자료: J. M. Keynes, A Tract on Monetary Reform (1923)
※ This is a reading note with excerpts taken, and personal annotations and remarks added, in trying to understand the above text. So, visit the above source links to see the original.
※ 발췌 / excerpts of which: Chapter 2, p. 41 (p.50 on PDF)~
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Chapter 2
Public Finance and Change in the Value of Money
Public Finance and Change in the Value of Money
I. Inflation as a Method of Taxation
A Government can live for a long time, even the German Government or the Russian Government, by printing paper money. That is to say, it can by this means secure command over real resources,ㅡresources just as real as those obtained by taxation. The method is condemned, but its efficacy, up to a point, must be admitted. A Government can live by this means when it can live by no other. It is the form of taxation which the public find hardest to evade and even the weakest Government can enforce, when it can enforce nothing else. Of this character have been the progressive and catastrophic inflations practised in Central and Easter Europe, as distinguished from the limited and oscillatory inflations, experienced for example in Great Britain and the United States, which have been examined in the preceding chapter.
The Quantity Theory of Money states that the amount of cash which the community requires, assuming certain habits of business and of banking to be established, and assuming also a given level and distribution of wealth, depends on the level of prices. If the consumption and production of actual goods are unaltered but prices and wages are doubled, then twice as much cash as before is required to do the business. The truth of this, properly explained and qualified, it is foolish to deny. The Theory infers from this that the aggregate real value of all the paper money in circulation remains more or less the same, irrespective of the number of units of it in circulation, provided the habits and prosperity of the people are not changed,ㅡi.e. the community retains in the shape of cash the command over a more or less constant amount of real wealth, which is the same thing as to say that the total quantity of money in circulation has a more or less fixed purchasing power.[1: 화폐수량설에 대해서는 3장 1절도 함께 보라.]
Let us suppose that there are in circulation 9,000,000 currency notes, and that they have altogether a value equivalent to 36,000,000 gold dollars.[2] Suppose that the Government prints a further 3,000,000 notes, so that the amount of currency is now 12,000,000; then, in accordance with the above theory, the 12,000,000 notes are still only equivalent to $36,000,000. In the first state of affairs, therefore, each note＝$4, and in the second state of affairs each note＝$3. Consequently the 9,000,000 notes originally held by the public are now worth $27,000,000 instead of $36,000,000, and the 3,000,000 notes newly issued by the Government are worth $9,000,000. Thus by the process of printing the additional notes the Government has transferred from the public to itself an amount of resources equal to $9,000,000, just as successfully as if it had raised this sum in taxation.
Temporarily, the yield of the tax is even a little better for the Government than by the above calculation. For the new notes can be passed off at first at the same value as though there were still only 9,000,000 notes altogether. It is only after the new notes get into circulation and people begin to spend them that they realise that the notes are worth less than before.
What is there to prevent the Government from repeating this process over and over again? The reader must observe that the aggregate note issue is still worth $36,000,000. If, therefore, the Government now prints a further 4,000,000 notes, there will be 16,000,000 notes altogether, which by the same argument as before are worth $2.25 each instead of $3, and by issuing the 4,000,000 notes the Government has, just as before, transferred an amount of resources equal to $9,000,000 from the public to itself. The holders of notes have again suffered a tax of 25% in proportion to their holdings.
Like other forms of taxation, these exactions, if overdone and out of proportion to the wealth of the community, must diminish its prosperity and lower its standards, so that at the lower standard of life the aggregate value of the currency may fall and still be enough to go round. But this effect cannot interfere very much with the efficacy of taxing by inflation. Even if the aggregate real value of the currency falls for these reasons to a half or two-thirds of what it was before, which represents a tremendous lowering of the standards of life, this only means that the quantity of notes which the Government must issue in order to obtain a given result must be raised proportionately. It remains true that by this means the Government can still secure for itself a large share of the available surplus of the community.
Has the public in the last resort no remedy, no means of protecting itself against these ingenious depredations? It has only one remedy,ㅡto change its habits in the use of money. The initial assumption on which our argument rested was that the community did not change its habits in the use of money.
Experience shows that the public generally is very slow to grasp the situation and embrace the remedy. Indeed, at first there may be a change of habit in the wrong direction, which actually facilitates the Government's operations. The public is so much accustomed to thinking of money as the ultimate standard, that, when prices begin to rise, believing that the rise must be temporary, they tend to hoard their money and to postpone purchases, with the result that they hold in monetary form a larger aggregate of real value than before. And, similarly, when the fall in the real value of the money is reflected in the exchanges, foreigners, thinking that the fall is abnormal and temporary, purchase the money for the purpose of hoarding it.
But sooner or later the second phase sets in. The public discover that it is the holders of notes who suffer taxation and defray the expenses of government, and they begin to change their habits and to economise in their holding of notes. They can do this in various ways:─(1) instead of keeping some part of their ultimate reserves in money they can spend this money on durable objects, jewellery or household goods, and keep their reserves in this form instead; (2) They can reduce the amount of till-money and pocket-money that they keep and the average length of time for which they keep it,[1] even at the cost of great personal inconvenience; and (3) they can employ foreign money in many transactions where it would have been more natural and convenient to use their own.
When the public take alarm faster than they can change their habits, and in their efforts to avoid loss, run down the amount of real resources, which they hold in the form of money, below the working minimum, seeking to supply their daily needs for cash by borrowing, they get penalised, as in Germany in 1923, by prodigious rates of money-interest. The rates rise, as we have seen in the previous chapter, until the rate of interest on money equals or exceeds the anticipated rate of the depreciation of money. Indeed it is always likely, when money is rapidly depreciating, that there will be recurrent periods of scarcity of currency, because the public, in their anxiety not to hold too much money, will fail to provide themselves even with the minimum which they will require in practice.
Whilst economist have sometimes described these phenomena in terms of an increase in the velocity of circulation due to loss of confidence in the currency; nevertheless there are not, I think, many passages in economic literature where the matter is clearly analysed. Professor Cannan's article on “The Application of the Apparatus of Supply and Demand to Units of Currency” (Economic Journal, December 1921) is one of the most noteworthy. He points out that the common assumption that “the elasticity of demand for money is unity” is equivalent to the assertion that a mere variation in the quantity of money does not affect the willingness and habits of the pubic as holders of purchasing power in that form. But in extreme cases this assumption does not hold; for if it did, there would be no limit to the sums which the Government could extract from the public by means of inflation. It is, therefore unsafe to assume that the elasticity of demand is necessarily unity. Professor Lehfeldt followed this up in a subsequent issue of the Economic Journal (December 1922) by a calculation of the actual elasticity of demand for money in some recent instances. He found that between July 1920 and April 1922, the elasticity of demand for money fell to an average of about 0.73 in Austria, 0.67 in Poland, and 0.5 in Germany. Thus in the last stages of inflation the prodigious increase in the velocity of circulation may have as much, or more, effect in raising prices and depreciating the exchanges than the increase in the volume of notes. The note-issuing authorities often cry out against what they regard as the unfair and anomalous fact of the notes falling in value more than in proportion to their increased volume. Yet it is nothing of the kind; it is merely the result of the one method to evade a crushing burden left open to the public, who discover for themselves, sooner than the financiers, that the law of unit elasticity in their demand for money can be escaped.
Nevertheless, it is evident that so long as the public use money at all, the Government can continue to raise resources by inflation. Moreover, the conveniences of using money in daily life are so great that the public are prepared, rather than forego them, to pay the inflationary tax, provided it is not raised to a prohibitive level. Like other conveniences of life the use of money is taxable, and, although for various reasons this particular form of taxation is inexpedient, a Government can get resources by a continuous practice of inflation, even when this is foreseen by the public generally, unless the sums they seek to raise in this way are very grossly excessive. Just as a toll can be levied on the use of roads or a turnover tax on business transactions, so also on the use of money. The higher the toll and the tax, the less traffic on the roads, and the less business transacted, so also the less money carried. But some traffic is so indispensable, some business so profitable, some money-payments so convenient, that only a very high levy will stop completely all traffic, all business, all payments. A Government has to remember, however, that even if a tax is not prohibitive it may be unprofitable, and that a medium, rather than an extreme, imposition will yield the greatest gain.
Suppose that the rate of inflation is such that the value of the money falls by half every year, and suppose that the cash used by the public for retail purchases in shops is turned over 100 times a year (i.e. stays in one pocket for half a week on the average); then this is only equivalent to a turnover tax of 0.5% on each transaction. The public will gladly pay such a tax rather than suffer the trouble and inconvenience of barter with trams and tradesmen. Even if the value of the money falls by half every month, the public, by keeping their pocket-money so low that they turn it over once a day on the average instead of only twice a week, can still keep the tax down to the equivalent of less than 2% on each transaction, or more precisely 4d. in the ￡. Even such a terrific rate of depreciation as this is not sufficient, therefore, to counterbalance the advantages of using money rather than barter in the trifling business of daily life. This is the explanation why, even in Germany and in Russia, the Government's notes remained current for many retail transactions.
For certain other purposes, however, to which money is put in a modern community, the inflationary tax becomes prohibitive at a much earlier stage. As a store of value, for example, money is rapidly discarded, as soon as further depreciation is confidently anticipated. As a unit of account, for contracts and for balance sheets, it quickly becomes worse than useless, although for such purposes the privilege of the current money as legal-tender for the discharge of debts stands in the way of its being discard as soon as it ought to be.
In the last phase, when the use of the legal-tender money has been discarded for all purposes except trifling out-of-pocket expenditure, inflationary taxation has at last defeated itself. For in that case the total value of the note issue, which is sufficient to meet the public's minimum requirements, amounts to a figure relatively so trifling that the amount of resources which the government can hope to raise by yet further inflationㅡwithout pushing it to a point at which the money will be discarded even for out-of-pocket triflesㅡis correspondingly small. Thus at last, unless it is employed with some measure of moderation, this potent instrument of governmental exaction breaks in the hands of those that use it, and leaves them at the same time with the rest of their fiscal system in total ruins;ㅡout of which, in the ebb and flow of the economic life of nations, may emerge once more a reformed and admirable system. The chervonetz of Moscow and the krone of Vienna are already stabler units than the franc or the lira.
All these matters can be illustrated from the recent experiences of Germany, Austria, and Russia. The following tables show the gold value of the note issues of these countries at various dates:
The characteristics of each phase emerge clearly. The tables show, first of all, how quickly, during the period of collapse, the rate of the depreciation of the value of the money outstrips the rate of the inflation of its volume. During the collapse of the German mark beginning with December 1920, the rate of depreciation proceeded for some time roughly twice as fast as that of the inflation[즉, inflation of the volume of notes], and eventually by June 1923, when the volume of the note-issue had increased 200-fold compared with December 1920, the value of a paper mark had fallen 2500-fold. The figures given above for Austria begin at a rather later stage of the débâcle. But if we equate Austria in June 1920 to Germany in December 1920, the progress of events between that date and September 1922 is roughly comparable to that in Germany between December 1920 and May 1923. The figures for Russia between January 1919 and the early part of 1923 also exhibit the same general features.
These tables all commence after a considerable depreciation had already occurred and the gold-value of the aggregate note-issue had fallen considerable below the normal.[1] Nevertheless their earliest entries still belong to the period when an eventual recovery was still widely anticipated and the general public had not at all appreciated what they were in for. They indicate that as the situation develops from this point onwards and the use of money is discarded except for retail transactions, the aggregate value of the note-issue falls by about four-fifths. As the result of extreme panic or depression a further fall may occur for a time; but, unless the money is discarded altogether, a minimum is reached eventually from which the least favourable circumstance will cause a sharp recovery.
The temporary recovery in Germany after the collapse of February 1923 exhibited how a point may come when, if the money is to continue in use at all, a bottom is reached and a technical position is created in which some recovery is possible. When the gold value of the currency has fallen to a very low figure, it is easy for the Government, if it has any external resources at all, to give sufficient support to prevent the exchange from falling further for the time being. And since by that time the public will have carried their attempts to economise the use of money to a pitch of inconvenience which it is impracticable to continue, even a moderate weakening in the degree of their distrust of the future value of the money will lead to some increase in their use of it; with the result that the aggregate value of the note issue will tend to recover. By February 1923 these conditions existed in Germany in a high degree. The German Government was able within two months, in the face of most adverse political conditions, to double the exchange-value of the mark whilst simultaneously more than doubling the note circulation. Even so the gold value of the note issue was only brought back to what it had been six months earlier; and if even a moderate degree of confidence had been restored, it might have been possible to bring the value of the note circulation of Germany up to (say) 2 milliard gold marks(￡100,000,000) at least, which is probably about the lowest figure at which it can stand permanently, unless every one is to put himself to intolerable inconvenience in his efforts to hold as little money as possible. Incidentally the Government is able during the period of recovery to obtain, once more, through the issue of notes the command over a considerable amount of real resources.
In Austria, ( ... p. 55 / PDF 64 ... )
Even in Russia ( ... ... )
The collapse of the currency in Germany which was the chief contributory cause to the fall of Dr. Cuno's Government in August 1923, was due, not so much to taxing by inflationㅡfor that had been going on for yearsㅡas to an increase in the rate of inflation to a level almost prohibitive for daily transactions and quite destructive of the legal-tender money as a unit of account. We have seen that what concerns the use of money in the retail transactions of daily life is the rate of depreciation, rather than the absolute amount of depreciation as compared with some earlier date.
In the middle of 1922 I estimated, very roughly, that the German Government had then been obtaining for some time past the equivalent of something between ￡75,000,000 and ￡100,000,000 per annum by means of printing money. Up to that time, however, a substantial proportion of these receipts had been contributed through the purchase of mark-notes by speculative foreigners. Nevertheless the German public itself had probably paid upwards of ￡50,000,000 per annum in this form of taxation. Since the German note issue was still worth ￡240,000,000 so lately as December 1920 (see the table on p. 51) and had not fallen below ￡100,000,000 even in the middle of 1922, the rate of depreciation represented by the above, whilst sufficiently disastrous to the mark as a store of value or as a unit of account, had been by no means prohibitive to its continued use in daily life. In the latter half of 1922, however, the public learnt to make enough further economies in the use of the mark as money to reduce the value of the total note issue to about ￡60,000,000. The first effect of the Ruhr occupation was, as we have seen above(p. 54), to bring down the note issue below the minimum to which the public could adjust their habits, which resulted in the temporary recovery of March 1923. Nevertheless by the middle of 1923 the public was able to get along with a note issue worth about ￡20,000,000. All this time the German Government had continued to raise resources equivalent to round about ￡1,000,000 a week by note-printingㅡwhich meant a depreciation of 5% a week even if the public had been unable to reduce any further the value of the aggregate note issue, and came in practice to about 10% a week allowing for their yet further economies in the use of mark-currency.
But the expenses of the Ruhr resistance, coupled with the complete breakdown of other sources of taxation, had led, by May and June 1923, to the Government's raising the equivalent of, first, ￡2,000,000 and them ￡3,000,000 a week by note-printing. On a note issue, of which the total value had sunk by that time to about ￡20,000,000, this was pushing inflationary taxation to a preposterous and suicidal point. ( ... ... )
By the time this book is published, Dr. Cuno's successors may have solved, or failed to solve, the problem facing them. However this may be, the restoration of a serviceable unit of account seems to be the first step. This is a necessary preliminary to the escape of the German financial system from the vicious circle in which it now moves. The Government cannot introduce a sound money, because, in the absence of other revenue, the printing of an unsound money is the only way by which it can live. Yet a serviceable unit of account is a pre-requisite of the collection of the normal sources of revenue. The best course, therefore, is to remain content for a little longer with an unsound money as a source of revenue, but to introduce immediately a steady unit of account (the relation of which to the unsound money could be officially fixed daily or weekly) as a preliminary to the restoration of the normal sources of revenue.
The recent history of German finance can be summarised thus. Reliance on inflationary taxation, whilst extremely productive to the exchequer in its earliest stages especially whilst the foreign speculator was still buying paper marks, gradually broke down the mark as a serviceable unit of account, one of the effects of which was to render unproductive the greater part of the rest of the revenue-collecting machineryㅡmost taxes being necessarily assessed at some interval of time before they are collected. The failure of the rest of the revenue rendered the Treasury more and more dependent on inflation, until finally the use of legal-tender money had been so far abandoned by the public that even the inflationary tax ceased to be productive and the Government was threatened by literal bankruptcy. At this stage, the fiscal organisation of the country had been so thoroughly destroyed and its social and economic organisation so grievously disordered, as in Russia 18 months earlier, that it was a perplexing problem to devise ways and means by which the Government could live during the transitional period whilst the normal machinery for collecting revenue was being re-created, especially in face of the struggle with France proceeding at the same time. Nevertheless the problem is not insoluable; many suggestions could be made; and a way out will doubtless be found at length.
It is common to speak as though, when a Government pays its way by inflation, the people of the country avoid taxation. We have seen that this is not so. What is raised by printing notes is just as much taken from the public as is a beer-duty or an income-tax. What a Government spends the public pay for. There is no such thing as an uncovered deficit. But in some countries it seems possible to please and content the public, for a time at least, by giving them, in return for the taxes they pay, finely engraved acknowledgements on water-marked paper. The income-tax receipts, which we in England receive from the Surveyor, we throw into the wastepaper basket; in Germany they call them bank-notes and put them into their pocket-books; in France they are termed Rentes and are locked up in the family safe.
II. Currency Depreciation versus Capital Levy
We have seen in the preceding section the extent to which a Government can make use of currency inflation for the purpose of securing income to meet its outgoings. But there is a second way in which inflation helps a Government to make both ends meet, namely by reducing the burden of its pre-existing liabilities in so far as they have been fixed in terms of money. These liabilities consist, in the main, of the internal debt. Every step of depreciation obviously means a reduction in the real claims of the rentes-holders against their Government.
It would be too cynical to suppose that, in order to secure the advantages discussed in this section, Governments (except, possibly, the Russian Government) depreciate their currencies on purpose. As a rule, they are, or consider themselves to be, driven to it by their necessities. The requirements of the Treasury to meet sudden exceptional outgoingsㅡfor a war or to pay the consequences of defeatㅡare likely to be the original occasion of, at least temporary, inflation. But the most cogent reason for permanent depreciation, that is to say Devaluation, or the policy of fixing the value of the currency permanently at the low level to which a temporary emergency has driven it, is generally to be found in the fact that a restoration of the currency to its former value would raise the recurrent annual burden of the fixed charges of the National Debt to an insupportable level.
There is, nevertheless, an alternative to Devaluation in such cases, provided the opponents of Devaluation are prepared to face it in time, which they generally are not,ㅡnamely a Capital Levy. The purpose of this section is to bring out clearly the alternative character of these two methods of moderating the claims of he rentier, when the State's contractual liabilities, fixed in terms of money, have reached an excessive proportion of the national income.
The active and working elements in no community, ancient or modern, will consent to hand over to the rentier or bond-holding class more than a certain proportion of the fruits of their work. When the piled-up debt demands more than a tolerable proportion, relief has usually been sought in one or other of two out of the three possible methods.[:] (1) The first is Repudiation. But, except as the accompaniment of Revolution, this method is too crude, too deliberate, and too obvious in its incidence. The victims are immediately aware and cry out too loud; so that, in the absence of Revolution, this solution may be ruled out at present, as regards internal debt, in Western Europe.
(2) The second method is Currency Depreciation, which becomes Devaluation when it is fixed and confirmed by law. In the countries of Europe lately belligerent, this expedient has been adopted already on a scale which reduces the real burden of the debt by from 50 to 100%. In Germany the National Debt has been by these means practically obliterated, and the bond-holders have lost everything. In France the real burden of the debt is less than a third of what it would be if the franc stood at par; and in Italy only a quarter. The owners of small savings suffer quietly, as experience shows, these enormous depredations, when they would have thrown down a Government which had taken from them a fraction of the amount by more deliberate but juster instruments.
This fact, however, can scarcely justify such an expedient on its merits. Its indirect evils are many. Instead of dividing the burden between all classes of wealth-owners according to a graduate scale, it throws the whole burden on to the owners of fixed interest bearing stocks, lets off the entrepreneur capitalist and even enriches him, and hits small savings equally with great fortunes. It follows the line of least resistance, and responsibility cannot be brought home to individuals. It is, so to speak, nature's remedy, which comes into silent operation when the body politic has shrunk from curing itself.
(3) The remaining, the scientific, expedient, the Capital Levy, has never yet been tried on a large scale; and perhaps it never will be. It is the rational, the deliberate method. But it is difficult to explain, and it provokes violent prejudice by coming into conflict with the deep instincts by which the love of money protects itself. Unless the patient understands and approves its purpose, he will not submit to so severe a surgical operation.
Once Currency Depreciation has done its work, I should not advocate the unwise, and probably impracticable, policy of retracing the path with the aid of a Capital Levy. But if it has become clear that the claims of the bond-holder are more than the tax-payer can support, and if there is still time to choose between the policies of a Levy and of further Depreciation, the Levy must surely be preferred on grounds both of expediency and of justice. It is an overwhelming objection to the method of Currency Depreciation, as compared with that of the Levy, [:]
There is a respectable and influential body of opinion which, repudiating with vehemence the adoption of either expedient, fulminates alike against Devaluations and Levies, on the ground that they infringe the untouchable sacredness of contact; or rather of vested interest, for an alteration of the legal tender and the imposition of a tax on property are neither of them in the least illegal or even contrary to precedent. Yet such persons, by overlooking one of the greatest of all social principles, namely the fundamental distinction between the right of the individual to repudiate contract and the right of the State to control vested interest, are the worst enemies of what they seek to preserve. For [:]
In our own country the question of the Capital Levy depends for its answer on whether the great increase in the claims of the bond-holder, arising out of the fact that it was easier, and perhaps more expedient, to raise a large part of the current costs of the war by loans rather than by taxes, is more than the taxpayer can be required, in the long run, to support. The high levels of the Death Duties and of the income- and super-taxes on unearned income, by which the net return to the bond-holder is substantially diminished,[1] modify the case. Nevertheless, immediately after the war, when it seemed that the normal budget could scarcely be balanced without a level of taxation of which a tax on earned income at a standard rate between 6s. and 10s. in the ￡ would be typical, a levy seemed to be necessary. At the present time the case is rather more doubtful. It is not yet possible to know how the normal budget will work out, and much depends on the level at which sterling prices are stabilised. [:]
At the end of 1922 the internal debt of France, excluding altogether her external debt, exceeded 250 milliard francs. Further borrowing budgeted for in the ensuing period, together with loans on reconstruction account guaranteed by the Government, may bring this total to the neighbourhood of 300 milliards by the end of 1923. The service of this debt will absorb nearly 18 milliards per annum. The total normal receipts under the provisional[1] Budget for 1923 are estimated at round 23 milliards. That is to say, the service of the debt will shortly absorb, at the value of the franc current early in 1923, almost the entire yield of taxation. Since other Government expenditure in the ordinary budget (i.e. excluding war pensions and future expenditure on reconstruction) cannot be put below 12 milliards a year, it follows that, even on the improbable hypothesis that further expenditure in the extraordinary budget after 1923 will be paid for by Germany, the yield of taxation must be increased permanently by 30% to make both ends meet. If, however, the franc were to depreciate to (say) 100 to the pound sterling, the ordinary budget could be balanced by taking little more of the real income of the country than in 1922.
In these circumstances it will be difficult, if not impossible, to avoid the subtle assistance of a further depreciation. What, then, is to be said of those who still discuss seriously the project of restoring the franc to its former parity? [:]
France must come in due course to some compromise between increasing taxation, and diminishing expenditure, and reducing what they own their rentiers. I have not much doubted that the French public, as they have hitherto, will consider a further dose of depreciationㅡattributing it to the "bad will" of Germany or to financial Machiavellism in London and New Yorkㅡas far more conservative, orthodox, and in the interest of small savers, than a justly constructed Capital Levy, the odium of which could be less easily escaped by the French Ministry of Finance.
If we look ahead, averting our eyes from the ups and downs which can make and unmake fortunes in the meantime, the level of the franc is going to be settled in the long run not by speculation or the balance of trade, or even the outcome of the Ruhr adventure, but by the proportion of his earned income which the French taxpayer will permit to be taken from him to pay the claims of the French rentier. The level of the franc exchange will continue to fall until the community-value of the francs due to the rentier has fallen to a proportion of the national income, which accords with the habits and mentality of the country.
Let us suppose that there are in circulation 9,000,000 currency notes, and that they have altogether a value equivalent to 36,000,000 gold dollars.[2] Suppose that the Government prints a further 3,000,000 notes, so that the amount of currency is now 12,000,000; then, in accordance with the above theory, the 12,000,000 notes are still only equivalent to $36,000,000. In the first state of affairs, therefore, each note＝$4, and in the second state of affairs each note＝$3. Consequently the 9,000,000 notes originally held by the public are now worth $27,000,000 instead of $36,000,000, and the 3,000,000 notes newly issued by the Government are worth $9,000,000. Thus by the process of printing the additional notes the Government has transferred from the public to itself an amount of resources equal to $9,000,000, just as successfully as if it had raised this sum in taxation.
[2] It will simplify the argument to ignore the fact that the value of gold in terms of commodities is itself a fluctuating one, and to treat the value of a currency in terms of gold as a rough measure of its value in terms of "real resources" generally.On whom has the tax fallen? Clearly on the holder of the original 9,000,000 notes, whose notes are now worth 25% less than they were before. The inflation has amounted to a tax of 25% on all holders of notes in proportion to their holdings. The burden of the tax is well spread, cannot be evaded, costs nothing to collect, and falls, in a rough sort of way, in proportion to the wealth of the victim. No wonder its superficial advantage have attracted Ministers of Finance.
Temporarily, the yield of the tax is even a little better for the Government than by the above calculation. For the new notes can be passed off at first at the same value as though there were still only 9,000,000 notes altogether. It is only after the new notes get into circulation and people begin to spend them that they realise that the notes are worth less than before.
p.44(and p.53 on PDF) begins here:
What is there to prevent the Government from repeating this process over and over again? The reader must observe that the aggregate note issue is still worth $36,000,000. If, therefore, the Government now prints a further 4,000,000 notes, there will be 16,000,000 notes altogether, which by the same argument as before are worth $2.25 each instead of $3, and by issuing the 4,000,000 notes the Government has, just as before, transferred an amount of resources equal to $9,000,000 from the public to itself. The holders of notes have again suffered a tax of 25% in proportion to their holdings.
Like other forms of taxation, these exactions, if overdone and out of proportion to the wealth of the community, must diminish its prosperity and lower its standards, so that at the lower standard of life the aggregate value of the currency may fall and still be enough to go round. But this effect cannot interfere very much with the efficacy of taxing by inflation. Even if the aggregate real value of the currency falls for these reasons to a half or two-thirds of what it was before, which represents a tremendous lowering of the standards of life, this only means that the quantity of notes which the Government must issue in order to obtain a given result must be raised proportionately. It remains true that by this means the Government can still secure for itself a large share of the available surplus of the community.
Has the public in the last resort no remedy, no means of protecting itself against these ingenious depredations? It has only one remedy,ㅡto change its habits in the use of money. The initial assumption on which our argument rested was that the community did not change its habits in the use of money.
Experience shows that the public generally is very slow to grasp the situation and embrace the remedy. Indeed, at first there may be a change of habit in the wrong direction, which actually facilitates the Government's operations. The public is so much accustomed to thinking of money as the ultimate standard, that, when prices begin to rise, believing that the rise must be temporary, they tend to hoard their money and to postpone purchases, with the result that they hold in monetary form a larger aggregate of real value than before. And, similarly, when the fall in the real value of the money is reflected in the exchanges, foreigners, thinking that the fall is abnormal and temporary, purchase the money for the purpose of hoarding it.
But sooner or later the second phase sets in. The public discover that it is the holders of notes who suffer taxation and defray the expenses of government, and they begin to change their habits and to economise in their holding of notes. They can do this in various ways:─(1) instead of keeping some part of their ultimate reserves in money they can spend this money on durable objects, jewellery or household goods, and keep their reserves in this form instead; (2) They can reduce the amount of till-money and pocket-money that they keep and the average length of time for which they keep it,[1] even at the cost of great personal inconvenience; and (3) they can employ foreign money in many transactions where it would have been more natural and convenient to use their own.
[1] In Moscow the unwillingness to hold money except for the shortest possible time reached at one period a fantastic intensity. If a grocer sold a pound of cheese, he ran off with the roubles as fast as his legs could carry him to the Central Market to replenish his stocks by changing them into cheese again, lest they lost their value before he got there; thus justifying the prevision of economists in naming the phenomenon "velocity of circulation"! In Vienna, during the period of collapse, mushroom exchange banks sprang up at every street corner, where you could change your krone into Zurich francs within a few minutes of receiving them, and so avoid the risk of loss during the time it would take you to reach your usual banks. It became a seasonable wittcism to allege that a prudent man at a café ordering a bock of beer should order a second bock at the same time, even at the expense of drinking it tepid, lest the price should rise meanwhile.By these means they can get along and do their business with an amount of notes having an aggregate real value substantially less than before. For example, the notes in circulation become worth altogether $20,000,000 instead of $36,000,000, with the result that the next inflationary levy by the Government, falling on a smaller amount, must be at a greater rate in order to yield a given sum.
When the public take alarm faster than they can change their habits, and in their efforts to avoid loss, run down the amount of real resources, which they hold in the form of money, below the working minimum, seeking to supply their daily needs for cash by borrowing, they get penalised, as in Germany in 1923, by prodigious rates of money-interest. The rates rise, as we have seen in the previous chapter, until the rate of interest on money equals or exceeds the anticipated rate of the depreciation of money. Indeed it is always likely, when money is rapidly depreciating, that there will be recurrent periods of scarcity of currency, because the public, in their anxiety not to hold too much money, will fail to provide themselves even with the minimum which they will require in practice.
Whilst economist have sometimes described these phenomena in terms of an increase in the velocity of circulation due to loss of confidence in the currency; nevertheless there are not, I think, many passages in economic literature where the matter is clearly analysed. Professor Cannan's article on “The Application of the Apparatus of Supply and Demand to Units of Currency” (Economic Journal, December 1921) is one of the most noteworthy. He points out that the common assumption that “the elasticity of demand for money is unity” is equivalent to the assertion that a mere variation in the quantity of money does not affect the willingness and habits of the pubic as holders of purchasing power in that form. But in extreme cases this assumption does not hold; for if it did, there would be no limit to the sums which the Government could extract from the public by means of inflation. It is, therefore unsafe to assume that the elasticity of demand is necessarily unity. Professor Lehfeldt followed this up in a subsequent issue of the Economic Journal (December 1922) by a calculation of the actual elasticity of demand for money in some recent instances. He found that between July 1920 and April 1922, the elasticity of demand for money fell to an average of about 0.73 in Austria, 0.67 in Poland, and 0.5 in Germany. Thus in the last stages of inflation the prodigious increase in the velocity of circulation may have as much, or more, effect in raising prices and depreciating the exchanges than the increase in the volume of notes. The note-issuing authorities often cry out against what they regard as the unfair and anomalous fact of the notes falling in value more than in proportion to their increased volume. Yet it is nothing of the kind; it is merely the result of the one method to evade a crushing burden left open to the public, who discover for themselves, sooner than the financiers, that the law of unit elasticity in their demand for money can be escaped.
Nevertheless, it is evident that so long as the public use money at all, the Government can continue to raise resources by inflation. Moreover, the conveniences of using money in daily life are so great that the public are prepared, rather than forego them, to pay the inflationary tax, provided it is not raised to a prohibitive level. Like other conveniences of life the use of money is taxable, and, although for various reasons this particular form of taxation is inexpedient, a Government can get resources by a continuous practice of inflation, even when this is foreseen by the public generally, unless the sums they seek to raise in this way are very grossly excessive. Just as a toll can be levied on the use of roads or a turnover tax on business transactions, so also on the use of money. The higher the toll and the tax, the less traffic on the roads, and the less business transacted, so also the less money carried. But some traffic is so indispensable, some business so profitable, some money-payments so convenient, that only a very high levy will stop completely all traffic, all business, all payments. A Government has to remember, however, that even if a tax is not prohibitive it may be unprofitable, and that a medium, rather than an extreme, imposition will yield the greatest gain.
Suppose that the rate of inflation is such that the value of the money falls by half every year, and suppose that the cash used by the public for retail purchases in shops is turned over 100 times a year (i.e. stays in one pocket for half a week on the average); then this is only equivalent to a turnover tax of 0.5% on each transaction. The public will gladly pay such a tax rather than suffer the trouble and inconvenience of barter with trams and tradesmen. Even if the value of the money falls by half every month, the public, by keeping their pocket-money so low that they turn it over once a day on the average instead of only twice a week, can still keep the tax down to the equivalent of less than 2% on each transaction, or more precisely 4d. in the ￡. Even such a terrific rate of depreciation as this is not sufficient, therefore, to counterbalance the advantages of using money rather than barter in the trifling business of daily life. This is the explanation why, even in Germany and in Russia, the Government's notes remained current for many retail transactions.
For certain other purposes, however, to which money is put in a modern community, the inflationary tax becomes prohibitive at a much earlier stage. As a store of value, for example, money is rapidly discarded, as soon as further depreciation is confidently anticipated. As a unit of account, for contracts and for balance sheets, it quickly becomes worse than useless, although for such purposes the privilege of the current money as legal-tender for the discharge of debts stands in the way of its being discard as soon as it ought to be.
In the last phase, when the use of the legal-tender money has been discarded for all purposes except trifling out-of-pocket expenditure, inflationary taxation has at last defeated itself. For in that case the total value of the note issue, which is sufficient to meet the public's minimum requirements, amounts to a figure relatively so trifling that the amount of resources which the government can hope to raise by yet further inflationㅡwithout pushing it to a point at which the money will be discarded even for out-of-pocket triflesㅡis correspondingly small. Thus at last, unless it is employed with some measure of moderation, this potent instrument of governmental exaction breaks in the hands of those that use it, and leaves them at the same time with the rest of their fiscal system in total ruins;ㅡout of which, in the ebb and flow of the economic life of nations, may emerge once more a reformed and admirable system. The chervonetz of Moscow and the krone of Vienna are already stabler units than the franc or the lira.
All these matters can be illustrated from the recent experiences of Germany, Austria, and Russia. The following tables show the gold value of the note issues of these countries at various dates:
The characteristics of each phase emerge clearly. The tables show, first of all, how quickly, during the period of collapse, the rate of the depreciation of the value of the money outstrips the rate of the inflation of its volume. During the collapse of the German mark beginning with December 1920, the rate of depreciation proceeded for some time roughly twice as fast as that of the inflation[즉, inflation of the volume of notes], and eventually by June 1923, when the volume of the note-issue had increased 200-fold compared with December 1920, the value of a paper mark had fallen 2500-fold. The figures given above for Austria begin at a rather later stage of the débâcle. But if we equate Austria in June 1920 to Germany in December 1920, the progress of events between that date and September 1922 is roughly comparable to that in Germany between December 1920 and May 1923. The figures for Russia between January 1919 and the early part of 1923 also exhibit the same general features.
These tables all commence after a considerable depreciation had already occurred and the gold-value of the aggregate note-issue had fallen considerable below the normal.[1] Nevertheless their earliest entries still belong to the period when an eventual recovery was still widely anticipated and the general public had not at all appreciated what they were in for. They indicate that as the situation develops from this point onwards and the use of money is discarded except for retail transactions, the aggregate value of the note-issue falls by about four-fifths. As the result of extreme panic or depression a further fall may occur for a time; but, unless the money is discarded altogether, a minimum is reached eventually from which the least favourable circumstance will cause a sharp recovery.
The temporary recovery in Germany after the collapse of February 1923 exhibited how a point may come when, if the money is to continue in use at all, a bottom is reached and a technical position is created in which some recovery is possible. When the gold value of the currency has fallen to a very low figure, it is easy for the Government, if it has any external resources at all, to give sufficient support to prevent the exchange from falling further for the time being. And since by that time the public will have carried their attempts to economise the use of money to a pitch of inconvenience which it is impracticable to continue, even a moderate weakening in the degree of their distrust of the future value of the money will lead to some increase in their use of it; with the result that the aggregate value of the note issue will tend to recover. By February 1923 these conditions existed in Germany in a high degree. The German Government was able within two months, in the face of most adverse political conditions, to double the exchange-value of the mark whilst simultaneously more than doubling the note circulation. Even so the gold value of the note issue was only brought back to what it had been six months earlier; and if even a moderate degree of confidence had been restored, it might have been possible to bring the value of the note circulation of Germany up to (say) 2 milliard gold marks(￡100,000,000) at least, which is probably about the lowest figure at which it can stand permanently, unless every one is to put himself to intolerable inconvenience in his efforts to hold as little money as possible. Incidentally the Government is able during the period of recovery to obtain, once more, through the issue of notes the command over a considerable amount of real resources.
In Austria, ( ... p. 55 / PDF 64 ... )
Even in Russia ( ... ... )
The next paragraph begins here on p. 58(and p. 68 on PDF):
The collapse of the currency in Germany which was the chief contributory cause to the fall of Dr. Cuno's Government in August 1923, was due, not so much to taxing by inflationㅡfor that had been going on for yearsㅡas to an increase in the rate of inflation to a level almost prohibitive for daily transactions and quite destructive of the legal-tender money as a unit of account. We have seen that what concerns the use of money in the retail transactions of daily life is the rate of depreciation, rather than the absolute amount of depreciation as compared with some earlier date.
In the middle of 1922 I estimated, very roughly, that the German Government had then been obtaining for some time past the equivalent of something between ￡75,000,000 and ￡100,000,000 per annum by means of printing money. Up to that time, however, a substantial proportion of these receipts had been contributed through the purchase of mark-notes by speculative foreigners. Nevertheless the German public itself had probably paid upwards of ￡50,000,000 per annum in this form of taxation. Since the German note issue was still worth ￡240,000,000 so lately as December 1920 (see the table on p. 51) and had not fallen below ￡100,000,000 even in the middle of 1922, the rate of depreciation represented by the above, whilst sufficiently disastrous to the mark as a store of value or as a unit of account, had been by no means prohibitive to its continued use in daily life. In the latter half of 1922, however, the public learnt to make enough further economies in the use of the mark as money to reduce the value of the total note issue to about ￡60,000,000. The first effect of the Ruhr occupation was, as we have seen above(p. 54), to bring down the note issue below the minimum to which the public could adjust their habits, which resulted in the temporary recovery of March 1923. Nevertheless by the middle of 1923 the public was able to get along with a note issue worth about ￡20,000,000. All this time the German Government had continued to raise resources equivalent to round about ￡1,000,000 a week by note-printingㅡwhich meant a depreciation of 5% a week even if the public had been unable to reduce any further the value of the aggregate note issue, and came in practice to about 10% a week allowing for their yet further economies in the use of mark-currency.
But the expenses of the Ruhr resistance, coupled with the complete breakdown of other sources of taxation, had led, by May and June 1923, to the Government's raising the equivalent of, first, ￡2,000,000 and them ￡3,000,000 a week by note-printing. On a note issue, of which the total value had sunk by that time to about ￡20,000,000, this was pushing inflationary taxation to a preposterous and suicidal point. ( ... ... )
p. 60 (p. 69 on PDF)
By the time this book is published, Dr. Cuno's successors may have solved, or failed to solve, the problem facing them. However this may be, the restoration of a serviceable unit of account seems to be the first step. This is a necessary preliminary to the escape of the German financial system from the vicious circle in which it now moves. The Government cannot introduce a sound money, because, in the absence of other revenue, the printing of an unsound money is the only way by which it can live. Yet a serviceable unit of account is a pre-requisite of the collection of the normal sources of revenue. The best course, therefore, is to remain content for a little longer with an unsound money as a source of revenue, but to introduce immediately a steady unit of account (the relation of which to the unsound money could be officially fixed daily or weekly) as a preliminary to the restoration of the normal sources of revenue.
The recent history of German finance can be summarised thus. Reliance on inflationary taxation, whilst extremely productive to the exchequer in its earliest stages especially whilst the foreign speculator was still buying paper marks, gradually broke down the mark as a serviceable unit of account, one of the effects of which was to render unproductive the greater part of the rest of the revenue-collecting machineryㅡmost taxes being necessarily assessed at some interval of time before they are collected. The failure of the rest of the revenue rendered the Treasury more and more dependent on inflation, until finally the use of legal-tender money had been so far abandoned by the public that even the inflationary tax ceased to be productive and the Government was threatened by literal bankruptcy. At this stage, the fiscal organisation of the country had been so thoroughly destroyed and its social and economic organisation so grievously disordered, as in Russia 18 months earlier, that it was a perplexing problem to devise ways and means by which the Government could live during the transitional period whilst the normal machinery for collecting revenue was being re-created, especially in face of the struggle with France proceeding at the same time. Nevertheless the problem is not insoluable; many suggestions could be made; and a way out will doubtless be found at length.
*
It is common to speak as though, when a Government pays its way by inflation, the people of the country avoid taxation. We have seen that this is not so. What is raised by printing notes is just as much taken from the public as is a beer-duty or an income-tax. What a Government spends the public pay for. There is no such thing as an uncovered deficit. But in some countries it seems possible to please and content the public, for a time at least, by giving them, in return for the taxes they pay, finely engraved acknowledgements on water-marked paper. The income-tax receipts, which we in England receive from the Surveyor, we throw into the wastepaper basket; in Germany they call them bank-notes and put them into their pocket-books; in France they are termed Rentes and are locked up in the family safe.
Section I of the Chapter 2 ends on p.62 (PDF 71)
II. Currency Depreciation versus Capital Levy
We have seen in the preceding section the extent to which a Government can make use of currency inflation for the purpose of securing income to meet its outgoings. But there is a second way in which inflation helps a Government to make both ends meet, namely by reducing the burden of its pre-existing liabilities in so far as they have been fixed in terms of money. These liabilities consist, in the main, of the internal debt. Every step of depreciation obviously means a reduction in the real claims of the rentes-holders against their Government.
It would be too cynical to suppose that, in order to secure the advantages discussed in this section, Governments (except, possibly, the Russian Government) depreciate their currencies on purpose. As a rule, they are, or consider themselves to be, driven to it by their necessities. The requirements of the Treasury to meet sudden exceptional outgoingsㅡfor a war or to pay the consequences of defeatㅡare likely to be the original occasion of, at least temporary, inflation. But the most cogent reason for permanent depreciation, that is to say Devaluation, or the policy of fixing the value of the currency permanently at the low level to which a temporary emergency has driven it, is generally to be found in the fact that a restoration of the currency to its former value would raise the recurrent annual burden of the fixed charges of the National Debt to an insupportable level.
There is, nevertheless, an alternative to Devaluation in such cases, provided the opponents of Devaluation are prepared to face it in time, which they generally are not,ㅡnamely a Capital Levy. The purpose of this section is to bring out clearly the alternative character of these two methods of moderating the claims of he rentier, when the State's contractual liabilities, fixed in terms of money, have reached an excessive proportion of the national income.
The active and working elements in no community, ancient or modern, will consent to hand over to the rentier or bond-holding class more than a certain proportion of the fruits of their work. When the piled-up debt demands more than a tolerable proportion, relief has usually been sought in one or other of two out of the three possible methods.[:] (1) The first is Repudiation. But, except as the accompaniment of Revolution, this method is too crude, too deliberate, and too obvious in its incidence. The victims are immediately aware and cry out too loud; so that, in the absence of Revolution, this solution may be ruled out at present, as regards internal debt, in Western Europe.
(2) The second method is Currency Depreciation, which becomes Devaluation when it is fixed and confirmed by law. In the countries of Europe lately belligerent, this expedient has been adopted already on a scale which reduces the real burden of the debt by from 50 to 100%. In Germany the National Debt has been by these means practically obliterated, and the bond-holders have lost everything. In France the real burden of the debt is less than a third of what it would be if the franc stood at par; and in Italy only a quarter. The owners of small savings suffer quietly, as experience shows, these enormous depredations, when they would have thrown down a Government which had taken from them a fraction of the amount by more deliberate but juster instruments.
This fact, however, can scarcely justify such an expedient on its merits. Its indirect evils are many. Instead of dividing the burden between all classes of wealth-owners according to a graduate scale, it throws the whole burden on to the owners of fixed interest bearing stocks, lets off the entrepreneur capitalist and even enriches him, and hits small savings equally with great fortunes. It follows the line of least resistance, and responsibility cannot be brought home to individuals. It is, so to speak, nature's remedy, which comes into silent operation when the body politic has shrunk from curing itself.
(3) The remaining, the scientific, expedient, the Capital Levy, has never yet been tried on a large scale; and perhaps it never will be. It is the rational, the deliberate method. But it is difficult to explain, and it provokes violent prejudice by coming into conflict with the deep instincts by which the love of money protects itself. Unless the patient understands and approves its purpose, he will not submit to so severe a surgical operation.
Once Currency Depreciation has done its work, I should not advocate the unwise, and probably impracticable, policy of retracing the path with the aid of a Capital Levy. But if it has become clear that the claims of the bond-holder are more than the tax-payer can support, and if there is still time to choose between the policies of a Levy and of further Depreciation, the Levy must surely be preferred on grounds both of expediency and of justice. It is an overwhelming objection to the method of Currency Depreciation, as compared with that of the Levy, [:]
- that it falls entirely upon persons whose wealth is in the form of claims to legal-tender money,
- and that these are generally, amongst the capitalists, the poorer capitalists.
- It is entirely ungraduated; it falls on small savings just as hardly as on big ones ;
- and incidentally it benefits the capitalist entrepreneur class for the reasons explained in Chapter 1.
There is a respectable and influential body of opinion which, repudiating with vehemence the adoption of either expedient, fulminates alike against Devaluations and Levies, on the ground that they infringe the untouchable sacredness of contact; or rather of vested interest, for an alteration of the legal tender and the imposition of a tax on property are neither of them in the least illegal or even contrary to precedent. Yet such persons, by overlooking one of the greatest of all social principles, namely the fundamental distinction between the right of the individual to repudiate contract and the right of the State to control vested interest, are the worst enemies of what they seek to preserve. For [:]
- nothing can preserve the integrity of contract between individuals, except a discretionary authority in the State to revise what has become intolerable.
- The powers of uninterrupted usury are too great. If the accretions of vested interest were to grow without mitigation for many generations, half the population would be no better than slaves to the other half.
- Nor can the fact that in time of war it is easier for the State to borrow than to tax, be allowed permanently to enslave the tax-payer to the bond-holder.
- Those who insist that in these matters the State is in exactly the same position as the individual, will, if they have their way, render impossible the continuance of an individualistic society, which depends for its existence on moderation.
In our own country the question of the Capital Levy depends for its answer on whether the great increase in the claims of the bond-holder, arising out of the fact that it was easier, and perhaps more expedient, to raise a large part of the current costs of the war by loans rather than by taxes, is more than the taxpayer can be required, in the long run, to support. The high levels of the Death Duties and of the income- and super-taxes on unearned income, by which the net return to the bond-holder is substantially diminished,[1] modify the case. Nevertheless, immediately after the war, when it seemed that the normal budget could scarcely be balanced without a level of taxation of which a tax on earned income at a standard rate between 6s. and 10s. in the ￡ would be typical, a levy seemed to be necessary. At the present time the case is rather more doubtful. It is not yet possible to know how the normal budget will work out, and much depends on the level at which sterling prices are stabilised. [:]
- If the level of sterling prices is materially lower, whether in pursuance of a policy of restoring the old gold parity or for any other reason, a levy may be required.
- If, however, sterling prices are stabilised somewhere between 80 and 100% above the pre-war levelㅡa settlement probably desirable on other groundsㅡand if the progressive prosperity of the country is restored, then perhaps we may balance our future budgets without oppressive taxation on earned income and without a levy either.
[1] The net return to the French ^rentier^ is more than 6%; to the British not much above 3%.In several countries the existing burden of the internal debt renders Devaluation inevitable and certain sooner or later. It will be sufficient to illustrate the case by reference to the situation of France,ㅡthe home of absolutism of all kinds, and hence, sooner or later, of bouleversement. The finances of Humpty Dumpty are as follows:
At the end of 1922 the internal debt of France, excluding altogether her external debt, exceeded 250 milliard francs. Further borrowing budgeted for in the ensuing period, together with loans on reconstruction account guaranteed by the Government, may bring this total to the neighbourhood of 300 milliards by the end of 1923. The service of this debt will absorb nearly 18 milliards per annum. The total normal receipts under the provisional[1] Budget for 1923 are estimated at round 23 milliards. That is to say, the service of the debt will shortly absorb, at the value of the franc current early in 1923, almost the entire yield of taxation. Since other Government expenditure in the ordinary budget (i.e. excluding war pensions and future expenditure on reconstruction) cannot be put below 12 milliards a year, it follows that, even on the improbable hypothesis that further expenditure in the extraordinary budget after 1923 will be paid for by Germany, the yield of taxation must be increased permanently by 30% to make both ends meet. If, however, the franc were to depreciate to (say) 100 to the pound sterling, the ordinary budget could be balanced by taking little more of the real income of the country than in 1922.
In these circumstances it will be difficult, if not impossible, to avoid the subtle assistance of a further depreciation. What, then, is to be said of those who still discuss seriously the project of restoring the franc to its former parity? [:]
- In such an event the already intolerable burden of the rentier's claims would be about trebled. It is unthinkable that the French taxpayer would submit.
- Even if the franc were put back to par by a miracle, it could not stay there. Fresh inflation due to the inadequacy of tax receipts must drive it anew on its downward course.
- Yet I have assumed the cancellation of the whole of France's external debt, and the assumption by Germany of the burdens of the extraordinary budget after 1923, an assumption which is not justified by present expectations. These facts alone render it certain that the franc cannot be restored to its former value.
France must come in due course to some compromise between increasing taxation, and diminishing expenditure, and reducing what they own their rentiers. I have not much doubted that the French public, as they have hitherto, will consider a further dose of depreciationㅡattributing it to the "bad will" of Germany or to financial Machiavellism in London and New Yorkㅡas far more conservative, orthodox, and in the interest of small savers, than a justly constructed Capital Levy, the odium of which could be less easily escaped by the French Ministry of Finance.
If we look ahead, averting our eyes from the ups and downs which can make and unmake fortunes in the meantime, the level of the franc is going to be settled in the long run not by speculation or the balance of trade, or even the outcome of the Ruhr adventure, but by the proportion of his earned income which the French taxpayer will permit to be taken from him to pay the claims of the French rentier. The level of the franc exchange will continue to fall until the community-value of the francs due to the rentier has fallen to a proportion of the national income, which accords with the habits and mentality of the country.
Chapter 2 ends here on p. 73 (p. 81 on PDF)
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