DO YOU in the United States think it a paradox that Englishmen can continue to increase their capital wealth by adding both to their foreign investments and to their equipment at home, that they can continue to live (most of them) much as usual and support at the same time a vast body of persons in idleness with a dole greater than the income of a man in full employment in most other parts of the world; and yet do all this with one quarter of their industrial plant closed down and one quarter of their industrial workers unemployed?

It would not be merely a paradox, but an impossibility, if Britain’s potential capacity for the creation of wealth were not much greater than formerly. But this greater capacity does exist. It is to be attributed mainly to three factors––the ever increasing technical efficiency of her industry (British output per capita is 10 percent greater than it was even so recently as 1924), the greater economic output of women, and the larger proportion of the population which is at the working period of life. The fall in the price of her imports compared with the price of her exports also helps. The result is that with three-quarters of her capacity Great Britain can now produce as much wealth as she could produce with the whole of it a few years ago. But how rich she could be if only she could find some way of employing four-fourths of her capacity today!

Our trouble in Great Britain is, therefore, not that we lack the physical means to support a high standard of life, but that we––like most other countries––are suffering a breakdown in organization and in the machinery by which we buy and sell to one another.


There are two reactions to this breakdown. We experience the one or the other according to our temperaments. The one is inspired by a determination to maintain our standards of life by bringing into use our wasted capacity; that is to say, to expand, casting fear aside. The other, the instinct to contract, is based on the psychology of fear. How reasonable is it to be afraid?

We live in a society organized in such a way that the activity of production depends on the individual business man’s hoping for a reasonable profit or at least to avoid an actual loss. The margin which he requires as his necessary incentive to produce may be a very small proportion of the total value of the product. But take this away from him and the whole process stops. This, unluckily, is just what has happened. The fall of prices relatively to costs, together with the psychological effect of high taxation, has impaired the necessary incentive to production. This is at the root of our disorganization. Great Britain is not the only country of which this is true. It is unwise, therefore, to frighten the business man or torment him further. A forward policy is liable to do this. For, reasoning by a false analogy from what is prudent for an individual who finds himself in danger of living beyond his means, he is usually, when his nerves are frayed, a supporter, though to his own ultimate disadvantage, of national contraction. 


And there is a further reason for nervousness. Great Britain is suffering from international instability. Notoriously the competitive power of our export trade is diminished by our export trade is diminished by our high standard of life. At the same time the lack of profits in home business inclines the investor to place his money abroad, while high taxation exercises a sinister influence in the same direction. Above all, the reluctance of other creditor countries to lend (which is the root cause of this slump) places too heavy a financial burden on London. These again are apparent arguments against a forward policy; for greater activity at home due to increased employment will increase our excess of imports, and the government borrowing may frighten investors.

In every way, therefore––the opponents of an expansionist policy point out––it will aggravate the want of confidence, the burden of taxation and the international instability, which (they believe) are at the bottom of Great Britain’s present troubles.

Yet the policy of doing nothing is even more dangerous. For as time goes by, it can become increasingly doubtful whether we can support our standard of life. With 1,000,000 unemployed we certainly can; with 2,000,000 unemployed we probably can; with 3,000,000 unemployed we probably can’t. Thus, the negative policy, by allowing unemployment steadily to increase, must lead in the end to an unanswerable demand for a reduction in the standard of life.

Unemployment, we must repeat, exists because employers have been deprived of profit. The loss of profit may be due to all sorts of causes. But, short of going over to Communism, there is no possible means of curing unemployment except by restoring to employers a proper margin of profit. There are two ways of doing this––by increasing the demand for output, which is the expansionist cure, or by decreasing the cost of output, which is the contractionist cure. Both of these try to touch the spot. Which of them is to be preferred?


I have given some of the arguments for contraction. But there are some fundamental arguments on the other side. To decrease the cost of output by reducing wages and curtailing budget services may increase foreign demand for British goods (unless, which is quite likely, it encourages a similar policy of contraction in other countries), but it will probably diminish the domestic demand; and it is by no means certain to increase total demand. The advantages to employers of a general reduction of wages are not so great, therefore, as they look. Each employer sees the advantage to himself of a reduction of the wages which he himself pays and overlooks both the consequences of the reduction of the incomes of his customers and of the reduction of wages which his competitors will enjoy. In the second place, it leads to social injustice and violent resistance, since it benefits some classes of income at the expense of others. Moreover, the contractionist policy will aggravate, rather than solve, the international problem; since it is an endeavor to adjust ourselves to present prices rather than to raise them. These arguments apply equally in every country alike.

Two years ago the problem was mainly a British problem; today it is mainly international. An international remedy is, therefore, essential; and I find the best hope of remedying the international slump––I trust not vaingloriously––in the leadership of Great Britain. But is Great Britain is to assume leadership, she must be strong and believed to be strong. At least for Englishmen, it is of paramount importance to restore full confidence in London. I do not believe that this is difficult; for the real strength of London is being underestimated today by foreign opinion, and the position is ripe for a sudden reversal of sentiment. For these reasons I, who opposed Britain’s return to the gold standard and can claim, unfortunately, that my Cassandra utterances have been partly fulfilled, believe that London’s exchange position should be relentlessly defended today, in order, above all, that she may resume the vacant financial leadership of the world, which no one else has the experience or the public spirit to occupy, speaking out of acknowledged strength and not out of weakness.

What measures are available to restore confidence? A decision to reform the grave abuses of the Dole, and a decision to postpone for the present all new charges on the Budget for Social Services in order to conserve its resources to meet schemes for the expansion of employment, are advisable and should be taken. But the main decision which today is absolutely forced on any wise Chancellor of the Exchequer, whatever his beliefs about protection, is the introduction of a substantial revenue tariff. It is certain that there is no other measure all the immediate consequences of which will be favorable and appropriate. The tariff which I have in mind would include no discriminating protective taxes, but would cover as wide a field as possible at a flat rate, or perhaps two flat rates, each applicable to wide categories of goods. Rebates would be allowed in respect of imported material entering into exports, but raw materials, which make up an important proportion of the value of exports such as wool and cotton, should be exempt. The amount of revenue to be aimed at should be substantial, not less than $250,000,000 and, if possible, $375,000,000. Thus, for example, there might be import duties of 15 percent on all manufactured and semi-manufactured goods without exception, and of 5 percent on all food stuffs and certain raw materials, while other raw materials would be exempt. IT should be the declared intention of the free-trade parties acquiescing in this decision to remove the duties in the event of world prices recovering to the level of 1929.


Compared with any alternative which is open to Great Britain, this measure is unique in that it would at the same time relieve the pressing problems of the Budget and restore business confidence. But this is not its only advantage. In so far as it leads to the substitution of home-produced goods for goods previously imported, it will increase employment at home. At the same time, by relieving the pressure on the balance of trade, it will provide a much needed margin to pay for the additional imports which a policy of expansion will require and to finance loans by London to necessitous debtor countries. A revenue tariff is a high card which we still have in our hand. Where would the Budget of any other country be, if it had no receipts from its tariff?

I am not unaccustomed to being in a minority. But on this occasion I believe that 90 percent of my countrymen agree with me. In estimating the financial strength and prospects of Great Britain, foreign observers should bear two points in mind. The first is the one emphasized above, that British national finance has a very high card in hand in the shape of a tariff, which we shall certainly employ if necessary. The second is the tremendous strength of the Bank of England, which also has all its cards in hand––and its powder dry.

This article appeared in the April 8, 1931 issue of the magazine.