LETTERS TO THE EDITOR.
DEFLATION AND UNEMPLOYMENT.
[To the Editor of the SPECTATOR.] SIR,—In writing to express my admiration for the attitude you have adopted with regard to deflation, I would ask you to emphasize more clearly that there is not a shadow of doubt that deflation does mean unemployment.
To those who have studied currency and exchange questions in " silver " countries and gained years of pre-War experience of the effect of appreciated currency exchange on trade, it would be comic, if it -were not tragic, to find that the ordinary Englishman has not got farther in his education regarding valuta than when his practical experience was limited to those occasions when visiting the Continent he sometimes got what he called a " good " rate, and at others what he called a " bad " rate, for a sovereign. For him the good rate of exchange was, say, frs. 25.70, and the bad rate meant that his sovereign was barely worth twenty- five francs. He never had that experience which teaches that an appreciated rate of exchange is a bad one for trade and that a depreciated rate is a good one.
Naturally officials and bankers in " silver " countries are slow to recognize the advantage of that condition in which their pay or profits are reduced, as was seen in the Report of the Herschel Indian Currency Commission, which, having recognized that a Chinese merchant will still be glad to sell a dollar's worth of goods for a depreciated dollar, while an Indian exporter cannot afford to sell an appreciated rupee's worth of goods for fourteen annas, dismissed the natural inference by saying, "One reply given to this objection is that it involves the proposition that the continuous deprecia- tion of the currency of a country in relation to that of others is advantageous to the commerce of the country whose currency is thus debased and adds to its prosperity."
Anyone foolish enough to be influenced in a matter of such immense importance by an epigram might try the following reflection, which is neither more nor_ less stupid : To claim that an appreciated currency is necessarily advantageous to a country involves the proposition that a country's prosperity depends upon its shortage of currency !
Many Britons are so obsessed by metal mania that they apparently still hold the qualitative theory of money, and it is doubtful whether they have yet realized the existence of the quantity theory which, after nearly a. century of life, is now, in its turn, awaiting a public funeral.
[The quantity theory, as expressed in the words "The level of price is proportionate to the quantity of money," has crashed since the Currency Board system of the Crown Colonies has been working with ideal success in the most " difficult " of all countries from a currency and exchange point of view. In Egypt, under this perfectly automatic currency system, the " seasonal " nature of its demands necessitates a maximum currency issue twice as great as its minimum issue, and this one hundred per cent. increase, or fifty per cent, reduction in the currency, leaves prices unaffected!] Every day can be seen in most of the great " dailies " reports stating that our industrial distress is mainly due to the "unfair competition" of depreciated currency, while in other columns in the same issue it is stated that apprecia- tion of currency can have no harmful effect on trade. To illustrate how extraordinarily ignorant as to existing conditions in other countries are some of the writers who deal with 'this subject, I would take the case of a special article in a Sunday paper of a fortnight ago, in which it was actually asserted that the United States exemplified the fact that deflation was compatible with thriving trade and that "American exports are by no means hampered by the pure gold standard." The actual and easily ascertained facts are, of course, exactly opposed to these obviously absurd statements.
The experience of the United States was that deflation to the extent of $944,000,000 led during the twelve months ending 1921 to three times the wreckage that ensued from the financial disaster of 1907 that previously held the United States record for bankruptcy suicide and distress. To save the country a policy of inflation became imperative and was inaugurated in the latter half of last year, resulting in the marvellous prosperity that has, during the past twelve months, beaten all previous records. [According to the National City Bank of New York Circular, the production of pig iron has surpassed all previous records, the automobile industry has had the greatest six months in its history, and the textile mills have increased their monthly output by 125,000 bales !] Exports have, however, declined enormously, and the United States Currency Controller reports that "Excess of gold is reacting against America as illustrated by the drop in America's favourable trade balance." The actual figures for the past two years arc: For 1921, favourable balance 32,862,050,687; for 1922 $1,163,077,481 ; while for 1923 a far greater reduction is anticipated.
There is not and cannot be any exception to the rule that a high currency exchange in relation to other countries kills export trade, as will be seen in the case of every country that is unfortunate enough to suffer from "appreciation." Equally there is no exception to the rule that a low exchange is favourable to trade and employment ; but chaos can, if desired, be as easily achieved by means of constant and progressive depreciation as by progressive appreciation. So long as Germany was aiming at increasing her trade and finding employment for all by depreciation, she achieved her object, as have all other countries that attempted the same means of improving trade conditions.
Comparative stability is, of course, at all times essential for trade, while absolute stability is still better. Absolute stability can, so far as experience teaches, only be attained by abandoning gold and adopting the Currency Board system.
With a low stable exchange and automatic control of currency as in Egypt, it seems virtually certain there would be less unemployment in Britain than has ever been the case in living memory, since we should have no serious com- petition to face until the United States abandoned the gold basis and Germany gets to work again.
Will not the public realize, if it is pointed out in the light of their present experience, that oppressive restriction of currency necessarily involves injury to trade and ever increasing unemployment ? This is no new discovery. It was known for decades before the Cunliffc Committee of metal maniacs decided to defy the warnings of those who foretold the staggering price in loss of trade and in unem- ployment that must result from adoption of the policy they
recommended.—I am, Sir, &c., A. S. BAXENDALE. Westminster.
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