Thomas Attwood on Debt Deflation in 1817

Following on from my last post, I noted that the author of the “Economicreflections” blog has done some sterling work, and written a fascinating post here showing how the essence of debt deflation was already understood as early as 1817 by the economist Thomas Attwood.

The passage from Thomas Attwood’s Prosperity Restored, or, Reflections on the Cause of the Public Distresses: and on the only means of relieving them (London, 1817) is worth quoting at length:

“If the whole mass of the property of England was valued at Four Thousand Millions sterling four years ago, which is perhaps a moderate calculation at the prices then established there has been a loss of full One Thousand Millions sterling, sustained by some persons or other, by the redaction of prices in these four years; a loss, which was a mere nominal or monied loss at the first, but which has become a real loss in the end. But whilst this loss has been sustained upon property, there has been no elimination of the engagements or debts to which all property is more or less subjected. Those debts have, in fact, nearly doubled in their value in the meanwhile, and have given the creditor generally the command of nearly double the property which he ever advanced to the debtor. The debtor has found his debts doubled whilst he has been thinking that he was paying them off, and all his efforts to accomplish that object have been in vain, for they have grown under his exertions, and have encreased faster than his exertions could reduce them. If they bore any considerable proportion to his property at first, say one half or two thirds, it would have been much better for him to have relinquished the whole of his property to his creditors three years ago; for all his efforts to discharge debts of that amount must generally have proved in vain, and must now have left him no better consolation than the conviction of having done the most in his power for his creditors, without the prospect of saving himself from bankruptcy and ruin.

The situation of the nation, considered as a debtor, has been the same, and this is the true cause of the pressure of taxes. The national debt, three months ago, would have commanded double the quantity of the good things of life that it would have commanded four years ago, and yet while the taxes thus became virtually doubled, the means of the payers became diminished in the same proportion. The payers of taxes had to contribute double the quantity of good things of life in the shape of taxes, whilst the amount of the good things of life in their possession was diminished every day, by the stagnation of industry, and the diminution of production, which was occasioned by the same depression of prices, which bad occasioned the same doubling of the real amount of their taxes.

Here is the true cause of the pressure of taxes, which does not lie in their nominal amount, but in the action upon money, which has given a quadruple weight to their operation. The real value of the taxes has been doubled, whilst the real property of the nation has been diminished in nearly the same degree. For three years the labourers generally have not had more than one half or two thirds of full work, and thus the productive powers of the country have been stagnant, whilst its necessary consumption has been going on, and whilst all the debts and engagements, both public and private, have become virtually doubled. Thus a nominal loss of One Thousand Millions sterling has become a real loss of that enormous sum to the nation. I do not hesitate to say, that whilst the relations between property and money were fixed on the same scale as they were four years ago, there was no difficulty at all in the payment of seventy millions per annum in taxes. Nor do I hesitate to assert, that the country could have born to have had those taxes raised to one hundred and forty millions per annum in the last four years, with far less injury than it has born the action upon currency, or what is called the depression of prices.

But it may be said, how can the depression of prices produce such an immense loss, when I, myself, allow that it is of no consequence upon what terms the relations between property and money are fixed, provided they are fixed and understood.

I have endeavoured to shew in the ‘Remedy’ that it is the action of this depression whilst in progress that creates the evil, and not the depression itself when once fixed and understood. Whilst the action is taking place the principles of production are arrested; for since almost all the transactions of life take place through the medium of debts or obligations, and more of them through that of currency or money invested with legal powers and privileges, those transactions can no longer be carried on when the legal responsibilities which the production or purchase of property incurs, are greater than that property will redeem when produced.

When prices have only risen for a short time, they may be reduced without injury, because they have not operated upon the debts and obligations tinder which property is held, nor upon the labour and system under which it is obtained. Such a rise of prices as this, is a mere monied profit into the hands of the property holders whilst it continues, and when it falls, it occasions no loss to the property holders, because the state of prices only returns to what it was when their property was obtained. Of course, there is nothing here to arrest production and consumption, or to interfere in any serious way with the prosperity of the country : but when prices fall after having been long fixed and understood, and after having operated upon all debts and obligations, and upon the production and consumption of property, they cannot be reduced without breaking up the channels and the systems through which society is supported, and without discharging the great body of the labourers, and reducing the whole population to a state of penury and distress.

If prices were to fall suddenly, and generally, and equally, in all things, and if it was well understood, that the amount of debts and obligations were to fall in the same proportion, at the same time, it is possible that such a fall might take place without arresting consumption and production, and in that case it would neither be injurious or beneficial in any great degree, but when a fall of this kind takes place in an obscure and unknown way, first upon one article and then upon another, without any correspondent fall taking place upon debts and obligations, it has the effect of destroying all confidence in property, and all inducements to its production, or to the employment of labourers in any way.” (Attwood 1817: 75–79).

The crucial passage at the end:

“If prices were to fall suddenly, and generally, and equally, in all things, and if it was well understood, that the amount of debts and obligations were to fall in the same proportion, at the same time, it is possible that such a fall might take place without arresting consumption and production, and in that case it would neither be injurious or beneficial in any great degree, but when a fall of this kind takes place in an obscure and unknown way, first upon one article and then upon another, without any correspondent fall taking place upon debts and obligations, it has the effect of destroying all confidence in property, and all inducements to its production, or to the employment of labourers in any way.” (Attwood 1817: 75–79).

As I said, it is interesting that Thomas Attwood was part of the “Birmingham School” of economists, who were a proto-Keynesian school.

BIBLIOGRAPHY
Attwood, Thomas. 1817. Prosperity Restored, or, Reflections on the Cause of the Public Distresses: and on the only means of relieving them. Baldwin, Cradock, and Joy, London.