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Keynes on the Slump

A Guide to Keynes' Thoughts During the 1929-32 Crisis, with a Focus on International Relationships and Protection
Introduction When you take one of the most capable and insightful economists of all time, and then combine him with the biggest and most infamous period of economic turmoil the world has ever seen, there was always a good chance that the outcome was going to be interesting. In this essay, I want to try to walk through and reproduce part of this interesting combination. The whole subject would be a long book, not a 32k word essay, so I have chosen to focus mainly on Keynes' thoughts on trade, currency and protection issues. I am writing from a not dis-interested point of view, as I personally believe there is a place for a certain new kind of targeted post growth protectionism in attacking our future inequality and sustainability issues. But I hope to not misrepresent Keynes. A quip which I am all together too pleased with myself for making, is that Keynes is rather like the Bible and Shakespeare, in that it is very easy to find something he wrote to suit your particular requirement. I hope I am not too guilty of this. On the other hand, I would urge in the same vein it is important for the reader not to see phantom parallels being drawn, and phantom points being scored, for the cause of contemporary protectionist sentiment where this is not intended. Most of this essay really is just about the troubled early 1930's, and the enjoyment of following Keynes' masterly writing and thinking from that dramatic period. There are many instances during the story where I found myself in sympathy with those who were against the messy and complex quagmire which those examples of protection did tend to encourage. The blanket revenue tariffs common during that time, could not be further from what I consider useful for today, and protection from that time serves as a cautionary example as much as anything else. However I do also try to answer those free market supporters who would lay the blame for the whole depression at the door of protection, as this is also an unfair conclusion, and a conclusion that Keynes himself certainly did not share. On starting out, I intending this essay to be shorter and focused more strongly on the protection angle. But, as you will see from the middle part of the essay, the larger economic story of the period, including the exit from the Gold Standard, was too hard to resist attempting to convey, and too many of Keynes' words and insights seemed too good to leave out. A case of serious mission creep I am afraid. Speaking of mission, the most obvious omission or bias of this essay, is the time

period it covers. In the later years of Keynes' life, he devoted much of his energies into helping to reconstruct a less protectionist post war international trading system, for the common good. Therefore some commentators have claimed he had changed his thinking completely away from protection. I would argue that this reversal of Keynes' sentiment has been exaggerated, in that although he considered it desirable to reduce international trade barriers in general, he continued to maintain the belief that each country had the right to use limited sensible protection policies where necessary. This is the subject of a future project in progress. Below is most of the transcript of a radio broadcast Keynes did for the BBC in November 1932, which was notably after much of the tumultuous activity recorded in this essay. This was the piece that first got me hooked on Keynes' sublime writing surrounding the subject, which is partly why it is by far the longest extract I have included. In case you have limited interest or time, I hope that you to at least read this extract, before the essay gets down to the larger 1929-1932 story: PROS AND CONS OF TARIFFS . . . I can claim that I have considerable sympathy with both parties; though, as you will find, I sympathise with both more from the practical than from the theoretical side. For the theoretical arguments which free traders and protectionists have each used are, many of them, as I think, invalid or misapplied. Each, on the other hand, has got hold of an important practical maxim. The Free Trade Position Let me begin with the essential truth of the free trade position. It is best illustrated by beginning at home. We all know that, individually or taken by groups, we are much richer if we concentrate on those activities for which we are best fitted, become specialists in the production of certain articles, and live by exchanging our products for the products of other specialists. We do not doubt that we shall be richer if we concentrate industry in the towns. We know that it would be stupid to put a higher licence duty on a motor-car used in a county where it was not manufactured. It never occurs to us to put on special taxes designed to prevent a Lancashire man from using a car made in Birmingham. And all this is just as true between countries, as it is between individuals or between districts. It is a waste and a stupidity for us to make one thing inefficiently when we might be better employed making something else. There is no mysterious quality in a frontier which upsets this obvious conclusion of the common sense. Most protectionist arguments to the contrary are sophistriesparticularly the one which contends that what I have been saying holds good under universal free trade, and that, if other countries impose tariffs, then it becomes advantageous to us to do the same. The tariffs of the foreigner reduce the opportunities for advantageous trade; but that is no reason why we should reduce them still further. Moreover, if we have to pay more than we need for what we use, that will raise our costs even in those branches of production for which we are best

suited; so that our efficiency will go downhill all along the line. All this is, surely, obvious; but that does not make it unimportant. On the contrary, it is frightfully important. The free trader starts with an enormous presumption in his favour. Nine out of ten times he is speaking forth the words of wisdom and simple truth-of peace and of good will also-against some little fellow who is trying by sophistry and sometimes by corruption to sneak an advantage for himself at the expense of his neighbour and his country. The free trader walks erect in the light of day, speaking all passers-by fair and friendly, while the protectionist is snarling in his corner. Nor does practical experience of tariffs in the least modify this general presumption. Quite the contrary. There is no important country with an old established tariff system which has not committed a hundred stupidities-stupidities difficult to reverse, once done, without doing a further injury-stupidities frankly confessed by all understanding people within the country itself. . . . The Limitations of Free Trade Why, then, did I begin by saying that I sympathised with both sides? I will tell you. In spite of all that I have just said, there are some important respects in which those who are not afraid to use tariffs have a broader conception of the national economic life and truer feeling for the quality of it. Free traders, fortified into presumption by the essential truths-one might say truisms-of their cause, have greatly overvalued the social advantage of mere market cheapness, and have attributed excellences which do not exist to the mere operation of the methods of laissez-faire. The protectionist has often used bad economic arguments, but he has sometimes had a truer sense of the complicated balances and harmonies and qualities of a sound national economic life, and of the wisdom of not unduly sacrificing any part even to the whole. The virtues of variety and universality, the opportunity for the use of every gift and every aptitude, the amenities of life, the old established traditions of a countryside-all those things, of which there are many, even in the material life of a country, which money cannot buy, need to be considered. National protection has its idealistic side, too-a side which a well-balanced national economic policy will try to marry with the peace and truth and international fair-dealing of free trade. If it were true that we should be a little richer, provided that the whole country and all the workers in it were to specialise on half-a-dozen mass-produced products, each individual doing nothing and having no hopes of doing anything except one minute, unskilled, repetitive act all his life long, should we all cry out for the immediate destruction of the endless variety of trades and crafts and employments which stand in the way of the glorious attainment of this maximum degree of specialised cheapness? Of course we should not-and that is enough to prove that the case for free trade, as I began by starting it, has left something out. Our task is to redress the balance of the argument.

. . . For the free trade argument against the use of a tariff for drawing workers into an industry for which they are relatively ill-suited fundamentally assumes that, in the absence of a tariff, they will be employed in some other more suitable industry, and does not allow for the contingency that they may not be employed at all. Protection for motor-cars Now for my examples of tariffs which I deem to be justified. First, our motor-car industry. I have always maintained that the protection which we have accorded to this industry ever since the War [WWI] was wise and beneficial. This was a new, progressive, ever-changing industry, of first-class interest and importance in itself, of a kind for which one would expect our national aptitudes to be excellent, offering highly congenial and attractive tasks and problems to one typical kind of Englishman. Indeed, it would be a shocking thing if we were to be without a prosperous and inventive motor industry. But during the War, when we were otherwise occupied, the United States had gained a great start on us both financially and technically; so that it was certain that the English industry would be bankrupt before it could pay, if it were to be exposed to the full force of foreign competition. The results today are a triumphant vindication of the protection we gave it. Can anyone deny it? For iron and steel That is a new industry. My next example is an old oneiron and steel. Here is a case of an industry with a great past, languishing to decayby our own fault, in no small degree. The problem is intricateI cannot enter upon it here. But I should not discard the assistance of a tariff if it were part of a well-concerted general scheme for the regeneration of the industry. For I am convinced that this is an industry for which, if one thinks in decades and not in single years, we are singularly well adapted. Yet it is obvious that much lasting injury can be done to it in a short time. Its further debilitation will devastate whole neighbourhoods; it will root up tens of thousands of men from their homes and associations to throw them helpless on the world; and it will render valueless miles of houses the financial fortunes of which the steel plants cannot take into account in their calculations of what will or will not pay. I do not consider it important, over against this, that steel today should be as cheap as possible to the consumer. I wish to see the blast furnaces of the north-east coast roar again and ships of British steel sail out of the Clyde. And I am prepared, if necessary, to pay a little for the satisfaction. And for agriculture My last example is the greatest crux of all for the uncompromising free trader agriculture. Suppose it to be true that the average farmer in this country will be ruined unless the prices of his output are raised by taxes on food or equivalent

measure. Is the free trader prepared to sayWell, let farming go? Of course we must not be foolish in our remedies, or attract the farmer into crops for which the country is unsuited compared with other crops. But that is not the dilemma I am putting to the free trader. Suppose that it is not possible for British farming today, so long as it is exposed to the uncertainties of unrestricted competition, to provide for those employed in it the standard of life set by the mass-produced industries of the towns and this supposition is by no means improbable. Are there any free traders who say Well, let farming go? I hope there are none such. For, anyone who does not imprison his mind in a straight-jacket, must know, as well as you and I do, that the pursuit of agriculture is part of a complete national life. I said above that a prosperous motor industry was a national necessity, if only to give an opening to one kind of typical Englishman. It is true in the same way that another kind needs as his pursuit in life the care and breeding of domestic animals and contact with the changing seasons and the soil. To say that the country cannot afford agriculture is to delude oneself about the mean of the word 'afford'. A country which cannot afford art or agriculture, invention or tradition, is a country in which one cannot afford to live. The path of wisdom in these matters is, then, a narrow one, to be trodden safely only by those who see the pitfalls on both sides. Neither free trade nor protection can present a theoretical case which entitles it to claim supremacy in practise. Protection is a dangerous and expensive method of redressing a want of balance and security in a nation's economic life. But there are times when we cannot safely trust ourselves to the blindness of economic forces; and when no alternative weapon as efficacious as tariffs lies ready to our hand. Keynes The Listener, 30 November 1932. vol XXI p204-210

Part One: The Background, and Keynes' Changing Thinking on Trade Questions From Free Trader Don't sacrifice the substance to the symbol I was brought up, like most Englishmen, to respect free trade not only as an economic doctrine which a rational and instructed person could not doubt but almost as a part of the moral law. I regarded departures from it as being at the same time an imbecility and an outrage. I thought England's unshakable free-trade convictions, maintained for nearly a hundred years, to be both the explanation before man and the justification before heaven of her economic supremacy. vol XXI p233-4 Above, in an article for the New Statesman and Nation in 1933 called National Self Sufficiency, Keynes is reflecting on how he was a firm believer in free trade right through his early career, up till the late 1920's. Although the USA in recent decades has become the champion of free trade, it must be remembered, as the above alludes to, that in the 19th and first decades of the 20th century, it was Britain that was the main agent, supporter and enforcer of free trade around the world. A key point to make is that when Britain did decide to introduce an all out protectionist tariff in 1932, it was in the context of being a follower and not a leader, as most of the rest of the significant countries in the world were already protecting heavily. Towards the end of the 19th century, second generation industrial countries like Germany, France and the USA, had started to use protection heavily to gain shelter from Britain's established advantages, and develop their own industrial base. With these markets being limited to British exports by tariffs, and arguably as Britain fell behind in investment and innovation in some key sectors also, Britain tended to rely more heavily on other less developed economies, including to a growing extent her empire and dominions, as markets for her goods. The high tariffs of second generation country protectionism from the likes of America and Germany, set the precedent for some to believe Britain should also fight to protect her own manufacturing interests. This sentiment was growing gradually in some sectors well before the depression came along. For example the Mckenna Duties, which aided amongst other sectors the car industry, were still in place, even though conceived as a temporary luxury tax measure to boost revenue and save Atlantic shipping capacity in WWI. The high tariffs of industrialising countries and the natural fit between Britain's manufacturing exports and the rural country markets of her colonies and dominions, provided support for 'Imperial Preference' policies throughout the first third of the 20th century. Imperial preference advocates envisaged a kind of large imperial trade bloc, with trade between Britain and her empire being subject to smaller or no tariffs, while the countries maintained their own higher tariffs with the rest of the world. But The City of London, being the specialist provider of

the many financial services connected to all the aspects of trade and shipping, was always a strong voice in support of free trade. The City, alongside the mostly free trade preferences of the Lancashire textile industry, served to keep the protectionists at bay in Britain. After WWI, Britain had made small but significant steps towards a 'safeguarding' notion of protectionism in some industries, and had created various limited means of closer economic ties with her empire and dominions. But it was the 'Import Duties Act' in 1932 which marked the big break from the free trade tradition. After being the key international advocate of free trade for many generations, Britain had succumb to introducing a general revenue tariff like her neighbours, which initially levied a 10 per cent and later higher, tariff on all manufactured imports, and allowed for even higher rates to be later applied piecemeal where they were deemed necessary. The conditions and arguments for this decision, including Keynes' support, will be discussed in detail later. Limited further Imperial preference polices were also negotiated later in 1932, meaning that some intra empire trade experienced advantages in escaping from this new tariff. Only once Britain had such a tariff, did she now have concessions she could award in return for the favourable treatment of her own exports. However the unwillingness of Britain to risk raising too far the domestic cost of living, and Britain's key investment interests in non empire countries like Argentina and Scandinavia, stunted the scope of this Imperial preference system. Also, to a growing extent later in the thirties as the fear of war returned, the unwillingness of Britain to let her self-sufficiency in agriculture wither even further in the face of greater empire imports, was a constraining factor to empire trade negotiations. Furthermore Dominion countries such as Canada and Australia had their own industrialising ambitions, and did not relish being kept in a perpetual agriculture and commodity role, which the imperialists envisaged. The high tariffs of many countries in the 1930's were reversed during the post war decades, and imperial preference was effectively ended even sooner by the Bretton Woods process. In these plans and negotiations for a post war world, the Americans, whom now held all the cards over a bankrupt Britain, were determined to end this old fashioned colonial state of affairs, and allow access on equal footing for their own trade interests in these developing countries. By the time the slump came, Keynes had already lived through a few periods where protectionism had risen up to become prominent in national debate. There had been two notable unsuccessful surges of political support for protection / imperial preference in the recent past. The first was lead by Joseph Chamberlain, (prominent Birmingham MP, one time Birmingham Mayor, and father of Neville) in the first decade of the last century.

The second was in 1923, when new Conservative Prime Minister Stanley Baldwin called an election in the hope of achieving a mandate for his proposed protectionist policies. During this election, Keynes campaigned for the opposing free trade Liberal political party, and in November 1923, wrote the following in The Nation and Athenaeum: Before we examine Mr Baldwin's contention that new facts have changed the significance of old proposals, let us remind ourselves of some principles which have certainly not changed. Free trade is based on two fundamental truths which, stated with their due qualifications, no one can dispute who is capable of understanding the meaning of the words:-I. It is better to employ our capital and our labour in trades where we are relatively more efficient than other people are, and to exchange the products of these trades for goods in the production of which we are relatively less efficient. Every sane man pursues this principle in his private life. He concentrates his energies on those employments where his efficiency is greatest in comparison with other peoples; and leaves to others what they can do better than he can. ... II. The second great principle is that there can be no disadvantage in receiving useful objects from abroad. If we have to pay at once, we can only pay with export of goods and services, and the exchange would not take place (subject to necessary exceptions just stated) unless there was an advantage in it. ... Our imports are our income. To put obstacles in their way is to be as crazy as a businessman would be who tried to prevent his customers and his debtors from paying their bills. vol XIX p147-149, Baldwin and the Tories lost the following 1923 general election, just as Chamberlains protectionists of 1906 had lost their election. The loss was seen largely as a rejection of Baldwin's proposed protectionist solutions to the high unemployment of that time. Years later, in his most famous book The General Theory (1936), Keynes reflects on the complete certainty in which he had held certain free trade beliefs, views which he had by this time come to modify. He illustrates this by citing the same old 1923 article: It will be fairest, perhaps, to quote, as an example, what I wrote myself. So lately as 1923, as a faithful pupil of the classical schools who did not at that time doubt what he had been taught and entertained on this matter no reserves at all, I wrote: if there is one thing that Protection cannot do, it is cure Unemployment. ... Never the less, if we contemplate a society with a somewhat stable wage-unit, with national characteristics which determine the propensity to consume and the preference for liquidity, and with a monetary system which rigidly links the quality of money to the stock of the precious metals, it will be essential for the maintenance of

prosperity that the authorities should pay close attention to the state of the balance of trade. For a favourable balance, provided it is not too large, will prove extremely stimulating; whilst an unfavourable balance may soon produce a state of persistent depression. for we, the faculty of economists prove to have been guilty of presumptuous error in treating as a puerile obsession what for centuries has been a prime object of practical statecraft. [mercantilism] General Theory p207-10. It is in itself interesting to note that, towards the end of the most famous book written by one of the most prominent, influential and respected economist of the 20th century, there is at length, a detailed discussion of mercantalism and its historical thinkers; concluding how it may have been neglected in presumptuous error by the economists of his own generation. It was certainly a surprise to me to find that discussion in that book, so perhaps one could argue that the subject of mercantalism has since also been neglected. Especially interesting and potent is the suggestion made that a trade surplus is stimulating to an economy, whilst an unfavourable balance can cause a state of persistent depression. I was careful to include the qualifications Keynes describes in the first half of the second paragraph above, in which mention of precious metals may seem to make the writing dated and relevant only to the gold standard era. But substitute the constraints of a gold based exchange scenario, for the similar constraints of a shared currency scenario, and we can see that Keynes has something to say about the current economic positions of trade deficit Greece and trade surplus Germany. (more on this theme later). Back to the early 1930's, and the long extract titled Pros and Cons in the introduction of this essay gives a good general impression of why Keynes softened, then changed his mind, on free trade issues. Then also there is the 1933 National Self-Sufficiency article, already cited at the top of this chapter, which lays out some of Keynes' mixed views on trade. You may recognise the second paragraph below, as it is a favourite citation of anti free trade writers: The divorce between ownership and the real responsibility of management is serious within a country when, as a result of joint-stock enterprise, ownership is broken up between innumerable individuals who buy their interest today and sell it tomorrow and lack all together both knowledge and responsibility towards what they momentarily own. But when the same principle is applied internationally, it is, in times of stress, intolerableI am irresponsible towards what I own and those who operate what I own are irresponsible towards me. There may be some financial calculation which shows it to be advantageous that my savings should be invested in whatever quarter of the habitable globe shows the greatest marginal efficiency of capital or the highest rate of interest. But experience is accumulating that remoteness between ownership and operation is an evil in the relations between men, likely or certain in the long run to set up strains and enmities which will bring to nought the financial calculation.

I sympathise, therefore, with those who would minimise, rather than with those who would maximise, economic entanglements between nations. Ideas, knowledge, art, hospitality, travel--these are the things which should of their nature be international. But let goods be home spun when ever it is is reasonable and conveniently possible; and, above all, let finance be primarily national. vol XXI p236 This adds up to quite a surprising side-swipe at globalisation, and the themes raised will have only become more significant since the recent unravelling of many part of the world's financial system. The stock market crash, price slump and subsequent depression starting in 1929, violently swung the economic landscape around to a different perspective, and this added a great deal of credibility to Keynes' opinions and previous writings. As he famously remarked to his wife in an October 1929 letter: I am becoming more fashionable again. vol XX p1. Having before been a voice of concern on the outside, he now became more of an establishment and government insider, being heavily involved in the British government's response to the ensuing crisis. He became the key member of 'The Macmillan Committee' which was set up by the British government to look into the economic situation. The committee and its subsequent report became a platform for Keynes' views and proposals, which contrasted with the then Tresury's traditional, more laizze faire 'sound money' approach. He was also a member of the government's own 'Economic Advisory Council' which was chaired by the Prime Minister and included other key government ministers. Keynes was on personal terms with most of the other leading British and some international economists, and now with many of the leading British politicians of his day. Throughout his 'Collected Writings' volumes from this period, there are many examples of his corespondences with Prime Ministers and Chancellors. One such is a long letter written by Keynes in July 1930, to the Labour Prime Minister Ramsay Macdonald. The letter was initiated by the PM's request for his views regarding the unfolding deppression and price slump. In the part of this letter shown below, Keynes describes further his sentiment as moving away from being a free trade believer; this being as an accompaniment and a preparation to suggesting a protectionist approach to the PM later in the letter: I am no longer a free traderand I believe that practically no-one else isin the old sense of the term to the extent of believing in a very high degree of national specialisation and in abandoning any industry which is unable for the time being to hold its own. I believe, for example, that this country is in the long run reasonably adapted for, and ought always to have, a motor industry, a steel industry, a farming industry. If it is proved to me that in present circumstances and at present wages these industries cannot live, then I am in favour of protecting them. But a real free trader would answer without hesitationlet them go. For some months past I have been trying to find some responsible person who was in this good old

traditional sense a free trader but I have not found one. Persons calling themselves free traders nearly always retort either that the industries can thrive without a duty or even that a duty would be actually injurious to them. But such answer has nothing whatever to do with free tradea real free trader would not even want to know the answer to these questions ... vol XX p379-380 The point Keynes makes here can still be applied to free trade arguments made today. How many free trade supporters have the courage of conviction to stand up and say let them go, to industries struggling with foreign competition. The USA, supposedly the present home of free trade, certainly has always been unwilling to let its car industry go when the market has suggested that it should. (And that is pre Obama as well as during the Obama administration). Arguing free trade is the best system to maximise the wealth creation of the world, and arguing it is the best system for your own country are two different things. When these objectives converge, such as Britain in the 19th century, or the USA in the mid 20th century, the economists life is simple. But when they diverge? This alludes to the fact that there is arguably a game theory dimension to the nature of trade relationships, where the best outcome for all as a whole is to follow the common good and seek efficiency and cheapness. This is in contrast to a country cheating by gaming trade conditions in favour of its own producers. It is this benevolent ethos which Keynes is responding to below, in a letter he sent to The New Statesman and Nation in March 1931, referring to comments made by Professor Lionel Robbins of The London School of Economics, who was a prominent key adversary to tariffs: Professor Robbins taunts me in conclusion with abandoning 'the service of high and worthy ideals in international relations' for 'the service of the means and petty devices of economic nationalism'. I know that he sincerely feels this, and that for him, as for many others, free trade stands as a banner and as a symbol of fundamental reason and decency between nations. Free trade unbesmirched invokes old loyalties, and recalls one of the greatest triumphs of reason in politics which adorns our history. It is a poor retort, perhaps, to this, to say that one must not let one's sense of the past grow stronger than one's sense of the present and of the future, or sacrifice the substance to the symbol. vol XX p497 Many contemporary alternative economists still note the reluctance of right wingers to let go of one of the few strong scientifically well disposed areas of economics, that being free trade theory. In a subject such as economics often embarrassed by the lack of scientific rigour it can yield, trade theory has been likened to the crown jewels of the profession. Keynes never stopped believing in the fundamental truths regarding the general benefits and wisdom of trade, but, ever the pragmatist, he was prepared to break with the strong bonds and attachments of 19th century economic ideology, which lets remember had made Britain rich, when he believed he had a good case to do so. As Keynes was supposedly to have said: When my information changes, I alter

my conclusions. What do you do, sir?

Understanding Trade Relationships It is a complicated business As mentioned above, free trade theory has been described as the crown jewels of economics. It is an area where the rational and instructed person can be educated to appreciate the higher wisdom of the benign mechanisms of free trade theory, and enlightened away from the narrow minded instincts of the selfish, short sighted protectionist or mecantalist. Much of the basis for this enlightenment is the fundamental recognition that trade relationships between countries have a circular nature, in that international exchanges inherently involve the exchange of currency, which means sellers of a currency need buyers, and buyers of a currency need sellers. Keynes explains it better: It is a necessity for a country that its international debits and credits (including those which arise out of movements of gold) should at all times be balanced. This seems a simple truth. But a great deal of what is said and written ignores it. For every seller of a county's exchange there must be a buyer. For no one can sell a currency unless he can find a counterparty who will buy it from him; and whilst the buyer and the seller need not both belong to the same one of the groups distinguished above, they must each belong to one or other of these groups. vol XXI p64-65 In referring to the different groups, he meant the different type of international transaction, i.e. import / export transactions, foreign or inward capital investment (FDI), short term speculation in currencies or bonds etc. made by traders, income from foreign investments going in or out. Taken together these inherently must balance, as all currency transactions require a buyer and seller. For example if China exports to the USA, it has put labour and resources into those exports and wants something back in return. It can either: buy US goods; buy some US assets; or, (which may be the same thing e.g. Treasury Bonds) lend its dollars to US entities in return for interest. While many economic theories contain or propose causation relationships which are roughly correct or roughly provable scientifically, trade relationships contain a higher degree of precision, because the money has to go somewhere. During trading transactions, the currency in which the trade is priced almost never leaves its home country, but instead the country's currency market works to essentially match the transaction to a currency transaction in the opposite direction. I expect like many others, I fully got to grips with these knotty, counter-intuitive concepts of trade embarrassingly late in my economic studies, and still often have to stop and walk myself through certain aspects or trade conundrums that I come across. The left wing American economist Paul Krugman has been one of the best communicators of trade theory over recent years, and his tiny book Why a Country is Not a Company offers a concise particular explanation as to why business minded people often overlook, or have difficulty with, the circular mechanisms contained in trade relationships. Central to his approach is the idea that there is a fundamental

difference between the open ended system nature of the markets faced by individuals and businesses, and the closed system nature of trade relationships between countries. Businessmen are used to dealing with markets that are open ended in nature, in that their company can expand its sales, sometimes for all intense purposes indefinitely, by capturing a greater market share and crushing competitors. Where as when countries seek to grow their exports, the circular nature of trade relationships mean this growth will generate a corresponding change somewhere else in the country's economic relations with its neighbours. Or to put it another way, squeeze the half inflated balloon at one end, and the effects will show up somewhere else in their international double entry accounts. This assertion has led purist free trade economists to criticise the instinctive mercantalist notions of people from practical business rather than an economics background. Free trade purists try to point out the fallacy of notions such as 'national competitiveness', as the circular and equilibrium generating theories of trade suggest such approaches are irrelevant. The supposedly enlightened insight is that, unlike a company or an individual, a country can never be competed out of the game / market, because the naturally adjusting mechanisms of the value of the country's currency and the counter workings of the capital and physical trade accounts mean that a country will always find a role in the international trading system. If a country gets too good at exporting, its currency will tend to appreciate to make it less competitive and push it back towards an equilibrium. If a country exports more goods than it imports, it will tend to end up investing in the importer country, as the capital movement counter balances the movement of funds used to buy the goods. In business, there are many factors which accrue advantages to the biggest and strongest competitors, such as positive externalities, which perpetuate the lead of the leader. In contrast, for countries, as free market theorists will claim, there are equilibrium checks and balances which hold back lead countries and help each country to find and maintain its most suitable role in world trade. Strong exporter countries by definition cannot inhabit every sector and cannot cause your country to close down like an uncompetitive business. The circular nature of trade relationships can produce counter intuitive outcomes, alien to the businessman's expectations. Hence the phenomena of the countries with the best business investment prospects often becoming net foreign investors (present China), or, for example, when at times the 'export led growth' Asian Tigers of the 80s and 90s became net importers of goods in certain instances, because they were receiving very high levels of foreign direct investment from the West. Keynes never ever neglected the role of these trade principles in his writing, and his famous intellect and capacity for absorbing information meant he comes across as effortlessly all over both the implications of these theories, and the real world facts and figurers which populate any trading scenario. Unlike myself, you get the impression that he never had to 'walk himself through' any implications or relationships in this area. In short, he was a lethal adversary if you became engaged in

a public economic disagreement with him. In March and April 1931 in The New Statesman and Nation in an article titled Economic Notes on Free Trade , Keynes openly question the hard line sound money 19th century approach of the then Chancellor of the Exchequer, Mr E.D. Simon: I would put it like this. I believe that it would be of great advantage to the international equilibrium of this country if we could increase our favourable balance of trade by, say, 50m; and that it will be much easier to do this by checking imports to this amount than by increasing exports. For how are we to increase our exports? For Mr Simon tells us that he would have to reduce his [Britain's] wages by 20 per cent in order to be on level terms with Germany, and I have no doubt that he is right. Has he any prospect of doing this? If he could, does he feel sure that Germany would not reply with a further reduction of her wages, seeing that we have bound her by treaty under dire penalties to compete successfully with ourselves (in effect), however much we reduce our wages to reduce hers by more? vol XX p499. Of course Keynes had partly made his name as a vocal opponent of the harsh reparations obligations put on Germany after WWI. He was now pointing out the logical inconsistency of both expecting a country to pay you reparations, which inherently means through foreign earnings / exports, and at the same time presuming to win in a trade battle with them, by means of achieving a competitive wage advantage over them. Keynes' writing in this area is characteristically sharp, and often is centred on pointing out such a logical inconstancy missed by an opponent, as above. It is noticeable that he chides his adversaries both for instances where they neglect aspects of the theoretical circular logic of trade relationships, and also sometimes he chides them for taking the logic of the theories a step beyond what he believes is justified. When Keynes was publicly proposing a broad tariff policy for Britain, after generations of relatively free trade, it was inevitable that he should attract opposition from other economists. To a free trade economist, enlightened with the knowledge that efficiency, equilibrium theory and the common good were on their side, tariffs represented the uneducated, irrational and short sighted solution. One example of Keynes' response to a free trade attack was to highlight subtle inconsistencies in views regarding a country's trade relationships; inconsistent free trade views which still ring true today. One could almost feel sorry for the much respected Sir William Beveridge, (Contributor to the Beveridge report which helped to initiate the welfare state of the Atlee government), when Keynes sought to lay an intellectual economic trap for him in this letter to 'The Times' in March 1931: Sir William Beveridge believessubject to two exceptions which he mentions only to dismiss them as not applicable to present circumstancesthat a restriction of our imports will lead at once to a more or less corresponding reduction of our exports,

because it will mean 'a reduction of the power of foreigners to buy in Britain'. It will help me to clear up what appears to be a deep-seated difference of opinion if I may be allowed to ask him some questions. (1) Does he believe that it makes no difference to the amount of employment in this country if I decide to buy a British car instead of an American car? For it seems, clearly, to follow from his argument that the reduction last year in the imports of foreign cars must have injured our export industries to the same extent that it benefited our motor car industry. I say that our difference of opinion must be profound, for to me such a conclusion seems quite silly. (2) Does he believe that an increase in our imports would at once increase our exports also, by providing 'an increase of the power of foreigners to buy in Britain'? For example, I have always thought that it was a difficulty in the way of home development schemes that they might lead to increased imports of raw materials and also of food to meet the increased consumption of the newly employed, since this, by weakening our trade balance, might lead to a loss of gold. But according to Sir W. Beveridge this would, apparently, be an extra advantage in favour of such schemes, because, by increasing our imports, they would increase our exports and hence augment employment in the export industries as well as in the home construction industry. Is this right? And if not, why not? (3) Suppose that our imports were to fall off as the result of a lowering of our own costs of production in the iron and steel industry so that our own producers could compete more successfully with Continental producers. Does Sir W. Beveridge hold that this would do nothing for employment, because 'by reducing the power of foreigners to buy in Britain' it would increase unemployment in the export industries by an amount equal to the improvement in the iron and steel industry? I see nothing in Sir W. Beveridge's argument which would not apply just as forcibly to a reduction of our imports caused by a diminution in our own costs as to a reduction caused by a tariff. Moreover, even if it did not have this effect, we should be just as much in the soup according to Sir William. For, in the event of our balance of trade becoming more favourable, he holds it 'unproved that an increase of lending abroad could take place without harmful contraction of lending at home'. When I know Sir William's answers to these questions I can, if necessary, pursue the matter further. vol XX p508-9 After Beveridge attempted to redraw the issues as he saw them in a letter of his own to The Times, and after he recognised that Keynes was trying instead to entangle me in rather elementary dialectical difficulties (vol XX p510), Keynes, in another letter to The Times about a week later, went on to drive home the logical pay-off produced by his trap: I could not hope in my previous letter to expound my own theory of international

equilibrium in the space at my disposal. It seemed, therefore, that the best hope of bringing the issue to a head within a reasonable compass was to invite Sir William to tread the path of the reductio ad absurdum. Sir William believes (answer 1) that if I buy a British car instead of buying an American car this causes a diminution in our exports, but (answer 2) that if I buy an American car instead of buying a British car this will not cause an increase in our exportswhich hideous it would be if true, since, if I sometimes buy an American car and sometimes a British car, it seems to follow that British exports would gradually sink towards zero! Of course, Sir William is right that we cannot increase our exports merely by increasing our imports. I had hoped that this would lead him gently to the perception that his first answer might not be correct. But there is, in my opinion, no simple or direct relationship between the volume of imports and the volume of exports, and it is a complicated business, beyond the scope of a letter, to analyse the various reactions, domestic and international, which would be set up by a reduction of our imports, and the possible ultimate effects of these on our exports. vol XX p511-512 This inconsistency between theory and behaviour found in free trade supporting governments, is an insight that still rings true today. Governments shelter under the intellectual banner of free trade, which if they were to live by this Bible, would entail a healthy disinterest in what your own country produced or exported. But the reality is that the instinctive common sense of the mercantalist still resides when it matters, and politicians spend great effort trying to increase or improve the competitive makeup of their exports. Would it be possible during a recession, to find a free market politician who would publicly advise that any policy that leads to increasing imports is OK, because it will directly increase exports to the same extent? Add in the dimension of jobs, outsourcing and off-shoring, and a politician promoting this kind of argument in a recession soon gets into hot political water. Also politicians instinctively know that certain sectors and certain industries, such as car production, are more important than others, but there is nothing in basic free trade theory which suggests they should act on such a mercantalist instinct. Keynes scores a hit at the expense of Beveridge through his sharp rhetorical brinkmanship. But his victory in pointing out what he later called the inverse proposition (vol XX p513) is more clever and crafty than it is complete, and it is easy to have sympathy with both sides. It is a complicated business. After all, a point Sir William makes in his response contains a fundamental truth; especially considering that the British unemployment Keynes was aiming to solve was largely concentrated in the old staple export industries: Does he think that the ability of (say) the Argentine to take exports from us is unaffected by what we take from them? Could we cut off all imports from that (or any other) country without reducing our exports? vol XX p510.

Around the same time, Keynes wrote the more comprehensive article in The New Statesman and Nation already cited at the top of this chapter, titled; Economic Notes on Free Trade. In this article he goes into more detail regarding his thoughts on the complex and not necessarily fixed relationship between imports and exports, and his critique of the way free traders seem to over rate the precision of the equilibrium forces governing the relationship: The course of the present controversy seems to indicate that a large proportion of free traders hold their faith, not as the outcome of a nice balancing of advantages against disadvantages, but believing it to be an obvious inference from a simple truth. If you keep out an import, then 'since imports and exports pay for one another' it follows mathematicallyso it is believed-- that you will lose an export after an interval of time so short as not to matter. and Sir William Beveridge, in 'The Times' newspaper, has produced the doctrine in its full purity, asserting that it makes no difference to employment in this country whether I buy an American car or a British car, or whether our cost of manufacturing iron and steel are reduced to a competitive basis with foreign costs. No, not quite in its full purity! For Sir William's credulity falters at a critical point; whilst he believes that a reduction in our imports would cause a reduction in our exports, he does not believe that an increase in our imports would cause an increase in our exports. Now, if all this were trueif a reduction of imports causes almost at once a more or less equal reduction in exportsobviously a tariff (and many other things) would be completely futile for the purposes of augmenting employment or of increasing the balance of trade in our favour. But, of course, it is not true! To believe it is to fly in the face of common sense and of experience, and cannot be supported by argument. It would only be true in a hypothetical economic system possessing such an inherent capacity for stable equilibrium, that not only were both the initial and final positions in equilibrium, but that the elasticity of the system was such that any disturbance was responded to so immediately that the system was incapable of ever departing appreciably from equilibrium. At any rate, I am sure that the assumptions required for their conclusion are far remote from contemporary fact; and in the proof along these lines, that a tariff cannot diminish unemployment, one of the inappropriate assumptions which has tacitly slipped in is, I suggest, that there is no unemployment to diminish! On the contrary, whilst the position of every element in the economic system is, in a sense, dependant on that of every other, there is not, according to my view of the subject, any direct and simple relationship between the volume of exports and the volume of imports. A change in imports, due to the interposition of a new factor such as a tariff, sets up a series of complex reactions on the economic body, which are likely, indeed, before they have completely worked themselves out, to have some effect on almost every factor in the situation. But the nature of this effect depends profoundly (amongst other things) upon whether the initial position was one of

equilibrium. vol XX p502-4 So the conclusion can be drawn that Keynes at the time of the 1930's depression, can be found to have what could be summed up as an 'its complicated' general opinion regarding the effects of tariffs on a country's own export industries. This is in contrast to free traders like Robbins and Beveridge, who adhered to a more strictly circular and strong relationship, which implied tariffs were immediately and proportionately damaging to exports. While Keynes does not dispute the basis of the free traders simple truth, i.e. the circular and counter balancing nature of trade and money flows between countries, he claims that they have made an incorrect obvious inference from a simple truth. It is testament to the complexity of these issues that many of the same charges can still be made against free trade theorists today. As Keynes recognised and used in his arguments as much as anyone, there are important inferences to be found in trade theory. But he was quick to point out where ivory tower theoretical inferences are taken a step too far.

Part Two: Keynes' Qualified and Conditional Support for the Protection Option It appears to me that Keynes' writing on tariffs and protection can be divided into two distinct areas, by considering two rough types of motive a government may have to protect. Firstly in Keynes' writing there are many examples of him supporting protectionist sentiment in what could be conceived as a strategic industrial policy kind of motive. In other words protection used to maintain domestic production of certain products, or encourage domestic production in certain sectors. In the language of that time, the word commonly used is 'safeguarding'. For example in the 'Pro's and Con's' BBC radio speech in the introduction of this essay, Keynes clearly explains the merits of protecting Britain's: Iron & Steel, Motor Cars, and Agriculture sectors. On the other hand, most of Keynes' writing on protection and tariffs was during the early 1930's, when he also believed the urgent economic crisis and the unique position of Britain required a 'revenue tariff', to solve its wider macro economic problems. As the name suggests, a primary aim, but by no means the only aim, of a revenue tariff was to raise funds for the government. The revenue tariff was considered, by Keynes at least, as a short term policy aimed at tackling specific urgent macro economic and trade balance issues. Even by 1937 he is advocating a partial reversal of this strand of broad, economy wide protection, as detailed later, and of course his later key involvement in designing the post war economic system goes further along these general tariff reduction lines. This general or revenue tariff protection, as represented by the 1932 Act, was in contrast to and always alongside, the more strategic protectionist policies which would fall under the more long-term safeguarding label. The motive for the one strand of protection was related to the immediate strains on the country's finances, the motive of the other strand was a desire to shape, or to 'safe-guard' against the unfavourable re-shaping of, Britain's economy. The two different motives of a general or revenue tariff, and safeguarding protection, which are the basis of the above distinction, obviously overlap in practise, and therefore the distinction can appear artificial. In aiming for revenue, you cannot help safeguarding, and in safeguarding you probably collect revenue, (unless using another form of protection such as quotas or limitations). Therefore, the distinction is more useful in terms of clarifying the theoretical motivation for protection, than it is effective in differentiating the actual practise of, or specific examples of, tariff implementation. This is demonstrated by the fact that the key 1932 tariff, which was on the face of it a revenue tariff also designed to restore a trade balance, had an initial base rate of ten per cent, but this rate was increased substantially and in areas like iron and steel became very high. This shows that the revenue tariff was also used as a safeguarding tool, and the distinction becomes blurry. But the theoretical differentiation is still useful when analysing Keynes' thoughts and arguments. The distinction between the two approaches to protection is also inherently connected

to the time scale envisaged. The sectoral type of safeguarding protection would be of little value unless its advantages to certain sectors could be relied upon by investors in those industries to last a reasonable period of time. In contrast, because the revenue tariff is partly a macro economic tool motivated by special circumstances, the protection it offers by implication, is of a temporary nature. Basically the protection a revenue tariff offers is broad, temporary, and in being usually only around the lower percentages, marginal rather than industry changing. Whereas a sectoral kind of safeguarding protection is targeted, usually applied at a higher rate, and applied and removed for strategic micro rather that macro economic reasons. The temporary macro economic motive of the 1932 tariff is implied by Keynes below, in his essay called Mitigation by Tariff, March 1931: It should be the declared intention of the Free Trade parties acquiescing in this decision to remove the duties in the event of world prices recovering to the level of 1929. Persuasion p151 This inherently means that in some ways the infamous general or revenue tariff of 1932 is less relevant to those interested in contemporary protectionism, because it is specific to the macro economic crisis and thinking of that time. Where as the strategic protection of the three areas Keynes mentions in the Pros and Cons broadcast, is where more fundamental philosophical arguments in favour of long-term protectionist policies are made. However it is the subject of Keynes' thoughts on, and support for, the 1932 tariff which this, part two, mostly deals with.

Disequilibrium Can be long enough to compass the decline and downfall of nations As mentioned above, Britain was the standard bearer for free trade up until this period, and indeed some economists have claimed that Britain was the only major country ever to have practised pure free trade, for a short period of time during the mid 19th century. Keynes' lifetime was far closer to this zenith than we are now. As represented by Chancellor Simon mentioned above, there was still in the 1930's, many of the great and the good who held onto 19th century notions of economics, where laissez faire alongside 'sound money' was the wisest policy. In the old British economic system of the 19th century, the economics of trade was centred around the Gold Standard. For non-economists, this was an international monetary system which used the set rate of convertibility into gold of the major currencies, to regulate trade relationships, and settle international trade accounts between countries. Because the volume of gold in the world was almost finite (it was being mined which slowly increased its quantity), and because gold had to move between different countries' central reserves to settle trade imbalances, it provided a confidence enhancing, but constraining mechanism upon the international system. Governments had to arrange their economic policy to suit the needs of maintaining their currency to a fixed value in gold, and had to respond if their reserves were being depleted. This was done by maintaining the required balance of attractiveness between their currency and others, and also by maintaining the domestic cost level, in terms of gold, at a level to which aided the balance of payments to not generate a gold shipment. The gold standard also constrained other financial policy options for national governments, like running a government spending deficit or printing money. The capability that a gold standard had to constrain governments has inspired renewed interest from some of those on the right of the Republican party in America, although not many economists support such a draconian move. In the meetings of the Macmillan Committee in February 1930, Keynes describes in detail how this 19th century system was regulated. This masterful exposition of classical economic policy was an introduction which served as the starting point for Keynes to debate what was now going wrong with the economy, and what should be done. He is describing how, for generations, classical monetary policy had been used to maintain equilibrium between Britain and other countries, both by effecting Britain's capital inflows and outflows, and by effecting Britain's balance of trade through managing the domestic price level: Now the only normal method which is open to the Bank of England for its currency management is by altering the terms of bank lending. I shall often use Bank rate as a convenient shorthand for the terms of lending as a whole including alterations in the quantity of credit as well as in the price for it. The great historic virtue of Bank rate policy is, as we shall see, that it works on both factors in the situation and on both in the right direction. If Bank rate is raised it tends to restore equilibrium,

partly by diminishing the adverse balance on lending account [Britain's capital account or net capital outflow (net foreign investment), plus in Keynes terminology he includes net cash transfers or short-term liabilities (the short-loan situation) to foreigners] and partly by increasing the favourable balance on income account [net exports, and net foreign investment income]; and the beauty of Bank rate is that double effect. Its influence on lending is rapid, but not permanent. By raising Bank rate we can rapidly diminish the rate of our lending for the time being, The Bank rate could not restore permanent equilibrium, if it merely affected the short-loan situation. On the other hand, its immediate efficacy on the short position is very great. Its influence on the price factor is much slower, in fact it may be intolerably slow, but when it has produced its final effect on price levels this effect is much more lasting. It is the real change which, in some circumstances, is necessary for the restoration of real equilibrium. So the Bank rate sets in motion rapid forces to diminish the cause on us to lend abroad, and slow forces which will have the effect of increasing our ability to lend abroad by reducing our price level to a more competitive level with the outside world. vol XX p41 What I have been trying to set forth is the historic doctrine of Bank rate policy as it was evolved during the nineteenth century as a means of maintaining monetary equilibrium. You see what a very good doctrine it is, because the completely harmonious disposition of the economic forces of the world is preserved merely by the Bank of England changing the Bank rate from time to time in an appropriate way and leaving all the rest to the operation of laissez faire. And not only so; the Bank of England is set, in a sense, a very easy task, because movements of gold will always operate as a barometer to tell the Bank of England exactly when a change of Bank rate has become necessary, so that the method, assuming that it works according to the way in which it is supposed to work, is as simple as possible. when one sees the way in which one part dovetails into anotherthere is no need to wonder why two generations, both of theorists and practical men, should have been entranced by it. vol XX p53 In other words, as is still the case in modern government, raising base interest rates is a way of cooling an economy and therefore reducing domestic price levels which improves international competitiveness. In the aftermath of the 1929 crash, Britain's balance of payments accounts were deteriorating fast. The traditional response was for the Bank of England to use the Bank Rate, as described by Keynes above, to both improve the immediate capital flow (short-loan situation), and also to deflate the economy and therefore reduce costs, most significantly wage rates, in the long term. This explains why, thinking in a 19th century gold standard mindset, Chancellor Simon above naturally first proposes that wage rates need to fall in order to regain competitiveness / equilibrium. In this mindset, in contrast to ours today, it was the currency which was fixed, and wages absorbed any shocks or divergences in the international system.

In Keynes' letter to Prime Minister MacDonald of July 1930 already cited above, he expresses his concerns regarding what he views as an unwise tendency of the British establishment to hold onto this 19th century mindset, and remain slaves of sound general principle, when Keynes thinks the economic circumstances, and the world, have moved on: All the same I am afraid of 'principle'. Ever since 1918 we, alone amongst the nations of the world, have been the slaves of 'sound' general principle regardless of particular circumstances. We have behaved as though the intermediate 'short period' of the economist between our position of equilibrium and another really were short, where as they can be long enoughand have been before nowto compass the decline and downfall of nations. Free trade is profoundly based on the assumption of equilibrium conditions and in particular that wages always fall to their strict economic level. If they do not, and if for several reasons we do not desire them to, then it is only by means of a tariff that the ideal distribution of resources between different uses, which free trade aims at, can be achieved; and there is an unanswerable theoretical case for a countervailing import duty (and also for an export bounty) equivalent to the difference between the actual wage and the economic wage. vol XX p 379 This writing alludes to the fact that Britain maintained the old free trade, laissez faire and sound money notions long after countries like Germany and America had moved on to become more managerial and interventionist. Back to the subject of equilibrium and one of Keynes' most famous economics 101 assertions, is that classical economists or free market supporters often tend to over estimate the ability of certain markets to return quickly and easily to equilibrium conditions. Echoing the quote cited in the heading of this chapter, one of Keynes' most famous responses to the question of free market adjustment being the best long-run solution is: in the longrun, we're all dead. During the 1930's depression, while much of the economic establishment was willing to wait for markets to slowly adjust, Keynes felt the economy was jammed in disequilibrium, and more urgent action was called for. The slump had pushed the economy of Britain further out of equilibrium, in that given the dramatic fall of world prices, sticky British wages, and therefore costs, were too high to achieve a manageable balance in Britain's trading accounts. Below, again during the discussion in the Macmillan Committee in February 1930, Keynes summarises the essential nature of how Britain had in the past, and now needed to, manage her economy under the 19th century gold standard tradition: If we have a system of laissez-faire the amount we want to lend abroad is governed by the relative attractions of investment abroad and at home which is not a thing which depends very much on prices. The amount the want to invest having been settled by relative interest rates we have to get our cost down to a level which will allow us to export an amount corresponding to that. vol XX p51 To understand the reasoning in this extract, you need to fully understand the

technicalities of the Balance of Payments mechanisms, which will be dealt with in more detail later. The implication of the old system was that the wage rates and costs in the British economy need to be the variable, not the starting point in economic policy. But the key point was that in recent years, deflationary Bank rate policy had not been successful in forcing wages to fall to correct the persistent disequilibrium, but instead wages had remained static or sticky. In terms of the scale of this disequilibrium to be surmounted, Keynes proves a characteristically essential and concise illustration. Keynes had an impressive habit of seeming to fluently pluck figurers out of the air to illustrate his points. One would presume that he was confident that he simply had the superior knowledge and judgement required to carry this off: I have made the guessit has not very much behind; it is just a statistical judgement that we are increasing efficiency about 1 per cent per annum. Over 50 years that is a terrific rate. In 5 years that is 7 per cent [the numerically literate amongst you should have spotted that in compound this is more, but only very slightly], therefore, if prices had not fallen abroad we should have got a very long way towards the 10 per cent task which have set ourselves. To get back to equilibrium with the gold standard would have meant 10 per cent, but with the subsequent fall of world prices it has meant 20 per cent so while we were 10 per cent out in 1925, we are 12 per cent out now. That is just a guess but it gives you and idea of the order of magnitude, and to cure that will take 8 years assuming there is no further misfortune. vol XX p58. In other words, the costs of Britain's exports were 12 per cent higher than the costs of other countries' producers. The high gold standard re-entry in 1925 discussed later, meant Britain entered the slump already with an uncompetitive high pound (+10%), which five previous years of growing efficiency and static costs / wages had only partly neutralised (-7 %). The effects of the international slump then came and added further to this existing disequilibrium (+10%). Later in the Macmillan Committee discussions, Keynes highlights how the inadequacy of the government's 19th century policy approach, in an economic environment lacking the 19th century characteristic of wage flexibility, is translating into unemployment and bankruptcies: One can put it another way by saying that we have a currency policy and a wages policy which are incompatible with one another. We have, as I have heard Mr Brand put it, two fixed points in our system, two fixed millstones between which we are being ground; whereas, the system assumes that there is one fixed point, namely, the currency policy, that wages will always sooner or later follow business receipts. In effect our currency policy fixes the total monetary receipts that we get from the sale of our goods. there is not the normal margin of profit for the businessman and his only course today is gradually to withdraw, first by reducing the employment he offers and, secondlywhich is much slower in effectby not investing in new

enterprises. vol XX p68. After much thought, Keynes' favoured approach was to solve this disequilibrium by using a tariff to raise import prices, and then to presume that wages would remain the same, not keep up with the rising prices of imports, and therefore fall in real terms. The disequilibrium was tackled therefore at multiple levels; the trade imbalance between net foreign investment and net exports would be resolved at the national macro economic level, and at the micro economic level, the tariff would make the purchasing power compared to the productivity of workers in better equilibrium with foreign workers. Also the lacking business confidence which had encouraged investors to look abroad would be reversed slightly by the better prospects of protected industries. In a letter to The Daily Mail in March 1931, titled Put the Budget On a Sound Basis: A Plea to Lifelong Free Traders, Keynes again tries to emphasise the urgency of the situation and the inadequacy of existing policies: I have been asked to develop a proposal for a revenue tariff which I put forward last week in an article contributed to the 'New Statesman and Nation'. I do so from the point of view of one who believes that tariffs are dangerous. If we were in our usual economic equilibrium with the rest of the world, I should be opposed to such an expedient. But the world slump and a fall of wholesale prices of a quite unprecedented severity, coming on the top of other difficulties, have created a position of great anxiety, when one must be ready to consider extraordinary remedies. Unqualified free trade is part of an austere philosophy which depends, and indeed insists, on things being allowed to find their own levels without interference. But if economic changes are very violent and very rapid, human nature makes it impossible for some things to find their proper levels quick enough. In particular, we all know that it is not practical politics (whether we like it or not) to bring down wages generallythough some money wages ought to come down somewhat and probably willto an extent corresponding to the fall in prices. When a free trader agues that a tariff cannot increase employment but can only divert employment from one industry to another, he is tacitly assuming that a man who loses his employment in one direction will lower the wage rate which he is willing to accept until he finds employment in another direction. When small changes only are in question, there may be much long-run truth in this. But in present circumstances stances it is sheer nonsense. vol XX p489-90

Don't Try Reducing Wages A sort of civil war or guerilla warfare carried on, industry by industry, all over the country As discussed, before the 1930's the established 'sound money' laissez faire approach to a situation of deficit in Britain's international trade accounts, was to expect deflationary government policies to push national wage rates downwards, until international competitiveness was regained. As has likewise since been the wisdom of many free market believers, they also held that the short term pain of downward wage adjustment was a necessary evil to be experienced, in order to achieve the greater long-run good. As a kind of prequel to the wage reducing arguments faced in the early 1930's, it is interesting to consider Britain's situation five years earlier, and an essay by Keynes which helped to further establish his name as an insightful economist. The sketchy impression of the economic history of this period which I used to hold, until I learnt better, was that things were basically going OK up until the 1929 stock market crash, and then the infamous depression was triggered. This is fairly accurate in terms of America, whose experience tends now to make the deepest impression on our collective cultural memory. But in Britain in the 1920's, although the economy was growing healthily, there was high unemployment of over ten percent throughout the decade. The unemployment was concentrated in areas which were and had been Britain's staple export industries, like textiles, ship building and coal mining. In the early part of the decade, Britain was still recovering from WWI, and then after 1925, it is commonly believed that the rejoining of the Gold Standard at the ambitiously high pre war rate, caused difficulties for Britain's competitiveness for the remainder of the decade. The Gold Standard had been abandoned by Britain during WWI, as the characteristics of a total war economy distorted usual trade relations, and made adherence impractical. There was precedent for countries coming off monetary standards during wars, and then seeking to rejoin after, so by 1925 there was strong pressure from the financial establishment to return to the standard. Just as in present times US dollars are used around the world as the default trading currency, in those days, British pounds were still the worlds currency of choice. Therefore there was a large international interest and support for returning the worlds key trading currency back into the worlds key international currency system. Winston Churchill was the Chancellor during that time, and although he was sceptical himself, not being a strong economist he was persuaded by the weight of establishment opinion to re-enter at the old rate. In hindsight it certainly seems over ambitious to re-enter at the same rate as before the war, given how much foreign capital assets had been liquidated and given how much the economic tide had turned in favour of the US. But the mindset of the time was that stability, continuation and confidence were paramount, and returning to the old rate was, in the light of this, a strong statement. Another more cynical interpretation is that the figurers of the establishment had an interest in the maintenance of the higher value of the pound, due to their connections and interests

in The City, and they prioritised these benefits at the expense of other non financial export sectors. More on this subject in a later chapter. Below, in one of Keynes' most famous early essays called: The Economic Consequences of Mr Churchill, Keynes in 1925 describes, (in a way which the Greek population today may find bitterly familiar), how the overly strong currency required a lowering of British wages and price levels, in order to return to competitive equilibrium. With a floating currency, the exchange rate moves to suit the price level of that country compared to its neighbours, through the balancing effect of flows of money and trade. The currency of a country not exporting enough falls, until a balance returns. Greece today is arguably being forced to relive an old 19th century gold standard scenario, where the exchange rate is presently fixed too high for their individual needs, compared to their internal costs and wage levels. Therefore the authorities (Greek and Euro Zone technocrats) wait for, or pursue? a deflation in prices and wages instead, as a means to attempt to return the country to international competitiveness: ... The policy of improving the foreign-exchange value of sterling up to its pre-war value in gold from being about 10 per cent below it, means that when ever we sell anything abroad, either the foreign buyer has to pay 10 per cent more in his money or we have to accept 10 per cent less in our money. ... Our export industries are suffering because they are the first to be asked to accept the ten per cent reduction. If every one was accepting a similar reduction at the same time, the cost of living would fall, so that the lower money wage would represent nearly the same real wage as before. But, in fact, there is no machinery for effecting a simultaneous reduction. Deliberately to raise the value of sterling money in England means, therefore, engaging in a struggle with each separate group in turn, with no prospect that the final result will be fair, and no guarantee that the stronger groups will not gain at the expense of the weaker. ... Those who are attacked first are faced with a depression in their standard of life, because the cost of living will not fall until all the others have been successfully attacked too; and, therefore, they are justified in defending themselves. Nor can the classes which are first subjected to a reduction of money wages be guaranteed that this will be compensated later by a corresponding fall in the cost of living, and will not accrue to the benefit of some other class. Therefore they are bound to resist so long as they can; and it must be war, until those who are economically weakest are beaten to the ground. ... On grounds of social justice, no case can be made out for reducing the wages of the miners. They are the victims of the economic Juggernaut. [see the subsequent miners strike of 1926] They represent in the flesh the 'fundamental adjustment' engineered by the Treasury and the Bank of England to satisfy the impatience of the City fathers to bridge the 'moderate gap' between $4.40 and $ 4.86. [The latter was

the rate of the Gold Standard exchange per British pound, while the former was presumably what the floating exchange rate had been]. They (and others to follow) are the 'moderate sacrifice' still necessary to ensure the stability of the Gold Standard. The plight of the coal miners is the first, but not--unless we are very lucky-the last, of the Economic Consequences of Mr Churchill. ... Their [the Treasury Committee on Currency advising Churchill] arguments--if their vague and jejune meditations can be called such--are there for any one to read. What they ought to have said, but did not say, can be expressed as follows:-... To begin with, there will be great depression in the export industries. This in itself will be helpful, since it will produce an atmosphere favourable to the reduction of wages. The cost of living will fall somewhat. This will be helpful too, because it will give you a good argument in favour of reducing wages. Nevertheless, the cost of living will not fall sufficiently, and, consequently, the export industries will not be able to reduce their prices sufficiently until wages have fallen in the sheltered [industries which are not effected by imports or exports] industries. Now wages will not fall in the sheltered industries merely because there is unemployment in the unsheltered industries, therefore you will have to see to it that there is unemployment in the sheltered industries also. The way to do this will be by credit restriction. By means of the restriction of credit by the Bank of England you can deliberately intensify unemployment to any required degree until wages do fall. When the process is complete the the cost of living will be have fallen too, and we shall then be, with luck, just where we were before we started. [i.e. internationally competitive]. We ought to warn you, though perhaps this is going a little outside our proper sphere, that it will not be safe politically to admit that you are intensifying unemployment deliberately in order to reduce wages. Thus you will have to ascribe what is happening to every conceivable cause except the true one. We estimate that about two years may elapse before it will be safe for you to utter in public one single word of truth. By that time you will either be out of office or the adjustment, somehow or other, will have been carried through. Persuasion p132-142 There are many others who have recognised the parallels between the gold standard in the 1920's and 30's, and the present Euro difficulties, so this is not at all original, but isn't the language Keynes uses dramatic! It was especially satisfying for me to link together in my understanding of British history, the sparse knowledge I had regarding the miners strike and general strike of 1926, with the ambitious 1925 gold standard re-entry. From a modern standpoint, as Keynes also alludes to below, the practicalities of tying the ability of the worlds financial system, and its ability to expand its monetary volume, to the ability of the worlds miners to dig up a random metal element from the ground, seems very arbitrary. Imagine the implications if an exceptionally rich gold mine had been discovered? In hindsight it was fortuitous for the whole system at that

time, that the gold production of California, Australia and South Africa allowed the steady-ish level of economic expansion that it did. It is a measure of the reassurance and order (and perhaps discipline?) which politicians and bankers felt that the gold standard brought to international trade relations, that they were willing to bet on such an arbitrary system. They must have considered the benefits to be worth it, or the alternatives far worse? In conditions where the current output of the precious metals from the mines is on a relatively small scale, an influx of money into one country means an efflux from another ... The General Theory, p209. It is important to note that the theoretical position of reducing a whole country's wages, if it is able to be done in a complete and automatic way, is not necessarily some grand exploitative conspiracy against the working man. In theory if everyone's wages and incomes fall, real incomes (spending power) would remain the same for everyone in relation to domestic goods. Keynes' issue was that in reality this kind of clean and pure adjustment was confined to ivory tower theory, and the reality, as he explains above so colourfully, is that the outcome is inevitably unequal. The growing influence of trades unions and generally more civilised contractual arrangements between employers and employees, was also a factor in making wage reductions unlikely for all but the most powerless of workers, as compared with the previous century when such an approach was more common and wages less sticky. Five years later, during his lengthy exposition of the slump situation to the Macmillan Committee in February 1930, Keynes below argues that the classical economic policy of using interest rates to regulate the wage rate in service of the gold exchange had, during the 100 years or less that it had been a method in use (p57 after below) never been used or expected to support such a large downward adjustment in wages: prices were on the whole tending upwards, and allowing for the sharp increase of efficiency which was going on all the time there was never any occasion to use Bank rate to bring about a downward adjustment of wages. It was sufficient to use it as the regulator of the rate of the upward movement. Efficiency itself was enough to allow wages to rise quite materially year by year, and all the Bank rate did was to regulate the rate rate at which we could afford to pay higher wages. The position in the last four years has been entirely different. The return to the pre-War gold parity in 1925 committed us to use Bank rate policy to force wages down 10 per cent, except in so far as increased efficiency could diminish the amount by which we had to reduce them. That was setting Bank rate policy a task it had never been asked to do before in the economic history of this country. vol XX p56 My reading of history is that for centuries their has existed an intense social resistance to any matters of reduction in the level of money incomes. Throughout history I can only recall two occasions at all comparable to the present one. One was the highly analogous deflation which followed the Napoleonic Wars, very much

like the one we are going through now, was one which brought this country to the verge of revolution, The other analogous case was the price fall in the middle ages prior to the discovery of America and the influx of precious metals to Europe. The fall of prices was, then, an appalling problem, and it was only mitigated by monetary readjustments. Many of our monarchs rest under unjust imputations of depreciating the currency for their own personal advantage. I am sure they only did it to avoid what they regarded as intolerable wage adjustments. There is no question as to the impoverishment of the world that occurred; and subsequently the High Renaissance and the general process of recovery were based on the accumulation of profit which took place during the period of the rise in prices, lasting about 100 years, which followed on the influx of gold from America. But apart from these two periods I do not think there is anything to prove that it was ever easy to bring about material fall in the level of money incomes. vol XX p 64. A year later in March 1931, Keynes in a letter to The New Statesman and Nation was back on familiar ground, making the same points. In considering the possible economic action required to urgently regain Britain's competitiveness / trade balance, he was adamant that putting any further hope in the old 19th century approach of expecting a fall in wages to take up the slack was misplaced. As he mentioned above, historically deflationary high interest rate (Bank Rate) policy had never been used for an adjustment of such a scale, and its potency as a lever of policy had already ran out of steam in the previous four years, even before the further downward impact of the slump on international prices had occurred: Now free trade, combined with great mobility of wage rates, is a tenable intellectual positionthough it presents a problem of justice so long as many types of money income are protected by contract and cannot be mobile. The practical reason against it, which must suffice for the moment, whether we like it or not, is that it is not one of the alternative that we are in a position to choose. We are not offered it. It does does not exist outside the field of pure hypothesis. vol XX p496-7 Below in even more vivid language, Keynes conveys his strong feeling regarding the nature of such a policy, and reveals part of the reason why he has concluded that the lesser evil of a tariff policy was preferable. Keynes included the following as the last point in an 18 point paper titled A Proposal for Tariffs Plus Bounties for discussion in a session of the Economic Advisory Council in September 1930: 18. I would also repeat, what I have stated above, namely that a great advantage of this method [a tariff plus bounty] is that it is capable of being put into force by legislative enactment, where as a reduction of money wages cannot be enforced in this way, but only as a result of a sort of civil war or guerilla warfare carried on, industry by industry, all over the country, which would be a hideous and disastrous prospect. vol XX p419

A Creditor Nation Should Not Devalue The special circumstances of Great Britain Although Britain was on the gold standard at the beginning of the 1930's crisis, the prospect of devaluing the sterling to gold rate was by no means impossible, and in many respects from today's perspective it looks more attractive, and less of a wrench from historical habits and customs, than the tariff route. Indeed a short period later in September 1931, as will be discussed later, speculation against sterling forced Britain off the gold standard anyway, before the full blown 1932 revenue tariff had even been enacted. So why was the tariff route initially favoured over the more obvious devaluation? There are a few references Keynes makes at the time which help us to understand this choice. From the same discussion paper cited in the last chapter, the following points show that it was Britain's or in some ways more accurately London's special position in world economics and finance which made tariffs preferable to a sterling devaluation: 1. My proposal is for a uniform tariff of, say, 10 per cent on all imports what so ever, including food, and a bounty of the same amount on all exports whatsoever. 2. The effect of such an arrangement on international trade would be to restore the conditions which would exist under free trade if money costs were reduced 10 per cent. 3. It has, in effect, the same result as devaluation, except that it leaves sterling's international obligations unchanged in terms of gold. There are, obviously, very great advantages in this from the point of view of national credit. Moreover, since we are a creditor nation in terms of sterling and our imports exceed our exports, there is actually a pecuniary benefit to us in leaving the gold value of sterling alone. 12. The system would be capable of being adjusted from time to time with the changing value of money. Indeed, in might be laid down from the outset that the rate of the tariff-bounty would be annually increased or decreased according to the international price level. Thus if international prices were to fall another 5 per cent the tariff-bounty could be increased 5 per cent. On the other hand, if they rise by an adequate amount it could be abolished. Indeed, it is a method of rendering us to some extent independent of external instability in the value of money without interfering with the position of London as an international financial centre and as a depository of short-loan funds. Indeed, the tendency to increase tariffs everywhere in the last few years may be interpreted as an instinctive act of self-protection against the instability of the external value of gold. Unless some way can be found of making money wages habitually mobile it is difficult to see how we can do without such a device in the event of the world value of gold being highly fluctuating. 13. It would not help if every other country followed suit. But this is equally true of a reduction of money wages. vol XX p416-8

Added to this rather calculating approach must be the more subjective emotional connection many made between the strength of the pound, and the status, pride and strength of Britain itself. This is arguably an irrational sentiment that was noticeable, in diminishing degrees, in every instance of British devaluation throughout recent history, right up until Edward Heath criticised Prime Minister Wilson's government for devaluation in the late sixties. Even when devaluation has been inevitable and turned out to be beneficial to the economy, cries of pain and national shame have usually accompanied it. Given the exchange rate with the US dollar now, and given that Britain left the gold standard in September 1931 on a rate of $4.86 to the pound, perhaps it seems surprising that we should have felt each small step of this adjustment over the years so keenly? This psychological dimension to devaluation is a subject that will be returned to in the 'Impending Crisis' chapter. Remember also that the period of German hyper-inflation in the early 1920's was still a recent memory, and although Keynes himself never had such worries about the pound, perhaps it influenced others with a less confident grasp of the economic facts. Keynes of course had famously written about the German reparations issue earlier in his career, so he understood the special unique factors at work in that country at that time. But the possibility that an initial devaluation could trigger a downward spiral in the value of the pound, was real in the minds of others. Below, in May 1931, in an addendum subsection of the Macmillan Committee's main report, Keynes covers very similar ground. The addendum was largely Keynes' work, and signed by only the section of the Macmillan Committee members whom agreed with him (if sometimes with specific noted reservations). The members of the committee with counter, more traditional free market views, produced their own contrasting addendum. Keynes' addendum was titled Proposals Relating to Domestic Monetary Policy to Meet the Present Emergency. The extract is taken from: Part 4: Means of Adjusting Money Incomes: ... (a) Devaluation Theoretically the most obvious and comprehensive method of effecting the desired object would be to leave money incomes alone but to change the monetary standard, e.g., by diminishing by 10 per cent the gold parity of sterling. This would have the advantage of bringing the direct, initial benefit to those industries which need it most, mainly, to the foreign-trade industries. It would involve no interference with contract, since debts are legally fixed in terms of sterling and not in terms of gold. It would effect every class of income without the necessity of any other special measures. For a country which was not an international banker and was not owed large sums from abroad fixed in terms of sterling, this would be the simplest solution. We have already agreed, however, that for a country in the special circumstances of Great Britain the

disadvantages would greatly out weigh the advantages, and we have concurred with our colleagues in rejecting it. (b) Tariffs plus Bounties Precisely the same effect s those produced by devaluation of sterling by a given percentage could be brought about by a tariff of the same percentage on all imports together with an equal subsidy on all exports, except that this measure would leave sterling international obligations unchanged in terms of gold. This proposal would avoid the injury to the national credit and to our receipts from foreign loans fixed in terms of sterling which would ensue on devaluation. vol XX p295. This reveals that Keynes always had one eye on Britain's national interests and the bottom line, and never under appreciated the special capitalist and imperial interests which The City of London's place in the world bestowed. Britain having been the first nation to gain wealth from industrialised exports to the rest of the world, and also because of London's 'City' being the financial hub of a large trading empire, Britain had in the previous decades become a large investor in the rest of the world. Although the liquidisation of foreign assets and large scale borrowing during WWI reduced the scale of this role Britain had, it was still a major factor during the depression. Considering the 1930's from the present day, it is hard to appreciate just how different the position of Britain was, even then in what would turn out to be the dying days of empire. For example, in an extract of a letter written by Sir William Beveridge in an earlier chapter, he mentions the imports from and exports to the Argentine. Argentina today is still famous for its exports of beef and other foodstuffs, but one hundred years ago the economic relationship between Britain and Argentina, although never a colony, was much closer. For example large amounts of British capital investment financed Argentine infrastructure projects, like railways (including British built locomotives etc.) and then subsequently exports of beef etc. back to prosperous British industrial cities were expected to generate the income which would pay the interest or profit returns on these investments. The importance of this relationship is signified by the way Argentina often followed Britain rather than America in her currency exchange policies at this time. The US had her own vast farmlands, so for Argentina, Britain was the key export market, with her large, well paid for the time, urban population. Our large industrial population on a small island, was the biggest market in the world for exports of food and raw materials from developing / empire countries, many whose economies and populations were much smaller than they are today relative to ours. Below in his Macmillan Committee discussions in 1930, Keynes alludes to this kind of British trading, which was then waning, as being the glories of the nineteenth century:

it is much harder for us to expand our exports than it used to be. In the glories of the nineteenth century, when we had money that we were prepared to lend abroad, railway systems were developing abroad, and this often materialised in a greater eagerness to take our exports. We were practically the only suppliers of the kind of things that people wanted to put their money into. now... when we lend 1,000,000 to a foreign country for them to make investments, a comparatively small proportion of that 1,000,000 comes back to us in the form of orders. At one time a very considerable part would come back. So we would quickly stimulate our exports. At present it is very difficult for us greatly to expand our exports, even if we do cut wages. vol XX p 85. So the above extracts reveal that Keynes believed it was desirable to maintain the high value of the British pound, partly in order to retain the value of interest payments and profits coming into us from abroad (such as from previous railway investments). As well as the out right financial gains of maintaining a high exchange, Keynes and co are recognising the more intangible benefits of stability and constancy to traders and investors. For any market centre such as London, the ability to provide and project stability and confidence is an advantage and an implicit common good, as this phrase in the earlier extract implies: without interfering with the position of London as an international financial centre and as a depository of short-loan funds. At the same time the trade deficit issue could instead be addressed by a proposed tariff and bounty policy. As mentioned, at that time Britain was able to import more goods than it exported permanently, because of the counter-acting support to the balance of payments that income from foreign investment provided. So taken as a whole, the tariff alongside the high pound value alternative, could appear a bit like a 'having your cake and eating it' policy. In the same article as he had criticised Chancellor Simon regarding Germany earlier, Keynes below links the benefits of a revenue tariff to the strains being experienced on British finances, in that the Bank of England is having to keep interest rates high in order to support the pound: In the present instance, I believe that there is an opportunity for a tariff to produce a net favourable effect on employment; firstly, because the Bank of England is having to exert pressure by maintaining a rate of discount artificially, indeed unprecedentedly, high relatively to the rates in France and the United States, and has been more or less in this position for a considerable time past, in order to prevent us from lending too much abroad, so that a relaxation of the pressure on the foreign exchanges might be expected to increase forthwith our foreign lending; and secondly, because we have a large surplus capacity of men and plant, so that a substantial increase of output for use of home might be possible without the reaction on the price of our exports which might be expected if we had no surplus capacity. vol XX p505

This is significant, as lowering interest rates was a key desire of Keynes, and something which crops up frequently in many different areas of his writing. (Towards the end of The General Theory, he even has warm things to say about the concept of usury, which was historically widespread in societies and religions, and which today only devout Muslim's still give full credence to). Indeed, economists generally agree that the 'cheap money' policy favoured by Keynes helped to pull Britain out of the depression, stimulating, amongst other things, a massive surge in house building. These houses include the classic mock Tudor semi's, that can still be seen across suburban Britain. This complementary link between recessionary times, low interest rates and house building, is again, highly relevant to today's recession. In 1930's Britain, a tariff would stop some pounds going abroad to pay for imports relative to the foreign currency coming into Britain to pay for exports. Due to the change in relative scarcities, this would therefore make it less necessary for the value of the pound to be held up by the Bank of England paying high interest (discounting more heavily the present value compared to the redemption value of government bonds). What Keynes means by a relaxation of the pressure on the foreign exchanges is that a tariff and bounty system would stop some pounds going abroad relative to foreign currency coming into Britain. He thinks this might be expected to increase forthwith our foreign lending because, as the rules of the counter balancing physical trade and international capital accounts dictate, if net physical imports decrease, then the net export of capital should rise also. The last sentence also observes that in times of recession, inflation is less of a worry.

Complementing Domestic Stimulus Would run well in double harness with that other class of remedy It could be summarised that during 1930 and the first half of 1931, Keynes had settled on the tariff option as being the lesser of three evils to tackle Britain's economic disequilibrium. Firstly this solution was more desirable than the old 19th century custom of attempting the widespread reduction in national wages. The scale of the deflation desired was unprecedented for solving by this means, and his conclusion was that the result would be like guerilla warfare carried on, industry by industry. And secondly Keynes believed tariffs would be less hurtful than the loss of foreign investment income, national esteem and financial reputation associated with devaluing the pound. (Although, as discussed later, he did come to warm to devaluation as the financial pressure for it mounted). The British government at that time was facing quite urgent economic problems with its fiscal and trade balance situations, which it had no choice but to react to, and tariffs for Keynes presented the least unpalatable option. The fact that other countries had already been following a protectionist course also lessened the resistance of such a move, compared to other times in history, and the concept of tariffs as chips created out of nothing to be bartered in international negotiation was also a factor in their favour. But there is also evidence that Keynes viewed tariffs as having a complementary effect on another policy he wanted to advance. In present times, the most common understanding of the term 'Keynesian policy', would be a government spending program designed to reflate an economy with high unemployment. During this period, Keynes seems to be proposing the first example of this form of tailor-made 'Keynesian policy', to address Britain's slump, and in the same Addendum to the Macmillan Committee report titled: Proposals Relating to Domestic Monetary Policy to Meet the Present Emergency also cited in the devaluation chapter above, the complementary nature of the two policies are stated: For these reasons and also because relief will be given both to the budget and to the balance of trade, it would seem that restrictions on imports and aids to exports would run well in double harness with the other class of remedy which we next discuss, namely, schemes of capital development. For it is obvious that the whole of the resources required for capital development at home are necessarily found within the country and as a result of our own efforts and sacrifices, except in so far as their effect is to diminish our net foreign surplus, whether by decreasing our exports or increasing our imports. Thus the 'burden' of such schemes, for which we need to make special provision is exactly measured by the burden on the balance of trade. If, therefore, we were to expand investment at home and control imports, we should get the favourable effects of both schemes on domestic employment and avoid the disturbing effects on both on our international balance. vol XX p300 In other words, if Britain wanted to enact a new type of Keynesian spending program,

a major side effect of such a policy would be to increase the ability of workers and the economy in general to consume, and part of that consumption would inevitably be in the form of imports. Another economic term for expressing this tendency is a leakage. The British government is putting in the cash, but the positive benefit of their stimulus is in danger of leaking out to benefit the exporters of other countries. This is another theme very relevant to today's international situation. This leakage effect would put further pressure on the country's trade balance, as remember all along Britain is at that time still battling to maintain what is widely agreed to be an over strong pound. So Keynes' thinking is that a large part of the benefit of a tariff policy would not be just for its effect on domestic activity, business confidence and the country's finances, but in counter acting the negative effects on Britain's trade balance of his other, what we would now call 'Keynesian', policy. Keynes is widely acknowledged to have single handedly invented a large part of what we think of today as being Macroeconomics, and these early steps into macroeconomic virgin territory were at the time, a much more notable departure from usual economic policy than they would be viewed as today. In the sub-title to this essay, I stated that emphasis would be on international and protection issues. By implication, this means what I am neglecting is this area of the domestic Keynesian stimulus and the connected multiplier themes. But these dimensions are so iconic and so much part of the everyday political and economic debate, that they seem to have little new interest to me, so I have left out the details of this part of the story. I hope it goes without saying that my personal belief in the merits of modern post growth protectionism has little in common with the particular circumstances and arguments surrounding this 1932 tariff above. The arguments and events are interesting and illustrative, but not that relevant to today's problems.

Part Three: Developments Cause Keynes to Now Favour Devaluation Impending Currency Crisis the games up the other exits are now closed As discussed, through 1930 and up till the summer of 1931, Keynes had gone along with the establishment view that maintaining the sterling to gold rate was in the national interest. He agreed that Britain's historical role as an investor country, and the place of London at the centre of the financial world, made the costs of an over strong pound an impediment which was, on balance, wiser to endure. But throughout 1930 and 1931, the fundamental underlying disequilibrium between the spiralling downwards of world prices, in contrast to the stickiness of Britain's wage and other costs, was getting worse. Britain's balance of trade was deteriorating. The sticky domestic costs compared with plummeting foreign costs were making businesses more unprofitable, subsequently making domestic investment even more unattractive. The Bank of England was trying to tided over the immediate situation through high interest rates, which only served to make existing finance and new investment costs for domestic businesses, again, even more unattractive. Keynes had already noted five months earlier in March 1931, in his Economic Notes on Free Trade article for the New Statesman and Nation that: the Bank of England is having to exert pressure by maintaining a rate of discount artificially, indeed unprecedentedly, high relatively to the rates in France and the United States, and has been more or less in this position for a considerable time past, in order to prevent us from lending too much abroad. vol XX p505 And this situation was only getting worse. By 5th August 1931, in a letter to PM MacDonald, Keynes' opinion of the situation had become more urgent and pessimistic. But above alland this is the new fact within the last two monthsit is now nearly certain that we shall go off the existing gold parity at no distant date. Whatever may have been the case some time ago, is is now too late to avoid this. We can put off the date for a time, if we are so foolish as to borrow in terms of Francs and Dollars and so allow a proportion of what are now sterling liabilities to be converted into Franc and Dollar liabilities, thus giving a preference to those of our creditors who are the quickest to sell. But when doubts as to the prosperity of a currency, such as now exist about sterling, have come into existence, the game's up; for there is no object to foreigners in keeping sterling balances if there is any appreciable doubt about their value. vol XX p 591 The borrowing in Francs and Dollars which Keynes had disparagingly predicted above, was required in due course. In a scenario all too familiar in Europe today, in mid to late August 1931, the British government sought foreign support to tide over its haemorrhaging reserves:

the cabinet attempted to agree a package of expenditure cuts and tax increases that would prove satisfactory to financial opinion so that the government could raise additional loans in New York and Paris to support sterling. The cabinet failed to agree a suitable package, including a cut of 10 per cent in the unemployment benefit. The new government agreed to a program of cuts on the 27th August. Two days later the government raised loans totalling 85m in New York and Paris. (Collected Writings Editorial comment, not Keynes' words) vol XX p595 As alluded to above, the disagreement over the policies necessary to secure satisfactory financial opinion, caused the fall of that second ever Labour Government, as the cabinet were irreconcilably split. On the one side some prominent Labour Ministers were unwilling to introduce the budget cuts that the country's worsening finances suggested, and on the other side Chancellor Snowden was against the alternatives of deficit spending or tariffs. The devaluation option was not on the table at this point. The inability of the Labour Government to reach a solution in the face of this urgent financial crisis, lead PM MacDonald to decide to resign. On 24th of August, MacDonald went to the Palace to submit his resignation, but King George V and other political figures persuaded him to form the new National Government alongside the Conservatives, in the national interest of best tackling the impending crisis. As noted above, the new National government, now consisting of a Tory majority and very few from the Labour side, was then able to agree the proposed cuts. A very controversial political episode both for the Labour Party and for Ramsay MacDonald. Today, a phrase often used to describe repeat incremental, but not decisive, loans or bailout agreements, especially in respect to the current Euro problems, is: 'kicking the can further down the road'. Keynes at that time echoed this sentiment regarding the interim, but not conclusive 85m loan. But the analogy he employs below, in a letter to the prominent economist Sir Josiah Stamp, 27th August, was the German reparations issue, which leading countries had over the previous decade, approached in a piecemeal and too little too late manner: I feel very unhappy about the whole course of development. It seems to me that the question of adhering to the gold standard is going through the same sort of stages as reparations. and then at long last we shall have to face the real question (again like the Germans) whether we are going to have a large reduction of wages or in the end go off gold. But why do we always have to go through these dilatory and disastrous stages before facing up to anything? As you know, I have been putting off facing up to the position so long as there was a chance of any other exit. But the other exits are now closed. vol XX p595 As discussed in the earlier 'creditor nation' chapter, the notion of a country devaluing its currency is often likely to arouse subjective passions and fears. Keynes, three weeks before Britain left gold, in an article for The New Statesman and Nation called

Notes on the Situation points out this psychological factor: It is probable that public opinion is not ready for devaluation, it is a matter very difficult to debate in public with candour, opinion is unprepared. The idea of devaluation carries with it for the ordinary man all the exaggerated terrors of something the consequences of which are unknown to him. National pride is deeply involved. vol XX p596 A few weeks later, as the crisis was worsening and the big break was just a week away, Keynes wrote the following to his American economist friend Walter Case: At present there is a vast wave of so-called patriotic propaganda to the contrary, which is trying to frighten the people with the most fantastic accounts of what would happen if we slipped our anchor. vol XX p606 However, even Keynes was not as unequivocal as he could have been about the desirability of leaving gold, and even so late as 12th September 1931, (one week before exit) in an article titled A Gold Conference for The New Statesman and Nation, he was contemplating the possibility of an internationally agreed alternative: there was, and still is, an alternative emergency policy open to the Government, ... if the other creditor countries do not play the 'rules of the game'. It [the British Government] should thereupon demand an international conference of the gold standard countries vol XX p599 Keynes would not have to wait too long before the gold matter came to a head, as the disequilibrium was too large to be endured. Earlier it was shown that Keynes had estimated the gap between British and world prices / costs, in terms of gold, to be about 12 per cent. Months later in April 1932, in an article for the Lloyds Bank Monthly Review called Reflections on the Sterling Exchange, Keynes looks back upon the crisis and adds a more detailed explanation of what finally done for the gold standard: As typical of international currency type issues, the key to understanding what happened lies in first appreciating the relationships or formula which governs trade and currency movements. As usual, Keynes' explanation, from the above article, is miles better than the one I had previously attempted to write: It is a necessity for a country that its international debits and credits (including those which arise out of movements of gold) should at all times be balanced. This seems a simple truth. But a great deal of what is said and written ignores it. For every seller of a county's exchange there must be a buyer. But really to understand which is happening and to know whether the rate of exchange at which the balance has been effected is a stable one, we have to segregate the flow of transactions (which in the aggregate must balance) into distinct sets (each of which, taken in isolation, need not

balance, and in fact will not do so, unless it be by an improbably and transitory accident). the credit and debit items on all these accounts taken together must always exactly balance. For no one can sell a currency unless he can find a counterparty who will buy it from him; and whilst the buyer and the seller need not both belong to the same one of the groups distinguished above, they must each belong to one or other of these groups. vol XXI p64-65 So the net balances, surplus or deficit, of the four types or sets of international transaction listed below, must in total be equal to zero. Underneath I have listed the terms used today along the top, and added the slightly different labels which Keynes used in italics underneath. As mentioned in the later extract, Keynes also labels them into sub-groups in a way different to how it is done today, but this is just a simple change in the algebraic equation that any 12 year old maths student would recognise, and the overall implication of the relationships of the four primary values or sets listed below remains exactly the same: Balance of Trade * Factor Income * Cash Transfers * Capital Account . or or . Net Earnings from Net Capital Outflow . Foreign Investments Speculative Account Lending abroad Current Business e.g. Short Term Liabilities In the same article, Keynes provides the values which demonstrate the magnitude of the growing disequilibriums in the first two balances on the left. The first row of numbers show Britain's deficit of imports not covered by exports; the Balance of Trade or what Keynes calls, Current Business. As well as physical trade, this balance includes for example international shipping earnings, and London's international financial services earnings. As was typical for the time, it shows that Britain imported more than she exported, but the deficit was growing: (Deficit:) 1929: 147m 1930: 192m 1931: 275m (vol XXI p65)

While at the same time the surplus of Britain's net income from foreign investment, which was also a key factor of Britain's imperialist economy, in contrast was falling: (Surplus:) 1929: 250m 1930: 220m 1931: 165m (vol XXI p65)

Keynes in the same article then provides reasons for this dropping away of earnings on foreign investments: the main loss has been from foreign properties which we own outright. It is in respect of income from British-owned railway companies operating abroad, tea and rubber plantations, tin and lead and copper mines, oilfields, land and development companies and so forth, that the decline in our favourable balance is mainly due. For

the majority of such concerns today are making no profit whatever, and are even a drain upon our resources through having to draw upon London reserves built up out of profits previously remitted to us. This loss of profits is entirely a reflection of the fall in commodity prices we may estimate that our 1929 investment income, amounting to (say) 250,000,000 or probably somewhat more, was divided about equally between our fixed-interest receipts and our profits from equity. Up to date the former have declined by perhaps 15 per cent, but the later by 60 per cent or more. vol XXI p66-7 The previous year, in his evidence to the Macmillan Committee in February 1930, Keynes had provided one example of why the balance of trade account deficit (the upper set of numbers) was growing: For example, at this moment the average [price] of freights [international shipping charges] is 30 per cent lower than it was a year ago. Our gross receipts from freights are a very big figureI do not know if anybody knows itsomething of the order of 150,000,000 a year; a fall of that degree in the price of one of our specialities is a very serious thing for us. vol XX p40 So the deficit is getting larger and the surplus is getting smaller. From being a situation where the two sets of numbers combined to produce a surplus of 103m in 1929, they now in 1931 produced a deficit of 110m. To make matters worse, a third set or group of transactions, being foreign investment which made up the the deficit on the Capital Account, were not helping the situation. A year and a half earlier, during the discussion in the Macmillan Committee in February 1930, Keynes was already noting the worrying tendency for British investors to continue investing abroad: today I believe there is a rather strong attraction towards foreign investment, which is due not so much to special attractions abroad such as there was in the case of railway investment in the nineteenth century, but to a feeling of discouragement at home. That discouragement works in a vicious circle. The falling off in profit because of the Bank rate [what we would now call the interest rate, set by the BoE] makes people less eager to invest at home. Then we have to put the Bank rate higher to prevent them investing abroad and that causes still further discouragement at home and sets up a vicious circle. Our investors cannot lend money abroad on a larger scale than the amount of our income balance, so when there is a desire to invest abroad that desire has to be thwarted by a high Bank rate, and that high bank rate by causing further discouragement at home may still further increase the tendency to invest abroad. The high Bank rate ought by making interest higher at home to make home investment more attractive than it was before, but if there is an atmosphere in which everybody is losing money the higher rate of interest is out weighed by that. So the higher Bank rate operates to make them still more anxious to get their money abroad. vol XX p63

Below, back in the Reflections on the Sterling Exchange article, Keynes reflects that it was the growing volume of foreigners short term lending to Britain, i.e. Short-Term Liabilities, which was the key factor forcing the crisis: The actual crisis of last August was, in fact, produced not by the growing adverse balance on income account, [the two sets of numbers above] which indeed, had not at that date gone far enough to be a major factor in the situation, but by the sudden development of an enormously adverse balance on capital account. [Keynes labels both the other two types of transaction on the right hand side as making up the Capital Account, which is different to modern terminology, but this does not matter.] The immediate cause of this was doubtless the breakdown of confidence in the ability of the London market to meet its short-term liabilities, engendered by the critical position in Central Europe and the realisation that much of London's assets there had become frozen or worse. But the more fundamental cause was the growing vulnerability of Londona new thing, a vulnerability which, in my judgement, had been none-existent at previous times of international crisisdue to the Bank of England's incautious handling of the position from 1925 onwards. ... the policy actually adopted was to preserve a middle coursewith money dear enough to make London an attractive centre for foreign short-term funds but not dear enough to force an adjustment of internal costs. In this way we tided over the immediate situation by exploiting London's immense reserves of credit and prestige. We were even able to continue lending abroad on a scale almost commensurate with our former strength, in spite of our increasingly adverse balance on account of current business. But the inevitable price of this temporary ease was the accumulation of a heavy burden of short term liabilities. the evidence collected more recently indicates that in the six years from the middle of 1925 to the middle of 1931, the assistance obtained from this very precarious source was in aggregate on an immense scale, as indeed many of had at the time supposed it to be. events have shown that the true total was in June 1931, to some figure between 600,000,000 and 800,000,000 on the other hand, the liquid available assets which London could mobilise rapidly to meet withdraws did not amount to a third of this sum. Necessarily London had become, as I have said, vulnerable. Sooner or later, for good reasons or for bad, some loss of confidence might arise; and then, in all probability, the insecure structure had to tumble. vol XXI p67-69. Keynes tells us above that, in the years leading up to the crisis, Britain was continuing lending abroad (Capital Account deficit) at a high rate, even though the deteriorating figures listed above should have put pressure on Britain's Capital Account to change from a net outflow to a net inflow. If this desirable change to a surplus or capital inflow had taken place, it could have been achieved through Britain selling more foreign assets and foreigners buying more British assets. But it was not happening, i.e. Britain was still net-investing in the rest of the world. Because the first two types or sets of transaction in the balance of payments, as illustrated by the numbers above, were, on net, now producing a deficit, and because foreign

investment was still continuing its traditional imperial pattern of being a deficit also, this situation entailed that it was the precarious source of the fourth type of transaction, being Short-Term Liabilities, which tided over Britain's Balance of Payments. In other words, the position of the other three sets or types of exchange in pounds, taken as a whole, were sucking pounds out of Britain. Therefore the Bank of England had been forced to offer high interest rates to encourage foreigners to lend back these pounds to Britain, in the form of short term liabilities, which were vulnerable to the loss in confidence which finally happened. As the Northern Rock bank can attest, to be in the financial position of borrowing short term loans to match long term lending has its risks.

Forced Devaluation: Time to Wait and See May I urge that the immediate question for attention is not a tariff but the currency question On 19th September 1931, Britain was forced off the gold standard for good. After the forced devaluation had taken place, Keynes was quick to voice how this unplanned, but not totally surprising event, had completely changed the situation as regards the tariff question. The support for tariffs was, partly due to his own previous efforts, already gaining a seemingly unstoppable political momentum. In a letter to The Times in September 1931, Keynes succinctly lays out his argument: Until recently I was urging on Liberals and others the importance of accepting a general tariff as a means of mitigating the effects of the obvious disequilibrium between money-costs at home and abroad. But the events of the last week have made a great difference. At the present gold-value of sterling British producers are probably in many directions among the cheapest in the world. In these circumstances we cannot continue as if nothing had happened. It is impossible to have a rational discussion about tariffs so long as the currency question is all together unsolved. For until we know more about the probable future level of sterling in relation to gold, and, above all, until we know how many other countries are going to follow our example, it is impossible to say what our competitive position is going to be. May I urge that the immediate question for attention is not a tariff but the currency question? It is the later which is urgent and important. It is at present a non-party issue on which none of the political parties have taken up a dogmatic attitude. It is suitable, therefore, for non-party handling. It is most certainly unsuitable for a General Election. It offers immense opportunities for leadership by this country. We are probably in a position to carry the whole of the Empire and more than half of the rest of the world with us, and thus rebuild the financial supremacy of London on a firm basis. Meanwhile, proposals for high protection have ceased to be urgent. To throw the country into turmoil over them to the neglect of this other more urgent and important problem would be a wrong and foolish thing. Let us give our whole attention and our united energies to devising a sound international currency policy for ourselves and the rest of the world. For it is futile to suppose that we can recover our formal prosperity without such a policy, or that tariffs can be any substitute for it. When the currency question has been settled, then we can return to protection and our other domestic issues with a solid basis to go upon; and that will be the time for a General Election. Persuasion p156 The above shows Keynes to be urging others to hold fire in the course they are set upon; to wait and see where the outcome of the international currency turmoil leaves Britain's competitiveness, before returning to the question of protection. One can imagine some of the political actors concerned being already more ideologically fixed, or politically already committed to the process of a tariff solution, and blinkered in not wanting to appreciate how the new circumstance totally altered the economic landscape. The Tories especially, who were about to put protection at the

centre of their election manifesto, were perhaps understandably not willing to temporarily shelve the popular idea. For example, the soon to be Chancellor Neville Chamberlain was certainly ideologically attached to protection, and made the comment that he was completing his fathers work when later introducing the 1932 Act. But Keynes had not got the idealogical or political baggage which chains him to a certain course, and instead retains an open and pragmatic mind as to when and to what extent tariffs would still be desirable in the future. In writing about the return to the gold standard years earlier, Keynes had used the imagery of a heavy juggernaut lorry set upon its course, imposing, unstoppable, and being unable to react to a change in circumstance. Now, ironically after coming off gold, Keynes again is trying to influence and turn around what can be perceived as the juggernaut of a political party set on a certain course. Again Keynes sees his role as trying to 'persuade' the establishment and the British government that they are travelling too fast in the wrong direction. It is no coincidence that in this period Keynes publishes his Essays in Persuasion, which although secondary in its coherent focused economic impact to The General Theory published some five years later, the first book is more readable and more easy to absorb. This is because it relates more directly to the real historical economic events and issues of Keynes' lifetime up to that point. The depression and the international currency issues can be seen to vindicate many of the unpopular positions Keynes had taken in previous persuasion essays, therefore it is understandable that Keynes should be tempted to have his 'I told you so' moment of glory. These essays are on subjects such as: WWI reparations, the high British gold re-entry, the fallacy of national economy (economy in the older meaning of getting by while spending as little as possible), and other international currency questions. Although apparently Keynes lost a great deal of money in 1929 like many others, from a professional point of view the series of events must have given him a boost of gratification, confidence and professional esteem. The Essays in Persuasion are kind of the trophy cabinet of a proud economists, whose previously unpopular offspring had finally came good. However Keynes was unsuccessful at preventing a General Election, as one was called for the month after devaluation. Members of the Conservatives Party, who had formed the majority of MacDonald's National government for the last few months, had pushed for a General Election, partly in order to establish a clear mandate for protection. Having been punished by the electorate for protectionist proposals in 1923, Stanley Baldwin and his party now won a landslide victory with protection as a key part of his Conservative manifesto, (although MacDonald remained as PM of a National government). Although Baldwin acknowledges in his Conservative election manifesto (see the manifesto through the link at the bottom of the '1931General Election' Wikipedia page) that devaluation has improved the economic situation, he seems set on a protectionist course despite of this, and interestingly notes the value of British tariffs as negotiating chips to aid British export interests in other countries.

Even though devaluation had been considered unanimously undesirable by Keynes and others just a short time earlier, when it was finally forced upon Britain, Keynes' reaction is very positive, as he wrote here for the Sunday Express in an article titled, The End of the Gold Standard, and as also became one of his chosen Essays in Persuasion: There are few Englishmen who do not rejoice at the breaking of our gold fetters. We feel that we have at last a free hand to do what is sensible. The romantic phase is over, and we can begin to discuss realistically what policy is for the best. It may seem surprising that a move which had been represented as a disastrous catastrophe should have been received with so much enthusiasm. But the great advantages to British trade and industry of our ceasing artificial efforts to maintain our currency above its real value were quickly realised. No wonder, then, that we feel some exuberance at the release, that Stock Exchange prices soar and that the dry bones of industry are stirred. For if the sterling exchange is depreciated by, say, 25 per cent, this does as much to restrict our imports as a tariff of that amount; but where as a tariff could not help our exports, and might hurt them, the depreciation of sterling affords them a bounty of the same 25 per cent by which it aids the home producer against imports. Persuasion p 156-7 In reconciling this apparent U-turn, Keynes in the same article below, evokes notions of an obligation of honour to foreigners. He implies that it would have been dishonourable to deliberately plan to devalue at the first sign of trouble, but being forced to devalue after resisting considerable pressures was an honourable exit from implied contracts. Was this sense of honour he is referring to really as significant in this process of events? (Is this honour something sadly lost and missing in parts of the modern financial industry?) Whichever way, one feels 1990's British Chancellor Norman Lamont would have been jealous of Keynes' persuasive skills, as usually to the contrary a government is perceived as weak, not honourable, if its hand is forced by speculators. Sometimes Keynes, like a good barrister, can feel like he could argue both sides and be utterly convincing in both instances: The division of inside opinion was largely on a different point. The difficult question to decide was one of honour. The City of London considered that it was under an obligation of honour to make every possible effort to maintain the value of money in terms of which it had accepted large deposits from foreigners, even though the result of this was to place an intolerable strain on British industry. At what pointthat was the difficult problemwere we justified in putting our own interest first? As events have turned out, we have got the relief we needed, and, at the same time, the claims of honour have been, in the judgement of the whole world, satisfied to the utmost. For the step was not taken until it was unavoidable. In the course of a few weeks the Bank of England paid out 200,000,000 in gold or its equivalent, which was about half the total claims of foreigners on London, and did this at a time when

the sums which London had re-lent abroad were largely frozen. No banker could do more. Out of the ashes the City of London will rise with undiminished honour. For she has played the game up to the limits of quixotry, even at the risk of driving British trade almost to a standstill. Persuasion p157 Was this the nimble spin doctoring of a true patriot, or were the reputation and honour issues surrounding The City really such a valuable asset worth the rest of the economy having suffered so much for? To be fair to Keynes, he had emphasised the position of London as an international financial centre and as a depository of shortloan funds in his anti devaluation writing. I suppose also that to have previously written too much on this subject may have inflamed a civil war of unrest within the country, if the suffering export industries, and the unemployed men from them, had been told in black and white terms just how much bankers interests, and even the honour felt to foreigners interests, was dictating the crushing national economic conditions of the time. Thank goodness Britain learned her lesson and never suffered at the hands of bankers interests ever again! ? Keynes was the kind of patrician minded person to show caution and responsibility in this respect, as I am sure have read the opinion before that he also showed restraint in his writing around Karl Marx's ideas, even when he admired parts of them, because he did not want to fuel revolutionary or reactionary sentiment. This dimension of 'The City' interests influencing national economic policy is all too relevant to current debates, and is the subject of a future chapter.

Part Four: Conclusions From and Inspired by Keynes' Writing From this Time Linking Reparations with the Slump and Devaluation She [the United States] set the problem, and, as it had only one solution, that solution we have been compelled to find The subject of Germany and German WWI reparations has already been mentioned in this essay, and Keynes' writing on this subject was an important part of establishing his early reputation. It would be easy to under appreciate the significance of this subject, but in reading Keynes' writing from this period, you come to realise it was an underlying, and even sometimes a prime factor, in many of the subsequent international economic issues and events of the 1920's and 1930's. Remember the end of WWI was only around eleven years before the 1929 crash. Most of us have learnt how the harsh financial punishment dealt to Germany after WWI contributed to the rise of Hitler years later. Some of us students of economics may also appreciate how the unrealistic foreign demands placed on Germany helped to generate the hyper-inflation of 1921-24. But Keynes shows that the implications of the punitive debt obligations, and the economic stance of the creditor countries in the face of their differing situations, had consequences that reach right up into the depression and gold standard issues a decade later. The main two creditor nations were France; which obviously bore the brunt of German aggression and destruction during WWI, and the United States; who had lent to the Allies on a massive scale. Below in the same one of the Essays in Persuasion as cited in the previous chapter, written just after Britain has been forced off gold, Keynes provides his interpretation regarding what had happened, and the international situation as he sees it: When we try to calculate the effect on other manufacturing countries, whose competition we are now in a better position to meet, the effect is more complex. A large part of the world will, I expect, follow Great Britain in reducing the former gold value of their money. Now, in so far as this is the case, we and all the countries following our example will gain the benefits of higher prices. But non of us will secure a competitive advantage at the expense of the others. Thus the competitive disadvantage will be concentrated on those few countries which remain on the gold standard. On these will fall the curse of Midas. As a result of their unwillingness to exchange their exports except for gold their export trade will dry up and disappear until they no longer have either a favourable trade balance or foreign deposits to repatriate. This means in the main France and the United States. Their loss of export trade will be an inevitable, a predictable, outcome of there own actions. These countries, largely for reasons resulting from the war and the war settlements, are owed much money by the rest of the world. They erect tariff barriers which prevent payment of these sums in goods. They are unwilling to lend it. They have already taken nearly all the available surplus gold in the whole world. There remained, in logic, only one way by which the rest of the world could maintain its solvency and self respect; namely, to cease purchasing these countries' exports. So long as the gold

standard is preservedwhich means that the prices of international commodities must be much the same everywherethis involved a competitive campaign of deflation, each of us trying to get our prices down faster than the others, a campaign which had intensified unemployment and business losses to an unendurable pitch. But as soon as the gold exchange is ruptured the problem is solved. For the appreciation of French and American money in terms of the money of other countries makes it impossible for French and American exporters to sell their goods. The recent policy of these countries could not, if it was persistently pursued, end in any other way. They have willed the destruction of their own export industries, and only they can take the steps necessary to restore them. The appreciation of their currencies must also embarrass gravely their banking systems. The United States had, in effect, set the rest of us the problem of finding some way to do without her wheat, her copper, her cotton, and her motor-cars. She set the problem, and, as it had only one solution, that solution we have been compelled to find. Persuasion p 158-9 Keynes again is pointing out some logical inconsistencies, this time in French and more importantly US economic policy. Just as he earlier criticised British Chancellor Simon for presuming that Britain could out-compete Germany, while Germany was compelled by treaty, to out compete Britain, again Keynes is picking up the same logical inconsistency in the US stance. The United States was still a protectionist country, like it had been since the civil war, and was therefore both asking Germany and others to pay their due debts, but at the same time having tariffs in place which made this harder. The tariffs meant that in order to compete with domestic US products, if it was to effectively export into the US, Germany had to settle for a relatively lower income for their wares. Germany and others had to be net exporters to the US, because reparations indirectly de-facto demanded this. They had to in effect pay the US import tariffs out of their costs, and therefore had to maintain an economy back home capable of supplying goods to the degree cheap enough to pay the tariff and still compete with domestic US producers. The same logic meant that, if the opportunity for exports into the US were limited, but Germany had to be a net exporter, then imports of US goods into Germany had to be also restricted somehow. German tariffs were useful for this, but also, like the export case, it was necessary to have cheaper costs than the US producers. This is what Keynes means by a competitive campaign of deflation, as countries vied to hold down their wages and other costs for trade balance reasons. A few weeks before Britain went off gold, in the same article titled A Gold Conference cited in the last chapter, Keynes had also voiced his frustration with the hoarding attitude of France and the US: The whole world is heartily sick of the selfishness and folly with which the international gold standard is being worked. Instead of being a means of facilitating international trade, the gold standard has become a curse laid upon the economic life of the world. It is only necessary to look at the present distribution of the

world's gold supplies. Half the world's gold stocks are now held by America. At the present time the American gold stock is about 1,000,000,000 and the French 471,000,000. The reason for this concentration of gold in America and France is that these countries have not lent their surplus balance on international account as Great Britain used to do in the past. France appears to have employed virtually the whole of her international surplus during the last three or four years in the purchase of gold and short-term liquid claims instead of embarking on long-term investments abroad. The attitude towards long-term investments of investors in the United States has varied, but has been generally unfavourable, It was the opinion of the Macmillan Committee that the disposition of these creditor countries to employ their international balances in the purchase of liquid claims, including gold, had been primarily responsible for the disastrous fall in the level of world prices. Yet it is one of the objects of the gold standard to maintain stability of the international price level. vol XX p600 In the next chapter, there are a few instances of Keynes patriotically proclaiming the desirability of a world where Britain is the most influential country in international economic affairs. In the above extract, we can actually see evidence of a way in which Britain could indeed be argued to be a more positive hegemony: these countries have not lent their surplus balance on international account as Great Britain used to do in the past. In other words, in the days before the capital haemorrhaging of WWI, when imperial Great Britain was enjoying an industrial lead and unrivalled trading supremacy, Britain did not hoard gold, but used her surplus to invest around the world, such as giving much of the world railways. Given Keynes' iconic theories about excess saving and the key role of investment in aggregate demand, it is understandable and significant that he compares the behaviour of the US and France unfavourably to Britain in this respect. Although this may be unfair as the times were different. But, never one to stick to over-simplistic one dimensional interpretations, below, back in the transcript of his contribution to the Macmillan Committee, Keynes' focus is on Britain's own role in causing the international deflation which he holds as being responsible for the slump. Today Britain's economy is a small factor in the world, but it has to be remembered that in the early part of the last century, although we were being overtaken in terms of sheer size, our empire, Britain's disproportionate trading speciality, and the continuing use of Pounds Sterling and London financial services by other countries, made Britain's economic impact upon the world economy still significant. This discussion in the Macmillan Committee was a year and a half before Britain's exit from gold, so perhaps later Keynes grew more and more dissatisfied with the other two hoarding countries, but here at least there is plenty of blame to go around, as he doles out plenty of blame to his own country: I should say we are further off equilibrium than we were then. The reason for this fall in price level is another story. I should say that we ourselves played a very considerable part in causing it, and that the efforts we made to tighten up caused

deflation in all the rest of the world. I would not put forward the United States as the main criminal, except for very short periods. It was, really, the return to the gold standard in many other countries which caused them to behave just as we have; they were struggling to deflate. That is the root cause of the situation. I think the world was running on more or less an even keel then and everything was set for better times, and then we started our return to the gold standard. vol XX p 57 The gold standard was a key part of the mechanism kettling in this unsustainable set of forces, as it was stopping the natural equilibrium in currency values from being achieved. The build-up of pressure had to be released somehow, and as Keynes notes, France and the US at that time were building up huge reserves of gold, which starved the rest of the world system, and created an unsustainable imbalance: As a result of their unwillingness to exchange their exports except for gold. The United States and France, perhaps conscious even more than Britain's establishment had been of their status as creditor nations, stayed on the gold standard for a number of years after Britain had left, and subsequent economic research concluded that they did indeed suffer the curse of Midas, in that their economies recovered more slowly compared to those countries who had left gold and devalued earlier. Keynes' broad conclusion as to the key factor generating the slump was famously of course, a general lack of international demand. But reading his thoughts regarding reparations causes one to think that these debts, combined with the gold standard system, and the lengths countries had to go to win out in this competitive campaign of deflation, was an important contributing factor behind this lack of international demand. These thoughts and experiences led Keynes to contribute more than any other individual to the post war economic system, which was to turn out to be one of the greatest ever examples of international cooperation for the economic common good.

How Altruistic were Britain's Policies, Including Tariffs: petty devices of economic nationalism or many of the evils, with which the pious resolutions will deal, are symptoms? Although Keynes comes across as wishing to put Britain's interests first, he does imply that, regarding the particular tariff policy he is proposing, the rest of the world will not lose out too badly. In his Persuasion essay titled: Mitigation by Tariff written in March 1931, he writes: At the same time, by relieving the pressure on the balance of trade it will provide a much-needed margin to pay for the additional imports which a policy of expansion will require and to finance loans by London to necessitous debtor countries. In these ways, the buying power which we take away from the rest of the world by restricting certain imports we shall restore to it with the other hand. Persuasion p152 In other words the negative effect of the tariff policy on the rest of the world must be viewed together with the expansionist policy intended to be implemented alongside in double harness. The assumption is that the negative impact of the tariff on raw material trading partners will be compensated by the extra demand for imports generated by the expansionist domestic policies. Thus Britain does its bit to keep the international system trading. This is slightly dubious reasoning. It would be similar to saying to your local shopkeeper; I am going to pay ten per cent less for everything I buy from you, but don't worry, the money I save I am going to come back and spend with you also! The key question in that analogy would be whether Britain / the shop customer is going to be able to now spend significantly more extra money, rather than just replacing the money taken in tariffs? Keynes' famous 'multiplier effect' may indeed allow this, but it is not a certainty which trading countries, or indeed a local shopkeeper, would perhaps want to rely on! Although Keynes advocated the revenue tariff later introduced by Britain, he was at the same time wary of the international implications which tariffs had generally on depressing trade. Free market supporters like to use the phrase 'beggar thy neighbour' as evoking the downward spiral of selfishness and short-sightedness that a course of tit for tat protection can provoke, and it is a valid point. The game theory dimension can kick in, and the common good dividends of trade are swallowed up by duplication and inefficiency. In September 1931, at exactly the time Britain had left the gold standard, in the draft conclusions to a report for the 'Economic Advisory Committee' on the subject of: The Balance of International Payments, Keynes seems to sympathise with the pro free traders arguments. He is focusing now not specifically on imports verses exports, but on imports verses foreign investment returns, or as they are called (in contrast to the visible exports), 'invisible earnings': our invisible income from the fixed interest portion of our foreign investments may wilt away under the continuance of the existing international situation. looking

forward into 1932-3 we believe that these receipts must be regarded as in the highest degree precarious This brings us to a few observations, which will not be out of place, on a hidden danger which may escape the careful attention it deserves at a time when we are necessarily so much concentrated on our own affairs. Domestic measures to improve the balance of trade, whether in the shape of a devalued exchange or of a tariff, might go a long way to make good the adverse balance estimated in the first part of this Report. But if at the same time our income from fixed interest investments abroad was fading away, this would render these measures of insufficient avail. Measures to right our own position are liable to have the effect of increasing unemployment elsewhere and of making it still more difficult for debtor countries to meet their obligations. Thus what we do to improve our visible balance of trade may have a serious adverse reaction on our invisible balance. We fear, therefore, that if we concentrate on domestic measures alone, our efforts mat be defeated by the loss of invisible income from debtor countries. vol XX p616-7 The 1930s slump hit the new world countries very hard, as their food and commodity export prices fell swiftly, causing the income of small producers to quickly collapse. This was in contrast to the more sticky wages of employed British manufacturing workers lucky enough to have held onto their jobs, who were experiencing a rising standard of living. As an illustration of this, many Brits who had emigrated to the young countries seeking a better life, returned when the slump hit, and Britain, in contrast to previous years, experienced net immigration. At that time Britain was in the position of being both the main importer / market and the main investor for many developing empire and new world countries. This is in contrast to present times when arguably a protectionist stance by Britain could only slightly dent the exporting capability of some developing countries. In present times the loss of British markets would be small fry alongside the massive growth of the BRIC's, and not the international game changer it would have been in 1931. The Argentine mentioned by Beveridge earlier, was the archetypal raw material exporter country, and the money generated by, say, a British owned company exporting beef to Britain, would have been a prime example of the kind of invisible income Keynes was referring to, adding a little credit to the argument Beveridge was making earlier. Again here Keynes is showing appreciation for the wider international economy, and noting the conflict this often has, game theory style, with the immediate national interest. In an article which he wrote in December 1932, Keynes builds on this theme and provides an interesting explanation and resolution of the complex and contrasting views of tariffs which he held. In this article he evokes effectively the fact that tariffs were a last resort motivated by the crisis, and that the international common good and individual national interests were often at odds in trade issues. In the first paragraph, Keynes' caricature of how he expected statesman in the up coming World Economic Conference to behave, provides a timeless recognisable picture of national leaders grappling with international issues. The gap between the warm rhetoric in favour of the international common good on the one hand, but real concessions being limited by a jealously guarded national interest on the other hand, feels familiar to many such

economic, and even climate change kind of gatherings, held over the intervening years: It is easy to predict the agenda of the Conference. A number of resolutions will be passed declaring that many things ought to be changed, but without a serious intention of changing them. The Conference will agree in its collective capacity that tariffs and quotas have reached a pitch of absurdity and are a menace to international trade, but there will be no offers by individual countries to reduce them. Exchange restrictions will be denounced, but those countries where they exist will regret that they are in no position to abate them. It will be said that debts should be written down when they are beyond the capacity of the borrower, but no individual creditor will offer to write them down. The Conference will declare that there should be a general return to the gold standard as soon as possible, but those countries which have gained their liberty in this respect will not surrender it except on conditions which they do not expect to see satisfied. The Conference may agree, even with French acquiescence, that prices should be raised. But will it offer any plan for raising them? So long as the Conference deals with symptoms and not with causes the shadow of futility will lie across its path. Its first task, therefore, should be to distinguish the one from the other. If we study the problem in that way, it is apparent that many of the evils, with which the pious resolutions will deal, are symptoms. The latest extravagances of tariffs and quotas, exchange restrictions, the default of debts, the collapse of the gold standard, even the fall of prices itself, are mainly symptoms. No one has desired these things; none of them is the expression of deliberate policy; they have been forced upon us as the expression and the result of more fundamental forces. It is as though a council of doctors, summoned to cure colds in the head, were to pass resolutions that it is desirable to stop sniffling and that a man who coughs is a nuisance to his neighbours. There is one, and only one, genuine remedy; namely, to increase demandin other words to increase expenditure. If we all begin purchasing again, we shall all have the means to do so. The appropriate stimulus to the activity of trade will vary from nation to nation; in some a relief from taxation, in some a program of public works, in some an expansion of credit, in some a relaxation of exchange and import restrictions, in some a repayment of pressing debts, in some the mere removal of anxieties and fear, in some the mere stimulus to the lords of business to be courageous and active again. What is the charm to awaken the Sleeping Beauty, to scale the mountain of glass without slipping back? vol XXI p211-6 Previously above Keynes had mentioned that the negative international contribution that a British tariff made could be offset by enabling an even greater expansionary expenditure by Britain's government. Now in this article, Keynes expands on this line of thought and paints a more detailed picture of the situation as he sees it. Yes, tariffs are damaging to world trade, but from an individual country's perspective, they are

the symptom of a problem of reduced demand in the international economy. His approach to solving the demand problem described in the last paragraph is strikingly un-ideological and un-dogmatic. Rather than insisting that countries do what perhaps is politically or economically impossible in the short term, Keynes is very nonprescriptive regarding how different countries should go about doing whatever they can to contribute to greater stimulus in international demand. He recognises tariffs as both a negative factor and also a symptom regarding the reduction in international demand, but implies in his pragmatic suggestions for remedy, that reducing tariffs is only one option on the menu. While later thinkers made freer trade the central issue, and even brazenly cited protectionism as the prime factor in the depression, Keynes is more measured in recognising it as just part of a larger picture. For Keynes, international demand was the key factor, and it would be easier to increase this with lower tariffs. But if national expedience made tariffs absolutely necessary, other factors such as government spending and borrowing can make up the ground lost and overshoot that negative effect. To free traders wishing to chastise those countries who protect, Keynes likens them to doctors who wish to chastise the man with a cold for sniffing and coughing. The free traders interpretation of the depression often stops at the conclusion that tariffs were bad, and were a main cause of the contraction. Although any alternative narrative could not go as far as considering tariffs a positive or even a neutral force in this period, one could place more blame on the other factors, and consider tariffs just a part, and in some ways a symptom, of the slump, rather than the prime cause. The triangular kettling effect produced by the combination of the gold standard, tariffs and reparations requirements, all played their collective part in generating the competitive campaign of deflation, and protection by itself would not have been nearly so harmful if it was not carried out against the grain of these other two international factors. Arguably in Keynes' thinking, there was little to be gained in pointing out specifically inherently respectable policies or unrespectable policies. There was just countries which contributed to counter-acting the slump in international demand, and those which did not. Keynes put a great deal of effort into making sure Britain's net contribution was positive, and if this meant a tariff policy to complement and make safe, in trade balance terms, a 'Keynesian' policy of government investment, well then the internationally positive ends, justified the questionable means of protection. The benign nature of Keynes' approach to international trade partners is also revealed in the following, which he wrote in a section called Boom Control in part of a larger essay called How to Avoid a Slump, published in The Times some years later in January 1937. By this time the surge of rearmament spending by the British government was providing an experimental laboratory for the testing of many of Keynes' beliefs, such as the multiplier effect, which he is noticeably excited about. Keynes has quickly recognised that high government spending is producing different economic weather for Britain's economy, and not missing a trick he is ready to

nimbly change economic tack to suit: Just as it was advisable (from our own point of view) to check imports and to take measures to improve the balance of trade during the slump, so it is now advisable to shift in the opposite direction and to welcome imports even though they result in an adverse balance of trade. I should like to see a temporary rebate on tariffs wherever this could be done without throwing British resources out of employment. But, above all, it is desirable that we should view with equanimity and without anxiety the prospective worsening of our trade balance which is likely to result from higher prices for raw materials and from our armament expenditure and general trade activity, even though this may put a temporary strain on the Exchange Equalisation Fund. The recent decrease in the Bank of England's fiduciary issue indicates that we have today a plethora of gold. It is desirable, therefore, that the raw material countries should be allowed to replenish their gold and sterling resources by sending their goods to us; This policy is doubly desirable. First, because it will help to relieve a temporarily inflated demand in the home market. But, secondly, because a policy of allowing these countries to increase their resources in 1937 provides the best prospect of their using these resources to buy our goods and help our export industries at a latter date when an increased demand in our home market is just what we shall be wanting. These, I urge, are the methods which will best serve to protect us from the excesses of the boom, and, at the same time, put us in good trim to ward off the cumulative dangers of the slump when the reaction comes, as come it surely will. vol XXI p391 In summary, concerning international questions, to modern ears Keynes' tone is no doubt at times a little paternalist and condescending at best, or imperialistic at worst. But at least the above does demonstrate a benign give and take attitude to his fellow man. The impression is given that if there was a conflict of interest, Keynes would always put Britain's interest first, and there is evidently a snobbery regarding Britain's place in the world, as typified by the two short extracts below. It needs to be noted that the dramatic fall in food and raw material prices caused by the slump, which helped real British wages rise during the recovery period, was at the direct expense the raw material countries, who suffered badly. However, there is nothing in what I have read to suggest that Keynes is interested in expressly exploiting weaker countries for gain, and he is willing to show some significant generosity when it fits in with his grand schemes or expectations for the future of Britain. Keynes has been widely described as a humanist, and the desire he shows to see Britain lead the world could, at that time by him at least, be to a degree reconciled with the common good, as he alludes to when he finishes a letter to The New Statesman and Nation in March 1931 already cited: to enable this country to resume the financial leadership of the world which we alone are capable of using in the general interest vol XX p497 Likewise he also finishes his Plea to Lifelong Free Traders, for The Daily Mail in

March 1931 with a similarly patriotic call: and re-assume that financial leadership which is properly ours vol XX p492 Regarding the question in the Chapter heading, I am sure the reader can guess with which side my sympathies lie, and I hope that even if your views are not in agreement, that at least you can recognise that there was more going on during that time than just the rise in protectionism. The international financial tensions and imbalances created by creditor countries such as the US and France, through the gold standard and reparations, hoarding a large section of the worlds spending power must also share the blame.

The Pitfalls of Protectionism The path of wisdom in these matters is, then, a narrow one The impression given so far in this essay should be that Keynes was in many ways a very cautious supporter of protectionist policies. As mentioned earlier, it is important to make the distinction between the two types of motive for protection: with most of the last chapters being relevant to revenue or macro economic motives, where as arguably the most relevant to today is the other safe-guarding or industrial policy type. Below, returning to the 1923 anti Baldwin article, Keynes voices some reservations and criticisms on the reality of tariffs. Although in the early 1930's he had softened on the greater question of protectionism, these points would still remain valid, both for him, and generally for present times: The old view, that the self-interest if individuals, operating without interference, will always produce the best results, is not true. As knowledge increases and the arts of government improve, the public good requires many checks on the unregulated acts of individual traders. Never the less, in a case like this, where lobbying, expense, waste of time, and friction of all kinds would endlessly ensue, we require, to justify the change, not the momentary caprice of a minister who is short of material for a speech at a party gathering, but solid and certain advantages to the state, carefully thought out and clearly explained. vol XIX p149 The complication of the free trade issue has generally arisen in the past from the fact that, whilst protectionist have really wanted protection for its own fallacious sake, they have generally advanced under a thick smoke-screen of the exceptional cases,-agriculture and race-virility, key industries, infant industries, dumping, preference, retaliation, and making the foreigner pay. There remains retaliation available for an occasional mention. But the worst of this cry is its utter inconsistency with the main cry of providing permanent employment. For it is of the essence of retaliation that the duties are put on with the idea of taking them off again, soon and suddenly, when they have served their purpose. It is obvious that no expansion of home industry could be started under the precarious and deceptive shelter of retaliatory duties. vol XIX p150 The above extracts underline the miss-match between the short-term horizons of politicians and governments, and the inherently long time scales which business investment and the changing of organisational capacity requires to be efficient and effective. Trends in the free markets of capitalism may be brutal and heartless in their disposal of unprofitable organisations, but at least these trends and developments are relatively predictable. And when the changes are quick, at least they usually do not have the caprice of some politician's narrow objectives driving them. Keynes returns to this main concern he has regarding tariffs later in March 1931, in the same article for The New Statesman and Nation used a few times earlier, and again the focus is towards his free trade adversary, Professor Lionel Robbins from the

LSE: I am more nearly touched by Professor Robbins' contention that a tariff, once put on, will never be taken off when the special circumstances which called for it have passed away. I know that there is a risk that this maybe so. But it is a risk which circumstances demand that we should take. Nor do I rate the risk so high as he does. It depends above everything on what happens to the price level. A tariff is the natural reaction, and in my judgement a sensible reaction, to an external price level which is falling at a rate to which internal costs and incomes cannot adjust themselves. I believe that Joseph Chamberlains' campaign was engendered in the falling price level of the [eighteen] nineties and was entombed in the rising price level of the nineteen-hundreds [1900-1909]. When prices are falling, we all welcome a measure which will hold some of them up; and when they are rising we all welcome what will cause a reduction. A return to the price level of two or three years ago will make a world of difference to the national sentiment. If prices rise to their former level, and if unqualified free trade turns out to be as much in the interests of this country in the conditions of the twentieth century as it certainly was in the conditions of the nineteenth century, then I believe that the tariff will be taken off again. But if I look into the bottom if my own heart, the feeling which I find there is, rather, that a tariff is a crude departure from laissez-faire, which we have to adapt because we have at present no better weapon in our hands, but that it will be superseded in time, not by a return to laissez-faire, but by some more comprehensive scheme of national planning. vol XX p495. I like this extract because, with the typical effortless insight and the broad scope of Keynes' understanding, it places in context the peak of protectionist sentiment around the turn of the last century, personified by Joseph Chamberlain and his 'Empire Preference', as mentioned in the first chapter. Other accounts of that period may focus on the party political intricacies of the protectionist campaigns. Still others may broaden out and consider the power struggles taking place between manufacturing Birmingham, a free trade Lancashire (textile industry) and a free trade City of London. But Keynes, with a macro-economists rather than a politicians or businessman's eagle eye view, implies simply that it was the changing general international price level that nurtured, and then done for, this wave of protectionist support. It has to lead me to consider the same question; is my approach to protectionism today only relevant to recessionary times? I do not think so because the environmental and inequality factors it mainly seeks to address are terminal not cyclical. But the avenue of attack is there to be used by detractors. There is definitely a correlation between protectionist sentiment and recessions. There are a few other points relevant to today's situation and my protectionist beliefs, that can be illustrated by parts of Keynes' writing. The first is a characteristically

lofty, generalised and colourful point Keynes makes regarding efficiency, in a talk he presented to a group of Liberal political party supporters in January 1928: There is a dual aim before the statesmana society which is just and a society which is efficient; and more and more in terms of our old solutions we are feeling ourselves confronted with a dilemma, a seeming contradiction very often between the policy which appears to be just and the policy which seems to be in the interest of efficiency. On these issues between the Tories and Labour there is a sharp cleavage on both points. They disagree as to what is just; they disagree as to what is efficient; and so they can engage with conviction and enthusiasm on the business of cutting one anothers throats. But Liberals are in a more difficult position. They are inclined to sympathise with Labour about what is just, but to suspect that in the ignorant blind striving after justice Labour may destroy what is at least as important and is a necessary condition of any social progress at allnamely, efficiency. It is useless to suppose that we can pursue ideal justice regardless of ways and means in the economic world. No one can look at the evolution of society and not admit to himself that some measure of social injustice has often been the necessary condition of social progress. If society had always been strictly just, I am not at all sure that we might not still be monkeys in a forest. vol XIX p639 These sentiments ring true for me, in that now as then, I notice how quick socialists or greens or reactionary thinkers are prone to forget or disregard as unimportant the mechanisms and incentives within capitalism which get people out of bed and out to work in the mornings, and keeps the economy efficient. Conflict of interest is inherent within any economic system, and capitalism has lasted because it has clever, neat and impersonal ways of resolving many types of potential sources of conflict. I view a certain kind of protectionism as a way to re-jig the existing capitalist system in a favourable direction to approach the issues of inequality and the environment, and not a means of uprooting capitalism completely. It could in my view, be used as a stealth tax on he rich, a means of reducing inequality, and through reducing the requirement for perpetual economic growth, allow a more sensible approach to the future of wealthy countries in a resource finite world. One surprising area of Keynes' correspondence and writings during this time, was on the subject of Sir Oswald Mosley and his protectionist Manifesto. Later in that decade, Mosley would shamefully become the leader of the British Union of Fascists, and then in WWII be interned for his extremist political beliefs and Nazi sympathies. Looking backwards, his subsequent actions and beliefs do tend to degrade, or give at least a bad smell to, anything the man ever did. However, as I did not previously know, before his fall from grace, Mosley was in fact a respectable Conservative and then Labour politician, and acceptable aristocratic company and correspondent for Keynes, Churchill and others.

Before he had turned to extremism, Mosley was in the 1929 Labour government of MacDonald as Chancellor of the Duchy of Lancaster, a role which we would now equate with 'Minister without portfolio'. In this role he was given responsibility for looking at the unemployment problem, and it is from this remit and platform that he produced his protectionist manifesto. Mosley received a degree of support from his colleagues and newspapers, but his ideas were blocked in the Labour party and so he subsequently resigned from the post and later the party. Keynes, unaware like everyone else of the notorious future Mosley would chose for himself, did find his manifesto, centred on protection, a worthwhile and interesting proposal: Sir Oswald Mosley's Manifesto deserves attention. I like the spirit which informs the document. A scheme of national economic planning to achieve a right, or at least a better, balance of our industries between the old and the new, between agriculture and manufacture, between output for export and output for home consumption, between home development and foreign investment. The question for us is not whether the signatories to the manifesto have thought out correctly the details of such a plan in all their particulars; but whether or not it is desirable to have a plan. If it is desirable, the manifesto offers us a starting point for thought and action. vol XX 4734 In the politics of the first quarter of the 20th century, it tended to be the Tories who were most inclined to be protectionist, where as the Liberal political party were instinctively free traders, and Labour wary of protectionism because it may raise the cost of living for the working population. A cynical angle often noted by historians is that, in times of strain on the government finances, tariffs were seen as a more desirable form of revenue raising than property and wealth taxes by the Tories. Anyway, in the following, also from the same article as above, Keynes recognises the socialist credentials of Mosley's protectionist Manifesto, and produces a comment which is perhaps pointedly directed at free trade supporters within the Labour movement: how anyone professing and calling himself a socialist can keep away from the manifesto is a more obscure matter. looking further ahead I do not see what practical socialism can mean for our generation in England unless it makes much of the manifesto its own vol XX p475 In echoing Keynes' sentiment about protection having socialist qualities, I would claim to draw broad philosophical parallels between national protectionism and the trades union movement. Trades unions, those modern bastions of disappearing socialist (and even sometimes near communist) sentiment within our modern economy, can be interpreted as a means of protectionism on a small scale, and distant cousin to national protectionism. Trades unions, in the instances where they remain most potent, choke off the ability of employers to offer the lowest pay and conditions which the relevant labour market will bear, and instead form a protective platform of

minimum pay and conditions through collective bargaining. Personally, although I recognise the historical role of trades unions in improving the practises of employers, I am sceptical as to their relevance to solving modern labour market problems, and inequality in general. The most powerful and notorious unions seem to owe their power and success to the access to monopoly which the occupation of their members happens to bestow upon them, purely by economic accident. The strength of their arm often seems to bear little direct relation to the validity of their claims. Inherently the workers who most need union support are those working in competitive areas, where such organisation would allow a union to exercise no monopoly advantage over the national population of consumers / customers. So where unions are most needed, they are powerless to help. In the modern economy, with its gradually deteriorating bottom end labour market, unions, where they have achieved some degree of influence, are a bulwark against the general downward trends experienced by the rest of the working population. Therefore they are understandably precious to these particular sections of working society. But their benefit is sectional, and in a better balanced country with generally tighter bottom end labour markets, their sectional benefit would become less precious to their members. Trades union jargon includes the phrase 'closed shop' to indicate that a workplace can only employ union members. In the protectionist notion I support, carefully chosen whole industries become like closed shops, except the closed means in this case merely domestic labour rather than outsourcing, in contrast to meaning union labour rather than non union labour. This concept of monopoly verses competition brings us onto one of the most important dimensions of protectionism, which also ties in with the questions of efficiency Keynes emphasised earlier. In the extract below, Keynes has spotted that Mosley was trying to claim two different benefits of his protectionist manifesto, that were inherently incomparable. He suggests emphasising the most important benefit, and making a lesser but still important claim regarding the other: The mere payment by an industry of higher wages than are paid by its foreign competitors is a very bad criterion for imposing a tariff, and quite incompatible with promises to the consumer not to raise prices against him. Indeed, the manifesto seems to me to stand insecurely between promises of advantage to the producer and of cheapness to the consumer. It would be better today to take a firm stand for the former in the first instance as the sole possible condition of increased employment, and to promise no more to the consumer than that no monopoly shall take unreasonable advantage of him or curtail his full sharehe can ask no moreof the maximum output of which the country is capable. vol XX p473 In other words, Keynes is suggesting that protection inherently will maker certain goods more expensive to consumers, as that is the nature of the beast. If the price of imports have a tariff added to them, or more expensive British labour is used to make

them instead of cheaper foreign labour, the goods affected will be more expensive. But Keynes emphasises that this is not inherently bad, as long as the spectre of monopoly can be avoided. A protected industry under monopoly can take unreasonable advantage of the consumer, so it is important to promise to guard against this happening. But a distinction can be made between an appropriate rise in prices due to the inherent change in production costs or the tariff tax, and the unfair extortionate rents of a monopoly scenario. For me, clever, post growth protectionism is summarised as using protectionism in a way which prioritises making sure that the process of protectionism does not create pockets of monopoly power and advantage. This is done by choosing sectors of the economy to protect which are large enough in scope to allow a protected domestic industry to support a number of prosperous competitors, producing at an efficiently large scale. This scope and scale led protection can best be understood when contrasted with traditional forms of historic 'safeguarding' or 'infant industry' protection, which have often been motivated by the social implications of large employers going under, or the ambitious technology or industrial policy goals of governments. Both of these kinds of protection can tend to provide too much shelter and too little domestic competition. Free traders argue for the real and potent benefits of competition, and that protection destroys these benefits. In summary, an intelligent protection approach is one which tries to maintain competition under protection, as long as the correct sectors are protected which have large enough markets to enable effective domestic competition.

Allowing a Breathing Space The creation of an environment in which other ideals can be safely and conveniently pursued A phrase used by Keynes a number of times when attempting to argue the case for the revenue tariff, was that it could provide a breathing space. Keynes shared some of the reservations of those who were against a protectionist policy, but this concept shows how he reconciles these doubts in his mind, in the light of the dire position of the British Governments' finances. In the March 1931 Economic Notes on Free Trade article in the The New Statesman and Nation already cited earlier, Keynes explains his position in quite a sombre and cautious tone: I have reached my own conclusions as the result of continuous reflection over many months, without enthusiasm, and as the result of the gradual elimination of the practicable alternatives as being even more undesirable. Nor do I suppose for one moment that a revenue tariff by itself will see us out of our troubles. Indeed, I mainly support it because it will give us a margin of resources and a breathing space, undercover of which we can do other things. vol XX p498 As an extract from a letter Keynes wrote to The Times in the same month also illustrates, this concept of a breathing space was an argument he used to reconcile and try to win over the free trade views of his respected peers. Again one of the signature Keynes issues of long-term verses short-term is brought up: The unemployment of men and plant is so large and so widespread, has lasted so long, and looks like lasting so much longer, that I should expect a tariff to increase employment now, and for some time to come; while the advantages to business confidence, the balance of trade, and the Budget are too obvious to need emphasis. Uncompromising free traders are entitled to claim that they are taking a long view but they are on weak ground when they deny the immediate advantages of a tariff. My own view of our position is so pessimistic that I am afraid to forgo advantages at a time when we greatly need a breathing space. vol XX p507

If looking for a seal of royal Keynes approval for protectionism, one would have to conclude at best a mixed outcome, especially if his later Bretton Woods period is taken into account. But I think it is far to say that Keynes was far more pro protection, or open minded if you like, than the majority of economists are today. It is tempting for free traders to label Keynes' support for protection as specific to the crisis, but this, as discussed, was only one part of his writing on protection. It is important to notice the dates of the extracts I have provided. Many of the most pro safeguarding writing comes from well after the intense currency / balance of payments crisis period had been resolved, and make no reference to being dependant on changing future macro-economic conditions. His support for revenue / macro / trade balancing type of protection, may well have been short term, but his support for

the safe-guarding or more industrial policy type of protection was no flash in the pan as far as his opinions were concerned. Book VI of The General Theory in 1936 is not exactly a hymn to the free market. In researching Keynes' attitudes to trade during the Bretton Woods and post war period, Keynes approached the giving up of protection as being a concession to make in return for larger new international system ambitions, and not as a goal in itself. It is interesting to ponder what Keynes would advocate today? Ask ten economists familiar with Keynes' writing, and you would probably receive twelve different answers. Environmental issues are now more prominent, and the balance between potential population consumption and the earth's key capacities or key resources have certainly radically changed since his time. So one would hope he would be mindful of this environmental dimension? I think he would be. And would he even, like me, make the link between a protectionist path and environmental issues when talking of other ideals can be safely and conveniently pursued ? Would he also see that some form of thoughtful protection, which does not harm the most useful qualities of competition and trade, must have a role in a long term solution to the knot of: unemployment & inequality, growth & consumption, environment & sustainability, we are so obviously living through and running towards? Perhaps. Above all, I hope that the many lengthy extracts from Keynes I have included, show that he was a pragmatist, and willing to experiment with the economic system of his country. He was willing to break the rules and go against what the economic establishment of his day had taught him, and indeed what he himself had taught in his early career. He recognised that economics was not a science of black and white objective answers like physics: Is it that economics is a queer subject or in a queer state? vol XX p505, but he was interested in what would work. One thing that unites both Keynes and Hayek, (perhaps also interestingly unites them against many of both of their own followers) is how much they emphasise uncertainty in economics, and deride the false certainty of ideological thinking. OK, later after the depression was over he may of changed his view of economic priorities regarding trade, but not by as much as is commonly believed. OK, so now western countries are not locked in a destructive competitive campaign of deflation and we have now grown up to have the WTO to maintain the common good of low tariffs. But has China really been playing this game with us? What would Keynes make of China's artificially low currency and unbalanced trade account throughout recent decades? What would he make of the fact that China holds US government debt to the equivalent of $1000 per each of its citizens (hoarding?). This narrative is losing its significance slightly, as China's production costs and trade flows become more balanced with the West, but a heck of a lot of water has already flowed into this hoarding lake up till now, even if the stream is slowing. Also we in Britain flatter ourselves if we believe that, like the 1930's, the protection of our markets would be such a big deal to developing countries. The BRIC countries

now have each other's consumers to indulge, and the most positive contribution we could make to their long-term existence, would be to set a positive example, and use protection to enable us to bound our claim upon the earths resources at the present average levels of our national consumption, in a more painless and harmonious way. We in the West should not assume as a birthright, perpetually growing consumption claims on a finite world. In other words, don't try to justify perpetual Western growth through a free trade model by emphasising developing country exports, as times have moved on. It is interesting to reflect both on how much has changed and how little has changed in 80 years. For the final extract, I have indulgently reverted to a somewhat reflective and philosophical piece of writing taken from the same article titled National SelfSufficiency, as cited twice in the first chapter, which does lend support to contemporary protectionist sentiments. Remember this was written in July 1933, well after the initial turmoil of the world price slump and Britain leaving the gold standard: But over an increasingly wide range of industrial products, and perhaps of agricultural products also, I become doubtful whether the economic cost of national self-sufficiency is great enough to out weigh the other advantages of gradually bringing the producer and the consumer within the ambit of the same national, economic and financial organisation. Experience accumulates to prove that most modern mass-production processes can be performed in most countries and climates with almost equal efficiency. Moreover, as wealth increases, both primary and manufactured products play a smaller relative part in the national economy compared with houses, personal services and local amenities which are not the subject of international exchange; with the result that a moderate increase in the real cost of the former consequent on greater national self-sufficiency may cease to be of serious consequence when weighed in the balance against advantages of a different kind. National self-sufficiency, in short, though it costs something, may be becoming a luxury which we can afford if we happen to want it. Are there sufficient good reasons why we may happen to want it? The decadent international but individualistic capitalism, in the hands of which we found ourselves after the War [WWI], is not a success. It is not intelligent, it is not beautiful, it is not just, it not virtuousand it doesn't deliver the goods. In short, we dislike it and we are beginning to despise it. But when we wonder what to put in its place, we are extremely perplexed. Each year it becomes more obvious that the world is embarking on a variety of politico-economic experiments, and that different types of experiment appeal to different national temperaments and historical environments. The nineteenth century free trader's economic internationalism assumed that the whole world was, or would be, organised on a basis of private competitive capitalism and of the freedom of private contract inviolably protected by the sanctions of lawin various phases, of

course, of complexity and development, but conforming to a uniform type which it would be the general object to perfect and certainly not to destroy. Nineteenthcentury protectionism was a blot upon the efficiency and good sense of this scheme of things, but it did not modify the general presumption as to the fundamental characteristics of economic society. But today one country after another abandons these presumptions. Russia is still alone in her particular experiment, but no longer alone in her abandonment of the old presumptions. Italy, Ireland ,Germany have cast their eyes, or are casting them, towards new modes of political economy. Many more countries after them will soon be seeking, one by one, after new economic gods. Even countries such as Great Britain and the United States, though conforming in the main to the old model, are striving, under the surface, after a new economic plan. We do not know what will be the outcome. We are--all of us, I expectabout to make many mistakes. No one can tell which of the new systems will prove itself best. But the point for my present discussion is this. We each have our own fancy. Not believing that we are saved already, we each would like to have a try at working out our own salvation. We do not wish, therefore, to be at the mercy of world forces working out, or trying to work out, some uniform equilibrium according to the ideal principles, if they can be called such, of laissez-faire capitalism. There are still those who cling to the old ideas, but in no country of the world today can they be reckoned as a serious force. We wishfor the time at least and so long as the present transitional, experimental phase enduresto be our own master, and to be as free as we can make ourselves from the interferences of the outside world. Thus, regarded from this point of view, the policy of an increased national selfsufficiency is to be considered not as an ideal in itself but as directed to the creation of an environment in which other ideals can be safely and conveniently pursued. vol XXI p238 240 Most of the citations used come from volumes XIX, XX & XXI of the Collected Writings. My copies are the old circa 1980 blue editions, but the whole series has just been republished and are now therefore more easily available.

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