[To the Editor of THE SPECTATOR.] STR,—Mr. Ian Horobin "
distrusts all expansionists." The proposals of the Macmillan Committee, presumably, or of Mr. R. G. Hawtrey, equally with those of Major Douglas and the currency cranks; are founded on " defective theories of money," and the proof of the defective nature of these theories is simple—it is just " the sort of politicians to which they appeal." To which the expansionists might well reply that they have even better reason for- distrusting the orthodox, whose monetary practice has repeatedly proved inadequate to prevent disaster or' hasten recovery; and that the sort of politician to whom the deflationist case appeals is always con- tent with laissez-faire so long as this snits the moneyed interests he serves.
From his " concrete illustrations" of Tin and the Thermo- meter, Mr. Horobin's ideas as to the reformers' criteria for expansion seem to be quite erroneous. Increased public expenditure would only be undertaken in the event of a general fall in prices ; so if the average had been steady or rising when tin fell, no expansion of credit would have been required. And to compare stabilization of the general price- level with an attempt to keep a patient's temperature down by cooling the thermometer shows that Mr. Horobin does not appreciate the difference between monetary stabilization and attempts at price maintenance by producers. His analogy might do for the latter; but applied to the former appears deliberately misleading, for the level of prices is not merely an index to the state of trade. While monetary stability shows that expenditure is covering the costs of what is being pro. duced, a rise. or fall in the value of money (or a contrary move- ment in the price-level) in itself depresses or stimulates indus- try at the very time when the opposite influence is required. Stabilization, in fact, is the opposite of a " manipulation " of the price-level, which was exactly what the Bank of England unconsciously .practised during the century before the War, when—with no criterion for the control of credit but its gold reserve—the Bank's influence on prices was both belated and violent, thereby aggravating industrial depressions.
The fall in interest rates has certainly been a condition pre- requisite for recovery, but a rise need have no harmful effect if accompanied by an upward movement in commodity prices, for it will then amount to a negative ratesomething of which Mr. Horobin never seems to have heard. Indeed, a rise in interest rates is inevitable if industry ever recovers from depression, for outlay must not be limited to the " actual total sum available " for investment. Mr. Horobin would be con- tent to keep money cheap until " little by little " recovery comes about "automatically." This, however, is not the way recovery has come in the past. Extraordinary circumstances have always intervened to promote prosperity, and in their absence periods of depression have been prolonged: In the middle 'nineties, after prices had been falling for two decades, the market rate averaged below two per cent. for nearly five years, but depression continued until the enormous increase in gold output from the Rand forced an expansion of credit and investment, and reversed the unprofitable trend of values.
It is true that the influence of " false doctrine " has had disastrous results. But the false doctrines, to which " states- men " have adhered, were not those of Dr. Cassel and Mr. Keynes, but the ideas (a) that it was desirable to return to the pre-War price levels and gold parities, though it should have been obvious that in 1920 labour costs and contractual obliga- tions could not be reduced along with prices, and that the rise in sterling at the end of 1924 was merely due to speculative anticipation ; (b) that the slump in • prices after 1920 was " inevitable," and. the decline after 1924 was a " natural " one. For the present slump did not start as " an ordinary boom and reaction due to over-borrowing." World depression affecting the producers of foodstuffs and materials began with the general return to gold payments without regard for the necessary precautions agreed to at Genoa in 1922. The theory to which Mr. Horobin alludes as showing that stabilization is " often undesirable and impracticable, and which asserts that—when the efficiency of industry is increasing—stability in the price-level is a sign of inflation, ignores the tendency for rents, wages and other Services to rise as technical costs fall, and for the latter to -be offset—so long as prices are expressed in. terms of gold—by corresponding economies in the cost of obtaining the metal. ' As for the " American experience," which is supposed to prove the deflationist ease, the. Federal Reserve authorities explicitly declined to admit responsibility for stabilization, and all their experience shows is that—if the prices of primary products are allowed to fall— maintenance of sheltered prices cannot secure -industrial
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