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Keynes, Consequences of Mr. Churchill

The document discusses John Maynard Keynes' criticism of Winston Churchill's decision to restore the gold standard in Britain in 1925 without properly adjusting the country's monetary values. Keynes argues Churchill committed to lowering wages and prices without a clear plan for doing so, and that his experts failed to warn him of the difficulties this would cause.

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129 views2 pages

Keynes, Consequences of Mr. Churchill

The document discusses John Maynard Keynes' criticism of Winston Churchill's decision to restore the gold standard in Britain in 1925 without properly adjusting the country's monetary values. Keynes argues Churchill committed to lowering wages and prices without a clear plan for doing so, and that his experts failed to warn him of the difficulties this would cause.

Uploaded by

bigdigdaddyy
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© © All Rights Reserved
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Keynes, J.M., The Economic Consequences of Mr. Churchill, London, 1925 (pp.

10-13)

The arguments of Chapter I are not arguments against the Gold Standard as such. That is a
separate discussion which I shall not touch here. They are arguments against having restored
gold in conditions which required a substantial readjustment of all our money values. If Mr.
Churchill had restored gold by fixing the parity lower than the pre-war figure, or if he had
waited until our money values were adjusted to the pre-war parity, then these particular
arguments would have no force. But in doing what he did in the actual circumstances of last
spring, he was just asking for trouble. For he was committing himself to force down money-
wages and all money-values, without any idea how it was to be done. Why did he do such a
silly thing ?

Partly, perhaps, because he has no instinctive judgment to prevent him from making mistakes;
partly because, lacking this instinctive judgment, he was deafened by the clamorous voices of
conventional finance; and, most of all, because he was gravely misled by his experts.

His experts made, I think, two serious mistakes. [...]

Mr. Churchill asked the Treasury Committee on the Currency to advise him on these matters.
He declared in his Budget speech that their Report "contains a reasoned marshalling of the
arguments which have convinced His Majesty's Government." Their arguments—if their vague
and jejune meditations can be called such—are there for anyone to read. What they ought to
have said, but did not say, can be expressed as follows:

“Money-wages, the cost of living, and the prices which we are asking for our exports have not
adjusted themselves to the improvement in the exchange, which the expectation of your
restoring the Gold Standard, in accordance with your repeated declarations, has already
brought about. They are about 10 per cent, too high. If, therefore, you fix the exchange at this
gold parity, you must either gamble on a rise in gold prices abroad, which will induce
foreigners to pay a higher gold price for our exports, or you are committing yourself to a policy
of forcing down money wages and the cost of living to the necessary extent.

"We must warn you that this latter policy is not easy. It is certain to involve unemployment and
industrial disputes. If, as some people think, real wages were already too high a year ago, that
is all the worse, because the amount of the necessary wage reductions in terms of money will
be all the greater.

"The gamble on a rise in gold prices abroad may quite likely succeed. But it is by no means
certain, and you must be prepared for the other contingency. If you think that the advantages
of the Gold Standard are so significant and so urgent that you are prepared to risk great
unpopularity and to take stern administrative action in order to secure them, the course of
events will probably be as follows.

"To begin with, there will be great depression in the export industries. This, in itself, will be
helpful, since it will produce an atmosphere favourable to the reduction of wages. The cost of
living will fall somewhat. This will be helpful too, because it will give you a good argument in
favour of reducing wages. Nevertheless, the cost of living will not fall sufficiently and,
consequently, the export industries will not be able to reduce their prices sufficiently, until
wages have fallen in the sheltered industries. Now, wages will not fall in the sheltered
industries, merely because there is unemployment in the unsheltered industries. Therefore,
you will have to see to it that there is unemployment in the sheltered industries also. The way
to do this will be by credit restriction. By means of the restriction of credit by the Bank of
England, you can deliberately intensify unemployment to any required degree, until wages do
fall. When the process is complete the cost of living will have fallen too; and we shall then be,
with luck, just where we were before we started.

"We ought to warn you, though perhaps this is going a little outside our proper sphere, that it
will not be safe politically to admit that you are intensifying unemployment deliberately in
order to reduce wages. Thus you will have to ascribe what is happening to every conceivable
cause except the true one. We estimate that about two years may elapse before it will be safe
for you to utter in public one single word of truth. By that time you will either be out of office,
or the adjustment, somehow or other, will have been carried through."

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