(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 [1] (Home Office) and Steel-Maitland [2] (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 [3] 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