EFFECTS OF THE WAR UN CREDIT, CURRENCY, AND FINANCE, 325 



chief need of Europe. We are not sure, however, wliethcr the Army should be 

 proportioned to tne population, or tlie cost of the Army proportioned to the 

 tax revenue. 



Whether a country can maintain its present or any given standard of arma- 

 ments, bala.'ice jts Budget, and stabilise its currency depends upon its output 

 of commodities and the distribution of the output between the Government 

 (including the Army and Navy) and the civilian population. 



The unsettlement of the War and the consequences of making a fetish of 

 nationality at the subsequent Peace Conference have resulted in a good deal 

 of political instability, not only externally but also internally. Accordingly, in 

 many countries, for the present the necessary military forces are in excess of 

 those that should be required in a few years. On a broad view of the situation 

 serious internal disturbances in any country would be inimical to the general 

 interest of Europe. Therefore in such cases the maintaining of an adequate 

 force takes precedence of Budget adjustment or stabilising the currency. In 

 several cases forces largely in excess of this necessary minimum are maintained. 

 But that reduction should not be -projiortionatc , if proportionate means that 

 disarmament is to be calculated as the reduction of present forces by an equal 

 proportion. That would simply be to put a premium on the action of those 

 countries which had been most extravagant in maintaining large forces. They 

 would only lose men that it would soon turn out they could not maintain 

 as effectives ; whereas another country, which had already brought its forces 

 to a minimum, might possibly be driven below the margin' of safety. It seems, 

 probably, that several countries will have to apply the pruning knife them- 

 selves, being driven to it by financial exigencies. This is possibly an argument 

 against an immediate cancellation of war debts and war obligations. 



Question 7. — What is your opinion on the suggested devaluation of certain 

 Eurojieun currencies? 



On this question our opinions differ. Evidently there are some 

 currencies — the rouble, the Austrian crown, the Polish mark and the German 

 mark — which have lost all relation to their pre-War value, and must undergo a 

 process of devaluation. There are other currencies, such as the Greek drachma 

 and the Italian lira, which still have a substantial value, though it does not 

 seem conceivable they should ever again be worth 25.22^ to the golden sovereign. 



That the rouble, the crown, and the Polish and German marks must be 

 scaled down to an enormous extent if they are to have any relation to gold 

 seems beyond question. The complete recovery of the drachma and the lira 

 appears highly improbable ; but the real problem is that offered by the French 

 (and Belgian) franc. 



On the whole we think that the policy of the Bank of France, aiming at 

 the ultimate restoration of the franc to its old gold parity, is an unwise and 

 probably impossible one. When countries whose currency is depreciated on so 

 considerable a scale see their way to balancing their Budgets regularly they 

 should consider means of giving the currency unit a gold value lower than its 

 nominal gold equivalent. 



Note. — Mr. A. H. Gibson dissents from this recommendation, and writes : — ■ 

 ' France should eventually be able to bring the franc back to its old gold parity. 

 Of all the schemes that could be suggested to lessen the penalties yet to be 

 paid for inflation, devaluation of currencies is the most pernicious and inequit- 

 able. It would amount to confiscation of past savings of the working classes 

 and of the fixed-income class to a relatively greater extent than of the savings 

 of those who have made great fortunes since 1914. To put into operation a 

 devaluation scheme would accentuate the many inequalities in sacrifice already 

 caused by the recent War, and inflation, unless applied on the graduated scale 

 system — people with small savings receiving a greater number of units of the 

 new currency in exchange for a certain number of units of the old currency 

 than in the case of people with greater wealth ; hut such a modified scheme 

 would present practical difliculties to put into operation. What is wanted is 

 the institution of a great international credit system, international control of 

 exchanges, and the gradual letting down of the balloons of inflation over the 

 next ten years.' 



