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THE CRISIS
by
Ernest Bevin and G.D.H.Cole
V.—WHAT SHOULD WE DO?
[THE GOLD STANDARD AND STABLE PRICES - AT HOME AND ABROAD]
What should British policy be, both at such a Conference and in our other national and international measures to deal with the present crisis? We have seen that it would be disastrous for Great Britain to attempt, now or later, to bring the pound back to its old gold value; for this would involve a drastic downward revision of British incomes, an intolerable retrenchment in the social services, and an industrial struggle in which the British economic system would be inevitably torn to pieces. Such a policy would be sheer madness, even from the standpoint of the financiers themselves; and we cannot believe that it will be seriously pursued.
There remains, as we saw, the possibility of stabilizing the pound at a new and lower gold value, perhaps a quarter, perhaps a third, lower than the pre-war value. Is this to be our policy? The answer, we think, depends on what is done in the rest of the world.
As long as the level of world prices continues to fluctuate, it is not possible for us to have both a stable internal price-level and a fixed relative value of our currency to the currencies of other nations. The gold standard fixes the relative value of our currency; but it does this at the cost of compelling us to let our internal price-level fluctuate with movements in world prices. For, if we returned to the gold standard and at the same time attempted to stabilize internal prices, our internal price-level might be at any time either higher or lower than the world level. If it were higher, we should lose our export trade, and be subject to an outflow of gold, as we have been in recent years. If it were lower, we should attract to ourselves a large stock of useless gold, and throw the world economic system out of gear. We could, moreover, only keep our price-level below that of other countries at the expense of our standard of living; and, if such a situation arose and we had a large stock of gold, the pressure for an increased issue of currency and credit, which would raise prices, would speedily become irresistible.
Under the gold standard, then, stable foreign exchanges are secured at the cost of unstable prices at home. But, in view of the very large number of persons whose incomes are either fixed, or difficult to adjust to changes in the price-level, there is a very strong demand nowadays for stability of prices at home. If the great mass of people were asked whether they preferred stable foreign exchanges or a stable price-level at home, they would undoubtedly choose the latter.
We can get a fairly stable level of home prices if we choose, by so "managing" our currency and credit as to keep their volume at a fairly constant ratio to the volume of things needing to be bought and sold. This is a clear and intelligible policy, which has many powerful advocates. But we can do this under present conditions only if we remain off the gold standard, and allow the value of our currency in terms of other currencies to fluctuate with changes in the level of world-prices.
The reason for reluctance to do this is that it is most desirable to promote world economic co-operation and exchange, and to thwart the powerful influences at present making all over the world for economic nationalism and hostility between nations. Unstable exchanges mean unstable trading relationships; and a currency so managed as to stabilize internal prices removes the possibility of working towards a single world currency, valid equally in every country. It is therefore a serious matter to throw over an international standard permanently, in favour of the policy of stabilizing internal prices.
[HOW TO SECURE STABLE EXCHANGE RATES - AN INTERNATIONAL BANK]
But the fixing of the relative values of different currencies involves the instability of internal prices only because world prices are allowed to fluctuate. If the world as a whole would agree upon a common effort to stabilize the world price-level, and could do this successfully, we could have both stable exchange rates and stable internal prices without any inconsistency at all.
Could this be secured under the gold standard? It could, and it could not. It could not, under the gold standard as it has been worked hitherto; but it would be possible to work out a modified gold standard compatible with price-stability.
Under the gold standard as it has been worked hitherto, the level of world prices has fluctuated broadly with changes in the supply of gold. When the gold supply has been increasing more slowly than the supply of goods and services, prices have gone down; whereas successive gold discoveries, in California, Australia and South Africa, have been followed by large rises in the world price-level. At present, the world’s stock of gold bullion is certainly growing much less fast than the world’s power to produce goods; and in addition a large part of the stock is laid up unproductively in America and France. This is one most potent cause of the fall of world prices in recent years. Moreover, there is every reason to believe that the production of new gold in the world is likely to fall off heavily in the future, as many of the South African mines become exhausted. Unless the world changes its monetary policy, this means that the world tendency for prices to fall is likely to be intensified, especially as the drift of gold to the creditor countries will also continue unchecked unless drastic measures are taken to correct it.
In these circumstances, it is natural to suggest that the whole world ought to go off the gold standard, and take to a "managed" monetary system instead. Many such systems have been proposed; but the essence of them all is that the world should agree to make its issues of currency and credit depend, not on the supply of gold available as a basis, but on the needs of the world productive system. This would be no doubt a difficult matter to arrange from the technical standpoint; but there is no reason at all to deem it beyond the wit of man, if the nations are really prepared to co-operate in working out a common financial system, and to set up a really strong International Bank, based perhaps on the Bank of International Settlements, to act as a world clearing-house for their monetary dealings.
Nor is such a system really incompatible with the retention, in part, of the gold standard. For there is nothing at all sacrosanct, or even logical, about the magnitude of the reserves which bankers at present think it vital, or are even compelled by law, to keep against their issues of currency and credit. There is no reason why the ratio should not be half as much, or twice as much, or anything else—provided that the change is made by concerted action among the gold standard countries. If, in recent years, the world’s gold had been better distributed, and if the world’s banks had agreed to issue more currency and credit on the basis of a given amount of gold, the tendency for the level of world prices to fall could have been prevented. And world prices could, and should, be raised now, by the adoption of precisely these measures.
This amounts, indeed, to a "managed" currency system—the management consisting in the variation from time to time of the amount of gold kept as a reserve against issues of currency and credit. It would enable currency and credit to be issued in accordance with the expansion of world productive power, and so as to keep world prices stable. And balances owing from one financial centre to another could continue, as now, to be settled in gold, if the world thought fit, or by the device known as "earmarking" of a single centralized gold reserve kept under the custody of the League of Nations or the World Bank. By and by, perhaps, the world would wake up to the realization that even this central reserve of gold was not necessary, and pass over to a completely "managed" world currency. But gold has been a fetish so long that the easiest course may well be to pass away from the gold standard by stages, and even to keep the shadow of it when the substance is gone.
[IN THE EVENT OF FAILURE]
It is thus desirable for us at present to continue to work for an international standard of currency, based on a world policy of price-stabilization. But, if the world as a whole will not adopt the necessary measures for the successful working of such a standard, or if no adequate steps are taken to write off impossible international obligations and to put world trade once more on a reasonable basis of mutual exchange, there will be nothing for it but for Great Britain to resort to the alternative policy of stabilizing her internal price-level, at the cost of allowing the exchange value of her currency to fluctuate in accordance with changes in world prices. In other words, Great Britain will have to remain off the gold standard at least as long as the working of that standard in the world as a whole continues to force world-prices downwards, and to cause a persistent flow of the world’s gold towards France and the United States. This is a second-best policy; but the advantages of internal stability of prices are considerable, and far to be preferred to stable exchange rates secured at the cost of persistently falling internal prices.
There is another factor that has to be taken into consideration. Not once but many times have the United States shown a tendency to upset the equilibrium of the world economic system by huge speculative loans which have been followed by disastrous panics. Now, the effect of a speculative boom in America is to send gold flying there in quest of the excessive profits that are being made, and to set up a condition of restricted currency and credit over the rest of the world. And, when speculation ends in panic, there ensues in America a business slump which drives down prices and spreads trade depression over the whole world, as it has done in the past two years.
Great Britain, because of London’s importance as a world financial centre, is peculiarly exposed to the effects of America’s outbursts of speculation; for it is above all London that has its gold and its resources drained away to take part in the Wall Street orgy. It must be a condition of any successful attempt to stabilize world wholesale prices and monetary conditions that the United States shall set their banking system in order, and find means of curbing speculative excesses which bring disaster on the rest of the world as well as on themselves.
Unless means can be found and adopted to stabilize world prices and monetary conditions, and to keep American speculation in check, it seems clear that Great Britain will be best advised to be in no hurry to go back to the gold standard. Nor does it follow, even if we refuse to go back to it, that we need act alone. The currencies of a number of other countries, both within the British Empire and outside it, are already pegged to sterling, and fluctuate in terms of sterling rather than of gold. Failing world agreement to establish a better international method of managing monetary problems, Great Britain will be well advised to rally round her those countries with which she has the closest trading and financial relations, and endeavour to make herself the centre of a new system which will challenge the predominance of gold as a basis for currency and credit, and provide at least the nucleus of a new world order in finance. If she does this, the countries which stand out of such a system will be threatened with the disappearance of a large part of their export trade; and gold and gold-hoarding will be robbed of their power to upset the balance of the world’s economic affairs.
We are not suggesting that the policy here outlined will be simple to carry into effect, or that the world is yet fully prepared for its adoption. But we believe that during the next few months events will move very swiftly indeed, and exert a powerful influence on public opinion in all countries, and not least in those which adhere to the gold standard and are likely to be the chief sufferers by the developments of this autumn. The population of the world is learning economics by experience at a great rate; and within a few months at the most the countries which are now unready to consider any drastic reforms are likely to change their tune. The question is whether this process of conversion will be swift enough to anticipate the logic of events; for, unless it is swift indeed, the collapse of the credit system may render the steps here proposed obsolete, and necessitate the putting forward of still more drastic projects for the restoration of the world to financial sanity and economic progress, But for the moment the right course is to make a last appeal to the world’s common sense—an appeal for immediate and drastic action in relation, not merely to gold and currency, but to the whole absurd tangle in which the world’s economic system has become involved. In this appeal Great Britain ought to take the lead; and, if all the world will not respond, she ought to act promptly and courageously in partnership with those who will, leaving the recalcitrant countries to bear the consequences of their folly, until they are reduced by events to a more amenable frame of mind.