A Tract on Monetary Reform quotes

Money is only important for what it will procure.

Thus a change in the monetary unit, which is uniform in its operation and affects all transactions equally, has no consequences.

The savings were seldom drawn on, and, accumulating at compound interest, made possible the material triumphs which we now all take for granted. The morals, the politics, the literature, and the religion of the age joined in a grand conspiracy for the promotion of saving.

God and Mammon were reconciled.

Peace on earth to men of good means. A rich man could, after all, enter into the Kingdom of Heaven—if only he saved. A new harmony sounded from the celestial spheres.

The morals, the politics, the literature, and the religion of the age joined in a grand conspiracy for the promotion of saving. God and Mammon were reconciled.

Peace on earth to men of good means.

A rich man could, after all, enter into the Kingdom of Heaven—if only he saved. A new harmony sounded from the celestial spheres.

God and Mammon were reconciled. Peace on earth to men of good means. A rich man could, after all, enter into the Kingdom of Heaven—if only he saved.

A new harmony sounded from the celestial spheres.

“It is curious to observe how, through the wise and beneficent arrangement of Providence, men thus do the greatest service to the public, when they are thinking of nothing but their own gain”1; so sang the angels.

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

The power of taxation by currency depreciation is one which has been inherent in the State since Rome discovered it.

The creation of legal-tender has been and is a Government’s ultimate reserve; and no State or Government is likely to decree its own bankruptcy or its own downfall, so long as this instrument still lies at hand unused.

It has been a loosening influence against the rigid distribution of old-won wealth and the separation of ownership from activity.

By this means each generation can disinherit in part its predecessors’ heirs; and the project of founding a perpetual fortune must be disappointed in this way, unless the community with conscious deliberation provides against it in some other way, more equitable and more expedient.

At any rate, under the influence of these two forces—the financial necessities of Governments and the political influence of the debtor class—sometimes the one and sometimes the other, the progress of inflation has been continuous, if we consider long periods, ever since money was first …

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 …

If, therefore, month after month his stock appreciates on his hands, he is always selling at a better price than he expected and securing a windfall profit upon which he had not calculated. In such a period the business of trade becomes unduly easy.

Any one who can borrow money and is not exceptionally unlucky must make a profit, which he may have done little to deserve.

The continuous enjoyment of such profits engenders an expectation of their renewal. The practice of borrowing from banks is extended beyond what is normal.

The profits of certain kinds of business to the man who has a little skill or some luck are certain in such a period to be inordinate.

Great fortunes may be made in a few months.

But apart from all such, the steady-going business man, who would be pained and insulted at the thought of being designated speculator or profiteer, may find windfall profits dropping into his lap which he has neither sought nor desired.

… all men and classes most respectable, praiseworthy and necessary, with whom interference was not only disastrous but almost impious, was now to suffer sidelong glances, to feel himself suspected and attacked, the victim of unjust and injurious laws,—to become, and know himself half-guilty, a profiteer.

No man of spirit will consent to remain poor if he believes his betters to have gained their goods by lucky gambling.

To convert the business man into the profiteer is to strike a blow at capitalism, because it destroys the psychological equilibrium which permits the perpetuance of unequal rewards.

The economic doctrine of normal profits, vaguely apprehended by every one, is a necessary condition for the justification of capitalism.

The business man is only tolerable so long as his gains can be held to bear some relation to what, roughly and in some sense, his activities have contributed to society.

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

and the effort of every one to hold as small stocks as possible brought industry to a standstill, just as previously their efforts to accumulate stocks had over-stimulated it.

Unemployment succeeded Profiteering as the problem of the hour.

But whilst the cyclical movement of trade and credit has, in the good-currency countries, partly reversed, for the time being at least, the great rise of 1920, it has, in the countries of continuing inflation, made no more than a ripple on the rapids of …

and it can even trench on existing capital or fail to make good its current depreciation. When the value of money is greatly fluctuating, the distinction between capital and income becomes confused.

It is one of the evils of a depreciating currency that it enables a community to live on its capital unawares.

The increasing money value of the community’s capital goods obscures temporarily a diminution in the real quantity of the stock.

For his losses in one capacity depend only infinitesimally on him personally refraining from action in his other capacity.

The facts, that a man is a cannibal at home and eaten abroad, do not cancel out to render him innocuous and safe.

But there is a further reason, connected with the above but nevertheless distinct, why modern methods of production require a stable standard,—a reason springing to a certain extent out of the character of the social organisation described above, but aggravated by the technical methods of …

That is to say, the business world as a whole must always be in a position where it stands to gain by a rise of price and to lose by a fall of price.

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

The argument is not affected by the fact that there is some degree of specialisation of function within the business world, in so far as the professional speculator comes to the assistance of the producer proper by taking over from him a part of his …

If prices are expected to rise and the business world acts on this expectation, that very fact causes them to rise for a time and, by verifying the expectation, reinforces it; and similarly, if it expects them to fall.

Thus a comparatively weak initial impetus may be adequate to produce a considerable fluctuation.

Three generations of economists have recognised that certain influences produce a progressive and continuing change in the value of money, that others produce in it an oscillatory movement, and that the latter act cumulatively in their initial stages but produce the conditions for a reaction …

… in a better position to protect themselves from the worst effects of Deflation than lenders are to protect themselves from those of Inflation, and because labour is in a better position to protect itself from over-exertion in good times than from under-employment in bad times.

Thus Inflation is unjust and Deflation is inexpedient.

Of the two perhaps Deflation is, if we rule out exaggerated inflations such as that of Germany, the worse; because it is worse, in an impoverished world, to provoke unemployment than to disappoint the rentier.

A Government can live for a long time, even the German Government or the Russian Government, by printing paper money.

That is to say, it can by this means secure the command over real resources,—resources just as real as those obtained by taxation. The method is condemned, but its efficacy, up to a point, must be admitted.

The method is condemned, but its efficacy, up to a point, must be admitted. A Government can live by this means when it can live by no other.

It is the form of taxation which the public find hardest to evade and even the weakest Government can enforce, when it can enforce nothing else.

Of this character have been the progressive and catastrophic inflations practised in Central and Eastern Europe, as distinguished from the limited and oscillatory inflations, experienced for example in Great Britain and the United States, which have been examined in the preceding chapter.

The burden of the tax is well spread, cannot be evaded, costs nothing to collect, and falls, in a rough sort of way, in proportion to the wealth of the victim.

No wonder its superficial advantages have attracted Ministers of Finance.

Temporarily, the yield of the tax is even a little better for the Government than by the above calculation. For the new notes can be passed off at first at the same value as though there were still only 9,000,000 notes altogether.

It remains true that by this means the Government can still secure for itself a large share of the available surplus of the community.

Has the public in the last resort no remedy, no means of protecting itself against these ingenious depredations?

It has only one remedy,—to change its habits in the use of money. The initial assumption on which our argument rested was that the community did not change its habits in the use of money.

… collapse, mushroom exchange banks sprang up at every street corner, where you could change your krone into Zurich francs within a few minutes of receiving them, and so avoid the risk of loss during the time it would take you to reach your usual bank.

It became a seasonable witticism to allege that a prudent man at a café ordering a bock of beer should order a second bock at the same time, even at the expense of drinking it tepid, lest the price should rise meanwhile.

By these means they can get along and do their business with an amount of notes having an aggregate real value substantially less than before.

We have seen that this is not so. What is raised by printing notes is just as much taken from the public as is a beer-duty or an income-tax.

What a Government spends the public pay for.

There is no such thing as an uncovered deficit. But in some countries it seems possible to please and content the public, for a time at least, by giving them, in return for the taxes they pay, finely engraved acknowledgements on water-marked paper.

We have seen that this is not so. What is raised by printing notes is just as much taken from the public as is a beer-duty or an income-tax. What a Government spends the public pay for.

There is no such thing as an uncovered deficit.

But in some countries it seems possible to please and content the public, for a time at least, by giving them, in return for the taxes they pay, finely engraved acknowledgements on water-marked paper.

What is raised by printing notes is just as much taken from the public as is a beer-duty or an income-tax. What a Government spends the public pay for. There is no such thing as an uncovered deficit.

But in some countries it seems possible to please and content the public, for a time at least, by giving them, in return for the taxes they pay, finely engraved acknowledgements on water-marked paper.

The income-tax receipts, which we in England receive from the Surveyor, we throw into the wastepaper basket; in Germany they call them bank-notes and put them into their pocket-books; in France they are termed Rentes and are locked up in the family safe.

There is no such thing as an uncovered deficit. But in some countries it seems possible to please and content the public, for a time at least, by giving them, in return for the taxes they pay, finely engraved acknowledgements on water-marked paper.

The income-tax receipts, which we in England receive from the Surveyor, we throw into the wastepaper basket; in Germany they call them bank-notes and put them into their pocket-books; in France they are termed Rentes and are locked up in the family safe.

We have seen in the preceding section the extent to which a Government can make use of currency inflation for the purpose of securing income to meet its outgoings.

It follows the line of least resistance, and responsibility cannot be brought home to individuals.

It is, so to speak, nature’s remedy, which comes into silent operation when the body politic has shrunk from curing itself.

The remaining, the scientific, expedient, the Capital Levy, has never yet been tried on a large scale; and perhaps it never will be. It is the rational, the deliberate method.

The remaining, the scientific, expedient, the Capital Levy, has never yet been tried on a large scale; and perhaps it never will be. It is the rational, the deliberate method.

But it is difficult to explain, and it provokes violent prejudice by coming into conflict with the deep instincts by which the love of money protects itself.

Unless the patient understands and approves its purpose, he will not submit to so severe a surgical operation.

For nothing can preserve the integrity of contract between individuals, except a discretionary authority in the State to revise what has become intolerable.

The powers of uninterrupted usury are too great.

If the accretions of vested interest were to grow without mitigation for many generations, half the population would be no better than slaves to the other half.

It will be sufficient to illustrate the case by reference to the situation of France,—the home of absolutism of all kinds, and hence, sooner or later, of bouleversement.

The finances of Humpty Dumpty are as follows:

At the end of 1922 the internal debt of France, excluding altogether her external debt, exceeded 250 milliard francs.

… law at 10 per cent below its present value, it would be safe to assume that n and p would now be just 10 per cent greater than they actually are and that the present values of k, r, and k´ would be entirely unaffected.

But this long run is a misleading guide to current affairs.

In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.

But this long run is a misleading guide to current affairs.

In the long run we are all dead.

Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.

But this long run is a misleading guide to current affairs. In the long run we are all dead.

Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.

In actual experience, a change of n is liable to have a reaction both on k and k´ and on r. It will be enough to give a few typical instances.

Thus even in Great Britain the fluctuations of k and k´ can have a decisive influence on the price level; whilst we have already seen (pp. 51, 52) how enormously they can change in the recent conditions of Russia and Central Europe.

The moral of this discussion, to be carried forward in the reader’s mind until we reach Chapters IV. and V., is that the price level is not mysterious, but is governed by a few, definite, analysable influences.

Two of these, n and r, are under the direct control (or ought to be) of the central banking authorities. The third, namely k and k´, is not directly controllable, and depends on the mood of the public and the business world.

July 1923

Thus the theory does not provide a simple or ready-made measure of the “true” value of the exchanges.

When it is restricted to foreign-trade goods, it is little better than a truism. When it is not so restricted, the conception of purchasing power parity becomes much more interesting, but is no longer an accurate forecaster of the course of the foreign exchanges.

Speculators, indeed, by anticipating the movements tend to make them occur a little earlier than they would occur otherwise, but by thus spreading the pressure more evenly through the year their influence is to diminish the absolute amount of the fluctuation.

General opinion greatly overestimates the influence of exchange-speculators acting under the stimulus of merely political and sentimental considerations.

Except for brief periods the influence of the speculator is washed out;

General opinion greatly overestimates the influence of exchange-speculators acting under the stimulus of merely political and sentimental considerations.

Except for brief periods the influence of the speculator is washed out; and political events can only exert a lasting influence on the exchanges, in so far as they modify the internal price level, the volume of trade, or the ability of a country to borrow on foreign markets.

A political event, which does not materially affect any of these facts, cannot exert a lasting effect on the exchanges merely by its influence on sentiment.

Nevertheless, in practice merchants do not avail themselves of these facilities to the extent that might have been expected. The nature of forward dealings in exchange is not generally understood. The rates are seldom quoted in the newspapers.

There are few financial topics of equal importance which have received so little discussion or publicity.

The present situation did not exist before the war (although even at that time forward rates for the dollar were regularly quoted), and did not begin until after the “unpegging” of the leading exchanges in 1919, so that the business world has only begun to …

This result may seem surprising in view of the huge amounts which exchange speculators in European currencies, more particularly on the bull side, are reputed to have lost.

But the mass of amateur speculators throughout the world operate by cash purchases of the currency of which they are bulls, forward transactions being neither known nor available to them.

Such speculation may afford temporary support to the spot exchange, but it has no influence on the difference between spot and forward, the subject now under discussion.

… unavoidably present, it is much better that it should be carried by those who are qualified or are desirous to bear it, than by traders, who have neither the qualification nor the desire to do so, and whose minds it distracts from their own business.

The wide fluctuations in the leading exchanges over the past three years, as distinct from their persisting depreciation, have been due, not to the presence of speculation, but to the absence of a sufficient volume of it relatively to the volume of trade.

3. A failure to analyse the relation between spot and forward exchange may be, sometimes, partly responsible for a mistaken bank-rate policy. Dear money—that is to say, high interest rates for short-period loans—has two effects.

The wise man will be he who turns his assets into cash, withdraws from the risks and the exertions of activity, and awaits in country retirement the steady appreciation promised him in the value of his cash.

A probable expectation of Deflation is bad enough; a certain expectation is disastrous.

For the mechanism of the modern business world is even less adapted to fluctuations in the value of money upwards than it is to fluctuations downwards.

It will be to the interest of every one in business to go out of business for the time being; and of every one who is contemplating expenditure to postpone his orders so long as he can.

The wise man will be he who turns his assets into cash, withdraws from the risks and the exertions of activity, and awaits in country retirement the steady appreciation promised him in the value of his cash.

A probable expectation of Deflation is bad enough; a certain expectation is disastrous. For the mechanism of the modern business world is even less adapted to fluctuations in the value of money upwards than it is to fluctuations downwards.

In Italy, where sound economic views have much influence and which may be nearly ripe for currency reform, Signor Mussolini has threatened to raise the lira to its former value.

Fortunately for the Italian taxpayer and Italian business, the lira does not listen even to a dictator and cannot be given castor oil.

But such talk can postpone positive reform; though it may be doubted if so good a politician would have propounded such a policy, even in bravado and exuberance, if he had understood that, expressed in other but equivalent words, it was as follows:

The fact, that the restoration of their currencies to the pre-war parity is still the declared official policy of the French and Italian Governments, is preventing, in those countries, any rational discussion of currency reform.

All those—and in the financial world they are many—who have reasons for wishing to appear “correct,” are compelled to talk foolishly.

In Italy, where sound economic views have much influence and which may be nearly ripe for currency reform, Signor Mussolini has threatened to raise the lira to its former value.

Her finances were in equilibrium, her credit good, her foreign resources adequate, and no one could have blamed her for devaluating the crown, ruined by no fault of hers and inherited from the Habsburg Empire.

Pursuing a misguided policy in a spirit of stern virtue, she preferred the stagnation of her industries and a still fluctuating standard.41

41 I cannot criticise the work, in his second term of office (1922), of Dr. Rasin, now fallen by the hand of an assassin, without reference to his great achievement during his first term (1919) in rescuing his country’s currency from the surrounding chaos.

If the external price level is unstable, we cannot keep both our own price level and our exchanges stable.

And we are compelled to choose.

In pre-war days, when almost the whole world was on a gold standard, we had all plumped for stability of exchange as against stability of prices, and we were ready to submit to the social consequences of a change of price level for causes quite …

Conservatism and scepticism join arms—as they often do.

Perhaps superstition comes in too; for gold still enjoys the prestige of its smell and colour.

The considerable success with which gold maintained its stability of value in the changing world of the nineteenth century was certainly remarkable. I have applauded it in the first chapter.

Years may elapse without great improvement in the methods of extracting gold; and then the genius of a chemist may realise past dreams and forgotten hoaxes, transmuting base into precious like Subtle, or extracting gold from sea-water as in the Bubble.

Gold is liable to be either too dear or too cheap.

In either case, it is too much to expect that a succession of accidents will keep the metal steady.

The United States has not been able to let gold fall to its “natural” value, because it could not face the resulting depreciation of its standard.

It has been driven, therefore, to the costly policy of burying in the vaults of Washington what the miners of the Rand have laboriously brought to the surface.

Consequently gold now stands at an “artificial” value, the future course of which almost entirely depends on the policy of the Federal Reserve Board of the United States.

Confidence in the future stability of the value of gold depends therefore on the United States being foolish enough to go on accepting gold which it does not want, and wise enough, having accepted it, to maintain it at a fixed value.

This double event might be realised through the collaboration of a public understanding nothing with a Federal Reserve Board understanding everything.

But the position is precarious; and not very attractive to any country which is still in a position to choose what its future standard is to be.

It is natural, after what we have experienced, that prudent people should desiderate a standard of value which is independent of Finance Ministers and State Banks.

The present state of affairs has allowed to the ignorance and frivolity of statesmen an ample opportunity of bringing about ruinous consequences in the economic field.

It is felt that the general level of economic and financial education amongst statesmen and bankers is hardly such as to render innovations feasible or safe; that, in fact, a chief object of stabilising the exchanges is to strap down Ministers of Finance.

But this is not the situation.

We have no ready-made standard.

Experience has shown that in emergencies Ministers of Finance cannot be strapped down.

Or are we to continue and develop the experimental innovations of our present policy, ignoring the “bank ratio” and, if necessary, allowing unmoved a piling up of gold reserves far beyond our requirements or their depletion far below them?

In truth, the gold standard is already a barbarous relic.

All of us, from the Governor of the Bank of England downwards, are now primarily interested in preserving the stability of business, prices, and employment, and are not likely, when the choice is forced on us, deliberately to sacrifice these to the out-worn dogma, which …

17 : 10½ per ounce. Advocates of the ancient standard do not observe how remote it now is from the spirit and the requirements of the age. A regulated non-metallic standard has slipped in unnoticed. It exists.

Whilst the economists dozed, the academic dream of a hundred years, doffing its cap and gown, clad in paper rags, has crept into the real world by means of the bad fairies—always so much more potent than the good—the wicked Ministers of Finance.

For these reasons enlightened advocates of the restoration of gold, such as Mr. Hawtrey, do not welcome it as the return of a “natural” currency, and intend, quite decidedly, that it shall be a “managed” one.

For these reasons enlightened advocates of the restoration of gold, such as Mr. Hawtrey, do not welcome it as the return of a “natural” currency, and intend, quite decidedly, that it shall be a “managed” one.

They allow gold back only as a constitutional monarch, shorn of his ancient despotic powers and compelled to accept the advice of a Parliament of Banks.

The adoption of the ideas present in the minds of those who drafted the Genoa Resolutions on Currency is an essential condition of Mr. Hawtrey’s adherence to gold. He contemplates “the practice of continuous co-operation among central banks of issue” (Res.

In any case, I doubt the wisdom and the practicability of a system so cut and dried.

If we wait until a price movement is actually afoot before applying remedial measures, we may be too late.

“It is not the past rise in prices but the future rise that has to be counteracted.”55 It is characteristic of the impetuosity of the credit cycle that price movements tend to be cumulative, each movement promoting, up to a certain point, a further movement …

In practice the Federal Reserve Board often ignores the proportion of its gold reserve to its liabilities and is influenced, in determining its discount policy, by the object of maintaining stability in prices, trade, and employment.

Out of convention and conservatism it accepts gold. Out of prudence and understanding it buries it.

Indeed the theory and investigation of the credit cycle have been taken up so much more enthusiastically and pushed so much further by the economists of the United States than by those of Great Britain, that it would be even more difficult for the Federal …

… by the economists of the United States than by those of Great Britain, that it would be even more difficult for the Federal Reserve Board than for the Bank of England to ignore such ideas or to avoid being, half-consciously at least, influenced by them.

The theory on which the Federal Reserve Board is supposed to govern its discount policy, by reference to the influx and efflux of gold and the proportion of gold to liabilities, is as dead as mutton.

It perished, and perished justly, as soon as the Federal Reserve Board began to ignore its ratio and to accept gold without allowing it to exercise its full influence,56 merely because an expansion of credit and prices seemed at that moment undesirable.

In fact it has established a dollar standard; and, instead of ensuring that the value of the dollar shall conform to that of gold, it makes provision, at great expense, that the value of gold shall conform to that of the dollar.

This is the way by which a rich country is able to combine new wisdom with old prejudice.

It can enjoy the latest scientific improvements, devised in the economic laboratory of Harvard, whilst leaving Congress to believe that no rash departure will be permitted from the hard money consecrated by the wisdom and experience of Dungi, Darius, Constantine, Lord Liverpool, and Senator Aldrich.

But there is in all such fictions a certain instability. When the accumulations of gold heap up beyond a certain point the suspicions of Congressmen may be aroused.

One cannot be quite certain that some Senator might not read and understand this book.

Sooner or later the fiction will lose its value.

The banking authorities of the United States would be likely to notice in good time that, if the gold is not wanted and must be got rid of, it would be much simpler just to reduce the dollar price of gold.

The only way of selling redundant stocks of anything, whether gold or copper or wheat, is to abate the price.

The alternative method, namely the increase in the value of gold in the outside world, could scarcely be brought about unless some other country or countries stepped in to relieve the United States of the duty of burying unwanted gold.

A collaboration which is not free on both sides is likely to lead to dissensions, especially if the business of keeping dollars steady involves a heavy expenditure in burying unwanted gold.

We have reached a stage in the evolution of money when a “managed” currency is inevitable, but we have not yet reached the point when the management can be entrusted to a single authority.

The best we can do, therefore, is to have two managed currencies, sterling and dollars, with as close a collaboration as possible between the aims and methods of the managements.