Professional Documents
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M ONEY
P H.ROBERTSON
CAMBRIDGE ECO-iOMCC
MA
f-tr^^V^^'
Ho "2.1
^tate
O^aUege nf
3k.t
AgrwuUutp
QJarnell MniwcraitH
ICtbcarg
HG
221.R64
Money.
3 1924
The
tine
original of
tliis
book
is in
restrictions in
text.
http://www.archive.org/details/cu31924013818145
CAMBRIDGE ECONOMKTlffZNDBOOKS.II.
GBNEEAL EDITOR
J. ir.
KEYNES.
MONEY
M.A., C.B.
MONEY
BY
D. H.
ROBERTSON
M.A.
WITH AN INTRODUCTION BY
J.
M.
KEYNES
JI.A.
C.B.
XonOon
',
settled
policy.
It
of
concliisions
is
applicable
to
not
its
possessor to
difficult in
scientific
its
modes
draw correct
of expression are
correctly to the
Before
It
is
minds
much
conclusions.
of learners.
Adam Smith
this
apparatus
of
thought
professional economist
now
of
themselves
may
This Series
is
number
method
his
skill
of those
who can
think for
be increased.
directed towards the latter aim.
It
vi
is
uninitiated student
some conception
the general
of
intentional
is
important,
wings.
M. Keynes.
PREFACE
This book
1.
contained unit
series.
son's
laid
is
intended to be a more or
but
Its connection
it is
with
its
predecessor
less self-
volume of a
Mr. Hender-
Its
man
himself.
An
PREFACE
viii
worth while
is
in
This
is
originality
or
research.
Among
of others.
desire to acknowledge
my
published works, I
Withers.
tradition."^
may
much
of
whatever
it
possess.
D. H. R.
Cambridge,
March, 1921.
p. 393.
CONTENTS
CHAPTER
Intkoductoey
2.
3.
4.
5.
6.
.......
....
2
Money
The Advantage of Money to the Consumer
4
The Advantage of Money to the Peodttceb
7
The Dangerous Ease of Borrowing and Lending
Money
The Evil Effects of Monetary Instability on
the Distribution of Wealth
.11
Definition of
........
.
7.
PAGE
CHAPTER
.13
II
What
is
3.
4.
Provisional Solution
1.
2.
II.
5.
6.
7.
8.
How
is
20
24
Determined
....
ix
IT
.18
....
.....
.
28
30
34
37
CONTENTS
CHAPTER
III
1.
2.
3.
II.
4.
5.
6.
7.
...
...
...
.
......
...
.....
.....
...
II.
12.
duction OF Gold
The Gold Exchange Standard
8.
9.
10.
44
39
42
...
47
50
53
57
59
62
66
C8
.71
CHAPTER IV
6.
.....
74
76
79
82
Si
87
CONTENTS
XI
PAGE
7.
8.
94
CHAPTER V
THE WAR AND THE PRICE-LEVEL
....
4.
5.
109
6.
111
1.
2.
3.
THE Price-Level
7.
......
......
98
100
102
105
lU
CHAPTER VI
THE QUESTION OF THE STANDARD
4.
128
5.
An Improved Standard
131
1.
2.
3.
118
122
125
CHAPTER VII
THE FOREIGN EXCHANGES
1-
2.
3.
45-
Money
6.
7.
......
135
139
141
144
Token
147
150
153
CONTENTS
xu
CHAPTER Vin
MONETARY POLICY
....
7.
8.
Conclusion
1.
2.
3.
4.
5.
6.
156
159
161
164
167
170
.......
.
PAGE
.174
177
MONEY
CHAPTER
want to buy
Introductory.
1.
as
"
is
Through
Money
often supposed
is
necessary
for
of
the
Sheep
" plenty
Now what
the
do you
Looking-ghss.
nevertheless,
is
tlie
it is
an interesting
the study of
economics.
economic student
to
try
MONEY
And
money systems
of the
therefore,
to explore
it
thoroughly,
if
only to clear
and apportionment
which
when
it
goes wrong.
Definition of
arrive at
payment
widely accepted in
business obligation.
be money
stance
is
the
cease
If things
in discharge of
money. ^
involves
another,
namely the
common
services
all
of
exchanging with
MONEY
4
chosen, as
money
and Pank
of
England five-pound
Kingdom
be widely acceptable for this purpose unless it is expressed as a multiple of some unit which is regarded as
a measure or standard of the value of things in general.
This conception of a " standard of value " raises some
difficulties,
must
to
later
and we
ways
in
to
it.
But over
may
be.
of
money is that
it
enables
man
they were
strictly rationed, or
power.
And
it
helps each
member
of society to ensure
MONEY
To waste
even be
man
satisfaction
itself
a source of satisfaction.
income, that
is
see
if
money
he pleases
of the fight
payment.
we
all of
or domestic service, a
is
services,
Army
in kind
everybody concerned
rein
of
But
of
certificates,
that
is
by the
would have to
The need for money
a given volume of prothen seems to be fimdamental,
ductive power a given poise of mankind in his relations
with nature
to be made to yield the greatest
individual
persist.
if
is
MERITS AND DRAWBACKS OF MONEY
harvest of individual satisfaction which
it is
capable of
yielding.
man
own
and
so to
add more
on
his
it is sufficiently
accurate to describe
as one
for
who
workmen.
Now
it
would as a
rule be intolerable
from
company
had
to lay in a store of
all
MONEY
workmen
profit to the " capi" (as under the old truck system), or because it
furnishes a special incentive to the workman (as in the
either because it
is
a source of
illicit
talist
speaking generally
it is
far simpler,
and
is
But
indeed the
only practicable course, for the " capitalist " to pay his
in
the
them
the things which they require. The existence of money
then seems to be a necessary condition for any great
confident expectation of being able to obtain with
those
initiate
all
that
is
urged here
is
money immensely
of all kinds.
till it is
in a finished state
made
The making
for this.
general public.
by
money
individuals,
rests so largely
fer
command
upon the
willingness of one
man to
trans-
by that other
or
by some
third
MONEY
10
that
is
it
expected, with a
not do
so,
wanted.
it
and that
it
their production.
Our second
of industry.
tional trades
rest"
illustration is
When
there
is
boom
steel, shipbuilding,
money -system
there
is
active
ture, as
he might have to do
if
11
but of course
would be very slow and difficult.
the ease with which advances of every kind can
;
industrial progress
As
it is,
be made in money
oils
and to lay up all sorts of trouble and disillusionment for themselves. Adam Smith once compared
money to a road, over which all the produce of a district
selves,
surprised afresh
itself
produce a
Nobody would be
:
yet
man
is
so foolish
always being
much
6.
of
it.
The Evil
Effects
Distribution of Wealth.
of
money
is
what we mean by this phrase, " the value of money " for
we may define it provisionally as the power
:
the present
of
money
of us,
Now
all-
live
buy our
and
if
money
same
MONEY
12
money
to
buy other
people's
expected over
their
therefore,
as
it is
own enjoyment,
however
slight, in
are variable.
of the
fixed, while
Any change
two groups
of persons.
it
who
money expenses
remained relatively
sale of goods
and
13
for
capital
money incomes
At
is still
partially true,
by the
The violent fall
money between 1914 and 1920 led to a
The
class.
without
he
is
classes,
but
same
much
difficulty to
If
value of
he
will
work out
so badly.
importance
for
more deserving.
But
in fact
14
MONEY
done.
as
But
so long as reliance
on the method
work
of contract
of the
value of
working
contract
life
:
tion, faith.
of his
And
we
live
by
calculation, expecta-
money and by
by the
the attempts.
15
tations.
though not
altogether fortunate, that during the war those " capitalists " in Great Britain who were concerned with the
room
should
The
Just
present situation
as the
in
is
more obviously
which a workman
useful
is
incurs
useful
direction in
which a
man
has
risk,
money should
Noblesse oblige
remedy
Nor
is it
money
to pur-
tion
MONEY
16
the
money
of other countries
money
to
buy
itself
to this
It has
perplexing environment.
changes by sloughing
on to the
off
money.
imperfectly
known
is still
But
in
or used,
is still warped.
For
Not to those who most
those who will pay us in a
whom
shall
we export
all,
CHAPTER
II
I.
What
is
is
determined.
By
the value of
analogous to what we
else,
say bread or
amount
of things in general
which
will
be given in
MONEY
18
the value of
2.
Changes in
the
permitted themselves
now and
And
is
19
also
difficulty.
is
upon
One
it.
gone so
tion
far as to
of
forty-four
algebraical formulae
of
increasing
marks
in accordance
certain qualifications
and some
of
and are
also implicit
fall in
the value of
money
will indicate,
that
is,
that a
We may
the
way
of constructing
such an index-number
It
is
for
'-A
MONEY
20
prices
we
sit
down
is
it
we
things,
shall leave
out these
services as enter
Again, even so
is,
are estimating.
If,
we must be
we
among the
person to
whom
abstraction
all
we can do
is
to
make him
is
at best an
as represen-
tative as possible.
Secondly, when"we
Difficulties of Measurement.
have decided what things to include, the question
arises as to how we are to combine the price movements
3.
21
number.
The obvious suggestion is that we should
take the average of the several percentage price changes
and regard that as the percentage change in general
prices.
will
show that
this sug-
number
of general prices."
We
which we take
is
or as the
of
view of
Welfare, Part
I,
Chap.
III.
of.
22
For convenience
MONEY
of inspection this result is set
out
23
But other experts tell us and they are able to support their contention with striking examples thatj^this
is
number may
if
there
it
money
in 1910.
25 per cent.
But now
let
articles,
by
MONEY
24
in 1910
this
combination
2 pints of beer.
The combination
in our first
example
is
that which
sumwhether
is
that which
sum on each
4.
which
if
we can
An
obvious
Provisional Solution.
find a combination
is
not arbitrary.
suggestion
or something like
This
is
moment
the
so-called
moment
name
for it
not accurate), which has been the basis for the sliding
25
is
in
in the habit of
which it
consuming
July, 1914.
tion
consumed
is
completely different.
It
that there
is
mean
it
it.
That
actually cost
MONEY
26
more
which
it
even
had wished
if it
to.
all sorts of
people
who were
all
time
and so long
as this sentiment
general there
is
be obsolete
by about
1950, for
may
it
habitually
consumed by Chinamen.
of
meeting the
difficulty
would be to
consumed at the
first
date,
price
prices.
And
if
we use
this
THE VALUE OF MONEY
satisfactory index of the
money.*
not enter.
The
movements
all sorts of
same end,
chief point
27
of the value of
other mathematical
into
which we need
is
to be completely water-tight
many than
such as
which nobody
would buy
if
they could.
of 1921
MONEY
28
" the general level of prices " will be freely used, without
further allusion to the ambiguities involved.
How
II.
5.
are
is
Determined
now
been the
subject
much
of
fierce
controversy
of
the
money
is
demand
for
money
con-
all
The volimie
actions to be performed
may
of business trans-
two
and
services which have to be distributed among the community increases, or because some of these goods and
reasons
29
of time.
abolished.
Eeaders of the
first
MONEY
30
see, therefore,
that given
money
re-
the conditions
available,
6.
it
and
is
Differences between
may now
Money and
other Things.
We
money
is
of other things.
in
it
is
also in
some
If
economic welfare.
about money ?
From one point of view we can. If one unit of money
were suddenly abolished, the possessor of the particular
unit selected for abolition would clearly be the poorer.
But
it is
by no means
in the
surren(}ered
THE VALUE OF MONEY
crease in
its real
economic welfare.
31
This consideration
must be taken into account in forming a practical judgment on schemes, such as we shall have to discuss later,
for effecting wholesale reductions in the quantity of
money.
of
of
society as a whole
while the value of bread is also a
measure (within limits) of the social usefulness of any
one loaf of bread.
It is worth noting that money is not absolutely
peculiar in this respect.^ If Jones' gramophone were
unfortunately damaged, the gain of Jones' neighbours
must be weighed up, in estimating the total effects on
the world's welfare, against Jones' loss. If Lady X's
diamond tiara were unluckily mislaid, the unholy glee
of Lady Y and Mrs. Z must be set against the chagrin
of Lady X. In the first case this peculiar circumstance
arises from the social perniciousness of the article in
question, in the second from its enviable rarity. In the
case of money it arises from the fact that nobody generally speaking wants it except for the sake of the control
which it gives over other things. But the case of money
being by far the most important, it is not unreasonable
to set this down as a respect and an important one
in which money is peculiar as regards the determination
:
of its value.
The second
to the
first
money
respect in which
and while
it
its
is
value
less
is
is
peculiar as
closely aUied
important,
it
has
MONEY
32
attracted
more
attention.
kind
the larger
A moment's
wiU carry conviction that this must be true.
If there is a certain volume of things to be exchanged,
and if each of them is to change hands a certain number
of times
then, if the quantity of money available were
halved, there would be exactly twice as much work for
each imit of money to do, each unit would have to pass
in exchange for twice as great a volume of things in
general.
If the quantity of money available were
doubled, there would be exactly half as much work for
each unit to do each unit would have to pass in exchange for half as great a volume of things in general.
the same proportion, the value of each unit.
reflection
To
available.
name
important, therefore,
if
we wish
money. It is
clearly conceivable
might
83
money
available
important
is
of
money
is
it
of
may
be associated with a
demand
it
should be un-
money which
with cause.
is
is
associated with
The conception
any change
of cause
it
and
as effect
effect,
as
dogmatically.
and
profess to throw
any
light
of
This
money affects
on in
this
is
book we
shall
if it
does affect
do our best to
satisfy
it.
Later
him with
MONEY
34
any progress.
Thus shorn
of anything
demonstration
impressive
for us
it
here at
What
or
exciting
make
itself
to
what
debate,
all
ations of
are to
stump
we
if
justification
of
money
available,"
little
further explana-
reasons.
35
holiday-making in
my
Some
separate transactions.
pieces of
money
are very
it is
the
demand
for
Epsom with
on the race-course at
'
and
it retail
On Derby-day
in a barrel of beer,
left in
On
the
p. 329.
MONEY
86
thirst,
The magnitude
money
money
will
is less
is
nevertheless
some importance.
it.
3^
money.
actual working of this principle, as of the others enunciated in this chapter. Meanwhile it must be put on
"
record that the phrase " quantity of money available
is
money
in existence.
the story.
We
arises, can we
money ? Are there any
make the quantity of money
work tending to
on the
available dependent
and
its
by what other
money available ?
If not,
of
difficulty of
is
its
producing
it,
cost of production
What
"
But
money
ask simply,
in existence
MONEY
38
question of the means
money
(if
no simple or
universal answer.
of
kinds of
CHAPTER
III
It's
ful."
it's
Through
the Looking-glass.
1.
Legal Tender,
still
many
different kinds of
money
39
MONEY
40
And
it is
somebody within
That
is
where
once on paying
they get to
all
know you a
bit
me and some
of
my
by cheque,
for they
You
may
will
vmtil
not be
do better
every-
41
selves.
"
When
See
J.
1914, p. 260.
MONEY
42
got
my
orders,
and that
clears me, as
we used
to say in
the Army."
Our Bradbury,
money which
we call
money, which
is
it for
that
is certified
up to
a limited
not so certified at
2.
Convertible
all.
to our interrogation.
Let us return
" I quite understand now, Mr.
Bank
and
"
if
My
and asked
for golden
of England,
43
Only
think
tell
you
shouldn't bother
were you."
But
want the truth. Am I
entitled to convert you if I choose into some other kind
of money, or are you, as one might say, the last
word ? "
" Oh dear," our poor note will answer, " what awkIf you want the literal and
ward questions you do ask
and you
legal truth, you are entitled to convert me
can classify me with my big brother, the Bank of England
I
am
and
in
MONEY
44
told
you
Bank
of
discharge of
its obligations,
is
money
for instance,
bank money,
of
money.
fetch as
much
"
And
45
And let me tell you this, it's not only we paper standard
pieces of whom that's true.
There is my friend the
who is the standard coin of India he looks very
smart and solid, and takes a lot of people in
but if
you took his lettering off him, his carcase would come
tumbling down in value. For it isn't his flesh that
gives him the value he has got, it's the writing on
rupee,
him.
" And
too,
if
a great
many of those
it,
lose their
he's
they
all
money
But
job again.
if
they'ld be
there aren't
all
that
number
worn a
bit thin
world.
Greeks and the tobacco of the Red Indians and the knives
of the Chinese were better money than I am, because
or to
smoke or to
kill
people
MONEY
46
office.
our classification.
some
(like
token, and
some
(like
is
is full-bodied.
Most convertible legal tender
token money, such as the bank-notes of all important
countries before the war and of the Bank of England
but the sovereign in India is fuU-bodied conto-day
vertible legal tender, not standard money, for the
in the East)
is
Government
exchange for
it
on demand.
it is
money
Bank
of
THE QUANTITY OF MONEY
These
may
results
reference as follows
47
MONEY
I
Common
Bank
(cheque)
Legal Tender
Subsidiary
Optional
(sliilling)
Standard
Convertible Legal
Convertible
common money
Tender
|
Maria
Theresa
ox,
Token
(U.S.A.
national
Full-bodied
(primitive
Full-bodied
(sovereign
Token
(Bank of
in India).
England
Bolshevik
note),
rouble note).
bank-
Token
(rupee,
Full-bodied
(sovereign),
note).
dollar).
This classification,
it will
bedfellows.
The rupee turns out to be only a silver
rouble note a paper coin, whichBolshevik
note, or the
which best
II.
satisfies
different kinds of
money
in accordance
with various
MONEY
48
by keeping
steadfastly
on the trail
book
but
a country
is
determined,
That
is
to say,
we
shall
system
is
professedly
and
to the
49
this
the quantity of
money
money available
(see p. 35).
in existence
of
unless
in cheques the
it is
possible to
describe as
paradox.
drawn against
in
is
idling
bank money,
bad and
for
common
in mind,
and
things,
it
may
also to avoid
new names
some cumbrousness
of phras-
MONEY
50
ing,
is
of
The
of a bank's deposits.
is
The
on the kind
of causes
the matter is
is,
left to
51
we may almost
say, of those
who control the policy of the five giant joint stock banks. ^
But it is generally beheved that the bankers regulate
the volume of deposits in accordance with a customary
facilitates
Barclay's ; Lloyd's
London County Westminster and Parr's ;
London Joint City and Midland ; National Provincial and Union.
' Since January, 1921, these chequeries are no longer described
as " cash " but as " balances " at the Bank of England : but the
change is only a verbal one, since their amount is not stated separately from " cash." If " balances with and cheques in course of
collection on other banks in the United Kingdom" are allowed to
count as " reserves," a figure of 7 to 1 for the proportion of deposits
to reserves becomes nearer the mark than that given in the text. For
the influence of Treasury Bills on these figures, see Chap. V, 4.
'
MONEY
52
who bank
at difierent banks.
A who
If
banks at
is
so large
and steady
means
an
of
them out by
Bank
of
moment
but
England
it
may
way.
bank
by the existence of
up with one another by means
the Bank of England. At the
moment
is
The consequence
is
money
is
common
appreciably
and
total
and calculations.
main upshot, which is that
But
is
volume
of the reserves of
53
commou
money.
If we enquire why this volume of deposits should bear
any reference to the volume of common money, the
answer
is
that bank
money
is convertible.
The
right to
draw a
" to obtain
talists
wages.
common money
immediate reach.
6.
ask
The Magnitude
why
of
Bank
Reserves.
If,
however, we
so clear.
MONEY
54
not).
all.
For the common money which is paid out in exchange for cheques does not continue for ever in circulation
it finds its way back to the banks from the
:
traders
for goods,
common money
An
instan-
common money
Now
of deposits,
and no reserves
whatever.
different.
little
pool of
common money
temporarily slacken.
if
And
size of this
is
drawing
pool according
them
to expect
common money
out
THE QUANTITY OF MONEY
55
at the particular
their accounts.
money and
eventualities.
The
meet
practice of bankers
is
all
common
possible
a compromise
because
detail,
it is
some
prevails
street."
there
to deposits
to 9 or some other
MONEY
56
becomes unassailable.
member
It
is
important therefore to
re-
of
great importance,
of the
detail,
exhausted.
For
clearly
if
1 doUar,
57
its
ingenious
buffer
arrangements.
body which
best to fore-
the
by means of
The most
exercises
Board
and
supreme
Federal Reserve
rules
about
payment
of a tax.
Bank
MONEY
58
common money.
in
fixed eternally
This proportion
for instance,
if
is
not of course
ing
payment
of
respect
which
it rests
common money
arbitrary
and conventional
more or
59
less
And
some
exists) is also, as
we
shall see in a
III.
8.
The Relation of
Convertible
Common Money
to
MONEY
60
common money
of the people,
laid
down
that
it is
only
when economic
conditions are
standard money that is, golden sovereigns for ordinary transactions was ineradicable but as the smallest
piece of non-standard legal tender available for their
use was the 5 Bank of England note, which was too
large to be convenient for most of us, it was difficult to
test the validity of this assertion. Nowadays it seems
to be generally agreed that even if the Bradbury note
became freely and indubitably convertible, there would
be no frantic rush to convert it for the purpose of making
ordinary payments within the country. The mere assurance of convertibility, it is thought, would have the same
kind of soothing efiect as church bells in the distance,
:
61
bank
notes)
as in England,
though
the limit was raised at certain times of the year and might
The
pro-
was
by law
it
to 3 to 1
limited. Against
one kind of token optional money (national bank-notes
and their successors under the Act of 1913) a reserve of
5 per cent in legal tender must be kept, against another
kind (Federal Reserve notes), a reserve of 40 per cent in
gold. But both these kinds of optional money are also
the
limited by provisions of quite a difEerent kind
dollar's
worth
notes
that
for
every
of
first by a rule
created a dollar's worth of United States Goverrunent
bonds must be held by the bank which creates it ; the
second by a somewhat similar provision in which the
is
pledges of business
men
MONEY
62
The
is
war.
What
is
determined, more or
money.
"
money
The answer
question
money
"
?
money
If it
is token or full-bodied money.
token money, its quantity depends on the will of the
Government. If private individuals were allowed to
create it, its quantity might well increase indefinitely ;
standard
is
63
And
entirely imfettered in
thus the legal limit to the note issue of
of France, though it has been raised many
his decisions
the
Bank
to do
But
in these
way
of doing
still exists.
and
in
most countries
Government
And
volume.
its
is
stufE of
ceeding
its
money shows
signs of ex-
it
in
equality with
its
If,
as generally
money
is
must wait
in patience
till
fall
Chap. V,
comes about,
2.
MONEY
64
from our
definition of
for its
value as
of
amount.
though we could
money
in a country
monetary
depends on the
it is composed.
But before taking this step we
must beware. In the first place, from the standpoint of
any one country, the alternative employments which are
open to the material in question include employment as
money in other coimtries and the quantity of full-
which
therefore partly
money made
of gold
is
last century
Governments do not
while
volume
of full-bodied standard
and
in fact that
If
is
it
artificially
money,
them at
money should
it
artificially
65
it is
actually worth
less),
that
is
sovereign exceeds
of the
But even
if
it is
are freely
exceptional conditions)
to
citizen
is
limit to
fixed
by the
Further, while
MONEY
66
would be
we may
and
alone
it
and
money
is
in
determined.
progress,
become usual to
call
It
system a " gold exchange standard," because the Government operated it mainly by buying and selling the money
of a country England which had a true gold standard.
It is better to confine the term " gold standard " to
money
of
gold.
all
other kinds of
money should be
is it
neces-
ultimately
67
standard money.
Thirdly, in order to have a gold standard,
that
all
is it sufficient
money should be ultimately congold money ? The answer is No, not unless
other kinds of
vertible into
money
not, that
itself is convertible,
is
to
by melt-
England, therefore,
even if we regard the sovereign as the only standard
money, has not at present got a gold standard.
A gold standard country then is one in which, for all
money
are ultimately
bodied gold
money
is
itself
freely
full-
convertible into
It
is difficult
to
any example
of
MONEY
68
11.
of Gold.
What
our question.
to
standard
money
Western coimtry
in a
Of any gold
is
its
use as
money
is
to
Now
production
its
its
it
its
cost of
cost of
very difficult to assert anything of the sort for the discovery of gold was in those days something of a windfall,
;
and
its
regard to costs.
'fifties
in Australia
and bringing
free of
it
to market.
methods
Gold mining, especially
called picture-palace
of proin the
69
Transvaal,
The means by
them depends on whether they live in a
which
it affects
is
a change in their
In the
money expenses
the money price
change in
which they get for their product in either event there
is likely to be an appreciable effect on their annual
output of gold. For if the value of gold falls they will
curtail their production, and if it rises they will expand
their production, just as would the producers of any
other commodity in like case. Thus there is a tendency
with gold, as with other things, for its value to correspond with what we will call its marginal cost of pro:
duction
that
is,
We
must
from
MONEY
70
For
first,
the
less
Secondly,
if
the proportion
"
of output
what
to
great
proportionate
increase
itself
in
to lead
the world's
stock.
to equal
it
is
of
Bearing
all this in
mind we may
money
of gold,
is
and that
its
But
of
71
its
production
made.
number
with a
In these countries the
standard money is token money, but is nevertheless
regulated by Government in a manner which is not
arbitrary, but is designed to keep the value of the
standard money stable in terms either of some other
political status similar to hers.
money
or of gold.
attained in India
means the gold value of the rupee its value, that ij,
terms of gold was prevented from appreciably
exceeding one-fifteenth of a sovereign
for if it showed
signs of doing so, there were always people who woidd
offer sovereigns to the Government and demand rupees.
But the Government would also always promise to give
approximately a sovereign in London in exchange for
15 rupees handed to it in India
so the gold value of
in
fall
if
it
showed
signs of
MONEY
72
but
it
was supposed
in 1920 that it
was about to be
re-
The value
sovereign,
and was
to be one-tenth
and not
one-fifteenth,
rise
which had taken place since the war in the gold value
of the silver of which the rupee is made. But owing to
various causes it has hitherto been found impossible to
make these decisions efiective, and the gold value of the
rupee at present fluctuates just like that of the
lira
or
the franc.
of the
to-day
(p. 46).
Under
money
is
regulated
by Government not
standard
arbitrarily,
:
but
money
of
standard country, to equal the marginal cost of production of a given weight of gold,
^t
Finally,
optional
of
money
those
is
countries
of importance,
in
which full-bodied
the
73
total quantity of
in part,
CHAPTER IV
'
is
of mine,
1.
Prima
Bank Loans.
facie Objections to
We
have
quantity of standard
money
supplies
is
regulated
by the world
money is regulated partly by the decisions of Government and bankers. But we do not yet know all we
should like to know about these decisions. Why do
bankers and Governments create money at all, and how
do they put into execution the decisions which they
make about the quantity to be created ?
We
bank money.
good deal
of
what
will
namely
be said can be
common money
by Governments and banks
in other countries.
But we cannot study everything
at once
and further, by confining our attention to
bank money, we may perhaps make progress with our
with modifications, to the
applied,
74
75
which variations
level of prices
in the quantity of
money
afEect the
The banks,
The answer
its origin in
in Chapter
is
money has
I,
money
its
advance of
made by
all
kinds.
ductive enterprise.
bank
for a loan of
1000
is
to say
it
him
him the
creates for
gives
right to create
up
to the
and
sells
bank.
At the end
of the
his wheat-crop,
Meanwhile
the
own
personal
upon it.
To the ordinary business man
there
is
nothing what-
MONEY
76
toil
interest
is
the re-
ward of saving
hands off them
yet here
is
may
money, which
is
be
We
is
made
there
is
any
real stuff
men
are
somehow
or other main-
2.
Provisional Justification of
chases,
matters, let
just, let
his pur-
simplify
there
is
tlie
77
partly
common
money, partly
directly
chequery, while
chequery,
it
is
is
way
it
in nature
for it has
total deposits,
by 1000.
Now we know
MONEY
78
small purchases, that
its
way
with
common money
its
have found
There
is
any point
if it
it will
get
sees
interest.
And undoubtedly
in doing so.
1000,
will
will
for
on such a loan
it
We
again.
Yes,
first,
it
for of course
similar origin
we have chosen
it is
first
" in
life,
and not
we
79
first syllable of
money
in this
and
pro-
currently,
bound together by
unconscious
real
though
ties.
on
cess described
p.
argument to make
its
Bank
it
applicable to our
plurality of banks,
of
it
England.
As
course in real
life
the merchant
for
has enabled us to
who buys
Of
the farmer's
crop
is
forth
who keep a
and, further,
is
a true analysis of
3.
Interest
on Bank Loans.
second accusation
that
life.
Now what
about our
it has
the reward of
MONEY
80
partially true.
also for a
and he is therefore
or at any rate he
bank
Yes
things
is
after all
no such
of private trading
in
and
it
will therefore
interest as it receives
and the
differ-
which
of interest
for
acting
that
Super-Selfridge
is
for
all,
of banking.
With our
withdraw
pressing.
his
For
if it
declines,
he can
common
81
it to another bank
and the effect
on our bank's reserves of common money,
in the second on its chequery at the Bank of England
or transfer
(see p. 52)
its
in the long
reward
though
of saving
is
and
split
many
in competi-
calls
of
common money
MONEY
82
at
first
it is
is
very considerable,
we thought
now
It appears
is
made
but for
by which
is
brought
The
Banking System. So
banking system working in the
way we have described seems well adapted not merely
to oil the wheels of industry but to preserve its stability.
For the creation of money does not outrun the production of goods, nor does the production of goods outrun
the creation of money. But we must now go on to
observe that this conclusion holds good only on the
assumption that the community we are examining is a
stationary one, making no economic progress. Now we
Western folk have grown accustomed, whether rightly
or not, to regard such a state of affairs as abnormal
we are inclined to expect that the annual output of
goods and services of all kinds should increase from
year to year. In any case it is clearly possible that it
should so increase. But how is our banking system to
4.
is well.
money corresponding
to
annual increment
of goods, since it
83
which
is
the basis of
all its
moment
calculations
Without en-
too closely
by more
of
more or
adequately to respond
fail
Now
there are a
number
of people
who think
that an
is
money
its
sluggishness
called for
by the
In the
We
first
huge
rate,
and that
of various devices
for
two reasons.
amalgamation,
Bank
and
of
by means
First,
the clearing-house,
MONEY
84
of legal tender.
Secondly,
obvious nonsense, as
is
so often
men
satisfactory
money would be
regulated primarily
by the
We
a progressive industrial
Bank Loans.
quantity of bank
lishes itself.
is
one
85
is
human
human
being or group of
The application
enquiry
is
simple.
goods would be unaffected in order, therefore, to prevent goods for which they have no personal need accumulating in their possession, the sellers would be obliged
:
to part with
fall for
MONEY
86
fall
to accept less
Now how
money
for
them than
formerly.
affairs
must
There
eat,
By
lending more
money
money by way
of han.
rise for
one of the
because
those
regulating the
this
amount
able
and
willing to offer
formerly.
And by
so
increment of
moneyin
to the full
amount
of their value
remember, to any
money and
87
the steadiness of
oranges
is
6d. each.
after
satisfied.
6.
little
is
not
nor perhaps
the
typical
MONEY
88
one.
Suppose now that Mr. Orangeman is not an
airman at all, but a local hawker, so that his orange
does not, like Mr. Eggman's egg, constitute a net
addition to the volume of goods in the country. And
suppose that only Mr. Eggman borrows from the bank
in order to effect his purchase. It will then be possible
for Mr. Orangeman to pay Mr. Eggman's cheque into
the bank, and draw of his oivn right a cheque for the
same amoimt with which to purchase Mr. Eggman's egg.
Let us see what has happened in this case. The volimie
of bank-loans and the volume of exchangeable goods
(reckoned at prices hitherto current) have both been
increased by 6d.
but the volume of available money
has been increased by Is. namely, by two cheques of
6d. each.
The stability of trade and prices has been
upset
for whereas Mr. Orangeman's increased money
demand for eggs has been offset by an increased supply
of eggs, Mr. Eggman's increased money demand for
oranges has not been offset by an increased supply of
oranges
and the price of oranges will therefore tend
:
to
rise.
89
of sellers to
cheques.
pieces of
sale.
If he is a
shopkeeper they are in his show window, if he is an
importing merchant they are on the sea, if he is a farmer
they are still in the ground, if he is an inventor they are
still
in his brain
it is all
a question of degree.
them
is
going on
In any
money
its travels,
MONEY
90
banking system.
public,
who
money
diminished,
full
91
in the
of forced
that
loans
of
it
to other people.
But
to the borrower,
otJier
people
Our " more money " enthusiasts are right in urging that
to ensure stability of prices and trade the volume of
bank loans should be progressively increased to " meet
the needs of trade "
but the simplicity of the mechanism by which they propose to connect the two is illusory
:
and dangerous.
The Inherent Tendency of the Banking System to
Excessive Creation of Money. In the light of what we
7.
MONEY
92
moment
loans, let us
now
look back
by which in 2, from
the same standpoint of stabiUty, we presented the case
for a banking policy which in a stationary community
for a
at tbe illustration
It
now
becomes clear that our " second " loan the loan to the
bootmaker was justified not by the fact (which satisfied
the bank) that it was of the same amount as the first, nor
by the fact (which satisfied the bootmaker) that it was
about equal to the expected selling value of his product
it was justified solely on the assumption (which it was
nobody's business to verify) that it would maintain a
stable relation between available money and available
goods.
If (as is probably the case) boots are things
which change hands less often than wheat, this assumption would be falsified in one direction the average
rate at which goods come to market would fall off, and
the general level of prices would tend to rise. If however (as is also probably the case) the boots could be
brought to market in a shorter time than the wheat, so
that the new loan would be repaid, say in six months
instead of a year, the assumption would be falsified in
the other direction the average rate at which goods
come to market would increase, and the general level of
prices would tend to fall. It is, of course, possible that in
the instance chosen, and still more over a great field of
similar transactions, these forces would cancel one
another but there is no reason to feel certain that they
would. A " new loans for old " policy could not be
relied upon even in a stationary community to ensure
stability in the value of money
it might give rise to
4,
93
the inherent
grows in wealth
it will
its
resources in con-
and
capital
money "
puts
his
as
it is
though,
goods which are tied up
and not the money, which is very much untied and
" runs about the City." Thirdly, the bank is naturally
tempted to snatch at any opportunity of increasing the
for long periods
really the
which it receives. Now the creation of addibank loans means additional interest and the
substitution of a long for a short loan means, in normal
interest
tional
the borrower
is
greater.
It
is
bank has to
which it receives
but
that act of retribution is not immediate nor always
For if the bank makes an
very clearly foreseen.
additional loan of 1000 to a farmer, it charges interest
immediately, and draws it from a single and clearly
but the process by which that 1000
visualised source
swells the chequeries of the people from whom the
farmer buys goods, and to whom the bank pays interest
of the interest
(or for
whom
it
is
is
gradual,
of additional
MONEY
94
appear to
likely to
it
more
it
in
is
another manner.
definite date.
8.
Now
English bankers,
maker
calcula-
suggests,
statistical
possesses.
It
is
our
BANK MONEY AND THE PRICE-LEVEL
95
More-money
Sirens,
of explanation.
When an
English banker
is
it
form
some piece
of
of
is
man
of substance, in the
collateral, as it is called
the borrower
fails to
market which
exchange.
And
it is
is
But
it
known
applies to a great
many bank
ensuring that
money
loans.
first in
"
and
domination.
of
because
it
is
often imperfectly
MONEY
96
aware
of
what the
effect of his
loan
is
likely to
be on the
value of
less it is
stability of industry.
Neverthe-
Siren voices.
And
happened.
The mast
had bound
and wafted him
the wax with which he had
its
:
socket,
The method
bank loans, and the manner in which they
affect prices, have been discussed in broad general terms
because they are standing features of any modern
banking system. But it will be more convenient, and
perhaps more interesting, to fill in the details, especially
as regards the part played by legal tender, and to deliver
our final reflections on the problem of Money, by means
perhaps, which will be out of date in 1940.
of creation of
which are
and the pens of
newspaper correspondents at the present day. The
of a discussion of certain specific questions
exercising the
minds
of practical persons
will
97
be freely
people
it,"
versies.
CHAPTER V
1.
question to which
worn
the Looking-glass.
Why
one.
Kingdom
so
was the
much
United
it
as our starting-point
Some
official figures
According to these
figures,
and the
above the 1913
food prices seemed natural, if
The
lag of retail
in
144 per
08
but subsequent
of
prices.
Thus
in
retail
its level
common
at the outbreak
These
volume
99
level.
view of the
all
therefore see
may
call
of the cause of
'
Errata
kScc
pp. 98
& 99 For
"
MONEY
100
now and
By
twice.
1920 the
first
which
Government control was still operative.
Secondly, and far more important, the actual volume
of exchangeable goods was still in the spring of 1920
smaller than in 1914. As everybody knows, the output
of a number of important things had fallen ofE seriously
during the war, and had not yet completely recovered.
One need only instance coal, of which the production in
this country was 20 per cent less in 1919 than in 1913,
and sugar, of which the consumption was 16 per cent
the second
less.
still
Among
is little
reason to doubt
and
of
There is thus
its old level.
common-sense view that the high
prices as compared with 1914 was due partly
level of
it
was not
This
also
is
obviously,
due
in part to
the
demand
for
money, and
still
remain essentially
unscathed.
2.
The second
Bradbury theory
America, which remained
possible
ground
of objection to the
101
money according
value, that in
had fallen by 60 or 70 per
to our definition
its
is,
25 per cent.
fair
prices,
rise in
rise in
gold prices.
The reason for this rise in gold prices (apart from the
world shortage of goods) is not far to seek. Most of the
belligerent countries, on entering the war, abandoned
the gold standard, in so far as they ever had it, without
a struggle in other words, they decided that they could
make shift to run their money-systems without the
luxury of gold. Further, as time went on most of them
:
wanted to make big purchases from the neutral coimand since they were in no position to part with
real goods, they used most of what gold they had for
tries
This ple-
practically closed
in the hopes
it
revised
them
MONEY
102
the value of
money
prices.'
And
if
is
to
is
is
and some
of the
have presented
itself
103
to anyone in whose
is
of preponderant importance,
it
also
borrowed from
and
was highly important to the Government that
:
sometimes argued that the great bulk of the existthe 5000 m. odd of "War Loan of various
kinds which is held at home could not still be operating
to keep prices high in 1920. The fact that five years
It
is
it is
bank loans
affect
prices.
by which
bank loan
MONEY
104
and
repayment of
borrowed directly or indirectly from the
banks, would have had a very striking effect in reducing
prices. Indeed it might have had no immediate effect
at all, for the money repaid by the G-overimient might
have been forthwith lent to somebody else (for instance,
It does not, however, follow that the
war
loan,
total
ability of buyers to
buy
and
it
liberates
some im-
sell.
The repayment
of
be small) that
it
(likely to
war stores
would have operated only
of the sale of
enterprise,
two ways.
loans
in this case.
105
we do not
would necessarily have
lowered prices considerably, or that if it had the process
would have been painless.
The existence of the great war debt also tended
indirectly to raise prices in another way, and that is by
providing an abundance of good collateral (p. 95). For
while the oSer of good collateral will not prevail on a
banker to desert altogether his views about the proper
factor contributing to keep prices high in 1920,
mean
him
to interpret
them
generously,
it is likely
and
to induce
likely therefore
bank money.
Here, then,
we
see one
and
way
in
Treasury
Price-Level.
MONEY
106
Bank
of
is
there
volume of bank
money in the country abnormally large as compared
with the volume of common money, and therefore to
a force at
maintaia
work tending
to keep the
prices.
107
action
is
very important, as
will
be readily understood
it
which pays
it
both swollen by 1,000,000, and the proportion of reit wOl see a chance,
conformably with
its
own rules, of
increasing
its
loans
by
MONEY
108
money
for tlie
repayment
of
Treasury
Bills
is,
which the
of which
for,
as
bank
If
loans.
we ask whether
is
not too
City journalists,
of
clear.
mournful fataUsm.
of England, the
It seems to be so treated
But they
bewail
it
by
with a kind
sary results on the assumption that bankers are constitutionally unable or unwiUing to modify, in the light of
new
Notes.
loans the
main
If
we
volume
109
are right
of
bank
bank
loans, or those to
the bank
bound to
common money
is
additional loans.
Common
buy
to
goods.
by
it
communicates
things, not so
itself
With
much, in the
first
instance,
by
by
it
common
increasing
MONEY
no
A
sellers to sell.
wholesale merchant
a lb.
have
will not,
it
if
manufacturer
he can help
if
it, sell
he can help
it,
And from
consequences follow.
First, those
two
common money
for they
make
money wages
raised
During the
years 1917-20, at any rate, these efforts were singularly
insistent and successful
with the result not merely of
to cope with the increased cost of living.
common
money required each week from the banks for the payment of wages, but perhaps also of an increase in the
proportion of the total volimie of chequeries withdrawn
for this purpose.
community
for
common money
it,
or
if
the course of
ment.
111
Bank
chequeries at the
of
shown
itself
(which are
but
to
all
all
the same
fulfil
its
it
keeps between
its
reserves
its deposits:
common money
resort
6.
we
it,
in
changed
money.
MONEY
112
The
actual arrangement^
by
by
wliich these
happy
results
many
and
if
effect
is
pursued,
it
means
that, as
It seems, however,
113
compels.
rise of prices.
however,
it
make any
by
which each successive rise in prices was set in motion.
But the knowledge, on the part of somebody, that they
could be created if necessary was an essential condition of
the expansion of bank loans which gave the initial
thrust
and their actual entry into the world served to
maintain a rise already achieved, by maintaining the
ability of the population, and especially of the workinglarge contribution to the initial thrust
But
in
5 for
MONEY
114
made
common money
in
the
rise in prices
this,
Treasury
ripening claims to
Bills, of
the chirruping, as
common money
it
and
reserves,"
money out
to
so
increase the
volume
of
bank
common
money.
so long as prices
volmne
of
loans were
When
bound ultimately
volume
of
bank
these
considerations
statistical relation
7.
Cause and Effect in Relation to Money and the PriceThere is one further objection which may be
Level.
it
may be
said, is
direction
is
estabHshed
but
in precisely the
115
theorists.
So far from the large volume of money
having been a cause of the high price-level, it was a
consequence of it.
We
additional
bank money,
just as the
movements
of retail
prices
Treasury notes.
who had
when
that
find the
As a
money.
rule,
however,
it
(so far as
MONEY
116
But
certain persons.
if
bank money had to be forthcoming jor other persons also. Let us take a concrete
example in order to get this conception clear. Suppose
a bank has made an additional loan of 10,000 to a shipbuilder to enable him to buy steel plates. The price of
steel plates will rise
and the additional bank money
created will pass from the shipbuilder to the steel-maker.
From the steel-maker some of it will pass on its way
rescinded,
additional
some
(let
us
say)
successively
to
the
and
followed up
from
by
champagne
But once
by, there
so on,
etc.
is
then of
and motor-cars,
wave is
But probably it wiU be for
of coal
another.
an addition to
their loans
successors.
To some
extent,
therefore,
additional loans,
like
made
money
117
available."
is
CHAPTER
VI
I ought to go
"
Productive Power.
To
it is
clear the
ground
perfectly free
value to do.
little
to first principles,
and to enquire a
that
we should
little
like
the value of
118
money
in the
normal
THE QUESTION OF THE STANDARD
sense
^its
value, that
to remain stable.
119
is,
That
is
money
value of
The
human
first of
effort
to behave.
and inconvenience,
of producing market-
deep-seated tendencies in
and
of
scientific research, of
organisation,
sources of supply,
is
new
command
the
real cost at
half,
and
and to the
and
oil)
as contrasted with
its
current income
MONEY
120
Thirdly,
the nations of
we cannot
accumulations
capital
to time, their
achievements
their
of
organisation
of
are forthcoming.
at present
To some
tendencies
money
is
foreseen
and allowed
A man who
contracts.
for in the
made
making
it
may
his
productivity
by
events,
be,
the
the
And
it is
of
fulfilled,
but that he
than he
human
may
effort.
There
supposing that
man
would
it
not be
by law
most
self-assertive
121
or custom,
Again, would
it
have proved
or other a share of
is
not
may
by some means
going, should be
demands
fail
chronic warfare
'
is
Cf.
C. 5512-2, QqOSlfiff,
MONEY
122
power.
upon the
price-level.
But
since
in fact population
we
shall
made, or
else
that
money
human
any exceptional
behave.
2.
123
it
still
system.
it
justify themselves to
asserted
that
additional
bank-loans
are
generally
making
is
this.
money and
rise in
it is
not so
by adding
to the
money demand
for
who
feel
by putting
confidence in
by adding
And
this fillip to
it is
convenient to
MONEY
124
forget it
but
it is
true
all
men
the same.
men
gently rising
reins of industry.
Is
emplojrment exchange
the shipyards
And
registers,
is it
and
fill
all
should be
left
on the
The
of rising prices
is
is
partly founded
salaried official
Even the
for he
is
busi-
spurred on
not only by real gains at the expense of his debentureholders and his doctor and even (with a little luck) of
his workpeople, but also by imaginary gains at the
expense of his fellow business men. It is so hard at first
to
believe
that
other
people
wiU
really
have the
much
illusory, the
spur
is
effective
But whether
real or
for in economic
as''
in
125
war finance
of
Governments
falls
business.
And
if
is
in the
hands
So
of a
minority, rewarded
is
for
them but
for the
community
And
as a whole.
it is
members
3.
if
in full
we were
the
Gold Standard.
its
work done.
On the
whole,
we should perhaps
keep the
either to
price-level stable.
money
known
as Private Enterprise
money-pump,
if
sagging unduly.
and
so
variously
MONEY
126
Now
let
and see
any certain prospect of
offers
any other
surely be that
it
does not.
these periods
permitting a great
the great
is
also true,
the war.
It
is
possible that
if
a number of countries
now
Layton, IntrodwUion
1909-13).
to the
Study
of Prices, p.
23 (carried on to
127
additions
made
of
dental
desire
for
personal adornment.
progressive
fall
may
peasant,
who has
this
It
is difficult
to regard as
is
MONEY
128
liable to
effects
true that
the
on gold-production
limits
banker.
It
is
gold
of
fell
industrially
considerably,
and, further,
If
the value
as
money because
clearly a
it
yeUow
is
system.^
Cannot we then
Having made so much progress
in the manipulation of token money, cannot we make
a little more ? We could not abolish banking and note 4.
devise a better
the
way
Gold Standard.
Cf.
out
against
p. 101.
the
artificiality
and
it
129
and
we wish
money.
For
preferable to
money
and whenever
it
money
as really
other below
its
economic
cost.
by
It
is
name
coal
of
or
some means or
not surprising
if
MONEY
130
their
own
cells.
had never
existed, it
If
a gold standard
obliterated.
Here
is
There
is
location
181
raft while it
at the bottom of the sea, and none of the present generation of the family has ever seen
it
fall
into disrepair,
of the island
will,
but
it
An
mediate course.
MONEY
132
on the part
but
is
efEected
And
suppose
This
is
by the genius
of
The suggestion in
The country's whole
money supply would be composed of token money
but the Government would be at all times under obhgation to give gold in exchange for money and money in
exchange for gold. The rate of exchange, however,
between money and gold the official price of gold
in thoughtful circles before the war.
its essential
outUnes
is
as follows
and
in such a
way
and
market price
fell.
above the
Consequently
people would have inducement
rise
Power
of
Money,
sell
to the Government,
133
to contrive
gold whose operation should in all circumstances exactly and immediately coimteract any
movement in the price-level. Further, the very rigidity
of the sliding-scale, which is one of the essential safeguards of the scheme, would prevent impromptu action
in cases where it might be valuable, and would oppose
official price of
obstacles to
any reconsideration,
in special circumstances,
Baffled
134
MONEY
It
may
be that
its
quest
is
vain,
come.
Meanwhile,
if
it is
all,
which
is
in practice
CHAPTER
VII
Caterpillar
was the
first
to speak.
chose,
moneys
of other countries.
behaviour
is
determined at present,
It
is
neces-
how that
and how it might
MONEY
186
and
to he worth 25 francs
would be muddled from the
start.
moment
and let us
man) that there
between them, and that
;
What
then
moneys
it is
called,
?^
how does
money has any value in terms
either
The answer
is
all in
it
of
terms of
who have
them
Utopians who desire to
money and
desire to dispose of
Journal, March,
December, 1919.
1916,
September,
137
The former class will include those who have sent goods
to England and sold them there, or have rendered other
services to residents in England, or are receiving interest
payments on
The
years.
capital invested in
England
in previous
who have
ways
of the services
money
English
are bought
and
money.
what
Now we
utopes
we can
As a
first
down
lay
that
tend to
settle at
exchange
And
the
is
as follows
MONEY
138
profit of 5 utopes.
And
in either case so
many
people
will
of
pounds
till it
our proposition
Thus
moneys
of the
And
this corre-
spondence
is
(if
England
is
buy wheat
Utopia.
in
Now
and
may
be altered.
its
139
let
see
us
how
Suppose
supply of money.
many
so
of
But
in terms of utopes,
pound exchanges
for twice as
many
of adjustment
is
utopes as before.
going on there
is
While
this process
a stream of goods
old rate.
spondiQC
degrees.
compaEa^ye
(so far or so
Here are
alteration in prices
MONEY
140
:i
141
difEerent
results.
movements
of the latter
(This
kept
tion
is
specially relevant
artificially
;
and
movements
of the exchanges.
use the retail prices of food, which are very unsatisfactory for our purpose, both because they are tinkered
is
closer in the
month
in
little
to Utopia.
Other Influences on
3.
Utopia greatly increases
and that
its
Exchanges.
its
way
Suppose that
money supply
price-level doubles
England.
the
as before,
as before,
but that
of exporting goods
from
MONEY
142
is
no longer
available.
It
is
foreign
money
is
very purpose of
mean
It might, however,
would
clearly
143
manage
it,
some
of their
number may
money supply
against
them
to
expansion of their
an extent out
own money
And
exchanges
of proportion to the
supply,
and
still
more out
Now
this
position of
is
Germany
in the eighteen
months
after the
MONEY
144
reason
it
the efforts of
German
capitalists to
mark
out of
We
all
in
proportion to both.
it is
perfect storehouse of
But some
the exchanges.
work
in the case of
bound
to be reflected in a progressive
its
value,
fall of
that
is,
the sterUng
in
terms of
pounds.
4.
Some
145
moment
relation
that
is
money
the war.
coimtry than they were before the war proves that that
country
its
is still
neighbours.
England
the United
if
is
This
is
not true
either.
its
payments to
It
is
true that
payments to
is low compared to
was in 1914 is no proof that such a thing is
happening, and as a matter of fact at present there is no
what
it
it is.
which
is
though a coimtry
payments to its
its
MONEY
146
itself.
rate
of
pounds
value.
hope
But even if
in the
of
who
will
buy
an ultimate
outright for
it
rise in its
sterhng
little
disposition in
England
Cf.
is
no limit to
it fell,
147
fall
and
Utopian money,
its
money abroad
by
Germany.
Thanks to
it
Germany was
is
German money
scarcely less of a
in
menace than an
must not
by submitting
falling
fate
exchange
is
it
were,
right to be extrava-
much
much
MONEY
148
continue to retain
its
for internal
money
stable
the value of
its
national
money
This
it
though in case
somewhat
much
its price-level
it
dis-
national
It
money
if it
would be a flow
international
any great
it
in either direction.
allowed too
of
149
of
goods into
money
to
pay
its
for
money,
it
carefully.
it
would
Further,
if
the
of course only
of
in national
money
all
dealings
what
principles
is it
money
that
is
down
But unfortunately if
some countries would
this
find
MONEY
150
national
money
money
way the International
if
the only
movements
And
its
of general prices.
in fact it
international
money
for
an
new form
body need deny that the making
devices for facilitating a
of loan.
Now
no-
whether
of loans
has
its
place
It will not
have
151
gold standard would keep in effect a stock of international money, which though not stable in value would
be readily acceptable in all the other countries at a
known rate.
in
England
(say)
sent to England,
and gold
(in the
absence of sufficient
The
price-levels
means.
In point of fact, it would probably not even be necessary for goods to flow to England. To understand this,
we must glance for a moment at a subject on which more
will have to be said in the next chapter, namely, the
actual method by which English bankers normally
enforce the decisions at which they arrive about the
volume of their loans. That method is to vary the rate
and the
of interest at which they are willing to lend
Bank of England, which shares with the Government
the responsibility of keeping them supplied with legal
;
tender,
fall in
is
this.
Now these
in the rate of interest chokes them off.
borrowers comprise not only English business men but
also foreigners. If the rate of interest is low in England
MONEY
152
compared
as
find that
it
pounds
will
turn
the
American
exchange
against
England.
of
in
England to
For
England than elsewhere, it
indicates that the English banks are creating money too
freely, and therefore probably that the rate of interest
which they are demanding is lower than that prevailing
elsewhere
and the reaction on the rate of exchange
througli the rate of interest and the volume of foreign
borrowings is more direct and speedy than that through
the price-level and the flow of goods.
Now under a gold standard this turn of the exchange
against England would alarm the English banking
system for if it were to progress far it would mean in
effect that the foreign borrowers would use their claims
upon English money to draw gold from London, rather
than sell those claims in their own countries on dis-
advantageous terms.
And
For an account
thesje
THE FOREIGN EXCHANGES
reserves the English banking-system
of interest, thus
stemming the
choking
off
would
153
the exchange.
directly at heart
the
that those
who remember
go back to
it.
If,
indeed,
it
we
seemed
it,
in Britain should
likely that
no other
MONEY
154
that
it is
country which
is
we should
It
is
most
in fact
all
likely to
aim
and
it is
convenient that
standard.
We
decided
(p. 66)
could
is,
in case, that
sell
their price-levels
began to
achieved
and
rise
out of proportion to
worldstability would be
human
more
nature
is
rational
ripe for
would be easier.
For ourselves, if we went so far, we should probably
have to go further. London has acted so long and so
it
successfully as the
money
it is
And
it
155
reasonable
way
of doing business.
CHAPTER
VIII
MONETARY POLICY
" Well, in our country," said Alice, still panting a little,
" you'd generally get to somewhere else ^if you ran very
fast for a long time, as we've been doing."
" A slow sort of country " said the Queen. " Now,
here, you see, it takes all the running you can do, to keep
in the same place. If you want to get somewhere else,
"
you must run at least twice as fast as that
" I'd rather not try, please " said Alice.
Through
1.
Prices.
the Looking-glass.
we
British
What
is
it
Cf.
This, however,
is
156
p. 347.
MONETARY POLICY
view of what
objections to
The
first
desirable.
is
it,
157
question to consider
fall in
is
this
stages.
What
has been
we should need
to
Now
to answer
make a thorough
things.
is
one of the symptoms of trade depression, can be discussed, if it cannot be completely explained, in terms of
the analysis which has been employed in this book. We
can connect the fall in the price-level which began in
1920 with changes both in the conditions of demand for
of the
show
from its meagre level of the postthere have been big world harvests of
armistice year
wheat and cotton and other things, and in the United
Kingdom at all events industrial plants have been
getting back into respectable condition. Furthermore,
the desire of merchants and traders of all kinds to
world's agriculture and industry has begun to
signs of recovery
:
1.
MONEY
158
The change
first
sight
in the quantity of
much
less
money
easy to detect.
available
is
at
Publishd figures
be recalled,
differs
strike
had
"
to
satisfied
its
most
insistent
it
money
actually in existence as
to be likely to
come
by the quantity
into existence.
It
was
believed
in part the
MONETARY POLICY
159
backwards.
For
all
is
no wonder
if
in the
down
if
I shall
How
2.
is
The
this
nounced
What
fall
in the price-level
Let us suppose,
first,
fall is
MONEY
160
money
means
now
be,
reduced by
on existing private
taken, we must regard
But
wealth.
is
Next
let
^"
fall in
the
MONETARY POLICY
161
less serious
who hold
MONEY
162
For
let
us consider
how it
operates.
caught in their
wire entanglement.
how soon
strives,
with
own
to the stream,
and
tries to
Commons.
young and ambitious or idealistic he keeps the
rolling and the flag flying as best he can. If he is
he
ball
is
and
In any case,
Early or
late,
He bows
to fate,
output of his
MONETARY POLICY
Thus two things happen which
product.
cause
163
(it is
believed)
its
nose, as
it
were, to spite
its face.
And men
trained
Now
price-level
which
is
It
is
accompanied by a corresponding
carry
all
is
not.
While,
graph.
is
is
indeed endorsed by
28, 1921.
MONEY
164
loom larger
in
shadow than
it
stance.
It
is
output below
its
possible level
is less
grave
if
the actual
standard rates.
not have
some
of
all
the
ployment.
fall in prices is
arms.
4.
is this.
The next
have the forces
Price-Levels.
How
far
Kingdom
And how
MONETARY POLICY
165
the world in 1920 in ushering in the fall of prices. Increasing productive capacity, unloading of stocks,
hesitation in buying, all these things have been at least
sterling
pound to
was before the
war
and suppose for a moment the Government
attempted to give effect to that decision by simply
declaring that it was prepared to give 113 grains of fine
gold in exchange for a pound to anyone who asked it to
do so. Then it would at once become profitable for
people in England to get hold of gold on an enormous
scale, buy goods in (say) the United States and sell them
in England, and with the pounds so obtained repeat the
like the
it
process.
is
by
creation of
fall in
the price-
level
fall
to
MONEY
166
pound from
its
present to
its
tlie
Knowing what we
two sections about the results of
falling prices, is this a conclusion which we are prepared
to face with equanimity ? Are we willing to engineer
must
have learnt
prices
fall
by nearly one-haK.
in the last
fall of
Now
Some
will
two
possible answers.
sheep as a lamb
that since
are in for an
wind,
ill
(to
we should not
it
may blow
it
at any rate
who remain
at work.
human
these
are the
terrible figure
with the
MONETARY POLICY
1C7
extra engineered
fall
in prices.
We may
well pause
cent
to enable
it
to over-
American
its
rival.
social revolution.
5.
Revaluation of the
Pound
Sterling.
Such, then,
is
restoring to the
and
dollars.
It
is,
case so strong as to
tell
some
of, say,
90 ^ grains of
four-fifths of the
fine gold
pre-war figure
a gold standard
MONEY
168
be
could
established
wind.
of this
any kind
of gold
reasonable men.
generally
standard
But
dismissed
for
as
is
now
generally admitted
by
is still
Against
it
is
arrayed
all
those
who
Again, those
who
lent to
it
no equitable right to be
revaluation of the
of their chance of
would be up in arms
of Englishmen.
And
less rancour,
a similar posture of
injured virtue.
Now
makes
there
it so.
whether to
is
If
fix
indeed
MONETARY POLICY
all
we should be compelled to
its
169
pre-war figure,
pounds
welfare
sterling
forces
and not of
gold,
reserves of gold, in
manifest
itself
descending
downward trend
But
will
mean than
in
Now it
may
should
rise
ardour of business
men
MONEY
170
market, but accurately reflecting the relative purchasingpower of the moneys of the two countries and we might
:
money men.
In these matters of prices then
The end men looked
And
a path
is
for
cometh
there where no
not.
man
thought.
pound
its
old
fall in
On
no such haven of
possible that
at
more
all,
a gold standard
It
is
is
even
if
VI was sound,
may
public opinion a
permit us to take heroic measures,
for a worthier
end
In any
might after
6.
one
all
is
have to be rescinded.
MONETARY POLICY
171
requires mention.
price-level,
there will
quantity of
ineffective
or
up by an appropriate
loan policy on the part of the banks. Even a scheme like
mainly through
loans of banks.
its effects
expand or to
effective,
curtail the
the price at which they are offered that is, on the rate
of interest demanded by the banks. By making suffi-
MONEY
172
and frequent
ciently bold
effect
in favour of this
argument
loanable
is
that
sum
way
it
in the
6,
there
of doing things.
The general
hands
The
that
its
which are
which a
rise in
and
boom,
for checking
first sight
The first
" who when
consists in
prices
rising
are
them
MONETARY POLICY
173
It must suffice here to say that speculasome commodity of which there is likely to be
a future shortage renders at any rate an incidental
but the kind of speculative
service to the community
activity which characterised the winter of 1919-20
of this
book.
tion in
prices
and so
of this kind.i
The second
class
of
commendable,
but in
its
boom
is
in its nature
consequences
disastrous.
hardly
who
more
less
are en-
gaged in constructional enterprise, especially the construction of instruments of transport. Such loans take
a peculiarly long time in increasing the flow of consumable goods
during their currency, therefore, they press
with peculiar severity on the community's real income
and accumulation of consumable goods, and exercise a
;
Of.
MONEY
174
more
and
quickly,
will
the
moment
afEord.'^
7.
First, it does
made
is
abroad
it is
accurately
or
present costs
to
;
bring into
close
comparison with
really requires
of the railway
is
their
a Channel
system or a
Cf. Cassel,
Memorandum
MONETARY POLICY
and if the quality
more efiectively
175
or whatever
coffee,
it
is
may
world
motor trade)
with which
it
tackles
it.
ment must be
reinforced
by another.
Production nor-
money.
ment which
Now we may
it is
is
an arrange-
that the
bold
MONEY
176
is
wrong.
Now
once such a
vexatious to hamper
its
down
argument
is
much
of evasion.
bank
to a par-
The
first
loans, since
is
England to-day,
hands of a few
in the
MONETARY POLICY
177
call
is
8.
to
most
day.
1
Some
of the pressing
It
is
reference has
monetary problems
of the present
Cf. PhiUips,
Bank
MONEY
irs
solved rightly
but
it
real
economic
is
much from
their solution.
inadequate
evils of society
we
The
production
themselves.
No tinkering with counters will take us
very far towards the discovery of an industrial system
which shall supply both adequate incentives to those
plan,
and peace
of
mind
to those
Printed
in
Great Britain at
William Brendon
&
Son, Ltd.
who
II.
College, Cambridge.
HENDERSON,
Cambridge
MONEY
ROBERTSON,
By P. H.
G. F.
SHOVE, M.A.
PUBLIC FINANCE
By M.
ROBINSON.
C.
Lecturer
in
Economics
Manchester University
Director of Studies
nomics at Newnham College, Cambridge.
;
in
at
Eco-
BARBARA WOOTTON,
Economics
at
Director of Studies in
POPULATION
By
HAROLD WRIGHT,
Cambridge;
Member
M.A.
Pembroke
College,
Fishery Research.
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