For if we consistently act on the optimistic hypothesis, this hypothesis will tend to be realized; while by acting on the pessimistic hypothesis we can keep ourselves for ever in the pit of want.


And even if we put on one side the burden of the internal debt, which amounts to 240 milliards of marks, as being a question of internal distribution rather than of productivity, we must still allow for the foreign debt incurred by Germany during the war, the exhaustion of her stock of raw materials, the depletion of her live-stock, the impaired productivity of her soil from lack of manures and of labor, and the diminution of her wealth from the failure to keep up many repairs and renewal over a period of nearly 5 years.


I cannot leave this subject as though its just treatment wholly depended either on our own pledges or on economic facts. The policy of reducing Germany to servitude for a generation, of degrading the lives of millions of human beings, and of depriving a whole nation of happiness should be abhorrent and detestable.


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


Here the financial position is different, since to ask us to pay $800M is a very different proposition from asking Italy to pay it. But the sentiment is much the same. If we have to be satisfied without full compensation from Germany, how bitter will be the protests against paying to the US. We, it will be said, have to be content with a claim against the bankrupt estates of Germany, France, Italy, and Russia, whereas the US has secured a first mortgage upon us. The case of France is at least as overwhelming. She can barely secure from Germany the full measure of the destruction of her countryside. Yet victorious France must pay her friends and Allies more than 4 times the indemnity which in the defeat of 1870 she paid Germany.


It might be an exaggeration to say that it is impossible for the European Allies to pay the capital and interest due from them on these debts, but to make them do so would certainly be to impose a crushing burden. They may be expected, therefore, to make constant attempts to evade or escape payment, and these attempts will be a constant source of international friction and ill-will for many years to come.


With external debts this is not os, and the creditor nations may soon find their interest inconveniently bound up with the maintenance of a particular type of government or economic organization in the debtor countries. Entangling alliances and entangling leagues are nothing to the entanglements of cash owing.


Germany owes a large sum to the Allies; the Allies owe a large sum to Great Britain; and Great Britain owes a large sum to the US. The holders of war loan in every country are owed a large sum by the State; and the State in its turn is owed a large sum by these and other taxpayers. The whole position is in the highest degree artificial, misleading, and vexatious. We shall never be able to move again, unless we can free our limbs from these paper shackles.


Before the middle of the 19th century no nation owed payments to a foreign nation on any considerable scale, except such tributes as were exacted under the compulsion of actual occupation in force and, at one time, by absentee princes under the sanctions of feudalism.


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


The US is disinclined to entangle herself further (after recent experiences) in the affairs of Europe, and, anyhow, has for the time being no more capital to spare for export on a large scale. There is no guarantee that Europe will put financial assistance to proper use, or that she will not squander it and be in just as bad case 2 or 3 years hence as she is in now; Klotz will use the money to put off the day of taxation a little longer, Italy and Yugo-Slavia will fight one another on the proceeds, Poland will devote it to fulfilling towards all her neighbors the military role which France has designed for her, the governing classes of Romania will divide up the booty amongst themselves.


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


It is the method of modern statesmen to talk as much folly as the public demand and to practice no more of it than is compatible with what they have said, trusting that such folly in action as must wait on fully in word will soon disclose itself as such, and furnish an opportunity for slipping back into wisdom — the Montessori system for the child, the Public. He who contradicts this child will soon give place to other tutors.


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

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

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


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


The industries of the US would suffer, not so much from the competition of cheap goods from the Allies in their endeavors to pay their debts, as from the inability of the Allies to purchase from America their usual proportion of her exports. The Allies would have to find the money to pay America, not so much by selling more as by buying less.


It is useless for the US to suppose that an equilibrium position can be reached on the basis of her exporting at least as much as at present, and at the same time restricting her imports by a tariff. Just as the Allies demand vast payments from Germany, and then exercise their ingenuity to prevent her paying them. Great nations can often act with a degree of folly which we should not excuse in an individual.


If she persevered to the bitter end, scrapped her export industries and diverted to other uses the capital now employed in them, and if her former European associates decided to meet their obligations at whatever cost to themselves, I do not deny that the final result might be to America’s material interest. But the project is utterly chimerical. It will not happen. Nothing is more certain that America will not pursue such a policy to its conclusion; she will abandon it as soon as she experiences its first consequences. Nor, if she did, would the Allies pay the money. The position is exactly parallel to that of German Reparation.


The equilibrium of international trade is based on a complicated balance between the agriculture and the industries of the different countries of the world, and on a specialization by each in the employment of its labor and its capital. If one country is required to transfer to another without payment great quantities of goods, for which this equilibrium does not allow, the balance is destroyed. Since capital and labor are fixed and organized in certain employments and cannot flow freely into others, the disturbance of the balance is destructive to the utility of the capital and labor thus fixed. The organization, on which the wealth of the modern world so largely depends, suffers injury.


They want to be generous to Europe, both out of good feeling and because many of them now suspect that any other course would upset their own economic equilibrium. But they don’t want to be “done.” They do not want it to be said that once again the old cynics in Europe have been one too many for them. Times, too, have been bad and taxation oppressive; and many parts of America do not feel rich enough at the moment to favor a light abandonment of a possible asset.


By the principle of the Balfour Note, France must make good the difference to ourselves and the US. If the Dawes Scheme produces half its maximum, which, in the opinion of many good judges, would be a considerable achievement, France will get less than nothing at all and more than the whole of Germany’s payments will go to the US. France would become, in fact, a deferred claimant on a third share of the Dawes Scheme, if the Scheme works very well, and a guarantor of Germany, if it works less well.


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

The Balfour Note, therefore, is bad in principle. There can be no working settlement except on the exactly opposite principle, namely that the less Germany pays, the less France shall pay.


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


From the moment she entered the war she undertook to lend whatever was required for the expenditure of ourselves and our Allies in the US, including some contribution to support the Foreign Exchanges. But she was not prepared to make loans for use outside America. Great Britain had therefore to go on making loans to her Allies for such expenditure — with the result that we had to lend our Allies after America came into the war an amount almost equal to what we ourselves borrowed. In effect it was true — what the Americans have always been concerned to deny — that the loans she made to us were for the purpose of financing our Allies rather than for ourselves.

The result was that by the end of the war we were owed by our Allies about $1.6B while we owed to the US $850M.


I have put the calculation in this form because it renders it very clear why, in the minds of the Allies, the question of further relief to Germany is intimately bound up with the question of their own obligations to the US. The official American attitude that there is no connection between the tow, is a very hollow pretense.


If all, or nearly all, of what Germany pays for Reparations has to be used, not to repair the damage done, but to repay the US for the financial part which she played in the common struggle, many will feel that this is not an outcome tolerable to the sentiments of mankind or in reasonable accord with the spoken profession of Americans when they entered the war or afterward.


Lenin is said to have declared that the best way to destroy the Capitalist system was to debauch the currency. By a continuing process of inflation, Governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some.


These “profiteers” are, broadly speaking, the entrepreneur class of capitalists, that is to say, the active and constructive element in the whole capitalist society, who in a period of rapidly rising prices cannot but get rich quick whether they wish it or desire it nor not. If prices are continually rising, every trader who has purchased for stock or owns property and plant inevitably makes profits. By directing hatred against this class, therefore, the European Governments are carrying a step further the fatal process which the subtle mind of Lenin had consciously conceived. The profiteers are a consequence and not a cause of rising prices.


If follows, therefore, that a change in the value of money, that is to say in the level of prices, is important to Society only in so far as its incident in unequal. Such changes have produced in the past, and are producing now, the vastest social consequences, because when the value of money changes, it does not change equally for all persons or for all purposes. A change in prices and rewards, as measured in money, generally affects different classes unequally, transfers wealth from one to another, bestows affluence here and embarrassment there, and redistribute Fortune’s favors os as to frustrate design and disappoint expectation.


Under this phase of capitalism, as developed during the 19th century, many arrangements were devised for separating the management of property from its ownership. These arrangements were of 3 leading types: (1) Those in which the proprietor, while parting with the management of his property, retained his ownership of it, this mode of tenure being typified by a holding of ordinary shares in a joint-stock company; (2) those in which he parted with the property temporarily, receiving a fixed sum of money annually in the meantime, but regained his property eventually, as typified by a lease; and (3) those in which he parted with his real property permanently, in return either for a perpetual annuity fixed in terms of money, or for a terminable annuity and the repayment of the principal in money at the end of the terms, as typified by mortgages, bonds, debentures, and preference shares. This 3rd type represents the full development of Investment.


As in other respects, the 19th century relied on the future permanence of its own happy experiences and disregarded the warning of past misfortunes. It chose to forget that there is no historical warrant for expecting money to be presented even by a constant quantity of a particular metal, far less by a constant purchasing power.


This progressive deterioration in the value of money through history is not an accident, and has had behind it 2 great driving forces — the impecuniosity of Governments and the superior political influence of the debtor class.

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


Throughout the Continent the pre-war savings of the middle class, so far as they were invested in bonds, mortgages, or bank deposits, have been largely or entirely wiped out. Nor can it be doubted that this experience must modify social psychology towards the practice of saving and investment. What was deemed most secure has proved least so. He who neither spent nor “speculated,” who made “proper provision for his family,” who sang hymns to security and observed most straitly the morals of the edified and the respectable injunctions of the worldly-wise, —he, indeed, who gave fewest pledges to Fortune has yet suffered her heaviest visitations.


The farmers throughout Europe, who had raised by mortgage the funds to purchase the land they farmed, now find themselves almost freed from the burden at the expense of the mortgagees.


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


His excessive gains have come to him unsought and without fault or design on his part, but once acquired he does not lightly surrender them, and will struggle to retain his booty. With such impulses and so placed, the businessman is himself not free from a suppressed uneasiness. In his heart he loses his former self-confidence in his relation to Society, in his utility and necessity in the economic scheme. He fears the future of his business and his class, and the less secure he feels his fortune to be the tighter he clings to it.


To convert the businessman into the profiteer is to strike a blow at capitalism, because it destroys the psychological equilibrium which permits the perpetuance of unequal rewards. The economic doctrine of normal profits, vaguely apprehended by everyone is a necessary condition for the justification of capitalism. The businessman is only tolerable so long as his gains can be held to bear some relation to what, roughly and in some sense, his activities have contributed to Society.

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


Whether it likes it or not, the technique of production under a regime of money-contract forces the business world always to carry a big speculation position; and if it is reluctant to carry this position, the productive process must be slackened.

Not merely that the actual occurrence of price changes profits some classes and injures others, but that a general fear of falling prices may inhibit the productive process altogether. The fact of falling prices injure entrepreneurs; consequently the fear of falling prices causes them to protect themselves by curtailing their operations.


The best way to cure this mortal disease of individualism must be to provide that there shall never exist any confident expectation either the prices generally are going to fall or that they are going to rise; and also that there shall be no serious risk that a movement, if it does occur, will be a big one.


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

Thus Inflation is unjust and Deflation is inexpedient. Of the two perhaps Deflation is the worse; because it is worse, in an impoverished world, to provoke unemployment than to disappoint the rentier.


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


It is interesting to compare the several fortunes of France and Great Britain over the post-war period. In Great Britain our authorities have never talked such rubbish as their French colleagues or offended so grossly against all sound principles of finance. But Great Britain has come out of the transitional period with the weight of her war debt aggravated, her obligations to the US unabated, and deflationary finance still in the ascendant; with the heavy burden of taxes appropriate to the former and 1M unemployed as the outcome of the latter. France, on the other hand, has written down her internal war debt by four-fifths, and has persuaded her Allies to let her off more than half of her external debt; and now she is avoiding the sacrifices of Deflation. Yet she has contrived to do this without the slightest loss of reputation for conservative finance and capitalist principles.


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


Individual saving means that some individuals are producing more than they are consuming. This surplus may, and should, be used to increase capital equipment. But, unfortunately, this is not the only way in which it can be used. It can also be used to enable other individuals to consume more than they produce.

This is what happens when there is unemployment. We are using our savings to pay for unemployment instead of using them to equip the country.


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


But if we were simply to increase credit without providing a specific use for it at home, we should be nervous that too much of this extra credit would be lent to foreigner and taken away in gold. We conclude, therefore, that while an increased volume of bank-credit is probably a sine qua non of increased employment, a program of home investment which will absorb this increase is a sine qua non of the safe expansion of credit.


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

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


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


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

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


How can it be that prices have fallen more than costs? For costs are what a business man pays out for the production of his commodity, and prices determine what he gets back when he sells it.


Let us take, first of all, the consumption-goods which come on to the market for sale. Upon what do the profits (or losses) of the producers of such goods depend? The total costs of production, which are the same thing as the community’s total earnings looked at from another point of view, are divided in a certain proportion between the cost of consumption-goods and the cost of capital-goods. The incomes of the public, which are again the same thing as the community’s total earnings, are also divided in a certain proportion between expenditure on the purchase of consumption-goods and savings.


A large proportion of the globe is, for one reason or another, distrusted by lenders, so that they exact a premium for risk so great as to strangle new enterprise altogether. For the last 2 years, 2 of the 3 principal creditor nations of the world, namely, France and the US, have largely withdrawn their resources from the international market for long-term loans.


See how the vicious process works out. The prices of wool and wheat fall. Good for the British consumer of wheat and woolen garments — so one might suppose. Bu the producers of wool and wheat, since they receive too little for their products, cannot make their usual purchases of British goods. Consequently those British consumers who are at the same time workers who make these goods find themselves out of work. What is the use of cheapness when incomes are falling?


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


For the object of saving is to release labor for employment on producing capital-goods such as houses, factories, roads, machines, and the like. But if there is a large unemployed surplus already available for such purposes, then the effect of saving is merely to add to this surplus and therefore to increase the number of the unemployed. Moreover, when a man is thrown out of work, his diminished spending power causes further unemployment amongst those who have produced what he can no longer afford to buy. And so the position gets worse and worse in a vicious circle.


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


There is a multitude of real assets in the world which constitute our capital wealth — buildings, stocks of commodities, goods in course of manufacture and of transport, and so forth. The nominal owners of these assets, however, have not infrequently borrowed money in order to become possessed of them. To a corresponding extent the actual owners of wealth have claims, not on real assets, but on money. A considerable part of this “financing” takes place through the banking system, which interposes its guarantee between its depositors who lend it money, and its borrowing customers to whom it loans money wherewith to finance the purchase of real assets. The interposition of this veil of money between the real assets and the wealth owner is a specially marked characteristic of the modern world.


We are also familiar with the idea that a change in the value of money can gravely upset the relative positions of those who possess claims to money and those who owe money. For a fall in prices, which is the same thing as a rise in the value of claims on money, means that real wealth is transferred from the debtor in favor of the creditor, so that a larger proportion of the real asset is represented by the claims of the depositor, and a smaller proportion belongs to the nominal owner of the asset who has borrowed in order to buy it.


The ostensible proprietor of the actual asset has financed it by borrowing money from the actual owner of wealth. Furthermore, it is largely through the banking system that all this has been arranged. That is to say, the banks have, for a consideration, interposed their guarantee. They stand between the real borrower and the real lender. They have given their guarantee to the real lender; and this guarantee is only good if the money value of the asset belonging to the real borrower is worth the money which has bene advanced on it.

It is for this reason that a decline in money values so severe as that which we are now experiencing threatens the solidity of the whole financial structure. Banks and bankers are by nature blind. They have not seen what was coming. Some of them have even welcomed the fall of prices toward what, in their innocence, they have deemed the just and “natural” and inevitable level of pre-war, that is to say, to the level of prices to which their minds became accustomed in their formative years.


A “sound” banker is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional an orthodox way along with his fellows, so that no one can really blame him.


It is necessarily part of the business of a banker to maintain appearances and to profess a conventional respectability which is more than human. Lifelong practices of this kind make them the most romantic and the least realistic of men.


Some four or five thousand years ago the civilized world settled down to the use of gold, silver, and copper for pounds, shilling, and pence, but with silver in the first place of importance and copper in the second.


In 1914 gold had held this position in Great Britain de jure over less than 100 years (though de facto more than 200), and in most other countries over less than 60. For except during rather brief intervals gold has been too scarce to serve the needs of the world’s principal medium of currency. Gold is, and always has been, an extraordinarily scarce commodity. A modern liner could convey across the Atlantic in a single voyage all the gold which has been dredged or mined in 7K years. As a rule, generally speaking, there has been not enough.


During the war individuals threw their little stocks into the national melting-pots. Wars have sometimes served to disperse gold, as when Alexander scattered the temple hoards of Persia or Pizzaro those of the Incas. But on this occasion war concentrated gold in the vaults of the Central Banks; and these Banks have not released it.


Even the handing round is becoming a little old-fashioned, being the occasion of unnecessary traveling expense, and the most modern way, called “ear-marking,” is to change the ownership without shifting the location. It is not a far step from this to the beginning of arrangements between Central Banks by which, without ever formally renouncing the rule of gold, the quantity of metal actually buried in their vaults may come to stand, by a modern alchemy, for what they please, and its value for what they choose.


The instability of money has been compounded, in most countries except the US, of 2 elements: the failure of the national currencies to remain stable in terms of what was supposed to be the standard of value, namely gold; and the failure of gold itself to remain stable in terms of purchasing power. Attention has been mainly concentrated on the first of these 2 factors. It is often assumed that the restoration of the gold standard must be our objective; and that the main question of controversy is whether national currencies should be restored to their pre-war gold value or to some lower value nearer to the present facts; in other words, the choice between Deflation and Devaluation.


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


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


In Italy, where sound economic views have much influence and which may be nearly ripe for currency reform, Mussolini has threatened to raise the libra to its former value. Fortunately for the Italian taxpayer and Italian business, the lira does not listen even to a dictator and cannot be given castor oil.


Whereas Inflation, by easing the burden of national debt and stimulating enterprise, has a little to throw into the other side of the balance, Deflation has nothing.


It is not easy for men to apprehend that their money is a mere intermediary, without significance in itself, which flows from one hand to another, is received and is dispensed, and disappears when its work is done from the sum of a nation’s wealth.


Stability of exchange is in the nature of a convenience which adds to the efficiency and prosperity of those who are engaged in foreign trade. Stability of prices, on the other hand, is profoundly important for the avoidance of the various evils described above.


For these reasons enlightened advocates of the restoration of gold do not welcome it as the return of a “natural” currency, and intend, quite decidedly, that it shall be a “managed” one. They allow gold back as a constitutional monarch, shorn of his ancient despotic powers and compelled to accept the advice of a Parliament of Banks.


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


The US lives in a vast and unceasing crescendo. Wide fluctuations, which spell unemployment and misery for us, are swamped for them in the general upward movement. A country, the whole of whose economic activities are expanding, year in, year out, by several percent per annum, cannot avoid, and at the same time can afford, temporary maladjustments. This was our own state during a considerable part of the 19th century. Our rate of progress was so great that stability in detail was neither possible nor essential. This is not our state now.


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

In no other way than by the deliberate intensification of unemployment. The object of credit restriction, in such a case, is to withdraw from employers the financial means to employ labor at the existing level of prices and wages.


It is possible for Deflation to produce its effects without being recognized. Deflation, once started ever so little, is cumulative in its progress. If pessimism becomes generally prevalent in the business world, the slower circulation of money resulting from this can carry Deflation a long way further, without the Bank having either to raise the bank-rate or to reduce its deposits. And since the public always understands particular causes better than general causes, the depression will be attributed to the industrial disputes which will accompany it, to the Dawes Scheme, to China, to the inevitable consequences of the Great War, to tariffs, to high taxation, to anything in the world except the general monetary policy which has set the whole thing going.


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


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

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


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


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


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


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


Like other new religions, Leninism derives its power not from the multitude but from a small minority of enthusiastic converts whose zeal and intolerance make each one the equal in strength of a hundred indifferentists. Like other new religions, it is led by those who can combine the new spirit, perhaps sincerely, with seeing a good deal more than their followers, politicians with at least an average dose of political cynicism, who can smile as well as frown, volatile experimentalists, released by religion from truth and mercy but not blinded to facts and expediency, and open therefore to the charge (superficial and useless though it is where politicians, lay or ecclesiastical, are concerned) of hypocrisy. Like other new religions, it seems to take the color and gaiety and freedom out of everyday life and to offer a drab substitute in the square wooden faces of its devotees. Like other new religions, it persecutes without justice or pity those who actively resist it. Like other new religions, it is unscrupulous. Like other new religions, it is filled with missionary ardor and oecumenical ambitions.


But many, in this age without religion, are bound to feel a strong emotional curiosity towards any religion which is really new, and not merely a recrudescence of old ones, and has proved its motive force; and all the more when the new thing comes out of Russia, the beautiful and foolish youngest son of the European family, with hair on his head, nearer to both the earth and to heaven than his bald brothers in the West — who, having been born 2 centuries later, has been able to pick up the middle-aged disillusionment of the rest of the family before he has lost the genius of youth or become addicted to comfort and to habits. I sympathize with those who seek for something good in Soviet Russia.


How can I accept a doctrine which sets up as it bible, above and beyond criticism, an obsolete economic textbook which I know to be not only scientifically erroneous but without interest or application for the modern world? How can I adopt a creed which, preferring the mud to the fish, exalts the boorish proletariat above the bourgeois and the intelligentsia who, with whatever faults, are the quality in life and surely carry the seeds of all human advancement?


Yet we shall miss the essence of the new religion if we stop at this point. The Communist may justly reply that all these things belong not to his ultimate Faith but to the tactics of Revolution. For he believes in 2 things: the introduction of a New Order upon earth, and the method of the Revolution as the only means thereto. The New Order must not be judged either by the horrors of the Revolution or by the privations of the transitionary period. The Revolution is to be a supreme example of the means justified the end.


In one respect Communism but follows other famous religions. It exalts the common man and makes him everything.


In England today a talented and virtuous youth, about to enter the world, will balance the advantages of entering the Civil Service and of seeking a fortune in business; and public opinion will esteem him not less if he prefers the second. Money-making, as such, on as large a scale as possible, is not less respectable socially, perhaps more so, than a life devoted to the service of the State or of Religion, Education, Learning, or Art. But in the Russia of the future it is intended that the career of money-making, as such, will simply not occur to a respectable young man as a possible opening, any more than the career of a gentleman burglar or acquiring skill in forgery and embezzlement.


It seems a churlish thing for me to say, after all the kindness shown to me in Russia, but if I am to tell the whole truth I must here put on record that in this frontier station of Finland I experienced a sense as of the removal of a great weight which had been oppressing me. I cannot explain just how this weight had been felt. I did not experience the imposition of it on entering Russia, but as the days passed it seemed slowly to accumulate. The sense of freedom gradually disappeared. Though everyone was kind one felt the presence of an oppression, not on oneself, but all-pervading.


There never was anyone so serious as the Russian of the Revolution, serious even in his gaiety and abandon of spirit — so serious that sometimes he can forget tomorrow and sometimes he can forget today. Often this seriousness is crude and stupid and boring in the extreme. The average Communist is discolored just as the Methodists of every age have been.


Here — one feels at moments — in spite of poverty, stupidity, and oppression, is the Laboratory of Life. Here the chemicals are being mixed in new combinations, and stink and explode. Something — there is just a chance — might come out.


Let us clear from the ground the metaphysical or general principles upon which, from time to time, laissez-faire has been founded. It is not true that individuals possess a prescriptive “natural liberty” in their economic activities. There is no “compact” conferring perpetual rights on those who Have or on those who Acquire. The world is not so governed from above that private and social interest always coincide. It is not so managed here below that in practice they coincide. It is not a correct deduction from the Principles of Economics that enlightened self-interest always operates in the public interest. Nor is it true that self-interest generally is enlightened; more often individuals acting separately to promote their own ends are too ignorant or too weak to attain even these. Experience does not show that individuals, when they make up a social unit, are always less clear-sighted than when they act separately.


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


But more interesting than these is the trend of the Joint Stock Institutions, when they have reached a certain age and size, to approximate to the status of public corporations rather than that of individualistic private enterprise. One of the most interesting and unnoticed developments of recent decades has been the tendency of big enterprise to socialize itself. A point arrives in the growth of a big institution at which the owners of the capital, i.e. the shareholders, are almost entire dissociated from the management, with the result that the direct personal interest of the latter in the making of great profit becomes quite secondary. When this stage is reached, the general stability and reputation of the institution are more considered by the management than the maximum of profit for the shareholders.


Confusion of thought and feeling leads to confusion of speech.


Material Poverty provides the incentive to change precisely in situation where there is very little margin for experiments. Material Prosperity removes the incentive just when it might safe to take a chance. Europe lacks the means, America the will, to make a move.


The hereditary principle in the transmission of wealth and the control of business is the reason why the leadership of the Capitalist Cause is weak and stupid. It is too much dominated by 3rd-generation men. Nothing will cause a social institution to decay with more certainty than its attachment to the hereditary principle. It is an illustration of this that by far the oldest of our institutions, the Church, is the one which has always kept itself free from the hereditary taint.


Just as the Conservative Party will always have its Die-Hard wing, so the Labour Party will always be flanked by the Party of Catastrophe — Jacobins, Communists, Bolshevists, whatever you choose to call them. This is the party which hates or despises existing institutions and believes that great good will result merely from overthrowing them — or at least that to overthrow them is the necessary preliminary to any great good.


However moderate its leaders may be at heart, the Labour Party will always depend for electoral success on making some slight appeal to the widespread passion and jealousies which find their full development in the Party of Catastrophe. The passions of malignity, jealousy, hatred of those who have wealth and power ill consort with ideals to build up a true Social Republic.


A party which would discuss these things openly and wisely at its meetings would discover a new and living interest in the electorate — because politics would be dealing once more with matters about which everyone wants to know and which deeply affect everyone’s own life.


How far is bored and suffering humanity to be allowed, from time to time, an escape, an excitement, a stimulus, a possibility of change? — that is the important question. Is it possible to allow reasonable license, permitted Saturnalia, sanctified Carnival, in conditions which need ruin neither the health nor the pockets of the roysterers, and will shelter from irresistible temptation the unhappy class who, in America, are called addicts?


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


There are the advocates of the method of violence and sudden change, by an abuse of language called Communists, who are committed by their creed to produce evil that good may come, and, since they dare not concoct disaster openly, are forced to play with plot and subterfuge. There are the Socialist, who believe that the economic foundations of modern society are evil, yet might be good.


The political problem of mankind is to combine 3 things: Economic Efficiency, Social Justice, and Individual Liberty. The first needs criticism, precaution, and technical knowledge; the second, an unselfish and enthusiastic spirit which loves the ordinary man; the third, tolerance, breadth, appreciation of the excellencies of variety and independence, which prefers, above everything, to give unhindered opportunity to the exceptional and to the aspiring.


The Labour Movement is represented as an immense and dangerous force of destruction, led by sentimentalists and pseudo-intellectuals, who have “feelings in the place of ideas.”


Why do practical men find it more amusing to make money than to join the Open Conspiracy? I suggest that it is much the same reason as that which makes them find it more amusing to play bridge on Sundays than to go to church. They lack altogether the kind of motive, the possession of which, if they had it, could be expressed by saying that they had a creed. They have no creed. That is why, unless they have the luck to be scientists or artists, they fall back on the grand substitute motive, the perfect Ersatz, the anodyne for those who, in fact, want nothing at all — Money.


This slow rate of progress, or lack of progress, was due to 2 reasons — to the remarkable absence of important technical improvements and to the failure of capital to accumulate.


Out of the profits of the Levant Company, the East India Company was founded; and the profits of this great enterprise were the foundation of England’s subsequent foreign investment.


We are being afflicted with a new disease of which some readers may not yet have heard the name, but of which they will hear a great deal in the years to come — namely, technological unemployment. This means unemployment due to our discovery of means of economizing the use of labor outrunning the pace at which we can find new uses for labor.

But this is only a temporary phase of maladjustment. All this means in the long run that mankind is solving its economic problem.


Now it is true that the needs of human beings may seem to be insatiable. But they fall into 2 classes — those needs which are absolute in the sense that we feel them whatever the situation of our fellow human beings may be, and those which are relative in the sense that we feel them only if their satisfaction lifts us above, makes us feel superior to, our fellows.


I draw the conclusion that, assuming no important wars and no important increase in population, the economic problem may be solved, or be at least within sight of solution, within 100 years. This means that the economic problem is not — if we look into the future — the permanent problem of the human race.


Yet there is no country and no people, I think, who can look forward to the age of leisure and abundance without a dread. For we have been trained too long to strive and not to enjoy. To judge from the behavior and the achievements of the wealthy classes today in any quarter of the world, the outlook is very depressing.


  • Will you ever have to pay him that $4K?
  • Never, my child. He’ll go on doubling it till he dies. You see, it’s always worth while waiting another year to get twice as much money.

This extraordinary man is a mixture of statesman and economist for whom monetary and economic doctrines must be political instruments of the art of governing men.