GOLD AND SIR CHARLES ADDIS.

THAT the currency system, by means of which the economic life of this country is carried on, is not understood by the general public, by the business community, or by the writers of the weekly reviews, need cause neither surprise nor alarm. The subject is admittedly both intricate and, in its present form, novel. Here, if anywhere, is the field of the expert. As long as the half-dozen or so men, who constitute that .almost unknown but paramount body, the Court of Treasury of the Bank of England, understand their own currency system to the full, all is well. Clearly, the only method by which the uninstructed public like ourselves can ascertain whether or not this is the case, is to take the official pronouncements of the spokesmen of that body of opinion which has established and now supports our present currency policy, and to examine them, not with any pretension to a knowledge which we do not possess, but rather applying to them the simple methods of common sense, the acknowledged rules of everyday logic. It is in this spirit that anyone who feels that there is quite literally no single factor in the life of the community so important as its currency should read and consider the address which Sir Charles Addis, an author of our present policy, delivered to the bankers and accountants of the City of Edinburgh on December 10th last.

This address, we take it, was the official defence against the new and unexpected assaults which Mr. Maynard Keynes and his friends are directing against the return to the gold standard. No one can accuse Sir Charles of shrinking from the issue. He calls his address, " Back to the Cold Standard." Here, then, is the counter- blast to Mr. Keynes. No one can now say that our present policy remains undefined, and few after reading the address would claim that it had been ill-defined. Sir Charles devotes the first part of his address to giving an account of the situation and the controversy as it stands to-day. He describes the so-called " Cambridge School," and states his belief that the policy of this school—i.e., the abandonment of the gold standard— must be resisted at all costs. He then goes on to define what this gold standard which he champions really is. He describes the legal position of the Bank of England and of the statutes and Treasury minutes which control the situation. In a vital paragraph he puts out what he claims for the gold standard and what he does not claim for it :- " Stabilization is not a function of the gold standard. What the gold standard does do is to link up our prices with world prices, and -that perhaps is the best service that any monetary system can render to a country dependent like Great Britain on its foreign trade for a quarter to a third of its national income, whose fundamental - preoccupation it is to export sufficient manufactures to pay for the food and raw materials it cannot produce at home. Nearly half the existing unemployment, according to Dr. Bowley's estimate, • may be attributed directly to failure of exports. From the point of view of our foreign trade, stability of exchange is more important than stability of price."

Here is the object of the gold standard put down in a nutshell—i.e., to link up our prices with world prices. Now, it I* obvious that, before the War, this object was in a large measure attained. Sterling fluctuated in terms of the other principal currencies of the world to but an inconsiderable degree, and it is as obvious that since 1914, and the abandonment of the gold standard, sterling has fluctuated wildly in terms of almost all other important currencies—obviously to the detriment of our foreign trade. We take it, therefore, that -Sir Charles Addis's desire to return to the gold standard of 1914—in other words to see the pound sterling worth 4.86k dollars again— is principally based on the belief that so, and only so, can foreign exchanges be kept stable.

He goes on to define' the three methods that -the Cunliffe Currency Committee advocated for the attain- ment of this end. Very frankly Sir Charles agrees that these methods have amounted to a policy of deflation :- " If you like to call that a policy of deflation, I shall not demur. Deflation is not a pleasant medicine—purgatives seldom are— but is there any other cure for a surfeit ? It is true that further inflation in the United States might relieve us of the disagreeable necessity of further deflation here, but failing that, and there appears to be little likelihood of it at present, it is certain we shall not be able to escape some further degree of deflation in this country if our hopes of a return to the gold standard are to be realized. No one would suggest that the policy of deflation should be carried out otherwise than prudently and circumspectly, and with due regard to the state of trade and unemployment."

So far, therefore, we seem to have established two things : (i.) That if we wish to re-establish the gold standard of before the War, we must in all human prob- ability deflate our currency to a still greater extent than at present ; and (ii.) that the principal object of so doing would be to produce a stability in foreign exchange. The next two questions to be considered are obviously : (1) Has the policy of deflation of the last year and a-half affected our trade adversely, and hence will that policy, continued and intensified in the next six months, also affect adversely our economic life ? and (2) would the achievement of the pre-War standard—that is, the quoting of the pound sterling at 4.861 dollars—result in that stability of foreign exchanges which Sir Charles takes as the principal objective of his policy ?

Unfortunately- Sir Charles does not, at any rate imme- diately, go on to consider these problems. He turns rather to deal with the demand for a new inquiry to supersede that of the Cunliffe Committee, to the quantity theory of money and the inconvertible note issue. The section following these, however, is entitled " Deflation as the Cause of Unemployment." Here, then, is the first of our two problems dealt with. As usual, Sir Charles faces the issue fairly and squarely :- " Has any substantial relation of the nature of cause and effect been established between our currency policy and trade depression ? It is unscientific to seek afar off for an explanation of any phenom- enon when there are obvious ancL-adequate causes to be found close at hand. The present depression of trade has been intensified and extended by the War, but we should be wrong to regard it as alto- gether abnormal. The fact is that, as always, the waste and havoc of War made a subsequent industrial boom inevitable. There was the usual feverish activity in speculative production. Prices rose swiftly to the peak in 1920. Then the wheel turned. Prices fell more rapidly than they had risen. The bottom was reached in 1922. The trade cycle, of a type sadly familiar to us, had turned full cirele and landed us in our present depression. -It seems to me fantastio to single out the policy of deflation as the principal cause of unemployment. Surely the main cause is the loss of our export trade, due partly to the impoverishment of our foreign customers, and still more to the disorganization and unsettlement of Europe. Nor must we forget that unemployment insurance, by removing one of the strongest incentives to work, undoubtedly contributes to the extent of unemployment. The sick -man is always-ready- to lend a credulous ear to any quack who will promise him a cure, but quacking is no cure. Until peace and security, on which our foreign trade depends, are restored, it is idle to expect that any juggling with the currency can bring recovery to trade. The charge that the policy of deflation is hampering trade or obstructing employment cannot be sustained."

Here is -a passage of very great interest, well worth analysing almost sentence by sentence. Mark especially the sentences describing the fortunes of post-War trade. The effects of the War were followed by " feverish activity of speculative production," " prices soaring to their peak in 1920." - " Then the wheel turned," " prices fell to the- bottom in 1922 "—then, most of all perhaps mark the next two sentences : " The trade cycle, of a type sadly familiar to us, had turned full circle and landed us in the present depression. It seems to me fantastic to single out the policy of deflation as the principal cause of unemployment." Here is an accurate account of the phenomena, but they are assumed to be natural and inevitable. " The wheel " of trade, we are told, " turned " ; but why did it turn ? Did, in 1920, the demand for goods which were being produced in such numbers suddenly cease ? Did men and women suddenly not -want food, clothes, houses, pleasures and amusements ? Was the nation suddenly stricken with a Rousseauesque determination to return to the simple life ? If memory serves, there were few signs of this at the time ; but the fact remains, " the wheel did turn." Is it, after all, so fantastic to single out this policy of deflation, which was the one new factor which became operative at that date ? But Sir Charles attributes the turning of the wheel to the loss of our export trade, due to the disorganization and unsettlement of Europe. But did we suddenly lose our export trade in 1920 ? Was Europe one whit less unsettled before that date than she is now ? It is frankly a little puzzling. We have not the authority to say definitely that deflation has been the cause of unemployment, but we cannot pretend that Sir Charles has proved that it has not been so. Indeed, he seems to have doubts himself, for further on in his address occurs the following passage :— " It would have a deplorable effect on the Continent if, after the

heroic sacrifices already made, we should shrink from paying the ecst of a little more deflation in order to get back to gold."

But what are these heroic sacrifices ? Deflation, he has told, us, has had no detrimental effect on our trade. Who, then, has made these sacrifices ? Has it been the bankers ? They have indeed sustained them splendidly !

It is thus, then, that Sir Charles deals more or less satisfactorily with our first question, whether the policy of deflation, which he says is necessary to the reinstate- ment of the gold standard, has had a bad effect on our industries. On our second question, whether the re- establishment of that standard will produce its one useful result—the stabilizing of foreign exchanges, Sir Charles says literally nothing. While he is silent, it is difficult to prevent doubts creeping in. We may carry the pound to 4.86 of the dollar and keep it there with truly bulldog determination, but does that guarantee that France, that Italy, that Germany, that Russia will all be equally sound in their currency policy ? For remember, if by some evil chance they were to refuse to submit to those mysterious " heroic sacrifices," then ours would be utterly in vain, and the pound would fluctuate as merrily, and as detrimentally to our trade, in terms of the franc, the lira, the rouble or the mark, as if we had never undertaken the whole policy of deflation and as if the Cunliffe Committee had never sat. Worse, if the mighty system of stabilization established by the Federal Reserve Banks in America were to break down and the dollar make a downward movement, should we follow it and so maintain our stability of foreign exchange ? But this is inflation, and how would Sir Charles like that ? These are sad doubts, but as Sir Charles has told us nothing, it is difficult to stifle them.

Here, then, is how Sir Charles Addis dealt, or did not deal, with our two questions as to his policy of deflation, which were : (1) Would it in itself be detrimental to our industries ? and (2) would it, even if successful, result in that stabilization of foreign exchange which is its objective ? If there are any who answer the first of these questions in the affirmative, and the second in the negative, and Sir Charles seems to say and we seem to read that Pro- fessor Keynes, for one, would do so, then obviously these " strange folk " must seek for an alternative. Now, Sir Charles tells us that there are two alternatives, First, inflation—this Sir Charles dismisses in the one uncontro- versial passage in his address. With it no sane man can disagree. Causeless inflation is obviously, as he phrases it, an anti-social act. The second alternative is stabilization. To this subject he devotes some three pages, and they are unquestionably the most important in his address. In them he attempts to demolish the policy which has become identified with the so-called " Cambridge school."

Sir Charles Addis understands perfectly the object of these proposals. Their object is to regulate the currency of the country so as to maintain a constant general price level of commodities. Re agrees that the gold standard does not do this. (" We are not entitled to say that the gold standard prevents instability.") In a brief paragraph he gives an account of the proposals to effect this price stabilization :- "''hr" (the proposals) " require us to discard gold and substi- tute the index number of the wholesale prices of commodities, or, strange as it may appear, the figures of unemployment, as the new measure of value. The Bank Rate will then be raised and lowered, not as formerly to regulate the movements of gold, but to stabilize the general level of prices. It will be lowered when prices fall and raised when prices rise. Or, in the second alternative, be raised when the percentage of unemployment falls, and lowered when it rises."

Obviously two classes of objection can be raised to this scheme : (1) That it will not attain its object—i.e., a stable internal price level ; and (2) that this object, even if attained, is not an important one or, at any rate, is not as important as the object of a return to the gold standard—i.e., a stability of foreign exchanges. Sir Charles Addis makes both these objections. He deals first with the question whether a constant internal price level is desirable or, at any rate, important. " Fluctuations in price, so long as they are not abrupt or excessive, have an economic service to perform with which society could ill dispense."

What this economic service is we are not told. Perhaps it is the introduction of the sporting element into the otherwise solemn proceedings of the commercial world, or perhaps Sir Charles is prompted by an aesthetic dread of monotony and drabness. However, we may easily agree that fluctuations in price, if not abrupt or excessive, do very little harm. Unfortunately, " abrupt " and " excessive " are precisely the epithets, which must be applied to the price fluctuations which have been the most striking feature of the economic conditions of this century. This, too, Sir Charles admits. He says : " Those violent, short period changes known as trade cycles are among the most persistent and pestilent phenomena of the business world." So, in the main, we seem after all to be agreed that price fluctuations are a social evil. On the other hand, we must put a later passage against the above : " From the point of view of international trade, stability of exchange is more important than stability of price."

Granting that this proposition is true with regard to international trade, does it follow that it is true in regard to the interests of Great Britain ? We have already quoted Sir Charles as saying that a quarter to a third of our national income is derived from foreign trade. There- fore, from three-quarters to two-thirds is derived from home trade. Therefore it does not follow that because the statement, " stability of exchange is more important than stability of price," is true of international trade it is true of British trade. It is, indeed, on this fundamental question of relative value—whether we prefer stability of price or stability of exchange—that the pro- gold, anti-gold arguments ultimately hinge. If two- thirds of our national income are more important than one-third, it is hard to see how we can decide otherwise than that stability of price is the more important con- sideration, and, if we believe this, we must then believe that the stabilization policy, if it worked, would produce a result more important than the gold standard policy, if it worked, Here, then, is the second of our two objec- tions dealt with. There remains the first—would the stabilization policy work ? We do not pretend to be able to say that it would work, but we may again be able to examine and to judge whether Sir Charles Addis proves that it would not work. He has two objections to it ; That it would involve inflation. This he arrives at by quoting a " suggestion " that lie says somebody has made that the normal price level will be considered at an index number of 185 as against the present index figure of 156. On this plan, as he justly remarks, a 19 per cent. rise in prices would be necessary, which he condemns as inflation. Here, then, is an excellent argument against stabilizing at that particular point of 185, but absolutely no argument against the principle of stabilization in itself. His second objection appears to be that index figures are untrustworthy. The Board of Trade figure differs from the Sauerbeck figure which, in turn, differs from the Irving Fisher figure. So long as we definitely decide which figure to take, it does not seem to matter much whether there are other different ones. The important point is the relative truth of index figure readings, not their absolute accuracy ; as long as the index figure that has been taken is calculated on a consistent system it will show price fluctuations consistently, whether or not the original approximation was an accurate one. Sir Charles then passes on to deduce that the logical outcome of stabilization is " a species of Communism " also based on " the time-honoured fallacy that high prices are beneficial to industry." Evidently Sir Charles finds any stick good enough to beat the Cambridge dog with. The lucidity of mind which he shows in most of his address seems quite to fail him in these passages. He is obviously speaking under the stress of real emotional tension when he comes to consider the actual proposals for the abolition of the gold standard. Thus it would be unfair to apply the process of analysis to his statements, such as the one on stabilizing staple commodities separately, or to point out that the whole object of the index figure is not to show fluctuations in the price of commodities relative to each other, but only fluctuations of prices as a whole, such as indicate a change in the value of money.

Frankly we do not leave Sir Charles Addis's address with the confidence that he is approaching the problems of currency from a rationalistic standpoint. Evidently the question is to him not one of truth and error but of right and wrong, not of fact and fallacy, but of