The World’s Money Troubles

Hawera Star, Volume LI, 21 May 1932, Page 14

The World’s Money Troubles

Open Letter To British Government

Mr Arthur Kitson On Currency Expansion

Gentlemen, —The Prime Minister has made a request for assistance to enable his Government to find a solution for each of the problems which he has undertaken in your name to endeavour to solve, and he h)as stated that due consideration will be given to, every suggestion and proposal offered calculated to restore the economic prosperity of this country. Moreover, it is the duty of any citizen who has studied these problems, and who believes he has any useful information or suggestion that will be of help to the Government, to contribute such information freely and frankly. I need hardly ,say that the overwhelming response you have received from the voters to your request for a mandate has imposed the most serious obligations upon you, and any unnecessary delay in your efforts to discover a remedy for our. national economic ills will lead to disappointment, if not despair. PREDICTED IN 1915. As one who foresaw and predicted, as far back as 1915, the present crisis, as well as the long period of trade depression with which this country has been afflicted, it may be of service to you if I briefly enumerate the causes -of th’C'SO evils. It will be remembered that within a year or so of the adoption of the treasury note monetary system, which 'was established at the beginning of the war after the collapse of the pre-war gold standard policy, there were numerous suggestions by certain financial writers to the effect that no matter how efficiently the treasury notes functioned as the medium of exchange, the banks and city financiers would insist upon the revival of the gold standard policy soon after the war terminated. It. was evident to anyone familiar with the financial history of this and other -countries during similar war crisis, that the attempt to carry out such a policy could only be achieved at the expense of the industrial and trading classes, which would result in the wholesale bankruptcies, trade depression, unemployment, the inflation of all war debt's, the destruction of enterprise, a lowering of the standard of life for millions of our people, and general social misery and discontent. These evils have always followed every attempt to raise the purchasing power of money by contracting tho money supplies. Examples of this may be found after the Napoleonic wars, which ended in -the ‘ ‘ hungry forties;” and our final national ruin was only avoided by the accidental discoveries of gold in Australia and California in .1848 and 1849. These discoveries . resulted in what would now be termed an "inflation” of the currency, causing a considerable advance in the level of prices, and so reversed the policy that has been pursued by the Bank of England and the Government of Sir Robert Peel. THE UNITED STATES. Another example may be cited in' the history of the United States after the termination of their Civil War. Like all other countries, the United States had to conduct their military operations as well as their trade and commerce, by means of national currency notes, which functioned satisfactorily. Buit scarcely had peace been declared when the- American hankers commenced agitating for the destruction of the " greenbacks” and the substitution with bank-notes and coins necessitating a drastic contraction- -of ill e people’s money. It may be asked, wliat object have the njoney-lending classes in thus forcing an insufficient supply of money to meet the needs of trade? The answer is first, financiers are interested in 1 creating a great market for their own commodity, namely, credit, and the greater the volume of legal tender the less need there is for such credit. Secondly, during war crises, Governments —under -the advice of the bankers and treasury officials—make a practice of issuing bonds instead of their own national credits, and these -bonds -are purchased when money is cheap. Some of the United States bonds issued during the Civil War were sold for less than -one-third of the price at which they were afterwards redeemed. When the" wars are over and peace established, the owners of -the bonds use their influence with the Government to force the taxpayers to pay interest charges and redeem the bonds in money of twice or three times the value of that for which the bonds were purchased. This policy has been pursued in this country during the recent Great War, and it explains to a great extent all that has happened in the shape of economic and social disaster and suffering by the British public during the past ten or eleven years. OUR WAR DEBT.

of the currency—the late John S. Williams. The losses inflicted upon the fanners, the merchants, and manufacturers by this policy was stated by Mr Williams in a letter to the writer as exceeding the entire costs of America’s participation in the Great War! SIMILAR DEFLATION.

NOT IDEAL (STANDARD.

The present crisis in that country may also be traced to a similar deflation policy that was started at the end of 1929. All through the ages and in all countries, a decrease of money below the normal needs of trade has brought disaster. On the other hand, an increase of currency to meet the demands of the public needs has resulted in prosperity and trade revival-. A century and a-half ago this truth was recognised by David Hume, among others, who wrote as follows: —

"In every kingdom into which money begins to flow in greater abundance than formerly, everything takes a new face. Labour and industry gain new life, the' merchant becomes more enterprising, the manufacturer more diligent and' skilful, and even the farmer follows his plough with greater alacrity and attention.”

America’s greatest economist General Francis Walker—once wrote as follows: —

"A diminution of the money supply is one of the grayest evils which can menace mankind. The mischiefs of a contracting circulation have twice at least in the course of events befallen Europe as the result of the exhaustion of the mine's of the precious metals, or -the interruption of _ mining industry by Barbarian invasion or civil convulsion. It has remained for this generation and this decade to see these mischiefs brought upon Europe by the deliberate act of Government under the advice of political economists. Suffocation, strangulation, are words hardly too strong to express the •agony of the industrial body when embraced in the fatal coils of a contracting money supply. .Against so great a wrong to civilisation, and to the hopes of mankind, the representatives of the .United; States here present raise their earnest protest and warning.” ALL NATIONS AFFECTED. Cannot the cause of the world crisis with -which practically all nations are now afflicted be expressed in one sentence —a (shortage of money? Trade depression, unemployment, unbalanced budgets, bank failures, reparation failures, bankruptcies, are all traceable to this one condition —a condition that has been artificially created by the world’s Governments since the war, at the suggestion and advice of the world’s leading bankers. These Governments have allowed themselves -to be intimidated . against tfhe use of the national credits they control for monetary purposes by the cry of inflation. The gold standard has been forced upon the world ait the instignation of those who live and amass their wealth by providing a substitute for legal tender in the form of bank credit. What function does the gold standard perform except the limitation of currency supplies? And this limitation has no relation whatever to the needs of trade and commerce. _ . .FINANCIAL BASIS.

One would have imagined that before any Government permitted its people to build their industries and trading operations on a given financial basis, it would have at least enquired as to the- strength of the foundation and its capacity to bear the strains to which it would bo subjected. But no -such enquiry seems ever to have been made since the war by any Government.

When one considers the relative insignificance of the world’s gold supplies to the world’s debts, one cannot be surprised that this system has collapsed. The marvel is that it did not collapse sooner. Even if all the gold held by the banks in America and France were liberated and distributed, it would prove utterly incapable of meeting the world’s requirements at the present time. The total debts of the world specifically payable in gold are estimated at more than fifty times the entire volume of gold above ground! And when one considers that gold is held as private property, the owners of which have a perfect right to put it out of use, to bury it as they do in India and Egypt, or to sterilise it as they are doing in France and the United States, it would seem sheer madness even to attempt to make this metal the source of the life-blood of trade and commerce.

The bulk of our -national war debt was- created when the pound sterling, represented by the treasury note, had less -than one-half of the purchasing power of the pound sterling in 1913. When the gold standard was revived and the pound restored to its pre-war ratio with gold in 1925, the burden of our war debts was practically doubled and the .public were made to carry a financial load which has almost broken the backs of out trade and industries, and all for the benefit of the moneylending classes. An examination of recent events in the United States, Germany, and other countries suffering from trade depression an-d unemployment will show that these results are due -to a contraction of the currency. Take, for example, the period 1919 to 1922 in the United States, which will be long remembered as one of the most serious and disastrous in the annals of that country. This war directly 'due to the deliberate action of the Federal Reserve Board in reducing the currency against the protests of the comptroller

PERFECTLY SAFE. The war demonstrated that money based upon national wealth and issued in the form of Government notes was a perfectly safe, sound, honest and efficient medium of exchange. It required no metallic basis of either gold or silver. Its supply could be adjusted most readily to the needs of trade. It was reliable and did not fluctuate as gold has done, both during and since tho war. To talk of gold as a stable commodity in view of what has hap-, pened during the past half-century is to talk nonsense. No paper currency issued to meet the needs of trade (and not for political purposes) has ever fluctuated to tho same extent as gold has done.

Mr McKenna is authority for the statement that our treasury note was more stable in regard to the price level of commodiies although without any gold backing than the American dollar, in spite of its ample gold basis,

C| URRENCY reform is the most important question before the „ number of people believe that the world can not emerge from SoveSments 1 by the “economic blizzard” without a change m the attitude of 1 b S ArtSSon and industry towards currency. The article below was written by Mr. Arthur Kitson, British businessman, student of currency, and the author of several pubhcations oneconomcs. It appeared in “The National Review” for January, 1932, as an open elected National Government. Though it is reprinted here as an interesting contrition by an authority to a discussion of wide importance, the Star does not necessarily iden y itself with the views expressed therein.

Professor Gustav Cassel, the eminent 'Swedish economist, has stated that “The gold standard is by no means an ideal standard. The value of gold is subject to variations which cause serious difficulties to every country the economic system of which is buiit up on the basis of a goldstandard. The modern gold-standard dates from the Napoleonic wars. Apart from the short-time fluctuations of the price level, attributable to trade cycles, great secular alterations in the purchasing power of gold have taken place. When, for instance, the index figure of Sauerbeck fell from 111 in 1873 dowm to 61 in 18'96, this is sufficient to prove that gold is no reliable measure of value, and that even, with a gold standard, economic life is exposed to serious disturbances having; their root in an unstable monetary system. The period which I mention is known in history as a period of prolonged economic depression. The gen-, erat-ion then living had to pay a very heavy price for having built up its monetary system on a unit which could almost double its value within a quarter of a century.'’

REFUSED TO TAKE GOLD

To this may be added the fact that gold depreciated in value during the war to such an extent that the Swedish 'Government Bank refused to ex- ; change its paper notes for gold. This fall in value amounted to about 40 per cent, of its pre-war value. We have also seen within the past four or five years a similarly spectacular exhibition of instability in this socalled stable standard by a rise in its value of over 33 1 per cent! But such changes can always ,be affected by the controllers of any large proportion of the gold supplies, by merely adopting the recent policy of the American and French bankers.

May I ask you to consider a few elementary truths which —if properly digested—may help yon in solving the problems you have undertaken. Money —whether based upon gold or upon the national wealth —is NOT a measure of values. There is no such thing as a standard of values. The very expression is meaningless—just as meaningless as a “standard of love” or a, ‘‘standard of beauty.” Values are not con'creto magnitudes: they are not like porosity, density, or transparency, the’ property of bodies. They are not even intrinsic. They are merely exchange relations established by society and areindicated by the quantities in which’ they are exchanged. These exchange relations are expressed in ratios by numbers, and so long as these numbers, are all known by the same denomination, they represent for all practical purposes the values of the goods exchanged. Values are estimated—not measured. No man has ever yet been able to measure the value of a house, horse, a sheep, or a goat, by putting a golden sovereign beside it. If I give a dozen people a yard-stick and ask .them to measure the length and width of a room, they will all give me the same results, provided they all have the same standard yard-stick. If I were to ask a dozen different people to give me. I the value of a building, or any other J object, it is doubtful if I should get • uniform answers from any two of the number. LIKE WITH BIKE. Values are estimated by comparing like with like, not with unlike. Values can only be expressed in .terms of numbers—never in commodities. If I know that a certain object is ■worth X, .and another 2X, and another 3iX, and so on, I know the exchange relations of these various articles without having to know just what X is. For this reason,: pieces of paper function just as readily in promoting trade and in expressing values, provided they are all of the same denomination and issued by some authority in' whom the public have confidence, as golden coins. Again, what is it that gives to money its purchasing power? Is it not the public who —ny, accepting it in exchange for goods and, services—render it valuable by giving it circulation? Certainly it is not gold that gives this value. See what happens to silver when, the nations of the world demonetised it. Precisely the same thing wmuld happen to gold under, similar treatment. Professor Cassel has also stated that during and after the war, “the world had a system of paper standards and if each of these paper standards had simply been stabilised at a certain purchasing power against commodities, the world would have had a satisfactory monetary system. Stabilisation did not in itself require that the separate currencies should be bound up with gold.” MONEY 'ILLUSION. In his w r ork entitled “Money Illusion,” Professor Irving Fisher, the American economist, w'rites as follows:

“Under modem conditions, with our vast credit structures, the old theory of an automatic gold standard heyond the reach of any voluntary control has ceased to have much relation to reality. To-day, instead of saying that the paper dollar or credit dollar derives its value from the gold dollar in which it is convertahle, it would he truer to say that the gold dollar derives its value from the credit dollar into which it is controllable and controlled; we have already a managed currency in spite of ourselves. ’ ’

In view of all this authoritative information, practically all the claims for the necessity or for the advantages of gold as a basis for currency disappear. And this brings us within sight of a simple remedy for our present economic troubles. The

remedy consists in a reversal of the policy which has -brought about these . conditions, viz., an expansion of the currency. This expansion! can be effected in -one or several ways. It could be achieved by the revival _of the treasury note system, which carried us safely through the greatest crisis i in. ou-r iiisfcory. It ■could al-so be- attained by increasing the fiduciary issue of the Bank of England notes. It could even be accomplished by the increase of bank credit, provided the banks were willing to grant sufficiently long time periods. If fresh gold discoveries were made, as -occurred in tSouth Africa after the demonetisation of silver, the effects would be similar to the increase of the note issues. There is only one qualification required to make any given instrument money, and that is its acceptability by the public. The Government possess this power above. that of any bank or tender, and by - accepting it in payment of taxes, they establish its value and give it its circu : lating power. The remedy, therefore, already lies within your own grasp. CRY OF INFLATION'. As to the cry of inflation—this evil is only possible where permission is given for issuing more notes than the community require for carrying on their trade and industries, and is soon indicated by the advance in the price level of commodities. Such an evil is readily controlled by the issuing J authority. At present, however, an advance in the price level of commodities is essential to jpromote industry. No one will continue to produce goods at a loss. And prices of many goods are to-day unprofitable. Expansion of the currency does not necessarily lead to inflation. Moderate inflation is often advantageous, and would bo of the the greatest possible benefit to this country at the present time. There can be mo great revival of trade without an increase in the effective demand for goods, and there can be no increase in the effective demand for goods without an increase in the supply of general purchasing power in the hands of the public. Those who are waiting for trade revival before allowing an increase in ; the volume -of currency will continue to wait ..until -Doomsday. Demand induces supply, and money in the hands of those needing goods constitutes demand. A WORSE EVIL. In any circumstances, there is a - worse -evil than currency inflation, I and that is debt inflation. Debt in- • flation is one of the great evils from

which the world is. now suffering, and has been created by currency deflation.

There has never been any great revival in trade that was not preceded I or anticipated by an increase in the currency. Look how -the gold discoveries of California and Australia re- { vived tbe world, trade, and bronglrt a J revival of hope' and happiness to the masses of mankind. The same results would have been obtained if the nations of the world had increased the money supplies to the -same extent by the issue of paper money. It is hardly necessary to deal with the question of protective tariffs in this letter. Undoubtedly some form of protection is essential to save our farmers and manufacturers. But tariffs alone will not save us, any more than it has saved the United States, where the currency is allowed to be manipulated by individuals for their own profit, regardless of the national interests. PROTECTION OF -GOVERNMENT. Neither is it necessary to make the character and volume of our national currency depend upon international agreements. Every country has its own currency, no matter what the basis may be. There is no international currency, and there is no necessity for one. -Gold is an international commodity, but gold is not money, and money is not a commodify. Money circulates freely only within -the jurisdiction of the Government under which it is created. Every currency is national and rightly -so. We are now experiencing the results of attempting to limit our currency to the supply of a metal which is the basis of many other currencies, and the result has been disastrous. "Why should tlie lives and fortunes and -standard of life of the people of Great Britain be made to depend upon or to be affected by the actions, the judgment, or even the misdeeds of foreign nations? -Surely the first duty of any Government is to legislate for the interests of its -own people, and not to sacrifice those interests for -the benefit of foreign nations. There has been too much -of this -spirit in our recent administrations, and we are now suffering the consequences. _ln conclusion, gentlemen, the solution of the problems you have undertaken is entirely in your own hands, and it is with the hope .that you will use your own power in" the manner indicated that I beg to subscribe myself, Your sincere well-wisher, ARTHUR KIT-SON [Reprinted from “The National Review.'” for January, 1932.3