Let the dead man speak

Keynesians routinely malign policymakers from the 1930s, charging them with failing to run sufficiently large fiscal deficits to maintain aggregage demand. According to this modern myth, mass unemployment during the interwar years could have been avoided, if only the officials running the Treasury and the Bank of England had been brave enough to spend their way out of recession.

Of course, it is easy to pour abuse on long dead officials. However, the excellent jka online blog produced a wonderful post recently, which goes a long way to counterbalancing this malicious Keynesian myth.

The site published a memo, written in 1931 by Sir Warren Fisher, who was then the permanent Secretary to the Tresuary. The memo outlines the case for responsible fiscal policies during a deep and damaging financial crisis.

Here is rare chance for a long dead Treasury official to put forward the case for low fiscal deficits and sound money. The memo is as valid today as it was back in the 1930s.

"The seriousness of the financial difficulties which are engaging public attention is perhaps not fully realised. It may therefore be useful to set out the elementary facts. The root cause of the "run" on the part of the foreign depositor is the fact of our living beyond our means as evidenced by our ordering from abroad more goods than we could pay for and therefore our owing to other countries more in dollars and francs than they owe to us in sterling.

Closely associated with this fact in the foreign mind is the question of our national Budget. After the war a certain number of countries continued to have difficulties in balancing their budgets and instead of pulling in their belts, resorted to the expedient of meeting deficits by printing innumerable bank or currency notes. Whenever this was done, the national currency lost much or all of its value i.e. purchasing power, and with the corresponding rise in prices, hardship, even hunger, was widespread.

Consequently, when any of these countries subsequently desired financial assistance from other countries before the citizens of the latter could be induced to lend, they insisted on the borrowing country balancing its budget. And no one was more emphatic than ourselves in preaching this doctrine.

A national Budget has thus come to be regarded as a touchstone of a country's financial stability second only in importance to its international balance of trade; and if, as the case at present with us, we are "down" on our balance of trade with other countries, foreigners to whom we owe money automatically turn a microscope on to our Budget. And if the Budget is not really balanced, but is merely dressed up to look as though it were; or again if the national expenditure is of a scope and type such as to involve (by means of taxation) taking people's saved, up capital and spending it as if it were recurrent income, the distrust abroad of our soundness would be intensified.

Any expectation that we might continue on a "rake's progress" would complete the destruction of international confidence and thus result in the final collapse of our greatest asset, i.e. our credit.

The remedy is to reverse the process which has been responsible for the trouble, and this means that instead of living at a level which has entailed ordering abroad more goods than we can pay for, we must relate our orders to our capacity to pay. And unless we can produce and sell abroad more goods (including "services") than we have been doing, we shall be forced to cut down our orders abroad, and our and our standard of living must be reduced accordingly.

If not the epitaph of us English of to-day will be written by historians to come in Shakespeare' words (Richard II , Act 2, Scene l )
­
England, bound in with the triumphant sea,
Whose rocky shore beats back the envious siege of watery Neptune,
Is now bound in with shame, with inky blots and rotten parchment bonds.
That England, that was won’t to conquer others, hath made a shameful conquest of itself".