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A TRACT on MONETARY REFORM MACMILLAN and CO., Limited LONDON • BOMBAY • CALCUTTA • MADRAS MELBOURNE

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A TRACT on MONETARY REFORM MACMILLAN and CO., Limited LONDON • BOMBAY • CALCUTTA • MADRAS MELBOURNE NUNC COGNOSCO EX PARTE TRENT UNIVERSITY LIBRARY if BY THE SAME AUTHOR INDIAN CURRENCY AND FINANCE. 7s. 6d. net. THE ECONOMIC CONSEQUENCES OF THE PEACE. 8s. 6d. net. A REVISION OF THE TREATY. 7s. 6d. net. A TREATISE ON PROBABILITY. 18s. net. A TREATISE ON MONEY. A TRACT ON MONETARY REFORM MACMILLAN AND CO., Limited LONDON • BOMBAY • CALCUTTA • MADRAS MELBOURNE THE MACMILLAN COMPANY NEW YORK • BOSTON • CHICAGO DALLAS • SAN FRANCISCO THE MACMILLAN CO. OF CANADA, Ltd. TORONTO A TRACT ON MONETARY REFORM BV JOHN MAYNARD KEYNES FELLOW OF KING'S COLLEGE, CAMBRIDGE MACMILLAN AND CO., LIMITED ST. MARTIN’S STREET, LONDON 1929 \\(~5 COPYRIGHT First Edition 19*3 Reprinted 1924. >929 PRINTED IN GREAT BRITAIN PREFACE We leave Saving to the private investor, and we encourage him to place his savings mainly in titles to money. We leave the responsibility for setting Production in motion to the business man, who is mainly influenced by the profits which he expects to accrue to himself in terms of money. Those who are not in favour of drastic changes in the existing organisation of society believe that these arrange¬ ments, being in accord with human nature, have great advantages. But they cannot work properly if the money, which they assume as a stable measuring- rod, is undependable. Unemployment, the precarious life of the worker, the disappointment of expectation, the sudden loss of savings, the excessive windfalls to individuals, the speculator, the profiteer—all pro¬ ceed, in large measure, from the instability of the standard of value. It is often supposed that the costs of production are threefold, corresponding to the rewards of labour, enterprise, and accumulation. But there is a fourth cost, namely risk ; and the reward of risk-bearing is V 17201 vi A TRACT ON MONETARY REFORM one of the heaviest, and perhaps the most avoidable, burden on production. This element of risk is greatly aggravated by the instability of the standard of value. Currency Reforms, which led to the adoption by this country and the world at large of sound monetary principles, would diminish the wastes of Risk, which consume at present too much of our estate. Nowhere do conservative notions consider them¬ selves more in place than in currency; yet nowhere is the need of innovation more urgent. One is often warned that a scientific treatment of currency questions is impossible because the banking world is intellectually incapable of understanding its own problems. If this is true, the order of Society, which they stand for, will decay. But I do not believe it. What we have lacked is a clear analysis of the real facts, rather than ability to understand an analysis already given. If the new ideas, now developing in many quarters, are sound and right, I do not doubt that sooner or later they will prevail. I dedicate this book, humbly and without permission, to the Governors and Court of the Bank of England, who now and for the future have a much more difficult and anxious task entrusted to them than in former days. J. M. KEYNES. October 1923. CONTENTS PAGE Preface . v CHAPTER I The Consequences to Society of Changes in the Value of Money ...... 1 I. As Affecting Distribution . .5 1. The Investor . .5 2. The Business Man . .18 3. The Earner . .27 II. As Affecting Production . .32 CHAPTER II Public Finance and Changes in the Value of Money . 41 1. Inflation as a Method of Taxation . .41 2. Currency Depreciation versus Capital Levy . 63 CHAPTER III The Theory of Money and the Exchanges . .74 1. The Quantity Theory re-stated . .74 2. The Theory of Purchasing Power Parity . 87 3. The Seasonal Fluctuation of the Exchanges . 106 4. The Forward Market in Exchanges . .115 vii viii A TRACT ON MONETARY REFORM CHAPTER IV pa or. Alternative Aims in Monetary Policy . 140 1. Devaluation versus Deflation 142 2. Stability of Prices versus Stability of Exchange 154 3. The Restoration of a Gold Standard 163 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 [I have utilised, mainly in the first chapter and in parts of the second and third, the material, much revised and re-written, of some articles which were published during 1922 in the Reconstruction Sup¬ plements of the Manchester Guardian Commercial.— J. M. K.] CHAPTER I 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 estab¬ lished 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 con¬ sequences, 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, 2 A TRACT ON MONETARY REFORM CHAP. 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 im¬ mediately 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, I THE EFFECT OF CHANGES IN THE VALUE OF MONEY 3 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). (2). (3). Italy. India. United Japan. France. Canada. Monthly Sweden. Average. Germany. U.S.A. Kingdom 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 rela¬ tively to the supply of things to purchase, that is to say Inflation. Since 1920 those countries which have 4 A TRACT ON MONETARY REFORM CHAP. 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 in¬ flationary 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 retard¬ ing the 'production of wealth, though here Deflation is the more injurious.
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