John Maynard Keynes

“ When it is not so restricted, the conception of purchasing power parity becomes much more interesting, but is no longer an accurate forecaster of the course of the foreign exchanges. If, therefore, we follow the ordinary practice of fixing purchasing power parity by comparisons of the general purchasing power of a country’s currency at home and abroad, then we must not infer from this that the actual rate of exchange ought to stand at the purchasing power parity, or that it is only a matter of time and adjustment before the two will return to equality. ”

“ I argue, therefore, that the same policy which is wise for Great Britain is wise for the United States, namely to aim at the stability of the commodity-value of the dollar rather than at stability of the gold-value of the dollar, and to effect the former if necessary by varying the gold-value of the dollar. ”

“ A violent disturbance of the standard of value obscures the true situation, and for a time one class can benefit at the expense of another surreptitiously and without producing immediately the inevitable reaction. In such conditions a country can without knowing it expend in current consumption those savings which it thinks it is investing for the future; and it can even trench on existing capital or fail to make good its current depreciation. When the value of money is greatly fluctuating, the distinction between capital and income becomes confused. ”

“ The powers of uninterrupted usury are too great. If the accretions of vested interest were to grow without mitigation for many generations, half the population would be no better than slaves to the other half. Nor can the fact that in time of war it is easier for the State to borrow than to tax, be allowed permanently to enslave the taxpayer to the bond-holder. ”

“ Rome may have understood the principles of commerce imperfectly in the third century and not perfectly in the twentieth; but that does not save her citizens from experiencing their applications. Signor Mussolini might peruse with interest the annals of Aurelian, who, “ignorant or impatient of the restraints of civil institutions,” fell by the hand of an assassin within a year of his deflation of the currency, “regretted by the army, detested by the Senate, but universally acknowledged as a warlike and fortunate prince, the useful though severe reformer of a degenerate State.” ”

“ It is common to speak as though, when a Government pays its way by inflation, the people of the country avoid taxation. We have seen that this is not so. What is raised by printing notes is just as much taken from the public as is a beer-duty or an income-tax. What a Government spends the public pay for. There is no such thing as an uncovered deficit. But in some countries it seems possible to please and content the public, for a time at least, by giving them, in return for the taxes they pay, finely engraved acknowledgements on water-marked paper. ”

“ If we glance at the course of prices during the last five years, it is obvious that the United States, which has enjoyed a gold standard throughout, has suffered as severely as many other countries, that in the United Kingdom the instability of gold has been a larger factor than the instability of the exchange, that the same is true even of France, and that in Italy it has been nearly as large. On the other hand, in India, which has suffered violent exchange fluctuations, the standard of value, as we shall see below, has been more stable than in any other country. ”

“ The above discussion suggests that the diminution in the production of wealth which has taken place in Europe since the war has been, to a certain extent, at the expense, not of the consumption of any class, but of the accumulation of capital. Moreover, Inflation has not only diminished the capacity of the investing class to save but has destroyed the atmosphere of confidence which is a condition of the willingness to save. Yet a growing population requires, for the maintenance of the same standard of life, a proportionate growth of capital. ”

“ If we agree that gold is not to be employed in the circulation, and that it is better to employ some other criterion than the ratio of gold reserves to note issue in deciding to raise or to lower the bank rate, it follows that the only employment for gold (nevertheless important) is as a store of value to be held as a war-chest against emergencies and as a means of rapidly correcting the influence of a temporarily adverse balance of international payments and thus maintaining a day-to-day stability of the sterling-dollar exchange. ”

“ For these grave causes we must free ourselves from the deep distrust which exists against allowing the regulation of the standard of value to be the subject of deliberate decision. We can no longer afford to leave it in the category of which the distinguishing characteristics are possessed in different degrees by the weather, the birth-rate, and the Constitution,—matters which are settled by natural causes, or are the resultant of the separate action of many individuals acting independently, or require a Revolution to change them. ”

“ During the lengthy process of production the business world is incurring outgoings in terms of money—paying out in money for wages and other expenses of production—in the expectation of recouping this outlay by disposing of the product for money at a later date. That is to say, the business world as a whole must always be in a position where it stands to gain by a rise of price and to lose by a fall of price. Whether it likes it or not, the technique of production under a régime of money-contract forces the business world always to carry a big speculative position; ”

“ The business man, the prop of society and the builder of the future, to whose activities and rewards there had been accorded, not long ago, an almost religious sanction, he of all men and classes most respectable, praiseworthy and necessary, with whom interference was not only disastrous but almost impious, was now to suffer sidelong glances, to feel himself suspected and attacked, the victim of unjust and injurious laws,—to become, and know himself half-guilty, a profiteer. ”

“ If capital and labour can freely move on a large scale between home and export industries without loss of relative efficiency, if there is no movement in the “equation of exchange” (see below) with the other country, and if the fluctuations in price are solely due to monetary influences and not to changes in other economic relationships between the two countries, then this further assumption may be approximately justified. But this is not always the case; and such a cataclysm as the war, with its various consequences to victor and vanquished, may set up a new equilibrium position. ”

“ But if it has become clear that the claims of the bond-holder are more than the taxpayer can support, and if there is still time to choose between the policies of a Levy and of further Depreciation, the Levy must surely be preferred on grounds both of expediency and of justice. It is an overwhelming objection to the method of Currency Depreciation, as compared with that of the Levy, that it falls entirely upon persons whose wealth is in the form of claims to legal-tender money, and that these are generally, amongst the capitalists, the poorer capitalists. ”

“ The wealth of the public in the aggregate will only change gradually. Their habits in the use of money—whether their income is paid them weekly or monthly or quarterly, whether they pay cash at shops or run accounts, whether they deposit with banks, whether they cash small cheques at short intervals or larger cheques at longer intervals, whether they keep a reserve or hoard of money about the house—are more easily altered. But if their wealth and their habits in the above respects are unchanged, then the amount of purchasing power which they hold in the form of money is definitely fixed. ”

“ A Government has to remember, however, that even if a tax is not prohibitive it may be unprofitable, and that a medium, rather than an extreme, imposition will yield the greatest gain.
Suppose that the rate of inflation is such that the value of the money falls by half every year, and suppose that the cash used by the public for retail purchases in shops is turned over 100 times a year (i.e. stays in one pocket for half a week on the average) ; then this is only equivalent to a turnover tax of 1⁄2 per cent on each transaction. ”

“ 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 borrowers, and that Inflation leads to the over-stimulation of industrial activity. ”

“ We have seen in the preceding section the extent to which a Government can make use of currency inflation for the purpose of securing income to meet its outgoings. But there is a second way in which inflation helps a Government to make both ends meet, namely by reducing the burden of its pre-existing liabilities in so far as they have been fixed in terms of money. These liabilities consist, in the main, of the internal debt. Every step of depreciation obviously means a reduction in the real claims of the rentes-holders against their Government. ”

“ 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 transference 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. ”

“ The price of a particular commodity, in terms of a particular currency, does not exactly respond to changes in the value of that currency on the exchange markets of the world, with the result that a movement in a country’s exchanges may, in the case of a commodity of which that country is a large seller or a large purchaser, change the commodity’s world-value expressed in terms of gold. ”

“ When, therefore, we enter the realm of State action, everything is to be considered and weighed on its merits. Changes in Death Duties, Income Tax, Land Tenure, Licensing, Game Laws, Church Establishment, Feudal Rights, Slavery, and so on through all ages, have received the same denunciations from the absolutists of contract,—who are the real parents of Revolution. ”

“ When the gold value of the currency has fallen to a very low figure, it is easy for the Government, if it has any external resources at all, to give sufficient support to prevent the exchange from falling further for the time being. And since by that time the public will have carried their attempts to economise the use of money to a pitch of inconvenience which it is impracticable to continue, even a moderate weakening in the degree of their distrust of the future value of the money will lead to some increase in their use of it ”

“ Instead of dividing the burden between all classes of wealth-owners according to a graduated scale, it throws the whole burden on to the owners of fixed interest bearing stocks, lets off the entrepreneur capitalist and even enriches him, and hits small savings equally with great fortunes. ”

“ The object of fixing the amount of gold to be held against a note issue is to set up a danger signal which cannot be easily disregarded, when a curtailment of credit and purchasing power is urgently required to maintain the legal tender money at its lawful parity. But this system, whilst far better than no system at all, is primitive in its ideas and is, in fact, a survival of an earlier evolutionary stage in the development of credit and currency. ”

“ But if the depreciation of money is a source of gain to the business man, it is also the occasion of opprobrium. To the consumer the business man’s exceptional profits appear as the cause (instead of the consequence) of the hated rise of prices. Amidst the rapid fluctuations of his fortunes he himself loses his conservative instincts, and begins to think more of the large gains of the moment than of the lesser, but permanent, profits of normal business. ”

“ Thus, since no one can have complete confidence whether they are to be a great deal better or very much worse, there must be a wide fluctuation before financiers will come in, purely from motives of self-interest, to balance the day-to-day fluctuations and the month-to-month fluctuations round about the unpredictable point of equilibrium.
If, therefore, the exchanges are not stabilised by policy, they will never come to an equilibrium of themselves. As time goes on and experience accumulates, the oscillations may be smaller than at present. ”

“ If 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 to152 the pound, or at its pre-war parity. ”