Query: Whether bank bills should at any time be multiplied but as trade and business were also multiplied? The Querist.

Amid much that clarifies economic thought and much that mystifies non-mathematical economists, many readers must have rubbed their eyes when they came across in Mr Keynes book (see page 341 'The General Theory etc' published in 1936), the restatement of the Merchantilist view that the rate of interest depends on the quantity of money. Apparently, in a time of real scarcity of goods, for example in the course of a great war, the money rate of interest can be kept at a suitable level by appropriate re-adjustments in the quantity of money. The correct antidote to the revival of this atavistic Merchantilist heresy is the restatement of a point of view which is prominent in the economic philosophy of Adam Smith, and implied in Berkeley's Querist.

Let us agree at once that the rate of interest must be regarded as a price for money, ie the surplus of money income over consumption requirements which savers are prepared to place at the disposal of producers of new capital goods. The surplus of money, or rather purchasing power, thus transferred, is in fact a means of securing the command over the factors which will be employed in the production of the capital goods in question. While it remains in the form of free purchasing power it may be regarded as the monetary equivalent of undifferentiated capital goods. The process of providing capital goods is a process of differentiation, generally into relatively permanent forms of wealth.

But something in the economy must correspond to that surplus of purchasing-power which is transferred. We have to enquire what that something is, for we cannot remain indefinitely suspended in the stratosphere of money. That something is a potential or actual surplus of food and raw materials -- the characteristic products of agriculture and the extractive industries.

These industries provide the material condition without which capital cannot grow, or the economy continue with safety, to differentiate itself. The growth of capital does not, however, require that there should be an absolute surplus of food and raw materials, i.e. a surplus in excess of economic demand at a given moment.. All that is necessary is that the existing volume of food and raw materials should be capable of production by less than the existing number of workers employed in agriculture and extractive industry.

The surplus then is really a surplus of manpower engaged in such industries, and it is the continual drift of labour from agricultural and extractive industry to other forms of industry which provides the efficient cause of the growth of capital and the differentiation of the economy. Hence the agricultural causes of fluctuation in employment are, and always must be, of fundamental importance.

Hence too the exchange relations between agriculture and non-agricultural goods must always be important in a way that the exchange relations between the products of toffee manufacturers and the services of dentists are not important. As Adam Smith has pointed out, the capacity -- and willingness -- of agriculture to produce enough for the sustenance of those engaged In non-agricultural Industry as well as for themselves must always be a limiting factor in the growth of the latter.

Unsatisfactory price relations between agricultural and non-agricultural goods might conceivably put an end to this willingness, and cause the collapse of an outwardly imposing industrial structure.

Apart from this fundamental relationship there seems to be no limit to the extent to which the exchange of services for services might develop, and urban communities enrich themselves, in money, by attaching higher and higher money values to these- reciprocal services.

What keeps the balance between agricultural and non-agricultural industry -- and therefore balances the economy as a whole -- is the continuous drift of man-power from the country to the town, and the possibility of finding urban work at a wage which corresponds to the level of agricultural Incomes, at a time when they are tending to fall.

Rigidity in the money wages of urban workers lessens the possibility of finding such employment to the extent necessary if unemployment is to be avoided.

The Keynesian analysis confused money with purchasing power. Purchasing power results from the reciprocal exchange of goods and services for money. It is a function of the activity of commerce -- not of gold-digging or currency note printing. The production of purchasing power is not so easy as the production of money. It depends on the maintenance of such relations between the consumption and production economies as a whole as encourage enterprise as a whole, and therefore maintain employment.

This in turn is most likely to be the case if a sufficient number of elements in the price and income structure are not rigid, but readily adjustable both upwards and downwards. The present situation, in which urban incomes are almost infinitely rigid, and agricultural incomes infinitely flexible (in a downward direction), is not compatible with the continued maintenance of full employment either urban or agricultural.

In the last resort freedom of commerce, in the widest sense, is necessary both to the continuous adjustments which increasing wealth requires in a free economy, and to the enterprise which maintains full employment and an adequate supply of purchasing power. Freedom of commerce, in the sense of freedom of export for agricultural surpluses, is necessary most of all to agriculture. In no other way can agriculture hope to have a square deal in its relations with urban communities at home and abroad.

The present (1937) so-called revival of business in Great Britain is not due to an expansion of bank-money or a fall in the rate of Interest. It is due to the exploitation of overseas agriculture. The British public are getting more agricultural goods from abroad than they did ten years ago -- for £200M less money per annum. They had to spend this £200 millions on something. Hence the expansion of business in motor cars and wireless sets.

But for the New Zealand farmer the economic situation has imposed the necessity of producing more and more and consuming less and less. This situation is incompatible with the continued maintenance of the existing volume of world agricultural production. To that extent the present revival of business in Great Britain lacks foundations and must eventually collapse.

(The above was written In 1937 but never published. It seems to be once more highly relevant to the 1968 economic situation. JJ 1968)

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Copyright Dr Roy Johnston 1999