ABSTRACT

The defects from which the existing economic system is suffering have now been diagnosed, but before proceeding to outline the remedy which the diagnosis, itself, suggests, we shall run through the principal ideas held on the matter and the currently proposed remedies. Firstly, there are those who see the trouble in the dissipation of wealth by governments and individuals. They call for reduced taxation by means of greater economy in government, and reduction of government debts by cancellation or Capital Levy; and they would like to abolish the middle man and prohibit speculation. Greater Economy in Government.—A lot has been said about true and false economy, but these are not questions that we need go into. Greater economy in government is mainly advocated by the vested interests which are alive to the evils of over-taxation but do not wish government debts to be touched. When a country is consuming more than it is able to produce, economy is the remedy; but when a country is well stocked with commodities accompanied with large numbers of unemployed, greater economy in government fails because the evil resulting from the diminished effective demand of those who are supposed to be “wasting” is not compensated for by any reduced taxation. “Stop the waste” campaigns are useless at the best, in such circumstances, and are very unjust and cruel in application. Reduction of Government Debts by Cancellation or by a Capital Levy.—The advocates of this are mainly those who are in the opposite camp to that of the vested interests. They believe that, by means of the government debts, the vested interests get a larger proportion of the total production of a country at the expense of labour than would otherwise be the case. It is, also, believed that the taxation required to pay the interest and sinking funds, by increasing the cost of production, reacts against the export trade. For the rest, they know the war debts are unjust and they do not like them; but they have a very hazy idea of the effect of government debts on the economic system. In the fi rst place, nobody can tell what would be the effect of the cessation of distribution of interest by governments; but, at all events, as regards England, it would not be surprising if the effective demand were not, thereby, substantially reduced. It is a question of whether the people from whom the money is taken by taxation would spend more of it on commodities and services for fi nal consumption

and deferred utilisation than those people do, now, who receive it from the Government as interest on the National Debt. It is quite likely that the former would spend less of it in order to “save,” if it remained in their hands; whilst those to whom it is now distributed by the Government treat it as income and probably spend it all. Allowing, however, that the same amount is spent on commodities and services in either case, other things equal, the effective demand would not be increased by the cessation of the distribution of the interest; and, consequently, there could be no increase in production for the home market, nor could there be any increase for the export trade, for we have seen that this, other things equal, is dependent upon the value of commodities and services imported, without which exports cannot be paid for. When it comes to a Capital Levy, one may well exclaim: “What! again?” A Capital Levy took place during the war on all money and bonds or shares of fi xed monetary value; for the rise in the price level resulting from monetary infl ation was a levy in favour of the State on the value of all such monetary capital, and it was also a levy on wages wherever wages were not rising as fast as prices. Although there is really nothing controversial about this statement, the effect of infl ation may, briefl y, be described. Infl ation is an expansion22 in the total supply of cash and credit money unaccompanied by a proportionate increase in the total supply of commodities and services for sale. It can take place as the result of the public being anxious to buy commodities and services for fi nal consumption or deferred utilisation more rapidly than they are being produced and offered for sale, causing rising prices and recourse to bankers for increased supplies of credit money; but it is unusual for any perceptible infl ation to be caused in this manner. Infl ation in the aggravated form we are accustomed to connect with the word is due to government expenditure of money, together with the total expenditure of money by the public, taking place more rapidly than the production and supply offered for sale of commodities and services: and this is due to failure on the part of governments, either to limit adequately their own expenditure of money, or to limit adequately the total expenditure of money by the public by suffi cient taxation. If, for the purpose of war or for any other reason, a government wishes to increase its continuous purchases of commodities and services for fi nal consumption and deferred utilisation in such manner that these, together with the continuous purchases of the public, are in excess of continuous production and supply for sale, it can only do so (excluding what can be borrowed from abroad) provided the purchases of the public are correspondingly reduced. A government can reduce the quantity of purchases by the public fi rstly: by imposing heavier taxation upon it, and secondly: by bidding higher prices for the available commodities and services for sale, paying for them by borrowed money, causing a general recourse to bankers for increased supplies of credit money, and supplying any additional cash that may be required by bankers to meet their increased obligations to depositors of credit money. The latter method is monetary infl ation. The rise in prices, however, by diminishing the purchasing power of monetary units, infl icts losses on all holders of, and on all those with claims to, fi xed quantities of monetary units. Nevertheless, a large portion of

people are able to gain by the rise in prices more or less as much as they lose in the reduced value of any monetary units they hold or have claims to. Speculators for a rise gain by a rise pretty well in proportion to what they stake; and merchants and manufacturers, on the whole, gain more than they lose. Wage-earners usually lose; but they do not necessarily lose, for both their bargaining power and the effectiveness of their labour might, eventually, be increased in the case of an increased volume of trade resulting from a rise in prices. Those who have contracted to pay fi xed quantities of monetary units at deferred dates, and whose revenues are derived directly or indirectly from trading commodities and services, are gainers; for, their monetary obligations or debts correspond to a smaller quantity of their stock in trade than before the rise. After a rise in prices, other things equal, the revenue in monetary units obtained by a government from taxation on trade, and the profi ts on trade, is greater, although the commodity value of this increased monetary revenue remains unchanged; for taxation is only on monetary values irrespective of volume, weight and quality. In effect, therefore, a rise in prices causes the commodity value of government debts to be reduced, whilst, not only it does not necessarily cause any reduction in the commodity value of revenue, but it might cause, by improving trade, an increase in the commodity value of revenue. Hence, infl ation does reduce government debt at the expense of certain classes, and may, therefore, be regarded as a levy upon both their capital and income. In England, when the highest point of infl ation after the war had been reached, had the currency been offi cially divorced or devalued from the supposed gold standard and gradually stabilised with a new gold standard compatible with the gold resources of the country, all would have been well in the matter. The holders of money and fi xed interest bearing bonds, however, made a fi erce attack, resulting in another Capital Levy that took place towards the end of 1920 and 1921 on all capital in the form of commodities and services for fi nal consumption and deferred utilisation. As a result of the buyers’ strike and monetary defl ation that took place, a levy was made on all commodity capital in favour of the holders of monetary capital; and by means of this Capital Levy the National Debt was more than doubled in terms of commodities and services by the fall in the price level. Nevertheless, as usual, producers could not, and cannot, pay in commodities and services because the necessary markets are lacking. The quantity of commodities and services required to pay the debt were not, and are not, wanted by those who have the money; and so payment from producers is not acceptable in commodities and services, and the reduced effective demand of the victims of the fall in prices renders it still less acceptable in this form. Thus, whilst individuals score at the expense of each other, the State suffers. How do those who are calling for a Capital Levy want to reduce the Government Debt? Do they admit that the debt is due to be repaid in gold, and do they want to reduce the quantity of gold due by means of a Capital Levy, without altering the present price level of commodities and services? If so, this is impracticable on the face of it. As a considerable part of the Government Debt, as well as other securities on which the levy would be made, are either direct loans from bankers or stand as security for loans from bankers, and, as every repayment of a loan to a banker

destroys a deposit of credit money, the quantity of capital appropriated in this respect by the levy must proportionately reduce the total quantity of credit money and lower, proportionately, the price level. On the other hand, any war loan or bonds, cash or credit money, taken from the public by the Levy, or in any other way, and not returned to it by Government expenditure on commodities and services will, to a greater or less extent-probably to a proportionate extent-reduce the effective demand for commodities and services together with the effective demand for bankers’ loans; and, therefore, the total quantity of credit money will be proportionately reduced and the price level proportionately lowered. It is argued that there would be no defl ation because, although the Government would pay its debts by means of the Levy, those to whom the money is paid would use it in trade. This is a fallacy arising from a fallacious idea of the nature of credit. As shown in Chapter VII, effective borrowers for trade or for any other purpose can always borrow; but, so far as trade is concerned, it is only the effective demand for commodities and services that creates effective borrowers. The Capital Levy would not create any effective borrowers except those who required to borrow in order to pay the Levy; and such people, whether they borrowed from the Government by getting an extension of time for payment, or whether they were considered good enough for a banker’s loan on the usual terms, the moment they repaid the loan, either to the Government or to the bankers, so much credit money would be cancelled. If it is agreed that defl ation, to-day, has already gone further than is warranted by the extent of the National Debt, it may also be admitted that the extent of the defl ation arising from a Capital Levy of Government gold obligations, and stocks and shares of companies, would be proportionately less severe. That is to say, if the total quantity of cash and credit money in the country is, to-day, unwarrantably small in relation to the Government’s debt to the nation, which would be the case if people are spending money too sparingly in relation to the rate at which they are receiving interest from the Government and earning it, the reduction of the National Debt by means of the Levy would not reduce the effective demand for commodities and services and, consequently, the total quantity of cash and credit money, to a proportionate extent. Probably, owing to the heavy taxation for the purpose of reduction of debt that has been going on together with the normal disposition of the public to spend less than it earns, the effective demand to-day is more than abnormally low. However, nobody can say how a Capital Levy of this class would end; but in any case, if the commodity value of gold is increased as fast as the quantity of gold to the debit of the Government is reduced, where is the advantage? It cannot even be argued that, once the quantity of gold to the debit of the Government is reduced, the commodity value of gold could then be reduced by a rise in prices; because the price level could only be deliberately23 raised by means of infl ation from Government borrowing, in which case the debt would again be increased to an extent proportionate with the degree to which the price level is raised. Thus, the quantity of gold for which the Government is a debtor can neither be increased nor reduced without altering the price level, probably, to a proportionate extent.