An Exchange with John Maynard Keynes
on the Nature of Credit
[Evidence Submitted to the MacMillan Committee of
Finance and Industry. Reprinted from the Official Minutes of Evidence,
24th day, 1 May 1930]
|[Present: The Rt. Hon. LORD
MACMILLAN, Chairman; - Sir THOMAS ALLEN; The Rt. Hon. LORD
BRADBURY, G.C.B.; The Hon. R. H. BRAND, C.M.G.; Professor T. E.
GREGORY, D.Sc.; Mr. J. M. Keynes, C.B.; Mr. LENNOX B. LEE.; Mr.
CECIL LUBBOCK.; The Rt. Hon. REGINALD McKENNA.; Mr. J. FRATER
TAYLOR.; Mr. A. A. G. TULLOCH.; Sir FREDERICK LEITH-ROSS,
K.C.M.G., C.B.; Mr. G. ISMAY, Secretary.; Major CLIFFORD HUGH
DOUGLAS, M.I.Mech.E., M.I.E.E.; called and examined... ]
4461. PROFESSOR GREGORY: May I go back to the motor- car? You say if
the motor-car costs me #100 I will get a chit, which I deposit with
Mr. McKenna's bank, and he finally deposits it with the Treasury, and
by a series of book-keeping entries 25 per cent. of additional
purchasing power is created? --
[Major DOUGLAS] That is one form of mechanism.
4462. [PROFESSOR GREGORY] That is one form of mechanism, but I do not
want to pay too much attention to the consumers' side -- what is the
position of the manufacturer? Are you assuming that the car costs the
manufacturer #100, or that it costs the manufacturer more than #100?
Is the actual cost price to the manufacturer what you pay for it? --
[Major DOUGLAS] Do you mean, is he making a profit?
4463. [PROFESSOR GREGORY] No, I am asking is he covering his cost if
he sells at #100? --
[Major DOUGLAS] Oh! yes.
4464. [PROFESSOR GREGORY] You are assuming that he is carrying on his
business on a perfectly definite commercial basis? --
[Major DOUGLAS] Absolutely. He is selling in competition with other
people who may sell at #99.
4465. [PROFESSOR GREGORY] Your #25 does not really go to that
motor-car manufacturer at all? --
[Major DOUGLAS] No.
4466. [PROFESSOR GREGORY] It is added to the general borrowing or
purchasing power of the community. Well, I do not see, in those
circumstances, how you can prevent prices from rising? --
[Major DOUGLAS] I cannot see, as a matter of fact, how it can
possibly cause prices to rise, again as a matter of mechanism, by this
process. Supposing they do rise, your subsidy becomes inoperative.
4467. [PROFESSOR GREGORY] Let us suppose in a given period of time,
one month, the total turnover of consumable goods in this country is
#1,000,000,000, and let us take your figure of 25 per cent.; that
means that at the beginning of next month there would be
#1,250,000,000 of purchasing power available. I am only using your own
figure of 25 per cent. --
[Major DOUGLAS] No, that is not quite true. I should not regard it,
incidentally, as very important if it were true.
4468. [PROFESSOR GREGORY] Let us clear up that point first? --
[Major DOUGLAS] The result of your having done this is greatly to
increase the total amount of sales in the country. Now, the whole of
the price which is collected from the public becomes an item for
cancellation, just as it does at the present time.
4469. [PROFESSOR GREGORY] How do you get it back? You get it from the
consumer, you pay it into the bank, who pay it into the Treasury, who
get additional credit from some source, but you never do get that
[Major DOUGLAS] I will pursue this subject as far as you like, but I
am frankly much more interested in making you see that the thing is
perfectly possible. If you would really like me to get out a
considered report as to the mechanism by which it can be done I shall
be delighted to do it, my services are entirely at the disposal of the
Committee, but the point that I want to hammer home is that it is
inconceivable that you cannot get a mechanism which will enable you to
equate purchasing power to the capacity to deliver.
4470. Mr. KEYNES: Is it not probable that those of us who are
criticising are not inclined to accept the inherent difficulty which
you develop in paragraph 16 of your Memorandum. You divide payments
there into A and B payments? --
[Major DOUGLAS] Yes.
4471. [Mr. KEYNES] The cost of production to the manufacturer is A
plus B. Of that A goes to the public and is spent by them on
manufactured goods, but B goes elsewhere? --
[Major DOUGLAS] Yes.
4472. [Mr. KEYNES] Where does it go? --
[Major DOUGLAS] I felt sure that this would arise, because it
generally does arise. May I put it this way? The wording of this
statement is very careful. I always make the wording very careful. I
say "Since A will not purchase A + B, a proportion of the product
at least equivalent to B must be distributed by a form of
purchasing-power which is not comprised in the description grouped
under A." I have not said it must be paid.
4473. [Mr. KEYNES] I did not want to go on as far as that. Just
previous to that you see "Group B," which includes raw
material; I assume you mean imported raw material; is that right? --
[Major DOUGLAS] "Group B. All payments made to other
organisations (raw materials, bank charges, and other external costs)".
Yes; simply what we should call in a company, bills payable at the end
of the month.
4474. [Mr. KEYNES] If they are paid through another business then
that business will pay the amount as part of its cost of production to
individuals? Is that it? --
[Major DOUGLAS] Yes, I quite understand the difficulty. The real
weight to be attached to this undoubted statement of fact -- as it
stands it is simply a statement of obvious fact -- is whether the
transfers from one firm to another are financed by either trade credit
or from the firm's own credit, let us say its working capital, or by a
bank's credit. The exact weight which that has in the whole of the
statement depends to a very large extent on that. If the B payments
are really financed from working capital then that working capital
must, I think, inevitably have been obtained by the process of
investment which is criticised under (b) in the same pricis. That is
to say, the whole of the savings which have formed the working capital
of that concern must previously have appeared in the cost of
4475. [Mr. KEYNES] That would be true, but I thought the emphasis
here was on the phrase "other organisations," and what you
are saying has no bearing on that. --
[Major DOUGLAS] I am sorry! I missed that.
4476. [Mr. KEYNES] I thought the force of the argument here was that
it was a payment made by this manufacturing firm to other
[Major DOUGLAS] Yes.
4477. [Mr. KEYNES] Its working capital is required to meet its
expenditure under Group A during the period of production just as much
as under Group B, so what you are saying now does not seem to me to
distinguish between Group A and Group B? --
[Major DOUGLAS] Yes, it does, because in Group A you paying out to
the consumer; all the payments under Group B are purchasing power;
which, if it was obtained by re-investment, was originally in the
hands of the public and never gets back into the hands of the public
4478. [Mr. KEYNES] Other organisations which were receiving money
under Group B are getting back that amount from this first one? --
[Major DOUGLAS] Yes, that is the case; but there is a large amount of
purchasing power which is permanently retained purely in the
productive system, and never gets out into the consumers' system.
4479. [Mr. KEYNES] If all firms were united in a single firm would
your difficulties be overcome?-- [Major DOUGLAS] That is the obvious
remedy for the financial difficulty but not necessarily the right
remedy. Even from the purely financial standpoint it is a little
difficult to say; you understand a time lag comes in.
4480. [Mr. KEYNES] You think it would vanish? --
[Major DOUGLAS] No, I do not think it would completely vanish.
4481. [Mr. KEYNES] Why not? --
[Major DOUGLAS] Because there would be a considerable amount of money
being paid out in wages for delayed production, and your hypothesis
assumes that the distributed costs of a given week are the total
prices of the goods for sale in the same week.
4482. [Mr. KEYNES] It would be diminished? --
[Major DOUGLAS] It probably would be diminished I think, yes.
4483. [Mr. KEYNES] Insofar as the fact that you have a
differentiation in industry means that some people have to have bank
accounts which they pay to others, it means you have to create a
certain amount of credit, and really it acts as a revolving fund? --
[Major DOUGLAS] Yes.
4484. [Mr. KEYNES] If a revolving fund has been established, why do
you have to add to it? --
[Major DOUGLAS] If the revolving fund is as large as the total amount
of money required to finance the whole of all business from the time
the first process takes place to the time the article goes out to the
consumer--it is possible--I should not be inclined to admit it
offhand--that the question might disappear; but that is certainly
nothing like the actual case.
4485. [Mr. KEYNES] If you once raise the volume of credit to whatever
level may be required by your profit in relation to the volume of
production you have only to go on increasing it in proportion as
production increases? --
[Major DOUGLAS] No; there are all sorts of questions that would still
arise. The question of turnover, depreciation, and the fact that the
purchasing power of credit, or whatever you like to call it, which has
been transformed into price values of fixed assets in the industrial
system would in existing circumstances have to enter into the cost of
the goods -- and cost items of that type would always raise the price
of the articles above the amount of purchasing power.
4486. [Mr. KEYNES] And if in the interval you had to have new
machines to replace old ones you would have to have individuals to
produce them. How does that differ from any other form of consumption?
[Major DOUGLAS] Because you are not starting from zero. You are
starting from a world as it is.
4487. [Mr. KEYNES] How does that bear on the matter? --
[Major DOUGLAS] It bears on the matter that you have a tremendous
amount of real capital which at the present time is creating prices
and which has not contributed anything like that amount of purchasing
4488. [Mr. KEYNES] Do you mean that the receipts of capital are
greater than the amount it pays out in dividends? --
[Major DOUGLAS] Yes; that is an obvious statement of fact; the
accounts of any company will show that.
4489. PROFESSOR GREGORY: What happens to the difference? --
[Major DOUGLAS] It is represented by the fixed assets in the company
which it cannot distribute in the form of money...