the great depression by lionel robbins

THE GREAT DEPRESSION

THE GREATDEPRESSION

BY

LIONEL ROBBINS

BOOKS FOR LIBRARIES PRESSFREEPORT, NEW YORK

First Published 1934Reprinted 1971

INTERNATIONAL STANDARD BOOK NUMBER*.

0-8369-5711-3

LIBRARY OF CONGRESS CATALOG CARD NUMBER:

75-1 $0198

PRINTED IN THE UNITED STATES OF AMERICA

TO

I. E. K.

PREFACETHE following pages make no claim to present an ex-haustive account of the events with which they deal.Nor do they set out in full rigour the various analyticaltheorems upon which they are based. They are merelyan attempt, with the aid of what is sometimes called"orthodox" economics, to furnish a succinct commen-tary on the more conspicuous features of the slumpand its antecedents. In doing this I have been mostacutely aware of the difficulties of the task I haveundertaken. The subject is highly controversial, andmany of the conclusions to which I have been led runcounter to opinions wrhich have been widely held, atany rate in this country. I put them forward, notwith any confidence whatever in the superiority ofmy own judgment, but in the belief that the point ofview from which they spring, which is not specificallymy own but is the heritage of generations of subtleand disinterested thought, is a point of view whoseapplicability to the interpretation of the bewilderingproblems with which we are now confronted has notas yet been sufficiently recognised.

I have to acknowledge indebtedness to the variousfriends who have been kind enough to favour me withthe benefit of their advice and criticism. My main

vii

viii THE GREAT DEPRESSION

debt, however, is to Mr. Stanley Tucker, RockefellerResearch Assistant in the Department of Economics,without whose loyal and unremitting labours in thepreparation of the charts and the statistical appendixpublication at this stage would have been impossible.

LIONEL ROBBINSTHE LONDON SCHOOL OF ECONOMICS

June 1934

CONTENTS

C H A P T E R I1914-1933

1. In t roduc t ion 12. P re -war Capital ism . . . . . . 13 . W a r 34. Pos t -war Chaos . . . . . . . 65. Boom 76. Collapse 107. The Grea t Depression 10

C H A P T E R I IM I S C O N C E P T I O N S

1. In t roduc t ion 122. The Fal l of Pr ices 123. Over-product ion 134. Deflation 165. Shor tage of Gold 196. Maldis t r ibut ion of Gold 22

C H A P T E R I I I

T H E G E N E S I S O F T H E D E P R E S S I O N

1. I n t roduc t i on . . . . . . . 302. The P rob lem res ta ted 303. The S t ruc tu re of P roduc t ion . . . . 314. The Theoret ical Effects of an Expans ion of Credit . 345. Outl ine of a possible T rade Cycle . . . . 396. Rea l and Mone ta ry Exp lana t ions of Cyclical F luc tua -

t ion 42ix

THE GREAT DEPRESSION

7 . T h e A m e r i c a n B o o m . . . . . . 4 38 . I n t e r n a t i o n a l C r e d i t E x p a n s i o n . . . . 4 99 . T h e G e n e s i s of t h e B o o m . . . . . 5 1

C H A P T E R I V

T O E C A U S E S O F D E F L A T I O N

1. I n t r o d u c t i o n . . . . . . . 5 52 . P o l i t i c s 5 73 . W a r , C a p i t a l C o n s u m p t i o n a n d C h a n g e . . . 5 8•4. T h e P o s t - w a r E c o n o m i c S t r u c t u r e . . . 5 95 . T h e F i n a n c i a l P o l i c i e s of t h e B o o m . 6 16 . P r o t e c t i v e T a r i f f s 6 57 . T h e M a i n t e n a n c e of C o n s u m e r s ' P u r c h a s i n g P o w e r . 6 98 . B a n k r u p t c y - P h o b i a . . . . . . 7 1

C H A P T E R V

G R E A T B R I T A I N A N D T H E F I N A N C I A L C R I S I S

1. I n t r o d u c t i o n 7 62 . T h e P o s t - w a r M o n e t a r y C o n t r o v e r s y . . . 7 63 . T h e P e r i o d of S t a g n a t i o n 8 04 . G r e a t B r i t a i n a n d t h e W o r l d S l u m p . . . 8 75 . F l o a t i n g B a l a n c e s 8 86 . T h e C r i s i s . 9 17 . R e t r o s p e c t of t h e G o l d S t a n d a r d . . . . 9 6

CHAPTER VI

I N T E R N A T I O N A L C H A O S

1. I n t r o d u c t i o n . . . . . . . 100

2. The Case of Ge rmany . . . . . . 100

3. The F o r t u n e s of Ster l ing 104

4.% Gold Prices and Deflation 110

5. Amer ica leaves t h e Gold S t a n d a r d . . . 119

CONTENTS xi

CHAPTER VII

RESTRICTIONISM AND PLANNING VM}E

1 . T h e A m e r i c a n R e c o v e r y P r o g r a m m e . . . 1 2 52 . R e s t r i c t i o n o f H o u r s o f L a b o u r . . . . 1 2 63 . A g r i c u l t u r a l " A d j u s t m e n t " . . . . . 1 2 94 . M a i n t a i n i n g t h e V a l u e o f I n v e s t e d C a p i t a l . . 1 3 65 . T h e C u m u l a t i v e T e n d e n c i e s of R e s t r i c t i o n i s m . 1 4 36. T h e M e a n i n g of P l a n n i n g . . . . . 1457. T h e C e n t r a l Di f f i cu l ty of a P l a n n e d S o c i e t y . . 1488. P l a n n i n g a n d E c o n o m i c N a t i o n a l i s m . . . 156

C H A P T E R V I I I

C O N D I T I O N S O F R E C O V E R Y

1. I n t r o d u c t i o n . . . . . . . 1 6 02. S t a b i l i s a t i o n of E x c h a n g e s . . . . . 1603 . T h e B a s i s of a n I n t e r n a t i o n a l M o n e t a r y S y s t e m . 1 6 44 . " A G o l d S t a n d a r d w i t h M o v a b l e P a r i t i e s " . . 1725 . R e m o v a l of T r a d e R e s t r i c t i o n s . . . . 1 8 26. T h e F r e e i n g of t h e M a r k e t 1 8 57. T h e R e s t r i c t i o n of R e s t r i c t i o n i s m . . . . 1 8 98. T h e R e s t o r a t i o n of C a p i t a l i s m . . . . 1 9 3

C H A P T E R I XP R O S P E C T S

1. T h e I n s e c u r i t y of t h e F u t u r e . . . . 1952 . W a r 1963 . S o c i a l i s m 1974 . D e m o c r a c y . . . . . . . 198

S T A T I S T I C A L A P P E N D I X . . . . . . . 2 0 3

TABLES IN THESTATISTICAL APPENDIX

PAGE

1. Uni ted Kingdom—Secur i ty Prices . . . . 2032. Uni ted States—Securi ty Prices . . . . 2043. Total Capital Issues 2054. Capital Issues on Foreign Account . . . . 2065. Uni ted Kingdom—Index of Wholesale Prices . . 2076. Uni ted S ta tes—Index of Wholesale Prices . . . 2 0 87. Indices of the Cost of Living 2098. Indices of Indust r ia l Product ion . . . . 2109. Indices of Product ion of Producers ' and Consumers '

Goods 21110. Total Value of World Trade 21211. Nat ional Unemployment Stat ist ics . . . . 2 1 312. Uni ted S ta tes—Index of Indust r ia l Product ion . . 2 1 413. Acceptances and Securities of Federal Reserve Banks . 21514. Bank of England—Tota l Deposits . . . . 2 1 615. Uni ted States—Velocity of Circulation of Bank Deposits 21716. Uni t ed S ta tes—Tota l Gold Reserves of the Federal

Reserve Banks . . . . . . . 21817. Uni t ed S ta tes—Tota l Loans, Discounts and Inves t -

men t s of Weekly Repor t ing Member Banks . . 2 1 918. B a n k of F rance — Gold Reserves and Notes in

Circulation 22019. B a n k of England—Gold Reserves . . . . 2 2 120. London Clearing Banks—Tota l Deposits . . . 2 2 221 . New York—Average R a t e of In teres t on Call Loans . 22322. Uni ted S ta tes—Index of Composite Wages . . 22423. Reichsbank—Gold Reserves plus Foreign Assets . 22524. Germany—Tota l Credits of the Big Banks . . 22625. Germany—Est ima ted Balance of P a y m e n t s . . 22726. Germany—Indices of Securi ty Prices . . . 228

xiii

xiv THE GREAT DEPRESSION

27. Germany—Index of Wages 22928. Reichsbank—Discount Rate 23029. New York Federal Reserve Bank—Discount Rate . 23130. Bank of England—Bank Rate . . . . 23231. Bank of France—Discount Rate . . . . 23332. Sterling-Dollar Exchange—London Quotations . . 23433. Sterling-Dollar Exchange—New York Quotations . 23534. United Kingdom—Index of Average Weekly Wages . 23635. United Kingdom—Balance of Payments on Income

Account 23736. Foreign Exchange Rates—Percentage Discount in

Relation to Gold Parity 238

CHAPTER I

1914-1933

1. THE object of this Essay is to examine the natureand the causes of the present depression of trade. Itsfirst task, therefore, is to trace the background of thedepression and the broad conditions amid which it wasgenerated.

To do this it is necessary to draw the picture on acanvas wider than that which would at first sight seemappropriate to an enterprise of this nature. The onsetof the present crisis may perhaps be dated from theautumn of 1929. But its causes and the conditionsunder which they have operated take their rise longbefore this date. The body-economic, equally with thebody-politic, has been in a state of violent tension eversince the war. We live, not in the fourth, but in thenineteenth, year of the world crisis. If our discussionof the events since 1929 is not to be wholly unrelatedto their most significant causes, it must take someaccount, however brief, of events before that date.1914 is the beginning of our epoch.

2. For the hundred years which preceded the out-break of the Great War, the economic system had notat any time shown itself to be in serious danger of gravebreakdown. It was a period of unprecedented change.The external conditions of economic activity werein process of continual alteration. In the old world

1 B

2 THE GREAT DEPRESSION OH.

the advent of steam and machinery was changingthe nature and the structure of manufacturing indus-try. In the new, the coming of new modes of trans-port was opening up vast areas, hitherto undeveloped,both as sources of food supply and raw materials, andas markets for the products of the manufacturing pro-cesses. The population of the world, whose normalstate there is reason to suppose to have been more orless stationary, was growing rapidly. The aggregationof people into large cities, dependent for the mostelementary necessities of life upon supplies producedat the other ends of the earth, proceeded at a rate un-known in any earlier epoch. Yet the economic mechan-ism was adjusted to this complex of change withoutanything like the present dislocations, and, year in,year out, turned out what, for a substantial proportionof the increasing population, has been regarded as thebasis of an increasing standard of real income. Accord-ing to the calculations of Sir Josiah Stamp, the levelof real incomes in Great Britain in the years beforethe war was four times as great as in the Napoleonicperiod.

To say all this is not in the least to contend that thepre-war period was immune from economic difficulties,or that what has come since is to be regarded asspontaneous catastrophe, having no intimate connec-tion with anything that went before. No student ofthose times is likely to be unaware of the ups anddowns of trade, the recurrent waves of business de-pression and unemployment, which ruffle the lines ofsecular development. Nor will he be blind to theincrease towards the end of the period in politicaltendencies which, viewed in the light of more recentdevelopments, can be seen to have been fraught with

i 1914-1933 3

danger to the stability of the whole system. The GreatWar itself was the product, not of accident, but of someof these tendencies. Nevertheless, compared with whathas come since, the difficulties of those times must beadmitted as being of a minor order. During the yearsfor which we have records, the number of unemployedtrade-unionists in Great Britain only once rose above10 per cent. The crises were not such as to disrupt theunity of monetary conditions in the important financialcentres. The interventionist and restrictive tendenciesof economic policy, although no doubt calculated toretard the increase of productivity, were never suchas seriously to threaten to reverse it. There is no needto present the world before the war as a Utopia topoint the contrast with what has come after.

3. Into this world there came the catastrophe ofwar. There is no need at this point to dwell on the in-tellectual and cultural changes which this catastropheinvolved, although for those who are not dominatedby a purely materialist conception of history it is argu-able that, even in this context, these were the mostimportant changes of all. More germane, however,to the purpose of this survey, are certain more tangibleinfluences.

As an influence on economic activity, the war, andthe political changes which followed the war, must beregarded as a vast series of shifts in the fundamentalconditions of demand and supply, to which economicactivity must be adapted. The needs of war called ahuge apparatus of mechanical equipment into being.The resumption of peace rendered it in large partsuperfluous. The fact of war involved a disruption ofthe world market. The settlement, which came after,created conditions which aggravated this disruption.

4 THE GREAT DEPRESSION en.

The struggle which was to end nationalist frictionin fact gave nationalism new scope.

As an influence on subsequent developments, thesechanges have a double significance. In the first place,they were discontinuous. They therefore involved vastdestruction of capital. Secondly, they were restrictiveof free economic activity. They therefore involved areduction in the productivity of the factors of pro-duction. For four years, the capital resources of thebelligerent countries of the world were devoted toproviding offerings to Mars, which either perished inthe moment of their production or remained as uselessas the pyramids of the Pharaohs, once the occasionfor the sacrifice had ceased. The disruption of theworld market, consequent on the war and on the peacesettlement, meant a restriction of the area withinwhich the division of labour had scope. It meant there-fore a limitation of the increase of wealth to whichdivision of labour gives rise.

Concurrently with these structural dislocations, therecame a further series of changes no less important inthe causation of post-war difficulties. At the same timeas the using up of capital and the lowering of product-ivity were producing conditions demanding readjust-ment on a scale hitherto unknown in economic history,the economic system was losing its capacity for adapta-tion. The successful prosecution of war involved, as wehave seen, a large and discontinuous alteration of the"set" of the apparatus of production. This alterationwas carried through. But the measures which werenecessary to bring it about—the centralisation of con-trol of industrial operations—were such as permanentlytc impair its capacity for further change. The groupingof industrial concerns into great combinations, the

i 1914-1933 5

authoritarian fixing of wages and prices, the impositionof the habits of collective bargaining, were no doubtmeasures which would be justified by appeal to thenecessities of war. But they carried with them aweakening of the permanent flexibility of the system,whose effects it is difficult to over-estimate. This was adish of eggs not easy to unscramble.

Here, as with other contrasts between pre-warand post-war conditions, it is important not to exag-gerate differences. It is not contended that the pre-warsystem was entirely flexible, or that the post-warsystem has shown itself to be incapable of some adapta-tion. This would be untrue. All that is argued is thatthe changes introduced by way of groupings whichmade for cartellisation on the one hand and a greatlyincreased rigidity of the labour market on the other,were such as to produce an important and far-reachingimpairment of what degree of flexibility there was. Inthe light of well-known facts regarding the rigidity ofwages and the prices of cartellised products in the post-war period, this does not seem to be a contention whichis open to serious question.

Beyond all this came the break-up of internationalmonetary unity. For forty years before the war, thefinancial systems of the leading countries of the worldhad been linked together by the international GoldStandard. For a century, the Gold Standard had beenvirtually effective. Trade between different nationalareas took place on the basis of rates of exchange whichfluctuated only between very narrow limits. Capitalmoved from one part of the world to another, if notwith the same ease with which it moved within nationalareas, at least with much the same effects as regardsthe volume of credit available. The prices of inter-

6 THE GREAT DEPRESSION CH.

nationally traded commodities moved together in allthe important centres. The price and cost structures ofthe different financial areas maintained a relationshipwhich was seldom seriously out of equilibrium.

The war put an end to all this. Within a few days ofthe outbreak of hostilities, in each of the belligerentfinancial centres, measures had been taken whichamounted to an actual, if not to a legally acknowledged,abandonment of the Gold Standard. Of the chief finan-cial centres, the United States was the only one toremain on gold. The others not only suspended therights of effective convertibility; they each, in greateror lesser degree, resorted to the device of inflation as ameans of financing the war. The results were as mighthave been expected. The gold supplies of the worldtended more and more to be concentrated in the vaultsof the Federal Eeserve Banks. Prices rose in the in-flating countries in various degrees, according to themeasure of the inflation. In the markets for foreignexchange the conditions of supply and demand re-flected the internal depreciation. It was the first phaseof a period of international disequilibrium from whichwe have not yet emerged.

4. The conclusion of peace brought no end to thisdisorder. The inordinate claims of the victors, the crassfinancial incapacity of the vanquished, the utter bud-getary disorder which everywhere in the belligerentcountries was the legacy of the policies pursued duringthe war, led to a further period of monetary chaos. Inthe United States a brief inflationary boom was fol-lowed by collapse, and then a fairly rapid recovery. InGreat Britain the boom and the collapse had no suchfortunate sequel: a long period of relative stagnationfollowed. In continental Europe, the confusion was

i 19H-1933 7

without precedent. It was the era of the great inflations.The rouble, the crown and the mark all suffered whatwas virtually an annihilation of value. The franc andthe lira underwent serious depreciation. The resultswere what was to be expected—severe curtailment oftrade, further structural dislocations, capital con-sumption and the wiping-out of middle-class resources,a further disruption of the basis of the internationalequilibrium of prices.

5. By the middle of the 'twenties, this intense dis-order had come to an end. One by one, budgets werebalanced and disordered currencies were restored tosome kind of stability. In the spring of 1925, GreatBritain and the British dominions returned to theGold Standard. By the end of the year, of the import-ant countries, only France was still on a fluctuatingstandard.

There followed a period of good trade—a period,indeed, which in the light of more complete knowledgeof the relevant statistics can be seen to have been,for some parts of the world, one of the biggest boomsin economic history. Trade revived, incomes rose.Production went ahead by leaps and bounds. Inter-national investment was resumed on a scale surpassingeven pre-war dimensions. The stock exchanges of themore prosperous centres displayed such strength thatspeculation for a rise seemed a more certain path to asecure income than all the devices of ancient prudence.It was a period in which the finance ministers of theworld, looking forward to years of increasing revenue,felt no hesitation in incurring fresh obligations on theside of expenditure. Men of the type of the lateIvar Kreuger moved rapidly from one capital city toanother, arranging without fuss or inconvenience to


anybody, wha t were described as "good constructiveloans"—the acolytes of the "new economics". I t wasin these days that it was said that the trade cycle hadbecome extinct.

Nevertheless, there were certain features of thisphase which were such as to distinguish it, if not inkind, at any rate in degree, from other periods of ex-panding trade. It was pre-eminently an industrialboom. The rise in profitability was essentially a featureof manufacture and raw material producing industry.Throughout the period, the profitability of certainlines of food production was relatively low. In theUnited States—then as now the centre of the worldfluctuation—side by side with extreme prosperity inthe manufacturing industries, there existed severedifficulties, and in parts even distress, among the pro-ducers of agricultural products. All over the world therelative decline of agriculture was giving rise to severepolitical strain and desperate attempts, in the shapeof pools and restriction schemes, to evade the con-sequences of technical progress.

Moreover, even in manufacturing industry the boomwas not universal. Important areas of manufacturingproduction experienced its influence only indirectly.Throughout the boom years in the United States, in-dustrial activity anywhere in Great Britain couldnever have been described as more than moderatelygood. There were large areas in the North where thisdescription would have been an exaggeration. InCentral Europe, particularly in Austria, partly as aresult of the peace settlement, partly as a result ofinternal policy, there was definitely discernible a tend-ency to capital consumption. In Germany, the appal-ling shortage of capital created by the war and the

i 1914-1933 9

post-war inflation was partly compensated by largeimports of capital. But the business situation wasnever normal, and at a much earlier date than else-where it became quite obviously perilous.

At the same time, in the financial centres of theworld there existed conditions wholly without parallelin any earlier period of prosperity. The stabilisationof European currencies and the fixing of new parities,after the colossal fluctuations of the post-war years,had been carried through on the basis of what veryoften could only be described as hit-or-miss methods;and although in some cases the miss was not verygreat, in others it was considerable. In the case ofGreat Britain, the parity chosen was almost certainlytoo high. In France there is reason to suppose that theerror was in the opposite direction. The result was amost peculiar state of inter-local monetary disequi-librium. The centres which had returned too high werecontinually in danger of losing gold; the centres whichhad returned too low were almost embarrassed by thegold they attracted. Now it so happened that thecentre which suffered chiefly from over-valuation wasalso the chief centre of organised capital export. Whilethe over-valued exchanges made long-term capitalexport from London a highly difficult operation, therelatively high rates, which were necessary to keep goldfrom flowing out, were especially tempting to short-term balances. Hence, throughout the whole of thisperiod there existed in one of the chief financial centresof the world a lack of balance between long- and short-term investment which was itself conducive to dis-equilibrium and latent with dangers of extensivecatastrophe, should anything occur to disturb theinsecure prosperity elsewhere.


6. Thus, in spite of the appearance of considerableprosperity and a very real measure of revival of tradeand industry, the period immediately preceding theslump was not without conditions which might justifi-ably have given rise to very grave anxiety. Clearly,if the forces making for prosperity were to slacken,the ensuing depression was likely to be a depressionof more than usual severity.

They did slacken. Looking back, it is possible to dis-cern the beginning of the depression about the end of1928, when the How of American lending to Germanyfirst began to lose its pace. By the middle of 1929, theevidences of serious weakening in that part of theworld were unmistakeable. In certain raw materialproducing centres, too, there were signs of weaknessquite early in the summer.

But the main tide of American speculation continuedto flow with undiminished strength until the autumn.As early as February the authorities of the FederalReserve System had become persuaded that the boomhad reached such dimensions that a crash was inevit-able. But, in spite of private warnings, rising discountrates, and all kinds of unofficial indications, the rise ofstock exchange values continued. Then suddenly therecame a crack. The collapse of the Hatry swindles mLondon caused a sudden tightening of markets there.The rate of interest was advanced to 6j per cent. InNew York there was a sympathetic movement. OnOctober 23rd the Dow-Jones index of the price of in-dustrial shares in New York dropped about 21 points ;during the next six days it fell about 76 points more.Prosperity was at an end. The bottom had droppedout of the market.

7. The depression which followed has dwarfed all

i 1914-1933 11

preceding movements of a similar nature both inmagnitude and in intensity. In 1929 in the UnitedStates the index of security prices stood in the neigh-bourhood of 200-210. In 1932 it had fallen to 30-40.Commodity prices in general fell in the same periodby 30 to 40 per cent; the fall in particular commoditymarkets was even more catastrophic. Production inthe chief manufacturing countries of the world shrankby anything from 30 to 50 per cent: and the valueof world trade in 1932 was only a third of what itwas three years before. It has been calculated by theInternational Labour Office that in 1933, in the worldat large, something like 30 million persons were outof work.1 There have been many depressions in moderneconomic history but it is safe to say that there hasnever been anything to compare with this. 1929 to1933 are the years of the Great Depression.

1 For more extensive statistical information see Tables 1 to 12, StatisticalAppendix.

CHAPTER II

MISCONCEPTIONS

1. WHY did these things happen?Before proceeding to a tentative explanation, there

are certain misconceptions which demand our atten-tion both on account of their widespread acceptationand their possible influence on policy. Incidentallytheir examination will bring to light certain matterswhich have an important bearing on the explanationseventually to be offered.

2. Perhaps the most conspicuous feature of thestatistics which we have just cited is the fall of com-modity prices. A fall of 40 per cent in gold prices infour years is an event without precedent. In populardiscussion, people often speak as if this were, not onlya symptom, but actually the cause of the slump andits various attendant difficulties. The fall of prices isthe cause of the depression, they urge.

Such a view is based upon misapprehension. Therecan be no doubt that when prices fall as rapidly andas severely as they have done in this depression allsorts of difficulties, which would not otherwise haveexisted, necessarily come into being. The increasingbudgetary deficits and the growing weight of fixedindebtedness of which so much has been heard in thepast few years, are difficulties of this kind. These diffi-culties may rightly be described as consequences of the

12

CH. ii MISCONCEPTIONS 13

fall of prices. But it does not in the least follow thatthe fall of prices is, in any sense, a prime cause of thedepression. Indeed, if we reflect upon the role playedby prices in the markets in which prices arise, such aconclusion must at once be seen to be fallacious. In themarket, prices are the resultant of the forces under-lying, on the one hand, commodity supply, and on theother, money demand. A fall of prices does not occurspontaneously. It occurs only as a result of changesin one or other of these factors. No doubt when itoccurs, it may bring with it the further complicationswe have noticed. But its occurrence is not the cause—it is the effect—of the fundamental fluctuation. In thesearch for ultimate causes it constitutes the problem,not the solution.

3. It follows, therefore, that any explanation of theslump which is to escape the charge of complete super-ficiality must go behind prices to the causes of whichprices are the resultant. That is to say, it must lookeither to commodity supply or to demand expressedin terms of money.

It is in this sense, if we are to do justice to them atall, that we must interpret those theories which explainthe slump in terms of over-production. So long as thereremain anywhere wants which are unsatisfied, it isquite clear that there cannot be over-production inthe sense of a real superfluity of commodities. No doubt,as against those who wish to cure depression by all-round restriction, it is important to reiterate thishomely truth. But the over-production which is in-voked in popular explanations of the depression is notover-production in this sense. It is merely over-pro-duction in the sense that, in wide groups of importantmarkets, at the price prevailing, the supply cannot be


sold a t a profit. Against appeal to this unquestion-able fact it is absurd to brandish the platitude tha teven in the best of times many wants are left un-satisfied.

Now there can be no doubt tha t in the present de-pression, and indeed in every depression of which wehave knowledge, over-production in this sense has beenpresent. The fall in profitability in many lines of in-dustry due to changed relations, or anticipations ofchanged relations, between supply and demand is oneof the most conspicuous features of the beginning ofall downward fluctuations of this nature. I t is a move-ment which often shows itself in the index of securityprices long before commodity prices have been affected.The appeal to over-production of this sort thereforehas a solid basis of fact.

But here, as with the appeal to the fall in commodityprices, the alleged explanation proves to be nothingbut another way of putting the fundamental problem.Over-production in this sense exists. But why does itexist? Why is it tha t supply exceeds demand in somany different markets?

I t is useful to put the question thus, for in this waythe real nature of the problem—the simultaneity ofover-production in many lines of industry—is especiallyemphasised. Over-production in one line of industryonly is not likely to lead to general depression. If theindustry is one from which producers cannot shift,consumers get the larger supply at cheaper prices andthe producers have to put up with lower incomes. Ifmigration into other lines of industry is possible, thensupply is restricted by a redistribution of labour andcapital. In a competitive system, the fact that , in oneline of industry, costs are above prices, definitely im-

ii MISCONCEPTIONS 15

plies that the different factors, whose prices go to makeup cost here, would produce elsewhere a more valuableproduct. In either case, the disturbances involved arenot of the sort which is necessarily conducive togeneral disequilibrium.

It is sometimes thought that an increase of produc-tion which leads to lower prices and lower incomes ina particular branch of industry is detrimental to pro-duction elsewhere, in that it involves a diminution inthe demand for the products of other industries. Anincrease of agricultural production, it is held, leads toa fall in agricultural prices, and this, in turn, impliesa diminution in demand for the products of manu-facturing industry—a diminution of purchasing power.Such a view undoubtedly underlies the agrarianpolicy at present being pursued in the United States.It is sometimes- said that the growing cheapness ofagricultural products is detrimental to the prosperityof manufacturing production in Great Britain.

This belief is misleading. Let us suppose that, owingto technical progress, the supply of wheat increases.Let us suppose further that, owing to the relativelyinelastic nature of the demand for wheat, the price ofwheat falls more than proportionately, and the pro-ducers of wheat have therefore lower incomes. Doesthis mean that that much purchasing power will havedisappeared from the world? Not at all. It is true thatthe wheat producers will have less to spend. But theconsumers, who now get more wheat for a smaller out-lay, will have more money left over. It may very wellbe that they will not spend this increase on exactly thesame things that the wheat producers would have pur-chased. But they will be in a position to buy more ofsomething; and this will render any reshuffling of the


labour force which the changed direction of demandmakes necessary, a comparatively easy process.

But is it not possible that the money thus trans-ferred may not be spent at all—that the consumers ofwheat, having obtained their wheat for less, hoard thedifference rather than spend it? In such a case, nodoubt, there would be a net diminution of spendingand the over-production in one industry would haveinjurious effects, via the hoarding process, on others.But is such a state of affairs likely, if the initial over-production takes place in only one industry? Whyshould consumers hoard? Why should they not spendmore on something else? The possibility of hoardingof this sort must not be ruled out altogether. But solong as the initial increase in production is confined toone industry it seems, prima facie, improbable. Onlyif there is a fall of prices due to a simultaneous over-production in many lines of industry does such atendency seem at all probable.

But this brings us back to the real problem. Why dosuch simultaneous changes take place? Why is thereover-production in many lines of industry?

4. Considerations of this sort have led many to thebelief that the ultimate cause of this, and indeed of allother depressions, is to be looked for, not on the side ofcommodity supply, but rather on the side of money.Money is the one thing common to almost all eco-nomic activity in the modern world. Is it not probablethat disturbances affecting many lines of industry atonce will be found to have monetary causes?

The suggestion is plausible and, as we shall eventu-ally see, it is probable that it contains an importantcore of truth. But the kinds of monetary explanationare various and need separate examination.

IT MISCONCEPTIONS 17

Perhaps the most widely held view of this sort isthat which attributes the slump to deflation. A fall ofprices so great as the fall we have recently witnessedcannot be wholly due to increased technical pro-ductivity. Clearly there must bf* a strong element ofmonetary causation involved. The slump, therefore, isdue to deflation. Such is the most popular monetaryexplanation of our present difficulties. It is not difficultto see what implications are held to follow as regardsthe policy appropriate to recovery.

Unfortunately, there seems to be no reason to regardthis explanation as sufficient. If we take deflation tomean a deliberate curtailment of the supply of money,there seems to be no evidence of its existence on alarge scale either before or since the slump commenced.Before the slump, if we take the world as a whole, allthe evidence shows that the supply of money in thewidest sense was expanding very rapidly. Since theslump, Central Banks and Governments have viedwith each other in promoting policies calculated tobring about easy money conditions. Save perhaps inGermany, where the exigencies of the transfer prob-lem compelled a certain stringency of credit, there isno evidence of deflation, in the sense of a deliberaterestriction of credit. The following chart,1 which showsthe effects of the "open market" policy of the FederalReserve System and the Bank of England, should bea sufficient refutation of the charge that the CentralBanks of the world have deliberately brought aboutdeflation.

If, however, we take deflation to mean, not merely adeliberate curtailment by Central Banks of the supply

1 For the statistics upon which it is based, see Tables 13 and 14 of theAppendix.

C


of money, but a slowing up of the frequency withwhich money is used by different members of the com-

$mns.

2,300-

2.OOO-

1,700-

1.4OO-

1,100-

8OO-

5OO-

2 0 0 -

_ _ _ _ _ _ _ Qd

Ace

\ /^—y

nh of EnQland Depositseptances and Securities of Federal Reserue Banl

iiii

V

/ '

V

3 A J21O

-180

-150

-120

-00

-6O

3O1929 1930 1931 1932

"OPEN MARKET" POLICY

1933

munity, then there can be no possible question of itsexistence in the years since the slump. The figures ofbank debits divided by bank deposits give a roughidea of the average rapidity with which money ischanging hands. The following chart shows the extra-

2-8-

2-4-

2-0-

1-6-

1.2-

v

-3-2

-2-a

-2-4

- 2 0

-I-a

•1-2

- • 8

1929 1930 1931 1932 1933

UNITED STATES—VELOCITY OF CIRCULATION OF BANK DEPOSITS

ordinary diminution which has taken place in theUnited States since the slump began.1

1 See Statistical Appendix, Table 15.


There can thus be no denying the existence of de-flation in this sense in this period. But here, as in thecase of all the theories we have so far examined, thediagnosis reveals, not a solution, but a problem. Why-was there deflation in this sense? Why did people tendto leave money on idle deposit, rather than invest itin active business? Surely we cannot regard such aphenomenon as a spontaneous evil. Under capitalismthere are permanent influences tending in the oppositedirection. Under capitalism he who hoards is punished—punished by the loss of interest. If therefore peopleincur this punishment we are entitled to assume thatsomething has gone wrong—that some other disturb-ance is the prior cause of the depression. To appeal todeflation as an ultimate explanation is only one degreeless superficial than to appeal to the mere fact of thefall in prices. A monetary explanation which is tocommand respect must show why deflation takes placeat all.

5. It is sometimes thought that the coming of de-pression is due to a shortage of gold. In order that busi-ness may remain stable it is said it is necessary thatprices should not fall. In order that prices should notfall it is necessary that the gold supply should increaseso as to keep pace with advancing productivity. Thefailure of prices to remain stable is therefore due to adeficiency of gold.

It is clear that a theory of this sort cannot be dis-missed as a mere restatement of the problem. If it weretrue that it is necessary for prices to remain stable forbusiness to continue to be profitable; if it were truethat for prices to remain stable it is necessary for thegold supply to increase by a certain percentage everyyear; if it were true that during the period leading up to


the depression the gold supply had failed to conformto these requirements, then clearly here would be agenuinely causal explanation of our troubles. Un-fortunately none of these things seem to be true. I t isnot difficult to demonstrate this.

Let us take first the proposition that for businessconditions to be profitable it is necessary for the price-level to be stationary. I t is often thought that thisview is generally accepted by economists—that it isonly questioned by a tiny handful of "sadistic de-flationists". In fact this is the reverse of the truth.Whatever their differences on other aspects of mone-tary theory, the majority of economists of repute inrecent times have held quite definitely the view thatthere is nothing detrimental to business stability in aprice-level falling with increased productivity. Mar-shall, Edgeworth, Taussig, Hawtrey, Robertson, Pigou,to mention only the names of English-speaking econo-mists, have all been of this opinion.

The reason is very simple. Technical progress—themain cause of an increase in the volume of produc-tion—is essentially a cost-reducing process. Now itis clear that there is nothing inimical to the profit-ability of particular undertakings if the prices of thethings they produce fall pari passu with their cost.Why should the mere amalgamation of particularprices into a statistical average in any way affect theposition?

I t is sometimes thought that this argument ignoresthe existence of fixed interest charges and similarobligations. But this is a misapprehension. The argu-ment is that, if costs fall, prices can fall too, withoutloss of profitability: it is beside the point to say thatsome costs do not fall. So far as Government debt is

MISCONCEPTIONS 21

concerned, it is true that in such circumstances the"real value" of each pound's worth of debt rises. Butit is not true that the "real burden" rises. By hypo-thesis the fall in prices is due to increased productivity.There is a larger product out of which to pay the largerinterest. All that happens is that rentiers share in theincrease of productivity. This may or may not bethought to be ethically desirable. But it imposes nomechanical friction on the smooth working of theeconomic system. The real burden of debt increases inthe way suggested only when the price fall is due, notto increased productivity, but to absolute deflation.Hence there is no foundation for the view that the goldsupply must "keep pace" with increased productivity;so long as it "keeps pace" with the increase of popula-tion there is no serious ground for fearing a goldshortage.

But let us put these refined considerations aside andconcentrate on the facts of the situation we are ex-amining. Even if it were true that, for business to bestable, the gold supply must keep pace with produc-tivity, it would still be untrue that the gold supplyactually failed to conform to these requirements in theperiod under discussion. The rate of increase which iscommonly held to be desirable is from 2\ to 3 percent per annum. There are grave reasons for suspect-ing the whole basis of the statistical operation bywhich these results are reached. But for the sake ofargument let us accept them. The following table *shows the state of the world's monetary stocks of goldfor the years 1925-30:

1 See Annex to the Final Report of the Gold Delegation of the League ofNations. The Table was originally published in the Statistical Yearbook ofthe League of Nations, 1931-32 (Geneva, 1932).


WORLD'S MONETARY GOLD STOCKS

End of1925 .1926 .1927 .

$ millions.. 10,244. 10,496. 10,602

End of1928 .1929 .1930 .

$ millions. 10,953. 11,201. 11,715

It will be seen that the monetary gold reserves of theworld as a whole increased at a rate of between 2\ and3 per cent per annum. Even if the theory on which theexplanation of the slump in terms of absolute goldshortage is based were correct, it would be inapplicablebecause it fails to fit the facts. The assertion of a goldshortage is unfounded.

6. Confronted with arguments of this sort, those whoare disposed to explain the present difficulties in termsof the vagaries of gold supply usually fall back onanother kind of argument. They appeal, not toshortage, but to maldistribution of the precious metal.They admit that the gold supply as a whole has beensufficient. But they urge that its distribution has beensuch as to prevent its effective use. There has been toomuch gold in France and America they say; too littlein the rest of the world. For this the banking authoritiesin the two countries first named are to blame. Theyhave not worked the Gold Standard according to the"rules of the game". They have sterilised their enor-mous gold reserves. For a time the rest of the worldwas able to progress in spite of this policy, but eventu-ally the pressure became too great and depression setin. A highly sensational mythology has been em-broidered around this argument.

It is important to examine this carefully. It is anargument which has received extraordinarily wideacceptance in Great Britain. It has influenced our


views regarding the economic policy of the future. I thas caused much international misunderstanding. I thas led to much self-righteous denunciation of ourneighbours. Yet in fact it is almost completelyfalse.

Let us first be clear about the problem at issue. Therecan be no doubt that, at the time of the break-up ofthe International Gold Standard, the gold supplies ofthe world were distributed in a highly abnormal man-ner. At the end of June 1931 over 60 per cent of thecentral gold reserves of the world (apart from theU.S.S.R.) were in two countries: the United States ofAmerica and France. There can be no doubt, moreover,that from the time of the break in prosperity in theautumn of 1929, the gold which flowed into thesecountries did not produce a commensurate expansion ofcredit. But this is no proof that the slump was theconsequence of this movement. On the contrary, thereis every reason to suppose that this movement was theconsequence of the slump. It is a well-known pheno-menon of the trade cycle that, from the turn of tradeonwards, the creditor countries tend to receive intereston the money they have lent in the boom in gold ratherthan in goods. I t is well known, too, that during timesof depression a reinforcement of the gold reserves of acentral bank does not necessarily immediately producea commensurate increase of borrowing. I t is clear thatthe authorities of the Federal Reserve Bank and theBank of France did nothing to prevent their increasedreserves becoming effective. I t is not really sensible,therefore, to attribute what happened after 1929 totheir policy; the causes of the gold flows after 1929 areobvious, and though it may rightly be argued that theywere aggravated by tariff policies adopted after that


date,1 it is to lose all sense of proportion to regard themas the causes rather than as the consequences of theslump. The real problem relates to what happened be-fore, not after, the depression became intense. Did theFrench and American authorities transgress the rules ofthe Gold Standard game in the period before that date?

What are "the rules of the Gold Standard game"?Broadly speaking they are simply these: that centres

receiving gold should expand credit, and centres losinggold should contract credit. In detail, they require thatthe expansions and contractions should more or lesscounterbalance each other so that payments betweennational areas should be on the same footing as pay-ments within national areas; i.e. should involve no netexpansion or contraction of the money supply in theworld as a whole. When the gold supply of the worldas a whole is increasing, the situation is more com-plicated as regards the absolute magnitude of therequirements of expansion and contraction; but thebroad principle remains the same as regards flowsfrom one country to another. Inter-local transfers, assuch, should involve no net expansion or contraction.

It follows, therefore, that we can judge the validity ofthe theory we are discussing by examination of the bank-ing statistics of the countries concerned. Were goldimports sterilised or not? That is the question at issue.

Let us first take the United States of America. Thefollowing chart shows the movements of gold reservesand effective bank credit in the United States duringthe period under discussion:2

1 It is important to remember that the notorious Hawley Smoot Tariffonly became operative in 1930. There were no important alterations in U.S.tariff policy between 1922 and that date.

2 For the figures on which the chart is based see Statistical Appendix,Tables 16 and 17.

MISCONCEPTIONS 25

Gold ReservesLoans, Discounts and Investments

1926 1927 1928 1929

FEDERAL RESERVE BANKS

1930

Is this a picture of gold sterilisation? Surely not. It is apicture rather (or part of a picture) of a considerableexpansion of credit. (How great this expansion was weshall examine further in the next chapter.) Far fromindicating any infringement of the rules of the GoldStandard game in the sense of inadequate expansion,it indicates, if anything, an infringement in the oppo-site direction. From the spring of 1927 until late in1928—the period which is regarded by many as decisivefor the genesis of the collapse which followed—therewas taking place in the United States an expansionof credit on a declining gold basis. The Americans aresurely not altogether to be blamed when they showsome impatience at our interpretation of their policy!

The French position is a little more complex. Thereis some reason to suppose that the parity at whichthe Gold Standard was restored in France was, if any-thing, on the low side. To the extent that this is trueit is correct to argue that more gold must have flowedin that direction than would otherwise have been thecase. But it does not seem correct to argue that, oncethere, the gold was deliberately sterilised. The follow-


ing chart shows the movement of the gold reservesplus foreign assets of the Bank of France and thenotes in circulation against it:1

64.00O-

60,000-

56,000

64.OOO

•6O.OOO

56,000

1928 1929 1930

BANK OF FRANCE—RESERVES AND NOTES

There is no obvious "sterilisation" here. As gold flowsin or as foreign assets are acquired, so the note issueis enlarged. Nor is there evidence of sterilisation in theaccounts of the commercial banks. Owing to an exten-sion of demand for cash the volume of deposits actuallysinks during this period, but it sinks proportionately-less than the cash reserve. The reserve as a percentageof deposits therefore actually diminishes. The table2 onthe following page shows its movements.

Where this cash went to is a difficult question to de-termine. There is reason to suppose that some was im-mobilised in the savings banks. But that much wentinto active circulation seems to be sufficiently shownby the index of cost of living during that period, which

1 See Statistical Appendix, Table 18.2 See Balogh, "The Import of Gold into France", Economic Journal, 1930,

p. 447. (Extracted from Jean Loriot, "Les Banques", Revue d? EconomicPolitique, 1930, p. 542.) The whole article is a mine of illuminating informationon this difficult question.

MISCONCEPTIONS 27

RESERVES OF THE CREDIT BANKS AS A PERCENTAGE

OF DEPOSITS

January-MarchJuneSeptemberDecember .

1927.

1827403123

1928.

2018181618

1929.

1514141414

rose from 498 in the last quarter of 1927 to 565 in thelast quarter of 1929.1

There seems no reason, therefore, to accuse either theAmerican or French authorities of deliberate sterilisa-tion of gold during the period under discussion. In bothcountries there was expansion as gold flowed in. Butit may well be asked: Was the expansion sufficient,having regard to what was going on elsewhere? Toanswer this it is necessary to look at the Britishstatistics.

If we were to believe what is commonly said aboutBritish experience during this period we should expectto find a substantial contraction. Moreover if we haveregard to the requirements of Gold Standard theorywe should entertain similar expectations. For therecan be no doubt that during this period Great Britainwas out of international equilibrium. Even when wedid not actually lose gold we only retained it by allsorts of devices—including, so it is said, occasionalappeals ad misericordiam to French bankers not towithdraw their balances. The sterling exchange tendedcontinuously to be in the neighbourhood of the goldexport point during the greater part of the period we

1 Paris Commission on Cost of Living.


are discussing. But the figures do not bear out theseexpectations. The following chart1 shows the move-ments of the gold reserve of the Bank of England andthe deposits of the London Clearing Banks from 1925to 1929:

Bank of England- Gold Reserves

London Clearing Banks-Deposits

1925 1926 1927 1928

UNITED KINGDOM

1929

Clearly there is no evidence here of deflation. Depositsactually increased from a yearly average of £1623-2millions in- 1925 to £1762-5 millions in 1929. Theremay have been some offset to this in an increase inthe proportion of time deposits to current accounts.But of deflation, in any sense of that much abusedword, there can be no question.

But this puts a new complexion on the French andAmerican figures. So long as Great Britain, the centretending to lose gold, was not contracting, the othercentres were under no obligation, according to "therules of the Gold Standard game", to expand. Indeed,in so far as they did so, they were risking a net in-flation. As we have seen, in America this risk was taken—with what results we shall see later. In France, as

1 See Tables 19 and 20, Statistical Appendix, and the chart in ChapterV. p. 84.


was only natural in a country which had just emergedfrom the horrors of a big inflation, the policy was muchmore cautious. But it is clear that if "the rules of theGold Standard game" were infringed during theseyears it was not in France or America.

Moreover—and this is a point which even theapologists of France and America have often over-looked—while Great Britain remained out of equi-librium, it is difficult to see how, in the absence of acomplete reversal of existing habits of foreign lendingin the case of France, and a drastic change in tariffpolicy in the case of America, the monetary authoritiesof these two countries could have avoided receivinggold, save by carrying out a degree of inflation whichall the experience of post-war years suggested to befraught with disaster. A country which is out of in-ternational equilibrium—as Great Britain was duringthis period—acts, as it were, as a watershed of theprecious metal. The fact that it is out of equilibriumis the cause of a gold flow to other centres. Whatmaldistribution there was in these years, therefore, isto be ascribed, not to gold sterilisation on the part ofAmerica and France—this thesis does not stand exam-ination—but to the state of continued disequilibriumwith the rest of the world which was the fate of GreatBritain. The theory that the maldistribution of goldin the period 1925 to 1929 caused deflation thereforefalls to the ground. In so far as there was maladjust-ment it caused, not deflation, but inflation. This leadsto the thesis which is the subject of the next chapter.

CHAPTER III

THE GENESIS OF THE DEPRESSION

1. So far, the various explanations of the depressionwhich we have examined have all proved to be de-fective; some because they were not explanations atall but merely restatements of the problem; some be-cause the assumptions on which they rested were inobvious conflict with fact. Where then are we to turn?

2. Let us go back a little to a point which was raisedin the last chapter when we were discussing over-production. We saw there that one way of describingthe slump was to depict it as a simultaneous break-down of the profitability of many different lines ofindustry. It is well known, in fact, that this breakdownis most serious in the industries producing what areknown as producers' goods; that is to say, the so-calledconstructional industries and the industries produc-ing raw materials.1 In these industries the depressionshows itself as a condition of over-production, a condi-tion in which costs are higher than prices, a conditionin which the supply coming forward is not taken up atprofitable prices, a condition in which the businessesengaged in these lines of industry find that theirearlier expectations are not justified by the state of themarket, a condition in which earlier errors of anticipa-tion are revealed.

1 See Tables 8 and 9, Statistical Appendix, for evidence on this point.30

CH. m THE GENESIS OF THE DEPRESSION 31

One way of putting our problem, therefore, is to askwhy the errors thus revealed were originally com-mitted, why they occurred in this peculiar form. It isquite clear that the leaders of business are at no timeequipped with perfect foresight. We should alwaysexpect some mistakes to be made somewhere. But inthe absence of special information we should expecta random distribution. We should not expect thispeculiar cluster of errors. Why should the leaders ofbusiness in the various industries producing producers'goods make errors of judgement at the same time andin the same direction?

Now it seems probable, as was hinted in the lastchapter, that a dislocation which is common to manyindustries, if it does not actually originate on the sideof money, will at least be transmitted and enlargedthough the monetary medium. This provides a clueof a kind to the solution of our problem. But it doesnot, in itself, explain the peculiar distribution of error.Money is spent on everything. Why do not fluctuationsin the supply of or the demand for money affect alllines of production equally? Are there any reasons forsupposing that monetary changes will bring about thekind of error we are contemplating?

3. Let us first see if such a thing is theoreticallyconceivable. If this proves to be the case, we can thenproceed to discover whether the assumptions on whichour theory is based have a counterpart in the realityof the fluctuation we are examining.

Our problem relates to demand expressed in termsof money. It is necessary, therefore, to be quite clearwherein money demand consists.

If we take a cross-section of the industrial systemat any moment of time, the activities of supply there


discernible fall quite naturally into two groups. Onthe one hand we have the supply of goods and ser-vices ready for immediate consumption—bread, fuel,domestic service, etc. On the other hand we have thesupply of things which directly or indirectly contributechiefly to the consumption of the future. In this groupfall raw materials, semi-manufactures, machines, fac-tories, and all those durable consumption-goods likehouses whose consumptive uses stretch out over longperiods ahead. This division corresponds more or lessto the familiar statistical division between consumers'goods and producers' goods save that with the pro-ducers' goods we must here include durable consump-tion-goods such as houses. In conception, this distinctionbetween production for present and future consump-tion is quite clear and definite. In practice we have tobe content with rough classification. A suit of clothesis a durable consumption-good. But we usually class itwith consumption-goods. If we like, we may make adistinction between the supply of income-goods andthe supply of capital-goods, remembering that theuse of a house for which rent is paid will be an income-good and the house itself considered as an object ofownership will be a capital-good.

Corresponding to these activities of supply therewill be streams of money demand. On the one hand,there will be streams of money being spent on goodsfor immediate consumption. On the other hand, busi-ness men and others will be spending money on goodsand services whose fruits will only be available in thefuture. The housewife will be spending money onbread, fuel, etc. The baker will be spending money onthe labour he employs to make bread, on replenishinghis stocks of flour, perhaps on repairing his oven, and

in THE GENESIS OF THE DEPRESSION 33

so on and so forth. The distinction here is roughly thesame as the distinction between expenditure out ofincome and capital expenditure. The sums of moneyspent by consumers, in normal times at any rate, willbe part or the whole of their money-incomes, moneyswhich have accrued to them as a result of the labourwhich they do as producers or the property which, inone way or another, they lend out. The business menwill be using their capital—money released by the saleof stock or new funds borrowed in one way or anotherfrom the capital market. Corresponding to our dis-tinction relating to supply we may distinguish betweenthe demand for income-goods and the demand forcapital-goods.

The minute circumstances determining expenditureon income-goods need not concern us here. But thedirection of capital expenditure deserves a littlefurther attention. As we have seen, at any moment oftime business men must be conceived as spendingmoney on particular objects—re-investing capitalwhich has been freed by previous sales, or investingnew sums which they have saved themselves or bor-rowed from the capital market. What determines thedirection of their expenditure? In the capitalistsystem, within the limits prescribed by law, free capitalcan be spent on anything. A business man who hascapital free may re-invest it in his business, doing thesame sort of thing he has done before. Or he may put itelsewhere. What in fact are the considerations govern-ing the direction of his expenditure?

Clearly in particular instances there may be all sortsof non-pecuniary considerations. But, speaking broadly,it is not misleading to say that the main considerationsare anticipations of profit. Money goes where, taking


everything into account, the profits are expected to behighest. The business man considers costs on the oneside and prices on the other, and tries to put his moneywhere the margin of profit is greatest. If therefore thereturn on capital in different lines of industry is notequal (and it never actually becomes equal) there is atendency for capital to shift from those branches andmethods of production where it is relatively lower tothose where it is relatively higher. The rate of returnon capital is, as it were, the governor of the system.

One further point before we utilise these elementarynotions in examining the effects of monetary changes.It should be clear that at any moment there must existpossibilities of production which might be utilised ifthe profitability of other lines of industry were not sohigh. When the rate of interest drops from 4 to 3 percent, a whole range of enterprises, which were notworth while when 4 per cent was the rule, now becomeattractive. Factories can be built, machines con-structed, transport facilities extended, housing pro-vided, which, when the higher rate prevailed, were outof the question. The owners of free capital would notundertake these things themselves if a higher returncould be obtained elsewhere. They could not profitablyhave been undertaken on borrowed money, since thecost of borrowing was too high. The anticipated rate ofreturn on capital, therefore, performs the double func-tion of guiding the direction of existing investment andconfining it to enterprise yielding a return above acertain margin.

4. So far we have supposed that money spent at anymoment, either by business men or consumers, ismoney which has been released either by sales ofstock, the rendering of services, or the hiring out of

m THE GENESIS OF THE DEPRESSION 35

property. We have assumed the total supply of cur-rency and credit to be constant. We have tacitly ex-cluded the possibility of an augmentation of moneydemand either by way of an increase of currency, orby an increase in the rate at which currency and creditare used. We must now examine what happens if thisoccurs. We must examine the effects on production ofmonetary changes.

Let us suppose, for the sake of simplicity, an in-crease in the supply of money.

Now it is very important, from our point of view,to be clear how this increase actually comes about.Suppose that by a governmental decree all moneyholdings were to be doubled; that is to say, supposethat all balances at the banks were multiplied by twoand all holders of cash were entitled to treat each noteand coin in their possession as double its previous facevalue. In such circumstances, in a free economy withfairly full employment, there is no reason to supposethat great disturbances would follow. The competitionof buyers would lead to the fairly quick marking upof all prices to something like double their originallevel. Some distributive changes there would be as aresult of the existence of long-term contracts. Rentierswould continue at the old level of income. Profit-makers and possibly wage-earners would benefit corre-spondingly. These distributive changes would possiblylead to shifts in demand for particular commodities.But there seems no reason to expect that a generaloscillation of any importance would be generated.

But, in the real world, new money is not made avail-able in this way. In normal times, expansion and con-traction of the money supply comes, not via the print-ing press and government decree, but via an expansion


of credit through the banks . The ra te of discount ofthe Central Bank is t he main regulator of moneysupply. This involves a mode of diffusion of new moneyradically different from the case we have jus t exam-ined—a mode of diffusion which m a y have impor tan teffects on t he na tu re and direction of production. Le tus see how this happens.

Le t us suppose t ha t , for reasons which for the mo-men t we will leave uninvestigated, t he Central Banksof the world make their ra tes of discount lower t h a nwould be justified by the volume of voluntary savingcoming into the system. (We shall re turn later on toa discussion of the possible reasons for such a policy.)W h a t are likely to be the effects on production?

Le t us ignore, for the t ime being, the ra ther intr icatemechanism b y which the initial change will t ransmi titself th rough the capital market . The fundamentalfact on which we mus t concentrate our a t ten t ion ist h a t borrowing is cheaper. The s t ructure of interestrates has fallen. This means t h a t the profitability ofall forms of production which involve making thingswhich only yield services a t a later date , or over a longperiod of t ime, is increased. Consider the position ofa speculative builder when the ra te a t which heborrows falls b y one per cent, say from 6 per cent to 5.Suppose he has been paying £1000 for a certain collec-tion of materials. In teres t on t h a t a t 6 per cent is £60.When the ra te falls to 5 per cent and the price of exist-ing house proper ty rises accordingly, he will be makingan increased profit unt i l the price rises to somethinga little less t h a n £1200. Clearly i t will pay to borrowmore.

We can perhaps see this even more clearly if we usethe language of the real-estate market . A fall in the ra te


of interest implies an increase in the number of years'income which it is worth while to pay for the possessionof land outright. When the rate of interest is 5 per centthe corresponding number of years' purchase is 20.When it is 4 per cent it is 25. Now this applies notmerely to land and houses but to all kinds of capitalinstruments. The longer-lived the capital instrument,or the greater its distance from consumption, the moreits value is affected by the change in the rate of inter-est. The shorter-lived it is, or the less its distance fromconsumption, the less is it affected. The value of flourin the baker's shop is hardly affected at all by a cheap-ening of the cost of borrowing. The value of mines,forests, houses and heavy factory equipment is enor-mously affected.

It follows, therefore, that the bulk of the newborrowing will be undertaken by those who propose toengage in enterprises of this nature. The new moneywill flow to those parts of the economic system mostaffected by the rate of interest. There will be an in-creased demand for what we have called capital-goods.There will be a boom in the constructional industriesand the industries producing raw materials. Pro-ducers in these industries, on the strength of the newdemands, will be able to bid away from other in-dustries factors of production common to both. Thenew labour supply will go into these industries ratherthan elsewhere. Raw materials, such as coal, pig ironand timber, will tend to be used in greater proportionsin these parts of the economic system. The productionof "producers' goods" and durable consumption-goods, such as houses, will increase.

So far, the phenomena we have described are almostexactly similar to the phenomena we should expect to


accompany a fall in the rate of interest which was dueto an increase in voluntary saving. But there is thisvery important difference. An increase in voluntarysaving which is made effective in the investmentmarket, means a spontaneous change in the proportionof money spent on income-goods and capital-goods—a change in favour of the latter. It is of the essence ofsaving that it involves a proportionate slackening ofexpenditure on present consumption, and a proportion-ate increase of expenditure on making things which willonly be consumable in the future. But the change wehave been describing involves a change in the amountspent on capital-goods without any diminution, on thepart of the recipients of income, of expenditure onconsumption-goods. The business men who haveborrowed the new money from the banks competewith the demands which come from those whosemoney has been secured by the sale of stocks, the per-formance of work or the hiring out of their property.

But these sums of new money which come from thebanks do not remain at the stage of demand for rawmaterials and the products of the constructionalindustries. Gradually, as they filter through theeconomic system, they become ultimate income. Nowthere is nothing which justifies us in assuming that therecipients of income will necessarily increase the pro-portion of their incomes that they save. It follows,therefore, that as the new money becomes income wemust expect a strengthening of the demand, not forcapital-goods, but for income-goods. The old propor-tion between demand for income-goods and demandfor capital-goods tends to be re-established.

But what does this mean in terms of the relativeprofitability of different lines of industry? Surely that


the producers making for immediate consumption willnow be in a stronger position to bid against the pro-ducers of capital-goods for the factors of productionwhich they use in common and for new loans from thebanks. And what does this mean? A tendency to a risein costs and a hardening of market rates of interest.Wages rise. Interest rates in the short-loan marketrise still more. But this means that the anticipationson which the producers of capital-goods planned theirextensions of production are frustrated. What do theydo? Probably they try to obtain new credits at thebanks. For a time this may be possible. The initialprospects of profitability will in all probability havetempted both banks and individuals to reduce theirmargin of liquidity. But eventually the rise in costsand in the rate of interest becomes too great. The errorof the initial anticipations becomes revealed. Invest-ment in the lines of industry most affected by the rateof interest is seen to be unprofitable. The supply ofcapital-goods coming forward encounters a slackeningdemand. There ensues depression in the constructionalindustries and the industries producing raw materials.

5. So much by way of bare essential outline of themanner in which an inflationary extension of creditmay generate collective error on the part of the pro-ducers of capital-goods. It is not difficult to fill insufficient detail as regards the actual movement of thecapital markets to give the picture a much morefamiliar appearance.

Let us start, as before, from a state of affairs in whichthe rate of discount of the Central Banks has moveddownwards. We may assume that the Central Banksare in a position to make this rate effective either invirtue of the actual market situation or of "manage-


ment" in the shape of purchases of securities in theopen market. What happens as a result of this move-ment?

I t is probable tha t the effect will a t first be confinedto the short-loan market. Bill rates and call-loan rateswill be low. There will be a condition of ease andliquidity in the inner circle of financial institutions.

If such a state of affairs continues for long, however,it will begin to spread to the long-term market. I t willbe profitable to borrow from the banks to hold long-dated securities. There will be an upward movement inthe market for bonds and debentures. There is no needto suppose tha t all this is financed by new credit. Asthe upward movement proceeds, people who have hadmoney lying idle in the banks will be drawn into themovement. The existing supply of money will com-mence to circulate more rapidly.

I t is not possible for a movement of this sort to pro-ceed very far before it begins to affect other branchesof the market. The fall in the yield of bonds anddebentures, which is the obverse of the rise in theirvalue, will lead the more adventurous spirits in themarket to begin to look elsewhere for a higher returnon their investment. The market in common stocks willrise. I t will not be long before a stock exchange boomis in progress. If it is a country where development isexpected, there will be extensive speculation too in realestate.

But a boom of this sort is not a thing which can beconfined in its effects to the money market. The ideatha t a boom on the Stock Exchange keeps money fromindustry is of course the exact reverse of the t ruth . Therise in security prices makes it easier for existing under-takings to secure overdrafts from the banks. At the


same time it is a direct incentive to the flotation of new-issues. If the centre is financially important, part of thiswill probably take the form of foreign lending.

All this will be reflected in the various commoditymarkets. As the money raised in these different ways isspent, it will tend to drive up (or to prevent from falling)the prices of raw materials. The heavy industries willbegin to make larger profits. This in turn will react onthe market for securities. Prices will be marked up toreflect the higher expectations of profit. More moneywill be borrowed from the banks to finance speculativeoperations. The rapidity with which deposits are usedwill increase still further. The yield of gilt-edgedsecurities will begin to rise. The opportunity forspeculative gain will be such that short-loan rates willbe driven above long. By this time the banks will havebecome alarmed and will be making various attemptsto put the brake on. For some time, however, the waveof optimism may carry the boom along.

But it cannot go on. As it proceeds, the technicalstrain on the credit structure becomes greater andgreater. At the same time, the rise in wage rates, re-inforced probably by the expenditure of speculativegains for consumptive purposes, diminishes the pros-pects of profitability of the industries producing capital-goods, both by raising their costs and by stimulatingthe competition of the consumption-good industries,thus raising the rate at which they can borrow. Usuallyit is some accident which is actually responsible for areversal of the process—a conspicuous business failure,the rumour of a bad crop, or something fortuitous ofthat kind. But the end is certain. Once costs have begunto rise it would require a continuous increase in therate of increase of credit to prevent the thing coming


to disaster. But that itself, as we have seen in the greatpost-war inflations, would eventually generate panic.Sooner or later the initial errors are discovered. Andthen starts a reverse rush for liquidity. The StockExchange collapses. There is a stoppage of new issues.Production in the industries producing capital-goodsslows down. The boom is at an end.

6. Finally, one more word about the origin of suchmovements. So far, for the sake of expository con-venience, we have assumed that the expansion ofcredit was directly initiated by the banks. This is notunlikely. Indeed, as we shall see, there is strong reasonto suppose that such was the origin of at least oneimportant phase of the fluctuation we are discussing.But it is not at all necessary. The downward movementof the discount rate may be the result of the flow ofnew gold from the mines. It is equally possible that theexpansion may originate on the "goods side". The con-ditions for credit expansion of the sort we have beendiscussing are present when, the structure of moneyrates remaining constant, there occurs some change inthe sphere of production, some invention, some open-ing up of new markets, some discovery of new naturalresources, which makes borrowing more profitable—touse a technical term, some change which tends to raisethe "natural rate" of interest. If in such circumstancesmoney rates are not raised, then there are present theconditions for an extension of borrowing, an introduc-tion into circulation of new money, which brings itabout that investment is in excess of saving.

Kecognition of this point should do much to removethe misgivings which are often entertained with regardto "purely monetary" theories of the trade cycle. Apurely monetary theory of the trade cycle—a theory


which explained the ups and downs of trade solely interms of movements of the general level of pricesbrought about by the arbitrary changes in monetaryconditions—is quite rightly regarded with suspicionby most people who have had some experience of theworking of the economic machine. If it were all as easyas that the trade cycle would have been eliminatedalready. If a mistake were made in one direction, itwould be enough to reverse it by the converse mone-tary measures. The world we live in is not of thisdegree of simplicity.

But the theory we have been developing does notmake this assumption. It allows for the impulse toexpansion to come either from the condition of realinvestment or from changes in monetary policy. Itexhibits at every point the changes in the world ofproductive activity which follow these initial impulses,and it shows them proceeding via changes in antici-pation of the future of business men and investors.It explains the real over-production in certain lines ofindustry which arises as a result of these changes. Itshows how, when the boom has collapsed, there existdislocations and disproportionalities in the world ofindustry, the wreckage of false expectations, whichmonetary manipulation is not likely to remove. Onlyin its emphasis on the importance of demand in termsof money and the influence of money rates of interestas transmitted through investment markets can it bedescribed as a monetary theory of the trade cycle. Butin this form surely emphasis on monetary factors isonly in accordance with common knowledge of thefacts of business.

7. So far we have simply discovered how a generalfluctuation of trade is logically possible. We have seen


how an inflation which operates through the mechan-ism of the money market may breed errors of anticipa-tion among the capital-producing industries whichlead first to the phenomena of a boom and then, whenthese errors are revealed, to a consequential collapse.How does this theory fit the facts of the presentdepression?

At this point it is necessary to proceed with greatcaution. Whatever be the ultimate truth with regard tothe origin of this depression, one thing is certain, tha tno one explanation is capable of explaining all itsdifferent aspects. As we shall see in more detail in thenext chapter, the fundamental causes, whatever theymay be, have operated in a milieu more than usuallydisturbed by external changes and secondary oscilla-tions, and their manifestations are thus inevitably com-plicated. I t will take years of careful scrutiny of theavailable material before we can hope to be in a posi-tion to pronounce with complete confidence on thesematters, and it is not certain that we shall everreach this stage. Nevertheless, even now, there isa considerable body of evidence which seems toafford a presumption that causes, not dissimilar fromthe causes outlined above, have actually been inoperation.

The big collapse came in America, and it is toAmerica, and the centres most intimately associatedwith America, that we must turn if we are to discoverthe antecedents of the depression.

If we look in this direction we do certainly findmovements remarkably similar to the movements weshould expect from our theory. We saw in the lastchapter what a very considerable expansion of credittook place in the Federal Reserve System from 1925


onwards. The following chart, which exhibits bankdebits divided by bank deposits, gives a rough indi-cation of the changes in the velocity of circulationduring the same period:1

C-8-

1-4.

1926 1927 1928 1929

UNITED STATES—VELOCITY OF CIRCULATION OF BANK DEPOSITS

No doubt some of this was restricted to a very narrowfield of speculative operations—though it should beobserved that the index for the banks outside NewYork moves in the same direction as the New Yorkindex itself. But even when this has been fully dis-counted, it is evident, if we take both the increase incredit and the increase in velocity into account, thatthe increase in the effective volume of money was verygreat indeed—that there was undoubtedly a mostconsiderable inflationary movement.

The effects of this are quite evident in the marketfor common stocks. The following chart shows themovement of the prices of such securities during theperiod under consideration.2

It is not necessary to labour the point that this wasone of the most remarkable Stock Exchange booms inmodern economic history.

Expectations are not disappointed when we turn1 For the figures on which it is based see Statistical Appendix, Table 15.

2 For the figures see Statistical Appendix, Table 2.


220'

200-

180-

160"

140-

130

1OO-1926 Level

220

200

•18O

•160

-14O

12O

1OO

801925 1926 1927 1928 1929

UNITED STATES—INDEX OF SECURITY PRICES

to the sphere of production. The following chart1

shows the movement of the production of producers'goods and consumers' goods at this time. The indicesfrom which it is constructed are not by any meansall that could be desired from the point of view ofstatistical purity, but the general direction of move-ment is unmistakeable.

12O

110-

1OO-

90

120

110

1OO

9O

80

Producers' GoodsConsumers' Goods

Averagre 1925/9

80.

s1925 1926 1927 1928 1929

. UNITED STATES—INDICES OF PRODUCTION

The construction of durable consumers' goods tooshows a similar movement. The index of the value ofresidential building contracts awarded rises from 117in 1927 to 126 in 1928. It then falls off as money ratesbecome higher. In general we find all the characteristicevidences of a boom in the constructional and rawmaterial producing industries.


THE GENESIS OF THE DEPRESSION 47

Similarly, when we turn to interest rates and costswe find movements which conform to the expectationsof theory. The following chart shows movements ofshort-loan rates of interest in New York City:1

Per Cent10-

1925 1926 1927 1928

NEW YORK—CALL-LOAN RATE

1929

Statistics of costs are hard to obtain. The wage index,however, which stood at 212 in January 1925 and 221in January 1927, had risen to 227 in September 1929.Here we have just those directions of movement whichhave been explained.

It is sometimes said that the movement of wagerates is too small to have played the part here ascribedto them. This objection is reinforced by appeal to thecomparatively small increase in the figures of nationalincome recorded during this period ($79 billions to$85 billions). This seems to have little weight. This fortwo reasons. In so far as the wage index is an index ofcosts, it probably considerably under-estimates themovement. All the evidence on trade fluctuation seemsto show that, during the later phases of a cycle, costsrise faster than the movement of wage rates wouldsuggest. On the other hand, in so far as it is an index



of increased pressure at the consumption end, it mustbe remembered that it again clearly errs on the sideof under-estimation. During the later stages of theboom there seems reason to suppose that among manyclasses of consumers speculative gains were treatedas income and spent accordingly. Moreover, statisticsof national income are misleading here, since they in-clude agricultural incomes which were actually fallingduring the period under consideration. So far as manu-facturing industry is concerned there seems no reasonto doubt that, towards the end of the boom, thereoccurred an increase in costs and a considerable increaseof spending for consumptive purposes.

The one element which at first sight appears to beincompatible with the explanation we have offered isthe movement of prices. In June 1924 the level ofwholesale prices in the United States stood at 95.*In June 1927 it stood at 94. In June 1929 it stoodat 95. The price-level was almost stationary—if any-thing, tending to fall slightly. At first sight this appearsto be incompatible with the suggestion of an infla-tionary boom, and there can be no doubt that it wasthe more or less stable condition of the price-levelwhich blinded contemporary observers to the realnature of what was going on at the time. So long as theprice-level remains stationary, they urged, there canbe no fear of inflation. A little reflection, however,should show that this belief is fallacious. A stationaryprice-level shows an absence of inflation only whenproduction is stationary. When productivity is in-creasing, then, in the absence of inflation, we shouldexpect prices to fall. Now the period we are examiningwas a# period of rapidly increasing productivity. The



comparative stability of prices, therefore, so far frombeing a proof of the absence of inflation, is a proof ofits presence.

On this point the verdict of Mr. J. M. Keynes isparticularly interesting. Mr. Keynes, it will be remem-bered, was not one of those who expressed alarm atthe abundance of cheap money during the days of theexpansion. On the contrary, he was one of the chiefinfluences in the world calling for more and more cheapmoney. In the Treatise on Money, however, with cus-tomary candour, he admits having misapprehendedthe situation:

Anyone who looked only at the index of prices would see noreason to suspect any material degree of inflation, whilst any-one who looked only at the total volume of bank credit and theprices of common stocks would have been convinced of thepresence of an inflation actual or impending. For my part Itook the view at the time that there was no inflation in thesense in which I use this term. Looking back in the light offuller statistical information than was then available, I believethat whilst there was probably no material inflation up to theend of 1927, a genuine profit inflation developed some timebetween that date and the summer of 1929.x

On the existence of inflation in America during theseyears, therefore, there would appear to be substantialagreement. Would that this had been so then.

8. The inflation was not confined to America,although it was in that part of the world that some ofits most characteristic manifestations were witnessed.An enormous volume of foreign loans spread outto other centres and generated expansion there. Thefollowing chart shows the movement of capital intoGermany and the resulting credit expansion:2

1 A Treatise on Money, vol. ii. p. 190.8 For the figures see Statistical Appendix, Tables 23, 24 and 25.

E


12

I 6

* 4

£ 3

|

* 1

Gold Reserve of ReichsbankNet Capital Import

V

•I.,

...—''

= ^_^

\\\

4 5

3 |

1925 1926 1927 1928

GERMANY

1929 1930

Security prices had reached a peak in the early partof 1927 from which they were shaken by efforts on thepart of the Reichsbank to control the situation. Butthe inflowing tide of credit from the United Statesoverbore this tendency to recession. In the later partof the year they revived and remained active untilthe end of 1928, when the inflow of foreign lendingbegan to slacken. The discount rate which was 5 percent in the early part of 1927 reached 1\ per cent in thespring of 1929. Wages rose. The index of skilled wages,for instance, which was 96 in the first quarter of 1927,by October 1929 had reached a level of 104. Other seriesshow a similar movement. Here surely are characteristicsymptoms of the effects of credit expansion.1

But the expansion did not stop here. It was almostworld-wide in extent. It is difficult to compile an index

1 For further figures see Statistical Appendix, Tables 26, 27 and 28.

I l l THE GENESIS OF THE DEPRESSION 51

of world expansion. The following table, based onstatistics furnished by the League of Nations, givessome idea of the extent to which even not predomin-antly industrial countries were affected:

LOANS, DISCOUNTS AND ADVANCES OF COMMERCIAL BANKS

Country

C a n a d a . . . .A r g e n t i n e . . . .B r a z i l . . . . .

A u s t r a l i a . . . .N e w Z e a l a n dU n i o n of S o u t h Af r i ca .

192-4

100100100100100100

1929

162134151 (1928)146122181

These figures probably a little exaggerate the ex-pansion for they are "corrected" for changes in theprice-level, which fell slightly during the period. Butit is difficult to understand the frame of mind of thosewho deny the existence of a very considerable degreeof inflation.

9. But why did inflation take place?It is clear that the effects of the war and the post-

war inflation, which caused so large a proportion ofthe world's gold supply to be concentrated in NewYork, laid the foundations for the expansion. It hassometimes been said that these gold imports weresterilised. But, as we have seen, this is a complete mis-apprehension. They were made the basis of a veryconsiderable expansion.

But clearly this is not the end of the story. If welook back at the chart of credit movements in theStates which we were examining in the last chapterwe shall see, as indeed we noticed then, that the system


continued to expand in 1927-28, even when gold wasflowing out. I t is clear, too, from the velocity chart thatit was during this period that the situation got reallyout of hand. Why did this take place?

The answer seems to be that it was the direct out-come of misdirected management on the part of theFederal Reserve authorities—an error of management,however, which Englishmen at any rate have no rightto speak of with reproach, for it seems almost certainthat it was carried out very largely with the intent toease our position.

The situation seems to have been roughly as follows.By the spring of 1927 the upward movement of busi-ness in the United States, which started in 1925,showed signs of coming to a conclusion. A moderatedepression was in sight. There is no reason to supposethat this depression would have been of very greatduration or of unusual severity. I t was a normalcyclical movement.

Meantime, however, events in England had produceda position of unusual difficulty and uncertainty. In1925 the British authorities had restored the GoldStandard at a parity which, in the light of subsequentevents, is now generally admitted to have been toohigh. The consequences were not long in appearing.Exports fell off. Imports increased. The Gold Standardwas in peril. The effects of the over-valued exchangemade themselves felt with greatest severity in the coaltrade. Throughout 1926 there raged labour disputes,which were the direct consequence of these troubles—first the general strike, then a strike in the coal-fieldswhich dragged out for over six months, still furtherendangering the trade balance. By 1927 the positionwas one of great danger. International assistance was


sought. And in the summer of that year, partly inorder to help us, partly in order to ease the domesticposition, the authorities of the Federal Reserve Systemtook the momentous step of forcing a regime of cheapmoney. A vigorous policy of purchasing securities wasinitiated.

On this point the evidence of Mr. A. C. Miller, themost experienced member of the Federal ReserveBoard, before the Senate Committee on Banking andCurrency, seems decisive:

In the year 1927 . . . you will note the pronounced increasein these holdings [Federal Reserve holdings of United Statessecurities] in the second half of the year. Coupled with theheavy purchases of acceptances it was the greatest and boldestoperation ever undertaken by the Federal Reserve System, and,in my judgement, resulted in one of the most costly errorscommitted by it or any other banking system in the last75 years! . . -1

What was the object of Federal Reserve Policy in 1927? Itwas to bring down money rates, the call rate among them,because of the international importance the call rate had cometo acquire. The purpose was to start an outflow of gold—toreverse the previous inflow of gold into this country.2

The policy succeeded. The impending recession wasaverted. The London position was eased. The reflationsucceeded. Production and the Stock Exchange tookon a new lease of life. But from that date, accordingto all the evidence, the situation got completely outof control. By 1928 the authorities were thoroughlyfrightened. But now the forces they had released weretoo strong for them. In vain they issued secret warn-ings. In vain they pushed up their own rates of dis-

1 Senate Hearings pursuant to S.R. 71, 1931, p. 134.2 Ibid. p. 154.

54 THE GREAT DEPRESSION CH. m

count. Velocity of circulation, the frenzied anticipationof speculators and company promoters, had now takencontrol. With resignation the best men in the systemlooked forward to the inevitable smash.

Thus, in the last analysis, it was deliberate co-opera-tion between Central bankers, deliberate "reflation"on the part of the Federal Reserve authorities, whichproduced the worst phase of this stupendous fluctua-tion. Far from showing the indifference to prevalenttrends of opinion, of which they have so often beenaccused, it seems that they had learnt the lesson onlytoo well. It was not old-fashioned practice but new-fashioned theory which was responsible for the excessesof the American disaster.

CHAPTER IV

THE CAUSES OF DEFLATION

1. A FLUCTUATION of the kind described in the lastchapter is bound to be followed by a period of exten-sive depression. The errors of anticipation which led tothe disaster have been discovered. Adjustment mustbe made to the new situation. While this takes placesome factors of production will be unemployed, somefunds of liquid capital will be left idle at the banks.Moreover, the general shock to confidence is likely toaccentuate this process. Investors will fight shy ofactive investment. Bonds will be preferred to equities.More money will tend to be left on deposit. The comingof depression is almost certain to be accompanied bysome measure of deflation.

But, in a system undisturbed by other causes makingfor depression, there seems no reason to suppose thatthis process need go very far. The experience of similarfluctuations in the pre-war period seems to suggestthat, after a certain interval of liquidation and costcutting, business prospects will once more brightenand revival will gradually take place. In the presentdepression things have been different. Whether or notrevival is now on the way, there can be no doubt thatthe deflationary process which preceded it has beenone of quite unparalleled severity. The explanationwhich we have examined already provides an account

55


of how the slump originated. But it certainly does notexplain why it has been so severe. Our next task,therefore, is to examine this problem. What have beenthe causes of the severity of the depression?

At the outset of the inquiry, one thing is clear. Nosingle explanation of this phenomenon will be sufficient.The genesis of the slump may be traced to the collapseof a general inflationary movement which might beregarded as a single cause. But the subsequent courseof the slump has been so obviously affected by amultiplicity of influences that any attempt to bringthem under one heading must necessarily involve over-simplification. Political accidents, deliberate policies,structural weaknesses, local psychology, have all playeda part which cannot be ignored. Nor is it possibleat this stage to assign exact quantitative importanceto these influences. Who can diagnose with certaintythe relative importance of the part played by politicalpower and the part played by bad banking policy, notto mention personal dishonesty, in the causation of theGerman Banking Crisis? What weight are we to assignto the peculiar psychology of the American people,what weight to the mechanical difficulties of their debtstructure, in explaining the collapse of last spring?Clearly the time has not yet come, if it ever will, forexact assessment of exact causal priority in this his-tory. All that can be done is to ascertain the existenceof certain tendencies and to explain their mode ofoperation.

I t will be convenient to examine, first, certaingeneral characteristics of the political and economicstructure in which the dislocation took place, and thensubsequently to trace certain tendencies of policywhich have aggravated the disturbance.

iv THE CAUSES OF DEFLATION 57

2. If we look at the general circumstances of thetime in which the breakdown took place, it is notdifficult to see that the probabilities of a depressionmore severe than most were very high.

It was a time of great political unrest. The Repara-tion problem was still unsettled. The political fron-tiers of Europe, then as always since the war, werethe subject of hot dispute. Internally the variousgovernments of the ex-enemy powers maintained anequilibrium ever more perilously poised half-way be-tween democracy and dictatorship. The Germanposition was especially acute. The tide of politicalextremism, which has since overwhelmed that country,was already rising strongly. The Nazi propaganda,hitherto confined to the worst elements of the ex-military and ex-criminal classes and to a handful ofthe less responsible students, was beginning to makeitself felt in high politics. The German middle classes,bereft of their property during the inflation, theirminds besodden with the turgid anti-rationalism whichin that part of the world has for many decades passedas profundity, were apt soil for such teaching. Anyworsening of the economic situation was likely to leadto political upheaval.

All this was itself conducive to a worsening of theeconomic situation. In a world of such uncertainpolitical prospects, the prospects of enterprise werenecessarily uncertain. The distribution of resourceswas distorted by the high political risk factor. As thesituation deteriorated a vicious circle set in. The busi-ness depression reacted on politics and politics reactedon the business depression. Fears of the future set inmotion forces which brought it about that these fearswere justified. The view which ascribes the course of


the depression to fluctuations of political confidencealone, no doubt involves considerable exaggeration.But a view which takes no account of politics omitsone of the most important factors operative. The con-tinual intensification of political risk is one of thedominant features of this period.

3. But politics apart, there were certain featuresof the general economic situation which were con-ducive to severity of depression. The profound dis-locations brought about by the war, to which we havealready alluded, had not yet been eliminated. Thecapital shortage in Germany and Central Europe in-volved a dislocation of the channels of investment un-precedented in modern economic history. Never havethere existed between civilised areas such wide differ-ences of rates of return on capital. While the boomlasted, foreign lending from American and from othercentres to some extent submerged these differences.The industrial machine in Germany was attuned oncemore to relatively low rates of interest. But the mo-ment foreign loans ceased to flow in this direction thecapital shortage was once more revealed. The vastsystem of over-rationalised plant and equipment wasparalysed for want of capital. In a normal fluctuationthe probability is that the degree of error in long-terminterest rates is not more than one or two per cent. InGermany and Central Europe it was probably two orthree times this magnitude.

Beyond this, the technical changes of the post-warperiod, especially in agricultural production, had pro-duced a situation in which the incidence of industrialdepression was likely to be unusually severe. We haveseen already that it is a fallacy to regard technicalprogress in any line of industry as being likely in itself


to lead to general depression. But we have recognisedalso that if the result of technical progress in the shapeof a great fall in the prices of the products concernedwere to become manifest at a time at which otherlines of industry were depressed, there might well bean enhancement of the general difficulties. This seemsto have been what has happened. The fall of pricesof agricultural products due to technical improvementhas coincided with industrial depression, and the diffi-culties of transition have been heightened. This seemsto be the core of truth in the popular views on thissubject. It is important, however, not to press it toofar. As we shall see, there is strong reason to believethat many of the difficulties created by the positionin the markets for agricultural products are in factby-products of State policy and the peculiar natureof the boom.

4. The effects of these changes were bound in anycase to be extensive. But there can be little doubtthat the difficulties with which they have been ac-companied are, in part at any rate, a by-product ofthe weaknesses of the post-war economic structure.The effects of an earthquake are, in part, a function ofthe strength of the original shocks, in part a functionof the strength of the buildings affected. So in theeconomic system the effects of fluctuations, whethercyclical or otherwise, are in part a function of themagnitude of the original change, in part a function ofthe elasticity of the economic organisation affected.

Now there can be no doubt that, in the post-warperiod, the capacity of the economic system to sustainshocks and to adapt itself to a process of rapid changehas been seriously impaired. The essence of pre-warcapitalism was the free market, not necessarily free

60 THE GREAT DEPRESSION OR.

competition in the remote and rigid sense of the mathe-matical economists; but the free market in the sensethat the buying and selling of goods and the factors ofproduction was not subject to arbitrary interference bythe State or strong monopolistic controls. No doubtthere was some interference and some monopoly. Butthat the free market was the typical institution is notopen to serious question. Since the war it has tendedto be more and more restricted. The cartelisation ofindustry, the growth of the strength of trade unions,the multiplication of State controls, have created aneconomic structure which, whatever its ethical oraesthetic superiority, is certainly much less capable ofrapid adaptation to change than was the older morecompetitive system. This puts it very mildly. There canbe little doubt, on a broad view, that the tendenciesunder discussion, so far from facilitating change oreasing the process of transition, do indeed work in pre-cisely the opposite direction. Certainly no one whowishes to understand the persistence of the maladjust-ments of the great slump can neglect the element ofinelasticity and uncertainty introduced by the exist-ence of the various pools and restriction schemes,the rigidities of the labour market and cartel prices,which are the characteristic manifestation of thesedevelopments.

These tendencies are the creation of policy. I t issometimes thought that they are the inevitable out-come of modern technical conditions. But this is notthe case. Whether modern technical developmentsoperating in a free system would give rise to suchphenomena is a question which we may leave un-discussed. Historically, the fact is that the elements ofrigidity and instability, which we are discussing, are


the direct outcome of policy. So far in the history ofthe world cartels and labour organisations exercisingstrongly monopolistic influence have not shown them-selves to be capable of survival, save as a result ofdirect or indirect assistance from States. We have seenalready how the war-time controls fostered the growthof such bodies. The cartel systems of continentalEurope are the direct creation of tariffs and Stateintervention. The post-war rigidity of wages is a by-product of Unemployment Insurance. So, too, with thegreat restriction schemes which have exerted such in-fluence on the various commodity markets—EubberRestriction, the Brazilian Coffee Institute, the SugarControl, the Federal Farm Relief Agency, and so on.All are inconceivable without direct State intervention.Whether or not from what is called a "social" point ofview these things have been justifiable, it is not open toserious question that their existence has introduced anew instability in the economic structure, and that thishas had an important influence in the intensificationof the slump.

5. To understand completely the peculiar dangersof the economic structure in which the slump began, itis necessary to turn once more to the circumstances ofthe boom which preceded it.

We have seen already that the genesis of the slumpcan be attributed to the effects of credit expansion.But, so far, our diagnosis has been confined to thequantitative aspects of this process—to its magnituderelatively to the movement of productivity and to itseffects on industries with different investment periods.As a first approximation to the truth this procedurehas justification. Any other mode of approach wouldinvolve missing the wood for the trees—missing the


essential direction of change b y preoccupation wi thdetails of part icular movements . Nevertheless, we dowrong to s top a t this s tage—to leave undiscussed thequali tat ive aspects of the credit expansion—for therecan be no doubt t h a t they are of high relevance to theexplanat ion of the severity of the slump. The econo-mist, listening to the business man as he a t t r ibu tes thewhole disaster to this or t h a t par t icular ly monstrouspiece of financial inept i tude or business chicanery, m a ywell feel t h a t these details alone p u t ma t t e r s in a wrongperspective. Bu t he pays the penal ty of superficialityif he does no t see t h a t somewhere, somehow, t hey mus tform pa r t of the to ta l picture.

Now it is clear t h a t an inflationary boom of the kindwhich was described in the last chapter , besides havingthe quant i t a t ive effect of over-st imulating the capital-goods industries, also has the qual i tat ive effect of pro-viding a favourable a tmosphere for the fraudulentoperations of sharks and swindlers. I t is no t whenmoney is t ight , when men look twice a t each shillingbefore they spend it, t h a t the Kreugers and H a t r y s getaway with it. I t is when money is easy, when profitsseem to be there for the taking and everyone is anxiousto be in a li t t le earlier t han his neighbour. This hasbeen the case in all the major booms of history. Thebig frauds almost all have been perpet ra ted on a risingmarket.

Blest paper credit. Last and best supplyTo lend corruption lighter wings to fly,

sang Pope two hundred years ago. There is no needto multiply evidence of this influence of inflationarycredit in the boom from whose aftermath we are stillsuffering.

But there is no doubt, too, that the latest frauds


were perpetrated upon a public which had become quiteabnormally gullible. The scale of business, the air ofexpertise with which it was invested, the vast mechan-ism of the operations of high finance, were conduciveto an attitude of mind in which the possibility of fraudor serious error was disregarded. No doubt before bankshad big offices and expert advisers there was an"individualist chaos". But we had changed all that.As if the fact that a man had five telephones on hisdesk and a menagerie of tame statisticians in the cellarwas a circumstance which justified the suspension ofall the maxims of Victorian prudence! But they weresuspended, and the mistakes which Victorian prudencehad painfully learnt to avoid were committed.

But the boom was remarkable, not only for theproliferation of fashionable fraud; it was remarkable,too, for a change in the methods of straightforward fin-ancing. The history of post-war finance is marked bya conspicuous increase in the proportion of publicinvestment which takes the form of fixed debt ratherthan participating ownership. This tendency wasbound to accentuate the difficulties of any period ofdepression.

In part, the change was due to changes of bankingpolicy. The increased participation by banks in thefinancing of all kinds of enterprise created a market forbonds where equities would have been unacceptable.The big insurance companies, moreover, through whoseagency so large a proportion of the savings of thepoorer and middle classes are invested, had a preferencefor this kind of investment.

But in part it was due to the increased economicactivity of States and governmental bodies. The mostintractable and disastrous masses of fixed debt which


have obstructed recovery in the slump have beendebts of this sort. The example of Australia will befamiliar to English investors. Even more conspicuous,and much more important as an unsettling influencein the depression, are the debts of the German andCentral European States and municipalities. Of thetotal amount invested in Germany in the years 1924-1928, it has been estimated that at least 40 per cent wason account of governmental bodies. Much of this wasspent on the carrying out of works such as the con-struction of swimming-baths, the financing of housingschemes and so on, which had little prospect of beingfinancially remunerative. This was at a time whenGerman industry was still suffering from the greatestcapital shortage in modern economic history. Much ofthis money is irretrievably lost. But, because it wasborrowed by government bodies, recognition of thisfact is slow to come and liquidation has thus beendelayed. Paradoxically enough, economists who haveurged that this sort of thing has not proved its worthin practice, are often called by their opponents"deflationists".

Finally, in this connection, it should be noted thatthe easy money conditions created by the boom hadan important influence in facilitating the rise of thevarious pools and restriction schemes for agriculturalproducts to which allusion has been made already. I tis not to be thought that the Brazilian Coffee Institute,for example, would have been able to raise the colossalsums it did for so preposterous an adventure as the"valorisation" of 1927-29 in a time in which men werecareful of the way they spent their money. Nor can itbe doubted that the general inflationary conditionsof that period served to support the prices of agricul-


tural products which in more normal circumstanceswould have been falling. To that extent, therefore,the process of readjustment was delayed, and the dis-location which was eventually revealed was madegreater.

6. So far, we have done little but examine thosevarious features of the general political and economicenvironment and the internal industrial structure ofthe pre-slump period which made it likely that thebreakdown of the boom would be accompanied bymore dislocations and disturbances than have usuallyaccompanied the termination of prosperity in thepast. We have now to examine certain tendencies ofpolicy since that date which have greatly enhancedthese difficulties.

We may commence with the policy of restrictionson international trade.

The use of protective tariffs as a "cure" for tradedepression is not new. The atmosphere of trade de-pression is favourable to the adoption of panicmeasures. The interests which, in times of prosperity,find it hard to enlist support for their conspiracies torob the public of the advantages of cheapness anddivision of labour, in times of bad trade, find a muchmore sympathetic hearing. People are alarmed. Thedangers of a price-fall due to deflation blind them tothe dangers of a price-rise due to restriction. Theexistence of unused capacity makes it easy for themto believe that no diminution of the volume of exportsis likely to follow the imposition of restrictions on im-ports. As a consequence, whenever a depression occurs—that is, a general contraction of trade—there is tobe witnessed the odd spectacle of the nations of theworld zealously endeavouring to bring about a further


contraction by excluding each other's products. Inthis way arose the protective systems of the latter partof the nineteenth century. In this respect the post-war world has not been slow to continue old practices.

But it has continued them on a scale which makes allprevious trade restrictions insignificant by comparison.We have seen already the effects of this on the totalvalue of world trade—contraction to something likea third of its former dimensions. An almost equallyvivid illustration of what has happened is provided bythe following table, which shows the domestic priceof wheat in different countries in 1929 and 1932:x

Country

A r g e n t i n a . . . .C a n a d a . . . .G r e a t B r i t a i n . . .U n i t e d S t a t e s . . . .I n d i a . . . . .H u n g a r y . . . .P o l a n dS w e d e n . . . . .A u s t r i a . . . . .C z e c h o s l o v a k i aG e r m a n y . . . .I t a l yF r a n c e . . . . .

In United StatesCents per Bushel of CO lb.

January 1929

113120123121158158140137131147135192164

January 1932

4451535860608191

120121147151179

From a state of affairs in which the price differenceswere at the most of the order of magnitude of 80cents we have passed in three years to a state of affairs

1 The figures are taken from the League of Nations World Economic Survey,1931-32, p. 137.


in which they are 135 cents. In some centres the priceof wheat has actually risen. In others it has fallen byalmost 100 cents per bushel. To speak of a world pricefor wheat has now become an absurdity.

The effects of such obstructions are highly inimicalto rapid recovery. That their long-run effects are toraise prices by restriction, and to limit the division oflabour, need scarcely be argued. Only the feeble-minded and the paid agents of vested interests will befound to deny such propositions. But that their short-run effects are damaging to business improvement isnot so immediately obvious. Yet in fact it is equallycertain.

The short-run effect of the erection of obstructionsto trade is a tendency to deflation. This is perhaps ahard saying for those who have come to look at tariffsas a means of safeguarding the trade balance and soavoiding deflation. But if we look at things from theinternational point of view, it is not so difficult torealise. I t is clear that the effect of such obstructions isto destroy business capital. The effect of the curtail-ment of markets is to lower the value of stocks andof fixed capital devoted to making such stocks. Thisclearly tends to bring about forced sales and to in-crease the struggle for liquidity. At the same time,taking the world as a whole, it limits the field for theinvestment of new capital; that is to say, it lowers theequilibrium rate of interest. I t follows, therefore, thatunless money rates of interest immediately respond tothis change in the conditions of real investment, thetendency for saving to lag behind investment, alwayspresent in the first stages of depression, will be en-hanced.

There is a further effect also conducive tcr net


deflation. The erection of obstructions to trade has theeffect of enhancing the difficulties of transferring debtpayments from one centre to another. It should benoticed that the phrase used in this connection is the"erection of obstructions". It is not true, as is some-times asserted, that the mere existence of tariffs makestransfer impossible. Nothing in theory or experiencegoes to suggest that this is correct. Given time, pricesand costs in the different countries concerned can beadapted to carry through almost any degree of trans-fer over almost any degree of tariff obstacle. But if, asthe price relationships which make this possible beginto emerge, new tariffs are erected to protect thecreditor countries against the "devastating flood ofcheap imports" which are the interest on their debts,then, of course, transfer is prevented and new adjust-ments have to take place. If the new tariffs come intooperation as trade depression is developing, theprobability is that the contraction of credit which theycompel in the paying country will not be offset by anyexpansion in the receiving country. There will be anet deflation.

Now, of course, this is just what happened at thecommencement of the present depression. When theflow of foreign lending from the United States began tocease it became necessary that the various debtsowing to the United States and her citizens, whichhitherto had been re-lent, should be paid in the formof goods. But just at the same time the Congress ofthe United States saw fit to put into force that monu-ment of obstruction to trade, the Hawley-SmootTariff. There can be no doubt that the difficulties of thedebtor countries were enormously enhanced by this.As has been shown in an earlier chapter, the accusa-


tion that the difficulties of the world had been en-hanced by gold sterilisation on the part of the UnitedStates in the period 1923-29, has no foundation infact. But that the introduction of the Hawley-SmootTariff at a critical stage of the depression did muchdamage is clear.

7. It would be a great mistake, however, to at-tribute the intensification of the crisis, particularly inits earlier stages, entirely to the influence of suchobstacles. There were other policies adopted, the effectof which was no less serious.

The breakdown of an inflationary boom is a revela-tion of a wastage of capital. Large blocks of invest-ment which have been made in the expectation ofprofit now prove to have no such prospect. It follows,therefore, that if profitability is to be restored costsmust be cut and the capital resources rehabilitated.

In earlier depressions this has been the rule. Andsince the process has started quickly, comparativelylittle cutting has been necessary. But at the outset ofthis depression other measures were adopted. In theUnited States the word went forth that consumers'purchasing power must at all costs be maintained.President Hoover pledged the leaders of big industryto make no reduction of wage rates.1 Until the summerof 1930 no serious reduction of wage rates took place.At the same time special efforts were made to maintainrates of dividends for shareholders. In Germany, too,throughout 1930 wage rates were well maintained.

Now this policy was the reverse of what was needed.As we have seen already, the depression is essentiallya depression in the constructional and raw material

1 See J . Viner, Balanced Deflation, Inflation or More Depression, Uni-versity of Minnesota Press, 1933, pp. 12-13.


producing industries—a falling-off of demand forcapital goods. As will be readily seen from the theorywhich has already been developed, one way of ex-plaining the coming of depression is to say thatdemand at the consumers' end has become relativelytoo high. And, in fact, there was no deficiency ofconsumption at this period. Global statistics of con-sumption are almost impossible to obtain. But in-vestigations made by the Harvard School of Business*indicate a state of affairs which is far from suggestingthat consumers' buying was unduly slack. The follow-ing table exhibits some of the more spectacular resultswhich the Harvard enquiry brings to light:

INDICES OF CONSUMPTION IN THE UNITED STATES

(1928 = 100)

Article

Wheat flour.ButterCheeseGasoleneCigarettes .

Silks and velvets .HosieryInfants' wearPopular - priceddresses

1928

100100100100100

100100100

100

1929

100-2101-593-2

1134112-4

94-5109-8107-5

113-5

1930

101-0101-899-3

120-2112-9

98-2118-6106-8

115-3

1931

94-5104-4113-2122-8107-1

98-3138-8105-4

125-5

1932

90-0105-6107-3113-297-8

90-6137-691-4

117-7

These are admittedly strong cases. But it is clearthat in many lines, consumption in 1930 was higher

1 See Arthur R. Tebbutt, The Behaviour of Consumption in BusinessDepression, Harvard University Graduate School of Business Administration,August 1933. For the lower portion of the Table, which is based on physicalsales of department stores, see p. 15. The other indices have been calculated.


than in the boom year 1929. In 1931 it was still high.Not until 1932 when the deflation which followedthe financial crisis of 1931 had the system in its gripwas there any important falling off. This is exactlywhat we should expect from the theory outlined inChapter IV. But it is not a state of affairs whichseems to call for the action which was taken.

In fact, the result of this action was to intensify theeffects of the boom. The maintenance of wage ratesand dividends was at the expense of capital. There canbe little doubt that it was financed by encroachmenton secret reserves. But what does this mean? Simplythat the new saving of the community which takes upthe sale of securities that constitute hidden reserves,instead of constituting new demand for the productsof the capital-goods producing industries, is appropri-ated for the consumption of wage earners and dividendreceivers. Consumption is maintained at the expenseof capital. The powers of resistance of the capital-producing industries are sapped, and the struggle forliquidity is intensified. Thus, when cost cutting actuallybegan, the cuts which were necessary if profitabilitywas to be restored were very much greater and verymuch more disturbing to general confidence thanwould have been the case if the process had not beenso long delayed.

8. The policy of maintaining consumers' purchasingpower was of limited application and duration. Muchmore damaging and productive of general deflationhave been the policies adopted in regard to debts andbad business positions in general. For these have beenalmost universally adopted.

In the course of a boom many bad business commit-ments are undertaken. Debts are incurred which it is


impossible to repay. Stocks are produced and accumu-lated which it is impossible to sell at a profit. Loans aremade which it is impossible to recover. Both in thesphere of finance and in the sphere of production,when the boom breaks, these bad commitments arerevealed.

Now in order that revival may commence again, itis essential that these positions should be liquidated.There is nothing which is more damaging to confidence,nothing therefore which is more deflationary, than thepersistence on a large scale of bad business positions.They affect the whole business atmosphere. The wordgoes round that such and such a house is in difficulties.People say, "It's only a matter of time before a crashcomes. When it comes it may hit us too." Hence, evenif their own position is perfectly sound, they begin todraw in their horns to make their position more liquid.So too in the commodity markets. If stocks are hang-ing over the market, even if for the time being priceshave not fallen, people become nervous. They say,"The thing cannot last. It would be foolish to buyextensively." So hand-to-mouth buying sets in. Thefear of a break is often much worse than the breakitself.

Now in the pre-war business depression a very clearpolicy had been developed to deal with this situation.The maxim adopted by central banks for dealing withfinancial crises was to discount freely on good security,but to keep the rate of discount high. Similarly indealing with the wider dislocations of commodity pricesand production no attempt was made to bring aboutartificially easy conditions. The results of this weresimple. Firms whose position was fundamentally soundobtained what relief was necessary. Having confidence


in the future, they were prepared to foot the bill. Butthe firms whose position was fundamentally unsoundrealised that the game was up and went into liquida-tion. After a short period of distress the stage was oncemore set for business recovery.

In the present depression we have changed all that.We eschew the sharp purge. We prefer the lingeringdisease. Everywhere, in the money market, in thecommodity markets and in the broad field of companyfinance and public indebtedness, the efforts of CentralBanks and Governments have been directed topropping up bad business positions.

We can see this most vividly in the sphere of CentralBanking policy. The moment the boom broke in 1929,the Central Banks of the world, acting obviously inconcert, set to work to create a condition of easymoney, quite out of relation to the general conditionsof the money market.1 This policy was backed up byvigorous purchases of securities in the open market inthe United States of America. From October 1929to December 1930 no less than $410 millions waspumped into the market in this way. The result wasas might have been expected. The process of liquida-tion was arrested. New loans were floated. The follow-ing table shows the issues on foreign account alone inthe principal investment centres for the years 1928 to1932:2

1 See Statistical Appendix, Tables 28, 29, 30 and 31.2 This table, which relates to foreign issues in the United States, United

Kingdom, Netherlands and Switzerland, is reproduced from Timoshenko,World Agriculture and the Depression (University of Michigan, 1933), p. 625.The original data are from the German Institut fur Konjunkturforschung,with the exception of those for the fourth quarter of 1931, which have beentaken from the article by F. Sternberg, "Die Weltwirtschaftskrisis," Welt-wirtschaftliches Archiv, vol. 36, Heft 1 (July 1932), p. 131.


FOREIGN ISSUES ON FOUR SECURITY MARKETS

(In Millions of Dollars)

Period 1928 1929 1930 1931

! First quarter .I Second quarter! Third quarterj Fourth quarter

Annual Total

636-3754-9324-7386-4

584-8373-5132-0194-9

491-7727-3184-4304-0

277-0169-668-10-5

2102-3 1285-2 1707-4 515-2

It will be seen that the issues in the second quarter of1930 were of an order of magnitude comparable withthe issues of the corresponding quarter of 1928. Thismoney was not soundly invested. For the most part itwent to prop up positions which were fundamentallyunsound. The easy conditions in the money marketthen and later on made possible the carrying of stockswhich otherwise would have had to be sold off. Thefundamental causes of uncertainty and deflation werenot removed. It is clear from their magnitude that theycould not be removed in this way. The reflation merelyhelped them to persist.

But this was not all. The policy of relief was notconfined to the money markets. Everywhere theGovernments of the world, fearing the effects of abreak, intervened in one way or another to supportweak positions. We have noted already the multiplica-tion of tariffs. More direct forms of support were almostequally prevalent. The expenditure of the Federal FarmBoard, the Reconstruction Finance Corporation, therenewed support to restriction schemes of one kind oranother, are only the most conspicuous cases of a policy


which was universal. The effects we know: continuationof uncertainty, intensification of the deflation, pro-longation of the depression.

I t is important to realise the nature of this diagnosis.I t is not difficult for its critics, who are often peoplewith something to save from the wreck themselves, tomisrepresent it as a plea for bankruptcy as such. Butthis is not the case. Nobody wishes for bankruptcies.Nobody likes liquidation as such. If bankruptcy andliquidation can be avoided by sound financing nobodywould be against such measures. All that is contendedis that when the extent of mal-investment and over-indebtedness has passed a certain limit, measures whichpostpone liquidation only tend to make matters worse.No doubt in the first years of depression, to those whoheld short views of the disturbance, anything seemedpreferable to a smash. But is it really clear, in thefourth year of depression, that a more astringent policyin 1930 would have been likely to cause more dis-turbance and dislocation than the dislocation anddisturbance which have actually been caused by itspostponement?

CHAPTER V

GREAT BRITAIN AND THE FINANCIAL CRISIS

1. DEFLATION, when it springs from causes such asthose discussed in the last chapter, is likely to have acumulative influence. In the summer of 1931 the de-pression deepened into a great financial crisis, a crisisfrom whose disruptive effects the whole world is stillsuffering and is likely long to suffer. To understandthis event and its consequences it is necessary todevote some attention to the peculiar economic cir-cumstances of Great Britain. Great Britain is thestorm-centre of this phase of the depression.

2. At the outbreak of the war, Great Britain, incommon with all the other belligerent countries, aban-doned the Gold Standard. At the end of 1919 theexternal value of the pound sterling in terms of golddollars showed a depreciation of 22 per cent. Internalprices had more than doubled. Money-wages, if theyhad not kept pace with prices, at any rate had notlagged far behind.1 For a short time the inflation con-tinued. But it was not long before it was arrested. By1921 the post-war boom was at an end.

As soon as this had happened there emerged animportant issue of policy. What was to be the futurebasis of the British Monetary System? Was it to con-tinue to be inconvertible paper without a gold backing

1 See Tables 33 and 34, Statistical Appendix.76

CH. v GREAT BRITAIN AND THE FINANCIAL CRISIS 77

as it had been during the war? Or was it once more tobe linked up to gold as it was before the war? And if so,at what rate of exchange was the return to gold to takeplace? These questions were the subject of long, andoften heated, discussion.

In fact, however, there was only one question whichhad practical importance—the question of the correctgold parity. From the point of view of the historian ofthe recent crisis, nothing can be more important thanthe propaganda for a managed currency. It encouragedthe belief that the stable price-level was the be-all andend-all of monetary policy. It created an attitude ofmind on the part of the educated public which in sub-sequent years made it more and more difficult to workthe Gold Standard successfully. It led to an extrava-gant admiration of the policy of the Federal ReserveSystem at a time when the policy of the FederalReserve System was sowing the seeds of the slump.One of the main obstacles to the restoration of stablemonetary conditions at the present day is the publicopinion which this propaganda has engendered.

But from the point of view of immediate practice allthis was a side-issue. At that time the idea of a managedcurrency never had a ghost of a chance of being adoptedas a basis of policy. This for very good reasons. Thestate of the world at large was not such as to justifyhigh hopes in the ability of Governments to manageinconvertible paper successfully. All the Great Powers,save America, had gone ofl the Gold Standard duringthe war. None of them had exhibited the capacity tokeep the operation of the printing press within limits.At the time when the controversy in England was at itsheight, the standards of continental Europe were in acondition of the most violent fluctuation ever witnessed.

78 THE GKEAT DEPRESSION OH.

Trade had shrunk to a fraction of its pre-war dimen-sions. The one hope of stabilising business condit ionsseemed to be the elimination of these f luctuat ions.Gold stood for stabil i ty. The eyes of the world lookedto Great Bri ta in for leadership. Small wonder t h a tresponsible men charged wi th t he conduct of policy,a l though ignorant for the most p a r t of the profoundtheoretical s tr ictures which could have been passedupon the plan for a managed currency, t u rned a deafear to all this ta lk and resolved upon a restorat ion ofthe Gold S tandard .

B u t a t wha t ra te was i t to be restored? Were we togo back to the old Gold S tanda rd wi th the pound wor th123-27 grains of fine gold and t he dollar-sterling ex-change a t 4-86? Or were we to devaluate to restore t heGold S tanda rd a t some lower par i ty? Here was a ques-t ion of severely pract ical import . To go back to t he oldpar i ty safely involved a rise of prices in America—the leading gold centre—a fall of prices a t home, orsome combinat ion of these circumstances, which wouldbring prices and costs in Great Br i ta in and t he gold-using centres into t he appropr ia te relat ionship. Todevaluate a t t he pa r i ty of t he momen t m e a n t none ofthese difficulties—meant t he elimination of t he wait-ing period, t he avoidance of the stresses and strainsof deflation. Y e t curiously enough i t was a policywhich was hard ly discussed. I t was almost t aken forgranted that the Gold Standard should be restored atthe old parity.

Why did this happen?A combination of causes conspired to bring it about.

Sentiment played a part. It was thought to be a finething for the pound once more to "look the dollar inthe face". It was thought, too, that a return at the old

v GREAT BRITAIN AND THE FINANCIAL CRISIS 79

rate would redound to the prestige of the City and sobring international business in greater volume to thiscountry. There was some regard for the real value ofsterling debts abroad, some regard for what was thoughtto be justice to the bond-holder. Partly it was due toa belief that American prices would rise and so obviatethe need for deflation, partly to an ignorance of thedifficulties which the degree of deflation otherwisenecessary would involve. Beyond this we must notignore the confusion created by the propaganda for amanaged currency. In their eagerness to combat theviews of the advocates of paper, the protagonists ofthe Gold Standard tended to assume that there wasonly one alternative to such a system—the GoldStandard "at the old rate. In the clamour of thisdiscussion, the few voices which urged devaluationtended to pass unheard.

It is not easy at this distance of time to do fulljustice to the undoubted sincerity and public spiritof those who held these opinions. There seems littlein the argument for prestige. There could have beenlittle loss of prestige in recognising changed conditions.Nor is there much in the argument for justice to thebond-holder. The object of policy was to restore thedollar-sterling exchange to the old parity. This couldcome about by a deflation of English prices, an in-flation of American prices or an inflation of Englishprices accompanied by a still greater inflation inAmerica, etc. etc.—"justice to the bond-holder",therefore, was a highly ambiguous notion. No doubtthere was more in the argument for retaining the fullvalue of sterling debts from abroad. But it is doubtfulwhether the sacrifices here would have outweighedthe advantages of stabilisation in 1921 without the


difficulties of deflation. As for the traditional wisdom ofthe subject, had not Bicardo a hundred years beforemade it perfectly clear that, whereas to redress a 5 percent depreciation it was worth making a special effort,to redress a depreciation of 20 per cent was a gamenot worth the candle?

But restoration at the old parity was chosen.Throughout 1921 there was considerable deflation.Prices fell from 325 in April 1920 to 164 in January1922. The dollar-sterling exchange rose to 4-221.From 1922 there ensued a period of uncertainty andindecision. The British price-index remained relativelystable; it was 160 in March 1922 and 165 in the samemonth of 1924. American prices rose from 95 in thesecond quarter of 1922 to 102 in the second quarter of1923. They then relapsed to 96 in the second quarterof 1924. The exchange moved accordingly—4-44 in thesecond quarter of 1922, 4-63 in the second quarter of1923, 4-34 in the second quarter of 1924. By the middleof 1924, however, matters took a decisive turn.American prices began to rise. By the first quarter of1925 they had risen 8 per cent (from 96 to 104) whileBritish prices only rose from 164 to 169 (quarterlyaverages)—roughly 4 per cent. In the foreign ex-change markets a return to gold at the old parity wasanticipated. The sterling-dollar exchange appreciatedfrom 4-34 to 4-78.

In the spring of 1925, therefore, it was thought thatthe adjustment between sterling and gold prices wassufficiently close to warrant a resumption of gold pay-ments at the old parity. Accordingly, on April 28th,1925, gold payments were resumed. Great Britain hadreturned to the Gold Standard.

3. From 1925 onwards British industry was in diffi-


culties. Unemployment persisted at a high figure. InOctober 1924 it was 1,281,000. In the same month of1929 it was 1,254,000. The export industries werestagnant and in some instances declining. Large ex-panses of the industrial North were more severely-depressed than at any time since their rise. It is im-portant not to exaggerate the dark side of the picture*.Some industries in the South were going ahead fairlyrapidly. Others were at least holding their own. Thereal wages of those in employment rose rapidly. Butin a world in which, in most parts, trade appeared tobe very prosperous, the mediocrity of our circumstanceswas conspicuous.

Why was this? Was it the result of a return to theGold Standard at too high a parity? Or were othercauses operative?

Even to-day it is not easy to give a precise answerto this question. Broadly speaking, the various ex-planations which have been put forward do not seemmutually exclusive. Controversial discussion of thequestion of the parity has made it quite clear that toomuch weight should not be attached to precise esti-mates of the degree to which sterling was over-valuedwhen the return to gold took place. But that therewas some over-valuation seems unquestionable. Ad-mission of this, however, does not preclude appeal toother factors., the falling of! of markets in the East,competition in the European markets for coal, the riseof manufacturing industry in other countries and soon, which tended further to aggravate the position.Indeed, an eclectic view seems most reasonable. Theparity was too high. Our position in world marketsdeclined also for other reasons.

But, whatever the rights and wrongs of this most


intricate question, one thing is certain. We were outof equilibrium. And the steps necessary to restoreequilibrium were not taken.

It is quite clear that there was disequilibrium in thelabour market. During the period under discussionthe total number of unemployed never fell seriouslybelow the level of a million. It was often considerablyhigher. Now the labour market is like all other marketsin that the quantity sold—the amount of labour em-ployed—is a function of price. If the price which pre-vails is above a certain point, then the market isnot cleared—there is labour unemployed. Of coursein times of the briskest trade and the freest labourmarket there will be some unemployment due to theprocess of industrial change, just as, during the besttimes in the real estate market, there will be housesvacant due to the turnover of population. But theunemployment of the period 1925-29 considerablyexceeded the most generous estimate of the necessaryminimum of this kind. The very fact, therefore, thatthere was unemployment on this scale is a proof that,in some parts of the labour market, the rates chargedwere too high.

This is not to say, as might wrongly be inferred, thatthe total amount paid as wages was too high. Thatdoes not follow at all. There are strong reasons forbelieving that the demand for labour of the lessspecialised kind has a considerable degree of elasticity.If that is so, then a reduction of wage rates would havebeen accompanied by an actual increase in the amountpaid as wages. The main import of the diagnosis ismissed if this distinction is not observed.

Nor is it to argue that unemployment was due to apolicy of aggressive rate-raising. This may be the case


in certain instances. It is fairly clear that it was soin Germany during this period. There are other casesequally conspicuous. But in Great Britain this was notso. Wage rates in Great Britain were more or less con-stant from 1924 onwards. All that happened was that,in the face of a tendency to a decline in the demandfor labour, wage rates were not lowered. The causes ofthe change in the conditions of the market did notoriginate with the trade unions. If the analysis givenabove is correct, they originated partly in monetarypolicy and partly in changes in world markets. But theeffects on the volume of unemployment were the sameas would have been the case if they had. If the equi-librium price falls and the actual price remains un-altered, the market is not cleared.

But why was such a disequilibrium possible? In thepre-war period the persistence of unemployment atsuch a level was unheard of. The trade union per-centage of unemployed in Great Britain only exceededthe lowest point of post-war unemployment twiceduring the fifty years for which we have records. Thecause is evident. In the pre-war period the tradeunions were responsible for the maintenance of theirunemployed. If the volume of unemployment roseabove a certain point they knew that it was time toreconsider their wage policy. (We owe our excellentunemployment statistics to the care with which theywatched such movements.) In the post-war periodthey have been relieved of this responsibility by thesystem of unemployment insurance. The volume ofunemployment created by their wage policy is there-fore no longer a first consideration with their leaders.This is no indictment of the trade union leaders. Noris it, in itself, a criticism of the system of unemploy-


ment insurance. It is simply a statement of unescap-able fact. It is one of the consequences of unemploy-ment insurance in the form in which it existed duringthat period that it increased the rigidity of wages. Ina period when the equilibrium wage tends to fall thismeans disequilibrium in the labour market.

But this was not the only disequilibrium of thatperiod. It is no less clear that the money market wasin disequilibrium. We have examined the nature ofthis disequilibrium in Chapter II., when discussing thedistribution of gold. All through the period from 1925to 1929 the condition of the money market was ab-normal. The dollar-sterling exchange tended continu-ally towards the gold export point, as may be seenfrom the following figure:*

Gold Import Point

JParity /

Gold Exj ort Point

rV^y —

1925 1926 1927 1928 1929 1930

STERLING-DOLLAR EXCHANGE

1931

The net increase in the reserve from April 1925to April 1929 was about £3 millions. Duringthe same period the world's monetary resources in-creased from about £10,244 millions to about £11,201millions.

In such circumstances, as was only natural, therewas continual anxiety about foreign lending. Themarket, which in pre-war days had cheerfully carried

1 For the figures on which it is based see Statistical Appendix, Table 32.


an annual volume of anything up to £190 millions,now felt alarmed at movements less than half this sizealthough in the meantime the value of money hadfallen by 40 per cent. On at least two occasions, anembargo was placed on foreign issues by the Bank ofEngland; and rumour speaks of less public restraintswhose operation was almost continuous.

Such a state of affairs is clearly indicative ofacute disequilibrium—a condition for which, failing amiracle elsewhere, the only remedy was a contractionof credit—a contraction of credit which would bringprices and costs into such a relation with the outsideworld that the tendency to lose gold would be arrestedand the condition of stringency eased. But no suchcontraction took place. Micawber-like, the authoritiessat waiting for something to turn up which wouldavoid the necessity for this disagreeable operation,meanwhile, on occasion, taking such steps as wouldprevent the loss of gold from having any effect on themarket. "You will find, if you look at a successionof Bank Returns," said Sir Ernest Harvey, DeputyGovernor of the Bank of England, in his evidencebefore the Macmillan Committee, referring to anoccasion of this sort, "that the amount of gold wehave lost has been almost replaced by an increase inthe Bank's securities." Such a policy was bound toperpetuate the trouble. If, as gold flows out, credit isnot contracted, then the occasion for the gold flow isnot removed. The monetary reformers who, duringthese years, complained so bitterly that the Bankwas deaf to their teaching, complained too much.Unostentatiously, without any public repudiation ofGold Standard practice, the Bank was following theirpolicy.


It is clear that in such conditions the persistenceof disequilibrium was almost inevitable. The initialoccasion of disequilibrium, the precise weights to beassigned to the over-valuation of 1925, and to theadverse market conditions subsequently operative,may still be the subject of dispute. But the persistenceof disequilibrium, however occasioned, is only to beexplained as a failure of the internal mechanism toadapt itself to changed conditions—a failure whichwas due to the factors we have examined, a wage-level which was rigid and a credit mechanism whichdid not contract. Great Britain was not the onlycountry to stabilise her exchange at the pre-war level.But, as Mr. Loveday has shown in an essay whosemain findings are not open to serious question, shewas the only country to fail to recover from sucha policy. The following table, taken from this essay,shows the percentage movement of the gold value ofexports of those European countries which re-estab-lished the pre-war level of their currencies:1

GOLD VALUE OF EXPORTS—PERCENTAGE MOVEMENT

Country

United Kingdom .DenmarkNorwaySwedenSwitzerland .Netherlands .

1913

100100100100100

1924

1384194142153146100

1925

146221184167148114

1926

124216174174133110

1927

135226173198146120

1928

137241176193154126

1929

136-6251194221151126

(The figure for the first year during the whole ofwhich the exchanges were at par is printed in italics.)

1 See Loveday, Britain and World Trade, London, 1931, p. 158.


It will be seen that of the countries concerned onlythe United Kingdom failed to recover a level of ex-ports at least as high as that prevailing before therestoration of the old parity. As Mr. Loveday con-cludes, the restoration of the old parity was moredetrimental in England than elsewhere, "because othercountries made the necessary adjustments to theirwhole machinery of production and we did not".

4. There was no boom in Great Britain. There wererepercussions of the boom which was taking placeelsewhere but no direct inflationary disturbance.1 Inconsequence, the direct impact of depression waslighter. The slump, when it came, revealed no suchgross internal mal-investments as were generally re-vealed elsewhere. The effects of the slump showedthemselves in the first instance far more in a falling-off of demand from countries where the boom hadbeen rampant than in any grave internal maladjust-ment. This showed itself in the statistics. The Boardof Trade Index of Production for the third quarterof 1930, for instance, shows a decline of 10 per cent.In Germany over the same period there was a declineof 20 per cent; in the United States of America adecline of 23 per cent. The increase of unemploymentbetween September 1929 and September 1930 showsa similar tendency. In Great Britain it increased 82per cent and in Germany 116 per cent. Although noaccurate information is available regarding unemploy-ment in the United States, there is a consilience ofevidence that the position of Great Britain in the

1 It should be noted that this is not in the least in conflict with the viewexpressed in the last section that the price structure was in an inflatedcondition compared with the equilibrium level; nor with the view expressedin an earlier chapter that British disequilibrium was indirectly responsiblefor some of the inflation elsewhere.


slump, in respect of production, was perceptibly lessbad than that of many other countries.

None the less, viewed as a whole, it was a positionof great danger. We have seen already how insecurewas the general position of London as a centre ofworld finance during the preceding period of prosperity.In the slump this insecurity was enhanced by theoperation of a new factor. Hitherto there had beena certain reserve margin of safety in the magnitude ofthe volume of interest on investments overseas. Solong as this continued to mount from year to year,the diminution of overseas lending which could bebrought about by a rise in the discount rate could betrusted to restore for the moment the conditions ofsafety for the Gold Standard. This reserve was nowto be depleted. The coming of depression in the landsin which British capital had been invested led to afalling-off of dividends. As it deepened, there was adecline in other more dependable receipts due tothe suspension of debenture interest and default ongovernmental obligations. In 1929 the estimated netincome from overseas investment was £250,000,000;in 1930 it was £220,000,000; in 1931, £165,000,000.In the same period, exports fell from £729,000,000 to£389,000,000 and shipping earnings from £65,000,000to £30,000,000.* Clearly, unless steps were taken toremedy the local disequilibrium, the maintenance ofthe Gold Standard by Great Britain was likely to bea matter of increasing difficulty.

5. The difficulty thus created would have been greatenough in the case of a subsidiary monetary system. I twas increased beyond all comparison by the specialcircumstances of London as a world financial centre—

1 See Table 35, Statistical Appendix.


by the presence of unusually large volumes of foreignbalances liable to be withdrawn at very short notice.

The presence of these balances is to be attributedto a variety of causes. Monetary stabilisation in con-tinental Europe had, in many cases, resulted in theestablishment, not of independent Gold Standards ofthe British pre-war type, but of what were known asGold Exchange Standards—currency systems in whichthe reserve of the Central Bank concerned consistednot of gold itself but of titles to gold held in anothercentre, such as London or New York, where gold wasfreely obtainable. The saving in expense of such ar-rangements was obvious, for the reserves so held wereremunerative. But they tended to the erection of acredit structure larger than would otherwise have beenpossible and they concentrated the risk of withdrawalon the few main centres on which they depended.London was the chief of these centres, and in theperiod after 1925 a large volume of balances wascontinually held in London on foreign Central Bankaccount.

Such balances were a normal feature of the post-war monetary system. Had that system persisted theywould necessarily have persisted with it. There wereother balances, however, whose presence was not sonormal. In the period from 1924 to 1926, when theFrench franc was depreciating and its future was highlyuncertain, large volumes of French funds were placedfor safety in this country. When the franc was stabilisedthese funds were not immediately repatriated. TheFrench banks, into whose hands these assets graduallydrifted, retained them in London to take advantageof the higher rates of interest there prevailing. It issaid that, in times of difficulty, appeals were made


that they should not be withdrawn too quickly. Theseappeals were not unsuccessful. In this way there re-mained right up to the crisis of 1931 an unusuallylarge volume of French money on short loan in theCity.

Beyond this, there was a miscellaneous volume ofinternational money whose presence was to be ex-plained partly in terms of straightforward commercialand financial convenience, partly, however, in termsof the peculiar circumstances of the post-war capitalmarket. There seems little doubt that, since the war,there have existed very abnormal conditions in theEuropean capital market. The supply of short-termfunds relatively to the supply of money for long-terminvestment has been much greater than in the pre-warperiod—a condition which has been reflected in therelation between short- and long-term rates of interest.This has been due to many factors. Partly it is to beexplained in terms of political risks which have scaredthe investor from certain forms of long-term invest-ment; partly in terms of the provision by Governments,especially by the British Government, of short-termsecurities and bills which were thought to provideimmunity from the risks of other forms of investment.Nor must we overlook, in this connection, the funda-mental fact of the British international trade dis-equilibrium, whereby the chief European centre forlong-term lending was chronically prevented from dis-charging its function of providing for the world at largean ample stream of foreign securities for long-terminvestment. But whatever the cause, in particularinstances, the net effect was the same—an abnormallylarge fund of international short money flitting fromone centre to another according to the variations in


local conditions of risk and opportunities of profit. Inthe days before the crisis London was the habitationof a large proportion of this fund.

Now the presence of all these balances was not initself a bad thing for the City. To judge from thelanguage which was sometimes used when the abandon-ment of the Gold Standard had deprived such balancesas remained of 25 per cent of their value, one wouldthink that they had been accommodated here solelyfor charitable reasons. That was certainly not the case.They were a source of very considerable profit. Butat the same time they were a source of considerabledanger. If, at any time, confidence in London wasshaken, a sudden withdrawal would lead to a verygrave crisis.

6. The crisis came. Throughout the years since thewar, the inhabitants of the Kepublic of Austria hadbeen gradually consuming their capital. The tradepolicies of the secession States had limited the Austrianmarkets. The economic policy of successive Austriangovernments and the Viennese municipality acceleratedthe process which the Paris Settlement had begun.From 1913 to 1930 the value of the Austrian industrialshare capital situated in the present Austria shrank toa fifth of its former dimensions.1 The expenditure ofthe Viennese municipality on its housing programmealone since the Armistice exceeded the total value ofthe capital of all Austrian manufacturing joint-stockcompanies.2 In the year 1931 it was calculated thatif all the undertakings in Austria were to be sold atthe value of their Stock Exchange quotation for the

1 The figures are given in an article by Dr. Oskar Morgenstern in the Zeit-schrift fur Nationalokonomie, Bd. iii. pp. 251-5.

2 See Hayek, "Wirkungen des Mietzinsbeschrankungen," Schriften desVereinsfiir Sozialpolitik, Bd. 182, p. 265.


autumn of that year, the proceeds would not coverone-half of the public expenditure for a single year.

No financial system could stand such a strain as thiswithout collapse. One by one, the financial houses inVienna put up their shutters. The slump intensified thecapital consumption. Early in May 1931, the KreditAnstalt, which had taken over the bad debts of itspredecessors, announced that it could not meet itsliabilities. The actual smash is sometimes attributedto the political tension aroused by the untimely pro-posals for an economic Anschluss between Germanyand Austria. Whether this is so or not, there can beno doubt that the ultimate cause of the difficulty wasthe capital consumption of the years which had pre-ceded it.1

The collapse was the beginning of a world-widefinancial crisis. The process of deflation analysed in anearlier chapter, together with the growing politicaltension which accompanied the rise of Hitler, had pro-duced a situation of extreme peril in Germany in par-ticular. The German banks, weakened by practiceswhich for years had been the admiration of foreignfinancial experts—active participation in industrialfinancing—and honeycombed with the jobbery andgraft characteristic of the Kreuger period, were in noposition to stand a run. A run developed. Americanand French creditors hastened to withdraw theirbalances from Berlin. Domestic withdrawals began on

1 On the whole Austrian episode, to which much too little attention has beengiven in English-speaking countries, the important paper by Mr. NicholasKaldor on "The Economic Situation of Austria", Harvard Business Review,October 1932, should be consulted. Austria is the classical example of howthe various policies now being vigorously introduced into this and othercountries actually work out in practice. The contention that it is all the re-sult of the Peace Treaties does not bear examination. The Peace Treatiesdid much. But much, too, is the result of policy.


a large scale. Feverish attempts were made on all sidesto arrest the rot. The Hoover moratorium was the mostconspicuous. But in vain. On the morning of July 13th,the Danat Bank closed its doors, never to be reopened.The next day all banks in Berlin, save the Reichsbank,were closed by decree.

The crisis in Berlin was bound to have serious reper-cussions in London. The London bankers, drawingupon the ample supplies of international short moneyat their disposal, had made liberal advances to Germanbanks and industry. When the run developed they hadbeen slow to follow their American and French col-leagues in withdrawing their advances. When thesmash came and the Berlin banks were closed, there-fore, their German assets were frozen. Importanthouses were believed to be heavily committed. Theforeign creditors of London became nervous for thesafety of their sterling assets. There began a run onsterling.

How far these fears would have gone had confidencein London otherwise been general it is impossible tosay. But there existed no such confidence. For years,Continental opinion had been coming to the view thatthe British system was dying of ossification. The in-flexibility of the wage-level, the drain on the Govern-ment finances of the colossal expenditure on un-employment relief, the incessant propaganda for cheapmoney, were widely noted. Englishmen travelling onthe Continent in those years speedily became awarethat, from the European point of view, these were theconspicuous features of the economic position of GreatBritain. Rightly or wrongly, the Continent had cometo the conclusion that if serious strain were to occurthe adjustments necessary to remain on the Gold


Standard would not be made. The rejection by all threeparties of the recommendations of the interim reportof the Royal Commission on Unemployment Insuranceonly confirmed this opinion. The publication of theMay report served to communicate something of thisalarm to Englishmen. The run on sterling was intensi-fied. Apprehension became general.

In these circumstances the measures taken to meetthe crisis were not such as to restore confidence. Indeed,so far as foreign opinion was concerned, they onlyserved to weaken it. Large sums were borrowed fromFrance and the United States in the a t tempt to staveof! disaster. Now there was very good warrant in earlierfinancial history for the adoption of such a measure.I t was not the first t ime tha t the Bank of Englandhad had resort to foreign borrowing when faced withfinancial difficulties. The immense resources of theBank of France traditionally constituted a reserve lineof defence when London was in difficulty. But therewas this difference: in earlier crises the borrowing hadbeen accompanied by high rates of discount. On thisoccasion the rate never rose above 4 j per cent. More-over, there was made permissible an increase in thefiduciary circulation.

If we are to understand the Continental point of viewthe significance of these facts cannot be overstated.Ever since the war, British financial experts had beentravelling round Europe saying to distressed Govern-ments: "You must put up your bank rate and you mustlimit your fiduciary issue. Anything else is bad finance."And now when the British crisis arrived we wereobserved to do neither of these things. The bank ratewas kept low and we raised the fiduciary limit. I t issaid tha t the circumstances were different, tha t the


functioning of English institutions is exempt from thecriteria which Englishmen frame for the judgment ofother people's policy. But it is scarcely to be wonderedat that other people do not understand this; and thatthe foreigner, still smarting from the lessons of domesticinflation, thought that what was sauce for the goosewas sauce for the gander, and continued to withdrawhis money.

It is sometimes urged that if the bank rate had beenraised it would only have made matters worse. Peoplewould have said, "The crisis is really serious now",and would have withdrawn their money all the morequickly. It is not easy to see sufficient reason for thisview. There may have been some who were unawareof the gravity of the crisis. If there were, it is con-ceivable that a rise in the bank rate would have rousedtheir apprehensions. But it is difficult to believe thatsuch were in a majority either as regards numbers oras regards possessions. The Continental holders ofbalances knew that the situation was grave. That waswhy they were withdrawing their money. And one ofthe main reasons why they thought it to be grave wasthe belief that steps would not be taken to raise therate and contract credit. It is hard to believe that,if they had seen such measures actually taken, theywould have been made more apprehensive. No doubtmuch would have depended upon the time at whichthese things were done. It may well be that, by theend, the situation had become uncontrollable. But if atthe time when foreign assistance was first sought therehad been a stiff rise in the rate, it is at least arguablethat it would have been effective. The foreign creditswould then have appeared as a mass de manoeuvreavailable for meeting bear attacks in a manner with


which M. Poincare had made Continental operatorsfamiliar. As it was, they must have appeared merelyas a means of avoiding credit contraction. Hence theyactually functioned merely as a means for the safe re-patriation of foreign capital.

A new Government was formed. The Budget wasbalanced. But there was no rise in the bank rate. Therun continued. The last straw was a rumour of a navalmutiny, greatly exaggerated in the Continental news-papers. On September 21st, the right to draw goldfrom the Bank of England was suspended. GreatBritain had left the Gold Standard. To the end therate of discount was 4 | per cent.

7. Thus ended the post-war Gold Standard as aninternational monetary system. From this momentthe world was broken up into a series of competinglocal monetary areas, some still on gold, some pursuingdifferent policies of their own. Before dealing withthese it is worth while looking back for a moment atthe period which had thus ended, and trying to get itsmain lessons in proper perspective.

The post-war monetary reconstruction was not asuccess. Its stability was never great and it ended inchaos. It is often said that this failure was inherent inits nature—that the experience of these years showsthe Gold Standard as such to be a generator of in-stability. It was on the Gold Standard that the Ameri-can boom was generated, it is urged. It was adherenceto the Gold Standard which was responsible for theeconomic difficulties of Great Britain. It was the GoldStandard which engendered this great mass of floatingbalances which eventually brought the whole structureto disaster. Experience is conclusive against the GoldStandard.


But, if the analysis of the present and earlierchapters is correct, this conclusion is unwarranted.For none of these difficulties can the Gold Standardas such be held responsible. The American boom, aswe have seen, was generated on a declining goldbasis. The English disequilibrium was the result ofthe choice of a wrong parity and of failure to con-form to its requirements. The floating balances, in sofar as they were a special danger, were the productpartly of the instability which preceded the restorationof the Gold Standard—the flight from the franc—partly of the persistence of the British disequilibrium.In so far as the disaster of this period is to be attri-buted to monetary causes, it was not conformity tothe logic of the Gold Standard, but rather disregardof this logic, which was at the root of the trouble. Itwas not the Gold Standard as such but rather the wayit was mismanaged, and the peculiarly perilous natureof the environment in which the mismanagement tookplace, which was the cause of the difficulty; not theGold Standard, but the choice of a wrong parityand the attempt to work the Gold Standard onmanaged currency lines, which were responsible forthe debacle.

There are, however, certain positive lessons whichflow from this recent experience. Two in particularare conspicuous.

In the first place, it is clear that monetary disturb-ances are likely to be much more severe than wouldotherwise be the case if they are accompanied by inter-national disequilibrium. Booms and slumps are likelyto take place as a result of monetary causes—in thesense defined above—under almost any system, butthey are likely to be much more severe if they are the

H


outcome of the failure of the leading monetary centresof the world to keep properly in step with one another.I t is almost certain that the extravagance of theAmerican boom was, in part at any rate, a by-productof the British disequilibrium. If we had been in equi-librium with the rest of the world it is still unlikelythat the boom would have been avoided; but it is alsoimprobable that the peculiar distortions which accom-panied it would have been present, nor would theposition during the slump have been latent with suchexplosive properties.

I t follows therefore that, if relative stability isdesired, international equilibrium is a major objectiveof policy. But—and here is the second lesson of thisexperience—it is clear that this international equi-librium cannot be secured under the Gold Standardunless the authorities in the various monetary centresare prepared to work the Gold Standard on GoldStandard lines. That is to say, they must be preparedto allow the gold movements to produce their fulleffect through the whole system. You cannot work alocal Gold Standard on "managed currency" lines.1

This is made abundantly clear by British experience.No one will wish lightly to pass adverse judgment onthe eminent and disinterested men who gave suchunremitting labour to the conduct of the monetarypolicy of Great Britain during these troubled times.Viewed even from the distance of two short years, thewhole episode assumes more and more the aspects ofa tragedy, a tragedy in which judgments of praise orblame are equally inappropriate. But in respect of theactual implications of the policy they pursued, the

1 This does not in the least preclude concerted measures throughout theworld to damp down general fluctuation. See below, pp. 169-172.


verdict of Sir Josiah Stamp, himself a director of theBank of England, must be taken as final:

The charge often made by continental writers that theresponsibility ior working the gold standard throughout theindustrial organism was not recognised, must be admitted tobe in part true. The gold standard certainly presupposes thatthe flow of gold to balance international trade must work outits effects in raising and lowering costs; otherwise that standardis meaningless. The gold was flowing for political reasons andother reasons that were artificial compared with the balance oftrade, and every effort was made to prevent wages and othercosts rising and falling. The natural reactions of the goldstandard were, therefore, denied—denied no doubt, or pre-vented, in self-protection, but all the same having the effectsof prevention in destroying the self-balancing qualities of thegold standard.1

This is a hard saying, and its implications are evenharder. Rigidity of costs is inimical to the successfulworking of an international standard, and for thisreason many have been led to seek relief in the deviceof independent national currencies. Before we canpass judgement on plans of this sort, however, we mustexamine their operation in practice. But this leads tothe subject of the next chapter.

1 Economic Essays in Honour of (Justav Casscl, p. GO I.

CHAPTER VI

INTERNATIONAL CHAOS

1. THE abandonment of the Gold Standard by GreatBritain meant the end, for the time being at any rate,of the international monetary system. Henceforwardthe course of the depression in different centres variedwith the fortunes of the local monetary system, thedisunity itself giving rise to new complications anddisturbances. It is the task of this chapter to outlinethe most conspicuous features of this period of mone-tary chaos.

2. It is convenient to start with Germany. For thecrisis first became acute in Germany. And there arecertain special features of the German situation whichare deserving of separate comment.

The Germans did not abandon the Gold Standard.Officially at any rate, when the Berlin banks werereopened, the mark was still on a gold basis. For thisthere were obvious reasons. The memory of inflationdies hard. At the first sign of an official abandonmentof the Gold Standard there can be little doubt thatthe mark would have become almost worthless. Thepopulation to a man would have sallied into the shopsand bought anything rather than keep money. Therewould have been a flight into commodities.1 It is said

1 Whether this would happen now if Unser Fuhrer in his wisdom decidedto pnt Dr. Feder's plans into operation, is another question. Perhaps inflationis only conceived to be possible when there are Jews about. When there aregood Aryans behind the counter prices do not rise!

100

CH. vi INTERNATIONAL CHAOS 101

that agreements existed between the big concerns andthe trade unions that the moment the mark ceased tobe on a gold basis all dealings should be calculated indollars. No doubt this sounds childish to Anglo-Saxons,who do not know yet what a major inflation is. Butthe burnt child dreads the fire.

Moreover, quite apart from this psychological ob-stacle there were stubborn mechanical reasons why adepreciation wras not thought to be advisable. Theoverwhelming proportion of the German debts werecontracted in gold terms. A depreciation of the ex-change would have had the effect of increasing theburden of interest. In those days, at any rate, thereseems every reason to suppose that the Germanauthorities honestly intended to make every effort intheir power to continue paying their debts. Theylooked forward to a time when new credits might bedesirable. They entertained no desire for retreat into acomplete state of self-sufficiency. In such circum-stances, and with such objectives, an abandonment ofthe Gold Standard would have only increased theirdifficulties.

But the Gold Standard was not maintained in sub-stance. The facade was there. But the machineryceased to function. To maintain this facade there waserected the most formidable apparatus of exchangecontrol yet known to economic history. The accu-mulated knowledge of the inflation period was mus-tered in the Reichsbank to elaborate a mechanismwhich should make unofficial dealing in foreign ex-change, if not impossible, yet so hedged about withpenalties and inspection as to reduce it to what haveprobably been smaller proportions than those pre-vailing at any earlier period. It is not impossible to


get money out of Germany on a small scale. But large-scale evasion of the control is said to be almost out ofthe question.

Now it may be possible to control the exchange bymeasures of this sort. But it is not possible to controlthe number of bills coming forward. That is a matterwhich depends upon the volume of transactionseffected. And it is the paradox of measures of thissort that the more efficient they are from the technicalpoint of view, the more inimical they are to therestoration of trade equilibrium. As an emergencymeasure against a flight of capital caused by purelypolitical disturbances they may on occasion be effect-ive, though it is arguable that there are almost alwaysalternative measures which would meet the situationmore efficiently. But as a cure for less transitory dis-turbances, be it an adverse turn of the terms on whichthe country in question can do trade or a change ofdisposition on the part of domestic and foreign capi-talists in regard to the location of their investments,they tend to be self-frustrating. By keeping up the rateof exchange and apparently obviating the necessityfor credit contraction, they prevent that expansion ofexports which is necessary to restore equilibrium. Andthe longer such restrictions last, the more rapid is therate of accumulation of deferred payments. Sooner orlater the controlling authorities are forced to take othermeasures—repudiation of foreign debts, surreptitioussubsidies to export and so on. The exchange controlin Germany has been more efficient than anythingof its kind before, and at the outset the case forits imposition must have seemed almost overwhelm-ing. But it is no accident that German exports havelost ground and that the position of the foreign debtors

vi INTERNATIONAL CHAOS 103

of Germany to-day is less hopeful than at any timebefore.1

The situation in Germany was moreover compli-cated by the peculiar arrangements made with foreigncreditors. In return for exchange control and certainguarantees about internal repayment, the foreigncreditors of Germany undertook not to attempt towithdraw their advances. No doubt it was an ad-vantage to the monetary authorities in Berlin to beimmune from attempts at withdrawal. But the strictcontrol of exchange which such agreements necessi-tated, still more the working of the arrangements asregards repayment, were a highly dubious benefit.Funds which would otherwise have left the countryaccumulated in the blocked accounts, producing a stateof false liquidity peculiarly damaging to money ratesas a guide to rational investment. The insistence of theforeign creditors that they should share in all repay-ments by home debtors produced a situation in whichhome debtors were even compelled by the banks todefer the repayment of credits in order that the volumeof foreign repayments might not be "unduly" aug-mented. The result was naturally an almost completeparalysis of investment of any kind —a paralysis whichwas all the more damaging in that it hit sound con-cerns even more severely than the unsound. Concernswhich could have repaid all that they owed wereprevented from doing so. Concerns which had no hopeof repaying were kept alive. The result was, as mighthave been expected, deflation and an intensification ofthe depression.

1 It is perhaps worth noting that this diagnosis is not a case of wisdomafter the event. The substance of this section is adapted, with very littlealteration, from a memorandum written in conjunction with a friend forprivate circulation in the early summer of 1932.


The whole episode is peculiarly instructive. Ittypifies in a particularly vivid way that new mode ofdealing with economic diseases to which allusion wasmade in an earlier chapter. The fact is that much ofthe money advanced to Germany was lost, and lostirretrievably. The right way to have dealt with sucha situation was to have recognised this—to have ex-amined each case on its merits, to have wound up thebad concerns, written off the bad debts and startedanew on a fresh basis. But this was not done, and hasnot been done even now. Instead, a system waserected which treated good and bad debts indis-criminately, and perpetuated a state of uncertaintyand maladjustment in the capital market which hadthe effect of causing still further deterioration in thegeneral economic position.

In all this the foreign creditors were by no meanswithout responsibility. No doubt the breathing-spacethus afforded gave certain influential houses whichhad over-lent, the opportunity of retrenching in otherdirections and steadying their position. But the safe-guarding of the credit of individual lenders, howeverimportant, seems a high price to pay for a prolonga-tion of the general paralysis which was probably theimmediate occasion for political changes which havealready destroyed all Liberal institutions in Germany,and may yet be responsible for even graver politicalcomplications.

3. The abandonment of the Gold Standard byGreat Britain was attended by no internal disaster.Having kept the bank rate at 4 | per cent when theywere struggling to keep on the Gold Standard, theauthorities decided that it was worth while puttingit up to 6 per cent now we were off. This obviated any


immediate danger of inflation and tended to restoreconfidence. By February it was thought safe to lowerit to 5 per cent and henceforward by stages to 2 percent at the end of June. The dollar-sterling exchangerapidly fell to about 3'85, and later in the year itmoved down to a lower level in the neighbourhood of3-40. But for reasons which we shall have occasion todiscuss later on, there was no great rise in prices.In September 1931 the level of sterling prices was 99.Three months later (December 1931) it was 106. FromSeptember 1931 to September 1933 it only movedbetween 99 and 103.1

But what of the external position? How did thechange affect Great Britain vis-a-vis the rest of theworld? This is a matter of some complexity which it isnecessary to examine carefully.

In foreign eyes the abandonment of the Gold Stan-dard by Great Britain was the equivalent of default.In less troubled times the loss of prestige would havebeen enormous. The chief centre of internationalfinance was not paying twenty shillings in the pound.It is important not to under-estimate the effects of allthis on the absolute level of confidence throughout theworld. We may be quite sure that in future banks andfinancial institutions will be much less willing to holdbalances in foreign centres. The restoration of theGold Standard on Gold Exchange Standard lines willbe a matter of much greater difficulty than it wasbefore. For good or for bad, the tendency for eachCentral Bank to accumulate its own reserves of goldhas been immensely strengthened.

But actually the relative position of Great Britainhas not suffered greatly. Once off the Gold Standard,

1 Board of Trade Index (1913= 100). See Statistical Appendix, Table 5.


the policy of the Treasury and the Bank has been oneof great prudence. The Budget has been balanced. Theexpansion of credit has been kept within limits. I t istrue that they have refrained from taking any stepstowards a return to gold when it has been arguablethat such steps would have contributed greatly to astabilisation of world conditions. They have left therest of the world in great uncertainty concerning thefuture of sterling. But in the face of what at times hasbeen an almost overwhelming pressure to indulge ininflationary experiments, they have pursued a policyof solvency and restraint. Moreover external con-ditions have altered. As the result of causes, whoseoperation we shall examine later, the position of otherfinancial centres has weakened. A balance in London,although exposed to the fluctuations of the sterlingexchange, has on occasion seemed relatively saferthan a balance in most other centres—a pis alter nodoubt, but, so far as the relative strength of sterlinghas been concerned, effective for all that.

The fall of the exchange meant a diminution ofpower to buy foreign products. I t is true that, in theevent, the prices of some foreign products fell so thatthe absolute volume of such products purchasablewith a pound sterling was not greatly diminished. Butit is clear that it is less than it would be if the rate ofexchange were higher. No one who has had occasionfor foreign travel in the last two years will deny a notinconsiderable impoverishment.

In the same way it has involved a relative shrinkagein the real value of all debts owing to Great Britain andpayable in sterling. This is a sacrifice inevitably boundup with the abandonment of the Gold Standard, yet inno way contributory to the solution of the problem


which the abandonment of the Gold Standard may beregarded as an attempt to solve. To relieve the over-valuation of the pound and to get into internationalequilibrium it was necessary either to reduce costs orlower the exchange. The fall of the exchange viewed inthis light is simply an automatic instrument for reduc-ing the price of exports and the power to buy imports.But whereas the direct reduction of costs would haveleft the real value of our sterling assets unaffected, thefall of the exchange has also the effect of surrenderingpart of such assets. It may be argued that default onsuch payments was inevitable with the exchange at itsformer level, and that the fall in the exchange maytherefore be regarded as a rough-and-ready arrange-ment with our debtors. It is certainly true that it haseased the position of such people and, to that extent,may even have been conducive to their recovery. Butit is open to the objection applicable to so many of thepolicies of the slump that it sacrifices good debts alongwith bad, and most certainly sets a precedent likely tobe damaging to the prospects of prudent internationallending.

But it is a relief from over-valuation. Here too itmay well be objected that it is a crude method ofdealing with a very complex question. As has alreadybeen emphasised, the maladjustments which were re-sponsible for the disequilibrium in Great Britain werenot of that simple order which would be typified by astate of affairs in which all money incomes were acertain percentage too high. They were much morecomplex than that. The fundamental obstacle to thesmooth working of the equilibrating forces was not theheight of the various cost items but their rigidity. Thedepreciation of the exchange removes none of this. It


applies a crude cut to the gold value of all sterlingincomes. It leaves their relations unaltered and theirrigidity unaffected. Indeed it sets a certain seal ofinviolability on such arrangements. If we were preparedto abandon the Gold Standard with all the fatefulconsequences which that involved, rather than changenominal incomes, under what circumstances would suchchanges be deemed obligatory? Yet it is improbablethat the necessity for adaptation to external changeceased in 1931. We may yet pay dearly for our refusalto adopt what from the internal and short-run pointof view may well seem to have been the harder alter-native.

None the less, the fall of the exchange was a definiterelief. By itself it did not, and it could not, remedy theinternal disequilibrium—the maladjustment betweendemand for and supply of the various kinds of labour,and the many other circumstances making for lack ofprofits and depression. But it did mean that no longerwere the export trades to struggle against the burdenof an exchange out of relation to a level of costs whichseemed unyielding. It did mean that, in so far as theinternal disequilibrium was conditioned by externalfactors, its occasion would be removed. It meantfurther that, in so far as the exchange fell below itsequilibrium point, for the time being it conferred onBritish exporters a comparative, though of coursenecessarily transitory and in part self - frustrating,advantage.

How far this happened it is quite impossible to saywith any great degree of precision. We do not know thedegree of over-valuation which existed when the GoldStandard was abandoned, and we cannot know howthe equilibrium relationship has changed since that


time. The purchasing-power parity of the foreign ex-changes is essentially a doctrine which is only capableof affording quantitative guidance when few elementsin the situation are changing. But this has not beenthe case in the period under discussion. The wholeframework of international trade has undergone, as itwere, a continuous earthquake. The changes in thechannels of trade have been so multitudinous that wecan really form no precise idea of the probable volumeof trade in more settled conditions. Moreover, the price-changes to which we refer in any attempt to ascertainthe changes in the purchasing-power parities are them-selves of a kind which is highly unstable. There can beno doubt, as we shall see in detail later on, that somepart, at any rate, of the fall in gold prices during thisperiod is to be attributed to the effects of the fluctua-tions in the exchanges. What value, then, can be attri-buted to it as a measure of the change in exchangerates which might be expected if exchange rates wererelatively stable?

Nevertheless on the crudest tests a considerabledegree of under-valuation seems probable. If we assumethat the dollar-sterling exchange was 10 per cent over-valued at the time of the departure from gold, theequilibrium rate would have been in the neighbourhoodof 4-42. The actual rate in the next four weeks was inthe neighbourhood of 3-90. By October 1932 goldprices had fallen from 70 to 64, while sterling priceshad only moved from 104 to 101. This means a lower-ing of the purchasing-power parity calculated on thisbasis from 4-42 to 4-16. But the actual exchange stoodat about 3-40. This probably greatly under-estimatesthe true under-valuation. A tariff had been imposedon the importation of goods into Great Britain. This


must have had the effect of a not inconsiderableraising of the equilibrium exchange rate. Moreoverthe level of gold prices was clearly abnormal. Givengreater stability of conditions it was bound to recoverconsiderably. This diagnosis is in conformity withwhat appears to be the common experience of mer-chants and travellers. The fall in the exchange madesterling abnormally cheap.

But there was no immediate response in the figuresof external trade. In October 1931 British exportswere £32,832,000. By October 1932 they were only£30,440,000. Despite the enormous exchange advan-tage there had been no important improvement. Tounderstand why this was, we must turn our attentiononce more to conditions overseas.

4. When Great Britain left the Gold Standard herexample was rapidly followed by a number of othercountries who, by a number of obscure devices, con-trived to depreciate their exchanges to keep more orless in step with the depreciation of sterling. Some,such as Australia, Argentina and Brazil, had aban-doned it before. The following chart shows the varyingrelation to the old gold parity of a representative groupof national currencies during this period.1

To the extent to which this was not brought aboutby measures involving a (relative) rise in costs, suchdepreciation involved for these countries too, for thetime being, a relative advantage to trade of the kindwe have discussed already.2 Any pressure to internalcontraction was transferred to the exchange market.

1 For the figures on which it is based see Statistical Appendix, Table 36.2 Whether the advantage was permanent or not depended upon the extent

to which there had previously existed real over-valuation of the currency.If this were not the case, then necessarily the measures taken to depress theexchange must in the long-run wipe out the advantage of depreciation.

INTERNATIONAL CHAOS 111

Parity

- 8 -

-16-

-24-

-32-

-4O-

-48-

-56-

-64-

Japan

/Nt \ ' " V '••"

Splir^-

•

Argentina

Spain

19331931 1932

FOREIGN EXCHANGE RATES

Percentage Discount in relation to Gold Parity

The depreciation of the exchange gave a bonus toexporters.

But in the Gold Standard countries there continueda most catastrophic deflation. In September 1931 theindex of wholesale prices in the United States stood at71; by February 1933 it had fallen to 60—a fall of 15per cent. At no period during the slump had the fallbeen more extensive or more damaging.

We have examined already the general causes whichwere making for deflation during the earlier stages ofthe depression. These causes did not cease to operate.But from September 1931 they were reinforced by newtendencies—the results of the crisis of 1931. A sub-stantial part of the deflation of 1931-32 must bedirectly attributed to the break-up of the GoldStandard.

At first sight this verdict may appear highly para-doxical. The abandonment of the Gold Standard in-volved a diminution of the demand for gold as a backingfor the currencies concerned. Surely this should implytendencies the reverse of deflationary in the GoldStandard countries? The argument is plausible—if we

112 THE GREAT DEPRESSION c«.

think only of the long-run. In the long-run, if thiscountry and others remain off the Gold Standard andother things remain unchanged, there seems reasonto suppose that the value of gold will be less thanit would otherwise have been—that the general levelof gold prices will be higher than it would havebeen if the area of monetary use of gold had beengreater. The precedent of silver seems to bear out thisconclusion. The same volume of metal concentratedin a smaller area will surely give rise to a higher levelof prices.

The argument is plausible. If we could assume thatother things would remain unchanged for a sufficientperiod, no doubt the results predicted would comeabout. But the impact effects of a change of the kindwe are considering are not of this order; and if thechange is on a large scale, they may produce newchanges in the situation which postpone almost in-definitely the working out of the long-run tendencies.In the short run the effects of such a change are likely tobe highly deflationary. We can best see why this is soif we examine what actually happened.

The suspension of gold payments in London and thefall of the exchange which followed meant a substantialshrinkage in the gold value of all foreign balanceswhich had not already been withdrawn. The immediateeffect of this was violently deflationary. Central Bankswhich had kept part of their reserves in the form ofsterling assets suddenly found their reserves depletedin circumstances when the probability of unexpectedwithdrawals was greater than ever before. It is saidthat the Bank of France lost a sum exceeding the wholevalue of its paid-up capital. The Bank of the Netherlandsopenly announced a loss of over 30 million guilders.


All those smaller Central Banks which had been recon-structed, often with the advice of British experts, on theassumption tha t a sterling balance was as good as gold,suffered losses of comparable proportions. Nor wereother financial institutions which had abstained fromparticipating in the general panic in any better position.Their assets, too, had lost 20 per cent of their valueovernight. One and all commenced a desperate strugglefor liquidity—a struggle which, by its very nature, wasdeflationary in its incidence. When the reserve fallsand at tempts are made to re-establish liquidity, it isactive investment which suffers.

But this was only the beginning of the trouble. Thestruggle for liquidity was not confined to financialinstitutions. The fall of the exchange which conferred abenefit upon British exporters imposed a correspondingdisadvantage on their competitors in foreign marketswhose exchange had not also fallen. The German textilemanufacturer, the Polish mine-owner, the Americancar exporter, all found their capital committed to linesof enterprise in which its value had fallen. Naturallythey, too, commenced to struggle for liquidity—toshorten credit, to diminish reinvestment, to save whatthey could from the wreck.

Nor was this all. The commodity markets were moredirectly affected. The fall in the sterling exchangemeant a diminution in demand from buyers whosecapital was in sterling. Now the demand from suchsources in many cases constituted an important pro-portion of the total demand in the market. A diminu-tion of such demand therefore meant a substantial fallin gold prices. This fall, in turn, while it permitted theBritish consumer to escape any big rise in sterlingprices, meant a further destruction of capital and a


further intensification of the struggle for l iquidi ty.These are things which to-day he who runs m a y read .Yet at the time they first began, in this country atany rate, whoever ventured to predict them, how-ever pianissimo, wrote himself down as perverse andobscurantist—out of touch with the best tendencies ofmodern thought, unsympathetic to the economics ofthe new era, enthralled in the tangles of the goldsuperstition, etc. etc. etc.

All this followed from the effects of the first fall ofthe exchanges. But these effects were now to be re-inforced by policy. The Governments and the CentralBanks in the countries remaining on the Gold Standardwere composed of men educated in a strong mercan-tilist tradition. It was not to be expected that theyshould be content to meet the shrinkage in their re-spective trade balances due to the tendencies justdescribed, by straightforward contraction of credit.Moreover, if they had, an electorate still more stronglyinnoculated with similar views would have set othermen in their places. Accordingly the various mercan-tilist expedients were once again adopted. Tariffs,exchange restrictions, quotas, import prohibitions,barter trade agreements, central trade-clearing arrange-ments—all the fusty relics of mediaeval trade regulation,discredited through five hundred years of theory andhard experience, were dragged out of the lumber-roomsand hailed as the products of the latest enlightenment.Protest, in the few cases in which it was made, wascompletely unavailing. "You cannot put the clockback", it was said.

It is difficult to exaggerate the state of confusion ininternational trade which has been produced by thesearrangements. We have examined already the effects


of tariffs. But if we are to retain a sense of proportion,it must be realised that, in these recent developments,tariffs have been a relatively minor obstacle. I t is theexchange restrictions, the quota regulations, the im-port prohibitions, which have done the greater damage.And it should be added, it is the persistence of suchmeasures which offers the greater obstacle to recovery.Given stability of tariff conditions, however high therates, the currents of trade may be expected eventuallyto become adapted to the new situation. The existenceof a tariff is not inimical to the achievement of tradeequilibrium—although no doubt the equilibrium whichmay be achieved in this way may be judged by com-monly accepted standards to be inferior to that whichcould have been achieved in its absence. But withthese other measures it is different. We have examinedalready how exchange restriction prevents the restora-tion of equilibrium. The same thing is true, althoughfor different reasons, of the quotas. When the volumeof goods that is permitted to pass the customs' barriersis rigidly fixed and cannot fluctuate with price orexchange fluctuations, then the entire mechanism ofinternational equilibration, be it by way of gold flowsor of exchange movements, is thrown completely outof gear. It is sometimes thought that it can be replacedby a series of barter trade agreements. But this is apure delusion, based on the mistaken belief that equi-librium in the balance of trade between one countryand the rest of the world implies equality of exportsand imports between it and any other single country.As soon as it is realised that this is only the case bypure accident, the hope of reconstructing trade equi-librium by a series of bilateral agreements is seen tobe quite without foundation. The concept of barter


equilibrium is applicable only to exchange betweentwo groups.

To this chaos there was added yet a further sourceof confusion: the fluctuations of exchange. As we haveseen already, when the Gold Standard broke up in1931, the exchange rates of the centres which aban-doned it did not fall to a certain point and then remainfixed; they continued to fluctuate over a very wide range(see chart p. I l l above). In December 1931 the poundsterling had fallen to 3-37. By April it had risen to3-75. In August it stood at 3-47. By December it hadfallen to 3-27. The fluctuations in other exchanges wereof a similar order of magnitude.

The uncertainty created by these fluctuations wasin itself highly deflationary. It was deflationary in itseffects on day-to-day trade. If there exists a free for-ward market in foreign exchange it is possible to someextent for the trader to insure himself against exchangefluctuations. But it was one of the objects of themeasures already described to prevent free dealingin the exchanges. Over the area where exchange re-striction prevailed, therefore, this expedient was notavailable. And in the centres which remained free, awide forward market was not always operative. Thevolume of trade therefore tended further to contract.

But beyond this, the uncertainty of the exchangemeant an almost complete cessation of long-term inter-national investment. If it is possible to effect an insur-ance of day-to-day trade and finance, it is out of thequestion to carry out any similar operation for long-term investment. There is no forward market in bondsand debentures. Either lender or borrower has to takethe risk. If the exchange is fluctuating, therefore, aconsiderable curtailment of foreign investment is in-


evitable. If it fluctuates widely, foreign investment islikely to cease. But cessation of foreign investment ina world which has been organised on the expectationof a large volume of capital movement is in itself adeflationary influence. In circumstances of uncertainty,such as we have just described, this influence waslikely to be greatly enhanced. An investor in a GoldStandard country was on the horns of a dilemma. Hewas reluctant to invest a t home because he did notknow what new damage the exchange was likely todo to domestic industry. The only way out was to re-frain from investing. But this meant a continuance ofdeflation.

In all these ways the break-up of international mone-ta ry uni ty aggravated the difficulties of the countrieswhich still remained on gold. I t is not surprising,therefore, t ha t for many months after it had happenedthe position of the countries which had been eased bythe breakdown showed such scanty signs of improve-ment. Whether or not it be welcomed as a solutionfor certain very pressing domestic problems, no reallyimpartial observer of world events can do other thanregard the abandonment of the Gold Standard byGreat Britain as a catastrophe of the first order ofmagnitude. Will European democracy in the form wehave known it survive the repercussions it has engen-dered? I t is much too early to say. But the question isnot irrelevant.

I t is sometimes said t ha t the dislocation was inevit-able, t ha t , given the initial disequilibrium in whichGreat Britain was placed a t the beginning of the slump,similar results must have followed any measures whicheliminated it. Whether we adopted the method of costreduction or the method of releasing the exchange, it


was the same thing so far as the rest of the worldwas concerned, it is urged. From the domestic pointof view the adoption of the latter eliminated all thehorrors of disputes between capital and labour.

Such a view seems based upon complete misappre-hension. It may be admitted that the elimination ofour disequilibrium by internal contraction would havecaused some disturbance. It would certainly havemeant a disadvantage to the foreign manufacturersand miners who competed with our exports. It wouldhave involved some contraction of our demand forimports. But to argue that the probable effects of suchmeasures can be compared with the effects of theabandonment of the Gold Standard is surely to lose allsense of proportion. They would have involved nodiminution of the value of foreign balances. Theywould have involved not the slightest probability ofundervaluation of sterling. They would have involvedno persistent uncertainties of trade. Suppose that inthe spring of 1931 there had been cuts in wage ratesin Great Britain of the order of 10 per cent—totake a figure which was often quoted at that time—is it really to be supposed that this could have givenrise to the crop of exchange restrictions, tariffs, quotas,and all the other obstacles to trade which franticGovernments elsewhere erected against exchange de-preciation? There would have been some gain of com-petitive advantage by Great Britain. There might havebeen some competitive wage reductions elsewhere.But in general people would have known where theywere. They would have been sure that there was abottom to this kind of contraction—and with a gooddeal of grumbling and some obstruction no doubt theywould have accepted the result. But with the exchange


there was no such certainty. With a depreciatingexchange nothing was certain—not even the numberof exchange rates which could remain relatively stable.It is impossible that domestic contraction could haveled to the same results as competitive depreciation.

5. This brings us to a new phase of the post-crisischaos.

In the summer of 1932 there began a small revivalof business. The orgy of trade restrictionism which hadfollowed the crisis of the previous autumn had begunto abate its intensity. In Great Britain the effects ofthe fall in the exchange and the restoration of financialsolvency were beginning to make themselves felt. Inother parts of the world, liquidation and cost-cuttinghad reached a stage at which the restoration of profit-ability at some not too far distant date seemed a legi-timate expectation. The conclusion of what seemed tobe a definitive settlement of the Reparation problemat Lausanne gave a stimulus to confidence. There wasa stock exchange recovery. The indices of trade andproduction turned slightly upwards. For Great Britainand for many other parts of the world this was thebeginning of revival.

But in the Gold Standard countries the position wasstill very precarious. The revival in other parts wasto some extent the result of undervaluation of theexchange. The position of those who had maintainedcontinuity of standard was therefore bound to be lessfavourable. And the continued uncertainty of the ex-change was further cause of difficulty. In the autumn,partly as a result of the usual seasonal pressure, partlyas a result of apprehensions regarding default on theAmerican debt, partly as a result of the credit expan-sion which had accompanied the conversion operations,


sterling began to fall. In October it stood at 3-39.By December it had fallen to 3-27. Even when appre-hension of default had passed, it did not rise above 3-43until after the American crisis*.

In no country was this felt more severely than inthe United States of America. The banking situationin that country had long been profoundly unhealthy.The strain of two years of deflation had producedpanic psychology on the part of depositors. Especiallyin the middle west, the banks were loaded up withmortgages, the value of which was probably neverfully recoverable. As the international uncertaintycontinued, gold hoarding became more and more pre-valent. Only a revival of confidence could avert a bigdisaster.

In these circumstances a desperate bid was made fromWashington. An unofficial ballon d'essai was launchedacross the Atlantic. If Great Britain would stabilise thepound, it was hinted, then the United States would beprepared to write off a substantial slice of the war debt.1

Could anything have been more attractive? Herewas the pound sterling almost certainly under-valued,but deprived of the opportunity of conferring themaximum stimulus to recovery by continued uncer-tainty about its future. Here was the offer, or sug-gestion of an offer, that in return for taking a step somuch to our advantage we should receive the furtherconsiderable benefit of a revision of our obligations.Was it ever given to a great nation before in such wiseto be bribed into sanity?

But in vain. The antagonists of the Gold Standard,the reflationists, had done their work too well. Goback to the Gold Standard under circumstances quite

1 See the Economist, vol. cxvi., Jan. 21, 1933, p. 113.


as favourable as those under which the French wentback in 1927—an under-valued exchange and a largemargin for a cautious credit expansion? Never. Not untilthe price-level is at the 1929 (or the 1924) figure, untiltariffs have been swept away and all obstacles to traderemoved. Sentiments of this sort were voiced freelyby the highest authorities. I t did not seem to occurto these gentlemen that obstacles to trade would notbe removed until the exchanges were stable, that analleviation of the paralysing instability of the ex-changes would have been conducive to a considerablerecovery of prices—a recovery which, unlike a return tothe 1929 price-level, would not necessarily carry withit the dangers of inflation and collapse—and that theperpetuation of the uncertainty with regard to thefuture of sterling was creating a position in whichresort to competitive depreciation was more and moreprobable.

Thus the opportunity for a restoration of inter-national stability under conditions of maximum ad-vantage for the ossified cost structure of Great Britainwas rejected. I t is unlikely to recur.

Meanwhile the position of the American banks wasrapidly deteriorating. Uncertainty with regard tofuture monetary policy, alarm at the revelations ofweakness in unsuspected quarters which followed thepublication of the Reconstruction Finance Corpora-tion's accounts, the paralysis of business almost in-,evitable in a change of political regime, had producedan atmosphere of distrust which only needed a veryslight jolt to degenerate into complete panic. The joltcame in the shape of a run on the banks of Detroit. Abank holiday was declared in Michigan. The panicspread. Other states followed suit. On March 4th,


1933, when President Roosevelt took up office, thecrisis had become general. A general bank holidaywas declared and the right to withdraw gold for exportwas suspended.

The internal crisis was handled with great expedi-tion. An Act was passed giving the President ex-tensive powers to reorganise bankrupt institutions andto regulate the reopening of the sound. An emergencycurrency was provided. On March 13th such banks aswere judged to be sound began to reopen. The StockExchange moved upwards.

But the export of gold remained in abeyance and forover a month the position was obscure. There wereample reserves of gold. The trade balance was favour-able. To the outside observer, the obvious policy forthe President was to proceed as rapidly as possible withthe liquidation of the bank crisis and to redouble at-tempts to stabilise the international position. "Therecan be little doubt," says the American Institute ofBanking, " that at the time the United States departedfrom the Gold Standard its international economicposition was so strong and its own gold holdings solarge that no external pressure could easily haveforced suspension." * But the party that was now inpower had other views of policy. Inflationist senti-ment, always a strong force in American policy, nowbecame dominant. The advisers of the President weredetermined to carry through a policy of deliberate re-flation. In the pursuance of this policy they conceivedthat the Gold Standard would prove an obstacle.Accordingly, when the banks reopened, the right towithdraw gold was not restored. By a series of ad-ministrative orders culminating in the refusal, on May

1 Anti-Depression Legislation, p. 101.


1st, of licences for the export of gold to meet matur-ities and interest on United States obligations heldabroad, the abandonment of the Gold Standard wasconfirmed. The dollar-franc exchange at par is 1 dollar= 25-52 francs. In May it was 21-70. Thenceforwardit continued to depreciate.

These measures produced a revulsion of opinion inGreat Britain. Before the dollar had cut loose fromgold, opinion was hostile to any sort of stabilisation.But now things were different. The fear of competitivedepreciation was seen to have been no illusion. Theadvantage of the under-valuation of sterling, whichmight have been consolidated in a general settlement inFebruary, now seemed likely to be snatched away bystill further under-valuation of the dollar. The politicalrepercussions of still further damage to the GoldStandard countries, moreover, were not lightly to becontemplated. If some stabilisation agreement werenot reached all hopes of a successful outcome of theWorld Economic Conference would prove illusory.Something must be done even at this late hour to re-store the conditions of stability.

Accordingly when the World Economic Conferencemet in June, the representatives of the leading CentralBanks had established a provisional agreement forstabilisation. So far as Great Britain was concernedthe terms were certainly not as good as could havebeen obtained earlier. Still, such as they were, theywere better than nothing. If they could be carriedout there seemed good prospect of stabilisation oftariffs and substantial modification of the greaterobstacles to international trading. The terms weresuch as to commend themselves even to the moreradical members of the American delegation. To

124 THE GREAT DEPRESSION OH. VI

many observers the prospects of sound recoverywere present.

But they reckoned without the President. Theabandonment of the Gold Standard and the expecta-tion of inflation had produced a minor boom inAmerica. The Dow Jones index of the price of commonstocks rose from 59 in April to 92 in July. The pricesof raw materials were rising. Any move which seta limit to the prospects of inflation was likely tomoderate the pace of the improvement. This was nota prospect which commended itself to the presidentialmind. Moreover, he was now set on even more grandi-ose manoeuvres. The Agricultural Adjustment Act,which was to restore prosperity to the farmers (andincidentally to win the Middle West from itsEepublicanallegiance), had declared as an object of policy theraising of prices to the 1926 level, and the restorationof agricultural prices to a pre-war relation to theprices of industrial products. Could this be done ongold? It was doubtful. The President therefore re-mained recalcitrant and sternly called the assemblednations of the earth to a sense of economic realities.

Thus at one stroke the prospects of stabilisationwere shattered. In vain did the reflationists in thePresident's own team send imploring telegrams totheir chief urging him to accept the eminently reason-able settlements they had negotiated. In vain did theredoubtable, Professor Moley, hitherto the leader ofthe American isolationists, bend every nerve to effecta last-minute ..settlement. It was too late. As on anearlier occasion, it had been easier to bamboozle aPresident than to debamboozle him. The period ofinternational chaos passed into a new phase.

CHAPTER VII

RESTRICTIONISM AND PLANNING

1. IT is yet too early to say whether the Americanemergency legislation will prevent the coming of somedegree of recovery. The various measures which havebeen introduced each work in such different directions.The National Recovery Act raises costs and fostersmonopoly. The Agricultural Adjustment Act restrictsoutput and subsidises immobility. The Gold Policyattempts to raise prices by a method which increasesthe scarcity of gold and imposes the maximum incon-venience on the world at large. The unbalancing of theBudget and the vast expenditures on public workshave an inflationary tendency which may well over-ride the various impediments to enterprise created inother directions and engender an inflationary boom—a boom which, if the analysis of earlier chapters iscorrect, would be likely to be followed by a deflationarycollapse. It would be futile to attempt to assess indetail the relative importance of these various andrapidly changing influences. It is more fruitful at thisstage, if we are to understand the broad conditions ofrecovery, to examine the underlying principles of cer-tain proposals for reconstruction. It will be observedthat such a discussion has a bearing on certain aspectsof the American experiments.

125


2. We may commence with proposals for restrictinghours of labour.

In recent years it has often been suggested that theappropriate cure for the slump is a reduction of hoursof labour. The enormous volume of unemployment inmanufacturing industry, it is held, is a proof that withmodern machine production the amount of work to bedone is less than the supply of labour available. Insuch circumstances unemployment is inevitable unlesssteps are taken to ration the amount of employmentthat any one labourer may secure. If this could bedone by a general reduction of hours, a great cursewould be turned into a great blessing—what wouldhave been unemployment for the part would becomeleisure for the whole. At one stroke the problem of thedepression would have been solved.

Now there can be no doubt that a demand for agiven number of man-hours is capable of being spreadover a greater or a smaller number of labourers accord-ing to the number of man-hours that each labourersupplies. If labour is bought on an hourly basis, therefore,or if it is rewarded according to the volume of product itproduces, a reduction in the length of time it is per-mitted to employ any one labourer will in all proba-bility involve an increase in the number of labourershired. It is by no means certain that the increase willbe proportionate—that for instance a halving of theworking day will result in doubling of the volume ofemployment. A change of this sort would in manybusinesses involve an increase in costs other than directlabour costs, an increase in expenditure on supervision,etc., which would diminish the amount available forthe purchase of labour. But, broadly speaking, it is notopen to question that the volume of employment could

VII RESTRICTIONISM AND PLANNING 127

be increased by spending the amount devoted to hiringlabour on the purchase of smaller quantities of labourfrom a larger number of men.

But what does this mean? So far as production isconcerned it involves no increase on the existing lowlevel. The "work to be done"—the product to be pro-duced—has been done by a greater number of people.Even if we assume that there is no increase in cost, andtherefore no diminution in production, can this be saidto be a cure for depression? Has anything been donewhich involves a revival of industrial output? Clearlynot. At best—and to ignore all the disorganisationwithin particular business units, which such a changewould involve, is to make a very generous assumption—the effects of the contraction have been redistributed.And a re-expansion of production has been preventedfrom taking place.

We can perhaps better appreciate the implicationsof this if we look at the other side of the picture—the effects on working-class income. I t should beabundantly clear from what has been said already thatan increase of employment due to a reduction of hoursinvolves diminution in the weekly wages of thosealready in employment. If a man is paid by piece ratesa reduction in the time he is allowed to work means areduction in his income—though not necessarily aproportionate reduction if his rate of output is greaterwith a shorter working day; if he is paid by the hour,then a strictly proportionate reduction will occur. Thisis a well-known feature of organised short time in par-ticular industries. There is nothing to suggest that itcould be different if organised short time were general.

But is this what labourers want? In discussions ofsuch proposals appeal is often made to the well-known


phenomenon that in the past increasing wealth perhead has often been taken out partly in increasedleisure. The historical fact is unquestionable, as is,indeed, the probable existence of such a disposition onthe part of labourers. If wealth per head were toincrease it is probable that hours of labour would beshorter. But such considerations are surely irrelevantto the matter under discussion. If the labourers alreadyin employment wished to "take out" part of theirexisting earning power in leisure—that is, if theywished to exchange part of their incomes for greaterleisure—it would be open to them to negotiate. Thefact that they do not do so, that it would be necessaryto prevent them by law from working as long as theydo now, suggests that the adjustment that would bebrought about in this way would not be, from theirpoint of view, a movement towards equilibrium.

In fact, of course, the popularity of the proposal weare discussing depends essentially upon the tacit as-sumption that, if hours were shortened in this way,weekly wages would not be lowered—that is, that theprice of labour per hour and piece rates would beadjusted upwards. But if this were the case there isno reason to believe that unemployment would bediminished. For a reduction of hours, weekly wagesremaining constant, means an increase in the cost oflabour per unit. To employ the same number of men asbefore would cost the same total amount. But unlessthe daily output per man remained constant—a mostimprobable outcome of the big reductions usually pro-posed—the cost per unit of output would increase.There would therefore be an incentive to a contractionof employment. The volume of unemployment wouldbe increased.


It is sometimes alleged that this effect would notfollow, since the employers would borrow more fromthe banks to finance an increase of their wage bill.There seems no reason to believe this to be at allprobable, at any rate as a general rule. As a generalrule, business men will be disposed to borrow morefrom their banks when the prospects of profit are in-creasing. In certain cases when there occurs an un-expected increase in costs which is not expected to bepermanent, they may borrow more than usual. But suchcases are to be regarded as exceptional. The justifica-tion of such borrowing is the transitory nature of theincrease. A legislative increase of costs such as isinvolved by a compulsory reduction of hours, wagesremaining constant, does not fall within this category.The net effect of such a measure would be a contractionrather than an increase of borrowing. If in the UnitedStates, where, under the National Recovery Act,measures of this sort have been put into operation,there is not an absolute increase of unemployment, thiswill be because of the simultaneous operation of othertendencies—lavish Government expenditure and thelike—which work in the other direction more power-fully. If recovery comes, it will be in spite of thesemeasures, not because of them. In isolation they areinimical both to employment and to production.

3. It is clear then that a general restriction of pro-ductive activity offers no hope of escape from depres-sion. We may turn, therefore, to proposals for restric-tion in limited areas.

The course of the slump, as we have already seen,has been marked by extreme depression in agriculturaland raw material production. The industries producingfood and raw materials have suffered falls in the prices


they receive for their products far greater in magnitudethan those taking place at other points of the industrialsystem. In many quarters, therefore, it has been sug-gested that concerted measures for the restriction ofthis kind of output are an essential condition of revival.Only in this way, it is said, can the prices of such pro-ducts be raised to their old level. Only in this way cana "proper balance" be restored to the world economy.So strong a hold indeed have such views on the mindsof certain leaders of opinion that there can be littledoubt that the news of widespread earthquakes andinundations, which reduced substantially the totalcapacity of the world to produce such products, wouldbe hailed by them as a bull point for general recovery.A beneficent interposition of Providence would haveperformed at a stroke a restoration of the "balance"which a score* of international conferences mightaccomplish much less perfectly.

Such beliefs are founded upon delusion. There is no"proper balance" between one industry and another inthe sense of a ratio of prices which must not be changedwhatever the changes in the general conditions of pro-duction.1 The fall in prices of food and raw materials isthe resultant of two tendencies. Partly it is due to thecontraction of demand which is the sign of the down-ward phase of a general fluctuation. On general groundswe should expect to find the fluctuations of raw materialprices much greater than any other. In so far as it isdue to this, and to the superimposed deflationary in-fluences we have examined, it is reasonable to expect

1 The whole notion of a proper balance between industry and industry,of which so much is heard in popular discussion of planning, etc., is relevantonly to the sphere of aesthetics or military strategy, if it is not strictly re-lated to considerations of prices and costs. Outside these spheres it is analmost perfect example of the pseudo-concept—a concept which on analysisproves to have no content of meaning.


that to some extent it will be reversed in any recoveryof trade. But it is due partly to an intensification ofproductivity in these branches of production, due, notmerely to the influences of the boom, but to the marchof technical progress—an intensification of product-ivity which has encountered a relatively inelasticdemand. In so far as it is due to such causes, there is noreason whatever to expect a restoration of the oldprice ratios. If the products whose prices have fallenrelatively are produced in centres from which no migra-tion is possible, then, in the absence of restriction, weshould expect a permanent change of the same orderas the original fall. The inhabitants of such areas wouldhave lower incomes. The inhabitants of other areaswould have more to spend on other things. If they areproduced in areas from which migration is possible,then there would come about some shift over to better-paid occupations, which would have the effect of miti-gating the original fall.1 But there is no reason to expectthat the old price relationship would be restored.

Now it is conceivable that restriction schemes mayhave the effect of restoring the old relationship. As weshall see later on, there are very grave difficulties inthe way of their successful management. But if theydo succeed, they do so merely by depriving those mem-bers of the world community who would have gainedby greater cheapness of the benefits which the tech-nical changes which brought about the initial price-change have made possible. They are exactly equiva-lent, if they are successful, to natural disasters whichlimit productivity; or to a deliberate suppression oftechnical progress. If they benefit the producers of thecommodity restricted, they do so by damaging the

1 See Chapter II. pp. 15-16, above.


producers of o ther commodi t ies . A n d if t h e y becomewidespread they are apt to recoil with damaging effectseven on those who originally benefited. Restrictionin one line of production may benefit the restricted.Restriction all round leads to general impoverishment.A rise of prices brought about by restriction in manyindustries would be an indication not of increasedwealth but of increased poverty.

It is sometimes said, however, that such schemeshave the effect of restoring purchasing power and inthat way promoting recovery. Such contentions arethe obverse of the fallacy we examined in an earlierchapter. A change of relative prices of this sort has nodirect significance so far as the total volume of spend-ing is concerned. The man who has to pay more forbacon has less to spend on cloth. The pig farmer mightborrow more from the bank. But the cloth manu-facturer will borrow less. And, as we shall see later,general restriction is probably deflationary.

An apt illustration of all this is provided by Americanexperience. For many years American agriculture hasbeen in chronic difficulties. Ever since the war theprices of agricultural products have been tending down-wards. In June 1920 the price of No. 2 winter wheatin Chicago was 295 cents per 60 lb. In June 1929 it was113 cents. The prices of cotton, maize, hogs and otherstaples have moved, if not with the same rapidity,at least in the same direction. The farmers, many ofwhom mortgaged their farms in the boom period of1920, have found it increasingly difficult to meet theirobligations. Even when manufacturing industry wasbooming there was some distress in the agriculturaldistricts. With the coming of industrial depression thisdistress has become widespread. Many of the most con-

vn RESTRICTIONISM AND PLANNING 133

spicuous features of American political history in thelast fifteen years are only to be explained in terms of theinfluence of the difficulties of the farmers of the Southand the Middle West.

In all this there is no particular mystery for the eco-nomist. The agricultural experts who provide esotericexplanations in terms of deficiencies of marketingarrangements, shortage of agricultural credit, inade-quate diffusion of crop reports and the like, have losttheir way in a mass of not very interesting details.They see the fly on the barn door but they do not seethe barn door itself. The difficulties of agriculture here,as elsewhere in modern economic history, are to be ex-plained, in the large, in terms of an increase of pro-ductivity due to technical progress which encounters arelatively inelastic demand. Superimposed on this arethe further difficulties due to the industrial slump—difficulties which, as has been said already, may beexpected to disappear if manufacturing industry re-vives. But, in the main, the secular tendency is clear.Technical progress in American agriculture has beenvery rapid. The American farmer is feeling with especialforce the pressure of those influences which in thecourse of history have tended continually to reduce theproportion of effort devoted to the production of agri-cultural staples. In the beginning it was 100 per cent.Since then it has been diminishing. In the absenceof restriction, it would in all probability continue todiminish.

In such circumstances there is only one solutionwhich does not involve a deliberate rejection of thefruits of technical progress, or a permanent impover-ishment of agricultural producers. A certain proportionof the producers of the products whose prices have


fallen must change over to an occupation the demandfor whose product is more elastic. There must be areshuffling of the labour force—a contraction of theproportion employed on the production of products inrelatively inelastic demand and an expansion of theproportion employed elsewhere.

Now there can be no doubt that such a process bearshard on particular producers. A change of this sortnecessarily involves the breaking of old associations,the rupture of deep-rooted habits. When its incidenceis slow, the transfer can come about mainly by a shiftof the younger generation. When it is more rapid, orwhen it has been delayed by State intervention, thepropping up of agricultural prices by subsidy andGovernment buying, more drastic movements arenecessary. There can be no doubt that in America thepolitical pressure from the agrarian interests has beentremendous.

But it so happens that in America in recent yearsthere has been ready to hand an expedient which, whilefostering no artificial restriction and giving rise to nofalse hopes for agricultural producers, would have un-questionably done much to ease the difficulties of thetransition and to mitigate the pressure on the farmers—a lowering of the industrial tariff. The Americanfarmer has been subject to two pressures—the reduc-tion of his money-income due to the forces we havebeen discussing, and an increase of costs, a curtailmentof markets and a reduction of real income due to theoperation of American tariff. This second pressure is inno wise dictated by the operation of consumers' de-mand or the course of technical progress. It is thedirect result of restrictions on division of labour im-posed in the interests of manufacturing industry. Its


net result, so far as agriculture is concerned, is to makethe degree of contraction necessary to bring real in-comes into equilibrium greater than would otherwisebe the case. A lowering of the tariff would have theeffect of extending agricultural markets, lowering agri-cultural costs, raising agricultural incomes, and to thatextent relieving the pressure to contraction.

It would have been reasonable to expect, therefore,that the policy of successive Governments would havebeen based upon this knowledge. While doing nothingthat would hinder the movement from the more de-pressed branches of agriculture, or raise false hopes of afundamental change in the direction of secular pressure,a Government determined to give a square deal toagriculture might have been-expected to strain everynerve to reduce industrial tariffs—already, as we haveseen, a cause of general disturbance and disequilibriumin the world economy as a whole.

But it was not so. We have already examined theeffects of Mr. Hoover's policy. The grandiose buyingorganisations by which he tried to maintain agriculturalprices had the effect of demoralising markets alto-gether, by the accumulation of stocks and the creationof uncertainty. At the same time, by raising falsehopes in the minds of the producers, they tended toarrest the contraction of agricultural production.

President Roosevelt has been more thorough. TheAgricultural Adjustment Act declares it to be thepolicy of Congress "To establish and maintain betweenthe production and consumption of agricultural com-modities . . . such a ratio as will re-establish prices tofarmers at a level that will give agricultural com-modities a purchasing power with respect to articlesthat farmers buy, equivalent to the purchasing power


of commodities in the base period. The base period. . . shall be the pre-war period, August 1909 to July1914." To this end it proposes in various ways to re-strict production by paying farmers to throw land outof cultivation. No reduction of tariffs has been carriedthrough, and the provisions of the National RecoveryAct make it extremely unlikely that any substantialreduction will take place. It is worth noting that atthe same time under the Tennessee Valley AuthorityAct steps are being taken to provide for "the floodcontrol . . . and the agricultural development of thesaid valley".

Thus the net effect of the State intervention inAmerican agriculture is this. The industrial workerswill pay more for their food (they pay, as it were,twice—once in the rise of price which restriction bringsabout and once in the processing tax by which it ishoped to subsidise the restriction), and the farmerscontinue to pay high prices for industrial products andsuffer the curtailment of markets which is the conse-quence of industrial protection. At the same time, thesubsidy which they receive for the curtailment ofacreage is a definite incentive to marginal producersto stay where they are. Presumably when the agricul-tural development of the Tennessee Valley has beenprovided for, there will be more subsidies to keep partof it out of cultivation.

4. Not all restrictionism is as avowedly restric-tionist as the Agricultural Adjustment Act. Thesubtler apologist for the various producers' rings,pools, marketing boards and the like which, with theenthusiastic support of the Governments of the world,are rapidly being brought into being, will defend them,not on the ground that they restrict sales and produc-

vri KESTRICTIONISM AND PLANNING 137

tion, but on the ground that they promote "orderlymarketing" and eliminate "wasteful competition".They bring order into the "chaos of unrestrictedcapitalism". They permit "conscious control" of thefortunes of the various industries. All of which soundsvery pleasant. But it is not irrelevant to ask what itmeans.

"Orderly marketing" means the raising or the main-tenance of prices. The various pools and marketingboards which have justified their existence in theseterms have all had this object in view and, at theoutset of their operations at any rate, have not in-frequently succeeded in bringing it about. The morecandid supporters of such schemes have been quitefrank about this. Let us hear, for instance, Mr. AaronSapiro, the founder of the American Pool Movement:"When we go into co-operative marketing activities,"he said to the Indiana Wheat Marketing Conference,"do we say we are simply going to try to get some littleeconomy in the handling of wheat? No, because youand I know that we can't handle wheat as far as thephysical handling alone is concerned any more cheaplythan the big elevator companies. . . . We don't saythat the purpose of co-operative marketing is to intro-duce any economy in the physical handling of grain,because we think that particular point is absolutelytoo trifling to bother about. What are we trying to do?When we talk of co-operative marketing we say this:We are interested in raising the basic level of the priceof wheat." 1

Such changes are only likely as a result of restric-tion—restriction of sales and eventually restriction of

1 Quoted by Boyle, "The Farmers and the Grain Trade", EconomicJournal, vol. xxxv., 1925, p. 18.

138 THE GREAT DEPRESSION

production. I t is sometimes urged that the basic pricecan be raised merely by evening out sales throughouta given crop year. This plea is singularly lacking insubstance. In the case of the staple gradeable products,at any rate, there is no reason whatever to suppose thatfluctuations within the crop year are not evened outalready, so far as this is desirable, by the machinery ofthe market. Whenever this matter has been investi-gated by impartial observers the same conclusion hasbeen reached. The supporters of the wheat pool pro-jects, for instance, made much of the contention thatwheat "dumping", as they called it, upset the courseof prices. The investigations of Professor Boyle and theLeland Stanford Food Institute showed beyond ques-tion that this was entirely without foundation.1 I t isquite conceivable, and no doubt very often happens,that an isolated producer, temporarily short of cash,may sell to a local dealer at a price lower than theprice he would have obtained if he could have waiteda day or two. But quantitatively such cases are not im-portant. In any case they do not demand the settingup of nation-wide monopolies as remedies. In the mainthere can be no doubt that "orderly marketing", whenthat stands for marketing schemes making it com-pulsory for producers to market their products throughone central authority, stands also for restriction ofproduction. If it were not so, then it would not bethought necessary to give the organisers of suchschemes statutory powers to limit output.

But is not some restriction desirable? The more in-telligent supporters of such schemes will admit that

1 Professor Boyle examined the average price of cash wheat in Chicagofor forty-three years and found that the total spread for the year was ninecents—barely sufficient to cover carrying charges (op. cit. p. 23).


they involve restriction, but only such restriction, theywill contend, as is indicated by the demand for theproduct. If the conditions of demand make it desirable,they will urge, it will be possible to relax the limits ofrestriction.

To such a contention two answers are possible. Inthe first place it is surely not irrelevant to point outthat an association of producers with statutory powersto exclude competition is not necessarily the best judgeof the interest of consumers. Monopolistic bodies with-out statutory powers may well be restrained fromgreat exploitation of their position by fear of potentialcompetition. I t is not so clear that restraint of this sortwill dictate the policy of monopolies backed up byState authority. "The interests of dealers in any par-ticular branch of trade or manufactures is always insome respects different from, and even opposite to,that of the public. To widen the market and to narrowthe competition is always the interest of the dealers.To widen the market may frequently be agreeableenough to the interest of the public, but to narrow thecompetition must always be against it and can serveonly to enable the dealers by raising their profits abovewhat they naturally would be, to levy, for their ownbenefit, an absurd tax upon the rest of their fellowcitizens. The proposal of any new law or regulation ofcommerce which comes from this order ought alwaysto be listened to with great precaution, and oughtnever to be adopted till after having been long andcarefully examined, not only with the most scrupulous,but with the most suspicious, attention. I t comes froman order of men, whose interest is never exactly thesame with that of the public, who have generally aninterest to deceive and even to oppress the public,


and who accordingly have, upon many occasions, bothdeceived and oppressed it." x Nothing that has hap-pened in the hundred and fifty years since this waswritten has made it less applicable now than it wasthen. State-aided monopolies of producers, now asthen, are not the best judges of the interests of theconsumer.

But even if this were not the case, even if it couldbe shown that the State-aided monopolist, new style,was a totally different animal from the State-aidedmonopolist of Adam Smith's day,2 from the point ofview of the consumer there would still be reason forregarding the principles on which he acts with verygrave misgiving. The criterion of restricting supply todemand, which is so loudly proclaimed as the objectof these schemes, is no criterion at all. There is no suchthing as demand for a commodity irrespective of itsprice. And so long as a price exists at all there is un-satisfied demand for the product. Whether from theconsumers' point of view it is more desirable that thedemand which is left unsatisfied—excluded that is tosay—at any given price, should be supplied before theunsatisfied demands for other commodities are pro-vided for, depends essentially upon the prices of theother commodities and the ability and willingness oflabour and capital to migrate from one line to another.From the consumers' point of view, the only justifiablerestriction on the supply of one commodity is thatwhich is exerted by the competing demand for others.The only justifiable restriction on the supply ofpotatoes is the limitation on indefinite transfer into

1 Wealth of Nations (Cannan's Edition), vol. i. p. 250.2 It does not seem very clever to argue that such a transformation is

effected by putting a "representative of the consumer1' on the Board ofManagement.


potato production which is provided after a certainpoint by the prospects of wages and profits elsewhere.Before this point is reached restriction is damaging tothe consumer. Afterwards it is unnecessary.

Now this is not the view of the supporters of State-aided monopoly. For them the underlying principleof restriction—the rationale of the mysterious adjust-ment of supply to demand to which allusion has beenmade already—is just this, that no expansion shall bepermitted which lowers the value of capital alreadyinvested in the industry. No doubt most restrictionattempts to do more than this—to raise the value ofcapital already invested in the industry. But this is notan aim to which public appeal is made. The publicpolicy of restrictionism is the maintenance of the valueof invested capital.

But this policy is completely at variance with theinterests of the consumer. The interest of the con-sumer, as we have seen, is to get as much of each com-modity as is compatible with the service of demand forothers. The maintenance of the value of investedcapital may very well mean that producers who findprospects in one industry more attractive than theprospects in any others are prevented from enteringit, that cost-reducing improvements of technique whichwould greatly cheapen the commodity to consumersare held up, that the "wasteful competition" of peoplewho are content to serve the consumer for lower returnsthan before is prevented from reducing prices. Everyschoolboy knows that the cheapness which comesfrom importing corn is incompatible with the main-tenance of the value of the corn lands which wouldbe cultivated if import were restricted. The plati-tudes of the theory of international trade do not lose


any of their force when they are applied to domesticcompetition. The argument, for instance, that roadtransport diminishes the value of railway capital hasjust as much and just as little force as the argumentthat cheap food lowers the value of agricultural pro-perty. "To be consistent," said Ricardo, "let us by thesame act arrest improvement, and prohibit importa-tion." * Economic progress, in the sense of a cheapen-ing of commodities, is not compatible with the pre-servation of the value of all capital already investedin particular industries. A policy which is directed tothis end, therefore, is a policy which conflicts with thisconception of economic progress.

But do we want economic progress in this sense?This is clearly a question of ultimate valuation uponwhich neither economics nor any other science iscapable of giving a decision. All that science can do isto present the alternatives. The ultimate decision isone of will, not of knowledge. But, if a digression intothis sphere be permitted, it does seem pertinent toobserve that the majority of the human race are stillvery poor and that if, in the interests of a supposedstability, a halt is to be called in the process of raisingreal incomes, it is an issue which should be squarelypresented to those who are most affected by it. It isall very well for the dilettante economists of wealthyuniversities, their tables groaning beneath a suffi-ciency of the good things of this world, their garagesfurnished with private means of transport, to say,"Food is cheap enough. Charabancs are vulgar. Therailways are admirable. We have enough of plenty.Let us safeguard security." It is for the millions to

1 On the Influence of a Low Price of Corn on the Profits of Stock (Gonner'sEdition), p. 253.

vii RESTRICTIONISM AND PLANNING 143

whom a slice of bacon more or less, or a bus ride to thesea, still matter, to make the decision. It is not socertain that, if the issue were clearly and honestly ex-plained to them, they would choose the maintenanceof existing capital values. For as yet the issue has notbeen put either honestly or clearly.

5. There are certain further aspects of restriction-ism which, from the point of view with which we areespecially concerned in this essay, it is particularlydesirable to bear in mind.

The effect of restrictionism, as we have just seen,is to maintain (or to enhance) the value of capitalalready invested in the industry in which productionis restricted. But it does this by lowering the prospect-ive return on capital which is invested elsewhere. If,before restriction was applied, there was a tendencyfor more capital to be invested in the restricting in-dustry—and it is such a tendency which is the raisond'etre of restrictionism—it should be clear that when thischannel of investment is closed, other channels wherethe prospective return is thought to be lower must beresorted to. That is to say, the productivity of newinvestment is lower. There will be more invested inother lines of industry than would have been the casehad restriction not been applied. The volume ofworkers seeking employment in other lines of industry,too, will be greater.

Now if investors are not quickly responsive to thischange in the rate of return on investment, the effectwill be a tendency to deflation. And surely this is notimprobable. The man who is prevented from reapinga gain of, let us say, 7 per cent on investment in roadhaulage will not immediately be content with the 6per cent which is perhaps the best he can hope for


elsewhere. He will say, "Things can't be as bad as all this;I must wait a bit". So he keeps his money on depositor in some short-dated security. There is a tendencyfor saving to lag behind active investment—a dragon the velocity of circulation. The proliferation of re-striction schemes may preserve existing capital values,but it is detrimental to the revival of investment.

But beyond this, and far transcending it in long-run importance, is the tendency of restrictionism tospread. There is a sort of snowball tendency about thiskind of interventionism which has no limit but com-plete control of all trade and industry. It is clear that,within the restricting industries, the State will bedriven to adopt closer and closer control if the schemesare not to break down from evasion of their rules. Itis one thing to forbid farmers and others not to pro-duce more than a certain quota. It is another thingto prevent them doing so. The Agricultural Adjust-ment Act which pays farmers to throw land out ofcultivation contains the pathetic proviso that suchrestriction must be unaccompanied by "increase ofcommercial fertilisation". How, short of the socialisa-tion of American farming, do the framers of this stipu-lation propose to put it into force?

But the tendency to extension of control does notoperate only within the industries already partiallysocialised. It works just as conspicuously outside thissphere. As we have seen already, the fact that pro-duction in one line is limited means that more capitaland labour will be available for other lines of produc-tion. The fact that some farmers who wish to growpotatoes are precluded from doing so, because theyare not in the original restriction scheme, means thatmore of other kinds of produce will be forthcoming.


But this increase in supply will bring down prices.The earnings of those already in these lines of pro-duction will be reduced. They will go to the Govern-ment and say: "You have helped the growers ofpotatoes to make higher profits, but it is time you didsomething for us. If you don't, we shall insist that it isa scandal and a shame that we are not allowed togrow more potatoes." There is no law of analyticaleconomics which obliges us to conclude that aminister of agriculture, anxious to make his way in theworld, will not tell them to go away and be contentwith lower earnings. But experience suggests that thisis not the line he will adopt. And so new controls areinstituted. It is the overwhelming verdict of theoryand war-time experience that once Governments startto control important branches of industry, if they arenot willing at some point definitely to reverse theirwhole line of policy, there is no stop to this processshort of complete socialism.

6. But is this a tendency we wish to avoid? I t is notclear that this is the attitude of the present leaders ofopinion. Socialism is a term which is not universallypopular. But "planning"— ah! magic word — whowould not jplani We may not all be socialists now, butwe are certainly (nearly) all planners. Yet, if planningis not a polite name for giving sectional advantagesto particular industries, what does it denote but social-ism—central control of the means of production? A"planned" economy introduced by right-wing partiesmight for a time (until the parties of the left gotcontrol) acknowledge certain rights to the receipt ofincome, in the past associated with the ownership ofproperty, which would be destroyed at the outset by apurely socialist dictatorship. But, if it were to be true


to its name, it could not acknowledge the substance ofownership, the right of individual disposal of the actualinstruments of production. For "planning" involvescentral control. And central control excludes the rightof individual disposal. Nothing but intellectual con-fusion can result from a failure to realise that Planningand Socialism are fundamentally the same. Now theleaders of opinion want planning.

But do they know what they mean? Have they reallyfaced what planning involves? This is by no means socertain.

I t is often thought that the erection of State-aidedmonopolies of the kind we have discussed already is anintegral part of the general policy of planning, and thatthe problems which confront the framers of suchschemes are essentially the problems of a plannedsociety. No doubt this belief is helpful to the interestswhich benefit from the existence of State-aided mono-poly: it enlists for the support of sectional exploitationa body of disinterested opinion which would otherwisebe hostile. But it rests on misapprehension. The prob-lems which confront the organisers of a particularindustry differ, not only in degree, but also in kindfrom the problems which confront the organisers of aplanned economy.

A simple example should make this quite clear. I t isto the interest of any particular branch of industry thatit should have plentiful supplies of capital at low ratesof interest. Only if the rate of return on new invest-ment in that industry were zero and the rate at whichit borrowed were also zero would its interest in moreand cheaper capital be at an end. But for the organisersof the system as a whole it presents itself in quite adifferent manner. For them it is not desirable that any


particular industry should have an unlimited claim, atthe lowest possible rates, to the limited supply of freecapital. For them the problem is essentially a problemof distributing the given supply between differentindustries. The solution of this problem is different inkind from the solution of the former problem. Longbefore the organisers of a particular industry wouldcease to benefit from a reduction of the rate at whichthey could borrow, there would come a point at whichthe economy as a whole would lose by not devotingcapital to some other object. From the point of viewof the economy as a whole, making certain assumptionsregarding the relative importance of different con-sumers, the greatest gain would be reaped when allindustries borrowed at an equal rate. From the pointof view of any particular industry there would alwaysbe a gain in borrowing more cheaply than the others.

It should be clear then that the problem of planningis not to be solved by giving each industry the powerof self-government (i.e. restriction of entry and pro-duction). This is not planning; it is syndicalism. Itmerely extends to whole industries the right to makeplans for themselves similar to the right already en-joyed by individual entrepreneurs. But by eliminatingcompetition, or potential competition, it creates astate of affairs much less likely to be stable—muchmore likely to be restrictive—than the so-called chaosof competitive enterprise. President Roosevelt maythink that by suspending the Sherman Act, and bygiving each industry the right to restrict competition,he is creating the framework of an ordered society. Buthe is likely to receive a rude shock. A planned economymust be planned from the centre. This is the onlyintelligible meaning which can attach to the concept.


7. But on what basis is planning to take place?1 Therationale of a planned society must surely be t h a t itserves some purpose outside the plan. I t must beplanned for something. There are few who wouldregard the mere imposition of a pa t te rn as an end initself. W h a t purpose is the plan to serve? Whosepreferences are to govern the organisation of pro-duction?

If the question is pu t in this way the answer seemsobvious. A democratic community, a t any rate, willa t t empt to organise production to meet the preferencesof consumers. I t will not value branches of productionas such. I t will value them for the various individualsatisfactions which they make possible. I t will notdecide t h a t the production of boots must be a certainabsolute volume before it has ascertained the relativestrength of the demand for boots and the demand forthe products whose production has to be sacrificed ifcapital and labour are pu t to this job rather than toothers. I t will seek to distribute the factors of produc-tion between different lines of industry in such a wayt h a t i t will be impossible to withdraw them from anyone line and pu t them to any other without the pro-ducts sacrificed being of greater value than the pro-ducts gained. And if wants change, or if the means ofsatisfying them alter, i t will seek to rearrange produc-tion so as once more to a t ta in this end.

But how is this to be done? W h a t mechanism isavailable for ascertaining the complex and changingtastes of the millions of different individuals constitut-ing the community? And what means are present for

1 The argument which follows owes much to the work of Professor Lud-wig von Mises. See especially his Gemeinwirtschaft. A translation of thisimportant book is shortly to appear in English.


deciding the relative efficiency of the different factorsof production for satisfying these ends? How will theorganisers of the planned economy choose between theproduction of boots and the production of potatoes?And having chosen, how will they decide the mostexpeditious methods of production?

Let us examine first the ascertainment of the pre-ferences of consumers. It should be quite clear thatthis is not a matter which can be satisfactorily settledby the methods of political election. The problem of theplanning of production concerns a vast multiplicity ofalternatives. It is not a matter of "Vote for Jones andmore umbrellas" or "Vote for Smith and more water-proof suiting". Thousands of commodities are involvedand the possibilities of alternative grouping run intomany millions. It is clear that to attempt to solve theproblem this way would result in complete chaos—achaos which would result, not in consumers gettingwhat they wanted, but in their being given simplywhat the planning authority on quite arbitrary prin-ciples decided that they ought to want—which wouldbe by no means the same thing.

At first sight there seems ready to hand a much moreefficient mechanism. If the various individuals con-stituting the community were given sums of money andwere left free to bid for the various commodities avail-able, there would result a series of prices which wouldbe the objective register of their various preferences.The market in this respect may be compared to a con-tinuous election with proportional representation.Every shilling spent is a vote for a particular com-modity. The system of prices as a whole is the registerof such an election.

It might be supposed then that a democratic com-


munity, determined to plan production, would attemptto resort to the market as a means for ascertaining therelative urgency of the demand for the various com-modities available. A plan which was based upon thepreferences of consumers would seek so to distribute itsproductive resources that the demand for all com-modities was satisfied to the same level of urgency.If in making clothes a given quantity of labourproduced less value in price terms than it wouldproduce in the making of, let us say, fireworks, itwould be withdrawn from the one and devoted to theother. And so with all the multitudinous instrumentsof production.

But it is one thing to sketch the requirements of theplan. It is another thing to conceive of its execution.It is in carrying out these requirements of productiveorganisation that the project of planning to meet con-sumers' demands seems likely to encounter obstaclesof a quite fundamental character—obstacles of whoseexistence the majority of the advocates of planning donot seem to have the slightest suspicion.

The requirement of a rational plan, as we have justseen, is that the factors of production (the land, capitaland labour) should be so distributed between thevarious alternatives of production that no commoditywhich is produced has less value than the commoditieswhich might have been produced had the factors ofproduction been free for other purposes. But how is thisto be carried out? How is the planning authority todecide what distribution of resources satisfies this re-quirement? We have seen that it can do something toascertain the preferences of consumers by permittingthe pricing of the different commodities they consume.But clearly this is not enough. It must know also the


relative efficiencies of the factors of production in pro-ducing all the possible alternatives.

On paper we can conceive this problem to be solvedby a series of mathematical calculations. We canimagine tables to be drawn up expressing the con-sumers' demands for all the different commodities atall conceivable prices. And we can conceive technicalinformation giving us the productivity, in terms of eachof the different commodities, which could be producedby each of the various possible combinations of thefactors of production. On such a basis a system ofsimultaneous equations could be constructed whosesolution would show the equilibrium distribution offactors and the equilibrium production of commodities.

But in practice this solution is quite unworkable.It would necessitate the drawing up of millions ofequations on the basis of millions of statistical tablesbased on many more millions of individual computa-tions. By the time the equations were solved, theinformation on which they were based would havebecome obsolete and they would need to be calculatedanew. The suggestion that a practical solution of theproblem of planning is possible on the basis of theParetian equations simply indicates that those who putit forward have not begun to grasp what these equa-tions mean. There is no hope in this direction ofdiscovering the relative sacrifices of alternative kindsof investment. There is no hope here of a meansof adjusting production to meet the preferences ofconsumers.

Under competitive conditions this problem is solvedby a comparison of costs and prices. In a free capital-istic society, the business man, deciding in what lineto extend his enterprise, will take two things into


consideration: on the one hand, the prices at whichvarious commodities may be expected to sell; on theother, the costs which their production by varioustechnical methods may be expected to incur. Hisexpectations of price are based upon his knowledgeof markets. His expectations of cost on • technicalinformation coupled with knowledge of the prices forthe various factors of production. But the prices ofthe various factors of production, which are the re-sultant of the competitive bidding of the differententrepreneurs, tend to reflect the value of their con-tribution to the production of different products. If,therefore, costs are below prices in any line, that is anindication that additions to production in that line aremore valuable in terms of consumers' preferences thanthe things which are being produced elsewhere—thattransfer would result in a distribution of factors morein accordance with the preferences of consumers. If,under competitive conditions, the cost of producingpotatoes is above the price which potatoes will fetch,that is an indication that some of the resources devotedto producing potatoes would produce things of morevalue elsewhere. Computations of costs and pricesunder competitive conditions are, as it were, a short cutto the solution of the millions of equations whosemultiplicity we found such an obstacle to planning.The free market does the rest.

But, unfortunately, it is not easy to see how suchcomputations could be made by a planning authority.For the possibility of computations of relative profit-ability of this sort involves the existence, not merelyof a market for final products but also of marketsfor all the multitudinous elements entering into costs:raw materials, machines, semi-manufactures, different


kinds of land, labour, expert guidance and, last but notleast, free capital—with the entrepreneurs constitutingthe sellers and buyers, each acting according to hisanticipation of the prices in the various markets inwhich they operate. But, by definition, the centralplanning authority has abolished all that. I t disposesof all resources. There is no division between buyersand sellers. A plan is the centralised disposal of factorsof production. And centralised disposal of the factorsof production precludes the existence of free markets.The planning authority can order production to beorganised how it wishes. But it does not seem to be in aposition to keep accurate accounts. How, then, can itplan in the spirit we have postulated?

It is sometimes thought that this difficulty can besurmounted by the creation of fictitious markets. Theplanned society is to be broken up again into semi-independent productive units, and the management ofthese units must, as it were, play at competition. Theywill bid against each other for factors of production,sell their products competitively, in short behave as ifthey were competitive capitalists. In this way theplanned society will be realised.

There is a certain aesthetic attraction in the con-templation of a project which, setting out to eliminatethe institutions of a "planless" society—the "chaos ofcompetitive enterprise"—arrives finally at an attemptto reproduce them. Unfortunately there does not seemreason to suppose that the reproduction would be suc-cessful. The propounders of such schemes conceive ofthe problem in altogether too static and simpliste amanner. They conceive of competitive prices as spring-ing from the demands of clearly demarcated admin-istrative units whose continuity can be postulated


without destroying the hypothesis that competitiveprices are realised. But this is not the case. The conditionsof demand and supply are continually changing. Tasteschange. Technique changes. The availability of re-sources and the supply of labour and capital is in pro-cess of continual alteration. Competitive prices in thefactor markets are the resultant of all this multiplicityof forces influencing the disposal of individual capital.For competition to be free the entrepreneur must be atliberty to withdraw his capital altogether from one lineof production, sell his plant and his stocks and go intoother lines. He must be at liberty to break up the ad-ministrative unit. It is difficult to see how liberty ofthis sort, which is necessary if the market is to be theregister of the varying pulls of all the changes in thedata, is compatible with the requirements of a societywhose raison d'etre is ownership and control at thecentre. No doubt capitalism as we know it, encum-bered on all sides by interventionism and State-createdmonopoly, and distorted by the vagaries of mis-managed money, is very far short of the accuracy ofcompetitive adjustment. But with all its deficiencies inthis respect, it seems a much more flexible mechanismthan the collectivist alternatives. The path towards acompletely planned economy is not a path towards, itis a path away from, the organisation of productionwhich would fulfil most completely the preferences ofconsumers.

In fact, of course, there is very little reason to sup-pose that the authorities of a planned society wouldresort to pseudo-competition. It is much more probablethat they would fall back upon frankly authoritarianplanning. They would attempt to manage productionas a whole as the general staff manages an army at war.


They would probably retain the price mechanism asan agency for distributing consumers' goods, supple-menting it when anything went very wrong by thedevice of rationing, as in Russia at present. But for therest they would dictate production from the centre,choosing what kinds and qualities seemed to themmost desirable. Such decisions, as we have seen, couldnot be based on an accounting system with any veryprecise meaning. The planning authorities would haveno way of discovering with any accuracy whether theends they chose were being secured with an economicaluse of means. In particular lines of production theycould no doubt erect an apparatus which, from thetechnical point of view, would be very imposing. ThePharaohs did not need a price system for the erectionof the pyramids. But at what sacrifice of other goods itsproducts would be secured, at what economic, as dis-tinct from technical, efficiency,1 it functioned, could notbe ascertained. The system would require the completeregimentation of individuals considered as producers.As consumers they could choose between the com-modities available. But on the choice of commoditiesto be produced they would have relatively little in-fluence. They would have to take what it was decidedto produce. And what it was decided to produce wouldbe the resultant, not of the conflicting pulls of pricesand costs, but of the conflicting advice of differenttechnical experts and politicians with no objectivemeasure to which to submit the multitudinous alter-natives possible.

1 For a more extensive discussion of the difference between the economicand the technical see my Essay on the Nature and Significance of EconomicScience, chapter ii., also my article on "Production" in the Encyclopedia ofthe Social Sciences, vol. 12. It is perhaps no exaggeration to say that failureto distinguish between the technical and the economic lies at the root ofnearly all the major confusions of contemporary economic discussion.


Is it certain that such a system would be moreefficient than Capitalism? Is it certain that the friendsof liberty and progress who are also friends of planninghave sufficiently considered the compatibility of theseaims?

8. If the world were united under a single Govern-ment, the tendencies of restrictionism which we havealready examined would find their logical conclusionin complete world socialism. In the world as we knowit, they tend to a world of national socialist economies.If we examine the prospects of a world of this sort, wefind further reasons for doubting both its efficiencyand its stability.

The authorities of a democratic State which was runon planned lines would presumably postulate, as theobject of their plan, the ideal which we have sketched inthe previous section—the organisation of production tomeet the preferences of consumers. In carrying out theplan, in so far as they were concerned with domesticproduction, they would encounter the accounting diffi-culties we have already examined. In so far as theywere concerned with production entering into inter-national trade in one way or another, in certain circum-stances their task would be facilitated. A socialistState in a non-socialist world enjoys something of theadvantages of a municipal undertaking. I t can base itscalculations on the outside market. I t can judge theefficiency of its own enterprise by comparison withcosts elsewhere. Because others buy and sell, it cancalculate. Of course this is all a matter of degree. Alarge State doing a small international business withthe rest of the world would have small help here ineconomic calculation. But a small State doing extensivebusiness with the rest of the world might well evade


most of the difficulties of economic calculation whichwould arise under purely socialist conditions.

In such circumstances, the trade policy appropriateto the aim of planning to meet the preferences of indi-viduals would be one which approximated in all import-ant particulars to the traditional free trade policy. Theproductive resources of the State would be put to theuses for which they were relatively most efficient inprice terms. If commodities could be procured morecheaply from abroad, by way of producing somethingelse and sending it in exchange, this would be done. Aconcern whose costs were higher than the costs of acorresponding concern abroad would cease to receiveorders. I t would have to go out of business. The capitaland labour there employed would have to be put toother uses. The ideal trade policy of a State planned toraise to a maximum the real incomes of its members inall these formal respects would exactly resemble thetrade policy of economic liberalism.

But is there the slightest chance that a State of thiskind would in fact pursue such a policy? Can we imaginea socialist State permitting free imports to undercutthe products of its own factories? Surely not. All theprobabilities point to a policy of restrictionism. Havinginvested resources in a given set of undertakings, thepolicy actually adopted would be to maintain theirvalue intact. If this necessitated the exclusion of com-peting foreign imports, they would be excluded withouthesitation. I t would be so much easier, it would causeso much less friction with the producers, to do this thanto bring about the changes in the organisation of pro-duction which the new conditions of internationalsupply and demand made desirable. If the conditionsof international trade were such as to call simply for


an expansion of established export industries a t a con-s tan t or rising ra te of money incomes, this tendency-would not operate. Bu t a planned economy which didnot occupy so fortunate a posit ion—an economy whoseposition in the world was such as to necessitate con-tinual readjustments if the full advantages of inter-national exchange were to be enjoyed—would almostinevitably come to adopt a policy of greater and greaterisolation. The ideal socialist policy would be equivalentto the free t rade adjustment. The actual policy wouldbe equivalent to something worse t han high protec-tionism.

But all this assumes a planned economy operatingwithin a world of otherwise free enterprise.1 A world ofplanned economies would present a total ly differentpicture. I t would be a world of geographical syndi-calism. Any semblance of a competitive marke t wouldhave disappeared. Inside the various systems therewould be author i tar ian disposal of the factors of pro-duction; between them a chaos of bilateral bargainsbetween Sta te monopolies. We have seen already thedisorder and indeterminateness brought about in Cen-tral Europe and elsewhere by the a t t emp t to make bar tert rade agreements the foundation of t rade policy. I n aworld of planned economies this disorder and indeter-minateness would be general.

I t is often said t h a t in such circumstances the worldof planned States would be merged in a scheme ofworld planning. We have seen already t h a t there aregrave reasons for doubting the efficacy of this part icularsolution. But , quite apar t from this, how improbable issuch an outcome. The process which has preceded the

1 This does not exclude the existence of a good deal of petty tradeobstruction, tariffs, and so on.

VII RESTRICTIONS! AND PLANNING 159

state of affairs we are contemplating is a process whichin every direction has strengthened the forces of eco-nomic and political nationalism. Vested interests ofofficialdom and associations of producers, not to men-tion the emotional forces which tend to be projectedupon anything specifically national, would all presentbarriers to international union much more formidablethan any yet existing. A world in which the movementof goods, of money and of people, is restrained andimpeded by national organisation is a world in whichthe achievement of the international ideal, whether onSocialist or Liberal lines, is more distant even than it isat present. I t is mere self-deception to believe, as somany Socialists now believe, that such developmentsare an "inevitable stage" in the "right line" of evolu-tion, just as it is self-deception to urge that it is rightto arm further to facilitate disarmament, to erecttariffs in order to promote free trade, and so on. Theseare not cases of reculer pour mieux sauter; they arecases of recoiling to jump in the opposite direction.Nationalism and internationalism in the field of eco-nomic organisation are inimical to each other. Whateverleads to the one must inevitably lead from the other.

It is difficult to believe that in such a world inter-national peace would be safer, or national productivityhigher, than in a world of free enterprise. Internationaldivision of labour would be less; international invest-ments almost negligible. To the existing causes ofpolitical friction between States would be added a hostof economic frictions which do not arise when inter-national trading is in private hands. A world of nationalplanning is not a world which offers high hopes ofpolitical stability or economic progress.

CHAPTER VIII

CONDITIONS OF RECOVERY

1. UNDER what conditions might we hope for stablerecovery? It is not the function of the economist toframe a day-to-day programme of action. But if hisdiagnosis is correct, it should enable him to describethe general conditions which must be satisfied if thedisorders he has indicated are to disappear. Whetherit is ultimately desirable that they should disappearit is not within his capacity as economist to judge. Onthe basis of what has been said in earlier chapters,therefore, an attempt will now be made to outline theconditions under which business might be expectedto revive and the tendencies to extreme instability, socharacteristic of the post-war period, might in somedegree be eliminated. Complete stability is probablyunattainable. But experience suggests that there arecauses of instability which could be eliminated if itwere so desired.

2. The first essential of any recovery from the posi-tion in which the world now finds itself is a return ofbusiness confidence. Much as has been done in variousways to eliminate the causes of the initial dislocations,men will not recommence business operations, theywill not undertake new commitments of any but themost transitory nature, unless they have confidencein the future. The revival of industry in the lines where

160

CH. VIII CONDITIONS OF RECOVERY 161

it is most depressed—in the capital-producing in-dustries—depends upon a revival of willingness to takelong-term risks, to plan for a future beyond the dayafter to-morrow. Enterprise is the assumption of risk.But when risk is too great enterprise will not be under-taken.

But how is confidence to be restored?It should be quite clear from what has been said

already, that, political complications apart, the maindanger to confidence at the present time is the fear ofmonetary disturbance. A world in which the exchangesfluctuate on the scale on which they have fluctuatedduring the last three years is not a place in whichany general revival of business can be expected. Localrevivals there may be, in the areas benefited by relativeunder-valuation. But world-wide revival cannot comefrom such causes. While this very paragraph was beingwritten, there came news of the depreciation of yetanother currency. Before it is printed, there may bemany more. There can be no healthy recovery on sucha basis. So long as there is danger either of loss ofmarkets through exchange fluctuations, or loss ofcapital through internal inflation, investment will hangfire and revival be retarded. The first essential ofworld-wide recovery is some degree of stabilisation ofthe foreign exchanges.

It is often said that stabilisation of this sort shouldnot be attempted until prices have risen. Until priceshave risen to the level at which they stood before theslump started, it is urged, it is wrong to think aboutexchange stabilisation. When we are back at the 1926price-level, and not before, it will be time to discusssuch refinements as exchange stability. Such has beenthe view of the English reflationists. Such was the

M


ground on which President Roosevelt destroyed theprospects of the World Economic Conference.

Now it may be freely admitted that the level ofprices, which exists at the bottom of a great depression,is not a level which it is desirable to perpetuate. Noone who has followed the analysis of the earlier chaptersof this book will be disposed to question the exist-ence of deflationary tendencies which have reduced thegeneral level of prices considerably below the levelwhich the purely technical tendencies operative beforethe slump h( gan would have led one to expect. No onewill deny th- x the presence of unusual risks in the shapeof exchange fluctuations, apprehensions of politicaldisturbances and the like, has held up spending to adegree which has been highly deflationary. I t is quiteclear that if confidence were restored there would besuch an increase of spending as would raise certainprices considerably.

But it is one thing for prices to rise as a result of therestoration of confidence. I t is quite another to attemptto push them up by deliberate monetary manipulation.A rise in prices which comes from a return of confidenceis a movement which may be viewed without appre-hension, provided that it is not too quick and that itdoes not go too far. (The sudden uprush which comesfrom relief from undue panic, as in the United Statesin the May and June of 1933, is not of this order.) Butthe rise of prices which comes from the anticipationof inflation, the upward spurt which comes from amomentary gain in the race of competitive deprecia-tion, these are movements which, so far from creatingthe basis of lasting confidence, are likely to destroythe basis in which lasting confidence can be built. Twoyears ago, when the present writer and others drew

VIII CONDITIONS OF RECOVERY 163

attention to the real danger of competitive deprecia-tion to which the policy of isolated reflation was lead-ing, fears of this sort were treated as academic andillusory. At the present day, if they are to be dis-credited, they must be described by other adjectives.1

Failure to stabilise at an earlier date on the part ofGreat Britain was one of the main causes of the aban-donment of the Gold Standard by the United Statesof America. Failure to stabilise generally at the WorldEconomic Conference was one of the main causes ofthe present grave economic and political difficultiesof the different members of the Gold Block, amongwhich are to be counted the most conspicuous of theremaining parliamentary democracies of continentalEurope. If democracy goes by the board altogether,among the chief States of continental Europe, thechaos of international exchanges since 1931, althoughby no means the only cause, will have played a notunimportant role in bringing about the disaster.

As for the view that what is necessary is to raiseprices to the 1929 or to the 1926 level, it is perhaps un-necessary to waste much time in argument. Whatevermay have been its influence two years ago—and as wehave seen it was the main cause for the British refusalto co-operate in repairing the ravages of the disasterof 1931—at the present day it is coming to be realisedthat as an objective it is not merely illusory, butpositively harmful. If the analysis which has been de-veloped in these pages is correct, one of the maincauses of the present difficulties was the inflationaryboom of 1927-29. To raise prices from their presentlevel to the level of the pre-slump period would be torun the risk of a repetition of this disaster. Already it is

1 See a correspondence in the pages of the Economist, May 1932.

164 THE GREAT DEPRESSION cm.

abundantly clear tha t if recovery gets going at all—and of course it is not certain tha t it will not be frus-trated by war or by Government policy—one of themain tasks of the monetary authorities will be toprevent it flaring up into a wild boom whose collapsemight well be associated with consequences even moredisastrous than anything which has happened inthe present depression. The policies which have beenpursued by the Central Banks in the a t tempt tocounter deflation have resulted in the creation of abasis for credit expansion much more considerable thantha t existing at the commencement of the slump.1 Ifbusiness prospects were to brighten and confidencewere to be restored, it would probably be incumbenton the authorities actually to contract this basis ifthings were not to get out of hand. To carry throughsuch a policy of business stabilisation and at the sametime to a t tempt to get back to the price-level of 1926are not compatible undertakings.

3. I t is clear, then, tha t some kind of provisionalstabilisation of exchanges is the first condition of per-manent recovery. Having regard to the incredible con-fusion into which the world has been thrown by theexchange policy of the United States, it is improbabletha t anything more than provisional stabilisation canbe hoped for until sufficient time has elapsed for it tobe seen whether the new parities are appropriate tothe permanent elements in the situation. I t wouldcertainly be most unwise to a t tempt to restore theGold Standard under conditions which would make itsoperation impossible. The countries which are now offthe Gold Standard will do well to follow the example

1 See Chart above, Chapter II. p. 18, and Tables 13 and 14, StatisticalAppendix.


set by the French in 1927 rather than that set by theBritish in 1925, in bringing about a final stabilisationof the exchanges.

But while provisional stabilisation must come first,final stabilisation must come later, if full recovery on aworld-wide scale is to be possible. There can be no re-vival of international lending, no extensive reductionof obstacles to international trade, until uncertaintywith regard to the exchanges is finally at an end. Untilinternational investment revives, until internationaltrade is relieved of some, at least, of the impedimentswhich now hinder its operation, it is futile to hope forrecovery to reach a very high level. This considerationis important for all countries dependent to any greatextent upon relations with the outside world, but itis especially germane to the circumstances of GreatBritain. Important as are the new industries cateringfor the home market, there can be no full restorationof prosperity for this country, without a considerablerestoration of international trade and internationalinvestment.

On what basis should such stabilisation take place?It is clear that two things are desirable. Firstly, thatmonetary conditions in different parts of the worldshould be kept in a relationship conducive to inter-national equilibrium—that the local movements ofmoney and credit should be such as to bring aboutthose movements of relative prices necessary to avoida breakdown of the regime of stabilised exchanges.Secondly, that monetary conditions in the world as awhole should be such as to avoid the creation of largefluctuations of trade and industry by the generation ofinflationary booms. Let us examine these requirementsseparately.


So far as the preservation of interlocal equilibriumis concerned, it is clear that the main requirement is amechanism which allows payments between individualsand groups of individuals living in different countriesto exercise the same effect on prices as would beexercised by similar payments between individuals andgroups of individuals living in the same country—amechanism which puts payments between countrieson the same footing as payments between counties.If, on balance, the payments made from Edinburghto London in a certain period exceed the paymentsmade from London to Edinburgh, it is necessary, ifequilibrium is to be preserved, that there should be acontraction of balances in Edinburgh and an expan-sion in London. If this does not happen—if balancesin London are increased and balances in Edinburghare not diminished—then there is a net inflation, andthe disequilibrium in the trade balance will continue.Precisely the same thing is true of international pay-ments. The requirement of equilibrium is that themovements of active balances should exactly balanceeach other. If this does not take place, if in onecentre there is "offsetting" in the sense of creatingnew credit to take the place of the credit which hasbeen transferred, then the conditions of equilibriumare not satisfied. As we have already seen, underconditions of this sort, most disastrous inflations maybe generated.

It is clear that such requirements would be fulfilledby a banking system which was completely unifiedand international. The balances in the various branchesin different parts of the world would expand and con-tract automatically with the payments in and out ofthe various customers. It would be within the power of


the controlling authority to maintain effective inter-national and interlocal equilibrium.

Such a system is not practicable. In a world ofseparate States, it is highly improbable that completesurrender of the right to regulate the conditions ofsupply of money would be made by the variousnations. It is an open question, on quite other grounds,whether such a complete elimination of separate banksis desirable. In any case we may be quite sure that suchan arrangement is not immediately probable. Inter-national equilibrium will not be secured on these lines.

But the advantages of such an arrangement can besecured in a much more practical manner. If the vari-ous Central Banks agree to buy and sell one of theprecious metals at a fixed price and if they regulatethe volume of credit in their respective areas by refer-ence to the fluctuations in their holdings of thesemetals, expanding as they increase, contracting as theycontract, and rigorously avoiding "offsetting" creditcreation, the same effects will be secured as regardsinterlocal adjustment as if the money of all thesecountries were exclusively composed of the preciousmetal or if the credit arrangements of the world werein the hands of one bank. If prices and costs in a par-ticular area are too high in relation to the world con-ditions of supply and demand, payments out willexceed payments in. Elsewhere the reverse state ofaffairs will prevail. Payments out will tend to be madeby shipments of the precious metal which forms thecommon basis of the different countries. If no "off-setting" takes place, there will be a tendency forprices and costs in the different areas to be broughtinto equilibrium.

But what is this but that most maligned and mis-


understood institution, the Gold Standard, run, noton the inflationist lines which caused its breakdown inthe years after the war, but on the strict lines whichthe theory of the Gold Standard rightly understoodhas always postulated? It was the rationale of theGold Standard in the sense in which it was alwaysunderstood by its intelligent supporters—it is not reallyvery clever to pretend that the bulk of expert opinionin the past has always been actuated by ignorant pre-judice—that it imposed on a world of separate nationalStates and national currencies the same conditions aswould obtain if the currency system were truly inter-national. To be on the Gold Standard in this sensemeant that although the various national moniesmight have different units of account yet the value ofthese units was kept in a fixed relationship. Inter-national payments had the same significance as inter-county payments. Arbitrary increases in the localsupply of money could take place only at the risk ofbeing forced off the Gold Standard.

It is quite clear that such a system is not fool-proof.It is not "automatic" in the sense that it is independentof human volition. As we have seen since the war, if itis attempted to work it without regard for the ruleswhich constitute its raison d'etre, it breaks down. Butso far as international adjustments are concerned itsets a clear objective of policy. It possesses powerfulpsychological sanctions. It provides a basis on whichmen can trade and invest internationally with somedegree of confidence. The pre-war world in which sucha system prevailed was not immune from generalcyclical fluctuations but, save in outlying parts, itwas reasonably immune from the evils of fluctuatingexchanges and the paralysis of capital movements.

vm CONDITIONS OF RECOVERY 169

This it owed to the Gold Standard. The achievement ofeven such a limited degree of stability would seem tobe a worthy object of policy in our own time.

But what about our second requirement, a monetarysystem which avoids the generation of general fluctua-tions'?

I t is quite clear that there is nothing in the GoldStandard as such which precludes the generation ofsuch fluctuations. I t is possible to conceive them aris-ing under a monetary system consisting solely of goldcoins and token money with no bank credit. Once bankcredit is taken into account, the probability of theiroccurrence, in the absence of policy directed to securetheir elimination, becomes much greater. I t is clearthat the accidental variations of geological discoveryand mining technique do not necessarily guaranteefluctuations of money supply conducive to the elimina-tion of cyclical fluctuations. Discovery of this truismhas often afforded great satisfaction to first-yearstudents and platform speakers in search of cheapeffects.

But this is by no means decisive against the GoldStandard. I t is clear that it is a safeguard against grossinflation. Uncontrolled, it permits a certain degree ofinflation which no doubt may be very damaging. Butit sets a limit to such movements which does not existunder a free standard. I t is unfortunately true that inthe past there is no example of a paper standard whichhas not sooner or later suffered a degree of depreciationinconceivable under any probable condition of theGold Standard. Moreover, if run according to the rulesinherent in the logic of its conception it is a safeguardagainst local depreciation. There can be little doubtthat the extreme severity of the present depression is


due in part to the fact that it was the result of aninflation conditioned by local disequilibrium. As wehave seen, the American inflation would never havegone so far had it not been for the disequilibrium ofGreat Britain. The American inflation is a product ofthe absence of a banking policy on Gold Standard lines.

Beyond this—and for those who have hopes that intime the growth of knowledge will permit the smooth-ing out of the worst excesses of cyclical fluctuation,this is the important consideration—there is nothingin the Gold Standard as such which precludes con-certed action for the stabilisation of business on thepart of the Central Banks concerned. Examination ofthe probable trend of the gold supply during the nexttwo decades does not suggest any mechanical obstacleto a policy of this kind. A "shortage" of gold in thesense of an absolute diminution or a failure of supplyto increase as rapidly as the gold-using population isimprobable. A rapid increase—itself conducive to largeinflation on a world scale—is also unlikely. With pricesat anything near their present level the present supplyshould be ample to permit of adequate reserves for suchCentral Banks as want them. For the rest, the possi-bility of concerted variation of reserve requirements byCentral Banks should be quite sufficient to ensure thatthe fact that their respective systems were linked togold should not be an obstacle to the carrying out ofprudent action designed to mitigate the instability ofbusiness.

But what form should that action take? I t would belacking in candour to suggest that at the present time weare in a position to draw up any very precise set of rulesfor such action. Our knowledge of the more intricatemechanism of fluctuations is far from complete, and it


is with the more intricate mechanism that a CentralBank policy which is not to be intolerably wooden andclumsy must be concerned. There is not completeagreement among economists upon these matters. It isagreed that to prevent the depression the only effectivemethod is to prevent the boom. But how this is to bedone is not a matter on which there exists unanimity.Certain economists, impressed by the analysis wherebyit is established that the policy of the stable price-levelis not necessarily conducive to general stability, nowurge that the object of policy should be the stabil-isation of incomes—that is, a price-level falling withincreased productivity. With the general theoreticalbackground of this proposal it is possible to feel con-siderable sympathy. Many of the propositions in thisessay are based upon similar analysis. But at the sametime it is still possible to feel considerable scepticismconcerning the adequacy of such a prescription. Theprice-level is a crude index for the carrying out of sointricate a policy as the smoothing out of the tradecycle. It is insensitive and slow to respond to what maywell be important changes of tendency. A policy whichwaits on movements of the price-level before taking theaction necessary to arrest the development of a boommay well miss the main opportunity of carrying out itsintentions. Much more promising, and at the same timemuch more practical—at least in the opinion of thepresent writer—is the suggestion that the banks shouldpay chief attention to the movements of the securitymarkets and that group of prices which is especiallysensitive to movements of interest rates. If, as soon asthere appeared signs of a general boom on securitymarkets, the Central Banks were to take action tobring it to an end, it seems probable that extremes of


business fluctuations might be avoided. Certainly thisis a policy which would have averted much of the dis-tresses from which the world has been suffering recently.

B u t whatever may be the t r u t h in this very difficultmat ter , one thing seems tolerably certain. The policyof stabilising the general level of prices and ignoring allother movements is a snare and a delusion. I t was thispolicy, conjoined with t h a t other policy of frustratingthe effects of gold movements , to which we have alreadyalluded, which was largely responsible for the catas-t rophe of 1929. Again and again during the boom yearswe were assured by men who should have known bet te rt h a t the t rade cycle had been eliminated, t h a t so longas prices did not rise there was no fear of over-expansion, t h a t the boom in land and common stockswas merely a reflection of the increased value ofproperty, and t h a t if there were any sign of a fallof prices due to a transfer of expenditure to StockExchange and real-estate speculation, then the CentralBanks should create more credit to support the specula-tion. This policy was pursued. Ye t such is the inflexi-bility of the human mind tha t , in spite of all t h a t i t ledto, there are yet to be heard voices urging t h a t a similarpolicy should be adopted in the next period of pro-sperity. I t is no accident t h a t they are the voices of menwho failed u t te r ly to see wha t was happening beforet h e depression, and who throughout the slump, nodoubt with the best will in the world, have consistentlysupported those policies which have arrested liquida-tion, prolonged uncer ta inty and delayed the coming ofrecovery.

4. I t is the a rgument of the preceding section t h a ta condition of final recovery is the restoration of aninternat ional Gold S tandard managed with a view to


preserving interlocal equilibrium and avoiding thedevelopment of booms. There can be little doubt thatat the present time a policy of this sort commands theapproval of a growing body of expert opinion. But it isby no means generally accepted. In this country, atany rate, there are those who favour a more separ-atist policy. They are willing to undertake a pro-visional stabilisation. They are willing to preserve acertain relation between the national currency andgold. But they are unwilling to fix a permanent parity.A Gold Standard with movable parities, not merelyduring the period of provisional stabilisation but alsoas a permanent arrangement, is the object of theirpolicy. Such influences must not be under-estimated.It is necessary, therefore, to give full consideration totheir case. Incidentally this will cast further light onthe position here adopted.1

The case for a Gold Standard with movable paritiesis essentially the case for an independent nationalstandard. The arguments by which it is supported areessentially the arguments by which the case for inde-pendent paper standards has been supported in thepast. It should be clear that a system under whichinterlocal adjustments are carried out, not by the gold-flow mechanism with its local expansions and con-tractions of credit, but by alterations of the par of ex-change, is no Gold Standard at all in the strict sense ofthe word. In its working it resembles the paper systemof pure theory. But because paper does not inspire con-fidence, because the constant fluctuations of paper areobviously damaging, it works behind a gold fac,ade.

The arguments for such a system are twofold. On1 The argument of this section is necessarily somewhat technical; the next

section takes up the thread of the general argument of the chapter.


the one hand it is hoped that in this way it will bepossible to insulate, as it were, the area in which itprevails from the general fluctuations of business whichoccur in the outside world. On the other hand it isclaimed that it provides a more effective method ofadaptation to changes in world conditions. Under theGold Standard proper, a change in the conditions ofworld supply and demand may involve a contractionof credit and a lowering of prices and incomes. Underthe Gold Standard with movable parities, a change inthe par of exchange will be sufficient.

The two arguments are not equally persuasive. Theclaim that a national system will be enabled to insulatethe area in which it prevails from general fluctuationsof business is not at all convincing. We can leave un-discussed the desirability of a mechanism which per-mits experiments in local inflation. (The possibility ofvarying the exchange removes the check of the goldflow). History affords no ground for confidence thatsuch experiments will not be attempted, and, as wehave seen, there is not yet sufficient agreement on thepolicy of monetary management to justify any verygreat confidence in supposing that one area will dobetter in this respect than the combined efforts of thebanks of the world as a whole. But, even if we ignorethese grave practical difficulties, there still remains theimportant general question, Can a system, which is incommunication with the rest of the world, insulateitself from world fluctuations by a device of thisnature? General reasoning affords no presumption thatit can. Indeed if the analysis of earlier chapters becorrect, there is a certain presumption that it cannot.For if it be true that a business cycle is generated bymovements of interest rates which affect relative prices


in such a way as to cause false expectation, there is noreason to suppose that a policy of local managementdirected to keeping the local price-level constant orgently falling would prevent the transmission of suchchanges arising in other parts of the world. If pricesin general in one part of the world moved differentlyfrom prices in the managed area, there would pre-sumably be a shift in exchange rates. But this shiftin exchange rates would not itself affect the relativeprofitability of different stages of production. If pricesin the capital-producing industries in the rest of theworld were affording a greater profit margin, then thefact that the British exchange rate moved against therest of the world would not prevent the British capital-producing industries receiving also a relative stimulus.It is not at all clear that the fluctuating exchange byitself is an effective insulator against this kind offluctuation. The principles of monetary managementwhich, in such circumstances, would eliminate dis-turbance have yet to be enunciated.

The argument for independence and insulation,therefore, is much less persuasive than might at firstbe imagined. The argument for automatic adjustmentto changes in the terms of trade, however, is on a muchless fragile footing. It is quite clear that the rigidity ofcosts in certain areas has been one of the great obstaclesto the successful functioning of an international stan-dard. It is clear that in the future it may give riseto difficulties. A system which eliminated such diffi-culties without countervailing disadvantages wouldhave much to recommend it. The question is, does it?Are there no countervailing disadvantages? It is thisquestion which is fundamental to the correct judge-ment of this proposal.


It is important to realise the exact object of thesystem if we are not to attach undue weight to theresult which it promises. If the fundamental conditionsof international trade bring about a lowering of theequilibrium real terms of trade, then no power in theworld can prevent real incomes from being lowered orunemployment from being created. If the demand forAustralian wool falls off, nothing can prevent the realreceipts derived from the sale of wool from beinglowered. The sole purpose of the device of the fluctuat-ing exchange, therefore, is to put the receivers of fixedmoney-incomes (contract wages, etc.) into the sameposition as those who sell directly in the world market.It is as though the people in the area concerned wereto say: "We know that the goods we sell in the worldmarket fetch a smaller weight of gold, but we don'tlike admitting that the weight is smaller. We willtherefore change the unit of weight and pretend ourincomes are the same." Only of course they don't knowit. The essence of the device is to carry through theadjustment without causing trouble. How long it wouldbe before wage-earners and others began to think interms of real instead of money wages, and whether itwould not be simpler in the end to instruct them in theelementary theory of markets, we may leave undis-cussed for the moment. Our question is rather, are thereaccompanying disadvantages?

There can be no doubt that such a system wouldimpose considerable limitations on international in-vestment. Long-term contracts between the inhabitantsof the different national areas would be subject to therisk of an alteration in the relative gold content of therespective currencies. A world of Gold Standards withmovable parities would be a world in which the volume

vni CONDITIONS OF RECOVERY 177

of international investment would be considerablyreduced.

Is this effect undesirable? A few years ago therewould have been almost unanimous agreement that itwas. The benefits of putting free resources to the pointof maximum return were so obvious; the part playedby the movement of international capital in the de-velopment of the modern world was so conspicuous.Who could have argued that the time had come to calla halt to such a process—that what had made possiblethe enormous increase in wealth of the last hundredyears had now ceased to have any function? And atthe present day, if we survey the wreckage left behindby the slump, the crushing shortage of capital in thoseparts of the world least able to provide it, can itseriously be argued that a revival of international lend-ing would be anything but beneficial? Nevertheless,there can be no doubt that there has been* a certainchange of opinion. The slump has brought disillusion-ment. So many of the international investments madein the pre-slump period have proved to have beenmisplaced, so much money that was sent abroad inthose days has been irretrievably lost, that to say thata certain measure will diminish the volume of inter-national lending does not nowadays arouse the appre-hension that it would have done in the days before theslump.

This attitude is surely unreasonable. Unquestion-ably in the past there have been grave mistakes in thebusiness of international lending. Unquestionably inthe future there will exist political risks which willmilitate against a revival of international investment.It is certainly desirable that greater prudence shouldbe exercised in the flotation of foreign loans. But the

N


fact tha t risks which were previously ignored are nowrecognised and that risks which did not before existhave now come into being is no argument for anarrangement which introduces yet another limitationon business. The fluctuating exchange discriminatesequally against all foreign loans of the same class,whether good or bad. I t does not really seem a sensibleplan to deal with one set of risks by calling another intoexistence.

Beyond this—and this is a consideration which hasespecial importance for Great Britain—it is importantnot to underestimate the structural and monetaryimplications of a great diminution of the volume ofinternational lending. The structure of industry allover the world has been based on the expectation oflarge volumes of international capital transfer. Theexport industries of countries like Great Britain de-pend even in their present shape upon a substantialvolume of capital export. If this is to cease, these in-dustries will have to be abandoned or totally trans-formed. Moreover, the monetary effects of such acurtailment are not such as to warrant the expectationof a smooth transition. If the custom of exportingcapital from the centres in which the rate of returnon investment is relatively low to centres where it isrelatively high is to cease, the long-term equilibriumrate in the erstwhile capital-exporting centres must bevery much lower than accords with present expecta-tions. This means a danger that long-term investmentwill hang fire, that balances will accumulate and, inshort, that that persistence of deflationary tendenciesin the system, which we all deplore, may be indefinitelyprolonged.

But this is not all. Quite apart from its effect on


long-term investment, the existence of a Gold Stan-dard with movable parities is likely to create a highly-dangerous and deflationary situation in the short-termmarket. We have seen already, in an earlier chapter,how the existence of abnormally large funds of liquidresources, ready to migrate at short notice from onecentre to another, has caused dislocation and difficultyin the chief money markets of the world. The settingup as a final arrangement of a Gold Standard with mov-able parities is likely to cause such a state of affairs tobe permanent. The prospect of alterations of paritycreates opportunities of investment which definitelyprovoke extraordinary transfers of capital. There havebeen abundant examples in the last few years. So soonas it is thought that the parity may be altered theredevelops an abnormal situation in the forward market.Short-term funds begin to distribute themselves ina wholly abnormal manner—flying from the centrewhere downward valuation is expected, piling up inthe centres where consequential appreciation is likely.I t is difficult to see how this can be avoided. Whatdealer operating in short money, who has reason toanticipate a downward valuation of the money of thecentre in which he is operating, will not regard this asa suitable occasion for an in-and-out operation? It ispretty clear that a regime of this sort must necessitatethe most extensive measures of exchange control andprobably the nationalisation of the entire apparatusof the capital market. Some may find this unobjection-able; if so, they should say so explicitly.

Such difficulties would accompany a regime in whichthe parities were moved only in accordance with the"ideal" theoretical requirements. In practice it isimprobable that the movements would be of this order.


The advocates of this scheme often speak as if theascertainment of the appropriate movements of theparities would be a simple matter. In fact it would bea matter of the utmost difficulty. In works on theory,in which the movements of exchanges are discussed,it is assumed that the movements of the real terms oftrade, etc., which occasion such movements, are given.In practice they would have to be discovered, and thisis no easy matter. To gauge the equilibrium exchangerate it is not enough to know how technical productivityin different areas is developing, though this is suffi-ciently difficult. It is necessary to know the movementsin relative demand for different kinds of goods, togauge the effects of the import and export of capital.It is impossible to believe that the authorities wouldhit the nail on the head nearly so often as they wouldif they were simply trying to maintain the Gold Stand-ard. And if they did not hit the nail on the head therewould arise all those tendencies to international dis-equilibrium which, since the over-valuation of thepound and the under-valuation of the franc, we havelearned to know so well.

All this, moreover, assumes that the question of theparity could be kept out of politics. But is it not almostcertain that it could not? No doubt there is no guaranteethat the working of the Gold Standard itself may notbe the subject of political debate and influence. Thissometimes happens. But can there be any doubt thatif the alteration of gold parities were to come to beregarded—to use the terms of one of its supporters—as "the most natural and easy means of adjustingthe international position of countries vis-a-vis oneanother", it would become one of the most naturaland easy ways of appealing to the electorate? Can the

CONDITIONS OF RECOVERY 181

supporters of this policy contemplate with equanimitythe disturbance in the sphere of industry and financein a world in which mob voting on the parity was oneof the staple items of democratic elections? Would itnot be one of the most certain methods of discreditingdemocracy?

But even if such a matter could be kept out ofdomestic politics, is it probable that it would not createinjurious repercussions in international relationships?This of course is a matter of practical judgement, notof analytical economics. But it seems fairly clear thatcompetitive depreciation, the erection of anti-exchange-dumping duties, systems of discriminating licensing andthe like, would be the almost inevitable accompanimentof any manipulation of exchange rates. It would be allvery well for the supporters of such manipulations togo round to the politicians of the nations undertakingsuch reprisals, and to say: "My dear friends, your ap-prehensions are groundless; we are only altering theexchange to correspond with the alteration of the realterms of trade. You must realise that this is in theinterests of international equilibrium." This is not thesort of story which will go down with the manufac-turers of competing exports. No doubt Gold Standardadjustments, too, may have the effect of intensifyinginternational competition, and may occasionally pro-voke tariff reprisals. It is improbable that they wouldlead to the kind of competition in depreciation andtrade restriction which seems the most likely outcomeof alterations of parity. There will be no substantialreduction of tariffs in a world of movable parities.

What, then, are we to say of the device of movableparities? It follows from what has been said alreadythat the disturbance and limitations upon the smooth


working of the economic machinery which it bringsinto being are in all probability even greater than thedisturbances and difficulties which we know may ac-company the working of the Gold Standard. I t follows,too, that these disturbances and difficulties are almostinseparable from the device as such, whereas the dis-turbances and difficulties which have accompanied theworking of the Gold Standard are not bound up withthe Gold Standard itself but spring from causes whichwith greater knowledge and goodwill we might hope tosee dissipated. But in matters of this sort we must notabstract too much. I t is improbable that in the nextfew years all the outlying raw material producingcentres will restore the Gold Standard. And so far asthe smaller areas, which in the past have probablyalready borrowed too much, are concerned, it is con-ceivable that the disadvantages of such an arrange-ment may not be too great, nor the repercussions onworld stability very considerable. But so far as thegreat financial centres of the world—London, Paris,New York, Amsterdam—are concerned, the weight ofargument is all the other way. If these centres do notestablish a common monetary system which permitsconfidence in the future and eliminates uncertaintywith regard to the exchanges, the continuance of theprocess of recovery to a very high level is improbable,and the danger of a relapse into severe financial crisisis very grave.

5. A stabilisation of exchanges and an eventualrestoration of an international monetary system, runon the lines indicated above, would probably afford thebasis for a considerable recovery of business if politicalconditions were favourable—if there were no war andif domestic policy in the various countries was not such


as seriously to disturb confidence. Over a wide spreadof business activity, in one way or another, there hasprobably been sufficient liquidation and cost reductionto restore the prospects of profit if monetary instabilityis eliminated. But recovery cannot be general, nor canit be expected to reach a very high level, so long asthe various barriers and impediments to internationaltrade which have grown up in the post-war period,especially since the slump, remain at their present highlevel. Full recovery, let alone future progress, dependsupon the removal of, at any rate, the worst of theseobstacles.

It is important that in considering this matter weshould preserve a sense of proportion. As has beenargued in an earlier section, the existence of protectivetariffs on a considerable scale is not in itself an obstacleto extensive business activity nor to a fairly rapid rateof progress. During the period before the war thereexisted extensive systems of protective tariffs, andalthough there can be little doubt that they were inimi-cal to the full exploitation of the advantages of thedivision of labour, they did not prevent that consider-able advance of wealth per head which was character-istic of that period. No one in his senses would arguethat the establishment of universal free trade is a sinequa non of business recovery at the present. But theobstacles which limit international business at the pre-sent time are on so much more extensive a scale thanin the pre-war period, and are of a kind so much moredisturbing to trade, that the situation created by theirexistence differs not only in degree but in kind from thesituation of those days. In central Europe at the presenttime, to be called a Free Trader it is not necessary tocease to support a regime of high protection; it is


necessary only to oppose the existing systems of importlicences, exchange controls and quota restrictions. Be-fore the world can hope for general recovery, theseobstacles at least must be swept away. In the presentsituation a moderate tariff is a relatively minor evil. Areturn even to the pre-slump level of tariffs would be amost powerful stimulus to recovery.

This is not to say that there is anything to be saidfor tariffs as a positive means to prosperity. Nothingthat has been said in recent years has served to alterin any substantial respect the strength of the case forthe maximum international division of labour, that isthe case against protective tariffs; and the technicaldevelopments of modern industry have done much tomake that case even more pertinent than in the past.The economies of mass production, which moderntechnical developments make possible, are economieswhich can only be reaped to the full if the market issufficiently extensive. Since tariffs necessarily con-tract markets, it follows that the existence of tariffsmust prevent resort to the economies of mass pro-duction being as widespread as might otherwise be thecase. A world of national States each striving foreconomic autarchy is a world in which the economiesof large-scale production can never be fully exploited.A removal of the grosser obstacles to trade would bea powerful stimulus to recovery. But the world wouldcontinue to be poorer than it need be if it were con-tent with tariffs at the pre-slump level. The creationof an economic machinery more immune from fluctua-tions, and capable of making available for mankindthe full fruits of technical progress, must involve adefinite reversal of the trade policies which have im-posed increasing limitation on world trade since the


seventies, and a return to the policy of a progressivefreeing of trade.

6. A removal of the grosser obstacles to trade andthe prospect of a lowering of tariff barriers would domuch to enhance a recovery made possible by a stabil-isation 6f monetary conditions. Neither monetarypolicy norstability <structure <regain itsbeen emphasised in an earlier chapter, we misread

he freeing of trade can guarantee a lastingbusiness conditions, if the underlyingbusiness costs and organisation does not

apacity for adaptation to change. As has

he lesson of the present depression if wes violence solely to monetary disturbances.

seen, the nature of the structure withinmonetary disturbances took place, the

Great Britain to get into international, the delay in liquidation and cost reduc-r the world in 1930, not to mention theof State-aided monopolies and pools, alsorge part. It is quite certain that if, in theprice system becomes more rigid and busi-

which otherwise might be of quite a minordevelop into fluctuations of the same orr order of magnitude will be very greatly>rice rigidity and an ossified business struc-only be supportable in a period in which•f change was very slow. But the tempo ofur times is very rapid.

oscillationsorder mayeven greatenhanced,ture woulcthe tempochange in

In recent years, the consequences of inflexibilityhave been particularly apparent in the labour market.As we have seen already, it would be a mistake to saythat the existence of a large body of unemploymentis necessarily due in the first instance to wage rates


which have been pushed above the point at whichemployment would be normal. The initial change maycome as a result of some monetary maladjustment—the restoration of the exchange at too high a level forinstance; or it may originate in some movement ofthe conditions of real demand for the products of theindustry or industries in question. Nor is it true toargue that if wage rates were perfectly plastic all un-employment would disappear. Some unemploymentexists at the height of prosperity, and in times ofsevere slump a complete absorption of all the un-employed within a very short period is not to behoped for. But in general it is true to say that a greaterflexibility of wage rates would considerably reduce un-employment; in particular, that a greater flexibilityof wage rates in the industries first affected by fluctua-tions would almost certainly diminish the spread andthe violence of the repercussions of these movements.If it had not been for the prevalence of the view thatwage rates must at all costs be maintained in orderto maintain the purchasing power of the consumer,the violence of the present depression and the magni-tude of the unemployment which has accompanied itwould have been considerably less. If the obstacles tocost adjustment in Great Britain had been less for-midable the whole history of the last ten years wouldhave been different.

This is a hard saying, and there can be little wonderthat men of humanity, especially those who are notthemselves of the wage-earning classes and who there-fore feel a natural reluctance to say anything whichmay seem to imply a desire that the position of othersshould be even temporarily worsened, should be loathto accept it. But it can be rejected only as a result


of failure to perceive the significance of the wagecontract in the organisation of modern industry. Ifindustry were run by groups of independent pro-ducers and if the demand for their products were to falloff, it would be inevitable either that prices would haveto be lowered or that some of the products would re-main unsold. If the buyers in the market place a lowervaluation on the product but the sellers maintain theirprices, then they are left with supplies on their hands.But substantially the same is true when industry isorganised by capitalist employers. The employers sellthe products of industry and pay the wage-earners outof the capital thus maintained. If there is a diminu-tion of demand, the first impact of the shock fallsupon profits. It is right that this should be so, for it isthe function of the entrepreneur to assume the mainrisks of enterprise. But profits are not indefinitelysqueezable, nor are the other non-wage elements incosts. So that if the fluctuation is at all severe, eitherthere must be some downward modification of wagerates or some of the labour offered at the old pricemust remain unemployed. This conclusion is abund-antly borne out by experience. Unemployment is pre-dominantly a phenomenon of those industries wherethe market for labour and the market for the productare separated, as it were, by the wage contract. Theareas of unemployment to-day are the areas of contractwages. Peasant producers are not unemployed in tradefluctuations. They suffer an automatic reduction ofmoney-income.

Once this is clear, the attitude of the true humani-tarian must surely assume a new complexion. He willnaturally be anxious that the wage-earner should re-ceive the full value of his part in the production of the


product. But he will realise too that a policy whichholds wage rates rigid when the equilibrium rate hasaltered, is a policy which creates unemployment. Hewill regard it as hypocritical to blame the policy of thetrade unions more than, or even as much as, he wouldblame other attempts at monopolistic restriction. Buthe will remember too the victim of monopolistic restric-tion, the unemployed man who is prevented by thepolicy of maintaining wage rates from disposing of hislabour at a price at which it is possible for the con-sumer to be induced to purchase the product. And hewill regard with some contempt the attitude of thosewho, unwilling to face the facts of poverty, contentthemselves with approving the enforcement of a wagehigher than industry can bear and avert their gaze fromthe unemployment which they have thus created, ordeceive themselves that it springs from other causes.

I t is sometimes said that this proposition that un-employment could be diminished and fluctuationsavoided by a greater plasticity of wage rates involvesthe view that wages should be reduced indefinitelyand trade unions prohibited by law. Such assertionsrest either upon crass ignorance or deliberate misrepre-sentation. With a free demand for labour there isno probability of an indefinite reduction of wage rates.Nor is the disappearance of trade unions a necessaryfeature of the restoration of flexibility of wage rates.As selling and negotiating agents, trade unions per-form a function which, if guided by a right conceptionof policy, may well be conducive to the smooth func-tioning of the market for labour. They prevent pettyexploitation and they eliminate a multiplicity of indi-vidual bargains. What is necessary is that their policyshall be guided by considerations of employment, and


that they shall not be allowed to prevent from workingthose who, in order to avoid unemployment, are pre-pared to accept a rate lower than the rate which haspreviously prevailed. In order that the market shouldbe reasonably free it is not at all necessary that tradeunions should be prohibited. It is necessary only thatthey, equally with other would-be monopolists, shouldreceive no support from the Government, either director indirect.

7. But this brings us back to our main contention,the necessity for the elimination of all kinds of inflexi-bility. In order that recovery maybe assured and futuredislocations minimised, it is necessary not only thatflexibility should be restored to the prices of differentkinds of labour but that flexibility should also berestored in other markets. There is strong reason forattributing much of the severity of the depression tothe inflexibility of cartel prices and to the insecuritycaused by the existence of giant buying agencies in thevarious commodity markets. If future fluctuations areto be avoided it is necessary that these things shoulddisappear.

But how is this to be done? The answer is not verydifficult. As we have seen already, the worst cases ofmarket rigidity, or of insecurity of industrial structure,are the creation of Government policy. Cartel priceshave never shown themselves unduly inflexible whenthe cartels could not depend upon a tariff or otherforms of State support. Industrial monopoly, where itdoes not depend upon natural monopoly, is usually theby-product of Protection or a system of trade marksand patent legislation definitely inimical to competi-tion. Pools and restriction schemes flourish chieflywhen they receive Government support. It would be


foolish to pretend that the structure of capitalistic in-dustry is such as continually to achieve the ideal com-petitive adjustment. But it is fairly clear that the mostconspicuous failures to tend in this direction depend inone way or another on authoritarian measures whichtend to foster monopoly.

If, therefore, it is desired to eliminate these sourcesof instability, the policies of States in relation to in-dustry must undergo complete revision. It must be amaxim of State policy to do nothing to bolster upmonopoly. The habit of intervening to prop up un-sound positions and to support particular interestsmust cease. Nothing must be done which will encouragebusiness men to believe that they will not be allowedto go under if they make mistakes or if the conditionsof the market make necessary a contraction of theirindustry. Instead of being more and more an officialof the State, hampered on all sides by administrativerules and regulations, the business man should be freedas far as possible to perform that function which is hismain justification in a society organised, not for thebenefit of the part but of the whole, namely, the as-sumption of risk and the planning of initiative. Thesame principle must underlie the treatment of privateproperty. Property must be left to stand on its ownlegs. Intervention to maintain the value of existingproperty—i.e. to frustrate the effects of change in theconditions of demand and supply—must cease. Theproperty owner must learn that only by continuallysatisfying the demands of the consumer can he hope tomaintain intact its value. Only in such conditions canwe hope for the emergence of a structure of industrywhich is stable in the sense that it can change withoutrecurrent catastrophe.

vin CONDITIONS OF RECOVERY 191

It is often said that this plea for the liberation oftrade and investment to the domination of the market—that is, in the last resort, to the demand of the ulti-mate consumer—involves a denial of State functions,a demand for an anarchistic chaos. At the present dayif it is desired to discredit any proposal, howevermodest, for the freeing of trade and industry, there isno more certain appeal to the gallery, no more certaintitle to the approval of the sciolist, than to say thatit smacks of laissez-faire. If this essay should be re-viewed by any of the more popular writers on thesesubjects, there is a 99 per cent probability that it willbe said to be based upon a laissez-faire philosophy longsince discredited among reasonable men, that it harksback to a system which is past, that it ignores thechanged temper of the modern mind, and so on.What laissez-faire was; whether there ever was a laissez-faire philosophy in the sense usually implied; whodiscredited it—these are, of course, questions to whichevery intelligent man may be assumed to know theanswer. They are questions therefore to which answersare never provided. Perhaps this is just as well. It isthe emotional effect which is important.

In fact, of course, the propositions under discussionhave no such implication. The plea that the marketshould be freed, and that private property should beleft to assume the risks of investment and enterprise,in no way involves the denial of the economic functionsof the State. Private property is itself a creation ofthe State. The delimitation of its scope and the main-tenance of the appropriate mechanism of contract is atask of the utmost complexity, which can only be per-formed by the State. No one who has any idea of thenature of the problems relating, for instance, to the

192 THE GREAT DEPRESSION ™.

status of the so-called public utility undertakingsunder changing technical conditions can believe, for amoment, that in a world in which States abandonedall the specific measures of intervention which havehere been the subject of discussion, their economicfunctions would cease to be of grave importance to thewell-being of their citizens. In the context of this dis-cussion the accusation of anarchism, of laissez-faire, ofa denial of the economic functions of the State, is apure red herring. All that is contended is that if theends of stability and progress are deemed desirable,then States must abstain from certain forms of inter-vention which analysis most clearly shows to be defin-itely inimical to the achievement of these ends. Tomeet this indictment of a whole trend of policy witha smoke-screen of exceptional cases and metaphysicaldiscussions of State functions is not argument: it is justobscurantism.

As a matter of fact, so far from such changes imply-ing any abdication of the proper functions of the State,it is becoming increasingly clear that it is only in thisway that their proper functions can be safeguarded.One of the most conspicuous and disquieting featuresof our time is the inefficiency of governmental institu-tions—not the inability of parliaments or dictatorshipsto "cure the depression"—they have already done somuch curing as almost to kill the patient—but theirinability to turn out laws which do not need to berevised within twelve months of their being placedon the statute book, their incapacity to pay sufficientattention to the great issues which States, and onlyStates, can handle. The House of Commons, which, forgood or for bad, is ultimately responsible for thegovernment of India, can barely afford forty-eight

vni CONDITIONS OF RECOVERY 193

hours in a normal year for the discussion of Indianbusiness. The literature of political science abounds indiscussions of this problem. The pundits are nevertired of propounding new solutions in the shape ofadjustments in the committee system, devolution onnon-elected bodies, reform of local government, andso on. But it is essentially a problem which cannot besolved without a more radical limitation of Stateactivity. The congestion of governmental business allover the world is due, in the last analysis, not to thetrifling imperfections of this or that system or parlia-mentary procedure or to the absence of electric buttonsfor recording the votes of members, but to the factthat parliaments are assuming responsibility for morethan they can properly supervise. The maxim "togovern well, govern little" is not to be interpreted inthe sense that government is a necessary evil to bereduced to an absolute minimum, but in the sense thatwhen governments bite off more than they can chew,they don't do their own business properly. Thetendency to dictatorship in the modern world is aninevitable result of the fact that if democratic bodiesattempt to go outside a certain sphere, either theydo the business inefficiently or they abdicate theirfunctions.

8. I t has been the object of the last sections to showthat if recovery is to be maintained and future progressassured, there must be a more or less complete reversalof contemporary tendencies of governmental regulationof enterprise. The aim of governmental policy in regardto industry must be to create a field in which the forcesof enterprise and the disposal of resources are oncemore allowed to be governed by the market.

But what is this but the restoration of capitalism?

194 THE GREAT DEPRESSION CH.VIH

And is not the restoration of capitalism the restorationof the causes of depression?

If the analysis of this essay is correct, the answer isunequivocal. The conditions of recovery which havebeen stated do indeed involve the restoration of whathas been called capitalism. But the slump was not dueto these conditions. On the contrary, it was due to theirnegation. It was due to monetary mismanagement andState intervention operating in a milieu in which theessential strength of capitalism had already beensapped by war and by policy. Ever since the outbreakof war in 1914, the whole tendency of policy has beenaway from that system, which in spite of the persistenceof feudal obstacles and the unprecedented multiplica-tion of the people, produced that enormous increase ofwealth per head which was characteristic of the periodin which it was dominant. Whether that increase willbe resumed, or whether, after perhaps some recovery,we shall be plunged anew into depression and the chaosof planning and restrictionism—that is the issue whichdepends on our willingness to reverse this tendency.

CHAPTER IX

PROSPECTS

1. WHAT, then, are the prospects of enduring recovery?It is clear that they are not bright. It is quite prob-

able, if there is no immediate outbreak of war on alarge scale, that the next few months may see a sub-stantial revival of business. If the exchanges are stabil-ised and the competition in depreciation ceases, thereis a strong probability that the upward movement,which began in the summer of 1932, will continue.If the stabilisation were made permanent and someprogress were made with the removal of the grosserobstacles to trade, it is not out of the question that aboom would develop. There are many things whichmight upset this development. The basis of recoveryin the United States is gravely jeopardised by thepolicy of the Government. The conditions under whichthe dollar has been stabilised may lead to an inflationthere, or most severe difficulties, financial and political,in continental Europe. There is the danger of war andcivil disturbance.

These dangers may not mature. It may be that thenext two or three years (or even longer) may be yearsof comparative revival. But it is impossible to feel anyconfidence in a continuance of stability. In the fiftyyears before the war, in England, a man planning hislife on the threshold of his career might look forward

195


to a time of reasonable peace and security, conditionedno doubt in part by the luck which governs so mucheven in the most settled society, but determined alsoby the vigour and the foresight with which he pursuedhis aims. To-day not even the most fortunate can haveany such assurance. The probability of peace and pro-gress in the next half-century is not very great. We maynot feel this at every moment any more than we feelat every moment that we shall not live for ever. Butthe rational grounds for believing the contrary are notstrong.

2. Why is this? There are two main reasons.In the first place comes the danger of war. In the

years immediately following the conclusion of the lastwar, the memory of what it meant and the relief atbeing delivered from its horrors, were so intense thatmost of us were loath to believe that such things couldbe allowed to occur again. There was never very muchground for this assurance, and recent events have madeit clear that what ground there was has largely ceasedto exist. So long as we could believe that the great bodyof people in civilised countries hated war and would beprepared to do anything to avoid it, it was possible toview the growing diplomatic tensions in Europe andelsewhere with the belief that these were minor diffi-culties which patience and goodwill could eliminate.The Nazi revolution has dispelled this illusion. Weknow now that, for a time at any rate, we have to liveout our lives side by side with men whose conceptionsof the true ends of life are fundamentally different fromour own—men to whom the kindly virtues of peace arecontemptible and for whom the destruction of life is abetter thing than its preservation. We do damage tothe prospects of peace if we fail to recognise this fact.

PROSPECTS 197

3. These paroxysms may pass. But the economicinstability of the modern world does not seem likely todiminish. The tendencies making for instability, whichwe have examined in earlier chapters, have not beenweakened during this depression. On the contrary, theyhave been strengthened. I t is true that there are somesigns of recognition of the mistakes which have beenmade in the sphere of monetary policy. But as yetthere seems little will to repair them, still less to facethe wider economic consequences which such repairwould involve. For the rest, so far from there beingany recognition of the instability and confusion whichhas been caused by the policy of interventionism, themajority of the leaders of public opinion seem to havedrawn from the events of the last few years the con-clusion that more intervention is necessary. All overthe world, Governments to-day are actively engaged,on a scale unprecedented in history, in restricting trade

_and enterprise and undermining the basis of capitalism.Such a policy is not confined to the Socialists. Indeedthe political power of the socialist parties in manyparts of the world may be said to be waning. But theiropponents, the dictators and the reactionaries, areinspired by the same ideas. I t is a complete misappre-hension to suppose that the victory of the Nazis andthe Fascists is a defeat for the forces making for thedestruction of capitalism. They have the same fanaticalhatred of economic liberalism, the same hopes of aplanned society. The differences are hierarchical. InGermany it is a crime deserving of torture or exile tobe a Jew; in Russia to possess two cows. In our ownmore tranquil community the differences are equallynon-economic. No doubt to their respective friends andcolleagues it seems to make a world of difference


whether agriculture is planned by Major Elliot or Dr.Addison. From the economic point of view there iscontinuity of policy.

Such policies, as we have seen, have a cumulativetendency. They lead to an order of society which islikely to be less stable, less free, less productive, thanour own. They lead, too, to an intensification ofnationalism and to an enhancement of the causes whichlead to civil strife. Men will not stand indefinitely aregime of catastrophic fluctuations. Neither will theyacquiesce without blind protest in protracted im-poverishment. We fail to realise the connection ofthings if we attribute the civil disorder and thenationalistic chaos of continental Europe entirely tothe malevolence of violent men or the lack of fore-sight of the makers of treaties. The forces making fornationalism and domestic violence have no doubtbeen influenced by such factors. But they have beenenormously strengthened by the results of economicpolicy. The unfortunate men who were shot down inthe streets of Vienna the other day were the victims,not only of anti-democratic politics, they were thevictims also of an economic policy which had eatenup the capital of industry, and by producing desperateimpoverishment had provoked a violent reaction. Itmay be that in our more fortunate parts we have beengiven a period of respite. We have not yet travelledfar down the Austrian road. But we deceive ourselvesif we think we can stand indefinitely fluctuations ofthe present order of intensity.

4. It is often said that these developments are in-evitable. The changes in policy which would be neces-sary to avert.them are impossible, it is said, becausemen will not stand them. Whether we like it or not

ix PROSPECTS 199

the modern world is set upon the creation of the in-stitutions and the habits which cause instability. Pro-test is unavailing. We can only go with the stream.

Such an attitude is surely unreasonable. If it can beshown, as has been argued in this essay, that the pur-suance of these policies leads to instability and poverty,and if it can be shown too that these disasters are onlyto be avoided by the adoption of policies not favouredat the moment, then surely it is folly not to say so. Itis not really to be believed that the majority of menin democratic communities are so in love with povertyand instability that if they were convinced that certainpolicies led in that direction they would continue tosupport them. On the contrary, it is clear that theyat present support these policies because they believe—wrongly it has here been argued—that they lead togreater stability and progress. If they were convincedotherwise, can it be doubted that they would abandonthem?

But can such things be in democratic communities?Can men be led by reason? Are not the majority of menso limited in outlook and so bound by prejudice thatit is hopeless to endeavour to argue with them?

It is conceivable. But the history of the modernworld does not bear out the contention. The policieswhich at present prevail have been adopted, not be-cause they have been forced on politicians by themasses, but because the masses have been taught tobelieve them. The masses, as such, do not think forthemselves; they think what they are taught to thinkby their leaders. And the ideas which, for good or forbad, have come to dominate policy are the ideas whichhave been put forward in the first instance by detachedand isolated thinkers. If the direction of policy in

200 THE GREAT DEPRESSION CH. IX

Great Britain, and the modern world generally, to-dayis overwhelmingly socialist, this is not because it isdictated by the objective facts of the situation, orbecause the masses v/ith one accord have willed asocialistic reorganisation of industry. It is because menof intellect, with powers of reason and persuasion,have conceived the socialistic idea and gradually per-suaded their fellows. It is the same with monetarypolicy. The measures of the last decade have been theresult, not of spontaneous pressure by the electorate,but of the influence of a number of men whose namescould be counted on the fingers of two hands. We donot appreciate fully the tragedy of this aspect of thepresent situation unless we realise that it is essentiallythe work of men of intellect and goodwill. In the shortrun, it is true, ideas are unimportant and ineffective,but in the long run they can rule the world.

There is, therefore, no reason to despair on theground that reason is necessarily powerless. It maybe that the forces, which have been released by theideas of forty years ago, have become so powerful—so surcharged with mere mechanical impetus—thatit is now too late to arrest them. It would be unwise toignore the very strong probability that this is so. Butuntil the case, which experience and more recentdevelopments of knowledge have shown can be madeagainst them, has been argued with as much patienceand disinterested intelligence as went to the establish-ment of their ascendancy, we are not justified in con-cluding that reason and persuasion have reached thelimit of their effectiveness. At all events it is worthtrying.

STATISTICAL APPENDIX

STATISTICAL APPENDIX 203

TABLE I

UNITED KINGDOM

INDEX OF SECURITY PRICES

(1926 = 100)

Year andMonth

1925JanuaryFebruary .MarchApril .May .June .July .AugustSeptember .OctoberNovember .December ,

1926JanuaryFebruary .MarchApril .May .June .July .AugustSeptember .OctoberNovember .December .


Index

96949494939390949598

10199

101100999799

10099

100101101102101

105104104104107107107108110114114114

Year andMonth




Index

120119123125129125121122125128125121

130129125125126123121124"126118106106

10810410110510498989396909287

Year andMonth




Index

848284827072757268768071

727075736764737579798080

838480818488949396

10010099

The above index relates to the price of 92 ordinary industrial shares, theprices being taken on the 15th of each month. The index is based upon that ofthe London and Cambridge Economic Service, but the series has been recalcu-lated from the original 1924 base for purposes of comparison with theAmerican index.


TABLE 2

UNITED STATES

INDEX OF SECURITY PRICES

(1926 = 100)

Year andMonth

1925JanuaryFebruaryMarchApril .May .June .July .AugustSeptember .OctoberNovember .December .


1927JanuaryFebruary .MarchApril .May .June .July .AugiistSeptember .OctoberNovember .December .

Index

83848180838588899296

100100

10210296939397

100103104102103105

106108109110113114117122129128131136

Year andMonth




Index

137135141150155148148153162166179178

193192196193193191203210216194145147

149156163171160143140139139118109102

Year andMonth




Index

1031101121008987908976656854

545354423834365256484545

464342496577847981767779

This index, compiled by the Standard Statistics Company, is based on 335-351 ordinary industrial shares, the average of the closing prices on eachThursday of the month being used.


TABLE 3

TOTAL CAPITAL ISSUES

X celland

Month

1929Jan.Feb.Mar.AprilMayJuneJulyAug.Sept.Oct.Nov.Dec.



UnitedKingdom

Amount

£millions

47-433033-834-821125-422-2

3-62-7

11-512-95-3

16-926-226-421-337-913-216-46-65 0

30-519-915-9

12-319-613-4

1-711012-85-21-71-32-54-42-7

Index

1929= 1002251561601651001201051713546125

8012412510117962783124

1449475

589363

8526125

86

122113

UnitedStates

Amount

%millions

915894984677

1127773880843307843281574

747598799903

1109704553204379394258385

46620656036834125022612026844

109119

Index

1929= 10012111813089

14910211611140

1113776

9979

10511914693732750523451

612774494533301635

61416

v p n rx earandMonth



UnitedKingdom

Amount

£millions

2-912012118012-317-53-30 1

19-710-84-3

8-37-2

13-48-2

14-617-56 0

21-27-2

10012-86-4

Index

1929= 100

14575785588316

, ,935120

39346339698328

10034476130

UnitedStates

Amount

$millions

18074

162719184

10562939844

123

6520162544

1101174664598857

Index

1929= 100

241021

91211148

12136

16

93236

1515688

128

The series for the United States is published by the Commercial and FinancialChronicle. The monthly average for 1929, upon which the index is based, is $758millions.

The United Kingdom series was compiled by the Midland Bank, and the figuresare for "subscriptions invited on the home market, excluding Government loans fornational purposes, local government loans with no specific limit to total subscriptionsand bonds of less than 12 months currency". The monthly average for 1929 ia£21-1 millions.


TABLE 4

CAPITAL ISSUES ON FOREIGN ACCOUNT

V P H Tx Gcir

andMonth




UnitedKingdom

Amount

£millions

29-46-99 06 08-8

11-48-31-41-24 16-71-2

5-618-29-49-4

20-15-53-33 12-6

17-78-45-4

4-513-76-00-3

10-18-52-9

••

Index

1929= 100374

88114

761121451051815528515

71231119119255

70423933

22510769

57174

764

12810837

UnitedStates

Amount

$millions

4066

2251647

1723521

8533545

311261411751201768039

3100

1021

1324

10

'*826

51

Index

1929= 100

631043542574

270553313835571

4919822227518927712661

5157

1633

2086

16, .1341

'80

v p a rJL earand

Month



UnitedKingdom

Amount

£millions

2-62-91-08-43-42 10 1

7-90-50-3

0-42-31-21-05-31-50-8

19-90-43-20-61-3

Index

1929= 100

333713

1074327

1

10064

5291513671910

2535

417

17

UnitedStates

Amount

%millions

. ,2

2041

1

#

Index

1929= 100

"331

62

2

The data for the United States are published by the Commercial and FinancialChronicle, and the monthly average for 1929 upon which the index is based is $63-6millions.The United Kingdom series was compiled by the Midland Bank, and the monthly

rage for 1929 is £7-87 millions.


O2

PH

IO

w

ftwHgP

2

05O0505OOOOOO

ocb»o-^cccob b o b o o o o c h N

CO CO CO 00 >••< 00 ^H O5 " '"•6 A

COc r h b N o

COCOCOCOCOCOCOCOt>COI>


w

<O

PQ X

s s

Iw

g

3

CO CO CO CO CO

QOt^©iO«M(M(NHOO

I O S O J O O C O O O Q O O O Q O Q C O O

t^«0»OTt(^-*-^iO<Ot^COCOol

M N H O H O O O O O S O O O O

oooooooroooojo

oooooooooooo

OOOil>CDiOCOI>t>OO0000)0105 0)00505

IOOO

IfiitiflfjJl

B8aCO

.8

it


TABLE 7

INDICES OF THE COST OF LIVING

(July 1914 = 100)

Year andMonth

1929JanuaryFebruaryMarch.April .May .June .July .AugustSeptember .OctoberNovember .December .

1930JanuaryFebruaryMarch.AprilMayJuneJulyAugustSeptember .OctoberNovember .December .

1931JanuaryFebruaryMarch.AprilMayJuneJulyAugustSeptember .OctoberNovember .December .

UnitedKingdom

165166162161160161163164165167167166

164161157155154155157157156157155153

152150147147145147145145145146148147

UnitedStates

161161160159159160162163163163163162

160159157158156155152152153152150148

145143142141139137137137137135134133

Year andMvjnth



UnitedKingdom

147146144143142143141141143143143142

141139137136136138139141141143143142

UnitedStates

130128127126124123123123122121121120

118115115114116116120123124125124123

The figures for the United States are for the middle of the month; for theUnited Kingdom, end of the month. In both cases, the base is July 1914.

1 After this point the figures given are those of the National IndustrialConference Board converted from the 1923 base. Strict comparability is notpossible between the two sections of the series and there is reason to supposethat they would diverge appreciably.

P


TABLE 8

INDICES OF INDUSTRIAL PRODUCTION

(1928 = 100)

Year andMonth

1929January .February .MarchAprilMayJuneJulyAugustSeptemberOctober .NovemberDecember

1930January .FebruaryMarchAprilMayJuneJulyAugustSeptemberOctober .NovemberDecember

1931January .February .MarchAprilMayJuneJulyAugustSeptemberOctober .NovemberDecember

Ger-many

959199

10810911010510410210110196

959393959084818078777672

686974767474726867646460

U.K.

106

108

106

112

107

98

89

90. .

83

79

79.,

88••

U.S.A.

105105106110111114112111110105

9689

949794969490858382797674

747878808076757169666567

Year andMonth

1932January .February .MarchAprilMayJuneJulyAugustSeptemberOctober .November.December .

1933January .February .MarchAprilMayJuneJulyAugustSeptemberOctober .November.December.

Ger-many

626361616261605960616262

636565666870717171727375

U.K.

89

si

76

85

86

87

86

95

U.S.A.

656260575453525460605960

595754607083 ,908276696568

The above statistics have been compiled from the bulletins of the GermanInstitut fiir Konjunkturforschung.

The original sources are:GERMANY—Institut fiir Konjunkturforschung.U.K.—London and Cambridge Economic Service (original base, 1924).U.S.A.—Federal Reserve Board (original base, 1923-1925).


TABLE 9

INDICES OF PRODUCTION OF PRODUCERS' AND

CONSUMERS' GOODS

(1925-1929 = 100)

Yearor

Quarteri

19251926192719281929193019311932

1930: (1)(2)(3)(4)

1931: (1)(2)(3)(4)

1932: (1)(2)(3)(4)

1933: (1)

PRODUCERS' GOODS

Germany

8885108107112957054

108989085

77767158

54555254

58

U.K.

102100107967875

1081029384

83807377

78777275

77

U.S.A.

939992104113835429

97927863

66604742

36272428

25

CONSUMERS' GOODS

Germany

87891111091041019485

1031039999

92989491

86848386

85

U.K.

ioi100100908890

95908790

85878996

92938590

89

U.S.A.

9797102100104888982

95888587

88919287

84708487

82

Compiled from the League of Nations' World Production and Prices,1925-32, Table V. p. 56.

GERMANY—Producers' industries include: iron and steel, non-ferrous oresand metals, building, machinery, motor vehicles, shipbuilding, coal, petro-leum, gas, electricity, paper, hemp, yarn and potash. Consumers* industriesinclude: textiles, footwear, glassware, porcelain, musical instruments, meat,dairy produce, sugar, tobacco products, beer, brandy, sea fishes.

UNITED STATES.—Investment industries represented by iron and steel, tinand cement. Consumers' industries represented by textiles, leather and foodindustries.

UNITED KINGDOM.—Investment industries represented by iron and steel,non-ferrous metals, chemicals, engineering and shipbuilding. Consumers' in-dustries as in the case of U.S.A.


TABLE 10

TOTAL VALUE OF WORLD TRADE

(1929-1932)

Millions of Dollars

Year

1929

1930

1931

1932

Imports

35,606

29,083

20,847

13,885

Exports

33,035

26,492

18,922

12,726

Total

68,641

55,575

39,769

26,611

From the League of Nations' World Economic Survey, 1932-33, p. 211.


TABLE 11

NATIONAL UNEMPLOYMENT STATISTICS

END OF MARCH X

(In thousands)

Country

Australia.Austria .Belgium 2

Canada .CzechoslovakiaDanzig .DenmarkEsthoniaFinland .FranceGermany.HungaryIrish Free State 4

Italy2 .JapanLatviaNetherlandsNew Zealand .Norway .Poland .Roumania . , .SaarSweden .Switzerland 2 .United Kingdom 2 .United States 3

Yugoslavia

1929

39225

2812501866

439

2,4841419

309

9

" 324

17710

944

91,204

12

1930

63239

4223882049

41014

3,0414323

413352

6

**323

289139

4221

1,6942,964

10

1931

11430420732

34027703

1172

4,7445525

735397

9

*3829

37348187361

2,6666,403

12

1932

120417350

7763436

1458

18347

6,0347131

1,085474

232534538

360554599

1032,660

10,47723

1933

10945638380

87838

1661519

3565,599

6983

1,111

13342

5142

280

42121113

2,82113,359

23

Reproduced from the League of Nations' World Economic Survey 1932-33,p. 109.

1 Original Source—League of Nations' Monthly Bulletin of Statistics.2 Partial and intermittent unemployment included.3 Figures for United States, 1930-1932 ; American Federation of Labour,

see Weltwirtschaftliches Archiv, April 1933.4 New Series from June 1932.


TABLE 12

UNITED STATES

INDEX OF INDUSTRIAL PRODUCTION

(1923-1925 = 100)

Year andMonth




Index

10510710710410310099

101102107108103

105108110108107106103109113114110101

10611111311011210710210510610510196

Year andMonth




Index

105111112110110108105110116118115109

11712112412412612512012212312110896

10310910610710599919092908477

Year andMonth




Index

828789908983807877757368

717168646159565967686560

646460677991969085787269

The above index has been compiled by the Federal Reserve Board, Divisionof Research and Statistics, from 57 individual series of data representingthe production of about 34 industries and estimated to represent directly, orindirectly, about 80 per cent of total industrial production in the UnitedStates. The base is the monthly average for the years 1923 to 1925.


TABLE 13

UNITED STATES

ACCEPTANCES AND SECURITIES OF FEDERAL RESERVE

BANKS

Millions of Dollars

Yearand

Month



Accept-ances andSecurities

702569462321298278222279394491611766

799765786796711712737752794787783901

Yearand

Month

1931January .February.MarchAprilMayJuneJulyAugust .SeptemberOctober .NovemberDecember



853705727773743731753847995

142512871117

980894914

106614541747187818871882188518851888

Yearand

Month

1933January .February.MarchAprilMayJuneJulyAugustSeptemberOctober .NovemberDecember


183819062254206719321945203220722209236224522533

These are monthly averages of daily figures, and represent the totalacceptances and securities of the Federal Reserve Banks. The series hasbeen compiled from the Federal Reserve Bulletin.


TABLE 14

BANK OP ENGLAND

TOTAL DEPOSITS

Millions Sterling

Year andMonth

1925January .February .MarchAprilMayJuneJulyAugustSeptemberOctoberNovemberDecember.


1927JanuaryFebruary .MarchAprilMayJuneJulyAugustSeptemberOctober .NovemberDecember.

Deposits

129-8121-7121-4122-5122-5131-81240126-0129-5113-7125-7169-0

123-9122-2129-0114-6123-31651115-2128-2122-4122-6124-61430

116-5116-3130-4108-81181126-9113-41153123-2111-8113-6138-5

Year andMonth

1928January .February .MarchAprilMayJuneJulyAugustSeptemberOctoberNovember.December .



Deposits

115-2108-6111-9112-8111-8129-5118-4114-5113-4117-712101200

115-3107-7114-3112-4115-6128-3109-1114-6108-1110-6113-8115-6

118198-9

109-6123-7108-1121-4107-5114-6111-6111-7111-6175-2

Year andMonth




Deposits

107-9108-6100-9103-7106-0120-4104-7128-6145-3133-41250174-4

127-8114-2116111701341139-3133-9135-7137-4136-3137-71451

147-5159-5148-9148-8150-2161-4170-3164-4157-8165-8157-0159-9

The above figures relate to the end of the month and comprise:(a) "Public Deposits" (including Exchequer, Savings Banks, Com-

missioners of National Debt, and Dividend Accounts).(b) "Private Deposits" ("Bankers' Deposits" and "Other Accounts").

TABLE 15

UNITED STATES

VELOCITY OF CIRCULATION OF BANK DEPOSITS

Year andMonth

1926January .FebruaryMarchAprilMayJuneJulyAugust .SeptemberOctober .NovemberDecember



1929January .FebruaryMarchAprilMayJune

1 JulyAugust .SeptemberOctober .November

! December

Deposits 2

$ millions

29,16929,14928,98429,11229,24029,28729,39329,38529,58629,68229,65429,825

29,72929,90030,25730,34830,59530,69330,81630,82731,11931,48731,75932,263

32,26332,64732,15332,16532,65032,73532,61332,21131,65132,05932,24132,578

32,56632,29832,06831,79431,73331,76131,92131,89632,09032,44133,17332,182

Debits 8

$ millions

54,14544,91556,46451,83748,02050,66250,95947,01146,95452,53547,38457,070

54,71448,22058,51855,58354,14356,82053,68253,70256,75059,20157,08565,441

62,88554,49370,63367,00371,61672,48558,98158,50463,17672,89471,34982,386

82,81470,77783,52474,75076,53569,66677,63177,34477,61795,57282,09066,752

D J '

Ratio

1-861-541-951-781-641-731-731-601-591-771-601-91

1-841-611-931-831-771-851-741741-821-881-802-03

1-951-672-202-082-192-211-811-822-002-272-212-53

2-542-192-602-352-412-192432-422-422-952-472-07

Year andMonth



1932January .FebruaryMarch .AprilMayJuneJulyAugust .SeptemberOctober .NovemberDecember


Deposits2

$ millions

31,98231,53131,79132,15932,22932,50432,66332,58132,64332,72633,01432,314

32,04831,96832,06932,17932,16831,60231,52631,04130,50029,13828,21827,438

26,59225,71525,43125,38625,46625,07524,71224,74424,97325,29225,47625,492

25,64124,978

4

21/71022,50922,97423,16023,03923,14023,36923,48623,646

Debits 3

$ millions

60,42352,62565,72362,94661,81162,31252,74445,99348,63654,46042,17652,107

46,25338,03147,01146,44043,93045,29939,45134,02736,70038,80229,06936,345

33,56927,25129,88929,92325,41127,10325,23925,21525,93125,29820,75026,787

24,46622,437

4

22^62825,48629,71131,23225,45124,55526,30724,13126,301

Ratio

1-891-672-071-961-921-921-611411-491-661-281-61

1-441-191-471441-371-431-251-101-201-331-031-32

1-261-061-181-181-001-081-021-021-041-000-811-05

0950-90

1-041-131-291-351-101-061-131-031-11

1 Ratio of Bank Debits each month to the average of Bank Deposits for the samemonth. What is significant is not the absolute magnitude of this figure but its fluctua-tions through time.

2 Net Demand Deposits plus Time Deposits of all member banks: Monthly aver-


TABLE 16

UNITED STATES

TOTAL GOLD RESERVES OF THE FEDERAL RESERVE BANKS

Millions of Dollars

Year andMonth

1926January .February .MarchAprilMayJuneJulyAugustSeptemberOctober .NovemberDecember.



GoldReserves

280127672767279728162835285128412807282328302815

296729833022304130023021302329982989295728052739

281928082760272326072583260426192633264126002584

Year andMonth




GoldReserves

265726772701279128132858292429452971300429482857

296029653015307330383012299029272967300429812941

306230703115316132503409343134563138274629182989

Year andMonth



GoldReserves

297629383020300427902578263527732893300330493151

325629523250341635203543354835883591359135733569

These figures, which do not include gold earmarked for foreign account,have been compiled from the Federal Reserve Bulletin and relate to the lastWednesday of each month. I t would appear that strictly comparable datawill not be available in future.


TABLE 17

UNITED STATES

TOTAL LOANS, DISCOUNTS AND INVESTMENTS OF WEEKLY

REPORTING MEMBER BANKS

Millions of Dollars

Year andMonth




Loans,Discounts

6H1Q

Invest-ments

19,42619,42219,54619,52519,57919,81619,62719,68420,02919,89219,84920,110

19,68619,55819,98920,06820,27320,50620,40420,35720,65320,91821,11221,328

21,49321,31521,50221,94422,14822,06322,00621,80921,87121,93821,98322,189

Year andMonth



1931January .February .MarchAprilMayJuneJulyAugustSeptemberOctoberNovember.December.

Loans,Discounts

Invest-ments

22,32022,26322,47222,38822,11422,23122,47922,46522,64623,12423,66323,012

22,36822,08322,35222,65722,66223,02423,10123,12823,22023,40923,45523,117

22,66022,65922,83922,94222,71322,43922,39322,09322,07821,42521,02320,749

Year andMonth

1932JanuaryFebruary .MarchAprilMayJuneJulyAugustSeptemberOctober .November.December .

1933January .February .

Loans,Discounts

Invest-ments

20,17819,77519,43419,09619,11218,87718,41918,58718,73919,02618,98718,840

18,66518,532

The above figures are monthly averages, except for the year 1926, whenthey related to the last return of the month. Strictly comparable figures arenot available after February 1933. The series has been compiled from the

220 THE GREAT'DEPRESSION

TABLE 18

BANK OF FRANCE

GOLD RESERVES AND NOTES IN CIRCULATION

Millions of Francs

Year andMonth

1928JuneJulyAugustSeptemberOctober .NovemberDecember

1929January .FebruaryMarchAprilMayJuneJulyAugustSeptember

Gold Re-serves plus

ForeignAssets

56,23559,35362,30161,76563,26362,27564,618

64,45163,86063,07862,81362,78862,35763,10364,73265,225

Notes inCircula-

tion

60,62860,43462,18462,65461,32762,66063,916

62,15362,50664,57562,84864,31664,92164,13566,46766,639

Year andMonth

OctoberNovemberDecember .


Gold Re-serves plus

ForeignAssets

65,95466,63367,439

68,61168,52568,19267,94669,33669,65472,04672,81874,00176,39977,83479,725

Notes inCircula-

tion

68,24668,15967,149

70,33971,11670,82672,37373,07972,59474,00873,67773,05374,78775,95176,436

The above figures, compiled from the Annuaire Statistique de la France,relate to the end of each month. Comparable statistics are not availablebefore June 1928, the gold reserves of the Bank of France having beenrevalued at that date.


TABLE 19

BANK OF ENGLAND

GOLD RESERVES

Millions Sterling

Year andMonth




GoldReserves

155-6155-6155-7155-7156-5157-6164-3162-5160-5150-3145-7144-6

144-5144-6146-8146-4148-8150-31521155-5155-8152-8152-91511

1510150-1150-5154-2152-61521151-8151-21511151-3149-9152-4

Year andMonth

1928January .February .MarchAprilMayJuneJulyAugustSeptemberOctober .NovemberDecember .


1930January .February .MarchAprilMayJuneJulyAugustSeptemberOctober .NovemberDecember...

GoldReserves

155-9157-31581160-7162-9172-3173-7175-9173-2164-9159-8153-3

1530151-3153-7158-8163-3155-7142-6137-6130-31321135-41461

150-4152-01571164-31581157-2153-3155-9156-8160-7155-6148-3

Year andMonth

1931January .February .MarchAprilMayJuneJulyAugustSeptemberOctoberNovemberDecember .



GoldReserves

1401141-6144-5147-21521164-0133-3134-61361136-9121-7121-3

121-4121-3121-4121-5125-81370138-6139-8140-4140-4140-4120-6

124-41430172-7186-9187-4190-6191-4191-7191-8191-8191-8191-7

The above figures relate to the end of the month and, for the year 1925,include gold in the Treasury. Since September 1931 an additional quantity ofgold (of unknown amount) has been held by the Exchange EqualisationAccount.


TABLE 20

LONDON CLEARING BANKS

TOTAL DEPOSITS

Millions Sterling

Year andMonth




Deposits

165316431605160615981624163316111613162716191647

163716061588159015901630164616341623164916481688

169416531632164216501635168216691668171016941729

Year andMonth




Deposits

174716981672169016881731174917321732175317521806

180917771739174317321770177817591754176517511773

176717141682171217421788179417671764179118011839

Year andMonth




Deposits

183617821726169817001744175017081675168816701700

167716211639164316611727176518131826185318591944

194319171886189119041939193419271919191218891903

The above statistics are monthly averages, relating to the nine LondonClearing Banks, and have been compiled from the Bulletins of the Londonand Cambridge Economic Service.


TABLE 21

NEW YORK CITY

AVERAGE RATE OF INTEREST ON CALL LOANS

223

Year andMonth




CallRate

3-323-603-973-863-823-974094194-624-874-745-32

4-334-854-554063-814154-274-525-024-754-56516

4-324-034134184-264-334053-683-803-903-604-43

Year andMonth




CallRate

4-244-384-475-085-706-326056-877-266-986-678-86

6-947-479-809-468-797-839-418158-626105-404-88

4-314-283-563-793052-602182-222-172-002002-27

Year andMonth

1931JanuaryFebruary .MarchAprilMayJuneJulyAugustSeptemberOctoberNovember.December .



CallRate

1-501-501-561-571-451-501-501-501-502102-502-73

2-652-502-502-502-502-502-082 002-001-351-00100

1001-003-271-291-001001-000-980-750-750-750-94

These figures represent the monthly average rate of interest paid on newStock Exchange call loans in New York City and have been compiled fromvarious issues of the Federal Reserve Bulletin.


TABLE 22

UNITED STATES

INDEX OF COMPOSITE WAGES

(1913 = 100)

Year andMonth


1 MarchAprilMayJuneJulyAugustSeptemberOctober .NovemberDecember .

1926January .February .MarchApril •May

JuneJulyAugustSeptemberOctoberNovemberDecember.

1927January .February .MarchAprilMayJuneJuly

i AugustSeptember

; October .1 November

December.

Index

212212212211211211213213212214216216

217216216218217218219218218220219220

221221221220220220221221220220219221

Year andMonth

1928January .February .MarchAprilMayJuneJulyAiigustSeptemberOctober .November.December .



Index

221220220220221222222222222224224224

224224225225225226226226227226226225

226225224224222223221220219216216213

Year andMonth



1933January .February .MarchAprilMayJuneJulyAugustSeptemberOctober .

Index

212213213212209207207206202199199196

194192190187184182179179179178177174

173172168170172173176177177177

The above series is a weighted index based on indices of either wages orearnings in 12 different industries, with seasonal fluctuations eliminated.The index was compiled by the Federal Reserve Bank of New York.


TABLE 23

KEICHSBANK

GOLD KESERVES PLUS FOREIGN ASSETS

Millions of Reichsmarks

Year andMonth




Reserves

111212091337135213551416147214951494155516091611

167318431972188318801817198819912120212921732350

225620382055202118951870198020102006201221392147

Year andMonth




Reserves

216121702120220923152334238424432576269627962884

288128192719199120642272248224912547258826372687

269428282883289329423078288029882649237827052685

Year andMonth

1931JanuaryFebruary .MarchAprilMayJuneJulyAugustSeptemberOctober .NovemberDecember .



Reserves

244324512511253925761721160917221440127611751156

109310771021990992962894925929940937920

923921836510449274323381

407414408395

The above data represent holdings at the end of the month of gold re-serves plus those foreign assets which may legally replace gold as primarycover for notes.


TABLE 24

GERMANY

TOTAL CREDITS OF THE BIG BANKS 1


Year andMonth




Credits

4,205

4,563

4,677

4,783

5,003

5,227

5,241

5,500

5,674

5,935

6,387

6,890

7,275

7,569

7,451

7,690

8,121

8,800

Year andMonth




Credits

9,0969,1259,4009,5459,5329,5659,6109,979

10,30910,59311,132

. .11,26011,23810,87010,51310,81810,89611,09611,39511,67011,68612,001

12,00412,22512,18412,16712,24911,98911,73911,58511,04311,02111,070

Year andMonth



1933JanuaryFebruary .MarchAprilMayJuneJulyAugustSeptemberOctoberNovemberDecember .

Credits

10,65610,68810,56910,2939,2648,1568,0027,8567,4517,333

7,1797,1987,1717,2017,2077,1207,0697,1107,0676,984

.,6,8436,7926,6586,5376,5026,3766,2926,2376,2246,216

1 Grossbanken: Kreditoren Insgesamt.—The above statistics, which relateto the end of the month, include figures for ten banks until February 1929;then, as a result of fusions, nine banks until October 1929; subsequently,seven banks. The series is, however, quite continuous. The data have beencompiled from various issues of the Vierteljahrshefte zur Konjunkturfor-schung, published by the German Institut fiir Konjunkturforschung.


TABLE 25

GERMANY—ESTIMATED BALANCE OP PAYMENTS 1


Exports2 .Imports 2 .

Balance of CommodityTrade 2 .

Gold and Devisen Move-ments at Banks ofIssue

ReparationsServices3 (Shipping,

Tourist, Insurance,etc.)

Interest

Capital Movements—Long term * .Short term * .Other capital move-

ments, etc. .

1924

7-99-7

_ 1 .0

- 1-3-0 -3

+ 0-3+ 0-2

- 2-9

+ 1-0+ 1-5

+ 0-4

+ 2-9

1925

9-5120

- 2-5

- 0 1- 10

+ 0-5••

- 3 1

+ 11+ 0-3

+ 1-7

+ 3 1

1926

10-79-9

+ 0-8

-0-5- 1-2

+ 0-5-0-2

-0-6

+ 1-4+ 0 1

-0-9

+ 0-6

1927

111141

- 3 0

+ 0-5- 1-6

+ 0-5-0 -3

- 3-9

+ 1-7+ 1-8

+ 0-4

+ 3-9

1928

12-613-9

- 1-3

-0-9-2-0

+ 0-5-0-6

-4 -3

+ 1-7+ 1-4

+ 1-2

+ 4-3

1929

13-613-6

+ 0 1-2-5

+ 0-5-0-8

-2-7

+ 0-6+ 11

+ 1-0

+ 2-7

1930

12110-6

+ 1-5

+ 0 1- 1-7

+ 0-2-0-8

-0-7

+ 1-6

-0-9

+ 0-7

Total1924-30

77-583-8

-6-3

- 2 1-10-3

+ 3 0-2-5

- 18-2

+ 9 1+ 6-2

+ 2-9

+ 18-2

1 Reproduced from the Economist, August 22, 1931, Special Supplement, Annex I.2 Includes movement of precious metals (other than those at the Banks of Issue)

and the bulk of Deliveries in Kind. The latter amount to 4 milliard Reichsmarks for theseven years.

3 Includes Reparation deliveries outside Germany, and Deliveries in Kind, so faras these are not included in the figures of Merchandise Trade.

* So far as known.


TABLE 26

GERMANY

INDICES OF SECURITY PRICES

Year andMonth

1927JanuaryFebruary .MarchAprilMayJuneJulyAugustSeptember.October .November .December .




IndexBase

1924-26

158169163175168152158155148143128136

138136143147148144143143141140142140

139134133133128131129127125116112107

113113

IndexBase1928

1111191151231181071111091041019095

9796

1001031041011011019999

10099

989493949092908988827876

7979

Year andMonth

MarchAprilMayJuneJulyAugustSeptemberOctober .November.December .

January .February .MarchAprilMay.June

1932AprilMayJuneJulyAugustSeptemberOctober .November.December .


IndexBase

1924-26

1111141141091029593878378

727783847467

454646464956545559

616167717270676561606265

IndexBase1928

78818076726766615855

515458595247

323332333439383941

43434750

49474643424446

The above indices are based on the monthly average prices of 212 ordinaryindustrial shares, the source of the original data being the StatistischesEeichsamt. The series based on the years 1924 to 1926 has been compiledfrom the Monthly Bulletin of Statistics of the League of Nations. That basedon 1928 has been calculated from this, for purposes of comparison with theGerman wage index. The Stock Exchange was closed from July 1931 toAnril 1932.


TABLE 27

GERMANY

INDEX OF WAGES

(1928 = 100)

229

Year andMonth




Index

848487899291899194949697

989999989897969697979696

969696979999979999979797

Year andMonth




Index

96979798

101101100100101102102102

102101100102104104104104104104105105

106107109110110110108109110111112113

Year andMonth




Index

113114114113111111111113113113113113

107109109109106106105106106106106106

107107107106105104104104103102102102

The above indices are monthly weighted averages for skilled workers in12 occupations and are based on weekly wages until 1931, and upon hourlywages thereafter. The series has been recalculated from the index publishedby Wirtschaft und Statistique, which is based on 1913.


TABLE 28

GERMANY

DISCOUNT RATE OF THE REICHSBANK

Year andMonth




Rate

1099999999999

887776A666666

555556666777

Year andMonth




Rate

777777777777

6166,1;1\7i1\7-7 |7177

6"£655

4444555

Year andMonth




Rate

555557

1010l

8887

776555554444

444444444444

The above data relate to the end of each month.1 The rate rose to 15 per cent during this month.


TABLE 29

NEW YORK FEDERAL RESERVE BANK

DISCOUNT RATE *

Year andMonth




Rate

33-53-53-53-53-53-53-53-53-53-53-5

4443-53-53-53-544444

44444443-53-53-53-53-5

Year andMonth




Rate

3-54444-54-5555555

55555555554-54-5

4-543-53-532-52-52-52-52-52-52

Year andMonth

1931JanuaryFebruary .MarchAprilMayJuneJulyAugustSeptemberOctober .NovemberDecember .



Rate

222i

'

IL-5L-5L-5L-5L-53-5 2

3-53-5

3-533332-52-52-52-52-52-52-5

2-52-53-532-52-52-52-52-5222

1 Discount R a t e for 60- to 90-day commercial paper . For t he first th reeyears the rates given are month ly averages. Thereafter, they relate to the endof the month .

2 F r o m 8 th to 14th October, 2-5 per cent.


TABLE 30

BANK OF ENGLAND—BANK RATE

Year andMonth




Rate

44555554-54-5445

555555555555

5554-54-54-54-54-54-54-54-54-5

Year andMonth



1930January .February .MarchAprilMayJune . .JulyAugustSeptemberOctoberNovember.December .

Rate

4-54-54-54-54-54-54-54-54-54-54-54-5

4-55-55-55-55-55-55-55-56-565-55

54-53-51

3-533333333

Year andMonth


1932JanuaryFebruary .MarchAprilMayJuneJulyAugustSeptemberOctoberNovember.December .


j

Rate

33332-52-54-52

4-56666

653-53

32-52222222

222222222222

Monthly averages for the first three years, then end-of-the-month data—1 From 6th to 19th March, 4 per cent.2 From 23rd to 29th July, 3-5 per cent.3 From 9th to 15th March, 4 per cent.


TABLE 31

BANK OF FRANCE—DISCOUNT RATE

Year andMonth




Rate

777777666666

6666667-57-57-57-57-56-5

6-55-55-5555555554

Year andMonth




Rate

3-53-53-53-53-53-53-53-53-53-53-53-5

3-53-53-53-53-53-53-53-53-53-53-53-5

3332-52-52-52-52-52-52-52-52-5

Year andMonth




Rate

2222222222-52-52-5

2-52-52-52-52-52-52-52-52-52-52-52-5

2-52-52-52-52-52-52-52-52-52-52-52-5

For the first three years, the rates given are monthly averages. Thereafter,they relate to the end of the month.


TABLE 32

STERLING-DOLLAR EXCHANGE

LONDON QUOTATIONS

Year andMonth

! 1925January .February .MarchAprilMayJuneJulyAugustSeptemberOctober .NovemberDecember.


1927JanuaryFebruary .MarchAprilMayJuneJulyAugustSeptemberOctober .NovemberDecember.

Rate

4-7804-7724-7774-7964-8554-8614-8604-8574-8474-8434-8464-850

4-8584-8644-8614-8624-8624-8664-8644-8584-8554-8504-8494-851

4-8534-8504-8544-8574-8574-8564-8554-8614-8634-8704-8744-883

Year andMonth




Rate

4-8764-8754-8804-8824-8824-8814-8644-8544-8514-8504-8504-853

4-8504-8534-8534-8534-8514-8494-8514-8494-8484-8704-8784-882

4-8704-8624-8634-8634-8604-8594-8654-8714-8614-8594-8574-857

Year andMonth




Rate

4-8554-8574-8594-8604-8644-8654-8574-8574-5423-8863-7193-372

3-4303-4593-6343-7523-6763-6493-5523-4763-4713-3993-2773-276

3-3723-4223-4363-5073-9384-1414-6434-5034-6604-6675-1365-124

The above are monthly averages of daily rates, and have been compiledfrom the Bulletins of the London and Cambridge Economic Service.

02

X8 o

pq ^

OP6

1933

1932

1931

1930

1929

1928

1927

1926

1925

1924

1923

1922

1921

1920

1919

1918

1917

1916

1915

1914

{•36

133-

4312

1-85

46I-

8688

1-84

98•8

753

t-85

261-

8578

1-78

16•2

591

1-65

461-

2247

3-74

193-

6779

1-76

58

585-!

1-75

85

OO

Sl

1-85

37

J-42

203-

4563

1-85

831-

8617

t-85

21•8

748

1-85

021-

8633

1-77

24•3

077

1-69

081-

3620

3-87

583-

3810

00

CD

585-!

1-75

80r6

621-

8495

S-43

28

86

89

-8

1-85

83t-

8631

t-85

26•8

799

1-85

40t-

8608

1-77

62•2

906

1-69

56

i n

CO

3-91

113-

7258

r~

1-71

^?5

35

999-!099-!

1-81

25

86Z5-S

3-7^

1-85

98t-

8631

1-85

32•8

820

1-85

651-

8622

1-79

53•3

512

1-65

54

COCO

• > *

3-92

923-

9310

9

J550

989J099J

1-80

00

J-93

23

mCO

cb

1-86

401-

8596

1-85

07•8

816

1-85

701-

8615

1-85

47•3

608

1-62

56

CO

?

3-97

533-

8477

CO

COCO

099J

r556

'625

1-80

.00

1135

6

COCO

CO

CO

1-86

481-

8586

1-84

82•8

802

1-85

611-

8661

1-86

04•3

198

1-61

46

0 0

• ^

3-78

153-

9497

r i

cb

099-!

r555

'587

99

8i

1-89

10

t-64

99961

incb

1-85

601-

8656

1-85

10•8

636

1-85

501-

8634

1-85

96•3

703

1-58

33

s

3-63

213-

8647

1-42

8775

359

99

i'5

87'7

120009

f1-

5026

("57

cb

1-85

771-

8707

1-84

85•8

535

1-86

02t-

85

86

t-8

56

9•4

99

41-

5603

t-4

64

63

-65

36

3-6

219

1-27

20

009 J

999;

587

'62

55-

5600

1-66

47

o

cb

1-53

121-

8611

1-84

82•8

505

1-86

351-

8541

1-84

64•4

60

51-

5422

1-43

073

-72

40

3-5

102

11

79

0f5

50

999J

'67

5

008.

5062

5

COooCOCO

1968-8

05O50000

1-85

891-

8699

•849

5

I1-

8503

1-84

28•4

870

1-52

371-

4384

3-87

283-

4751

1184

0^5

50

089J699;

'250

4-98

00

)149

73-

2752

S-71

991-

8564

1-87

741-

8492

1-87

401-

8487

1-84

58•6

096

1-38

211-

4799

3-97

023-

4372

1098

2f5

75^5

20

i n

fl37

4-90

87

3-27

86J-

3737

1-85

661-

8816

1-85

24t-

8825

1-85

121-

8498

•695

81-

3601

1-60

9841

561

3-49

23J-

8123

1-75

85r5

25

69

5i

f512

i n

1-23

683-

5060

1-53

4918

621

4-85

684-

8662

1861

0t-

8582

4-82

8944171

1574

81-

4292

3-84

9036642

1-42

58

0>>

1-"S

the.

o

s2'M

ven

{

££.IS

OU

iva

ri

g2

[edf

mpi

l

8

been

03

8

tist

i

!

CO03

s03

bseq

3en

and

919

a

1a


w o

oQ

OSOSOSOSOSOSOSOSOSOSOSOSOi

N (N (N »O»OCvl

( D o o o n o i o i o > n i O ' * ^ l oOS OS OS OS OS OS OS 0^ O2 O^ O^ G^ O}

ascbobdboboboooOQOQOoooo

pO5 O^ OJ OJ O^ OJ OJ O^ O^ O^ O^ O<)O5 O^ Oi O OS OS O5 OS OS OS OS OS

OOOOOQOOSOSOSOsds^OOOOOOOOSOSOSCSOS^S

OOOOOO§OOo88'

lO *O *O O lO O IO *O

OOOOOOOOOoOO^

88ooo8888888§

SSSSS8888888S

o>ososososGOi>t~t^i>i>OSOSCSOSOSOSOSOSOSOSOS

511«> o fl

111§8-5

III& 8 SS

i ri

2CO

>

o

V.

iwai

Serv

1

1

es

•2 §

o |

© ^73 O


£

§

OJfCOO lO O ©CO0 0 CO Q 0 CD CO i—I ^ HCO >—i <—i

—I 00 (M lO O

5 °°2 S

aacco o 10 »o •*<M f - CO lO CO i—i <N

•;- ^ O> -H O Og O 0 O CO r-H i—i

u O h O O O CO lOi—i*« O <N ^ \G CO ^H

CO i—it»O O O lOl O r i N N lO CO i—iCO i—I <N

CO <M O g 8 2 •

GO GO 00OS OS

O O Q O

•3 3 . S H O O

5P-Io

' 2 o

C g g

JW W ^

s | g I

111!

J§.H

2

illgf 3 g

iiinm•2 ?S "3J i ^ S•2 S o

1 =


TABLE 36

FOREIGN EXCHANGE RATES

PERCENTAGE DISCOUNT IN RELATION TO GOLD PARITY

Year




Argen-tina

27-7525-43191120-7426-7127-1827-56330738-1246-1039-0139-34

39-6039-6539-5839-6639-5539-3439-3039-2939-2739-2839-2839-28

39-2839-2839-5739-6539-9639-9339-9539-9839-8639-8740-3649-71

Aus-tralia

23-3728-5138-6441-3144-83

43-7143-3040-2938-4839-7140-1741-7742-98430544-2846-2746-21

44-8543-8643-9644-10451244-8345-5246-3648-5848-5947-3746-41

Canada

•21•02•02•05•06•28•34•31

3-7510-90110117-29

14-8712-7110-55101211-5613-2612-9312-459-748-77

12-7013-40

12-5416-4916-4819-0825-2726-6932-20

. 31-2834-9734-2636-7535-65

Japan

•81•88•96•98•93•95•99•99

1031-191-102-80

27-80311435-4934-1835-8639-2444-9450-8652-5953-7358-6358-41

58-3958-2857-3457-6858-9357-8558-5760-6663-1562-4861-3960-53

Spain

54-4153-4453-5555-3656-47

56-5059-7560-62601257-9357-2758-2758-2258-0057-5757-6457-76

57-6257-2756-2456-0455-8456-1956-6556-7256-6556-5957-5257-57

Sweden

•13•11•08•09-03 x

•02 1

•16•19

2-6613-7522-623018

28-4028-0125-9228-76301330-2032-0233-4033-5634-5734-963317

31-7231-84321332-9635-5735-2335-7836-8339-5039-51380736-97

U.K.

•24•17•17•14•05•03•22•18

6-8920-0823-5630-68

29-4928-9825-2222-9424-4825-0727-0628-5828-6830-2132-7032-63

30-6729-7229-5829-73311630-6831-4132-4835-3135-4733-8632-70

The above Table has been compiled from various issues of the League ofNations' Monthly Bulletin of Statistics.

1 Premium.

the great depression by lionel robbins

Documents