The Socialist Forum: Some Questions About Gold. (1932)

Letter to the Editors from the April 1932 issue of the Socialist Standard

Elvaston Place, S.W.

Editor of the Socialist Standard.

Sir,

In October, you wrote: “The illusion that lack of gold has anything to do with the main problems is easily dispelled.” Is trade depression not a main problem ? No doubt a large part of the world’s economic difficulties are due to the lack of any plan in laissez-faire production and to the inequitable distribution of purchasing power resulting from private exploitation of the sources of wealth. But the best chance of modifying these conditions lies in the trades unions’ membership being increased, and the number of their members varies inversely with the percentage unemployed.

If the supply of gold is inadequate for the alleged requirements of the central banks and their clients, then primary prices will be forced down ; such a fall in prices involves reduction in the demand for manufactures, and inadequate profit or prospective losses deter the entrepreneur class from operations which increase employment and wages. There is almost complete short-term correspondence between the relation of primary prices to costs and the numbers unemployed, while with the upward trend of prices from 1896 to 1915 there was only two-thirds the unemployment of the preceding twenty years when the trend of prices was downward. Thorp & Mitchell’s Business Annals shows seven times as many years of prosperity per year of depression for the upward periods, 1849-73 and 1896-1920 as for that from 1873 to 1896. Your reference to the “very great increase in the supply of gold from 1890 to 1914″ shows that you do not appreciate the meaning of the term, “relative gold supply,” i.e., the actual supply relative to an increasing demand. This rose but slowly from the year 1896, allowing for an average increase in prices of about 2 per cent. a year from the disastrously low level of 1894-98. Both employment and the standard of living, however, were much higher at the end of the period than at the beginning. In 1926, real wages in the United States, according to Professor P. H. Douglas, were one-quarter higher than in 1890-99, while for Great Britain the New Survey of London gives a figure one-third higher than in 1890.

With regard to the second part of the article, “The Gold Standard and the Crisis,” I should like to say that (1) a practical policy must adapt itself to changing conditions. At the beginning of 1931, Mr. Keynes—who was mainly responsible for the Macmillan Report—considered that Great Britain would be in a much stronger position for leading the world out of the depression if sterling remained tied to gold. In the summer he no longer held that view. (2) Mr. Norman’s opinion as to the efficacy of Bank Rate is of no importance. Under the circumstances, a 9 per cent. rate would have been ineffective, but would probably have caused a panic. It might have been better if we had abandoned gold without first borrowing and then being pushed off, but to contend that the Bank should have maintained payments in gold, come what might, is to imagine that gold parity is an end in itself. The essential—as opposed to the ostensible—reason for high money rates is a sharp rise in the level of prices. And prices were falling heavily.

Geoffrey Biddulph.

Reply

Mr. Biddulph’s remarks are only distantly related to the articles which he seeks to criticise. Further they reveal a complete lack of understanding of the Socialist view of the depression. Our contention is that the present crisis is merely a fresh manifestation of an ever-recurring phenomenon of capitalism. As such it does not create any new problem for the workers, whose political object should be the substitution of capitalist society by Socialism. Consequently the workers, as a class, have nothing to gain from any of the various measures—from tariffs and wheat quotas to currency reform—put forward to rescue capitalism from the mire in which its own inherent defects have landed it. By whatever means the depression is ended, capitalism, as a system, will remain intact. In other words the propertyless condition of the workers, the ending of which is, in our view, their sole concern, will persist. Reforms designed to make that condition less oppressive have no attractions for us. When we discussed the present trade depression it was with two objects in mind. In the first place we wished to show how the fundamental cause of this crisis—as of its predecessors—was the fact that goods are produced by wage-labour for profit and not for use. Secondly, we sought to refute certain of the explanations of the crisis that have been advanced, and to expose the incompetence in high places that it has revealed. As we carefully pointed out, we are not concerned to take sides on the question of gold versus managed standard; we merely gave an account of the events thai led up to the abandonment of the gold standard by this country.

Having made clear our position let us turn to Mr. Biddulph. Although he does not specifically say so, it would appear that his view is :—

(1) That the depression is attributable to a fall in the general price-level, itself the consequence of the fact that the rate of increase of the world’s gold has been less than the rate of increase in “the alleged requirements of Central Banks and their clients” for gold.

(2) That a rise in general prices is required to end the depression.

(3) That rising prices are desirable from the point of view of the workers.

The second and third points can be taken together. Even if it is conceded that the depression could be ended by a currency policy that would raise world prices, would the basic conditions of the workers be altered? For one thing would unemployment be eliminated? The most that Mr. Biddulph can claim for a period of rising prices is that unemployment (on the experience of 1896-1915) might be reduced to two-thirds of what it is at present. It is just because Capitalism cannot provide a full life for all, even given the most favourable business conditions, that we are Socialists. Unemployment is a symptom of a defective economic organisation and the defects it indicates remain when unemployment is relatively low as when it is relatively high. This is what reformers and those who talk of “years of prosperity” overlook when they urge their reforms and the taking of steps to restore “prosperity.”

So far as Mr. Biddulph’s first contention is concerned, that is open to two criticisms. Firstly, if it is correct, then Capitalism stands condemned on account of the incompetence of capitalists, for from his use of the word “alleged” in the phrase “alleged requirements of the Central Banks and their clients” for gold it is clear that these requirements were in his view capable of being reduced. In other words, the relative shortage of gold, which he believes to be at the root of the trouble, need not have manifested itself if the world’s leading bankers had possessed but an elementary knowledge of correct currency principles. This is to say that the crisis occurred because of the inability of those in charge ot the financial machine to run it properly. A system of production under which there is such scopes for incompetence to produce evil must stand condemned.

But in our view the crisis cannot be traced to monetary causes. Prices did not fall because of the decline in the relative gold supply but because, as periodically does and must happen under capitalism, goods were produced beyond the capacity of the market to absorb them.

The facts do not support the contrary view advanced by Mr. Biddulph.

The period from 1925 to 1929 was, for the world as a whole, one of increasing economic activity. Even here the national income was rising, and U.S.A. enjoyed the greatest boom in its history. The increase in the supply of gold during that period must have been sufficient to carry the increased volume of business, since economic expansion in fact occurred. In the face of this Mr. Biddulph’s theory requires that the rate of increase in the gold supply after 1929 was less than during the preceding 4 years. Unfortunately for the theory, however, the figures show exactly the opposite. According to the estimates of Mr. Kitchin (see “The Times,” February 18th, 1932), in the years from 1925 to 1928 the world’s gold production increased, as compared with the preceding year, by nil, 1.8 per cent., .04 per cent, and 1.3 per cent, respectively and in 1929 was 1.1 per cent, less than in 1928. On the other hand, in 1930 output rose by 3.5 per cent, above the 1929 level and in 1931 was even 4.4 per cent, more than in 1930.

But apart altogether from the question whether the relative supply of gold was or was not sufficient to maintain the 1929 price level, Mr. Biddulph has no justification for stating, without further evidence, that the crisis resulted from a fall in general prices. The price level was falling continuously up to 1929, yet the slump did not start until that year and indeed, as already stated, the period from 1925 to 1929 was one of economic expansion. This last fact destroys the whole of Mr. Biddulph’s case and completely disproves his implied assertion that periods of falling prices are periods of dwindling trade, reduced employment and declining “prosperity.” In this connection it is worth looking at some figures. Between 1924 and 1929 wholesale prices fell about 20 per cent. During the same period the Board of Trade index of industrial production rose about 14 per cent., and the numbers of insured workers in employment rose by nearly 9 per cent., although admittedly the percentage unemployed rose from 10.7 per cent, to 11.1 per cent.

Of those, such as Mr. Biddulph, who relate trade activity to rising prices, Mr. D. H. Robertson, the well-known economist, has well written that they speak “with the voice of the inflationist entrepreneur of all ages, claiming that the scales must always be weighed in (their) favour if (they) are to do (their) job properly” (The International Gold Problem, 1931, page 146).

So much for Mr. Biddulph’s main argument. The other points in his letter must, because of the lack of space, be dealt with only briefly.

(1) He implies that the standard of living rises with rising prices and vice versa. Sauerbeck’s index for 1873 was 111 and for 1896 was 61, a fall of about 45 per cent. Would Mr. Biddulph contend that the standard of living was lower in 1896 than in 1873?

(2) So far as the last paragraph of his letter is concerned, we regret that we cannot, without evidence, accept Mr. Biddulph’s view of the efficacy of the Bank Rate as being of greater value than the view of Mr. Montagu Norman.

(3) As we do not enjoy the personal confidence of Mr. Keynes we are interested to be informed of his changes of opinion by Mr. Biddulph. We had, however, thought that Mr. Keynes had been opposed to the gold standard for some years. As long ago as 1925, Mr. Keynes was opposing a return to the gold standard, and advocating a “managed” currency. (See “Nation,” March, 1925.) The “Nation” (supposed to echo the opinions of Mr. Keynes) were attacking the gold standard early in 1931.

4) Finally, we would assure Mr. Biddulph that we fully appreciate the meaning ol the term “relative gold supply.” In fact, we understood the phrase to have been introduced into economic discussion by Prof, Cassel, and that among economists it had the meaning given to it by him. For Mr. Biddulph’s guidance we quote from “Fundamental Thoughts in Economics,” where Prof. Cassel writes : “I have introduced the conception of a relative gold supply, which is for any given year the actual gold supply divided by the normal gold supply.” Mr. Biddulph might compare this definition with that given in his letter above.

B. S.

Editorial: Lord Keynes – Economist of Capitalism in Decline (1946)

Editorial from the June 1946 issue of the Socialist Standard

In the sickness of its declining years capitalism is being nursed by the Labour Party. Lord Keynes, who died on April 21st, was the doctor who prescribed the treatment. His theories, on which rest the belief in the possibility of “full employment” under capitalism, have come to the widely accepted not because of intrinsic merit or originality, but because capitalists and the Labour politicians alike have dire need of a panacea that will, they hope, make capitalism work or at least persuade workers that it will. Faced with mounting unemployment and the political discontent that it causes, many Tory and Liberal politicians had lost confidence in their ability to save capitalism. Lord Keynes promised them another lease of life. The Labour Party, new to power, never had much confidence in its own ability, and the “economic blizzard” of 1931 that wrecked the  Labour Government destroyed even what it had; so Keynes was their hope, too.

He believed that investment and price trends could be made subject to governmental control and thereby booms and slumps could be ironed out and approximately full employment secured. His views found expression in the National Government’s “White Paper on Unemployment Policy” (1944), in which the Government accepted “as one of their primary aims and responsibilities the maintenance of a high and stable level of employment after the war”. The Labour Government has endorsed this White Paper. Keynes directly influenced the Liberal and Labour programmes.

“It was mainly through his personal influence”, says the Times (April 22nd), “that the Liberal Party adopted as their platform in the election of 1929 the proposal to conquer unemployment by a policy of public works and monetary expansion”. The section of the Labour Party that opposed the MacDonald-Snowden economy cuts in 1931 quoted Keynes in support of their view. The Labour Party’s report on “Full Employment and Financial Policy” (1944) largely rests on Keynes’s theories. It declares that “the best cure for bad trade is to increase purchasing power and to speed up development”. It looks to loans, “compulsory if necessary”, from the Banks to “help the Chancellor to find the purchasing power required for full employment . . .” “If bad trade and general unemployment threaten, this means that total purchasing power is falling too low . . . We should give the people more money, and not less, to spend.”

Socialists have no hesitation is saying that if the Labour Government attempts anything of the kind – it may, of course, get cold feet and scurry to the safety of “orthodox” financial policies, as did Snowden and MacDonald-it will not succeed in avoiding unemployment and crises. Capitalism depends for its relatively smooth functioning on the capitalists’ confidence in their prospect of selling their goods at a profit. By the time that bad trade threatens the capitalists will already be apprehensive and the proposed government policy would sap their confidence still more. It is one thing to propose to increase the workers’ purchasing power but the capitalists (including the Government itself in State industries) are at all times forced by competition to seek to reduce the purchasing power of the working  class in relation to the mass of goods produced for the market. This they do, if not directly, by wage cuts, then indirectly by installing labour-displacing machinery to increase output and lower costs of production.

Always the workers can buy only part of the commodities they produce (but which belong to the owners of the means of production), the part represented by their wages. Keynes and the Labour Party ignored these basic facts of private ownership and the wages system and looked to financial schemes to relieve the disequilibrium when, periodically, it had produced a crisis of bad trade and unemployment. Events will show that unemployment cannot be abolished under capitalism, even though its growth may for a time be masked by war, war preparations and totalitarian controls.

The extent and nature of the dependence of capitalists and the Labour Party on Keynes’s theories was shown by the estimates of his work published by the Herald and the Times on April 22nd. The Herald,  under the heading “The Great Lord Keynes”, by a Labour MP, Mr. Evan Durbin, said that Keynes “more than anyone else .  . . bridged the gap between Liberalism and Socialism”. The Times developed the same idea at length:-

“The Keynesian approach offered a bridge between the academic economists on the side and ‘the brave army of heretics’—Mandeville, Malthus, Marx, Gesell and Hobson (to name only a few)—on the other. This may yet prove to have been Lord Keynes’s most valuable achievement”.

Marx is here put in curious company, but the Times‘ inclusion of him had a reason. The Times thinks that Keynes had found the way to cure unemployment and thus save capitalism from the challenge of Socialists. It quotes him as defending his policy of full employment through State control of investment “both as the only practicable means of avoiding the destruction of existing economic forms in their entirety and as the condition for the successful functioning of individual initiative”.

The Times went on to claim that Keynes had shown how to bring about reconciliation between the orthodox political parties and the “growing army of deeply discontented reformers and revolutionaries”. The claim is certainly true of the Labour Party, but woe betide that Party when Keynes’s full employment policy fails them and the bridge he built collapses. Let it therefore be clearly understood that neither Keynes nor anyone else has reconciled the Socialist demand for the abolition of capitalism with the despairing attempt to make the system tolerable by trying to cure unemployment within its framework.

50 Years Ago: Lord Keynes: Economist of Capitalism in Decline (1996)

The 50 Years Ago column from the June 1996 issue of the Socialist Standard

In the sickness of its declining years capitalism is being nursed by the Labour Party. Lord Keynes, who died on April 21st, was the doctor who prescribed the treatment. His theories, on which rest the belief in the possibility of “full employment" under capitalism, have come to be widely accepted not because of intrinsic merit or originality, but because capitalists and Labour politicians alike have dire need of a panacea that will, they hope, make capitalism work or at least persuade the workers that it will. Faced with mounting unemployment and the political discontent that it causes, many Tory and Liberal politicians had lost confidence in their ability to save capitalism. Lord Keynes promised them another lease of life. The Labour Party new to power, never had much confidence in its own ability, and the "economic blizzard” of 1931 that wrecked the Labour Government destroyed even what it had; so Lord Keynes was their hope, too.

He believed that investment and price trends could be made subject to governmental control and thereby booms and slumps could be ironed out and approximately full employment secured . . . Socialists have no hesitation in saying that if the Labour Government attempts anything of the kind—it may, of course, get cold feet and scurry to the safety of “orthodox" financial policies, as did Snowden and MacDonald—it will not succeed in avoiding unemployment and crises.

(From the editorial in Socialist
 Standard, June 1946)

Cooking the Books: Keynes rides again (2008)

The Cooking the Books column from the December 2008 issue of the Socialist Standard

It is not just the ideas of Marx that the current crisis is getting people to look at again. It’s also those of Keynes. In fact it now seems to be official government policy. In October the Chancellor Alistair Darling declared that “much of what Keynes wrote still makes sense” (Sunday Telegraph, 19 October). Then last month Gordon Brown himself, in America for a summit of the G20, “invoked the memory of John Maynard Keynes”, according to the Financial Times (15/16 November), proposing a typically Keynesian approach to the current crisis, right down to exactly the same terminology:

“Gordon Brown yesterday heralded an anti-recession strategy founded on tax cuts for low earners and further cuts in interest rates, in the hope that Britain will spend its way out of the downturn. Mr Brown . . . suggested that the government would use tax credits to help poor families since they were more likely to spend any money handed out. People on low income had ‘a higher propensity to spend if their credits are higher’, Mr. Brown said.”

Keynes was an inter-war years economist who was at one time credited with having saved capitalism. He argued that capitalism did not automatically tend towards full employment and that government intervention to increase spending was needed to ensure this. He was himself a Liberal, but his ideas were embraced by all three main parties in Britain. He was particularly liked in Labour Party circles as his theories seems to justify their reformist attempt to redistribute income from the rich to the poor with their “higher propensity to spend”.

As it happened, post-war Britain did have more or less full employment for twenty or so years after the war, but this was more due to the expansion of world markets than to Keynesian “demand management” policies. When, in the mid-1970s, world market conditions changed, Keynes’s policies were shown not to work. Instead of stimulating a revival of industrial production they added a new problem – rising prices through currency inflation, which in turn led to periodic devaluations of the pound. In all previous slumps prices had fallen, but the implementation of Keynesian policies in the 1970s meant that they continued to rise. A new word was invented to describe the result: “stagflation”.

In Britain the funeral oration on Keynesianism (Keynes himself had died in 1946) was delivered by the then Labour Party Prime Minister, James Callaghan, at the 1976 Labour Party Conference:

“We used to think that you could just spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you, in all candour, that that option no longer exists and that in so far as it ever did exist, it only worked on each occasion since the war by injecting bigger doses of inflation into the economy, followed by higher levels of unemployment” (Times, 29 September 1976).

Or, as Keynes’s biographer Lord Skidelsky put it, “Then Keynesian policies suddenly became obsolete and the theory that backed it was condemned to history’s dustbin” (Times, 23 October).

It is a sign of the desperation of Brown and his government that they have been forced to rummage through the dustbin of history for a policy to deal with the current financial crisis and coming depression. Spending your way out of a crisis was tried by the last Labour government and, as Callaghan was forced to admit, it didn’t work. There’s no reason to believe it will this time either.

The End of “Full Employment”? (1971)

From the November 1971 issue of the Socialist Standard

Unemployment has been increasing continuously for five years. It was increasing under the Wilson Labour government and the rate of increase has accelerated under the Tories. At first it was noticed that the monthly figures were higher than they had been a year earlier; then they had reached levels which were a record for seven, eight, nine and ten years; and when unemployment passed the 900,000 mark in August, this represented the highest total for thirty years—back  to the beginning of the war.

Normally unemployment is expected to rise in winter and fall in summer. This summer the fall did not take place. The September figure was 280,000 more than in January and about 560,000 above September 1966. It may well reach the million mark this winter.

Every industry has been affected—private and nationalised, old and new. No section of the workers has escaped and some of the most heavily hit have been the clerical, technical and managerial. Many who have lost their jobs have little prospect of ever getting work again at their old rates of pay.

This is not the first time since the war that unemployment has reached peak levels, but the peaks go higher. In the four years 1947, 1958, 1959 and 1962 the average for the whole year just exceeded 500,000. In 1963 and 1967-9 it was about 600,000. In 1970 640,000 and for 1971 it is likely to come out at 850,000.

Of course it will drop back again sometime as markets and production pick up but there are signs that it will run in future years at levels considerably higher than it was in the nineteen fifties and early nineteen sixties, when the annual average was usually below 400,000 and often below 300,000.

One new factor is that employers’ expectations about quick recovery have been undermined by the long duration of the present recession. In earlier setbacks employers expected a quick recovery with a return of labour shortage, and were often prepared to keep surplus staff on in slack times; now it has become the practice to get rid of “redundant” workers immediately.

Why was unemployment relatively low in the early post-war years? Why is it rising now? and what will happen in the future?

Many politicians and economists have had a ready answer. They believed that governments have almost complete control of the situation and can make unemployment as high or low as they choose. This assumed control was not claimed to be total—it would not eliminate small up and down fluctuations and it might take a few months to be effective. In 1957 Professor A. C. L. Day in his The Economics of Money, discussing the pre-1914 ten year cycle of boom and depression, wrote:

“It may now have been mastered as a result of the insight into economic processes which has been acquired in the last generation.”

Even more confidence in what the government can do was expressed in the Sunday Times (24/5/70) when their contributor Malcolm Crawford wrote that American bankers “know that the government can stop a recession of any magnitude, nowadays, at about six months notice”, and that the steps already taken by the American government were “enough to stop the recession”. (Since then Nixon has had two or three more goes “to stop the recession”, but it still persists). The economic backwoodsmen of the TUC still firmly believe in this assumed power of governments.

Naturally, therefore, those economists and politicians regarded the low level of unemployment which lasted for about fifteen years after the war as proof positive that they were right in believing that Keynesian methods had changed the nature of capitalism and that serious unemployment need never be feared again.

The explanation was too simple. From the start it had one major flaw, for the same Keynesian methods were also supposed to keep prices more or less stable and not even the most zealous believer can regard the rise of prices since 1938 to a level four and a half times what it was as price stability. And now they have to explain why the Labour government before 1970 and the Tory government since 1970 could not prevent unemployment rising to levels both say are too high.

The odd thing is that though they claimed to be Keynesians they hadn’t even got Keynes on their side for he didn’t believe it possible to keep unemployment down to two per cent or less, which it was in those years. When Lord Beveridge hoped that, taking the good and bad years together, they could keep unemployment to an average of three per cent, Keynes dissented on the ground that Beveridge was too optimistic. Keynes did not state how much above three per cent he thought it should be but if we assume only three and a half per cent as an average, this would mean a range of, say, two and a half per cent to four and a half per cent. This would mean unemployment ranging from about 600,000 to 1,100,000. So present unemployment is Keynes’ “Full Employment”.

It is interesting to note that in America, where Democratic Presidents have from time to time been said to be operating on Keynesian lines (and Nixon suddenly announced in January that he too had been converted) unemployment in May was at a nine year record level of 6.2 per cent, and Nixon’s Chief Economic spokesman John Connally admitted in a moment of candour that, except in war-time, it has never been below four per cent (Financial Times, 8/7/71). In Britain four per cent would be about a million.

An examination of the causes of low post-war unemployment in Britain was made by Professor R. C. O. Matthews, himself broadly a supporter of Keynes, and published in the Economic Journal (September 1968). His conclusion was that, starting with the stimulus given by making good war damage of all kinds, a major cause was a prolonged investment boom and that “the decline of unemployment as compared with 1914 is to a large extent not a Keynesian phenomenon at all”.

On a comparative basis he estimated pre-1914 unemployment at 4.5 per cent and that from 1945 to 1967 at 1.8 per cent. He expected this situation to continue, but the doubling of unemployment since 1967 has already destroyed the basis for that optimism. On one point in particular Matthews has been proved wrong. He thought that the greater job-security of the post-war years, due to employers retaining surplus workers in slack periods, would continue, but this is no longer true as the hundreds of thousands of redundancies show.

The fact is that some British industries have been losing ground and failing to keep up with the expansion of world markets. Better equipped, more efficient rivals in Japan, Germany and elsewhere have been undercutting British (and latterly also American) companies. The two devaluations of 1949 and 1967 delayed, but did not stop, this drift.

Belief in the ability of any government to secure “full employment” at will soon came up against a complication. The 1945 Attlee government (followed by Tory governments) discovered, as Marx or even Keynes could have told them, that when unemployment is very low the workers are in a better position to push up wages and this combines with other boom developments to cut into profit margins; which in turn discourages capitalist plans to expand industry. So the governments applied their “incomes policies” to keep wages down. It never succeeded for long. The Heath government came in with its alternative, of encouraging employers to show tougher resistance to wage claims, and warning them that if they could not pay their way they must no longer count on the government bailing out “lame ducks”—which also adds to unemployment.

If we disregard the possibility of another world depression like that of the nineteen thirties, present indications are that the years ahead will see more unemployment in Britain, coming nearer to the pre-1914 average of four and a half per cent. But the myth of “full employment” will die hard. The Labour Party and trade unions will go on pursuing it, for—not being Socialist—what else have they to offer?

Edgar Hardcastle

Bank for World Trade (1943)

From the August 1943 issue of the Socialist Standard

Discussions have recently been started on the future of banking currency and exchange after the war. Lord Keynes (British Treasury) has put forward one set of proposals for an International Clearing Union. Mr. Morgenthau, Treasurer of the United States Government, has made other proposals for an international currency, based on gold.

Various writers and journals have taken up these suggestions with the usual alacrity, hailing them as serious contributions to the solution of world problems.

Typical of such journals is the dear old New Statesman (April 10th, 1943) :

“Man’s failure to construct a sane system to regulate exchange between the nations is one of the reasons for the ghastly state of the world to-day. . . . The general standard of life which the world enjoys, and on which all hopes of social betterment hang—(our italics)—must depend on the way in which the nations succeed in organising exchange of … surplus goods.”

This is no new idea : it’s as old (almost) as the capitalist system itself. The same issue of the New Statesman carries one of those typical “Left” articles, which they have published for years, calling on somebody or other (in authority) to do something for somebody. This week it's Professor Laski urging President Roosevelt not to support Fascist elements in Tunis. This has something to do with the New Deal in America, although Laski admits “that the essence of the New Deal was not Socialism.” Nevertheless, “freedom from want and fear deliberately organised now can make the foundations of democracy secure in the post-war world.”

“Do you remember, Mr. President, those brave words you used in your inaugural address of March 4th, 1933?” asks the Professor.

“This is pre-eminently the time to speak the truth. . . . Plenty is at our door but a generous use of it languishes in the very sight of the supply. Primarily this is because the rulers of the exchange of mankind’s goods have failed.”—Pres. Roosevelt, March, 1933.

Here, again, the same idea that faulty exchange is the cause of the trouble.

Taking our courage in both hands, we boldly challenge President Roostvelt, Professor Laski and Sir Kingsley Wood to prove this proposition. The crises of capitalism are not caused by faulty exchange.

Exchange itself is but an effect, not the cause. Exchange is the result of private property in the means cf production.

It is the economic relationship of private owners. 

That is why the S.P.G.B. for years, despite charges of pedantry, opposed the S.D.F. and I.L.P., who stated that they stood for the “socialisation of the means of production, distribution, and exchange.”

This is not Socialism. Socialism abolishes money, banks, cheques, and all the counters of various sizes and names which capitalists require to ensure their pound of flesh. Socialism is a system based on common ownership, which freely distributes to all whatever the community cam produce.

People starve in the sight of plenty because it is privately owned by capitalists.

A new system of international currency after the war may assist British or American capitalists—no amount of alteration of the tokens which circulate wealth will help property-less workers.

Horatio.

The Age of Keynes (1971)

Book Review from the August 1971 issue of the Socialist Standard

The Age of Keynes. A Biographical Study, by Robert Lekachman. Pelican, 30p.

For most of the thirty years just passed, the academic study of political economy has proceeded on the assertion of the Keynesians that it is not necessary to abolish the capitalist system, because it can be manipulated for the general good. By this they mean, that skilful handling of the economy can ensure that there will always be wage-labour for those who must avail themselves of it because they have no other means of subsistence, while the capitalist class will be able to enjoy untrammelled success to wealth as heretofore.

Considering that the edifice of academic economics erected in modern times is essentially nothing but a camouflage against the works of Marx, it is surely reasonable to hope that, in a biography of his principal adversary, some of his arguments would at least be touched upon in passing. But the hope is in vain. Throughout the book the only direct reference to Marx is a quotation from an essay written by Keynes in 1925, when he was old enough to know better, in which he makes a first class fool of himself by declaring, without any supporting argument worthy of the name, that ‘Capital’ is “without interest or application for the modern world”. The diatribe, including the abhorrence which “an educated, intelligent, decent son of Western Europe” must naturally feel for Marx and all his works, is here printed in full.

Is this what we are expected to accept as Keynes’ final criticism of Marx? Could he not do any better later in life? Did he not, at any time, state an opinion on the theory of surplus value? Is his modern biographer, an American professor of economics, not able to manage just one more bash at the much battered-about labour theory?

Obviously then there is little here to interest an educated intelligent worker, whether he happens to be a "decent son of Western Europe” or the son of Chinese sea cook, but there are some weird themes running through the book which it may be a pity to miss. The most revealing, perhaps, is based on the notion that Keynes’ theories can only be seen working properly in time of war. We are given a description of world economics in 1943; “economies rejoicing in buoyant demand, factories operating at capacity and overfull employment”.

As always with Keynesian economists the question of employment, other people’s employment, of course, not his own, is of anxious concern to this professor. “Making work” for other people, preferably at a factory bench, is an obsession with him. But perhaps the most revolting examples of capitalistic cant are the references to Keynes cleverness in gambling on the Stock Exchange.

It is a frightening thought that students of political economy, the understanding of which is of such overwhelming importance to every human being, still have to soil their minds with this sort of rubbish in universities today.

F.T.G.

Letters: So that’s why . . . (2008)

Letters to the Editors from the July 2008 issue of the Socialist Standard

So that’s why …

Dear Editors, 

Under the heading “Working classes ‘have lower IQs'” the BBC reported on 22 May:

“Working class people have lower IQs than those from wealthy backgrounds and should not expect to win places at top universities,” an academic has claimed. Newcastle University’s Bruce Charlton said fewer working class students at elite universities was the “natural outcome” of class IQ differences. The reader in evolutionary psychiatry questioned drives to get more poorer students into top universities”. (Link)

So that’s why I’m a bit thick and should know my place.Or does it say something about the validity of IQ testing or the disadvantage of just being poor and the limitations to knowledge opportunity? Or does it say something about a ‘science’ that justifies the status quo or about what is ‘science’ in this field of biological determinism which justifies the fundamental ‘rightness’ of our social organisation based on a hierarchy where those with the highest IQs take their natural place?

Obviously university is not the place for me if this is the type of thinking that goes on there. I’m the better for it. I wish I hadn’t been born stupid but apparently it’s quite natural. I should respect my betters with their superior intellect. I’m not a prisoner of my genes but of my limited intelligence. I know my place! 

Stuart Gibson, 

Bournemouth

MP’s pay 

Dear Editors,

 The ongoing row over MP’s pay and allowances obscures that those elected to Parliament will always receive a remuneration far superior to the average income of their constituents regardless of what punitive measures are taken to masquerade it as greater equability.

 Contrary to the conventional wisdom, MP’s aren’t elected to the House of Commons to represent their constituents in the running of the country’s best economic and social interests. They are elected to assist in the running of capitalism’s best interests and whatever personal style they choose to deal with the problems they encounter at their surgeries (all of which inevitably have their genesis in the traumas of the system), what they do and say will always be dictated by this factor.

 Now that the underlying rottenness of the system is becoming more evident in the form of banks running dry, home repossessions, and global stagflation even the most opportunist of MP’s particularly if they’ve used New Labour as a political career platform are placed in a dilemma in how to explain the economic crisis to their anxious electors particularly if those electors actually voted for them personally.

 Consequently the whole purpose of such excessive remuneration packages they receive is to act as an inducement to ensure that all of them, particularly if associated with the left, act in the highest traditions of parliamentary etiquette and bi-partisan propriety so that none, apart from the odd maverick who can easily be marginalised, dares to challenge the wisdom in Parliament that there isn’t an alternative to capitalism and the global chaos it causes when there quite clearly is!

 This issue has all been comprehensively laid bare by New Labour’s electoral drubbings in recent local elections and the Crewe and Nantwich by-election. Tory leader David Cameron was ironically ‘right’ when he said afterwards the results heralded the end of New Labour but not for the reason he infers. After ten years of an economy tied to the US dollar and credit, voters actually rejected the neoliberal economic policies New Labour had stolen from the Tories so that in effect politics, like the housing market has plummeted into a type of ‘negative equity’ where voters reject Tory policies by New Labour yet vote in official Tory candidates on the other.

 Such apathy will persist as long as MP’s are paid in a way that buys them off to defend or play down the woes of the system, regardless of what their previous political leanings were. 

Nick Vinehill, 

Snettisham, Norfolk

Would you credit it? 

Dear Editors, 

In your reply to my last letter (Socialist Standard, May 2008), you deny that banks create money by lending. This flies in the face of the facts … see any book on economics! How else do you explain the huge increase in the money supply over recent decades?

 Yes, they do have to balance their books – so when they make a loan they account the money put into the borrower’s account as a liability, and balance their books by entering the debt taken on as an asset. If the loan is not repaid, and has to be ‘written off’, then their books do not balance – hence their present woes.

 You really ought to study the system. The fiction that they only lend money deposited with them is promoted to confuse the general public about this matter.

(At the end of the last World War, the government still did create almost half of our money – the notes and coins – and spent it into circulation; but with the decline in use of these, it now only provides about 3%, the rest being created by banks and other ‘financial institutions’.)

Brian Leslie (by email) 

Reply: 

We have been studying the system for over 100 years and it is because of this that we know that banks are financial intermediaries who channel and distribute purchasing power rather than ‘create’ it. The idea that they can create vast multiples of credit from a given deposit base is a total fiction – it is theoretically incorrect and empirically unsupportable.

 It was a view that gained credence because of the 1931 MacMillan Committee Report into Finance and Industry that was written in large part by John Maynard Keynes. You may be interested to know that a significant minority of the Committee at the time opposed the view promoted by Keynes and several of those who went along with it did not understand or realise the implications of what they had signed up to – and we know this because some of our members at the time (including a member of the Editorial Committee of this magazine) were in correspondence with them about it.

 Interestingly, in his most renowned work, The General Theory of Employment, Interest and Money (1936) Keynes effectively abandoned the view he had promoted on the MacMillan Committee just a few years previously, stating that “the notion that the creation of credit by the banking system allows investment to take place to which ‘no genuine saving’ corresponds can only be the result of isolating one of the consequences of the increased bank-credit to the exclusion of others”.

 Indeed, what the simplistic model used in the Report had assumed was that banks kept a certain ‘cash ratio’ back for customers to access as a proportion of whatever is deposited with the bank (10 percent was assumed at the time though these days this would be far less). They then assumed that the whole of a new deposit by a customer could be held in cash to underpin the creation of credit nine times its value (i.e. operating with a 10 percent cash reserve an initial £1,000 deposit would enable the creation of £9,000 worth of credit). Bizarrely, it also then assumed that this cash was never called upon in practice. In other words, for the model to hold, they correctly assumed that banks kept cash in reserve for customer use, but then assumed that nobody ever withdrew any of it!

 Very few economics textbooks today repeat this nonsense. Instead, they typically promote the version put forward by Paul Samuelson among others which explicitly rejects the approach used by the MacMillan Committee in favour of a multi-bank model. However, this model does not demonstrate anything more than that currency circulates around the banking system and can be used more than once in the process of customers’ creating bank deposits – as opposed to banks somehow creating multiples of credit from these deposits (the July 1990 Socialist Standard dealt with this particular model in more detail).

 If banks could create vast multiples of credit from their deposit base then the recent problems of Northern Rock and others would never have occurred. In reality, their problems arose precisely because they wished to lend out more than had been deposited with them and to do this they had to borrow ‘short’ on the money markets to finance their long-term loans and mortgages. When inter-bank lending rates hit the roof, the game was up – and the Bank of England and the Treasury did not just tell them to go away and create some more multiples of credit from their deposits.

 Traditionally, banks have covered most of their loans through the generation of deposits by customers; Northern Rock was unique in that in its dash for growth it allowed its ratio of deposits to loans to go down to under a quarter, an unprecedented level in UK banking history (it was around £24 billion in deposits set against around £113 billion in loans and other assets at the time of its major crisis). The difference was not made up through ‘credit creation’ but simply by borrowing on the money markets at the prevailing inter-bank rates of interest, as can be seen from an examination of its balance sheet.

 Similarly, the current £12 billion discounted ‘rights issue’ of new shares by the Royal Bank of Scotland is an attempt to shore up its asset base partly because of losses it has made on investment vehicles tied to the US sub-prime mortgage crisis. So again, much to the chagrin of their shareholders, there is no easy way out of this crisis for banks by attracting some more deposits and then creating vast multiples of credit from them to magically cover their losses.

Editors

Aspect: Can Banks Create Credit? (1971)

The Aspect column from the July 1971 issue of the Socialist Standard

Confusion about banking operations and the power of bankers has been in evidence for a long time. It was known before 1848, and that year saw the publication of two works putting opposite points of view. One was Lectures on the Nature and Use of Money in which John Gray outlined a scheme which was the forerunner of the Social Credit Movement founded by Major Douglas in the nineteen twenties. The other was John Stuart Mill’s Principles of Political Economy which contained the following:

“Credit has a great but not, as many people seem to suppose, a magical power; it cannot make something out of nothing … It seems strange that there should be any need to point out that credit, being only permission to use the capital of another person, the means of production cannot be increased by it, but only transferred … The same sum cannot be used as capital both by the owner and also by the person to whom it is lent . . .”

Part of the confusion arose out of the loose use of the term “credit creation”; by some writers to mean merely the grant of a loan by a bank, but by others to mean what Mill had in mind as making something out of nothing.

Marx on occasion wrote of the “creation of credit and capital” by the banks but not meaning anything more than the act of lending or investing. Elsewhere he described banks as merely institutions for bringing together and relending sums deposited by depositors. He ridiculed the “illusions concerning the miraculous power of the credit and banking system”, which he said, were held by those who failed to understand the nature of capitalist production and the credit system (Capital, Vol. III p. 713).

Sir Ralph Hawtrey in his Currency and Credit dealt with another confusion of terms:

“It is true that we are accustomed to think of bank credit as money. But this is only because for the practical purposes of every day the distinction between bank credits and money is rarely of any importance. And for all that a bank credit is merely a debt, differing from other debts only in the facilities allowed by the banker for transferring it to another creditor. No one imagines that a trade debt is money, though it may be as good an asset as a bank credit” (2nd Edition, p. 5).

Major Douglas, like John Gray, would have rejected outright the views of Mill, Marx and Hawtrey on credit. He claimed that bank loans are the issue of money just like the issue of notes by the Bank of England and that, by making loans, “a bank acquires securities for nothing”, and that “it is absolutely correct to say that . . . new money has been created by a stroke of the banker’s pen.” (The Monopoly of Credit, 1931 pp. 15 and 17). In the words of one of his supporters, banks can create “untold wealth at the cost of a few drops of ink and the fraction of a clerk’s wages”.

Basically the dispute is between those who hold that banks are merely intermediaries to whom depositors make purchasing power available by depositing with them, and which then make that purchasing power, or most of it, available to others by transferring it to them as loans or using it to purchase securities etc; or whether the banks themselves, by making loans create the largest part of the deposits.

Starting from the production of value by the application of human labour to nature-given materials and its conversion into money, is it that some part is lent to the banks in the form of deposits, for the banks to relend or invest, or is it the banks which create large amounts over and above the amounts deposited?

G. D. H. Cole accepted the “creationist” view. He wrote that bank loans “represent a real creation of additional money — additional purchasing power”. (What Everybody Wants to know about Money, p.39).

Among those who have held the “intermediary” view, along with Mill and Marx were many bankers and, notably Professor Edwin Cannan in his An Economist’s Protest.

Of particular interest were Reginald McKenna, politician turned banker, who was Chairman of the Midland Bank, and J. M. Keynes, both of whom at first supported creationist theory and later changed their attitudes.

One of many anti-creationist statements made by bankers, was that by Walter Leaf, Chairman of the Westminster Bank:

“The banks can lend no more than they can borrow — in fact not nearly so much. If anyone in the deposit banking system can be called a ‘creator of credit’ it is the depositors; for the banks are strictly limited in their lending operations by the amount which the depositors think fit to leave with them” (Banking. Home University Library, 1926, p. 102).

Hartley Withers, sometime editor of the Economist popularised creationist theory in his The Manufacture of Money and used the phrase “every bank loan makes a deposit”, later expanded to “every bank loan or purchase of securities creates a deposit”; and its converse that every withdrawal of a loan or sale of a security destroys a deposit.

McKenna repeated this and provided Major Douglas with weighty support.

The theory was given official endorsement in the Report of the MacMillan Committee 1931, (Committee on Finance and Industry) and found its way into the textbooks. Though McKenna was a member of the Committee he then denied that he agreed with Major Douglas about the creation of credit; which was really rather hard on Douglas who had, after all, only taken McKenna’s words at their face value. Another signatory of the Report was Professor T. E. Gregory who held the Chair of Banking and Currency at the London School of Economics and who in that capacity took Cannan’s line.

The Macmillan Committee’s support for creationist theory is still widely accepted. It turned up recently in Ernest Mandel’s Marxist Economic Theory where Mandel quotes it with approval.

One argument used by creationists to support their case was that, without creationist theory, it was not possible to explain how the deposits of the commercial banks could exceed the total amount of notes and coin in circulation. This is easily disposed of. If a bank receives deposits of £5 million a week and has £4 million a week withdrawn by depositors, deposits will increase by £1 million a week and the eventual total is in no way limited by the amount of currency in circulation. In 1937 the Post Office Savings Bank had no cheque facilities and made no loans to businesses or private borrowers, but its total deposits did in fact exceed the total amount of notes and coin in circulation with the public. The deposits were invested in government securities.

The statement of the “creationist” case in the MacMillan Report started with the following:

“It is not unnatural to think of the deposits of a bank as being created by the public through the deposit of cash representing either savings or amounts which are not for the time being required to meet expenditure. But the bulk of the deposits arise out of the action of the banks themselves, for by granting loans, allowing money to be drawn on an overdraft or purchasing securities, a bank creates a credit in its books which is the equivalent of a deposit. A simple illustration, in which it will be convenient to assume that all banking is concentrated in one bank will make this clear”.

The illustration assumed that a depositor deposited £1,000 in cash. The bank then lent £900 which was withdrawn by cheque and came back as new deposits. At this stage the deposits in the bank totalled £1,900 made up of the original £1,000 and the later deposits of £900. Against this liability the bank would show, on the assets side of its balance, cash £1,000 and loans to customers £900.

This lending process was repeated with nine more loans of £900, so that the bank’s books would then show £10,000 deposits, balanced by £1,000 cash and £9,000 loans owed to it by borrowers. The bank had thus “created” deposits of £9,000 by making loans, and the creationist case was proved. Or was it?

Certainly the Committee got the answer they wanted but in view of the way the conditions were rigged that was not surprising; little in the example had any resemblance to real banking conditions.

Not only did the Report make the thoroughly artificial assumption of only one bank in existence but it also assumed that none of the borrowers made withdrawals except by cheque, never by cash to hold and not to be returned to the bank. This enabled them to proceed on the basis that all the cheques drawn (or all the cash withdrawn) come back to the one bank — there was no other bank to which they could go. Actually the Report did not allow for any withdrawal in cash at all but treated the £1,000 cash deposit as remaining unchanged throughout the operations; which meant that the Committee was assuming, but without saying so, that a change had occurred in the world outside the bank which led to a permanent increase by £1,000 in the amount of cash left in the bank.

This line of reasoning, which isolates from a continuous in-and-out flow of deposits and withdrawals of cheques and cash, one single deposit of cash, is fallacious. If it were valid it could be applied in reverse; that is the Committee could have isolated a single withdrawal of £1,000 cash and treated it is a permanent reduction by £1,000 of the amount of cash left in the bank. It only needed one of the ten borrowers of £900 to take it out in cash or destroy the whole of the Committee’s case.

It appears to have been a belated recognition of this fallacy that later led J. M. Keynes to put a view contrary to that of the Report he had signed.

In his General Theory of Employment, Interest and Money (1936) he wrote:

“It is supposed . . . that the banking system can make it possible for investment to occur to which no saving corresponds. But no one can save without acquiring an asset, whether it be cash or a debt or capital goods, and no one can acquire an asset which he did not previously possess, unless either an asset of equal value is newly produced or someone else parts with an asset of that value which he previously had . . . The notion that the creation of credit by the banking system allows investment to take place to which ‘no genuine saving’ corresponds can only be the result of isolating one of the consequences of the increased bank-credit to the exclusion of others” (p. 80-1).

Actually, under the conditions assumed in the Report the bank was needlessly modest in making loans of only £9,000. They could have made it £90,000, or any figure they had cared to name, because every cheque had to come back to the one bank and they had in practice, but without saying so, prescribed that nobody was to draw and hold any of the £1,000 cash.

They also claimed that the result would be the same if there were many banks, i.e. that all withdrawals would automatically come back into the banking system, but this, as already mentioned, was based on the fallacy of supposing that the £1,000 deposit of cash was a permanent increase of cash in the banking system but without going into the change of outside conditions which would make it possible.

In practice there is nothing automatic about deposits. Banks have to attract money on deposit account by paying interest of millions of pounds on it and they spend tens of thousands of pounds on advertisements to attract new depositors.

The Committee also overlooked the fact that banking figures vary according to the method of investing. If a depositor with £1,000 in the bank draws a cheque to lend that amount to a business, bank balance sheet figures are completely unaffected since the £1,000 deposit has merely been transferred from the depositor’s account to the account of the business; but if the depositor leaves the £1,000 on deposit and the bank lends £1,000 to the business, bank deposits and loans both increase by £1,000.

The absurdity of creationist theory can be seen in practical terms if we consider what happens if the owner of £1,000 lends it direct to a business firm, and the effect if he deposits it in a bank and the bank then lends to the same firm. The MacMillan Committee’s example would have it that though the original owner had only £1,000 to dispose of the bank can lend £9,000 to the firm if it receives the £1,000 on deposit.

The Committee’s example also took it for granted that banks with money to lend can always find “creditworthy” clients who want to borrow all the banks have available. When trade is slack, as in recent months, they cannot.

If creationist theory had been correct banks would make profit at a rate far above that of industry — “fabulous profits” and “hundreds per cent” were the claims. It does not happen.

There is one company with wide interests in publishing, oil, engineering and other manufacturing activities, S. Pearson and Son Ltd. which also has a controlling interest in a bank, Lazards. Yet only about a sixth of Pearson’s profits come from Lazards. Lazards had a director on the MacMillan Committee who was also on the board of Lloyds Bank. It seems that he failed to convince Lazards — assuming that he even tried — that they really have the creationist powers set out in the Report he signed.

The MacMillan Report worked out its figures on the basis that banks need to keep ten per cent of their deposits in cash “to meet the demands of customers”. This ten per cent ratio enabled them to suppose that banks can lend nine times the amount of the £1,000 deposit. The conventional cash ratio is now down to 8 per cent, which would increase the creationist power to eleven and a half times the deposit. But the cash ratio is largely window dressing. If there were a mass withdrawal by depositors of the London Clearing Banks, £700 million of notes and cash would be quite ineffective if the depositors wanted to withdraw their £11,000 million of deposits. What banks endeavour to do is to anticipate events and match outgoing withdrawals and loans with incoming deposits and repayments of loans. If they could match these outgoing and incomings completely day by day they would need no cash in their tills, without the banks thereby being any less safe. If they could get it down to one per cent the assumed creationist powers would then be 99 times the £1,000 deposit. The cash ratio of the Savings Bank in 1937 was a quarter of one per cent.

Another consequence of creationist theory, accepted by its supporters, is that bank loans by increasing purchasing power have a determining influence on the price level. The facts show this to be baseless. Between the first quarter of 1921 and the first quarter of 1933 prices were falling continuously, by a total of forty four per cent. They fell when the deposits and loans of the London Clearing Banks were falling, when they were stationary and when they were rising. At the beginning of 1931 deposits and loans were at the same level as in 1921 but prices had fallen by forty per cent. Between 1926 and 1933 deposits and loans went up by seventeen per cent while prices went down by nineteen per cent. (Incidentally the MacMillan Committee wanted prices to rise in order to cure the depression). Bank deficits went down slightly between 1968 and 1970 while prices went up by twelve per cent.

Mention has been made of Marx having a view on the specific question of credit creation which was in line with that of some other economists, but he did not share their views on wider aspects. He wrote:

“The superficiality of Political Economy shows itself in the fact that it looks upon the expansion and contraction of credit which is a mere symptom of the periodic changes of the industrial cycle, as their cause” (Capital Vol. I. p. 695)

Against logic and all the weight of evidence, credit creationism still has its believers. Professor Cannan hit the nail on the head when he called them “the mystical school of banking theorists”.

Edgar Hardcastle

Cooking the Books: Must prices rise? (2021)

The Cooking the Books column from the December 2021 issue of the Socialist Standard

The Times (22 October) reported Alan Jope, the CEO of Unilever, warning that the price of many household goods would have to go up:

‘He highlighted how the cost of palm oil – the Anglo-Dutch company uses a million tonnes a year in its Dove soap and moisturisers – had increased by 82 per cent in two years due to labour shortages in Indonesia. Soya bean oil, used in its Hellmann’s mayonnaise, had risen by two thirds due to poor crop production in Brazil.’

To say that in such circumstances sellers are ‘forced’ to put up their price is misleading. Faced with an increase in the cost of producing their product, a seller cannot simply decide to increase its price to compensate. They could try but, if they misjudged the market, they would end up losing sales and profits. If the market won’t take an increase, they have to lump it and take a cut in profit margins.

As the Times went on to report, the supermarkets selling Unilever products won’t necessarily be able to pass on any price increase to buyers:

‘A retail source said that the intensely competitive food retail market meant it was hard for supermarkets to pass on higher prices, as shoppers might desert them for the likes of Aldi or Lidl.’

In short, when costs go up, it is the law of supply and demand that will bring about any price increase, but only as long as demand is maintained. Businesses do not have a free hand when it comes to fixing prices; it is the market that decides.

There is, however, one circumstance in which prices must go up. As long as it is government policy to depreciate the currency, the general price level has to increase. The reason is simple. Prices are expressed in a unit of currency and, if that unit depreciates, then more units will be needed to express a price.

It is government policy, not just in Britain but co-ordinated with the other members of the G7 (USA, Japan, Germany, France, Italy and Canada), that their currencies should depreciate by around 2 percent a year. They don’t put it that way but that is what it is. They present it as keeping prices from rising above or falling below this figure.

The justification for this is that a slowly rising price level is the best situation to encourage firms to invest and consumers to spend. Falling prices (which, due to increasing productivity, would otherwise be the case) would mean that firms and people would tend to hold off spending in the hope of a lower price. This is not always necessarily true as capitalism can, and did until the outbreak of WW2, function with falling as well as rising prices.

But Keynes noted another advantage for employers:

‘Keynes expressed, in numerous passages in The General Theory, the view that wages were “sticky” in terms of money. He noted, for example, that workers and unions tended to fight tooth-and-nail against any attempts by employers to reduce money wages (the actual sum of money workers receive, as opposed to the real purchasing power of these wages, taking account of changes in the cost of living), even by a little bit, in a way they did not fight for increases in wages every time there was a small rise in the cost of living eroding their “real wages”’ (bit.ly/3qBbVbD).

It’s not workers that cause rising prices. That’s another problem they have to face, forcing them to run fast to try to catch up. Keynes’s other policies have been discredited and abandoned but not this one.

So, must prices go up? Yes, in the case of currency depreciation. Not necessarily, in the case of the cost of supplies going up.

Mr. Keynes Goes to the Bank of England (1941)

From the October 1941 issue of the Socialist Standard

The news that Mr. J. M. Keynes, the “rebel against financial orthodoxy,” has become a director of the Bank of England and may in due course become governor when Mr. Montague Norman retires, inspires great hopes among his admirers in the Labour Party, but it will not cause even the slightest flutter of excitement among Socialists. His admirers may congratulate themselves at his appointment because he opposed the return to the gold standard in 1925 and advocated “unorthodox” proposals such as a managed currency and State control of interest rates, but they should remember his own words: “My trouble has been that orthodoxy has always caught up with me.” In other words, his quarrel with the administrators of capitalist finance has always been at bottom that they did not know their job properly, and should take some tips from him. He has never been concerned with our job of getting rid of capitalism.

It will be recalled that Mr. Keynes was active early in the war with his scheme for “compulsory savings,” the idea being that a proportion of every wage should be deducted and paid to the Government for war expenditure, and that the amount should be repaid after the war. The scheme is now applied in a modified form to income tax payments, part of which will be returned later on. Mr. Keynes may claim to have provided the Government with a shrewd scheme for the painless extraction of part of wages but it would be interesting if he could be induced to explain exactly how the workers are going to get it back after the war. Of course they will receive the money, but what exactly will be the real result in terms of work and articles of consumption ?

The first point to notice is that the labour and materials which go into shells and bombs and guns and are destroyed in the war no longer exist. They cannot be brought back. So that if, during wartime, the workers spend only part of their wages on food, clothing, etc., and forego other consumption in order that shells may be produced and destroyed they have in effect and for the time being suffered a reduction of wages.

But, say Mr. Keynes and the Chancellor of the Exchequer, what the workers have given up during the war will be made up to them afterwards. In other words if, during a war a nominal wage of say £5 a week was reduced to £4 a week, a nominal wage of £4 after the war will be brought up to £5 by these payments. (These figures are not actual ones but are merely taken for illustration.) But after the war (as always) it will be the working class who will be producing the articles which all the nation consumes. Then (as always) the wealth the workers produce will belong to the capitalist class, and what the workers get out of the total will be their wages. If they are to get a larger amount it can be in two ways, either by reducing the share that goes to the propertied class or by working harder and producing a larger total. Remembering what happened after the last war (the great “work harder, produce more” campaign, carried on by the Government and by a group of Labour leaders and economists) we may well anticipate that the workers will be told that the great destruction of the war has to be made good and will be asked to provide their own “bonuses” by working harder. If they don’t, they will certainly be told by employers that there isn’t enough to go round and wages must be reduced. Do Mr. Keynes and the Government intend to rack their brains finding some cast-iron scheme for preventing wages from being reduced (and prices from rising), and for preventing employers from dismissing workers, in short a scheme for forcing an all-round reduction of the wealth of the propertied class in order to raise the standard of living of the workers?

An illustration may help to show the essence of the matter. There was once a tenant who worked some acres of land on condition that he surrendered half his crop to the landlord. Then came war and the landlord said we shall each have to hand over some of our share to feed the troops, but your loss will be put right for you later on. When later on came, the landlord said, “Now that the destruction of the war has to be made good, I am afraid I still can’t let you have more than half the crop, but the promise will be kept. You shall have a larger amount, for I will let you work harder and produce a, bigger crop. Thus your half will be larger and you will be repaid for what you gave up.” And the tenant, while not very clear about the matter, had a feeling that there was something wrong somewhere.

It would certainly be interesting to have the shrewd Mr. Keynes explain the second part of the trick of turning your butter into guns and getting the butter back afterwards.

P. S.

Press Cuttings. (1940)

From the February 1940 issue of the Socialist Standard

Biblical Injunction.

From a letter to the Daily Telegraph (January 19th, 1940), criticising the Bishop of Birmingham, who had opposed the Blockade because of the Biblical injunction, “If thine enemy hunger, feed him” : —

“Is it permissible to bomb and shell the enemy, to inflict on him death and mutilation and destruction, but not permissible to interfere with his diet? Must the enemy, like the birds in a game preserve, be fattened only for the guns?”

* * *

A Knotty Problem for the Unemployed. 

“Can a man who has a few shillings to spend (having, we may add, taken up his full allowance of certificates and bonds) buy a bottle of champagne, or some other French product in the same category, without compromising the best national economic interests?”

(From a letter to The Times, January 23rd.)

* * *

“Sir, this is Monstrous!”

‘”Now, Sir, this is a monstrous state of affairs. This man is only one of a great multitude. He is being paid at least £8 a week more than he is worth.”

(From a letter to The Times, January 22nd, about an engineer fitter, formerly earning 65s., who, on piece-work, is said to have received £12 a week, not to mention “tea brought to him twice a day.”)

* * *

Where shall we send Tommy to School? !

” . . . It costs £300 a year to send your son to a good school.”

(From an article in the Daily Mail, January 22nd, 1940.)

* * *

She will Meditate on Democracy.

“Mlle. Marie-Louise Pusset, 57-year-old teacher at a girls’ school here, has been sentenced to four months’ imprisonment for attempting to defend Soviet Russia in her classroom.

“The judge declared that the teacher, a former member of the Communist Party, had shown activity favouring the Third International.—Exchange.”

(Evening Standard, January 11th, 1940.)

* * *

“Continual raiding of Germany would provoke retaliatory measures against this country which would use up still more material, as well as strengthen the determination of our people. Raids on Germany would shake the confidence of the people of Germany in Hitler.”

(From a speech of Mr. L. S. Amery, reported in The Times, January 24th, 1940.)

* * *

Unpatriotic Cats.

From an account of Germany by a neutral correspondent (Daily Telegraph, January 19th, 1940): —

“The nation that can eat the least can win the war.”

“German physicians privately express their conviction that the post-war generation will be physically unfit as the result of to-day’s feeding. Even cats refuse to drink the skimmed milk. . . .”

* * *

From The People, January 21st, 1940:—

” Germany’s miracle peasant girl has refused her ration cards because she has no need of food. . . . For the past 12 years she has taken neither food nor drink.”

* * *

Sensitive as Prima Donnas.

What the general said : —

“You’ll soon learn, like Repington did, that we generals are as sensitive as prima donnas!”

(Sunday Express, January 14th, 1940.)

* * *

Did they Listen to Keynes?

“November 14th, 1939: ‘Mr. Keynes, in The Times, urges the Government to introduce a scheme of compulsory savings, repayable after the war.

“January 12th, 1940: Copenhagen correspondent of Daily Telegraph reveals ‘astonishing new details of the desperate plan evolved by Field-Marshal Goenng and Dr. Funk.’

” ‘A most amazing feature’ is that the worker ‘will only receive an official receipt for the confiscated money, which is not redeemable until the war is over.'”

(Daily Telegraph, January 12th.)

* * *

Good Health from H. G. Wells.

“This is war, and this is what it must come to. I would rather bomb the Germans than starve them. In the end it will be quicker, and it will leave the Germans, it may be, in a healthier state of mind.”

(Daily Mail, January 25th, 1940.)

* * *

Not Hitler but the Pacifists.

“‘It is my firm belief, based on good evidence,’ the bishop said, ‘that these people-pacifists is the name they go by—are more responsible than anybody else for the fact that we are once again involved in war.'”

(The Bishop of Grantham, Daily Telegraph,January 15th, 1940.)

* * *

Stalin, the Dancing Master.

“The old peasant woman Anfisa Taraseyeva recollects that ‘Joseph Vissiaronovitch loved to sing, and even more to dance. He was a great master of dancing and taught the young people to dance.

‘ When asked to dance he would enter the circle at jog-trot, halt for a moment, shake his head and shoulders, clap his hands and cry out, “Let go, like lightning,” dancing with such fervour that he raised a whirlwind of dust.

‘He was some master at dancing; and could not see enough of it!'”

(Daily Worker, December 23rd, 1939.)

* * *

War, the Liberator.

It is not too much to say that always every reform that has been introduced since the war is the result of discussions and preparations that started during the war and under its liberating impulse.”

(Manchester Guardian Editorial)

Socialism and the so-called “middle class”. - Part 2 (1925)

From the February 1925 issue of the Socialist Standard

(Continued from January issue.)

The property holdings of the “middle class,” unlike those of the capitalist, do not free their possessors from worry, and do not give them command over the lives and destinies of other men. They represent deductions from present income for future needs; they are therefore not capital in the sense of being “wealth used for the purpose of gain” (the definition of capital used by a Conservative, Sir William Ashley), the receipt of a return on them being only incidental, and not the object of their existence. Unlike Topsy, they have not “just growed.” On the contrary, these reserves, for the future of themselves and their children, can only be accumulated by deliberate and self-denying effort. Failure to make such saving against the future is followed by a fall to a lower level of life, either in this or the succeeding generation. The effort to retain their “nest egg” occupies so large a part of their lives that it becomes the basis of the political philosophy of the more highly paid workers, and, like the bird in the Mediaeval romance, they are so busy sitting tight on their eggs so that they shall not be stolen, that they do not see they are being robbed by the opening of the nest from below. To secure their savings from “predatory Socialists” who are supposed to have raiding designs on their women and children, they hitch their wagon to capitalism. But what security does capitalism offer even for their savings ?

Savings can be held in one of the following forms—in currency or in bank balances which represent claims to a definite amount of currency, in government bonds, or in titles to property of various kinds, such as title deeds of land, shares in industrial and commercial undertakings, etc. Of the two main kinds of shares, debentures represent a claim to a fixed annual interest and the repayment of a definite sum of money. Therefore debentures, government bonds, currency holdings, and bank balances can be lumped together as being holdings of money, and it follows that the value of these holdings depends on “the value” of money. But there is no guarantee under capitalism that the value of money measured in the commodities it will purchase for its possessor will remain constant, or even that it will fluctuate only within narrow limits. Wherever there has been money economy there have been violent fluctuations. (For an example in the Ancient World, see Gibbons’ “Decline and Fall,” Chapter 11.) The recent happenings in Europe provide an instructive illustration of the lack of security in all currency holdings. In Germany the value of money has fallen to such a degree that the internal debt has been wiped out. In France pre-war holdings of Government Stock have lost seven-eighths of their real value; in Italy, eleven-twelfths; and in England, one half.

  “Throughout the Continent pre-war savings of the middle class, so far as they were invested in bonds, mortgages, or bank deposits, have been largely or entirely wiped out” (“A Tract on Monetary Reform,” J. M. Keynes, page 16).

Mr. Keynes adds : 

  “What was deemed most secure has proved least so. He who neither spent nor ‘speculated,’ who made ‘proper provision for his family,’ who sang hymns to security and observed most straightly the morals of the edified, and the respectable injunctions of the worldly-wise—he, indeed, who gave fewer pledges to Fortune, has yet suffered her heaviest visitations” (page 17). 

And this lack of security proceeds not from natural causes such as make uncertain the life of the savage—that is, famines, plagues, earthquakes, floods, etc.—but from a defect in the organisation of society based as it is on money economy. If it be argued that these fluctuations were the product of war, which is an abnormal condition, it need only be pointed out that where there is production for profit there will be struggles for markets and raw materials, and where there is a clash of interests there is an ever-present danger of war. And, moreover, price fluctuations before the war were considerable over a period of years. Here it is sufficient to note (see Keynes) that between 1896 and 1914 the capital “value of the annuity of any investor in Consols fell by about one-third, and the purchasing power of his income from them by about the same amount.” Consols are chosen as representing a class of investment free from ordinary speculative risks of trade, and therefore affording the best index to changes of the kind we are here concerned with.

There is, then, no permanent security in that class of savings which represent titles to certain sums of money. Titles to land and ordinary shares remain to be dealt with. But, first, two possible criticisms must be anticipated.

Economic Insecurity.

It may be objected that lack of security affects the capitalist as well as the small saver. It certainly does, but as all authorities admit, not nearly to the same extent. The capitalists as a class are not ruined by changes in the value of money, though some individual members may be. Their economic domination is not ended by fluctuating prices, any more than the subjection of the workers is lessened by either stable or changing prices. This is because capitalists hold goods, factories, mines, and commodities of all kinds, and not money, which is only a means to the obtaining of goods. To quote Keynes again : “Small savers have most to lose by currency depreciation” (page 66). But even if it were true that the capitalists are also insecure, this would not disprove our contention that capitalism fails to provide security for the “middle class,” and it would be additional evidence of the decay of the system.

The other objection which might be raised is that there could never be complete security under any system. This is obviously true as regards natural catastrophes like plagues, crop failures, earthquakes, etc., whose effects we can at present not guard against entirely, but it has no bearing on the kind of insecurity which is an effect of capitalism and which can be removed with capitalism.

Now let us consider titles to land. This kind of “middle class” property needs little attention, because it hardly exists. Some own their own houses, and a few own other houses as well as the one in which they live. Those that are held on lease are not a form of permanent revenue, thus only freehold house property remains, and the capital and rental values of this are by no means certain. The decay of industry in a particular neighbourhood may completely destroy the value of house property in it. Even since the war, and in spite of the Rents Restriction Acts, there have been local falls of the value of house property, and before the war fluctuation in value of house property was notorious.

As for ordinary shares, they are a type of investment not in favour with those people now under discussion. They play for safety and avoid investing in industrial shares whose fluctuations are so wide and unpredictable. Only the favoured few experienced persons “in the know” are aware of impending movements by which money can be made, and they are not members of the so-called “middle class,” whose savings, moreover, are not large enough to be widely distributed so as to minimise the risk of loss. The recent happenings in Dunlops will serve to drive home our point. Adverse trading conditions resulting in a loss of ten and a half million pounds have involved the reduction of the ordinary £1 shares to 6s. 8d. each. Yet Dunlops was regarded as one of the safest companies in that trade. Crosse and Blackwell’s, and Burberry’s, other perfectly “safe” concerns, have had to carry through similar re-organisation schemes.

There is certainly no security for small property ; is there any more security attaching to the employment of the “middle class”? The following London banks have collapsed since the war, and many of the staff are still looking for work, to be met always with the reply, even where vacancies need to be filled, younger men or boys will do:

Sir Robert McGrigors, Bart., and Sons; Hannevigs Bank Ltd. ; Alliance Bank of Simla, Ltd. ; Boulton Brothers. If it be said that these were not first-class firms, that objection cannot be raised against the Austrian Discount Bank, of Vienna, or against the Banco Disconto in Italy, or Alperin, Kisch, and Schiff, of New York—all of them first-class, old-established banks or banking companies which have recently failed. Shipping and insurance companies which have failed during the last few years and thrown thousands of men out of employment are too numerous to mention. Recall the affair of Bevan. He was a financier who gambled in a way that his kind do every day. But he was unlucky, and went to gaol, and an associated firm, the oldest-established stockbrokers in the City, was ruined. As a result, clerks of over forty years’ service found themselves suddenly out of a job.

As Mr. R. Tawney puts it (“Acquisitive Society,” page 204): The brain workers, like the manual workers, find that

  “Their tenure of their posts is sometimes highly insecure. Their opportunities for promotion may be few and distributed with a singular capriciousness. They see the prizes of industry awarded by favouritism, or by the nepotism which results in the head of a business unloading upon it a family of sons whom it would be economical to pay to keep out of it, and which, indignantly denounced on the rare occasions on which it occurs in the public service, is so much the rule in private industry that no one even questions its propriety.”

Enough has been written to show that there is no section of the working class without its problem of unemployment, and that the problem is the same for the whole class without distinction of sex or colour of skin or working coat. The problem, moreover, is not one of mere numbers. To reduce the number, as the Labour Party and other capitalist quacks seek to do, does not solve the problem. It is an effect of the social system that it cannot provide its members with the opportunity to labour in support of themselves. The only guarantee the present system gives is that certain privileged members shall be able to live in sumptuous idleness on the backs of their fellows. They do this by exploiting those they employ, and the latter, if alive to their own interest, would end the system which is based on exploitation.

The Inefficiency of Capitalism.

If the “middle class” are more foolish than the so-called manual workers, and instead of looking at social problems from the point of view of their own self-interest they wish to measure everything according to the standards set by the ruling class, they must still condemn the present system because it is grossly inefficient.

Is it efficient to have millions of workers seeking employment while the machinery of production is standing idle? Is it efficient to put checks on Nature because she yields too generously of her bounty? And yet this is what happens in the production of rubber, tea, jute, etc. Is it efficient to have trawlers dumping cargoes of fish into the sea in order to keep prices up? Is it efficient to fatten and pamper a select and useless few while half the people are on the verge of starvation? Is it efficient to be doing jobs which are not necessary for the ordering and use of society? Yet nearly the whole of the clerical profession are thus occupied. What need of insurance clerks in a world where risks are borne by society instead of by a special section with a view to making a profit. Solicitors’ clerks, what need of them except to haggle over private property? Abolish money economy, and what a reserve labour is made available for production from the ranks of the bank staffs. Whichever way you look at it, this system is rotten, inefficient, and destructive of the best potentialities in man. Social progress demands its overthrow, a task which only the working class can perform. The workers alone can break the chains that bind them, and replace a class system based on production for profit by a classless system producing for use. Chains are still chains though they are gilded, and the “middle class” being in reality merely a section of the workers, must join with the rest of their class in breaking those chains.

A. L. T.

(Conclusion.)

Blogger's Note:

'A.L.T.' could have been Albert L. Torr, who joined the Manchester Branch of the SPGB in October 1916 (alongside a William Torr). It makes sense that a bank clerk,  a 'brain-worker', would seek the anonymity of a pen-name in the pages of the Socialist Standard.