essays in persuasion
A change in the value of money, that
is to say, in the level of prices, is important to Society only in so far as
its incidence is unequal. Such changes have produced in the past, and are
producing now, the vastest social consequences, because, as we all know, when
the value of money changes, it does not change equally for all persons or for
all purposes. A man's receipts and his outgoings are not all modified in one
uniform proportion. Thus a change in prices and rewards, as measured in money,
generally affects different classes unequally, transfers wealth from one to
another, bestows affluence here and embarrassment there, and redistributes
Fortune's favors so as to frustrate design and disappoint expectation. (p. 81)
Each process, Inflation and
Deflation alike, has inflicted great injuries. Each has an effect in altering
the distribution of wealth between different classes, Inflation in this respect
being the worse of two. Each has also an effect in over stimulating or retarding
the production of wealth, though here Deflation is the more injurious. (p. 82)
There is no record of a prolonged
war or a great social upheaval which has not accompanied by a change in the
legal tender, but in an almost unbroken chronicle in every country which has a
history, back to the earliest dawn of economic record, of a progressive
deterioration in the real value of the successive legal tenders which have
represented money.
Moreover, this progressive
deterioration in the value of money through history is not an accident, and has
had behind it two great driving forces --- the impecuniosity
of Governments and the superior political influence of the debtor class.
The power of taxation by currency
depreciation is one which has been inherent in the state since
Besides this,...
the benefits of a depreciating currency are not restricted to the Government.
Farmers and debtors and all persons liable to pay fixed money dues share in the
advantage. As now in the persons of business men., so
also in the former ages these classes constituted the active and constructive
elements in the economic scheme. Those secular changes, therefore, which in the
past have depreciated money, assisted the new men and emancipated them from the
dead hand; they benefited new wealth at the expense of the old,
and armed enterprise against the accumulation. The tendency of money to
depreciate has been in past times a weighty counterpoise against the cumulative
results of compound interest and the inheritance of fortunes. It has been a
loosing influence against the rigid distribution of old-won wealth and the
separation of ownership from activity. By this means each generation can
disinherit in part its predecessors' heirs; and the project of founding a
perpetual fortune must be disappointed in this way.
At any rate, under the influence of
these two forces --- the financial necessities of Governments and the political
influences of the debtor class --- sometimes the one and sometimes the other,
the progress of inflation has been continuous, if we consider long periods,
ever since money was first devised in sixth century B.C. Sometimes the standard
of value has depreciated of itself; failing this, debasements have done the
work.
Nevertheless it is easy at all
times, as a result of the way we use money in daily life, to forget all this
and to look on money as itself the absolute standard of value; and when,
besides the actual events of a hundred years have not disturbed his illusions,
the average men regards what has been normal for three generations as a part of
the permanent social fabric. (p. 88)
There is also a considerable risk
directly arising out of instability in the value of money. During the lengthy
process of production, the business world is incurring outgoings in terms of
money --- paying out in money for wages and other expenses of production --- in
the expectation of recouping this outlay by disposing of this product for money
at a later date. That is to say, the business world as a whole must always in a
position where it stands to gain by a rise of price and to lose by a fall of
price. Whether it likes it or not, the technique under a regime of
money-contract forces the business world to carry a big speculative position;
and if it is reluctant to carry this position, the productive process must be
slackened. The argument is not affected by the fact that there is some degree
of specialization of function within the business world, in so far as the
professional speculator comes to the assistance of the producer proper by
taking over from him a part of his risk.
Now it follows from this, not merely
that the actual occurrence of the price change profits some classes and injure
others ... but that a general fear of falling prices may inhibit the productive
process altogether. For if prices are expected to fall, not enough risk takers
can be found who are willing to carry a speculative "bull" position,
and this means that entrepreneurs will be reluctant to embark on lengthy
productive processes involving a money outlay long in advance of money recoupment,
--- whence unemployment. The fact of falling prices injures entrepreneurs;
consequently the fear of falling prices causes them to protect themselves by
curtailing their operations; yet it is upon the aggregate of their individual
estimations of the risk and their willingness to run the risk,
that the capacity of production and of employment mainly depends.
There is a further aggravation of
the case, in that an expectation about the course of prices tends, if it is
widely held, to be cumulative in its results up to a certain point. If prices
are expected to rise and the business world acts on this expectation, that very
fact causes them to rise for a time and, by verifying the expectation,
reinforces it; and similarly, if it expects them to fall. Thus a comparatively
weak initial impetus may be adequate to produce a considerable fluctuation. (p.
101)
We have magneto trouble. How, then,
can we start up again? Let us trace events backwards: ---
1. Why are workers and plant
unemployed? Because industrialists do not expect to be able to sell without
loss what would be produced if they were employed.
2. Why cannot industrialists expect
to sell without loss? Because prices have fallen more than costs have fallen
--- indeed, costs have fallen very little.
3. How can it be that prices have
fallen more than costs? For costs are what a business man pays out for the
production of his commodity, and prices determine what he gets back when he
sells it. It is easy to understand how for an individual business or an
individual company these can be unequal. But surely for the community as a
whole the business men get back the same amount as they pay out, since what the
business men pay out in the course of production constitute the incomes of the
public which they pay back to the business men in exchange for the products of
the latter? For this is what we understand by the normal circle of production,
exchange, and consumption.
4. No! Unfortunately this is not so;
and here is the root of the trouble. It is not true that what the business men
pay out as costs of production necessarily comes back as to them as the
sale-proceeds of what they produce. It is the characteristic of a boom that
their sale-proceeds exceed their costs; and it is the characteristic of a slump
that their costs exceed their sale-proceeds. Moreover, it is a delusion to
suppose that they can necessarily restore equilibrium by reducing their total
costs, whether it be by restricting their output or
cutting rates of remuneration; for the reduction of their outgoings may, by
reducing the purchasing power of the earners who are also their customers,
diminish their sale-proceeds by a nearly equal amount.
5. How, then, can it be that the
total costs of production for the world's businesses as a whole can be equal to
the total sale-proceeds? Upon what does the inequality depend? I think that I
know the answer. But it is too complicated and unfamiliar for me to expound it
here satisfactorily. (Elsewhere I have tried to expound it
accurately.) So I must be somewhat perfunctory.
Comment: With our fixed cost,
variable cost theory, it is very easy to understand. Fixed cost occurs before
the production of commodities and cannot be changed easily.
Be confident, therefore that we are
suffering from the growing pains of youth, not from the rheumatics of old age.
We are failing to make full use of our opportunities, failing to find an outlet
for the great increase in our productive powers and our productive energy.
Therefore we must not draw in our horns; we must push them out. Activity and
boldness and enterprise, both individually and nationally, must be the cure.
(p. 156)
Comment: 80 years ago, in the midst
of the Great Depression, Keynes offered such an optimistic outlook.
"Growing pain of youth" Today, we are at the peak of our capacity.
Admittedly, this is a much more difficult challenge. Quote Keynes' above
paragraph in the paper.
A "sound" banker, alas! is not one who foresees danger and avoid it, but one who,
when he is ruined, is ruined in a conventional and orthodox way along with his
fellows, so that no one can blame him. (p. 176)
Comment: It is no only a sound
banker fail in this way, but all other professions. To look sound, they also
need to suppress all other options and opinions.
For except during rather brief
intervals gold has been too scarce to serve the needs of the world's principle
medium of currency. Gold is, and always has been, an extraordinarily scarce
commodity. (p. 182)
Comment: This is why gold cannot be
effectively used as a standard medium of currency, especially now the boom of
the product with relative constant amount of gold.
All those --- and in the financial
world they are many --- who have reasons for wishing to appear
"correct", are compelled to talk foolishly. (p. 191)
Comment: It is the same today.