May 1932
The World's Economic Outlook
by John Maynard Keynes
The immediate problem for which the world needs a solution to-day is
different from the problem of a year ago. Then it was a question of
how we could lift ourselves out of the state of acute slump into
which we had fallen and raise the volume of production back toward a
normal figure. But to-day the primary problem is to avoid a
far-reaching financial crisis. There is now no possibility of
reaching a normal level of production in the near future. Our
efforts are directed toward the attainment of more limited hopes.
Can we prevent an almost complete collapse of the financial
structure of modern capitalism? With no financial leadership left in
the world and profound intellectual error as to causes and cures
prevailing in the responsible seats of power, one begins to wonder
and to doubt. At any rate, no one is likely to dispute that for the
world as a whole the avoidance of financial collapse, rather than
the stimulation of industrial activity, is now the front-rank
problem. The restoration of industry must come second in order of
time. Nowhere, I believe, is this better understood than in the
United States.
The immediate causes of the world financial panic—for that is what
it is—are obvious. They are to be found in a catastrophic fall in
the money value, not only of commodities, but of practically every
kind of asset. The 'margins,' as we call them, upon confidence in
the maintenance of which the debt and credit structure of the modern
world depends, have 'run off.' In many countries the assets of the
banks are no longer equal, conservatively valued, to their
liabilities to their depositors. Debtors of all kinds find that
their securities are no longer the equal of their debts. Few
governments still have revenues sufficient to cover the fixed money
charges for which they have made themselves liable.
Moreover, a collapse of this kind feeds on itself. We are now in the
phase where the risk of carrying assets with borrowed money is so
great that there is a competitive panic to get liquid. And each
individual who succeeds in getting more liquid forces down the price
of assets in the process of getting liquid, with the result that the
margins of other individuals are impaired and their courage
undermined. And so the process continues. It is, indeed, in the
United States itself that this has proceeded to the most incredible
lengths. The collapse of values there has reached astronomical
dimensions. I scarcely need to remind American readers of the facts.
But the United States only offers an example—extreme, owing to the
psychology of its people—of a state of affairs which exists in some
degree almost everywhere.
The competitive struggle for liquidity has now extended beyond
individuals and institutions to nations and to governments, each of
which endeavors to make its internal balance sheet more liquid by
restricting imports and stimulating exports by every possible means,
the success of each one in this direction meaning the defeat of
someone else. Moreover, each country discourages capital development
within its own borders for fear of the effect on its international
balance. Yet it will only be successful in its object in so far as
its progress toward negation is greater than that of its neighbors.
II
We have here an extreme example of the disharmony of
general and particular interest. Each nation, in an effort to
improve its relative position, takes measures injurious to the
absolute prosperity of its neighbors; and, since its example is not
confined to itself, it suffers more from similar action by its
neighbors than it gains by such action itself. Practically all the
remedies popularly advocated to-day are of this internecine
character. Competitive wage reductions, competitive tariffs,
competitive liquidation of foreign assets, competitive currency
deflations, competitive economy campaigns—all are of this
beggar-my-neighbor description. For one man's expenditure is another
man's income. Thus, while we undoubtedly increase our own margin, we
diminish that of someone else; and if the practice is universally
followed everyone will be worse off. An individual may be forced by
his private circumstances to curtail his normal expenditure, and no
one can blame him. But let no one suppose that he is performing a
public duty in behaving in such a way. The modern capitalist is a
fair-weather sailor. As soon as a storm rises, he abandons the
duties of navigation and even sinks the boats which might carry him
to safety by his haste to push his neighbor off and himself in.
Unfortunately the popular mind has been educated away from the
truth, away from common sense. The average man has been taught to
believe what his own common sense, if he relied on it, would tell
him was absurd. Even remedies of a right tendency have become
discredited because of the failure of a timid and vacillating
application of them. Now, at last, under the teaching of hard
experience, there may be some slight improvement toward wiser
counsels. But through lack of foresight, and constructive
imagination the financial and political authorities of the world
have lacked the courage or the conviction at each stage of the
decline to apply the available remedies in sufficiently drastic
doses; and by now they have allowed the collapse to reach a point
where the whole system may have lost its resiliency and its capacity
for a rebound.
Meanwhile the problem of reparations and war debts darkens the whole
scene. We all know that these are now as dead as mutton, and as
distasteful as stale mutton. There is no question of any substantial
payments' being made. The problem has ceased to be financial and has
become entirely political and psychological. If in the next six
months the French were to make a very moderate and reasonable
proposal in final settlement, I believe that the Germans, in spite
of all their present protestations to the contrary, would accept it
and would be wise to accept it. But to all outward appearances the
French mind appears to be hardening against such a solution and in
favor of forcing a situation in which Germany will default. French
politicians (and in candid moments American politicians may confess
to a fellow feeling) are conscious that it will be much easier for
them, vis-a-vis the home political front to get rid of reparations
by a German default than to reach by agreement a moderate sum, most
of which might have to be handed on to the United States. Moreover,
this outcome would have what they deem to be the advantage of piling
up grievances and a legal case against Germany for use in connection
with the other outstanding questions created between the two
countries by the Treaty of Versailles. I cannot, therefore, extract
much comfort or prospective hope from developments in this sphere of
international finance.
III
Well, I have painted the prospect in the blackest
colors. What is there to be said on the other side? What elements of
hope can we discern in the surrounding gloom? And what useful action
does it still lie in our power to take?
The outstanding ground for cheerfulness lies, I think, in this—that
the system has shown already its capacity to stand an almost
inconceivable strain. If anyone had prophesied to us a year or two
ago the actual state of affairs which exists to-day, could we have
believed that the world could continue to maintain even that degree
of normality which we actually have? This remarkable capacity of the
system to take punishment is the best reason for hoping that we
still have time to rally the constructive forces of the world.
Moreover, there has been a still recent and, in my judgment, most
blessed event of which we have not yet had time to gain the full
benefit. I mean Great Britain's abandonment of the gold standard. I
believe that this event has been charged with beneficent
significance over a wide field. If Great Britain had somehow
contrived to maintain her gold parity, the position of the world as
a whole to-day would be considerably more desperate than it is, and
default more general.
For Great Britain's action has had two signal consequences. The
first has been to stop the decline of prices, measured in terms of
national currencies, over a very considerable proportion of the
world. Consider for a moment what an array of countries are now
linked to the fortunes of sterling rather than gold: Australasia,
India, Ceylon, Malaya, East and West Africa, Egypt, and Scandinavia;
and, in substance, though not so literally, South America, Canada,
and Japan. Outside Europe there are no countries in the whole world
except South Africa and the United States which now conform to a
gold standard. France and the United States are the only remaining
countries of major importance where the gold standard is functioning
freely.
This means a very great abatement of the deflationary pressure which
was existing six months ago. Over wide areas producers are now
obtaining prices in terms of their domestic currencies which are not
so desperately unsatisfactory in relation to their costs of
production and to their debts. These events have been too recent to
attract all the attention they deserve. There are several countries
of which it could be argued that their economic and financial
condition may have turned the corner in the last six months. It is
true, for example, of Australia. I think it may be true of Argentina
and Brazil. There has been an extraordinary improvement in India,
where the export of gold previously hoarded, a consequence of the
discount of sterling in terms of gold which no one predicted, has
almost solved the financial problem.
As regards Great Britain herself, the world has a little overlooked,
I think, the change since last September, which represents, if not
an absolute, at least a relative improvement. The number of persons
employed to-day exceeds by 200,000 the number employed a year
ago—which is true of no other industrial country. This has been
achieved in spite of the fact that there has been, even during the
past year, a further rise in real wages; for, while money wages have
fallen by 2 per cent, the cost of living, in spite of the
depreciation of the sterling exchange, has fallen by 4 per cent. And
the explanation is an encouragement for the future. For the
explanation lies in the fact that over a wide field of her
characteristic activities Great Britain to-day is once again the
cheapest producer in the world. The forces set on foot last
September have by no means had time to work their full effect. Yet
even to-day—though, since popular knowledge of a foreign country is
always out of date, it may surprise you that I should say so—Great
Britain is decidedly the most prosperous country in the world.
IV
But there is a second major consequence of the
partition of the countries of the world into two groups, on and off
the gold standard respectively. For the two groups roughly
correspond to those which have been exercising deflationary pressure
on the rest of the world, by having a net creditor position which
causes them to draw gold, and those which have been suffering this
pressure. Now the departure of the latter group from gold means the
beginning of a process toward the restoration of economic
equilibrium. It means the setting into motion of natural forces
which are certain in course of time to undermine and eventually
destroy the creditor position of the two leading creditor gold
countries. The process will be seen most rapidly in the case of
France, whose creditor position is likely to be completely
undermined before the end of 1932. The cessation of reparation
receipts, the loss of tourist traffic, the competitive disadvantage
of her export trades with non-gold countries, and the importation of
a large proportion of the world's available gold, will, between
them, do that work. In the case of the United States the process may
be a slower one, largely because the reduction of tourist traffic,
which costs France so dear, means for the United States a large
saving. But the tendency will be the same. A point will surely come
when the current release of gold from India and the mines will
exceed the favorable balance of the gold countries.
Thus a process has been set moving which may relieve in the end the
deflationary pressure. The question is whether this will have time
to happen before financial organization and the system of
international credit break under the strain. If it does, then the
way will be cleared for a concerted policy, probably under the
leadership of Great Britain, of capital expansion and price raising
throughout the world. For without this the only alternative solution
which I can envisage is one of the general default of debts and the
disappearance of the existing credit system, followed by rebuilding
on quite new foundations.
The following, then, is the chapter of events which might
conceivably—I will not attempt to evaluate the probability of their
occurrence—lead us out of the bog. The financial crisis might wear
itself out before a point of catastrophe and general default had
been reached. This is, perhaps, happening. The greatest dangers may
have been surmounted during the past few months. Pari passu with
this, the deflationary pressure exerted on the rest of the world by
the unbalanced creditor position of France and the United States may
be relaxed, through their losing their creditor position as a result
of the steady operation of the forces which I have already
described. If and when these things are clearly the case, we shall
then enter the cheap-money phase. This is the point at which, on the
precedent of previous slumps, we might hope for the beginning of
recovery. I am not confident, however, that on this occasion the
cheap-money phase will be sufficient by itself to bring about an
adequate recovery of new investment. It may still be the case that
the lender, with his confidence shattered by his experiences, will
continue to ask for new enterprise rates of interest which the
borrower cannot expect to earn. Indeed, this was already the case in
the moderately-cheap-money phase which preceded the financial crisis
of last autumn.
If this proves to be so, there will be no means of escape from
prolonged and perhaps interminable depression except by direct state
intervention to promote and subsidize new investment. Formerly there
was no expenditure out of the proceeds of borrowing that it was
thought proper for the State to incur except for war. In the past,
therefore, we have not infrequently had to wait for a war to
terminate a major depression. I hope that in the future we shall not
adhere to this purist financial attitude, and that we shall be ready
to spend on the enterprises of peace what the financial maxims of
the past would only allow us to spend on the devastations of war. At
any rate, I predict with an assured confidence that the only way out
is for us to discover some object which is admitted even by the
deadheads to be a legitimate excuse for largely increasing the
expenditure of someone on something!
V
In all our thoughts and feelings and projects for
the betterment of things, we should have it at the back of our heads
that this is not a crisis of poverty, but a crisis of abundance. It
is not the harshness and the niggardliness of nature which are
oppressing us, but our own incompetence and wrong-headedness which
hinder us from making use of the bountifulness of inventive science
and cause us to be overwhelmed by its generous fruits. The voices
which—in such a conjuncture—tell us that the path of escape is to be
found in strict economy and in refraining, wherever possible, from
utilizing the world's potential production are the voices of fools
and madmen. There is a passage from David Hume in which he says:
'Though the ancients maintained that, in order to reach the gifts of
prophecy, a certain divine fury or madness was requisite, one may
safely affirm that, in order to deliver such prophecies as these, no
more is necessary than merely to be in one's senses, free from the
influence of popular madness and delusion.'
Obviously it is much more difficult to solve the problem to-day than
it would have been a year ago. But I believe even now, as I believed
then, that we could still be, if we would, the masters of our fate.
The obstacles to recovery are not material. They reside in the state
of knowledge, judgment, and opinion of those who sit in the seat of
authority. Unluckily the traditional and ingrained beliefs of those
who hold responsible positions throughout the world grew out of
experiences which contained no parallel to the present, and are
often the opposite of what one would wish them to believe to-day. In
France the weight of authoritative opinion and public sentiment is
genuinely and sincerely opposed to the whole line of thought which
runs through what I have been saying. In the United States it is
almost inconceivable what rubbish a public man has to utter to-day
if he is to keep respectable. Serious and sensible bankers, who as
men of common sense are trying to do what they can to stem the tide
of liquidation and to stimulate the forces of expansion, have to go
about assuring the world of their conviction that there is no
serious risk of inflation, when what they really mean is that they
cannot yet see good enough grounds for daring to hope for it. In
Great Britain opinion is probably more advanced. I believe that the
ideas of British bankers are on sounder lines than those current
elsewhere. What we in London have to fear is timidity and a
reluctance to act boldly.
Nothing could be a greater advantage to the world than that the
United States should solve her own domestic problems, and, by
solving them, provide the stimulus and the example to other
countries. But observing from a distance,—a nearer view of the
prospect might modify my pessimism,—I am unable to imagine a course
of events which could restore health to American industry in the
near future. I even fancy that, so far from the United States giving
the example, she will herself have to wait for stimulus from
outside. I, therefore, dare to hope—however improbable it may seem
in the light of recent experience—that relief may come first of all
to Great Britain and the group of overseas countries which look to
her for financial leadership. It is a dim hope, I confess. But I
discern less light elsewhere.
Volume 149, Number 5, pp. 521-526
|