2. The restoration of a currency to its pre-war gold value enhances a country’s financial prestige and promotes future confidence.
Where a country can hope to restore its pre-war parity at an early date, this argument cannot be neglected. This might be said of Great Britain, Holland, Sweden, Switzerland, and (perhaps) Spain, but of no other European country. The argument cannot be extended to those countries which, even if they could raise somewhat the value of their legal-tender money, could not possibly restore it to its old value. It is of the essence of the argument that the exact pre-war parity should be recovered. It would not make much difference to the financial prestige of Italy whether she stabilised the lira at 100 to the £ sterling or at 60; and it would be much better for her prestige to stabilise it definitely at 100 than to let it fluctuate between 60 and 100.
This argument is limited, therefore, to those countries the gold value of whose currencies is within (say) 5 or 10 per cent of their former value. Its force in these cases depends, I think, upon what answer we give to the problem discussed below, namely, whether we intend to pin ourselves in the future, as in the past, to an unqualified gold standard. If we still prefer such a standard to any available alternative, and if future “confidence” in our currency is to depend not on the stability of its purchasing power but on the fixity of its gold-value, then it may be worth our while to stand the racket of Deflation to the extent of 5 or 10 per cent. This view is in accordance with that expressed by Ricardo in analogous circumstances a hundred years ago.[43] If, on the other hand, we decide to aim for the future at stability of the price level rather than at a fixed parity with gold, in that case cadit quaestio.
In any case this argument does not affect our main conclusion, that the right policy for countries of which the currency has suffered a prolonged and severe depreciation is to devaluate, and to fix the value of the currency at that figure in the neighbourhood of the existing value to which commerce and wages are adjusted.
3. If the gold value of a country’s currency can be increased, labour will profit by a reduced cost of living, foreign goods will be obtainable cheaper, and foreign debts fixed in terms of gold (e.g. to the United States) will be discharged with less effort.
This argument, which is pure delusion, exercises quite as much influence as the other two. If the franc is worth more, wages, it is argued, which are paid in francs, will surely buy more, and French imports, which are paid for in francs, will be so much cheaper. No! If francs are worth more they will buy more labour as well as more goods,—that is to say, wages will fall; and the French exports, which pay for the imports, will, measured in francs, fall in value just as much as the imports. Nor will it make in the long run any difference whatever in the amount of goods the value of which England will have to transfer to America to pay her dollar debts, whether in the end sterling settles down at four dollars to the pound, or at its pre-war parity. The burden of this debt depends on the value of gold, in terms of which it is fixed, not on the value of sterling. It is not easy, it seems, for men to apprehend that their money is a mere intermediary, without significance in itself, which flows from one hand to another, is received and is dispensed, and disappears when its work is done from the sum of a nation’s wealth.
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In concluding this section, let me quote on the issue between Deflation and Devaluation two classic authorities, Gibbon and Ricardo, the one to represent the imposing but false wisdom of the would-be upright statesman, the other to speak in clear tones the voice of instructed reason.
In the eleventh chapter of The Decline and Fall, Gibbon deems incredible a story of how in A.D. 274 Aurelian’s deflationary zeal to restore the integrity of the coin excited an insurrection which caused the death of 7000 soldiers. “We might naturally expect,” he says, “that the reformation of the coin should have been an action equally popular with the destruction of those obsolete accounts, which by the emperor’s order were burnt in the forum of Trajan. In an age when the principles of commerce were so imperfectly understood, the most desirable end might perhaps be effected by harsh and injudicious means; but a temporary grievance of such a nature can scarcely excite and support a serious civil war. The repetition of intolerable taxes, imposed either on the land or on the necessaries of life, may at last provoke those who will not or who cannot relinquish their country. But the case is far otherwise in every operation which, by whatsoever expedients, restores the just value of money.”