The World's Economic Outlook
John Maynard Keynes
[1932]
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!
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.