Bankers and Credit/Chapter 8
For purposes of this merely popular discussion, there is no need to go more deeply into the Quantity Theory of Money than to recognize that if money, by which we mean any coin, or bit of paper, or other article that is commonly taken in payment, is multiplied and circulated faster than goods come forward for sale, the general level of prices will go up and vice versa. From this it is any easy and alluring jump to the conclusion that changes in the general price level need no longer happen, and that by regulation of the quantity of money the price level can be kept steady or moved up and down to any point that we like to choose. If so we have found what the old critics of our gold standards have for many years been seeking and we have got, in regulated paper, a standard that shall be as trustworthy as a yard measure. Mr. Kitson—or his particular embodiment which sought for stability rather than the moral right of everybody to all the credit that he wanted—and Professor Soddy join hands with some of the most distinguished exponents of economic science, Irving Fisher who for years has been hammering away like a Trojan at his plan for "stabilizing" the dollar, Gustav Cassel, the great Swedish master who ever since the Brussels Conference has been imploring mankind not to add the folly of deflation to the crime of inflation, and J. M. Keynes and R. G. Hawtrey, the brilliant English champions of stabilization. What we humbler mortals have to consider is firstly whether stabilization is as simple a matter as it seems: secondly, whether, even if it were all that its admirers claim, it is wise to widen the power of Government, especially in a field in which it has blundered with unusual vigour and recklessness; and even though the actual regulation were put into the hands of the Bank of England, Parliament would, I think, certainly claim the ultimate nght of control. Thirdly, if we do decide to stabilize, at what point we should steady our price level.
After giving the above list of names in favour of stabilization, it seems almost profane to suggest that this doctrine involves big assumptions; but surely the Quantity. Theory, as any complete statement of it must show, depends for its truth not only on the quantity of money in relation to things to be bought and sold but on the use that is made of the money by its holders, that is to say, on the velocity or slackness of its circulation. You may contract and expand—if you can—the volume of currency and of bank credits like a concertina, but if the public makes a nimbler use of the scantier currency and credit left after contraction, and leaves idle in its pocket and in its bank balances the larger amount produced by expansion, the effect on prices will be little, if any.
And the original contraction and expansion is not going to be as easy as it looks. Professor Soddy told us all about one way of doing it, dismissing it in a couple of sentences as a thing which went without saying. "Currency," he said, "must be regulated pari passu with the changing revenue, issued as the latter expands and destroyed as the latter contracts." (It should be noted that the Professor when he talks of revenue does not use the word in its ordinary sense, of the Government's income, but means the whole income of the whole nation.) "Since it would neither be given away in the first nor taken away in the second event, but used to buy back old, or taken in exchange for new State loans, the community as a whole would share the prosperity of good times as well as the stringency of bad ones, instead of only the latter as under the existing system." Why our peevish friend should suppose that the community as a whole does not share the prosperity of good times we need not pause to inquire. What is curious is to find his system of currency regulation depending on the existence of a national debt, in view of the many eloquent passages in his pamphlet which are devoted to denunciations of usury. The fact, however, that only a nation with a debt can use the system is never likely to be an objection.
In this country the system would work, I suppose, somewhat on this wise. If prices went down and it was therefore desired to increase the volume of currency, the official broker would be sent into the Consols market to buy the necessary number of millions of Government securities, and new notes, either Treasury notes or Bank of England notes, would be issued to the sellers in payment for their stock; this would be a simple and inexpensive operation. Interest bearing debt would be paid off by the issue of paper which would only bear the cost of printing.
But when it is the other way and debt is issued so as to contract currency at a time of rising prices, the process seems likely to be both expensive and unpopular. No use could be made by the Government of the currency received from subscribers to the new loan; it would have to be destroyed, to carry out the scheme, and so the operation would be dead loss; at a time of expansive prosperity implied by the circumstances the Government would probably have to pay a handsome rate to get its loan out, and it would have to lay this sacrifice on the shoulders of the taxpayer, knowing that thereby, if the measure succeeded, it would be checking the rise in prices that makes the business world so happy.
There would probably be plenty of people who would argue, that the Index Numbers, which are supposed to record the average movement of the prices of the principal commodities, were all wrong, and that prices are not really rising at all. Dr. E. C. Snow in an article in the Manchester Guardian Commercial of July 19, 1923, observed that "the perplexity in which those who have attempted to make practical deductions from the movements of price Index Numbers in the past few years have been placed is sufficient evidence of the inadequacy of these Index Numbers for the purpose." And as I write in August of the same year, a dock strike is still going on which began because the dockers, whose pay was to be reduced because an Index Number had fallen, knew, or thought that they knew, that there had been no fall in the cost of living which the Index Number was supposed to record.
Mr. Kitson, in his expansive embodiment, would be saying that "sales are limited by the amount of money or credit offered"; that "production is necessarily limited by the quantity of money or credit available for commercial purposes"; and that "a study of the currency and bank methods of all industrial nations for the past century will convince every unprejudiced person that the scarcity of wealth and the limited amount of production has been due primarily to the legally restricted supply of money." (Money Problems, page 32.) One can hear the rattling cheers of the Opposition back benches as the leader of the Kitsonian party makes his points, and convicts the cowering Administration of throttling, at the bidding of misleading statistics in which nobody believes and armchair economists with cosmopolitan leanings, the industry of England just struggling to expand.
Professor Irving Fisher will always be associated with the rise of stabilization to the position of an ideal, for which people were ready to work. His system is expounded in his well-known work on the Stabilization of the Dollar published in 1920, but the first sketch of it was outlined in 1911, in his Purchasing Power of Money. It has always seemed to me to be rather too clever and complicated for the public ever to understand, and that it would therefore always be received with suspicion and made responsible for earthquakes, harvest failures, and epidemics. Professor Fisher, in his own summary of his scheme, says that his method is "to vary the weight of the gold dollar so as to keep its purchasing power invariable. We have now a gold dollar of constant weight and varying purchasing power; we need a dollar of constant purchasing power and therefore of varying weight. . . . If prices tend to rise or fall, we can correct this tendency by loading or unloading the gold in our dollar, employing an Index Number of prices as the guide for such adjustments. The process for doing this is as simple as clock-shifting for daylight saving and would produce its effects unobtrusively."
The plan has now been embodied in a bill which has been introduced in the United States House of Representatives and referred to the Committee of Banking and Currency. Its working is explained as follows by Mr. T. Alan Goldsborough, a member of the House, in the January 1923 number of the Proceedings of the Academy of Political Science, New York:
"The mechanism of the bill provides for the retirement of gold coin by the payment of a small premium, leaving gold certificates, or yellowbacks, in circulation. There will then be a certain number of dollars in gold in the Treasury either in gold coin or gold bars. Should the general wholesale commodity price level rise, say, 1 per cent. in a given period (two months in the bill), the amount of gold in a gold dollar is increased arithmetically 1 per cent., which leaves 1 per cent. less of gold dollars in the Treasury, which necessitates the retirement of 1 per cent. of the yellowbacks, which in turn contracts the total volume of potential money and credit by 1 per cent. This process is followed every two months until the price level is down to normal. Should the price level fall below normal, say 1 per cent., the amount of gold in a gold dollar is decreased 1 per cent., which increases the number of gold dollars in the Treasury by 1 per cent., which permits the issuance of I per cent. more of gold certificates, which in turn increases the potential money and credit throughout the country by 1 per cent."
Clock-shifting for daylight saving, if it happened whenever the thermometer moved, would be a most unpopular arrangement, and there is reason to fear that Professor Irving Fisher's scheme would be a cause of much bewilderment, and that if it were adopted by a large number of nations, it would make questions of exchange more difficult than ever to unravel. It is easy to answer this objection by saying that the scheme is quite simple to those who are clever enough to understand it, and that its working would naturally be entrusted to such folk. But the general public, I think, has a rather well-based suspicion of schemes that can only be understood and carried out by very clever people.
Professor Lehfeldt of Johannesburg, however, who really understands these matters, says in his clear and excellent Restoration of the World's Currencies that the Fisher plan is not only ingenious, but has serious practical merits to recommend it. He has no doubt that the system would work and that it would confer great benefit on a world plagued with ill-regulated currencies; "it would, however," he adds, "be necessary to convince the commercial and political classes of its merits," thereby seeming to imply that neither of these classes is likely to show much eagerness in making the mental effort necessary for grasping the beauties of the system. Professor Lehfeldt decides that the simple gold standard being familiar to everyone should first be restored to get us out of our present distresses, and that after that we can go on to discuss new devices and improvements.
Regulation by discount rate remains as a third method of controlling the volume of currency, and at present perhaps the most fashionable among reformers—especially those who may be referred to with no intention whatever of disrespect as academic. In this country and in others where legal tender currency is only used in wages payment and retail transactions and as the bankers' cash reserve against deposits, the amount and circulation of "bankers' money"—bank deposits and cheques drawn on them—is evidently a most important influence on prices. When we have all got growing balances at our banks and are constantly turning them over by drawing cheques against them, a rise in prices is certain to happen unless the volume of goods coming forward for sale is growing as fast as the figure of our bank balances.
These bank balances are contained in the deposits held by the banks[1] and it has been shown that these deposits are created by the banks in making advances, discounting bills (Treasury Bills or the bills of exchange of commerce and finance) and investing in securities. If then the bankers raise the rate that they charge for advances and discounts it is easy in theory to assume that those who have borrowed from them will be inclined to repay advances and discontinue discounting, and that there will thus be a reduction in bank balances and a consequent fall in prices; and vice versa when the banks lower the rates that they charge for accommodation borrowers will be encouraged, deposits will expand and prices will go up.
And so we proceed to the ideal set forth by Professor Cassel of Sweden, of a "true bank policy." He tells us on page 103 of his work on Money and Foreign Exchange after 1914 that "the supply of credit must be so regulated that no rise in prices and, naturally, no fall in prices either, takes place. In order to keep demands for credit within the limits of available means, the banks must apply interest rates fixed with that object in view, but in their continual scrutinizing of the demands for credit must also be able to effect the necessary restrictions. The main factor determining interest rates throughout the entire banking system in a country is the central bank's discount rate, and in addition the central bank naturally possesses a very great influence owing to the general advice it is able to give to private banks as to their credit policy." A little later he says that "a fixed value (of the monetary unit) can only be kept up by properly limiting the granting of credit and principally, therefore, by a suitable discount rate."
Now this scheme of regulating prices through credit contraction and expansion, brought about by raised and lowered rates for loans, the rises and falls of which were prompted by movements in the central bank's official rate, was tentatively, and as I venture to believe quite ineffectively tried in this country in 1919 and the following years. As was shown in Chapter V the rises in Bank Rate in 1919 and 1920 were certainly followed by a catastrophic fall in prices, which, however, was accompanied by a further expansion in bank deposits. It was clear that to produce actual contraction of bank credits, under the circumstances then ruling, Bank Rate would have had to go up at a pace that would almost certainly have precipitated panic. The fall in prices happened not because banking credits had been contracted—because they had not—but because, stimulated by the Chinese example, consumers all over the world stuck in their toes like an overburdened, over-beaten ass and refused to go any further. Professor Cassel admits on page 226 of the work already cited that "the common purchasing strike, both on the part of business enterprise and consumers, may perhaps be regarded as the immediate cause of the fall in prices. But this purchasing strike," he adds, "has been a direct and natural consequence of the restrictive policy adopted by the bank administration." The Professor might have explained how a restrictive policy which failed to restrict could have produced a fall in prices.
In 1919, however, conditions were quite abnormal, with prices soaring so fast and furiously that producers and merchants might well think that hardly any rate for money could make it advisable to take in sail. In normal times a few turns of the Bank Rate screw might certainly be counted on sooner or later to produce the desired effect. But when the wind is on the other cheek, when depression prevails and it is desired by lower money rates to induce enterprise to tuck up its sleeves and get to work, no such success can be expected with any confidence. If people think that any business that they do is likely to involve them in loss, they would evidently be born fools to do it, even if the money needed was lent them for nothing.
This difficulty is admitted even by Mr. Hawtrey, whose belief in the overwhelming influence of monetary conditions on trade is carried to such amazing lengths in his brilliant and interesting works. In his Monetary Reconstruction, page 142, he says that "even lending money without interest would not help, if the borrower anticipated a loss on every conceivable use that he could make of the money. . . . But such a condition of stagnation is not possible except in the course of reaction from a riot of inflation. If the inflation is prevented, the stagnation will never arise." It must indeed be pleasant to possess a mind like Mr. Hawtrey's that can arrive at this completely confident certainty about matters which to ordinary mortals seem to be so full of doubts, difficulties and complications. How does he know that if there has been no previous inflation there can be no—business stagnation? Might not stagnation arise from political or social upheaval or apprehension thereof, or from the effect of a plague or the failure of a harvest which might seriously disorganize the business of the world?
Surely the price that enterprise has to pay for the use of money is only one among very many items that it has to consider when it is deciding whether to spread or take in canvas, or just to "keep her so," and it is a big assumption to suppose that by varying this one item a certain and prompt effect can be produced on industry's decision.
This assumption, however, Mr. Hawtrey not only makes without an effort but expects the rest of the world to take on the strength of his personal pronouncement. "Whatever other factors," he says (page 143), "affect the purchasing power of the monetary unit, one, the volume of trade borrowing, is amenable to human control. By its means the agency which exercises the control, that is to say the Central Bank, can correct the effect of all the others." Hence it follows that, whatever disasters happen such as—wars, plagues, pestilences and famines, trade will continue steadily on an even keel as long as the Bank of England makes appropriate use of its Bank-Rate weapon. "It is quite superfluous," our Mentor continues, "to seek for other causes of depression and unemployment when there has been so tremendous a deflation as to reduce prices by half in less than two years. . . . This does not mean to say that we do not suffer through the distresses of Europe. Our loss is heavy enough, but it does not take the form of Unemployment. Unemployment is due to a defect of organization, a maladjustment of the monetary machine. The defect can be cured, the maladjustment can be corrected." So our lack of foreign customers and our failure to get peace, and the action of France on the Ruhr which so many have held responsible for our continued depression, have had nothing to do with our unemployment; and a new Gengis Khan might sweep over the whole of Europe and Asia with fire and sword from Pekin to the Bay of Biscay, and might then proceed to inflict the same inconvenience on North and South America, Africa and Australasia, but as long as the Governor of the Bank of England moves his official rate according to Mr. Hawtrey's directions, employment will go on steadily in England!
Well, one can only hope that Mr. Hawtrey is right, but the admissions which he himself makes seem to show that his theory is not quite as impregnable as his confidence. For he observes on page 120 that "a deflation so intense as to reduce prices of commodities by nearly 50 per cent. and to throw 2,000,000 people out of employment has been accompanied by no visible fall in bank deposits. And it is even argued that there has been no deflation at all, as if the quantity of purchasing power were the sole test of the state of credit. The kind of deflation that is practically important is deflation not of the outstanding aggregate of purchasing power but of the flow of purchasing power." But this new complication seems to upset the whole theory of the control of prices through money rates. There is a great deal to be said for the belief that higher rates will tend to restrict the volume of credit, as long as this belief is not pushed to extremes. But now Mr. Hawtrey, finding that the fall of 1920 was not produced by a restriction of credit, because credit was not restricted, begins to bark up quite a new tree and tells us that what really matters is restriction of the flow of credit.
Everybody recognizes that the effect of the quantity of money in relation to goods in raising and depressing prices is complicated by the pace at which the owner of the money turns it over, and this is one of the reasons why some of us doubt the efficacy of the remedy that Mr. Hawtrey proposes for all our economic ills. But it seems to be making a new claim on our credulity to expect us to believe that because Bank Rate goes up therefore people are certain to make less use of their bank balances and turn them over more slowly. If the rise in Bank Rate makes them expect a fall in prices it may through psychological influence produce this effect. But at the end of July 1914 we remember that a 10 per cent. Bank Rate was accompanied by a consumers' panic and a scramble both for money and for goods.
It should be noted that Mr. Keynes expresses himself much more cautiously than Mr. Hawtrey on this subject of price regulation through control of credit. In a letter published in the Times of August 7, 1923, he only claims to be "supported by expert opinion in the belief that . . . it lies in the power of the Bank of England and the Treasury, within wide limits to determine in the long run how much credit is created," and he argues that "the policy of the Cunliffe Committee assumes that the authorities have the power in the long run to fix the price level, just as much as the policy of price-stabilization assumes it."
And Mr. Carl Snyder, statistician to the Federal Reserve Board New York, shows doubt of the efficacy of mere movements in the discount rate by proposing, in a scheme published in the American Economic Review of June 1923, to reinforce them by automatic increases and decreases in the Central Bank's holdings of securities and acceptances. But surely if there is one thing that a Central Bank cannot do, it is to refuse to lend or discount at a price. If it is to become a merely automatic machine, with no elasticity or power of discrimination, it will lose the greater part of its right to exist.
Moreover even if the system of regulating the general level of prices through the discount rate were as certain and simple as its distinguished exponents believe, even if it were possible with Professor Cassel to lay down that "the supply of credit must be so regulated that no rise in prices, and naturally, no fall in prices either, takes place," should we then have removed from the minds of organizers of industry all fear of loss and from their workmen's all fear of unemployment? The Index Numbers of the average price of commodities would march, serenely stabilized, in a steady straight line across the charts that are so dear to statisticians. But the leather merchant and the bootmaker might very likely say "A murrain on your Index Number, what's going to happen to hides?"
For it is these special fluctuations that affect one commodity and one trade and are not by any means lessened by the most successful stabilization of the general price level through credit regulation, that affect those who are concerned much more seriously than a movement in which all other prices are joining. For instance, if wool rises or falls with other prices, the cloth maker and the tailor are comparatively little affected. Their raw material is rising and their finished commodity likewise (or the rise in raw material could not go on rising long), but so also are all the other materials that enter into food, clothes, shelter, and transport. For a time, owing to the habitual "lag" in wages, they may earn an extra profit at the expense of those who work for them; but this cannot last and when it is over what they make on cloth and clothes is offset by higher prices for all the things that they have to buy. And in the case of a fall it is likewise, except that then the advantage of the lag in wages is on the workers' side.
But if wool, cloth and clothes go up or down when other things are steady or moving in the opposite direction, then there is a big gain or loss. If the cloth maker can make a bigger profit and buy other things more cheaply, or suffers a loss at a time when all that he has to buy is dearer, then it may be a question of fortune or of ruin, and such things are quite possible with a successfully stabilized Index Number. And in spite of Mr. Hawtrey's conviction to the contrary there is surely something to be said for the view that trade depressions begin owing to these special fluctuations in the fortunes of particular enterprises, which arise because of the uneven pace of development and production in different industries, and spread to others like an unwholesome contagion.
If this be so, the notion that we can secure real stability in enterprise and freedom from unemployment, even if stabilization of the general price level were entirely successful, might bring with it grave disappointment.
Champions of stabilization are already arising who go all the way with Professor Cassel and Mr. Hawtrey but insist that when their goal is achieved it must only be a first step towards the stabilization of individual prices. Mr. E. M. H. Lloyd has lately produced a book entitled Stabilization, an Economic Policy for Producers and Consumers, which is all that a book should be in brevity and clearness and brightness. He is very eager and earnest, thinks private property in land and railways an "anachronism," and takes things for granted with an airy confidence that is very pleasant; as Mr. Edmund Gosse once said of a French theorist about Shakespeare, "he leaps to conclusions with the sudden agility of a chamois." He seems to think that because thirty-one Governments assembled at the Genoa Conference have officially endorsed the "important new doctrine, that the general level of prices, and consequently the general state of trade and unemployment, can be to a large extent stabilized by appropriate action on the part of the Central Banks," therefore this so desirable stabilization may soon be expected. Was not there a Brussels Conference and did it not officially endorse balanced Budgets, cessation of finance by printing press, and inter-change of goods between nations, and have not most of the Governments which endorsed these ideals continued to spend more than their income from revenue and to maintain and increase restrictions on trade? And how long would it take before the Central Banks of Europe and America could really be got to work together and to hand over the control of their credit policy to the majority of a committee or whatever the machinery proposed might be?
Mr. Lloyd, however, leaves America out, on the curious ground that "so long as public opinion in the United States will insist on repayment of European debts not much progress can be made in monetary stabilization." Why America, whose interest in the war was so much remoter than Europe's, should be expected to lend huge sums for it and then remit them, he does not explain. Following Mr. Hawtrey and the Genoa Conference he proposes a European Monetary Convention and a sort of European Consortium to be formed by the Central Banks, which would pool their gold. "Let us assume," he says, "for the sake of simplicity that all the gold is deposited in London." It would be simple, but is it likely as long as there is any possibility of war between any of the Powers included in the scheme? "Being thus linked together, with a single pool of gold, the Central Banks would need to pursue a common discount policy. In other words, the expansion and contraction of credit and the regulation of the volume of money and circulation would be effected by alterations in the Bank Rate at a common centre. This would virtually restore the state of affairs which existed before the war, when the London Bank Rate exercised a determining influence over monetary conditions in other European countries." How many French bankers would allow the truth of this last statement?
But as already indicated, the most interesting point in Mr. Lloyd's programme is that having taken the stabilization of the general level of prices in his stride, as secured by the Genoa resolutions, he goes on (page 79) to doubt whether stabilization "can be effectively achieved by manipulating the Bank Rate and co-operation between the Central Banks, so long as the marketing of staple commodities, which enter into the general Index Number of prices, are [sic] carried on under competitive conditions," so he proceeds to a plan to apply stabilization to "certain basic raw materials and foodstuffs such as coal, petroleum, wheat, sugar, cotton, rubber, nitrates, and other similar commodities in universal and fairly constant demand."
Well, all this may happen some day and may be very nice when we have got it, though on the other hand regulation of the prices of staple commodities by international control opens a wide door to possibilities of economic mistakes. Mr. Lloyd, in his very fair examination of the objections to his scheme, admits that "a new use for rubber to replace some more expensive commodity, or the substitution of wheat for rice as the staple article of diet for the Far East, might enormously increase the demand for rubber and wheat and necessitate the raising of prices as the only means of checking consumption."
In the meantime, after this rather dizzy walk along the mountain tops in the company of minds that are able to soar into the region of the problematically attainable, let us get back to a less rarefied atmosphere and consider what in this world of workaday fact we should like to see our monetary authorities doing or trying to do.
Should we "devaluate" the pound sterling to something like its present gold value and so hasten the return to a gold standard? Or should we continue the effort that we have begun to restore sterling to its old gold value and its old parity of exchange with the dollar? Or should we abandon all connexion between gold and our currency, and go frankly to paper officially regulated as suggested by Professor Soddy?
I think most of us will rule out Government control in view of all the crimes and follies committed by Governments during and since the war in their handling and abuse of our machinery of credit, that had been brought so near to perfection by bankers working for industry and commerce. It is rather amazing, seeing that we live in the midst of a world brought very near to utter shipwreck by the failure of Governments to do their international job decently, to find that any one should propose to put new duties, of the highest importance to our welfare, into the hands of our political rulers.
In one of Lord Macaulay's speeches on the Reform Bill, lately quoted by the Times Literary Supplement, he asked whether there can be "any stronger contrast than that which exists between the beauty, the completeness, the speed and the precision with which every process is performed in our factories, and the awkwardness, the rudeness, the slowness, the uncertainty of the apparatus by which offences are punished and rights vindicated. . . . Surely we see the barbarism of the thirteenth century and the highest civilization of the nineteenth century side by side, and we see that the barbarism belongs to the Government, and the civilization to the people." Since Macaulay spoke there have been improvements, which he would have thought incredible, in our industrial processes, but at least in matters of finance the barbarism of Governments is even more barbarous than it was, as has been shown above, and the late war was not nearly as well paid for as the Crimean or the Napoleonic.
If ever the day comes when democracy or any other "cracy" can solve the problem of getting a continuous supply of the right people to do the governing job, and when all the other nations have done likewise, and when the nations have also learnt to live together so friendly and trustfully as to have confidence in an international paper currency, then perhaps we may be able to enjoy the use of a paper currency regulated to keep prices steady. Until that far-off day arrives, we shall most of us agree that the gold standard, with all its faults, carried an immeasurable advantage in that under it the action of the Government was confined to the purely mechanical business of coinage. It also provided a machinery for international payments under which trade between nations was carried on with an ease and confidence which seem now almost incredible.
If then we want the gold standard restored, do we want the old pre-war gold standard, or a new one to be arrived at by a process of "devaluation?" The devaluation plan has high theoretical authority behind it, but as far as England is concerned our bankers have pronounced strongly in favour of the old pre-war standard, and even in countries like France and italy the necessity for devaluation has not yet been admitted by those who guide their financial destinies. As to England even Professor Cassel now seems to think that it might be as well for us to restore the old standard.
The question was discussed with admirable clearness by Sir Charles Addis, Chairman of the London Committee of the Hong Kong and Shanghai Banking Corporation and a Director of the Bank of England, in his Inaugural Address as President of the Institute of Bankers delivered in November 1921. He pointed out that if we accept the findings of the Cunliffe Committee that there are sound reasons for a return to the pre-war parity, then we must recognize that further deflation (using the word in the sense of a fall in prices) might be necessary, and he proceeded to put the case against deflation and in favour of devaluation as follows:—
"Why then, it may be asked, should we continue to wrestle with the burthen of deflation with all its attendant ills, when a way of escape presents itself, not by abandoning the gold standard, but by the simple expedient of altering it? Is there anything sacrosanct, it may be asked, in the ratio of 123 grains of gold or 4.86 American dollars to the pound? How could we be prejudiced if the pound were reduced to 92½ grains of gold and the American exchange to a new parity of 3.65 to the pound? It is true that gold would then command a premium of 33 per cent.; that is, it would be quoted at £5 3s. 8d. instead of £3 17s. 9d. per ounce in paper money, while the paper pound would be worth only 15s. in gold. What would that matter? It is worth a good deal less now. And as for the American exchange, we should go back at a stroke to the much vaunted automatic standard system by which we set such store. Prices would be stabilized at the new level by gold flowing out when exchange fell below the new parity of 3.65, and flowing in when it rose above it just as it did when the parity was 4.86. Why not?"
And having thus set out the case for devaluation, Sir Charles then tore it to pieces. "An unlettered man," he said, "I never listen to the learned Dons—I hope I have stated their case fairly—who advocate this course, and suffer the charm and vivacity of their exposition, and realize my incompetence to make an adequate response, without feeling constrained to adjure them in the words of Oliver Cromwell to the General Assembly of the Kirk of Scotland, 'I beseech you, consider it possible you may be mistaken.' Do not let me be misunderstood. I intend no sneer. I hope I should be the last man to underrate the value of the theoretical economist. I am too sensible of my obligations. Where long periods have to be considered the theoretical economist is indispensable to business men. Indeed, if ever I felt tempted to treat his judgment lightly it would be sufficient, in order to render me dumb, to remind me of the great boom of 1920, and where our hand-to-mouth business opportunism led us then. . . . But I must be allowed to remark with respect that it is not enough for a principle to be shown to be logically indefeasible in the seclusion of the economist's study. We have to take the world as it is. The principle must—be brought down into the hurly-burly of the market place and proved in operation there, through the medium of the heart and mind of ordinary men, in conflict with their opposing interests, their changing purposes, their unruly passions and their defective wills. That, to my mind, is where Professor Cassel's devaluation proposal falls short. It may have all the merits claimed for it, but if it fails to take sufficient account of human nature, or, shall I say, of human nature as we know it in these Islands, it is doomed to nullity. To suppose that a people so conservative by instinct, so tenacious of custom, so careful of tradition, could be induced to trample on their monetary past and to relinquish the dearly purchased gold standard, which rightly or wrongly they believe to be bound up with the prestige of their national credit and their supremacy in international finance, is to live in a world of illusion."
Apart from these questions of conservative sentiment, on the great importance of which Sir Charles laid such eloquent stress, there is also that of the claim of common honesty. It may be rather far fetched, but I think it is very real and relevant. We have been in the past a great place of deposit for other peoples both officially and individually, because London was thought to be a place where money could most safely be put with the certainty of getting it back. This was partly because of the freedom with which gold could be taken away and partly owing to our comparatively stable politics and our long freedom from invasion. Foreigners left and kept money here because they knew that when they wanted it they could take it back in gold. Thanks to the tricks that our Governments have played with our money any foreigner who had put money here before the war and took it away after would get a quantity of gold that would be less than he originally expected according to the premium on gold current on the day when he drew it. Unless he got a licence he could not take gold at all, and would probably take dollars and get so much fewer of them. It is easy to argue that this wrong has already been perpetrated, but I do not see that this justifies us in making it perpetual. It is surely worth while to make an effort so that we may show that although the war and the bungling and cowardice of our rulers depreciated our currency, we put it back on its old gold basis as soon as we reasonably could. For the fact that gold has lost much of its pre-war buying power we can hardly be held responsible.
It is very true that if we attempt, in order to bring our currency up to its old gold value, to bring prices down by violent credit contraction and so take the heart out of our producers and traders, we shall be damaging ourselves more than could be expected by our reasonable creditors. In all these economic matters it is surely best to go very slowly. If we can induce our Governments to spend less than they get in revenue, and leave a balance for debt redemption, then at least we can be sure that there will be no new inflation on the war-time lines through faulty Government finance. Then as the volume of production and trade gradually grows it should slowly overtake the volume of money, restoring the value of the latter. Professor Cassel in his two Memoranda published under the title The World's Monetary Problems, expresses the opinion that is it a "particularly vain expectation" to suppose that the "general economic development will increase the genuine need for money so much as to match the present supply." He thinks that such a policy would involve a continual depression of the general level of prices by about 3 per cent. per annum, and that "the most probable result would be a more or less complete killing of industrial enterprise, and of the very spirit of economic progress." On this point—the connexion between falling prices and depression, the Professor is strongly supported by Mr. Hawtrey, who says in his Monetary Reconstruction (page 145): "The relation of business depression to falling prices is so well recognized, not merely among economists but among practical men, that it is hardly necessary to labour the point. Experience has confirmed theory scores of times."
Shall we venture with Sir Charles to quote Cromwell to these learned pundits and beseech them to consider it possible they may be mistaken? We indeed dare to do so, because we have excellent authority on the other side. Mr. Hawtrey refers to the period 1873-96 as having been marked by a "chronic state of depression." Mr. W. T. Layton, now Editor of the Economist, on page 101 of his Introduction to the Study of Prices published in 1912, says that "the arts of production and the means of transport probably progressed faster between 1874 and 1896 than they had ever done before." He finds that national productivity depends much more upon the advance of science and discovery and on the training, education and organization of labour than on the rise and fall of prices—"the Bessemer process of steel production was invented when prices were rising fast—the Siemens Martin process when they were depressed." He decides that "there is no reason to desire an advance in prices on the ground that it stimulates production" and that "on the whole the social well-being is best advanced when prices are stationary or slightly declining," and in a note he thanks Dr. Marshall for a "pregnant suggestion" that under an ideal currency system prices should fall at such a rate that receivers of fixed salaries should secure a fair proportion of man's increasing control over his material environment.
For a theoretical authority Dr. Marshall should satisfy the most exacting. He is also quoted by Professor Lehfeldt, in Restoration of the World's Currencies (page 123), as stating before a Royal Commission at a time when the continuous fall in prices provoked widespread complaint that "it wants very much stronger statistical evidence than one yet has to prove that the fall in prices diminishes perceptibly, or in the long run, the total productivity of industry." He maintained that a depression of prices, interest and profits was consistent with prosperity—"the employer gets less, and the employee gets more"—not a bad thing when the uneven distribution of wealth is a cause of much social mischief.
Professor Lehfeldt himself adds that "whilst rising prices bring more profit to the employing classes, this very fact makes them careless, and the opposite conditions, which make it difficult to run business with profit, eliminate the careless and incompetent employers and screw the whole body up to a higher pitch of efficiency and enterprise"; and finally Dr. Snow in the Manchester Guardian Commercial article already quoted on page 245, says that in the leather producing industry "it is almost axiomatic that trade is good when prices are low and bad when prices are high."
It is true that falling prices would increase the weight of the debt charge. But it is safe to rely on high prices for securities if prices of goods are low, and so the course of the market would enable the debt charge to be lowered—perhaps cut in half—by conversion. In 1896 when the Index Numbers were at their nadir Consols touched their zenith—114.
We come then to the conclusion that the practical thing to do is to leave Index Numbers, stabilization, international conventions and Consortiums of Banks of Issue in the hands of the learned and able gentlemen who understand these matters, wishing them, with the heartiest respect, all success in the task of working out a scheme of currency reform which will avoid Government control and will be accepted by all of them; and in the meantime to follow the line marked out by our leading bankers at the International Chamber of Commerce Conference held in 1921. Sir Felix Schuster expressed their determination to "return as soon as possible to the pre-war gold standard . . . whether it be this year, next year, or in five, six or ten years." The best way to get there is not to cut down our money but to increase our goods so that we may have cheapness through plenty and make England the best country to buy in. When we have got back the gold standard we can go on to think about Professor Lehfeldt's suggestion for a working agreement between United States and ourselves to stabilize gold prices by regulating the output of gold. In view of the close relations already existing between the Bank of England and the—American Federal Reserve Board this proposal seems to be much more feasible than a European Consortium with a gold pool and a common Bank Rate. But even it—so close is the connexion between monetary policy and political money—could not be considered if a Presidential Election were anywhere within sight.