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Anon - A Twentieth Century Economic System (1943)

Anon - A Twentieth Century Economic System (1943)

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CONTENTS
PAGE
INTRODUCTION 5
PART I. An Appreciation of the Economic
Problems after the War:
(a) The Short-Term Position ... 10
(b) The Long-Term Position ... 12
Summary ... ... 24
PART II. Constructive Proposals:
(a) International System 27
(b) Internal System 37
Summary 55


"SUMMARY: Internal System:

11. In a progressive society there is an annual
increase in the total output of goods and services
which necessitates a corresponding increase in
the total issue of purchasing media unless prices
are to fall. It is this annual increase in the
total of purchasing media which, it is submitted,
should be spent into existence by the State without
any capital debt or interest charge, instead of being
lent into existence by the private banking system.
(Par. (56).)
12. The reform referred to in the above paragraph
would afford a means of stopping a fall
in prices and would also solve the problem of
unemployment. The measures necessary to give
effect to it are set out in paragraph (57)."


Governor Eccles, President of the Federal Reserve Bank of the United States :
" The Banks can create and destroy money. Bank credit is money. It is the money we do most of our business with, not with that currency which we usually think of as money."

Mr. R. G. Hawtrey, a prominent economist and one of the chief officials of the Treasury :
" When a bank lends it creates money out of nothing."

Mr. J. M. Keynes, the well-known economist:
" There can be no doubt that all deposits are created by the banks."

The Encyclopaedia Britannica (14th edition) :
" Banks create credit. It is a mistake to suppose that bank credit is created to any important extent by the payment of money into the banks. A loan made by a bank is a clear addition to the amount of money in the community."

CONTENTS
PAGE
INTRODUCTION 5
PART I. An Appreciation of the Economic
Problems after the War:
(a) The Short-Term Position ... 10
(b) The Long-Term Position ... 12
Summary ... ... 24
PART II. Constructive Proposals:
(a) International System 27
(b) Internal System 37
Summary 55


"SUMMARY: Internal System:

11. In a progressive society there is an annual
increase in the total output of goods and services
which necessitates a corresponding increase in
the total issue of purchasing media unless prices
are to fall. It is this annual increase in the
total of purchasing media which, it is submitted,
should be spent into existence by the State without
any capital debt or interest charge, instead of being
lent into existence by the private banking system.
(Par. (56).)
12. The reform referred to in the above paragraph
would afford a means of stopping a fall
in prices and would also solve the problem of
unemployment. The measures necessary to give
effect to it are set out in paragraph (57)."


Governor Eccles, President of the Federal Reserve Bank of the United States :
" The Banks can create and destroy money. Bank credit is money. It is the money we do most of our business with, not with that currency which we usually think of as money."

Mr. R. G. Hawtrey, a prominent economist and one of the chief officials of the Treasury :
" When a bank lends it creates money out of nothing."

Mr. J. M. Keynes, the well-known economist:
" There can be no doubt that all deposits are created by the banks."

The Encyclopaedia Britannica (14th edition) :
" Banks create credit. It is a mistake to suppose that bank credit is created to any important extent by the payment of money into the banks. A loan made by a bank is a clear addition to the amount of money in the community."

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A TWENTIETH CENTURY ECONOMIC SYSTEM

The author has decided to remain anonymous, in the hope that his fellow citizens will Insist, on this occasion, on doing their own thinking, and will consider these proposals on their merits, uninfluenced by the names and reputations of the protagonists on either side.

First

Edition

(3,000) (5,000) (4,000) (4,000) (4,000) (3,000)

November, December, February, June, October, July,

1941 1941 1942 1942 1942 1943

Second Edition Third Fourth Fifth Sixth Edition Edition Edition Edition

CONTENTS
PAGE INTRODUCTION 5

P A R T I.

A n A p p r e c i a t i o n of the E c o n o m i c P r o b l e m s after the W a r : (a) T h e S h o r t - T e r m P o s i t i o n (b) T h e L o n g - T e r m P o s i t i o n Summary ... ... ... ... 10 12 24

PART II.

Constructive

Proposals: 27 37 55

(a) International System (b) Internal System Summary

" If our initial impulses proceed from the belief that things are so limited that our gain can only come from someone else's corresponding loss, then we have here the root of all envy, hatred and fear." T. Troward.

INTRODUCTION
W H E N the w a r is over the w o r l d w i l l consist of nations w i t h economies i n a state of flux. Those which before the w a r were p r i m a r i l y producers of foodstuffs a n d r a w materials w i l l have secondary industries i n different stages of development a n d w i t h v a r y i n g claims o n their nations to be firmly established. O n the other h a n d , nations w h i c h before the w a r were m a i n l y m a n u f a c t u r i n g w i l l h a v e resuscitated their a g r i c u l t u r a l a n d p r i m a r y industries : these, too, i n each n a t i o n , w i l l have firmly established claims to consideration i n v a r y i n g degrees. It is fatal to a p p r o a c h this p r o b l e m w i t h the m e n tality of the 19th C e n t u r y economists w h o assumed that the o n l y proper objective of a n economic system was to produce the m a x i m u m of real wealth w i t h the m i n i m u m of l a b o u r , a n d therefore l o o k e d to " d i v i s i o n of l a b o u r " carried to its extreme limits, not o n l y as between people w i t h i n the nation b u t as between one nation a n d another. W i t h the development of P o w e r P r o d u c t i o n i n the 20th C e n t u r y , the p r o b l e m of p r o d u c i n g a sufficiency for a l l has been largely solved, a n d people are no longer content to accept it as a x i o m a t i c that the be-all a n d end-all of society, i n its economic aspect, is to produce a m a x i m u m quantity of goods a n d services. T h e y recognise that there are other values w h i c h they m a y choose i n preference to still more goods a n d services.
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It is useless to attempt to persuade or force nations to sacrifice the economic aspirations of their people, w h i c h are clearly w e l l w i t h i n their compass i n the 20th C e n t u r y , b y arguments v a l i d i n the 19th C e n t u r y . I n d u s t r i a l nations n o w realise that a p o p u lation entirely urbanised becomes decadent a n d that a healthy a g r i c u l t u r a l c o m m u n i t y is a n essential stabilising factor: these are considerations w h i c h they feel outweigh the s a v i n g of l a b o u r w h i c h w o u l d be effected if they relied entirely u p o n imports of foodstuffs f r o m countries where they c o u l d be prod u c e d w i t h less l a b o u r . P r i m a r y p r o d u c i n g countries, on the other h a n d , recognise that they can never achieve full nationhood so l o n g as they are unable to offer to their citizens w i t h i n their o w n borders that wide variety of occupations w h i c h m o d e r n science has made p o s s i b l e : so l o n g , i n short, as those of their sons who are not content to be p r i m a r y producers must emigrate to find congenial occupations. T h e y , too, feel that this is a l u x u r y w h i c h they can afford, a n d w h i c h they prefer to s a v i n g l a b o u r b y r e l y i n g solely u p o n imports of m a n u f a c t u r e d goods. A g a i n s t this 20th C e n t u r y desire of nations for well-balanced, healthy a n d h a p p y communities is a d v a n c e d a perfectly true, b u t irrelevant, 19th C e n t u r y argument that only b y each nation specialising o n what it is best able to produce a n d exchanging its surplus for the surpluses of other nations can m a x i m u m wealth be p r o d u c e d w i t h m i n i m u m labour. E v e r y a d v a n c e d n a t i o n has m i l l i o n s of people set free b y l a b o u r - s a v i n g m a c h i n e r y , i.e., u n e m p l o y e d , a n d the argument is not l i k e l y to
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appeal to them that they c o u l d " free " still more if they w o u l d set their faces h a r d enough against the rising tide of 20th C e n t u r y economic thought and w o u l d revert to 19th C e n t u r y policies. T h i s does not m e a n that i n d u s t r i a l nations w i l l , i n the future, produce a l l the foodstuffs that they require, n o r that p r i m a r y p r o d u c i n g countries w i l l produce a l l the manufactured goods they require. It does m e a n that a n international t r a d i n g system, based o n the assumption that a n a t i o n w i l l always welcome imports if they are cheap enough, is out of touch w i t h m o d e r n reality a n d w i l l constantly break down. It is sometimes suggested that if larger p o l i t i c a l units c o u l d be f o r m e d , so r e d u c i n g the n u m b e r of tariff barriers a n d also the n u m b e r of n a t i o n a l currencies, the p r o b l e m of the " favourable " a n d " unfavourable " balance of payments w o u l d be solved w i t h i n that area. I n support of this contention it is asserted that there are no " u n f a v o u r a b l e " balances as between, e.g., one E n g l i s h county a n d the rest of the c o u n t r y , or between one State a n d the rest of the U n i t e d States of A m e r i c a . T h i s is quite untrue. A " Distressed A r e a " is one w h i c h is obliged to " i m p o r t " f r o m the rest of the country but is not able to produce enough to p a y for those " imports " w i t h " exports " to the rest of the c o u n t r y . T h e result is that money is sucked out of the area. I n this case, however, the G o v e r n m e n t taxes m o n e y — n e c e s s a r i l y f r o m the areas w h i c h have i t — a n d spends it b a c k into the distressed area i n the f o r m of relief, etc. E v e n w i t h i n nations where, t h r o u g h a l o n g history, a strong sentiment of solidarity between the
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citizens has been b u i l t u p , where throughout the c o u n t r y a p p r o x i m a t e l y the same standard of l i v i n g a n d the same conditions o b t a i n , the redistribution of m o n e y through t a x a t i o n b y the C e n t r a l Government is b y no means p o p u l a r , a n d is only tolerated within limits. Is it not then sheer fantasy to suppose that nations w i t h n o such traditional b a c k g r o u n d of m u t u a l responsibility, w i t h different standards of l i v i n g and w a y s of life, w o u l d agree to unite a n d remove trade barriers between one another, o n the understanding that the flow of the c o m m o n money w i t h i n the U n i o n , or F e d e r a l A r e a , f r o m the poor nations to the rich, w o u l d be counteracted b y the newly constituted F e d e r a l G o v e r n m e n t t a x i n g the rich nationmembers for the benefit of the poor ? N a t i o n a l sentiment is a fact a n d it is not l i k e l y to be weaker after this w a r t h a n it was before, so that it is useless to advance schemes w h i c h ignore it. I n the f o l l o w i n g m e m o r a n d u m a n attempt is made to ascertain the factors w h i c h are potent today i n determining n a t i o n a l economic policies a n d to suggest the modifications in the economic system, b o t h i n its n a t i o n a l a n d international aspects, w h i c h are i m m e d i a t e l y necessary to enable constructive forces to be released a n d disruptive factors to be eliminated. Unless international trade is changed f r o m a struggle b y the nations to get one another into u n p a y a b l e debt, to a m u t u a l l y advantageous exchange of real wealth, a n d unless the palpable absurdity of u n e m p l o y m e n t a n d poverty i n j u x t a position is p e r m a n e n t l y r e m o v e d , then fear, resentment a n d frustration, which these things have spread
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through the w o r l d , w i l l destroy o u r c i v i l i s a t i o n . E c o n o m i c systems were made for m a n : not m a n for economic systems. P o l i t i c a l freedom is not enough. Nations n o w realise that, so l o n g as there is financial a n d economic d o m i n a t i o n , p o l i t i c a l freedom is a n illusion. W e are engaged i n a w a r w h i c h is, at root, a W a r of Ideas. It is not enough to be negative—to expose a n d fight against False Ideas, although this is essential. W h e n we c a n offer h u m a n i t y a system w h i c h provides economic security a n d freedom, without the surrender of p o l i t i c a l freedom as a condition, we shall have a r m e d ourselves w i t h so powerful a w e a p o n of p r o p a g a n d a as to ensure speedy v i c t o r y . W e s h a l l have c a p t u r e d the imagination a n d enthusiastic support of m e n everywhere. General professions of good intentions after the w a r w i l l not again be accepted. T h e necessary changes must be made now. August, 1941.

Note.—Since the first edition was published, the United States has come into the war, but its economic position relative to the rest of the world has not thereby been substantially altered, and the argument which follows remains unaffected.
9

PART ONE AN APPRECIATION OF THE ECONOMIC PROBLEMS AFTER THE WAR The Short Term Position.
(1) W h e n hostilities cease this country w i l l find itself w i t h its foreign investments greatly reduced a n d therefore i n receipt of a smaller v a l u e of imports b y w a y of interest o n those investments. I f we consider first the short-term position, i t seems evident that E u r o p e generally w i l l have need of imports of a l l k i n d s . F o o d w i l l be required i n immense quantities. M a c h i n e r y w i l l be needed i n order to change over as r a p i d l y as possible f r o m w a r to peace-time p r o d u c t i o n , as w e l l as to replace that w o r n o u t d u r i n g years of high-pressure output, a n d raw materials of every description w i l l also be needed. U n t i l those supplies have been received a n d the change over has been effected, neither E u r o p e n o r perhaps this country w i l l be able to p a y for its i m p o r t s w i t h exports. (2) D u r i n g this transitional p e r i o d , the U n i t e d States a n d , i n a lesser degree, other neutral countries w i l l also be faced w i t h a n N e u t r a l s w i l l need upon to e x p o r t b u t n o t internal p r o b l e m consequent import: ex-bellithe cessation of high-pressure progerents w i l l need duction of armaments. Unlike to i m p o r t b u t won't have m u c h the belligerents, however, the to e x p o r t . U . S . A . w i l l not have large works of reconstruction o n w h i c h to e m p l o y their people. It is therefore u n l i k e l y that they w i l l wish to a d d
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to the internal employment p r o b l e m , created b y the closing d o w n of a r m a m e n t factories, by stopping exports to this c o u n t r y a n d E u r o p e o w i n g to the i n a b i l i t y of E u r o p e to p a y w i t h corresponding exports to them. It is, o n the contrary, evident that they w o u l d , under such c i r c u m stances, not welcome imports even if they c o u l d be made. (3) I n short, E u r o p e a n d this country w i l l be in need of imports a n d m a y not be i n a position to p a y for a l l of them w i t h exports. O n the other h a n d , the U n i t e d States w i l l be i n need of exports to ease their e m p l o y m e n t position at h o m e , a n d for the same reason w i l l be u n w i l l i n g to take imports. such conditions it w o u l d be fatal foreign exchanges. T h e exchange value of the currencies of this F o r e i g n excountry a n d E u r o p e , if offered for changes c a n n o t sale freely, w o u l d r a p i d l y fall i n be freed. relation to the currencies of the non-belligerents. T h i s w o u l d m e a n that the cost of imports here a n d i n E u r o p e w o u l d be greater, so causing a rise i n the Cost of L i v i n g . This w o u l d necessitate a n increase i n wages w h i c h , i n its t u r n , w o u l d m e a n the issue of more currency to p a y those wages. T h i s w o u l d be the signal for speculators to offer f o r w a r d still larger blocks of our currency for sale o n the exchange. We should, i n fact, go straight into the s p i r a l of inflation b y the same process as was responsible for inflation of the mark in Germany in 1923. T h e freeing of the exchanges is therefore quite out of the question d u r i n g the transitional period a n d exchange control w o u l d to
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(4) U n d e r free the

h a v e to be continued for the above reasons, even i f i t were not thought desirable to m a k e this a permanent feature of the post-war economy, a p r o p o s a l w h i c h is advocated later i n this memorandum. (5) A n attempt has been made i n the foregoing paragraphs to show that it is i n the true interest, b o t h of the non-belligerent a n d lately w a r r i n g countries, that d u r i n g the transitional p e r i o d goods s h o u l d flow m a i n l y i n one direct i o n — f r o m the former to the latter. It m a y w e l l be, however, that for psychological reasons a continuance into peace time of the L e a s e - L e n d A c t m a y not be possible without modification, a n d such a modified f o r m is advocated i n the following memorandum.

The Long-Term Position.
(6) W h e n once the transitional period is passed, the difficulty for the countries lately at w a r w i l l not be to produce enough to p a y for their imports w i t h exports, b u t the unwillingness of the U . S . A . to take p a y m e n t i n the o n l y possible w a y , n a m e l y , i n goods a n d services. T h i s position w o u l d be immensely aggravated if, d u r i n g the transitional p e r i o d , the U . S . A . h a d insisted upon the late belligerents i n c u r r i n g huge financial debts to p a y for their imports. S h o u l d this mistake of the last w a r be repeated, E u r o p e a n nations w o u l d have to induce the U . S . A . — w h e n once the transitional p e r i o d was p a s t — t o take imports to p a y for their exports, a n d also to take a further large v o l u m e of i m p o r t s , against w h i c h the U . S . A . must export n o t h i n g , i n order to p a y the interest on the loans.
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(7) The wretched financial history of the 21 years between the wars w o u l d be repeated. E i t h e r the E u r o p e a n nations w o u l d have N o unpayable to stop imports f r o m the creditor indebtedness. neutrals, whilst t r y i n g to p a y the interest on debts b y forcing their goods into their markets, or they w o u l d have to continue to take imports on l o a n , so increasing the debts to the p o i n t where they w o u l d have to be repudiated. T h e atmosphere w o u l d again be poisoned b y the m u t u a l recriminations between debtor a n d creditor nations w h i c h made amicable relations impossible i n the inter-war p e r i o d . T h e creditor nation insisting u p o n p a y m e n t a n d threatening the exchange rates of the debtor b y selling its currency at what it w o u l d f e t c h : the debtor nation p o i n t i n g out that it d i d not manufacture the creditor's money a n d c o u l d o n l y acquire it if allowed to sell its o w n goods i n the creditor's market. T h e attitude of the creditor n a t i o n under these circumstances m a y be s u m m a r i s e d as follows. " Packets of pesos, m a r k s , francs, a n d sterling are useless to me as they are o n l y legal tender i n their respective countries, a n d I do not w i s h to b u y y o u r goods. Y o u r obligation is to p a y me i n m y o w n currency, e.g. dollars. I realise that y o u do not manufacture dollars a n d that y o u c a n o n l y acquire them b y selling goods i n m y m a r k e t . I propose, however, to stop y o u d o i n g this b y means of tariffs or quotas, but heaven h e l p y o u i f y o u are not successful i n y o u r efforts to defeat me i n m y attempts to stop y o u p a y i n g . If y o u are u n successful, I shall sell y o u r currency o n the F o r e i g n E x c h a n g e for what I can get, a n d k n o c k
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y o u r exchange rate d o w n , so putting y o u through uncontrolled inflation. T h e alternative is that I l o a n y o u what y o u owe me at c o m p o u n d interest. T h i s w i l l , however, merely defer the day of reckoning w h i c h , when it comes, w i l l be so m u c h the w o r s e . " (8) So l o n g as the economic relations between nations produce, through the operations of the financial system, such tension, i l l - w i l l a n d fear, it is a m i s n o m e r to describe as Peace the periods between wars. L e t us hope, however, that the lessons of the past have been learned. T h i s hope is supported b y the reflection that the A m e r i c a n p u b l i c lost their money b y l e n d i n g to ex-belligerents after the last w a r , a n d are not l i k e l y to subscribe v o l u n t a r i l y to such loans again. (9) It is useless to r e l y , as i n the 21 years between the wars, u p o n appeals to creditor nations to allow debtor nations to p a y i n goods a n d Useless to rely services: the reasons, under the on appeals. present system, w h y such appeals must fall o n deaf ears are considered i n the following paragraphs. W h a t is necessary is the establishment of a system under w h i c h creditor nations have the option of t a k i n g goods a n d services or nothing. (10) A c c o r d i n g to o r t h o d o x economic theory, a nation welcomes cheap imports a n d is thereby made richer. D i v i s i o n of l a b o u r W h y nations results i n a s a v i n g of l a b o u r , but d o n ' t welcome o w i n g to l a b o u r - s a v i n g devices the imports. advanced nations have supera b u n d a n t l a b o u r , so that this argument no longer appeals as it d i d i n the 19th C e n t u r y . Nations
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now prefer the luxury of a well-balanced economy so that they c a n offer to their citizens w i t h i n their o w n borders a wide choice of activities. (11) M o r e o v e r , the 19th C e n t u r y system i m p l i e d willingness to see a native i n d u s t r y r u i n e d b y cheaper imports. T h i s i n v o l v e d great insecurity, both for capital a n d l a b o u r . F o r l a b o u r it meant a constant threat of being out of w o r k a n d l e a r n i n g new trades w h e n y o u n g , w i t h the knowledge that when middle-aged n o new trade w o u l d bother to d o the t r a i n i n g . It meant willingness to move f r o m one part of the c o u n t r y to another i n search of w o r k , w i t h u p r o o t i n g of homes, loss of friends, etc. One of the c r y i n g needs of o u r civilisation is a measure of m a t e r i a l security a n d stability a n d this system can p r o v i d e neither. It ignores h u m a n nature a n d w i l l not be tolerated b y the workers i n the second half of the 20th Century. (12) T h e o l d financial m e c h a n i s m was, i n fact, based on the assumption that the o n l y reason w h y a nation's exports were not welcomed b y i m p o r t i n g countries was that they were too expensive a n d that, if cheap enough, they w o u l d be gladly received. T h e case of J a p a n has s h o w n quite clearly that this theory is contrary to the facts. One nation after another has taken special measures to exclude Japanese goods because they are too cheap. (13) T h e e x p l a n a t i o n is not far to seek. Mass production implies mass c o n s u m p t i o n , as goods are not p r o d u c e d for l o n g if there are no buyers. L a b o u r - s a v i n g m a c h i n e r y produces the goods previously produced b y m a n y m e n w h o w o u l d have
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received wages w i t h w h i c h to b u y their o w n or other people's output. T h e machines n o w receive those wages i n the f o r m of interest o n c a p i t a l , b u t the machines d o not consume their o w n output. Some of this m o n e y w i l l no doubt come b a c k into the hands of the w o r k e r s i n the f o r m of wages for new c a p i t a l p r o d u c t i o n , but m u c h of it w i l l be used for p u r e l y f i n a n c i a l speculation. E v e n when the wages of existing machines are distributed to the workers to m a k e more machines, the p r o b l e m is not s o l v e d . W h e n completed, the new machines w i l l facilitate the p r o d u c t i o n of more consumption goods. T h i s w i l l necessitate a repetition of the cycle. W i t h each t u r n of the wheel the speed is increased, u n t i l a m a j o r collapse occurs. The larger the total wages of a l l machines becomes, the more capital goods must be p r o d u c e d i n the next cycle, if those wages are to be distributed to the w o r k e r s , who alone c a n consume the product of the machines. T h e interest o n the c a p i t a l represented b y the machines, i . e . , the m a c h i n e ' s wages, goes to a v e r y s m a l l section of the c o m m u n i t y w h i c h is u n l i k e l y to increase its consumption of goods and services. (14) T h e r e is therefore i n each nation a shortage of effective d e m a n d for the goods w h i c h the nation is capable of p r o d u c i n g , i . e . , of m o n e y i n the pockets of the people w a n t i n g to b u y goods. The more h i g h l y developed a nation economically, the more is this so, w i t h the result that the richer the n a t i o n the larger is its u n e m p l o y m e n t , other things being e q u a l . T h e u n e m p l o y e d m a n has a right to say, " Is the reason w h y I h a v e to go short a n d w h y m y wife a n d children are expected
16

to go under-nourished, b a d l y clothed, a n d b a d l y sheltered, because there are not enough of these things to go r o u n d ; if so, w h y s h o u l d I not be allowed to produce m o r e ? " T o this the answer must be, " N o ; the reason w h y y o u must go without is not because there is not enough b u t because there is too m u c h : otherwise y o u w o u l d be e m p l o y e d . " " W h y , t h e n , " he w o u l d ask, " s h o u l d I not be allowed to consume the ' too m u c h ' a n d then there w o u l d not be too m u c h a n d I s h o u l d be a l l o w e d to produce m o r e ? " T o this the answer w o u l d be, " B u t y o u cannot consume because y o u h a v e n o Licences-to-Consume, i . e . , m o n e y , a n d y o u c a n o n l y o b t a i n these b y w o r k i n g to produce m o r e . " " B u t I a m v e r y w i l l i n g to produce m o r e , " to w h i c h again he w o u l d receive the reply, " A s I have told y o u , there is overproduction already a n d we d o n ' t wish y o u to produce m o r e . " (15) It is evident that if each n a t i o n w o u l d distribute to its people i n t e r n a l l y enough p u r c h a s i n g power to ensure that there w o u l d be effective d e m a n d for 100 per cent. of its o w n output, then a nation c o u l d either consume the whole of its o w n production or it c o u l d exchange a n y percentage it chose for the p r o d u c t i o n of other nations a n d c o n sume that. It does not, i n fact, welcome imports because it does not distribute enough p u r c h a s i n g power i n t e r n a l l y , a n d imports w i l l , therefore, c o m pete w i t h its o w n p r o d u c t i o n for the inadequate available p u r c h a s i n g power. (16) H o w to distribute p u r c h a s i n g power to the mass of the people is therefore the most pressing
17
D2

a n d urgent internal p r o b l e m of every a d v a n c e d n a t i o n . W h e n a n a t i o n exports goods it serves out m o n e y i n the f o r m of wages to the workpeople m a k i n g the goods. T h e goods leave the country but the wages r e m a i n b e h i n d i n the pockets of the workers. T h e y w i l l be used to b u y the surplus of goods a w a i t i n g consumption i n the domestic market. Effective d e m a n d for goods has been increased without the s u p p l y of goods a w a i t i n g consumption i n the domestic m a r k e t being s i m i l a r l y increased. T h i s is, however, true o n l y so l o n g as imports of consumers' goods o r competitive non-consumers' goods do not come into the domestic market to p a y for those exports. H e n c e tariffs a n d quotas. H e n c e also exports o n l o a n . T h e cheaper imports are, the more l i k e l y are they to capture the entire m a r k e t a n d so destroy the native i n d u s t r y , thus a g g r a v a t i n g the p r o b l e m of finding ways a n d means of d i s t r i b u t i n g p u r c h a s i n g power to the workers. (17) It is sometimes suggested that a solution of this p r o b l e m w o u l d be to increase wages generally. It is, however, evident that a general increase i n wages merely results i n a general increase i n prices, so that the two increases cancel one another out. M o r e o v e r , a rise i n price w i l l have put the country out of the w o r l d ' s markets. T h e total purchasing power is n o greater t h a n before. It is true that a technological i m p r o v e m e n t enables increased wages to be p a i d w i t h o u t a rise i n p r i c e , but technological improvements u s u a l l y m e a n the employment of fewer people a n d a larger p r o p o r t i o n of the sale price of the p r o d u c t going i n wages to the machine, i . e . , interest on c a p i t a l .
18

(18) Social services represent another method of increasing effective d e m a n d b y the masses: they are, i n fact, wages i n k i n d , since they relieve the worker of an expense w h i c h he w o u l d otherwise have to meet out of his wages. (19) P u b l i c w o r k s have also been tried on a large scale. Instead of a s m a l l dole, full wages can, under this m e t h o d , be p a i d to the u n e m p l o y e d , so that they are able to consume the surplus of goods overhanging the market. T o be effective, it is essential that the p u b l i c w o r k u p o n w h i c h the unemployed are engaged w o u l d not otherwise have been undertaken. I f the w o r k is competitive w i t h the n o r m a l activities of private enterprise or p u b l i c authorities, it w o u l d merely result i n the n e w l y employed receiving the wages, whilst the m e n w i t h w h o m they were then competing w o u l d be t h r o w n out of w o r k a n d receive none. T h i s is not, however, an insoluble p r o b l e m a n d it is not the m a i n objection to this method of e n a b l i n g a people to consume a l l the goods they are capable of produci n g , o r alternatively, the goods of other nations which they exchange for their o w n product. (20) T h e m a i n objection is that it is financially cheaper to p a y m e n a s m a l l dole to do n o t h i n g than to p a y them wages to produce real w e a l t h : that i n order to acquire the m o n e y w i t h w h i c h to employ them, the State must either tax it f r o m the citizens or must b o r r o w it at interest; b u t if it taxes the money f r o m the citizens it is merely t a k i n g purchasing power a w a y f r o m e m p l o y e d citizens i n order to give it to u n e m p l o y e d citizens, a n d is not thereby increasing the total p u r c h a s i n g power of
19

the c o m m u n i t y : if it borrows the money at interest it adds to the N a t i o n a l D e b t a n d so to the a n n u a l interest charge w h i c h , i n its t u r n , involves further taxation to p a y that interest. T h i s objection applies also to the method mentioned i n p a r a g r a p h (18). (21) P u b l i c w o r k s t r a d i t i o n a l l y take the form of rearmament. I n d u s t r y is stimulated over a v e r y wide range a n d the u n e m p l o y e d are r a p i d l y absorbed. T h e wages p a i d to them w i l l be used b y them to b u y the surplus output of the rest of the c o m m u n i t y . Effective d e m a n d for goods is increased, whilst the v o l u m e of goods awaiting consumption i n the m a r k e t is not increased. Moreover, the financial indebtedness resulting f r o m this f o r m of p u b l i c w o r k s c a n be represented as a t e m p o r a r y a n d emergency expenditure rather than as a permanent feature of the economic system. I n its early stages, whilst it is consciously being used to ease the u n e m p l o y m e n t p r o b l e m , a n d so avert r e v o l u t i o n , it is v e r y effective, b u t it i n v a r i a b l y results i n other nations t a k i n g fright a n d starting an armaments race w h i c h c a n o n l y terminate i n war. (22) N o excuse is made for h a v i n g considered some length U n d e r - C o n s u m p t i o n , w h i c h is synonymous with Unemployment, Undersince it is submitted that this is Consumption and Unemployment a root p r o b l e m w h i c h must be synonymous. solved, unless a l l hope of the s u r v i v a l of o u r c i v i l i s a t i o n is to be abandoned. at (23) T h e r e is a further reason w h y nations are anxious to export a n d not import. U n d e r the
20

T h e struggle for " favourable " balances.

existing system, the pre-occupation, i n the economic sphere, of the statesmen of a l l nations, must be to ensure a n active " f a v o u r able " balance of p a y m e n t s . If successful, a nation gets other nations into u n p a y a b l e d e b t : if unsuccessful, other nations get it into u n p a y a b l e debt. If some nations have " favourable " balances, other nations must h a v e " u n f a v o u r able " ones. I n t e r n a t i o n a l trade has therefore degenerated into financial w a r , instead of b e i n g a n exchange of goods a n d services to the m u t u a l advantage of both parties. (24) If a measure of stability a n d security is to be assured i n the future i n the economic relations of nations, the new system must be designed to make impossible the sale b y private i n d i v i d u a l s o n the foreign exchange of the currencies of their o w n and other nations. N o n a t i o n c a n hope to m a i n tain its economy i n e q u i l i b r i u m w i t h the w o r l d , i.e., its imports of goods a n d services i n balance w i t h its exports of goods a n d services, if it is open to i n d i v i d u a l s — t h r o u g h fear of conditions i n their o w n c o u n t r y , because they c a n see a rake-off, o r a better rate of interest i n some other c o u n t r y , o r because they wish to b r i n g about a p o l i t i c a l crisis b y r o c k i n g the exchanges—to offer for sale o n the foreign exchange massive quantities of one n a t i o n ' s currency for another. (25) T h e M a c m i l l a n C o m m i t t e e recognised the right w h i c h i n d i v i d u a l s h a d to do this under the o l d system as a great potential danger. W i t h i n three months of their R e p o r t , the danger w h i c h they h a d foreseen materialised a n d caused a m a j o r economic crisis.
21

(26) F r o m 1936 onwards the F r e n c h nation was subjected to rising internal prices and the r u i n of m a n y of its citizens through the action of i n d i v i d u a l F r e n c h m e n w h o , apprehensive of the future, sold francs a n d bought sterling, so k n o c k i n g d o w n the F r e n c h exchange rate. T h e y bought this sterling, not for the purpose of b u y i n g E n g l i s h goods nor to p a y their debts i n E n g l a n d , but because they preferred to h o l d their personal fortunes i n the f o r m of sterling i n L o n d o n rather than i n the f o r m of francs i n F r a n c e . B y s t r i k i n g i n this w a y a series of blows at the economic stability of their o w n country, they created the v e r y conditions of chaos f r o m w h i c h they were fleeing. (27) W h e n , i n 1938, this s m a l l group of foreigners scented a E u r o p e a n w a r i n the offing, they decided that they preferred to h o l d their private fortunes i n the f o r m of dollars i n N e w Y o r k rather t h a n sterling i n L o n d o n . T h e sudden t h r o w i n g of this large mass of sterling o n to the E x c h a n g e m a r k e t caused a s h a r p fall i n the value of sterling, i n spite of the fact that, w i t h i n a year of w a r , this c o u n t r y parted w i t h large quantities of gold to A m e r i c a to counteract the effect of these sales. (28) It w i l l be necessary, if peace is to be established i n the w o r l d after the w a r , to adopt a n international t r a d i n g system Other w h i c h w i l l enable the following problems. a d d i t i o n a l problems to be settled amicably: — (a) T h e unwillingness, consequent their industrialisation, of primary
22

upon pro-

during countries, more particularly the D o m i n i o n s a n d I n d i a , to receive imports of certain manufactured goods, which prev i o u s l y they h a d i m p o r t e d freely. (b) N a t i o n s w i t h different internal economic systems must be enabled to l i v e i n the same w o r l d without those differences constituting a threat to the continued existence of one another's internal systems. (c) T h e movement of people f r o m overpopulated to under-populated countries. The objection of the latter to receiving i m m i g r a n t s is due to the u n e m p l o y m e n t of their o w n people a n d w i l l disappear when that p r o b l e m is solved.

23
E

SUMMARY
1. W h i l s t the ex-belligerents are reconstructing their countries a n d their industries, they w i l l have need of imports i n excess of their a b i l i t y to p a y i n exports. Transitional period. (Par. (1).) 2. D u r i n g this period, the U . S . A . a n d other neutrals w i l l have to reabsorb their w a r workers into peacetime p r o d u c t i o n and w i l l h a v e need of exports but not of imports. T h e y w i l l perhaps object, however, to extending Lease L e n d procedure into peacetime unless i n a modified f o r m . ( P a r s . (2), (3), (5).) 3. T o float loans i n the U . S . A . to p a y for these surplus imports w o u l d p r o b a b l y be impossible, because the people w o u l d remember that they lost their m o n e y after the last war and understand better n o w that they w o u l d inevitably lose it again. E v e n if it were possible, it w o u l d be undesirable to float loans because it w o u l d greatly accentuate the troubles of the U . S . A . when the transitional p e r i o d was passed, since they w o u l d have to adjust their economy to receive imports i n p a y m e n t of interest on loans, as well as i n payment for their exports. It w o u l d mean their h a v i n g to receive imports i n excess of their exports b y w a y of interest o n the loan. (Pars. (6), (7).) 4. F o r e i g n exchanges cannot be freed (4). 5. Useless to rely on appeals to creditor nations to allow their debtors to p a y i n goods a n d services:
24

L o n g term position.

nothing.

it is necessary to establish a system under w h i c h they have the option of t a k i n g goods a n d services o r ( P a r . (9).)

6. There are two m a i n economic pressures, under the present system, w h i c h ensure that such appeals w i l l f a l l o n deaf ears. T h e first is the u n e m p l o y m e n t p r o b l e m at h o m e : the second the struggle for " favourable " balances of p a y ment under threat of getting into a position of unpayable indebtedness. T h i s second pressure has resulted i n international trade h a v i n g become a financial w a r instead of, as it s h o u l d be, a n exchange of goods a n d services between the nations to their m u t u a l advantage. ( P a r . (23).) There are also certain s u b s i d i a r y , t h o u g h nevertheless i m p o r t a n t , considerations w h i c h m a k e a nation u n w i l l i n g to accept u n l i m i t e d quantities of cheap i m p o r t s . W h i l s t it is no doubt true that m a x i m u m wealth can be achieved b y each nation specialising i n w h a t it is best able to p r o d u c e , a n d e x c h a n g i n g the surplus for those goods w h i c h other nations are best able to p r o d u c e , m o d e r n w a r calls for such a v a r i e t y of commodities that nations are not w i l l i n g to become entirely dependent on other nations for the p r o d u c t i o n of such commodities. A p a r t , h o w e v e r , f r o m w a r , nations are a n x i o u s to be able to offer to their o w n citizens w i t h i n their o w n borders that choice of occupations w h i c h m o d e rn science has made possible. (Pars. (10)-(16).) 7. A n u m b e r of methods have been e m p l o y e d to increase the effective d e m a n d without increasing
25
E 2

the n u m b e r of goods awaiting c o n s u m p t i o n i n the m a r k e t : i m p r o v e d technique is necessary. If nations w o u l d give their o w n people enough p u r c h a s i n g power to consume 100 per cent. of their o w n p r o d u c t i o n , no n a t i o n w o u l d object to a proportion of its products b e i n g exchanged for the products of other nations, their people h a v i n g enough p u r c h a s i n g power to consume their own output or the output of other nations w h i c h they might exchange for their o w n . (Pars. (17)-(22).) 8. T h e sale b y private i n d i v i d u a l s on the F o r e i g n E x c h a n g e of massive quantities of one nation's currency for another should be prohibited. Unless the new system is designed to m a k e such sales impossible, there can be n o stability a n d security i n the economic relations of nations. T h e sudden a n d unpredictable upsetting of the E x c h a n g e s caused i n this w a y was recognised b y the M a c m i l l a n Committee as a great potential danger. T h i s b u y i n g a n d selling of other nation's currencies m a y h a v e , a n d frequently has, no relationship to trade, although it m a y so disturb the nation's economic system as to have serious social a n d political consequences. (Pars. (24)-(27).) 9. Other (28).) problems requiring solution. (Par.

26

PART TWO CONSTRUCTIVE PROPOSALS International System
(29) P a s t experience has s h o w n us that it is useless to rely u p o n appeals to nations to take p a y m e n t f o r their exports a n d Causes of interfor interest o n their loans i n the national friction f o r m of imports (goods a n d serremoved. vices). T h e first essential, therefore, is to establish a n i n t e r n a t i o n a l t r a d i n g system under w h i c h , if nations w i s h to take p a y ment, they w i l l have n o o p t i o n b u t to take i t i n goods a n d services—otherwise m a k i n g a present. S u c h a system w o u l d h a v e the merit of l e a v i n g each nation free to determine h o w m u c h i m p o r t a n d export trade i t wished to d o . I t w o u l d m a k e subsidies a n d other devices f o r the artificial stimulation of exports pointless, unless the n a t i o n were s i m i l a r l y prepared to increase its i m p o r t s . A n t i - d u m p i n g laws c o u l d deal w i t h attempts b y i n d i v i d u a l manufacturers to u n l o a d u n w a n t e d surpluses s h o u l d the i m p o r t i n g n a t i o n consider that such prices w o u l d have a d i s r u p t i v e effect o n its o w n market. Instead o f the bickerings a n d recriminations w h i c h a c c o m p a n i e d the o l d system, under w h i c h fruitless attempts were made to persuade nations to p l a y the game b y t a k i n g imports i n exchange f o r their exports, there w o u l d be a solid foundation f o r trade negotiations, since each nation w o u l d be as m u c h concerned w i t h its
27

i m p o r t as w i t h its export trade. M o r e o v e r , it w o u l d enable nations w i t h totally different internal economic systems to trade together a m i c a b l y without that trade being the means b y w h i c h one internal system c o u l d threaten the continued existence of another. (30) A s has been p o i n t e d out, this country after the w a r w i l l not be entitled to receive a large v o l u m e of imports b y w a y of interest o n loans, against w h i c h , therefore, it has to do no corresponding export. T h e countries w h i c h were o u r debtors i n the past were distributing wages to their people for p r o d u c i n g the goods w h i c h they sent to us b y w a y of interest on loans. T h e exports left the country a n d n o t h i n g came b a c k . T h e wages, however, h a d been distributed a n d were used to b u y what r e m a i n e d . Effective d e m a n d was increased without increasing the s u p p l y of goods awaiting c o n s u m p t i o n i n their m a r k e t . I f we cannot have the same value of imports after the w a r as before, it w i l l not be because we c o u l d not v e r y easily produce a d d i t i o n a l goods for export to p a y for t h e m ; but because the late debtor nations w i l l not be p r e p a r e d to take p a y m e n t i n goods since such a d d i t i o n a l imports w o u l d increase the n u m b e r of goods a w a i t i n g consumption i n their markets, whilst the a m o u n t of p u r c h a s i n g power distributed w o u l d not be increased. These a d d i t i o n a l imports w o u l d , i n fact, be i n competition w i t h the goods already i n their m a r k e t , for s u c h p u r c h a s i n g power as there was. It is therefore e s s e n t i a l that nations s h o u l d i m p r o v e u p o n the methods indicated i n paragraphs (16)-(19,) for equating effective demand with s u p p l y . It is evident that the late debtor
28

countries w o u l d v e r y readily accept a d d i t i o n a l imports if their people h a d enough of their o w n national m o n e y (pieces of paper a n d book-entries) to b u y t h e m — w h e n once those i m p o r t s were i n their c o u n t r i e s — i n a d d i t i o n to a n d not instead of the goods already there; the p r o b l e m is not i n soluble. (31) It must further be recognised that the D o m i n i o n s , I n d i a , a n d a n u m b e r of other markets, are being r a p i d l y industrialised Industrialisation d u r i n g the w a r , a n d they w i l l of p r i m a r y producing insist u p o n protecting a n d b u i l d i n g countries. u p their secondary industries for the reasons set out i n the I n t r o d u c t i o n . If then a satisfactory solution is to be reached without relations becoming strained, it is clear that this cannot be done b y the methods of persuasion a n d conference w h i c h p r o v e d so fruitless d u r i n g the inter-war period. (32) I t is submitted that it is necessary to establish a system of international trade under w h i c h the p r o b l e m w i l l be f a i r l y Remove question and squarely placed on the of trade barriers from intershoulders of each n a t i o n , as to n a t i o n a l to h o w it proposes to take p a y m e n t n a t i o n a l arena. for its e x p o r t s : if it does not take payment i n the f o r m of i m p o r t s , it w i l l merely have made a present of its exports. T h e matter w i l l then be one for settlement, not as between nations, but w i t h i n each nation as between the exporting industries, w h i c h w i l l w i s h to continue to export, a n d the new industries, w h i c h w i l l be faced b y the d i l e m m a of seeing their best customers, the export industries, r u i n e d , or allow29

i n g imports i n to p a y for those exports. It w o u l d no longer be possible, as i n the past, to satisfy both parties b y stopping imports w i t h tariffs, so as to protect the new industries, whilst continuing to export p r i m a r i e s , a n d then, under threat of knocki n g d o w n the exchange rate of the b u y i n g country, c o m p e l l i n g it to get into u n p a y a b l e debt. It is u n l i k e l y that the workers of a n y country w o u l d for l o n g be content to export their real wealth a n d receive n o t h i n g whatever i n r e t u r n — n o t even an admission of u n p a y a b l e indebtedness. (33) N o doubt the solution reached w o u l d v a r y f r o m c o u n t r y to c o u n t r y . I n so far as a country decided to restrict i m p o r t s , to that extent it w o u l d restrict exports, so l e a v i n g other export markets free for those nations w h i c h wished to do a larger two-way overseas trade. (34) T h e U n i t e d States has already shown the way to the new system i n the L e a s e - L e n d A c t . She has there accepted the p r i n Lease-Lend A c t . ciple that nations can only p a y for goods a n d services w i t h goods a n d services. She has also recognised that y o u c a n take a horse to the water b u t y o u cannot m a k e it d r i n k : that the i m p o r t i n g nation c a n give the exporting nation a c l a i m to its goods, but that it cannot m a k e the e x p o r t i n g n a t i o n b u y those goods against its w i l l , a n d s h o u l d not be u n d e r obligation to do so. A c o n v e n t i o n a l rate of exchange between the dollar a n d the p o u n d has been fixed b y agreement. T h e goods s h i p p e d f r o m the U n i t e d States are p a i d for b y the U n i t e d States G o v e r n m e n t a n d the A c t provides that p a y m e n t for them m a y ultimately be made b y the i m p o r t i n g country i n k i n d or property
30

or any direct or indirect benefit w h i c h the President deems satisfactory. (35) T h e changes w h i c h w o u l d be necessary convert this m e c h a n i s m f r o m wartime to peacetime uses, whilst not altering Modifications of international the u n d e r l y i n g principles, are, it system. is s u b m i t t e d : — (a) T h a t the conventional agreement between the two countries as to the fixity of exchange s h o u l d be continued. S i m i l a r conventions s h o u l d be m a d e w i t h the D o m i n i o n s , I n d i a , the Colonies, a n d a n y other countries w h i c h cared to participate, thereby automatically determining the exchange rates between themselves: the exchange rate when once fixed w o u l d be i n v a r i a b l e , as the currencies w o u l d not be subject to the L a w of S u p p l y a n d D e m a n d , i.e., w o u l d not be bought a n d sold. to (b) T h a t instead of the U n i t e d States Government p a y i n g the A m e r i c a n citizen for his exports, the p r i v a t e A m e r i c a n trader should d r a w a b i l l i n sterling o n the E n g l i s h importer a n d s h o u l d discount that b i l l w i t h his o r d i n a r y c o m m e r c i a l b a n k , w h i c h should be under obligation to re-discount it w i t h the American Exchange Control. Any credit w h i c h the A m e r i c a n exporter m i g h t w i s h to give to his E n g l i s h b u y e r w o u l d be reflected i n the discount rate w h i c h he w o u l d be charged b y his b a n k . E v i d e n c e that such a b i l l w o u l d be offered for rediscount w o u l d be necessary before the goods c o u l d leave the U n i t e d States. T h e E n g l i s h importer, o n t a k i n g u p the documents, w o u l d p a y his
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sterling, through his o w n b a n k , into the E n g l i s h E x c h a n g e C o n t r o l , a n d the U n i t e d States E x c h a n g e C o n t r o l w o u l d be given a blocked credit for that amount. O n l y when a n A m e r i c a n i m p o r t e r bought goods f r o m a n E n g l i s h exporter a n d the process was reversed — t h e E n g l i s h E x c h a n g e C o n t r o l then h a v i n g a b l o c k e d credit w i t h the U n i t e d States E x c h a n g e C o n t r o l — w o u l d the first credit i n this country be cleared. International trade w o u l d , i n fact, be done b y a system of contra account. T h e above is a simple example of bilateral trade, but m u l t i l a t e r a l trade c o u l d be p r o v i d e d for b y the E x c h a n g e C o n t r o l s of the participating nations h a v i n g representatives at a n International E x c h a n g e * where b l o c k e d credits i n one country c o u l d be exchanged for those i n another at the
* T h e I n t e r n a t i o n a l E x c h a n g e w o u l d i n n o sense be a n I n t e r n a t i o n a l B a n k n o r w o u l d i t be t h e b o d y w i t h w h i c h a l l t h e n a t i o n s w o u l d h o l d t h e i r d e b i t s a n d c r e d i t s . P s y c h o l o g i c a l l y i t is i m p o r t a n t t h a t e a c h n a t i o n s h o u l d k n o w i n w h i c h c o u n t r i e s i t has u n c a n c e l l e d c r e d i t s , so t h a t i t m a y t a k e steps t o c l e a r those c r e d i t s e i t h e r b y t a k i n g more i m p o r t s or by restricting its exports to t h e m . The responsibility w h i c h this scheme places squarely u p o n each n a t i o n t o keep i t s o w n i m p o r t s a n d e x p o r t s i n e q u i l i b r i u m , m u s t i n no c i r c u m s t a n c e s be t r a n s f e r r e d t o a C e n t r a l I n t e r n a t i o n a l C l e a r i n g Bank. If a C e n t r a l I n t e r n a t i o n a l B a n k were entrusted w i t h this t a s k i n s t e a d of e a c h n a t i o n b e i n g free t o s o l v e i t s o w n d o m e s t i c p r o b l e m i n i t s o w n w a y , w e s h o u l d once m o r e be b a c k t o the o l d c o n d i t i o n of financial w a r to c o n t r o l a central m o n e t a r y a u t h o r i t y w h i c h , i n i t s t u r n , w o u l d c o n t r o l t h e d o m e s t i c affairs of so-called i n d e p e n d e n t n a t i o n s . I n p r a c t i c e , s u c h a s y s t e m of c e n t r a l i n t e r n a t i o n a l m o n e t a r y c o n t r o l m e a n s t h a t w h i l s t effective pressure c a n n o t be p u t u p o n t h e s t r o n g c r e d i t o r n a t i o n s t o t a k e p a y m e n t i n g o o d s a g a i n s t t h e i r w i s h e s , g r e a t p r e s s u r e c a n be b r o u g h t to bear u p o n the weak debtor nations to lower their prices i n an a t t e m p t t o f o r c e t h e i r g o o d s o v e r t h e tariffs o f c r e d i t o r s u n w i l l i n g to r e c e i v e p a y m e n t i n the o n l y w a y o p e n t o t h e d e b t o r , n a m e l y , i n goods. 32

conventionally fixed exchange rates: the p r i m a r y responsibility for establishing a contra account, b y i m p o r t i n g f r o m the country to w h i c h a sale h a d been m a d e , w o u l d r e m a i n w i t h the e x p o r t i n g country. If it d i d not w i s h to d o so that w o u l d be its affair a n d not that of the i m p o r t i n g c o u n t r y , which w o u l d have done its part b y establishing the necessary credit. T h e i m p o r t i n g country w o u l d be entitled to cancel the credit, u n d e r a Statute of L i m i t a t i o n s , if it were not used w i t h i n seven years. The principle is that w i t h w h i c h we are a l l f a m i l i a r i n internal t r a d i n g : if y o u have a credit w i t h a shop, y o u cannot take it out i n cash but y o u clear it when y o u take goods. Interest on loans w o u l d s i m i l a r l y be p a i d into the E x c h a n g e C o n t r o l of the debtor c o u n t r y as a blocked credit to the account of the creditor nation's E x c h a n g e C o n t r o l , w h i c h w o u l d p a y its o w n nationals for it i n its n a t i o n a l c u r r e n c y . T h i s blocked credit, too, w o u l d s i m i l a r l y o n l y be cleared when importers of the creditor n a t i o n bought goods, i n this w a y enabling the debtor n a t i o n to acquire a n offsetting b l o c k e d credit i n the creditor nation's Exchange Control. It w i l l be appreciated that a n exporter w o u l d receive p a y m e n t when he exported his goods, i n his o w n c u r r e n c y , a n d that a n i m p o r t e r w o u l d make p a y m e n t i n his o w n c u r r e n c y w h e n he took up the documents. N e i t h e r importers n o r exporters w o u l d be at a l l concerned w i t h foreign exchange, but solely w i t h the honesty a n d solvency of their opposite numbers. I f a n i m p o r t e r failed to p a y i n his o w n currency for the goods, then the E x c h a n g e C o n t r o l of the exporter's c o u n t r y ,
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w h i c h h a d rediscounted the b i l l , w o u l d have recourse against the b a n k w h i c h h a d discounted it, a n d the b a n k , i n its t u r n , w o u l d have recourse against the exporter. M o r e o v e r , there w o u l d be no r o o m for a b l a c k m a r k e t , as a n exporter c o u l d not ship his goods without discounting his b i l l . As, therefore, he w o u l d already have been p a i d , there w o u l d be n o temptation for the foreign buyer to acquire the seller's currency on a black market to p a y h i m twice. (c) T h e p a r t i c i p a t i n g nations w o u l d have to undertake to m a i n t a i n their internal general price levels stable. T h e y w o u l d , i n other w o r d s , guarantee the value of their currency b y u n d e r t a k i n g that a unit of it w o u l d b u y a p p r o x i m a t e l y the same satisfaction i n goods a n d services i n seven years' time as it d i d at the time of the Agreement, i . e . , that taken over the whole range of commodities w i t h i n that c o u n t r y , it w o u l d b u y approximately the same satisfaction or s t a n d a r d of l i v i n g . T h e v a l u e of a currency depends u p o n what it w i l l b u y i n the c o u n t r y where it is legal tender. If prices rise, a unit of m o n e y w i l l b u y less a n d is therefore w o r t h less. If prices f a l l , a unit of money w i l l b u y more a n d is therefore w o r t h more. A n honest measure of value is, therefore, a unit of m o n e y w h i c h has a constant p u r c h a s i n g power. N a t i o n a l currencies w o u l d , under the foregoing scheme, be i m m u n e f r o m external attack, thereby m a k i n g the p r o b l e m of m a i n t a i n i n g stability a m u c h simpler one, as w e l l as r e m o v i n g fear. A change i n the i n t e r n a l monetary technique is advocated
34

later, w h i c h w o u l d eliminate the factors w h i c h n o w make difficult, if not impossible, the task of m a i n taining a stable internal general price level b y monetary means. (36) If these proposals were adopted, a c o u n t r y , e.g. J a p a n , w h i c h d r o p p e d its general price level w i t h the idea of underselling other " Our Jim " nations, w o u l d merely get itself into must keep step w i t h the difficulties. It w o u l d become a good Regiment. country to b u y f r o m a n d a b a d one to sell to. Its exporters w o u l d receive their y e n f r o m their o w n E x c h a n g e C o n t r o l , on rediscounting their export bills. Its E x c h a n g e C o n t r o l w o u l d find itself w i t h g r o w i n g b l o c k e d credits i n the E x c h a n g e Controls of the other nations, whilst the other nations w o u l d find themselves w i t h d i m i n i s h ing blocked credits i n the Japanese E x c h a n g e C o n t r o l , so that when cancellation took place, J a p a n w o u l d find itself w i t h outstanding u n cancelled credits i n the E x c h a n g e Controls of the other nations. T h e other nations w o u l d merely point out to J a p a n h o w foolish she h a d been i n m a k i n g it impossible for herself to take p a y m e n t , a n d that unless she restored the a b i l i t y of her importers to take what they h a d p r e v i o u s l y been able to take, her unused credits w o u l d , at the end of the seven-year p e r i o d , be cancelled under a Statute of L i m i t a t i o n s . She w o u l d , i n fact, merely have made a present to the rest of the w o r l d of her exports, a n d at the same time reduced the i n t e r n a l purchasing power of her people, a result w h i c h , if pointed out to t h e m , they w o u l d not be l i k e l y to welcome.
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(37) S i m i l a r l y , should a c o u n t r y indulge in internal inflation, so causing a rise i n the internal price level, it w o u l d become a good country to sell to b u t a b a d one to b u y f r o m . Other nations would consequently find themselves w i t h uncancelled b l o c k e d credits i n the E x c h a n g e C o n t r o l of the offending n a t i o n . N o t o n l y w o u l d there be a great o u t c r y on the part of the e x p o r t i n g industries i n the offending n a t i o n against their o w n C e n t r a l B a n k for h a v i n g failed i n its first statutory d u t y , i.e., to keep the price level stable, but the other E x c h a n g e C o n t r o l s w o u l d clearly not be prepared to go on indefinitely a c c u m u l a t i n g uncancelled balances. T h e y w o u l d , therefore, give notice to the offending nation that they w o u l d be obliged, as f r o m a future date, to l i m i t the total v a l u e of the export bills of their nationals w h i c h they w o u l d be prepared to rediscount. T h e offending c o u n t r y w o u l d , i n this w a y , t h r o u g h its o w n action, already have lost some of its export trade a n d w o u l d subseq u e n t l y , if unrepentant, lose some of its import trade. (38) T h i s system differs f r o m the o l d i n that any nation getting out of step w i t h the w o r l d w o u l d be obliged to get b a c k into step again, whereas, i n the past, a n y nation w h i c h dropped its general price level a n d undersold the other nations, took gold f r o m them a n d compelled them to lower their price levels. T h e regiment was expected to get into step w i t h " O u r J i m , " whereas, under the proposed new technique, " Our J i m " would be compelled to get b a c k into step w i t h the regiment.

36

Internal System
(39) I t s h o u l d be possible, w i t h i m p r o v e d monetary technique, to reach a n d m a i n t a i n great trade a c t i v i t y without a steep rise The Trade Cycle. i n prices, followed subsequently b y a s l u m p i n trade activity a n d a disastrous fall i n prices. W h e n the Effective D e m a n d f o r goods is increased so suddenly a n d largely that current production cannot be speeded u p fast enough to keep pace w i t h i t , stocks begin to d i m i n i s h a n d prices to rise. T h e first impetus u p w a r d s m a y be given b y a relatively s m a l l increase i n d e m a n d f r o m the ultimate consumer, o r i t m a y be d u e to psychological causes. T h e u p w a r d movement when once started i s , however, carried f o r w a r d b y the urgent a n d largely increased demands o f the holder of stocks, whether m a n u f a c t u r e r , wholesale dealer, o r retail trader. H i s action is based u p o n fear a n d greed. T h e fear that i f he does not b u y now prices w i l l go still higher a n d the hope that if he does b u y n o w prices w i l l go still higher a n d he w i l l reap the benefit. T h e result of his a c t i o n i s , i n fact, to d r i v e prices higher. W h e n prices are falling he holds off the m a r k e t i n the fear that if he b u y s n o w his competitors w i l l later b u y at lower prices, a n d the hope that if he does h o l d off prices w i l l go lower. T h e effect of his h o l d i n g off is to d r i v e prices lower. This psychological factor c o u l d , it is Reverse the psychological submitted, be reversed a n d made factor. to w o r k i n f a v o u r of stability under the monetary technique advocated later i n this memorandum.
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(40) T h e technique under w h i c h the B a n k of E n g l a n d contracted the cash base of the J o i n t Stock B a n k s , so c o m p e l l i n g t h e m , if they were to m a i n t a i n their ratio of cash to deposits, to reduce their deposits b y c a l l i n g i n loans, was always effective i n stopping the b o o m a n d forcing d o w n prices. T h e trouble arose when prices reached the point of e q u i l i b r i u m a n d then passed it a n d a major s l u m p supervened. E x i s t i n g technique was i n capable of stopping the fall i n price at the point of equilibrium. It was for this reason that the monetary authorities hesitated to check a n u p w a r d rise i n price at its i n c e p t i o n : they might so easily convert a n incipient b o o m into a n uncontrollable major s l u m p . (41) It is clearly necessary, if the trade cycle is to be e l i m i n a t e d , that the technique for raising prices or for stopping a fall in T h e technique price at the desired point should for r a i s i n g the be as effective a n d speedy i n action general price level or s t o p p i n g as the technique for bringing a fall m u s t be prices d o w n . m a d e as effective
as that for lowering it.

(42) T h e reason w h y it is i n effective under the present system is not far to seek. T h e b u l k of the purchasing m e d i a i n a n y m o d e r n State consists of book entry m o n e y , a n d this c a n o n l y be created a n d issued b y the J o i n t Stock B a n k s if b o r r o w e d at interest. (43) W h e n currency is contracted a n d loans are called i n , w i t h a v i e w to c h e c k i n g an inflation a n d b r i n g i n g prices d o w n to the point of e q u i l i b r i u m , traders, i n order to repay their bank loans, are forced to throw their stocks of goods a n d securities on to a n u n w i l l i n g m a r k e t to acquire
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the money w i t h w h i c h to repay their loans. This means that soon there is a surplus of unsaleable goods overhanging the market. T h e a b i l i t y to b u y has been restricted, whilst supplies of goods o n order f r o m the manufacturers, n o w r u n n i n g to a high percentage of capacity, continue to p o u r into the market. (44) W h e n prices reach the point of e q u i l i b r i u m , it is necessary to stop the d o w n w a r d fall b y increasing the Effective D e m a n d for goods without, at the same time, increasing the supplies overhanging the market. T h i s , under the present technique, the b a n k s are incapable W h y the present of doing directly, as they can only technique is indirect a n d increase the total of p u r c h a s i n g therefore slow m e d i a b y m a k i n g loans at interest. and uncertain. A l r e a d y the deflationary p o l i c y w i l l have rendered m a n y previous customers uncreditworthy, a n d those w h o r e m a i n credit-worthy are not l i k e l y to w i s h to b o r r o w m o n e y to produce more when they cannot sell w h a t they have already produced. (45) T h e b a n k s are therefore d r i v e n to the alternative course open to t h e m . O n their cash base, w h i c h has been enlarged b y the B a n k of E n g l a n d , they create a d d i t i o n a l credit a n d w i t h it b u y G o v e r n m e n t securities o n the Stock Exchange. (46) T h i s b u y i n g of securities b y the b a n k s w i l l have the effect of d r i v i n g u p the sale price of Government securities on the Stock E x c h a n g e , so lowering the interest y i e l d . T h e p u b l i c , finding they get a lower interest y i e l d o n G o v e r n m e n t securities, w i l l start b u y i n g preference shares of
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industrial companies until their y i e l d is lowered, a n d then they w i l l start b u y i n g E q u i t i e s . I n short, a b o o m on the Stock E x c h a n g e is engineered and money is n o w described as " c h e a p . " (47) T h i s is designed to have the effect of restoring confidence, so as to induce people to spend more freely, a n d the object c a n easily be defeated if other happenings, political or otherwise, counteract the favourable impression created b y the Stock E x c h a n g e b o o m . This w i l l e x p l a i n w h y the Q u a n t i t y The Quantity T h e o r y of m o n e y is n o w being T h e o r y of M o n e y . questioned. A n increase i n the q u a n t i t y of m o n e y i n issue w i l l o n l y raise prices when it gets into the h a n d s of people who w i l l spend it on b u y i n g c o n s u m p t i o n goods. W h e n the v o l u m e of m o n e y seeking investment is i n creased i n the w a y described i n p a r a g r a p h (45), it m a y do one of two things. If it merely inflates the Stock E x c h a n g e value of existing securities, it w i l l have no effect u p o n the price level, a n d the result w h i c h m i g h t be expected from the Q u a n t i t y T h e o r y of m o n e y w i l l not follow. If, however, confidence is restored a n d the pressure of this new m o n e y seeking investment, w i t h consequent low interest y i e l d , results i n its being used for new i n d u s t r i a l or c o m m e r c i a l enterprise, e.g., the b u i l d i n g of new factories, the enlarging of existing ones, then this new money w i l l raise prices: it w i l l get into the hands of would-be consumers in the f o r m of wages, d i v i d e n d s , etc. T h i s w i l l also e x p l a i n the great emphasis w h i c h is always l a i d i n financial circles on the importance of confidence.
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(48) If, however, confidence is restored, then the p u b l i c w i l l start b u y i n g more freely a n d manufacturers w i l l go once more W h e n " confito their b a n k s a s k i n g for advances dence " is to finance larger p r o d u c t i o n . A t restored, a n uncontrollable this p o i n t , unless the B a n k of swing u p w a r d s E n g l a n d again increases the cash follows. base of the J o i n t Stock B a n k s , the latter w i l l be obliged to sell their G o v e r n m e n t securities on the Stock E x c h a n g e i n order to give advances to i n d u s t r y : so that as the b o o m starts i n i n d u s t r y , the s l u m p is started o n the Stock E x c h a n g e . H e n c e the so-called " T r a d e C y c l e . " (49) A n undesirable b y - p r o d u c t of this system is to m a k e speculation more profitable t h a n p r o duction : i n fact, if inside knowledge is possessed, selling for a fall ceases to be speculation as it is betting on a certainty. (50) T h e point, however, w h i c h it is here sought to m a k e is that the present m a c h i n e r y for raising prices is so uncertain a n d slow that stability of the general price l e v e l b y monetary means cannot be obtained without greatly i m p r o v e d technique. T h e present m e t h o d is uncertain i n its effect because it depends u p o n the successful creation of confidence, w h i c h frequently is c o n ditioned b y circumstances outside immediate monetary control, a n d it is slow because it is indirect a n d operates, if at a l l , t h r o u g h a l o n g c h a i n of cause a n d effect. (51) It should be borne i n m i n d that the objective of the o l d technique for r a i s i n g prices o r stopping a further f a l l was to increase effective demand for goods without increasing the n u m b e r
41

of goods a w a i t i n g consumption i n the market. I n order to achieve this objective it h a d , however, first to create a b o o m on the Stock E x c h a n g e i n the hope that this w o u l d lead to people feeling themselves richer a n d so spending more money w h i c h , i n its t u r n , w o u l d result i n unemployed being reabsorbed into i n d u s t r y , so increasing their p u r c h a s i n g power. T h e ultimate objective was, therefore, to give u n e m p l o y e d men full wages instead of a dole. T h i s points the w a y to the new technique w h i c h , if it is to be successful, must enable this final result to be achieved b y direct, certain a n d immediate action. Confidence i n business w o u l d then be founded on fact a n d there w o u l d be no need to rely u p o n creating o p t i m i s m — often groundless. I n the following paragraphs an attempt is made to outline the steps necessary to establish such a new technique. (52) A t the b e g i n n i n g of the last war the total b a n k deposits equalled £1,000,000,000. A t the end of the w a r they equalled £2,000,000,000. Since 1938 total b a n k deposits have risen f r o m £2,277,000,000 to £2,991,000,000 i n J u l y , 1941. It is therefore necessary to consider h o w the nation's total p u r c h a s i n g m e d i a came to be increased in this w a y . T h e matter is e x p l a i n e d b y the followi n g authorities: — The late Midland Sir Edward Bank): Holden (Chairman of the

" N e a r l y a l l l o a n transactions of the B a n k s create credit. T o understand this statement clearly, assume that a l l b a n k s i n the country are c o m b i n e d i n one b a n k a n d that a customer
42

borrows f r o m it, say, £100,000, but does not w i t h d r a w actual cash, then two different k i n d s of transactions are seen to take place. In L o n d o n the £100,000 w o u l d be p l a c e d to the credit of the b o r r o w e r , who w o u l d most p r o b a b l y at once begin to d r a w out the a m o u n t b y cheques to p a y for purchases. T h e cheques w o u l d go to the credit of the sellers of the goods a n d when the whole s u m h a d been d r a w n out, there w o u l d still be the whole of the £100,000 credit outstanding, although it m i g h t stand to the credit of a great n u m b e r of persons. T e c h n i c a l l y we say of such transactions the l o a n has created a credit of e q u a l a m o u n t . " Governor Eccles, President of the United States : of the Federal Reserve Bank

" T h e B a n k s c a n create a n d destroy m o n e y . B a n k credit is m o n e y . It is the money we do most of our business w i t h , not w i t h that currency w h i c h we u s u a l l y t h i n k of as m o n e y . " Mr. R. G. Hawtrey, a prominent economist and one of the chief officials of the Treasury : " W h e n a b a n k lends it creates money out of nothing." Mr. J. M. Keynes, the well-known economist:

" There c a n be no doubt that a l l deposits are created b y the b a n k s . " The Encyclopaedia Britannica (14th edition) :

" B a n k s create credit. It is a mistake to suppose that b a n k credit is created to a n y important extent b y the p a y m e n t of m o n e y into the b a n k s . A l o a n made b y a b a n k is a
43

clear a d d i t i o n to the community." Mr.

amount

of

money i n the

McKenna, Chairman of the Midland Bank : " W h e n a b a n k m a k e s a l o a n to a customer i n the o r d i n a r y course the l o a n w i l l be d r a w n u p o n b y a cheque b y the customer u p o n the b a n k a n d p a i d into someone else's credit at the same o r another b a n k . T h e receiver of the cheque, however, when he p a y s it into his o w n account, w i l l be credited w i t h its value a n d thereby a new deposit w i l l be created. I n the same w a y , w h e n a b a n k b u y s W a r L o a n or m a k e s a n y other investment the purchase m o n e y goes to the credit of somebody's account a n d increases the total of d e p o s i t s . " Sir Ernest Harvey, Deputy Governor of the Bank of England, w h e n g i v i n g evidence before the M a c m i l l a n C o m m i t t e e on F i n a n c e a n d I n d u s t r y i n 1931, made it clear that when the B a n k of E n g l a n d bought securities it increased the cash base of the J o i n t Stock or other b a n k s t h r o u g h w h i c h they were bought, so e n a b l i n g them to create, o n that base, a far larger structure of credit. (53) F r o m the foregoing it is evident that i n creases i n b a n k deposits d u r i n g the last a n d the present wars were brought about b y the G o v e r n ment b o r r o w i n g f r o m the J o i n t Stock B a n k s , the B a n k of E n g l a n d h a v i n g first increased their cash base. It is also clear that this n e w l y created p u r c h a s i n g m e d i u m d e r i v e d its sole value f r o m the fact that citizens were prepared to part w i t h their goods to the G o v e r n m e n t i n exchange for i t , b e i n g assured that other citizens
44

w o u l d , i n their t u r n , s i m i l a r l y part w i t h goods. Its acceptability d e r i v e d , i n fact, f r o m the trust which the citizens h a d i n one another a n d i n the l a w of the l a n d . T h e o n l y t h i n g l i k e l y to shake that trust w o u l d be a r a p i d fall i n the p u r c h a s i n g power of a unit of m o n e y t h r o u g h a steep rise i n prices (vide paragraphs (35c); (56); (57e); (59)). (54) T h i s new p u r c h a s i n g m e d i u m h a v i n g been created b y a stroke of the p e n , the cost to the banks of its creation was negligible. Paper money a n d book-entry m o n e y , of w h i c h the vast b u l k of the p u r c h a s i n g m e d i a of a n y m o d e r n State consists, are p r a c t i c a l l y costless to create. It is evident that, at the m o m e n t of creation, such money cannot be the p r o p e r t y of any private citizen as no service has been rendered for it, whereas when created it becomes a d e m a n d o n goods a n d services w h i c h w i l l be h o n o u r e d b y a l l citizens. (55) These considerations point to a r e f o r m of the internal monetary system w h i c h , if adopted, w o u l d m a k e the maintenance of Modifications of a stable i n t e r n a l price level pracinternal s y s t e m . ticable a n d w o u l d also solve the problem of u n e m p l o y m e n t . (56) I n a progressive society there is a n n u a l l y an increase i n the total a m o u n t of goods a n d services p r o d u c e d for c o n s u m p t i o n . If a l l the available labour, raw materials and capital equipment were f u l l y e m p l o y e d , the a n n u a l i n crease w o u l d be far greater t h a n it is. I f a corresponding increase i n the a m o u n t of p u r chasing m e d i a is not created a n d the same
45

amount of m o n e y has therefore to do service for a n increased n u m b e r of transactions (assuming the velocity of circulation is the same), prices at w h i c h each unit c a n be s o l d must f a l l . If, therefore, it is desired to m a i n t a i n a stable price level, there s h o u l d be a n a n n u a l increase i n the total a m o u n t of p u r c h a s i n g media corresponding to the total a n n u a l increase i n the a m o u n t of real w e a l t h to be distributed. T h i s issue of b r a n d new purchasing m e d i a s h o u l d , it is submitted, be spent into existence b y the State, i n v o l v i n g therefore n o c a p i t a l debt a n d n o interest charge, instead of being lent into existence at interest b y the private b a n k i n g system, the State often b e i n g the borrower. (57) T h e changes necessary w o u l d be as follows: — (a) T o pass legislation m a k i n g the J o i n t Stock B a n k s ' existing convention, n a m e l y , that they must h o l d a m i n i m u m of 10 per cent. of their total deposits i n l i q u i d cash, legally b i n d i n g u p o n t h e m , at the same time t a k i n g powers to require t h e m , as c i r c u m stances d e m a n d , to h o l d a higher ratio of cash. ( N o t e . — T h i s power has already been taken i n the U . S . A . ) T h e y s h o u l d , at the same time, be relieved of a n y legal liability to their depositors to h o l d a higher ratio of cash t h a n m i g h t be specified f r o m time to time under this statute. I n practice, the State has always come to the rescue of the b a n k i n g system when the public have wanted more cash t h a n the b a n k s h o l d . The legal position should n o w be made to conform with the facts.
46

(b) T h a t the B a n k of E n g l a n d s h o u l d be converted into a P u b l i c U t i l i t y C o m p a n y with a Governor and Deputy-Governor only r e m o v a b l e , o n a P e t i t i o n of b o t h H o u s e s to the C r o w n , for m i s c o n d u c t , so that subject to their c a r r y i n g o u t their statutory obligations, they w o u l d be as i m m u n e f r o m p a r t y p o l i t i c a l pressures as are the Judges. (c) T h a t this N a t i o n a l C e n t r a l B a n k s h o u l d be the sole B a n k of Issue of a l l sorts a n d k i n d s of p u r c h a s i n g m e d i a , whether metallic, p a p e r o r book entry. T o give effect to this it w o u l d be necessary to ascertain total deposits throughout the b a n k i n g system o n a g i v e n date. A n y further expansion of the total of bank deposits, through the J o i n t Stock a n d other p r i v a t e b a n k s issuing more new loans t h a n were offset b y o l d ones being r e p a i d , w o u l d thereafter be p r o h i b i t e d . N O T E . — I t must be remembered that every minute of every d a y o l d loans are b e i n g r e p a i d to the b a n k s a n d that these can be lent to new borrowers w i t h o u t a n y e x p a n s i o n of total deposits. T h i s proposal w o u l d not, therefore, interfere w i t h the n o r m a l l e n d i n g functions of the J o i n t Stock B a n k s . It merely ensures that w h e n the n a t i o n a l economy demands an e x p a n s i o n i n the total amount of p u r c h a s i n g m e d i a , whether cheque money or paper notes, it shall come into existence in the first place, b y being spent into existence b y the State without c a p i t a l debt o r interest charge, instead of being lent into existence b y the b a n k s , at interest.
47

(d) A s the new technique, described in par. (f) below, w o u l d be used when a n expansion of the total of purchasing media was necessary, O p e n M a r k e t operations b y the C e n t r a l B a n k w o u l d o n l y be employed when contraction was necessary. (e) T h e p r i m a r y duty of the Central B a n k w o u l d be to m a i n t a i n the internal price level stable, i.e. to m a i n t a i n the new standard value of the £ . F o r this purpose the B o a r d of T r a d e w o u l d issue a general price index figure w h i c h the N a t i o n a l Central B a n k w o u l d be under obligation to m a i n tain at 100. If it saw that index figure f a l l i n g , it w o u l d not, as i n the past, talk about o v e r - p r o d u c t i o n , but under-consumption. It w o u l d consider how m u c h more p u r c h a s i n g power i n the pockets of the people w o u l d take the surplus goods off the market a n d restore the index figure to 100. (f) So l o n g as 10 per cent. remained the J o i n t Stock B a n k s ' legal ratio of cash to total deposits, the N a t i o n a l C e n t r a l B a n k w o u l d issue a n y new money w h i c h might be required i n the ratio of ten book entry £ s for every paper £ p r i n t e d . Instead of the C e n t r a l B a n k spending the paper £ s into existence, as i n the past, b y b u y i n g gold, so creating a base u p o n w h i c h the J o i n t Stock Banks w o u l d later lend at interest ten times that amount into existence, the N a t i o n a l C e n t r a l B a n k w o u l d itself create both £ 1 0 book-entry a n d the £1 paper and w o u l d credit the G o v e r n m e n t ' s account with this
48

newly created money. It w o u l d then be the duty of the G o v e r n m e n t to spend the £ 1 0 book-entry into existence b y b u y i n g for the c o m m u n i t y something more useful than g o l d , e.g., s l u m clearance, roads, adequate pensions for o l d people, etc. These things w o u l d cost the nation the l a b o u r , r a w materials a n d capital equipment (previously unemployed) necessary to m a k e t h e m , a n d also to m a k e the food, clothes, etc., w h i c h the men e m p l o y e d i n m a k i n g them w o u l d b u y w i t h their wages, i.e., the surplus of goods overhanging the m a r k e t a n d causing the s l u m p . There w o u l d not be i n a d d i t i o n , as under the present system, a financial debt at interest, i.e., a double c o s t — r e a l a n d financial. W h e n circumstances d e m a n d e d the e m p l o y m e n t of people on capital w o r k rather t h a n o n the manufacture of c o n s u m p t i o n goods, the G o v ernment c o u l d spend this new m o n e y b y b u y i n g b a c k a n d cancelling G o v e r n m e n t securities, so increasing the v o l u m e of capital seeking a n outlet. It c o u l d also be used to remit taxation, so stimulating both investment i n capital goods a n d the purchase of c o n s u m p t i o n goods. F o r e x a m p l e , suppose the N a t i o n a l C e n t r a l B a n k , seeing the general price level f a l l i n g , decided that another h u n d r e d m i l l i o n pounds should be p l a c e d i n the hands of ultimate consumers, the N a t i o n a l C e n t r a l B a n k w o u l d credit the G o v e r n m e n t account w i t h a h u n d r e d million a n d w o u l d p r i n t o n l y ten m i l l i o n notes. L e t us next suppose that the G o v e r n m e n t then
49

drew a cheque for a h u n d r e d m i l l i o n pounds i n f a v o u r of a contractor w h o h a d engaged to clear slums a n d b u i l d houses. T h e contractor w o u l d p a y that cheque into a J o i n t Stock B a n k to his account. T h e J o i n t Stock B a n k ' s deposits w o u l d n o w have risen b y a h u n d r e d m i l l i o n , but the B a n k w o u l d , at that m o m e n t , h a v e no corresponding increase of ten m i l l i o n of cash as a base for that new deposit. Its cash ratio w o u l d , therefore, for the moment, h a v e fallen b e l o w the legal m i n i m u m . H o w ever, o n presentation of the cheque at the N a t i o n a l C e n t r a l B a n k it w o u l d receive, i n exchange, ten m i l l i o n paper pounds. It w o u l d once more h a v e restored its legal ratio. It w o u l d h a v e a fresh b o o k entry of a h u n d r e d m i l l i o n deposits, a n d a fresh ten m i l l i o n of paper notes. There w o u l d , therefore, be no room for further creation b y the J o i n t Stock B a n k . It w i l l be appreciated that the ten m i l l i o n of notes must be h e l d b y the B a n k against the time w h e n the depositor wishes to h a v e them i n l i e u of his b o o k entry m o n e y , i . e . , cashes a cheque, so cancelling some of his h u n d r e d m i l l i o n of book entry money a n d t a k i n g notes instead. (58) It is, perhaps, inappropriate to develop the question of technique i n this m e m o r a n d u m . T h e u n d e r l y i n g change i n concepE q u a t i n g Effection involved i n the foregoing tive D e m a n d proposals is that action w o u l d be with Supply. directed towards equating Effective D e m a n d w i t h S u p p l y , a n d w o u l d even some50

times be used to stimulate S u p p l y , whereas hitherto a l l efforts have been directed towards equating S u p p l y w i t h Effective D e m a n d b y the scrapping of useful capital equipment, the limitation of output, a n d the destruction of food a n d other m a t e r i a l wealth for w h i c h there was certainly a H u m a n D e m a n d , although not a n Effective one. (59) A n o t h e r change i n conception is that the price level is m a i n t a i n e d stable a n d increased supplies are reflected i n more Increased m o n e y being distributed to b u y national wealth those a d d i t i o n a l supplies at the reflected i n larger m o n e y incomes same price. T h e o l d conception, instead of lower based u p o n the notion that g o l d , prices. the q u a n t i t y of w h i c h was l i m i t e d , gave value to m o n e y , looked to a fall i n price when supplies were increased, so as to enable the same amount of m o n e y to b u y the a d d i t i o n a l goods because they were cheaper. It is, however, evident that a change i n the general price level not o n l y alters the incidence of long-term c o n tractual debt as between one citizen a n d another w i t h i n a country, b u t also is capable of i m p o s i n g great hardship a n d injustice as between creditor and debtor nations, besides c o m p e l l i n g other nations to alter their general price levels if they hope to r e m a i n competitive i n the w o r l d ' s markets. I n short, there can be no reasonable degree of s t a b i l i t y i n international t r a d i n g relations if a n y one m a j o r n a t i o n , b y altering its general price level, can disturb the internal economy of every other nation i n competition w i t h it. (60) It may also be
51

useful

to

consider

the

of the proposed change. U n d e r the old system, when prices rose H e l p f u l change traders bought h e a v i l y , so causing in psychology. prices to rise still more. When prices fell traders h e l d off the market for still lower prices, so causing them to f a l l further. U n d e r the proposals set out above traders w o u l d k n o w that when prices fell new purchasing p o w e r w o u l d speedily be p u t into the hands of the ultimate consumer through the Government spending new m o n e y into existence. The trader w o u l d therefore rush i n to b u y before this happened, so b r i n g i n g prices b a c k to the point of stability without official intervention. Similarly, when prices rose above that point, the trader w o u l d k n o w that the C e n t r a l B a n k w o u l d contract currency a n d credit, so forcing prices down again. H e w o u l d therefore h o l d off the market w a i t i n g for this to h a p p e n , so again m a k i n g official intervention unnecessary. T h e present psychology w o u l d , i n fact, be reversed w i t h beneficial results. (Vide P a r . (39).) (61) W h i l s t there are many m i n o r points w h i c h cannot be mentioned w i t h i n the scope of this m e m o r a n d u m , there is the following major point. (62) A l t h o u g h the general price level c o u l d , i n this w a y , be kept stable, special measures w i l l , it is submitted, have to be Different price taken to ensure that the gap systems for primaries and between the prices of manufacindustry. tured goods a n d p r i m a r y products does not, i n its t u r n , open a n d close i n the indefensible w a y it has done i n the past. T h r o u g h out 1920 wheat averaged 11/8 per b u s h e l ; d u r i n g
52

psychology

1925, 8 / 2 ; a n d i n 1931, 3 / 4 . T h e n d u r i n g the m o n t h of J a n u a r y , 1938, the price was 7 / 5 , whereas i n N o v e m b e r of the same year it was down again to 3 / 4 . D u r i n g 1939 it touched the lowest level ever recorded at less t h a n 3 / - . T h e average price per l b . of w o o l (Merino 66's clean basis) i n 1924 was 76¾d. I n J u l y , 1937, it was 38½d. a n d J u l y , 1938, 24d. Cotton (American middling) was 8 d . a l b . i n M a r c h , 1937, but h a d fallen to 4½d. b y N o v e m b e r of the same y e a r ; the average price for 1924 h a v i n g been 16½d. R u b b e r , w h i c h was 35¼d. a l b . i n 1925 a n d 2⅓d. i n 1932, was 12d. i n M a r c h , 1937, a n d 5¾d. i n M a y , 1938. T i n , w h i c h was £283 a ton i n M a r c h , 1937, was £ 1 6 3 b y M a y , 1938. C o p p e r , w h i c h was £ 7 2 a ton i n M a r c h , 1937, was £35 b y J u n e , 1938. (63) P r i m a r y producers are still the m a j o r i t y of the h u m a n race, a n d it is b o u n d to cause a serious c o n v u l s i o n of the economic system w h e n the prices w h i c h they can obtain for their output are liable to fall so steeply a n d so u n p r e d i c t a b l y ; whilst the prices of manufactured goods, w h i c h they wish to exchange for their output, do not fall correspondingly, a n d their fixed obligations, debts, etc., do not fall at a l l . T h e y find them­ selves able to c l a i m , i n exchange for their p r o ­ duct, a far smaller quantity of m a n u f a c t u r e d goods than before. N o t o n l y do they suffer a n injustice, but the m a n u f a c t u r i n g countries w i t h ruined customers have to restrict output a n d dismiss men f r o m their e m p l o y m e n t , so again destroying effective d e m a n d . It is evident that these results w i l l follow so l o n g as p r i m a r y p r o ­ ducers depend for the price they are p a i d on
53

the haggle of the m a r k e t , whereas the manufacturer charges a n administered price, i.e., cost of p r o d u c t i o n plus profit, a n d w i l l not for long produce at m u c h less than that price. (64) T h e r e are m a n y different ways i n w h i c h the p r i m a r y producer c o u l d be assured, under all circumstances, a reasonable return for his labour, together w i t h a further r e w a r d o n results b y w a y of a n incentive. It is, however, evident that the extreme instability a n d insecurity w h i c h was so m a r k e d a feature of the o l d economic system, cannot be cured unless this p r o b l e m is b o l d l y faced. I n this connection, the equating of Effective D e m a n d w i t h S u p p l y s h o u l d ensure that never again i n the future w o u l d the conscience of h u m a n i t y be shocked b y the spectacle of food being destroyed whilst people went h u n g r y .

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SUMMARY International Trading System
1. It w o u l d be fatal to r e l y , after the cessation of hostilities, u p o n persuasion, conferences, a n d trade negotiations, to avert the outbreak of a financial a n d economic w a r more ferocious t h a n a n y t h i n g yet experienced. N a t i o n s are i n s u c h different stages of development, politically, socially a n d e c o n o m i c a l l y , that a n y international trading system r e q u i r i n g f o r its successful w o r k ing some measure of equality a n d u n i f o r m i t y i n these matters must a c c o r d i n g l y be r u l e d out as impracticable. ( P a r . (29); (30).) 2. O n the c o n t r a r y , a system i s necessary which w i l l leave each nation entirely free to settle its o w n i n t e r n a l policies without fear of external interference. ( P a r . (29).) 3. T h e above c a n be done b y p l a c i n g u p o n each nation the sole responsibility of d e c i d i n g h o w it proposes to take p a y m e n t f r o m the outside w o r l d i n goods a n d services f o r its exports of goods a n d services a n d f o r interest o n loans, under penalty of h a v i n g credits a b r o a d w h i c h it does not clear i n this w a y cancelled after a period of years. T h i s w o u l d m e a n , i n practice, that if a nation wished to e x p o r t , it w o u l d either have to i m p o r t o r m a k e a present o f those exports. ( P a r . (32).) N o doubt the solution reached w o u l d v a r y f r o m country to c o u n t r y , some preferring more overseas trade a n d others more protection f o r home industries. ( P a r . (33).)
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4. S u c h a system w o u l d remove the question of trade barriers f r o m international to national arenas, the w i d t h a n d height of trade barriers being a matter to be fought out w i t h i n the nation between the export a n d i m p o r t interests o n one side a n d the industries w i s h i n g protection on the other. I n so far as a nation decided to stop imports it w o u l d , to that extent, stop exports unless it wished to m a k e a present of them. S u r p l u s exports c o u l d n o longer be used to get other nations into u n p a y a b l e debt under threat of k n o c k i n g d o w n their exchange rate. (Par. (32).) 5. I n v i e w of the industrialisation, d u r i n g the w a r , of the D o m i n i o n s a n d I n d i a , it has become especially desirable, if friction w i t h them is to be a v o i d e d , that the maintenance of a two-way traffic s h o u l d not be dependent, as i n the past, u p o n outside persuasion a n d pressure. (Par. (31).) 6. A s a regular instrument of national export p o l i c y , subsidies a n d s i m i l a r devices w o u l d be pointless. A n t i - d u m p i n g laws c o u l d deal w i t h attempts b y i n d i v i d u a l manufacturers to u n l o a d unwanted surpluses s h o u l d the i m p o r t i n g nation consider that such prices w o u l d have a disr u p t i v e effect o n its o w n market. ( P a r . (29).) 7. T h e w a y to the new system has been shown b y the L e a s e - L e n d A c t . T h e following three principles are there recognised: — (a) T h a t nations can o n l y p a y for goods a n d services w i t h goods a n d services. (b) T h a t an i m p o r t i n g nation can give the e x p o r t i n g nation a c l a i m to its goods, but it cannot m a k e the e x p o r t i n g nation b u y
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those goods against its w i l l a n d should not be under obligation to do so. (c) T h a t a conventional rate of exchange between two currencies s h o u l d be fixed b y agreement a n d should not be subject to the L a w of S u p p l y a n d D e m a n d , i.e., s h o u l d not be bought a n d sold. ( P a r . (34).) 8. T h e modifications necessary i n L e a s e - L e n d procedure to make it suitable for peace-time use. T h i s proposed system differs from the gold standard system i n that a n y nation getting out of step w i t h the w o r l d through a l l o w i n g its general price level either to rise o r fall w o u l d be obliged to get b a c k into step a g a i n , whereas, under the o l d system, a n y n a t i o n w h i c h d r o p p e d its general price level a n d undersold the other nations, took gold f r o m them a n d compelled them to lower their price levels. T h e regiment was expected to get into step w i t h " O u r J i m " whereas, under the proposed new technique, " O u r J i m " w o u l d be compelled to get b a c k into step with the regiment. ( P a r . (35)-(38).)

Internal System
9. T h e T r a d e C y c l e . T h e o l d technique of contracting currency a n d c a l l i n g i n loans was q u i c k l y effective i n forcing d o w n prices, b u t when once the desired price level was reached, it was incapable of stopping the fall u n t i l a major slump h a d r u n its course. It is therefore necessary, if the trade cycle is to be eliminated, that the technique for raising prices o r f o r the stopping of f a l l i n g prices at the desired point should be as direct, effective, a n d speedy as the
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technique

for

bringing prices

down.

( P a r . (39)-

(41).) W h e n once the s l u m p is under way the banks cannot inject new credit to stop prices falling b y l e n d i n g to i n d u s t r y , because m a n y previous customers are no longer credit-worthy a n d those w h o are do not w i s h to b o r r o w money to produce more as they cannot sell what they have already p r o d u c e d . T h e b a n k s are d r i v e n to the alternative method of injecting new purchasing power b y creating credit a n d b u y i n g securities on the Stock E x c h a n g e , so causing a Stock E x c h a n g e b o o m . T h i s is intended to create confidence a n d so induce freer spending b y the p u b l i c , w h i c h , i n its t u r n , w o u l d result i n u n e m p l o y e d people being re-absorbed into industry. ( P a r . (42)-(48).) T h e effect of the Stock E x c h a n g e b o o m m a y , however, be offset b y happenings i n the political sphere, a n d the effort to increase Effective Demand in this way may be defeated. ( P a r . (47).) The technique is inefficient, uncertain a n d slow. A m e t h o d must be f o u n d to achieve the ultimate purpose of the o l d technique, n a m e l y , a n increase i n effective d e m a n d without a corres p o n d i n g increase of goods a w a i t i n g consumption i n the m a r k e t , b y direct, certain a n d immediate action. ( P a r . (50)-(51).) 10. Since 1938 total b a n k deposits have risen f r o m £2,277,000,000 to £2,991,000,000. Many eminent authorities are quoted to show that this new p u r c h a s i n g media was created b y the banks and lent into existence. Its acceptability derived f r o m the trust w h i c h the citizens h a d in one
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another and in the law of the l a n d . It is evident that, at the moment of creation, such money cannot be the property of a n y private citizen or corporation, as no service has been rendered for it, whereas when created it becomes a d e m a n d on goods a n d services w h i c h w i l l be h o n o u r e d b y a l l citizens. ( P a r . (52)-(55).) 11. I n a progressive society there is a n a n n u a l increase i n the total output of goods a n d services w h i c h necessitates a corresponding increase i n the total issue of p u r c h a s i n g m e d i a unless prices are to fall. It is this a n n u a l increase i n the total of p u r c h a s i n g m e d i a w h i c h , it is submitted, should be spent into existence b y the State without any capital debt or interest charge, instead of b e i n g lent into existence b y the private b a n k i n g system. (Par. (56).) 12. T h e reform referred to i n the above p a r a graph w o u l d afford a means of stopping a fall in prices a n d w o u l d also solve the p r o b l e m of unemployment. T h e measures necessary to give effect to it are set out i n p a r a g r a p h (57). 13. The underlying changes i n v o l v e d i n the proposals a r e : — in conception

(a) T h a t action w o u l d be directed towards equating Effective D e m a n d w i t h S u p p l y a n d w o u l d sometimes be used to stimulate s u p p l y , whereas hitherto a l l efforts have been directed towards equating S u p p l y w i t h Effective D e m a n d b y the scrapping of useful capital equipment, the limitation of output, a n d the destruction of food and other material wealth. (Par. (58).) (b) T h a t the price level s h o u l d be
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main-

tained stable a n d increased supplies w o u l d be reflected i n more m o n e y being distributed to b u y those a d d i t i o n a l supplies at the same p r i c e ; instead of, as i n the past, the volume of m o n e y r e m a i n i n g static whilst the price level was lowered, so that more supplies c o u l d be sold, w i t h the same a m o u n t of money, for a lower price per unit. ( P a r . (59).) T h e objections to the second m e t h o d are that a fall i n general price level i n one nation upsets the internal economy of every other n a t i o n , a n d it also alters the burden of contractual indebtedness, b o t h as between citizens a n d internationally. 14. U n d e r the proposals there w o u l d be a h e l p f u l change i n the p s y c h o l o g y of traders. ( P a r . (60).) 15. A l t h o u g h the general price level c o u l d be maintained stable, the gap between the prices of m a n u f a c t u r e d goods a n d p r i m a r y products might still open a n d close, as they are sold under two quite different price systems. It is necessary, therefore, to take special measures to ensure greater stability i n the prices of foodstuffs a n d p r i m a r y products. ( P a r . (62)-(64).)

J. Alexander & Co., 2 2 , Northumberland Avenue, London, W.C.2.

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