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limitation, limitation by the price of gold or limitation by general prices—we must soon adhere. I believe I shocked some people a little time ago by saying that it was false in the long run that “bad money drives out good,” but I was perfectly right. Good money does in the end overcome bad, even when the bad is numbered by trillions. The countries which at present adopt no principle of limitation, but simply abuse the foreign speculator after selling him a great quantity of worthless paper, and then try to borrow from him, may have a long career of depreciation yet before them, but they will pull up at last. Countries like Great Britain and France which have adopted fixed and arbitrary limits bearing no relation to the prices of commodities or gold will at length come to see that though such limits when actually operative are far better than nothing, inasmuch as they prevent further depreciation beyond a certain point, yet they provide neither stability of internal prices nor stability of foreign exchanges. The recent experience of France is instructive on this point.

MR. HAWTREY Before I begin I ought perhaps to make it quite clear that, though I hold a post in a Government Department–in the Treasury—what I am going to say is exclusively my personal opinion and has nothing at all to do with official views.

I think we have all been very much interested in Professor Cannan's survey—a very non-controversial survey-of the recent growth of opinion on monetary theory. He really dealt very briefly with the subject of this afternoon's debate, that is to say, Monetary Reform, and I propose to pick up the subject rather where he left it. There are two quite distinct questions : there is the question that Professor Cannan raised of what ought to be our permanent monetary system; and there is the more immediate question of how we are to get from the existing condition of things to that reformed state. Professor Cannan mentioned the two possible regulating principles-convertibility into gold, and the determination of the value of the currency unit on the basis of an index-number of commodities. I am not sure that he made quite clear the possibility of the synthesis which unites those two opposites, which received approval at Genoa, that is to say, the adoption of a gold standard by all the countries that can, all the countries that hope to have sound currency at all—the adoption of a gold standard, and the regulation of the value of gold itself through the action of Central Banks, on the basis of an

index-number. That Genoa solution seems to me to be the right one. I think there are a great many disadvantages about the purely tabular standard, dissociated from gold. I do not propose to enlarge upon them, but I think there are great disadvantages, and I think also that the gold standard on the pre-war basis is very unsatisfactory indeed.

Now, assuming that we have got to get back to a sound currency of one of those three kinds, what ought we to be doing here and now? That really is the more controversial question of the two, and there are several schools of thought : there are those who desire a restoration of the pre-war parity by a renewed process of deflation; there are those who propose to stabilise our unit at its existing value, either without a gold standard or by devaluation with a lower standard, a smaller gold content; and finally there is another school of thought that proposes to wait and see—to do nothing, in the hope that presently the value of gold itself in the course of its fluctuations will drop down to parity with the pound. The real division of opinion, the most acute division of opinion, is between those who propose immediate deflation and those who do not, and opinion on that subject depends upon what I regard as one of the most important principles established in recent years in monetary theory, that is to say, the connection between price movements and unemployment. I think it is pretty well recognised by most practical business men-I am not sure it was not recognised by them before it was recognised by economists—that falling prices do cause trade depression and unemployment. As a matter of fact Sir Charles Addis, who is going to speak after me, has expressed himself quite emphatically on the subject, though I believe that he himself would be prepared to face deflation. I expect many of you present have read the very important and interesting speech that he made a few months ago to the Institute of Bankers on the return to a gold standard. Although he is one of those who are in favour of getting back to the pre-war gold standard as early as possible, by deflation if necessary, he was quite clear that falling prices do cause unemployment. He himself, I daresay, will be willing to take up the point and elaborate his own views. On that occasion he called attention to the fact that the recent unemployment in this country is similar in kind to the unemployment that we suffered from during the trade cycle before the war, and that I believe to be true, and I will go so far as to say that the deflationary movement that followed the inflation of 1919–20 is practically the sole important cause of the unemployment that we have been suffering

from, so far as it is abnormal. Well, I don't know that Sir Charles Addis would go so far as that, but at any rate he would agree, and I believe he speaks for the great bulk of City opinion, that falling prices do cause unemployment.

Turning from the opinion of business men, and from economic theory, to facts, there are masses of statistics to bear that out, both before and since the war. There is one particular example that I should like to refer to, which has been experienced since the war. It is commonly alleged that the unemployment we have been suffering from, although it may have been caused partly by deflation, is mainly due to the failure of our export markets in Europe. We are not alone in being dependent on export markets. There are other manufacturing countries in Europe, and some before the war were very much more dependent on the European export markets than we are. Switzerland during the war had 370 francs per head of exports to all quarters (about the same as we had), and whereas 35 per cent. of our exports went to European markets, 75 per cent. of the Swiss exports went to European markets. Swiss unemployment statistics are available in the form of the numbers on the live registers of the employment exchanges. In September 1920, at the culmination of the boom of that year, they had 7178 names on their registers. By February 1922, when prices had fallen by something approaching 50 per cent., they had 99,500. From that date prices rose steadily. The index-number rose from 160.2 to 186.5 in April 1923. By July 1923 their total of unemployed had fallen from 99,000 to 22,000. That in a country far more dependent on European markets for exports than we are, is a most striking result. It shows that if you have only a moderate rise in prices you can, despite all the disadvantages of the European market in the years when it was at its worst, reduce unemployment to what may practically be called normal dimensions : 22,000. is not abnormal for Switzerland.

Now what does this lead up to? It leads to the conclusion that, if unemployment is as important as we believe it to be, it is absolutely futile to start raising the value of your unit in terms of commodities when you are already suffering from unemployment. That, in my opinion, rules out deflationary measures at the present time. It may be that six months or a year hence unemployment will have fallen to such a level that it will be possible to raise the value of the pound in terms of commodities without causing very severe unemployment. If you start with good employment, and then produce a slight fall of prices, the result is tolerable. If 1,000,000 unemployed is your zero point when you begin reducing prices, it means you stop the revival, and the social consequences of that it would be impossible to face under existing conditions. If that is so, that leaves us to the choice of waiting, or devaluing the pound.

Well, some people would argue that there is no very great harm in devaluing the pound. There is no special virtue in the pre-war gold value of 113 grains of fine gold. It might be reduced to 100 grains or thereabouts, and in a way it is true there is no great virtue in pre-war parity. But there is one fundamental advantage in getting back to pre-war parity if we can : that is, that if we have got back there with a certain amount of struggle, have regarded it as an end for several years, and finally achieve it, everybody believes we shall stay there. If we devalued, though we started with 100 grains, it might be convenient to change it to 85 grains later, and there would not be that confidence in the gold value of the currency which is so valuable in great financial affairs. So if we prefer not to devalue the pound we are left with the alternative of waiting, and there we depend upon the world value of gold. The world value of gold is at the present time determined by the credit policy of the Federal Reserve Board, and it is to be hoped that in the course of a year or two the process by which their supply of gold is accumulating, and gradually stifling their control of credit, may lead to a moderate depreciation of the dollar, sufficient to bring it back to parity with sterling. Then from that point we shall be prepared to determine our future permanent monetary policy, and at that point I shall hope to see the Genoa resolutions come into operation, that is to say, the retention of gold and the agreed adoption by international co-operation of an index-number. That would be possible because the gold supply of the Central Banks of the world is so great that they can absolutely determine the value of gold in terms of other commodities. If their stock of gold is twenty or thirty times the annual consumption for non-monetary purposes, it is possible for them to regulate gold practically as they please. Therefore what is really required is an agreement between the great Central Banks, above all between the Federal Reserve Board on the one hand and the Bank of England on the other. A very interesting document has recently appeared—the Annual Report of the Federal Reserve Board-and they make clear the process by which they have in fact been regulating credit the last two years. It is hardly going too far to infer that they would be prepared to adopt a plan not very different from that of Genoa. How far they would go it is difficult to say until they begin the discussion. On this side Sir Charles Addis expressed approval of the same scheme in the speech to which I referred before, in which he argued so emphatically that we should return to gold standard. It is encouraging to find that such high authorities recognise the enormous advantages of stabilising purchasing power with relation to an index-number.

SIR CHARLES ADDIS Whatever our opinion of stabilisation may be, we are all in favour of stability-stability of policy as well as stability of prices. Instability of policy is no less dangerous than instability of price. Nothing can be worse than uncertainty. Better a defective policy which is fixed than a complete one which is uncertain. It is of the first importance in currency matters to know the goal at which we aim. We must know where we are and whither we are bound. The pronouncement of Mr. Baldwin last July in favour of stabilisation at the level of that time and, it must be added, the hesitating and equivocal utterances of some of our bank chairmen, left the public at home, and, what was more serious, our customers abroad, in some doubt as to what our monetary policy really was, whether indeed England could be said to have any definite monetary policy at all. All this uncertainty and obscurity have happily been dispelled by the timely statement of the present Prime Minister. All the world knows now that the official policy of this country is directed quite definitely to the restoration as soon as possible of the pre-war gold standard. The countries of Europe know it. Our ally Japan knows it, and, with Holland, Scandinavia, Switzerland, etc., is believed to be only waiting for our lead to get back to gold.

The British Dominions overseas know it and welcome the official confirmation of the early return to the gold standard contemplated in the unanimous report of the committee on currency at the Imperial Economic Conference. The country stands definitely pledged to return as soon as possible to the gold standard which prevailed before the war. It is no wonder if the sound money party is encouraged by this unanimity. It might be different if other countries formerly on a gold basis were disposed to discard it in favour of a paper currency, but of that there is no sign. The unanimity is complete. Every country which has ever possessed a gold standard, whether for good or evil, seeks or professes to seek a return to the gold

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