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Title: The Means to Prosperity
Author: John Maynard Keynes (1883-1946)
Date of first publication: 1933
Place and date of edition used as base for this ebook:
   London: Macmillan, 1933 (First Edition)
Date first posted: 14 January 2008
Date last updated: 14 January  2008
Project Gutenberg Canada ebook #61

This ebook was produced by: Marcia Brooks, David T. Jones, Mark Akrigg
& the Online Distributed Proofreading Team at http://www.pgdpcanada.net




THE MEANS

TO

PROSPERITY

BY

JOHN MAYNARD KEYNES

Price 1/-net

MACMILLAN AND CO., LIMITED

ST. MARTIN'S STREET, LONDON

1933


BY THE SAME AUTHOR

INDIAN CURRENCY AND FINANCE.
Pp. viii + 263.     1913.
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THE ECONOMIC CONSEQUENCES OF THE PEACE.
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A TREATISE ON PROBABILITY.
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A REVISION OF THE TREATY.
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A TRACT ON MONETARY REFORM.
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A TREATISE ON MONEY.
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Vol. II.--Pp. viii + 424.    1930.
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ESSAYS IN PERSUASION.
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POPULAR EDITION, 1933.
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ESSAYS IN BIOGRAPHY.
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(The figures of sales are for Great Britain and
the United States, exclusive of translations.)




THE MEANS

TO

PROSPERITY


BY

JOHN MAYNARD KEYNES

FELLOW OF KING'S COLLEGE, CAMBRIDGE


MACMILLAN AND CO., LIMITED
ST. MARTIN'S STREET, LONDON
1933




This pamphlet is an enlarged version of four
articles printed in _The Times_ in March 1933.


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




CONTENTS

CHAPTER I                                             page

THE NATURE OF THE PROBLEM                                1


CHAPTER II

INTERNAL EXPANSION                                       9


CHAPTER III

THE RAISING OF PRICES                                   17


CHAPTER IV

A PROPOSAL FOR THE WORLD ECONOMIC CONFERENCE            23


CHAPTER V

THE INTERNATIONAL NOTE ISSUE AND THE GOLD STANDARD      30


CHAPTER VI

CONCLUSION                                              35





CHAPTER I

THE NATURE OF THE PROBLEM


If our poverty were due to famine or earthquake or war--if we lacked
material things and the resources to produce them, we could not expect to
find the Means to Prosperity except in hard work, abstinence, and
invention. In fact, our predicament is notoriously of another kind. It
comes from some failure in the immaterial devices of the mind, in the
working of the motives which should lead to the decisions and acts of
will, necessary to put in movement the resources and technical means we
already have. It is as though two motor-drivers, meeting in the middle of
a highway, were unable to pass one another because neither knows the rule
of the road. Their own muscles are no use; a motor engineer cannot help
them; a better road would not serve. Nothing is required and nothing will
avail, except a little, a very little, clear thinking.

So, too, our problem is not a human problem of muscles and endurance. It
is not an engineering problem or an agricultural problem. It is not even
a business problem, if we mean by business those calculations and
dispositions and organising acts by which individual entrepreneurs can
better themselves. Nor is it a banking problem, if we mean by banking
those principles and methods of shrewd judgement by which lasting
connections are fostered and unfortunate commitments avoided. On the
contrary, it is, in the strictest sense, an economic problem, or, to
express it better, as suggesting a blend of economic theory with the art
of statesmanship, a problem of Political Economy.

I call attention to the nature of the problem, because it points us to
the nature of the remedy. It is appropriate to the case that the remedy
should be found in something which can fairly be called a _device_. Yet
there are many who are suspicious of devices, and instinctively doubt
their efficacy. There are still people who believe that the way out can
only be found by hard work, endurance, frugality, improved business
methods, more cautious banking, and, above all, the avoidance of devices.
But the lorries of these people will never, I fear, get by. They may stay
up all night, engage more sober chauffeurs, install new engines, and
widen the road; yet they will never get by, unless they stop to think and
work out with the driver opposite a small device by which each moves
simultaneously a little to his left.

It is the existing situation which we should find paradoxical. There is
nothing paradoxical in the suggestion that some immaterial
adjustment--some change, so to speak, "on paper"--should be capable of
working wonders. The paradox is to be found in 250,000 building
operatives out of work, when more houses are our greatest material need.
It is the man who tells us that there is no means, consistent with sound
finance and political wisdom, of getting the one to work at the other,
whose judgement we should instinctively doubt. The calculations which we
ought to suspect are those of the statesman, who, being already burdened
with the support of the unemployed, tells us that it would involve him in
heavy liabilities, present and to come, which the country cannot afford,
if he were to set the men to build the houses; and the sanity to be
questioned is his, who thinks it more economical and better calculated
to increase the national wealth to maintain unemployed shipbuilders, than
to spend a fraction of what their maintenance is costing him, in setting
them to build one of the greatest works of man.

When, on the contrary, I show, a little elaborately, as in the ensuing
chapter, that to create wealth will increase the national income and that
a large proportion of any increase in the national income will accrue to
an Exchequer, amongst whose largest outgoings is the payment of incomes
to those who are unemployed and whose receipts are a proportion of the
incomes of those who are occupied, I hope the reader will feel, whether
or not he thinks himself competent to criticise the argument in detail,
that the answer is just what he would expect,--that it agrees with the
instinctive promptings of his commonsense.

Nor should the argument seem strange that taxation may be so high as to
defeat its object, and that, given sufficient time to gather the fruits,
a reduction of taxation will run a better chance, than an increase, of
balancing the Budget. For to take the opposite view to-day is to resemble
a manufacturer who, running at a loss, decides to raise his price, and
when his declining sales increase the loss, wrapping himself in the
rectitude of plain arithmetic, decides that prudence requires him to
raise the price still more;--and who, when at last his account is
balanced with nought on both sides, is still found righteously declaring
that it would have been the act of a gambler to reduce the price when you
were already making a loss.

At any rate, the time seems ripe for reconsidering the possibilities of
action. In this belief I here reexamine the advantages of an active
policy, beginning with our own domestic affairs and proceeding to the
opportunities of the World Conference. This Conference may be well-timed
in spite of its delay. For it will come at a season when bitter
experience makes the assembled nations readier to consider a plan. The
world is less and less disposed "to wait for the miracle"--to believe
that things will right themselves without action on our part.




CHAPTER II

INTERNAL EXPANSION


The reluctance to support schemes of capital development at home as a
means to restore prosperity is generally based on two grounds--the
meagreness of the employment created by the expenditure of a given sum,
and the strain on national and local budgets of the subsidies which such
schemes usually require. These are quantitative questions not easily
answered with precision. But I will endeavour to give reasons for the
belief that the answers to both of them are much more favourable than is
commonly supposed.

It is often said that it costs L.500 capital expenditure on public works
to give one man employment for a year. This is based on the amount of
labour directly employed on the spot. But it is easy to see that the
materials used and the transport required also give employment. If we
allow for this, as we should, the capital expenditure per man-year of
additional employment is usually estimated, in the case of building for
example, at L.200.

But if the new expenditure is additional and not merely in substitution
for other expenditure, the increase of employment does not stop there.
The additional wages and other incomes paid out are spent on additional
purchases, which in turn lead to further employment. If the resources of
the country were already fully employed, these additional purchases would
be mainly reflected in higher prices and increased imports. But in
present circumstances this would be true of only a small proportion of
the additional consumption, since the greater part of it could be
provided without much change of price by home resources which are at
present unemployed. Moreover, in so far as the increased demand for food,
resulting from the increased purchasing power of the working classes,
served either to raise the prices or to increase the sales of the output
of primary producers at home and abroad, we should to-day positively
welcome it. It would be much better to raise the price of farm products
by increasing the demand for them than by artificially restricting their
supply.

Nor have we yet reached the end. The newly employed who supply the
increased purchases of those employed on the new capital works will, in
their turn, spend more, thus adding to the employment of others; and so
on. Some enthusiasts, perceiving the fact of these repercussions, have
greatly exaggerated the total result, and have even supposed that the
amount of new employment thus created is only limited by the necessary
intervals between the receipt of expenditure of income, in other words by
the velocity of circulation of money. Unfortunately it is not quite as
good as that. For at each stage there is, so to speak, a certain
proportion of leakage. At each stage a certain proportion of the
increased income is not passed on in increased employment. Some part will
be saved by the recipients; some part raises prices and so diminishes
consumption elsewhere, except in so far as producers spend their
increased profits; some part will be spent on imports; some part is
merely a substitution for expenditure previously made out of the dole or
private charity or personal savings; and some part may reach the
Exchequer without relieving the taxpayer to an equal extent. Thus in
order to sum the net effect on employment of the series of repercussions,
it is necessary to make reasonable assumptions as to the proportion lost
in each of these ways. I would refer those who are interested in the
technique of such summations to an article by Mr. R. F. Kahn published in
_The Economic Journal_, June 1931.

It is obvious that the appropriate assumptions vary greatly according to
circumstances. If there were little or no margin of unemployed resources,
then, as I have said above, the increased expenditure would largely waste
itself in higher prices and increased imports (which is, indeed, a
regular feature of the later stages of a boom in new construction). If
the dole was as great as a man's earnings when in work and was paid for
by borrowing, there would be scarcely any repercussions at all. On the
other hand, now that the dole is paid for by taxes and not by borrowing
(so that a reduction in the dole may be expected to increase the spending
power of the taxpayer), we no longer have to make so large a deduction on
this head.

My own estimate, taking very conservative figures in the light of present
circumstances, makes the multiplier to be at least 2. It follows that the
loan-expenditure per man-year of employment is, not the figure of L.500
with which we began, but L.100. Since, however, I am anxious not to
overstate what will be a sufficiently striking conclusion anyhow, let us
take it at 1-1/2, i.e. that two men employed by loan-expenditure lead
indirectly to the employment, not of two further men, which represents my
own belief, but of one further man. I do not think that anyone who goes
through the detailed calculation can bring it out at less than this;
which means that additional loan-expenditure of L.200 on materials,
transport, and direct employment puts, not one man to work for a year,
but--taking account of the whole series of repercussions--one and a half
men. This gives us a figure of L.133 as the amount of additional
loan-expenditure required to-day to stimulate a man-year of employment.
But let us, in order to give ourselves a further margin of safety, base
our argument on the figure of L.150. This answers, most conservatively,
the first of our two questions.

Next consider the magnitude of the relief to the Budget. For purposes of
broad calculation, the average cost of a man on the dole is usually
taken, I think, at L.50 a year. Since, on the basis of the above
calculation, a loan-expenditure of L.3,000,000 will employ at least 20,000
men for a year directly or indirectly, it follows that it will save the
dole L.1,000,000. Here is one-third of the expenditure already accounted
for.

But there is a further benefit to the Budget. The yield of the taxes
rises and falls more or less in proportion to the national income. Our
budgetary difficulties to-day are mainly due to the decline in the
national income. Now for the nation as a whole, leaving on one side
transactions with foreigners, its income is exactly equal to its
expenditure (including in expenditure both consumption-expenditure and
new capital-expenditure, but excluding intermediate exchanges from one
hand to another);--the two being simply different names for the same
thing, my expenditure being your income. Thus new capital-expenditure of
L.3,000,000, paid for by an additional loan and not by reducing
consumption-expenditure or existing capital-expenditure, increases the
national income by more than L.3,000,000 if we allow for repercussions.
The calculation to obtain the appropriate multiplier is much the same as
in the case of employment; except that it is somewhat greater, since to
obtain the national money-income we do not have to make the same
deduction for a rise in prices. However, to be on the safe side, let us,
as before, take the multiplier as being 1-1/2.

It follows that our capital expenditure of L.3,000,000 will increase the
national income, subject to taxation, by L.4,500,000. Now on the average
about 20 per cent of the national income is paid to the Exchequer in
taxes. The exact proportion depends on how the new income is distributed
between the higher ranges of income subject to direct taxation, and the
lower ranges which are touched by indirect taxes; also the yield of some
taxes is not closely correlated with changes in national income. To allow
for these doubts, let us take the proportion of the new income accruing
to the Exchequer at 10 per cent, _i.e._ L.450,000. There will, it is true,
be some time-lag in the collection of this, but we need not trouble about
that; though it is a powerful argument in favour of proposals for
modifying the rigidity of our annual Budget and for making our estimates,
on this occasion, cover a longer period than one year. Owing to the
time-lag in the effect of increased taxation in reducing the national
income our existing budgetary procedure is open to the serious objection
that the measures which will balance this Budget are calculated to
unbalance the next one; and _vice versa_.

Thus the total benefit to the Exchequer of an additional loan-expenditure
of L.3,000,000 is at least L.1,000,000 _plus_ L.450,000; or, in round
figures, L.1,500,000, _i.e._ a half of the loan-expenditure; or two-thirds
of it, if we were to take the multiplier as 2. We need see nothing
paradoxical in this. We have reached a point where a considerable
proportion of every further decline in the national income is visited on
the Exchequer through the agency of the dole and the decline in the yield
of the taxes. It is natural, therefore, that the benefit of measures to
increase the national income should largely accrue to the Exchequer.

If we apply this reasoning to the projects for loan-expenditure which are
receiving support to-day in responsible quarters, we see that it is a
complete mistake to believe that there is a dilemma between schemes for
increasing employment and schemes for balancing the Budget,--that we must
go slowly and cautiously with the former for fear of injuring the latter.
Quite the contrary. There is no possibility of balancing the Budget
except by increasing the national income, which is much the same thing as
increasing employment.

Take, for example, the proposal to spend L.7,000,000 on the new Cunarder.
I say that this will benefit the Exchequer by at least a half of this
sum, _i.e._ by L.3,500,000, which vastly exceeds the maximum aid which is
being asked from the Exchequer.

Or take the expenditure of L.100,000,000 on housing, whether for
rebuilding slums or under the auspices of a National Housing Board, this
would benefit the Budget by the vast total of some L.50,000,000--a sum far
exceeding any needful subsidy. If the mind of the reader boggles at this
and he feels that it must be too good to be true, let him recur carefully
to the argument which has led up to it. And if he distrusts his own
judgement, let him wait and see if any competent person has been able to
confound the bases of the argument, where I first offered it _coram
publico_ in the forum of _The Times_.

Substantially the same argument also applies to a relief of taxation by
suspending the Sinking Fund and by returning to the practice of financing
by loans those services which can properly be so financed, such as the
cost of new roads charged on the Road Fund and that part of the cost of
the dole which can be averaged out against the better days for which we
must hope. For the increased spending power of the taxpayer will have
precisely the same favourable repercussions as increased spending power
due to loan-expenditure; and in some ways this method of increasing
expenditure is healthier and better spread throughout the community. If
the Chancellor of the Exchequer will reduce taxation by L.50,000,000
through suspending the Sinking Fund and borrowing in those cases where
formerly we thought it reasonable to borrow, the half of what he remits
will in fact return to him from the saving on the dole and the higher
yield of a given level of taxation;--though, as I have pointed out above,
it will not necessarily return to him in the same Budget. I strongly
support, therefore, the suggestion which has been made that the next
Budget should be divided into two parts, one of which shall include those
items of expenditure which it would be proper to treat as
loan-expenditure in present circumstances.

I should add that this particular argument does not apply to a relief of
taxation balanced by an equal reduction of Government expenditure (by
reducing school teachers' salaries, for example); for this represents a
redistribution, not a net increase, of national spending power. It is
applicable to all _additional_ expenditure made, not in substitution for
other expenditure, but out of savings or out of borrowed money, either by
private persons or by public authorities, whether for capital purposes
or for consumption made possible by a relief of taxation or in some other
way.

It is often pointed out that, when loan-expenditure was on a larger scale
as a result of official encouragement, this did not prevent an increase
of unemployment. But at that time it was offsetting incompletely an even
more rapid deterioration in our foreign balance. The effects of an
increase or decrease of L.100,000,000 in our loan-expenditure are, broadly
speaking, equal to the effects of an increase or decrease of L.100,000,000
in our foreign balance. Formerly we had no visible benefit from our
loan-expenditure, because it was being offset by a deterioration in our
foreign balance. Recently we have had no visible benefit from the
improvement in our foreign balance, because it has been offset by the
reduction in our loan-expenditure. To-day for the first time it is open
to us, if we choose, to have both factors favourable at once.

If these conclusions cannot be refuted, is it not advisable to act upon
them? The contrary policy of endeavouring to balance the Budget by
impositions, restrictions, and precautions will surely fail, because it
must have the effect of diminishing the national spending power, and
hence the national income.




CHAPTER III

THE RAISING OF PRICES


It is the declared policy of the Government, and also of the
representatives of the Empire assembled at Ottawa, to raise prices. How
are we to do it?

To judge from some utterances of the Chancellor of the Exchequer, he has
been attracted to the idea of raising the prices of commodities by
restricting their supply. Now, it may well benefit the producers of a
particular article to combine to restrict its output. Equally it may
benefit a particular country, though at the expense of the rest of the
world, to restrict the supply of a commodity which it is in a position to
control. It may even, very occasionally, benefit the world as a whole to
organise the restriction of output of a particular commodity, the supply
of which is seriously out of balance with the supply of other things. But
as an all-round remedy restriction is worse than useless. For the
community as a whole it reduces demand, by destroying the income of the
retrenched producers, just as much as it reduces supply. So far from
being a means to diminish unemployment, it is, rather, a method of
distributing more evenly what unemployment there is, at the cost of
somewhat increasing it.

How, then, are we to raise prices? It may help us to think clearly, if I
proceed by means of a series of very simple, but fundamental
propositions.

(1) For commodities as a whole there can be no possible means of raising
their prices except by increasing expenditure upon them more rapidly
than their supply comes upon the market.

(2) Expenditure can only be increased if the public spend a larger
proportion of the incomes they already have, or if their aggregate
spending power is increased in some other way.

(3) There are narrow limits to increasing expenditure out of existing
incomes,--whether by saving less or by increased personal expenditure of
a capital nature. Incomes are so curtailed to-day and taxation so much
increased, that many people are already, in the effort to maintain their
standard of life, saving less than sound personal habits require. Anyone
who can afford to spend more should be encouraged to do so, particularly
if he has opportunities to spend on new capital or semi-capital objects.
But it is an evasion of the magnitude of the problem to believe that we
can solve it in this way. It follows, therefore, that we must aim at
increasing aggregate spending power. If we can achieve this, it will
partly serve to raise prices and partly to increase employment.

(4) Putting on one side the special case of people who can earn their
incomes by actually producing gold, it is broadly true to say that
aggregate spending power within a country can only be raised either (i.)
by increasing the loan-expenditure of the community; or (ii.) by
improving the foreign balance so that a larger proportion of current
expenditure again becomes income in the hands of home producers. By means
of public works the Labour Government--though rather half-heartedly and
in adverse attendant circumstances--attempted the first. The National
Government has successfully attempted the second. We have not yet tried
both at once.

(5) But there is a great difference between the two methods, inasmuch as
only the first is valid for the world as a whole. The second method
merely means that one country is withdrawing employment and spending
power from the rest of the world. For when one country improves its
foreign balance, it follows that the foreign balance of some other
country is diminished. Thus we cannot increase total output in this way
or raise world prices, unless, as a by-product, it serves to increase
loan-expenditure by strengthening confidence in a financial centre such
as Great Britain and so making it a more ready lender both at home and
abroad.

Currency depreciation and tariffs were weapons which this country had in
hand until recently as a means of self-protection. A moment came when we
were compelled to use them, and they have served us well. But competitive
currency depreciations and competitive tariffs, and more artificial means
of improving an individual country's foreign balance such as exchange
restrictions, import prohibitions, and quotas, help no one and injure
each, if they are applied all round.

We are left, therefore, with the broad conclusion that there is no
effective means of raising world prices except by increasing
loan-expenditure throughout the world. It was, indeed, the collapse of
expenditure financed out of loans advanced by the United States, for use
both at home and abroad, which was the chief agency in starting the
slump.

A number of popular remedies are rightly popular because they tend to
facilitate loan-expenditure. But there are several stages in the task of
increasing loan-expenditure; and, if there is a breakdown at any one of
them, we shall fail to attain our object. I must ask the reader,
therefore, to be patient with a further attempt at orderly analysis.

(1) The first necessity is that bank-credit should be cheap and abundant.
This is only possible if each Central Bank is freed from anxiety by
feeling itself to possess adequate reserves of international money. The
loss of confidence in bank balances held in leading financial centres as
constituting international money for this purpose, has greatly aggravated
the shortage of reserves. So has the accumulation of a large proportion
of the world's gold in a few Central Banks. On the other hand, we all
welcome an increased output of the gold mines or a reduction in India's
sterile hoards, because the quantity of reserve money is thus increased.
The devaluation of national currencies in terms of gold is another remedy
belonging to this category. Or, again, the abandonment of rigid gold
parities may help the case, since a Central Bank which can, if necessary,
relieve a strain by allowing the foreign exchanges to move against it,
will be satisfied with a smaller reserve of international money. The
abatement of the legal proportion of international money, which a bank
must hold against its note issue, might also help on a minor scale.

But this is only the first stage. In the early phase of recovery there is
not much loan-expenditure which can be safely financed by short-term
bank-credit. The rle of bank-credit is to finance the restoration of
working capital after business recovery has definitely set in. In
ordinary times we were able to rely on the first stage leading
automatically to the subsequent stages. But not in the conditions of
to-day.

(2) The second stage, therefore, must be reached, at which the long-term
rate of interest is low for all reasonably sound borrowers. This requires
a combination of manoeuvres by the Government and the Central Bank in the
shape of open-market operations by the Bank, of well-judged Conversion
Schemes by the Treasury, and of a restoration of financial confidence by
a Budget policy approved by public opinion and in other ways. It is at
this stage that a certain dilemma exists; since it may be true, for
psychological reasons, that a temporary reduction of loan-expenditure
plays a necessary part in effecting the transition to a lower long-term
rate of interest. Since, however, the whole object of the policy is to
promote loan-expenditure, we must obviously be careful not to continue
its temporary curtailment a day longer than we need.

A few countries have reached the first stage. But we alone have reached
the second stage. It is a great achievement of the Treasury and the Bank
of England to have effected so successfully a transition which France and
the United States, for whom the task was, until recently, much easier,
have bungled so badly.

(3) But there remains a third stage. For even when we have reached the
second stage, it is unlikely that private enterprise will, on its own
initiative, undertake new loan-expenditure on a sufficient scale.
Business enterprise will not seek to expand until _after_ profits have
begun to recover. Increased working capital will not be required until
_after_ output is increasing. Moreover, in modern communities a very
large proportion of our _normal_ programmes of loan-expenditure are
undertaken by public and semi-public bodies. The new loan-expenditure
which trade and industry require in a year is comparatively small even in
good times. Building, transport, and public utilities are responsible at
all times for a very large proportion of current loan-expenditure.

Thus the first step has to be taken on the initiative of public
authority; and it probably has to be on a large scale and organised with
determination, if it is to be sufficient to break the vicious circle and
to stem the progressive deterioration, as firm after firm throws up the
sponge and ceases to produce at a loss in the seemingly vain hope that
perseverance will be rewarded.

Some cynics, who have followed the argument thus far, conclude that
nothing except a war can bring a major slump to its conclusion. For
hitherto war has been the only object of governmental loan-expenditure on
a large scale which governments have considered respectable. In all the
issues of peace they are timid, over-cautious, half-hearted, without
perseverance or determination, thinking of a loan as a liability and not
as a link in the transformation of the community's surplus resources,
which will otherwise be wasted, into useful capital assets.

I hope that our Government will show that this country can be energetic
even in the tasks of peace. It should not be difficult to perceive that
100,000 houses are a national asset and 1,000,000 unemployed men a
national liability.

(4) Yet if we are to raise world prices, which is our theme, there is yet
a fourth stage. Loan-expenditure must spread its beneficent influence
round the world. How to assist that will be the subject of the next
chapter.




CHAPTER IV

A PROPOSAL FOR THE WORLD ECONOMIC CONFERENCE


We have reached the conclusion that there is no means of raising world
prices except by an increase of loan-expenditure throughout the world.
How to achieve this should, I suggest, be the central theme of the World
Economic Conference. There are, I think, three, and only three, possible
lines along which we can lend assistance.

(1) The first, and perhaps the most obvious, means is that of direct
foreign loans, in the style to which we have been accustomed in the past,
from the strong financial countries, which have a favourable foreign
balance or excessive reserves of gold, to the weaker, debtor countries.

The time may be coming for a return to this traditional policy, as
opportunity offers. But it would be chimerical to suppose that such
foreign loans can play a large part to-day in bringing about recovery.
Those countries which are best able to make them are least likely to do
so. Nor is it reasonable to expect private investors to assume new risks
of this kind, when those which they have already assumed are turning out
so badly.

(2) The second, and more promising, means is for the stronger financial
countries to increase loan-expenditure _at home_, on the lines
recommended in Chapter II above. For such expenditure will be twice
blessed. In so far as it sets up a stream of expenditure on
home-produced goods, the favourable repercussions of the initial
loan-expenditure on employment will be multiplied. In so far as it leads
to expenditure on imported goods, it will set up similar favourable
repercussions abroad, and will strengthen the position of the countries
from which we buy, both to make reciprocal purchases and also to augment
their own loan-expenditure. It will have set the ball rolling.

It may be better, therefore, to use our available resources to finance
the additional imports, to which a bold policy of loan-expenditure at
home is likely to lead, than to make foreign loans. This will be just as
beneficial to the outside world, and decidedly more healthy than further
additions to international indebtedness.

(3) Yet, once again, it seems obvious that we are discussing, so far,
remedies of which the quantitative effect is hopelessly disproportionate
to the problem of raising world prices. I see no reliable prospect of a
sufficient rise in world prices within a reasonable time, except as the
result of a substantial, and more or less simultaneous, relief of
taxation and increase of loan-expenditure in many different countries. We
should attach great importance to the _simultaneity_ of the movement
towards increased expenditure. For the pressure on its foreign balance,
which each country fears as the result of increasing its own
loan-expenditure, will cancel out if other countries are pursuing the
same policy at the same time. Isolated action may be imprudent. General
action has no dangers whatever.

We are now advanced a stage further in our argument. We have reached the
point where combined international action is of the essence of policy. We
have reached, that is to say, the field and scope of the World Economic
Conference. The task of this Conference, as I see it, is to devise some
sort of joint action of a kind to allay the anxieties of Central Banks
and to relieve the tension on their reserves, or the fear and expectation
of tension. This would enable many more countries to reach the first of
the stages which I distinguished in Chapter III--the stage at which
bank-credit is cheap and abundant. We cannot, by international action,
make the horses drink. That is their domestic affair. But we can provide
them with water. To revive the parched world by releasing a million
rivulets of spending power is the primary task of the World Conference.

For the Conference to occupy itself with pious resolutions concerning the
abatement of tariffs, quotas, and exchange restrictions will be a waste
of time. In so far as these things are not the expression of deliberate
national or imperial policies, they have been adopted reluctantly as a
means of self-protection, and are symptoms, not causes, of the tension on
the foreign exchanges. It is dear to the heart of Conferences to pass
pious resolutions deploring symptoms, whilst leaving the disease
untouched. It should be the rle of the British Government to make a
reality of this forthcoming Conference by concrete proposals which would
go to the root of the disease.

There are certain preliminaries which must be accomplished before
positive remedies will have a fair chance. We all agree that the
settlement of War Debts and of Reparations are, first of all,
indispensable. For these are of primary importance in creating fear of
acute tension on the foreign exchanges. But have we a positive scheme of
action wherewith to seize the opportunity which the settlement of these
issues would create?

No remedies can be quickly efficacious which do not allay the anxieties
of Treasuries and Central Banks throughout the world by supplying them
with more adequate reserves of international money. There is a
considerable variety of schemes which can be devised with this end in
view, having a close family resemblance to one another. After much
private discussion and borrowing the ideas of others, I am convinced that
the following scheme is the best one. If other variants command more
support, that would be a reason for preferring them.

There are certain conditions which any scheme for increasing the reserves
of international money should satisfy. In the first place, the additional
reserves should be based on gold. For whilst gold is rapidly ceasing to
be national money, it is becoming, even more exclusively than before, the
international money most commonly held in reserve and used to meet a
foreign drain. In the second place, it should not be of an eleemosynary
character, but should be available, not only to the exceptionally needy,
but to all participating countries in accordance with a general formula.
Indeed there are few, if any, countries left to-day which are so entirely
without anxiety that they would not welcome some strengthening of their
position. In the third place, there should be an elasticity in the
quantity of the additional reserves outstanding, so that they would
operate, not as a net permanent addition to the world's monetary supply,
but as a balancing factor to be released when prices are abnormally low
as at present, and to be withdrawn again if prices were to be rising too
much. These conditions can be satisfied as follows:

(i) There should be set up an international authority for the issue of
gold-notes, of which the face value would be expressed in terms of the
gold content of the U. S. dollar.

(ii) These notes would be issuable up to a maximum of $5,000,000,000, and
would be obtainable by the participating countries against an equal face
value of the gold-bonds of their governments, up to a maximum quota for
each country.

(iii) The proportionate quota of each country would be based on some such
formula as the amount of gold which it held in reserve at some recent
normal date, _e.g._, at the end of 1928, provided that no individual
quota should exceed $450,000,000, and with power to the governing board
to modify the rigidity of this formula where special reasons could be
given for not adhering to it strictly. (Some provision, for example,
would be required for silver-using countries.) The effect of this formula
would be that the quota of each country would add to its reserves an
amount approximately equal to the gold which it held in 1928, subject to
the above maximum proviso. The detailed allocation for each country is
given in an Appendix to this chapter.

(iv) Each participating government would undertake to pass legislation
providing that these gold-notes would be acceptable as the equivalent of
gold, except that they should not enter into the active circulation but
would be held only by Treasuries, Central Banks, or in the reserves
against domestic note-issues.

(v) The governing board of the institution would be elected by the
participating governments, who would be free to delegate their powers to
their Central Banks, each having a voting power in proportion to its
quota.

(vi) The gold-bonds would carry a rate of interest, nominal or very low
in the first instance, which could be changed from time to time by the
governing board subject to (viii) below. They would be repayable at any
time by the government responsible for them, or on notice given by the
governing board subject to (viii) below.

(vii) The interest, after meeting expenses, would be retained in gold as
a guarantee fund. In addition, each participating government would
guarantee any ultimate loss, arising through a default, in proportion to
the amount of its maximum quota.

(viii) The governing board would be directed to use their discretion to
modify the volume of the note-issue or the rate of interest on the bonds,
solely with a view to avoiding, so far as possible, a rise in the gold
price-level of primary products entering into international trade above
some agreed norm between the present level and that of 1928--perhaps the
level of 1930.


APPENDIX

Under the formula on p. 27 above for distributing the $5,000,000,000
gold-notes in proportion to the gold held in reserve by each country at
the end of 1928 subject to a maximum of $450,000,000 to any one country,
the allocation would work out as follows:

Seven countries (Great Britain, United States, France, Germany, Spain,
Argentine, and Japan) would qualify for the maximum $450,000,000 each

                     $
Italy           266,000,000
Holland         175,000,000
Brazil          149,000,000
Belgium         126,000,000
India           124,000,000
Canada          114,000,000
Australia       108,000,000
Switzerland     103,000,000
Poland           70,000,000
Uruguay          68,000,000
Java             68,000,000
Sweden           63,000,000
Denmark          46,000,000
Norway           39,000,000
South Africa     39,000,000
New Zealand      35,000,000
Hungary          35,000,000
Czecho-Slovakia  34,000,000
Roumania         30,000,000
Austria          24,000,000
Colombia         24,000,000
Peru             20,000,000
Jugoslavia       18,000,000
Egypt            18,000,000
Bulgaria         10,000,000
Portugal          9,000,000
Finland           8,000,000
Greece            7,000,000
Chile             7,000,000
Latvia            5,000,000
Lithuania         3,000,000
Esthonia          2,000,000

No country would have injustice done to it by this particular choice of
date except Chile, whose case might deserve special consideration, and,
to a lesser extent, Greece and Canada. If we were to take the _highest_
figure held at the end of any year from 1925 to 1928, the following would
be the only changes in the above total:

                  1928.        Highest of 1925 to 1928.
                    $                      $
Denmark         46,000,000             56,000,000
Greece           7,000,000             10,000,000
Holland        175,000,000            178,000,000
Canada         114,000,000            158,000,000
Chile            7,000,000             34,000,000
New Zealand     35,000,000             38,000,000
Java            68,000,000             79,000,000
South Africa    39,000,000             44,000,000




CHAPTER V

THE INTERNATIONAL NOTE ISSUE AND THE GOLD STANDARD


In the last chapter I have proposed the creation of an International Note
Issue designed to relieve the anxieties of the world's Central Banks, so
as to free their hands to promote loan-expenditure and thus raise prices
and restore employment. The necessity of this policy is a consequence of
the conclusion, which I reiterate with emphasis, that there is no means
of raising world prices except by increasing loan-expenditure. But it is
desirable that I should attempt to fill in some further details in this
far-reaching proposal.

Its adoption would afford a good opportunity, if sufficient agreement
could be obtained, to secure promises that the assistance thus given
would be used, in the first instance, to abate certain unsound
international practices which have become common under stress of hard
circumstances. Exchange restrictions should be abolished. Standstill
agreements and the immobilisation of foreign balances should be replaced
by definitive schemes for gradual liquidation. Tariffs and quotas imposed
to protect the foreign balance, and not in pursuance of permanent
national policies, should be removed. The stronger financial centres
should re-open their money markets to foreign loans. Defaults on public
debts held abroad should be terminated, with the aid of the postponement
of sinking funds and some writing down of interest or principal, perhaps
based on an index number of prices, where incapacity, even in the new
circumstances, is proved to the satisfaction of an independent expert
body. For my own part, I should withhold participation in the scheme from
any country which was acting in defiance of its international agreements
and obligations.

Subject to these external conditions, it would be advisable to leave to
each participant an unfettered discretion as to the best means of
utilising its quota. For there is great variety in the needs of different
countries. Some would discharge pressing foreign obligations; some would
restore budgetary equilibrium; some would re-establish commercial credit;
some would prepare for conversion schemes; some would organise schemes of
national development; and so on. But all uses alike would tend in the
desired direction.

There remains, however, one essential condition, upon which I have not
yet touched. The notes would be gold-notes, and the participants would
agree to accept them as the equivalent of gold. This implies that the
national currencies of each participant would stand in some defined
relationship to gold. It involves, that is to say, a qualified return to
the gold standard.

It may seem odd that I, who have lately described gold as "a barbarous
relic", should be discovered as an advocate of such a policy, at a time
when the orthodox authorities of this country are laying down conditions
for our return to gold which they must know to be impossible of
fulfilment. It may be that, never having loved gold, I am not so subject
to disillusion. But, mainly, it is because I believe that gold has
received such a gruelling that conditions might now be laid down for its
future management, which would not have been acceptable otherwise. At
any rate my advocacy is subject to the qualifications which follow.

It would be a necessary condition for the adoption of the proposed
International Note Issue that each participating country should adopt a
_de facto_ parity between gold and its national currency, with buying and
selling points for gold separated by not more than 5 per cent. With the
increased supply of gold and its equivalent brought into existence by the
new Note Issue, such a commitment by this country would be, in my
judgement, both safe and advisable. The _de facto_ parity should be
alterable, if necessary, from time to time if circumstances were to
require, just like bank-rate,--though by small degrees one would hope. An
unchangeable parity would be unwise until we know much more about the
future course of international prices, and the success of the board of
the new international authority in influencing it; and it would,
moreover, be desirable to maintain permanently some power of gradual
adjustment between national and international conditions. In addition,
the governing board should have some discretionary power to deal with
emergencies and exceptional cases. The margin of 5 per cent between the
gold points would be essential, in the light of recent experience, as a
deterrent and a protection against the wild movements of liquid funds
from one international centre to another, and to allow a reasonable
independence of bank-rate and credit policy to suit differing national
circumstances,--though there would be nothing to prevent a Central Bank
from maintaining the gold equivalent of its national money within
narrower limits in normal practice.

With these precautionary safeguards there would be much to gain and
little to lose from the greater stability of the foreign exchanges which
would ensue. There can be no object in exchange fluctuations except to
offset undesired changes in the international price level, or,
occasionally, to make an adjustment, with the minimum of friction, to
special national conditions, temporary or permanent; and they should not
be allowed to occur for any other reason.

It can be claimed, I think, as a considerable incidental advantage of the
plan here set forth, that it would enable the condition to be satisfied
which our authorities have laid down for even a qualified return to gold
on the part of this country, namely, that there must be a more equal
distribution of the world's gold reserves. Indeed I can imagine no other
way by which this condition could be satisfied within a reasonable time.
For if it means that the Bank of France and the Federal Reserve System of
the United States are to share out their gold reserves with the
impecunious countries of the world, it is clearly quite remote--to-day
more than ever--from anything which can possibly happen. Equally if it
means that these countries are to lend abroad sums so much greater than
their foreign balance as to lead to a heavy outward drain of gold, this
also is what no reasonable person would expect. Moreover, in the
conditions of to-day, with the employment of foreign balances as reserve
money completely at an end, and after the experiences by the world's
strongest financial centres of the scale on which balances can seek to
move, it is not merely a question of the maldistribution of gold. We need
a much greater absolute amount of reserve money to support a given level
of world-prices, than was necessary before the recent shocks to
international credit. This may not be a permanent requirement. But it
exists to-day, and it must be satisfied before we can expect that ease
of mind and absence of anxiety on the part of Central Banks which is a
condition of their freely encouraging the increased loan-expenditure
without which world prices cannot rise. Some such plan, therefore, as
that which I have proposed has become an indispensable condition of world
recovery. It is useless to do lip-service to the need of raising world
prices if we neglect the only measures which can have that result.

The alternative, sometimes suggested, of a simultaneous devaluation of
all national currencies in terms of gold, whilst offering some
advantages, has the great defect that it would only strengthen the
position of those countries which already hold large reserves of gold and
are, therefore, relatively strong.




CHAPTER VI

CONCLUSION


I have endeavoured to cover a wide field in a few words. But my theme has
been essentially simple, and I am hopeful, therefore, that I have been
able to convey it to the reader.

Many proposals now current are substantially similar in intention to the
proposals of this pamphlet. Some deal with one part of the field; some
with another. We shall have need of more than one, if our action is to be
adequate to the problem. After making all due allowances for the factors
which will cause a larger number of men to appear in the unemployment
returns even in good times, we have the task of putting at least
1,000,000 men back to work. On the figure of L.150 primary expenditure to
put one man to work for a year, which I have adopted above as my working
hypothesis, we should need an increased loan-expenditure _plus_ an
increased foreign balance amounting altogether to L.150,000,000. If we
take the more optimistic figure of L.100 per man, which I am myself
disposed to favour, the primary expenditure required will be L.100,000,000
per annum. We cannot rely on much further assistance towards this total
from the foreign balance, until after world recovery has set in. Thus it
would be prudent to assume that we have urgent need of the addition of at
least L.100,000,000 to our annual primary expenditure from increased
loan-expenditure at home.

This is a formidable, but not an impossible, figure to attain. At least
L.50,000,000 might reasonably come from a relief of taxation as a result
of suspending the sinking fund and borrowing for appropriate purposes;
though this would not lead to increased primary expenditure of so much as
L.50,000,000. On this basis an additional loan-expenditure of (say)
L.60,000,000 by private enterprise, assisted and unassisted, local
authorities, public boards, and the Central Government, would be a
substantial step towards re-establishing employment.

We are, I think, too much discouraged as to the potentialities of
fruitful action along these lines, because the effect of previous efforts
has been masked by offsetting influences. It is most important to
understand that the effects of loan-expenditure and of the foreign
balance are _in pari materia_. Thus it was the rapid decline of the
foreign balance by L.75,000,000 in 1930 and by L.207,000,000 in 1931 as
compared with 1929,[1] which defeated the attempt of the Labour
Government to increase employment by loan-expenditure; the additional
loan-expenditure for which they were responsible being on a much smaller
scale than this. But, again, the improvement of the foreign balance in
1932 by L.74,000,000 as compared with 1931 has brought no increase in
employment, because it has been offset by the drastic measures of the
National Government to reduce loan-expenditure. Heaven knows to what
plight a combination of the policy of the Labour Government in doing
nothing to protect the foreign balance, with the policy of the National
Government to curtail loan-expenditure might not have brought us!
Business losses would have risen to a figure comparable with those in the
United States,[2] bankrupting our railways and bringing the industry of
the country virtually to a standstill. On the other hand, we have the
other combination still untried--the policy of protecting the foreign
balance and at the same time doing all in our power to stimulate
loan-expenditure.

I plead, therefore, for a trial of this untried combination in our
domestic policy; and for the World Economic Conference an advocacy by our
representatives of an expansion of international reserve money on the
general lines proposed above.

For we have reached a critical point. In a sense, it is true that the
mists are lifting. We can, at least, see clearly the gulf to which our
present path is leading. Few of us doubt that we must, without much more
delay, find an effective means to raise world prices; or we must expect
the progressive breakdown of the existing structure of contract and
instruments of indebtedness, accompanied by the utter discredit of
orthodox leadership in finance and government, with what ultimate outcome
we cannot predict.

The authorities in power have pronounced in favour of raising world
prices. It is, therefore, incumbent upon them to have some positive
policy directed to that end. If they have one, we do not know what it is.
I have tried to indicate some of the fundamental conditions which their
policy must satisfy if it is to be successful, and to suggest the kind of
plan which might be capable of realising these conditions.


FOOTNOTES:

[1] These figures are the estimates of the Board of Trade, except that
the American debt payment in 1932, which was paid for in gold, has been
omitted. I believe myself that in all these years the absolute figures
may have been some L.25,000,000 better than the Board of Trade allows. But
this would not affect the comparative figures given above.

[2] I should attribute the extremity of the plight of the United States
largely to the combined effect of their having no dole financed out of
loans, as there was in this country prior to 1932, and no means of
improving the foreign balance such as we employed after September 1931.


_By the same Author_


ESSAYS

IN

PERSUASION


"Here are collected the croakings of twelve years--the
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  I. THE TREATY OF PEACE AND WAR DEBTS

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