MONEY OR GOODS?

December, 1918

[Footnote 1: This was the latter of two articles contributed to the_Times Trade Supplement in answer to a series in which Mr ArthurKitson had attacked our banking and currency system suggested aninconvertible paper currency.]

"Boundless Wealth"--Money and the Volume of Trade--The QuantityTheory--The Gold Standard--How is the Volume of Paper to beregulated?--Mr Kitson's Ideal.

In the November Trade Supplement an endeavour was made to answer MrKitson's rather vague and general insinuations and charges against ourbankers concerning the manner in which they do their business. Nowlet us examine the larger and more interesting problem raised by hiscriticism of our currency system.

In his article in the June Supplement he told us that "if theBritish public had any grasp of the fundamental truths of economicscience they would know that a future of boundless wealth andprosperity is theirs." This is a cheery and encouraging view and, letus hope, a true one. But, that boundless wealth can only be got if wework for it in the right way. Can Mr Kitson show it to us, and whatare these "fundamental truths of economic science"? It is easier totalk about them than to find any two economists who would give anexactly--or even nearly--similar list of them.

Mr Kitson glances "ata few elementary truths." "Wealth," he says, "is the product of twoprime factors, man and Nature, generally termed labour and land. Withan unlimited, or practically unlimited, supply of these two factors,how is it that wealth is and has been hitherto so comparativelyscarce?" But is the supply of "man" unlimited in the sense of manable, willing, and properly trained to work? And is the supply of"Nature" unlimited in the sense of land, mines, and factories fullyequipped with the right machinery and served and supplied by adequate means of transport? Surely the failure In production on which MrKitson so rightly lays stress is due, at least partly, to lack ofgood workers, good organisers, good machinery, and good transport facilities. Workers who restrict output, employers who despise scienceand cling to antiquated methods, the opposition of both classes to newand efficient equipment, and large tracts, even of our own land, stillwithout reasonable transport facilities, have something to do withit. And lack of capital--this answer to the question Mr Kitson floutsbecause, he says, "since capital is wealth," to say that "wealth isscarce because capital is scarce is the same as saying that wealth isscarce because it is scarce." But is it not a "fundamental truth ofeconomic science" that capital is wealth applied to production? Wealthand capital are by no means identical. When a well-known shipbuildingmagnate laid waste several Surrey farms to make himself a deer-park,the ground that he thus abused was still wealth, but it is no longercapital because it has ceased to produce good food and is merely apleasant lounging-place for his lordship. May not the failure ofproduction be partly due to the fact that, owing to the extravagant and stupid expenditure of so many of the rich, too much work is putinto providing luxuries--of which the above-mentioned deer-park is an example--and too little into the equipment of industry with the plantthat it needs for its due expansion?

Mr Kitson's answer is much easier. According to him, instead ofworking better, organising better, and putting more of our output intoplant and equipment and less into self-indulgence and vulgarity allthat we have to do to work the necessary reform is to provide moremoney and credit. Since, he says, under the industrial era--

"All goods were made primarily for exchange or rather for sale ... itfollowed, therefore, that production could only continue so long assales could be effected; and since sales were limited by the amount ofmoney or credit offered, it followed that production was necessarilylimited by the quantity of money or credit available for commercialpurposes."

But is this so? If goods are produced more rapidly than money, it doesnot follow that they could not be sold, but only that they would havebeen sold for less money. The producer would have made a smallerprofit, but on the other hand the cheapening of the product would haveimproved the position of the consumer, the cheapening of materialswould have benefited the manufacturer, and it is just possible thatproduction, instead of being limited, might have been stimulated bycheapness due to scarcity of currency and credit, or, at least, mighthave gone on just as well on a lower all-round level of prices. On thewhole, it is perhaps more probable that a steady rise in prices causedby a gradual increase in the volume of currency and credit would havethe more beneficial effect in stimulating the energies of producers.But Mr Kitson's argument that the volume of currency and credit imposes an absolute limit on the volume of production is surely muchtoo clean-cut an assumption. This absolute limit may be true, ifcurrency cannot be increased, with regard to the aggregate value inmoney of the goods produced. But money value and volume are two quitedifferent things. If our credit system had not been developed as ithas, and we had had to rely on actual gold and silver for carrying onall production and trade, it does not by any means follow that tradeand production might not have been on something like their presentscale in the matter of volume and turnover; but the money value wouldhave been much smaller because prices would have been all round at amuch, lower level.

This contention is based on what is called the "Quantity Theory of Money." This theory Mr Kitson wholeheartedly believes, so that this isnot a point that has to be argued with him. "The value of money,"he says, "as every student of economics knows, is determined by thequantity of money in use and its velocity of circulation." Quite so.If you increase the amount of money faster than that of goods, moremoney has to be given for less goods; the value, or buying power, ofmoney is depreciated and prices go up. The present war has given anexcellent example of this process at work. All the warring Governmentshave printed acres of paper money, and have worked the credit systemwith profligate energy; and so we have a huge increase in currencyand credit, along with little or no increase (probably a decrease) inconsumable goods, and prices have soared like rockets all over theworld. In neutral countries the rise has been as bad as anywhere,because the neutrals have been choked with the gold that the warringPowers exported, putting paper in its place. So we see that the volumeof money, on the theory so emphatically expounded by Mr Kitson andendorsed by common-sense--as long as we are careful to includeall forms of money that are taken in exchange for goods in thedefinition--reflects itself at once in prices. If money does notincrease in quantity and goods do, then prices go down, and afterthe necessary adjustments are made in rates of wages and salaries,a larger trade can be done with the same amount of money at a lowerlevel of values. The volume of money thus limits the aggregate valueof trade, but not its aggregate volume. Periods of falling prices arenot encouraging to producers, and they put too much advantage into thehands of the rentier--the man who lives on fixed interest; on theother hand, they are generally believed to be in favour of the workingclasses, since reductions in wages generally lag behind the fall inprices, which means increased buying power to the wage-earner.

Mr Kitson's view that the volume of trade is limited by the quantityof currency and credit is thus based on confusion between volume andvalue. Moreover, it follows also from the "Quantity Theory of Money,"which he holds, that if he applies his remedy and multiplies currencyand credit as fast as he appears to want to, the result will be astill further depreciation in the buying power of money, and a furtherrise in prices and an increase in all the bitterness, discontent,suspicion, and strikes that the rise in prices has already causedduring the war. Is this a prospect to pray for? Surely if we want toenjoy "boundless wealth and prosperity" the way to do so is to turnout goods--things to eat and wear and enjoy--and not to multiplymoney, thereby merely depreciating its value, on Mr Kitson's ownadmission. He thinks that "nothing but an abundant supply of currencyin the shape of legal tender notes and bank credit, could have enabledus to undertake successfully such unprecedented burdens" as we haveborne during the war. But it may equally well be argued that we haveborne these burdens because we worked harder than ever before to turnout the needed stuff, organised better, used our machinery to itsfull power, and spent less of our product on luxuries; and that theabundant currency, by forcing up prices, immensely increased thecost of the war and produced industrial friction which several timesbrought us unpleasantly close to disaster.

Mr Kitson, however, uses the "Quantity Theory of Money"--the doctrinethat the value or buying power of money varies according to itsquantity in relation to that of the goods that it buys--chiefly as astick wherewith to beat the Gold Standard. He shows, very easily andtruly, that it is absurd to suppose that the value of the monetarygold standard is invariable. Thereby he is only beating a dead horse,for no such argument is nowadays put forward. The variability of thegold standard of value is acknowledged, whenever a fluctuation in thegeneral level of commodity prices is recorded. But gold is the basisof our credit system, and of those of all the economically civilisedcountries of the world, not because its value is believed to beinvariable, but because it is the commodity which is universallyaccepted, in such countries and in normal times, in payment of debts.This quality of acceptability it has got largely by custom andconvention. Mr Kitson speaks of the "selection of gold by the world'sbankers as the basis for money and credit." But it was selected ascurrency by common custom long before bankers were heard of. And itwas selected because of its permanence, ductility and other qualities,especially its beauty as ornament, which made man, eager to adornhimself, his women-kind, and the temples of his gods, always readyto accept it in payment, knowing also that, because of thisacceptability, he would always be able to exchange it into any goodsthat he wanted.

Any other commodity that earned this quality of universalacceptability could do the work of gold just as well. But until onehas been found, gold, as long as it keeps that quality, holds thefield. And bankers use it as the basis for money and credit, notbecause, as Mr Kitson says, they selected it owing to its scarcity,but because this quality of universal acceptability made it the thingin which all debts, both at home and abroad, could be paid. "Given,"says Mr Kitson, "a self-contained trading community with a certainquantity of legal tender, just sufficient for its commercial needs,and it makes no difference either to the value or efficiency of themoney or to the trade affected whether it be made of metal or paper."Quite so, but trading communities are not self-contained. Theircurrency has to be convertible into something acceptable abroad, andthat something is, at present, gold. It is possible that the worldmay some day evolve an international paper currency that will beeverywhere acceptable. But such an ideal requires a growth of honestyand mutual confidence among the nations that puts it a long way off.And how is its volume to be regulated?

This question is all-important, whether the currency be national orinternational. Mr Kitson speaks of a currency "just sufficient" forthe community's commercial needs. Who is to decide when the currencyis just sufficient? The Government? A sweet world we should live in,if among other party questions, Parliament had to consider multiplyingor contracting the currency every year or every month, with all theinterests that would be affected by the consequent rise or fall inprices, lobbying, speech-making, and pulling strings to work theoracle to suit their pockets. And, according to Mr Kitson's view, thatthe volume of trade is limited by the supply of currency, this volumewould then depend on the whims of the House of Commons, half themembers of which would probably be innocent of a glimmering ofunderstanding of the enormously important question that they weredeciding. The gold standard, which makes the course of prices depend,more or less, on the chances of digging up a capricious metal from thebowels of the earth, has its obvious drawbacks; but it is a clean andsensible business compared with making them depend on the caprices ofParliament, complicated by the political corruption that would be onlytoo likely to follow the putting of such a question into the hands ofour elected and hereditary representatives and rulers.

Such, however, seems to be the Promised Land to which Mr Kitson wantsto lead us. Thus he propounds his remedy. "The remedy is surelyobvious. Divorce our legal tender from its alliance with goldentirely, so that the supply of money and credit for our home trade isno longer dependent upon our foreign trade rivals. Base our currencyupon the national credit ... treat gold as a commodity only, for thesettlement of foreign trade balances."

This passage in his article in the September Supplement tells uswhat to do. Keep gold, out of deference for foreign prejudice, for thesettlement of foreign trade balances, but make as much paper money asyou like for home use. As our legal tender money is to be "divorcedentirely from its alliance with gold" it clearly cannot be convertibleinto gold. So that apparently we shall have a paper pound and a goldpound (the latter for foreign use) with no connection between them.This stage of economic barbarism has been left behind now even bysome of the South American republics. The paper pound, based on thenational credit, can be multiplied as fast as our legislators thinkfit. If they do not multiply it fast enough, Mr Kitson will tell themthat they are strangling trade, because the volume of productionis limited by the amount of money available. At the same time bankcredits will be multiplied indefinitely because, as was shown in theNovember Supplement, Mr Kitson supports a view that the averagebusiness man holds (according to him) that he ought to have a legalright to as much credit as he wants. With the Government printingpaper to please its supporters, with the banks obliged by law to givecredit to every one who asks for it, and with prices soaring on everyaddition to currency and credit, what a country this will be to livein, and what a life will be led by those who have to compile andwork out the index numbers of the prices of commodities! Some of us,perhaps, will prefer the jog-trot conservatism of Lord Cunliffe'sCurrency Committee, who in their recently issued report[1] (whichevery one ought to read) recommend that gold should not be used forcirculation at present, but that endeavours should be made towardsthe cautious reduction of our swollen paper currency, and that itsconvertibility into gold should be maintained.

[Footnote 1: Cd. 9182, 2d.]


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