P6. Britain's Lead in Currency Policy. "The Time is Ripe for Action; the Opportunity Now is Ours"

(Daily Telegraph, 31 March, p. 12)


I propose in what follows to give reasons for the view, first, that the time has come for the country to develop a positive policy in regard to the currency question, and, secondly, that the currency question and public financial policy are now inextricably interwoven.

Great Britain is uniquely well placed to help herself and at the same time to give a lead to others.

Her financial and monetary condition is now such that she rightly inspires greater confidence than any other major country, with the possible exception of France, and she has the advantage over France in being free from the limitations of the Gold Standard, and thus able to pursue her own course.

Not that the policy outlined below would prejudice our return to the Gold Standard, if an when we desired it. It is now generally agreed that Great Britain should only consent to link herself to gold once more on condition that the gold countries agree to manage gold properly, which means to restore the general level of prices expressed in gold and to prevent its subsequent relapse.

Monetary Position

By embarking immediately upon this very policy of price restoration herself, she would in no way weaken her negotiating position in a future international Conference. [1] On the contrary she would strengthen it.

For the argument with which other parties to the Conference are most likely to counter her proposition is that they have no means at their disposal to achieve the price restoration that is asked of them. And the best answer she could give to such an argument would be to point out that she had herself achieved it in a well-ordered manner within her own boundaries.

If a particular firm or industry finds itself unable to market its goods in such quantity and at such a price as to yield a profit, it is natural to suppose that there is some special cause at work. The taste of the public may have changed, the firm or industry may have become less efficient than foreign competitors, its equipment may have been unduly enlarged in the past, and overheads expenses may have become excessive. But when all industries in all countries find themselves in more or less the same plight, it is inappropriate to look for special causes in each.

The fault lies on the other side. The monetary system, through which the demand for goods is made effective, must have become deranged. Such is the present position.

Falling Output

In a period of normality particular industries may wax or wane, but the total monetary demand for goods in general should cover the total costs of making them, together with a normal rate of profit. Space forbids me to attempt to diagnose the origins of the present depression. Suffice it to say that at some point the demand for consumable goods fell below the supply of them and the level of prices fell without costs of production falling pari passu.

In consequence, much production that was formerly profitable became unprofitable, and output and consequently income were curtailed. This curtailment of income involved a further and severer decline in the demand for goods, and falling output, falling income, and falling demand chased each other in a vicious circle. Yet the gap between prices and costs remains.

The problem with which we are faced is how to reverse this process. If a restoration of prices could be effected, much production now unprofitable would become profitable once more, and output, income and expenditure would rise, cumulatively as they have previously fallen.

It must be carefully observed, however, that to get the movement started, the initial replenishment of income and expenditure required to restore prices must be unaccompanied by an increase in consumable goods on the market. The ultimate objective is to expand output as well as expenditure. But the initial increase of expenditure required to raise prices and inaugurate the process of expansion must itself be unbalanced by an initial increase of output of consumables.

Restoring Prices

How is this unbalanced increase of expenditure to be achieved?

The traditional method is to encourage extra capital construction by low interest rates; the earnings of those newly engaged upon it swell expenditure on consumable goods, while their output does not itself consist of consumable goods. Unfortunately, in the present emergency consumption is so low that the capacity of our existing capital equipment is far in excess of requirements. The low rates tempt few to embark on capital expenditure.

When public bodies are urged to take a long view at the present time with regard to capital works, it should not be simply with the idea of their doling out a small quantity of employment at perhaps considerable cost.

Well-informed opinion holds such a long view to be desirable, because it is a means of increasing earnings without adding to consumable goods, or filling the present gap between costs and prices, and so making a revival of trade in its ordinary channels possible. Difficulties naturally arise, however, when public bodies are asked to go far outside their ordinary routine.

New Equalisation Fund

Responsibility ultimately rests at the centre. If the Government was resolutely determined to secure a restoration of prices, it would not fail in its endeavour. The central Government pays out in one form or another about a quarter of the total income of the community, and takes as much from them in taxation. It is thus singularly well placed to affect the balance between the output of consumable goods and the expenditure of the community.

Various technical devices are possible. The following is merely proposed by way of illustration.

A Currency Equalisation Fund might be established, with power to borrow, in the first instance, an amount equal to the Exchange Equalisation Fund (£150,000,000). The object of the Exchange Fund is, in general, to even out fluctuations in the external value of sterling (foreign exchange rates); in particular, it is supposed that it has been used, and would be used again, to prevent an excessive appreciation in the foreign exchange value of sterling.

The Currency Equalisation Fund would be used to control the internal value of sterling in terms of commodities, in particular, to counteract the excessive appreciation of recent years, and thereafter generally to prevent fluctuations.

The immediate task is to revive prices and expenditure. The Fund would, therefore, be drawn upon at once to finance Government expenditure. This does not mean that the Government would necessarily embark on new capital undertakings; it is probable, however, that there are various schemes which could be undertaken and financed from it with advantage.

For the rest, the Government would draw upon the fund to finance its present expenditure and reduce present rates of taxation.

Reduction of Taxes

It does not often happen that popular desire and the general interest coincide. Yet, strangely enough, in this most critical of times they do. Tax reduction would at once be popular, and tend to bring about the required revival of expenditure.

To secure the revival, however, it is essential that the tax reduction should not be accompanied by an equivalent reduction of Government expenditure; for it is of the essence of the scheme to increase the balance of the community's income, which it can expend upon consumable commodities. Tax reduction, balanced by a reduction of Government expenditure, does not add to the community's spendable income.

The avoidance of waste and extravagance is always a good thing; reductions of Government expenditure along these lines may be desirable and possible; on the other hand, it is possible that justice or expediency demands an increase along other lines; whether there be a net reduction on balance or not, it is vital that the tax reduction should exceed it.

For world recovery

Apart from tactical considerations, the only substantial argument against independent action is that it might injure sterling in the foreign exchange market. This can, however, be met. A drop in sterling might be due to three causes, a drop in its "proper" value measured in terms of other currencies, bear speculation, or loss of confidence.

To take the last-mentioned cause first, it is essential that confidence should be sustained. A Government struggling with unmanageable deficits, afraid or unable to impose new taxes, is a spectacle likely to shake confidence.

But a strong Government, deliberately and voluntarily reducing taxation with a specific end in view, and its contribution to world recovery, should be able to retain, and should, indeed, enhance, its prestige. Bear speculation will only succeed if it shakes confidence, or if the monetary authority is weak.

The bears are not likely to have sufficient funds to depress sterling for long unless they provoke a general flight from sterling. If their action is countered at the outset by vigorous support to the currency, so that it has no perceptible effect on exchange rates, and if the position at home is kept well in hand so as to give the general public no grounds for alarm, the country need have little to fear from the speculators. There remains for consideration the question of the "proper" value of sterling. An internal increase of consumption at home unaccompanied by a world revival would tend to increase imports without producing a counter-balancing increase of exports.

To secure the balance it might be necessary for sterling to fall somewhat, in order to make our exports cheaper for the foreigner and imports dearer for the home consumer. Such a fall might be found to be the natural corollary of the policy and would not in itself be undesirable.

The position of the objector is tantamount to this: "I cannot let your people come back into employment and a trade revival occur, because this might cause your people to import more food and raw materials, and so cause sterling to fall to a new level." To admit such an objection as final would, indeed, be the logical extreme of defeatism.

The time is ripe for action: the opportunity is ours. For a period some stability has been reached, but the depression is so great that there is no margin of safety. [2] An adverse turn abroad might precipitate a further crisis. Therefore to await events seems fraught with danger.

The policy suggested may be without precedent in time of peace, but it proposes nothing that should not commend itself to simple common sense and clear thinking.

  1. 1. Probably refers to the World Economic Conference, to be held in London at the beginning of July 1933.

    2. See note 2 to press item 5 .

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