# The Economics of Unemployment/Chapter 7

CHAPTER VII
CREDIT AS A FACTOR IN FLUCTUATIONS
A wider aspect of the credit question remains for consideration in connection with the present and prospective situation. The use of abundant bank credits during a trade expansion operates, as we recognise, favourably to profits, unfavourably to wages, owing to the wage-lag. During a trade depression the balance is temporarily redressed, at any rate in part, wages and subsidies for unemployment forming a larger proportion of the reduced current real income than in normal times. But since the operations of credit admittedly serve to exaggerate the fluctuations of prices and of trade, they afford increased opportunities to make gains out of speculation and manipulation of the money and the produce-markets. As the ordinary business man becomes more dependent upon bank asistance, alike for doing profitable trade in good times and for holding on in bad times, bankers, and other manufacturers of credit, are in a position to take a heavier toll from industry and commerce. Though it is easy to exaggerate the share of the general income which thus passes to the controllers of finance, its growing size is a factor in the problem of distribution. But the operation of credit serving, as we saw, to swell profits of business men in times of ​good trade, has during the last few years exercised a larger and more enduring influence upon the distribution of income. For during that period the necessities of government in every belligerent and most neutral state led to the creation of vast quantities of credits, issued either directly by governments as uncovered and inconvertible currency notes, or by banks as advances to governments or private customers, for a purpose wholly different from the commercial purposes of ordinary bank credits. The latter, as we see, help in ordinary times to stimulate production by applying more purchasing power to the employment of unused factors of production, or to the better grouping and intensive utilisation of factors already employed. Although the first immediate effect of issuing such credit is to raise prices, this effect is counteracted so soon as its secondary effect in stimulating production has been attained. So far as bank credit enables more goods to be produced, or, what is the same thing, to move with greater rapidity and facility through the economic system, it does not raise prices and is not 'inflation.'
There are, however, conditions under which bank credit does act as inflation. Where, as during the latter half of the war, the full resources of the country were already fully mobilised for production, further bank credits could not perform this stimulative work. They could at most enable the businesses which received them to secure a larger share of the more lucrative contracts than other businesses, i.e. they gave a merely competitive advantage without producing any appreciable net economy. This applies to ordinary ​periods of trade revival or prosperity where excessive confidence leads traders and bankers to expect and provide for further advances of trade, prices and profits, which are not going to take place.
These misuses, or excesses, of commercial credit are responsible for exaggerating the cyclical fluctuations, but they do not have any considerable effect upon the permanent distribution of wealth as between the different classes. For the greater part of the large profits made in the rising prices and expanding trade of a boom is lost in the subsequent depression.
But the war-period exhibited credit phenomena which have left lasting results of a different kind. A large part of the war credit, created either by governments or banks for financing the war, did very little to stimulate the total volume of production. It operated to convert a larger and larger proportion of the same volume of production into war supplies, a smaller proportion into civil supplies. Thus, increasing the volume of purchasing power without any corresponding increase of output, it was pure inflation, and was responsible for the great rise of prices that ensued. In proportion as various countries financed their national expenditure by these means, they were preparing a huge debt which was to alter the subsequent distribution of the national income to the advantage of the 'capitalist' classes and the disadvantage of the workers, entailing those reactions upon regularity and fullness of employment which we have already discovered. The connection between the inflation which the governments and banks conspired to produce and the magnitude and ownership ​of the war debts is not obscure. The 'money' which the governments got by printing notes, by borrowing from banks, or by inciting banks to give credit to customers in order to increase subscriptions to war loans (all pure inflation), they spent in buying goods and services. Thus prices and profits mounted up the faster, because this easy way of getting money made governments more careless in the rates they paid for what they bought. The immense and rapid profits—due to the expanding prices, with a lag of wages and a virtual elimination of competition—the recipients invested in war-loans, the only authorised and available investment. At the end of the war, in this country, the bond-holding class had established, by savings from these inflated war profits, a claim to deduct for the annual income of the people of this country, a sum of nearly £400 millions. With booming trade and high prices, this sum probably represented about 10 per cent, of the national income. With declining trade, falling prices and falling income, this fixed sum signifies an increasing percentage. If our national income fell to its pre-war level, the burden of war-interest would amount to between 15 per cent, and 20 per cent, of the total income. Now this burden differs from every other form of 'unearned income' in that, whereas rent, interest and profits are paid to the owners of some factor of production whose current productive use contributes to the increase of the real income of the country, no such claim can be made for the ownership of war ​debt. There is no current source out of which the payment of this interest can be made, except the incomes of other members of the community. Now, if the war debt were held by all classes in some approximate proportion to their incomes, this might not matter. But, as we have seen, war conditions enabled the war profiteers to supply the vast majority of the loans. Of the £7,400 millions held here in State securities in 1920, only £567 millions were held by 'small investors,' and of these a large proportion would not be workers. The hard times of last year again have greatly reduced the amount held by small investors. At the end of the depression virtually the whole of the debt will be held by the well-to-do classes, forming a considerable reduction in the proportion of the current income of the nation available as purchasing power for the working classes. If this is the result of our war finance, it applies far more severely to most other belligerent countries, whose war expenditure was defrayed far more largely out of inflation, unless the permanent adoption of lower monetary values effects a proportionate cancelment of debt.
War finance in a word, it would thus appear, has considerably aggravated the maldistribution of income which is the source of trade fluctuations, unemployment, and the political and economic maladies which flow from these conditions. But in Great Britain, as in most other modern states, progressive methods of direct taxation of incomes and inheritances go far to redress the balance. The increasing proportion of tax revenue, taken from the higher un​earned incomes and the larger estates, for the service of war debts, pensions, and other obligations, has probably absorbed in this country, as in Germany, Italy and the United States, most of the contribution which interest on war loans makes to the incomes of the well-to-do. Only in countries, such as France, where direct progressive taxation is notably inadequate and where the indirect taxes are largely borne by working class consumers, is there reason to conclude that the net result of war finance has been a worsening of the relative condition of the workers.
But there are other changes of class incomes—partly due to the war, partly to more general causes—which should be taken into account in considering how far tendencies favour a more equal distribution of income and a consequently improved adjustment between production and consumption. The damage inflicted upon the professional and salaried classes in most countries has been strongly marked. This has been partly due to weak organisation and personal ineptitude for bargaining, but chiefly to a numerical over-supply at a time when large bodies of consumers found it necessary to economise upon their less urgent needs, and many business firms to cut down their salariat. Large sections of the professional and employed middle classes have been reduced to poverty and want in Austria, Germany and other broken countries; and elsewhere, as in Great Britain, have suffered great damage to their economic status. Not entirely a war change, this dwindling of the economic strength of the rank and file of the brain-workers has been greatly accelerated by the war.
​With any strong economic revival some improvement in their condition may be expected. But the spread of educational opportunities must definitely weaken their position as claimants for income. Always a saving class, their contribution to the general investment fund will be diminished.
Set on the other hand a remarkable strengthening of the economic position of farmers and agriculturists in every country. Here, again, the war has accelerated a tendency visible before, viz. a relative shortage of the world supply of staple foods and raw materials and a consequent rise of prices. War profits made by these classes in all countries, belligerent or neutral, were immense, and in few cases was any successful attempt made by governments to secure an adequate contribution to the war or post-war taxation. This failure to impose taxation upon recent increments of land values and agricultural incomes, is largely responsible for the excessive taxes which in some countries are crippling industrial enterprise. Here is an aspect of the important economic and political cleavage between town and country. The large savings made in recent years by this notoriously thrifty class passed largely into the possession of landlords, where tenants used their profits to purchase their farms or where landlords were free to raise their rents. But in countries where peasant ownership prevailed, these gains were largely invested in war loans and other public securities, and involved an important change in the balance of class power in national policy, especially on matters of taxation and finance.
Thirdly, a certain levelling up of wages as between ​skilled and unskilled, manual and non-manual labour, is visible in most countries. During the war, when money and real wages were rising, the lower male grades rose proportionately more than the higher, women more than men, children and young persons more than adults. After the war, when conditions became more normal, some of this change has been maintained. On the whole, in this and other countries, the fall of skilled wage-rates during the depression has been greater than that of unskilled wage-rates. If, as is likely, this tendential equalisation of wage-rates continues to operate, it will have some effect in introducing a new saving habit into larger grades of the workers, whose former earnings left no margin for saving over their necessary or conventional standard of living. But so small is the proportion of the working class contribution as a whole to the new capital fund that for our particular problem this change is not significant. It is doubtful whether any change, which does not bring a considerable improvement both of real income and security to the workers as a whole, will appreciably increase the proportion of their contribution to the saving fund, and only if that improvement was obtained largely at the expense of the capitalist and other wealthy classes, would it make appreciably for an improved adjustment between spending and saving, production and consumption.
The other alterations in the relative condition of the professional and salaried middle classes and the agriculturists may fairly be held to cancel out in most industrially developed countries, where town life is relatively strong. Only in countries predominantly ​rural in their character does the new situation make perceptibly for a growing proportion of saving to spending. For the rural populations are at once more conservative in the standard of living, and are put in possession of larger surpluses for saving.
In developed industrial countries the attainment of a better distribution of income, in order to secure a better adjustment between production and consumption, depends upon whether the wage-earners and the State can between them absorb most of the unearned and unneeded surplus of the rich. So far as the struggle is a purely economic one between organised labour and organised capital, it is not easy to see how the former can prevail, unless it can both obtain a normal basic wage which leaves little surplus profit and also stop the wage-lag which, assisted by speculative credit, is seen to be responsible for over-production and consequent depression. During a depression the power of organised capital to break down the wage standards and bring labour to heel, is implicit in the economic situation. Labour can only defend itself effectively by political weapons, supposing it can get them and learn how to use them.
In this truly political economy there are three chief instruments. The first is the establishment of a common rule of minimum conditions of labour and of living, in the shape of wage, hour and other conditions, made obligatory in all employments. The second is the assumption by the State, municipality or other governing body, of the ownership and operation of (or at least the control of wages, prices and other conditions in) those essential services and in​dustries which, left to private enterprise, exhibit a strongly monopolistic character. The third is the scientific application of the State powers of taxation, so as to secure for public consumption as much as possible of those surplus earnings that accrue from lucrative businesses which it is convenient to leave to private enterprise.
Here, of course, I merely cite the three familiar departments of progressive economy. But though they seem at first sight only to aim at improved distribution of income, if our analysis of the situation be correct, this progressive economy must be equally effective for the stimulation of enlarged production; for our starting point was the recognition of the huge waste of productive power in our present economic system, attested by the habitual under-use of most of our productive factors, the misapplication of much of them in purely wasteful competition and the periodic idleness of a large part of them.
This actual waste, far exceeding any accepted measurement of unemployment, we traced to the operations in the economic system of a great body of surplus income representing maldistribution. Thus we recognise the problem of greater productivity to be, in fact, inseparable from that of better distribution.
There are those who hold that the solution of this problem can only be achieved by a destruction of the entire fabric of 'the capitalist system.' For only thus, they hold, can the 'surplus income' which causes our maladies be properly absorbed. If they can show that some such wholesale revolution of our economic arrangements is politically feasible, and ​that their new system will satisfy the needs of high productivity as well as of equitable distribution, they are right to go behind the progressive policy here cited. I am satisfied to leave the proposals for reform at a point that is in line with the actual movements which I perceive to be in operation in most modern industrial communities, disbelieving both in the need and the practicability of wholesale sudden transformations, either in human nature or the institutions it imposes.