John Maynard Keynes

The raising of prices
from The Means to Prosperity




This is an incredible article on political economy written in 1933 for The Times by a person that will be later known, erroneously, as the saviour of capitalism. In this text Keynes shows that he, implicitly, accepts a series of political assumptions that have nothing to do not just with capitalism but with simple sound economics.

The assumptions uphold by Keynes are:
- the raising of prices by the government (in other words, the manipulation of the market by the state)
- the increase of loan-expenditure by the government (each and every government on earth) just on the basis of political will
- currency depreciation and tariffs (again, tools for manipulating the market) as acceptable and useful weapons of political economy
- the provision of cheap and abundant bank credit as a political objective, without any connection to production (the central bank printing press working at full speed)
- the reaching of a level of state expenditure comparable to that put into being when the state is at war.

All this clearly had/has nothing to do with sound economics and it was/is only a way to try to save statism (state politicians and state bureaucrats) from the usual economic mess they engineer on a regular basis in their parasitic pursuit of power and money. The result, as we now know, was a protracted depression to which only a war and a post-war (partial) economic liberalization will put an end.

We are at the present back to that situation and the remedies currently suggested and implemented are exactly the ones prescribed by Keynes in this amazing piece of political economy crap. The results will probably be the same: a protracted depression.

However, times are different: in many quarters Keynes is rightly seen as the crackpot he has always been; moreover, information is not any longer in the hands of state radio or state subservient newspapers.

It is then quite possible that this crisis will mark the beginning of the end for statism and its bankrupt policies of boom and bust, inflation and depression, heavy taxation and high state appropriation and squandering of resources. In the meanwhile all rational individuals should put in place the tools to bypass the state (for instance, alternative ways of payments, as in the form of voluntary virtual vouchers) in such a way that during the next crisis statism (state corporatism) will be promptly dismissed as a failed ideology and an obnoxious practice as it has been the case for state communism.



It is the declared policy of the British government, and also of the representatives of the empire assembled at Ottawa, to raise prices. How are we to do it?

To judge from some utterances of the Chancellor of the Exchequer, he has been attracted to the idea of raising the prices of commodities by restricting their supply. Now, it may well benefit the producers of a particular article to combine restrict its output. Equally it may benefit a particular country though at the expense of the rest of the world, to restrict supply of a commodity which it is in a position to control. It may even, very occasionally, benefit the world as a whole to organise the restriction of output of a particular commodity, the supply of which is seriously out of balance with the supply of other things. But as an all-round remedy restriction is worse than useless. For the community as a whole it reduces demand, by destroying the income of the retrenched producers, just as much as it reduces supply. So far from being a means to diminish unemployment it is, rather, a method of distributing more evenly what unemployment there is, at the cost of somewhat increasing it.

How, then, are we to raise prices? It may help us to think clearly, if I proceed by means of a series of very simple, but fundamental propositions.

(1)  For commodities as a whole there can be no possible means of raising their prices except by increasing expenditure upon them more rapidly than their supply comes upon the market.

(2)  Expenditure can only be increased if the public spend a larger proportion of the incomes they already have, or if their aggregate spending power is increased in some other way.

(3)  There are narrow limits to increasing expenditure out of existing incomes - whether by saving less or by increased personal expenditure of a capital nature. Incomes are so curtailed today and taxation so much increased, that many people are already, in the effort to maintain their standard of life, saving less than sound personal habits require. Anyone who can afford to spend more should be encouraged to do so, particularly if he has opportunities to spend on new capital or semi-capital objects. But it is an evasion of the magnitude of the problem to believe that we can solve it in this way. It follows, therefore, that we must aim at increasing aggregate spending power. If we can achieve this, it will partly serve to raise prices and partly to increase employment.

(4)  Putting on one side the special case of people who can earn their incomes by actually producing gold, it is broadly true to say that aggregate spending power within a country can only be raised either (i) by increasing the loan-expenditure of the community; or (ii) by improving the foreign balance so that a larger proportion of current expenditure again becomes income in the hands of home producers. By means of public works the Labour government in Great Britain - though rather half-heartedly and in adverse attendant circumstances - attempted the first. The National government has successfully attempted the second. We have not yet tried both at once.

(5)  But there is a great difference between the two methods, inasmuch as only the first is valid for the world as a whole. The second method merely means that one country is withdrawing employment and spending power from the rest of the world. For when one country improves its foreign balance, it follows that the foreign balance of some other country is diminished. Thus we cannot increase total output in this way or raise world prices, unless, as a by-product, it serves to increase loan expenditure by strengthening confidence in a financial centre such as Great Britain and so making it a more ready lender both at home and abroad.

Currency depreciation and tariffs were weapons which Great Britain had in hand until recently as a means of self-protection. A moment came when we were compelled to use them, and they have served us well. But competitive currency depreciations and competitive tariffs, and more artificial means of improving an individual country's foreign balance such as exchange restrictions, import prohibitions, and quotas, help no one and injure each, if they are applied all round.

We are left, therefore, with the broad conclusion that there is no effective means of raising world prices except by increasing loan-expenditure throughout the world. It was, indeed, the collapse of expenditure financed out of loans advanced by the United States, for use both at home and abroad, which was the chief agency in starting the slump.

A number of popular remedies are rightly popular because they tend to facilitate loan-expenditure. But there are several stages in the task of increasing loan-expenditure; and, if there is a breakdown at anyone of them, we shall fail to attain our object. I must ask the reader, therefore, to be patient with a further attempt at orderly analysis.

(1) The first necessity is that bank credit should be cheap and abundant. This is only possible if each central bank is freed from anxiety by feeling itself to possess adequate reserve of international money. The loss of confidence in bank balances held in leading financial centres as constituting international money for this purpose, has greatly aggravated the shortage of reserves. So has the accumulation of a large proportion of world's gold in a few central banks. On the other hand, we all welcome an increased output of the gold mines or a reduction in India's sterile hoards, because the quantity of reserve money is thus increased. The devaluation of national currencies in terms of gold is another remedy belonging to this category. Or, again, the abandonment of rigid gold parities may help the case, since a central bank which can, if necessary, relieve a strain by allowing the foreign exchanges to move against it, will be satisfied with a smaller reserve of international money. The abatement of the legal proportion of international money, which a bank must hold against its note issue, might also help on a minor scale.

But this is only the first stage. In the early phase of recovery there is not much loan-expenditure which can be safely financed by short-term bank credit. The role of bank credit is to finance the restoration of working capital after business recovery has definitely set in. In ordinary times we were able to rely on the first stage leading automatically to the subsequent stages. But not in the conditions of today.

(2) The second stage, therefore, must be reached, at which the long-term rate of interest is low for all reasonably sound borrowers. This requires a combination of manoeuvres by the government and the central bank in the shape of open-market operations by the bank, of well-judged conversion scheme by the treasury, and of a restoration of financial confidence by a budget policy approved by public opinion and in other ways. It is at this stage that a certain dilemma exists; since it may be true, for psychological reasons, that a temporary reduction of loan-expenditure plays a necessary part in effecting the transition to a lower long-term rate of interest. Since, however, the whole object of the policy is to promote loan-expenditure, we must obviously be careful not to continue its temporary curtailment a day longer than we need.

A few countries have reached the first stage. But Great Britain alone has reached the second stage. It is a great achievement of the Treasury and the Bank of England to have effected so successfully a transition which France and the United States, for whom the task was, until recently, much easier, have bungled so badly.

(3) But there remains a third stage. For even when we have reached the second stage, it is unlikely that private enterprise will, on its own initiative, undertake new loan-expenditure on a sufficient scale. Business enterprise will not seek to expand until after profits have begun to recover. Increased working capital will not be required until after output is increasing. Moreover, in modern communities a very large proportion of our normal programmes of loan-expenditure are undertaken by public and-semi-public bodies. The new loan-expenditure which trade and industry require in a year is comparatively small even in good times. Building, transport, and public utilities are responsible at all times for a very large proportion of current loan-expenditure.

Thus the first step has to be taken on the initiative of public authority; and it probably has to be on a large scale and organised with determination, if it is to be sufficient to break the vicious circle and to stem the progressive deterioration, as firm after firm throws up the sponge and ceases to produce at a loss in the seemingly vain hope that perseverance will be rewarded.

Some cynics, who have followed the argument thus far conclude that nothing except a war can bring a major slump to its conclusion. For hitherto war has been the only object of governmental loan-expenditure on a large scale which governments have considered respectable. In all the issues of peace they are timid, over-cautious, half-hearted, without perseverance or determination, thinking of a loan as a liability and not as a link in the transformation of the community's surplus resources, which will otherwise be wasted, into useful capital assets.

I hope that her government will show that Great Britain can be energetic even in the tasks of peace. It should not be difficult to perceive that 100,000 houses are a national asset and 1 million unemployed men a national liability.

(4) Yet if we are to raise world prices, which is our theme, there is yet a fourth stage. Loan-expenditure must spread its beneficent influence round the world.


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