Page 5, 12th March 1937

12th March 1937
Page 5
Page 5, 12th March 1937 — Can Another Slump Be Prevented ?

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Organisations: Economy School, Senate
Locations: London


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Can The Next Slump Be Prevented ?

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Can Another Slump Be Prevented ?



IF I had to answer the question whether there will be a next slump or not I should say : I don't know. 1 am not a prophet and cannot forecast the actions of those who will be responsible for policy. On the othcr hand it is perfectly safe to say that it would be criminal folly to allow another slump to come upon us.

Slump and unemployment are synonymous terms. They imply that people who are willing to produce and serve arc unable to exchange the result of their own labour for goods produced and services rendered by others.

Do not let us make the mistake to think that booms and slumps are particular to the machine age. They were known long before the advent of modern industrialism; they are as old as the division of labour itself.

The Problem of Exchange The fundamental problem of our economy is still a problem of exchange. If the monetary system under which we work were a perfect system of exchange there could be no unearned gains at the expense of the wage earner. Unfair profits and accumulation of wealth in the hands of a few are not causes but symptoms of the failure of our economic system.

Nor can the machine be blamed for the misery. It has helped to reduce scarcity, and scarcity is the source of all economic power. Division of labour has made possible enormous increase in the efficiency of labour. But division of labour itself could make little advance until money was invented—and money alone made possible the division of exchange. It is this division of exchange which is all-important.

We have made some progress in thought since the first crude and bulky money made its appearance. But only yesterday have we come to see that the material of which money is made is of no importance.

Many have not yet recognised the truth that the exchange value of money depends entirely on what it can buy. But it is now more or less common knowledge that we can control the exchange value of money by manipulating the amount of money and surrogate money (cheques, etc.) in circulation. In other words, we have learned how to control the purchasing power of the money unit.

Inflation and Purchasing Power

When there is inflation, i.e., when there is too much money in circulation relative to goods ready for sale, the purchasing power of the money unit falls; deflation causes the purchasing power of the money unit to rise and the price level to fall.

The only rational, and at the same time, equitable money standard is the " purchasing power standard." Under this system the price level is kept stable. This, indeed, is the conditio sine qua non of an efficient monetary system. It must be remembered that any change in the purchasing power of money also alters the exchange value of all debts.

It is this latter fact which mainly causes unemployment during deflation.

Contrary to the opinion expressed by some writers, increased efficiency of a technological nature does not call for a lowering of the price level. The extensive use of machines and other technical improvements results in a saving of applied labour power. The machine-produced articles and services become cheaper in relation to those articles and services which depend for their production mainly or wholly on human exertion.

Thus in due course technical benefits are shared by all. Ultimately it is the free play of supply and demand which causes the re-distribution of exchange values without themselves disturbing the general price level.

Capital and Rent "Where a disproportionate amount of capital wealth is in the hands of a small number of men, so that these men command more wealth titan they can themselves use, they can only do one thing with it. They can try and make it earn rent." This was stated by Mr. Benvenisti in the first article of this series.

But is it not a fact that they can only get a rent •if they lend it? And would not the fact of all of them lending their surplus wealth tend to lower the rent which they could get? Both Mr. J. M. Keynes and the late Mr. Silvio Gesell, the one in his latest work on General Employment, and the other in his Freed Money theory, bring out the fact that crises are caused exactly because those people, whom Mr. Benvenisti mentions, do not accumulate real wealth which they cannot use and which they would have to lend out at whatever rate they might get.

After a Boom

Whenever after a period of good employment and rapid expansion of production the rate of interest falls on account of the increased supply of means of production and of slowly depreciating real wealth, such as houses, reinvestment of surplus incomes takes place at a slower rate.

Owners of large money incomes keep a large part of their monetary savings either in the form of currency (examples: United States of America 1929-1934, France repeatedly since the war, Switzerland 19321936) or in the form of idle balances with the banks. In addition to this the propensity to consume usually diminishes at the same time.

Thus the rate of velocity of all money and money surrogates decreases, which has the same effect as if the amount of money had been decreased. The result is crisis and unemployment. In other words. the sum total of consumption and actual investment is no longer equal to the aggregate of all money incomes. Money savings are not an addition to the aggregate wealth of the nation if they are not forthwith invested in goods of some kind or other. This is the central problem; and the fact that it does exist is to be related to the difference in the character of money as compared with that of average goods and services.

Idle Money

Money and money surrogates do not depreciate in storage. There are no maintenance costs, and the cost of storing is almost nil. Therefore money can wait if it suits its purpose.

Goods, on the other hand. are by their very nature subject to constant deterioration; to maintain their exchange value involves large costs and even then maintenance cannot be prolonged beyond a certain period; their storage is expensive. The loss of interest on the capital invested in them is disregarded because idle money does not get interest either.

Worse than the case for goods is the case for labour. Labour power cannot he carried forward at all; its loss through idleness is absolute.

Is it not clear from this that money has the whip hand when dealing with producers and service workers? Here, then, we face the source of monetary power, the main cause of crises, and the spring from which usury gets its fill.

The Free-Economy School

As the examples mentioned above proved, and for which additional evidence can be gathered from the fact that current account balances in the London banks turned over about 75 times in 1928 but only 50 times in 1935, it is useless to compensate for the deficiency in re-investment by merely adding new money to the previous issue, it simply goes on strike with the rest.

The one radical solution would be to subject money, and if necessary also current account balances, to a periodical demurrage charge. Thus money would he reduced to the status of goods which depredate.

This, indeed, is the proposal of the FreeEconomy school. But since there is little likelihood for such a proposal to he accepted within a year or two, the next best cure must be attempted, Mr. J. M. Keynes suggests that the Gov ernment should take over the idle balances and idle money by means of medium and short-dated bonds. Since the holders of these funds cannot get any return whatsoever while they keep them idle, even a low rate of interest would tempt them to pass the funds on to the Government. They could easily turn the bonds into cash again should they find better employment for them. " Better " means, of course, a higher rate of interest, The Government should use the funds for paying for essential public works and should—and easily could—redeem the bonds later out of increased revenue. Thus the circle would remain 'closed and prosperity need not disappear.

I am fully in agreement with this proposal but I believe that such a policy cannot be applied for all times.

Redemption of Debts Continued prosperity with a stable price level means wholesale redemption of old debts. Increased supply of real wealth on the one hand and declining demand for loans on the other will inevitably reduce the yield on all securities and shares considerably.

Once the gilt edged rate falls to 2 per cent. or even below we shall not tempt the surplus incomes to invest themselves any more. When that stage is reached nothing but demurrage (i.e., a time charge) on money and money surrogates will force reinvestment of all surplus incomes. The additional advantage of this method is that it needs no further governmental intervention.

But let me add, for the sake of accuracy, that the rate of interest cannot be brought down to zero and usury eliminated unless the land problem is solved at the same time. but from England and the Continent where Protestanism and Liberalism have been the predominating inspirations. Her financial and economic policies appear to be in the direct line of capitalist evolution, the first being linked to Great Britain and the City of London, the second following the trend of all modern States in protecting themselves against foreign competition in the interests not primarily of the people of all classes but of the national prestige.

Concentration on Appearances

When travelling in Ireland and talking to her people one cannot at times help feeling that in her magnificent effort to be Irish she has concentrated on the appearance rather than the reality, and that she has done this because she has forgotten that her national culture will find its deepest expression in close unity with all that the Catholic Faith implies, not only as regards ecclesiastical doctrine but also as regards moral habits and moral thinking in the widest sense of the words. In concentrating on the Irish, she has tolerated much of the Protestant and Liberal that superficially appeared to have no cultural and little religious bearing.

I noticed that when I asked important people in the State how far there had been an attempt to make a Catholic State rather than a State of Catholics I was put off with the answer: " Ninetythree per cent. of Irishmen are Catholics, so there's no problem here." Which showed that my question was scarcely understood and that they were content with a State of Catholics.

And no one can visit or even read of Ireland without realising how much importance is given to such things as the teaching of the Irish language and the use of the external symbols of Irish nationality. The latter, by the way, is understandable enough as a strong reaction to the use of British national symbolism for generations and Englishmen should concede a very great deal, indeed all, to the Irish in this respect, remembering that when the Irishman refuses to participate, say, in the Coronation, he is not looking for a new quarrel, but taking the opportunity of showing that when he feels friendliness towards Britain his friendliness must not be misconstrued as any sort of desire to move one inch backwards towards the past—while of the former (the exaggerated teaching of the Irish language) I have heard it said in very patriotic and very Irish quarters that it is lowering rather than raising the general standard of education.

It should, however, be remembered that Ireland is planning for all Ireland, with 25 per cent. of Protestants and a religious feud, so that it has to be more secularist in form than an all-Catholic country.

Political Changes Of the political and administrative system it is unfair to say much. It is a heritage from Britain, and certainly the present President has not shown any reluctance to amend it in accordance with Ireland's wishes.

Moreover Ireland is on the eve of getting a new Constitution, the features of which, it is understood, will embody two great im provements that may certainly be said to be along Christian lines.

The first is the abolition of the Governor-General and the appointment in his stead of an elected Head of the State who will be independent of the Legislature and the Executive and have an authority to refer to the people any matter of grave importance affecting their daily lives. There seems a chance here of a return to the Christian idea of the elected and personally responsible Monarch whose duty it is to guard the Divine and natural law and as a person to protect the interests of the people as against the irresponsible and non personal sovereignty of oligarchy or party or mob.

The second is the institution of a Senate an a moc•tional basis wit:. advisory and

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