E. 16. The Choice of a Currency Policy [a] , [1]

I esteem it a great privilege to have been invited to address the British Import Union. An Englishman cannot but feel moved on finding himself in the presence of, and called upon to address, a body of men who, acting under no restraint and bound by no ties of political allegiance, have chosen to put his country first. Nor has this attitude to friendliness been confined to mere words and gestures; on the contrary it has resulted in material and substantial benefit, trade, profits, receipts accruing to my own country amounting to millions of pounds. These are royal fruits of friendship indeed, and rare too. One may feast and be merry with one's friends, and interchange intimacies and expressions of regard and loyalty; but it is not often that one comes away with one's pockets fuller. I pay tribute to the work that the Union has done. These circumstances make me wish that I were not a mere professor, secluded in my remote academic cloister, but a magnate of the press or a political pundit, so that I might be able to pay a tribute, loud enough to be adequate, in my own country.

And what of the spirit of friendliness on our side of the water? May I be frank at the outset and touch on what must be in all our minds? If I am frank at this point, you will be more easily able to attend to the arguments that follow, without mental reservation. I cannot announce to you, you do not expect it, that I think my country likely to abandon concerting special measures for the greater production of bacon, butter and eggs at home. The question rather is--how far will those measures go? How drastic is the policy likely to be?

You are aware of the peculiar British position. Out of a population of over forty million there are but some half a million regular male agricultural workers. That is a remarkable proportion. When the slump came it was feared that even this tiny residue might be driven off the land, if completely free trade was maintained. Hence the special measures. [2] These should be regarded not so much as an attempt to restore the balance between farming and industrial or commercial occupations, as an attempt to preserve the last remnant of farming from extinction. It is true that there are many people in England who wish to restore the balance for political and social reasons, and these welcome the recent policy of our Minister for Agriculture as the first step in their programme. [3] They may believe it to be. He may believe so, too, or rather I should say, he may once have behaved so.

But it is one thing to preserve the farmers from extinction, it is quite another to restore the balance. When we approach the larger undertaking, we meet with the great resistance of public opinion--and recently British public opinion has shown itself still sufficiently alive to resist the vagaries of Ministers--to a rise in the cost of food stuffs. This resistance is bound to be reinforced, if world recovery proceeds and lifts world prices enough to make an impression on the cost of living. Moreover I do not think that the social scene in England is set for a great trek back to the land. For these reasons I believe that, despite the agitations of a minority, agricultural protectionism in England is likely to be confined within narrow limits. Passing outside the realm of economic expediency, which must be the paramount consideration, if the scale are to be tipped in any way by feeling and sentiment, I can assure you that Denmark is not without its warm friends in my country. We are appreciative of the large mutual benefits that trading in the past has yielded; we are sympathetic to your civilisation and your political democracy; and if the Englishman seeks, in his usual presumptuous way, to affect the balance of world forces by bestowing the imprimatur of his approval, or, even, the assistance of his co-operation, he will certainly say, "Denmark must be supported." But sentiment tends to wane, if not nourished by personal and trading contacts; and for this reason I am confident that the work of this Union will not be without its effects.

In approaching the main theme of my address this evening, I must warn you that I am primarily a student and an academic person. As such I am predisposed to take the long view. I cannot regard currency policy merely in the light of day-to-day events, but am driven by my studies to think of it in connection with the big movements of economic activity, movements that have recently been so distressing. Before we finally choose to adopt this arrangement or that, I feel that we must ask ourselves not only, will it serve us in our immediate difficulties here and now, but also, will it stand the strain of the impact with future events? What has the future in store?

There are two schools of thought with regard to the depression in the years following 1929. One regards it as part of the aftermath of the Great War. The other regards it as an example of a cyclical depression, of the same kind as those depressions with which we have been acquainted for a hundred years, but worse in degree, because the forces that all along have been causing a cycle in trade have themselves become stronger. [4] I confess at once that I belong to the second school of thought. If this view is correct there is an important consequence. We must not regard ourselves here and now, living in times of revival as we are, as exempt from future attacks of trade depression. Before making any final or binding decision with regard to the currency, we must consider whether our chosen system is well adapted to stand future shocks, and well adapted to be consistent with measures which it may be deemed advisable to take to combat depression. I do not believe the gold standard--anyhow as once understood and as still understood in some countries--is well adapted.

My main reason for doubting the view, that it is to the war that recent troubles must be primarily attributed, are these. You may feel that they are a little broad and sketchy. But Economics is not nearly advanced enough to pronounce with precision on such a point; and the wisest economist is he who does not hope to give an exact demonstration, but is content to form a general impression on the basis of the most important facts.

First, the recovery of world output in the years 1925-1929 was a very remarkable one; production reached a record level for all time. The economic effect of the war was a depletion of the capital wealth of the world. The subsequent volume of production was far more than enough to make good any such depletion. Anyone with a feeling for figures is driven to view with the gravest suspicion the idea that war depletion could still be exerting an important influence in 1929.

Secondly, why did the great depression come so long after the war? In 1920-1922 there was a severe depression which was by general agreement directly due to the war. Why the long delay in its second outbreak? It is said that the expansion in the intervening period was somehow artificial and that the position was buttressed up by an inflation of banking credit. I believe such ideas to be the merest nonsense. How was the situation artificial when the goods were actually produced? A position may be getting dangerous if people are spending more than their income, living on their capital. But in this period the capital equipment of the world was accumulated at an unprecedented rate. That particular generation was making more than ample provision for its successors. And, as for the inflation of baking credits, that was no greater in proportion than we have regularly experienced since the growth of modern capitalism.

The special position of Germany provides the strongest point for those who attribute the depression to the war; and I do not deny that the situation of Germany was a serious cause of additional embarrassment in the slump. In the good years Germany was lent far more money than she had to pay in reparations; she was severely hit by the cessation of lending; now that lending might reasonably be regarded as abnormally high; but, if it had not been for a bad turn of events in the world generally, due to quite different reasons, a moderate amount of lending might have been expected to continue and Germany, with her immensely improved capital equipment, might have been expected to be able to pay the balance of reparation thus offset. It seems altogether out of proportion to represent Germany's difficulty in paying this balance, whatever it might have been--not that I defend the Reparations clauses, far from it--as the cause of disasters world-wide and by no means confined to the continent of Europe. Moreover the great depression of raw material prices and the early stages of the recession in world output preceded the development of an acute crisis in Germany.

My third reason for not accepting the war view of the depression--and to it I attach the greatest importance of the three--is that the slump appeared in its most intense and characteristic form in the United States of America. Now that country was of all the furthest removed from the evil effects of the war. Were the United States devastated because Germany ceased to be a good export market for a few surplus millions of capital, itself a tiny trifle in relation to her gigantic national income? No. It is impossible for any war theory of the depression to explain why it was most severe in America.

But if the other view is adopted, the American experience is precisely what we should expect. America [b] has carried to its furthest extreme that capital accumulation which is the most characteristic feature of our modern economy. And if the trade cycle is rightly connected with modern capitalism, if it began to be an important factor at the time of the industrial revolution, if it has become more and more prominent as the economic forces set up by that revolution have gathered strength, should we not expect America to be the home of the cycle in its most severe form? But the repercussions are world-wide. The poor peasants of India and China, reaping none of the advantages of the growing affluence of the world, none the less suffer, along with us, the penalty we have to pay for that affluence, namely periodic depression.

At the risk of boring you, I should like to give some very brief hints as to how economists explain the connection between growing wealth and growing fluctuation in trade. [5] A high income--and it cannot be denied that incomes on the average are high now by comparison with any previous period--implies a high degree of saving, of provision by individuals for their future. Saving fructifies in the creation of material capital equipment to aid production. The fact that every year a large amount of new saving is done entails that a large amount of capital equipment is brought into existence. So long as production is on the upward incline that equipment may be fully utilized. But its profitability does depend on that upward incline. If the world suddenly became stationary, a great deal of the current increase of capital equipment would have to stop. There would be no prospective use for it.

Now the fact of the matter is that the system as a whole depends on investment, the creation of new real capital goods, being maintained. If it is not, to start with, employees in the industries making capital goods get thrown out of work. But the matter goes deeper. Certain ignorant persons sometimes say that when people save money instead of spending it, that is bad for employment. That is certainly a fallacy, provided that the saving is utilized in the production of new capital goods. But if the demand for additional capital goods suddenly ceased, there would be no way of utilizing the savings; then and then only would saving create a "deficiency of purchasing power." The existence of fields for the investment of saving is essential to the maintenance of a demand for goods equal to the supply. If savings are just not used for any purpose, the demand becomes short, and depression ensues.

So, if our system is to work, we must have the production of additional capital goods going on. But that will not go on, unless production in general is increasing. Thus our system will only work if it is growing. A stationary state is unthinkable without a complete re-modelling of our system. We can only exist in a world of glorious crescendo. Now from time to time the pace of advance may alter--we cannot expect uniformity in this world of chop and change. The trouble is that a slackening of advance is not possible without a definite set-back. For if there is a slackening of advance, the amount of new capital goods required goes down, men are thrown out of work in the industries making them, and their consumption must decline for lack of purchasing power. This affects other industries and there is a decline of consumption all round. But in a world of declining consumption, what need of new capital goods? The capital goods industries will find the depression one of extreme severity. What this amounts to is that there cannot be a small depression without there being a great one. The matter may be reduced to a mathematical law. [6] The amount of activity in the capital goods industries depending not on the amount of activity elsewhere, but on the increase of activity elsewhere, it follows that a small set-back elsewhere involves a great recession in the capital goods industry. After that the scene is set for recovery; for a time the forces of recovery are strong enough to overcome small obstacles; but when they are nearly spent a little set-back will again produce a large depression.

I will not develop this point further, but only indicate the moral. So long as we were living in a world in which annual saving and investment were small relative amounts, a severe depression might occur in the industries sustained by investment without having calamitous repercussions on society as a whole. But now when saving and investment constitute so large a proportion of annual income, this is impossible. The greatest depression known to history has occurred, and more will recur, in the United States, where, in prosperity, saving and investment are highest, and because they are highest.

This evening I have to concentrate on the question of the currency. I only say in passing that I do not believe that the problem of the cycle will solve itself. I believe that concerted attempts will have to be made to counteract the effects of this relation between capital output and consumption, disastrous in their effects on the well-being of man and necessitated by the laws of arithmetic. To consider the whole scope of appropriate measures would take me outside my subject.

Taking the cycle as a fact and an evil not likely to be remedied at once, I should like first to call your attention to its effects on the foreign balance of payments. The recession involves certain broad movements of relative prices--all of which can be explained in outline--such as a fall in the relative level of agricultural prices. Countries will be unequally affected by these movements. Those largely dependent on agricultural exports will tend to have an adverse balance. Or countries with a large item of dividend payments from abroad may experience an adverse balance because enterprise generally is much less profitable in the slump. In a great revulsion we cannot expect the balance of foreign payments of the different countries to be unaffected.

By the principles of the gold standard, an adverse balance should be corrected by a high bank rate. This has a tendency to reduce purchasing power in the country affected, thus to reduce its imports and foreign lending and so to restore the balance. But is this a desirable remedy to apply in these circumstances? I cannot think so.

I am not thinking now of an adverse balance of foreign payments due to some special circumstances connected with the country itself, such as a tendency to inflation in its own monetary system. I am thinking of an adverse balance resulting simply and solely from the dislocations due to a world slump. Now if there is any meaning at all in international co-operation in the monetary sphere, it must be laid down that in a world-wide depression all countries should conjointly do what they can to make conditions easier. The best established and most orthodox method for making conditions easier is the reduction of monetary rates. The gold standard makes the weapon unavailable for one half of the countries in the world. For if the balance of international payments becomes sufficiently dislocated, as is bound to happen in a slump, it is highly probable that one half of the countries will have an adverse balance. These countries are not only prevented from joining in a conjoint effort to make money cheaper, but they are compelled, in accordance with the gold standard principles, to make money dearer, if they wish to preserve the gold standard.

It may be objected that the other half of the countries will have a favourable balance and therefore be able to reduce their rates. But this is not what is required--some countries raising others lowering their rates, but a conjoint effort to make rates lower generally. Nor is it certain, in a time of depression, that the countries with a favourable balance, will play the rules of the game fully, for depression is a time of anxiety, and with the responsibility of preserving the gold standard hanging over them, they may fear that though their balance is safe to-day, it may turn against them to-morrow. At a time when everyone is in some sort of difficulties and many countries are in difficulties about their balance of payments, it takes much courage to commit oneself to steps which tend to jeopardise that balance, just because to-day the position seems safe. The atmosphere of anxiety alone makes it probable that no one will feel disposed to take vigorous action towards making money easier, while some will be compelled to do the opposite.

But what is the anxiety about? And whence arises this compulsion? Simply and solely from the duty and responsibility of maintaining the gold standard.

I think of my own country. As great international bankers our sense of responsibility is acute; and also our power for good or evil. I am of the opinion that if we had not been encumbered with the responsibility of maintaining the gold standard in the period between November 1929 and September 1931, we should have been in a position to put through the whole policy of very cheap money and conversion, which was carried out in 1932 to our own great advantage and that of the world, considerably earlier. [7] Now in a slump timeliness of action is essential. Stimulants will work slowly when the whole system has run down to a very low level of prices and output and widespread liquidation is unavoidable, may be much more effective if applied earlier.

It may be objected that the gold standard seems to have worked well enough before the war. But circumstances were different in certain important respects. For one thing, the position of London was more predominant, there were not important competing centres of monetary power, so that, once the actual crisis was past, we felt more or less at liberty to pursue our own monetary policy, confident that the rest of the world would keep in step. That is no longer so. Secondly, with the greater magnitude of the depression, the discrepancies which arise in the balance of payments are more radical and require more prolonged and drastic remedies--remedies which only too often create new problems for other countries. Thirdly, there is a new factor, to which I would draw particular attention, namely, the rise in the amount of the floating balances which are apt to move from country to country seeking security. These movements are accelerated in a slump as conditions in one country after another successively become unstable. This creates a new difficulty. A country may have an adverse balance of payments which in itself is not unmanageable. But if its existence excites distrust and large quantities of floating capital are withdrawn, the position gets hopelessly out of hand. A country has to have immense reserves of gold--far larger than all countries could have with the existing amount of gold in the world--if it is not to be worried about the possible consequences of a withdrawal of short-term funds. This adds to anxiety. A country has to be careful, not only that the adverse balance arising out of ordinary trading obligations and invisible items does not exceed what can be handled out of its reserves, but also that nothing happens to provoke a withdrawal of short-term funds. This second condition is much more inhibitory of any application of monetary stimulants than the first. It makes the gold standard a much more despotic dictator.

It was a withdrawal of this kind that finally drove Great Britain off the gold standard in 1931. It has sometimes been said abroad that our abandonment of gold in 1931 was a sort of stratagem designed to steal a march on others and stimulate our exports. This is quite untrue. We felt heavily pledged to maintain the gold standard, all the more so because the volume of our sight liabilities to foreigners was so great. As evidence of our effort to maintain the gold standard, I will only cite the fact that we borrowed £130 millions from France and the United States, thereby mortgaging every penny of gold that we had in the country.

The moral of this seems plain enough. Our recovery policy, in the monetary field, was not executed until nearly three years after the onset of the depression. This delay was due to two reasons. (i) Failure to appreciate the full nature of the depression in its early stages. We now have our lesson. (ii) The gold standard. If Great Britain re-fixed its currency definitely on a gold basis now, what would happen? There is at present considerable confidence in her stability and resources. Large balances would tend to be piled up in London. One cannot refuse deposits. In the event of a recurrence of a world slump, we should feel, quite properly, pledged to make all reasonable efforts to honour our obligations. We cold not lightly abandon the gold standard. There would be the same hold-up as before. We should probably have to abandon it in the end. But there would have been the same delay in getting down to a regime of really easy money, which there was before and which would kill all hope of quick revival. Whatever may be done with regard to the provisional stabilization of rates of exchange, it appears to me of paramount importance that we should not return to a position, in which there was some obligation of honour to adhere to a given rate when circumstances had changed.

So far I have referred only to an easy money policy. I do not myself think that this will prove sufficient to counteract the disastrous effect of the laws of arithmetic, which come into operation when the rate of investment begins to decline, that I have already mentioned. Nor do I think that public opinion will tolerate passive and patient acquiescence in the harrowing experience of a great industrial depression again. When all the old familiar phenomena, the fall in prices, the spreading unemployment, the budgetary difficulties [c] begin to re-appear, there will be an irresistible demand for measures. No government that is not prepared to intervene will be able to keep office. What are these measures to be? I suspect that they may have to be fairly drastic, but I cannot explore them now. I mention Public Works, I mention subsidies, I mention a supplementary budget not financed by taxation. All these will have to be tried, and tried quickly. They all require a flexible monetary system; they are all incompatible with a rigid resolve to maintain an existent gold standard in being.

There is one possible alternative type of remedy in the event of a depression, and that is a renewed movement towards national autarky; attempts may be made to give employment at home, by excluding imports and transferring the demand to home production. About this I say, first, that it makes world difficulties greater. If there is any one point which should take priority of all others in attempts to secure some mode of international co-operation, it is this: that the nations should solemnly agree that in the event of another world depression they should not resort to measures calculated to injure each other, except in a case of absolute necessity and after all other expedients had been tried. And, secondly, I say that commitment to a gold standard is likely to increase the movement towards autarky, because it rules out of court other alleviative measures. Which have been the more violently autarkic in the last three years, England and America, or the Continental countries struggling desperately to maintain a real or nominal gold standard?

On this point there are in widespread circulation certain ideas, which I believe to be profound misconceptions. It is often supposed that there is a logical connection between a managed currency and an autarkic policy and that on the other hand free trade and an international gold standard go together. And worthy gentlemen, who attend meetings of the International Chamber of Commerce, and such assemblies, may be heard advocating a return to the gold standard, as the indispensable condition of an increase of international trade. [8] I am prepared to admit that some stability of exchange rates--and I will revert to this point in a few minutes--is necessary for international trade. But the idea that managed currency and autarky [9] go together has little more behind it that they both involve departures from the accepted economic ideas of the nineteenth century and that they both entail some form of centralised control. Looking at the matter realistically, I suggest that devotion to the gold standard has been the most powerful single cause of autarkic movements. If England had been able to slip quietly off the gold standard in 1930, she might be a free-trade country to-day.

But, it may be objected, management of currency if it involves exchange depreciation, is merely one of the hydra-heads of protectionism. Depreciation, it might be said, is merely an easier method of producing the effect of a new general tariff. That depends on the nature of the management and the circumstances of the depreciation. In this connection I should like to say what I have to say about devaluation. I understand that this topic is [10] of political interest here to-day. [11] As an economist I find great difficulty in knowing how to regard the politicians. For if an economic doctrine is "kept out of politics", pure and untainted, we economists may preach it with the utmost eloquence and brilliance in book, pamphlet, newspaper, conversation or public meeting, and we may be quite certain that nothing whatever will be done about it. But if the politicians take it up, then we become ineffective because we lose the right to speak; if we preach it we are dubbed politicians and our words are utterly discounted. So we do not get our chance either way. Perhaps that is why economic doctrines so often fall on deaf ears.

I draw a distinction between devaluation which is required for the maintenance of economic equilibrium and devaluation deliberately introduced with the purpose of bringing about a new equilibrium. The former appears to me desirable and justifiable, the latter unjustifiable and un-neighbourly and one that should be tabooed. Perhaps this definition, using the word equilibrium as it does, is somewhat abstruse, and time forbids me to elaborate it at length. But I can give some simple examples. I have already given one. If the foreign balance of payments becomes adverse owing to a world depression, it is better for a country and the outer world that she should let the foreign exchange slip down, than that she should take internal restrictive measures and maintain the old rate by damping down activity at home. If she has in mind to take recovery measures, such as easy money or public works, she should not be debarred by reason of the fact that they [12] entail a somewhat lower rate of foreign exchange. But if a country is unsatisfied with the present level of activity and is looking round for means for stimulating it, she should not regard forced devaluation as a legitimate method. In the former case the outside world is likely to benefit too by her recovery measures, because the first impact of them on the outer world will be increased buying and the exchange rate will only fall because and in so far as the external world does not re-act favourably and begin to take more of her exports. In the latter case the first impact is a fire of cheap exports and this will have an adverse effect on the world price level. The rule is that a country should not be debarred from doing what is necessary to maintain her own internal activity at a high level by foreign exchange considerations; but she should not use the foreign exchange as a lever for working up her own internal activity. This rule is, I submit, perfectly consistent with neighbourly conduct, international co-operation, and the maintenance of foreign trade at its highest possible level.

Having spoken of a desirable monetary policy, I want to ask the question, what chances are there, looking at the matter impartially, that my own country will pursue it. I do not pretend that those responsible for our policy are already converted to the views I have been advancing of the ineluctable cycle, the inevitable depression and the necessity of drastic measures to combat it. In England action seems to be more likely to precede than to follow conversion. In favour of the view that monetary policy is likely to be conducted on lines not inconsistent with what I have been saying, I advance two considerations: (1) Public opinion is profoundly impressed with the beneficial effects of low interest rates. The recovery in England has been satisfactory both absolutely and by comparison with that in other countries. It is believed that the low interest rates have been an important factor in this. We have our housing boom, as you have yours. [13] This is a notable instance of an industry strongly affected by the rate of interest. Public opinion is likely to be favourable to the policy of maintaining cheap money. (2) Our Exchange Equalization Account has now been for some years in operation and has been, I think I may say, successful. [14] Here is a good example of action preceding conversion. We put a system of managed currency into operation before the responsible authorities were convinced that it was advisable. It has already been justified by its fruits.

I said just now that some stability in the foreign exchange rates is a pre-requisite of foreign trade. It is the policy of the Exchange Account to allow sterling to move to its long run equilibrium level, without interference, while evening out short period fluctuations. The great advantage of the gold standard is that the gold points provide a mechanism for balancing foreign payments from day to day. The limits of fluctuation being set, small changes in the rate provide the necessary stimulus for large forward or speculative movements by operators sufficient to look after any discrepancy in the day-to-day balance resulting from trade demand and supply. An independent currency, in the absence of prescribed limits of fluctuation, is apt to move up or down by large amounts in response to day-to-day variations. This is a serious impediment to traders. By the Exchange Account we endeavour to get the best of both worlds. In the long run the foreign exchange rate has sufficient flexibility to make movements in the bank-rate unnecessary. In the short run the Account provides sufficient stability for the movements to be no practical inconvenience to traders. We do not hear any complaints on that score. Those who proclaim that traders need the fixity provided by the gold standard are merely doctrinaire and speaking without reference to experience.

It is an immense argument in favour of an expedient that it should have been tried and found successful. Those who are responsible for it, in this case the Treasury, an institution of no mean importance in the British body politic, have acquired what might almost be called a vested interest in its operation. So long as it remains in their charge they are not likely to abandon the technique which they have so skilfully evolved; and we may relay on their continuing to pursue these excellent aims.

It is not necessary for me to point out to this audience that our Exchange Equalization Account is entirely different from your Valutakontor. [15] Our Account is nothing more than a very large scale operator, using government money, in gold and foreign exchange, which leaves other dealers as well as traders perfectly free to carry on their business in the usual way.

I conclude that, whatever their theories, the British authorities are likely to continue, so long as they are allowed to, managing the currency in a way conformable with the objectives I have set before you. If that is so, it does not much matter what their theoretical standpoint is; we may have confidence that their practice will be good.

I have so far spoken mainly in terms of the long view. But what I have said has implications all too immediate. At any moment pressure may be brought to bear upon us to abandon our happy freedom and to re-align ourselves with the gold standard countries. You all know the present position of France. Already half-convinced that the old gold parity cannot be maintained, she fears to take the necessary plunge. [16] Her authorities undoubtedly feel that it would help them to meet French public opinion in the event of a decision to devalue, if there was a pre-arranged agreement by which Great Britain simultaneously adopted an official gold parity. I do not know what gold parity we should be expected to adopt; perhaps our present de facto rate? It would seem more reasonable that, if the dollar-franc rate is altered from its present value by a given amount, we should adopt some intermediate position. What should be our response to this pressure?

It is sometimes said in London that abandonment of gold would entail revolution in France, and that we ought to proffer this kind of assistance to her in the interests of order, of democracy itself. I attach not the slightest weight to such a view. Abandonment of the gold standard or devaluation have never produced revolution or disorder anywhere. On the contrary, on the very next day the whole nation breathes a deep sight of relief. The German Revolution was not caused by abandonment of the gold standard, but, on the contrary, by the cruel deflationary measures which Dr. Brüning [d] imposed, in order to avoid such an eventuality. [17]

For the converse argument I have some sympathy, namely, that in fact the French government will not abandon the present gold standard and that the pressure of the deflation which she supposes it necessary to adopt, with cumulative intensity, may provoke disorder. In fact this deflation is not really necessary, for the maintenance of the gold standard. Being the one important country with a free gold currency, except the United States, and having a vast reserve, I believe that the only effective way in which France could save her standard would be by consistent internal inflation, which would depress the value of the franc relatively to the non-gold standard currencies. This would bring relief to her economic system both in its internal and external relations, and ease and finally solve her budgetary difficulties. And any consequential loss of gold to America she could probably easily afford. To maintain confidence she would have to show herself willing to release gold freely for export on demand.

France is not likely to achieve such wisdom. The question remains, therefore, whether, taking her psychology and inhibitions as given facts in the situation, Great Britain could reasonably be expected to go some way to assisting her, by agreeing to some stabilizing measure, to be simultaneous with French devaluation. I think she could.

What I would urge is that any stabilizing measure should be (a) temporary only, and (b) provisional. I think there should be two provisions. 1. It should be understood that the agreement would automatically lapse in the event of a big change in world conditions. Some statistical definition could probably be found for this "big change". 2. It should be explicitly understood that in no event must the maintenance of the stable exchange rate require us to raise the Bank Rate. Oh, but, it might be objected, this would render the whole scheme for stabilization quite impracticable. I do not think so. We would express ourselves willing to maintain the given exchange rate, provided that the French were willing to give credits to the Exchange Equalization Account up to any value required in a crisis. What if the crisis became so severe as to entail more credit than the French were prepared to grant? Well then, the agreement would automatically come to an end. But some large minimum figure for the credit would have to be agreed on beforehand in order to make the experiment worth trying. And what if the English made nonsense of the experiment by having an internal inflation of the currency? I think they can be relied on not to do that, in their own interest. Finally the credit, if it proved necessary, would have to be regarded as a franc obligation. This would inflict a capital loss on us in the event of a breakdown, but it is a risk I think we should be prepared to run in the interests of international co-operation.

I must draw to a close. I have indicated what I hope will be the lines of British policy. I have indicated what safeguards I think we should require in the event of being pressed by the French for an agreement to stabilize. What of the Danish currency?

I have endeavoured to give you confidence that our currency will be wisely managed. I am an external observer, having no official connections and only too ready to find fault with our government at every turn. I have tried to form an objective opinion as to what is likely. I have given you that opinion.

And if I am inclined to encourage you to preserve as close a link as possible between the Danish crown and sterling, it is not merely because I hope that you will then be in relation to a wisely managed currency. The matter goes far deeper.

I think of troubles ahead. In any future depression I believe that history will repeat itself as regards the course of agricultural prices. That is a matter which concerns you intimately enough. Our best hope, I suggest, for combating that depression is connected with the preservation of the elasticity in the British currency system. The importance of sterling in the world economy is generally recognised. If sterling is unshackled we can face future troubles with better prospects of combating them. It is therefore very important that British opinion should be confirmed in its present trend favourable to elasticity. If negotiations with France come on, there will be a dangerous moment. I have indicated that we could go some way to meet France while retaining what is most essential to our freedom. But it would be all too easy to let the essential slip. That can only be averted if there is a rugged determination in my country, supported by a wide public opinion, to avert it.

Do not underestimate the importance of the Danish connection in the formation of British opinion. A new word, sterlingaria, has recently been coined; [18] I have heard many a British citizen twist it round its tongue with a certain childish pride. These childish feelings are not without their importance in great affairs. I ask you to pardon this pride, nay more, to encourage it, for it is a force for good. "Oh, but," the scoffer objects, "what is this sterlingaria? Just the British Empire." "No!" he is answered, "you forget Denmark." Long live Denmark and the sterlingaria!

R. F. Harrod.

  1. 1. In November 1935, Harrod was making arrangements with the British Import Union (BIU) in Denmark for a lecture on "The Choice of a Currency Policy" to take place in Copenhagen on the 10 January 1936 (letter 499 R). The idea seems to have been suggested by the British Council, since its secretary-general Charles Bridge eventually thanked Harrod for lecturing for them and expressed the hope that he would undertake further lectures if his assistance was required on other occasions (letter of 16 January 1936, in HP VII/G-1/14).

    At the Danish end, the organization of the lecture proceeded smoothly. The BIU brought a notice about the lecture in their official journal Anglodania, and asked Harrod to provide them with some preliminary notes in order to make a more detailed mention of it in the January issue. Harrod sent the notes on 14 December. The BIU wanted to give publicity to the event, and arranged a meeting with the reporters in time for the news to be in the morning papers (<Larshein> to Harrod, 11 and 20 December 1935. See note 1 to letter 499 R).

    Harrod's lecture raised some concern in Britain, in view of the renewal of the British-Danish Trade Agreements. On 1 December, Harrod informed Walter Runciman, the President of the Board of Trade, of his forthcoming visit to Copenhagen. Runciman arranged that Harrod should see T. St. Q. Hill of the Commercial Relations and Treatise Department of the Board of Trade, who was instructed to give Harrod all the possible assistance (G. J. MacMahon to Harrod, letter 502 R of 3 December 1935). On 31 December, the British Council informed Harrod that the Foreign Office was still "slightly anxious" as to what Harrod would say, and asked him to send his lecture to the British Legation in Denmark before delivering it (Bridge to Harrod, letter 504 R of 31 December 1935, and H. P. Croom-Johnson to Harrod, letter 507 R of 2 January 1936). The Board of Trade's position on the Valutakontor and devaluation was explained by Cohen on 1 January 1936, letter 506 R). On 6 January, Harrod was informed that the Foreign Office raised no objection (Bridge to Harrod, letter 508 R). The lecture ended up in the hands of S. D. Waley, who was going to circulate it to Treasury officials because he thought that other people there--including Hawtrey--might be interested in it (Waley to Harrod, 7 January 1936, letter 509 R); Harrod also sent a copy to Runciman (Runciman to Harrod, 12 January 1936, in HP VII/G-1/13).

    The text of the Copenhagen lecture was published in the February and March 1936 issues of Anglodania (see source note a ), prefaced by the following preamble:

    • Under the auspices of the "British Council for Relations with other Countries" a lecture was arranged on the 10th January by the "British Import Union." The lecture was given by Mr. H. R. F. Harrod, the well known young British economist. In this and the following issue of "Anglodania" we are publishing this lecture in accordance with Mr. Harrod's manuscript.

    2. While before abandoning gold in 1931 Britain's commercial policy took almost as an axiom that imports of foodstuff should be free of duties, devaluation changed the situation and led to the introduction of some restrictions, in particular a 10 per cent duty on Danish agricultural products with the exception of ham and bacon (British Customs Act, 29 February 1932). Moreover, British farmers and part of the British press called for measures of control of agricultural products. On top of this, the Ottawa Agreements (August 1932, in force from 1 January 1933) granted preference to the Dominions, inflicting quite a blow on Denmark as Britain was practically the only purchaser of Danish bacon and the main importer of butter, and as prices of meat fell by one third in a few months following the inflow of large shipments from the Dominions. Denmark was therefore in a weak position when, in December 1932, negotiations began towards a trade agreement with Britain. Britain did not inflict harder duties than those resulting from the Ottawa Agreements (which involved an increase of approximately 50 per cent on the figure resulting from the Customs Act), but obtained important concession (on which see note 2 to letter 504 R) and "she reserved the right to introduce a quantitative limitation of imports [of ham and bacon] to such an extent as was deemed necessary in order to support home production" (H. P. Gøtrick, Danish Economic Policy, 1931-1938, Institute of Economics and History, Copenhagen, 1939, in particular pp. 43-47. On agricultural protection in Britain see R. Perren, Agriculture in Depression 1870-1940, Cambridge: Cambridge University Press, 1995, chapter 6).

    3. The Minister of Agriculture, Walter Elliot, was an ardent advocate of economic nationalism and in particular of agricultural self-sufficiency, which he saw as the solution to Britain's ills: see for instance A. F. Cooper, British Agricultural Policy, 1912-36 (Manchester and New York, Manchester University Press, 1989), chapter X, "Economic nationalism and international constraints".

    4. Harrod had recently stressed this point at the Antwerp conference of economists in July 1935 ("A Comment on the Questions for Discussion" ( 1935:5 ) and in a memorandum to the Royal Institute of International Affairs' Group on International Monetary Problems on "Continuity of Values and the Long-Term International Problem" (essay 13 ); see for references and a comment note 1 to letter 452 R.

    5. This is the first appearance in print of Harrod's explanation of the trade cycle based on the interaction between the multiplier and the accelerator. However, it is not possible to establish whether the lecture was written before or after the first two chapters of The Trade Cycle, which were sent to James Meade before Harrod's departure for Copenhagen (see letter 511 , [jump to page] ).

    6. The acceleration principle was also defined as a "relation ... vouched for by ... the laws of arithmetic" and as a "simple arithmetical relation" in The Trade Cycle (Harrod 1936:8 , pp. vii and 53). Similar expressions are used again in the sequel of this lecture ( [jump to page] and [jump to page] ).

    7. The cheap money policy actually began in 1930, as the bank rate dropped from 6.5 per cent in September 1929 to 3 per cent in May 1930. The process was pushed further in 1932 and was completed in June with the 5 per cent War Loan conversion, which reduced the bank rate to 2 per cent. Britain abandoned the gold standard on 21 September 1931.

    8. The meetings of the International Chamber of Commerce were held every two years. The 1935 meeting took place in Paris, and was preceded by a a private conference held at Chatham House on 5-7 March 1935 jointly organized by the Carnegie Endowment for International Peace and the International Chamber of Commerce. Among the outcomes of the latter were a recommendation that the international monetary system was provisionally stabilized--without, however, explicitly advocating a return to the gold standard--and a resolution for the initiation of a joint investigation on all aspects of international economic relations. The investigation was initiated in November 1935. Among the experts there was T. E. Gregory, who supplied three memoranda on stabilization and eventually surveyed the reports of his colleagues, while another memorandum was contributed by H. D. Henderson. The survey and memoranda are published by the Joint Committee Carnegie Endowment - International Chamber of Commerce, Separate Memoranda from the Economists consulted by the Joint Committee on the Improvement of Commercial Relations between Nations and the Problems of Monetary Stabilization (Paris: International Chamber of Commerce, 1936), and International Economic Reconstruction. An Economists' and Businessmen's Survey of the Main Problems of Today (Paris: International Chamber of Commerce, 1936); see for context G. L. Ridgeway, Merchants of Peace. The History of the International Chamber of Commerce (Boston: Little, Brown and Co., 1959), chapter 8.

    9. The typist erroneously transcribed "autarchy", and Harrod emended it. For his remarks on the etymology and use of these words see note 1 to letter 310 R.

    10. While the present tense was originally used in the Ts, Harrod emended it in "has recently been". This correction was ignored by the Anglodania editors.

    11. As about 60 per cent of Danish exports went to Great Britain, Denmark was severely hit by the depreciation of sterling in 1931. At first it attempted to maintain gold parity, but soon the krone had to follow sterling, also following the protest of the farmers. On Danish monetary policy and exchange restrictions see for instance Gøtrick, Danish Economic Policy, 1931-1938, pp. 5-40.

    12. The word "might" was meant to be inserted at this point; the typist, however, only wrote it as a catchword at the bottom of the page but forgot actually to transcribe it at the top of the following page, and the editors of Anglodania seem to have failed to notice it.

    13. Investment in building was among the first to react to the cheap money policy: it started to increase in autumn 1932, recovered to a substantial degree in 1933 and kept rising for the following four years: see for instance E. Nevin, The Mechanism of Cheap Money. A Study of British Monetary Policy 1931-1939 (Cardiff: University of Wales Press, 1955), chapter VIII, and Howson and Winch, The Economic Advisory Council (1977), pp. 106-11.

    14. The Exchange Equalisation Account was established in the April 1932 budget to stabilize sterling in the short run.

    15. On the Valutakontor see note 1 to letter 506 R.

    16. In order to maintain the gold parity established by Poincaré in 1926 after Britain and the United States devaluated, France had to heavily deflate. Gold was finally abandoned on 26 September 1936 (see for instance A. Sauvy, Histoire économique de la France entre les deux guerres, Paris: Economica, 1984, vol. 1, chap. XII on the dilemma of deflation or devaluation, chap. XVII on the great deflation, and chap. XXI on devaluation). Harrod had recently expressed the opinion that the uncertainty on France's position was one of the major factors of instability:

    • I do not want to go into a discussion as to whether and how far it was possible for foreign countries to adapt themselves [to Britain's September 1931 departure from gold]. But even leaving that on one side, one might get a general agreement on the statement that this departure from the gold standard did have bad repercussions: I accept that.

      I should like, having accepted this, to contrast it with the question as to how far the present fluctuations of small magnitude, which are still occurring in the pound sterling, have the same detrimental effect, and I should like to suggest that these fluctuations are not producing a disastrous effect in the outside world. I believe that for men engaged in commerce, the most damaging effect of the present situation is the uncertainty whether France will or will not, and, if so, when she will, depart from the present par of exchange.

      I should like to link these two points together and say of both cases, that if any country sticks to a particular gold parity that cannot well be sustained in the general economic situation, the result must have a depressing effect on trade transactions, both owing to the sudden depreciation itself when it comes, and owing to the endeavours of the country in question to sustain a parity it cannot well keep up, by means of restrictive measures, protection and quotas. (Antwerp Chamber of Commerce, Report of the Proceedings of the Meeting of Economists, Held at the Antwerp Chamber of Commerce, on July the 11th, 12th, and 13th, 1935, Brecht-Anvers, Typ. Braeckmans, 1935, pp. 106-7)

    17. Germany was inhibited by reparations settlements and the Standstill Agreements from following Britain off gold, while pressure on the balance of payments induced Heinrich Brüning (1885-1970; Chancellor and Foreign Minister, 1930-32) to impose four "emergency decrees for safeguarding the economy and finances" between December 1930 and December 1931, which lowered prices, wages, pensions and subsidies, and raised rates of interest and taxes. See for instance V. Hentschel, "German Economic and Social Policy, 1815-1939", in P. Mathias and S. Pollard, The Cambridge Economic History of Europe, vol. VIII (Cambridge: Cambridge University Press, 1989), pp. 801-6.

    18. The sterling area was informally developed after Britain's departure from gold in September 1931. It included about 15 countries whose currencies were linked to sterling, namely some Dominions and colonies, and Portugal, Egypt, Iraq, Siam, the Argentine, and the Scandinavian countries: see for instance M. S. Gordon, Barriers to World Trade. A Study of Recent Commercial Policy (New York: Macmillan, 1941), pp. 43-44.

    "Sterlingaria" seems to be an irreverent diminutive of American origin (A. Comstock, "The Defense of Sterlingaria", Current History 39, March 1932, p. 693).

    1. a. The essay was published in two parts in Anglodania, the journal of the British Import Union in Copenhagen, the first part in volume 8:2, February 1936, pp. 3-8, the second part in volume 8:3, March 1936, pp. 1-6. This is based on a TD with autograph corrections, 27 pages plus a typed title page indicating "Draft", in HP VII-G1/1; the first page also indicates "draft". Harrod's name is typed on the title page and at the end of the text. In the same folder in HP a loose leaf is preserved, with some notes in Harrod's handwriting ("What is the speaker's name? 1. Rising wages. 2. If Danish currency got out of equilibrium") suggesting that the typescript was the version actually read by Harrod before the British Import Union (see note 1 to this essay). An autograph draft with corrections in pencil, 16 pages, is preserved in HPBL Add. 72736a; the corrections are incorporated in the typescript. The version printed in Anglodania is used here as copy text; however, extra spaces added every few paragraphs by the editors of the magazine have been ignored.

      b. Anglodania: «American».

      c. Anglodania: «diffiiculties».

      d. Ts and Anglodania: «Bruning».


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