Labour policy—false and true

by Lynden Livingston Macassey

It does not seem that much can be done in the direction of steadying the exchanges except to put such pressure as is practicable on foreign countries to cease inflation by printing paper money, to balance their budgets, and to stabilize their currencies and re-anchor them to gold, though not necessarily in the same parity as pre-war, at the same time adding to the national wealth, on which sound currency is based, by increasing national production, decreasing consumption, reducing expenditure, and prompting public and private economy.

Revision of Financial Policy

Business men contend that stability and not inflation or deflation should have been aimed at by the Government, and that industry has been gravely injured by the instability resulting from the Government’s financial policy of deflating with the object of restoring an effective gold standard. In pursuance of this policy, towards the end of 1919, the bank rate was raised from 5 per cent. to 6 per cent., and Treasury Bill rate from 4½ per cent. to 5½ per cent.; then in April 1920, the bank rate was further raised to 7 per cent.[19] and the Treasury Bill to 6½ per cent. Appended to the Report of the War Wealth Committee, published in May 1920, is a Treasury Memorandum explaining the policy. Inflation and deflation are ambiguous terms; the Government has explained its understanding of them to be the increase or decrease respectively of purchasing power relative to the amount of commodities available for purchase—purchasing power being measured by the amount of bank deposits and currency in circulation. A masterly description of the nature and effect on industry of the Government’s policy was given by the Right Hon. R. McKenna at the Ordinary General Meeting of the London Joint City and Midland Bank, Limited, on January 28, 1921. Mr. McKenna drew the distinction, almost invariably overlooked, between “speculative inflation”—a temporary condition remediable by making money dearer and restricting credit—and “monetary inflation”—a more or less permanent condition which cannot so be remedied. In regard to the latter he said: “Dear money and a rigid restriction of credit, so far from proving an effective means of restoring trade to a wholesome condition, could only aggravate our evils.” Monetary inflation was due to gigantic war-time borrowing by the Government, not for increasing industrial production, but almost entirely for consumption. As loans remained outstanding after the commodities had been consumed, there was an immense increase of purchasing power relative to the amount of commodities available for purchase. Mr. McKenna pointed out that the first effects of an attempt at monetary deflation would be to cause severe trade depression, manifesting itself in a fall in wholesale prices, due to goods being thrown upon the market by traders who were unable to carry their stocks or who had failed in business; a diminution in production; a reduction in prices; a growth in unemployment; reduced purchasing power of wage-earners, and so a further fall in wholesale and retail prices, and later, in consequence of the trade depression, a decline in national revenue without any diminution of the permanent liabilities of the Government. To pay taxes traders would have to borrow from their banks; to meet national expenses Government would have to resort to bank loans, and credit inflation would again ensue. Mr. McKenna conclusively showed that monetary deflation can only be achieved through repayment of the immense Government loans, which cannot be effected by the imposition of additional taxation, as that would bring immediate ruin upon our commerce and manufacture, but only from funds secured by the most rigid economy in national expenditure, and by increasing the commodities available for purchase through the stimulation of production and of trade.

There are some drastic remedies which leave the patient cured of his disease, but dead from general debility; monetary deflation, as practised by the Government, is one of them. It is no satisfaction to the manufacturer whose works are closed down, or the worker who is unemployed, to be told that the currency is being restored to pre-war parity of exchange. They see in the United Kingdom and the United States—exponents of this process—a larger proportion of the population unemployed than in any other industrial country, and these are the two wealthiest countries in the world, with the greatest foreign trade.

Reconsideration of Reparations Policy

No one suggests that Germany should be relieved from payment of reparations or that the Government should be dissuaded from insisting on payment by any fraudulent bankruptcy on the part of Germany. At the same time there is real urgency for clear thinking and decisive action on the part of the Government in regard to the amount and mode of payment. The Government’s original figure of 20,000 millions turned out to be a ridiculous over-estimate, afterwards reduced by the Ultimatum of London to a maximum yearly payment of 400 millions. To make the payment, the surplus of the value of Germany’s exported saleable commodities over the cost of her imported raw materials and food must at least equal that amount. Pressed to provide that surplus she must necessarily undersell our manufacturers in foreign markets, which she will and can do by depreciating the mark in foreign exchange so as to keep its external below its internal value. This results in a premium on German exports, and the undercutting of our commodities in those markets. Mr. McKenna’s reasoned speech to his bank on January 27, 1922, is worthy of close attention. “Before Germany could meet her full liability,” says Mr. McKenna, “before she could develop her foreign trade to such a degree as to have an exportable surplus of 400 millions a year, the foreign trade of this country, her chief competitor, must dwindle into insignificance.” Speaking from the economic point of view, he goes on to point out that Germany can pay annually “to the full extent of the export surplus her trade can give her without forcing the external value of the mark below its internal value ... she can pay in specified commodities, which in our case might include sugar, timber, potash, and other materials which are indispensable to us, but which we either do not produce at all or in insufficient quantities. She can pay also by the surrender of any foreign securities her nationals may possess, so far as they can be traced, and, if the Allies are willing to accept this form of payment, by the direct employment of her labour in reconstructing devastated areas.” There can hardly be much question that vacillation in the reparations policy has been productive of serious injury to our foreign trade.

Inter-Allies Debts

The restoration of international trade depends also on a sound and sensible recognition by those of the Allies who are creditor nations of the economic effects of enforcing payment of the indebtedness to them by the Governments of debtor nations, coupled with such action as they, in the interests of civilization and of their own countries, find themselves able to take in the direction of modification. Government war-debts have produced for no debtor country any increase of its national wealth; they can be paid by the debtor country only out of its capital or its income. In regard to the first alternative, no debtor country can possibly, under any scheme of finance, pay its government war-debts out of capital, that is to say, out of home or foreign securities in the hands of its Government or its nationals, or out of cash balances standing to the credit abroad of either or both of them. If those debts are to be paid at all, it must be out of income, that is to say, out of the surplus realized by the export of natural products, manufactured goods, services and “invisible exports,” after payment of the expenses involved in producing such surplus, e.g. cost of raw material, labour involved in manufacture, and other costs of production and expenses of rendering the services. Now, the dominant fact to-day is that the debtor nations’ available surpluses are either insufficient, or not more than sufficient, to cover their pre-war debts. How then in each case is the surplus to be so enormously increased as to cover the fresh indebtedness resulting from the Great War? In one way only—by enormously increased production, and by a reduction in the national standard of living. Nothing is more certain than the absolute impossibility of any debtor country being able to pay its war-debts under its present standard of production and of living. Supposing, however, it to be practicable, and that it is determined to compel each debtor country to create the requisite surplus, what would be the peril to international trade of such forced payments? Mr. F. C. Goodenough—the Chairman of Barclay’s Bank—has explained the position with cogent clarity; his illuminating exposition will be found in The Times of April 11, 1922.

First let us consider how much of the needed surplus can be created by increased production. It obviously involves enormously greater output on the part of labour each working hour, the introduction of very greatly improved organization and of time- and labour-saving appliances, which, apart from the new spirit it would demand in industry, would entail a drain upon capital resources for their provision, that, at this present time of scarcity, could not be met, and a general alteration in price levels. Our difficulty to-day is to attain even to our pre-war standard of efficient and effective output. We are living to-day largely upon our capital and not upon income. But, assuming that debtor nations can go some way towards paying their war-time indebtedness by increased production, they plainly cannot go anything like the full length; they must fall back, if pressed, on a reduction of their standard of living which would be primarily effected by a reduction in industrial wages. Then mark the effect upon creditor nations. If wages in a debtor nation are reduced, and costs of production are correspondingly brought down without any equivalent diminution in the efficiency of labour, that debtor nation is in a position, and, if put under pressure to pay its war-debts, is compelled to put its manufactured commodities into foreign markets at prices considerably lower than its creditor nation with a higher standard of living can afford to do. This unfair competition applies not merely to creditor nations, but to all nations trading in the same competitive foreign markets. But, then, follow the matter one stage farther: if the other nations, under the stress of this competition, bring down their costs of production to the same level, the debtor nation loses its preferential position in the foreign markets and ceases to be in a position to pay its war indebtedness.