A Tract on Monetary Reform

by John Maynard Keynes

Closing the Mints to the compulsory acceptance of gold need not affect the existing obligation of convertibility;—the liability to encash notes in gold might still remain. Theoretically this might be regarded as a blemish on the perfection of the scheme. But, for the present at least, it is unlikely that such a provision would compel the United States to deflate,—which possibility is the only theoretical objection to it. On the other hand, the retention of convertibility would remain a safeguard satisfactory to old-fashioned people; and would reduce to a minimum the new and controversial legislation required to effect the change. Many people might agree to relieve the Mint of the liability to accept gold which no one wants, who would be dismayed at any tampering with convertibility. Moreover, in certain quite possible circumstances, the obligation of convertibility might really prove to be a safeguard against inflation brought about by political pressure contrary to the judgement of the Federal Reserve Board;—for we have not, as yet, sufficient experience as to the independence of the Federal Reserve system against the farmers, for example, or other compact interests possessing political influence.

Meanwhile Mr. Hoover and many banking authorities in England and America, who look to the dispersion through the world of a reasonable proportion of Washington’s gold, by the natural operation of trade and investment, as a desirable and probable development, much misunderstand the situation. At present the United States is open to accept gold at a price in terms of goods above its natural value (above the value it would have, that is to say, if it were allowed to affect credit and, through credit, prices in orthodox pre-war fashion); and so long as this is the case, gold must continue to flow there. The stream can be stopped (so long as a change in the gold-value of the dollar is ruled out of the question) only in one of two ways;—either by a fall in the value of the dollar or by an increase in the value of gold in the outside world. The former of these alternatives, namely the depreciation of the dollar through inflation in the United States, is that on which many English authorities have based their hopes. But it could only come about by a reversal or defeat of the present policy of the Federal Reserve Board. Moreover, the volume of redundant gold is now so great, and the capacity of the rest of the world for its absorption so much reduced, that the inflation would need to be prolonged and determined to produce the required result. Dollar prices would have to rise very high before America’s impoverished customers, starving for real goods and having no use for barren metal, would relieve her of £200,000,000 worth of gold in preference to taking commodities. The banking authorities of the United States would be likely to notice in good time that, if the gold is not wanted and must be got rid of, it would be much simpler just to reduce the dollar price of gold. The only way of selling redundant stocks of anything, whether gold or copper or wheat, is to abate the price.

The alternative method, namely the increase in the value of gold in the outside world, could scarcely be brought about unless some other country or countries stepped in to relieve the United States of the duty of burying unwanted gold. Great Britain, France, Italy, Holland, Sweden, Argentine, Japan, and many other countries have fully as much unoccupied gold as they require for an emergency store. Nor is there anything to prevent them from buying gold now if they prefer gold to other things.

The notion, that America can get rid of her gold by showing a greater readiness to make loans to foreign countries, is incomplete. This result will only follow if the loans are inflationary loans, not provided for by the reduction of expenditure and investment in other directions. Foreign investments formed out of real savings will no more denude the United States of her gold than they denude Great Britain of hers. But if the United States places a large amount of dollar purchasing power in the hands of foreigners, as a pure addition to the purchasing power previously in the hands of her own nationals, then no doubt prices will rise and we shall be back on the method of depreciating the dollar, just discussed, by a normal inflationary process. Thus the invitation to the United States to deal with the problem of her gold by increasing her foreign investments will not be effective unless it is intended as an invitation to inflate.

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I argue, therefore, that the same policy which is wise for Great Britain is wise for the United States, namely to aim at the stability of the commodity-value of the dollar rather than at stability of the gold-value of the dollar, and to effect the former if necessary by varying the gold-value of the dollar.

If Great Britain and the United States were both embarked on this policy and if both were successful, our secondary desideratum, namely the stability of the dollar-exchange standard, would follow as a consequence. I agree with Mr. Hawtrey that the ideal state of affairs is an intimate co-operation between the Federal Reserve Board and the Bank of England, as a result of which stability of prices and of exchange would be achieved at the same time. But I suggest that it is wiser and more practical that this should be allowed to develop out of experience and mutual advantage, without either side binding itself to the other. If the Bank of England aims primarily at the stability of sterling, and the Federal Reserve Board at the stability of dollars, each authority letting the other into its confidence so far as may be, better results will be obtained than if sterling is unalterably fixed by law in terms of dollars and the Bank of England is limited to using its influence on the Federal Reserve Board to keep dollars steady. A collaboration which is not free on both sides is likely to lead to dissensions, especially if the business of keeping dollars steady involves a heavy expenditure in burying unwanted gold.

We have reached a stage in the evolution of money when a “managed” currency is inevitable, but we have not yet reached the point when the management can be entrusted to a single authority. The best we can do, therefore, is to have two managed currencies, sterling and dollars, with as close a collaboration as possible between the aims and methods of the managements.

III. Other Countries.

What course, in such an event, should other countries pursue? It is necessary to presume to begin with that we are dealing with countries which have not lost control of their currencies. But a stage can and should be reached before long at which nearly all countries have regained the control. In Russia, Poland, and Germany it is only necessary that the Governments should develop some other source of revenue than the inflationary or turn-over tax on the use of money discussed in Chapter II. In France and Italy it is only necessary that the franc and the lira should be devaluated at a level at which the service of the internal debt is within the capacity of the taxpayer.