Economics and policy : a hist. study

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Ecoxnted, more submissive and

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EmromiaaJPolig las full of initiative". 1 He was alwa)'3 prepared to 1pccula11! on the emergence of a new social order which would "greatly surpaa the prcseot in justice and generoaity; in the sub-ordination of material possessions to human well-being; and even in the promptness of iu adjustment to changing technical and social conditions" .1 Britain had grown sufficiently "in wealth, health, in education and in morality" to be able to afford policies which placed mtraints on free enterprise. It was no longer necessary for her "to subordinate almost every other consideration to the need or increasing the total produce or indwtry'', It wu possible to make a gradual transition towards a society "in which common good overrules individual caprice",1 Any differences, therefore, between socialists and liberal economists at this time were not so much conceptual as practical; they concerned the extcrWvenca and scriousnCIIS of coatcmporary abuses, and the pace at which JOCicty could be made to move toWards new forms of social organisation without aucndant loa of benefit from the old. It was only in the context of a debate of this kind that Manhall must he accounll'd a conservati"-e. On questions in\·ol\·ing the redistribution of income and wealth there were already several important links between the orthodox tradition in economics and the views of English radicals and socialists.' Among the rconomists there seems to hnc been complete agreement that the gap between rich and pour was excessive, and that its existence could not be jwtified on economic grounds. They rtcagnised that there were elcmcnb of rent or pure scarcity iDcome present in the wages and salaries of the more highly paid professions and skilled trades, which could only be reduced by cqualis:ing educational opportunities. Compul101y education at the general taxpaycn' u.pense, togt"thcr with municipal provWon of libraries, museums and other mt"ans or "individual improvcmt:nt", 6ued easily into the readily acceptable collcctive-help-for•self-hclp category. More dirn:t methocb or redistributing income inc"-itably provokrd more disagreement. The practical issue:, 111 lhcy saw it, wu how [O reduce rxisting int:qualitics by means thal would not undermine th05C facton which had been nscntial lo Britain's growth in

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the past, nam~ly the middl~-class \'irturs or thrirt, rnttrprisc and initiati\·~.

Again, Marshall's .view:t on this question arc fairly repl't'.sentativ~ of academic opinion at thi1 tim~. He drew attention to th~ ~vid~ncc of improvement, to the increased opportunities for th~ working man to rile through education and higher wages, but did not feel that existing inequalities could be jwtified; th~y rep~nted "a lk:rious ftaw in our ~conomic organisation". For this reason he was unwilling to oppost" very strongly redistributive, or what he called "financial", socialism, "For pm·crty crushes character: and though the earning of great weahb generally strengthens character, the spending of it by those who have not l'amed it .•. i! not nearly an unmixed good. A cautious mo\-cmcnt towards enriching the poor at the expense of the rich seems to me not to cease to be bene-ficial, merely bttause socialists say it is a ste-p in their direction. " 1 We- sec" in this statement evide-nce of the ascetic, puritanical strain menlioncd earlier. Beyond a certain poinl, when lhc "comforts and decencies" appropriate to a man's station have been acquired, riches confer litde extra "real" enjoyment to the individuals concerned, and cannot be justified on wider social grounds. Indeed, Oll.entation or "socially wasteful" expenditure by lhc rich wa~ to be deplored as a bad example to the poor and a source of social envy. Large inequalities of incom~ and Wt'alth were no longer essential to the supply of savings. And bearing in mind 1hc impor1ance to a country of Britain's 1tagc of development of investment in thr improvement of human capital, Marshall bt-licvcd 1hat "any change in the distribution of Wf'alth which gives more to the wage re«h·rn and less to the capitalists is likely, other things being equal, to hasten the increase of material production, and that it will not perceptibly retard the storing-up of material wealth."'

AltUsludrs L-rnict of Wtljt~r~ It would be wrong to SUIJ!Cit that Marshall's contribution to fhe debate on socialism and sfate intervention was con6ned lo somewhat pious grneralities about "character". He not only contributed to the discua:ion of detailed questions of policy and institutional rcfonn, bul was, together with Henry Sidgwiclr., one of the founden of a branch of economics designed to furnish guiding principles for state inler-

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conclll""""lnwhirhioiNm" as an alternative:? ln the Trrut 011 AfOIVkny Rt]rm11 he ad,•ised building on "the actual systt'm -·hich has grown up, hal( haphazard, sine~ the war". Kq·nes was arguing (or tht> management d:ilb used by the Bank of England to kt>ep Britain on the gold standard bt:twttn 1925 and 1931 10 bt' applied to diffcrrnt ends. l11e real issue was whetht>r the possible. roreseeable benefits or stable exchanges outweighed the possible, foreseeablr drawbacks which Kt>ynrs predictrd, namely deflation and increasrd unemploymt>nt. Ultimately, o( eoune, the det:Won entailrd a moral or political judgment. Keynes, at lea.u, n~er trird. to avoid making thil judgment.

Tlu D«isio11 to &tum to Gol~: lAst Stapt The emba'RO on the export or gold passed by Parliament in 1919 was due (or renewal or removal at the end of" 1925· As the day for decision approached Keynes became even more convinced o( the folly orlinking Britain to gold, or, as he saw it, to the vicissitudes of the American economy. In February 1925 his criticisms were still concerned mainly with the question or whether a return to the Rold standard at any parity should be attempted. With the raster rise of American than BritUh prices dnring tg2.f, the signs were bCRinning to look more favourable (or a return at the old parity. But Keynes daTW attention to the weakncsan of the British situation. In contrast to the pre-war position London was more heavily indebted on short·

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term. He warned against relying on the temporary ftow ofspeculative funds which was then u:erting an upward presture on the sterling-

doUar c:xchange. He felt that the rile of American prica wu not likely to be pennancnt: if it collapsed after the tie with the dollar had been cft'cc:ted then Britain would be forced to bear the full strains of de8ation. He continued to favour a managed cUJTency, but adviled that lfa return to sold was to be attempted, it ahould be •ftn sterling had achieved parity and only if it looked likely that she would be able to maintain it. 1 In the same month a report of an official advisory committee under Lord Bradbury's chainnanship was published; the committee had been set up to review the Cunliffe Committee's recommendations in the light of recent dcvdopmcnta. At the outset they dismissed in summary fashion any suggestion of returning at a lower parity: "It was never, in our opinion, a policy which the United Kingdom could aca:pt. " 1 They abo rejected the idea of a managed currency without bothering to hear evidence on the subject. Though Keynes's statement that the report wu "indolent and jejune" is a little strong, it wu undoubtedly a rather vague and confUit'd. document.• When they 6nt bepn their deliberations ln Scptembrr 1924, the committee round a 10 to 12% difference between American and British prices. Evrn 10, it "-"U their opinion that there would be no difficulty in maintaining the pre•war parity "at any time it might be thought prudent to do 10". They viewed the ncccuary deflation with reasonable equanimity: "an effective gold standard could thus be restored without funhcr danger or inconvenience than that which is inevitable in any period of Cl't'dit restriction and railing prices." Ha,·ing thlll dosed the ii5Ue in paragraph If, they immediate-ly re-opened it in paragraphs 16 and 17. Would the "undoubted advantages or an immediate return to parity" be an adequate: compensation for the temporary "inconveniences" or deflation? Perhaps a waiting policy would be better? Given their earlier statrmenb, it is difficult to believe that they considered this dilemma to be a real one. FMtunately, however, they were comforted by the subsequent rise or American priccl and the further approach or the sterling-dollar rate towards parity. They calculated the existing disc:repancy between American and British prices to be about tl%-"a significant, though not very largr, amount" -and felt that this dqree of deflation wu a price well worth paying to achieve exchange 1tability. They considered that British gold rescrvcs were quite •n.N.-a4..._,Feb.llll,l91~.rq>rinlaliroE"9'•Prr..,..(1931),pp.

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l, = 4 .86 aufficient to meet any gold Lou due to the repatriation of apeculative balances. They also took comfort from the balm of diltant history; the restoration of _the goJd atandard after the Napoleonic Wan ahowed that "a courageous policy in currency matten aurmountl apparently formidable obstacln~ with surpriaiog ease". Further detiate on the decilion continued right up to the last moment. An eleventh-hour dinner party wu organiled by Churchill to which Sir Ouo Niemeyer and Lord Bradbury, for the proa, and Keynes and R. T. McKenna, Chairman of the Midland Bank, for the com, were invited to disc1111 the mauer. ThiJ dinner party il usually cited as n·idencc that, contrary to Kcyna's later charge that the decilion was ill-considered, Churchill was fully aware of all poinu of view, and of the poaible sacrifice~ that would be required. It iJ not surprising that Kcynca, single-handedMcKenna having given way to the opposition by the end of the meeting-failed to away Churchill. It iato be doubted if this wu due, as has been auggested, to the fact that Keynes had an "ofl"~ay". 1 We have only the te!ltimony of P.J. Grigg, Churchill's Private Secretary, Crom which to judge how the mcrting went. Grin, to say the least, was not exactly sympathetic to KcynCI. Indeed, it il difficult to 1ee how in the cyca of someone who believed that "our departure from the Gold Standard in (1931] heralded the beginning of our repellent modem world," Keynea could ever have had an "on-day".• Surely the result of the meeting waa a foregone conclusion? It had been the alated aim of the Bank of England and the Treasury Iince 1919 to return lo gold at pre-war parity. The mo:n that Keyne~ could have done at that late date waa to delay the momentum of the official machine; and even thil required special action to renew the embargo on the export of gold, with the rilk of suffering the consequences of dilappointing the expcctaliom ofspeculaton. Rn~toration oflhe gold 1tandard at the old parity, on the other hand, wuaimply a matter of doing what everybody expected anyway. Economia was never Churchill's forte, and il is clear from Grigg'a account of the meeting that the outcome was settled finally in ChurciUU'a mind by moral considerations. An undertaking had been made in 1918; it was now a que!ltion of whether Britain was going lo uphold thil undertaking in 1925. When Churchill announced hiJ dcc.iaion not to renew the embargo on April 29th, 1925, he claimed that in rcluming to gold Britain waa lhad:ling henclf to reality. He 1hcd further light on hil process of thought when he said that he had been convinced lhat it waa the right decision by the expcrtl at the Bank 15ftR.S.!V.ra-,'PJlwlle\urnloGold,I91S~ioiL.S.~U(ai.),SirJiaill

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or England and the Treasury, whose opinions "count more than the clever arJUmenll of academic thcorilll". 1 Keyncs immediately launched a final and bitter attack on Churchill and his advisen in a pamphlet entided 77u F.mtomic CIWtpiiiW •f Mr. Clnucllill. His main c:omention was that the decision entailed an overvaluation or lterting by to%, which therel"ore required an equivalent reduction in wage~ and pricct in the export industriCL Tb..ilstep could be justified only ir there wen: some means of reducing all wage~ and prices by the u.me amount; otherwise it constituted an unjWitifiable attack on the wages of those employed in the export tradct, and notably in the coal industry. He wanted to force the government to race up to the deflationary consequencnoriu dccilion: ''He who wills the ends, wilb the means." TIM Ra1io1111h of llu D«isitlfl

What were the "undoubted ad\·antagn or an immediate return to parity" or which the Bradbury Committee spoke? The chier one was that a decisive move would bt' made toWards the reconllnlction or the international cconomy.lt would restore London to the centre or the international financial Dl.'twork, and, it was hoped, create coudittons ravourable to a revival of" multilateral trade. The advantages to the City and to British invisible earnings or the old parity wert' obvious. lt hu also b«n argued subsequently that rar from Solerificing industry, and the expon tl'ada in particular, on the altar or high finance, the decision wu essentially a policy detigned to alleviate unemployment. British unemployment was hravily con· centrattd in the export induatries; some of the difficulties of thcse indWitrics could be accounted for by the decline in world trade; and one reason for this decline was the uncertotinty created by currency innability. Once this uncertainty had been removed by a concerted effort to re-establish the gold 1tandard, British exports and employment could be exp«ted to revive.• This interpretation of the elfects or returning to gold rests on the \'iew that British unemployment at this time was either due to po5t· war currency dislocation, or was exclusively "atructural" in character. To the extent that unemployment was the result of lti'UCtural changes in the economy, and required a re-deployment of I'CIOurces from old to growing industries, it could not be dealt with by general rellation. No credence i1 given in this view to the contention of Keynes and others that some of the difficulties of British industry

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could br laid at the door of the deflationary policies adopted 10 achieve and maintain the pre·war parity under changed con· ditions. For uasons given in the TriJllllll Mtm~ltJry Rtform, Keyncs concentrated on the problem of domestic stability, while the dcfcnden of the gold standard policy were more interested in stability orthe b.changc ratt. At the same time they refused, or wcrc unwilling to adr.nowlcdgc, that these two aims o( policy were in conflict; and they were not u frank as Keyna in rcc.ognising the implicit value judgments involved in choosing to stress one aim rathrr than the other. This can be attn dearly in the evidence given by Montagu Nonnan, Gmlcmor of the Bank of Enaland, and the chief an:hitecl of the return to gold, when he appeared before the Macmillan Commince on Finance and Industry in 1930. 1 The two chief opponents on the Committee of the return to gold, Keyne~ and Bt\in, asked Norman if he considered the domestic impact of rcsuictive actions taken to deal with the international credit markeu and to protect the exchange rate. At lint J'lionnan argued that the internal effect of changes in Bank Rate WIU "greatly n:aggerated", that iu etfecu were "more psyc:hological than real", and were exhawted in the short-term money market. The problems of Britilh industl)' were not due lO the return lO gold and the monetary policy which this neceuitated, but to "ill luck". The salvation of industry lay in rationali~ation-though he admittt'd that the: c:lfects of rationali~ation on employment would take: a very long time to work thenuclves out, Apart from thi.l, he had nothing to offer by way of diagnolil or shortterm remedy for the problem of unrmployment; he clearly fdt that this was not part of his responsibilities. Under pressure from Keynes, however, Norman was forcrd to admit that a restrictive C«dit policy initiated for international re:uons wu bound lO have somr effect on domrslic industry and employment, and that such an effect was actually n-quired u part of the mechanism of the gold standard. h is unfortunate that one of the leading supportcn of the return to gold should have been so inarticulate as an economic thinker.• Norman was quite incapable of taking an enlarged \'iew of the monetary policy which he controlled; his difficulties in explaining his position were apt to be confused with evasivcncu, passivity, and fatalism. His testimony confimll the wont fears of those critics who maintainrd that British monetary policy was conducted almost in spite of its t'lfect on the domestic situation. Nonnan'sslr.ills were best seen in his work as an international banker; they were the

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semi-instinctive skills of a craftsman. h U ironic that he should have spent most or the latter hair of the 'twcntiet Uli.ng these accomplishmenu to inaulatc and protect the domestic economy &om the rull impact ohhc earlier decili.oa to rrt.urn to gold. In the minds of supponcn or the gold standard there was an indissoluble link between going baclr: to BOld and going bad: at the old rate. According to Pigou, the only question which the Cunliffe Commiuec considered it neccuary to ask wu ,.,.V. shall we go badr. to gold at the pre-war parity? 1 The question or a lower parity wu ruled out at an early stage of the Bradbury Committee's dt:liberations; and we arc told by Nonnan'Jo biographer that he never eonaidered any alternative to the pre-war parity.• Allhough Norman was more aware than the Cunliffe Committee had been or the changes in world monetary conditions which made «tum difficult ror Britain, he was completely unaffected by any of" the doubu cs:prnscd by Keynes and othen. It is easy to sec that a good deal or pride and prestige attached to the pre-war parity. Most people, including the policy-makers of the day, were hypnotised by the only parity which had any reality ror them. It may not have been entirely irrational to act on such beliefL When dealing with matten of high finance, involving uncertainty and rorl!ign confidencr, what has been called the Oedipus effect in explaining 10eial behaviour mut be taken into account. Even prestige hu a market value ir enough people act u though it bu. But apart rrom such consideratioN, what rcaiON could be given ror being so auached to the pre-war parity that, in Norman's case ror example, no return wu prercrablc to return at a lower rate? Thill now accms an extraordinarily intransigent pmition. Would not a return at a lower parity have served the cause of international acability just as wdl without 10mc or the unrortunatc effects on the domestic economy? Most people, supportcn and opponents alike, agree that the pre-war parity entailed overvaluation or sterling and ICONtant strain on the balance or payments throughout the latter hair or the 'twenties. The disagreement centres on whether this overvaluation eould have been rorcscen and whether it was due to the claoicc or the pre-war parity. Some hishly intricate argumcnb. have been put l"orward to show that rar more than presti~~:c was at 11ake in this choice. Undoubtedly, one source or strain on the British balance or paymenu and exchange rate wu the relatively low raiC:II at which Franec and Belgium stabilised their currencies. Norman con1idercd thcx

., ratel to be chosen fortuitously; other defenden of the BriWh decision have claimed that the rata ch01en wen: deliberately competitive with that of Britain, and that. in contcquencc, the bendib ofa lower rate for the pound would have been ofl'aet by even lower French and Belgian rata. 1 Could lhil have been foreseen? Keynes at l~t had cast con~ aiderablc doubt on the possibility of achieving effective international co-operation to make the gold atandard work properly. He wa. not open to any charge of fabc optimism on tbis score. Sayen, apea.king of another source of difficulty for British aporten in thil period, the resurgence of German competition, hu Aid that: "A thoughtful and discriminating view of 'back to 1913' should have allowed for the pollibiliry lhat Germany would win back 10mcthing of her former trading atrength. The superticialitics of economic thousht in high quanen passed over all such pollibilitics."1 In any event, the competitive rates chosen by other countries cannot be cited in defence of Norman. When offered a chance to uy that he would not have

favoured a return if he had known the rates other natiorul would choose, hr rrrusrd. 1 Keynes baac:d hil case q:ainst rctum at the pre-war parity partly on the 10% discrepancy between American and British prices, which he claimed had been unc:leratimated by the Bradbury Committee. Even though hil prediction proved more or leu correcl, hr may have attached 100 much aignificance to a pruisc: 6gurr based on the questionable theory or purchasing power parity and crude 1tatiJtia. AU that was needed to make hil cue wu to indicalc: the unravourable change~ which had taken place in Britain'• inter· national position since 1914. 1 He wu on 6nncr ground when he accused ChurchiU'• advisc:n or gambling on a rise in American price~ to oftiet the dilcrc:pancy. Thill hu been dilputed by Sayen, who poinu out that the Bradbury Commin.ec aDumed no more than 1tability in American prices.• The paaagc: in question, like a good deal or 1hc: report, il open to divc:f1CRI inte:rprctation. A leading question pul by Bradbury to Nonnan bef'orr the Macmillan Committee IUBF'ts. however, that the expectation or a rile in American priCrl did f'onn pan or hill thinking at the time, I In 10 far as tbe dilcrepancy between BriWh and American price~ wu not made sood by a rile in American prices, it would have to be I R S. Sa~

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Eur!Dmits mull'lliq and incrt:asing taxn would tend 10 be deflationary, whcreu an increase in expenditure together with a reduction of tuc1 could be rcfla1ionary. In any event, a priori reuonins: would merely indicace the possible iittcfiml of influence; it would not tell us anything about the quantitative rcsuh. 1 A funher complication is that in order co gauge the results or filcal action by the central government, it would be necessary to consider the state of variow extra-budgetary accounts like the Road Fund and lhe Unemployment lmurance Fund, and the cJUcnt co which increases in central government expenditure were ofr~et by rcductioftl in local authority spending. Neither or these factors can be dilmissed at a time when the need 10 keep up the appearanCe of "10und finance" gave Chancellors the incentive to "juglc" with the ntra-budgetary accounts. There is abo good evidence to suggest that the central government thrust extra burdens on local authoritie~ in order to relieve the Exchequer.• As one group orrerormen pointed out at the time: "We should consider a private encerprix: which showed its accountl in this 1hapc as unbWJincalikc and un10und." 1 The point or all this is that if it is only possible to reach conclusion~ on this vital quation by mcan1 of econometric techniques which have only recently been applied 10 public finance, it is hardly surprising that by modem 1tandards fUca) policy wu confused and contradictory. The unfonunate aspect of this was that 10 a large tKtent these contradictions were vilited upon the uncm• ployed. UNIII~Irurntwt

As in the case or monetary policy, the public attitude towards the statr's rcsponsibilitin in dealing with unemployment in the immediate post-war period was shaped by pre-war experience. The basic machinery-labour exchanges, unemployment imurance, and public works-was inherited from the pre-war Liberal legislation. The labour exchanges had proved valuable as a means of mobilising labour for the war effort and had therefore emcrgt'd greatly strengthened, The modal J)'Stem of unemployment insurance of the prr-war period was improvrd and made more comprehensive by the t:'nemploymcnt Insurance Act of 1920 which c•tcnded coverage to nearly 12 million worken. The contributory insurance principle was desiped to cope with seasonal and cyclical unemployment; good time~ altl!'rnating with bad, The actuarial buis of the post-war 1ehcme was provided by

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pre-war figures which appeared to suggest thitt the average or "normal" level of unemployment wu around 4 to ~ per cent or the working population. AJ one orits champions said: "The tg:;to scheme wu an endeavour to carry on and apply 10 all industrial wor;ken the scientific theory of unemployment insurance wbich prevailed in the years tgog-t4. The theory wu that" certain minimum or unavoidable unemployment would alwitys be created by the Ouctuations and transitions or industry. Spells or worldeaness might be short, but they were to be expected by all worken. Thus the risb would, on the whole, be rairly evenly spread."l By prcsent-da)'Standards or welfare provilion and social justice, the unemployment insurance schemn ofthe 'twentin might be regarded u rather coruenrative. Their underlying rationale wu one of state• hel~for-self-hdp, with the government acting u promoter, umpire, and, u it turned out, long-stop, in a I)'Stem whereby rmployed worken and their employm (at least those who were unablr to pass the increase in thdr COlts onto the consumer) contributed 10 a rrvohing fund fOr the support of the unemployed. By the standards of the day a scheme whirh covered such a large proponion or the work-force, and extended benefits u of right rather than according to need, placed Britain in the van or progTea in this field. The scheme was a peculiarly English mixture of paternalism, individualism, and "fair play", aU interpr~ed within the giwn class context of English society.• At the end of the war this mixture was given all-party support. Ct-acb in the faljjade appeared later. The economic circumstancn of the 'twenties prevented the acheme from working as intended by itJ rounden. Before the insurance fund had a chance 10 accumulate reten't':ll the post-war boom collapsed; unemployment fOIC' to the unplffedented height or 17% of the insured populittion in 1921, and during the coal strike of thott year actually reached 23%. No respite Wall given in the following yean when aggregate unemployment fturtuated around to%. In the depressed staple industrin, and in the regions where thne were concentrated, unemployment Wall much higher and lasted for longer pcriodll; in 192t, for example, 36% of the worken in shipbuilding and iron and strcl, and 27% in engineering, were unemployed. AJ a result, the actuarial basis of the ICht'rDe wu undermined, aod numerow rxpcdients were required-the chief one being maaive Treasury support-to prop the system up.

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.&oi!OIIlitJ llmi Polit) The present-day approach to increased expenditure on un«!mploy• ment benefit in time u£ dcprasion would recognise it as a stabilising device, preventing incomes and spending from falling u drastically as they would in iu absence. Some contemporary commcntaton noticed this feature of expenditure on unemployment, but they were few and far between.' ll1cy were certainly not inOucntial enough to pre\'cnt govcrnmrnts from becoming worried by the increase in their outlay under this heading as dcpnssion deepened. Most contemporary discussion of unemployment iruurana: turned on the qurstion of the "'arious incidl'ntal cfl'«b on the nation's financrs, and on the Ufl('mploycd themsdvn of the Treasury contribution• to the hard-preacd unemployment fund; and of the changrs in contributioru, bencfib, and conditioru of eligibility, neccsitatcd by the situation. ll1ere were those:, like Profnsot' Edwin Cannan of the London School of Economics, who felt that the insurance principle was totally inapplicable to unemployment: "Wherever an evil can be increucd by human slackness or careln~nca, insurance against that evil tends to increase it." 1 On these harsh grounds, reminiscent of th01e used in the nineteenth century to suppon the t834 Poor l.aw, he propoxd a reduction in the eligibility ruin. While this may have been an extreme view, there were many who supponcd lhc related position that the exi1tence of unemployment insurance bcnefiu, claimable u of right, hindered the mobility oflabour, and tended to stiffen the rcsistant:e of organised labour to the wage-cuu which many coruiclcrcd nsrntial to the structural readjustment of the British n:onomy. 1 'lnere is little doubt that unemployment bencfiu frequently encouraged employers to organise the a1.·ailablc work in such a way that it was spread over a large number of workers; shun work was made more acceptable to tht individual worker bttause he recei1.·ed unC"mployment benefit in the ofl'-pcriod. • The tradt union movement was aware of many of thne anomalie1, but, in the absence of any altC"mativt, prcfcrTCd to keC"p the existing system rather than accept the kind of changes propwed by some ConiC'n·ativc:s and l.ibC"rals, which entailed placing the imurancc scheme on a fully IICif..,upporting basis and reducing the contribution made by tht general taxpayer.• The anomalies aro~e out of the difficulties of operating a scheme .;!i:,~:'-.~u·qt;.':f::,;:::::.:u·Fr..J.,_,(,!n~l.C.-:1. 4 rl,p.ro,;

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U"tm1loymmt, Ptdlie Spmdi11g ill Britai11 Du,ing 'Twtrt~its

103

designed to deal with occasional or cyclical unemployment under conditiom of chronic unromployment. Until a propcr remedy could be found for pcnistcnt unemployment, much of the discunion of whether and how ta prncn.·e the imurance fa~ade was bound 10 be fulile. The r:xprodironb employed could not concr:allhC' fact that to all intcnb and purposn the slate was no longer in the insurance businm bu1 was acting as a relief agt>ncy. One of the sidc-cffccu of Ihe insurance schC'mC' was that it ,;cJded a ~at deal of regular information about unemployment. This may nol ha\-c been u uscfullo the cause of the unemployed as might at lirsl appear. Cannan achiscd a former pupil who became a membcr of the l..abour Government in 1929 to slop publication of the figurcs. 1 Whatever Cannan's motives may have been, 1hr:rc is some truth in 1he view that the stream of monthly figures, always monotonously high, may ha,.-c encouraged a helpless attitude rather than a sense of urgency: the unemployed, like the poor, arc always with us. Over and above this conjcclure, howcnr, there is e\·idence 10 show that unemployment insurance encouraged complacency and fa1alism by acting as a substitute for more active remedies: 1hr. good wu enemy of thro best. The limitations of William Bc\·C'ridge's views on inaurancc and the trade cycle have br.r.n mentioned earlier.• Similar attitudes pcrsi.ued in thr. '1wen1ics. Thus we find one of lhc interpreters of 1he "new venture in scientific social legislation" arguing thai: "Maintenance for all may be a right and a duty, butlhcre arc times and places when work for all cannot be pi'O\idcd without flying in the face of economics and sound stalcsmanship. " 1 With such \icws went a lcndcncy to br.lil!'vc thai unl!'mployml!'nl could only be n~.ml by a drastic replacement of capitalism by wholesale nationalisation of 1he means of production. For those to whom such a solution was analhroma, unromployment insurance became a kind of compensation paid to the working classes in return for being allowrd to rclain a aystcm in which unemployment wu unavoidable. There seems to ha\·e been an clement of political insurance, by means of compensation for 1he diffC"rcntial impact of economic hardship, in lhc social lcgislalion of this period.' On lhC' left, for the opposite reasons, there was a tendroney 10 believe that only palliatives could be implcmentrd under the existing polilical and economic system. Bul if "work" for the unemployed wu not likely to be fonhcoming on a tcRUiar basis, and if socialism was still a dream, this !tort only "maintenance" 'Quocod in H. Clay, '-i } ( - (1957), p. tli8.

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as the proximate goal of political and indwtrial action. From this point of view, it was not so much a case ohhc good brins: enemy of the bcsl, as one of aiming 10 hi1h that it was ncccuary to settle for much ltss. For a varicry ol I'CUOIU then, the essential middle-ground wu ld• untilled. Court~-C.Jelical

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Thrrc wtre, however, those in the Labour mo\•cmcnt who argued that more positive action should be taken by the atatc than wu implied by insurance within the existing framework. The leading spokesmen for this group were Sydney Webb and later, with more insistence, G. D. H. Cole. Their position was baRd on the recommendations of the Minority Report of the Royal Commission on the Poor Laws or 1909 in fa\'OUf or contra-cyclical public works. During the war Webb had said that Labour would pn:a tOr the use of public works "to maintain a constant agsugottc the total demand for labour" as pan of iu post-war reconstrucdon policy. Thil policy was endoned later in the party's 6nt post-war manireato, LAIHntr tflfll 1/u "'"' SIKilll Ordff. 1 From the trade union wing orthe puty, notably rrom Emett Bevin, there wu also 10me 1uppon tor thY approach. The case was wually accompanied by an attack on the passive policy of the "dole". At best, maintenance should only be a stop-gap measure before work was provided. One reuon why the government ravoured maintenance rather than work, it wu arxued, arose out of a short-sighted belief in its relative cheapnN. For those who believed in the effectiveness or public worb policy this amounted to a charge that unemployment wu the nsult or a deliberate dcc:U.ion. Succellive governments did in ract make use or public worb Khemcs to supplement unemployment imuranccand Poor Law relief, though they did so with gradually declining ardour and confidence. It is perhaps a significant omen that the inauguration or ~ehemcs to deal with the slump or 192o-1 more or Jess coincided with the cam· paign for economy in public eJ:penditure which eventually led to the establishlllf!nt or the Geddes Committee. All or the schemes entailed co-operation be-tween the Trcuury, or the scpar.ate Ministrict, and local authoritiet. The work of co-ordination wu performed hy the Unemployment Granb Committee, whole job it wu to give financial assistance in the rorm of grants, or by undf'I"Writing loans, ror approved projects submitted by local authorities. The conditions attached to the aainancc were: that unemployment had to be severe in the locality; that the work had to be of "real utility", and yet or a type

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u~,. PUlic ~ • s,u.;, DMrilag 'Twna~w 1o5 which would not have been undertaken without a grant; that the projects had to be or a labour-intensive kind employing genuinely unemployed labour at wage ratCI beneath the local market level. These: were, or course, the dauic reaturcs of the relier work; and afier two yean the same kinds of' criticisms that had been made in pre-war yean Y(Cre brought rorward again: "They are uneconomical, suitable only ror general unskilled labour, and calculated to impair rather than maintain the industrial quality ofmon: akilled worken'' .' Morco\•er, the inducements to local authoritiCI were considered not to be large enough; and since much of the expense had to be met by local authorities themselves, the authorities that were particularly hurl-hit by dcpreuion were leut likely to be able to take advantage or the system. There arc several reasons why recourse was had to a policy or relief' worb. Suangdy enough, it accorded well with the C'COnomy campaign; it minimi.sc:d the burden railing on the Exchequer, and required relatively litde central government machinery or initiative. In the early post-war yean there wu abo a disposition to believe th:t.t the slump wu a temporary affair, conditional upon a ll:'oival or European and world uadc. The maintc:nance or the: systc:m in the face of criticilm. rrom all side~ wa1 also attributed to political motives: "The grants became a kind or conscience money paid out by the central Government because it was properly Knsitive to the reproach that it wu laying impossible burdcRI on the 1houlden of Local Govemmcnt bodies."• A study by Keith Hancock or the contribution made by the Unemployment Grants Committee 1o the aolution or the problem or unemployment in the period 1g11o to 19118, estimates that it aided projects which supponed 1% of the work rorce. 1 Arter 1925, when it became clear that unemployment was not a temporary poat-war phenomenon, the official attitude toWards relier works hardened. One of Lhe conditions ror receiving a grant had been that die work should be in advance orruture requirements; but as Hancock has pointed out, "stealing work rrom the ruture appeared to be less justilicd where there could be no conlidencc that the ruturc could afford it".• Those who ravoured contra-cyclical public works were equally vulnerable to this 10n or criticilm in lpite or efforU to distinguilh their scheme~ rrom the relier systems actually being used. They ~»in ted out that relief' ~ehemes were hurriedly improvised; that they suffered rrom bad aaociations with task-work under the old Poor Law; that under a proper aystem men would be ~elected on grounds or suitability and skills; and thac the scheme~ would be :~·~r:-~.aln,~~:~(1911),p.h. :~J.;~

•. rif.,p.S!5·

oo6 organised on a national rather than a local basis.• Ntvertbeleu, all fornu of public work had become associated in the public mind with simple n:licfmeuura.' In the sn:ond half of the 'twenties the emphasis lh.iftcd away from cyclical interpretations and measures towards more thorough-going structuralist rt"mcdics-rationalisation, labour mobility, and wageand cost-reduction. One sign of this shift was the Industrial Transference Scheme started in 1g28, the object of which was to aid the process of labour mobility from areas and trades with high unemployment. Apart from the inherent slowneu of any such policy, there was the added drawback that many of the men moved were unsuitable for other work, which, in any case, was not easy to find in a generally stagnant environment. AJ we have seen in the previous chapter, the structuralist approach to unemployment in thil period was generally accompanied by the view that there was limited ICOpe for general reftationary measures by the government. The luting solution to Britain's problems, it was claimed, would come through ordinary industrial channels. In 10 far as the state could make any contribution, it would be by reducing the tu: burden and economising in its expenditure. The Bank of England could act u sponsor to rationalisation scheme:~~, but the state should emurc thai its assistance to capital projccu was confined to those li.lr.cly lo prove remunerative in the ordinary commercial seDJC. Within the space of a few yean, therefore, both relief and contra· cyclical public works had hem discredited, and the Treasury was enunciating the view for which it later became infamoua. In anawer to a questionnaire on public work policies sent by the International Labour Office in 1927 the following reply was given: "The decision taken by the Government at the end of 1925 to restrict granu for relief schemes wu based mainly on the view that, the supply of capital in thb country being limited, it wu undc:tirable to divt'n any appreciable proportion of this supply from nonnal trade channels."' ThiJ innocent statement contains a far more fundamental objection to public worlu policia than any a( the administratiVlatioto frnm a wnrk -ill..,. in 19J4 lfUm..,....linii..,IM .,,..._,...,.on I!)•~· 0 T.J._., A Dkf?a.dol...lllm, IJJI·I.9.JD(I~),p. 1g.

Tlu Polituai .&o110my

of Crisis, 192!}-1931

141

prec~dent

and having to operate the cumbrous machinery of the Parbamentary l)'ltem, This ra~ the wholt' qu~tion of the role of the economic exp('rt at this time. The Economic AdviJory Council was a new innovation; not only were the experu divided, but their vi~ carried none of the wright attached to ad\·ice coming from Treasury and Banlr. of England sourcdi. 1 The attitude of the prnnanent civilsen·ice to the "expert" at thU time is perhaps bat aummarised by P. J. Grigg, private scc.retary to most of the Chancdlon of the Exchequer in the 'twenties: "let me say plainly ... that I do not lilr.e 'exprru' and technicians who have never occupied or altemat.ively have failed in executive positions of responsibility, and yet write books to prove how wise they are and how foolish is everybody else."• Keynes felt that there was an antipathy to new and constructive ideas in the Treasury right up to the eve of the Second World War.• The charge that Keynes's \'iews were "somewhat fluctuating'' cannot really be substantiated. Behind all the different remedies he favoured in tum, was a consistent desire to avoid deflationary solutions. Although a good deal of work still had to be done before he could pment to the academic community a satisfactory theory of output and employment, from the point of view of policy, the essence of the position latcr occupied by Keynes can be found in the 19:19 election literaturc.•TI•c rca\ difficulty with exparuionary ideas in 1931 was that they were 11ill the property of a small band of followtn scattered among tht major parties, with none of the backing of profe55ional consensus which they were later to acquire. One criticism that might be levcUed at Keynes himself in this period il of excessive optimism. He was too anxiow to malr.e the most of the narrow limitations set by circumstances and the official mentality. This wu due partly to an admirable desire to be relevant at all times, but it led him to expect and daim more than wasjustilitd for such stop-gap measures as the revenue tariff. With the benefit ofhindsight we can see that Bevin was correct in believing that an efTt"ctive expansionist policy to deal with untmployment would require the abandonment of gold. This Keynes was unwilling to contt"mplate until tht' final uages of the crisis. By August, he had come to the conclus.ion that Britain had lost tht' international initiative which sht' had posseucd earlier, and that "when doubu as to the prosperity of

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•llu> 1nannwillt.-lilinuplnCII"I'fullyinthtns's hopes and enthusiasm can be gaugtd from the opening scnlcnce of his famous open lcUt>r to RooSC\"Ch written in December 1933·' "You have made )'"Ounelf the trul!ec for those in every country who stTk to mend the evils of our condition by ITasoned experiment, within the famework of the existing social system. If you fail, rational change will be gravely prejudiced throughout the world, leaving orthodoxy and revolution to fight il out. But if you succeed, new and boldrr methods "ill be tried everywhere, and we may date the fint chaplcr of a new economic era from your accession to office." 8111 in Icrest and hopes arc not influence on the couneofcvcnts, still less a detennining influence. h would be strange indeed if it were possible to uc:ribc: to one man, and a IO~Tigner at that, a dominant role in anything as com pie• and confused u the parcel of mcasurn which comprise the New Deal. Nevertheless, the full story of the Keynesian revolution in America, whC'n it comes to be wriuen, will makc fascinating reading.• It will also be a difficult one to writt' even

&fiiWm#s tJNi Poliq

for an American scholar with full accns to the: mrmoin and docu· mrnts of the: participants. The: difficulties are interesting in thc:nudvo; they rc:latc: to the: complexity of the: American I}'Jtc:m of govc:rnmrnt with its bewildrring array of competing departments, agencies, and pressure grouping!. Compared with this, the: proccsa of policy fonnation and implementation in a Parliamentary 1ystc:m with a Cabinet ad...-ixd by the profosional civil service ia relatively straightforward. O..·er and above the problem posed by the institutional I!Tlleture li.c:s the potential, and essrntially pc,8ab6). On thr- P"'"" maolr on !hr l n l - npn Noll•· pp. tgli-sn•; anrl ("hap1rr>2f>And11.

•s• to thosr who regardtd monopoly u tlu barri~r to TC'CO\'rry, Roosewlt also announced his inttntion 1o sct up a comminee to make "a thorough study of the concentration of economic power". "lllis body eventually emerged as the Temporary National Economic Committ«. 0\·er the nrxt three yean this committee collcc:tcd a massive \-olume of tntimony from businnsmen and economists on subjcc:ts ranging from the effect ohaxes and patent!! on business behaviour,to the question of price IeveLI, pro6t1 and unemployment. From an anti-trust point of view it has been u.id that the ccmmiuer was "a harmless device that could be used by each group to urge a sp«ific line of action or no action at all''. 1 For HanM'n and other stagni'ltionists it provided a vaJuablc forum within which to conduct their campaign for their panicular interpretation of Keynesianism. Indeed, one of the chief criciciiiiiS by represcntath·"CI of the businns community was that the TNEC monographs pro,·ided an illegitimate way of using public funds to spread an insidious gospel of gloom about the capacity of American capitalism to maintain prosprrity.1 But as a more rympathetir. reader aaid: "(The invl"ltigacions of the TNECJ are the product of a mood of deep dnpair over both the justice and ('ftici~ency of our «onomic arnngem~enu. The information compiled , . , is a telling indict· man in its !C!'neral ciTccc. There can be little doubt that, in the hands of a powerful party , , • this official portrait of our economy would be a powerful, perhaps decisive, political instrument of reform." 1 This ,·erdicc is an acc::uratc one. It can be applied co chis whole phase of American debate. Stagnalionism was a radical and nformist doctrine which set out to achieve far more than the acrcptancf' of the principles of economic management by the state. Considt'rcd purely on ill economic meriu, it seems now to have been discredited, although it could be argued that it has only ~n "falsified" by the high level of military expenditure during and after the Second World War. It was quite clearly a reaction to the failure of American policymaking in the 'thirties. But as we have seen, fiscal policy failed because it was not tried; and it is doubtful if the limited evidence of chis prriod was sufficient to conclude that the incentives for privatc investment were pcrmanently weakened.' Thc real significance of

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stagnatiorWm lay in iu political appeal. For many it wu the American cquh·alcnt of the non-Marxist, !cA.-wing movcmc:ntl in Europe in the 'thirtirs. h is obvious that the permanently enlarged public spending which stagnalionilu called for carries with it implications for the talr.c-ovcr of many function1 prcvioWIIy performed by the .pri\·atc sector, u well as for the extension of state intervention into entirely DCW fields. It should be sccn, therefore, on one level as an attempt to prevent weak booms from being prcmaturrly smothered; and on another level as part of a longstanding debate on the ideals of Amuican public life. In both tht"'C rrspccb it has cchors in public debate today. 1

PART THREE:

The Second World War and After

CHAPTER TW8LV1t

Keynesi~n

War Economics and Post-War Plans

A promiucnt American economist has said that wars arc commonplace or routine occurrcrrcn so far ;u the long-term development of economic s.ciencr is concerned, There is certainly a good deal of truth in his statement that "a war may ravage a continent or destroy a generation without posing new theoretical questions".' But wars undoubtedly change- the climate of ec:onomie debate and pro\·idr a laboratory for conducting sodal and ec:onomic expc-rimrnts. The Second World War, both in Britain and the United States, acted as a forcing ground for ideas and for tec:hniqurs of economic measurement and control which would have taken longer to bring to fruition under peace-time conditions. In this rnpa::t, unlike the Fint World War, it was responsible for a radical modification in the conduct of ec:onomic affairs after the war. But if the war itself taught few new kssom in economiC!, it certainly underlined several that had lxen written in the inter-war period. In January 1939 Keynes was questioned in the }i'tw S141tnnml on his political and economic belie& in the light of the emerging struggle with the totalitarian regimes. He used it as an opportunity to expatiate" on the limitations of "our nineteenth-century school of Treasury officiall", and on their unfitness to serve the cause of "energetic expamion". "Great as is my admiration for many of the qualities of our Civil Srrviu, I am afraid that they arc becoming a heavy handicap in our sU"ugglr with the totalitarian States and making ourxlves safe from them. They cramp our energy, and spoil or discard our ideas."' By No\·ember Keynes was engaged in his last and most successful campaign to get his ideas accepted by the Treasury. This time it was a question of gaining recognition for his vieWJ on the problems of war finance. At fint it seemed that his ideas would be discarded once

more, But the early military setbacks that brought Churchill to pow~r in May 1940 also favoul't'd Keynea. Within eighteen months of his condemnation of the Treasury, thr:rcfore, he fuund himself, eontrary to all previous expectations, r:nsconcr:d in the Treasury itself, and in a position to ahape the counr: ofcvcnta. From t942 onwards he wu increasingly involved in the diplomacy of external finance for Britain's war effort, and later with the problems of poll-war inter• aational rcconsuuction; his eJforu at Bretton Woods and in negotiating the American Loan at the end of the war occupied moat of his energies in the lut yean of his life. In tpitc ofthe enormo111 practical importance of these activities, however, there il no doubt that hit r:arly r:fforu with regard to the internal problems of war finance had a gt'Cater impact on policy both at the time and substqucndy.

w... &--ws War presents all the problr:ms of an economic l)'llr:tn operating under peace-time conditions in a simplified but acute form. They are simplifitd by the narrowing of aims to one ovcniding one: maximum mobilisation of resoui'Cdl to defeat the enemy. They arc abo limplified-though the word may seem lea appropriate hereby the concentration of economic dcc.ilion-making in the hands of the pcrnmr:nt. They IU"r: made more acute by the hazards of enemy action and by the fact that 10lutions must be found rapidly. A wcful distinction can be made bclwcca the micro and macro branches of war economics: the one conccmr:d with the allocation of scarce physical rcsoun::ea and manpower among altematin civilian and military uses; and the other concerned with the regulation of the overall monetary and fiscal climate within which the allocation decisioN arc made. The fint require:~ a planning apparaiUJ for directing men and materiab into thOIIC usa which both in the long and the short run will be mOll conducive to the build-up of military potential; this type ofplannina: decision has to be based on a clear picture of the physical resources available and the prioritit:s in the demands made on them. The scconcl branch of war economics mutt be so conducted u to facilitate the transfer of resources to war purposes without undue strain in the form of open or repressed inflation, or rccounc to a level oftuation likely to have a debilitating effect on incentives and production. At allstaga. the pn:scrvation of equity of sacrifice and the minimisation ofthe difficulties and burdem of the poll-war period have to be kept in view. The financial branch of war Konomica muse be based on Cltimatcs of flows of aggrcgacc income and output; from the1e can be calr:ulat"'- the impact of

Kf.1Wsi(IJI Wu LOIJOMics aNI PoJI-U'a, l'ltnis

257

diffCTent laxrs, and of govCTnment borrowing and sprnding, on thc lcvds of consumption, saving, invatment, and cxporu. The mucro and micro branches of war economics should be llrictly complementary. Wiltlout an effectin system for controlling the gencrallevel of expenditure by consumen, businCSIC:II and the govern· ment, an intolerable strain would be placl!d on the mechanism for allocating manpower and materials for military purpoiCI, and on schemn for rationing civilian supplir:11. The u.me is true in rcvene. Much of the -.-ark of planning the war effon was done in temu of a physicalrwmit-di~t-available manpowt'r or shipping space-instead of in temu of money .1 The success of British war finance in the Second World War, as R. S. Sayers has explainOO., can to a large extent be judged by the fact that "thole rr:~ponsible for organising Britain's war effort wtte never fon::OO. to feel that financial policy was imponant".1 Economists and statisticians were ablt' to make imponant contri· butiolll behind the scenes to both atpccts of the conduct of the British wareffon. But it was in relation to financial policy that the war rcvcaiOO. m011 clearly the progrna that had bren madt' in cconomia as a result of the workofKeyne1 in'thc inter-war period. To put the matlt'r in slightly different terminology, it was during the Second World War that the co-ordination between macro- and microeconomic understanding, which had been 10 conspicuously lacking in the inter-war pcriod, was first achieved. One of the primary inlluenCCII on British policy-makers, par· ticularly at the beginning of the Second World War, was the memory of the failures and succcacs in the conduct of economic policy during and after the Fint World War. Apart from stratt'gic controll over ccnain key sectors of the economy, for the fint two yean of the earlier war the gonmment had relied heavily on the price mechanism and on private enterprist' to achieve its allocation and production goab. At the beginning of the Second World War it was rccognisOO. that the logic of controll would require their exlt'nsion beyond munitioN production, transpon, shipping and coal mining to co\·er the civilian use of acarcc rnourcr:11. Moreover, the active co-operation of organised labour would be needed In implement a manpowtt policy and to reduce the risk of industrial disturbance. In ordt'r to enlist this co-operation a number of conct'SSioDJ would have to bc made in the form of price controls, rationing, and nctu profits taxation. In the financial sphere, thCJ"e was awareness of the need to minimise the post-war burden of dead-weight debt by impr'0\·00. borrowing IS..:E.A.G.~inD.N.ca.e.-(N.)U-f/WBrilitAW•~(I951),

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techniques, and by deviling a system of taxation which would meet equitable aiteria and avoid disincentive dfccll OD production.

lrllnrsiRCW

The desire to avoid the mistakes of the First World War wu particularly marked in the case of internt ra1c policy. In the Fint World War the authorities had relied extensively on the traditional peace-time mechanilm of raising Bank Rate to defend the external value of the pound; a rudimentary system of exchange control was deviled only towanls the end of the war. Monetary policy was also taddlcd with mOlt of the responsibility for acting as a counter to domestic inflationary tendencies. ~ a rault, the borrowing of the gm·cmment to finance the war was done on unfa,·ourablc tcrnu, thereby imposing a heavy burden on post•war finance. This was certainly one of the rcason1 why at an early stage of the Second World War it was decided, after some wavcriRR, to retain the policy of cheap money that had been in fon:c Iince lhe convenion operation of 19311:. Another reason Wall the experience gained by the authoritir~ in lhe field of monetary management during the cheap money era of the 'thirties. But the decision was abo undoubtedly inOuenccd by the trend of :academic economic lhought on the rate of interest as it emera:ed afcer the Keynesian revolution.' We have noted earlier how the Keynesian revolution brought about an integration of monetary and real variables in economic analysis, and led to a reduction in the importance prcviou1ly attached to the money 1upply and the rate of interest all economic regulaton. During the 'thirties many economists came round lo the view, expressed by Keynes in his GtJimll Tfwry, that changes in the rate of intc:rcst were likely to have only a feeble inRucncc on the rate of saving or investment, particularly under depression conditions. They 1upported the policy of keeping interest rates low, but were not inclined 10 accord cheap money a major 1tatU1 as a reCO\'Cry measure. Empirical evidence derived from questionnaires and intervieWI with businessmen conducted by a group of Oxford economisu in 1937 appeared to confirm the idea that changa in the rate of inlercst were not a signi6cant inRuence on bulineu investment decision~.•

N early u April 1939 Keynes Wall putting the case for k~ping interest rates low during the war. If the CJ:por1 of capital could be

loi.JMsilm War Eanwmit1 tWl h.ri-Wa' Phltu

259

brought under direct control, the only justification for higher interat rates would be to strengthen the gcn·emmcnt's hand in competition with pri\·ate firms for borrowing resources. Keynes belie\·ed that control of new issues, rather than higher interest rata was the appropriate remedy for this sicuacion. Nor were higher interest rates necessary, he fell\ to foster personal or corporate sa\·ing; the rise of rul ineome:t and profits as a result of the incrt"asc in economic acti\·ity connected with the war would hne a more potent efl'ecl in raising the level ofsa\·ing. In view of the importance, therefore, of .l1.1:eping down the cost to the Exchequer of borrowing, lhe maintenance of low interest rates seemed to be the only sensible coune of action. 1 The Keynesian position e\·entually prevailed; the Second World War was fought on a three as oppost"d to a five per cent basis. In spite of the enonnous increase in the size of the National Debt by the end of the war, the burden ofinteresl payments did not loom as large in the calculations of posl•war Chancellors as it did in the 'twentie:t. The Keynf'Sian attitude to cheap money was also influential in Washington. So much so that Harrod has suggested that this, rather than the New Deal, was Keyna's main contribution to American prosperity.•

Hmu T1 PaJ FM TU War Even during what later became known as the "phoney war" period it was rt"alised that the main problem would be to finance the build-up of government apenditure for war purposn in a way that would not be inAationary. While this build-up was slow, and whilc there were still unemployed rcsourccs and stoclu to mop up, the problem of inflation was not acute. With thc coding of thc "phoncy war", and with mounting concern about the relative scalc of British and Gennan war expenditure, it became clear that the early war budgets were inadequate. They failed to make sufficient demands on national resources and did not attack inflation \'igorously enough. Apan from qucstions of equity, the main problcm was to find suitable criteria by which the adequacy of budgetary mraaura could be aacsscd. In November 1939 Ke)·ncs made a decisive contribution to the debatc on thill mattcr in articles for Tlu Tim~s which were reprinted in modificd form in the following year under the title of H1w lo PaJ •Scc~'lanidain71wT...,•.April_•71h~o8thuodjulyqllt.,251h,I~.A~much

:1:':..:~ ~~c:.=::::i:d'l::.~~~':!:..~;:n~~'!.C::~.:::: adriM'anlh~linanroalprobkrmofrt~~•;-R.S.Sa~•·"'·•PP.'53•5'lift-.fK~•·P.i93·

•6o for 1/u W111r. In thia pamphlet he showed how the aggregate demand approach, which he had pioneered in the 'thirties as an aplana· tion for unemployment, could be applied with equal value to the problerru of full employment and inflation. More particularly he showtd how this method of approach, coupled with national income accounb, could be med to measure the extent of the prvblciiUI to be tackled by bud!'=tary policy during the war. h wu a dec::Uivc contribution in the seruc that it provided the foundation for Kingsley Wood's budget in 1941 and .all subsequent war-time budgcb. The burden of Keynes's caae was that the government had

10

far

shown iuclf unwilling to face up to the problem of inHationary prn.surc arW.ng out of the war effort. In p:-ace-timc, with ac~ capacity in the system, hi1hcr employment and incomes would lead to higher consumption. In war-time, once the nation's rooun:es wm: fully cmpl~, it would be impoaible to raise civilian consumption without impeding the war effort. In race, a reduction in consumption would have to be engineer~ ir this effort was to be adequate. The auempt by households to spend the higher incomes gel\f'rat~ by rull employment in competition with the government would merely rnult in higher prices and shortages, but no signi6cant increase in consumption. Some consistent plan ror drawing off purchasinp; power would be need~. Voluntary saving and additional taxation, Keynes believed, would either be inadequate or involve intoh:rable sacrifices at the expense or incentives. Unlea inftation was control!~ directly at 10urce it would be necessary to extend the coverage or the wasteful and inefficient system or rationing and direct controls. Keynes's plan consisted or a set or linked proposals at the centre or which was a scheme or compul10ry SB\'ing or derrrrcd pay. It contains all the usual marks orKcynn's ingenuity and optimism, and demonstrates his dnire to combine economic expediency with social jUJtice. Huw lo PIJ) for 1M Wcr was in many respecb an ideological tract designed to prove to the working clastcs lhat borrowing and heavier taxation or the rich alone were not reasible or desirable methods or 6nancing the war from their point or view. Inftation could only be in the intemu or the ""'in. Compulsory uving would mJure that the rewards to effort on the part o( the working daues were merely postpone-d, not diaipatcd by rising prices. Moi'CO\•rr, the ownership or the National Debt in the rorm of post-war righu to derernd consumption would be more widely distributed throughout the community. With war-time inllation brought under control in this way, the scheme could tx- extended to include universal ramily aJiowancn and subsidies to keep down the cost or basic ncc:caitirs,

A"9nt.n'1111 W~tr &0110rnirs atul PIISI-War PIGAJ

:o~Gr

These would abo provide a flliJ pro fllrJ for tradr union co-oprration to stabilise wagts. A further subtlety of the scheme wu that the uleasc: of deferred pay could be made to coincide with "the onset of the 6nt po11-war slump". In this way it could be said to be self-liquidating becauac it would take the. place of the loans to finance public worlu that would otherwise be necessary. To satitfy those for whom this type of uasoning was unacceptable, Keyne~ propmed that the release of deferred pay should be finanud by a post-war capital levy 10 as to avoid adding to the National Debt. It is difficult to imagine a more comprehensive set of financial proposals; they were 1imuhancously anti-inflationary, counter-cyclical, and designed "to snatch from the exigency of war positive social improvemenU". But the real significance of Keyna's plan lay not so much in its ingenious proposals as in the system of "arithmetic" on which they were based. The conventional approach to budgeting was to crtimate the gap to be filled by extra taxation by calculating the difference between expenditure on the one 1ide and existing revenue plus "normal" borrowing on the other, where "normal" was de6ned as not being in cxcca of the flow of "voluntary" saving. In the Keynesian scheme an "inflationary gap", as it became known, was calculated by estimating the difference between the aggregate demand and supply of output at the existing price level. Instead of being narrowly concerned with the immediate budgerary components, public 6nance was scc-n as an important balancing item in a larger whole comprUing the flow of national income or output and the atemal balance of paymenb. In How 18 Pay for tlw War Keynes tint estimated the maximum le\·el of output obtainabJe assuming full employment of domestic resources; to this were added the re10urces which could be made a\·ailable for domestic use by allowing an excess of imports m•er exporu to be financed by drawing down gold rtserva and the sale of foreign in\'Citments. This provided a 6gure for the "ourput potential" of the economy. Gi,·en this, it was possible to show by how much private consumptioa would have to be rcdu«d in order to allow the target level of government expenditure to be achievrd without inflation. Alttmativcly, the national income could be computed, and estimates made of voluntary saving and of the revenue from existing taxer; the remaining gap between aggregate demand and supply of output provided an indication of the amount by which taxn or saving (voluntary or compulsory) would have to be raised in ordrr to avoid inflationary preaure. When Keynes fint put forward his proposals the public was not prepared to accept them. Within the Treasury the scriousneu of the

,., situation was be-ginning to be rcc:ogniKd, and the Kcynrs.ian method

of stating the problrm was abo becoming familiar.' But there was 1till resistance on grounds of practical detail and principle to Keynes's drastic remedies. The budcet introduced by Sir John Simon in 1940 relied exclusively on higher taxation and voluntary saving to counter·

act inflation. Keynes had already anticipated the argumenll in fa\-our of relying on these "nonnal" mctbocb in his pamphlet. He did not feel that adequate voluntary saving would be forthcoming to close the "gap" revealed by his estimates. Ir th.is prowd to be the case, even heavier taxation would ha..·e to be tried, and this would retrench funher on the aourccs of voluntary saving. The- main drawback of the voluntary method, according to Kc)·nes, was that th(' \"Illume of saving fonhcoming w.u not indepe-ndent of the degree of inflation taking place; it could be the result of inflation ratiK!r than the method for iu control. To the extent that voluntary sa\•ing at the existing level of prices was inadequate to prevent inflation, the subsequent rise in prices would complete the process; but it would be accompanied by a vicious price-spiral and the redistribution of income in favour of protit•rccti\·en. Two other facton infhu:nctd Keynes's attitude in puuing forward his schtmc: his dislike of detailed controla and rationing, and the antipathy to private thrift which he had acquiud in the inter-war period.' Food subsidies and family allowances were later adopted, and deferred pay bKame the basis of the post•war crcdiu ~theme. But the plan as a whole was nC\'CI" allowed to become the main·stay of war finance; rationing, queues, and savings dri ..·cs were '\'cry much a necessary, and dominant, ff'atuu or war-timt life in Britain. The fall of the Cham~rlain government in :\lay 19-10 bro11ght Sir Kingsley Wood to the Chancdlonhip of the Eachequer. B~· June Keynes had been appointed to a Consultative Council to ad\·isc thr new Chancellor; and shortly after he was given a room in the Treasury with a fO\ing commission. He was now in a pmition to press the case for a consideration of the problems of war finance in terms of the kind of arithmetic expounded in How lo PtJ] for 1/11 WtJr. The difficulty was that there were no ollicial otimato of national income at this time; Keynes's proposals were worked out on the basi~ of otimatcs by Irwin Rothbanh; the earlier statistkal work on these mattcn had all been undertaken by private invcsti· gaton without official backing, notably by Colin Clark in his NtJiitJIUIII~omt tJNI Oall.g ( 1937). Without these estimates inHationary gap analysis could be liule mou than a speculative exercise; it was

A'9""si1D1 JVu Eurumric~ tW/ Posi-War PIIIIU

:.~63

certainly not sufficiently well-grounded to form the basis for official policy. ln the summer of 1940 Richard Stone and James Meade started work on the fine official sunrey of national income and expenditure; their findings provided the bull for Trcuury disc:USiion of the task to be achieved in the forthcoming budget. The Chancellpr's fine budget wu thoroughly Keynesian in its method of presentation and in the spirit of many of the detailed proposa!J. The budget spm:h contained a full account of the problems of war finance and a ratkJnale in terms of inflationary gap analysis for the particular meuurcs to be taken. Among the papen accompanying the financial statement were Stone and Meade's estimates of national income and expenditure. 1 This apparently minor inno,·ation wu a major event in the hiJtory of the application of economics to policy formation. Not only was the government providing the public with the information upon which decisions were to be based, they were also publlshing, for the fint time, figurcs that were estimates and projections rather than a formal record of actual outcomes. ,.o\s Richard Stone hu said: "The euc:ntial fact is that the national income White Papers ..• auempt to meuure u best they can the set of transactiom that is significant for economic analysis, rather than to reach ideally precile estimates of those parts of economic acth·ity for which data happen to be available. "t

Keynes's influence on American economic policy in the Scc:ond World War wu not confined to the question of cheap money, whel'f' it was chieOy of a rather diffused kind anyway. As soon u the United States became committed to the war, the same issues of war finance faced by Britain earlier had to be tackled. In July 19f0 Keynes contributed to a Jirw Rtpv6lic symposium on "How to Pay for Dcfense", 1 He specifically directed his attention to the question of whether hls plan for restricting ci\ilian coruumption by deferred pay and higher taxes was suitable to the United StattS. Although he coruidered the thinking on which his plan wu based to be universally applicable, he did not feel the United Stat~:~ had yet reached the stage at which it would be necessary to bring it into operation. The enormous wealth-producing capacity of the t:nited States was slill not being fully utilised; a massive increase in output would be necessary to achieve full employment. The failure of the New Deal 'A~A..t,...•f/Ns..-.".fW•F.._,ntlaF.-".jllwJt'•~I-..I~liM

f-•nB_,t9f"·C.mcl.ln61.

.

.

• •··nor t.;,.. and l>o-wlopnoml n( Na1ional lnromc and f.~pmd1111n: Eoum11e1", .n

D. N. CbcsiCT {ni.),IAI-•fW IJ,itoM W.. 'Julv2glh.•!NO·

~·

..

,

dcficiu to produce full employment had shown the ma,n.itude of the task. A tripling of loan-financed expenditure on armaments in Britain had still not eliminated unemployment. The chances were that an increue in war CJ:pcnditun: would make pmsiblc an increase

in consumption in the United States, whcn:u consumption and the

war ctron would be competiton in Britain; no sp«ial stimuhu to saving would therefore be needed. A year later, when Keynes visited Washington on business connected with knd-le-ase and the external financing of Britain'• war effort, he made contact with a group of young ec:onomisu working in the Office of Price Administration and Civilian Supply.' On this occasion he expressed the view that the time had now come to press for 6scal mcasurts to curb inftation. The Amcrican «anomisu replied in the spirit of his earlier article to the effect th"t output was capable of t>xpanNon withoutsignifiunt price incnase. They backed up their case with statistical projections of the type prepared by Meade and Stone in Brilain, and with full Keynnian lol{i.c. They were, in ract, more e:~~:pansionist than Keynes himself-a difftcult reat normally. The difference of opinion was partly due to sc~ticism on Keynn's pan about some of the aaumptiom underl)ing the ntimates. But another ractor may have helped to produce a diver· gcnce: Keyne:1 had some experience of the fength or time rft~Uired to com·ince the public or the need for action. For thrir part, the American n:onomistJ, with all the memories or the railurn of the New Deal behind them, were anxioua not to apply the fiscal brake too soon. A. one or their spokamen, WalterS. Salant, stressed in a ll"tter to Keynn, "thr. level or output which we reach during this dl"rerue program will in the future probably be a bench mark for comparison .... It would be a calamity to ha\-c: this bench mark at a lr.vel which is so low that it leaves millioN or people unemployed." If the choice were posed between a moderate price increase and heavy unemployment, they would prefl"l' the former.• &DRtJrrri.JI.s

in GfRimlmml Smntt

Perhaps one of the most important rn~ults of the Second World War [or economics lay in the recruitment of economists into the machinery or government. In the United States, notably in the lattrr )"ran or the New Oral, the employment of economisu by various agmcies within the Administration w;u already a well-ntablished practice. 1 Am""!'lhnor- wh..m K..,..,. mtl .., ohio f!«asion ........ , \\"all" S. S.lanl. Drnn D. n::::..~{;!~ f~~~lh. R.apo~ond C:olthmioh. Cal~in H.,._,.• .J. M. Cl.o ... Rorh.ard

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A"9"fJimr ll"a, Eumomiu t111d PoJI-War P/4111

265

CJose rdations nisted betwl:t'n Washington officials and those universitics where acti\·c r~arch was bein!l' carried out on problems connected with immediate policy concerns. The Fiscal Policy Seminan conducted by Alvin Hansen andJ. H. Williams at Harvard in the late 'thb-tics, for example, were frequently attended by economists wor~ing in government. And ll!l early as 193tlhe Department of Commerct' had eo-opc-rated wilh Simon Kuzneb and a group of statinicialll at the Univenity of Pennsylvania and at the National Bureau of Economic: Rcsrarch to produce national income cstimatts. But in Britain lhis kind of inter-.lfour, A. J. (t::arl Balfour), 63, S. Balfow, Si• Anhur, 124 Balfour Conunillec on lnd ...ny &nd Tnodo:,214, 216 Banlr. of f.ngland (stf tilio Gold Stand.ard),76--7,8o,81,83,91,93, 116, 124,141 l.abour'opn::~~urrforolalrcontrolo(,

92-], 218,344

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Besau1,Annir.4B Bo:vmd'"· William (Lord lkveridgt:), 53·5-4 approach lo uno:mp]oymo:ftl problem, .'!S-7,~· IO:),Ig6-7

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277--'9 ~~

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lntrrnational

Johnaton, Tom, 120, 122 jona,j. H., 266 jona,j.-,, U4 jona, T., 1-40

W. S., ]1,]9 Jn.rko,j.,..66, 28o jha,N., 23 joh.....,, H. G., 170 joh....,n, Lyndon B., 313 (w til. KC11M"dy·Joh.....,Adminiatn.tion)

~tiontoKcynt:Si:.nisrn,I.,.S· ~o. 152-3 15 Anglo-American Loan and, 279 "dauical cconornia", intc:Jpnta· tionof,16g,t77-81 CommWiilm. ,.;,..... on, 2-f'rSO 1931 Criois, hi! ahn-nativc policica, 1}5-42,201,212 contcmponory ortho:xio».y and, 181-t'meslorllllvingu~l,

107-9· 110, "9· riiO, 1111,1611,

ai).:rrr uncmploymt'n1 and o&d-ap pcnaionl i'*-lrance,t.g ,_.,. E>ut:~• i11 F_,_,ju ill ~ .! EJ.We c - (H. Dalto~~), 1t1 London &hool o( EoononQca, 511, 10:1,

•fl-g.rso,Sf6.347 llt'wridgt'a1,151 0 r511,195olg6

/IIMIIC

362 hl~~

117 Panan~,

(R. Mill.iband),

Tabu,,,

l'.,rlllllll'rr#ffl'tfU....,.,_,W._ {Sydnqo Ball Le;:zura), 197 Pcacoo:k,A.T.,g6,gg,1111 Pechman, jwcph, 303 Pftl, Sir Robm,g6 Pmn.yl....U., Univenily al, .6.5 Pftkinl,fTanca,11]8

~..I:Jwii-I(P.J.Gria),8s,

1118,141 ~u. L. s., Bs Prclt,A.R.,,t6 Prica and lrKGDU:~ Board, St.t

Nut.W~(f.A..Hayek),llf

Priem, Pnld!,lll;tirily and r - . OowK-il on (1957), 191 l'riNi;lu~~ (A. Manball),t'J,

t8,'JI 0 'JII,j],'J7osBofD.41ofll•

""-:..,'-;-;~=~~~': ~49 ',f l'oliiUl

19fl),118.5 Phrl.-. E. S., SOl Phrlpi-llrowft,E.H.,IJ9o2D7 Phm.-.SirFudl:ridz,t6.5 l'lt;,.W, of 111/bu~ry, 1M U- A. Hoblon), 51 rr.-. j. H. C., t74 Pitou,A..C.,IIB,:u.43·44·57·61,,.S. 86, 110, lfD, lf7, 1,50, 1,511. 1.53, 'JI7,'JII5,'JI7,'J47 conlribulilmtowo:llan:«a.-ia.]l Man]QU'• rucce.or al Cunbridp, ]8 ~ ORI(Oid, 153-4 Pf....,U,..,s.n.IU.(W.Bewridle), 197 Plan1,A.,1,50,151 Plowdm, Sir Edwin (Lord Plowdm),

tllf

"'

Poor Law Synrm, 47, ,.S, 53-5, 1011, 1~,105

Minority Rqom on, 53· 5+- 55, ,56, 57oi~II:J9o2fi9.3+9 'I'P.U.' F.--.M1 tlflll 1'1119 otj«tiw1

(T.W.Huzchilon),:J8.43 Pallan,MK:haciM.,335 Polz-KeyRmiul. En., ,. _ , Ke,ma ... Gre~~tBrilain Poll-war em:liu ICbnne, 1162 I'.Jtu.c £c-...ic T.....t. U. W t!aild Sfdlu (E. Cary Brown in), 19:!

v,ur,-

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n.

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Pcnn:ll,Enoch,:rgo ~ ..J "'Jwwr (W.

,,,

,.,../l,,.,q

l'd/K ltW•lrrlnll-' FrJJ Ellflllur-l (B.

Plumptre, A. E. W., 16.t Polilical and Economic: Plannin1 01"!1...Uiilm,llll,215,1117 l'lllilicieu atlllw SU.., (R. Sb:lebt.y),

,...,.w..,

E-.. (H. Sidawidr.),'JI N...,. Ddt, 71r (E. Nnia), 97 ,.,..,_.... .,,.,v~.n.u.A. Hob.mJ, 47 l'rHlnru rtf~~,.,_.,. {E. M. t". Durbin), 347 ~ o f W A - &-rJ: Air &-is~'• ...._ (1'. Sunudllln), 3s6 ,.,.,_f-I'NpJI{j.Stnchey},'J52 Pnn;mfy IINI Dqwtu;... (G. Haberler), l!j9.1S, l'ro!eclion, Tariff Rebm and Prota:1ian "'-'nti,..WI'rrfwrrt~WDIIIUJ (A. C Pi..,..),61 N/K F~ (H. Cal,_), )47

Bewrid~).

110,

Higba), 139 ~"--'

TriMDtprtuiMr,A

CrifitwrtflJ...M~n...

rit1 (E. M. F. Durbin), S47 Rnllfl.llrwr-: .4 l'hfl /_. • N,.,;..J l'olily (H. Mumillan),1116, u7 R~. W. Panbrr, 58 Rf!.IMihprihrliMr.JS«Ml:Juljlt {W.G.Runciman),IOI,I40 Rellricriw Praczicn Coun, 3114 Revmuc Tariff, .,.lllllln Tarifi"Rd"orno Ric:anlo, David, 50,61, 109o 16f, •70178. 179. 3~1. ]46. Ridlardl0ft,H.W .. Ig8.103ol04 RiJJiufiAr Ttm§, 7111(A..C. r;pu),6•

:us

RW...JFall.jrNc-...a,z•/tltr~

M•hUtr(R.L.Meek),'J36 Road FW>1914llppf'OIIdlctaDdattiuldllilta,

46. 47-fi4, s6. ~,_. DitU'$ rram Wam af Emplaymmt, SeiOX"t Oamminee em

~peaditun,97-8

Wella,H..,:wg Whale, P. B., 77 WMI Arr W1 T• DoJ U. Stradley), U~ Wh.,.llry,John,I:IO

Wfln!p,_c-s:

nr w..,..t~rt~.utrVJ

R,._,rr.n.. (1916), Labour pam• phRI,IIJ4 WJU~. HUTY Dn1er, 201, 144, 1174o

.,.

YaleUniYUtity Kcnaedy rpetdt at, tgh, ]05 r ....... "11;,11 Tlwfl?; 1"'.,.,.. _, Tr...ntN.. U.Er-•i< n-,41 1~ '9Jg.(G. L. S. Sbacldr), 18, 161,

,.,

MYellowBoolr.",Liberal, too, 1o8, 109. 1109o

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2]2

Younpon, A.J., 81, Sf, go,

13~.

t6o

l~:c~~~tinuedfromrronllap)

\Us the world that laded from siJ)u during the interwar pcrlad we.m c~:onomist§, along udth most ntlc ~~ wtre (arced

:.~;:: ~~~;~~4~7c~~~~ ~~~~ national ccunomit: tntcrdcpendence, worldwide depression, and heavy unemploy-

ment. The chapters in the ~ond, and Wngcst part the book deal with the Brilisb and Ann::m:an response in terms ol policy durins !his t"ta o{ recurrent capitalis! cri&c:S; they ~;;over the return toJold in 192S; unentploymenl policy and public spending; the 1¥)1 crisis: and the policin. pursued in Bntain and the Unitl:d States durinJihe thirties to achieve recovery. As Marshall was the dominant figure in Brit· ish economil"S before 1914, so Keynes be· came the domin~~nt figure in both Britain and lhe United Stales in the interwar period. Two chapters an: devoted to the .Xvelopment o( Keynes's vie~ on policy and to the ucademic rcvolulion that he achieved in this period. The chaptcn; in the third pan of !he hook deal with the Scoond World War and after, when the Keynesian revolution was carried iniO practice. A lengthy postscript n:viewuome of the question~ that face policy-makers and economists in the post-Kcynesjan era.

or

•

EC0:'\0:\IICH AND POLICY A Historiclll Htnd)· by Donald Winch Donald Winch's £t'Vnomics Bnd Pt1licy is a book of the broadintcrc:M to everybody who has a ca.re for tbe great social and political issues of our times as these have been transmuted but not removed by the tran~forntations of the world as it was before the first World War into the world as it is after the Second World War. It is a dramatic and lopicaltalc, as well as unc lit for the scholan. of Professor Winch's subject-with its backcllllh through two generations of two world wars, of world dcprcMion and unemployment, of inflation, the foreign CliO· changes, balance~ of payments, uf America's New Deal and the NcwEl:unomics. e~t

II is not

ju~t

an IICCOunt of the chanJcS until today in economic

thought and in economic policies, from rhe days of Queen Victoria and Alfred Manhallto the days of Keynes, Macmillan and Wilson, or Pn:sidcnts Roosevelt, Kennedy and Johnson. II is also, primarily and distinctively, an account of lhc constant dialor.ue between the two, between economic thought and econ(mlic poiK:y, between the professional politicians, between the inlelleclual proposilions .and enquiries of the politic~o~l economists and lhe problems uf socicly itself. Donald Tyennan