A Tract on Monetary Reform

by John Maynard Keynes

One single country—Czechoslovakia—has made the experiment on a modest but sufficient scale. Comparatively free from the burden of internal debt, and free also from serious budgetary deficits, Czechoslovakia was able in the course of 1922, in pursuance of the policy of her Finance Minister, Dr. Alois Rasin, to employ the proceeds of certain foreign loans to improve the exchange value of the Czech crown to nearly three times the rate which had been touched in the previous year. The policy has cost her an industrial crisis and serious unemployment. To what purpose? I do not know. Even now the Czech crown is not worth a sixth of its pre-war parity; and it remains unstabilised, fluttering before the breath of the seasons and the wind of politics. Is, therefore, the process of appreciation to continue indefinitely? If not, when and at what point is stabilisation to be effected? Czechoslovakia was better placed than any country in Europe to establish her economic life on the basis of a sound and fixed currency. Her finances were in equilibrium, her credit good, her foreign resources adequate, and no one could have blamed her for devaluating the crown, ruined by no fault of hers and inherited from the Habsburg Empire. Pursuing a misguided policy in a spirit of stern virtue, she preferred the stagnation of her industries and a still fluctuating standard.[41]

[41] I cannot criticise the work, in his second term of office (1922), of Dr. Rasin, now fallen by the hand of an assassin, without reference to his great achievement during his first term (1919) in rescuing his country’s currency from the surrounding chaos. The stamping of the Austrian notes and the levy on holders of titles to money which accompanied it was the only drastic, courageous, and successful measure of finance carried through anywhere in Europe at that epoch; the story of it from Dr. Rasin’s own pen can be read in his The Financial Policy of Czecho-Slovakia. Before he had finished other influences became dominant. But, when in 1922 this austere and disinterested Minister returned to office, he missed, in my judgment, his opportunity. He could have completed his task by establishing the currency on a fixed and stable basis, instead of which he used his great authority to disorder trade by a futile process of Deflation.

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If the restoration of many European currencies to their pre-war parity with gold is neither desirable nor possible, what are the forces or the arguments which have established this undesirable impossibility as the avowed policy of most of them? The following are the most important:

1. To leave the gold value of a country’s currency at the low level to which war has driven it is an injustice to the rentier class and to others whose income is fixed in terms of currency, and practically a breach of contract; whilst to restore its value would meet a debt of honour.

The injury done to pre-war holders of fixed interest-bearing stocks is beyond dispute. Real justice, indeed, might require the restoration of the purchasing power, and not merely the gold value, of their money incomes, a measure which no one in fact proposes; whilst nominal justice has not been infringed, since these investments were not in gold bullion but in the legal tender of the realm. Nevertheless, if this class of investors could be dealt with separately, considerations of equity and the expedience of satisfying reasonable expectation would furnish a strong case.

But this is not the actual situation. The vast issues of War Loans have swamped the pre-war holdings of fixed interest-bearing stocks, and society has largely adjusted itself to the new situation. To restore the value of pre-war holdings by Deflation means enhancing at the same time the value of war and post-war holdings, and thereby raising the total claims of the rentier class not only beyond what they are entitled to, but to an intolerable proportion of the total income of the community. Indeed justice, rightly weighed, comes down on the other side. Much the greater proportion of the money contracts still outstanding were entered into when money was worth more nearly what it is worth now than what it was worth in 1913. Thus, in order to do justice to a minority of creditors, a great injustice would be done to a great majority of debtors.

This aspect of the matter has been admirably argued by Professor Irving Fisher.[42] We forget, he says, that not all contracts require the same adjustment in order to secure justice, and that while we are debating whether we ought to deflate to secure ideal justice for those who made contracts on old price levels, new contracts are constantly being made at the new price levels. An estimate of the volume of contracts now outstanding, classified according to their age, would show that some contracts are a day old, some are a month old, some are a year old, some are a decade old, and some are a century old, the great mass, however, being of very recent origin. Consequently the average, or centre of gravity, of the total existing indebtedness is probably always somewhat near the present. Before the war, Professor Fisher estimated, very roughly, that contracts in the United States were on the average about one year old.

[42] In his article “Devaluation versus Deflation,” published in the eleventh Manchester Guardian Reconstruction Supplement (Dec. 7, 1922).

When, therefore, the depreciation of the currency has lasted long enough for society to adjust itself to the new values, Deflation is even worse than Inflation. Both are “unjust” and disappoint reasonable expectation. But whereas Inflation, by easing the burden of national debt and stimulating enterprise, has a little to throw into the other side of the balance, Deflation has nothing.