[Chapter 3 of Keynes's Collected Writings, vol. 13] Interlude

※ related materials for the job of KHNW p062-2:

• [basic terms in Keynes's] external equilibrium in his frame of Treatise on Money
• [발췌] Free Trade Nation: Commerce, Consumption, and Civil Society in Modern Britain
• [Search for the context of] Keynes's position on import tariffs around 1930
• [발췌: S. Howson & D. Winch's] The Economic Advisory Council 1930-1939
• [발췌 10장: W. R. Garside's] British Unemployment 1919-1939
• [발췌: Keynes's] Mitigation by Tariff (1931), in “Essays in Persuasion”
• [Excerpts from Keynes's] letter to the Governor of the Bank of England on May 22, 1930
• [발췌 19장: Moggridge's Maynard Keynes] #19. The Emergence of the Treatise
• [발췌 Part III of Chapter 2: M.J. Flanders's International Monetary Economics 1870-1960] Policy-Oriented Academic─Keynes
• [발췌: A.H. Meltzer's] Keynes's Monetary Theory
• [발췌 12장: V. Barnett's] John Maynard Keynes (2013)
• [발췌: Chi-Yuen Wu's] “Developments since 1918: The Transfer Problem”

* * *

출처: J.M. Keynes, Collected Writings, vol. 13: The General Theory and After , ( ... )

※ 케인스가 화폐론 원고를 마감하고(1930년 9월 14일) 일주일 뒤(9월 21일) 쓴 문서다.

※ excerpts of which: pp. 177-200

* * *

CHAPTER 3. INTERLUDE

p. 177:

As usual, Keynes's activities during 1930 were not confined to economic theory. As noted above (p 126), he was taking an active part in the work of the Macmillan Committee on Finance and Industryㅡproviding by the end of the year a total of eight days of ‘private’ evidence,[KHNW_p059-1] and examining witnesses. In addition, he took an active part in the work of the Economic Advisory Council which provided advice to the Prime Minister and the Cabinet on economic questions.

  Keynes's approach to his ‘private’ evidence, papers and discussions for these bodies naturally reflected his current, more abstract preoccupation with the Treatise and in some cases provides good glimpses into his current theoretical development, independent of the more geological Treatise, which shows evidence of several changes of view. As this material emanates from Keynes's public activities, it naturally appears in volume 20.

  One exception to the general principles outlined above would, however, appear useful. At the time Keynes finished his Treatise, he was involved with Sir Josiah Stamp, Professor A.C. Pigou, Professor Lionel Robbins and Hubert Henderson as Chairman of a Committee of Economists of the Economic Advisory Council.[1] The discussion of this Committee and the papers circulated were of a somewhat different, more abstract, order from those of, say, the Economic Advisory Council Papers. 

• Moreover, Keynes's major paper on the current economic position is of considerable interest. Dated one week after Keynes finally passed the pages of the Treatise, at a time when he knew of R.F. Kahn's formulation of ‘the multiplier’,[2] this paper provides a useful indication of Keynes's state of mind at the time he finished the Treatise rather than his state of mind in the Treatise proper. 
• For this reason, this paper appears apart from Keynes's other, less abstract, papers for the Council (which appears in volume 20) as a brief reference point for the reader in the discussions of the Treatise and the road towards the General Theory which occupy succeeding chapters.

[1] The terms of reference of this committee were: ‘To review the present economic conditions of Great Britain, to examine the causes which are responsible for it and to indicate the conditions of recovery.’

[2] Kahn was one the secretaries of the Committee. His early formulation of 'the multiplier' was later circulated to the Committee.

* * * 

※ 21 September 1930 (pp. 178-200)

Memorandum by Mr J.M. Keynes 

to the Committee of Economists of the Economic Advisory Council

I. Prolegomena

In the following I have endeavoured to cast what I have been trying to say into a mould which is perhaps more similar to that in which the thoughts of the other members of the Committee run. But it is not easy to do so, and since I have not much time for reflection there are probably some mistakes in it. I plead for charity all through this document as it has been extraordinarily difficult in the time allowed to keep incidental errors of generalisation from creeping in.

1. I define ‘equilibrium’ real wages as those which are paid when all the factors of production are employed and entrepreneurs are securing normal returns, meaning by ‘normal’ returns those which leave them under no incentive either to increase or to decrease the money offers which they make to the factors of production.

2. Unless the level of money wages at home relatively to money wages abroad is such that the amount of the foreign balance (i.e. of foreign investment)[*] plus the amount of home investment at the rate of interest set by world conditions (i.e., which just prevents gold movements) is at least equal to the amount of home savings,[**] business losses will ensue. Thus there cannot be full employment unless this condition is fulfilled. The terms of trade which obtain when this condition is fulfilled I call the ‘equilibrium terms of trade’.

• [*] 케인스 용어: foreign balance(경상수지=순수출. 여기서는 foreign investment와 등치시켰는데 자료c에서도 그처럼 취급한다). (net) foreign lending(－자본수지). cf. 자료a; 자료b; 케인스 본인의 근거는 화폐론 9장.
• [**] ‘국외투자＋국내투자≥국내저축’가 되도록 국내외 상대적 명목임금 차이가 형성되지 않으면 기업은 계속 손실을 본다. : 총투자＝국내투자＋국외투자(경상수지) & 저축-투자 균형[총투자＝총저축(국내저축)] ⇒ ‘국내투자＋국외투자(경상수지)＝국내저축’과 관계된 이야기일 것이다. 
• 아래 일부 대목에서는 ‘경상수지(＝순수출＝수출－수입)＝잉여저축(＝국내저축－국내투자)’ 관계로부터 ‘수출＝수입＋잉여저축’으로 표현하기도.

3. Equilibrium real wages depend on:ㅡ

• (a) the volume of physical output per head ; 
• (b) the technique of industry taken in conjunction with the volume of existing capital ; 
• (c) the equilibrium terms of trade.

In an international system an adverse change in the equilibrium terms of trade has exactly the same effect as a diminution in physical output per head has in a closed system, since the result is that a given quantity of effort in one country produces a smaller quantity of what is wanted.

4. Thus, when we find a condition of disequilibrium in existence, it might be due to changes under any of these three heads.

 (a) [실물 산출의 인당 생산성 문제인가? 실질임금과의 비교] Now, there is no evidence that real wages, at any rate up to 1929, had increased appreciably faster either than actual physical output per head or than what physical output per head would have been if all the factors of production had been employed. Any excess covered under this head is probably no more than could be covered during the short period by the amount below their normal return which entrepreneurs will accept rather than reduce output.

 (b) [현 자본의 규모와 산업의 기술 문제인가?] This seems to me to be really a branch of (a) over the long period when there has been time to change the quantity and character of capital equipment. Changes under (b) might result, failing a compensating change in real wages, in declining output per head or more probably a smaller output per head than might have been over the long period. I see little evidence that this is a significant cause of our present troubles at this moment. But I find the point confusing and difficult to disentangle both from (a) above and from (c) below.

 (c) [균형 교역조건의 문제인가?] I, therefore, attribute the major part of our troubles to the equilibrium terms of trade having turned seriously against us, without this being compensated by a reduction of money wages to correspond to the new equilibrium terms of trade. [※ 균형 교역조건이 심각하게 악화되었지만 화폐임금이 그에 조응할 수 있도록  하락하지 않았다. ] 

5. When we are dealing with a closed system, it may help us to think primarily in terms of real wages. But when we come to an international system and to dealing with the equilibrium terms of trade, it appears to me that money wages at home per unit of output relatively to similar wages abroad are much more directly relevant to our problem than real wages. For example, an increase in real wages due to an increase of British money wages would, in this case, affect employment much more than, and in a different way from, an equal increase in British real wages due to a fall (e.g.) in the price of imported foodstuffs. But we may overlook this if we concentrate too much on real wages.

6. The actual terms of trade today have not moved adversely to us. The fact that the money value of output per man, which was greatly depressed by the return to gold, has been tending to catch up money wages is a sign of this.[*] So is the fact that our imports have fallen in price more than our exports and much more than our net exports, excluding imported raw material embodied in exports. These facts would be modified, but not, I should think, obliterated, if they included an allowances for the catastrophic decline in freights. Allowing for everything, the actual terms of trade have probably not changed a great deal.

[*]  금본위제 복귀에 따른 사실상의 평가절상으로 인당 산출물의 명목가치가 크게 떨어졌는데, 이 값이 명목임금 수준으로 높아지는 경향이 나타났다. 이걸 보면 실제 교역조건은 악화되지는 않았다(??). 수출가격보다 수입가격이 더 떨어졌다는 사실을 봐도 그렇다. ... 따라서 실제 교역조건은 아마도 크게 변하지 않았을 것이다.

  The question isㅡ(1) by how much are the existing equilibrium terms of trade worse than the actual terms of trade? (2) What reduction of money wages would be necessary to bring the terms of trade to equilibrium? (3) What reduction of real wages would this entail?

  There is also the question whether the long-period trend may not be such that, unless we do something about it, the equilibrium terms of trade will move further against us as times goes on.

[※ How much are important real wages in economic reasoning for the answers of current problems : ]

• Real wages seem to me to come in as a by-product of the remedies which we adopt to restore equilibrium. They come in at the end of the argument rather than at the beginning. That is to say, we arrive finally at a considerationㅡas having an important bearing on our choice between the different alternativesㅡas to how much each of the several expedients, both those which involve a reduction in money wages and those which do not, are calculated to reduce real wages. 
• But the answer to this will not have much direct bearing on the question how much employment we can expect from each of the several expedients. 
• Employment is not a function of real wages in the sense that a given degree of employment requires a determinate level of real wages, irrespective of how the employment is brought about.

  Suppose [:]

• that there were to be a flight from sterling and that thisㅡover the short period at any rateㅡcaused a violent adverse movement of the equilibrium terms of trade, but not so great a one that it could not be remedied by a sufficient reduction of money wages, which in turn would mean a reduction of real wages;  [※ 금 유출 → 통화량 감소 & foreign lending(L)>foreign balance(B) → 통화량 감소에 따른 영향 & B 증가를 위한 수출단가 하락 압력 → 군형교역조건 악화. 이 균형교역조건 악화를 화폐임금 하가(및 그에 따른 실질임금 하락)으로 교정될 만한 정도의 수준이라고 하자. ]
• and suppose that an economist were called in to diagnose the resulting unemployment; 

would it be useful or sensible for him to reply that the trouble was that real wages were too high? Yet, if he were in the habit of thinking of the wages question as a part of the long-period theory of distribution with the short-period theory of money and international trade in a separate compartment of his mind, this is what he might say, and, furthermore, he might be able to justify it, because it might be true that a sufficient reduction of real wages would be theoretically capable of restoring equilibrium. Moreover, ceteris paribus this might be the only remedy; which is another way of saying that if we cut ourselves off from all other remedies, this is the only remedy which is left.

7. For some reason we have got into the habit of assuming[:]

• that changes in the terms of trade are of small significance in relation to the problems of the national economy; for example, that there never is a serious transfer problem; 
• or, again, that the terms-of-trade argument for protection is never worth much. 
• There must, I think, have been something in 19th-century conditions which made this roughly true when applied to Great Britain. But, for a variety of reasons, I am sure that this is not true today. [※ 화폐론 21장과 그 앞의 어떤 장에서 언급된 주장.]

  Nor does the fact that the effect of changes in the equilibrium terms of trade is likely to be much greater on equilibrium money wages than on equilibrium real wages help us very much; because it is precisely money wages which are sticky and difficult to move. [※ 균형교역조건의 변화는 균형실질임금보다 균형화폐임금에 미치는 영향이 훨씬 크다는 사실을 얘기해봐야 별 도움될 게 없다. 왜냐하면 움직이기 힘든 경직적인 변수가 바로 화폐임금이기 때문이다. ]

7a. I classify the factors determining the equilibrium terms of trade as follows:ㅡ

  A. Those affecting the magnitude of the foreign balance.

  B. Those affecting the pressure to lend abroad.

A. There are many reasons (leaving out the temporary aggravations of the world slump) why the terms of trade corresponding to a given magnitude of the foreign balance might move adversely to us:ㅡ

• (a) as a result of increased tariffs abroad against our products;
• (b) as a result of the decline of former important markets (e.g. India, China);
• (c) as a result of the value of our monetary standard being raised relatively to monetary standards abroad without corresponding adjustments of money wages[1]
• (d) as a result of other countries catching us up in efficiency.

[1] I mean here that part of the consequent raising of relative gold wages which is in excess of any change in real wage relatively to output.

B. The pressure to lend abroad might be increased:ㅡ

• (a) as a result of the demand schedule of borrowers abroad rising relatively to the schedule of home borrowers;
• (b) as a result of the supply schedule of lenders at home for foreign lending falling relatively to their supply schedule for home lending.

  As an example of (a), let us suppose that we have been saving ￡500 million a year and investing ￡300 million at home and ￡200 million abroad. Then if the new investments at home which are expected to yield the world rate of interest become fewer because we are an old country, or if new investments abroad are expected to yield more for reasons which do not apply at home, equilibrium may require that we should invest ￡200 million at home and ￡300 million abroad. This means that we (1) must increase our favourable balance by ￡100 million. In order to do this we (2) must cheapen our exports, i.e. (3) alter the terms of trade to our disadvantage. Thus the effect of the incentive to lend more abroad will be to reduce equilibrium real wages.

  As an example of (b), let us suppose that the investor feels more confidence than before in the credit or prospects of some foreign countries or set of foreign countries. He will then be more willing than before to lend [abroad] unless the terms for home lending are correspondingly increased, which may be impossible having regard to the prospective yield. Or it may be that he feels less trust than before in the prospects of home investment. Again, equilibrium requires a larger favourable balances, to secure which we must cheapen our exports.

8. (1) The terms-of-trade schedule, that is to say the terms of trade corresponding to a given value of the foreign balance, we may call ‘the terms of transfer’. (2) The degree of pressure towards foreign lending we may call ‘the terms of lending’. (3) The problem of establishing equilibrium terms of trade we may call the transfer problem (borrowing from the language of the reparations controversy).

I am suggesting that the main cause of our troubles is [:]

• not that British real wages have been getting ahead of British physical productivity (though they may have been getting a trifle ahead of it);
• but that a serious transfer problem has arisen as a result of the terms of transfer and the terms of lending both moving adversely to the equilibrium terms of trade, i.e. the foreign balance is tending to decline at a time when foreign lending is trying to increase.

  The reactions of an unsolved transfer problem on domestic equilibrium may be very great, even though the deficiency of the foreign balance below equilibrium is quite a small percentage of the national income. For example, I should say that in our case the deficiency of the foreign balance cannot be above ￡200 million per annum at the very outside, which is only 5% of the national income. Yet ifㅡas a result of our failure to solve it otherwise than by a rate of interest punitive to home investmentㅡthe amount of home investment plus the amount of the foreign balance falls short of our savings [※ 국내투자＋경상수지＜국내저축, 수출＜수입＋(S－I)] by ￡200 million, this means that entrepreneurs will lose ￡200 million, which is enormous in relation to entrepreneurs' resources and must have a terrible effect in causing unemployment, and an increasing effect as times goes on.

케인스전집 v.13, pp.182-183.

*

케인스전집 v.13, pp.184-185.

pp. 184-185:

KHNW p062-2 {{

9. In order to illustrate the horrible possibility of the transfer problem[위 8 참조: 균형교역조건의 악화에 적응해 가는 과정], let me offer the following caricature. [:]

• (1) Suppose two countries England and America; labor of equal efficiency; both on the gold standard with no restriction on foreign lending, but with strict immigration laws.
• (2) Suppose that in England savings are increasing faster than population, whilst in America population is increasing faster than savings. 
• (3) Suppose that America has a tariff based on the difference between the cost of production at home and abroad, so that the tariff is raised whenever it can be proved that the difference has widened.
• (4) Suppose that the stock of gold which England is legally free to export is an insignificant fraction of America's stock of gold. 

※ 가정 (1): 두 나라의 노동생산성(따라서 실질임금)에 차이가 없다. foreign lending(L:금융수지 적자)가 발생하면 foreign balance(B: 수출－수입 혹은 경상수지) 흑자로 금융수지 적자분을 조달해야 하는데(L＝B), 금본위제하에서 L＞B가 되면 그 차이만큼 금 이 유출(G>0)된다. 즉 L＝B＋G.

※ 가정 (2): 영국에선 국내투자(I)로 흡수되지 않는 잉여저축이 매년 발생하므로 매년 국내저축(S) 잉여분이 L로 빠져나간다. 한편 L＞B가 되면 L－B를 해소하기 위해 B가 늘어나야 하고 아니면 금이 유출된다(G＞0).

※ 가정 (3): 영국 수출품과 미국 국산품 간의 가격 차이가 없다. 영국은 S－I＝L을 경상수지(B) 흑자로 조달하면 좋겠지만, 미국의 관세 때문에 수출을 늘리지 못하니 B가 증가하지 못한다. 그러면 금이 계속 유출된다.

※ 가정 (4): 미국은 영국으로부터 자금(금)이 계속 유입되어도 물가가 오르지 않는다. 즉, 미국이 영국으로부터의 금 유입에 제동을 걸 이유가 없다.

[Then, (케인스가 언술한 추론)]

• (a) The rate of interest in England will have to rise to a level at which her savings cannot be entirely absorbed by investment. [※ 국내저축이 전부 투자에 공급되는 상황(S＝I)에 비해 영국은 저축 일부가 국외에 빠져나가므로 금리가 오른다.]

• (b) Unemployment and business losses ensue. [※ 기업 손실과 실업이 계속 발생한다.]

• (c) It will become obvious that wages are too high. (c1) Wages will be reduced; whereupon the American tariff will be raised and the same situation will recur. (c2) Wage will always be too high, so long as there are any Englishmen left alive ; 

[※ 기업 손실과 실업이 계속 이어지니 임금이 너무 높아 보일 것이다. 그래서 임금을 낮춘다. 임금 하락으로 국내 생산단가가 떨어지지만 미국의 관세가 그만큼 오르므로 수출은 늘어나지 않는다. 똑같은 상황(잉여저축의 국외여신, 고금리, 기업 손실, 실업, 계속 L>B가 재연되니 금 유출)이 되풀이된다. 임금을 아무리 낮춰도 여전히 임금은 높을 것이다.]

• and when the last economist expires he will at least be able to claim with his dying breath that he has always had the courage of his convictions about wage being too high and that he has always been right.

• (d) In the early stages this will be aggravated by the fact that, as a result of business losses, the confidence of the British investor in British business will be diminished; he will reckon the risks higher here than in America (quite rightly, because when everyone is dead fixed capital in England will be worth nothing); and the pressure to lend abroad will be further increased.

(e) But there are certain mitigations which may come to the rescue.[:] (1) The gradually increasing impoverishment of the country will diminish saving, and (2) the lower money wages will make us steadily more independent of imports ;ㅡ

[※ 하지만 이런 악순환을 진정시킬 일말의 요인들이 나타날 것이다. (1) 나라가 가난해지니 저축도 줄어들 것이다. (2) 임금도 계속 낮아질 것이니 수입도 점점 줄어들 것이다. (결국) ]

• (e1) a point may come, for example, if we stick to laissez-faire long enough, when we shall grow our own vines. 

※ 나라 자체가 가난해져서 저축도 줄고 해외수입도 줄어드는 상황에 이를 때까지 자유방임을 줄기차게 밀고간다고 해보자. [그 다음 구절은 빈곤의 덫에 갇힌 채 억지로 자급자족을 하는 상황을 묘사하는 말에 가까울 것이다]

• (e2) Provided there is a residue of British exports (e.g. peers and old masters) which America is glad to have, and we can reduce our necessary imports plus our surplus savings to equality with this residue, equilibrium will be restored.

※ 그래도 영국이 수출할 게 남아 있고(e.g.) 이걸 미국이 기꺼이 사준다고 할 때, 우리가 수입+잉여저축을 이 수출액에 맞출 수만 있으면 다시 균형에 도달할 수 있을 것이다. 여기서 균형이란 S－I＝B를 말하지만 악순환이 멈추고 더 변화가 없는 상황이란 뜻일 것이다.

  If, however, foreign lending were to be forbidden from the outset, then we might find that equilibrium real wages were even higher than they were before the story began.

  The clue to the paradox is [:] 

• that if you bring about a situation in which entrepreneurs' returns are below what they require to keep them in business, even if they are only slightly below, you bring the whole machine to a standstill ; 
• and it may happen in an international system that even a substantial reduction of money wages in a given country will not mend matters, whilst it is theoretically possible that there is no reduction of money wages which will be sufficientㅡso long as the volume of saving, this international situation and mobility of foreign lending remains as before.

}}

※ CF: 같은 주제의 화폐론 언술: 화폐론 21장, 346-349쪽

  At present public opinionㅡin Great Britain at leastㅡis chiefly coloured by memories of 19th-century experience, when for various reasons the adverse reaction of foreign investment on the level of money-incomes at home was probably at a minimum. The significance of the above in the different circumstances of to-day in relation to the national benefits of a high degree of mobility for international loans is, as yet, scarcely appreciated.
  In an old country, especially one in which the population has ceased to expand rapidly,[,]

• the rate of interest at which borrowers for home investment are able to absorb home savings must necessarily decline. Meanwhile the new countries the rate will be maintained, and as these countries get over their early pioneer difficulties, the estimated risks of lending to themㅡprovided they are careful about their reputation as borrowersㅡwill decline.

• (1) Consequently the old country will tend to lend abroad an ever-growing proportion of its total savings. This will be partly cared for by the interest on its previous foreign lending.

• (2) But for the rest its costs of production must fall so as to stimulate its exports and increase its favourable balance on trading account.

• (3) If there is a resistance to this fall, gold will flow, bank-rate will rise and unemployment become chronic. 

• This is particularly likely to happen if the prevalence of tariffs against manufactured goods (and a readiness to raise them when imports of such goods are increasing) renders the foreign demand for the old country's exports inelastic, whilst at the same time Trade Union in the old country present great obstacles to a reduction of money-wages.

  I leave it to the reader to work out in detail what a pickle a country might get into if a higher rate of interest abroad than can be earned at home leads to most of its savings being lent abroad, whilst at the same time there are tariffs abroad against most of its exports and a tendency to raise these tariff from time to time to balance the gradually rising level of costs in the protected countries due to the outflow of the gold from the lending country.
  Let him take, for example, as his imaginary case, a Great Britain where neither the government nor individuals are prepared to invest at home at higher rate of interest than 5%, and a socialised Australia where the government is ready to develop at 6%, both on a gold standard and with complete mobility of lending between the two; let him suppose further that this imaginary Australia has a sliding-scale tariff on most British goods based on the difference between the costs of production in the two countries, and that in this imaginary Great Britain wages are virtually fixed in terms of money; and let him complete his imaginary picture by supposing a Thrift Campaign in Great Britain which raises savings to an unusual proportion of the national income, or, alternatively a government ruled by financial virtue which taxes heavily in order to raise to a high figure the Sinking Fund for the extinction of National Debt.[1]

}}

p.185-186

10. The remedies available to meet a transfer problem are:ㅡ

(ⅰ) To accept the equilibrium terms of trade and endeavour to meet them by reducing our money costs, i.e. our efficiency earnings in terms of money. This will only be a remedy if the foreign demand for our exports is elastic or if our preference for imports over home products is sensitive to the relative price of the two. Even if the demand for our exports is elastic rather then inelastic, it will have to be very elastic if a moderate reduction of money wages is to do the trick.

(ⅱ) To improve the equilibrium terms of trade:

• (a) by engineering a diminution of tariffs abroad;
• (b) by imposing tariffs at home (or other forms of import restrictions);
• (c) by raising the demand schedules of home borrowers; 
• (d) by lowering the supply schedules of home lenders for home investment.

11. Now, unless there are other serious objections to the remedies proposed, it is obviously (1) better to recover equilibrium by improving the equilibrium terms of trade than by meeting them. We only want to meet them by reducing money wages as a last resort and to the extent that we are unable to improve them.

  Further, in so far as real wages have to be reduced, it is (2) better, if possible, to raise prices than to reduce money wages. It is better:

• (ⅰ) Because there is less social resistance to keeping money wages unchanged when cost of living rises x%, than to reducing money wages x% with prices unchanged.
• (ⅱ) Because, although a reduction of x% in money wages will mean a smaller reduction in real wages, this will not be believed.

(Prices of home-produced goods will not fall by as high a percentage as that in which money wages have been reduced, because these prices also include other costs and profits. Thus real wages would fall to some extent even if the working classes consumed nothing except home-produced goods; but the smaller the percentage of their consumption directed to foreign-produced goods, the smaller will be the reduction in real wages. If 10% reduction in money wages means 8% reduction in the prices of home-produced goods and if 90% of working-class consumption is of home-produced goods, real wages will fall only 3%; but if 50% of such consumption is of home goods, real wages will fall nearly 6%. Thus it is probable that the reduction of real wages would be substantially less than the reduction of money wages. Nevertheless this will not readily believed beforehand, so that the social resistance will be greater than if the same reduction of real wages were brought about by a rise of prices.)

• (ⅲ) Because the method of raising prices throws the burden over a much wider area. In particular, it throws a due share on the rentier class and other recipients of fixed money incomes. Thus, from the point of view both of justice and of self-interest, the trade union leaders are right in preferring a rise of prices to a reduction of money wages as a means of restoring equilibrium. I believe it would be true to say that almost everyone would welcome a return of prices to the level of a year ago in full acknowledgment of the fact that this would raise the cost of living 5%; whereas the vast majority of working-class leaders would resist a reduction of money wages.

p. 187

II. My own way

1. Before proceeding to answer questionnaire in the light of the above, I should like very briefly to substitute for the foregoing the lines along which I should analyse the problem of unemployment, if I had only myself to please.

2. I define ‘primary’ employment as additional employment brought about otherwise than as the result of the increased consumption of newly employed men; and ‘secondary’ employment as employment resulting from such increased consumption.

3. It is impossible to bring about primary employment except by increasing investment relatively to saving (using these terms as I have defined them in my book).

4. The amount of secondary employment ensuing on a given amount of primary employment does not depend on how the primary employment has been brought about.

5. We can, therefore, test the quantitative effect of an expedient on employment by its tendency to diminish the excess saving over investment.

6. In so far as the newly employed buy foreign products with their increased income, this means a diminution of foreign investment. Thus the net increase of investment associated with any measure of bringing about primary employment will be less, so to speak, than the gross.

7. Secondary employment, whatever the character of the primary employment on which it ensues, will necessarily be associated with some increase (not necessarily large) in the price of home-produced goods. This will cause some substitution of home consumption of such goods for foreign consumption of them; which will be a second partial offset to the gross amount of new investment (or diminished saving) which is the direct occasion of the primary employment.

8. Mr Kahn has produced an argument, which seems to me convincing, for supposing that in present conditions in Great Britain a given amount of primary employment gives rise to an approximately equal amount of secondary employment.

  If this is correct, we may assess the existing excess of saving over investment at ￡187,500,000 per annum. This follows from taking our abnormal unemployment at 1,500,000 and the output corresponding to the employment of a man for a year at ￡250 (for 1,500,000/2 × ￡250 ＝ ￡187,500,000). Other general considerations suggests that this is about right in order of magnitude, but perhaps a little on the high side;ㅡif we were to take ￡150 million as our working figure, this might be high enough.

9. Thus if we could increase home investment by ￡75 million per annum and simultaneously increase the foreign balance by the same amount, we might expect to have substantially cured unemployment.[1] Put this way the problem does not sound so very formidable or impossible of accomplishment.

[1] Subject to a qualification below as to what we do with the money which we no longer need to borrow for the dole.

10. How much our methods of achieving these results would reduce real wages, it is extremely difficult to say in advance.

  In so far as our methods include a reduction of money wages, real wages will be reduced by an amount depending on (a) the proportion of working-class consumption devoted to foreign goods and (b) the extent to which the price of the home goods they consume moves with money wages.

  In any case, the secondary employment, to whatever remedies it is due, will cause a rise of prices in home goods which will somewhat reduce the value of a given money wage.

  I would emphasise that the decrease in net foreign investment due to the newly employed consuming more foreign goods and to the rise of home prices associated with secondary employment, and also the reduction in the real value of a given money wage due to the latter cause, will be the same to whatever cause the increase of employment is due.

  I would emphasise this because when I was advocating government schemes of home investment, these schemes were sometimes criticised as ‘inflationary’ and therefore undesirable, because of the rise of home prices associated with the secondary employment ensuing on the primary employment created by the government (this is what the criticism amounted to, though it was not expressed as clearly as this). But in this sense any conceivable cause of increased employment is ‘inflationary’. Even employment due to a decrease in money wages is inflationary in the sense that its secondary effects cause the prices of home-produced goods to rise relatively to the new level of money wages.

11. Please note that a reduction of saving is just as effective a remedy as an increase of investment. The worst of it is that some expenditure on consumption, namely when foreign goods are purchased, automatically reduced investment, because it reduces the foreign balance; in which case we are no further forward than we were. But increased consumption of home-produced goods at the expense of saving creates just as much primary employment, and consequently just as much total employment, as an equal amount of investment.

p. 189

III. The questionnaire

I can make my answers to most of the questions brief, because they follow pretty clearly from what I have already written above.

1[1] (ⅰ) (a) An increase of investment in the world at large. This would in any case raise the world price level and bring us the obvious benefits due to that, including a greater demand for our goods at present prices, an increase in relative money wages abroad, and some decrease in real wages. In short, it would tend both to diminish real wages, and to turn the terms of trade in our favour, so that it would bring the actual real-wage level lower and the equilibrium real-wage level higher.

[1] The first part of the questionnaire ran as follows:
“I. In what way would (a) British employment, (b) British prices, (c) British real wages, be affected by
   (ⅰ) an increase of investment (a) in the world at large, (b) in Great Britain;
   (ⅱ) a tariff;
  (ⅲ) a reduction of British money wages (a) all round, (b) in the relatively highly paid industries? ' [Ed.]

  If the increase in investment was due, not wholly to a rise in the rate of interest which borrowers were willing to pay but to a fall in the market rate, it would mean a fall of the market rate in Great Britain, and consequently an increase of investment in Great Britain. This by absorbing a larger quantity of our savings at home, would still further raise the equilibrium terms of trade and therefore the equilibrium real wage.

(ⅰ) (b) An increase of investment in Great Britain. If this was a result of a fall in the market rate of interest we have already dealt with it. If it was the result of an increase in the willingness to borrow for the purpose of investment in Great Britain (i.e. of an increase in the willingness to invest at the existing market rate), then, as before, by absorbing more of our savings at home it would raise the equilibrium terms of trade and consequently the equilibrium real wage.

(ⅱ) A tariff. This would be capable of bringing assistance along several different lines.

 1. In so far as it raised home prices relatively to foreign prices it would bring actual real wages nearer equilibrium real wages, but it would be wrong to assume that this is the only, or indeed the chief, way in which it would operate. A tariff which had a negligible influence on real wages would be helpful for the following reasons.

 2. In so far as it enabled home products to find an outlet in foreign investment, without turning the equilibrium terms of trade against us as much as would be required by an equal increase of foreign investment due to an expansion of exports. For example, it might be easier to improve the balance of trade by ￡50 million by restricting the import of poultry and pig products than it would be by increasing the volume of our staple exports by a gross amount equivalent to this after allowing for the import of raw material. The benefit of a tariff as compared with the benefit of reducing money wages, depends on the degree in which the former improved the terms of trade above the present actual terms of trade plus the degree in which the latter worsens the terms of trade below the present actual terms of trade. Over the short period this benefit may be very great and over a fairly long period it may be substantial.

  But the benefit of a tariff as compared with the present state of affairs is much greater still. Indeed it is simply enormous. This was the point I sought to bring out in my Manchester Guardian letter.[1] Roughly speaking the capital wealth of the country is increased by nearly the amount of the value of the previous imports which the tariff causes to be replaced by home production; except that, where the protected article is, directly or indirectly, a raw material of an export, we must, of course, subtract the value of any resulting decline in exports.

[1] Letter to the editor of the Manchester Guardian, 16 August 1930, entitled “Buying a British Car”, reprinted in ^JMK^, vol. xx. [Ed.]

 3. In so far as a tariff reduces real wage by raising prices, it is, for the reasons given above, both a more expedient and a more just way of doing this than by a reduction of money wages.

 4. In so far as it raised the spirits of business men it would increase the readiness to invest in Great Britain, thus allowing larger investment at home at the existing market rate, and thus raise the equilibrium terms of trade.

 5. In so far as it facilitated the solution of the budget problem, it might have the same effect as above in increasing confidence and so improve the equilibrium terms of trade.

 6. It could have no adverse effect on employment unless it was so ill contrived as to reduce exports more than it reduced imports.

 7. It would not be more likely and would, in my opinion, be less likely than alternative remedies to provoke a subsequent demand from trade unions for a premature increase in money wages.

p. 192

 8. In so far as it improved the terms of trade, it might call for a smaller reduction of real wages than alternative remedies.

  In the past economists have always admitted as an academic point the terms-of-trade argument in connection with tariffs, but British economists have generally implied that in the case of Great Britain the benefit to be got from this sources is small. This was probably true in the 19th century. It may be true today over the long period. But I think we should consider whether the terms-of-trade argument for a tariff is not today of an altogether different order of magnitude, at any rate if we are considering periods of intermediate length. One of our main problems is to secure a favourable balance of trade large enough to meet the pressure to lend abroad at existing relative rates of interest and relative attractiveness, allowing for risk, etc. There are various ways of attacking this problem.[:]

• One is to subsidise home investment in some shape or form. 
• Another is to penalise foreign lending in some shape or form. 
• A third is to increase our exports by reducing their price. 
• A fourth is to reduce our imports by a tariff or analogous arrangement. 

The orthodox advice is to employ only the third method, namely to reduce the price of our exports. But it seems to me quite uncertain whether the elasticity of demand for our exports is such that we canㅡexcept over a longish periodㅡgreatly increase their aggregate value by reducing their price. If not, then we are driven to fall back on more of the other expedients.

  In time, no doubt, a reduction of our money wages relatively to money wages abroad would tell considerably on the demand for our exports; for it might reduce the profits of our competitors to a point at which they would be disinclined to lay down new plant. But it might be five to ten years before this had much effect. While speaking of a tariff, there are two other points worth mentioning where I, at any rate, feel that I have moved away somewhat from what I used to believe.

  (1) In the case of most manufactured articles I doubt whether today there is any great advantage to be gained by a high degree of specialisation between different countries. Any manufacturing country is probably just about as well fitted as any other to manufacture the great majority of articles. It is unlikely, for example, that there would be great advantages in all the motorcars in the world being made in the United States, and all the tin plates being made in South Wales, and all the steel rails being made in Belgium. On the other hand, now that nearly all the manufacturing countries of the world have decided on a certain measure of self-sufficiency, a country which does not follow suit may pay a much greater price in instability than it gains through specialisation. Thus, I am not very much afraid of a tariff on manufactured articles leading to our manufacturing the wrong things. For I do not think that there are any wrong things, or at any rate not many. Here again I believe that the 19th-century view in favour of specialisation as against stability may have been right, at any rate for Great Britain. But today, if we take account of all sorts of familiar facts, stability may be more important, and the price we should have to pay for it as a result of diminished specialisation a far smaller price.

  Let me put a concrete question to members of the Committee. Suppose it were the case that unless we had a tariff on iron and steel and motor-cars for the next 5 years, the motor-car industry and the heavy steel industry in this country would shrink to negligible dimensions. Would we rather see that happen than put a tariff on to protect them, assuming that the latter could be effective? I should like to know the answer of members of the Committee to this question. I am assuring common knowledge as to our capacity to make the goods in question at a real cost which is not unreasonably high. For my part, if I were to believe that these industries would be crippled without a tariff, I should regard that as a conclusive argument for giving them a tariff. My only reason for hesitating would be the possibility that if they were to feel the pressure of circumstances a little longer they might, after all, be able to prosper without a tariff. But many free traders seem to me to believe this sort of thing on inadequate evidence. Moreover if they were free traders, in the old sense, they would not need to bolster up their opposition to a tariff on these grounds.

  (2) There are, moreover, certain fundamental industries which I should wish to preserve, even though it was clear that we were in some measure relatively inefficient in them. I mean particularly agriculture. It seems to me worth paying a price to maintain the industry of agriculture in the country. Every other country in Europe has adopted this view. Even if it be regarded just as a luxury, are we not rich enough to afford it? At any rate, I should like to put another concrete question to members of the Committee. If they were convinced that farming would be impossible in this country on anything approaching its present scale without a tariff, however willing farmers were to change their methods and their types of production, would they be opposed to giving farmers a tariff or equivalent assistance? I would rather see a prosperous agriculture plus tariff log-rolling at Westminster to the extent prevailing (say) in Germany than the rural population driven to live in Birmingham make screws (and the like) with purity at Westminster at its present level.

 (ⅲ) (a) Reduction of British money wages all round. This has been already been answered in effect in previous passages. The main object would be to reach down to the existing equilibrium real wage and equilibrium terms of trade rather than to raise these equilibria up, which is the main object of the other expedients.

 (ⅲ) (b) Reduction of British money wages in relatively highly-paid industries. This would have less effect in reducing real wages and less effect in improving the favourable trade balance. Its chief advantage might lie in its tending to increase investment in certain home industries and thereby raising the equilibrium terms of trade. This would also, of course, apply to an all-round reduction of British money wages, but would be of less relative importance in that case than in this case.

 (ⅳ) Miscellaneous. (1) We have already seen that anything which diminishes the excess of home savings over home investment tends to raise the equilibrium terms of trade. It follows, therefore, that there is a by-product of advantage from certain measures, which from every other point of view are undesirable. For example, in so far as the dole is financed by borrowing, it represents negative saving. Thus if the rate of the dole was increased to ￡5 a week out of the proceeds of borrowing and the whole of it spent on home-produced goods, unemployment would disappear, provided (ㄱ) that the 'genuinely seeking work' clause was strictly enforced, (ㄴ) that the newly employed factors of production spent their earnings (like the recipients of the dole) on home-produced goods, and (ㄷ) that the government spent the money previously spent on the dole on something else and the new ￡5 dole would in fact cost nothing. But this, after all, is only a roundabout way of saying that, subject to the above assumptions, if the government were always prepared to step in and borrow enough money and spend it on something, however unproductive, there would never be any unemployment. Nor would there be any greater reduction of real wages than if unemployment were to be cured, e.g., by a greater demand for our goods springing up abroad.

  Even as it is, it is quite conceivable that a reduction of the dole would actually, apart from its psychological effect in making wage reductions easier, somewhat increase unemployment! It is the rate of accumulation of our capital wealth which such expedients would diminish, not as compared with the existing state of affairs, but as compared with other remedies. This is a reason why, even if the necessary assumptions were fulfilled, this may not be an advisable remedy! But the fact that it is a remedy serves to bring out the analytical point. I stress the point because I am not clear that it was fully appreciated at our last meeting.

  (2) It is easy to apply the same line of argument to the possible beneficial effects on employment of a suspension of the sinking fund.

 (3) An expedient which would be wasteful in conditions of equilibrium might obviously be highly profitable in existing conditions. Any form of subsidy or detriment through tariffs which did not cost more than 33% of the value of the new output brought into production would pay for itself out of saving on the dole alone, without allowing for any benefit to the employed man himself (reckoning wages at ￡3 a week and the dole at ￡1 a week). In the case of some of the expedients mentioned above, the price to be paid for them would fall on the future rather than on the present. This is true of interference with the freedom of foreign lending. It is true of a tariff in so far as the objection to a tariff lies in its getting us into bad habits. Now, whilst Ramsay showed that we probably accumulated too little as it is, assuming that the future is to be reckoned equal with the present, subject to an appropriate rate of discount, I am not sure that this conclusion would hold if we assume that the progress of science, quite apart from any large accumulation of capital, will improve economic conditions at the rate of 1.5 or 2% per annum for many years to come. Therefore, I would not discard an expedient which would be of material benefit over the next five years merely because it meant that our level of life twenty years hence would be a little lower than it might have been, if we had been more austere now. Moreover, too much austerity might upset the apple-cart.

 (4) If a subsidy of 6% on the wages bill would cure unemployment, it would pay the Treasury to grant it. For with unemployment at 18% and wages three times the dole, the cost of such a subsidy would be no greater than the present cost of the dole.

  Thus, if anyone thinks that a reduction of 6% in wages would cure unemployment, it follows that the method of subsidy would pay for itself, as compared with going on as we are now.

p. 197

Answers to II [1]

[1] The second part of the questionnair ran as follows:
 “II. How much too high (in order of magnitude) are (a) real wages, (b) money wages at the existing level of world prices?
    What is your estimate of the increase (a) of real wages, (b) of productivity per head since 1910-14?
    If your estimate of the excess of real wages is greater than your estimate of the increase of real wages per unit of productivity, how do you explain this?” [Ed.]

1. If we put our present abnormal unemployment at 1,500,000, I should estimate (in order of magnitude) that 1/3 of this is due to the world slump, 5/9 to the emergence of a transfer problem, and 1/9 to excessive real wages, in the sense of real wages running ahead of physical productivity.

2. I should guess that in order to reduce real wages all round by a given amount, it might be necessary to reduce money wages by 175% of that amount. But a reduction of money wages which was concentrated on the sheltered industries would reduce real wages by a smaller amount than a similar reduction of wages concentrated on the unsheltered industries. On the other hand, a given reduction of money wages concentrated on the sheltered industries would do less to restore equilibrium than an equal reduction concentrated on the unsheltered industries.

3. I have put the amount of existing abnormal [un]employment due to excessive real wages at 1/9 of the whole. But I am not sure that this is not too much. For in existing industries employers will sacrifice a large part of their normal return before they close down, and this probably outweighs any increase in real wages relatively to output and also any changes of technical methods of a kind adverse to wages. Thus excessive real wages are only operating at present by diminishing employment which might otherwise be offering in new and expanding industries.

4. As regards the degree of the existing excess of real wages, I should say that, if we include the reduction in the cost of living since last year as amongst the effect of the world slump, it is not clear that any reduction of real wages below the level of a year ago need be necessary on this score. Broadly speaking, that is to say, I accept the verdict of the statistics. If we abstract from the special events of the last year, I should say that at the utmost a reduction of 5% in average money wages sufficiently concentrated on the higher paid (relatively to 1910-14) and sheltered industries to cause a fall not exceeding 2.5% in average real wages would be fully sufficient to balance the increase, if any, in real wages per unit of output and changes in technical methods. And two years' normal progress might make this up.

p. 198

5. As regards the amount of reduction of money wages necessary to solve the transfer problem, apart from the world slump, it is extremely difficult even to make a guess. I should certainly estimate it much higher than 5%. If our trade balance is now deficient by ￡150 million to satisfy the pressure towards foreign lending, what all-round reduction of money wages would be necessary to expand the balance by this amount? It might easily be 20%, resulting in a reduction of real wages by from 12.5% to 15%. The longer the period under consideration, the less it would be; but the period might have to be decidedly long before there would be any material relief from the reduction suggested above.

6. As regards the amount of reduction of money wages necessary to offset the world slump, I should doubt if any reasonably conceivable reduction would be sufficient at the present moment. I should certainly estimate it above 20%;ㅡand a reduction greater than this is not worth discussing from the practical point of view.

7. I think that the following observation is extremely important.

  In minimising in the past the importance of the transfer problem, we have, I think, had in mind a situation which was changing only slowly. In this event, the amount of the necessary rate of changes in money wages would be small, so that (assuming progress) the mere lapse of a little time during which money wages were not raised would be enough. Moreover, there would always be time for modifications to have their ultimate effect, before anything very dreadful happened.

p. 199

++KHNW p062-2 (b) {{
  The trouble today is that we are violently out of equilibrium[*], and that we cannot wait long enough for laissez-faire remedies to bring their reward. In particular, a reduction in money wages might at long last have a very beneficial effect on the value of our total exports; but it may be quite impossible for us greatly to increase our favourable [foreign] balance quickly merely by reducing money wages.

  I suspect, therefore, that (가) the correct answer on austere lines [경제위기에 긴축과 내핍을 대응하자] is as follows: [:]

A reduction of money wages by 10% will ease unemployment in five years' term. In the meantime you must grin and bear it.

 (나) But if you can't grin and bear it, and are prepared to have some abandonment of laissez-faire by tariffs, import prohibitions, subsidies, government investment and deterrents to foreign lending, then you can hope to get straight sooner. You will also be richer in the sense of owning more capital goods and foreign investments five years hence. You may, moreover, have avoided a social catastrophe. But you may also have got into bad habits and ten years hence you may be a trifle worse off than if you had been able to grin and bear it.

 (다) The worst of all, however, will be an attempt to grin and bear it which fails to last through. The risk of this is perhaps the biggest argument against the 'grin and bear it' policy.
(b)}}

케인스전집 v.13, pp.198-199.

*

케인스전집 v.13, pp.200-201.

8. It is an argument against our reducing money wages that if this helps to set [a] fashion, as it well might, world prices will never recover, and we shall be no further forward, but, on the contrary, faced with the prospect of having to repeat the process.

9. In any case, I think we should preface our report by saying that certainly any further fall in world prices and perhaps the fall which has occurred in the last year renders all the existing international debt settlements, all internal national debt burdens, and all existing money-wage settlements seriously and perhaps disastrously inappropriate. But having said this, what are we prepared to do about it?

J.M. Keynes

21 September 1930

The chapter 3 ends here on p. 200.

The next chapter is entitled "Arguing Out the 'Treatise'

[발췌 21장: Keynes's Treatise on Money] #21. Changes due to International Disequilibrium

출처: J. M. Keynes, A Treatise on Money (October 31, 1930)
자료: http://catalog.hathitrust.org/Record/007150328 ; 차례

※ 발췌 / excerpts of which:  Book Ⅳ, The Dynamics of the Price-Level,

* * *

Chapter 21. Changes due to International Disequilibrium

It is outside the scope of this book to deal thoroughly with the Theory of International Values. But there are certain brief ^prolegomena^ to such a theory, which are necessarily in place in a treatise on Money.

(1) Relative price-levels and Relative Interest-rates as Causes of Monetary Disequilibrium  (p. 326)

We have seen that equilibrium in an international currency system requires that for each country its rate of foreign lending should be equal to its foreign balance. Now this involves ^two^ sets of conditions. For the rate of foreign lending depends on relative interest-rates at home and abroad; whilst the foreign balance depends on relative price-levels at home and abroad.

  There is, however, a radical difference between a disequilibrium which is set up by the relative price-levels falling out of gear from a disequilibrium which is set up by the relative interest-rates falling out of gear. In the first case, the disequilibrium can be cured by a change in price-levels (or, rather, of income-levels) without any permanent change in interest-rates, though  a temporary change in interest-rates will be necessary as a means of bringing about the change in income-levels. In the second case, on the other hand, the restoration of equilibrium may require not only a change in interest-rates, but also a lasing change in income-levels (and probably in price-levels). That is to say, a country's price-levels and income-levels are affected not only by changes in the price-level abroad, ^but also by changes in the interest-rate, due to a change in the demand for investment abroad relatively to the demand at home^.

  (ⅰ) Let us begin with the first and simpler case, where the disturbance of equilibrium comes about solely through a change, let us say a fall, in the price-level abroad. This will result in a falling off in the foreign balance B without a corresponding change in the volume of foreign lending L with the consequence that L will exceed B and gold flows out of the country. Temporarily bank-rate must be raised; but when the process, which the sets up, towards a fall, first of prices and then of money-incomes, has been completed, the bank-rate can be safely restored to its previous level. For the conditions of equilibrium will be satisfied by a fall in Π, the price-level of output as a whole, and also in S1, L, I1, and B, below that they were measured in terms of money before prices fell abroad (though they will be unchanged in terms of purchasing power), corresponding to the fall in the foreign price-level. Apart from money-values, the new equilibrium once established will differ in no significant respect from the oldㅡthe character of production will be unchanged.[1]

[1] This involves certain tacit assumptions, such as that the money-earnings of the different factor of production are all changed in the same proportion.

 (ⅱ) Next let us suppose that the disturbance of equilibrium is due to a rise in the rate of interest abroad, whereas S and I1, at home remain the same functions of the rate of interest as before. This will result in an increase of L, with the consequence that L will exceed B and gold flows out of the country. As in the previous case, bank-rate must be raised, which retards both home investment I1 and foreign lending L, so that S exceeds I and prices Π fall. The fall of Π causes losses to entrepreneurs at the old cost of production, so that they tend to reduce the rates of money-earnings which they offer to the factors of production and eventually the first term[E/O＝1/e.W] of the Fundamental Equations falls. Meanwhile the fall of Π, occasioned initially by the fall of the second term[(I'－S)/R] of the Fundamental Equation and subsequently by the fall of the first term of the Fundamental Equation, will have served to increase B, whilst the rise of bank-rate will have abated L. The process continues until once more L＝B, when gold ceases to flow out of the country. At the new position of equilibrium[,] L is a greater proportion of S than before and S1 is a less proportion. What will have happened to Π?

  B will have had to increase, which means that exports must have increased or import diminished or both; so that the necessary increase of B can only come about as a result of a fall in the price of foreign-traded goods produced at home, leading to a diversion of production, and a reduction in I1. Now at one stage of the process outlined above all three of these things will have happened. For the outflow of gold will have ^pro tanto^ raised the prices of foreign-produced goods and reduced the prices of home-produced goods, whilst the rise in the rate of interest will have diminished I1. Thus at the new point of equilibrium, the prices of all home-produced goods will have fallen relatively to the prices of all foreign-produced goods. The ^amount^ of this relative fall will dependㅡas we shall see below (p. 333)ㅡon the change in the terms of trade resulting from the physical characteristics of the productive forces at home and abroad.

  As regards Π itself some of its constituents will have fallen and some will have risen. If all the articles consumed within the country enter into international trade without hindrance, then Π cannot change relatively to a similar price-level abroad. Since, however, this condition is never fulfilled in practice and, besides, most countries predominantly consume their own output, there will, as a rule, be an absolute fall in Π on balance. This is the essence of the argument. But we must now elaborate it further for reasons which will appear.


(2) The Relationships between Foreign Lending and Movements of Gold   (p. 329)

The foregoing argument has implicitly assumed that B is a function of relative price-levels at home and abroad, and that is not directly a function of L. That is to say,[,]

• the mere fact of L's increasingㅡso we have assumedㅡdoes not influence the foreign situation, whether in respect of foreign price-levels, or in respect of the volume of foreign demand for our country's goods at a give price-level, in such a way as to increase B to the same extent that L has been increased, without any appreciable disturbance of the level of prices or of incomes at home. 
• On the contrary, we have assumed that, for the most part, approximate equality between L and B is preserved, not by an increase of L directly stimulating an increase of B, but because an excess of L over B brings about either the threat or the fact of a movement of gold, which induces the Banking Authorities of the countries concerned so to alter their terms of lending as temporarily to reduce the net amount of L and ultimately to increase B (by when the temporary reduction of L will be no longer necessary) through the medium of a disturbance of the existing investment equilibrium in both countries leading to appropriate changes in relative prices at home and abroad.

  Now,[,]

• in so far as the above reasoning depends on actual movements of gold, it is in accordance with the traditional Ricardian doctrine, extended so as to cover international capital transactions of which Ricardo himself took little account, as it is expounded in relation to the facts of to-day by, for example, Professor Taussig.[1] 
• But it is not quite in accordance with another traditional doctrine which was widely held in Great Britain, mainly on empirical grounds, during the 19th century, and is still held to-day. According to this view foreign lending stimulates foreign balance directly and almost automatically, and the actual movement of gold plays quite a minor part. This conclusion was, I think, based much more on British experience during the 19th century than on a priori reasoning. But recentlyㅡespecially in connection with the German Transfer Problemㅡit has been supported by argument, notably by Professor Ohlin.

[1] his ^International Trade^ (1927) ^passim^.

  Professor Taussig has endeavoured, in his International Trade, to put the question to the inductive test by examining a number of 19th- and early 20th-century examples drawn from the countries which have at various dates suffered an important ebb and flow in the value of L. He finds, naturally enoughㅡindeed inevitablyㅡthat B and L tend to move together. But when he comes to the question how far monetary movements have been necessary to make B obey the direction of L, the result is more inconclusive. Sometimes the facts seem to support the Ricardian view, and sometimes it is difficult to detect monetary changes on a scale sufficient to verify the essentials of the theory. Moreover, the inflow of gold may sometimes follow, instead of preceding, a rise of prices.

  In a controversy between Professor Ohlin and myself in the pages of the ^Economic Journal^(1929), with special reference to the German Transfer Problem, I was not able to make clear the theoretical basis underlying my view, because the analysis of the preceding chapters had not then been published. But with the aid of this analysis I can, I hope, resolve the difficulty, and show in what circumstances the facts will appear to conform Professor Ohlin's thesis and in what circumstances to the Ricardo-Taussig thesis.

  There are two contingencies which we must first of all put on one side as not being relevant to the essence of the argument. There is the case where foreign lending is bound up with a contract or understanding that the proceeds shall be employed in making purchase at home, although, failing such an arrangement, they would in ordinary course have been made abroad;ㅡfor such an arrangements, apart from their being, in fact, negligible in aggregate quantity, are equivalent to subsidising the cost of the goods supplied, which is tantamount to reducing their price, at the expense of the rate of interest which might have been charged.

  Secondly, there is the case where Gold Exchange Management is present in some shape or form, so that movements of foreign liquid assets take the place of movement of actual gold. We shall regard such changes as equivalent to movement of gold for the purposes of discussion.

  Let us call the value of a country's market-rate of interest which would obviate gold movements (i.e. which is such that G＝0) its international-rate. (The international-rates of different members of the same currency system are, of course, not independent of one another.)

  Let us begin with the case where there are only two countries, A and B, in question, thus avoiding the complications of roundabout trade.

  Let us assume that we start from a position of equilibrium with G＝0 and I＝S in both countries. This means that in each country:

Its Market-rate＝its International-rate＝its Natural-rate.

(The reader should remember that this does not mean, unless there is complete mobility of international lending, that the rate of interest is ^the same^ in both countries. But if there is equality between the market-rate and the international-rate in one of the countries, thenㅡwhen there are only two countries in questionㅡthere must necessarily be equality between the market-rate and the international-rate in the other country also.)

  Let us then suppose that the attractions of investment increase in country A but not in country B. Two questions now arise for discussionㅡthe characteristics of the new position of equilibrium when it has been reached, and the nature of the transition from the old position of equilibrium to the new. (It will simplify the exposition, without altering the essence of the argument, if we assume that the rise which takes place in the market-rate of interest does not materially affect the rate of saving in either country.)

  1. First, the Characteristics of the New Position of Equilibrium.ㅡIn each country the market-rate, the international-rate, and the natural-rate will have returned to equality with one another, but at a somewhat higher level than before, corresponding to the increased marginal attractiveness of investment to the two countries taken togetherㅡand a level, moreover, which is higher in B and lower in A than if there was no mobility of international lending; and B and L will be again equal, but with higher values than before. In other words, there will be a displacement of investment, which was previously taking place in B, in favour of increased investment in country A. What will be the effect of this displacement on the levels of money-earnings in the two countries?

  There will have to be a change-over on the part of the factors of production, which were previously producing new investments in country B, to produce something else which is calculated to facilitate new investment in country A. This may come about [:]

• by the factors in B producing goods previously imported from A, thus releasing factors in A to produce for investment in A, 
• or by factors in B producing goods for export to A which were previously produced in A, thus releasing factors in A to produce for investment in A, 
• or by factors in B producing goods for export to A, which can be directly utilised for the purpose of the additional new investment which is now taking place in A. 

  If this change-over in the character of production can be effected without any loss of efficiency, e.g. if country B can produce goods, previously produced in A, to sell in B or in A, as the case may be, at the same price as before, without any reduction in money-earnings of the factors of production as compared with what they were getting in their previous employment or any loss to the entrepreneurs, then there is no reason why rates of money-earnings in the two countries should be any different in the new position of equilibrium from what they were in the old. In so far as country B is specifically efficient in the direct production of materials for the new investment-goods required for the use in A, there may well be not only no loss of efficiency as compared with producing these goods in A, but actually a gain of efficiency; and in this case, so far from money-earnings in B falling relatively to those in A, they might, in conceivable circumstances, actually rise as a result of the increased attractiveness of kinds of investment in A, which can only be efficiently supplied by factor of production in B. If, on the other hand, the investment-goods in A have to be produced by factors of production in A, which factors are made available by being released from producing goods hitherto exported to B or henceforward imported from B, then the presumption is the other way round; for it is unlikely that A would have previously exported the goods in question to B or refrained from importing them unless there was some gain in doing so. [※ 그전에 B에 수출하던 상품을 수출했거나 B로부터 수입할 수 있는 상품을 수입하지 않았던 것은 그만한 이익이 있었기 때문일 것이다. 따라서 B에 수출하던 상품의 수출이 중단되고 수입하지 않던 상품을 수입하게 되는 상황이 되면,] Thus, generally speaking, money-rates of earnings in B will have to fall relatively to money-rates of earnings in A in the new position of equilibrium as compared with the old. [1]

[1] Professor Taussig has, in his International Trade, collected a good deal of evidence to show that fact bears out this theory. That is to say, when foreign investment is increasing, the terms of trade turn against the lending country and in favour of the borrowing, wages falling in the former and rising in the latterㅡin his terminology the gross and net barter terms of trade tend to move in the same direction. Professor Taussig is, I think, a little too ready to assume that exports and imports adjust themselves to the other factors in the situation, rather thanㅡin partㅡthe other way round. But his treatment of the influence of international investment on the price-levels in different countries is far in advance of any other discussion of the subject.

  This is usually expressed by saying that there will be a change in the “terms of trade” between the countries, adverse to country B. The change in terms of trade is measured by the proportionate change in the price of goods exported by B relatively to the proportionate change in the price of goods imported. This ratio will not be equal to the ratio of the proportionate change in average rates of actual earning in B to that in A, except in so far as there is internal mobility of the factors of production within a country, so that their rates of remuneration in domestic-trade industries are the same as in international-trade industries. Perhaps we should add that, of course, the changes in real earnings will not be so great as the changes in money-earnings, and also that the less the importance of foreign trade in a country's economy the less will be the change in real earnings.

  Now the amount of the alteration in the terms of trade between A and B, due to the increased attractiveness of investment in A, is independent of the character of the transition and of the means by which it is brought about. It depends on non-monetary factorsㅡon physical facts and capacities, and on the elasticities of demand in each of the two countries for goods which the other can produce with physical efficiency.

  This alteration in the terms of trade may sometimes be very small, as, for example, when Great Britain made loans for railway developments abroad during the 19th century, and was herself the only efficient producer of much of the materials required for these new investments. Nor does it follow that the new situation is necessarily disadvantageous to country B on balance. For, as a set-off against the deterioration in the terms of trade, B has three possible sources of gain, namely, the higher rate of interest on part of her savings, a subsequent reversal of the change in the terms of trade when the interest on the new loans is being remitted or when the new loans are ultimately paid off, and a possible future cheapening as a result of the new investment of the costs of goods which she is in the habit of purchasing from A.

  But in some circumstances, on the other hand, the change in the terms of trade adversely to B may be substantial; and this is particularly likely if A puts a high tariff on B's goods, and ig B is not capable of supplying directly the materials required by the new investment in A.

  The change in the terms of trade is also likely to be large in the short period, when there is a ^sudden^ change in the relative attractions of lending at home and abroad, because the factors of production require time if they are to effect a change-over in the character of their activities without serious loss of efficiency. It is for this reason that the so-called "flight" from a currency can be so disastrousㅡthat is to say, the situation which arises when, for some reason, there is an overpowering motive to a country's nationals to lend their resources abroad. There were some remarkable examples in the post-War period of the extraordinary effect on the terms of trade over the short period, of a sudden distrust, leading to a sudden change in the relative attractions of lending at home and abroad.

  The neglect to allow for the effect of changes in the terms of trade is, perhaps, the most unsatisfactory characteristics of Prof. Cassel's Purchasing Power Parity Theory of the Foreign Exchanges. For this not only upsets the validity of his conclusions over the long period, but renders them even more deceptive over the short period, whenever the short period is characterised by a sharp change in the attractions of foreign lending.

  2. Second, the Characteristic of the Transition.ㅡWe have seen that the international-rate cannot return to equality with the natural-rate in ^both^ countries until an appropriate change has taken place in the ^relative^ rates of money-earnings in the two countries. But this relative change could come about either by one country bearing the whole brunt of change by modifying its own absolute rate, leaving the absolute rate of the other country unchanged, or by the two sharing the burden of change.

  If each of the countries is determined to keep a quantity of gold reserves, which bears a constant proportion of the level of its money-income, the share of the change to be borne by each is predetermined, the major part of the change being borne by the smaller of the two countries. But if the countries are prepared to allow some variation in this proportion (and the changes which actually occur as the result of increased foreign investment would generally involve only an ^small^ change in the proportion of gold reserves to total income, even if no gold at all moves from one country to the other), then the proportionate sharing between the two countries of the burden of the change in absolute rates of earnings is indeterminate, and depends on the course of event and on the policies of the two central banks during the period of transition.

  To illustrate this let us take the extreme cases. Let us suppose that country A has no objection to receiving more gold, and fixes its market-rate at an equality with its natural-rate regardless of the policy of country B, but that country B is reluctant to lose gold and keeps its market-rate at an equality with its international-rate (which latter largely depends, of course, on the market-rate fixed by country A). In this case country A suffers no period of inequality between its market-rate, its natural-rate, and its international-rate, and no alteration in its stock of gold, and there is, therefore, no need for any alteration in its rate of earnings. Thus the whole brunt of the change is thrown on the rate of earnings in country B, which will be forced, in order to retain it gold, to keep its market-rate above its natural-rate until the process of deflation thereby set up has brought its rate of earnings down to the necessary extent.

  If, on the other hand, country B is prepared to lose any amount of gold rather than raise it market-rate above its natural-rate, then it is country A which will have to bear the brunt of the change by undergoing an inflation until its rate of money-earnings has been raised to the necessary extent relatively to the rate in country B, which will have remained constant throughout.

  The amount of the flow of gold between the countries, if any, is, in a sense, quite non-essential to the process. For the same results can be brought about by the potentiality of a flow of gold as by the actuality. The amount of absolute change in rates of earnings in A and B depends on the policies of the central banks of the two countries as to the relationships which they respectively maintain between their natural-rate and their market-rate. The one whose policy is most dependent of the policy of the other, and keeps its market-rate nearest to its natural-rate throughout the transition, will suffer lest absolute change in its rate of earnings.

  Now, since there is generally much more reluctance to lose gold than to receive it, this means that the lending country will often have to bear the brunt of the change. Only if the lending country is willing and able to take up an independent attitude towards the risk of losing gold can it throw the brunt of the change on the borrowing country.

  When, however, it is a case of an old country lending to a new country, the necessary conditions may exist which will tend to ease the difficulties of the transition for the lending country. For the foreign loan may be the consequence (and the symptom) of a tendency of the natural-rate of interest in the borrowing country to rise relatively to that market-rate, which is dictated by conditions in the outside world; and in this case the loan may be preceded and accompanied by a rise in the rate of earnings in the borrowing country, which, in the absence of a loan, would set up a state of disequilibrium with the outside world. In short, the foreign loan allows an increase of home investment relatively to home saving in the borrowing country ^without^ this development being nipped in the bud, as it would otherwise, by rising prices, a loss of gold, and a consequent increase in market-rate leading to a reaction in the volume of home investment. But the reader must please note that all this only occurs if for some other reason there is already in existence a tendency for the natural-rate of interest in the borrowing country to rise relatively to the rate abroad. Thus it makes a difference whether the loan is required to preserve the existing equilibrium in face of a spontaneously rising tide of new home investment or whether it involves an induced transition to a new equilibrium.

  If, on the other hand, the loan is due to a rise in the market-rate of interest in the borrowing country, without there being a corresponding tendency in the natural-rate, then we must expect a deflationary effect on the lending country unless it can afford to allow substantial gold-movements to ensue. Such a situation may be due to deliberate policy on the part of the banking authority of the borrowing country, because they wish to increase their stock of gold. Or they may have been forced into it for one reason or another as a result of the character of their banking system, e.g. the loan may be due to a rising market-rate of interest in the borrowing country due, not to a rising natural-rate, but to meet the increasing requirements of the financial circulation. For example, the change in the value of L between the United States and the rest of the world in 1928-29 was probably due more to financial factors in the United States, which were increasing the requirements of the financial circulation, than to investment factors; whereas, if dear money in the United States had been due to a rising natural-rate of interest in that country relatively to other countries, the dear money policy need not have occasioned any serious embarrassment to the rest of the world or have depressed world-prices for commodities, since there would have been a concurrent tendency for it to be accompanied by a foreign balance increasingly unfavourable to America.

  Thus in the case where the responsibility lies with financial, rather than with investment, factors in the borrowing country, the gold movements will tend to continue orㅡto avoid thisㅡthe market-rate of interest will have to be raised in the rest of the world to a level in excess of the natural-rate, with the result of causing the rate of investment to fall below that of saving everywhere and so establishing a regime of Profit Deflation. This serves to illustrate the way in which Profit Deflations (and similarly Inflations) tend to spread sympathetically from one member of an international system to another; and this may occur without any material movement of gold, if the other members are not able or willing to let their stocks of gold fall to any great extent, the effort to keep their gold necessarily involving them in a sympathetic deflation. It will also occur, in spite of a material movement of gold, if the country which initiates the movement is able to absorb large quantities of gold without being compelled to bring its market-rate down to equilibrium with its natural-rate. [1]

  I have said enough to indicate the nature of the process and of the argument. It is evident that many illustrations could be given. For example, a lending country, which is not willing to lose much gold and whose rate of earnings is not sensitive to deflationary forces, may suffer a long and painful transition between one position of equilibrium and another. But it would lead me too far into the intricacies of the theory of international trade, which would fill a book in itself, if I were to purse the matter further. I must leave the reader to carry on the line of thought for himself, if it interest him.

  Perhaps, however, I may be allowed, in parenthesis, to apply the above to my discussion with Professor Ohlin about the German Transfer Problem in the ^Economic Journal^(1929). The payment of Reparations by Germany operates in the year in which it takes place, much in the same way as a compulsory process of foreign investment of equal amount, except that Germany will not enjoy the cumulative off-sets in subsequent years which foreign investment affords, and the investment does not correspond to a spontaneous change abroad, such as would lead directly to a demand for Germany's exports. Now I conceive Professor Ohlin's standpoint to have been, that, given an appropriate credit policy in the receiving countries, the new equilibrium could be brought about without throwing on Germany the brunt of any change whatever in her current rate of earnings, and without any movement of gold.

  This is quite true. Such a thing is not theoretically impossible. But I contend that it is highly improbable in the conditions of the actual problem, and that to establish the opposite, Professor Ohlin must explore more fully the conditions which have been satisfied before his conclusions can hold good.

  To begin with, this line of argument is quite irrelevant to the amount of change which will be required in the terms of trade, and therefore in the ^relative^ rates of earnings in Germany and elsewhere and in the rate of German real wages. It is only concerned with the question whether this relative change will be brought about mainly by an absolute fall in the rate of money-wages in Germany, or mainly by an absolute rise in the rate of money-wages elsewhere. Now it would be difficult to find a case where the conditions for the former alternative to be probable are better fulfilled. For Germany is not in a position to part with enough gold to have a sensible effect on the credit policies of the rest of the world, there is no pre-existing tendency for the natural-rate of interest in the recipient countries to rise relatively to the natural-rate in Germany, and she is not in a position to resort to the expedient of regulating the rate of growth of her foreign investment to suit the rate at which relative money-earnings can be adjusted (or rather she only can do this by increasing her own borrowing from abroad, which is a more difficult task than diminishing her own lending would be). I conclude that, ^if^ the payment of Reparations involves a substantial change in the terms of trade (which depends not on monetary considerations but on physical facts relating to the nature of the productive forces of Germany and the rest of the world), then it will probably be necessary to force down the rate of money-earnings in Germany by means o a painful (and perhaps impracticable) process of deflation. It will be necessary to qualify this, only if the rest of the world, deliberately or by a fortunate coincidence, encourage tendencies leading to an income inflation with the result of easing the practical difficulties of Germany's problem of reaching a relative adjustment, or if new extraneous conditions come to pass which naturally lead the rest of the world towards a high level of money-incomes.

  Borrowing from the now familiar terminology of the German Reparations Problem, we might use similar language in the general case, meaning by the "Transfer Problem" the problem of transition which occurs when there is a change in the locality where investment takes place. Thus, when international equilibrium (i.e. the equality of the international-rate of interest in every country with its natural-rate) requires a change in the relative rates of earnings in different countries, the amount of the absolute change in the rate of earnings in each country depends, in general on the two following factors;

  (1) The ^total^ amount of the relative change required. This depends on what degree of difficulty and what loss of efficiency is involved in the change-over of production from goods required for a particular kind of investment in one place to a different kind of investment in another place, i.e. the amount of necessary change in the terms of trade.

  (2) The ^proportion^ of the total amount of the relative change which has to fall on each country. This depends on the policy and comparative skill and strength to support changes in its proportion of gold to circulating money possessed by each of the central banks respectively.


(3) The Net National Advantages of Foreign Investment   (p. 343)

We have seen that, when a change in the terms of trade occurs as a concomitant of increased foreign investment, this is due to the factors of production in the lending country having to change over to a kind of output in which they are less effective (having regard both to technical efficiency and to the various elasticities of demand involved) relatively to the factors of production in the borrowing country, than they were in respect o the output which they were producing before the change-over. That is to say, their marginal efficiency is reduced for obtaining foreign-trade products by exchange. This means that the terms of exchange alter to their disadvantage, not only in respect of that part of their foreign trade which corresponds to the ^increased^ volume of foreign investment, but over the whole field of their foreign tradeㅡassuming, of course, competitive conditions. Since, in accordance with our definitions, we measure the output of the factors which are working to exchange exports for imports by the quantity of imports which are obtainable in exchange, it follows that the total output of the factors of production in the lending country is reduced by an amount corresponding to the loss involved in giving more exports for a given quantity of imports or in replacing goods previously imported by goods produced at home.

  In the new position of equilibrium actual rates of money-earnings will be reduced and real earnings will also be reduced, though to a less extent. But real efficiency-earnings will be unchanged, since in a position of equilibrium efficiency-earnings in terms of money and the price-level must necessarily have changed in the same proportion. In other words, E/(O.Π), the rate of real efficiency-earnings, will be unchanged; but O, the output, and E/Π, the actual real earnings of the factors of production, will both be reduced and in the same proportion, corresponding to the loss of efficiency of the factors of production in their new situation as compared with their efficiency in the old.

  On the other hand, the efficiency of capital engaged in foreign investment is increased by reason of the higher rate of interest earned. Whether on balance there is a national gain or loss as a result of the increased proportion of investment abroad depends on a comparison between the prospective gain of increased future income from foreign investment and of improved terms of trade when this income is being paid and the immediate loss occasioned by the deterioration in terms of trade whilst the foreign investment is taking place; i.e. on the elasticity of demand for investment at home in terms of the rate of interest and the elasticity of the world's demand for our goods and our demand for theirs.

  ( p. 344 ...)


(4) The Awkwardness of Changes due to International Factors   (p. 346)

※ 케인슥 1930년 9월 Committee of Economist 의장으로 이 경제학자들에게 제출한 문서에서 설정한 가상적 상황과 일치하는 주제

{{
The importance of the foregoing discussion is this. A mere change in the demand-schedule of borrowers abroad is capable, without any change in the monetary situation proper, of setting up a disequilibrium in the existing level of money-income at home. If borrowers abroad are ready and able to offer better terms than before, whilst the demand-schedule of borrowers at home is unchanged, this means that foreign lending is increased. Consequently gold will flow until money-earnings have fallen sufficiently, relatively to similar earnings abroad (which may be rising a little as a result of the movement of gold), for the foreign balance also to be correspondingly increased. [※ foreign lending이 늘어난 만큼 foreign balance가 늘어나려면 국외 화폐소득에 비해 국내 화폐소득이 충분히 떨어질 때까지 금이 유출될 것이다.]  The extent to which real incomes will fall at home will depend partly on the elasticity of demand for loans on the part of home borrowers and partly on the elasticity of the world's demand for out country's exports, and of our country's demand for its imports. If the demands of home investment are elastic and the foreign trade position is inelastic, the troubles and inconveniences of transition may be great great.

p. 346

  At present public opinionㅡin Great Britain at leastㅡis chiefly coloured by memories of 19th-century experience, when for various reasons the adverse reaction of foreign investment on the level of money-incomes at home was probably at a minimum. The significance of the above in the different circumstances of to-day in relation to the national benefits of a high degree of mobility for international loans is, as yet, scarcely appreciated.

  In an old country, especially one in which the population has ceased to expand rapidly, the rate of interest at which borrowers for home investment are able to absorb home savings must necessarily decline. Meanwhile the new countries the rate will be maintained, and as these countries get over their early pioneer difficulties, the estimated risks of lending to themㅡprovided they are careful about their reputation as borrowersㅡwill decline.

• Consequently the old country will tend to lend abroad an ever-growing proportion of its total savings. This will be partly cared for by the interest on its previous foreign lending. 
• But for the rest its costs of production must fall so as to stimulate its exports and increase its favourable balance on trading account. 
• If there is a resistance to this fall, gold will flow, bank-rate will rise and unemployment become chronic. 

This is particularly likely to happen if the prevalence of tariffs against manufactured goods (and a readiness to raise them when imports of such goods are increasing) renders the foreign demand for the old country's exports inelastic, whilst at the same time Trade Union in the old country present great obstacles to a reduction of money-wages.

  I leave it to the reader to work out in detail what a pickle a country might get into if a higher rate of interest abroad than can be earned at home leads to most of its savings being lent abroad, whilst at the same time there are tariffs abroad against most of its exports and a tendency to raise these tariff from time to time to balance the gradually rising level of costs in the protected countries due to the outflow of the gold from the lending country.

  Let him take, for example, as his imaginary case, a Great Britain where neither the government nor individuals are prepared to invest at home at higher rate of interest than 5%, and a socialised Australia where the government is ready to develop at 6%, both on a gold standard and with complete mobility of lending between the two; let him suppose further that this imaginary Australia has a sliding-scale tariff on most British goods based on the difference between the costs of production in the two countries, and that in this imaginary Great Britain wages are virtually fixed in terms of money; and let him complete his imaginary picture by supposing a Thrift Campaign in Great Britain which raises savings to an unusual proportion of the national income, or, alternatively a government ruled by financial virtue which taxes heavily in order to raise to a high figure the Sinking Fund for the extinction of National Debt.[1]

[1] The reader will readily perceive that in writing the above I have partly in mind the position of Great Britain in 1929-30. I should, therefore, add that, whilst I regard the relative attractiveness of foreign lending as a serious aggravation of the difficulties, I do not regard this factor as so important a cause of the disequilibrium between Foreign Lending and Foreign Balance as the factors decreasing the volume of the latter, due to the failure to deflate earnings and costs of production in as great a degree as the international value of sterling had been raised in the period ending in 1925. The actual situation was due to the combination of a tendency for foreign lending to increase, for long-period external reasons over which we had little control, with a tendency for the foreign balance to decrease as a short-period result of our post-War monetary policy.

  Or let him take the case in which the Currency Authorities of the countries to which gold flows so manage their currency systems that the inflow of gold is not allowed to have any effect on their bank-rates or their volume of money.

  All this, we must repeat, is subject to the assumption of a high degree of mobility of international lending. Where this does not exist, disequilibria due to changes in price-levels abroad may be more sudden and disagreeable than where it does exist (for changes in Bank-rate will not avail to break the impact) ; but, on the other hand, disequilibria due to changes in interest-rates abroad will be of secondary importance. Moreover, even when there is a fairly high degree of mobility of lending over long periods, our country need not necessarily subject itselfㅡunless there are other counterbalancing advantages to be gainedㅡto a high degree of short-period mobility of international lending. If short-period mobility is absent, then short-period changes in interest-rates abroad need occasion no serious inconvenience. Methods of damping down an excessive short-period mobility of international lending will be discussed in Vol. II Book VII Chapter 36.
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p. 349

  The seriousness of the changes which are set up as the result of International Disequilibrium lies partly in the ^inevitability^. If we are dealing with a closed system, so that there is only the condition of internal equilibrium to fulfil, an appropriate banking policy is always capable of preventing any serious disturbance to the ^status quo^ from developing at all. If the rate of creation of credit is so regulated as to avoid Profit Inflation, there will be no reason for the Purchasing Power of Money and the money-rate of efficiency earnings ever to be upset. But when the condition of external equilibrium must also be fulfilled, then there will be no banking policy capable of avoiding disturbance to the internal system.

  This is dueㅡquite apart from changes in the value of the international standardㅡto the lack of uniformity between home and abroad in respect of the demand schedules of borrowers. These schedules, for home and foreign borrowers respectively, can and do change differently from one another. When this happens, the existing rate of foreign lending is upset. Unless, therefore, a country is prepared to accept from time to time large quantities of gold and at other times to part with large quantities without modifying the terms and volume of lending at homeㅡand in any case this cannot continue indefinitelyㅡchanges in foreign conditions are bound to set up disequilibria in home conditions. If, moreover, there is a high degree of mobility of foreign lending, a low degree of mobility of home wage-rates, an inelasticity in the demand-schedule for our country's exports and a high elasticity in the demand for borrowing for home investment, then the transition from one position of internal equilibrium to another required by the necessity for preserving external equilibrium may be difficult, dilatory and painful.

  Even where a change in Bank-rate is only required as a temporary corrective to the rate of foreign lending, so as to preserve external equilibrium, it cannot be prevented from reacting on the rate of home lending, and, thereforeㅡover a period too short to effect the establishment of a lower wage-levelㅡon the volume of output and employment. Thus, what we have claimed in Chapter 13 as a virtue in Bank-rate regarded as an instrument for restoring long-period equilibriumㅡnamely, that it works ^both^ ways, tending to decrease foreign lending and also to increase the foreign balanceㅡbecomes a vice, or at least an awkwardness, when we use it to check foreign lending, the excessiveness of which may be due to temporary causes without having any wish to go through the painful readjustment of the wage-structure which must precede a material increase of the foreign balance. Since the influence of Bank-rate on foreign lending is both quick in taking effect and easy to understand, whereas its influence on the internal situation is slower in operation and difficult to analyse, the awkwardness of handling such a double-edged weapon is being but slowly realised.


(5) The Same Phenomena under Gold-Exchange Management   (p. 350)


The virtue of gold movements under an old-fashioned international gold standard, not merely as an expedient, but as a stimulus towards the restoration of international equilibrium, has been rightly extolled as lying in their ^double^ effectㅡboth on the country losing gold and on the country receiving gold, so that the two countries ^share^ the brunt of any necessary change. For just as the loss of gold stimulates a country to raise its interest rates at once and to lower its costs of production later on, so the receipt of gold has the opposite effect. Now, since L, the volume of foreign lending, depends on ^relative^ interest rates at home and abroad, and B, the amount of the foreign balance, depends on ^relative^ price-levels at home and abroad, this is important. For it means that the whole brunt of the change is not thrown on our own country; the flow of gold means that other countries are stimulated to meet us half-way.

  But what if our Central Bank keeps its reserves, not in the form of actual gold, but in the form of liquid resources at a foreign financial centre? Does a change in the volume of such resources also operate for the restoration of equilibrium in a reciprocal fashion? Some critics of the methods of Gold-Exchange Managementㅡthough applauding them as a means of economising the demand for gold in the reserves of Central Banksㅡhave argued that movements of liquid resources, other than gold, do not operate in reciprocal fashion, and that this is a very serious objection to the methods in question. When Central Bank A, which keeps liquid reserves in the country of Central Bank B, begins to draw on these reserves in order to maintain the parity of its exchanges, it is under the same motive, as if it were losing gold, to alter the terms of lending within its own country. But Central Bank Bㅡso the argument runsㅡis under no such motive; for nothing has happened in country B to affect the terms of lending, since nothing is altered except the ownership of certain liquid resources.

  Before we can say if there is a satisfactory answer to this criticism, we must probe into the whole matter somewhat more deeply. If Central Bank B is mainly influenced by the ratio of its gold-reserve to its liabilities, then it is clearly true that a change in the volume of foreign balances held within its system has no more ^immediate^ effect on its own behavour than a change in the volume of net foreign lending (for that is what it amounts to) for any other cause. Again, a change in the volume of foreign balances will not, unless A's balances are held in the form of demand-deposits with Central Bank B, ^force the hand^ of Central Bank B to act in a manner which in its own unfettered judgment is prejudicial to the interests of its own internal equilibrium, in the way in which a movement of actual gold may force its hand. So in this case, it would seem, the charge of there being no reciprocal action is justified.

  If, on the other hand, ( .... p. 352