September 13, 1917 
LAND & WATER 
13 
The Perils of Restriction 
By Arthur Kitson 
Thh article ly Mr. Arthur Kitson, whoae zmtings: on com-, 
mcrce and finance are well known, deals with a comphcaled 
and highlv controversial question. We welcome cqrres- 
pondence and criticism for the subject is of the first importance. 
THE editorial comments on Mr. Dudley Docker's 
recent article regarding restriction of output; which 
appeared in Land & Watkr, (September 0th) were 
timely and wise. For thirty years dr more warn- 
ings hav^ been sounded by leading statesmen and 
economists as to the disastrous results which must ultimately 
ensue from the continuance of this suicidal policy which 
has long been a recognised part of Trades Unionism. It 
is, however, a mistake to lav the blame entirely upon the 
shoulders of organised labour". Trades Unionism is not the 
real autlujr of this species of national folly. Its parents are 
finance and monoj^ly, and its adoption by Trades Unionism 
was literalh' forced upon labour as a measure of self-defence, 
as explained bv me in the article entitled " Labour, Capital, 
and tile State,"'in Land & W.\ter last ()ctol)er. 
Broadly sijeaking. output is limited by the effective demand 
for commoditii-s, and demand is limited by the amoimt of 
purchasing power (monev and credit) in the hands of those 
whose wants create thedemand. Legal tender laws have, 
however, artificially restricted p\irchasing power far below the 
natural requirements of the trade and industry necessary 
for maintaining forty millions o^ people in a rationally pro- 
gressive and economicallv healthy condition. This restric- 
tion has Ix-en brought about by" the establishment of the 
gold standard and basis system' which have no intelligible 
or coherent relationship to the currency needs of commerce. 
Let any one honestly and iriipartially seek a solution of the 
problerii of po\-erty and enforced idleness by a^^king himself 
how. it is that with an abundance of all the prime factors of 
production land and labour— wealth is and has lieen so 
comparatively scarce whilst poverty and semi-starvation have 
been the lot of the vast bulk of the world's inhabitants for the 
whole of the jieriod of modern industrialism ? A careful 
investigation will inevitably lead to the conclusion that one 
of the main causes— if not the chief cause— has been an utter 
insufficiency of the medium of exchange in the hands of the 
producing "classes. The gieed of employers in the past led 
them to starve the main factor of production by the suicidal 
policy of low wages, which naturally restricted the demand 
for goods- since Laiiour is the great consuming class and 
essential for maintaining good markets. 
Curiouslv enough, whilst employers have always realised 
the folly «jf starving the land and neglecting to maintain 
their plant, machinery, tools and equipment in a thorough 
state of efficiency, they have often failed to see that the 
impoverishment of labour is equally injurious to the mainte- 
nance of tradff prosi)erity. Consequently, labour was com- 
IK-lled to organise and restrict each man's output in order 
to provide employment for all. Hence both employers and 
employed were cauglit in a vicious circle which was not 
entirely their own creation, and in pursuing their own class 
interests, they were defeating thejMselves and each other ! 
Bv cutting down wages, employers were lessening the 
demand fur their own goods, and bv restricting the rate of 
production, the emploved were curtailing the volume of wealth 
available for distribution. But behind the scenes, limiting 
the means of trade and production, the sinister figure of 
cosmoi)olitan finance has lieen constantly oi)erating, con- 
trollhig both Labour and Capital, manipulating pria's and 
economic conditions and alternating periods of industrial 
prosperity with those of industrial depression ! No better 
exposure of the influence of gold in restricting output has ever 
been made than by Sir Edward Holden in his address on 
. the " Depreciation of Securities in relation to Gold," Ix'fore 
the LiverjKK)! Bankers' Institute in 1907. just after the 
American currency panic. In his address Sir Edward frankly 
asserted that gold controls the tradif of the world. 
" Hand in hand with restriction of. output goes restriction 
of the currency," writes Land & Water. This should In- 
regarded as an economic axiom. Everybody woulil admit 
that restriction of output in the engineering world would 
accompany restriction of tools, machinery and plant. Surely 
restriction of the mechanism of excharigc must similarly 
cause restriction of trade, and therefore restriction of outjjut 
generally. 
Much is being written and spoken just now regarding 
the dangers of currency inflation and the cons<'quent higli 
prices resulting. It is said that the present industrial 
unrest is partly attributable to this cause, and various 
remedies have already been suggested by one or two well 
known iinancial experts. I should like, however, to point 
out the clangers of these prescriptions, and to warn the public 
to be on its guard against remedies which may prove infinitely 
worse than the disease. 1 shall endeavour to deal with this 
question in as elementary a way as is necessary to enable an 
easy comprehension of a complicated problem. 
Price Level of Commodities 
What is ordinarily known as the price level of commodities 
is brought about by the action of two forces : {a) the 
marketable supply of" commodities, (b) the demand for them 
which is expressed by offers of money (namely, legal tender 
and credit) by way of purchase. This level will change under 
any of the following conditions : 
(1) If the supply of goods sensibly declines whilst the de- 
mand for them either increases or remains the same, prices 
\vill advance. 
(.') If the supply of goods increases whilst the demand either 
decreases or remains as before, prices will fall. 
(3) If the money demand for goods increases whilst the supply 
remains constant, prices will advance. 
(4) If the money demand decreases, the supply remaining 
constant, prices will decline. 
The first and third conditions produce inflation and higti 
prices, the second and fourth mean contraction and falling 
prices.. So long as the supply of goods and the money de- 
mand remain constant or vary together in the same direction 
and proportion, the price level will not be affected. Now 
apply these well known truths to present conditions. The 
war has changed normal peace trade conditions completely, 
so that the bulk of the populations in all belligerent countries 
as well as in several neutral countries have been with 
drawn from the production of the munitions of life to furnish- 
ing the munitions of death and destruction. If we take the 
total work done, including the fighthig services — those con- 
nected with the armies and navies — as well as the output of 
all products including munitions of war, the world's turn- 
over in goods and services which have had to be financed 
(or at least the goods and services of that part of the world 
occupied by the present belligerents) is undoubtedly very much 
greater than at any time prior to the war. 
This increase of ser\ace including trade and production has 
necessitated an increase in currency facilities. It takes just 
as much of the mechanism of exchange to produce and dis- 
tribute a given quantity of the munitions of war as it does 
the same amount of necessary commodities for sustaining 
and developing individual, social and national life. And armies 
though engaged in the work of destruction, must be financed 
in the same way as the armies of wealth'production. But the 
economic results of the two are vastly different. 
After producing hundreds of millions of pounds' worth of 
war munitions, our armies necessarily proceed to destroy 
them in the task of lighting and conquering the enemy. 
The result is that whilst the currency we have had to create 
and which is represented by these millions of products 
remains in circulation, the products are destroyed. Although 
the total turnover, including services has increased, the 
quantity of life-giving products has decreased, so that we have 
the first condition before mentioned which necessarily leads to 
higher prices — namely, a decline in tlie suj)ply of real wealth 
with an increase in the demand. And under our present 
economic system it would be tiuite impossible to avoid this 
result. If "instead of making guns, shells, submarines, 
aeroplanes, etc., for destructive purposes, we were building 
up towns, constructing new railways, new canals, in short 
increasing the national w'ealth, all this additional currency 
would be rei)resented by tangible wealth, and the supply 
of desirable goods woukl havi' kept pace at least with the 
increased demand, and hence we should not have witnessed 
any considerable increase in prices — if at all. 
\\ hat are the remedies — if any? l'"irst examine those 
proposed. One popular writer urges the (iovernment to in- 
crease taxation very considerably and comix'l the people 
to stint themselves. But to wliat extent ? To jiay the whole 
costs of the war during its progress out of taxation, the 
(iovernment would have to put a tax of 20 shillings in the 
pound on all incomes for the rest of the war. Which is 
absurd. 
Another proposal is to reduce the currency by cancelling 
a i)ro])ortion of tlie Treasurs- notes and by destroying a 
proportional volume of bank credit, which affects prices just as 
legal tender does. Now whilst this would undoubtedly reduce 
the effective demand for goods it would also curtail the 
