A Tract on Monetary Reform

CHAPTER V

POSITIVE SUGGESTIONS FOR THE FUTURE REGULATION OF MONEY 177

1. Great Britain 178

2. The United States 197

3. Other Countries 204

INDEX 207

CHAPTER I. The Consequences to Society of Changes in the Value of Money

THE CONSEQUENCES TO SOCIETY OF CHANGES IN THE VALUE OF MONEY

Money is only important for what it will procure. Thus a change in the monetary unit, which is uniform in its operation and affects all transactions equally, has no consequences. If, by a change in the established standard of value, a man received and owned twice as much money as he did before in payment for all rights and for all efforts, and if he also paid out twice as much money for all acquisitions and for all satisfactions, he would be wholly unaffected.

It follows, therefore, that a change in the value of money, that is to say in the level of prices, is important to Society only in so far as its incidence is unequal. Such changes have produced in the past, and are producing now, the vastest social consequences, because, as we all know, when the value of money changes, it does not change equally for all persons or for all purposes. A man’s receipts and his outgoings are not all modified in one uniform proportion. Thus a change in prices and rewards, as measured in money, generally affects different classes unequally, transfers wealth from one to another, bestows affluence here and embarrassment there, and redistributes Fortune’s favours so as to frustrate design and disappoint expectation.

The fluctuations in the value of money since 1914 have been on a scale so great as to constitute, with all that they involve, one of the most significant events in the economic history of the modern world. The fluctuation of the standard, whether gold, silver, or paper, has not only been of unprecedented violence, but has been visited on a society of which the economic organisation is more dependent than that of any earlier epoch on the assumption that the standard of value would be moderately stable.

During the Napoleonic Wars and the period immediately succeeding them the extreme fluctuation of English prices within a single year was 22 per cent; and the highest price level reached during the first quarter of the nineteenth century, which we used to reckon the most disturbed period of our currency history, was less than double the lowest and with an interval of thirteen years. Compare with this the extraordinary movements of the past nine years. To recall the reader’s mind to the exact facts, I refer him to the table on the next page.

I have not included those countries--Russia, Poland, and Austria--where the old currency has long been bankrupt. But it will be observed that, even apart from the countries which have suffered revolution or defeat, no quarter of the world has escaped a violent movement. In the United States, where the gold standard has functioned unabated, in Japan, where the war brought with it more profit than liability, in the neutral country of Sweden, the changes in the value of money have been comparable with those in the United Kingdom.

INDEX NUMBERS OF WHOLESALE PRICES EXPRESSED AS A PERCENTAGE OF 1913 (1).

+-----------------------------------+--------------------------------+ |Monthly Average. |U.S.A. (3). | | |United Kingdom (2). | |Canada. | | | |France. | | |Japan. | | | | |Italy. | | | |Sweden. | | | | | |Germany.| | | | |India.| +-------+-----+----- +-----+--------+-----+----- +-----+----- +------+ |1913 | 100 | 100 | 100 | 100| 100 | 100 | 100 | 100 | .. | |1914 | 100 | 102 | 96 | 106| 98 | 100 | 95 | 116 | 100 | |1915 | 127 | 140 | 133 | 142| 101 | 109 | 97 | 145 | 112 | |1916 | 160 | 189 | 201 | 153| 127 | 134 | 117 | 185 | 128 | |1917 | 206 | 262 | 299 | 179| 177 | 175 | 149 | 244 | 147 | |1918 | 227 | 340 | 409 | 217| 194 | 205 | 196 | 339 | 180 | |1919 | 242 | 357 | 364 | 415| 206 | 216 | 239 | 330 | 198 | |1920 | 295 | 510 | 624 | 1,486| 226 | 250 | 260 | 347 | 204 | |1921 | 182 | 345 | 577 | 1,911| 147 | 182 | 200 | 211 | 181 | |1922 | 159 | 327 | 562 | 34,182| 149 | 165 | 196 | 162 | 180 | |1923| 159 | 411 | 582 | 765,000| 157 | 167 | 192 | 166 | 179 | +-------+-----+----- +-----+--------+-----+----- +-----+----- +------+

(1) These figures are taken from the Monthly Bulletin of Statistics of the League of Nations. (2) Statist up to 1919; thereafter the median of the Economist, Statist, and Board of Trade Index Numbers. (3) Bureau of Labour Index Number (revised).

First half-year.

From 1914 to 1920 all these countries experienced an expansion in the supply of money to spend relatively to the supply of things to purchase, that is to say Inflation. Since 1920 those countries which have regained control of their financial situation, not content with bringing the Inflation to an end, have contracted their supply of money and have experienced the fruits of Deflation. Others have followed inflationary courses more riotously than before. In a few, of which Italy is one, an imprudent desire to deflate has been balanced by the intractability of the financial situation, with the happy result of comparatively stable prices.

Each process, Inflation and Deflation alike, has inflicted great injuries. Each has an effect in altering the distribution of wealth between different classes, Inflation in this respect being the worse of the two. Each has also an effect in overstimulating or retarding the production of wealth, though here Deflation is the more injurious. The division of our subject thus indicated is the most convenient for us to follow,--examining first the effect of changes in the value of money on the distribution of wealth with most of our attention on Inflation, and next their effect on the production of wealth with most of our attention on Deflation. How have the price changes of the past nine years affected the productivity of the community as a whole, and how have they affected the conflicting interests and mutual relations of its component classes? The answer to these questions will serve to establish the gravity of the evils, into the remedy for which it is the object of this book to inquire.

I.--CHANGES IN THE VALUE OF MONEY, AS AFFECTING DISTRIBUTION

For the purpose of this inquiry a triple classification of Society is convenient--into the Investing Class, the Business Class, and the Earning Class. These classes overlap, and the same individual may earn, deal, and invest; but in the present organisation of society such a division corresponds to a social cleavage and an actual divergence of interest.

1. The Investing Class.

Of the various purposes which money serves, some essentially depend upon the assumption that its real value is nearly constant over a period of time. The chief of these are those connected, in a wide sense, with contracts for the investment of money. Such contracts--namely, those which provide for the payment of fixed sums of money over a long period of time--are the characteristic of what it is convenient to call the Investment System, as distinct from the property system generally.

Under this phase of capitalism, as developed during the nineteenth century, many arrangements were devised for separating the management of property from its ownership. These arrangements were of three leading types: (1) Those in which the proprietor, while parting with the management of his property, retained his ownership of it--i.e. of the actual land, buildings, and machinery, or of whatever else it consisted in, this mode of tenure being typified by a holding of ordinary shares in a joint-stock company; (2) those in which he parted with the property temporarily, receiving a fixed sum of money annually in the meantime, but regained his property eventually, as typified by a lease; and (3) those in which he parted with his real property permanently, in return either for a perpetual annuity fixed in terms of money, or for a terminable annuity and the repayment of the principal in money at the end of the term, as typified by mortgages, bonds, debentures, and preference shares. This third type represents the full development of Investment.

Contracts to receive fixed sums of money at future dates (made without provision for possible changes in the real value of money at those dates) must have existed as long as money has been lent and borrowed. In the form of leases and mortgages, and also of permanent loans to Governments and to a few private bodies, such as the East India Company, they were already frequent in the eighteenth century. But during the nineteenth century they developed a new and increased importance, and had, by the beginning of the twentieth, divided the propertied classes into two groups--the “business men” and the “investors”--with partly divergent interests. The division was not sharp as between individuals; for business men might be investors also, and investors might hold ordinary shares; but the division was nevertheless real, and not the less important because it was seldom noticed.

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