Re: Keynes quote

[Stephen Block <stephenb@xxxxxxxx>]

Alan,

Meant to respond to this earlier. You say below:

"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."

Well, it is not a real surprise as Keynes was a quantity theorist then and
begins the GT, I believe, discussing his long arduous escape from quantity
theory which he abandons because of its close interweave with classical
economics, specifically SAY'S LAW. I don't have the GT here, but I am
certain someone on the list knows where the passage is by heart. In a way,
as has been mentioned on this list, we are back to square one: appreciating
Keynes' prescience. It was always there but buried under a mound of the kind
of laissez-faire logic he rejected (a decade or so after the quote you cited
at length). No doubt many will begin to start seeing how pertinent Keynes
was after all. Too bad we could not have been spared some of the excesses of
the past nearly three decades, as well as the unnecessary dismissal of his
thinking which was far better equipped to explain issues from stagflation to
undue speculation far better than he was credited with and far better than
his rivals, to date.


> 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?
>
>
>