MONETARY REFORM.*

THIS is a very brilliant as well as a very important book. Like all that Mr. Keynes writes, it is full of matter, and also full of wit. Whether Mr. Keynes is wise to be so witty, so ironical, and so charmingly allusive on a question like the Currency is a difficult question to answer. All I can say is that personally I like it, that I think it wings the arrows of his thought and snakes them go home to a dull breast far better than if he wrote in the true desiccated Blue Book style. To me his shrewd hits are not unworthy, but worthy of that great and fascinating subject with which he deals, for so in truth is the subject of Currency and Monetary Reform. As Milton said of philosophy, It is only dull fools who think the subject crabbed. But, though I personally may be tickled into the mood to accept daring conceptions and soul-shaking conclusions by being told by my author that the cause of " hard money " is " consecrated by the wisdom and experience of Dungi, Darius, Constantine, Lord Liverpool, and Senator Aldrich," I am afraid there are bankers and other grave and pious men who are a little put off by the light touch.

The crux of Mr. Keynes's book is to be found in his state- ments in regard to the problem of stabilization. Stabilization as regards the value of currency, expressed in commodities, is admittedly the ultimate aim of all those who have to deal with the monetary problem. No one, not even the maddest

• Monoarg &form. By J. M. Keynes, London: Macmillan sad Co. 17s, ed. net.] of currency cranks, would wish to have a measuring rod of

the pantomime kind—a measuring rod which is a yard long on Monday, a foot on Tuesday, an inch on Wednesday, and may then jump half-way back to the yard on Thursday, and on Friday be two yards long ! We want our measuring rod to stay steady.

But the whole of the problem for practical purposes is not contained in stabilization, or rather in stabilization at the present moment. You must not assume when you seize hold of the measuring rod and mean to stop its vagaries that you can feel certain that the measure of the moment is the right measure. Alice in Wonderland was in that predica- ment when she nibbled at one piece of food to make her grow tall and at another to make her grow short. At one moment she was very nearly disappearing altogether, and at another was knocking her head on the ceiling. But she worked to achieve a good average height and ultimately achieved it. In our present predicament we have not got to stabilize values at the prices of the moment, but have got to consider the most equitable, the safest, and the most practical epoch in the last three years as our safe and sound point considered in view of all the circumstances.

Many people would like to go back to the status quo of the measuring rod before the War and to make the value of the pound sterling measured in commodities the same now as it was in the summer of 1914. But this cannot be done. In the first place, such deflation would mean making an enormous present to the holders of shares with fixed rates of interest, of fixed salaries, of mortgages, and of promises to repay in money, i.e., in legal tender. The owners of the War

Debt would get, to begin with, a vast premium to which they have no claim, moral or economic. As it has often been put, we should have " borrowed in paper and paid in gold." That, of course, is what the process of deflation, which we have been practising for the last two years, means. It was probably right to " backward tread the paths of Fate " to a certain extent, but the problem when we want to choose

the datum line for stabilization is whether we have not • already gone too far for safety or justice in the direction of deflation, and whether it might not be better before we fix upon the stabilization point to retrace our footsteps a little —to retrace them, say, to the 1920 point. In the abstract there is a good deal to be said for undoing those acts of deflation which we have committed in a rather obtuse and blundering way during the past two or three years.

On the whole, however, I think it would be wiser, and certainly more English, to stumble into a compromise in the case of deflation, and be content not to go back, or at any rate far back, but certainly not to go forward. We might, for example, make our stabilization point April, 1923. If we took that, there would still be a good deal of deflation since that date to be undone, and still more to be guarded against in the future. Remember that the payment of the instalments of the American Debt in cash, and without borrowing afresh, is per se an automatic act of deflation. There is a good deal to be said also for taking account of the fact that if we were now to enter, as we probably shall and certainly ought, on a great campaign of works of public utility, in order, at one and the same time, to find work for the unemployed and to tidy up our untidy country, we should, if we raised the requisite money by taxation rather than by loan, be deflating once more.

And now for the way in which Mr. Keynes puts his problem.

Here are his actual words :—

"(1) Devaluation versus Deflation. Do we wish to fix the standard of value, whether or not it be gold, near the existing value ? Or do we wish to restore it to the pre-War value ? (2) Stability of Prices versus Stability of Exchange. Is it more im- portant that the value of a national currency should be stable in terms of purchasing power, or stable in terms of the currency of certain fore' countries ? (a) The Restoration of a Gold Stan- dard. In the ' ht of our answers to the first two questions, is a gold standard, owever imperfect in theory, the best available method for attaining our ends in practice ? Having decided between these alternative aims, we can proceed, in the next chapter, to some constructive suggestions."

After thus stating his thesis, Mr. Keynes goes on to deal with the all-important problem of Devaluation versus Deflation.

Here I cannot do better than quote him at length :-

" I. Devaluation versus Deflation. The policy of reducing the ratio between the volume of a country's currency and its require- ments of purchasing power in the form of money, so us to increase

the exchange value of the currency in terms of gold or of con- modities, is conveniently called Deflation. The alternative policy of stabilizing the value of the currency somewhere near its present value, without regard to its pre-War value, is called Devaluation. Up to the date of the Genoa Conference of April, 1922, these two policies were not clearly distinguished by the public, and the sharp opposition between them has been only gradually appreciated. Even now (October, 1923) there is scarcely any European country in which the authorities have made it clear whether their policy is to stabilize the value of their currency or to raise it. Stabilization at the existing level has been recommended by International Conferences ; and the actual value of many currencies tends to fall rather than to rise. But, to judge from other indications, the heart's desire of the State Banks of Europe; whether they pursue it successfully, as in Czecho-Slovakia, or unsuccessfully, as in France, is to raise the value of their currencies. In only one country so far have practical steps been taken to fix the exchange, namely, in Austria. The simple arguments against Deflation fall under two heads. In the first place, Deflation is not desirable, because it effects, what is always harmful, a change in the existing Standard of Value, and redistributes wealth in a manner injurious, at the same time, to business and to social stability. Deflation, as we have already seen, involves a trans- ference of wealth from the rest of the community to the rentier class and to all holders of titles to money ; just as inflation involves the opposite. In particular it involves a transference from all borrowers, that is to say from traders, manufacturers, and farmers, to lenders, from the active to the inactive."

Apropos of this passage Mr. Keynes prints a footnote, the end of which is so pregnant and so illuminating that, though it is a little difficult to underStand without the context I feel bound to quote it :— " Whilst the Conference of Genoa (April, 1922) affirmed the doctrine in general, representatives of the countries chiefly affected were united in declaring that it must not be applied to them in particular. Signor Peano, M. Picard, and M. Theunis, speaking on behalf of Italy, France, and Belgium, announced, each for his own country, that they would have nothing to do with devaluating, and were determined to restore their respective currencies to their pre-War values. Reform is not likely to come by joint, simul- taneous action. The experts of Genoa recognized this when they ' ventured to suggest ' that ' a considerable service will be rendered by that country which first decides boldly to set the example of securing immediate stability in terms of gold' by devaluation."

To the passages thus given I must add another, which follows immediately, because it is not only of great import- ance to the argument, but is a wonderfully good example of Mr. Keynes's method of exposition :—

" But whilst the oppression of the taxpayer for the enrichment of the rentier is the chief lasting result, there is another, more violent, disturbance during the period of transition. The policy of gradually raising the value of a country's money to (say) 100 per cent. above its present value in terms of goods—I repeat here the arguments of Chapter I.—amounts to giving notice to every merchant and every manufacturer, that for some time to come his stock and his raw materials will steadily depreciate on his hands, and to everyone who finances his business with borrowed money that he will, sooner or later, lose 100 per cent. on his liabilities (since he will have to pay back in terms of commodities twice as much as he has borrowed). Modern business, being carried on largely with borrowed money, must necessarily be brought to a standstill by such a process. It will be to the interest of everyone in business to go out of business for the time being ; and of everyone who is contemplating expenditure to postpone his orders so long as he can. The wise man will be he who turns his assets into cash, withdraws from the risks and the exertions of activity, and awaits in country retirement the steady appreciation promised him in the value of his cash. A probable expectation of Deflation is bad enough ; a certain expectation is disastrous. For the mechanism of the modem business world is even less adapted to fluctuations in the value of money upwards than it is to fluctuations downwards."

It again is followed by another very good passage in which he deals with what is supposed to be the correct and sound view on the monetary question. His comment is as follows :-

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

That is brilliant. I would, however, implore my readers when they come upon such passages, or upon the wonderful passage declaring that " the lira does not listen even to a dictator and cannot be given castor oil," not to think that, because the words are so brilliant, they are light or ill-founded. They are nothing of the kind. Mr. Keynes is often at his best when he is most in the mood to flutter his jeus d'esprit.

I wish I could find room to quote Mr. Keynes's very just and able treatment of the woes of the rentier class ; but unfortunately that is impossible. I must, however, find room to quote one passage, though it must be without comment, for it is an admirable example of the daring and yet soundness of Mr. Keynes's whole book :— • ".1.1 the gold value of a country's currency can be increased, labour will profit by a reduced cost of living, foreign goods will be obtainable

cheaper, and foreign debts fixed in terms of gold (e.g., to the United Slates) will be discharged with less effort. This argument, which is pure delusion, exercises quite as much influence as the other two. If the franc is worth more, wages, it is argued, which are paid in francs, will surely buy more, and French imports, which are paid for in francs, will be so much cheaper. No! 1f francs are worth more they will buy more labour as well as more goods—that is to say, wages will fall ; and the French exports, which pay for the imports, will, measured in francs, fall in value just as much as the imports. Nor will it make in the long run .any difference whatever in the amount of goods the value of which England will have to transfer to America to pay her dollar debts, whether in the end sterling settles down at four dollars to the pound, or at its pre-War parity. The burden of this debt depends on the value of gold, in terms of which it is fixed, not on the value of sterling. It is not easy, it seems, for men to apprehend that their money is a mere inter- mediary, without significance in itself, which flows from one hand to another, is received and is dispensed, and disappears when its work is done from the sum of a nation's wealth."

He who really understands this passage and can apply it has got the key to the monetary problem.

I shall close my necessarily imperfect review of Mr. Keynes's book by one more quotation :-

" We see, therefore, that rising prices and falling prices each have their characteristic disadvantage. The Inflation which causes the former means Injustice to individuals and to classes— particularly to investors ; and is therefore unfavourable to saving. The Deflation which causes falling prices means Impoverishment to labour and to enterprise by leading entrepreneurs to restrict production, in their endeavour to avoid loss to themselves ; and is therefore disastrous to employment. The counterparts are, of course, also true—namely, that Deflation means Injustice to bor- rowers, and that Inflation leads to the over-stimulation of industrial activity. But these results are not so marked as those emphasized above, because borrowers are in a better position to protect them- selves from the worst effects of Deflation than lenders are to protect themselves from those of Inflation, and because labour is in a better position to 'protect itself from over-exertion in good times than from under-employment in bad times. Thus Inflation is unjust and Deflation is inexpedient. Of the two perhaps Deflation is, if we rule out exaggerated inflations such as that of Germany, the worse ; because it is worse, in an impoverished world, to provoke unemployment than to disappoint the rentier. But it is not necessary that we should weigh one evil against the other. It is easier to agree that both are evils to be shunned.' The Individualistic Capitalism of to-day, precisely because it entrusts saving to the individual investor and production to the individual employer, presumes a stable measuring-rod of value, and cannot be efficient—perhaps cannot survive—without one."

If any further argument were wanted to show that, whether we like it or not, we must tackle the monetary problem, it is to be found in Mr. Keynes's book. It is a bright light, and though it may, if misused, do harm to the eyesight of some people, it throws a light, and a true light, on the world's