(ii) On the Eve of Gold Suspension

(Sept. 10, 1931)

The moral energies of the nation are being directed into wrong channels, and serious troubles are ahead of us unless we apply our minds with more effect than hitherto to the analysis of the real character of our problems.

The exclusive concentration on the idea of "Economy," national, municipal, and personal—meaning by this the negative act of withholding expenditure which is now stimulating the forces of production into action—may, if under the spur of a sense of supposed duty it is carried far, produce social effects so shocking as to shake the whole system of our national life.

There is scarcely an item in the Economy Programme of the May Report—whether or not it is advisable on general grounds—which is not certain to increase unemployment, to lower the profits of business, and to diminish the yield of the revenue; so much so that I have calculated that economies of £100,000,000 may quite likely reduce the net Budget deficit by not more than £50,000,000, and we are just hoodwinking ourselves (unless our real object is to pretend to balance the Budget for the benefit of foreign financiers) if we suppose that we can make the economies under discussion without any repercussions on the number of the unemployed to be supported or on the yield of the existing taxes.

Yet if we carry "Economy" of every kind to its logical conclusion, we shall find that we have balanced the Budget at nought on both sides, with all of us flat on our backs starving to death from a refusal, for reasons of economy, to buy one another's services.

The Prime Minister has said that it is like the war over again, and many people believe him. But this is exactly the opposite of the truth. During the war it was useful to refrain from any avoidable expenditure because this would release resources for the insatiable demands of military operations. What are we releasing resources for to-day? To stand at street corners and draw the dole.

When we already have a great amount of unemployment and unused resources of every description, economy is only useful from the national point of view in so far as it diminishes our consumption of imported goods. For the rest, its fruits are entirely wasted in unemployment, business losses, and reduced savings. But it is an extraordinarily indirect and wasteful way of reducing imports.

If we throw men out of work and reduce the incomes of Government employees so that those directly and indirectly affected cannot afford to buy so much imported food, to this extent the country's financial position is eased. But this is not likely to amount to more than 20 per cent of the total economies enforced. The remaining 80 per cent is wasted, and represents either a mere transference of loss or unemployment due to a refusal of British citizens to purchase one another's services.

What I am saying is absolutely certain, yet I doubt if one in a million of those who are crying out for economy have the slightest idea of the real consequences of what they demand.

This is not to deny that there is a Budget problem. Quite the contrary. The point is that the state of the Budget is mainly a symptom and a consequence of other causes, that economy is in itself liable to aggravate rather than to remove these other causes, and that consequently the Budget problem, attacked merely along the lines of economy, is probably insoluble.

What are our troubles fundamentally due to? Very largely to the world depression, immediately to the unbelievable rashness of High Finance in the City, and originally to the policy of returning to the Gold Standard without the slightest appreciation of the nature of the difficulties which this involved. To say that our problem is a Budget problem is like saying that the German problem is a Budget problem, forgetting all about Reparations.

Now as regards the world depression, there is at the moment absolutely nothing that we can do, for we have now lost the power of international initiative which we seemed to be regaining last May. The results of unsound international banking by the City are also, for the time being, irreparable. The choice left to us was whether or not to adhere to the present gold parity of the exchanges.

This was decided in the affirmative for reasons which I understand but with which I do not agree. The decision was taken in a spirit of hysteria and without a calm consideration of the alternative before us. Ministers have given forecasts of what might have been expected if we had taken a different course which could not survive ten minutes' rational discussion.

I believe that we shall come to regret this decision, just as we already regret most of the critical decisions taken during the last ten years by the persons who form the present Cabinet.

But that is not the point at this moment. The decision to maintain the gold standard at all costs has been taken. The point is that the Cabinet and the public seem to have no clear idea as to what has to be done to implement its own decision, apart from the obvious necessity of raising a foreign loan for immediate requirements; which simply has the effect of replacing money which we had previously borrowed in terms of sterling, by money borrowed in terms of francs and dollars. But they cannot suppose that we can depend permanently on foreign loans. The rest of the problem is primarily concerned with improving our current balance of trade on income account. This is what the Cabinet ought to be thinking about.

There are only two possible lines of attack on this. The one (which is the milder measure open to us) consists in direct measures to restrict imports (and, if possible, subsidise exports); the other is a reduction of all money wages within the country. We may have to attempt both in the end, if we refuse to devaluate.

But the immediate question is which to try first. Now the latter course, if it were to be adequate, would involve so drastic a reduction of wages and such appallingly difficult, probably insoluble, problems, both of social justice and practical method, that it would be crazy not to try first the effects of the alternative, and much milder, measure of restricting imports.

It happens that this course also has other important advantages. It will not only relieve the strain on the foreign exchanges. It would also do more than any other single measure to balance the Budget; and it is the only form of taxation open to us which will actually increase profits, improve employment, and raise the spirits and the confidence of the business community.

Finally, it is the only measure for which there is (sensibly enough) an overwhelming support from public opinion. It is credibly reported that the late Cabinet were in favour of a tariff in the proportion of three to one. It looks as if the present Cabinet may favour it in the proportion of four to one. The only third alternative Cabinet is unanimously for it. But sacrifice being the order of the day, we have in the spirit of self-immolation conceived the brilliant contrivance of a "National" Government, the basis of which is that every member of it agrees, so long as it lasts, to sacrifice what he himself believes to be the only sound solution for our misfortunes.

For if we rule out Devaluation, which I personally now believe to be the right remedy, but which is not yet the policy of any organised party in the State, there are three possible lines of procedure.

The first is to take the risks of brisk home development, as being preferable to enforced idleness.

The second is to organise a general reduction of wages, and, in the interests of social justice, of other money-incomes as well, so far as this is feasible.

The third is a drastic restriction of imports.

The "National" Government is pledged, if I understand the position rightly, to avoid all three. Their policy is to reduce the standard of life of as many people as are within their reach in the hope that some small portion of the reductions of standard will be at the expense of imports. Deliberately to prefer this to a direct restriction of imports is to be non compos mentis.

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