All Terrain Thinking

A Compendium of things I think are Important

John Maynard Keynes's,

Quotations

The Importance of Stable Prices:

"We see, therefore, that rising prices [inflation] and falling prices [deflation] each have their characteristic disadvantage. The Inflation which causes the former means Injustice to individuals and to classes--particularly to investors; and is therefore unfavorable to saving. The Deflation which causes falliing prices means Impoverishment to labor and to enterprise by leading entrepreneurs to restrict production, in their endeavor to avoid loss to themselves; and is therefore disastrous to employment.... Thus Inflation is unjust and Deflation is inexpedient. Of the two, perhaps Deflation is, if we rule out exaggerated inflations such as that of Germany [in 1923-1924], the worse; because it is worse, in an impoverished world, to provoke unemployment than to disappoint the rentier. But it is not necessary that we should weight one evil against the other. It is easier to agree that both are evils to be shunned."

"We leave Saving to the private investor, and we encourage him to place his savings mainly in titles to money. We leave the responsibility for setting Production in motion to the business man, who is mainly influenced by the profits he expected to accrue to himself in terms of money. Those who are not in favor of drastic changes in the existing organization of society believe that these arrangements, being in accord with human nature, have great advantages. But they cannot work properly if the money, which they assume as a stable measuring-rod, is undependable. Unemployment, the precarious life of the worker, the disappointment of expectation, the sudden loss of savings, the excessive windfalls to individuals, the speculator, the profiteer--all proceed, in large measure, from the instability of the standard of value."

"A policy of price stability is the very opposite of a policy of permanently cheap money. During the last boom, the present writer preached vehemently in favour of very dear money, months before the Bank of England acted. But when unemployment is very bad, enterprise disheartened, and prices with a falling tendency, that is not the moment to raise the Bank Rate…"

"It lies in the power of the Bank of England, and the Treasury, within wide limits, to determine in the long run how much credit is created. If the Bank of England had pursued a different policy, I believe that prices would stand at a different level…. The policy of the Cunliffe Committee assumes that the authorities have the power in the long run to fix the price level just as much as the policy of price stabilization assumes it…"

"For it is not the fact of a given rise of prices, but the expectation of a rise compounded of the various possible price movements and the estimated probability of each, which affects money rates; and in countries where the currency has not collapsed entirely, there has seldom or never existed a sufficient general confidence in a further rise or fall of prices to cause the short-money rate to rise above 10 percent per annum, or to fall below 1 percent. A fluctuation of this order is not sufficient to balance a movement of prices, up or down, of more than (say) 5 percent per annum–a rate which the actual price movement has frequently exceeded…"

"The business of stabilizing the price level, not merely over long periods but so as to avoid cyclical fluctuations, consists partly in exercising a stabilizating influence over k [the desired currency-to-income ratio] and k’ [the desired bank-deposits-to-income ratio] and insofar as this fails or is impractical , in deliberately varying n [high powered money] and r [the reserves-to-deposits ratio] so as to counterbalance the movements of k and k’…"

On Politics:

The proposals "are simply another move in the game, by which the players at any rate are no longer taken in. Mr. Lloyd George feels that he is making progress (perhaps he is) when he succeeds in persuading M. Briand to agree with him that 2 plus 2 does not make 12 but only 8; M. Briand hopes that, being eloquent, he may after all be able in the French Chamber to make a good enough song about 8 to defeat M. Poincare as to how much better it would be for France if 2 plus 2 made 12…"

"Burke ever held, and held rightly, that it can seldom be right… sacrifice a present benefit for a doubtful advantage in the future…. It is not wise to look too far ahead; our powers of prediction are slight, our command over results infinitesimal. It is therefore the happiness of our own contemporaries that is our main concern; we should be very chary of sacrificing large numbers of people for the sake of a contingent end, however advantageous that may appear…. We can never know enough to make the chance worth taking. There is this further consideration that is often in need of emphasis: it is not sufficient that the state of affairs which we seek to promote should be better than the state of affairs which preceded it; it must be sufficiently better to make up for the evils of the transition…"

"In our present confusion of aims is there enough clear-sighted public spirit left to preserve the balanced and complicated organization by which we live? Communism is discredited by events; socialism, in its old-fashioned interpretation, no longer interests the world; capitalism has lost its self-confidence. Unless men are united by a common aim or moved by objective principles, each one’s hand will be against the rest and the unregulated pursuit of individual advantage may soon destroy the whole. There has been no common purpose lately between nations or between classes, except for war…"

Germany's Hyperinflation:

"If I felt confident I could control the budgetary position, I should not doubt my capacity in Germany’s present situation to control the exchange. As soon as the supply of currency is limited, I do not see how it is possible that the balance of trade should be adverse. I believe that the point of view which looks first to the balance of trade, and seeks for an improvement in that first of all, or alternatively to the support of a foreign loan, is deeply erroneous and has not penetrated to the true process of causation…"

The Effects of Overvaluation:

"…the slowness of the revival of trade in this country, as compared to what is now going on in America, is due to an important extent to the course of the sterling exchange. The tremendous fillip that trade has had in America through the rise of prices has hardly been reflected here. The rise of prices in America has been counterbalanced here in the improvement in the rate of sterling, so that things are left here very nearly as they were. That is hindering our merchants, I think, partly because trade will never go ahead until people are certain they [prices] have touched bottom. They will never be certain that they have touched bottom until they see them going up a little; so that I am in favour of a moderate rise in prices as the only way of getting out of the present period of depression, and I think the improvement of sterling towards par is a hampering influence on that. Indeed, it is obvious it must be. In that connection… the more I study statistics the more convinced I am that we shall not be in equilibrium until wholesale prices have risen from 15 to 20 percent. The business of forcing down certain levels of wages, and so forth, into equilibrium is hopeless, or will take a long time. The continuance of unemployment is to an important extent due to the fact that we have got the level of wages… out of gear with everything else. The only way in which they will get in gear will be by an increase in the level of prices…"

High wages "are compelling us to ask double for our exports when the world level of prices… is only about 60 percent up. It is clear that that is not a situation which can go on permanently. People will not pay us for our exports at so discrepant a price from what goods are worth in the world, and we see the fruits of our high prices in the diminishing volume of our exports, and in our complete incapacity to employ the whole body of labour…"

The End of the Gold Standard:

"The theory on which the Federal Reserve Board is supposed to govern its discount policy, by reference to the influx and efflux of gold and the proportion of gold to liabilities, is as dead as mutton. It perished, and perished justly, as soon as the Federal Reserve Board began to ignore its ratio and to accept gold without allowing it to exert its full influence, merely because an expansion of credit and prices seemed at that moment undesirable. From that day gold was demonetized by almost the last country which still continued to do it lip-service, and a dollar standard was set up on the pedestal of the golden calf. For the past two years the United States has pretended to maintain a gold standard. In fact it has established a dollar standard; and, instead of ensuring that the value of the dolalr shall conform to that of gold, it makes provision, at great expense, that the value of gold shall conform to that of the dollar. This is the way by which a rich country is able to combine new wisdom with old prejudice. It can enjoy the latest scientific improvements, devised in the economic laboratory of Harvard, while leaving Congress to believe that no rash departure will be permitted from the hard money consecrated by the wisdom and experience of Dungi, Darius, Constantine, Lord Liverpool, and Senator Aldrich…"

The Limits of Property Rights:

"There is a respectable and influential body of opinion which… fulminates alike against devaluations and levies, on the ground that they infringe the untouchable sacredness of contract…. Yet such persons, by overlooking one of the greatest of all social principles, namely the fundamental distinction between the right of the individual to repudiate contract and the right of the State to control vested interest, are the worst enemies of what they seek to preserve. For nothing can preserve the integrity of contract between individuals except a discretionary authority in the State to revise what has beomc eintolerable. The powers of uninterrupted usury are great. If the accreations of vested interest were to grow without mitigation for many generations, half the population would be no better than slaves to the other half…. The absolutists of contract… are the real parents of revolution…"

The Costs of Deflation:

"Either the government’s announcement is believed and the future is discounted immediately in the rate of exchange, in which case we suffer all the elements of a violent and sudden deflation; or else the government’s announcement is disbelieved, or only half believed, in which case we have a slow movement with the expectation of a further movement in the same direction, the effect of which on trade and employment hardly bears thinking about. As soon as the business world has good reason to believe that prices are likely to fall, no course is open to it except to contract its engagements, draw in its horns, and go out of business as far as may be until the funeste process is over…"

"In no other way than by the deliberate intensification of unemployment. The object of credit restriction… is to withdraw from employers the financial means to employ labour at the existing levels of prices and wages. The policy can only attain its end by intensifying unemployment without limit, until the workers are ready to accept the necessary reduction in money wages under the pressure of hard facts…. Deflation does not reduce wages ’automatically’. It reduces them by causing unemployment. The proper object of dear money is to check an incipient boom. Woe to those whose faith leads them to use it to aggravate a depression!"

A View of Soviet Russia:

"For me, brought up in a free air undarkened by the horrors of religion, and with nothing to be afraid of, Red Russia holds too much which is detestable. Comfort and habits let us be ready to forgo, but I am not ready for a creed which does not care how much it destroys the liberty and security of daily life, which uses deliberately the weapons of persecution, destruction, and individual life. How can I admire a policy which finds a characteristic expression in spending millions to suborn spies in every family and group at home, and to stir up trouble abroad?… How can I accept a doctrine which sets up as its bible, above and beyond criticism, an obsolete economic textbook which I know to be not only scientifically erroneous but without interest or application for the modern world? How can I adopt a creed which, preferring the mud to the fish, exalts the boorish proletariat above the bourgeoisie and intelligentsia who, with whatever faults, are the quality of life and surely carry the seeds of human advancement? Even if we need a religion, how can we find it in the turbid rubbish of Red bookshops? It is hard for an intelligent, decent, educated son of western Europe to find his ideals here, unless he has first undergone some strange and horrid process of conversion which has changed all his values…"

Structural Change and the Business Cycle

"The existence of the dole doubtless diminishes the pressure on the individual man to accept a rate of wages or a kind of employment which is not just what he wants or what he is used to. In the old days the pressure on the unemployed was to get back somehow or other into employment, and if that were so today surely it would have more effect on the prevailing rate of wages…. I cannot help but think that we must partly attribute to the dole the extraordinary fact… that in spite of the fall in prices and the fall in the cost of living, and the hevy unemployment, wages have practically not fallen at all since 1924…"

"I hold that in modern conditions wages in this country are, for various reasons, so rigid over short periods that it is impracticalbe to adjust them to the ebb an dflow of internaitonal gold-credit, and I would deliberately utilize fluctuations in the exchange as the shock absorber. Sir H. Strakosch, believing that any other course is ’more appropriately called repudiation’, would make exchange stability at 4.86 1/2 the central object of policy and would leave prices and wages to be the shock-absorbers. In this case he must put up from time to time with unemployment and trade disputes and worse; but looking as usual at the bright side of things, he will doubtless contrive to see even in these the final demonstration of the ’outstanding virtues of the gold standard’…"

"The idea of the old-world party that you can… alter the value of money and leave the consequential adjustments to be brought about by supply and demand, belongs to the days of fifty or a hundred years ago when trade unions were powerless, and when the economic juggernaut was allowed to crash along the highways of progress without obstruction and even with applause. Half of the copybook wisdom of our statesmen is based upon assumptions that were at one time true, or partly true, but are now less and less true by the day. We have to invent new wisdom for a new age…"

"We stand midway between two theories of economic society. The one theory maintains that wages should be fixed by reference to what is ’fair’ and ’reasonable’ as between classes. The other theory–the theory of the economic juggernaut–is that wages should be settled by economic pressure, otherwise called ’hard facts’, and that our vast machine should crash along, with regard only to its equilibrium as a whole, and without attention to the chance consequences of the journey to individual groups. The gold standard, with its dependence on pure chance, its faith in the ’automatic adjustments’, and its general regardlessness of social detail, is an essential emblem and idol of those who sit in the top tier of the machine. I think that they are immensely rash… in their comfortable belief that nothing really serious ever happens. Nine times out of ten, nothing really does happen–merely a little distress to individuals or to groups. But we run a risk of the tenth time (and stupid into the bargain), if we continue to apply the principles of an economics, which was worked out on the hypothesis of laissez-faire and free competition, to a society which is rapidly abandoning these hypotheses…"

The Return to Gold in 1925:

"I suspect, therefore, that the correct answer along austere lines is as follows: A reduction in money wages by 10 percent will ease unemployment in five years time, but in the meanwhile you must grin and bear it. But if you can’t grin and bear it, and are prepared to have some abandonment of laissez faire by tariffs, import prohibitions, subsidies, government investment, and deterrents to foreign lending, you can get straight sooner. You will also be richer in the sense of owning more capital goods and foreign investments five years hence. You may, moreover, have avoided a social catastrophe. But you may also have got into bad habits and ten years off you may be a trifle worse off than if you had been able to grin and bear it. The worst of all, however, will be an attempt to grin and bear it that fails to last through. The risk of this is perhaps the best argument against the ’grin and bear it’ policy…"

"By the return to the gold standard in 1925 at an unsuitable parity the Bank had set itself a problem of adjustment so difficult as to be well-nigh impossible. On the one hand, it was obviously impracticable to enforce by high Bank rate or a contraction of credit a deflation sufficiently drastic to bring about a reduction in internal costs appropriate to the parity adopted. On the other hand, the maintenance of a low Bank rate which would have rendered London unattractive to foreign short-term funds, would, in the actual circumstances of our trade balances and readiness to invest abroad, have led to a rapid loss of gold by the Bank and a much earlier collapse of the gold standard…. The policy actually adopted was to preserve a middle course–with money dear enough to make London an attractive centre for foreign short-term funds but not dear enough to force an adjustment of internal costs. In this way we tided over the immediate situation by exploiting London’s immense reserves of credit and prestige. We were even able to continue lending abroad on a scale almost commensurate with our former strength, in spite of the increasingly adverse balance on account of current business. But the inevitable price of this temporary ease was the accumulation of a heavy burden of short-term liabilities…. Sooner or later, for good reasons or for bad, some loss of confidence might arise; and then… the insecure structure had to tumble…"

In the Long Run:

"…there has always seemed to me to be a confusion in the Marshallian distinction between long and short periods. Sometimes he means by a long period something where time is the essence of the matter, as for example the wearing out of a durable instrument or the length of period of production. In other cases he merely means by the lon gperiod what happens when everyone correctly foresees the situation, and by the short period what happens when mistakes of forecasting have been made…"

"Now 'in the long run' this [way of summarizing the quantity theory of money] is probably true.... But this **long run** is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again."

Revolutionizing How the World Thinks:

"To understand my state of mind, however, you have to know that I believe myself to be writing a book on economic theory which will largely revolutionize–not, I suppose, at once but in the course of the next ten years–the way the world thinks about economic problems. When my new theory has been duly assimilated and mixed with politics and feelings and passions, I can’t predict what the upshot will be in its effects on actions and affairs. But there will be a great change…"

"The more I spend my thoughts on these matters, the more alarmed I become at seeing you and others in authority attacking the problems of the changed post-war world with… unmodified pre-war views and ideas. To close the mind to the idea of revolutionary improvements in the control of money and credit is to sow the seeds of the downfall of individualistic capitalism. Do not be the Louis XVI of the monetary revolution…. I am told by a good many friends that I have become a sort of disreputable figure in some quarters because I do not agree with the maxims of City pundits. But you know I ought not to be considered so really! I seek to improve the machinery of society not overturn it…"

"I would like to warn the gentlemen of the City and High Finance that if they do not listen in time to the voice of reason their days may be numbered. I speak to this great city as Jonah spoke to Ninevah…. I prophesy that unless they embrace wisdom in good time, the system upon which they live will work so very ill that they will be overwhelmed by irresistible thigns which they will hate much more than the mild and limited remedies offered them now…"

Managing the Business Cycle by Managing Investment:

"If the Treasury were to fill old bottles with bank notes, bury them at suitable depths in disused coal mines which are then filled up with town rubbish, and leave them to private enterprise on the well-tried principles of laissez faire to dig them up again… there need be no more unemployment and, with the help of the repercussions, the real income of the community and its capital wealth also would probably become a great deal greater than it actually is…"

"My proposals for the control of the business cycle are based on the control of investment. I have explained in detail that the most effective ways of controlling investment may vary under the circumstances; and I have been foremost to point out that circumstances can arise and have recently arisen when neither control of the short-term rate of interest control of the long-rate will be effective, with the result that direct stimulation of investment by government is a necessary means…"

Managing the Business Cycle by Managing the Money Supply:

"…our desire to hold money as a store of wealth is a barometer of the degree of our distrust of our own calculations and conventions concerning the future…. The possession of actual money lulls our disquietude; and the premium which we require to part with money is the measure of the degree of our disquietude…"

"Unemployment develops, that is to say, because people want the moon: men cannot be employed when the object of desire (i.e., money) is something which cannot be produced and the demand for which cannot readily be choked off. There is no remedy but to persuade the public that green cheese is practically the same thing and to have a green cheese factory (i.e. a central bank) under public control…"

"What is the charm to awaken the sleeping beauty, to scale the mountain of glass without sliding back? If every Treasury were to discover in its vaults a large cache of gold proportioned in size to the scale of its economic life, would that not work the charm? Why should not that cache be devised? We have long printed gold nationally. Why should we not print it internationally? No reason at all, unless our hands are palsied and our wits dull…"

The Importance of Ideas:

"The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggereated compared with the gradual encroachment of ideas…. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil…"

What Is at Stake:

"If we aim deliberately at the impoverishment of Central Europe, vengeance, I dare predict, will not limp. Nothing can then delay for very long that final civil war between the forces of Reaction and the despairing convulsions of Revolution, before which the horrors of the late German war will fade into nothing, and which will destroy, whoever is victor, the civilization and the progress of our generation…. In one way only can we influence these hidden currents–by setting in motion those forces of instruction and imagination which change opinion. The assertion of truth, the unveiling of illusion, the dissipation of hate, the enlargement and instruction of men’s hearts and minds, must be the means…"

"The authoritarian state systems of today seem to solve the problem of unemployment at the expense of efficiency and freedom. It is certain that the world will not much longer tolerate the unemployment which, apart from brief intervals of excitement, is associated–and, in my opinion inevitably associated–with present-day capitalistic individualism. But it may be possible by a right analysis of the problem to cure the disease whilst preserving efficiency and freedom…"

"Forgive me for my words about barbarism. But that word rightly indicates the effect of recent events in Germany on all of us here…. It is many generations in our judgment since such disgraceful events have occurred in any country pretending to call itself civilized…. If you tell me that these events have taken place not by force but as an expression of the general will… that in our view would make some of the persecutions and outrages of which we hear… ten times more horrible…"

Bloomsbury and Others:

"In my bath today I considered your virtues–how great they are. As usual I wondered how you could be so wise. You must have spent much time eating apples and talking to the serpent! But I also thought that you combined all ages–a very old woman, matron, a debutante, a girl, a child, an infant; so that you are universal. What defence can you make against such praises?"

"Progress is a soiled creed black with coal dust and gunpowder; but we have not discarded it. We believe and disbelieve, and mingle faith with doubt…. We today are the most creedless of men. Every one of our religious and political constructions is moth-eaten. Our official religions have about as much practical influence on us as the monarchy or the Lord Mayor’s coach. But we no longer substitute for them the militant scepticism of Voltaire and Hume, or the humanitarian optimism of Bentham and Comte and Mill, or the far-fetched abstractions of Hegel. Our newest Spinoza [Wittgenstein] gives us frozen comfort: 'We feel that even if all possible questions of knowledge be answered, our problems of life are still not touched at all. But in that event there is obviously no question left; and just this is the answer…'"

"Last night I had to give the Princess [Elizabeth Bibesco, Asquith’s daughter] her long promised dinner, theatre, and tete-a-tete. She groped me in the stalls without the least concealment from the company and when the lights went up it turned out that her neighbor on the other side was my friend Mr. Cockerell of the Fitzwilliam Museum–which ought to be very good for my reputation…"

What an extraordinary episode in the economic progress of man that age was which came to an end in August 1914! The greater part of the population, it is true, worked hard and lived at a low standard of comfort, yet were, to all appearances, reasonably contented with this lot. But escape was possible, for any man of capacity or character at all exceeding the average, into the middle and upper classes, for whom life offered, at a low cost and with the least trouble, conveniences, comforts, and amenities beyond the compass of the richest and most powerful monarchs of other ages...

What an extraordinary episode in the economic progress of man that age was which came to an end in August 1914!... The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages; or he could decide to couple the security of his fortunes with the good faith of the townspeople of any substantial municipality in any continent that fancy or information might recommend. He could secure forthwith, if he wished it, cheap and comfortable means of transit to any country or climate without passport or other formality, could despatch his servant to the neighbouring office of a bank for such supply of the precious metals as might seem convenient, and could then proceed abroad to foreign quarters, without knowledge of their religion, language, or customs, bearing coined wealth upon his person, and would consider himself greatly aggrieved and much surprised at the least interference. But, most important of all, he regarded this state of affairs as normal, certain, and permanent, except in the direction of further improvement, and any deviation from it as aberrant, scandalous, and avoidable. The projects and politics of militarism and imperialism, of racial and cultural rivalries, of monopolies, restrictions, and exclusion, which were to play the serpent to this paradise, were little more than the amusements of his daily newspaper, and appeared to exercise almost no influence at all on the ordinary course of social and economic life, the internationalisation of which was nearly complete in practice.

Thus this remarkable system depended for its growth on a double bluff or deception. On the one hand the labouring classes accepted from ignorance or powerlessness, or were compelled, persuaded, or cajoled by custom, convention, authority, and the well-established order of society into accepting, a situation in which they could call their own very little of the cake that they and nature and the capitalists were co-operating to produce. And on the other hand the capitalist classes were allowed to call the best part of the cake theirs and were theoretically free to consume it, on the tacit underlying condition that they consumed very little of it in practice. The duty of 'saving' became nine-tenths of virtue and the growth of the cake the object of true religion. There grew round the non-consumption of the cake all those instincts of puritanism which in other ages has withdrawn itself from the world and has neglected the arts of production as well as those of enjoyment. And so the cake increased; but to what end was not clearly contemplated. Individuals would be exhorted not so much to abstain as to defer, and to cultivate the pleasures of security and anticipation. Saving was for old age or for your children; but this was only in theory -- the virtue of the cake was that it was never to be consumed, neither by you nor by your children after you...

[Clemenceau] felt about France what Pericles felt of Athens -- unique value in her, nothing else mattering; but his theory of politics was Bismarck's. He had one illusion -- France; and one disillusion -- mankind, including Frenchmen, and his colleagues not least. His principles for the peace can be expressed simply. In the first place, he was a foremost believer in the view of German psychology that the German understands and can understand nothing but intimidation, that he is without generosity or remorse in negotiation, that there is no advantage he will not take of you, and no extent to which he will not demean himself for profit, that he is without honour, pride, or mercy. Therefore you must never negotiate with a German or conciliate him; you must dictate to him. On no other terms will he respect you, or will you prevent him from cheating you. But it is doubtful how far he thought these characteristics peculiar to Germany, or whether his candid view of some other nations was fundamentally different. His philosophy had, therefore, no place for 'sentimentality' in international relations. Nations are real things, of whom you love one and feel for the rest indifference -- or hatred. The glory of the nation you love is a desirable end -- but generally to be obtained at your neighbour's expense. The politics of power are inevitable, and there is nothing very new to learn about this war or the end it was fought for; England had destroyed, as in each preceding century, a trade rival; a mighty chapter had been closed in the secular struggle between the glories of Germany and of France. Prudence required some measure of lip service to the 'ideals' of foolish Americans and hypocritical Englishmen; but it would be stupid to believe that there is much room in the world, as it really is, for such affairs as the League of Nations, or any sense in the principle of self-determination except as an ingenious formula for rearranging the balance of power in one's own interests...

So far as possible, therefore, it was the policy of France to set the clock back and to undo what, since 1870, the progress of Germany had accomplished. By loss of territory and other measures her population was to be curtailed; but chiefly the economic system, upon which she depended for her new strength, the vast fabric built upon iron, coal, and transport, must be destroyed. If France could seize, even in part, what Germany was compelled to drop, the inequality of strength between the two rivals for European hegemony might be remedied for many generations. Hence sprang those cumulative provisions for the destruction of highly organised economic life which we shall examine in the next chapter...

To his horror, Mr Lloyd George, desiring at the last moment all the moderation he dared, discovered that he could not in five days persuade the President of error in what it had taken five months to prove to him to be just and right. After all, it was harder to de-bamboozle this old Presbyterian than it had been to bamboozle him; for the former involved his belief in and respect for himself. Thus in the last act the President stood for stubbornness and a refusal of conciliations...

The destruction in France was on an altogether more significant scale, not only as regards the length of the battle-line, but also on account of the immensely deeper area of country over which the battle swayed from time to time. It is a popular delusion to think of Belgium as the principal victim of the war; it will turn out, I believe, that taking account of casualties, loss of property, and burden of future debt, Belgium has made the least relative sacrifice of all the belligerents except the United States. Of the Allies, Serbia's sufferings and loss have been proportionately the greatest, and after Serbia, France. France in all essentials was just as much the victim of German ambition as was Belgium, and France's entry into the war was just as unavoidable. France, in my judgment, in spite of her policy at the peace conference, a policy largely traceable to her sufferings, has the greatest claims on our generosity.

It proved an irresistible combination, and once more Mr George's political instinct was not at fault. No candidate could safely denounce this programme, and none did so. The old Liberal party, having nothing comparable to offer to the electorate, was swept out of existence.(26*) A new House of Commons came into being, a majority of whose members had pledged themselves to a great deal more than the Prime Minister's guarded promises. Shortly after their arrival at Westminster I asked a Conservative friend, who had known previous Houses, what he thought of them. 'They are a lot of hard-faced men', he said, 'who look as if they had done very well out of the war.'

It is evident that Germany's pre-war capacity to pay an annual foreign tribute has not been unaffected by the almost total loss of her colonies, her overseas connections, her mercantile marine, and her foreign properties, by the cession of ten per cent of her territory and population, of one-third of her coal and of three-quarters of her iron ore, by two million casualties amongst men in the prime of life, by the starvation of her people for four years, by the burden of a vast war debt, by the depreciation of her currency to less than one-seventh its former value, by the disruption of her allies and their territories, by revolution at home and Bolshevism on her borders, and by all the unmeasured ruin in strength and hope of four years of all-swallowing war and final defeat. All this, one would have supposed, is evident. Yet most estimates of a great indemnity from Germany depend on the assumption that she is in a position to conduct in the future a vastly greater trade than ever she has had in the past. For the purpose of arriving at a figure it is of no great consequence whether payment takes the form of cash (or rather of foreign exchange) or is partly effected in kind (coal, dyes, timber, etc.), as contemplated by the treaty. In any event, it is only by the export of specific commodities that Germany can pay, and the method of turning the value of these exports to account for reparation purposes is, comparatively, a matter of detail...

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become 'profiteers,' who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery. Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose. In the latter stages of the war all the belligerent governments practised, from necessity or incompetence, what a Bolshevist might have done from design. Even now, when the war is over, most of them continue out of weakness the same malpractices...

In this autumn of 1919 in which I write, we are at the dead season of our fortunes. The reaction from the exertions, the fears, and the sufferings of the past five years is at its height. Our power of feeling or caring beyond the immediate questions of our own material well-being is temporarily eclipsed.... We have been moved already beyond endurance, and need rest. Never in the lifetime of men now living has the universal element in the soul of man burnt so dimly. For these reasons the true voice of the new generation has not yet spoken, and silent opinion is not yet formed. To the formation of the general opinion of the future I dedicate this book...

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