say, to the level
of prices to which their minds became accustomed in their formative
years. In the United States some of them employ so-called "economists"
who tell us even to-day that our troubles are due to the fact that the
prices of some commodities and some services have not yet fallen enough,
regardless of what should be the obvious fact that their cure, if it
could be realised, would be a menace to the solvency of their
institution. A "sound" banker, alas! is not one who foresees danger and
avoids it, but one who, when he is ruined, is ruined in a conventional
and orthodox way along with his fellows, so that no one can really blame
him.

But to-day they are beginning at last to take notice. In many countries
bankers are becoming unpleasantly aware of the fact that, when their
customers' margins have run off, they are themselves "on margin." I
believe that, if to-day a really conservative valuation were made of all
doubtful assets, quite a significant proportion of the banks of the
world would be found to be insolvent; and with the further progress of
Deflation this proportion will grow rapidly. Fortunately our own
domestic British Banks are probably at present--for various
reasons--among the strongest. But there is a degree of Deflation which
no bank can stand. And over a great part of the world, and not least in
the United States, the position of the banks, though partly concealed
from the public eye, may be in fact the weakest element in the whole
situation. It is obvious that the present trend of events cannot go much
further without something breaking. If nothing is done, it will be
amongst the world's banks that the really critical breakages will occur.

Modern capitalism is faced, in my belief, with the choice between
finding some way to increase money values towards their former figure,
or seeing widespread insolvencies and defaults and the collapse of a
large part of the financial structure;--after which we should all start
again, not nearly so much poorer as we should expect, and much more
cheerful perhaps, but having suffered a period of waste and disturbance
and social injustice, and a general re-arrangement of private fortunes
and the ownership of wealth. Individually many of us would be "ruined,"
even though collectively we were much as before. But under the pressure
of hardship and excitement, we might have found out better ways of
managing our affairs.

The present signs suggest that the bankers of the world are bent on
suicide. At every stage they have been unwilling to adopt a
sufficiently drastic remedy. And by now matters have been allowed to go
so far that it has become extraordinarily difficult to find any way out.

It is necessarily part of the business of a banker to maintain
appearances and to profess a conventional respectability which is more
than human. Lifelong practices of this kind make them the most romantic
and the least realistic of men. It is so much their stock-in-trade that
their position should not be questioned, that they do not even question
it themselves until it is too late. Like the honest citizens they are,
they feel a proper indignation at the perils of the wicked world in
which they live,--when the perils mature; but they do not foresee them.
A Bankers' Conspiracy! The idea is absurd! I only wish there were one!
So, if they are saved, it will be, I expect, in their own despite.




  III

  THE RETURN TO THE GOLD STANDARD




  THE RETURN TO THE GOLD STANDARD

  1. Auri Sacra Fames (Sept. 1930)


The choice of gold as a standard of value is chiefly based on
tradition. In the days before the evolution of Representative Money, it
was natural, for reasons which have been many times told, to choose one
or more of the metals as the most suitable commodity for holding a store
of value or a command of purchasing power.

Some four or five thousand years ago the civilised world settled down to
the use of gold, silver, and copper for pounds, shillings, and pence,
but with silver in the first place of importance and copper in the
second. The Mycenaeans put gold in the first place. Next, under Celtic
or Dorian influences, came a brief invasion of iron in place of copper
over Europe and the northern shores of the Mediterranean. With the
Achaemenid Persian Empire, which maintained a bimetallic standard of
gold and silver at a fixed ratio (until Alexander overturned them), the
world settled down again to gold, silver, and copper, with silver once
more of predominant importance; and there followed silver's long
hegemony (except for a certain revival of the influence of gold in Roman
Constantinople), chequered by imperfectly successful attempts at
gold-and-silver bimetallism, especially in the eighteenth century and
the first half of the nineteenth, and only concluded by the final
victory of gold during the fifty years before the war.

Dr. Freud relates that there are peculiar reasons deep in our
subconsciousness why gold in particular should satisfy strong instincts
and serve as a symbol. The magical properties, with which Egyptian
priestcraft anciently imbued the yellow metal, it has never altogether
lost. Yet, whilst gold as a store of value has always had devoted
patrons, it is, as the sole standard of purchasing power, almost a
parvenu. In 1914 gold had held this position in Great Britain _de jure_
over less than a hundred years (though _de facto_ for more than two
hundred), and in most other countries over less than sixty. For except
during rather brief intervals gold has been too scarce to serve the
needs of the world's principal medium of currency. Gold is, and always
has been, an extraordinarily scarce commodity. A modern liner could
convey across the Atlantic in a single voyage all the gold which has
been dredged or mined in seven thousand years. At intervals of five
hundred or a thousand years a new source of supply has been
discovered--the latter half of the nineteenth century was one of these
epochs--and a temporary abundance has ensued. But as a rule, generally
speaking, there has been not enough.

Of late years the _auri sacra fames_ has sought to envelop itself in a
garment of respectability as densely respectable as was ever met with,
even in the realms of sex or religion. Whether this was first put on as
a necessary armour to win the hard-won fight against bimetallism and is
still worn, as the gold-advocates allege, because gold is the sole
prophylactic against the plague of fiat moneys, or whether it is a
furtive Freudian cloak, we need not be curious to inquire. But we may
remind the reader of what he well knows--namely, that gold has become
part of the apparatus of conservatism and is one of the matters which we
cannot expect to see handled without prejudice.

One great change, nevertheless--probably, in the end, a fatal
change--has been effected by our generation. During the war individuals
threw their little stocks into the national melting-pots. Wars have
sometimes served to disperse gold, as when Alexander scattered the
temple hoards of Persia or Pizarro those of the Incas. But on this
occasion war concentrated gold in the vaults of the Central Banks; and
these Banks have not released it. Thus, almost throughout the world,
gold has been withdrawn from circulation. It no longer passes from hand
to hand, and the touch of the metal has been taken away from men's
greedy palms. The little household gods, who dwelt in purses and
stockings and tin boxes, have been swallowed ed by a single golden image
in each country, which lives underground and is not seen. Gold is out of
sight--gone back again into the soil. But when gods are no longer seen
in a yellow panoply walking the earth, we begin to rationalise them; and
it is not long before there is nothing left.

Thus the long age of Commodity Money has at last passed finally away
before the age of Representative Money. Gold has ceased to be a coin, a
hoard, a tangible claim to wealth, of which the value cannot slip away
so long as the hand of the individual clutches the material stuff. It
has become a much more abstract thing--just a standard of value; and it
only keeps this nominal status by being handed round from time to time
in quite small quantities amongst a group of Central Banks, on the
occasions when one of them has been inflating or deflating its managed
representative money in a different degree from what is appropriate to
the behaviour of its neighbours. Even the handing round is becoming a
little old-fashioned, being the occasion of unnecessary travelling
expenses, and the most modern way, called "ear-marking," is to change
the ownership without shifting the location. It is not a far step from
this to the beginning of arrangements between Central Banks by which,
without ever formally renouncing the rule of gold, the quantity of metal
actually buried in their vaults may come to stand, by a modern alchemy,
for what they please, and its value for what they choose. Thus gold,
originally stationed in heaven with his consort silver, as Sun and Moon,
having first doffed his sacred attributes and come to earth as an
autocrat, may next descend to the sober status of a constitutional king
with a cabinet of Banks; and it may never be necessary to proclaim a
Republic. But this is not yet--the evolution may be quite otherwise.
The friends of gold will have to be extremely wise and moderate if they
are to avoid a Revolution.




  2. Alternative Aims in Monetary Policy (1923)[16]

[Footnote 16: [_I.e._ prior to the restoration of the Gold Standard in
Great Britain.]]


The instability of money has been compounded, in most countries except
the United States, of two elements: the failure of the national
currencies to remain stable in terms of what was supposed to be the
standard of value, namely gold; and the failure of gold itself to remain
stable in terms of purchasing power. Attention has been mainly
concentrated (_e.g._ by the Cunliffe Committee) on the first of these
two factors. It is often assumed that the restoration of the gold
standard, that is to say, of the convertibility of each national
currency at a fixed rate in terms of gold, must be, in any case, our
objective; and that the main question of controversy is whether national
currencies should be restored to their pre-war gold value or to some
lower value nearer to the present facts; in other words, the choice
between _Deflation_ and _Devaluation_.

This assumption is hasty. If we glance at the course of prices during
the last five years, it is obvious that the United States, which has
enjoyed a gold standard throughout, has suffered as severely as many
other countries, that in the United Kingdom the instability of gold has
been a larger factor than the instability of the exchange, that the same
is true even of France, and that in Italy it has been nearly as large.
On the other hand, in India, which has suffered violent exchange
fluctuations, the standard of value has been more stable than in any
other country.

We should not, therefore, by fixing the exchanges get rid of our
currency troubles. It is even possible that this step might weaken our
control. The problem of stabilisation has several sides, which we must
consider one by one:

1. Devaluation _versus_ Deflation. Do we wish to fix the standard of
value, whether or not it be gold, near the existing value? Or do we wish
to restore it to the pre-war value?

2. Stability of Prices _versus_ Stability of Exchange. Is it more
important that the value of a national currency should be stable in
terms of purchasing power, or stable in terms of the currency of certain
foreign countries?

3. The Restoration of a Gold Standard. In the light of our answers to
the first two questions, is a gold standard, however imperfect in
theory, the best available method for attaining our ends in practice?


  (i) _Devaluation_ versus _Deflation_

The policy of reducing the ratio between the volume of a country's
currency and its requirements of purchasing power in the form of money,
so as to increase the exchange value of the currency in terms of gold
or of commodities, is conveniently called _Deflation_.

The alternative policy of stabilising the value of the currency
somewhere near its present value, without regard to its pre-war value,
is called _Devaluation_.

Up to the date of the Genoa Conference of April 1922, these two policies
were not clearly distinguished by the public, and the sharp opposition
between them has been only gradually appreciated. Even now (October
1923) there is scarcely any European country in which the authorities
have made it clear whether their policy is to stabilise the value of
their currency or to raise it. Stabilisation at the existing level has
been recommended by International Conferences; and the actual value of
many currencies tends to fall rather than to rise. But, to judge from
other indications, the heart's desire of the State Banks of Europe,
whether they pursue it successfully, as in Czecho-Slovakia, or
unsuccessfully, as in France, is to _raise_ the value of their
currencies.

The simple arguments against Deflation fall under two heads.

In the first place, Deflation is not _desirable_, because it effects,
what is always harmful, a change in the existing Standard of Value, and
redistributes wealth in a manner injurious, at the same time, to
business and to social stability. Deflation, as we have already seen,
involves a transference of wealth from the rest of the community to the
rentier class and to all holders of titles to money; just as Inflation
involves the opposite. In particular it involves a transference from
all borrowers, that is to say from traders, manufacturers, and farmers,
to lenders, from the active to the inactive.

But whilst the oppression of the taxpayer for the enrichment of the
rentier is the chief lasting result, there is another, more violent,
disturbance during the period of transition. The policy of gradually
raising the value of a country's money to (say) 100 per cent above its
present value in terms of goods amounts to giving notice to every
merchant and every manufacturer, that for some time to come his stock
and his raw materials will steadily depreciate on his hands, and to
every one who finances his business with borrowed money that he will,
sooner or later, lose 100 per cent on his liabilities (since he will
have to pay back in terms of commodities twice as much as he has
borrowed). Modern business, being carried on largely with borrowed
money, must necessarily be brought to a standstill by such a process. It
will be to the interest of everyone in business to go out of business
for the time being; and of everyone who is contemplating expenditure to
postpone his orders so long as he can. The wise man will be he who turns
his assets into cash, withdraws from the risks and the exertions of
activity, and awaits in country retirement the steady appreciation
promised him in the value of his cash. A probable expectation of
Deflation is bad enough; a certain expectation is disastrous. For the
mechanism of the modern business world is even less adapted to
fluctuations in the value of money upwards than it is to fluctuations
downwards.

In the second place, in many countries, Deflation, even were it
desirable, is not _possible_; that is to say, Deflation in sufficient
degree to restore the currency to its pre-war parity. For the burden
which it would throw on the taxpayer would be insupportable. This
practical impossibility might have rendered the policy innocuous, if it
were not that, by standing in the way of the alternative policy, it
prolongs the period of uncertainty and severe seasonal fluctuation, and
even, in some cases, can be carried into effect sufficiently to cause
much interference with business. The fact, that the restoration of their
currencies to the pre-war parity is still the declared official policy
of the French and Italian Governments, is preventing, in those
countries, any rational discussion of currency reform. All those--and in
the financial world they are many--who have reasons for wishing to
appear "correct," are compelled to talk foolishly. In Italy, where sound
economic views have much influence and which may be nearly ripe for
currency reform, Signor Mussolini has threatened to raise the lira to
its former value. Fortunately for the Italian taxpayer and Italian
business, the lira does not listen even to a dictator and cannot be
given castor oil. But such talk can postpone positive reform; though it
may be doubted if so good a politician would have propounded such a
policy, even in bravado and exuberance, if he had understood that,
expressed in other but equivalent words, it was as follows: "My policy
is to halve wages, double the burden of the National Debt, and to reduce
by 50 per cent the prices which Sicily can get for her exports of
oranges and lemons."

       *     *     *     *     *

If the restoration of many European currencies to their pre-war parity
with gold is neither desirable nor possible, what are the forces or the
arguments which have established this undesirable impossibility as the
avowed policy of most of them? The following are the most important:

1. _To leave the gold value of a country's currency at the low level to
which war has driven it is an injustice to the rentier class and to
others whose income is fixed in terms of currency, and practically a
breach of contract; whilst to restore its value would meet a debt of
honour._

The injury done to pre-war holders of fixed interest-bearing stocks is
beyond dispute. Real justice, indeed, might require the restoration of
the purchasing power, and not merely the gold value, of their money
incomes, a measure which no one in fact proposes; whilst nominal justice
has not been infringed, since these investments were not in gold bullion
but in the legal tender of the realm. Nevertheless, if this class of
investors could be dealt with separately, considerations of equity and
the expedience of satisfying reasonable expectation would furnish a
strong case.

But this is not the actual situation. The vast issues of War Loans have
swamped the pre-war holdings of fixed interest-bearing stocks, and
Society has largely adjusted itself to the new situation. To restore the
value of pre-war holdings by Deflation means enhancing at the same time
the value of war and post-war holdings, and thereby raising the total
claims of the rentier class not only beyond what they are entitled to,
but to an intolerable proportion of the total income of the community.
Indeed justice, rightly weighed, comes down on the other side. Much the
greater proportion of the money contracts still outstanding were entered
into when money was worth more nearly what it is worth now than what it
was worth in 1913. Thus, in order to do justice to a minority of
creditors, a great injustice would be done to a great majority of
debtors.

When, therefore, the depreciation of the currency has lasted long enough
for Society to adjust itself to the new values, Deflation is even worse
than Inflation. Both are "unjust" and disappoint reasonable expectation.
But whereas Inflation, by easing the burden of national debt and
stimulating enterprise, has a little to throw into the other side of the
balance, Deflation has nothing.

2. _The restoration of a currency to its pre-war gold value enhances a
country's financial prestige and promotes future confidence._

Where a country can hope to restore its pre-war parity at an early date,
this argument cannot be neglected. This might be said of Great Britain,
Holland, Sweden, Switzerland, and (perhaps) Spain, but of no other
European country. The argument cannot be extended to those countries
which, even if they could raise somewhat the value of their legal-tender
money, could not possibly restore it to its old value. It is of the
essence of the argument that the _exact_ pre-war parity should be
recovered. It would not make much difference to the financial prestige
of Italy whether she stabilised the lira at 100 to the  sterling or at
60; and it would be much better for her prestige to stabilise it
definitely at 100 than to let it fluctuate between 60 and 100.

This argument is limited, therefore, to those countries the gold value
of whose currencies is within (say) 5 or 10 per cent of their former
value. Its force in these cases depends, I think, upon what answer we
give to the problem discussed below, namely, whether we intend to pin
ourselves in the future, as in the past, to an unqualified gold
standard. If we still prefer such a standard to any available
alternative, and if future "confidence" in our currency is to depend not
on the stability of its purchasing power but on the fixity of its gold
value, then it may be worth our while to stand the racket of Deflation
to the extent of 5 or 10 per cent. This view is in accordance with that
expressed by Ricardo in analogous circumstances a hundred years ago. If,
on the other hand, we decide to aim for the future at stability of the
price level rather than at a fixed parity with gold, in that case
_cadit quaestio_.

3. _If the gold value of a country's currency can be increased, labour
will profit by a reduced cost of living, foreign goods will be
obtainable cheaper, and foreign debts fixed in terms of gold (e.g. to
the United States) will be discharged with less effort._

This argument, which is pure delusion, exercises quite as much influence
as the other two. If the franc is worth more, wages, it is argued, which
are paid in francs, will surely buy more, and French imports, which are
paid for in francs, will be so much cheaper. No! If francs are worth
more they will buy more labour as well as more goods,--that is to say,
wages will fall; and the French exports, which pay for the imports,
will, measured in francs, fall in value just as much as the imports. Nor
will it make in the long run any difference whatever in the amount of
goods the value of which England will have to transfer to America to pay
her dollar debts whether in the end sterling settles down at four
dollars to the pound or at its pre-war parity. The burden of this debt
depends on the value of gold, in terms of which it is fixed, not on the
value of sterling. It is not easy, it seems, for men to apprehend that
their money is a mere intermediary, without significance in itself,
which flows from one hand to another, is received and is dispensed, and
disappears when its work is done from the sum of a nation's wealth.


  (ii) _Stability of Prices_ versus _Stability of Exchange_

Since, subject to certain qualifications, the rate of exchange of a
country's currency with the currency of the rest of the world (assuming
for the sake of simplicity that there is only one external currency)
depends on the relation between the internal price level and the
external price level, it follows that the exchange cannot be stable
unless _both_ internal _and_ external price levels remain stable. If,
therefore, the external price level lies outside our control, we must
submit either to our own internal price level or to our exchange being
pulled about by external influences. If the external price level is
unstable, we cannot keep _both_ our own price level _and_ our exchanges
stable. And we are compelled to choose.

In pre-war days, when almost the whole world was on a gold standard, we
had all plumped for stability of exchange as against stability of
prices, and we were ready to submit to the social consequences of a
change of price level for causes quite outside our control, connected,
for example, with the discovery of new gold mines in foreign countries
or a change of banking policy abroad. But we submitted, partly because
we did not dare trust ourselves to a less automatic (though more
reasoned) policy, and partly because the price fluctuations experienced
were in fact moderate. Nevertheless, there were powerful advocates of
the other choice. In particular, the proposals of Professor Irving
Fisher for a Compensated Dollar, amounted, unless all countries adopted
the same plan, to putting into practice a preference for stability of
internal price level over stability of external exchange.

The right choice is not necessarily the same for all countries. It must
partly depend on the relative importance of foreign trade in the
economic life of the country. Nevertheless, there does seem to be in
almost every case a presumption in favour of the stability of prices, if
only it can be achieved. Stability of exchange is in the nature of a
convenience which adds to the efficiency and prosperity of those who are
engaged in foreign trade. Stability of prices, on the other hand, is
profoundly important for the avoidance of the various evils described
above. Contracts and business expectations, which presume a stable
exchange, must be far fewer, even in a trading country such as England,
than those which presume a stable level of internal prices. The main
argument to the contrary seems to be that exchange stability is an
easier aim to attain, since it only requires that the same standard of
value should be adopted at home and abroad; whereas an internal
standard, so regulated as to maintain stability in an index number of
prices, is a difficult scientific innovation, never yet put into
practice.

At any rate the unthinking assumption, in favour of the restoration of
a fixed exchange as the one thing to aim at, requires more examination
than it sometimes receives. Especially is this the case if the prospect
that a majority of countries will adopt the same standard is still
remote. When by adopting the gold standard we could achieve stability of
exchange with almost the whole world, whilst any other standard would
have appeared as a solitary eccentricity, the solid advantages of
certainty and convenience supported the conservative preference for
gold. Nevertheless, even so, the convenience of traders and the
primitive passion for solid metal might not, I think, have been adequate
to preserve the dynasty of gold, if it had not been for another,
half-accidental circumstance; namely, that for many years past gold had
afforded not only a stable exchange but, on the whole, a stable price
level also. In fact, the choice between stable exchanges and stable
prices had not presented itself as an acute dilemma. And when, prior to
the development of the South African mines, we seemed to be faced with a
continuously falling price level, the fierceness of the bimetallic
controversy testified to the discontent provoked as soon as the existing
standard appeared seriously incompatible with the stability of prices.

Indeed, it is doubtful whether the pre-war system for regulating the
international flow of gold would have been capable of dealing with such
large or sudden divergencies between the price levels of different
countries as have occurred lately. The fault of the pre-war rgime,
under which the rates of exchange between a country and the outside
world were fixed, and the internal price level had to adjust itself
thereto (_i.e._ was chiefly governed by external influences), was that
it was too slow and insensitive in its mode of operation. The fault of
the post-war rgime, under which the price level mainly depends on
internal influences (_i.e._ internal currency and credit policy) and the
rates of exchange with the outside world have to adjust themselves
thereto, is that it is too rapid in its effect and over-sensitive, with
the result that it may act violently for merely transitory causes.
Nevertheless, when the fluctuations are large and sudden, a quick
reaction is necessary for the maintenance of equilibrium; and the
necessity for quick reaction has been one of the factors which have
rendered the pre-war method inapplicable to post-war conditions, and
have made every one nervous of proclaiming a final fixation of the
exchange.

A fluctuating exchange means that relative prices can be knocked about
by the most fleeting influences of politics and of sentiment, and by the
periodic pressure of seasonal trades. But it also means that this method
is a most rapid and powerful corrective of real disequilibria in the
balance of international payments arising from whatever causes, and a
wonderful preventive in the way of countries which are inclined to spend
abroad beyond their resources.

Thus when there are violent shocks to the pre-existing equilibrium
between the internal and external price levels, the pre-war method is
likely to break down in practice, simply because it cannot bring about
the readjustment of internal prices _quick enough_. Theoretically, of
course, the pre-war method must be able to make itself effective sooner
or later, provided the movement of gold is allowed to continue without
restriction until the inflation or deflation of prices has taken place
to the necessary extent. But in practice there is usually a limit to the
rate and to the amount by which the actual currency or the metallic
backing for it can be allowed to flow abroad. If the supply of money or
credit is reduced faster than social and business arrangements allow
prices to fall, intolerable inconveniences result.


  (iii) _The Restoration of a Gold Standard_

Our conclusions up to this point are, therefore, that, when stability of
the internal price level and stability of the external exchanges are
incompatible, the former is generally preferable; and that on occasions
when the dilemma is acute the preservation of the former at the expense
of the latter is, fortunately perhaps, the line of least resistance.

The restoration of the gold standard (whether at the pre-war parity or
at some other rate) certainly will not give us complete stability of
internal prices, and can only give us complete stability of the external
exchanges if all other countries also restore the gold standard. The
advisability of restoring it depends, therefore, on whether, on the
whole, it will give us the best working compromise obtainable between
the two ideals.

The advocates of gold, as against a more scientific standard, base their
cause on the double contention that in practice gold has provided and
will provide a reasonably stable standard of value and that in practice,
since governing authorities lack wisdom as often as not, a managed
currency will, sooner or later, come to grief. Conservatism and
scepticism join arms--as they often do. Perhaps superstition comes in
too; for gold still enjoys the prestige of its smell and colour.

The considerable success with which gold maintained its stability of
value in the changing world of the nineteenth century was certainly
remarkable. After the discoveries of Australia and California it began
to depreciate dangerously, and before the exploitation of South Africa
it began to appreciate dangerously. Yet in each case it righted itself
and retained its reputation.

But the conditions of the future are not those of the past. We have no
sufficient ground for expecting the continuance of the special
conditions which preserved a sort of balance before the war. For what
are the underlying explanations of the good behaviour of gold during the
nineteenth century?

In the first place, it happened that progress in the discovery of gold
mines roughly kept pace with progress in other directions--a
correspondence which was not altogether a matter of chance, because the
progress of that period, since it was characterised by the gradual
opening up and exploitation of the world's surface, not unnaturally
brought to light _pari passu_ the remoter deposits of gold. But this
stage of history is now almost at an end. A quarter of a century has
passed by since the discovery of an important deposit. Material progress
is more dependent now on the growth of scientific and technical
knowledge, of which the application to gold-mining may be intermittent.
Years may elapse without great improvement in the methods of extracting
gold; and then the genius of a chemist may realise past dreams and
forgotten hoaxes, transmuting base into precious like Subtle, or
extracting gold from sea-water as in the Bubble. Gold is liable to be
either too dear or too cheap. In either case, it is too much to expect
that a succession of accidents will keep the metal steady.

But there was another type of influence which used to aid stability. The
value of gold has not depended on the policy or the decisions of a
single body of men; and a sufficient proportion of the supply has been
able to find its way, without any flooding of the market, into the Arts
or into the hoards of Asia for its marginal value to be governed by a
steady psychological estimation of the metal in relation to other
things. This is what is meant by saying that gold has "intrinsic value"
and is free from the dangers of a "managed" currency. The _independent
variety_ of the influences determining the value of gold has been in
itself a steadying influence. The arbitrary and variable character of
the proportion of gold reserves to liabilities maintained by many of the
note-issuing banks of the world, so far from introducing an incalculable
factor, was an element of stability. For when gold was relatively
abundant and flowed towards them, it was absorbed by their allowing
their ratio of gold reserves to rise slightly; and when it was
relatively scarce, the fact that they had no intention of ever utilising
their gold reserves for any practical purpose permitted most of them to
view with equanimity a moderate weakening of their proportion. A great
part of the flow of South African gold between the end of the Boer War
and 1914 was able to find its way into the central gold reserves of
European and other countries with the minimum effect on prices.

But the war has effected a great change. Gold itself has become a
"managed" currency. The West, as well as the East, has learnt to hoard
gold; but the motives of the United States are not those of India. Now
that most countries have abandoned the gold standard, the supply of the
metal would, if the chief user of it restricted its holdings to its real
needs, prove largely redundant. The United States has not been able to
let gold fall to its "natural" value, because it could not face the
resulting depreciation of its standard. It has been driven, therefore,
to the costly policy of burying in the vaults of Washington what the
miners of the Rand have laboriously brought to the surface. Consequently
gold now stands at an "artificial" value, the future course of which
almost entirely depends on the policy of the Federal Reserve Board of
the United States. The value of gold is no longer the resultant of the
chance gifts of Nature and the judgement of numerous authorities and
individuals acting independently. Even if other countries gradually
return to a gold basis, the position will not be greatly changed. The
tendency to employ some variant of the gold-exchange standard and the
probably permanent disappearance of gold from the pockets of the people
are likely to mean that the strictly _necessary_ gold reserves of the
Central Banks of the gold-standard countries will fall considerably
short of the available supplies. The actual value of gold will depend,
therefore, on the policy of three or four of the most powerful Central
Banks, whether they act independently or in unison. If, on the other
hand, pre-war conventions about the use of gold in reserves and in
circulation were to be restored--which is, in my opinion, the much less
probable alternative--there might be, as Professor Cassel has predicted,
a serious shortage of gold, leading to a progressive appreciation in its
value.

Nor must we neglect the possibility of a partial demonetisation of gold
by the United States through a closing of its mints to further receipts
of gold. The present policy of the United States in accepting unlimited
imports of gold can be justified, perhaps, as a temporary measure,
intended to preserve tradition and to strengthen confidence through a
transitional period. But, looked at as a permanent arrangement, it could
hardly be judged otherwise than as a foolish expense. If the Federal
Reserve Board intends to maintain the value of the dollar at a level
which is irrespective of the inflow or outflow of gold, what object is
there in continuing to accept at the mints gold which is not wanted, yet
costs a heavy price? If the United States mints were to be closed to
gold, everything, except the actual price of the metal, could continue
precisely as before.

Confidence in the future stability of the value of gold depends
therefore on the United States being foolish enough to go on accepting
gold which it does not want, and wise enough, having accepted it, to
maintain it at a fixed value. This double event might be realised
through the collaboration of a public understanding nothing with a
Federal Reserve Board understanding everything. But the position is
precarious; and not very attractive to any country which is still in a
position to choose what its future standard is to be.

This discussion of the prospects of the stability of gold has partly
answered by anticipation the second principal argument in favour of the
restoration of an unqualified gold standard, namely that this is the
only way of avoiding the dangers of a "managed" currency.

It is natural, after what we have experienced, that prudent people
should desiderate a standard of value which is independent of Finance
Ministers and State Banks. The present state of affairs has allowed to
the ignorance and frivolity of statesmen an ample opportunity of
bringing about ruinous consequences in the economic field. It is felt
that the general level of economic and financial education amongst
statesmen and bankers is hardly such as to render innovations feasible
or safe; that, in fact, a chief object of stabilising the exchanges is
to strap down Ministers of Finance.

These are reasonable grounds of hesitation. But the experience on which
they are based is by no means fair to the capacities of statesmen and
bankers. The non-metallic standards of which we have experience have
been anything rather than scientific experiments coolly carried out.
They have been a last resort, involuntarily adopted, as a result of war
or inflationary taxation, when the State finances were already broken or
the situation out of hand. Naturally in these circumstances such
practices have been the accompaniment and the prelude of disaster. But
we cannot argue from this to what can be achieved in normal times. I do
not see that the regulation of the standard of value is essentially more
difficult than many other objects of less social necessity which we
attain successfully.

If, indeed, a providence watched over gold, or if Nature had provided us
with a stable standard ready-made, I would not, in an attempt after
some slight improvement, hand over the management to the possible
weakness or ignorance of Boards and Governments. But this is not the
situation. We have no ready-made standard. Experience has shown that in
emergencies Ministers of Finance cannot be strapped down. And--most
important of all--in the modern world of paper currency and bank credit
there is no escape from a "managed" currency, whether we wish it or
not;--convertibility into gold will not alter the fact that the value of
gold itself depends on the policy of the Central Banks.

It is worth while to pause a moment over the last sentence. It differs
significantly from the doctrine of gold reserves which we learnt and
taught before the war. We used to assume that no Central Bank would be
so extravagant as to keep more gold than it required or so imprudent as
to keep less. From time to time gold would flow out into the circulation
or for export abroad; experience showed that the quantity required on
these occasions bore some rough proportion to the Central Bank's
liabilities; a decidedly higher proportion than this would be fixed on
to provide for contingencies and to inspire confidence; and the creation
of credit would be regulated largely by reference to the maintenance of
this proportion. The Bank of England, for example, would allow itself to
be swayed by the tides of gold, permitting the inflowing and outflowing
streams to produce their "natural" consequences unchecked by any ideas
as to preventing the effect on prices. Already before the war the system
was becoming precarious by reason of its artificiality. The "proportion"
was by the lapse of time losing its relation to the facts and had become
largely conventional. Some other figure, greater or less, would have
done just as well.[17] The War broke down the convention; for the
withdrawal of gold from actual circulation destroyed one of the elements
of reality lying behind the convention, and the suspension of
convertibility destroyed the other. It would have been absurd to
regulate the bank-rate by reference to a "proportion" which had lost all
its significance; and in the course of the past ten years a new policy
has been evolved. The bank-rate is now employed, however incompletely
and experimentally, to regulate the expansion and deflation of credit in
the interests of business stability and the steadiness of prices. In so
far as it is employed to procure stability of the dollar exchange, where
this is inconsistent with stability of internal prices, we have a relic
of pre-war policy and a compromise between discrepant aims.

[Footnote 17: _Vide_, for what I wrote about this in 1914, _The Economic
Journal_, xxiv. p. 621.]

Those who advocate the return to a gold standard do not always
appreciate along what different lines our actual practice has been
drifting. If we restore the gold standard, are we to return also to the
pre-war conceptions of bank-rate, allowing the tides of gold to play
what tricks they like with the internal price level, and abandoning the
attempt to moderate the disastrous influence of the credit-cycle on the
stability of prices and employment? Or are we to continue and develop
the experimental innovations of our present policy, ignoring the "bank
ratio" and, if necessary, allowing unmoved a piling up of gold reserves
far beyond our requirements or their depletion far below them?

In truth, the gold standard is already a barbarous relic. All of us,
from the Governor of the Bank of England downwards, are now primarily
interested in preserving the stability of business, prices, and
employment, and are not likely, when the choice is forced on us,
deliberately to sacrifice these to the outworn dogma, which had its
value once, of 3:17:10 per ounce. Advocates of the ancient standard do
not observe how remote it now is from the spirit and the requirements of
the age. A regulated non-metallic standard has slipped in unnoticed. _It
exists._ Whilst the economists dozed, the academic dream of a hundred
years, doffing its cap and gown, clad in paper rags, has crept into the
real world by means of the bad fairies--always so much more potent than
the good--the wicked Ministers of Finance.

For these reasons enlightened advocates of the restoration of gold, such
as Mr. Hawtrey, do not welcome it as the return of a "natural" currency,
and intend, quite decidedly, that it shall be a "managed" one. They
allow gold back only as a constitutional monarch, shorn of his ancient
despotic powers and compelled to accept the advice of a Parliament of
Banks. The adoption of the ideas present in the minds of those who
drafted the Genoa Resolutions on Currency is an essential condition of
Mr. Hawtrey's adherence to gold. He contemplates "the practice of
continuous co-operation among central banks of issue" (Res. 3), and an
international convention, based on a gold exchange standard, and
designed "with a view to preventing undue fluctuations in the purchasing
power of gold" (Res. 11).[18] But he is _not_ in favour of resuming the
gold standard irrespective of "whether the difficulties in regard to the
future purchasing power of gold have been provided against or not." "It
is not easy," he admits, "to promote international action, and, should
it fail, the wisest course for the time being might be to concentrate on
the stabilisation of sterling in terms of commodities, rather than tie
the pound to a metal the vagaries of which cannot be foreseen."[19]

[Footnote 18: _Monetary Reconstruction_, p. 132.]

[Footnote 19: _Loc. cit._ p. 22.]

It is natural to ask, in face of advocacy of this kind, why it is
necessary to drag in gold at all. Mr. Hawtrey lays no stress on the
obvious support for his compromise, namely the force of sentiment and
tradition, and the preference of Englishmen for shearing a monarch of
his powers rather than of his head. But he adduces three other reasons:
(1) that gold is required as a liquid reserve for the settlement of
international balances of indebtedness; (2) that it enables an
experiment to be made without cutting adrift from the old system; and
(3) that the vested interests of gold producers must be considered.
These objects, however, are so largely attained by my own suggestions in
the following section that I need not dwell on them here.

On the other hand, I see grave objections to reinstating gold in the
pious hope that international co-operation will keep it in order. With
the existing distribution of the world's gold the reinstatement of the
gold standard means, inevitably, that we surrender the regulation of our
price level and the handling of the credit cycle to the Federal Reserve
Board of the United States. Even if the most intimate and cordial
co-operation is established between the Board and the Bank of England,
the preponderance of power will still belong to the former. The Board
will be in a position to disregard the Bank. But if the Bank disregard
the Board, it will render itself liable to be flooded with, or depleted
of, gold, as the case may be. Moreover, we can be confident beforehand
that there will be much suspicion amongst Americans (for that is their
disposition) of any supposed attempt on the part of the Bank of England
to dictate their policy or to influence American discount rates in the
interests of Great Britain. We must also be prepared to incur our share
of the vain expense of bottling up the world's redundant gold.

It would be rash in present circumstances to surrender our freedom of
action to the Federal Reserve Board of the United States. We do not yet
possess sufficient experience of its capacity to act in times of stress
with courage and independence. The Federal Reserve Board is striving to
free itself from the pressure of sectional interests; but we are not yet
certain that it will wholly succeed. It is still liable to be
overwhelmed by the impetuosity of a cheap money campaign. A suspicion of
British influence would, so far from strengthening the Board, greatly
weaken its resistance to popular clamour. Nor is it certain, quite apart
from weakness or mistakes, that the simultaneous application of the same
policy will always be in the interests of both countries. The
development of the credit cycle and the state of business may sometimes
be widely different on the two sides of the Atlantic.

Therefore, since I regard the stability of prices, credit, and
employment as of paramount importance, and since I feel no confidence
that an old-fashioned gold standard will even give us the modicum of
stability that it used to give, I reject the policy of restoring the
gold standard on pre-war lines. At the same time, I doubt the wisdom of
attempting a "managed" gold standard jointly with the United States, on
the lines recommended by Mr. Hawtrey, because it retains too many of the
disadvantages of the old system without its advantages, and because it
would make us too dependent on the policy and on the wishes of the
Federal Reserve Board.




  3. Positive Suggestions for the Future Regulation of Money (1923)


A sound constructive scheme must provide:

I. A method for regulating the supply of currency and credit with a view
to maintaining, so far as possible, the stability of the internal price
level; and

II. A method for regulating the supply of foreign exchange so as to
avoid purely temporary fluctuations caused by seasonal or other
influences and not due to a lasting disturbance in the relation between
the internal and the external price level.

I believe that in Great Britain the ideal system can be most nearly and
most easily reached by an adaptation of the actual system which has
grown up, half haphazard, since the war.

I. My first requirement in a good constructive scheme can be supplied
merely by a development of our existing arrangements on more deliberate
and self-conscious lines. Hitherto the Treasury and the Bank of England
have looked forward to the stability of the dollar exchange (preferably
at the pre-war parity) as their objective. It is not clear whether they
intend to stick to this irrespective of fluctuations in the value of the
dollar (or of gold); whether, that is to say, they would sacrifice the
stability of sterling prices to the stability of the dollar exchange in
the event of the two proving to be incompatible. At any rate, my scheme
would require that they should adopt the stability of sterling prices as
their _primary_ objective--though this would not prevent their aiming
at exchange stability also as a secondary objective by co-operating with
the Federal Reserve Board in a common policy. So long as the Federal
Reserve Board was successful in keeping dollar prices steady the
objective of keeping sterling prices steady would be identical with the
objective of keeping the dollar sterling exchange steady. My
recommendation does not involve more than a determination that, in the
event of the Federal Reserve Board failing to keep dollar prices steady,
sterling prices should not, if it could be helped, plunge with them
merely for the sake of maintaining a fixed parity of exchange.

If the Bank of England, the Treasury, and the Big Five were to adopt
this policy, to what criteria should they look respectively in
regulating bank-rate, Government borrowing, and trade-advances? The
first question is whether the criterion should be a precise,
arithmetical formula or whether it should be sought in a general
judgement of the situation based on all the available data. The pioneer
of price-stability as against exchange-stability, Professor Irving
Fisher, advocated the former in the shape of his "compensated dollar,"
which was to be automatically adjusted by reference to an index number
of prices without any play of judgement or discretion. He may have been
influenced, however, by the advantage of propounding a method which
could be grafted as easily as possible on to the pre-war system of gold
reserves and gold ratios. In any case, I doubt the wisdom and the
practicability of a system so cut and dried. If we wait until a price
movement is actually afoot before applying remedial measures, we may be
too late. "It is not the _past_ rise in prices but the _future_ rise
that has to be counteracted."[20] It is characteristic of the
impetuosity of the credit cycle that price movements tend to be
cumulative, each movement promoting, up to a certain point, a further
movement in the same direction. Professor Fisher's method may be adapted
to deal with long-period trends in the value of gold but not with the,
often more injurious, short-period oscillations of the credit cycle.
Nevertheless, whilst it would not be advisable to postpone action until
it was called for by an actual movement of prices, it would promote
confidence, and furnish an objective standard of value, if, an official
index number having been compiled of such a character as to register the
price of a standard composite commodity, the authorities were to adopt
this composite commodity as their standard of value in the sense that
they would employ all their resources to prevent a movement of its price
by more than a certain percentage in either direction away from the
normal, just as before the war they employed all their resources to
prevent a movement in the price of gold by more than a certain
percentage. The precise composition of the standard composite commodity
could be modified from time to time in accordance with changes in the
relative economic importance of its various components.

[Footnote 20: Hawtrey, _Monetary Reconstruction_, p. 105.]

As regards the criteria, other than the actual trend of prices, which
should determine the action of the controlling authority, it is beyond
the scope of this essay to deal adequately with the diagnosis and
analysis of the credit cycle. The more deeply our researches penetrate
into this subject, the more accurately shall we understand the right
time and method for controlling credit-expansion by bank-rate or
otherwise. But in the meantime we have a considerable and growing body
of general experience upon which those in authority can base their
judgements. Actual price-movements must of course provide the most
important datum; but the state of employment, the volume of production,
the effective demand for credit as felt by the banks, the rate of
interest on investments of various types, the volume of new issues, the
flow of cash into circulation, the statistics of foreign trade and the
level of the exchanges must all be taken into account. The main point is
that the _objective_ of the authorities, pursued with such means as are
at their command, should be the stability of prices.

II. How can we best combine this primary object with a maximum stability
of the exchanges? Can we get the best of both worlds--stability of
prices over long periods and stability of exchanges over short periods?
It is the great advantage of the gold standard that it overcomes the
excessive sensitiveness of the exchanges to temporary influences. Our
object must be to secure this advantage, if we can, without committing
ourselves to follow big movements in the value of gold itself.

I believe that we can go a long way in this direction if the Bank of
England will take over the duty of regulating the price of gold, just as
it already regulates the rate of discount. "Regulate," but not "peg."
The Bank of England should have a buying and a selling price for gold,
just as it did before the war, and this price might remain unchanged for
considerable periods, just as bank-rate does. But it would not be fixed
or "pegged" once and for all, any more than bank-rate is fixed. The
Bank's rate for gold would be announced every Thursday morning at the
same time as its rate for discounting bills, with a difference between
its buying and selling rates corresponding to the pre-war margin between
3:17:10 per oz. and 3:17:9 per oz.; except that, in order to obviate
too frequent changes in the rate, the difference might be wider than
1d. per oz.--say,  to 1 per cent. A willingness on the part of the
Bank both to buy and to sell gold at rates fixed for the time being
would keep the dollar-sterling exchange steady within corresponding
limits, so that the exchange rate would not move with every breath of
wind but only when the Bank had come to a considered judgement that a
change was required for the sake of the stability of sterling prices.

If the bank-rate and the gold-rate in conjunction were leading to an
excessive influx or an excessive efflux of gold, the Bank of England
would have to decide whether the flow was due to an internal or to an
external movement away from stability. To fix our ideas, let us suppose
that gold is flowing outwards. If this seemed to be due to a tendency of
sterling to depreciate in terms of commodities, the correct remedy would
be to raise the bank-rate. If, on the other hand, it was due to a
tendency of gold to appreciate in terms of commodities, the correct
remedy would be to raise the gold-rate (_i.e._ the buying price for
gold). If, however, the flow could be explained by seasonal, or other
passing influences, then it should be allowed to continue (assuming, of
course, that the Bank's gold reserves were equal to any probable calls
on them) unchecked, to be redressed later on by the corresponding
reaction.

It would effect an improvement in the technique of the system here
proposed, without altering its fundamental characteristics, if the Bank
of England were to quote a daily price, not only for the purchase and
sale of gold for immediate delivery, but also for delivery three months
forward. The difference, if any, between the cash and forward quotations
might represent either a discount or a premium of the latter on the
former, according as the bank desired money rates in London to stand
below or above those in New York. The existence of the forward quotation
of the Bank of England would afford a firm foundation for a free market
in forward exchange, and would facilitate the movement of funds between
London and New York for short periods, in much the same way as before
the war, whilst at the same time keeping down to a minimum the actual
movement of gold bullion backwards and forwards.

The reader will observe that I retain for gold an important rle in our
system. As an ultimate safeguard and as a reserve for sudden
requirements, no superior medium is yet available. But I urge that it is
possible to get the benefit of the advantages of gold without
irrevocably binding our legal-tender money to follow blindly all the
vagaries of gold and future unforseeable fluctuations in its real
purchasing power.




  4. The Speeches of the Bank Chairmen (1924-1927)

  (i) February 1924


We have an admirable custom in this country by which once a year the
overlords of the Big Five desist for a day from the thankless task of
persuading their customers to accept loans, and, putting on cap and
gown, mount the lecturer's rostrum to expound the theory of their
practice;--a sort of _Saturnalia_, during which we are all ephemerally
equal with words for weapons. These occasions are of great general
interest. But they are more than this. They have a representative
significance;--they hold up, as it were, financial fashion-plates. What
have they found to say this year about Monetary Policy?

Only one, Mr. Walter Leaf, of the Westminster Bank, has refrained
himself entirely. Each of the other four has had something to say. They
fall into a pair of couples: one of which, Mr. Beaumont Pease of Lloyds
Bank and Sir Harry Goschen of the National Provincial Bank, feel that
there is something improper, or at any rate undesirable, in thinking or
speaking about these things at all; and the other of which, Mr.
Goodenough of Barclays Bank and Mr. McKenna of the Midland Bank, so far
from deprecating discussion, join in it boldly.

Mr. Pease, as I have said, deprecates thinking, or--as he prefers to
call it--"the expenditure of mental agility." He desires "straightly to
face the facts instead of to find a clever way round them," and holds
that, in matters arising out of the Quantity Theory of Money, as
between brains and character, "certainly the latter does not come second
in order of merit." In short, the gold standard falls within the sphere
of morals or of religion, where free-thought is out of place. He goes on
to say: "As far as any ordinary joint-stock bank is concerned, I do not
think it determines its policy consciously on pure monetary grounds.
That is to say, its chief concern is to meet the requirements of trade
as they arise, regardless of adhesion to any particular theory. Its
actions are not the cause of trade movements; they follow after and do
not precede them." I think that this, broadly speaking, is a correct
account of the matter, and Mr. Pease's emphasis on it is the most
valuable part of his speech. It is precisely this automatic element in
the reactions of the joint-stock banks which makes the policy of the
Bank of England about the volume of the banks' balances and the rate of
discount so all-important. In conclusion, Mr. Pease does not propose to
take any particular steps at present towards establishing any particular
standard. Nevertheless he is "hopeful that we may gradually get back to
our gold standard, which, in spite of some defects and difficulties,
has, as a matter of fact, worked well in the past."

Sir Harry Goschen goes one better than Mr. Pease in a delightful passage
which deserves to be quoted in full:--

   I cannot help thinking that there has been lately far too much
   irresponsible discussion as to the comparative advantages of
   Inflation and Deflation. Discussions of this kind can only breed
   suspicion in the minds of our neighbours as to whether we shall
   adopt either of these courses, and, if so, which. I think we had
   better let matters take their natural course.

Is it more appropriate to smile or to rage at these artless sentiments?
Best of all, perhaps, just to leave Sir Harry to take his natural
course.

Leaving, then, these impeccable Spinsters, we come, in the speeches of
Mr. Goodenough and Mr. McKenna, to rational, even _risqu_ conversation.
In immediate policy there is a large measure of agreement between them.
They agree that monetary policy is capable of determining the level of
prices, that our destiny is therefore in our own hands, and that the
right course to pursue requires much thought and discussion. Mr.
Goodenough, however, lays greater stress on the bank-rate, and Mr.
McKenna on the amount of the cash resources in the hands of the banks.
They are opposed to any revival at the present time of the Cunliffe
Committee's policy of Deflation. They both look to internal conditions,
and not to the foreign exchanges, as the criterion for expanding or
contracting credit; with this difference, however, that Mr. McKenna
would look chiefly to the level of employment, whilst Mr. Goodenough
would be more influenced by the stability of internal prices. "To sum up
my views on the currency question," the latter says, "I feel that our
aim should be to maintain as nearly as possible the existing equilibrium
between currency and commodities. . . ." Neither of them, however,
would be much disturbed by a moderate rise of prices, provided (in the
case of Mr. McKenna) that the productive resources of the country had
not yet reached the limit of their capacity, and (in the case of Mr.
Goodenough) that the rise was due neither to the speculative withholding
of commodities nor to British prices rising relatively to American
prices. About our ultimate objective, Mr. McKenna does not speak; but
there is nothing in his speech to suggest that he would not be in favour
of pursuing permanently the policy, which he recommends for the present,
of "steering a middle course between Inflation and Deflation," _i.e._ of
aiming, like Mr. Goodenough, at a general stability of prices within
certain limits, and of deliberately employing monetary policy to
mitigate the evils of the credit cycle: "Ups and downs in trade we are
bound to have, but wise monetary policy can always prevent the cyclical
movement from going to extremes. The speculative excesses of an
inflationary boom and the cruel impoverishment of a prolonged slump can
both be avoided. They are not necessary evils to which we must submit as
things without understandable or preventable causes." Mr. Goodenough, on
the other hand, whilst desisting from the pursuit of the gold standard
for the time being, continues the passage from his speech quoted
above--". . . although always we should keep in mind our ultimate aim,
which is a return to a gold standard." Meanwhile, he puts his hopes on
an inflationary movement in America just sufficient to bring sterling
back to its former parity with gold, without any disturbance to its
present parity with commodities.

What is the net result of these speeches? They strengthen greatly the
hands of the Currency Reformers who believe that the stability of the
internal price level and the damping down of the credit cycle are
desirable and attainable objects. They are also reassuring, since they
show that two of the most influential figures in the City have clearly
in mind all the points of immediate practical importance, and can be
relied on to use their influence in the right direction. Mr. McKenna and
Mr. Goodenough are both in sympathy with the above aims. Nor would it be
fair to say that the Spinsters are definitely opposed to these ideas.
(There would be just as much impropriety for them, just as much mental
agility required, to think one thing as to think another. Their
simplicity is quite impartial.) If they could be led gently by the hand
beyond their copy-book maxims of "looking facts firmly in the face" and
"economy and hard work," it might be found that they, too, had no
objection to a deliberate attempt to keep prices steady and trade on an
even keel, and that, whilst they feel at first the same distaste towards
any proposal to "tamper" with "the natural course" of prices as they
might feel towards an attempt to settle the sex of a child before birth,
they are not really prepared to insist on their instinctive preference
for having these matters settled by some method of pure chance.


  (ii) February 1925

Once more the Bank chairmen have held up for our inspection their
financial fashion-plates. The captions vary; but the plates are mostly
the same. The first displays marriage with the gold standard as the most
desired, the most urgent, the most honourable, the most virtuous, the
most prosperous, and the most blessed of all possible states. The other
is designed to remind the intending bridegroom that matrimony means
heavy burdens from which he is now free; that it is for better, for
worse; that it will be for him to honour and obey; that the happy days,
when he could have the prices and the bank-rate which suited the
housekeeping of his bachelor establishment, will be over--though, of
course, he will be asked out more when he is married; that Miss G.
happens to be an American, so that in future the prices of grape-fruit
and pop-corn are likely to be more important to him than those of eggs
and bacon; and, in short, that he had better not be too precipitate.
Some of our chairmen were like him who, being asked whether he believed
that, when he was dead, he would enjoy perfect bliss eternally, replied
that of course he did, but would rather not discuss such an unpleasant
subject.

Like last year there are two distinct issues,--the abstract merits of
the gold standard, and the date and the mode of our return to it. The
first is a question about which, as Mr. McKenna justly said, "we are
still in the stage of inquiry rather than of positive opinion, and there
is no formulated body of doctrine generally regarded as orthodox." The
supporters of Monetary Reform, of which I, after further study and
reflection, am a more convinced adherent than before, as the most
important and significant measure we can take to increase economic
welfare, must expound their arguments more fully, more clearly, and more
simply, before they can overwhelm the forces of old custom and general
ignorance. This is not a battle which can be won or lost in a day. Those
who think that it can be finally settled by a sharp hustle back to gold
mistake the situation. That will be only the beginning. The issue will
be determined, not by the official decisions of the coming year, but by
the combined effects of the actual experience of what happens after that
and the relative clearness and completeness of the arguments of the
opposing parties. Readers of the works, for example, of the great Lord
Overstone, will remember how many years it took, and what bitter and
disastrous experiences, before the monetary reformers of a hundred years
ago established the pre-war policy of bank-rate and bank-reserves
(which, in its day, was a great advance), in the teeth of the opposition
of the Bank of England.

The other issue is of practical and immediate importance. Last year it
was a question of whether it was prudent to hasten matters by deliberate
Deflation; this year it is a question of whether it is prudent to hasten
matters by a removal of the embargo against the export of gold. This
year, like last year, the bankers, faced with the practical problem, are
a little nervous. I think that this nervousness is justified for the
following reasons.

In common with many others, I have long held the opinion that monetary
conditions in the United States were likely, sooner or later, to bring
about a rising price level and an incipient boom; and also that it would
be our right policy in such circumstances to employ the usual methods to
curb our own price level and to prevent credit conditions here from
following in the wake of those in America. The result of this policy, if
it was successful, would be a gradual improvement of the sterling
exchange; and it would not need a very violent boom in America to
justify a rise of the sterling exchange at least as high as the pre-war
parity. I have, therefore, maintained for two years past that a return
of sterling, sooner or later, towards its pre-war parity would be both a
desirable and a probable consequence of a sound monetary policy on the
part of the Bank of England coupled with a less sound one on the part of
the Federal Reserve Board.

What has actually happened? In the spring of 1923 boom conditions in the
United States seemed to be developing; but largely through the action
of the Federal Reserve Board, the movement was stopped. Since July 1924,
however, there has been a strong and sustained upward movement,
which--subject always to the policy of the Federal Reserve Board--is
expected to go further. The earlier upward movement of American prices
was duly followed by an improvement in sterling exchange; and the
relapse by a relapse. Similarly, the movement of American prices during
the past six months has been accompanied by the improvement in sterling
exchange, which has caught the popular attention. As Mr. McKenna pointed
out, sterling prices have been a little steadier than dollar prices, and
this greater steadiness has involved, as its necessary counterpart, some
unsteadiness in the exchange.

The movement of the past six months, however, has been complicated by
abnormal factors. The improvement in sterling exchange is more than can
be accounted for by our monetary policy. It is true that short-money
rates have been maintained at an effective  per cent above those in New
York, and that British prices have risen somewhat less than American
prices. But it is generally agreed that these influences have not been
strong enough to account for everything. The Board of Trade returns
indicate that there has been a movement of funds on capital account in
the past year (and most of it, probably, in the second half of the year)
from New York to London of the order of magnitude of 100,000,000. This
is due (in proportions difficult to calculate) to the return of foreign
balances previously held in London, to American investment in Europe
resulting from the greater confidence engendered by the Dawes Scheme
coming on the top of an investment boom in Wall Street, and to
speculative purchases of sterling in the expectation of its improving in
value relatively to the dollar. This unprecedented movement introduces a
precarious element into the situation;--we cannot expect that it will
continue on the same scale, and it may, at any time, be partly reversed.
We require an interval, therefore, to readjust our liabilities either by
a recovery of exports relatively to imports or by establishing a rate of
interest on permanent loans high enough to check the present (in my
judgement excessive) flow of new foreign investment outwards. At present
we are in danger of lending long (_e.g._ to Australia) what we have
borrowed short from New York. The strength of our pre-war position lay
in the fact that (through the bill market) we had lent large sums short,
which we could call in. At the present time this position is partly,
though perhaps only temporarily, reversed;--which, in itself, is one
reason for caution.

What is going to happen next? There are two leading alternatives. It may
be that the Federal Reserve Board will come to the conclusion that the
incipient boom conditions in the United States are getting dangerous,
and will take the position firmly in hand, just as they did two years
ago. This, almost certainly, is what the Board ought to do. In this
event, the situation would be back again very nearly where it was
eighteen months ago, and we should be faced, as we were then, with the
alternative of relatively steady sterling prices with the dollar
exchange below parity, or of stern Deflation in the effort to keep
exchange at parity. A premature announcement of the removal of the
embargo on the free export of gold would commit us in advance to the
latter alternative,--the alternative which we deliberately rejected two
years ago. This is what the fanatics desire. But with our unemployment
figures what they still are, it would not be wise.

The other alternative is that the Federal Reserve Board will allow
matters to pursue their present course, in which event we may expect
that dollar prices will advance a good deal further. During part of 1924
the Board's open-market policy was decidedly inflationary, and has been
largely responsible for the sharp rise of prices already experienced. At
the present moment their policy is more cautious; but there is no clear
indication that they have any steady or considered policy. It may be
that misplaced sympathy with our efforts to raise the sterling exchange
will be a factor tending to postpone action on their part; and if they
delay much longer, boom conditions may become definitely established. In
this event we need have no difficulty in raising sterling to pre-war
parity. A firm monetary policy, designed to check a sympathetic rise of
sterling prices, ought, without any positive Deflation, to do the trick.
But it does not follow that the embargo should, therefore, be removed.
To link sterling prices to dollar prices at a moment in the credit cycle
when the latter were near their peak as the result of a boom which we
had not fully shared would ask for trouble. For when the American boom
broke we should bear the full force of the slump. The conditions in
which we can link sterling prices to dollar prices without immediate
risk to our own welfare will only exist when the mean level of dollar
prices appears to be _stabilised_ at a somewhat higher level than in
recent times.

The removal of the embargo amounts to an announcement that sterling _is_
at parity with the dollar and will remain so. I suggest that the right
order of procedure is to establish the fact first and to announce it
afterwards, rather than to make the announcement first and to chance the
fact. Thus the removal of the embargo should be the last stage in the
restoration of pre-war conditions, not the first one. The only prudent
announcement on the subject would be to the effect that the embargo will
not be removed until after sterling has been at parity for some
considerable time, and until all the fundamental adjustments consequent
upon this have duly taken place. At the same time--if we want to return
to parity--steps should be taken to achieve the _fact_ by raising
bank-rate and checking foreign issues. I--without attaching any
importance whatever to a return to parity--believe that there is much to
be said for these measures in the interests of the stabilisation of our
own situation. I do not believe that a somewhat higher bank-rate would
do any harm, in view of the present tendencies of the price level, to
the volume of trade and employment, and that, in any case, the
maintenance of our own equilibrium will soon require the support of a
higher rate. Several of the bankers declared that they were in favour of
removing the embargo, provided this did not involve a risk of raising
the bank-rate. Unless this was merely a polite way of saying that they
were not in favour of removing the embargo, I do not follow their
analysis of the present situation.

It would be useless for me to attempt in the space at my disposal to
give the reasons for wishing to maintain permanently a Managed Currency.
The most important of them flow from my belief that fluctuations of
trade and employment are at the same time the greatest and the most
remediable of the economic diseases of modern society, that they are
mainly diseases of our credit and banking system, and that it will be
easier to apply the remedies if we retain the control of our currency in
our own hands. But whilst avoiding these fundamental questions I may
mention, in conclusion, one practical argument which is also connected
with what I have said above.

A gold standard means, in practice, nothing but to have the same price
level and the same money rates (broadly speaking) as the United States.
The whole object is to link _rigidly_ the City and Wall Street. I beg
the Chancellor of the Exchequer and the Governor of the Bank of England
and the nameless others who settle our destiny in secret to reflect that
this may be a dangerous proceeding.

The United States lives in a vast and unceasing crescendo. Wide
fluctuations, which spell unemployment and misery for us, are swamped
for them in the general upward movement. A country, the whole of whose
economic activities are expanding, year in, year out, by several per
cent per annum, cannot avoid, and at the same time can afford, temporary
maladjustments. This was our own state during a considerable part of the
nineteenth century. Our rate of progress was so great that stability in
detail was neither possible nor essential. This is not our state now.
Our rate of progress is slow at the best, and faults in our economic
structure, which we could afford to overlook whilst we were racing
forward and which the United States can still afford to overlook, are
now fatal. The slump of 1921 was even more violent in the United States
than here, but by the end of 1922 recovery was practically complete. We
still, in 1925, drag on with a million unemployed. The United States may
suffer industrial and financial tempests in the years to come, and they
will scarcely matter to her; but we, if we share them, may almost
drown.

And there is a further consideration. Before the war we had lent great
sums to the whole world which we could call in at short notice; our
American investments made us the creditors of the United States; we had
a surplus available for foreign investment far greater than that of any
other country; with no Federal Reserve system, American banking was weak
and disorganised. We, in fact, were the predominant partner in the Gold
Standard Alliance. But those who think that a return to the gold
standard means a return to these conditions are fools and blind. We are
now the debtors of the United States. Their foreign investments last
year were double ours, and their true net balance available for such
investment was probably ten times ours. They hold six times as much gold
as we do. The mere _increase_ in the deposits of the banks of the
Federal Reserve System in the past year has been not far short of half
our _total_ deposits. A movement of gold or of short credits either way
between London and New York, which is only a ripple for them, will be an
Atlantic roller for us. A change of fashion on the part of American
bankers and investors towards foreign loans, of but little consequence
to them, may shake us. If gold and short credits and foreign bonds can
flow without restriction or risk of loss backwards and forwards across
the Atlantic, fluctuations of given magnitude will produce on us effects
altogether disproportionate to the effects on them. It suits the United
States that we should return to gold, and they will be ready to oblige
us in the early stages. But it would be a mistake to believe that in the
long run they will, or ought to, manage their affairs to suit our
convenience.

What solid advantages will there be to set against these risks? I do not
know. Our bankers speak of "psychological" advantages. But it will be
poor consolation that "nine people out of ten" expected advantages, if
none in fact arrive.

That our Bank chairmen should have nothing better to cry than "Back to
1914," and that they should believe that this represents the best
attainable, is not satisfactory. The majority of those who are studying
the matter are becoming agreed that faults in our credit system are at
least partly responsible for the confusions which result in the paradox
of unemployment amidst dearth. The "Big Five" have vast responsibilities
towards the public. But they are so huge and, in some ways, so
vulnerable, that there is a great temptation to them to cling to maxims,
conventions, and routine; and when their chairmen debate fundamental
economic problems, they are most of them on ground with which they are
unfamiliar. It is doubtful, nevertheless, whether too much conservatism
on these matters and too little of the spirit of inquiry will redound,
in the long run, to their peace or security. Individualistic Capitalism
in England has come to the point when it can no longer depend on the
momentum of mere expansion; and it must apply itself to the scientific
task of improving the structure of its economic machine.


  (iii) February 1927[21]

[Footnote 21: [After the Return to Gold.]]

The voices of our old friends the Bank chairmen herald the approach of
spring. They have spoken this year--with the exception of Sir Harry
Goschen, who sees "no reason to be downhearted," and, as in former
years, cannot "remember a time when, throughout the industries of the
country, there was such a feeling of expectation and, indeed,
optimism"--in somewhat chastened tones. Mr. Beaumont Pease has done a
useful service by publishing some important figures analysing the
business of Lloyds Bank, which inaugurate a new policy of giving
information instead of withholding it. Mr. Walter Leaf made some sound
observations on the tendency of business towards amalgamation and, at
the same time, of shareholdings towards diffusion, and on the necessity
of the State taking some responsibility for guiding this inevitable
evolution along the right lines. But none of them except Mr.
McKenna--and on one point of detail Mr. Goodenough--had anything to say
about the future of monetary policy. So leaving Sir Harry Goschen to
chirrup in the bushes, let us join Mr. McKenna in an attempt to dig a
few inches below the surface of the soil.

Mr. McKenna reminded us of the overwhelming prosperity of the United
States as against our own depression during the past five years. He
declared that in the "wide divergence between English and American
monetary policy, we have at least a partial explanation of the
phenomenon." He found the measure of this divergence of policy in the
expansion and contraction respectively of the bank deposits in the two
countries, namely, as follows:--

  (Volume of Deposits in 1922 = 100)

          United States.   Great Britain.

  1922          100          100
  1923          107           94
  1924          115           94
  1925          127           93
  1926          131           93

He explained in some detail what is fundamental, yet too little
understood, that the volume of bank deposits in Great Britain does not
depend, except within narrow limits, on the depositors or on the Big
Five, but on the policy of the Bank of England. And he concluded that we
can scarcely expect a materially increased scale of production and
employment in this country until the Bank of England revises its policy.

Whilst I do not agree with Mr. McKenna in every detail of his argument,
I am certain that the broad lines of his diagnosis are correct. He has
done a service by his persistent efforts to educate the public and his
colleagues to the vital importance of some fundamental principles of
monetary policy of which the truth is as certain as the day, but to
which the City is blind as night.

Nevertheless, he has on this occasion shirked, in my opinion, half the
problem. How far and subject to what conditions is a reversal of the
Bank of England's policy consistent with maintaining the gold standard?
Is the Bank of England in its new-forged golden fetters as free an agent
as Mr. McKenna's policy requires?

What matters is, not some abstraction called the general level of
prices, but the relationships between the various price levels which
measure the value of our money for different purposes. Prosperity, in so
far as it is governed by monetary factors, depends on these various
price levels being properly adjusted to one another. Unemployment and
trade depression in Great Britain have been due to a rupture of the
previous equilibrium between the sterling price level of articles of
international commerce and the internal value of sterling for the
purposes on which the average Englishman spends his money-income.
Moreover, in proportion as we are successful in moving towards the new
equilibrium of lower sterling prices all round, we increase the burden
of the National Debt and aggravate the problem of the Budget. If the
Bank of England and the Treasury were to succeed in reducing the
sheltered price level to its former equilibrium with the unsheltered
price level, they would _ipso facto_ have increased the real burden of
the National Debt by about 1,000,000,000 as compared with two years
ago.

Now Mr. McKenna seems to assume that the disequilibrium which admittedly
existed two years ago has since disappeared. "To-day," he tells us,
"such questions have only historic significance." But the evidence does
not support this view. So far from having disappeared, the disparity
between the price levels is actually _greater_ than it was two years
ago.

How, then, have we lived in the meantime? The real ground of the
optimism on the lips of the Bank chairmen is to be found, I think, in
the fact that there has been no strain on our resources which we have
not been able to meet. Is this so great a paradox as it appears? Or so
comforting?

We have undoubtedly balanced the difference in our account partly by
drawing on the large margin of safety which we used to possess, and
partly, during the Coal Strike, by increasing our short-loan
indebtedness to the rest of the world. Before the war we probably had a
favourable balance on international account, apart from capital
transactions, of something like 300,000,000 per annum measured in
sterling at its present value. The war and the fall in the value of
fixed money payments may have reduced this annual surplus to about
225,000,000; i.e. this is what our surplus would be to-day if our
export trades were as flourishing as in 1913. Let us suppose that as the
result of our relatively high level of internal prices we have lost
200,000,000 of exports gross, namely, about a quarter of the whole, or
(say) 150,000,000 net, _i.e._ after deducting that part of the lost
exports which would have consisted of imported raw material, and that we
consequently have unemployed (say) 1,000,000 men who would otherwise,
directly or indirectly, have been producing these exports. All these
figures are, of course, very rough illustrations of what is reasonably
probable, not scientific estimates of statistical facts.

How does our international balance-sheet then stand? We still have a
surplus of 75,000,000 per annum. Provided, therefore, we do not invest
abroad more than this sum, we are in equilibrium. We can continue
permanently with our higher level of sheltered prices, with a quarter of
our foreign trade lost, and with a million men unemployed, but also with
some surplus still left for the City of London to invest abroad, and, as
the crown of all, the gold standard entirely unthreatened. The gold
standard may have reduced the national wealth, as compared with an
alternative monetary policy, by 150,000,000 a year. Never mind! "Our
economic reserves of strength," as Mr. Leaf puts it, "are far greater
than any of us supposed." "We are tougher than we thought," in the words
of the Chancellor of the Exchequer. In short, we can afford it!

The special losses of the Coal Strike period are not allowed for in the
above. They seem to have amounted to round 100,000,000, and to have
been met by increasing our short-loan indebtedness, partly with the aid
of the usual time-lag in the settlement of adverse balances, and partly
by a relatively attractive rate of discount drawing foreign balances to
London.

In determining the future of our National Policy, we have three
alternatives before us:--

(1) We can seek at all costs to restore the pre-war equilibrium of large
exports and large foreign investments. The return to gold has rendered
this impossible without an all-round attack on wages, such as the Prime
Minister has repudiated, or a considerable rise of external gold prices
which we wait for in vain.

(2) We can continue indefinitely in the pseudo-equilibrium described
above with trade depressed and a million unemployed. This
pseudo-equilibrium has been the result, though probably not the
intention, of the Bank of England's policy up to date. I see no
convincing reason why it should not be continued for some time yet. Mr.
Norman may have an awkward period ahead owing to the delayed results of
the Coal Strike. But even if the worst comes, a partial reimposition of
the embargo on foreign investments might be enough.

(3) The third course consists in accepting the loss of export trade and
a corresponding reduction of foreign investment and in diverting the
labour previously employed in the former and the savings previously
absorbed in the latter to the task of improving the efficiency of
production and the standard of life at home. If the return to gold has
the effect in the end of bringing about this result, it may have been a
blessing in disguise. For this course has manifold advantages which I
must not stop to enumerate at the end of a long article. I believe that
a further improvement in the standard of life of the masses is dependent
on our taking it.

This brings us back to Mr. McKenna. I assume that his object in
advocating an expansion of credit is to absorb the unemployed in a
general crescendo of home industry and indirectly to help a little the
export industries also by the economies of full-scale production. In
short, he favours the third course. For he can hardly hope to lower the
sheltered price level or to effect an adequate economy in manufacturing
costs by expanding credit. As on some previous occasions, Mr. McKenna
has done less than justice to his own ideas by pretending to greater
confidence in the effects of the return to gold than he really has.

Now, within the limitations of the gold standard, this is a very
difficult policy, and--in view of the 100,000,000 which we may still
owe on account of the Coal Strike--possibly a dangerous one. If Mr.
McKenna were Governor of the Bank of England with a free hand, I believe
it to be probable that he could greatly reduce the numbers of the
unemployed whilst maintaining gold parity. But can we expect Mr. Norman
to do so, moving within the limitations of his own mentality?




  5. The Economic Consequences of Mr. Churchill (1925)[22]

[Footnote 22: [Written immediately after the Return to Gold.]]

  (i) _The Misleading of Mr. Churchill_


The policy of improving the foreign-exchange value of sterling up to its
pre-war value in gold from being about 10 per cent below it, means that,
whenever we sell anything abroad, either the foreign buyer has to pay 10
per cent _more in his money_ or we have to accept 10 per cent _less in
our money_. That is to say, we have to reduce our sterling prices, for
coal or iron or shipping freights or whatever it may be, by 10 per cent
in order to be on a competitive level, unless prices rise elsewhere.
Thus the policy of improving the exchange by 10 per cent involves a
reduction of 10 per cent in the sterling receipts of our export
industries.

Now, if these industries found that their expenses for wages and for
transport and for rates and for everything else were falling 10 per cent
at the same time, they could afford to cut their prices and would be no
worse off than before. But, of course, this does not happen. Since they
use, and their employees consume, all kinds of articles produced at
home, it is impossible for them to cut their prices 10 per cent, unless
wages and expenses in home industries generally have fallen 10 per cent.
Meanwhile the weaker export industries are reduced to a bankrupt
condition. Failing a fall in the value of gold itself, nothing can
retrieve their position except a general fall of all internal prices and
wages. Thus Mr. Churchill's policy of improving the exchange by 10 per
cent was, sooner or later, a policy of reducing every one's wages by 2s.
in the . He who wills the end wills the means. What now faces the
Government is the ticklish task of carrying out their own dangerous and
unnecessary decision.

The movement away from equilibrium began in October last (1924) and has
proceeded, step by step, with the improvement of the exchange--brought
about first by the anticipation, and then by the fact, of the
restoration of gold, and not by an improvement in the intrinsic value of
sterling.[23] The President of the Board of Trade has asserted in the
House of Commons that the effect of the restoration of the gold standard
upon our export trade has been "all to the good." The Chancellor of the
Exchequer has expressed the opinion that the return to the gold standard
is no more responsible for the condition of affairs in the coal industry
than is the Gulf Stream. These statements are of the feather-brained
order. It is open to Ministers to argue that the restoration of gold is
worth the sacrifice and that the sacrifice is temporary. They can also
say, with truth, that the industries which are feeling the wind most
have private troubles of their own. When a _general_ cause operates,
those which are weak for other reasons are toppled over. But because an
epidemic of influenza carries off only those who have weak hearts, it is
not permissible to say that the influenza is "all to the good," or that
it has no more to do with the mortality than the Gulf Stream has.

[Footnote 23: This view was shared by the Treasury Committee on the
Currency, who reported that the exchange improvement of last autumn and
spring could not be maintained if we did not restore the gold standard;
in other words, the improvement in the exchange prior to the restoration
of gold was due to a speculative anticipation of this event and to a
movement of capital, and not to an intrinsic improvement in sterling
itself.]

The effect has been the more severe because we were not free from
trouble a year ago. Whilst, at that date, sterling wages and sterling
cost of living were in conformity with values in the United States, they
were already too high compared with those in some European countries. It
was also probable that certain of our export industries were overstocked
both with plant and with labour, and that some transference of capital
and of men into home industries was desirable and, in the long run, even
inevitable. Thus we already had an awkward problem; and one of the
arguments against raising the international value of sterling was the
fact that it greatly aggravated, instead of mitigating, an existing
disparity between internal and external values, and that, by committing
us to a period of Deflation, it necessarily postponed active measures of
capital expansion at home, such as might facilitate the transference of
labour into the home trades. British wages, measured in gold, are now 15
per cent higher than they were a year ago. The gold cost of living in
England is now so high compared with what it is in Belgium, France,
Italy, and Germany that the workers in those countries can accept a
gold wage 30 per cent lower than what our workers receive without
suffering at all in the amount of their real wages. What wonder that our
export trades are in trouble!

Our export industries are suffering because they are the _first_ to be
asked to accept the 10 per cent reduction. If _every one_ was accepting
a similar reduction at the same time, the cost of living would fall, so
that the lower money wage would represent nearly the same real wage as
before. But, in fact, there is no machinery for effecting a simultaneous
reduction. Deliberately to raise the value of sterling money in England
means, therefore, engaging in a struggle with each separate group in
turn, with no prospect that the final result will be fair, and no
guarantee that the stronger groups will not gain at the expense of the
weaker.

The working classes cannot be expected to understand, better than
Cabinet Ministers, what is happening. Those who are attacked first are
faced with a depression of their standard of life, because the cost of
living will not fall until all the others have been successfully
attacked too; and, therefore, they are justified in defending
themselves. Nor can the classes which are first subjected to a reduction
of money wages be guaranteed that this will be compensated later by a
corresponding fall in the cost of living, and will not accrue to the
benefit of some other class. Therefore they are bound to resist so long
as they can; and it must be war, until those who are economically
weakest are beaten to the ground.

This state of affairs is not an inevitable consequence of a decreased
capacity to produce wealth. I see no reason why, with good management,
real wages need be reduced on the average. It is the consequence of a
misguided monetary policy.

These arguments are not arguments against the gold standard as such.
That is a separate discussion which I shall not touch here. They are
arguments against having restored gold in conditions which required a
substantial readjustment of all our money values. If Mr. Churchill had
restored gold by fixing the parity lower than the pre-war figure, or if
he had waited until our money values were adjusted to the pre-war
parity, then these particular arguments would have no force. But in
doing what he did in the actual circumstances of last spring, he was
just asking for trouble. For he was committing himself to force down
money wages and all money values, without any idea how it was to be
done. Why did he do such a silly thing?

Partly, perhaps, because he has no instinctive judgement to prevent him
from making mistakes; partly because, lacking this instinctive
judgement, he was deafened by the clamorous voices of conventional
finance; and, most of all, because he was gravely misled by his experts.

His experts made, I think, two serious mistakes. In the first place, I
suspect that they miscalculated the degree of the maladjustment of
money values which would result from restoring sterling to its pre-war
gold parity, because they attended to index numbers of prices which were
irrelevant or inappropriate to the matter in hand. If you want to know
whether sterling values are adjusting themselves to an improvement in
the exchange, it is useless to consider, for example, the price of raw
cotton in Liverpool. This _must_ adjust itself to a movement of the
exchange, because, in the case of an imported raw material, the parity
of international values is necessarily maintained almost hour by hour.
But it is not sensible to argue from this that the money wages of
dockers or of charwomen and the cost of postage or of travelling by
train also adjust themselves hour by hour in accordance with the foreign
exchanges. Yet this, I fancy, is what the Treasury did. They compared
the usual wholesale index numbers here and in America, and--since these
are made up to the extent of at least two-thirds from the raw materials
of international commerce, the prices of which necessarily adjust
themselves to the exchanges--the true disparity of internal prices was
watered down to a fraction of its true value. This led them to think
that the gap to be bridged was perhaps 2 or 3 per cent, instead of the
true figure of 10 or 12 per cent, which was the indication given by the
index numbers of the cost of living, of the level of wages, and of the
prices of our manufactured exports--which indexes are a much better
rough-and-ready guide for this purpose, particularly if they agree with
one another, than are the index numbers of wholesale prices.

But I think that Mr. Churchill's experts also misunderstood and
underrated the technical difficulty of bringing about a general
reduction of internal money values. When we raise the value of sterling
by 10 per cent we transfer about 1,000,000,000 into the pockets of the
rentiers out of the pockets of the rest of us, and we increase the real
burden of the National Debt by some 750,000,000 (thus wiping out the
benefit of all our laborious contributions to the Sinking Fund since the
war). This, which is bad enough, is inevitable. But there would be no
other bad consequences if only there was some way of bringing about a
simultaneous reduction of 10 per cent in all other money payments; when
the process was complete we should each of us have nearly the same real
income as before. I think that the minds of his advisers still dwelt in
the imaginary academic world, peopled by City editors, members of
Cunliffe and Currency Committees _et hoc genus omne_, where the
necessary adjustments follow "automatically" from a "sound" policy by
the Bank of England.

The theory is that depression in the export industries, which are
admittedly hit first, coupled if necessary with dear money and credit
restriction, _diffuse_ themselves evenly and fairly rapidly throughout
the whole community. But the professors of this theory do not tell us
in plain language how the diffusion takes place.

Mr. Churchill asked the Treasury Committee on the Currency to advise him
on these matters. He declared in his Budget speech that their report
"contains a reasoned marshalling of the arguments which have convinced
His Majesty's Government." Their arguments--if their vague and jejune
meditations can be called such--are there for any one to read. What they
ought to have said, but did not say, can be expressed as follows:--

"Money wages, the cost of living, and the prices which we are asking for
our exports have not adjusted themselves to the improvement in the
exchange, which the expectation of your restoring the gold standard, in
accordance with your repeated declarations, has already brought about.
They are about 10 per cent too high. If, therefore, you fix the exchange
at this gold parity, you must either gamble on a rise in gold prices
abroad, which will induce foreigners to pay a higher gold price for our
exports, or you are committing yourself to a policy of forcing down
money wages and the cost of living to the necessary extent.

"We must warn you that this latter policy is not easy. It is certain to
involve unemployment and industrial disputes. If, as some people think,
real wages were already too high a year ago, that is all the worse,
because the amount of the necessary wage reductions in terms of money
will be all the greater.

"The gamble on a rise in gold prices abroad may quite likely succeed.
But it is by no means certain, and you must be prepared for the other
contingency. If you think that the advantages of the gold standard are
so significant and so urgent that you are prepared to risk great
unpopularity and to take stern administrative action in order to secure
them, the course of events will probably be as follows:

"To begin with, there will be great depression in the export industries.
This in itself will be helpful, since it will produce an atmosphere
favourable to the reduction of wages. The cost of living will fall
somewhat. This will be helpful too, because it will give you a good
argument in favour of reducing wages. Nevertheless, the cost of living
will not fall sufficiently, and, consequently, the export industries
will not be able to reduce their prices sufficiently until wages have
fallen in the sheltered industries. Now wages will not fall in the

sheltered industries merely because there is unemployment in the
unsheltered industries, therefore you will have to see to it that there
is unemployment in the sheltered industries also. The way to do this
will be by credit restriction. By means of the restriction of credit by
the Bank of England you can deliberately intensify unemployment to any
required degree until wages _do_ fall. When the process is complete the
cost of living will have fallen too, and we shall then be, with luck,
just where we were before we started.

"We ought to warn you, though perhaps this is going a little outside our
proper sphere, that it will not be safe politically to admit that you
are intensifying unemployment deliberately in order to reduce wages.
Thus you will have to ascribe what is happening to every conceivable
cause except the true one. We estimate that about two years may elapse
before it will be safe for you to utter in public one single word of
truth. By that time you will either be out of office or the adjustment,
somehow or other, will have been carried through."


  (ii) _The Balance of Trade and the Bank of England_

The effect of a high exchange is to diminish the sterling prices both of
imports and of exports. The result is both to encourage imports and to
discourage exports, thus turning the balance of trade against us. It is
at this stage that the Bank of England becomes interested; for if
nothing was done we should have to pay the adverse balance in gold. The
Bank of England has applied, accordingly, two effective remedies. The
first remedy is to put obstacles in the way of our usual lending abroad
by means of an embargo on foreign loans and, recently, on Colonial loans
also; and the second remedy is to encourage the United States to lend us
money by maintaining the unprecedented situation of a bill rate 1 per
cent higher in London than in New York.

The efficacy of these two methods for balancing our account is beyond
doubt--I believe that they might remain efficacious for a considerable
length of time. For we start with a wide margin of strength. Before the
war our capacity to lend abroad was, according to the Board of Trade,
about 181,000,000, equivalent to 280,000,000 at the present price
level; and even in 1923 the Board of Trade estimated our net surplus at
102,000,000. Since new foreign investments bring in no immediate
return, it follows that we can reduce our exports by 100,000,000 a
year, without any risk of insolvency, provided we reduce our foreign
investments by the same amount. So far as the maintenance of the gold
standard is concerned, it is a matter of indifference whether we have
100,000,000 worth of foreign investment or 100,000,000 worth of
unemployment. If those who used to produce exports lose their job,
nevertheless, our financial equilibrium remains perfect, and the
Governor of the Bank of England runs no risk of losing gold, provided
that the loans, which were formerly paid over in the shape of those
exports, are curtailed to an equal extent. Moreover, our credit as a
borrower is still very good. By paying a sufficiently high rate of
interest, we can not only meet any deficit but the Governor can borrow,
in addition, whatever quantity of gold it may amuse him to publish in
his weekly return.

The President of the Board of Trade calculates that, during the year
ended last May, it is probable that there was no actual deficit on our
trade account, which was about square. If this is correct, there must be
a substantial deficit now. In addition, the embargo on foreign
investment is only partially successful. It cannot hold back all types
of foreign issues and it cannot prevent British investors from
purchasing securities direct from New York. It is here, therefore, that
the Bank of England's other remedy comes in. By maintaining discount
rates in London at a sufficient margin above discount rates in New York,
it can induce the New York money market to lend a sufficient sum to the
London money market to balance both our trade deficit and the foreign
investments which British investors are still buying in spite of the
embargo. Besides, when once we have offered high rates of interest to
attract funds from the New York short-loan market, we have to continue
them, even though we have no need to increase our borrowings, in order
to retain what we have already borrowed.

Nevertheless, the policy of maintaining money rates in London at a level
which will attract and retain loans from New York does not really differ
in any important respect from the French policy, which we have so much
condemned, of supporting the exchange with the help of loans from
Messrs. J. P. Morgan. Our policy would only differ from the French
policy if the high rate of discount was not only intended to attract
American money, but was also part of a policy for restricting credit at
home. This is the aspect to which we must now attend.

To pay for unemployment by changing over from being a lending country to
being a borrowing country is admittedly a disastrous course, and I do
not doubt that the authorities of the Bank of England share this view.
They dislike the embargo on foreign issues, and they dislike having to
attract short-loan money from New York. They may do these things to gain
a breathing space; but, if they are to live up to their own principles,
they must use the breathing space to effect what are euphemistically
called "the fundamental adjustments." With this object in view there is
only one step which lies within their power--namely, to restrict credit.
This, in the circumstances, is the orthodox policy of the gold party;
the adverse trade balance indicates that our prices are too high, and
the way to bring them down is by dear money and the restriction of
credit. When this medicine has done its work, there will no longer be
any need to restrict foreign loans or to borrow abroad.

Now what does this mean in plain language? Our problem is to reduce
money wages and, through them, the cost of living, with the idea that,
when the circle is complete, real wages will be as high, or nearly as
high, as before. By what _modus operandi_ does credit restriction attain
this result?

_In no other way than by the deliberate intensification of
unemployment._ The object of credit restriction, in such a case, is to
withdraw from employers the financial means to employ labour at the
existing level of prices and wages. The policy can only attain its end
by intensifying unemployment without limit, until the workers are ready
to accept the necessary reduction of money wages under the pressure of
hard facts.

This is the so-called "sound" policy, which is demanded as a result of
the rash act of pegging sterling at a gold value, which it did
not--measured in its purchasing power over British labour--possess as
yet. It is a policy, nevertheless, from which any humane or judicious
person must shrink. So far as I can judge, the Governor of the Bank of
England shrinks from it. But what is he to do, swimming, with his boat
burnt, between the devil and the deep sea? At present, it appears, he
compromises. He applies the "sound" policy half-heartedly; he avoids
calling things by their right names; and he hopes--this is his best
chance--that something will turn up.

The Bank of England works with so much secrecy and so much concealment
of important statistics that it is never easy to state with precision
what it is doing. The credit restriction already in force has been
effected in several ways which are partly independent. First, there is
the embargo on new issues which probably retards the normal rate of the
circulation of money; then in March the bank-rate was raised; more
recently market-rate was worked up nearer to bank-rate; lastly--and far
the most important of all--the Bank has manoeuvred its assets and
liabilities in such a way as to reduce the amount of cash available to
the Clearing Banks as a basis for credit. This last is the essential
instrument of credit restriction. Failing direct information, the best
reflection of the amount of this restriction is to be found in the
deposits of the Clearing Banks. The tendency of these to fall indicates
some significant degree of restriction. Owing, however, to seasonal
fluctuations and to the artificial character of the end-June returns, it
is not yet possible to estimate with accuracy how much restriction has
taken place in the last three months. So far as one can judge, the
amount of direct restriction is not yet considerable. But no one can say
how much more restriction may become necessary if we continue on our
present lines.

Nevertheless, even these limited measures are responsible, in my
opinion, for an important part of the recent intensification of
unemployment. Credit restriction is an incredibly powerful instrument,
and even a little of it goes a long way--especially in circumstances
where the opposite course is called for. The policy of deliberately
intensifying unemployment with a view to forcing wage reductions is
already partly in force, and the tragedy of our situation lies in the
fact that, from the misguided standpoint which has been officially
adopted, this course is theoretically justifiable. No section of labour
will readily accept lower wages merely in response to sentimental
speeches, however genuine, by Mr. Baldwin. We are depending for the
reduction of wages on the pressure of unemployment and of strikes and
lock-outs; and in order to make sure of this result we are deliberately
intensifying the unemployment.

The Bank of England is _compelled_ to curtail credit by all the
rules of the gold standard game. It is acting conscientiously and
"soundly" in doing so. But this does not alter the fact that to keep a
tight hold on credit--and no one will deny that the Bank is doing that--
necessarily involves intensifying unemployment in the present
circumstances of this country. What we need to restore prosperity to-day
is an easy credit policy. We want to encourage business men to enter on
new enterprises, not, as we are doing, to discourage them. Deflation
does not reduce wages "automatically." It reduces them by causing
unemployment. The proper object of dear money is to check an incipient
boom. Woe to those whose faith leads them to use it to aggravate a
depression!

       *     *     *     *     *

I should pick out coal as being above all others a victim of our
monetary policy. On the other hand, it is certainly true that the reason
why the Coal Industry presents so dismal a picture to the eye is because
it has other troubles which have weakened its power of resistance and
have left it no margin of strength with which to support a new
misfortune.

In these circumstances the colliery owners propose that the gap should
be bridged by a reduction of wages, irrespective of a reduction in the
cost of living--that is to say, by a lowering in the standard of life
of the miners. They are to make this sacrifice to meet circumstances for
which they are in no way responsible and over which they have no
control.

It is a grave criticism of our way of managing our economic affairs that
this should seem to any one to be a reasonable proposal; though it is
equally unreasonable that the colliery owner should suffer the loss,
except on the principle that it is the capitalist who bears the risk. If
miners were free to transfer themselves to other industries, if a
collier out of work or underpaid could offer himself as a baker, a
bricklayer, or a railway porter at a lower wage than is now current in
these industries, it would be another matter. But notoriously they are
not so free. Like other victims of economic transition in past times,
the miners are to be offered the choice between starvation and
submission, the fruits of their submission to accrue to the benefit of
other classes. But in view of the disappearance of an effective mobility
of labour and of a competitive wage level between different industries,
I am not sure that they are not worse placed in some ways than their
grandfathers were.

Why should coal miners suffer a lower standard of life than other
classes of labour? They may be lazy, good-for-nothing fellows who do not
work so hard or so long as they should. But is there any evidence that
they are more lazy or more good-for-nothing than other people?

On grounds of social justice, no case can be made out for reducing the
wages of the miners. They are the victims of the economic Juggernaut.
They represent in the flesh the "fundamental adjustments" engineered by
the Treasury and the Bank of England to satisfy the impatience of the
City fathers to bridge the "moderate gap" between $4.40 and $4.86.
_They_ (and others to follow) are the "moderate sacrifice" still
necessary to ensure the stability of the gold standard. The plight of
the coal miners is the first, but not--unless we are very lucky--the
last, of the Economic Consequences of Mr. Churchill.

The truth is that we stand mid-way between two theories of economic
society. The one theory maintains that wages should be fixed by
reference to what is "fair" and "reasonable" as between classes. The
other theory--the theory of the economic Juggernaut--is that wages
should be settled by economic pressure, otherwise called "hard facts,"
and that our vast machine should crash along, with regard only to its
equilibrium as a whole, and without attention to the chance consequences
of the journey to individual groups.

The gold standard, with its dependence on pure chance, its faith in
"automatic adjustments," and its general regardlessness of social
detail, is an essential emblem and idol of those who sit in the top tier
of the machine. I think that they are immensely rash in their
regardlessness, in their vague optimism and comfortable belief that
nothing really serious ever happens. Nine times out of ten, nothing
really serious does happen--merely a little distress to individuals or
to groups. But we run a risk of the tenth time (and are stupid into the
bargain) if we continue to apply the principles of an Economics which
was worked out on the hypotheses of _laissez-faire_ and free competition
to a society which is rapidly abandoning these hypotheses.


  (iii) _Is there a Remedy?_

The monetary policy announced in the Budget (of 1925) being the real
source of our industrial troubles, it is impossible to recommend any
truly satisfactory course except its reversal. Nevertheless, amongst the
alternatives still open to this Government, some courses are better than
others.

One course is to pursue the so-called "sound" policy vigorously, with
the object of bringing about "the fundamental adjustments" in the
orthodox way by further restricting credit and raising the bank-rate in
the autumn if necessary, thus intensifying unemployment and using every
other weapon in our hands to force down money wages, trusting in the
belief that, when the process is finally complete, the cost of living
will have fallen also, thus restoring average real wages to their former
level. If this policy can be carried through it will be, in a sense,
successful, though it will leave much injustice behind it on account of
the inequality of the changes it will effect, the stronger groups
gaining at the expense of the weaker. For the method of economic
pressure, since it bears most hardly on the weaker industries, where
wages are already relatively low, tends to increase the existing
disparities between the wages of different industrial groups.

The question is how far public opinion will allow such a policy to go.
It would be politically impossible for the Government to admit that it
was deliberately intensifying unemployment, even though the members of
the Currency Committee were to supply them with an argument for it. On
the other hand, it is possible for Deflation to produce its effects
without being recognised. Deflation, once started ever so little, is
cumulative in its progress. If pessimism becomes generally prevalent in
the business world, the slower circulation of money resulting from this
can carry Deflation a long way further, without the Bank having either
to raise the bank-rate or to reduce its deposits. And since the public
always understands particular causes better than general causes, the
depression will be attributed to the industrial disputes which will
accompany it, to the Dawes Scheme, to China, to the inevitable
consequences of the Great War, to tariffs, to high taxation, to anything
in the world except the general monetary policy which has set the whole
thing going.

Moreover, this course need not be pursued in a clear-cut way. A furtive
restriction of credit by the Bank of England can be coupled with vague
cogitations on the part of Mr. Baldwin (who has succeeded to the
position in our affections formerly occupied by Queen Victoria) as to
whether social benevolence does not require him to neutralise the
effects of this by a series of illogical subsidies. Queen Baldwin's good
heart will enable us to keep our tempers, whilst the serious work goes
on behind the scenes. The Budgetary position will render it impossible
for the subsidies to be big enough to make any real difference. And in
the end, unless there is a social upheaval, "the fundamental
adjustments" will duly take place.

Some people may contemplate this forecast with equanimity. I do not. It
involves a great loss of social income whilst it is going on, and will
leave behind much social injustice when it is finished. The best, indeed
the only, hope lies in the possibility that in this world, where so
little can be foreseen, something may turn up--which leads me to my
alternative suggestions. Could we not _help_ something to turn up?

There are just two features of the situation which are capable of being
turned to our advantage. The first is financial--if the value of gold
would fall in the outside world, that would render unnecessary any
important change in the level of wages here. The second is
industrial--if the cost of living would fall _first_, our consciences
would be clear in asking Labour to accept a lower money wage, since it
would then be evident that the reduction was not part of a plot to
reduce real wages.

When the return to the gold standard was first announced, many
authorities agreed that we were gambling on rising prices in the United
States. The rise has not taken place, so far.[24] Moreover, the policy
of the Bank of England has been calculated to steady prices in the
United States rather than to raise them. The fact that American banks
can lend their funds in London at a high rate of interest tends to keep
money rates in New York higher than they would be otherwise, and to draw
to London, instead of to New York, the oddments of surplus gold in the
world markets. Thus our policy has been to relieve New York of the
pressure of cheap money and additional gold which would tend otherwise
to force their prices upwards. The abnormal difference between money
rates in London and New York is preventing the gold standard from
working even according to its own principles. According to orthodox
doctrine, when prices are too high in A as compared with B, gold flows
out from A and into B, thus lowering prices in A and _raising them in
B_, so that an upward movement in B's prices meets half-way the downward
movement in A's.

[Footnote 24: In my opinion, we need not yet abandon the hope that it
will take place. The tendency of American prices is upwards, rather than
downwards, and it only requires a match to set alight the dormant
possibilities of inflation in the United States. This possibility is the
one real ground for not being too pessimistic.]

At present the policy of the Bank of England prevents this from
happening. I suggest, therefore, that they should reverse this policy.
Let them reduce the bank-rate, and cease to restrict credit. If, as a
result of this, the "bad" American money, which is now a menace to the
London Money Market, begins to flow back again, let us pay it off in
gold or, if necessary, by using the dollar credits which the Treasury
and the Bank of England have arranged in New York. It would be better to
pay in gold, because it would be cheaper and because the flow of actual
gold would have more effect on the American price level. If we modified
the rules which now render useless three-quarters of our stock of gold,
we could see with equanimity a loss of 60,000,000 or 70,000,000 in
gold--which would make a great difference to conditions elsewhere. There
is no object in paying 4 per cent interest on floating American
balances which can leave us at any moment, in order to use these
balances to buy and hold idle and immobilised gold.

Gold could not flow out on this scale, unless at the same time the Bank
of England was abandoning the restriction of credit and was replacing
the gold by some other asset, _e.g._ Treasury Bills. That is to say, the
Bank would have to abandon the attempt to bring about the fundamental
adjustments by the methods of economic pressure and the deliberate
intensification of unemployment. Therefore, taken by itself, this policy
might be open to the criticism that it was staking too much on the
expectation of higher prices in America.

To meet this, I suggest that Mr. Baldwin should face the facts frankly
and sincerely, in collaboration with the Trade Union leaders, on the
following lines.

So long as members of the Cabinet continue to pretend that the present
movement to reduce wages has nothing to do with the value of money, it
is natural that the working classes should take it as a concerted attack
on real wages. If the Chancellor of the Exchequer is right in his view
that his monetary policy has had no more to do with the case than the
Gulf Stream, then it follows that the present agitations to lower wages
are simply a campaign against the standard of life of the working
classes. It is only when the Government have admitted the truth of the
diagnosis set forth in these chapters that they are in a position to
invite the collaboration of the Trade Union leaders on fair and
reasonable terms.

As soon as the Government admit that the problem is primarily a monetary
one, then they can say to Labour: "This is not an attack on real wages.
We have raised the value of sterling 10 per cent. This means that money
wages must fall 10 per cent. But it also means, when the adjustment is
complete, that the cost of living will fall about 10 per cent. In this
case there will have been no serious fall in real wages. Now there are
two alternative ways of bringing about the reduction of money wages. One
way is to apply economic pressure and to intensify unemployment by
credit restriction until wages are _forced down_. This is a hateful and
disastrous way, because of its unequal effects on the stronger and on
the weaker groups, and because of the economic and social waste whilst
it is in progress. The other way is to effect a _uniform_ reduction of
wages by _agreement_, on the understanding that this shall not mean in
the long run any fall in average real wages below what they were in the
first quarter of this year. The practical difficulty is that money wages
and the cost of living are interlocked. The cost of living cannot fall
until _after_ money wages have fallen. Money wages must fall _first_ in
order to allow the cost of living to fall. Can we not agree, therefore,
to have a uniform initial reduction of money wages throughout the whole
range of employment, including Government and Municipal employment, of
(say) 5 per cent, which reduction shall not hold good unless, after an
interval, it has been compensated by a fall in the cost of living?"

If Mr. Baldwin were to make this proposal the Trade Union leaders would
probably ask him at once what he intended to do about money payments
other than wages--rents, profits, and interest. As regards rents and
profits, he can reply that these are not fixed in terms of money, and
will therefore fall, when measured in money, step by step with prices.
The worst of this reply is that rents and profits, like wages, are
sticky and may not fall quick enough to help the transition as much as
they should. As regards the interest on bonds, however, and particularly
the interest on the National Debt, he has no answer at all. For it is
of the essence of any policy to lower prices that it benefits the
receivers of interest at the expense of the rest of the community; this
consequence of deflation is deeply embedded in our system of money
contract. On the whole, I do not see how Labour's objection can be met,
except by the rough-and-ready expedient of levying an additional
income-tax of 1s. in the  on all income other than from employments,
which should continue until real wages had recovered to their previous
level.[25]

[Footnote 25: This will not prevent bondholders from gaining in the long
run, if in the long run prices do not rise again. But such profits and
losses to bondholders are an inevitable feature of an unstable monetary
standard. Since, however, prices generally do rise in the long run,
bondholders in the long run are losers, not gainers, from the system.]

If the proposal to effect a voluntary all-round reduction of wages,
whilst sound in principle, is felt to be too difficult to achieve in
practice, then, for my part, I should be inclined to stake everything on
an attempt to raise prices in the outside world--that is on a reversal
of the present policy of the Bank of England. This, I understand from
their July _Monthly Review_, is also the recommendation of the high
authorities of the Midland Bank.

That there should be grave difficulties in all these suggestions is
inevitable. Any plan, such as the Government has adopted, for
deliberately altering the value of money, must, in modern economic
conditions, come up against objections of justice and expediency. They
are suggestions to mitigate the harsh consequences of a mistake; but
they cannot undo the mistake. They will not commend themselves to those
pessimists who believe that it is the level of real wages, and not
merely of money wages, which is the proper object of attack. I mention
them because our present policy of deliberately intensifying
unemployment by keeping a tight hold on credit, just when on other
grounds it ought to be relaxed, so as to force adjustments by using the
weapon of economic necessity against individuals and against particular
industries, is a policy which the country would never permit if it knew
what was being done.




  6. Mitigation by Tariff[26]

[Footnote 26: [For some months before the collapse of the gold standard
it had become obvious that this collapse was becoming inevitable unless
special steps were taken to mitigate the gravity of our problem.
Somewhat in desperation, I made various suggestions, and, amongst them,
a proposal for a Tariff combined, if possible, with a bounty to exports.
Mr. Snowden, endowed with more than a normal share of blindness and
obstinacy, opposed his negative to all the possible alternatives, until,
at last, natural forces took charge and put us out of our misery.]]

  (i) _Proposals for a Revenue Tariff_

  (March 7, 1931)

Do you think it a paradox that we can continue to increase our capital
wealth by adding both to our foreign investments and to our equipment at
home, that we can continue to live (most of us) much as usual or better,
and support at the same time a vast body of persons in idleness with a
dole greater than the income of a man in full employment in most parts
of the world--and yet do all this with one quarter of our industrial
plant closed down and one quarter of our industrial workers unemployed?
It would be not merely a paradox, but an impossibility, if our potential
capacity for the creation of wealth were not much greater than it used
to be. But this greater capacity does exist. It is to be attributed
mainly to three factors--the ever-increasing technical efficiency of our
industry (I believe that output per head is 10 per cent greater than it
was even so recently as 1924), the greater economic output of women, and
the larger proportion of the population which is at the working period
of life. The fall in the price of our imports compared with that of our
exports also helps. The result is that with three-fourths of our
industrial capacity we can now produce as much wealth as we could
produce with the whole of it a few years ago. But how rich we could be
if only we could find some way of employing _four_-fourths of our
capacity to-day!

Our trouble is, then, not that we lack the physical means to support a
high standard of life, but that we are suffering a breakdown in
organisation and in the machinery by which we buy and sell to one
another.

There are two reactions to this breakdown. We experience the one or the
other according to our temperaments. The one is inspired by a
determination to maintain our standards of life by bringing into use our
wasted capacity--that is to say, to expand, casting fear and even
prudence away. The other, the instinct to contract, is based on the
psychology of fear. How reasonable is it to be afraid?

We live in a society organised in such a way that the activity of
production depends on the individual business man hoping for a
reasonable profit, or at least, to avoid an actual loss. The margin
which he requires as his necessary incentive to produce may be a very
small proportion of the total value of the product. But take this away
from him and the whole process stops. This, unluckily, is just what has
happened. The fall of prices relatively to costs, together with the
psychological effect of high taxation, has destroyed the necessary
incentive to production. This is at the root of our disorganisation. It
may be unwise, therefore, to frighten the business man or torment him
further. A forward policy is liable to do this. For reasoning by a false
analogy from what is prudent for an individual who finds himself in
danger of living beyond his means, he is usually, when his nerves are
frayed, a supporter, though to his own ultimate disadvantage, of
national contraction.

And there is a further reason for nervousness. We are suffering from
_international_ instability. Notoriously the competitive power of our
export trades is diminished by our high standard of life. At the same
time the lack of profits in home business inclines the investor to place
his money abroad, whilst high taxation exercises a sinister influence in
the same direction. Above all, the reluctance of other creditor
countries to lend (which is the root-cause of this slump) places too
heavy a financial burden on London. These, again, are apparent arguments
against a forward policy; for greater activity at home due to increased
employment will increase our excess of imports, and Government borrowing
may (in their present mood) frighten investors.

Thus the _direct_ effect of an expansionist policy must be to cause
Government borrowing, to throw some burden on the Budget, and to
increase our excess of imports. In every way, therefore--the opponents
of such a policy point out--it will aggravate the want of confidence,
the burden of taxation, and the international instability which, they
believe, are at the bottom of our present troubles.

At this point the opponents of expansion divide into two groups--those
who think that we must not only postpone all ideas of expansion, but
must positively contract, by which they mean reduce wages and make large
economies in the existing expenditure of the Budget, and those who are
entirely negative and, like Mr. Snowden, dislike the idea of contraction
(interpreted in the above sense) almost as much as they dislike the idea
of expansion.

The policy of negation, however, is really the most dangerous of all.
For, as time goes by, it becomes increasingly doubtful whether we _can_
support our standard of life. With 1,000,000 unemployed we certainly
can; with 2,000,000 unemployed we probably can; with 3,000,000
unemployed we probably cannot. Thus the negative policy, by allowing
unemployment steadily to increase, must lead in the end to an
unanswerable demand for a reduction in our standard of life. If we do
nothing long enough, there will in the end be nothing else that we can
do.

Unemployment, I must repeat, exists because employers have been deprived
of profit. The loss of profit may be due to all sorts of causes. But,
short of going over to Communism, there is no possible means of curing
unemployment except by restoring to employers a proper margin of profit.
There are two ways of doing this--by increasing the _demand_ for output,
which is the expansionist cure, or by decreasing the _cost_ of output,
which is the contractionist cure. Both of these try to touch the spot.
Which of them is to be preferred?

To decrease the cost of output by reducing wages and curtailing Budget
services may indeed increase foreign demand for our goods (unless, which
is quite likely, it encourages a similar policy of contraction abroad),
but it will probably diminish the domestic demand. The advantages to
employers of a _general_ reduction of wages are, therefore, not so great
as they look. Each employer sees the advantage to himself of a reduction
of the wages which he himself pays, and overlooks both the consequences
of the reduction of the incomes of his customers and of the reduction of
wages which his competitors will enjoy. Anyway, it would certainly lead
to social injustice and violent resistance, since it would greatly
benefit some classes of income at the expense of others. For these
reasons a policy of contraction sufficiently drastic to do any real good
may be quite impracticable.

Yet the objections to the expansionist remedy--the instability of our
international position, the state of the Budget, and the want of
confidence--cannot be thus disposed of. Two years ago there was no need
to be frightened. To-day it is a different matter. It would not be wise
to frighten the penguins and arouse these frigid creatures to flap away
from our shores with their golden eggs inside them. A policy of
expansion sufficiently drastic to be useful might drive us off the gold
standard. Moreover, two years ago the problem was mainly a British
problem; to-day it is mainly international. No domestic cure to-day can
be adequate by itself. An international cure is essential; and I see the
best hope of remedying the international slump in the leadership of
Great Britain. But if Great Britain is to resume leadership, she must be
strong and believed to be strong. It is of paramount importance,
therefore, to restore full confidence in London. I do not believe that
this is difficult; for the real strength of London is being
under-estimated to-day by foreign opinion, and the position is ripe for
a sudden reversal of sentiment. For these reasons I, who opposed our
return to the gold standard and can claim, unfortunately, that my
Cassandra utterances have been partly fulfilled, believe that our
exchange position should be relentlessly defended to-day, in order,
above all, that we may resume the vacant financial leadership of the
world, which no one else has the experience or the public spirit to
occupy, speaking out of acknowledged strength and not out of weakness.

An advocate of expansion in the interests of domestic employment has
cause, therefore, to think twice. I have thought twice, and the
following are my conclusions.

I am of the opinion that a policy of expansion, though desirable, is not
safe or practicable to-day, unless it is accompanied by other measures
which would neutralise its dangers. Let me remind the reader what these
dangers are. There is the burden on the trade balance, the burden on the
Budget, and the effect on confidence. If the policy of expansion were to
justify itself eventually by increasing materially the level of profits
and the volume of employment, the net effect on the Budget and on
confidence would in the end be favourable and perhaps very favourable.
But this might not be the initial effect.

What measures are available to neutralise these dangers? A decision to
reform the grave abuses of the dole, and a decision to postpone for the
present all new charges on the Budget for social services in order to
conserve its resources to meet schemes for the expansion of employment,
are advisable and should be taken. But the main decision which seems to
me to-day to be absolutely forced on any wise Chancellor of the
Exchequer, whatever his beliefs about Protection, is the introduction of
a substantial revenue tariff. It is certain that there is no other
measure all the immediate consequences of which will be favourable and
appropriate. The tariff which I have in mind would include no
discriminating protective taxes, but would cover as wide a field as
possible at a flat rate or perhaps two flat rates, each applicable to
wide categories of goods. Rebates would be allowed in respect of
imported material entering into exports, but raw materials, which make
up an important proportion of the value of exports, such as wool and
cotton, would be exempt. The amount of revenue to be aimed at should be
substantial, not less than 50,000,000 and, if possible, 75,000,000.
Thus, for example, there might be import duties of 15 per cent on all
manufactured and semi-manufactured goods without exception, and of 5 per
cent on all food stuffs and certain raw materials, whilst other raw
materials would be exempt.[27] I am prepared to maintain that the effect
of such duties on the cost of living would be insignificant--no greater
than the existing fluctuation between one month and another. Moreover,
any conceivable remedy for unemployment will have the effect, and,
indeed, will be intended, to raise prices. Equally, the effect on the
cost of our exports, after allowing for the rebates which should be
calculated on broad and simple lines, would be very small. It should be
the declared intention of the Free Trade parties acquiescing in this
decision to remove the duties in the event of world prices recovering to
the level of 1929.

[Footnote 27: [In a subsequent article I agreed that this precise scale
of duties could not be relied on to produce so large a revenue as that
suggested above, and that 40,000,000 was a safer estimate.]]

Compared with any alternative which is open to us, this measure is
unique in that it would at the same time relieve the pressing problems
of the Budget and restore business confidence. I do not believe that a
wise and prudent Budget can be framed to-day without recourse to a
revenue tariff. But this is not its only advantage. In so far as it
leads to the substitution of home-produced goods for goods previously
imported, it will increase employment in this country. At the same time,
by relieving the pressure on the balance of trade it will provide a
much-needed margin to pay for the additional imports which a policy of
expansion will require and to finance loans by London to necessitous
debtor countries. In these ways, the buying power which we take away
from the rest of the world by restricting certain imports we shall
restore to it with the other hand. Some fanatical Free Traders might
allege that the adverse effect of import duties on our exports would
neutralise all this; but it would not be true.

Free Traders may, consistently with their faith, regard a revenue tariff
as our iron ration, which can be used once only in emergency. The
emergency has arrived. Under cover of the breathing space and the margin
of financial strength thus afforded us, we could frame a policy and a
plan, both domestic and international, for marching to the assault
against the spirit of contractionism and fear.

If, on the other hand, Free Traders reject these counsels of expediency,
the certain result will be to break the present Government and to
substitute for it, in the confusion of a Crisis of Confidence, a Cabinet
pledged to a full protectionist programme.


  (ii) _On the Eve of Gold Suspension_

  (Sept. 10, 1931)

The moral energies of the nation are being directed into wrong channels,
and serious troubles are ahead of us unless we apply our minds with more
effect than hitherto to the analysis of the real character of our
problems.

The exclusive concentration on the idea of "Economy," national,
municipal, and personal--meaning by this the negative act of withholding
expenditure which is now stimulating the forces of production into
action--may, if under the spur of a sense of supposed duty it is carried
far, produce social effects so shocking as to shake the whole system of
our national life.

There is scarcely an item in the Economy Programme of the May
Report--whether or not it is advisable on general grounds--which is not
certain to increase unemployment, to lower the profits of business, and
to diminish the yield of the revenue; so much so that I have calculated
that economies of 100,000,000 may quite likely reduce the net Budget
deficit by not more than 50,000,000, and we are just hoodwinking
ourselves (unless our real object is to _pretend_ to balance the Budget
for the benefit of foreign financiers) if we suppose that we can make
the economies under discussion without any repercussions on the number
of the unemployed to be supported or on the yield of the existing taxes.

Yet if we carry "Economy" of every kind to its logical conclusion, we
shall find that we have balanced the Budget at nought on both sides,
with all of us flat on our backs starving to death from a refusal, for
reasons of economy, to buy one another's services.

The Prime Minister has said that it is like the war over again, and many
people believe him. But this is exactly the opposite of the truth.
During the war it was useful to refrain from any avoidable expenditure
because this would release resources for the insatiable demands of
military operations. What are we releasing resources for to-day? To
stand at street corners and draw the dole.

When we already have a great amount of unemployment and unused resources
of every description, economy is only useful from the national point of
view _in so far as it diminishes our consumption of imported goods_. For
the rest, its fruits are entirely wasted in unemployment, business
losses, and reduced savings. But it is an extraordinarily indirect and
wasteful way of reducing imports.

If we throw men out of work and reduce the incomes of Government
employees so that those directly and indirectly affected cannot afford
to buy so much imported food, to this extent the country's financial
position is eased. But this is not likely to amount to more than 20 per
cent of the total economies enforced. The remaining 80 per cent is
wasted, and represents either a mere transference of loss or
unemployment due to a refusal of British citizens to purchase one
another's services.

What I am saying is absolutely certain, yet I doubt if one in a million
of those who are crying out for economy have the slightest idea of the
real consequences of what they demand.

This is not to deny that there is a Budget problem. Quite the contrary.
The point is that the state of the Budget is mainly a symptom and a
consequence of other causes, that economy is in itself liable to
aggravate rather than to remove these other causes, and that
consequently the Budget problem, attacked merely along the lines of
economy, is probably insoluble.

What are our troubles fundamentally due to? Very largely to the world
depression, immediately to the unbelievable rashness of High Finance in
the City, and originally to the policy of returning to the Gold Standard
without the slightest appreciation of the nature of the difficulties
which this involved. To say that our problem is a Budget problem is like
saying that the German problem is a Budget problem, forgetting all about
Reparations.

Now as regards the world depression, there is at the moment absolutely
nothing that we can do, for we have now lost the power of international
initiative which we seemed to be regaining last May. The results of
unsound international banking by the City are also, for the time being,
irreparable. The choice left to us was whether or not to adhere to the
present gold parity of the exchanges.

This was decided in the affirmative for reasons which I understand but
with which I do not agree. The decision was taken in a spirit of
hysteria and without a calm consideration of the alternative before us.
Ministers have given forecasts of what might have been expected if we
had taken a different course which could not survive ten minutes'
rational discussion.

I believe that we shall come to regret this decision, just as we already
regret most of the critical decisions taken during the last ten years by
the persons who form the present Cabinet.

But that is not the point at this moment. The decision to maintain the
gold standard at all costs has been taken. The point is that the Cabinet
and the public seem to have no clear idea as to what has to be done to
implement its own decision, apart from the obvious necessity of raising
a foreign loan for immediate requirements; which simply has the effect
of replacing money which we had previously borrowed in terms of
sterling, by money borrowed in terms of francs and dollars. But they
cannot suppose that we can depend permanently on foreign loans. The rest
of the problem is primarily concerned with improving our current balance
of trade on income account. This is what the Cabinet ought to be
thinking about.

There are only two possible lines of attack on this. The one (which is
the milder measure open to us) consists in direct measures to restrict
imports (and, if possible, subsidise exports); the other is a reduction
of all money wages within the country. We may have to attempt both in
the end, if we refuse to devaluate.

But the immediate question is which to try first. Now the latter
course, if it were to be adequate, would involve so drastic a reduction
of wages and such appallingly difficult, probably insoluble, problems,
both of social justice and practical method, that it would be crazy not
to try first the effects of the alternative, and much milder, measure of
restricting imports.

It happens that this course also has other important advantages. It will
not only relieve the strain on the foreign exchanges. It would also do
more than any other single measure to balance the Budget; and it is the
only form of taxation open to us which will actually increase profits,
improve employment, and raise the spirits and the confidence of the
business community.

Finally, it is the only measure for which there is (sensibly enough) an
overwhelming support from public opinion. It is credibly reported that
the late Cabinet were in favour of a tariff in the proportion of three
to one. It looks as if the present Cabinet may favour it in the
proportion of four to one. The only third alternative Cabinet is
unanimously for it. But sacrifice being the order of the day, we have in
the spirit of self-immolation conceived the brilliant contrivance of a
"National" Government, the basis of which is that every member of it
agrees, so long as it lasts, to sacrifice what he himself believes to be
the only sound solution for our misfortunes.

For if we rule out Devaluation, which I personally now believe to be the
right remedy, but which is not yet the policy of any organised party in
the State, there are three possible lines of procedure.

The first is to take the risks of brisk home development, as being
preferable to enforced idleness.

The second is to organise a general reduction of wages, and, in the
interests of social justice, of other money-incomes as well, so far as
this is feasible.

The third is a drastic restriction of imports.

The "National" Government is pledged, if I understand the position
rightly, to avoid all three. Their policy is to reduce the standard of
life of as many people as are within their reach in the hope that some
small portion of the reductions of standard will be at the expense of
imports. Deliberately to prefer this to a direct restriction of imports
is to be _non compos mentis_.


  (iii) _After the Suspension of Gold_

  (A letter to _The Times_, Sept. 28, 1931)

Until recently I was urging on Liberals[28] and others the importance of
accepting a general tariff as a means of mitigating the effects of the
obvious disequilibrium between money-costs at home and abroad. But the
events of the last week have made a great difference. At the present
gold-value of sterling British producers are probably in many directions
among the cheapest in the world. In these circumstances we cannot
continue as if nothing had happened. It is impossible to have a rational
discussion about tariffs so long as the currency question is altogether
unsolved. For until we know more about the probable future level of
sterling in relation to gold, and, above all, until we know how many
other countries are going to follow our example, it is impossible to say
what our competitive position is going to be.

[Footnote 28: [Not all my Free Trade friends proved to be so prejudiced
as I had thought. For after a Tariff was no longer necessary, many of
them were found voting for it.]]

May I urge that the immediate question for attention is not a tariff but
the currency question? It is the latter which is urgent and important.
It is at present a non-party issue on which none of the political
parties has taken up a dogmatic attitude. It is suitable, therefore, for
non-party handling. It is most certainly unsuitable for a General
Election. It offers immense opportunities for leadership by this
country. We are probably in a position to carry the whole of the Empire
and more than half of the rest of the world with us, and thus rebuild
the financial supremacy of London on a firm basis. Meanwhile, proposals
for high protection have ceased to be urgent. To throw the country into
a turmoil over them to the neglect of this other more urgent and
important problem would be a wrong and foolish thing. Let us give our
whole attention and our united energies to devising a sound
international currency policy for ourselves and the rest of the world.
For it is futile to suppose that we can recover our former prosperity
without such a policy, or that tariffs can be any substitute for it.
When the currency question has been settled, then we can return to
protection and to our other domestic issues with a solid basis to go
upon; and that will be the time for a General Election.




  7. The End of the Gold Standard

  (Sept. 27, 1931)[29]

[Footnote 29: [On Sept. 21, 1931, the Gold Standard in Great Britain was
suspended.]]


There are few Englishmen who do not rejoice at the breaking of our gold
fetters. We feel that we have at last a free hand to do what is
sensible. The romantic phase is over, and we can begin to discuss
realistically what policy is for the best.

It may seem surprising that a move which had been represented as a
disastrous catastrophe should have been received with so much
enthusiasm. But the great advantages to British trade and industry of
our ceasing artificial efforts to maintain our currency above its real
value were quickly realised.

The division of inside opinion was largely on a different point. The
difficult question to decide was one of honour. The City of London
considered that it was under an obligation of _honour_ to make every
possible effort to maintain the value of money in terms of which it had
accepted large deposits from foreigners, even though the result of this
was to place an intolerable strain on British industry. At what
point--that was the difficult problem--were we justified in putting our
own interests first?

As events have turned out, we have got the relief we needed, and, at the
same time, the claims of honour have been, in the judgement of the whole
world, satisfied to the utmost. For the step was not taken until it was
unavoidable. In the course of a few weeks the Bank of England paid out
200,000,000 in gold or its equivalent, which was about half the total
claims of foreigners on London, and did this at a time when the sums
which London had re-lent abroad were largely frozen. No banker could do
more. Out of the ashes the City of London will rise with undiminished
honour. For she has played the game up to the limits of quixotry, even
at the risk of driving British trade almost to a standstill.

No wonder, then, that we feel some exuberance at the release, that Stock
Exchange prices soar, and that the dry bones of industry are stirred.
For if the sterling exchange is depreciated by, say, 25 per cent, this
does as much to restrict our imports as a tariff of that amount; but
whereas a tariff could not help our exports, and might hurt them, the
depreciation of sterling affords them a bounty of the same 25 per cent
by which it aids the home producer against imports.

In many lines of trade the British manufacturer to-day must be the
cheapest producer in the world in terms of gold. We gain these
advantages without a cut of wages and without industrial strife. We gain
them in a way which is strictly fair to every section of the community,
without any serious effects on the cost of living. For less than a
quarter of our total consumption is represented by imports; so that
sterling would have to depreciate by much more than 25 per cent before I
should expect the cost of living to rise by as much as 10 per cent. This
would cause serious hardship to no one, for it would only put things
back where they were two years ago. Meanwhile there will be a great
stimulus to employment.

I make no forecast as to the figure to which sterling may fall in the
next few days, except that it will have to fall for a time appreciably
below the figure which cool calculators believe to represent the
equilibrium. There will then be speculation and profit-taking in favour
of sterling to balance speculation and panic selling on the other side.
Our authorities made a great mistake in allowing sterling to open so
high, because the inevitable gradual fall towards a truer level must sap
confidence and produce on the ignorant the impression of a slide which
cannot be stayed. Those who were guilty of undue optimism will quite
likely succumb to undue pessimism. But the pessimism will be as
unfounded as the optimism was. The equilibrium value of sterling is the
same as it was a month ago. There are tremendous forces to support
sterling when it begins to fall too far. There is no risk, in my
judgement, of a catastrophic fall.

These, in brief, are the consequences in Great Britain. How will the
rest of the world be influenced? Not in a uniform way. Let us take first
the debtor countries to whom Great Britain has in the past lent large
sums in sterling, and from whom interest is due in sterling, such as
Australia, Argentina, and India. To these countries the depreciation of
sterling represents a great concession. A smaller quantity of their
goods will be sufficient to meet their sterling liabilities. The
interest due to Great Britain from abroad, which is fixed in sterling,
amounts to about 100,000,000 a year. In respect of this sum Great
Britain now plays the part of a reasonable creditor who moderates his
claim in view of so great a change in the situation as the recent
catastrophic fall in commodity prices.

When we try to calculate the effect on other manufacturing countries,
whose competition we are now in a better position to meet, the effect is
more complex. A large part of the world will, I expect, follow Great
Britain in reducing the former gold value of their money. There are
already signs in many countries that no great effort will be made to
maintain the gold parity. In the last few days Canada, Italy,
Scandinavia have moved in our direction. India and the Crown Colonies,
including the Straits Settlements, have automatically followed sterling.
Australia and the whole of South America had already abandoned the
effort to maintain exchange parity. I shall be astonished if Germany
delays long before following our example. Will Holland deal final ruin
to the rubber and sugar industries of the Dutch Indies by keeping them
tied to gold? There will be strong motives driving a large part of the
world our way. After all, Great Britain's plight, as the result of the
deflation of prices, is far less serious than that of most countries.

Now, in so far as this is the case, we and all the countries following
our example will gain the benefits of higher prices. But none of us will
secure a competitive advantage at the expense of the others. Thus the
competitive disadvantage will be concentrated on those few countries
which remain on the gold standard. On these will fall the curse of
Midas. As a result of their unwillingness to exchange their exports
except for gold their export trade will dry up and disappear until they
no longer have either a favourable trade balance or foreign deposits to
repatriate. This means in the main France and the United States. Their
loss of export trade will be an inevitable, a predictable, outcome of
their own action. These countries, largely for reasons resulting from
the war and the war settlements, are owed much money by the rest of the
world. They erect tariff barriers which prevent the payment of these
sums in goods. They are unwilling to lend it. They have already taken
nearly all the available surplus gold in the whole world. There
remained, in logic, only one way by which the rest of the world could
maintain its solvency and self-respect; namely, to cease purchasing
these countries' exports. So long as the gold standard is
preserved--which means that the prices of international commodities must
be much the same everywhere--this involved a competitive campaign of
deflation, each of us trying to get our prices down faster than the
others, a campaign which had intensified unemployment and business
losses to an unendurable pitch.

But as soon as the gold exchange is ruptured the problem is solved. For
the appreciation of French and American money in terms of the money of
other countries makes it impossible for French and American exporters to
sell their goods. The recent policy of these countries could not, if it
was persistently pursued, end in any other way. They have willed the
destruction of their own export industries, and only they can take the
steps necessary to restore them. The appreciation of their currencies
must also embarrass gravely their banking systems. The United States
had, in effect, set the rest of us the problem of finding some way to do
without her wheat, her copper, her cotton, and her motor-cars. She set
the problem, and, as it had only one solution, that solution we have
been compelled to find.

Yet this is quite the opposite of the note on which I wish to end. The
solution to which we have been driven, though it gives immediate relief
to us and transfers the strain to others, is in truth a solution
unsatisfactory for every one. The world will never be prosperous without
a trade recovery in the United States. Peace and confidence and a
harmonious economic equilibrium for all the closely interrelated
countries of the globe is the only goal worth aiming at.

I believe that the great events of the last week may open a new chapter
in the world's monetary history. I have a hope that they may break down
barriers which have seemed impassable. We need now to take intimate and
candid conference together as to the better ordering of our affairs for
the future. The President of the United States turned in his sleep last
June. Great issues deserve his attention. Yet the magic spell of
immobility which has been cast over the White House seems still
unbroken. Are the solutions offered us always to be too late? Shall we
in Great Britain invite three-quarters of the world, including the whole
of our Empire, to join with us in evolving a new currency system which
shall be stable in terms of commodities? Or would the gold standard
countries be interested to learn the terms, which must needs be strict,
on which we should be prepared to re-enter the system of a drastically
reformed gold standard?




  IV

  POLITICS




  POLITICS

  1. A Short View of Russia (1925)

  (i) _What is the Communist Faith?_

Leninism is a combination of two things which Europeans have kept for
some centuries in different compartments of the soul--religion and
business. We are shocked because the religion is new, and contemptuous
because the business, being subordinated to the religion instead of the
other way round, is highly inefficient.

Like other new religions, Leninism derives its power not from the
multitude but from a small minority of enthusiastic converts whose zeal
and intolerance make each one the equal in strength of a hundred
indifferentists. Like other new religions, it is led by those who can
combine the new spirit, perhaps sincerely, with seeing a good deal more
than their followers, politicians with at least an average dose of
political cynicism, who can smile as well as frown, volatile
experimentalists, released by religion from truth and mercy but not
blinded to facts and expediency, and open therefore to the charge
(superficial and useless though it is where politicians, lay or
ecclesiastical, are concerned) of hypocrisy. Like other new religions,
it seems to take the colour and gaiety and freedom out of everyday life
and to offer a drab substitute in the square wooden faces of its
devotees. Like other new religions, it persecutes without justice or
pity those who actively resist it. Like other new religions, it is
unscrupulous. Like other new religions, it is filled with missionary
ardour and occumenical ambitions. But to say that Leninism is the faith
of a persecuting and propagating minority of fanatics led by hypocrites
is, after all, to say no more nor less than that it _is_ a religion and
not merely a party, and Lenin a Mahomet, not a Bismarck. If we want to
frighten ourselves in our capitalist easy-chairs, we can picture the
Communists of Russia as though the early Christians led by Attila were
using the equipment of the Holy Inquisition and the Jesuit missions to
enforce the literal economics of the New Testament; but when we want to
comfort ourselves in the same chairs, can we hopefully repeat that these
economics are fortunately so contrary to human nature that they cannot
finance either missionaries or armies and will surely end in defeat?

There are three questions to answer. Is the new religion partly true, or
sympathetic to the souls of modern men? Is it on the material side so
inefficient as to render it incapable to survive? Will it, in the course
of time, with sufficient dilution and added impurity, catch the
multitude?

As for the first question, those who are completely satisfied by
Christian capitalism or by egotistic capitalism untempered by subterfuge
will not hesitate how to answer it; for they either have a religion or
need none. But many, in this age without religion, are bound to feel a
strong emotional curiosity towards any religion which is really new, and
not merely a recrudescence of old ones, and has proved its motive force;
and all the more when the new thing comes out of Russia, the beautiful
and foolish youngest son of the European family, with hair on his head,
nearer both to the earth and to heaven than his bald brothers in the
West--who, having been born two centuries later, has been able to pick
up the middle-aged disillusionment of the rest of the family before he
has lost the genius of youth or become addicted to comfort and to
habits. I sympathise with those who seek for something good in Soviet
Russia.

But when we come to the actual thing what is one to say? For me, brought
up in a free air undarkened by the horrors of religion, with nothing to
be afraid of, Red Russia holds too much which is detestable. Comfort and
habits let us be ready to forgo, but I am not ready for a creed which
does not care how much it destroys the liberty and security of daily
life, which uses deliberately the weapons of persecution, destruction,
and international strife. How can I admire a policy which finds a
characteristic expression in spending millions to suborn spies in every
family and group at home, and to stir up trouble abroad? Perhaps this is
no worse and has more purpose than the greedy, warlike, and imperialist
propensities of other Governments; but it must be far better than these
to shift me out of my rut. How can I accept a doctrine which sets up as
its bible, above and beyond criticism, an obsolete economic textbook
which I know to be not only scientifically erroneous but without
interest or application for the modern world? How can I adopt a creed
which, preferring the mud to the fish, exalts the boorish proletariat
above the bourgeois and the intelligentsia who, with whatever faults,
are the quality in life and surely carry the seeds of all human
advancement? Even if we need a religion, how can we find it in the
turbid rubbish of the Red bookshops? It is hard for an educated, decent,
intelligent son of Western Europe to find his ideals here, unless he has
first suffered some strange and horrid process of conversion which has
changed all his values.

Yet we shall miss the essence of the new religion if we stop at this
point. The Communist may justly reply that all these things belong not
to his ultimate Faith but to the tactics of Revolution. For he believes
in two things: the introduction of a New Order upon earth, and the
_method_ of the Revolution as the _only_ means thereto.[30] The New
Order must not be judged either by the horrors of the Revolution or by
the privations of the transitionary period. The Revolution is to be a
supreme example of the means justified by the end. The soldier of the
Revolution must crucify his own human nature, becoming unscrupulous and
ruthless, and suffering himself a life without security or joy--but as
the means to his purpose and not its end.

[Footnote 30: I use the term "Communism" to mean the New Order, and not,
as is the practice in British Labour politics, to mean the Revolution as
a means thereto.]

What, then, is the essence of the new religion as a New Order upon
earth? Looking from outside, I do not clearly know. Sometimes its
mouthpieces speak as though it was purely materialistic and technical in
just the same sense that modern capitalism is--as though, that is to
say, Communism merely claimed to be in the long run a superior technical
instrument for obtaining the same materialistic economic benefits as
capitalism offers, that in time it will cause the fields to yield more
and the forces of Nature to be more straitly harnessed. In this case
there is no religion after all, nothing but a bluff to facilitate a
change to what may or may not be a better economic technique. But I
suspect that, in fact, such talk is largely a reaction against the
charges of economic inefficiency which we on our side launch, and that
at the heart of Russian Communism there is something else of more
concern to mankind.

In one respect Communism but follows other famous religions. It exalts
the common man and makes him everything. Here there is nothing new. But
there is another factor in it which also is not new but which may,
nevertheless, in a changed form and a new setting, contribute something
to the true religion of the future, if there be any true religion.
_Leninism is absolutely, defiantly non-supernatural, and its emotional
and ethical essence centres about the individual's and the community's
attitude towards the Love of Money._

I do not mean that Russian Communism alters, or even seeks to alter,
human nature, that it makes Jews less avaricious or Russians less
extravagant than they were before. I do not merely mean that it sets up
a new ideal. I mean that it tries to construct a framework of society in
which pecuniary motives as influencing action shall have a changed
relative importance, in which social approbations shall be differently
distributed, and where behaviour, which previously was normal and
respectable, ceases to be either the one or the other.

In England to-day a talented and virtuous youth, about to enter the
world, will balance the advantages of entering the Civil Service and of
seeking a fortune in business; and public opinion will esteem him not
less if he prefers the second. Money-making, as such, on as large a
scale as possible, is not less respectable socially, perhaps more so,
than a life devoted to the service of the State or of Religion,
Education, Learning, or Art. But in the Russia of the future it is
intended that the career of money-making, as such, will simply not occur
to a respectable young man as a possible opening, any more than the
career of a gentleman burglar or acquiring skill in forgery and
embezzlement. Even the most admirable aspects of the love of money in
our existing society, such as thrift and saving, and the attainment of
financial security and independence for one's self and one's family,
whilst not deemed morally wrong, will be rendered so difficult and
impracticable as to be not worth while. Every one should work for the
community--the new creed runs--and, if he does his duty, the community
will uphold him.

This system does not mean a complete levelling down of incomes--at least
at the present stage. A clever and successful person in Soviet Russia
has a bigger income and a better time than other people. The commissar
with 5 a week (_plus_ sundry free services, a motor-car, a flat, a box
at the ballet, etc., etc.) lives well enough, but not _in the least_
like a rich man in London. The successful professor or civil servant
with 6 or 7 a week (_minus_ sundry impositions) has, perhaps, a real
income three times those of the proletarian workers and six times those
of the poorer peasants. Some peasants are three or four times richer
than others. A man who is out of work receives part pay, not full pay.
But no one can afford on these incomes, with high Russian prices and
stiff progressive taxes, to save anything worth saving; it is hard
enough to live day by day. The progressive taxation and the mode of
assessing rents and other charges are such that it is actually
disadvantageous to have an acknowledged income exceeding 8 to 10 a
week. Nor is there any possibility of large gains except by taking the
same sort of risks as attach to bribery and embezzlement elsewhere--not
that bribery and embezzlement have disappeared in Russia or are even
rare, but any one whose extravagance or whose instincts drive him to
such courses runs serious risk of detection and penalties which include
death.

Nor, at the present stage, does the system involve the actual
prohibition of buying and selling at a profit. The policy is not to
forbid these professions, but to render them precarious and disgraceful.
The private trader is a sort of permitted outlaw, without privileges or
protection, like the Jew in the Middle Ages--an outlet for those who
have overwhelming instincts in this direction, but not a natural or
agreeable job for the normal man.

The effect of these social changes has been, I think, to make a real
change in the predominant attitude towards money, and will probably make
a far greater change when a new generation has grown up which has known
nothing else. People in Russia, if only because of their poverty, are
very greedy for money--at least as greedy as elsewhere. But money-making
and money-accumulating cannot enter into the life-calculations of a
rational man who accepts the Soviet rule in the way in which they enter
into ours. A society of which this is even partially true is a
tremendous innovation.

Now all this may prove Utopian, or destructive of true welfare, though,
perhaps, not so Utopian, pursued in an intense religious spirit, as it
would be if it were pursued in a matter-of-fact way. But is it
appropriate to assume, as most of us have assumed hitherto, that it is
insincere or wicked?

       *     *     *     *     *

After a long debate with Zinovieff, two Communist ironsides who attended
him stepped forward to speak to me a last word with the full faith of
fanaticism in their eyes. "We make you a prophecy," they said. "Ten
years hence the level of life in Russia will be higher than it was
before the war, and in the rest of Europe it will be lower than it was
before the war." Having regard to the natural wealth of Russia and to
the inefficiency of the old rgime, having regard also to the problems
of Western Europe and our apparent inability to handle them, can we feel
confident that the comrades will not prove right?


  (ii) _Communism's Power to Survive_

Can Communism in the course of time, with sufficient dilution and added
impurity, catch the multitude?

I cannot answer what only time will show. But I feel confident of one
conclusion--that if Communism achieves a certain success, it will
achieve it, not as an improved economic technique, but as a religion.
The tendency of our conventional criticisms is to make two opposed
mistakes. We hate Communism so much, regarded as a religion, that we
exaggerate its economic inefficiency; and we are so much impressed by
its economic inefficiency that we underestimate it as a religion.

On the economic side I cannot perceive that Russian Communism has made
any contribution to our economic problems of intellectual interest or
scientific value. I do not think that it contains, or is likely to
contain, any piece of useful economic technique which we could not
apply, if we chose, with equal or greater success in a society which
retained all the marks, I will not say of nineteenth-century
individualistic capitalism, but of British bourgeois ideals.
Theoretically at least, I do not believe that there is any economic
improvement for which Revolution is a necessary instrument. On the other
hand, we have everything to lose by the methods of violent change. In
Western industrial conditions the tactics of Red Revolution would throw
the whole population into a pit of poverty and death.

But as a religion what are its forces? Perhaps they are considerable.
The exaltation of the common man is a dogma which has caught the
multitude before now. _Any_ religion and the bond which unites
co-religionists have power against the egotistic atomism of the
irreligious.

For modern capitalism is absolutely irreligious, without internal union,
without much public spirit, often, though not always, a mere congeries
of possessors and pursuers. Such a system has to be immensely, not
merely moderately, successful to survive. In the nineteenth century it
was in a certain sense idealistic; at any rate it was a united and
self-confident system. It was not only immensely successful, but held
out hopes of a continuing crescendo of prospective successes. To-day it
is only moderately successful. If irreligious Capitalism is ultimately
to defeat religious Communism, it is not enough that it should be
economically more efficient--it must be many times as efficient.

We used to believe that modern capitalism was capable, not merely of
maintaining the existing standards of life, but of leading us gradually
into an economic paradise where we should be comparatively free from
economic cares. Now we doubt whether the business man is leading us to a
destination far better than our present place. Regarded as a means he is
tolerable; regarded as an end he is not so satisfactory. One begins to
wonder whether the material advantages of keeping business and religion
in different compartments are sufficient to balance the moral
disadvantages. The Protestant and Puritan could separate them
comfortably because the first activity pertained to earth and the second
to heaven, which was elsewhere. The believer in progress could separate
them comfortably because he regarded the first as the means to the
establishment of heaven upon earth hereafter. But there is a third state
of mind, in which we do not fully believe either in a heaven which is
elsewhere or in progress as a sure means towards a heaven upon earth
hereafter; and if heaven is not elsewhere and not hereafter, it must be
here and now or not at all. If there is no moral objective in economic
progress, then it follows that we must not sacrifice, even for a day,
moral to material advantage--in other words, that we may no longer keep
business and religion in separate compartments of the soul. In so far as
a man's thoughts are capable of straying along these paths, he will be
ready to search with curiosity for something at the heart of Communism
quite different from the picture of its outward parts which our Press
paints.

At any rate to me it seems clearer every day that the moral problem of
our age is concerned with the love of money, with the habitual appeal to
the money motive in nine-tenths of the activities of life, with the
universal striving after individual economic security as the prime
object of endeavour, with the social approbation of money as the measure
of constructive success, and with the social appeal to the hoarding
instinct as the foundation of the necessary provision for the family and
for the future. The decaying religions around us, which have less and
less interest for most people unless it be as an agreeable form of
magical ceremonial or of social observance, have lost their moral
significance just because--unlike some of their earlier versions--they
do not touch in the least degree on these essential matters. A
revolution in our ways of thinking and feeling about money may become
the growing purpose of contemporary embodiments of the ideal. Perhaps,
therefore, Russian Communism does represent the first confused stirrings
of a great religion.

The visitor to Russia from the outside, who tries without prejudice to
catch the atmosphere, must alternate, I think, between two
moods--oppression and elation. Sir Martin Conway, in his true and
sincere volume on _Art Treasures in Soviet Russia_, writes thus of his
departure out of the country:

   . . . After a very long halt the train moved on about half a mile
   to the Finnish frontier, where passports, visas, and luggage were
   again examined much less meticulously. The station was new built,
   a pleasant place, simple, clean, and convenient, and served with
   much courtesy. It has a charming refreshment room, where simple
   but nicely cooked food was supplied in an atmosphere of
   hospitality.

   It seems a churlish thing for me to say, after all the kindness
   shown to me in Russia, but if I am to tell the whole truth I must
   here put on record that in this frontier station of Finland I
   experienced a sense as of the removal of a great weight which had
   been oppressing me. I cannot explain just how this weight had
   been felt. I did not experience the imposition of it on entering
   Russia, but as the days passed it seemed slowly to accumulate.
   The sense of freedom gradually disappeared. Though everyone was
   kind one felt the presence of an oppression, not on oneself, but
   all-pervading. Never have I felt so completely a stranger in a
   strange land; with successive days what at first was a dim
   feeling took more definite shape and condensed into an
   ever-increasingly conscious oppression.

   I imagine one might have passed through the same experience in
   the Russia of the Tsars. Americans often praise what they call
   the "air of liberty" which they claim as characteristic of their
   country. They possess it in common with all the English-speaking
   dominions. The moral atmosphere of Russia is a very different
   compound of emotional chemistry.

   The part of Finland through which our train now bore us was not
   different in physical character from the lands across the
   frontier, but we found ourselves passing "nice little
   properties" and the signs of comfort and even prosperity. . . .

The mood of oppression could not be better conveyed. In part, no doubt,
it is the fruit of Red Revolution--there is much in Russia to make one
pray that one's own country may achieve its goal not in that way. In
part, perhaps, it is the fruit of some beastliness in the Russian
nature--or in the Russian and Jewish natures when, as now, they are
allied together. But in part it is one face of the superb earnestness of
Red Russia, of the high seriousness, which in its other aspect appears
as the Spirit of Elation. There never was any one so _serious_ as the
Russian of the Revolution, serious even in his gaiety and abandon of
spirit--so serious that sometimes he can forget to-morrow and sometimes
he can forget to-day. Often this seriousness is crude and stupid and
boring in the extreme. The average Communist is _discoloured_ just as
the Methodists of every age have been. The tenseness of the atmosphere
is more than one is used to support, and a longing comes for the
frivolous ease of London.

Yet the elation, when that is felt, is very great. Here--one feels at
moments--in spite of poverty, stupidity, and oppression, is the
Laboratory of Life. Here the chemicals are being mixed in new
combinations, and stink and explode. Something--there is just a
chance--might come out. And even a chance gives to what is happening in
Russia more importance than what is happening (let us say) in the United
States of America.

I think that it is partly reasonable to be afraid of Russia, like the
gentlemen who write to _The Times_. But if Russia is going to be a force
in the outside world, it will not be the result of Mr. Zinovieff's
money. Russia will never matter seriously to the rest of us, unless it
be as a moral force. So, now the deeds are done and there is no going
back, I should like to give Russia her chance; to help and not to
hinder. For how much rather, even after allowing for everything, if I
were a Russian, would I contribute my quota of activity to Soviet Russia
than to Tsarist Russia! I could not subscribe to the new official faith
any more than to the old. I should detest the actions of the new tyrants
not less than those of the old. But I should feel that my eyes were
turned towards, and no longer away from, the possibilities of things;
that out of the cruelty and stupidity of Old Russia nothing could ever
emerge, but that beneath the cruelty and stupidity of New Russia some
speck of the ideal may lie hid.




  2. The End of Laissez-faire (1926)


Let us clear from the ground the metaphysical or general principles upon
which, from time to time, _laissez-faire_ has been founded. It is _not_
true that individuals possess a prescriptive "natural liberty" in their
economic activities. There is _no_ "compact" conferring perpetual
rights on those who Have or on those who Acquire. The world is _not_ so
governed from above that private and social interest always coincide. It
is _not_ so managed here below that in practice they coincide. It is
_not_ a correct deduction from the Principles of Economics that
enlightened self-interest always operates in the public interest. Nor is
it true that self-interest generally _is_ enlightened; more often
individuals acting separately to promote their own ends are too ignorant
or too weak to attain even these. Experience does _not_ show that
individuals, when they make up a social unit, are always less
clear-sighted than when they act separately.

We cannot, therefore, settle on abstract grounds, but must handle on its
merits in detail, what Burke termed "one of the finest problems in
legislation, namely, to determine what the State ought to take upon
itself to direct by the public wisdom, and what it ought to leave, with
as little interference as possible, to individual exertion." We have to
discriminate between what Bentham, in his forgotten but useful
nomenclature, used to term _Agenda_ and _Non-Agenda_, and to do this
without Bentham's prior presumption that interference is, at the same
time, "generally needless" and "generally pernicious."[31] Perhaps the
chief task of Economists at this hour is to distinguish afresh the
_Agenda_ of Government from the _Non-Agenda_; and the companion task of
Politics is to devise forms of Government within a Democracy which
shall be capable of accomplishing the _Agenda_. I will illustrate what I
have in mind by two examples.

[Footnote 31: Bentham's _Manual of Political Economy_, published
posthumously, in Bowring's edition (1843).]

(1) I believe that in many cases the ideal size for the unit of control
and organisation lies somewhere between the individual and the modern
State. I suggest, therefore, that progress lies in the growth and the
recognition of semi-autonomous bodies within the State--bodies whose
criterion of action within their own field is solely the public good as
they understand it, and from whose deliberations motives of private
advantage are excluded, though some place it may still be necessary to
leave, until the ambit of men's altruism grows wider, to the separate
advantage of particular groups, classes, or faculties--bodies which in
the ordinary course of affairs are mainly autonomous within their
prescribed limitations, but are subject in the last resort to the
sovereignty of the democracy expressed through Parliament.

I propose a return, it may be said, towards mediaeval conceptions of
separate autonomies. But, in England at any rate, corporations are a
mode of government which has never ceased to be important and is
sympathetic to our institutions. It is easy to give examples, from what
already exists, of separate autonomies which have attained or are
approaching the mode I designate--the Universities, the Bank of
England, the Port of London Authority, even perhaps the Railway
Companies.

But more interesting than these is the trend of Joint Stock
Institutions, when they have reached a certain age and size, to
approximate to the status of public corporations rather than that of
individualistic private enterprise. One of the most interesting and
unnoticed developments of recent decades has been the tendency of big
enterprise to socialise itself. A point arrives in the growth of a big
institution--particularly a big railway or big public utility
enterprise, but also a big bank or a big insurance company--at which the
owners of the capital, _i.e._ the shareholders, are almost entirely
dissociated from the management, with the result that the direct
personal interest of the latter in the making of great profit becomes
quite secondary. When this stage is reached, the general stability and
reputation of the institution are more considered by the management than
the maximum of profit for the shareholders. The shareholders must be
satisfied by conventionally adequate dividends; but once this is
secured, the direct interest of the management often consists in
avoiding criticism from the public and from the customers of the
concern. This is particularly the case if their great size or
semi-monopolistic position renders them conspicuous in the public eye
and vulnerable to public attack. The extreme instance, perhaps, of this
tendency in the case of an institution, theoretically the unrestricted
property of private persons, is the Bank of England. It is almost true
to say that there is no class of persons in the Kingdom of whom the
Governor of the Bank of England thinks less when he decides on his
policy than of his shareholders. Their rights, in excess of their
conventional dividend, have already sunk to the neighbourhood of zero.
But the same thing is partly true of many other big institutions. They
are, as time goes on, socialising themselves.

Not that this is unmixed gain. The same causes promote conservatism and
a waning of enterprise. In fact, we already have in these cases many of
the faults as well as the advantages of State Socialism. Nevertheless we
see here, I think, a natural line of evolution. The battle of Socialism
against unlimited private profit is being won in detail hour by hour. In
these particular fields--it remains acute elsewhere--this is no longer
the pressing problem. There is, for instance, no so-called important
political question so really unimportant, so irrelevant to the
reorganisation of the economic life of Great Britain, as the
Nationalisation of the Railways.

It is true that many big undertakings, particularly Public Utility
enterprises and other business requiring a large fixed capital, still
need to be semi-socialised. But we must keep our minds flexible
regarding the forms of this semi-socialism. We must take full advantage
of the natural tendencies of the day, and we must probably prefer
semi-autonomous corporations to organs of the Central Government for
which Ministers of State are directly responsible.

I criticise doctrinaire State Socialism, not because it seeks to engage
men's altruistic impulses in the service of Society, or because it
departs from _laissez-faire_, or because it takes away from man's
natural liberty to make a million, or because it has courage for bold
experiments. All these things I applaud. I criticise it because it
misses the significance of what is actually happening; because it is, in
fact, little better than a dusty survival of a plan to meet the problems
of fifty years ago, based on a misunderstanding of what some one said a
hundred years ago. Nineteenth-century State Socialism sprang from
Bentham, free competition, etc., and is in some respects a clearer, in
some respects a more muddled, version of just the same philosophy as
underlies nineteenth-century individualism. Both equally laid all their
stress on freedom, the one negatively to avoid limitations on existing
freedom, the other positively to destroy natural or acquired monopolies.
They are different reactions to the same intellectual atmosphere.

(2) I come next to a criterion of _Agenda_ which is particularly
relevant to what it is urgent and desirable to do in the near future. We
must aim at separating those services which are _technically social_
from those which are _technically individual_. The most important
_Agenda_ of the State relate not to those activities which private
individuals are already fulfilling, but to those functions which fall
outside the sphere of the individual, to those decisions which are made
by _no one_ if the State does not make them. The important thing for
Government is not to do things which individuals are doing already, and
to do them a little better or a little worse; but to do those things
which at present are not done at all.

It is not within the scope of my purpose on this occasion to develop
practical policies. I limit myself, therefore, to naming some instances
of what I mean from amongst those problems about which I happen to have
thought most.

Many of the greatest economic evils of our time are the fruits of risk,
uncertainty, and ignorance. It is because particular individuals,
fortunate in situation or in abilities, are able to take advantage of
uncertainty and ignorance, and also because for the same reason big
business is often a lottery, that great inequalities of wealth come
about; and these same factors are also the cause of the Unemployment of
Labour, or the disappointment of reasonable business expectations, and
of the impairment of efficiency and production. Yet the cure lies
outside the operations of individuals; it may even be to the interest of
individuals to aggravate the disease. I believe that the cure for these
things is partly to be sought in the deliberate control of the currency
and of credit by a central institution, and partly in the collection and
dissemination on a great scale of data relating to the business
situation, including the full publicity, by law if necessary, of all
business facts which it is useful to know. These measures would involve
Society in exercising directive intelligence through some appropriate
organ of action over many of the inner intricacies of private business,
yet it would leave private initiative and enterprise unhindered. Even if
these measures prove insufficient, nevertheless they will furnish us
with better knowledge than we have now for taking the next step.

My second example relates to Savings and Investment. I believe that some
co-ordinated act of intelligent judgement is required as to the scale on
which it is desirable that the community as a whole should save, the
scale on which these savings should go abroad in the form of foreign
investments, and whether the present organisation of the investment
market distributes savings along the most nationally productive
channels. I do not think that these matters should be left entirely to
the chances of private judgement and private profits, as they are at
present.

My third example concerns Population. The time has already come when
each country needs a considered national policy about what size of
Population, whether larger or smaller than at present or the same, is
most expedient. And having settled this policy, we must take steps to
carry it into operation. The time may arrive a little later when the
community as a whole must pay attention to the innate quality as well
as to the mere numbers of its future members.

       *     *     *     *     *

These reflections have been directed towards possible improvements in
the technique of modern Capitalism by the agency of collective action.
There is nothing in them which is seriously incompatible with what seems
to me to be the essential characteristic of Capitalism, namely the
dependence upon an intense appeal to the money-making and money-loving
instincts of individuals as the main motive force of the economic
machine. Nor must I, so near to my end, stray towards other fields.
Nevertheless, I may do well to remind you, in conclusion, that the
fiercest contests and the most deeply felt divisions of opinion are
likely to be waged in the coming years not round technical questions,
where the arguments on either side are mainly economic, but round those
which, for want of better words, may be called psychological or,
perhaps, moral.

In Europe, or at least in some parts of Europe--but not, I think, in the
United States of America--there is a latent reaction, somewhat
widespread, against basing Society to the extent that we do upon
fostering, encouraging, and protecting the money-motives of individuals.
A preference for arranging our affairs in such a way as to appeal to the
money-motive as little as possible, rather than as much as possible,
need not be entirely _a priori_, but may be based on the comparison of
experiences. Different persons, according to their choice of
profession, find the money-motive playing a large or a small part in
their daily lives, and historians can tell us about other phases of
social organisation in which this motive has played a much smaller part
than it does now. Most religions and most philosophies deprecate, to say
the least of it, a way of life mainly influenced by considerations of
personal money profit. On the other hand, most men to-day reject ascetic
notions and do not doubt the real advantages of wealth. Moreover it
seems obvious to them that one cannot do without the money-motive, and
that, apart from certain admitted abuses, it does its job well. In the
result the average man averts his attention from the problem, and has no
clear idea what he really thinks and feels about the whole confounded
matter.

Confusion of thought and feeling leads to confusion of speech. Many
people, who are really objecting to Capitalism as a way of life, argue
as though they were objecting to it on the ground of its inefficiency in
attaining its own objects. Contrariwise, devotees of Capitalism are
often unduly conservative, and reject reforms in its technique, which
might really strengthen and preserve it, for fear that they may prove to
be first steps away from Capitalism itself. Nevertheless a time may be
coming when we shall get clearer than at present as to when we are
talking about Capitalism as an efficient or inefficient technique, and
when we are talking about it as desirable or objectionable in itself.
For my part, I think that Capitalism, wisely managed, can probably be
made more efficient for attaining economic ends than any alternative
system yet in sight, but that in itself it is in many ways extremely
objectionable. Our problem is to work out a social organisation which
shall be as efficient as possible without offending our notions of a
satisfactory way of life.

The next step forward must come, not from political agitation or
premature experiments, but from thought. We need by an effort of the
mind to elucidate our own feelings. At present our sympathy and our
judgement are liable to be on different sides, which is a painful and
paralysing state of mind. In the field of action reformers will not be
successful until they can steadily pursue a clear and definite object
with their intellects and their feelings in tune. There is no party in
the world at present which appears to me to be pursuing right aims by
right methods. Material Poverty provides the incentive to change
precisely in situations where there is very little margin for
experiments. Material Prosperity removes the incentive just when it
might be safe to take a chance. Europe lacks the means, America the
will, to make a move. We need a new set of convictions which spring
naturally from a candid examination of our own inner feelings in
relation to the outside facts.




  3. Am I a Liberal? (1925)[32]

[Footnote 32: An address to the Liberal Summer School at Cambridge.]

  I


If one is born a political animal, it is most uncomfortable not to
belong to a party; cold and lonely and futile it is. If your party is
strong, and its programme and its philosophy sympathetic, satisfying the
gregarious, practical, and intellectual instincts all at the same time,
how very agreeable that must be!--worth a large subscription and all
one's spare time;--that is, if you are a political animal.

So the political animal who cannot bring himself to utter the
contemptible words, "I am no party man," would almost rather belong to
any party than to none. If he cannot find a home by the principle of
attraction, he must find one by the principle of repulsion and go to
those whom he dislikes least, rather than stay out in the cold.

Now take my own case--where am I landed on this negative test? How could
I bring myself to be a Conservative? They offer me neither food nor
drink--neither intellectual nor spiritual consolation. I should not be
amused or excited or edified. That which is common to the atmosphere,
the mentality, the view of life of--well, I will not mention
names--promotes neither my self-interest nor the public good. It leads
nowhere; it satisfies no ideal; it conforms to no intellectual standard;
it is not even safe, or calculated to preserve from spoilers that degree
of civilisation which we have already attained.

Ought I, then, to join the Labour Party? Superficially that is more
attractive. But looked at closer, there are great difficulties. To
begin with, it is a class party, and the class is not my class. If I am
going to pursue sectional interests at all, I shall pursue my own. When
it comes to the class struggle as such, my local and personal
patriotisms, like those of every one else, except certain unpleasant
zealous ones, are attached to my own surroundings. I can be influenced
by what seems to me to be Justice and good sense; but the _Class_ war
will find me on the side of the educated _bourgeoisie_.

But, above all, I do not believe that the intellectual elements in the
Labour Party will ever exercise adequate control; too much will always
be decided by those who do not know _at all_ what they are talking
about; and if--which is not unlikely--the control of the party is seized
by an autocratic inner ring, this control will be exercised in the
interests of the extreme Left Wing--the section of the Labour Party
which I shall designate the Party of Catastrophe.

On the negative test, I incline to believe that the Liberal Party is
still the best instrument of future progress--if only it had strong
leadership and the right programme.

But when we come to consider the problem of party positively--by
reference to what attracts rather than to what repels--the aspect is
dismal in every party alike, whether we put our hopes in measures or in
men. And the reason is the same in each case. The historic party
questions of the nineteenth century are as dead as last week's mutton;
and whilst the questions of the future are looming up, they have not
yet become party questions, and they cut across the old party lines.

Civil and Religious Liberty, the Franchise, the Irish Question, Dominion
Self-Government, the Power of the House of Lords, steeply graduated
Taxation of Incomes and of Fortunes, the lavish use of the Public
Revenues for "Social Reform," that is to say, Social Insurance for
Sickness, Unemployment and Old Age, Education, Housing and Public
Health--all these causes for which the Liberal Party fought are
successfully achieved or are obsolete or are the common ground of all
parties alike. What remains? Some will say--the Land Question. Not
I--for I believe that this question, in its traditional form, has now
become, by reason of a silent change in the facts, of very slight
political importance. I see only two planks of the historic Liberal
platform still seaworthy--the Drink Question and Free Trade. And of
these two Free Trade survives, as a great and living political issue, by
an accident. There were always two arguments for Free Trade--the
_laissez-faire_ argument which appealed and still appeals to the Liberal
individualists, and the economic argument based on the benefits which
flow from each country's employing its resources where it has a
comparative advantage. I no longer believe in the political philosophy
which the Doctrine of Free Trade adorned. I believe in Free Trade
because, in the long run and in general, it is the only policy which is
technically sound and intellectually tight.

But take it at the best, can the Liberal Party sustain itself on the
Land Question, the Drink Question, and Free Trade alone, even if it were
to reach a united and clear-cut programme on the two former? The
_positive_ argument for being a Liberal is, at present, very weak. How
do the other parties survive the positive test?

The Conservative Party will always have its place as a Die-Hard Home.
But constructively, it is in just as bad case as the Liberal Party. It
is often no more than an accident of temperament or of past
associations, and not a real difference of policy or of ideals, which
now separates the progressive young Conservative from the average
Liberal. The old battle-cries are muffled or silent. The Church, the
Aristocracy, the Landed Interests, the Rights of Property, the Glories
of Empire, the Pride of the Services, even Beer and Whisky, will never
again be the guiding forces of British politics.

The Conservative Party ought to be concerning itself with evolving a
version of Individualistic Capitalism adapted to the progressive change
of circumstances. The difficulty is that the Capitalist leaders in the
City and in Parliament are incapable of distinguishing novel measures
for safeguarding Capitalism from what they call Bolshevism. If
old-fashioned Capitalism was intellectually capable of defending itself,
it would not be dislodged for many generations. But, fortunately for
Socialists, there is little chance of this.

I believe that the seeds of the intellectual decay of Individualistic
Capitalism are to be found in an institution which is not in the least
characteristic of itself, but which it took over from the social system
of Feudalism which preceded it,--namely, the hereditary principle. The
hereditary principle in the transmission of wealth and the control of
business is the reason why the leadership of the Capitalist Cause is
weak and stupid. It is too much dominated by third-generation men.
Nothing will cause a social institution to decay with more certainty
than its attachment to the hereditary principle. It is an illustration
of this that by far the oldest of our institutions, the Church, is the
one which has always kept itself free from the hereditary taint.

Just as the Conservative Party will always have its Die-Hard wing, so
the Labour Party will always be flanked by the Party of
Catastrophe--Jacobins, Communists, Bolshevists, whatever you choose to
call them. This is the party which hates or despises existing
institutions and believes that great good will result merely from
overthrowing them--or at least that to overthrow them is the necessary
preliminary to any great good. This party can only flourish in an
atmosphere of social oppression or as a reaction against the Rule of
Die-Hard. In Great Britain it is, in its extreme form, numerically very
weak. Nevertheless its philosophy in a diluted form permeates, in my
opinion, the whole Labour Party. However moderate its leaders may be at
heart, the Labour Party will always depend for electoral success on
making some slight appeal to the widespread passions and jealousies
which find their full development in the Party of Catastrophe. I believe
that this secret sympathy with the Policy of Catastrophe is the worm
which gnaws at the seaworthiness of any constructive vessel which the
Labour Party may launch. The passions of malignity, jealousy, hatred of
those who have wealth and power (even in their own body) ill consort
with ideals to build up a true Social Republic. Yet it is necessary for
a successful Labour leader to be, or at least to appear, a little
savage. It is not enough that he should love his fellow-men; he must
hate them too.

What then do I want Liberalism to be? On the one side, Conservatism is a
well-defined entity--with a Right of Die-Hards, to give it strength and
passion, and a Left of what one may call "the best type" of educated,
humane, Conservative Free-Traders, to lend it moral and intellectual
respectability. On the other side, Labour is also well-defined--with a
Left of Catastrophists, to give it strength and passion, and a Right of
what one may call "the best type" of educated, humane, Socialistic
Reformers, to lend it moral and intellectual respectability. Is there
room for anything between? Should not each of us here decide whether we
consider ourselves to be "the best type" of Conservative Free-Traders or
"the best type" of Socialistic Reformers, and have done with it?

Perhaps that is how we shall end. But I still think that there is room
for a party which shall be disinterested as between classes, and which
shall be free in building the future both from the influences of
Die-Hardism and from those of Catastrophism, which will spoil the
constructions of each of the others. Let me sketch out in the briefest
terms what I conceive to be the Philosophy and Practice of such a party.

To begin with, it must emancipate itself from the dead-wood of the past.
In my opinion there is now no place, except in the Left Wing of the
Conservative Party, for those whose hearts are set on old-fashioned
individualism and _laissez-faire_ in all their rigour--greatly though
these contributed to the success of the nineteenth century. I say this,
not because I think that these doctrines were wrong in the conditions
which gave birth to them (I hope that I should have belonged to this
party if I had been born a hundred years earlier), but because they have
ceased to be applicable to modern conditions. Our programme must deal
not with the historic issues of Liberalism, but with those
matters--whether or not they have already become party questions--which
are of living interest and urgent importance to-day. We must take risks
of unpopularity and derision. _Then_ our meetings will draw crowds and
our body be infused with strength.


  II

I divide the questions of to-day into five headings:--

  1. Peace Questions.
  2. Questions of Government.
  3. Sex Questions.
  4. Drug Questions.
  5. Economic Questions.

On Peace Questions let us be Pacifist to the utmost. As regards the
Empire, I do not think that there is any important problem except in
India. Elsewhere, so far as problems of government are concerned, the
process of friendly disintegration is now almost complete--to the great
benefit of all. But as regards Pacifism and Armaments we are only just
at the beginning. I should like to take risks in the interests of Peace,
just as in the past we have taken risks in the interests of War. But I
do not want these risks to assume the form of an undertaking to make war
in various hypothetical circumstances. I am against Pacts. To pledge the
whole of our armed forces to defend disarmed Germany against an attack
by France in the plenitude of the latter's military power is foolish;
and to assume that we shall take part in every future war in Western
Europe is unnecessary. But I am in favour of giving a very good example,
even at the risk of being weak, in the direction of Arbitration and of
Disarmament.

I turn next to questions of Government--a dull but important matter. I
believe that in the future the Government will have to take on many
duties which it has avoided in the past. For these purposes Ministers
and Parliament will be unserviceable. Our task must be to decentralise
and devolve wherever we can, and in particular to establish
semi-independent corporations and organs of administration to which
duties of government, new and old, will be entrusted;--without, however,
impairing the democratic principle or the ultimate sovereignty of
Parliament. These questions will be as important and difficult in the
future as the Franchise and the relations of the two Houses have been in
the past.

The questions which I group together as Sex Questions have not been
party questions in the past. But that was because they were never, or
seldom, the subject of public discussion. All this is changed now. There
are no subjects about which the big general public is more interested;
few which are the subject of wider discussion. They are of the utmost
social importance; they cannot help but provoke real and sincere
differences of opinion. Some of them are deeply involved in the solution
of certain economic questions. I cannot doubt that Sex Questions are
about to enter the political arena. The very crude beginnings
represented by the Suffrage Movement were only symptoms of deeper and
more important issues below the surface.

Birth Control and the use of Contraceptives, Marriage Laws, the
treatment of sexual offences and abnormalities, the economic position of
women, the economic position of the family,--in all these matters the
existing state of the Law and of orthodoxy is still
mediaeval--altogether out of touch with civilised opinion and civilised
practice and with what individuals, educated and uneducated alike, say
to one another in private. Let no one deceive himself with the idea that
the change of opinion on these matters is one which only affects a small
educated class on the crust of the human boiling. Let no one suppose
that it is the working women who are going to be shocked by ideas of
Birth Control or of Divorce Reform. For them these things suggest new
liberty, emancipation from the most intolerable of tyrannies. A party
which would discuss these things openly and wisely at its meetings would
discover a new and living interest in the electorate--because politics
would be dealing once more with matters about which every one wants to
know and which deeply affect every one's own life.

These questions also interlock with economic issues which cannot be
evaded. Birth Control touches on one side the liberties of women, and on
the other side the duty of the State to concern itself with the size of
the population just as much as with the size of the army or the amount
of the Budget. The position of wage-earning women and the project of the
Family Wage affect not only the status of women, the first in the
performance of paid work, and the second in the performance of unpaid
work, but also raise the whole question whether wages should be fixed by
the forces of supply and demand in accordance with the orthodox theories
of _laissez-faire_, or whether we should begin to limit the freedom of
those forces by reference to what is "fair" and "reasonable" having
regard to all the circumstances.

Drug Questions in this country are practically limited to the Drink
Question; though I should like to include gambling under this head. I
expect that the Prohibition of alcoholic Spirits and of Bookmakers would
do good. But this would not settle the matter. How far is bored and
suffering humanity to be allowed, from time to time, an escape, an
excitement, a stimulus, a possibility of change?--that is the important
problem. Is it possible to allow reasonable licence, permitted
Saturnalia, sanctified Carnival, in conditions which need ruin neither
the health nor the pockets of the roysterers, and will shelter from
irresistible temptation the unhappy class who, in America, are called
addicts?

I must not stay for an answer, but must hasten to the largest of all
political questions, which are also those on which I am most qualified
to speak--the economic questions.

An eminent American economist, Professor Commons, who has been one of
the first to recognise the nature of the economic transition amidst the
early stages of which we are now living, distinguishes three epochs,
three economic orders, upon the third of which we are entering.

The first is the Era of Scarcity, "whether due to inefficiency or to
violence, war, custom, or superstition." In such a period "there is the
minimum of individual liberty and the maximum of communistic,
feudalistic or governmental control through physical coercion." This
was, with brief intervals in exceptional cases, the normal economic
state of the world up to (say) the fifteenth or sixteenth century.

Next comes the Era of Abundance. "In a period of extreme abundance there
is the maximum of individual liberty, the minimum of coercive control
through government, and individual bargaining takes the place of
rationing." During the seventeenth and eighteenth centuries we fought
our way out of the bondage of Scarcity into the free air of Abundance,
and in the nineteenth century this epoch culminated gloriously in the
victories of _laissez-faire_ and historic Liberalism. It is not
surprising or discreditable that the veterans of the party cast backward
glances on that easier age.

But we are now entering on a third era, which Professor Commons calls
the period of Stabilisation, and truly characterises as "the actual
alternative to Marx's communism." In this period, he says, "there is a
diminution of individual liberty, enforced in part by governmental
sanctions, but mainly by economic sanctions through concerted action,
whether secret, semi-open, open, or arbitrational, of associations,
corporations, unions, and other collective movements of manufacturers,
merchants, labourers, farmers, and bankers."

The abuses of this epoch in the realms of Government are Fascism on the
one side and Bolshevism on the other. Socialism offers no middle course,
because it also is sprung from the presuppositions of the Era of
Abundance, just as much as _laissez-faire_ individualism and the free
play of economic forces, before which latter, almost alone amongst men,
the City Editors, all bloody and blindfolded, still piteously bow down.

The transition from economic anarchy to a rgime which deliberately aims
at controlling and directing economic forces in the interests of social
justice and social stability, will present enormous difficulties both
technical and political. I suggest, nevertheless, that the true destiny
of New Liberalism is to seek their solution.

It happens that we have before us, to-day, in the position of the Coal
Industry, an object-lesson of the results of the confusion of ideas
which now prevails. On the one side the Treasury and the Bank of England
are pursuing an orthodox nineteenth-century policy based on the
assumption that economic adjustments can and ought to be brought about
by the free play of the forces of supply and demand. The Treasury and
the Bank of England still believe--or, at any rate, did until a week or
two ago--that the things, which would follow on the assumption of free
competition and the mobility of capital and labour, actually occur in
the economic life of to-day.

On the other side, not only the facts, but public opinion also, have
moved a long distance away in the direction of Professor Commons's epoch
of Stabilisation. The Trade Unions are strong enough to interfere with
the free play of the forces of supply and demand, and Public Opinion,
albeit with a grumble and with more than a suspicion that the Trade
Unions are growing dangerous, supports the Trade Unions in their main
contention that Coalminers ought not to be the victims of cruel economic
forces which _they_ never set in motion.

The idea of the old-world party, that you can, for example, alter the
value of money and then leave the consequential adjustments to be
brought about by the forces of supply and demand, belongs to the days of
fifty or a hundred years ago when Trade Unions were powerless, and when
the economic Juggernaut was allowed to crash along the highway of
Progress without obstruction and even with applause.

Half the copybook wisdom of our statesmen is based on assumptions which
were at one time true, or partly true, but are now less and less true
day by day. We have to invent new wisdom for a new age. And in the
meantime we must, if we are to do any good, appear unorthodox,
troublesome, dangerous, disobedient to them that begat us.

In the economic field this means, first of all, that we must find new
policies and new instruments to adapt and control the working of
economic forces, so that they do not intolerably interfere with
contemporary ideas as to what is fit and proper in the interests of
social stability and social justice.

It is not an accident that the opening stage of this political struggle,
which will last long and take many different forms, should centre about
monetary policy. For the most violent interferences with stability and
with justice, to which the nineteenth century submitted in due
satisfaction of the philosophy of Abundance, were precisely those which
were brought about by changes in the price level. But the consequences
of these changes, particularly when the Authorities endeavour to impose
them on us in a stronger dose than even the nineteenth century ever
swallowed, are intolerable to modern ideas and to modern institutions.

We have changed, by insensible degrees, our philosophy of economic life,
our notions of what is reasonable and what is tolerable; and we have
done this without changing our technique or our copybook maxims. Hence
our tears and troubles.

A party programme must be developed in its details, day by day, under
the pressure and the stimulus of actual events; it is useless to define
it beforehand, except in the most general terms. But if the Liberal
Party is to recover its forces, it must have an attitude, a philosophy,
a direction. I have endeavoured to indicate my own attitude to
politics, and I leave it to others to answer, in the light of what I
have said, the question with which I began--Am I a Liberal?




  4. Liberalism and Labour (1926)[33]

[Footnote 33: The substance of a speech delivered at the Manchester
Reform Club, February 9, 1926.]


I do not wish to live under a Conservative Government for the next
twenty years. I believe that the progressive forces of the country are
hopelessly divided between the Liberal Party and the Labour Party. I do
not believe that the Liberal Party will win _one-third_ of the seats in
the House of Commons in any probable or foreseeable circumstances.
Unless in course of time the mistakes of the Conservative Government
produce an economic catastrophe--which is not impossible--I do not
believe that the Labour Party will win _one-half_ of the seats in the
House of Commons. Yet it is not desirable that the Labour Party should
depend for their chances of office on the occurrence of a national
misfortune; for this will only strengthen the influence of the party of
catastrophe which is already an important element in their ranks. As
things are now, we have nothing to look forward to except a continuance
of Conservative Governments, not merely until they have made mistakes in
the tolerable degree which would have caused a swing of the pendulum in
former days, but until their mistakes have mounted up to the height of a
disaster. I do not like this choice of alternatives.

That is the practical political problem which confronts all those, in
whichever party they are ranged, who want to see progressive principles
put into effect, and believe that too long a delay in doing so may find
the country confronted with extreme alternatives.

The conventional retort by Labour orators is to call upon Liberals to
close down their own Party and to come over. Now it is evident that the
virtual extinction of the Liberal Party is a practical possibility to be
reckoned with. A time may come when any one in active politics will have
only two choices before him and not three. But I believe that it would
be bad politics and bad behaviour to promote this end; and that it is
good politics and good behaviour to resist it.

Good politics to resist it, because the progressive cause in the
constituencies would be weakened, and not strengthened, by the
disappearance of the Liberal Party. There are many sections of the
country, and many classes of voters, which for many years to come will
never vote Labour in numbers, or with enthusiasm, sufficient for
victory; but which will readily vote Liberal as soon as the weather
changes. Labour leaders who deny this are not looking at the facts of
politics with unclouded eyes.

Good behaviour to resist it, because most present-day active Liberals,
whilst ready on occasion to vote Labour and to act with Labour, would
not feel comfortable, or sincere, or in place, as full members of the
Labour Party. Take my own case. I am sure that I am less conservative in
my inclinations than the average Labour voter; I fancy that I have
played in my mind with the possibilities of greater social changes than
come within the present philosophies of, let us say, Mr. Sidney Webb,
Mr. Thomas, or Mr. Wheatley. The Republic of my imagination lies on the
extreme left of celestial space. Yet--all the same--I feel that my true
home, so long as they offer a roof and a floor, is still with the
Liberals.

Why, though fallen upon such evil days, does the tradition of Liberalism
hold so much attraction? The Labour Party contains three elements. There
are the _Trade-Unionists_, once the oppressed, now the tyrants, whose
selfish and sectional pretensions need to be bravely opposed. There are
the advocates of the methods of violence and sudden change, by an abuse
of language called _Communists_, who are committed by their creed to
produce evil that good may come, and, since they dare not concoct
disaster openly, are forced to play with plot and subterfuge. There are
the _Socialists_, who believe that the economic foundations of modern
society are evil, yet might be good.

The company and conversation of this third element, whom I have called
Socialists, many Liberals to-day would not find uncongenial. But we
cannot march with them until we know along what path, and towards what
goal, they mean to move. I do not believe that their historic creed of
State Socialism, and its newer gloss of Guild Socialism, now interest
them much more than they interest us. These doctrines no longer inspire
any one. Constructive thinkers in the Labour Party, and constructive
thinkers in the Liberal Party, are trying to replace them with something
better and more serviceable. The notions on both sides are a bit foggy
as yet, but there is much sympathy between them, and a similar tendency
of ideas. I believe that the two sections will become more and more
friends and colleagues in construction as time goes on. But the
progressive Liberal has this great advantage. He can work out his
policies without having to do lip-service to Trade-Unionist tyrannies,
to the beauties of the class war, or to doctrinaire State Socialism--in
none of which he believes.

In the realm of practical politics, two things must happen--both of
which are likely. There must be one more General Election to disillusion
Labour optimists as to the measure of their political strength, standing
by themselves. But equally on our side there must be a certain change.
The Liberal Party is divided between those who, if the choice be forced
upon them, would vote Conservative, and those who, in the same
circumstances, would vote Labour. Historically, and on grounds of past
service, each section has an equal claim to call itself Liberal.
Nevertheless, I think that it would be for the health of the party if
all those who believe, with Mr. Winston Churchill and Sir Alfred Mond,
that the coming political struggle is best described as Capitalism
_versus_ Socialism, and, thinking in these terms, mean to die in the
last ditch for Capitalism, were to leave us. The brains and character of
the Conservative Party have always been recruited from Liberals, and we
must not grudge them the excellent material with which, in accordance
with our historic mission, we are now preserving them from intellectual
starvation. It is much better that the Conservative Party should be run
by honest and intelligent ex-Liberals, who have grown too old and tough
for us, than by Die-Hards. Possibly the Liberal Party cannot serve the
State in any better way than by supplying Conservative Governments with
Cabinets, and Labour Governments with ideas.

At any rate, I sympathise with Labour in rejecting the idea of
co-operation with a party which included, until the other day, Mr.
Churchill and Sir Alfred Mond, and still contains several of the same
kidney. But this difficulty is rapidly solving itself. When it is
solved, the relations between Liberalism and Labour, at Westminster and
in the constituencies, will, without any compacts, bargains, or
formalities, become much more nearly what some of us would like them to
be.

It is right and proper that the Conservative Party should be recruited
from the Liberals of the previous generation. But there is no place in
the world for a Liberal Party which is merely the home of out-of-date or
watery Labour men. The Liberal Party should be not less progressive than
Labour, not less open to new ideas, not behindhand in constructing the
new world. I do not believe that Liberalism will ever again be a great
party machine in the way in which Conservatism and Labour are great
party machines. But it may play, nevertheless, the predominant part in
moulding the future. Great changes will not be carried out except with
the active aid of Labour. But they will not be sound or enduring unless
they have first satisfied the criticism and precaution of Liberals. A
certain coolness of temper, such as Lord Oxford has, seems to me at the
same time peculiarly _Liberal_ in flavour, and also a much bolder and
more desirable and more valuable political possession and endowment than
sentimental ardours.

The political problem of mankind is to combine three things: Economic
Efficiency, Social Justice, and Individual Liberty. The first needs
criticism, precaution, and technical knowledge; the second, an unselfish
and enthusiastic spirit which loves the ordinary man; the third,
tolerance, breadth, appreciation of the excellencies of variety and
independence, which prefers, above everything, to give unhindered
opportunity to the exceptional and to the aspiring. The second
ingredient is the best possession of the great party of the Proletariat.
But the first and third require the qualities of the party which, by its
traditions and ancient sympathies, has been the home of Economic
Individualism and Social Liberty.




  V

  THE FUTURE




  THE FUTURE

  1. Clissold (1927)

Mr. Wells and his publisher having adopted an ingenious device by which
his newest book[34] has been reviewed three times over, perhaps it is
too much to write about it again at this late date. But, having read the
reviews first and the book afterwards, I am left seriously
discontented with what the professional critics have had to say. It is a
weakness of modern critics not to distinguish--not to distinguish
between one thing and another. Even Mr. Wells's choice of form has
confused his reviewers. They fail to see what he is after. They reject
the good beef which he has offered the British public, because mutton
should never be underdone. Or their delicacies are sharpened against his
abundance and omnivorous vitality, the broadness and coarseness of the
brush with which he sweeps the great canvas which is to catch the
attention of hundreds of thousands of readers and sway their minds
onward.

[Footnote 34: _The World of William Clissold._ 3 vols.]

Mr. Wells here presents, not precisely his own mind as it has developed
on the basis of his personal experience and way of life, but--shifting
his angle--a point of view based on an experience mainly different from
his own, that of a successful, emancipated, semi-scientific, not
particularly high-brow, English business man. The result is not
primarily a work of art. Ideas, not forms, are its substance. It is a
piece of educational writing--propaganda, if you like, an attempt to
convey to the very big public attitudes of mind already partly familiar
to the very small public.

The book is an _omnium gatherum_. I will select two emergent themes of
a quasi-economic character. Apart from these, the main topic is women
and some of their possible relationships in the modern world to
themselves and to men of the Clissold type. This is treated with great
candour, sympathy, and observation. It leaves, and is meant to leave, a
bitter taste.

The first of these themes is a violent protest against Conservatism, an
insistent emphasis on the necessity and rapidity of change, the folly of
looking backwards, the danger of inadaptability. Mr. Wells produces a
curious sensation, nearly similar to that of some of his earlier
romances, by contemplating vast stretches of time backwards and forwards
which give an impression of slowness (no need to hurry in eternity), yet
accelerating the Time Machine as he reaches present day, so that _now_
we travel at an enormous pace and no longer have millions of years to
turn round in. The Conservative influences in our life are envisaged as
Dinosaurs whom literal extinction is awaiting just ahead. The contrast
comes from the failure of our ideas, our conventions, our prejudices to
keep up with the pace of material change. Our environment moves too much
faster than we do. The walls of our travelling compartment are bumping
our heads. Unless we hustle, the traffic will run us down. Conservatism
is no better than suicide. Woe to our Dinosaurs!

This is one aspect. We stand still at our peril. Time flies. But there
is another aspect of the same thing--and this is where Clissold comes
in. What a bore for the modern man, whose mind in his active career
moves with the times, to stand still in his observances and way of life!
What a bore are the feasts and celebrations with which London crowns
success! What a bore to go through the social contortions which have
lost significance and conventional pleasures which no longer please! The
contrast between the exuberant, constructive activity of a prince of
modern commerce and the lack of an appropriate environment for him out
of office hours is acute. Moreover, there are wide stretches in the
career of money-making which are entirely barren and non-constructive.
There is a fine passage in the first volume about the profound, ultimate
boredom of City men. Clissold's father, the company promoter and
speculator, falls first into megalomania and then into fraud, because he
is bored. Let us, therefore, mould with both hands the plastic material
of social life into our own contemporary image.

We do not merely belong to a latter-day age--we are ourselves in the
literal sense older than our ancestors were in the years of our maturity
and our power. Mr. Wells brings out strongly a too-much neglected
feature of modern life, that we live much longer than formerly, and,
what is more important, prolong our health and vigour into a period of
life which was formerly one of decay, so that the average man can now
look forward to a duration of activity which hitherto only the
exceptional could anticipate. I can add, indeed, a further fact which
Mr. Wells overlooks (I think), likely to emphasise this yet further in
the next fifty years as compared with the last fifty years;--namely,
that the average age of a rapidly increasing population is much less
than that of a stationary population. For example, in the stable
conditions to which we may hope to approximate in the course of the next
two generations, we shall somewhat rapidly approach to a position in
which, in proportion to population, elderly people (say, sixty-five
years of age and above) will be nearly 100 per cent, and middle-aged
people (say, forty-five years of age and above), nearly 50 per cent more
numerous than in the recent past. In the nineteenth century effective
power was in the hands of men probably not less than fifteen years older
on the average than in the sixteenth century; and before the twentieth
century is out the average may have risen another fifteen years, unless
effective means are found, other than obvious physical or mental decay,
to make vacancies at the top. Clissold (in his sixtieth year, be it
noted) sees more advantage and less disadvantage in this state of
affairs than I do. Most men love money and security more, and creation
and construction less, as they get older; and this process begins long
before their intelligent judgement on detail is apparently impaired. Mr.
Wells's preference for an adult world over a juvenile sex-ridden world
may be right. But the margin between this and a middle-aged money-ridden
world is a narrow one. We are threatened, at the best, with the
appalling problem of the able-bodied "retired," of which Mr. Wells
himself gives a sufficient example in his desperate account of the
regular denizens of the Riviera.

We are living, then, in an unsatisfactory age of immensely rapid
transition in which most, but particularly those in the vanguard, find
themselves and their environment ill-adapted to one another, and are for
this reason far less happy than their less-sophisticated forbears were
or their yet more-sophisticated descendants need be. This diagnosis,
applied by Mr. Wells to the case of those engaged in the practical life
of action, is essentially the same as Mr. Edwin Muir's, in his deeply
interesting volume of criticism, "Transition," to the case of those
engaged in the life of art and contemplation. Our foremost writers,
according to Mr. Muir, are _uncomfortable_ in the world;--they can
neither support nor can they oppose anything with a full confidence,
with the result that their work is inferior in relation to their talents
compared with work produced in happier ages,--jejune, incomplete,
starved, anaemic, like their own feelings to the universe.

In short, we cannot stay where we are; we are on the move,--on the move,
not necessarily either to better or to worse, but just to an
equilibrium. But why not to the better? Why should not we begin to reap
spiritual fruits from our material conquests? If so, whence is to come
the motive power of desirable change? This brings us to Mr. Wells's
second theme.

Mr. Wells describes in the first volume of _Clissold_ his hero's
disillusionment with Socialism. In the third volume he inquires if there
is an alternative. From whence are we to draw the forces which are "to
change the laws, customs, rules, and institutions of the world?" "From
what classes and types are the revolutionaries to be drawn? How are they
to be brought into co-operation? What are to be their methods?" The
Labour Movement is represented as an immense and dangerous force of
destruction, led by sentimentalists and pseudo-intellectuals, who have
"feelings in the place of ideas." A constructive revolution cannot
possibly be contrived by these folk. The creative intellect of mankind
is not to be found in these quarters but amongst the scientists and the
great modern business men. Unless we can harness to the job this type of
mind and character and temperament, it can never be put through--for it
is a task of immense practical complexity and intellectual difficulty.
We must recruit our revolutionaries, therefore, from the Right, not from
the Left. We must persuade the type of man whom it now amuses to create
a great business, that there lie waiting for him yet bigger things which
will amuse him more. This is Clissold's "Open Conspiracy." Clissold's
direction is to the Left--far, far to the Left; but he seeks to summon
from the Right the creative force and the constructive will which is to
carry him there. He describes himself as being temperamentally and
fundamentally a Liberal. But political Liberalism must die "to be born
again with firmer features and a clearer will."

Clissold is expressing a reaction against the Socialist Party which very
many feel, including Socialists. The remoulding of the world needs the
touch of the creative Brahma. But at present Brahma is serving Science
and Business, not Politics or Government. The extreme danger of the
world is, in Clissold's words, lest, "before the creative Brahma can get
to work, Siva, in other words the passionate destructiveness of Labour
awakening to its now needless limitations and privations, may make
Brahma's task impossible." We all feel this, I think. We know that we
need urgently to create a _milieu_ in which Brahma can get to work
before it is too late. Up to a point, therefore, most active and
constructive temperaments in every political camp are ready to join the
Open Conspiracy.

What, then, is it that holds them back? It is here, I think, that
_Clissold_ is in some way deficient and apparently lacking in insight.
Why do practical men find it more amusing to make money than to join the
Open Conspiracy? I suggest that it is much the same reason as that which
makes them find it more amusing to play bridge on Sundays than to go to
church. They lack altogether the kind of motive, the possession of
which, if they had it, could be expressed by saying that they had a
creed. They have no creed, these potential open conspirators, no creed
whatever. That is why, unless they have the luck to be scientists or
artists, they fall back on the grand substitute motive, the perfect
_Ersatz_, the anodyne for those who, in fact, want nothing at
all--Money. Clissold charges the enthusiasts of Labour that they have
"feelings in the place of ideas." But he does not deny that they have
feelings. Has not, perhaps, poor Mr. Cook something which Clissold
lacks? Clissold and his brother Dickon, the advertising expert, flutter
about the world seeking for something to which they can attach their
abundant _libido_. But they have not found it. They would so like to be
Apostles. But they cannot. They remain business men.

I have taken two themes from a book which contains dozens. They are not
all treated equally well. Knowing the Universities much better than Mr.
Wells does, I declare that his account contains no more than the element
of truth which is proper to a caricature. He under-estimates altogether
their possibilities--how they may yet become temples of Brahma which
even Siva will respect. But _Clissold_, taken altogether, is a great
achievement, a huge and meaty egg from a glorious hen, an abundant
outpouring of an ingenious, truthful, and generous spirit.

Though we talk about pure art as never before, this is not a good age
for pure artists; nor is it a good one for classical perfections. Our
most pregnant writers to-day are full of imperfections; they expose
themselves to judgement; they do not look to be immortal. For these
reasons, perhaps, we, their contemporaries, do them and the debt we owe
them less than justice. What a debt every intelligent being owes to
Bernard Shaw! What a debt also to H. G. Wells, whose mind seems to have
grown up alongside his readers', so that, in successive phases, he has
delighted us and guided our imaginations from boyhood to maturity.




  2. Economic Possibilities for our Grandchildren (1930)

  I


We are suffering just now from a bad attack of economic pessimism. It is
common to hear people say that the epoch of enormous economic progress
which characterised the nineteenth century is over; that the rapid
improvement in the standard of life is now going to slow down--at any
rate in Great Britain; that a decline in prosperity is more likely than
an improvement in the decade which lies ahead of us.

I believe that this is a wildly mistaken interpretation of what is
happening to us. We are suffering, not from the rheumatics of old age,
but from the growing-pains of over-rapid changes, from the painfulness
of readjustment between one economic period and another. The increase of
technical efficiency has been taking place faster than we can deal with
the problem of labour absorption; the improvement in the standard of
life has been a little too quick; the banking and monetary system of the
world has been preventing the rate of interest from falling as fast as
equilibrium requires. And even so, the waste and confusion which ensue
relate to not more than 7 per cent of the national income; we are
muddling away one and sixpence in the , and have only 18s. 6d., when we
might, if we were more sensible, have 1; yet, nevertheless, the 18s.
6d. mounts up to as much as the 1 would have been five or six years
ago. We forget that in 1929 the physical output of the industry of Great
Britain was greater than ever before, and that the net surplus of our
foreign balance available for new foreign investment, after paying for
all our imports, was greater last year than that of any other country,
being indeed 50 per cent greater than the corresponding surplus of the
United States. Or again--if it is to be a matter of comparisons--suppose
that we were to reduce our wages by a half, repudiate four-fifths of the
national debt, and hoard our surplus wealth in barren gold instead of
lending it at 6 per cent or more, we should resemble the now much-envied
France. But would it be an improvement?

The prevailing world depression, the enormous anomaly of unemployment in
a world full of wants, the disastrous mistakes we have made, blind us to
what is going on under the surface--to the true interpretation of the
trend of things. For I predict that both of the two opposed errors of
pessimism which now make so much noise in the world will be proved wrong
in our own time--the pessimism of the revolutionaries who think that
things are so bad that nothing can save us but violent change, and the
pessimism of the reactionaries who consider the balance of our economic
and social life so precarious that we must risk no experiments.

My purpose in this essay, however, is not to examine the present or the
near future, but to disembarrass myself of short views and take wings
into the future. What can we reasonably expect the level of our economic
life to be a hundred years hence? What are the economic possibilities
for our grandchildren?

From the earliest times of which we have record--back, say, to two
thousand years before Christ--down to the beginning of the eighteenth
century, there was no very great change in the standard of life of the
average man living in the civilised centres of the earth. Ups and downs
certainly. Visitations of plague, famine, and war. Golden intervals. But
no progressive, violent change. Some periods perhaps 50 per cent better
than others--at the utmost 100 per cent better--in the four thousand
years which ended (say) in A.D. 1700.

This slow rate of progress, or lack of progress, was due to two
reasons--to the remarkable absence of important technical improvements
and to the failure of capital to accumulate.

The absence of important technical inventions between the prehistoric
age and comparatively modern times is truly remarkable. Almost
everything which really matters and which the world possessed at the
commencement of the modern age was already known to man at the dawn of
history. Language, fire, the same domestic animals which we have to-day,
wheat, barley, the vine and the olive, the plough, the wheel, the oar,
the sail, leather, linen and cloth, bricks and pots, gold and silver,
copper, tin, and lead--and iron was added to the list before 1000
B.C.--banking, statecraft, mathematics, astronomy, and religion. There
is no record of when we first possessed these things.

At some epoch before the dawn of history--perhaps even in one of the
comfortable intervals before the last ice age--there must have been an
era of progress and invention comparable to that in which we live
to-day. But through the greater part of recorded history there was
nothing of the kind.

The modern age opened, I think, with the accumulation of capital which
began in the sixteenth century. I believe--for reasons with which I must
not encumber the present argument--that this was initially due to the
rise of prices, and the profits to which that led, which resulted from
the treasure of gold and silver which Spain brought from the New World
into the Old. From that time until to-day the power of accumulation by
compound interest, which seems to have been sleeping for many
generations, was re-born and renewed its strength. And the power of
compound interest over two hundred years is such as to stagger the
imagination.

Let me give in illustration of this a sum which I have worked out. The
value of Great Britain's foreign investments to-day is estimated at
about 4,000,000,000. This yields us an income at the rate of about 6
per cent. Half of this we bring home and enjoy; the other half, namely,
3 per cent, we leave to accumulate abroad at compound interest.
Something of this sort has now been going on for about 250 years.

For I trace the beginnings of British foreign investment to the treasure
which Drake stole from Spain in 1580. In that year he returned to
England bringing with him the prodigious spoils of the _Golden Hind_.
Queen Elizabeth was a considerable shareholder in the syndicate which
had financed the expedition. Out of her share she paid off the whole of
England's foreign debt, balanced her Budget, and found herself with
about 40,000 in hand. This she invested in the Levant Company--which
prospered. Out of the profits of the Levant Company, the East India
Company was founded; and the profits of this great enterprise were the
foundation of England's subsequent foreign investment. Now it happens
that 40,000 accumulating at 3 per cent compound interest approximately
corresponds to the actual volume of England's foreign investments at
various dates, and would actually amount to-day to the total of
4,000,000,000 which I have already quoted as being what our foreign
investments now are. Thus, every 1 which Drake brought home in 1580 has
now become 100,000. Such is the power of compound interest!

From the sixteenth century, with a cumulative crescendo after the
eighteenth, the great age of science and technical inventions began,
which since the beginning of the nineteenth century has been in full
flood--coal, steam, electricity, petrol, steel, rubber, cotton, the
chemical industries, automatic machinery and the methods of mass
production, wireless, printing, Newton, Darwin, and Einstein, and
thousands of other things and men too famous and familiar to catalogue.

What is the result? In spite of an enormous growth in the population of
the world, which it has been necessary to equip with houses and
machines, the average standard of life in Europe and the United States
has been raised, I think, about fourfold. The growth of capital has been
on a scale which is far beyond a hundred-fold of what any previous age
had known. And from now on we need not expect so great an increase of
population.

If capital increases, say, 2 per cent per annum, the capital equipment
of the world will have increased by a half in twenty years, and seven
and a half times in a hundred years. Think of this in terms of material
things--houses, transport, and the like.

At the same time technical improvements in manufacture and transport
have been proceeding at a greater rate in the last ten years than ever
before in history. In the United States factory output per head was 40
per cent greater in 1925 than in 1919. In Europe we are held back by
temporary obstacles, but even so it is safe to say that technical
efficiency is increasing by more than 1 per cent per annum compound.
There is evidence that the revolutionary technical changes, which have
so far chiefly affected industry, may soon be attacking agriculture. We
may be on the eve of improvements in the efficiency of food production
as great as those which have already taken place in mining, manufacture,
and transport. In quite a few years--in our own lifetimes I mean--we may
be able to perform all the operations of agriculture, mining, and
manufacture with a quarter of the human effort to which we have been
accustomed.

For the moment the very rapidity of these changes is hurting us and
bringing difficult problems to solve. Those countries are suffering
relatively which are not in the vanguard of progress. We are being
afflicted with a new disease of which some readers may not yet have
heard the name, but of which they will hear a great deal in the years to
come--namely, _technological unemployment_. This means unemployment due
to our discovery of means of economising the use of labour outrunning
the pace at which we can find new uses for labour.

But this is only a temporary phase of maladjustment. All this means in
the long run _that mankind is solving its economic problem_. I would
predict that the standard of life in progressive countries one hundred
years hence will be between four and eight times as high as it is
to-day. There would be nothing surprising in this even in the light of
our present knowledge. It would not be foolish to contemplate the
possibility of a far greater progress still.


  II

Let us, for the sake of argument, suppose that a hundred years hence we
are all of us, on the average, eight times better off in the economic
sense than we are to-day. Assuredly there need be nothing here to
surprise us.

Now it is true that the needs of human beings may seem to be insatiable.
But they fall into two classes--those needs which are absolute in the
sense that we feel them whatever the situation of our fellow human
beings may be, and those which are relative in the sense that we feel
them only if their satisfaction lifts us above, makes us feel superior
to, our fellows. Needs of the second class, those which satisfy the
desire for superiority, may indeed be insatiable; for the higher the
general level, the higher still are they. But this is not so true of the
absolute needs--a point may soon be reached, much sooner perhaps than we
are all of us aware of, when these needs are satisfied in the sense that
we prefer to devote our further energies to non-economic purposes.

Now for my conclusion, which you will find, I think, to become more and
more startling to the imagination the longer you think about it.

I draw the conclusion that, assuming no important wars and no important
increase in population, the _economic problem_ may be solved, or be at
least within sight of solution, within a hundred years. This means that
the economic problem is not--if we look into the future--_the permanent
problem of the human race_.

Why, you may ask, is this so startling? It is startling because--if,
instead of looking into the future, we look into the past--we find that
the economic problem, the struggle for subsistence, always has been
hitherto the primary, most pressing problem of the human race--not only
of the human race, but of the whole of the biological kingdom from the
beginnings of life in its most primitive forms.

Thus we have been expressly evolved by nature--with all our impulses and
deepest instincts--for the purpose of solving the economic problem. If
the economic problem is solved, mankind will be deprived of its
traditional purpose.

Will this be a benefit? If one believes at all in the real values of
life, the prospect at least opens up the possibility of benefit. Yet I
think with dread of the readjustment of the habits and instincts of the
ordinary man, bred into him for countless generations, which he may be
asked to discard within a few decades.

To use the language of to-day--must we not expect a general "nervous
breakdown"? We already have a little experience of what I mean--a
nervous breakdown of the sort which is already common enough in England
and the United States amongst the wives of the well-to-do classes,
unfortunate women, many of them, who have been deprived by their wealth
of their traditional tasks and occupations--who cannot find it
sufficiently amusing, when deprived of the spur of economic necessity,
to cook and clean and mend, yet are quite unable to find anything more
amusing.

To those who sweat for their daily bread leisure is a longed-for
sweet--until they get it.

There is the traditional epitaph written for herself by the old
charwoman:--

  Don't mourn for me, friends, don't weep for me never,
  For I'm going to do nothing for ever and ever.

This was her heaven. Like others who look forward to leisure, she
conceived how nice it would be to spend her time listening-in--for there
was another couplet which occurred in her poem:--

  With psalms and sweet music the heavens'll be ringing,
  But I shall have nothing to do with the singing.

Yet it will only be for those who have to do with the singing that life
will be tolerable--and how few of us can sing!

Thus for the first time since his creation man will be faced with his
real, his permanent problem--how to use his freedom from pressing
economic cares, how to occupy the leisure, which science and compound
interest will have won for him, to live wisely and agreeably and well.

The strenuous purposeful money-makers may carry all of us along with
them into the lap of economic abundance. But it will be those peoples,
who can keep alive, and cultivate into a fuller perfection, the art of
life itself and do not sell themselves for the means of life, who will
be able to enjoy the abundance when it comes.

Yet there is no country and no people, I think, who can look forward to
the age of leisure and of abundance without a dread. For we have been
trained too long to strive and not to enjoy. It is a fearful problem
for the ordinary person, with no special talents, to occupy himself,
especially if he no longer has roots in the soil or in custom or in the
beloved conventions of a traditional society. To judge from the
behaviour and the achievements of the wealthy classes to-day in any
quarter of the world, the outlook is very depressing! For these are, so
to speak, our advance guard--those who are spying out the promised land
for the rest of us and pitching their camp there. For they have most of
them failed disastrously, so it seems to me--those who have an
independent income but no associations or duties or ties--to solve the
problem which has been set them.

I feel sure that with a little more experience we shall use the
new-found bounty of nature quite differently from the way in which the
rich use it to-day, and will map out for ourselves a plan of life quite
otherwise than theirs.

For many ages to come the old Adam will be so strong in us that
everybody will need to do _some_ work if he is to be contented. We shall
do more things for ourselves than is usual with the rich to-day, only
too glad to have small duties and tasks and routines. But beyond this,
we shall endeavour to spread the bread thin on the butter--to make what
work there is still to be done to be as widely shared as possible.
Three-hour shifts or a fifteen-hour week may put off the problem for a
great while. For three hours a day is quite enough to satisfy the old
Adam in most of us!

There are changes in other spheres too which we must expect to come.
When the accumulation of wealth is no longer of high social importance,
there will be great changes in the code of morals. We shall be able to
rid ourselves of many of the pseudo-moral principles which have
hag-ridden us for two hundred years, by which we have exalted some of
the most distasteful of human qualities into the position of the highest
virtues. We shall be able to afford to dare to assess the money-motive
at its true value. The love of money as a possession--as distinguished
from the love of money as a means to the enjoyments and realities of
life--will be recognised for what it is, a somewhat disgusting
morbidity, one of those semi-criminal, semi-pathological propensities
which one hands over with a shudder to the specialists in mental
disease. All kinds of social customs and economic practices, affecting
the distribution of wealth and of economic rewards and penalties, which
we now maintain at all costs, however distasteful and unjust they may be
in themselves, because they are tremendously useful in promoting the
accumulation of capital, we shall then be free, at last, to discard.

Of course there will still be many people with intense, unsatisfied
purposiveness who will blindly pursue wealth--unless they can find some
plausible substitute. But the rest of us will no longer be under any
obligation to applaud and encourage them. For we shall inquire more
curiously than is safe to-day into the true character of this
"purposiveness" with which in varying degrees Nature has endowed almost
all of us. For purposiveness means that we are more concerned with the
remote future results of our actions than with their own quality or
their immediate effects on our own environment. The "purposive" man is
always trying to secure a spurious and delusive immortality for his acts
by pushing his interest in them forward into time. He does not love his
cat, but his cat's kittens; nor, in truth, the kittens, but only the
kittens' kittens, and so on forward for ever to the end of cat-dom. For
him jam is not jam unless it is a case of jam to-morrow and never jam
to-day. Thus by pushing his jam always forward into the future, he
strives to secure for his act of boiling it an immortality.

Let me remind you of the Professor in _Sylvie and Bruno_:--

   "Only the tailor, sir, with your little bill," said a meek voice
   outside the door.

   "Ah, well, I can soon settle _his_ business," the Professor said
   to the children, "if you'll just wait a minute. How much is it,
   this year, my man?" The tailor had come in while he was speaking.

   "Well, it's been a-doubling so many years, you see," the tailor
   replied, a little gruffly, "and I think I'd like the money now.
   It's two thousand pound, it is!"

   "Oh, that's nothing!" the Professor carelessly remarked, feeling
   in his pocket, as if he always carried at least _that_ amount
   about with him. "But wouldn't you like to wait just another year
   and make it _four_ thousand? Just think how rich you'd be! Why,
   you might be a _king_, if you liked!"

   "I don't know as I'd care about being a king," the man said
   thoughtfully. "But it _dew_ sound a powerful sight o' money!
   Well, I think I'll wait----"

   "Of course you will!" said the Professor. "There's good sense in
   _you_, I see. Good-day to you, my man!"

   "Will you ever have to pay him that four thousand pounds?" Sylvie
   asked as the door closed on the departing creditor.

   "_Never_, my child!" the Professor replied emphatically. "He'll
   go on doubling it till he dies. You see, it's _always_ worth
   while waiting another year to get twice as much money!"

Perhaps it is not an accident that the race which did most to bring the
promise of immortality into the heart and essence of our religions has
also done most for the principle of compound interest and particularly
loves this most purposive of human institutions.

I see us free, therefore, to return to some of the most sure and certain
principles of religion and traditional virtue--that avarice is a vice,
that the exaction of usury is a misdemeanour, and the love of money is
detestable, that those walk most truly in the paths of virtue and sane
wisdom who take least thought for the morrow. We shall once more value
ends above means and prefer the good to the useful. We shall honour
those who can teach us how to pluck the hour and the day virtuously and
well, the delightful people who are capable of taking direct enjoyment
in things, the lilies of the field who toil not, neither do they spin.

But beware! The time for all this is not yet. For at least another
hundred years we must pretend to ourselves and to every one that fair is
foul and foul is fair; for foul is useful and fair is not. Avarice and
usury and precaution must be our gods for a little longer still. For
only they can lead us out of the tunnel of economic necessity into
daylight.

I look forward, therefore, in days not so very remote, to the greatest
change which has ever occurred in the material environment of life for
human beings in the aggregate. But, of course, it will all happen
gradually, not as a catastrophe. Indeed, it has already begun. The
course of affairs will simply be that there will be ever larger and
larger classes and groups of people from whom problems of economic
necessity have been practically removed. The critical difference will be
realised when this condition has become so general that the nature of
one's duty to one's neighbour is changed. For it will remain reasonable
to be economically purposive for others after it has ceased to be
reasonable for oneself.

The _pace_ at which we can reach our destination of economic bliss will
be governed by four things--our power to control population, our
determination to avoid wars and civil dissensions, our willingness to
entrust to science the direction of those matters which are properly the
concern of science, and the rate of accumulation as fixed by the margin
between our production and our consumption; of which the last will
easily look after itself, given the first three.

Meanwhile there will be no harm in making mild preparations for our
destiny, in encouraging, and experimenting in, the arts of life as well
as the activities of purpose.

But, chiefly, do not let us overestimate the importance of the economic
problem, or sacrifice to its supposed necessities other matters of
greater and more permanent significance. It should be a matter for
specialists--like dentistry. If economists could manage to get
themselves thought of as humble, competent people, on a level with
dentists, that would be splendid!




  REFERENCES


The essays collected in this volume were first published (in Great
Britain) as follows:

  I. The Treaty of Peace.

  1. "The Economic Consequences of the Peace" (Nov. 1919).

  2. The same.

  3. The same.

  4. "The Revision of the Treaty" (Dec. 1921).

  5. (i) The same.

  5. (ii) _The Nation and Athenum_, Jan. 24, 1925.

  5. (iii) The same, May 5, 1928 (Broadcast, May 3, 1928).


  II. Inflation and Deflation.

  1. "The Economic Consequences of the Peace" (Nov. 1919).

  2. "A Tract on Monetary Reform" (Oct. 1923).

  3. (i) _The Nation and Athenum_, Jan. 9, 1926.

  3. (ii) The same, June 30, 1928.

  4. "Can Lloyd George do It?" (A pamphlet, jointly
      with H. D. Henderson, May 1929).

  5. _The Nation and Athenum_, Dec. 1930.

  6. (i) _The Listener_, Jan. 14, 1931 (Broadcast, Jan. 1931).

  6. (ii) _The New Statesman and Nation_, Aug. 15, 1931.

  6. (iii) The same, Sept. 19, 1931.

  7. Not previously published in Great Britain.


  III. The Return to the Gold Standard.

  1. "A Treatise on Money" (Sept. 1930).

  2. "A Tract on Monetary Reform" (Oct. 1923).

  3. The same.

  4. (i) _The Nation and Athenum_, Feb. 23, 1929.

  4. (ii) The same, Feb. 21, 1925.

  4. (iii) The same, Feb. 12, 1927.

  5. "The Economic Consequences of Mr. Churchill" (1925).

  6. (i) _The New Statesman and Nation_, Mar. 7, 1931.

  6. (ii) _The Evening Standard_, Sept. 10, 1931.

  6. (iii) _The Times_, Sept. 29, 1931.

  7. _The Sunday Express_, Sept. 27, 1931.


  IV. Politics.

  1. "A Short View of Russia" (1925).

  2. "The End of _Laissez-Faire_" (1926).

  3. _The Nation and Athenum_, Aug. 8 and 15, 1925.

  4. The same, Feb. 20, 1926.


  V. The Future.

  1. _The Nation and Athenum_, Jan. 22, 1927.

  2. The same, Oct. 11 and 18, 1930.


  THE END


  _Printed in Great Britain by_ R. & R. Clark, Limited, _Edinburgh_.


=Transcriber's Notes:=
Page 65, "the idemnity tack" changed to "the indemnity tack"
Page 85, "research, etc. etc." changed to "research, etc., etc."
Page 106, "laisser-faire policy" changed to "laissez-faire policy"
Page 175, "Committee's recommendations:" changed to "Committee's
  recommendations;"




[End of Essays in Persuasion, by John Maynard Keynes]
