Chapter 2

The difference in the rates depended, of course, upon whether the customer was buying or selling the foreign money. If he was buying Austrian notes, he would get twenty-four hundred paper crowns for a pound. If he was selling them, he would receive a pound in exchange for twenty-six hundred paper crowns.

All these paper notes are called after, and profess to represent, silver coins, which were themselves before the war, tokens, and passed current at more than their intrinsic value because of their relation to gold.

Thus the pre-war parity of marks was about twenty to the gold pound; of Austrian crowns, about twenty-four; of francs, lire, etc., about twenty-five. On the day of my purchase, therefore, the exchange value of the German mark was less than one thirteenth, of the Austrian crown less than one one hundredth, and of the Polish mark, one two hundredth, of its pre-war status. But this underestimates the depreciation; for the British pound is no longer a gold sovereign, and even gold has been depreciated.[17] The paper pound in June, 1921, was, I think, about the equivalent of twelve pre-war shillings in purchasing power. The gold dollar, which would only buy a little more than four shillings before the war, would buy five at the beginning of December, 1921.

[17] To-day, November 30, 1921, the paper pound is worth about four fifths of a gold pound. The purchasing power of gold--say, the gold dollar--is perhaps about two thirds of what it was before the war.

Although an inconvertible paper currency has no intrinsic value, it can (in accordance with the quantity theory of money) be maintained at a fairly stable ratio to gold or commodities by an honest government if the total issue is fixed, or kept between reasonable maximum and minimum limits. The rise of prices since the war, in each country where reliable statistics are available, has been in proportion to the expansion of the paper currency, allowance being made for the scarcity of commodities. Of course a decline in purchasing power _follows_ an expansion of circulation. The stability of the British paper pound since a limit was imposed illustrates the correctness of the quantity theory of money. Its increase in purchasing power (like that of the gold dollar) during the first half of 1921 is, of course, due to the fact that the supply of utilities had overtaken the demand.

At first sight it seems difficult to understand how any government, however bad, can _deliberately_ issue flood upon flood of inconvertible paper money, seeing that its printing operations are ruinous to both public and private credit. To obtain the same amount of revenue, each new issue, each new dose, has to be much larger than the preceding. In the course of twelve months, for example, the exchange value of the Polish mark was divided by ten, that is, at the end of the period, ten times as much paper money had to be printed as at the beginning, to get the same revenue. Yet the Polish Government continued upon its course with the approval and support of the Polish Diet.

The following quotation is from the Warsaw correspondent of the _London Economist_, who wrote on July 28, 1921:

The effects of the last collapse of the exchanges are beginning to make themselves felt, and the Diet is already preparing fresh ground for new currency inflation. By its last vote the limit on the note circulation has been increased to 118 milliards, and on the advances of the Polish National Bank to the Government to 150 milliards.

The depreciation of the Polish mark in June was followed by a rise of prices, and this led immediately to a strike movement in almost all industries. In the Lodz district 40,000 workmen have gone on strike, demanding a wage increase of 120 per cent! The manufacturers declare that they cannot raise wages by more than 20 per cent; that even under present conditions the Polish textile industry is in a most difficult position on the foreign markets, especially in Roumania, the Baltic States, etc. Posnania was menaced by an agrarian strike, but a settlement has been reached. The strike of the municipal workers in Warsaw was short-lived. Everywhere, however, wages have been increased by more than 50 per cent. This naturally will entail a new wave of rising prices, the Government will be obliged to double the salaries of its officials, and the printing press will work again under a higher pressure. This is the vicious circle round which the country has been travelling for three years.

_Ex uno disce omnes._ The monetary policy of the Polish Government is merely a flagrant example of the recent monetary history of all the states of Europe northeast, southeast, east, of the Rhine and of the Alps. There is only one real remedy, the reëstablishment of complete peace, disarmament, the abolition of conscription, the drastic reduction of bloated bureaucracies, and a wholesale lowering of tariffs, which will allow the miserable and half-starved populations to renew the arts of peace and the exchange of their agricultural products and manufactures.

APPENDIX

THE BRUSSELS CONFERENCE[18]

If all countries were included, a general and proportionate reduction of the military and naval establishments to one half of their present cost would set free a fund of probably at least $3,000,000,000 to $4,000,000,000 annually for the purchase of food and useful commodities, for the stabilization and partial restoration of debased paper currencies, for the payment of debt, the removal of public deficits, the revival of credit, and the reduction of taxes. Thus the road to recovery lies plain before us. Will it be taken by the statesmen to whose hands the peoples have intrusted their lives and fortunes?

[18] Taken by permission from an article by the author in the _Saturday Evening Post_ of November 12, 1921.

DEFICITS THE RULE

In order to show that this view is in conformity with the conclusions of experts, and even of officials delegated for the purpose of examining world finance by the governments themselves, I turn to the conclusions unanimously arrived at by the Brussels conference a year ago, after eighty-six financial experts from thirty-nine countries had presented the accounts and balance sheets of their respective governments. In a general review of the situation they point out that "the total external debt of the European belligerents, converted into dollars at par, amounts to about 155 milliard dollars, compared with about 17 milliard dollars in 1913." They say that the government expenditures of the European belligerents amount to between 20 and 40 per cent of the total incomes of the peoples. They say emphatically that the restoration of real peace, with disarmament, is "the first condition for the world's recovery."

Four commissions were appointed. The first dealt with public finance, and its resolutions were adopted unanimously by the conference. The following extract from its resolutions deserves attention:

Thirty-nine nations have in turn placed before the International Financial Conference a statement of their financial position. The examination of these statements brings out the extreme gravity of the general situation of public finance throughout the world, and particularly in Europe. Their import may be summed up in the statement that three out of every four of the countries represented at this conference and eleven out of twelve of the European countries anticipate a budget deficit in the present year. Public opinion is largely responsible for this situation. The close connection between these budget deficits and the cost of living, which is causing such suffering and unrest throughout the world, is far from being grasped. Nearly every government is being pressed to incur fresh expenditure; largely on palliatives which aggravate the very evils against which they are directed. The first step is to bring public opinion in every country to realize the essential facts of the situation and particularly the need for reëstablishing public finances on a sound basis as a preliminary to the execution of those social reforms which the world demands.

Public attention should be especially drawn to the fact that the reduction of prices and the restoration of prosperity is dependent on the increase of production, and that the continual excess of government expenditure over revenue represented by budget deficits is one of the most serious obstacles to such increase of production, as it must sooner or later involve the following consequences:

(_a_) A further inflation of credit and currency.

(_b_) A further depreciation in the purchasing power of the domestic currency, and a still greater instability of the foreign exchanges.

(_c_) A further rise in prices and in the cost of living.

The country which accepts the policy of budget deficits is treading the slippery path which leads to general ruin; to escape from that path no sacrifice is too great. It is therefore imperative that every government should, as the first social and financial reform, on which all others depend:

(_a_) Restrict its ordinary recurrent expenditure, including the service of the debt, to such an amount as can be covered by its ordinary revenue.

(_b_) Rigidly reduce all expenditure on armaments in so far as such reduction is compatible with the preservation of national security.

(_c_) Abandon all unproductive extraordinary expenditure.

(_d_) Restrict even productive extraordinary expenditure to the lowest possible amount.

The Supreme Council of the Allied Powers in its pronouncement on the eighth of March declared that "armies should everywhere be reduced to a peace footing; that armaments should be limited to the lowest possible figure compatible with national security and that the League of Nations should be invited to consider, as soon as possible, proposals to this end."

The statements presented to the conference show that, on an average, some 20 per cent of the national expenditure is still being devoted to the maintenance of armaments and the preparations for war. The conference desires to affirm with the utmost emphasis that the world cannot afford this expenditure. Only by a frank policy of mutual coöperation can the nations hope to regain their old prosperity, and in order to secure that result, the whole resources of each country must be devoted to strictly productive purposes.

The conference accordingly recommends most earnestly to the Council of the League of Nations the desirability of conferring at once with the several governments concerned, with a view to securing a general and agreed reduction of the crushing burdens which on their existing scale armaments still impose on the impoverished peoples of the world, sapping their resource and imperiling their recovery from the ravages of war. The conference hopes that the Assembly of the League, which is about to meet, will take energetic action to this end.

The above recommendations were ignored by the League of Nations and by practically all the governments concerned. Consequently the debts and deficits of most European countries are larger at the present time than they were a year ago, and most of the paper currencies have depreciated--some very heavily--during the last twelve months.

THE DANGERS OF INFLATION

I turn next to the resolutions proposed by the second commission which had to examine problems of currency and foreign exchange.

From its resolutions, which also were adopted unanimously by the conference, I extract the following:

The currencies of all belligerent and of many other countries, though in greatly varying degrees, have since the beginning of the war been expanded artificially, regardless of the usual restraints upon such expansion--to which we refer later--and without any corresponding increase in the real wealth upon which their purchasing power was based; indeed in most cases in spite of a serious reduction in such wealth.

It should be clearly understood that this artificial and unrestrained expansion, or inflation, as it is called, of the currency or of the titles to immediate purchasing power does not and cannot add to the total real purchasing power in existence, so that its effect must be to reduce the purchasing power of each unit of the currency. It is in fact a form of debasing the currency.

The effect of it has been to intensify, in terms of the inflated currencies, the general rise in prices, so that a greater amount of such currency is needed to procure the accustomed supply of goods and services. Where this additional currency was procured by further inflation--that is, by printing more paper money or creating fresh credit--there arose what has been called a vicious spiral of constantly rising prices and wages and constantly increasing inflation, with the resulting disorganization of all business, dislocation of the exchanges, a progressive increase in the cost of living, and consequent labor unrest.

It is of the utmost importance that the growth of inflation should be stopped; and this, although no doubt very difficult to do immediately in some countries, could quickly be accomplished by abstaining from increasing the currency--in its broadest sense, as defined above--and by increasing the real wealth upon which such currency is based.

The cessation of increase in the currency should not be achieved merely by restricting the issue of legal tender. Such a step, if unaccompanied by other measures, would be apt to aggravate the situation by causing a monetary crisis. It is necessary to attack the causes which lead to the necessity for the additional currency.

The chief cause in most countries is that the governments, finding themselves unable to meet their expenditures out of revenue, have been tempted to resort to the artificial creation of fresh purchasing power, either by the direct issue of additional legal-tender money or more frequently by obtaining--especially from the banks of issue, which in some cases are unable and in others unwilling to refuse them--credits which must themselves be satisfied in legal-tender money. We say, therefore, that governments must limit their expenditure to their revenue.

Here again we have excellent doctrines and good practical advice from these financial experts to the governments which appointed them. But the doctrines have remained unapplied, and the advice has been honored in the breach instead of in the observance.

WISE COUNSEL IGNORED

I pass next to the resolutions proposed by the commission on international trade and adopted unanimously by the conference, from which the first two paragraphs will be quoted:

The International Financial Conference affirms that the first condition for the resumption of international trade is the restoration of real peace, the conclusion of the wars which are still being waged and the assured maintenance of peace for the future. The continuance of the atmosphere of war and of preparations for war is fatal to the development of that mutual trust which is essential to the resumption of normal trading relations. The security of internal conditions is scarcely less important, as foreign trade cannot prosper in a country whose internal conditions do not inspire confidence. The conference trusts that the League of Nations will lose no opportunity to secure the full restoration and continued maintenance of peace.

The International Financial Conference affirms that the improvement of the financial position largely depends on the general restoration as soon as possible of good will between the various nations; and in particular it indorses the declaration of the Supreme Council of the eighth March last "that the States which have been created or enlarged as a result of the war should at once reëstablish full and friendly coöperation and arrange for the unrestricted interchange of commodities in order that the essential unity of European economic life may not be impaired by the erection of artificial economic barriers."

Here again there is a full recognition of the fact that peace is necessary to the renewal of prosperity, and that the atmosphere of war preparations is fatal to the growth of trade. But neither the League of Nations nor the Supreme Council, so far as I am aware, has made any effective response to these appeals.

Fourthly and lastly, I come to the commission on international credits. This commission passed a number of resolutions, all of which were adopted unanimously by the conference; but it will suffice to cite the first two:

The conference recognizes in the first place that the difficulties which at present lie in the way of international credit operations arise almost exclusively out of the disturbance caused by the war, and that the normal working of financial markets cannot be completely reëstablished unless peaceful relations are restored between all peoples and the outstanding financial questions resulting from the war are made the subject of a definite settlement which is put into execution.

The conference is, moreover, of opinion that the revival of credit requires as primary conditions the restoration of order in public finance, the cessation of inflation, the purging of currencies, and the freedom of commercial transactions. The resolutions of the commission on international credits are therefore based on the resolutions of the other commissions.

My argument then is fully endorsed by the experts at Brussels. All the facts and figures set forth in the voluminous records of that remarkable conference indicate the urgency of peace and disarmament. A year has passed.

The Brussels recommendations have been ignored, and conditions in Europe as regards its currencies, debts, trade and credit have deteriorated. The Naval limitations proposed by Mr. Hughes at Washington, even if they are ratified, will give practically no relief to Europe.

End of Project Gutenberg's The Paper Moneys of Europe, by Francis W. Hirst