Various - Essays in Liberalism
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Various >> Essays in Liberalism
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I am speaking to you as one who for a great many years believed
absolutely that preparation for war was the means of securing peace. In
1919--when I had a little time to look round, to study the causes of the
war and the events of the war--I changed my opinion. I then came quite
definitely to the conclusion that preparation for war, carried to the
point to which it had been carried in 1914, was a direct cause of war. I
had to find another path, and I found it in 1919. Lord Robert may
possibly remember that in the early days of the Peace Conference I came
to him and made my confession of faith, and I promised to give him what
little help I could. I have tried to keep my promise, and I believe this
vital problem, upon which not only the economic reconstruction of Europe
and the future peace of the world, but also social development at home
depend, can be solved provided you will recognise that the problem is
very complex; that there is fear to be overcome; that you are content
with what is practical from day to day, and accept each practical step
provided it leads forward to the desired goal. I therefore most
earnestly trust that the Liberal party will take this question up, and
translate it into practical politics. For that is what is required.
REPARATIONS AND INTER-ALLIED DEBT
BY JOHN MAYNARD KEYNES
M.A., C.B.; Fellow of King's College, Cambridge; Editor of _Economic
Journal_ since 1912; principal representative of the Treasury at the
Paris Peace Conference, and Deputy for the Chancellor of the Exchequer
on the Supreme Economic Council, Jan.-June, 1919.
Mr. Keynes said:--I do not complain of Lord Balfour's Note, provided we
assume, as I think we can, that it is our first move, and not our last.
Many people seem to regard it as being really addressed to the United
States. I do not agree. Essentially it is addressed to France. It is a
reply, and a very necessary reply, to the kites which M. Poincare has
been flying in _The Times_ and elsewhere, suggesting that this country
should sacrifice all its claims of every description in return
for--practically nothing at all, certainly not a permanent solution of
the general problem. The Note brings us back to the facts and to the
proper starting-point for negotiations.
In this question of Reparations the position changes so fast that it may
be worth while for me to remind you just how the question stands at this
moment. There are in existence two inconsistent settlements, both of
which still hold good in law. The first is the assessment of the
Reparation Commission, namely, 132 milliard gold marks. This is a
capital sum. The second is the London Settlement, which is not a capital
sum at all, but a schedule of annual payments calculated according to a
formula; but the capitalised value of these annual payments, worked out
on any reasonable hypothesis, comes to much less than the Reparation
Commission's total, probably to not much more than a half.
THE BREAKDOWN OF GERMANY
But that is not the end of the story. While both the above settlements
remain in force, the temporary regime under which Germany has been
paying is different from, and much less than, either of them. By a
decision of last March Germany was to pay during 1922 L36,000,000 (gold)
in cash, _plus_ deliveries in kind. The value of the latter cannot be
exactly calculated, but, apart from coal, they do not amount to much,
with the result that the 1922 demands are probably between a third and a
quarter of the London Settlement, and less than one-sixth of the
Reparation Commission's original total. It is under the weight of this
reduced burden that Germany has now broken down, and the present crisis
is due to her inability to continue these reduced instalments beyond the
payment of July, 1922. In the long run the payments due during 1922
should be within Germany's capacity. But the insensate policy pursued by
the Allies for the last four years has so completely ruined her
finances, that for the time being she can pay nothing at all; and for a
shorter or longer period it is certain that there is now no alternative
to a moratorium.
What, in these circumstances, does M. Poincare propose? To judge from
the semi-official forecasts, he is prepared to cancel what are known as
the "C" Bonds, provided Great Britain lets France off the whole of her
debt and forgoes her own claims to Reparation. What are these "C" Bonds?
They are a part of the London Settlement of May, 1921, and, roughly
speaking, they may be said to represent the excess of the Reparation
Commission's assessment over the capitalised value of the London
Schedule of Payments, and a bit more. That is to say, they are pure
water. They mainly represent that part of the Reparation Commission's
total assessment which will not be covered, even though the London
Schedule of Payments is paid in full.
In offering the cancellation of these Bonds, therefore, M. Poincare is
offering exactly nothing. If Great Britain gave up her own claims to
Reparations, and the "C" Bonds were cancelled to the extent of France's
indebtedness to us, France's claims against Germany would be actually
greater, even on paper, than they are now. For the demands under the
London Settlement would be unabated, and France would be entitled to a
larger proportion of them. The offer is, therefore, derisory. And it
seems to me to be little short of criminal on the part of _The Times_ to
endeavour to trick the people of this country into such a settlement.
Personally, I do not think that at this juncture there is anything
whatever to be done except to grant a moratorium. It is out of the
question that any figure, low enough to do Germany's credit any good
now, could be acceptable to M. Poincare, in however moderate a mood he
may visit London next week. Apart from which, it is really impossible at
the present moment for any one to say how much Germany will be able to
pay in the long run. Let us content ourselves, therefore, with a
moratorium for the moment, and put off till next year the discussion of
a final settlement, when, with proper preparations beforehand, there
ought to be a grand Conference on the whole connected problem of
inter-Governmental debt, with representatives of the United States
present, and possibly at Washington.
THE ILLUSION OF A LOAN
The difficulties in the way of any immediate settlement now are so
obvious that one might wonder why any one should be in favour of the
attempt. The explanation lies in that popular illusion, with which it
now pleases the world to deceive itself--the International Loan. It is
thought that if Germany's liability can now be settled once and for all,
the "bankers" will then lend her a huge sum of money by which she can
anticipate her liabilities and satisfy the requirements of France.
In my opinion the International Loan on a great scale is just as big an
illusion as Reparations on a great scale. It will not happen. It cannot
happen. And it would make a most disastrous disturbance if it did
happen. The idea that the rest of the world is going to lend to
Germany, for her to hand over to France, about 100 per cent. of their
liquid savings--for that is what it amounts to--is utterly preposterous.
And the sooner we get that into our heads the better. I am not quite
clear for what sort of an amount the public imagine that the loan would
be, but I think the sums generally mentioned vary from L250,000,000 up
to L500,000,000. The idea that any Government in the world, or all of
the Governments in the world in combination, let alone bankrupt Germany,
could at the present time raise this amount of new money (that is to
say, for other purposes than the funding or redemption of existing
obligations) from investors in the world's Stock Exchanges is
ridiculous.
The highest figure which I have heard mentioned by a reliable authority
is L100,000,000. Personally, I think even this much too high. It could
only be realised if subscriptions from special quarters, as, for
example, German hoards abroad, and German-Americans, were to provide the
greater part of it, which would only be the case if it were part of a
settlement which was of great and obvious advantage to Germany. A loan
to Germany, on Germany's own credit, yielding, say, 8 to 10 per cent.,
would not in my opinion be an investor's proposition in any part of the
world, except on a most trifling scale. I do not mean that a larger
anticipatory loan of a different character--issued, for example, in
Allied countries with the guarantees of the Allied Government, the
proceeds in each such country being handed over to the guaranteeing
Government, so that no new money would pass--might not be possible. But
a loan of this kind is not at present in question.
Yet a loan of from L50,000,000 to L100,000,000--and I repeat that even
this figure is very optimistic except as the result of a settlement of a
kind which engaged the active goodwill of individual Germans with
foreign resources and of foreigners of German origin and
sympathies--would only cover Germany's liabilities under the London
Schedule for four to six months, and the temporarily reduced payments of
last March for little more than a year. And from such a loan, after
meeting Belgian priorities and Army of Occupation costs, there would not
be left any important sum for France.
I see no possibility, therefore, of any final settlement with M.
Poincare in the immediate future. He has now reached the point of saying
that he is prepared to talk sense in return for an enormous bribe, and
that is some progress. But as no one is in a position to offer him the
bribe, it is not much progress, and as the force of events will compel
him to talk sense sooner or later, even without a bribe, his bargaining
position is not strong. In the meantime he may make trouble. If so, it
can't be helped. But it will do him no good, and may even help to bring
nearer the inevitable day of disillusion. I may add that for France to
agree to a short moratorium is not a great sacrifice since, on account
of the Belgian priority and other items, the amount of cash to which
France will be entitled in the near future, even if the payments fixed
last March were to be paid in full, is quite trifling.
A POLICY FOR THE LIBERAL PARTY
So much for the immediate situation and the politics of the case. If we
look forward a little, I venture to think that there is a clear, simple,
and practical policy for the Liberal Party to adopt and to persist in.
Both M. Poincare and Mr. Lloyd George have their hands tied by their
past utterances. Mr. Lloyd George's part in the matter of Reparations is
the most discreditable episode in his career. It is not easy for him,
whose hands are not clean in the matter, to give us a clean settlement.
I say this although his present intentions appear to be reasonable. All
the more reason why others should pronounce and persist in a clear and
decided policy. I was disappointed, if I may say so, in what Lord Grey
had to say about this at Newcastle last week. He said many wise things,
but not a word of constructive policy which could get any one an inch
further forward. He seemed to think that all that was necessary was to
talk to the French sympathetically and to put our trust in international
bankers. He puts a faith in an international loan as the means of
solution which I am sure is not justified. We must be much more concrete
than that, and we must be prepared to say unpleasant things as well as
pleasant ones.
The right solution, the solution that we are bound to come to in the
end, is not complicated. We must abandon the claim for pensions and
bring to an end the occupation of the Rhinelands. The Reparation
Commission must be asked to divide their assessment into two parts--the
part that represents pensions and separation allowances and the rest.
And with the abandonment of the former the proportion due to France
would be correspondingly raised. If France would agree to this--which is
in her interest, anyhow--and would terminate the occupation it would be
right for us to forgive her (and our other Allies) all they owe us, and
to accord a priority on all receipts in favour of the devastated areas.
If we could secure a real settlement by these sacrifices, I think we
should make them completely regardless of what the United States may say
or do.
In declaring for this policy in the House of Commons yesterday, Mr.
Asquith has given the Liberal Party a clear lead. I hope that they will
make it a principal plank in their platform. This is a just and
honourable settlement, satisfactory to sentiment and to expediency.
Those who adopt it unequivocally will find that they have with them the
tide and a favouring wind. But no one must suppose that, even with such
a settlement, any important part of Germany's payments can be
anticipated by a loan. Any small loan that can be raised will be
required for Germany herself, to put her on her legs again, and enable
her to make the necessary annual payments.
THE OUTLOOK FOR NATIONAL FINANCE
BY SIR JOSIAH STAMP, K.B.E., D.SC.
Assistant Secretary Board of Inland Revenue, 1916-19. Member of Royal
Commission on Income Tax, 1919.
Sir Josiah Stamp said:--In discussing the problem of National Finance we
have to decide which problem we mean, viz., the "short period" or the
"long period," for there are distinctly two issues. I can, perhaps,
illustrate it best by the analogy of the household in which the chief
earner or the head of the family has been stricken down by illness. It
may be that a heavy doctor's bill or surgeon's fee has to be met, and
that this represents a serious burden and involves the strictest economy
for a year or two; that all members of the household forgo some
luxuries, and that there is a cessation of saving and perhaps a "cut"
into some past accumulations. But once these heroic measures have been
taken and the burden lifted, and the chief earner resumes his
occupation, things proceed on the same scale and plan as before. It may
be, however, that the illness or operation permanently impairs his
earning power, and that the changes which have to be made must be more
drastic and permanent. Then perhaps would come an alteration of the
whole ground plan of the life of that family, the removal to a smaller
house with lower standing charges and a changed standard of living. What
I call the "short period" problem involves a view only of the current
year and the immediate future for the purpose of ascertaining whether we
can make ends meet by temporary self-denial. What I term the "long
distance" problem involves an examination of the whole scale upon which
our future outlay is conditioned for us.
The limit of further economies on the lines of the "Geddes' cut" that
can become effective in 1923, would seem to be some 50 or 60 millions,
because every 10 per cent. in economy represents a much more drastic and
difficult task than the preceding, and it cuts more deeply into your
essential national services. On the other side of the account one sees
the probable revenue diminish to an almost similar extent, having regard
to the effect of reductions in the rate of tax and the depression in
trade, with a lower scale of profits, brought about by a lower price
level, entering into the income-tax average. It looks as though 1923 may
just pay its way, but if so, then, like the current year, it will make
no contribution towards the reduction of the debt. So much for the
"short period." Our worst difficulties are really going to be
deep-seated ones.
THE TWO PARTS OF A BUDGET
Now a national budget may consist of two parts, one of which I will call
the "responsive" and the other the "non-responsive" portion. The
responsive portion is the part that may be expected to answer sooner or
later--later perhaps rather than sooner--to alterations in general
conditions, and particularly to price alterations. If there is a very
marked difference in general price level, the salaries--both by the
addition or remission of bonuses and the general alteration in scales
for new entrants--may be expected to alter, at any rate, in the same
direction, and that part of the expense which consists of the purchase
of materials will also be responsive. The second, or non-responsive
part, is the part that has a fixed expression in currency, and does not
alter with changed conditions. This, for the most part, is the capital
and interest for the public debt.
Now the nature and gravity of the "long distance" problem is almost
entirely a question of the proportions which these two sections bear to
each other. If the non-responsive portion is a small percentage of the
total the problem will not be important, but if it is larger, then the
question must be faced seriously. Suppose, for example, that you have
now a total budget of 900 million pounds, and that, in the course of
time, all values are expressed at half the present currency figure.
Imagine that the national income in this instance is 3600 million
pounds. Then the burden, on a first approximation, is 25 per cent. Now,
if the whole budget is responsive, we may find it ultimately at 450
million pounds out of a national income of 1800 million pounds, _i.e._
still 25 per cent. But let the non-responsive portion be 400 million
pounds, then your total budget will be 650 million pounds out of a
national income of about 2000 million pounds, or 33-1/3 per cent., and
every alteration in prices--or what we call "improvement" in the cost of
living--becomes an extraordinarily serious matter as a burden upon new
enterprise in the future.
Let me give you a homely and familiar illustration. During the war the
nation has borrowed something that is equivalent to a pair of boots.
When the time comes for paying back the loan it repays something which
is equivalent to two pairs or, possibly, even to three pairs. If the
total number of boots produced has not altered, you will see what an
increasing "pull" this is upon production. There are, of course, two
ways in which this increasing pull--while a great boon to the person who
is being repaid--must be an increased burden to the individual. Firstly,
if the number of people making boots increases substantially, it may
still be only one pair of boots for the same volume of production, if
the burden is spread over that larger volume. Secondly, even supposing
that the number of individuals is not increased, if the arts of
production have so improved that two pairs can be produced with the same
effort as was formerly necessary for one, then the debt may be repaid by
them without the burden being actually heavier than before.
Now, coming back to the general problem. The two ways in which the
alteration in price level can be prevented from resulting in a heavier
individual burden than existed at the time when the transaction was
begun, are a large increase in the population with no lower average
wealth, or a large increase in wealth with the same population--which
involves a greatly increased dividend from our complex modern social
organism with all its mechanical, financial, and other differentiated
functions. Of course, some of the debt burden is responsive, so far as
the annual charge is concerned, on that part of the floating debt which
is reborrowed continually at rates of interest which follow current
money rates, but, even so, the burden of capital repayment remains. An
opportunity occurs for putting sections of the debt upon a lower annual
charge basis whenever particular loans come to maturity, and there may
be some considerable relief in the annual charge in the course of time
by this method.
What are the prospects of the two methods that I have mentioned coming
to our rescue in this "long distance" problem? It is a problem to which
our present "short distance" contribution is, you will admit, a very
poor one, for we have not so far really made any substantial
contribution from current revenue towards the repayment of the debt.
A CENTURY OF THE NATIONAL DEBT
Historical surveys and parallels are notoriously risky, particularly
where the conditions have no precedent. They ought, however, to be made,
provided that we keep our generalisations from them under careful
control. Now, after the Napoleonic wars we had a national debt somewhat
comparable in magnitude in its relation to the national wealth and
income with the present debt. What happened to that as a burden during
the 100 years just gone by? If it was alleviated, to what was the
alleviation due? I would not burden you with a mass of figures, but I
would just give you one or two selected periods. You can find more
details in my recent book on _Wealth and Taxable Capacity_. We had a
total debt of--
850 million pounds in 1817
841 " " " 1842
836 " " " 1857
659 " " " 1895
800 " " " 1903
and before this last war it had been reduced to 707 million pounds. In
1920, of course, it was over 8000 million pounds. Such incidents as the
Crimean and the Boer wars added materially to the debt, but apart
therefrom you will see that there is no tremendous relief by way of
capital repayment to the original debt. Similarly, in a hundred years,
even if we have no big wars, it is quite possible we may have additions
to the national debt from smaller causes. Yet the volume of the debt per
head fell from L50 to L15.7, so you will see that the increasing
population made an enormous difference. The real burden of the debt is
of course felt mainly in its annual charge. I will take this, therefore,
rather than the capital:--
In 1817 the charge was 32 million pounds
" 1842 " " " 28 " "
" 1857 " " " 28.8 " "
In 1895 the charge was 25 million pounds
" 1903 " " " 27 " "
" 1914 " " " 24 " "
Here you will see that the reduction from 32 to 24 was 25 per cent. or a
much greater reduction than the reduction of the _total_ capital debt,
and this, of course, was contributed to by the lower rates of interest
which had been brought about from time to time. When we take the annual
charge per head the fall is much more striking. In the hundred years it
decreased from 37s. to 10s. This, however, was a money reduction, and
the _real_ burden per head can only be judged after we have considered
what the purchasing power of that money was. Now, the charge per head,
reduced to a common basis of purchasing power, fell as follows:--
Index figure
1817 260
1842 242
1857 191
1895 210
1914 118
In the year 1920 the charge per head was L7.16 and my purchasing power
index figure 629. You will see that the _real_ burden in commodities
moved down much less violently than the _money_ burden, and the relief
was not actually so great as it looks, because prices were far lower in
1914 than they were early in the nineteenth century.
In view of the fact that our debt is approximately ten times that of the
last century, let us ask ourselves the broad question: "Can we look
forward to nothing better than the reduction of our debt by 450
millions in thirty-seven years?"
The nineteenth century was one long contest between two opposing forces.
The increase in the population, together with the power to make wealth,
were together enormously effective in decreasing the burden. Against
them was the ultimate tendency to lower prices, and the former of these
two forces slowly won the day.
I hesitate to say that we can expect anything at all comparable with the
wonderful leap forward in productive power during the early Victorian
era. I hope that in this I may prove to be wrong. Anyway I do not think
that in our lifetime we can expect these islands to double their
population.
THE CAPITAL LEVY
If we cannot look forward to any great measure of relief through these
channels, to what then must we look? By far the most important
alternative remedy which has been put to us is that of a Capital Levy;
it has the enormous virtue that it would repay on one level of prices
the debts incurred at that level; in short, it would give back one pair
of boots at once for every pair it has borrowed, instead of waiting and
stretching out over future generations the burden of two pairs. It is so
attractive that one cannot wonder there is a tendency to slur over its
less obvious difficulties.
Advocates of this scheme fall into two camps, whom I would distinguish
broadly as the economist group and the Labour Party, and if you will
examine their advocacy carefully, you will see that they support it by
two different sets of contentions, which are not easily reconciled. The
economists lay stress upon the fact that you not only pay off at a less
onerous cost in real goods, but that it may, considered arithmetically
or actuarially, be "good business" for a payer of high income-tax to
make an outright payment now and have a lighter income-tax in future.
Very much of the economists' case rests indeed upon the argument drawn
from the outright cut and the arithmetical relief. It will be seen that
this case depends upon two assumptions. The first is that the levy in
practice as well as in theory is an outright cut, and the second, that
it is not repeated, or rather that the income-tax is really effectively
reduced. But if you look at the programme of the other supporters of the
Capital Levy you will not find any convincing guarantees of its
non-repetition. I have not seen anywhere any scheme by which we can feel
politically insured against its repetition. You will find plenty of
indication that some intend to have both the levy and a high tax as
well, the new money to be employed for other social purposes. The
arguments based upon arithmetical or actuarial superiority of the levy
for your pocket and for mine may therefore rather go by the board. But I
am not going to discuss either the question of political guarantees or
the possible future socio-financial policy of the Labour Party. I will
merely ask you to consider whether the levy is likely to be in practice
the outright cut that is the basis of the chief and most valid
contention for it. Please understand that I am not attempting to sum up
all the many reasons for and against this proposal, but only to deal
with the particular virtue claimed for it, bearing upon the increasing
burden of the debt as prices decline.
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