standard. The only doubt is as to their ability to ensue it. But even the timorous among us may take heart of grace in the reflection that we shall not be acting alone. The danger they so much dread of an inundation of American gold is likely to be lessened by diffusion among several countries and mitigated, let us hope, by the co-operative action of the Central Banks contemplated by the Genoa Conference resolutions. Nor should it be forgotten that in any event there is a weapon to hand in the payment of the Allied debts to the United States. The annual purchases of dollars for this purpose may well prove an efficient safety-valve on the maintenance of a rise in the New York sterling exchange above parity, which is an essential condition of continued shipments of gold. In fact the gold standard policy holds the field and only the most cogent and convincing arguments should induce us to abandon it in favour of any new and untried currency system however alluring. The burden of proof lies on those who propose the change.

We are asked to substitute a managed currency based upon price or unemployment index-numbers for a currency based on gold. We are asked to do so on the ground that it is more advantageous to stabilise our internal prices than to link them up to world prices. It is not denied that the mobility of gold and the relatively small changes in supply to which it is subject have made it in the past a powerful factor in stabilising prices in the long run. The complaint is that it acts too slowly; that the mischief is done before the gold standard comes into operation. That argument seems to me to beg the question. It assumes that the gold standard is purely automatic in action. That is not so. The human element can no more be eliminated from the operation of an automatic than of a managed system of currency. In either case those who are responsible for currency control are expected to have regard to the course of prices and unemployment, as well as to the movements of gold and, since a rise in prices may precede an increase in currency, to check the anticipation of credit supply on which the rise of prices is based. It is gratuitous to assume that those responsible for the maintenance of the gold standard must necessarily wait upon a movement of gold before bringing into operation a rise in the rate of discount, as the appropriate instrument for checking a rise in prices. From that point of view the gold standard appears to be in no way inferior to a managed currency. It is superior to it in possessing an automatic signal to warn the public of what is coming, and to arouse their attention to the shortcomings of bank directors if

they fail to anticipate it. Public criticism is likely, and quite rightly, to be the more severe since the gold standard has the additional merit of being free from political influence. Its supreme value to the community is that it acts as an effectual check on any attempt on the part of Government to manufacture currency.

It is true that we have still some distance to travel before we get back to an effective gold standard, while stabilisation at the present level of prices can be put into operation forthwith. I pass over the effect on debtors and creditors, for I agree that the great bulk of existing contracts is of comparatively recent origin, and that the present level of prices presents about as near an approximation as you are likely to get to a middle term between the highest and lowest levels at which War Loans were purchased. As for the repudiation argument, I have never seen any force in that.

Stabilisation, however, may not be the same thing as stability. It has yet to be proved that the present level of prices is that which is best suited to economic production in this country. There is a present discrepancy between world prices of raw materials and manufactured articles, apart from the lag in retail prices, which requires to be adjusted; the latter are relatively too high; the urgent problem ahead is how to secure for the tiller of the soil remuneration sufficient to induce him to exploit its undeveloped wealth. British imports are 40 per cent. while British exports are 90 per cent. above pre-war prices. It looks as if we were selling our manufactures too dear and consequently selling too little of them. Is there any other way to sell more of them than to reduce the price? You may, of course, elect to maintain your internal prices and to reduce your external prices by letting exchange go hang, but this is only to transfer the instability from the price to the exchange, and I am not convinced that for a country like England, whose chief anxiety it is to export sufficient manufactures to supply her population with its daily bread, stability of price is more important than stability of exchange.

I am not sure that even the increased prominence which has recently been given to the subject of prices has succeeded in extirpating the old fallacy that, in some way which has never been explained, high prices are good and low prices bad for trade and industry. The fact is that, as Dr. Marshall says, there is no evidence whatever that a fall in prices diminishes perceptibly in the long run productivity of industry. Depression of prices is

consistent with prosperity. The employer gets less; the employee gets more. It is doubtful if the working classes have ever been so well off since, as they were during the period of falling prices that marked the latter half of the nineteenth century.

Nevertheless we must not shrink from the conclusion that, whatever the effect of low prices may be, falling prices are undoubtedly bad for trade and, unless prices rise in the United States, a further fall of prices in this country is a condition precedent to the re-establishment of the gold standard. I do not disguise the seriousness of such a step, but I submit that we ought not to exaggerate its extent. A year ago we were within four per cent. of gold parity, and may shortly be so again. We have already suffered a fall in prices, as registered in the index numbers, from 360 to 160. Is the comparatively small further drop, which is all that is required to bring us back to parity with gold, too great a sacrifice to ask of our people in order to restore the currency position on which the supremacy of this country in international trade and finance was formerly established? I do not believe it.

MR. KEYNES

Mr. Hawtrey has defined for us very clearly the issues to be discussed. First of all there is the problem whether we want monetary reform at all or whether we want to get back to something as near as possible to the pre-war system. Secondly, there is the question what precise device we should adopt, if we want reform, in order to bring it into operation. I will begin with the first problem.

Mr. Hawtrey has emphasised what is perhaps the main difference between the attitude of a good many economists now and their pre-war attitude, namely, their greater confidence as to the connection between monetary causes, the credit cycle, and unemployment. Mr. Hawtrey himself has been a great pioneer in the exploration of that subject. I myself believe that there is no longer any reason to doubt the connection. Professor Cannan referred to an equation which I published recently in the form npk, where n is the volume of money, p the level of prices and k the quantity of goods for which it suits the public to have purchasing power in the form of money. The view used to be that k was not subject to rapid fluctuations. It would move up and down over long periods, but over short periods it did not change very much. Therefore if you kept the quantity of currency stable you probably kept prices reasonably stable.

It was argued from this, that, as you would not have in any one year any very big change in the volume of money, therefore you could not have in any one year any big change in prices, so that though gold might move up or down slowly over a long period of years, a fair measure of stability would be secured over short periods. It is true that this was not in fact borne out, because booms and depressions occurred in pre-war days just as much as since; but the tendency was to explain these by particular causes. Many economists now take a different view from that. They think that k, and accordingly the quantity of real purchasing power required, is itself capable of sharp fluctuations, and in fact that it is the leading characteristic of booms and depressions that there should be a variation in the magnitude of k, so that it is this variation which makes those price fluctuations that occur even when there is no marked change in the total volume of money. That being so, attention is naturally transferred to a certain extent from the mere volume of money to this other element. We no longer believe that prices can be kept as steady as they might be simply by securing a constant volume of money, and we hold, rather, that we can only keep prices steady by varying the quantity of money to balance changes in k. If the public, for some one or another cause, decide on the average to keep more purchasing power than before, prices must fall to counterbalance this, and the tendency of prices to fall may produce a situation likely to provoke unemployment. That theory in a clear form is essentially new; and if it is correct it opens up enormous opportunities for far-reaching social reforms.

If we really have the power to control in some measure credit cycles which cause unemployment and other social disturbances experienced in the past, surely it is our duty to follow up this line of thought to the utmost, to make experiments and to see whether by a control of the monetary machine we cannot cure one of the greatest and most dangerous social evils of the economic system. We feel that those who oppose monetary reform ought to make it clear how far they agree with us on that diagnosis. If we have even a half-chance of getting rid by monetary reform of the evils of the credit cycle, I should have thought most people would have agreed that it was worth while, and that it is no good for Professor Cannan to talk about a barbarous age if his object in speaking thus is to keep it barbarous. We certainly live in a barbarous age, but our object should be to emerge from it, and if there is a new weapon forged for that purpose we have no right to overlook it. It is not so much a change in the whole theory of

our view of the credit cycle, as the increased clearness with which we now see the various steps, that is the reason why the minds of some of us have changed since pre-war days.

But there is another reason also for change which has arisen out of events connected with the war. Can we rely on gold to give in future even that amount of stability that it has given in the past? Formerly there was a great deal of gold in circulation in people's pockets. Many countries were rich enough and sufficiently inclined to hoard resources to keep a considerable amount of gold in banks and elsewhere. Any given country might suffer sudden changes in that respect, but it was not likely that in a short period of time there would be a simultaneous change of any magnitude in a number of different countries. As a result of the war, however, there is now extremely little gold in circulation in the world; in most countries none whatever. It is unlikely that gold will return into circulation both because of the expense and because of the change of habits. It is also much more difficult than it used to be for some countries to hold large amounts of gold in banks or to increase their holdings. A great stimulus has been given to all those methods of economising the use of gold, which have been gradually developing as a result of the growth of the credit system. We may even tend now to up against the ultimate truth that a perfectly conducted gold standard does not require any gold at all, or practically none. Suppose those who manage the credit policies of banks were to acquire sufficient skill in the management of international adjustments, no actual gold would be required at all; and while we are still very far from that position, we are probably already in the position in which the necessary quantity of gold for the maintenance of the existing price-level is far away less than the volume of gold in the world, and the difference between the two is getting larger every day. This redundance of gold pressing upon the world is a phenomenon which some one has to look after, and the problem of preventing that redundance from causing sudden changes in its value is much more acute than it was.

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Those of us who are in favour of monetary reform support it, therefore, for two main reasons: first, because we believe that we ought to do all we can in any reasonable way in the direction of the social aims already referred to; secondly, for fear that gold left to itself may prove a much less safe standard of value than in former times. I do not believe that there is sufficient weight on the other side to outweigh those two considerations. There are, of course, two sides to every argument, and it is generally a question No. 134.-VOL. XXXIV.

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