Re: Keynes quote

[Alan G Isaac <aisaac@xxxxxxxxxxxx>]

On Tue, 09 Jul 2002 22:32:46 -0400 Stephen Block <stephenb@xxxxxxxxxxxxx:
>All in all, this quote , and his interest in it, shows Keynes' pragmatism:
>any means necessary to get put the economy aright, to get it refloated. If
>the rich get in the way of that project, make them pay for their obstinence
>(through low interest rates). That is the way I read it.

But Keynes is clearly condeming the practice, which concerns not
interest rates but the inflation tax (and specifically, seignorage).
http://www.socsci.mcmaster.ca/~econ/ugcm/3ll3/keynes/peace.htm
What is more, there is a clear strand of quantity theory reasoning.
That is the surprise and therefore the interest.
And indeed, Keynes proved quite prescient.
Also of interest it turns out is the clear purchasing power parity
reasoning in this text, which is much earlier than Keynes's
famous 1925 discussion and indeed ties with the oft cited
1918 discussion by Cassel.  There is also a very nice discussion
of the hazards of taking on debt in a foreign currency denomination,
which deserved reading in advance of the debt and currency crises
of the last two decades.  The text follows.
Alan Isaac

     Lenin is said to have declared that the best way to destroy
 the capitalist system was to debauch the currency. By a
 continuing process of inflation, governments can confiscate,
 secretly and unobserved, an important part of the wealth of their
 citizens. By this method they not only confiscate, but they
 confiscate arbitrarily; and, while the process impoverishes many,
 it actually enriches some. The sight of this arbitrary
 rearrangement of riches strikes not only at security, but at
 confidence in the equity of the existing distribution of wealth.
 Those to whom the system brings windfalls, beyond their deserts
 and even beyond their expectations or desires, become
 'profiteers,' who are the object of the hatred of the
 bourgeoisie, whom the inflationism has impoverished, not less
 than of the proletariat. As the inflation proceeds and the real
 value of the currency fluctuates wildly from month to month, all
 permanent relations between debtors and creditors, which form the
 ultimate foundation of capitalism, become so utterly disordered
 as to be almost meaningless; and the process of wealth-getting
 degenerates into a gamble and a lottery.
     Lenin was certainly right. There is no subtler, no surer
 means of overturning the existing basis of society than to
 debauch the currency. The process engages all the hidden forces
 of economic law on the side of destruction, and does it in a
 manner which not one man in a million is able to diagnose.
     In the latter stages of the war all the belligerent
 governments practised, from necessity or incompetence, what a
 Bolshevist might have done from design. Even now, when the war is
 over, most of them continue out of weakness the same
 malpractices. But further, the governments of Europe, being many
 of them at this moment reckless in their methods as well as weak,
 seek to direct on to a class known as 'profiteers' the popular
 indignation against the more obvious consequences of their
 vicious methods. These 'profiteers' are, broadly speaking, the
 entrepreneur class of capitalists, that is to say, the active and
 constructive element in the whole capitalist society, who in a
 period of rapidly rising prices cannot but get rich quick whether
 they wish it or desire it or not. If prices are continually
 rising, every trader who has purchased for stock or owns property
 and plant inevitably makes profits. By directing hatred against
 this class, therefore, the European governments are carrying a
 step further the fatal process which the subtle mind of Lenin had
 consciously conceived. The profiteers are a consequence and not a
 cause of rising prices. By combining a popular hatred of the
 class of entrepreneurs with the blow already given to social
 security by the violent and arbitrary disturbance of contract and
 of the established equilibrium of wealth which is the inevitable
 result of inflation, these governments are fast rendering
 impossible a continuance of the social and economic order of the
 nineteenth century. But they have no plan for replacing it.
     We are thus faced in Europe with the spectacle of an
 extra-ordinary weakness on the part of the great capitalist
 class, which has emerged from the industrial triumphs of the
 nineteenth century, and seemed a very few years ago our
 all-powerful master. The terror and personal timidity of the
 individuals of this class is now so great, their confidence in
 their place in society and in their necessity to the social
 organism so diminished, that they are the easy victims of
 intimidation. This was not so in England twenty-five years ago,
 any more than it is now in the United States. Then the
 capitalists believed in themselves, in their value to society, in
 the propriety of their continued existence in the full enjoyment
 of their riches and the unlimited exercise of their power. Now
 they tremble before every insult -- call them pro-Germans,
 international financiers, or profiteers, and they will give you
 any ransom you choose to ask not to speak of them so harshly.
 They allow themselves to be ruined and altogether undone by their
 own instruments, governments of their own making, and a Press of
 which they are the proprietors. Perhaps it is historically true
 that no order of society ever perishes save by its own hand. In
 the complexer world of Western Europe the Immanent Will may
 achieve its ends more subtly and bring in the revolution no less
 inevitably through a Klotz or a George than by the
 intellectualisms, too ruthless and self-conscious for us, of the
 bloodthirsty philosophers of Russia.
     The inflationism of the currency systems of Europe has
 proceeded to extraordinary lengths. The various belligerent
 governments, unable or too timid or too short-sighted to secure
 from loans or taxes the resources they required, have printed
 notes for the balance. In Russia and Austria-Hungary this process
 has reached a point where for the purposes of foreign trade the
 currency is practically valueless. The Polish mark can be bought
 for about 1 1/2d and the Austrian crown for less than 1d, but
 they cannot be sold at all. The German mark is worth less than 2d
 on the exchanges. In most of the other countries of Eastern and
 south-eastern Europe the real position is nearly as bad. The
 currency of Italy has fallen to little more than a half of its
 nominal value in spite of its being still subject to some degree
 of regulation; French currency maintains an uncertain market; and
 even sterling is seriously diminished in present value and
 impaired in its future prospects.
     But while these currencies enjoy a precarious value abroad,
 they have never entirely lost, not even in Russia, their
 purchasing power at home. A sentiment of trust in the legal money
 of the state is so deeply implanted in the citizens of all
 countries that they cannot but believe that some day this money
 must recover a part at least of its former value. To their minds
 it appears that value is inherent in money as such, and they do
 not apprehend that the real wealth which this money might have
 stood for has been dissipated once and for all. This sentiment is
 supported by the various legal regulations with which the
 governments endeavour to control internal prices, and so to
 preserve some purchasing power for their legal tender. Thus the
 force of law preserves a measure of immediate purchasing power
 over some commodities and the force of sentiment and custom
 maintains, especially amongst peasants, a willingness to hoard
 paper which is really worthless.
     The preservation of a spurious value for the currency, by the
 force of law expressed in the regulation of prices, contains in
 itself, however, the seeds of final economic decay, and soon
 dries up the sources of ultimate supply. If a man is compelled to
 exchange the fruits of his labours for paper which, as experience
 soon teaches him, he cannot use to purchase what he requires at a
 price comparable to that which he has received for his own
 products, he will keep his produce for himself, dispose of it to
 his friends and neighbours as a favour, or relax his efforts in
 producing it. A system of compelling the exchange of commodities
 at what is not their real relative value not only relaxes
 production, but leads finally to the waste and inefficiency of
 barter. If, however, a government refrains from regulation and
 allows matters to take their course, essential commodities soon
 attain a level of price out of the reach of all but the rich, the
 worthlessness of the money becomes apparent, and the fraud upon
 the public can be concealed no longer.
     The effect on foreign trade of price-regulation and
 profiteer-hunting as cures for inflation is even worse. Whatever
 may be the case at home, the currency must soon reach its real
 level abroad, with the result that prices inside and outside the
 country lose their normal adjustment. The price of imported
 commodities, when converted at the current rate of exchange, is
 far in excess of the local price, so that many essential goods
 will not be imported at all by private agency, and must be
 provided by the government, which, in re-selling the goods below
 cost price, plunges thereby a little further into insolvency. The
 bread subsidies now almost universal throughout Europe are the
 leading example of this phenomenon.
     The countries of Europe fall into two distinct groups at the
 present time as regards their manifestations of what is really
 the same evil throughout, according as they have been cut off
 from international intercourse by the blockade, or have had their
 imports paid for out of the resources of their allies. I take
 Germany as typical of the first, and France and Italy of the
 second.
     The note circulation of Germany is about ten times(2*) what
 it was before the war. The value of the mark in terms of gold is
 about one-eighth of its former value. As world prices in terms of
 gold are more than double what they were, it follows that mark
 prices inside Germany ought to be from sixteen to twenty times
 their pre-war level if they are to be in adjustment and proper
 conformity with prices outside Germany.(3*) But this is not the
 case. In spite of a very great rise in German prices, they
 probably do not yet average much more than five times their
 former level, so far as staple commodities are concerned; and it
 is impossible that they should rise further except with a
 simultaneous and not less violent adjustment of the level of
 money-wages. The existing maladjustment hinders in two ways
 (apart from other obstacles) that revival of the import trade
 which is the essential preliminary of the economic reconstruction
 of the country. In the first place, imported commodities are
 beyond the purchasing power of the great mass of the
 population,(4*) and the flood of imports which might have been
 expected to succeed the raising of the blockade was not in fact
 commercially possible.(5*) In the second place, it is a hazardous
 enterprise for a merchant or a manufacturer to purchase with a
 foreign credit material for which, when he has imported it or
 manufactured it, he will receive mark currency of a quite
 uncertain and possibly unrealisable value. This latter obstacle
 to the revival of trade is one which easily escapes notice and
 deserves a little attention. It is impossible at the present time
 to say what the mark will be worth in terms of foreign currency
 three or six months or a year hence, and the exchange market can
 quote no reliable figure. It may be the case, therefore, that a
 German merchant, careful of his future credit and reputation, who
 is actually offered a short-period credit in terms of sterling or
 dollars, may be reluctant and doubtful whether to accept it. He
 will owe sterling or dollars, but he will sell his product for
 marks, and his power, when the time comes, to turn these marks
 into the currency in which he has to repay his debt is entirely
 problematic. Business loses its genuine character and becomes no
 better than a speculation in the exchanges, the fluctuations in
 which entirely obliterate the normal profits of commerce.
     There are therefore three separate obstacles to the revival
 of trade: a maladjustment between internal prices and
 international prices, a lack of individual credit abroad
 wherewith to buy the raw materials needed to secure the working
 capital and to re-start the circle of exchange, and a disordered
 currency system which renders credit operations hazardous or
 impossible quite apart from the ordinary risks of commerce.
     The note circulation of France is more than six times its
 prewar level. The exchange value of the franc in terms of gold is
 a little less than two-thirds its former value; that is to say,
 the value of the franc has not fallen in proportion to the
 increased volume of the currency.(6*) This apparently superior
 situation of France is due to the fact that until recently a very
 great part of her imports have not been paid for, but have been
 covered by loans from the governments of Great Britain and the
 United States. This has allowed a want of equilibrium between
 exports and imports to be established, which is becoming a very
 serious factor, now that the outside assistance is being
 gradually discontinued.(7*) The internal economy of France and
 its price level in relation to the note circulation and the
 foreign exchanges is at present based on an excess of imports
 over exports which cannot possibly continue. Yet it is difficult
 to see how the position can be readjusted except by a lowering of
 the standard of consumption in France, which, even if it is only
 temporary, will provoke a great deal of discontent.
     The situation of Italy is not very different. There the note
 circulation is five or six times its pre-war level, and the
 exchange value of the lira in terms of gold about half its former
 value. Thus the adjustment of the exchange to the volume of the
 note circulation has proceeded further in Italy than in France.
 On the other hand, Italy's 'invisible' receipts, from emigrant
 remittances and the expenditure of tourists, have been very
 injuriously affected; the disruption of Austria has deprived her
 of an important market; and her peculiar dependence on foreign
 shipping and on imported raw materials of every kind has laid her
 open to special injury from the increase of world prices. For all
 these reasons her position is grave, and her excess of imports as
 serious a symptom as in the case of France.(8*)
     The existing inflation and the maladjustment of international
 trade are aggravated, both in France and in Italy, by the
 unfortunate budgetary position of the governments of these
 countries.
     In France the failure to impose taxation is notorious. Before
 the war the aggregate French and British budgets, and also the
 average taxation per head, were about equal; but in France no
 substantial effort has been made to cover the increased
 expenditure. 'Taxes increased in Great Britain during the war',
 it has been estimated, 'from 95 francs per head to 265 francs,
 whereas the increase in France was only from 90 to 103 francs.'
 The taxation voted in France for the financial year ending 30
 June 1919 was less than half the estimated normal post bellum
 expenditure. The normal budget for the future cannot be put below
 £3880 million (22 milliard francs), and may exceed this figure;
 but even for the fiscal year 1919-20 the estimated receipts from
 taxation do not cover much more than half this amount. The French
 Ministry of Finance have no plan or policy whatever for meeting
 this prodigious deficit, except the expectation of receipts from
 Germany on a scale which the French officials themselves know to
 be baseless. In the meantime they are helped by sales of war
 material and surplus American stocks and do not scruple, even in
 the latter half of 1919, to meet the deficit by the yet further
 expansion of the note issue of the Bank of France.(9*)
     The budgetary position of Italy is perhaps a little superior
 to that of France. Italian finance throughout the war was more
 enterprising than the French, and far greater efforts were made
 to impose taxation and pay for the war. Nevertheless, Signor
 Nitti, the Prime Minister, in a letter addressed to the
 electorate on the eve of the General Election (October 1919),
 thought it necessary to make public the following desperate
 analysis of the situation: (1) The state expenditure amounts to
 about three times the revenue; (2) all the industrial
 undertakings of the state, including the railways, telegraphs,
 and telephones, are being run at a loss. Although the public is
 buying bread at a high price, that price represents a loss to the
 government of about a milliard a year; (3) exports now leaving
 the country are valued at only one-quarter or one-fifth of the
 imports from abroad; (4) the national debt is increasing by about
 a milliard lire per month; (5) the military expenditure for one
 month is still larger than that for the first year of the war.
     But if this is the budgetary position of France and Italy,
 that of the rest of belligerent Europe is yet more desperate. In
 Germany the total expenditure of the empire, the federal states,
 and the communes in 1919-20 is estimated at 25 milliards of
 marks, of which not above 10 milliards are covered by previously
 existing taxation. This is without allowing anything for the
 payment of the indemnity. In Russia, Poland, Hungary, or Austria
 such a thing as a budget cannot be seriously considered to exist
 at all.(10*)
     Thus the menace of inflationism described above is not merely
 a product of the war, of which peace begins the cure. It is a
 continuing phenomenon of which the end is not yet in sight.
     All these influences combine not merely to prevent Europe
 from supplying immediately a sufficient stream of exports to pay
 for the goods she needs to import, but they impair her credit for
 securing the working capital required to re-start the circle of
 exchange and also, by swinging the forces of economic law yet
 further from equilibrium rather than towards it, they favour a
 continuance of the present conditions instead of a recovery from
 them. An inefficient, unemployed, disorganised Europe faces us,
 torn by internal strife and international hate, fighting,
 starving, pillaging, and lying. What warrant is there for a
 picture of less sombre colours?