The World's Economic Outlook (May
1932) - 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
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
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
this outcome
would have what they deem to be the advantage of piling up
grievances and a
legal case against
other
outstanding questions created between the two countries by the
Treaty of
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
event has been
charged with beneficent significance over a wide field. If
position of the
world as a whole to-day would be considerably more
desperate than
it is, and default more general.
For
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:
literally,
countries in the
whole world except
which now
conform to a gold standard.
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
true of
in
the discount of
sterling in terms of gold which no one predicted, has
almost solved
the financial problem.
As regards
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
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 --
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
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
But the tendency will be the same. A
point will surely come when the
current release
of gold from
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
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
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
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
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
of British bankers are on sounder lines than those current
elsewhere. What
we in
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
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
which look to
her for financial leadership. It is a dim hope, I confess.
But I discern less light elsewhere.