John Maynard Keynes
"How to Organise a Wave of Prosperity" |
 |
___________________________________________________________
"HOW TO ORGANISE A WAVE OF PROSPERITY"
(1928)
[First published in The Evening Standard, 31 July, 1928]
___________________________________________________________
This article was first published in The Evening Standard on July 31, 1928. It is reproduced in Donald Moggridge, editor, 1981, The Collected Writings of John Maynard Keynes, Volume XIX, Activities 1922-1929, The Return to Gold and Industrial Policy Pt. 1I, pp. 761-7664.
[Note on HET version: This version does not contain pagination as we have not obtained a copy of the original version of the pamphlet. As far as we know, this essay is in the public domain. You are free to make use of this electronic version in any way you wish, except for commercial purposes, without asking permission. All comments and corrections of this text are encouraged..]
HOW TO ORGANISE A WAVE OF PROSPERITY
In the spring of every year there is a seasonal recovery of certain industries
which have been held back by the winter. This comes handy for the annual
speeches of the chairmen of the big banks and for the Chancellor of the
Exchequer introducing his Budget. So at each of their annual celebrations the
professional optimists assure us, on the strength of the spring trade, that at
last the revival is at hand.
By July we always know that we have been had again. This year particularly so.
It is certain that trade on the whole is bad. There are 200,000 more unemployed
than at this date a year ago. Indeed, there are as many unemployed as in any
July in the last six years except during the great strike.
The railway traffics confirm these figures. So does the condition of the staple
industries considered separately‑coal, agriculture, cotton, shipbuilding, iron
and steel, motors, and (more doubtfully) building and construction. A small
increase in certain classes of exports is the only favourable feature.
In short, both profits and employment are disastrously poor. Moreover, the more
successful the efforts which are being made to restore the margin of profits by
‘rationalisation’, the greater the likelihood‑at first anyhow‑of increasing
unemployment.
And the more successful the efforts of the Treasury, in the pursuit of so‑called
`Economy’, to damp down the forms of capital expansion which they
control‑telephones, roads, housing, etc., again the greater the certainty of
increasing unemployment.
The post‑war building programmes of local authorities will begin to peter out
before long, and, unless their place is taken by something else, the building
trades will join the depressed industries.
Since there can be no doubt about the explanation, it is well to remind
ourselves from time to time what it is. Labour costs, measured by the wage index
of eleven leading industries, are exactly what they were three years ago or four
years ago.
Meanwhile wholesale prices have fallen 9 per cent compared with three years ago
and 13 per cent compared with four years ago, whilst the cost of living has
fallen 5 per cent. But many industries have not enough margin of profit to
employ men at the same wages as before and to sell their products 5 to 10 per
cent cheaper.
This situation is what I ventured to predict when I wrote in The Evening
Standard three years ago, shortly after the return to the gold standard. We have
deflated prices by raising the exchange value of sterling and by controlling the
volume of credit; but me have not deflated costs.
The fundamental blunder of the Treasury and of the Bank of England has been due,
from the beginning, to their belief that if they looked after the deflation of
prices the deflation of costs would look after itself.
Regarding these two different things as though they were practically the same
thing, they did not hesitate to commit us to a deflation of costs without having
any idea or any plan as to how it was to be brought about. Yet, as I pointed out
when they made the commitment, it is extraordinarily difficult to deflate costs.
Broadly, there are three ways of doing it.
The first is a general assault on the level of money wages. The coal lock‑out of
1926 represented an attempt along this line of advance, and if the employers had
been allowed to press home their advantages after the defeat of the General
Strike some success might have been achieved. But Mr Baldwin decided quite
rightly‑that it would be socially and politically inexpedient to take advantage
of the situation in this way.
The events of this period confirmed the conclusion that in modern conditions an
assault on wages is not only politically impossible, but also maladroit, because
the wage rates which will be most likely to yield before the assault will be
those in which wages are already relatively low because of bargaining weakness.
Today, on the eve of a general election, a general assault on wages is more
entirely out of the question than ever.
The second way of deflating costs is that which is now being adopted in the
best‑led industries‑namely, the restoration of the normal margin of profit by
concentration of production on the most profitable lines and the curtailment of
unprofitable business. This is called rationalisation.
The reason why we are only feeling now at this late date, when there are no
other clouds on the horizon, the full effects on employment of the
disequilibrium set up by our monetary policy three and four years ago is because
many employers have been prepared, for a time and in hopes of the turn for the
better which has been promised them, to continue without profit or at a loss.
But they will not do so indefinitely. In present circumstances there is for them
no alternative to pressing on with rationalisation‑which is likely, moreover, to
achieve some economies and increased efficiencies which were already overdue.
But this is bound to aggravate, rather than cure, the problem of unemployment.
The third way of deflating costs is to take advantage of the economies of
successful bold enterprise and the working of plant and productive resources to
a hundred per cent of capacity.
Industry might afford the higher wages imposed on it if it could work at full
steam. The wastefulness of plant employed 10 or 20 or 30 per cent below capacity
is extreme. Moreover, the increased purchasing power of a working population in
full employment would react quickly and cumulatively on the prosperity of
numberless industries and occupations.
Probably, even so, it would be impossible to bridge the existing gap between
costs and prices without the assistance of some inflation of the latter. In any
case, to organise a wave of prosperity which shall sweep us out of the pool of
stagnation in which we are decaying is extremely difficult, involves some risks,
and might be unsuccessful. But it ought to be tried.
Unfortunately, it lies entirely outside the power of individual business men to
take the initiative. The first steps can be taken only by the Bank of England
and the Chancellor of the Exchequer. Yet the consequences of their policy so far
has been to ensure that businesses shall be unprofitable and that the level of
unemployment shall not fall below the million level.
Nevertheless, it is well to recognise squarely the nature of the risks which
stand in the way of any departure from the Bank of England’s present policy.
Unemployment will not decline unless business men have the incentive of
plentiful credit, high hopes and a slightly rising level of prices‑a slight
inflation of prices but not of costs.
The newly employed men will need increased imports of raw materials to work on,
and as their earnings improve their consumption will increase. Yet owing to the
length of the period of production, they will not have much to show for it for
six months or a year, and, if they are producing capital goods, adjustments of
the capital market will be required. In the meantime one would expect the
visible balance of trade to move against us.
Thus the process of getting more men to work is calculated to cause a drain on
the resources of the Bank of England, just as the depression has raised its
resources to a record level.
The practical steps which ought to be taken if we really want to reduce
unemployment are, I suggest, the following:‑
First, as Mr McKenna has consistently maintained, the Bank of England must
gradually increase the reserve resources of the joint stock banks up to (say),
£I0,000,000 above their present figure‑an augmentation of the basis of credit
which will ensure that no worthy business borrower will be turned down by his
bank.
Secondly‑since this would greatly reduce and perhaps avoid altogether the risks
of the experiment‑the Governor of the Bank must induce his colleagues throughout
the world to change their tune when he changes his, instead of his encouraging a
general deflationary atmosphere by insisting on every state bank in Europe
locking up its gold against note issues which do not need it.
Thirdly, the Chancellor of the Exchequer must remove and reverse his pressure
against public spending on capital account.
Every public department and every local authority should be encouraged and
helped to go forward with all good projects for capital expansion which they
have ready or can prepare‑roads, bridges, ports, buildings, slum clearances,
electrification, telephones, etc., etc.
When we have unemployed men and unemployed plant and more savings than we are
using at home, it is utterly imbecile to say that we cannot afford these things.
For it is with the unemployed men and the unemployed plant, and with nothing
else, that these things are done.
To have labour and cement and steel and machinery and transport lying by, and to
say that you cannot afford to embark on harbour works or whatever it may be is
the delirium of mental confusion.
For several years past these policies have not lacked powerful advocates who
have some claim to wisdom and experience‑Mr McKenna, Lord Melchett, Sir Josiah
Stamp, for example, amongst business authorities, Mr Lloyd George and Lord
Beaverbrook amongst public men, and many economists and journalists.
I do not believe that the Chancellor of the Exchequer is naturally unsympathetic
to this outlook. But he has succumbed, just as Mr Snowden did before him, to the
timidities and mental confusions of the so‑called `sound’ finance, which
establishes as an end to be worshipped what should only be pursued so long as it
is successful as a means to the creation of wealth and the useful employment of
men and things.
According to the census of production, the average net output of an employed
person in this country is £220. Therefore, the output of a million persons over
five years is £ 1,100.000,000.
It is very possible, therefore, that the policy of the Bank of England over this
period has reduced the wealth of the country by not less than £500,000,000.
The nature of the error committed will never be exactly understood by the
public. But its consequences will have a profound effect on the general election
and on the future government of this country.
___________________________________________________________
