28th February, 1929
PERSONAL AND CONFIDENTIAL
(Due to arrive Canberra 29.3.29)
My dear P.M.,
I have been allowed to see, in the greatest confidence, some papers of considerable interest, a brief summary of which you may care to have.
Joynson-Hicks  (Home Office) and Steel-Maitland  (Labour) have submitted memoranda to the Cabinet in which they recommend certain action being taken between now and the Election to diminish unemployment-mainly as an electioneering gambit. The measures that they propose involve what amounts to a modification of the Government's financial policy by a mild degree of inflation, combined with a large-scale governmental scheme for road construction, as well as developmental loans to Dominions and Colonies.
The main purpose of this letter is to outline to you the considered reply of the Treasury to these proposals, which appears under a covering memorandum by Churchill  in the following terms:-
I do not advise my colleagues in the closing months of a Parliament, and possibly of an Administration, to challenge the basic arguments upon which our monetary policy stands. That policy has been pursued by all British Governments; and it seems to me very unlikely that a Conservative Government would be well advised in abandoning it or throwing doubts upon it. France and Germany have gone through the Bankruptcy Court, and have started business anew with vigour and success. Our position is radically different from that either of France or of Germany. France is practically self-supporting economically, while we are dependent for a substantial portion of our daily bread upon a world-wide clientele. Germany, the universal debtor, had everything to gain by writing off her mark indebtedness. We are still the greatest of creditor nations; and even in the period since the War we have increased our long-term investments overseas by a larger amount than the United States. The London Bill, as the treasury point out, has again become the primary instrument of credit throughout the world. The fall in the cost of living, although depressing to trade and agriculture, has given us a more contented people and a better standard of living for the wage-earners than at any other time in our own history or in any other country in Europe. During the present Administration-in spite of the great strike period- exports have increased, savings have increased, and the balance of trade has improved.
We allow ourselves to be disparaged abroad and demoralised at home by the weekly figures of Unemployment. These figures are no true index of national conditions. They are a special culture developed by post-war extensions of the original Unemployment Insurance Act.
In my opinion the Unemployment position should be the subject, not of weekly, but of quarterly, reviews, in which Employment figures should play an equal part with those of Unemployment, and the relation of both to the Poor Law population and cost of living should from time to time also be shown.
Even on the defective and misleading barometer of weekly Unemployment returns there will probably be, out of a larger population, fewer unemployed in June than there were when we took office. Over 200,000 of these are so-called miners-mostly surface and auxiliary labourers who have been wisely shed from the purged and partially reconditioned coal industry. But for this melancholy accession to the Unemployment registers-in itself due to a healthy process-the comparison with 1924 would be much more favourable. It is to be hoped that we shall not let ourselves be drawn by panic or electioneering into unsound schemes to cure unemployment, and divert national credit and savings from the fertile channels of private enterprise to State undertakings fomented mainly for political purposes. The devastating nature of the criticism which could be applied to a policy of curing unemployment by large loan expenditure of an unprofitable character, whether on the roads or elsewhere, would only become apparent after a Government was committed to that policy and to the promises based upon it.
Nothing would be more unsuitable than for the Conservative Party to launch at the eleventh hour an ill-thought-out policy of this kind, avowedly for electioneering purposes.
Then follows the Treasury memorandum.
The Treasury do not believe that the proposals of Steel-Maitland and Joynson-Hicks would achieve their object-their reasons being as follows.
The Government has only two means at its disposal for acquiring funds for Imperial developmental loans or for an extensive road- building policy in this country-taxation or borrowing. No Government has any other means of creating resources.
They hold that any money raised by the State for financing productive schemes must diminish pro tanto the supply of credit available for ordinary industry, as both Government borrowing and private enterprise draw from the same pool. The case urged by the Treasury against Government developmental loans is that such capital as is available for investment will best be utilised by private enterprise. If the capitalist system is sound, private enterprise is more likely than the Government to attract investments to purposes which are economically justified and which tend to increase the wealth of the community.
It is questionable whether 1,000 spent by the Government will give more employment than if the 1,000 had been left to the public to spend.
In addition, there can be little doubt that extensive Government borrowings would tend to increase the cost of production, and thus further aggravate the real evil from which this country is suffering.
As far as Dominion and Colonial loans for developmental purposes go, they give their estimated figures of the comparatively small extent to which experience has shown that British trade has benefited.
As regards road-making in this country, the amount of employment created in comparison with the money spent is small-they estimate that it averages about 2,000 men being given employment for a period of a year for each 1,000,000 spent. The Interdepartmental Committee on Unemployment reported in November 1928 that the maximum extent of a trunk road construction programme which could be launched at an early date was 8,000,000 spread over three or four years, which, on the above basis, would give employment to only 4,000 to 5,000 men per annum for the period. This is but a very slight contribution to the solution of the unemployment problem.
Then follows the Treasury argument in support of the gold standard-doubts and queries about which are behind any proposal to create even a moderate amount of inflation. The Treasury point out that the Committee to consider this question that sat in 1924 forecasted the fall in the price level which would necessarily follow the adoption of the gold standard policy. The Treasury admit that the adjustment of prices has been a longer and more difficult process than was anticipated, mainly due to the fact that the American price level has fallen considerably in the interval. But they maintain that the process of adjustment has not proved an impossible strain on national economy and that the factors in favour of the gold standard have been so important as to outweigh the transitional difficulty. They hold that it is a mistake to suppose that the adoption of the gold standard has been altogether responsible for unemployment-which was as intense in the period before reversion to the gold standard as it is today.
They then cover some of the well-known arguments for the maintenance of the gold standard as against inflation, particularly in respect of this country. But they hold that the main difficulties in this country during the past few years have been international and not national. The bulk of the country's food must be imported and this (apart from our financial and trading profits) can only be achieved by exporting manufactured goods at prices which our customers are prepared to pay. The over- production of coal abroad, the considerable expansion in the use of oil fuel instead of coal, reduction in purchasing power by foreign countries, reduction in the volume of our capital available for investment abroad, increased competition in foreign markets-all these militate against high prosperity in this country.
The memorandum ends with the paragraph:-
Surely it would be unthinkable at this stage, when we have got over the unpleasant jolt necessitated by the reversion to the gold standard for the Government to treat the question as if it were in any respect an open one. From the financial standpoint, the gold standard has increased the value of our capital claims on foreign countries by the equivalent of, say 300-400 millions, and has enabled the London bill again to take its place as the primary instrument of credit throughout the world-to the national profit.
From the point of view of trade and industry, it has eliminated the risks of fluctuating exchanges, which went a long way to counterbalance any advantage resulting from depreciated wages.
From the social standpoint, it has, as the Minister of Labour recognises, given the working classes in this country a definite improvement in their standard of living. Such difficulties as it has shown up were inherent in our industrial situation and would in any case have had to be faced sooner or later. There is not a shadow of doubt that, taken as a whole, reversion to the gold standard has already contributed materially to the national well- being; and as a practical matter, there is no possibility of going back on it. In the circumstances, surely the right policy is for the Government at every opportunity to claim credit for its achievement, instead of encouraging doubts and inviting criticisms.
You will realise that this is a most secret document.
I am, Yours sincerely, R.G. CASEY