POLITICS FEBRUARY 24, 1932
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The main difficulty in solving the economic crisis that oppresses the world is that few of us are sure in which year or even in which century we are living. Most of us straddle, and in our thinking we lurch uneasily from one age to another and back again. We may, if we are of an analytic turn, occasionally detect ourselves in these transitions (I sometimes achieve this feat in my own case), but usually it is the behavior of our neighbors which invites us to date them. Each of them has, when we scrutinize him, his own characteristic time-lag. You will meet, in any random group of Englishmen, Elizabethans in violent controversy with Victorians; youngsters with pre-war minds are at odds with gray-heads who have adapted themselves to this age. But the classification is rarely so simple, for I meet men who are moderns in their business life, early Victorians in their politics, futurists in their easy morals and cavemen when they try to reason about currency and gold.
Our British “National” government is, as you would expect, a collection of this kind. It moves very slowly: it arrives with painful difficult at any decision whatever, and it has now, to the amusement of the world, recognized that men who live in different centuries cannot talk the same dialect. We shall enjoy a bewildering study in time-lags of various lengths, when (about the moment that this article reaches the reader) these colleagues assail each other in debate over the merits of their tariff.
The revenue tariff is, I take it, an expedient which is about two years behind the time. It dates in reality from the summer of 1930, and might have been a wise and timely measure if it had been carried in hot haste at that period, or a little earlier, as an emergency prescription. Mr. Maynard Keynes was its only begetter, and he defended it, somewhat later, in these columns. The case for it, midway in 1930, was strong. The tide of the worldwide deflation had struck us with full force: our costs of manufacture, including wages, were obstinately high and refused to fall with the drop in wholesale prices: our exports were dwindling dangerously while important enjoyed an advantage, with the result that our balance of international trading threatened to disappear (as in fact it has since done), and unemployment mounted to Himalayan heights, as the entrepreneur saw his profits vanishing. It was reasonable at this time to propose a low revenue tariff of 10 or 15 percent, which would have checked imports and stimulated internal trade by raising prices: the proceeds would have been used to subsidize the export trades. Such a device is at best only a local and temporary alleviation, which will make the general chaos worse confounded, but had it been adopted, when Mr. Keynes (which has no time-lag) so proposed, it might have saved us from the crisis which overtook us a year later. The plan came before the Labor Cabinet. Mr. MacDonald, who is rather more mobile in thought than he is in action was for accepting it, but he quailed (as he always did) before the stubborn veto of Mr. Snowden.
Today, after nearly two years’ delay, Mr. MacDonald, at the head of a very different administration, is about to give effect to this project, which he has cherished with a consistency that would be admirable, if circumstances, in the interval, had stood still. But the circumstances of our island problem have totally changed. Driven off the gold standard, our costs and prices, which remain at the old level when expressed in sterling, are now by the tricks of the exchange a full 25 percent lower than they were, when converted into gold. Our exports have received a stimulus which actually shows itself in the reopening of some of the closed coal mines and a just perceptible revival in the textile trades. The importer is now at a disadvantage, for the exchange works like a 25-percent duty. It falls, moreover, very conveniently for our manufacturers, upon their rivals in the industrial countries which still cling to gold (the United States, Germany, France, Belgium, Czechoslovakia), while it spares the countries from which we draw most of our imported foods and raw materials (Australia, the Argentine, Canada, Denmark, India, Ireland, and New Zealand), since they too have gone off gold. One could ask nothing better. If our trade balance is not yet satisfactory, that is because shipping and international banking are still depressed. But no one, so far as I can discover, in this Cabinet of rather elderly gentlemen, is yet living in this contemporary world. Mr. MacDonald, who may be mentally the youngest o them, remains imbedded in the year 1930, proud to win over Viscount Snowden the battle which he lost to Mr. Philip Snowden in the first summer of the slump. That knight of negation, and several of the Liberals with him, is more than half a century behind the times and lives on the memory of Cobden and Bright. They oppose the revenue tariff for reasons which might have been valid in the days when Lord Palmerstod used to carry on horseback to Queen Victoria at Windsor dispatches neatly written with quill pens and blotted with green sand. As for the Tories in the Cabinet, their time-lag is appreciably longer. For them this is neither a revenue nor an emergency tariff; it is the first timid and moderate installment of a full-blown protective tariff, which they may, indeed, achieve before the year is out. They think it terms of eighteenth-century mercantilism. One shuts one’s eyes while one listens to them, and pictures the elegant frilled hand dipping in the jeweled snuff-box, or fingering the hilt of its ornamental sword, And so, out of the contending pros and cons, equally remote from the conditions of today, this tariff will emerge.
Our case grows more complex and interesting still when one turns to the theme of currency and gold. It deeply interests us. IT is debated in England as nowhere else in the world. Popular newspapers, like The Daily Express and The Daily Herald, with circulations that far exceed a million, are spreading (though without naming him) the view which Professor Irving Fisher with difficult made intelligible to the experts only a few years ago. A speaker who handles this theme cleverly can get and keep an audience even at Hyde Park Corner. But here too our time-lag reveals itself. The orthodox view is that which the Macmillan Commission stereotyped in its able report, a few months before we went off gold. It attributed the world’s distress to the failure of the Central Banks to correct, by a sagacious monetary policy, a number of disturbing factors which were not a monetary origin, the chief among them (thought I enumerated others) bring reparations and war debts. It was easy to show by statistical evidence that the world’s gold had got congested in New York and Paris; the inference followed that in this way the world’s medium of exchange had been partially sterilized, and the volume of credit reduced, with the result that gold appreciated and prices fell by over 40 percent.
This explanation at once became popular in England. IT threw the blame for the world’ distresses and our own upon other shoulders. It flattered the City of London, which reflected that it managed gold vastly better when it was the world’s banker. Above all, it sheltered the Bank of England and the City from the criticism to which their own recent conduct is exposed. No one now recalls that we were driven off gold by the reckless husbandry of the City, which borrowed millions from the French at 3 percent to lend them to the Germans at 8; had no resources in hand to sever itself when the French took alarm and withdrew their deposits, and possessed no central organization to check, or even measure, operations on which our national credit depended. Again, when one considers the reason which led tot eh concentration of gold in New York and Paris, it is obvious that reparations and war debts, though they rank high, do not stand alone. London had difficult in getting or keeping gold, from 1925 onwards, because it had stabilized sterling y law at the old parity, when in fact its buying power was at least 10 percent too low. But that also is forgotten: it is, so much pleasanter to blame Paris and New York, more especially Paris–and assuredly they have much to answer for.
So a complacent English orthodoxy is crystallized. It exaggerates the monetary causes of the depression, and wholly ignores those of them which are of our own making. It forgets the special problem of the relatively low level of agricultural prices. It refuses to think about the social distribution of buying power, which matters no less than the control of its total volume. This school of thought still believes in gold, which it would “manage” through an international banking organization. It contemplates, one day, a return to gold, but it is in no hurry, for manifestly many a year will pass, on its reading of the problem, before the time=lags of Western Senators and French Nationalist politicians will permit a liberal dealing with debts, a more even distribution of the world’s gold that return to the price level of 1929 which it desires, with stability ever after. This creed is popular for many obvious reasons, but chiefly, perhaps, because it calls for no action. We can but wait till others grow sane.
Over against this fatalistic orthodoxy, a radical, activist school is gathering strength. It doubts the ability of the profession o usury (which always will have a bias toward deflation) to manage gold. It dreads the power of America and still more of cumbersome superstition, and points to the fact that the supply of it is drying up. It would base sterling on a commodity index, and control its volume so as to maintain a stable level of prices. This might admittedly lead to instability in the exchange value of the pound. That inconvenience, however, it would lessen, by an international currency league, which would include certainly the Dominions and India, and probably our chief commercial clients, notably Denmark and the Argentine. Within this big area, sterling would have both a stable buying power, and a steady exchange value. This plan has been advocated by no less a person than Sir Basil Blackett, who is a director of the Bank of England, and was India’s Finance Minister. It is the official policy of the sadly diminished Labor party, and one may encounter it running glibly in the popular press from the tips of pens which on other subjects commonly show a longer time-lag. It has elements of popularity, for it might be the basis of a new type of economic imperialism, and yet it appeals to the scientific and radical minds which dislike the more vulgar forms of that tendency.
We are governed, however, neither by the complacent orthodox view, nor yet by the radical heresy. We are governed by the Bank of England, and it, in turn, is an autocracy under Mr. Montagu Norman. In the matter of time-lags he presents the most singular study of all. Driven off the gold standard by an untoward hurricane, the still thinks it. He has conducted our affairs since that episode precisely as though it had never occurred. He is still deflating, as he has done with steady consistency through his decade of power. He has not increased the note issue since he toppled off gold; rather he has reduced it. Through the red discount rate and through open market operations, he is all the while contracting our buying power. This is, I supposed, the main reason why the cost of living has not risen in England, though the pound is worth a dollar less on the exchange. Wages, with the banks standing with set faces before every employer who seeks an advance, are still coming down. Mr. Norman is building up once more a gold reserve: he will not use his precious hoard even to pay off debts. Steadily, imperturbably, this strong man with the notable time-lag is steering us back to gold again. But note the explosive thing that will happen when the bankers and the politicians, each with their own peculiar and incompatible time-lag, have had their will of us. The politicians with their tariff will at least compel sterling prices to rise. Unless we are all to go short of bread and butter, we must have more money with which to do our marketing,. But the prime concern of the Bank is to contract buying power. Caught between these two time-lags, we face tomorrow the rarest form of economic torture that ingenuity could devise. The hands of the past lie heavy on our future.