A Tract on Monetary Reform

by John Maynard Keynes

II. Currency Depreciation versus Capital Levy

We have seen in the preceding section the extent to which a Government can make use of currency inflation for the purpose of securing income to meet its outgoings. But there is a second way in which inflation helps a Government to make both ends meet, namely by reducing the burden of its pre-existing liabilities in so far as they have been fixed in terms of money. These liabilities consist, in the main, of the internal debt. Every step of depreciation obviously means a reduction in the real claims of the rentes-holders against their Government.

It would be too cynical to suppose that, in order to secure the advantages discussed in this section, Governments (except, possibly, the Russian Government) depreciate their currencies on purpose. As a rule, they are, or consider themselves to be, driven to it by their necessities. The requirements of the Treasury to meet sudden exceptional outgoings—for a war or to pay the consequences of defeat—are likely to be the original occasion of, at least temporary, inflation. But the most cogent reason for permanent depreciation, that is to say Devaluation, or the policy of fixing the value of the currency permanently at the low level to which a temporary emergency has driven it, is generally to be found in the fact that a restoration of the currency to its former value would raise the recurrent annual burden of the fixed charges of the National Debt to an insupportable level.

There is, nevertheless, an alternative to Devaluation in such cases, provided the opponents of Devaluation are prepared to face it in time, which they generally are not,—namely a Capital Levy. The purpose of this section is to bring out clearly the alternative character of these two methods of moderating the claims of the rentier, when the State’s contractual liabilities, fixed in terms of money, have reached an excessive proportion of the national income.

The active and working elements in no community, ancient or modern, will consent to hand over to the rentier or bond-holding class more than a certain proportion of the fruits of their work. When the piled-up debt demands more than a tolerable proportion, relief has usually been sought in one or other of two out of the three possible methods. The first is Repudiation. But, except as the accompaniment of Revolution, this method is too crude, too deliberate, and too obvious in its incidence. The victims are immediately aware and cry out too loud; so that, in the absence of Revolution, this solution may be ruled out at present, as regards internal debt, in Western Europe.

The second method is Currency Depreciation, which becomes Devaluation when it is fixed and confirmed by law. In the countries of Europe lately belligerent, this expedient has been adopted already on a scale which reduces the real burden of the debt by from 50 to 100 per cent. In Germany the National Debt has been by these means practically obliterated, and the bond-holders have lost everything. In France the real burden of the debt is less than a third of what it would be if the franc stood at par; and in Italy only a quarter. The owners of small savings suffer quietly, as experience shows, these enormous depredations, when they would have thrown down a Government which had taken from them a fraction of the amount by more deliberate but juster instruments.

This fact, however, can scarcely justify such an expedient on its merits. Its indirect evils are many. Instead of dividing the burden between all classes of wealth-owners according to a graduated scale, it throws the whole burden on to the owners of fixed interest bearing stocks, lets off the entrepreneur capitalist and even enriches him, and hits small savings equally with great fortunes. It follows the line of least resistance, and responsibility cannot be brought home to individuals. It is, so to speak, nature’s remedy, which comes into silent operation when the body politic has shrunk from curing itself.

The remaining, the scientific, expedient, the Capital Levy, has never yet been tried on a large scale; and perhaps it never will be. It is the rational, the deliberate method. But it is difficult to explain, and it provokes violent prejudice by coming into conflict with the deep instincts by which the love of money protects itself. Unless the patient understands and approves its purpose, he will not submit to so severe a surgical operation.

Once Currency Depreciation has done its work, I should not advocate the unwise, and probably impracticable, policy of retracing the path with the aid of a Capital Levy. But if it has become clear that the claims of the bond-holder are more than the taxpayer can support, and if there is still time to choose between the policies of a Levy and of further Depreciation, the Levy must surely be preferred on grounds both of expediency and of justice. It is an overwhelming objection to the method of Currency Depreciation, as compared with that of the Levy, that it falls entirely upon persons whose wealth is in the form of claims to legal-tender money, and that these are generally, amongst the capitalists, the poorer capitalists. It is entirely ungraduated; it falls on small savings just as hardly as on big ones; and incidentally it benefits the capitalist entrepreneur class for the reasons explained in Chapter I. Unfortunately the small savers who have most to lose by Currency Depreciation are precisely the sort of conservative people who are most alarmed by a Capital Levy; whilst, on the other hand, the entrepreneur class must obviously prefer Depreciation which does not hit them very much and may actually enrich them. It is the combination of these two forces which will generally bring it about that a country will prefer the inequitable and disastrous courses of Currency Depreciation to the scientific deliberation of a Levy.

There is a respectable and influential body of opinion which, repudiating with vehemence the adoption of either expedient, fulminates alike against Devaluations and Levies, on the ground that they infringe the untouchable sacredness of contract; or rather of vested interest, for an alteration of the legal tender and the imposition of a tax on property are neither of them in the least illegal or even contrary to precedent. Yet such persons, by overlooking one of the greatest of all social principles, namely the fundamental distinction between the right of the individual to repudiate contract and the right of the State to control vested interest, are the worst enemies of what they seek to preserve. For nothing can preserve the integrity of contract between individuals, except a discretionary authority in the State to revise what has become intolerable. The powers of uninterrupted usury are too great. If the accretions of vested interest were to grow without mitigation for many generations, half the population would be no better than slaves to the other half. Nor can the fact that in time of war it is easier for the State to borrow than to tax, be allowed permanently to enslave the taxpayer to the bond-holder. Those who insist that in these matters the State is in exactly the same position as the individual, will, if they have their way, render impossible the continuance of an individualist society, which depends for its existence on moderation.