Inflation; J. M. Keynes

Reprinted by permission of the publishers. 36 ment of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the sys tem brings windfalls, beyond their deserts and even beyond their ex pectations or desires, become "profiteers," who are the object of the hatred of the bourgeoisie, whom the inflationism has impov erished, not less than of the pro letariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations be tween debtors and creditors, which form the ultimate foundation of 1965 INFLATION 37 capitalism, become so utterly dis ordered as to be almost meaning less; and the process of wealth getting degenerates into a gamble and a lottery. Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the cur rency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

In the latter stages of the war all the belligerent governments practised, from necessity or in competence, what a Bolshevist might have done from design. Even now, when the war is over, most of them continue out of weak ness the same malpractices. But further, the Governments of Eu rope, being many of them at this moment reckless in their methods as well as weak, seek to direct on to a class known as "profiteers" the popular indignation against the more obvious consequences of their vicious methods. These "profiteers" are, broadly speaking, the entrepreneur class of capital ists, that is to say, the active and constructive element in the whole capitalist society, who in a period of rapidly rising prices cannot help but get rich quick whether they wish it or desire it or not. If prices are continually rising, every trader who has purchased for stock or owns property and plant inevitably makes profits. By directing hatred against this class, therefore the European Govern ments are carrying a step further the fatal process which the subtle mind of Lenin had consciously conceived. The profiteers are a consequence and not a cause of rising prices. By combining a pop ular hatred of the class of entre preneurs with the blow already given to social security by the violent and arbitrary disturbance of contract and of the established equilibrium of wealth which is the inevitable result of inflation, these Governments are fast rendering impossible a continuance of the social and economic order of the nineteenth century. But they have no plan for replacing it.

No Will to Defend We are thus faced in Europe with the spectacle of an extraor dinary weakness on the part of the great capitalist class, which has emerged from the industrial tri umphs of the nineteenth century, and seemed a very few years ago our all-powerful master. The ter ror and personal timidity of the individuals of this class is now so great, their confidence in their place in society and in their neces sity to the social organism so di minished, that they are the easy 38 THE FREEMAN April victims of intimidation. This was not so in the England twenty-five years ago, any more than it is now [1920] in the United States. Then the capitalists believed in them selves, in their value to society, in the propriety of their continued existence in the full enj oyment of their riches and the unlimited ex ercise of their power. Now they tremble before every insult; c,all them pro-Germans, interna tional financiers, or profiteers, and they will give you any ransom you choose to ask not to speak of them so harshly. They allow themselves to be ruined and altogether un done by their own instruments, governments of their own making, and a press of which they are the proprietors. Perhaps it is his torically true that no order of society ever perishes save by its own hand. In the complexer world of Western Europe the Immanent Will may achieve its ends more subtly and bring in the revolution no less inevitably through a Klotz or a George than by the intellec tualisms, too ruthless and self-con scious for us, of the bloodthirsty philosophers of Russia.

The inflationism of the currency systems of Europe has proceeded to extraordinary lengths. The var ious belligerent Governments, un able, or too timid or too short sighted to secure from loans or taxes the resources they required, have printed notes for the balance. In Russia and Austria-Hungary this process has reached a point where for the purpose of foreign trade the currency is practically valueless. The Polish mark can be bought for about three cents and the Austrian crown for less than two cents, but they cannot be sold at all. The German mark is worth less than four cents on the ex changes. In most of the other countries of Eastern and SouthI Eastern Europe the real position is nearly as bad. The currency of Italy has fallen to little more than a half of its nominal value in spite of its being still subject to some degree of regulation; French cur rency maintains an uncertain mar ket; and even sterling is seriously diminished in present value and impaired in its future prospects.

A Sentimental Value But while these currencies en joy a precarious value abroad, they have never entirely lost, not even in Russia, their purchasing power at home. A sentiment of trust in the legal money of the State is so deeply implanted in the citizens of all countries that they cannot but believe that some day this money must recover a part at least of its former value. To their minds it appears that value is in herent in money as such, and they do not apprehend that the real 1965 INFLATION 39 wealth, which this money might have stood for, has been dissipated once and for all. This sentiment is supported by the various legal reg ulations with which the Govern ments endeavor to control internal prices, and so to preserve some purchasing power for their legal tender. Thus the force of law pre serves a measure of immediate purchasing power over some com modities and the force of senti ment and custom maintains, es pecially amongst peasants, a will ingness to hoard paper which is really worthless.

The presumption of a spurious value for the currency, by the force of law expressed in the reg ulation of prices, contains in it self, however, the seeds of final economic decay, and soon dries up the sources of ultimate supply. If a man is compelled to exchange the fruits of his labors for paper which, as experience soon teaches him, he cannot use to purchase what he requires at a price com parable to that which he has re ceived for his own products, he will keep his produce for .himself, dispose of it to his friends and neighbors as a favor, or relax his efforts in producing it. A system of compelling the exchange of commodities at what is not their real relative value not only relaxes production, but leads finally to the waste and inefficiency of barter. If, however, a government refrains from regulation and allows mat ters to take their course, essential commodities soon attain a level of price out of the reach of all but the rich, the worthlessness of the money becomes apparent, and the fraud upon the public can be con cealed no longer.

The effect on foreign trade of price-regulation and profiteer hunting as cures for inflation is even worse. Whatever may be the case at home, the currency must soon reach its real level abroad, with the result that prices inside and outside the country lose their normal adjustment. The price of imported commodities, when con verted at the current rate of ex change, is far in excess of the local price, so that many essential goods will not be imported at all by pri vate agency, and must be provided by the government, which, in re selling the goods below cost price, plunges thereby a little further in to insolvency. The bread subsidies, now almost universal throughout Europe, are the leading example of this phenomenon. + 7. The Pragmatic Sanction of Flux CLARENCE B. CARSON .••A pragmatist turns his back resolutely and once for all upon a lot of inveterate habits dear to professional philosophers. He turns away from abstraction and insufficiency, from verbal solution, from bad a priori reasons, from fixed principles, closed systems, and pretended absolutes and origins.