2013년 5월 31일 금요일

[발췌 19장: Moggridge's Maynard Keynes] #19. The Emergence of the Treatise

출처: D.E. Moggridge, Maynard Keynes: An Economist's Biography

자료: 구글도서

※ 발췌(excerpts): 

p. 498

( ... ) Before the first meeting, Keynes circulated various EAC memoranda, including some of the replies to the Prime Minister's questions; Pigou's heads of evidence to the Macmillan Committee;[t] a series of draft heads for discussion prepared by Richard Kahn; a note by Robbins on 'Possible Topics for Discussion' which he had sent Keynes on 31 August; and a 'semi-protectionist' letter written by Keynes to the ^Manchester Guardian^ on 14 August.[69] At this meeting, as well as asking for more papersㅡthe Macmillan Committee evidence of Sir Josiah Stamp, Dennis Robertson, and Professor A.L. Bowleyㅡthe members of the committee agreed to defer a decision on Robbins's suggestion that they hear evidence from American and Continental economists on the causes of the slump and the British position ( ... p. 499 unavailable ...)

p. 500-502

Keynes had always been sceptical about arguments wrapped up in principes: one recalls his campaign against the return to gold, when they had been called 'hard facts', or the 'Treasury view'. [72] However, these 1930 remarks on 'principle' related to one case where his increased eclecticism showed up most stronglyㅡprotection. In his Macmillan 'evidence' he had raised the issue and had raised general arguments against free trade, but he had not reached a firm conclusion. By July 1930, he had 'become reluctantly convinced that some protectionist measures should be introduced'. By the time of his Committee of Economists, he could go even further and question the basic advantage of a high degree of specialisation in the manufacturing sector amongst countries.[73]

  In setting down his replies to his own questions, Keynes re-cast his ‘special case’ of the Treatise in a strikingly effective wayㅡone more effective than his previous schematic presentation for the Macmillan Committee which he had also used in his letter to the Governor of the Bank. He centred his analysis on two equilibria[:] 
  • 'equilibrium' real wage or those paid when all factors of production are fully employed and entrepreneus are enjoying the Marshallian 'normal profits' necessary for them to persist in the same activities on the same scale, 
  • and 'equilibrium' terms of trade or the terms of trade that ensue when the level of domestic money wage relative to those abroad is such that the amount of foreign investment plus home investment equal the amount of saving at the world interest rate. [74] 
  • He argued that Britain's current problems mainly resulted from a deterioration in the equilibrium terms of trade uncompensated by an equivalent decline in money wages, for he could find no evidence that up to 1929 real wages had grown faster than output per head or that British industrial technology had suddenly deficient. 
  • The effect of this analytical contrivance was advantageous: it centred on the important elements of the problem; whereas, for example, a concentration on real wage levels seemed to begin the analysis at the wrong end for policy purposes. 
  • He then examined the main determinants of change in the equilibrium terms of trade: those affecting the current account of the balance of payments (foreign tariffs, declines in important foreign markets, changes in the exchange rate, and changes in relative efficiencies) and those affecting the incentives to lend overseas and hence the capital account (changes in borrowers' demands at home and abroad, and changes in supply conditions for home and foreign lending). 
[74] [※ this reader's note]  It is extremely inconvenient to verifying the source marked in the footnote. But this source must be this one (Memorandam by Keynes in September 1930) . The author discuss no more about this memo by Keynes except the part of the memo discussing the Kahn's multiplier, which follows just below in two paragraphs.
  Organising his analysis in this way, Keynes then turned to a side issue, which he had not yet integrated into his story: Richard Kahn's preliminary investigations into the employment multiplier that he would soon present to the committee in outline from during the weekend at Shortlands. Kahn's 'multiplier' put a limit on the repercussions of a rise in home investment resulting from an increase in public works expenditures. The trick was to look at the repercussions in terms of the possible leakages from each round of expenditure that did not immediately return to the stream of incomes (taxes, savings, imports) and thus be able to estimate a ^finite^ geometric series. He could thus, if he knew the size of the various leakages, estimate the relationship between initial expenditure and the final result, or the multiplier. At this stage, Keynes had picked up the estimate, which he took as 2, but he did not see the ultimately destructive implications of the concept for the pure theory of the ^Treatise^. [75]

  Having raised this side issue, which produced some controversy during the committee's proceedings but did not find its way into their report, Keynes returned to his questionnaire to put rough and ready estimate on the relevant items. He estimated abnormal unemployment at 1,500,000,

  • of which 1/9 was a result of real wages running ahead of productivity by 2.5%, 1/3 was a result of the slump, 5/9 the result of the deterioration in the equilibrium terms of trade
  • To solve the problem by reducing money wages would require reductions of the order of 40%ㅡit is hardly surprising that Keynes put so much emphasis on 'other expedients' to shift the equilibrium terms of trade in Britain's favour.
  Other members of the committee took differing view on both sections of the questionnaire. The view most markedly opposed to Keynes's was that of Robbins. Deeply influenced by Hayek's and von Mises's development of Wicksell's ideas, he approached the problem in a dramatically different manner, although the terminology looked similar to Keynes's, given the common Wicksellian inheritance. For Robbins, the slump and its problems were the result of overinvestment in fixed capital during the previous boom which had resulted from the money rate of interest being below the natural rate. Viable remedies for the slump would have to take account of the peculiarities of that boom and the need to write off mistaken investments and to bring prices back towards more realistic, equilibrium levels. In such an analysis, any reduction in the rate of interest or increase in investment outside normal channels would merely exacerbate the difficulties caused by the initial overinvestment which had led to the collapse of the previous boom. What was required were measures that would decrease rigidities in the economic system and allow the necessary adjustments. Thus, whereas Keynes took the rigidities of money wages as almost a given and tried to adapt policy to this fact of economic life, Robbins took it as a source of so many of Britain's economic problems that the report should highlight this rigidity and the roles of unemployment insurance, monopolies and restrictive practices in creating it. With his emphasis on rigidities and his life-long, philosophical aversion to quantitative economics, [76] Robbins was unwilling to play the game of estimating aggregate figures for wages and productivity, especially as he believed the existing average figures reflected a less than optimal distribution.

  The other members of the group were in varying degrees more prepared than Robbins to play the game according to Keynes's proposed rules. They were also more concerned to achieve some consensus and to minimise their theoretical differencesㅡpartly because of their longer experience in advisory committees and perhaps partly because some of them notably Stamp and Henderson, did not have well-defined, clearly thought out theoretical positions. Pigou did have such a position, which as a result of long work in the field stretching from ^Wealth and Welfare^(1912) to ^Industrial Fluctuations^(1927 and 1929), had developed from the microeconomic theoretical relationships that saw the quantity of employment as a function of real wages and of the productivity of labour. From such a starting pointㅡthe reverse of Keynes's where real wages came in towards the end of the storyㅡPigou addressed himself primarily not to cyclical matters but to the longer-term question of the origins of the post-war increase in average unemployment in Britain over its pre-war level. ( ... ... )

( ... p. 503 unavailable ... )

p. 504

( ... ) After almost 18 hours of discussion at Stamp's house, the committee adjourned until 7 October to giver the chairman time to draft a report embodying the sense of their discussions. Keynes's draft [83] put as the major cause of Britain's (and other countries') current difficulties the recent collapse in world prices following on from their slightly declining trend between 1924 and 1929. In Britain' case, the difficulties were exacerbated by her return to gold at pre-war par, her levels of taxation, her restrictive practices and barriers to labour mobility, which meant that she had 'no margin in hand to provide against a long process of falling prices unaccompanied by falling home wages'. Nor could he rule out the prospect of further price falls. The draft considered possible remedies, all of which required raising business returns to a more normal level. He classified them under four heads: those which increased businessmen's ability to pay existing money wages without a rise in the price level; those which raised the domestic price level relative to money wages; those which, although they might result in some rise in domestic prices, produced their main employment-creating effects through other means; and those which reduced money wage. He expressed a preference for any of the first three classes of remedy over the fourth. However, as he did not expect much relief from the first (the easing of restrictive practices, increased labour mobilityㅡincluding that which might come from a reform of unemployment insuranceㅡand increased technical efficiency), or from the second(a rise in the world price level),[w] most of his emphasis fell on the third class. These Britain could adopt on her own. They ranged from measures to raise business confidence through the ^Treatise^ menu of means of raising domestic investment at the existing internationally-determined rate of interest to an increase in foreign investment as a result of protection or his own tariff-bounty scheme.

( ... pp. 505-506 unavailable ... )

[발췌: G. Gandolfo's International finance and open-economy macroeconomics] Transfer Problem

출처: Giancarlo Gandolfo, International finance and open-economy macroeconomics (Springer, 2002)

자료: 구글도서

※ 발췌 (excerpts):

8.6 The Transfer Problem

Let us consider a two-country world, and suppose that country 1 makes a transfer of funds to country 2. The reason why we treat it here is that it has many connections with multiplier analysis.

  The transfer traditionally considered consists of war reparations and, in fact, although the transfer problem had already been studied in remote times, the culmination of the debate was in relation to the war reparations that Germany had to pay after World War I to the victors. Noteworthy is the debate that was carried out between Keynes (1929) and Ohlin (1929) over the effects of such payments.

  Keynes argued that the transferor would undergo a balance-of-payments deficits and, consequently, a deterioration in terms of trade to eliminate it. Ohlin, on the contrary, pointed out that the payer's terms of trade would not need to deteriorate if the recipient spent the transfer on the payer's goods.

  Before going on, it is important to point out that all kinds of transfer fall under this topic: not only war reparations, but also donations, long-term capital movement (direct investment, portfolio investment, international loans, etc.). Although donations and war reparations are ^unilateral^ transfers whilst capital movements are ^bilateral^ ones (see Sect. 5.1), in the current period both types of transaction give rise to the transfer of purchasing power from one country to another. It has therefore been correctly noted that an abrupt increase (by a cartel producers) in the price of an output not not substitutable in the short term (and so having a rigid short-term demand), such as for example oil, also give rise to a transfer, from the importing o the producing countries.

  Thus, in general, a transfer takes place whenever there is an international movement of funds temporarily (for example, the case of a loan, which will subsequently be repaid) or definitively (for example, the case of war reparations) without any ^quid pro quo^. In case of loan, of course, the ^quid pro quo^ exists in the form of an increase in the stock of indebtedness etc. written in the books, but we are looking at the ^actual flow^ of purchasing power. It goes without saying that, when a loan is granted, there is a transfer of funds in one direction, and when the loan is repaid, a transfer in the opposite direction will take place; in the case of a gradual repayment there will be a series of transfers. One can use a similar argument in the case of the subsequent disinvestment of funds transferred for direct or portfolio investment purposes.

  Besides the ^financial^ aspect of the transfer, we must also consider its ^real^ effects, that is the movement of goods between country 1 and 2 induced by the movement of funds. The ^transfer problem^ consists in ascertaining whether, account being taken of all the secondary effects induced by the transfer, the balance of payments of the transferor (country 1) improves by a sufficient amount to "effect" the transfer. To be precise, three cases are possible in theory:
  • (a) Country 1's balance of trade improves by less than (the absolute amount of) transfer. In this case the transfer is said to be ^undereffected^, and country 1's current account balance worsens.
  • (b) Country 1's trade balance imporves by an amount exactly equal to the transfer. In this case the transfer is said to be ^effected^, and country 1's current account does not change.
  • (c) Country 1's trade balance improves by more than the transfer, which is then said to be ^overeffected^; country 1's current account improves.
We recall that the transfer problem consists in determining whether the transferor (country 1) will achieve the ^trade surplus^ necessary to effect the transfer. This is equivalent to saying that after the financial transfer, country 1 "transfers" goods to country 2 (a real transfer) through the trade surplus (which means that country 1 has released to country 2 goods having a value greater than that of the goods acquired) so as to obtain funds required to effect the initial financial transfer.

  From this point of view it has been stated that ^the transfer problem can be considered as the "inversion" of the balance-of-payments problem^, since any actual balance-of-payments disequilibrium involves a real transfer from the surplus to the deficit country. Therefore, the problem of rectifying balance-of-payments disequilibria can be framed as the problem of creating either a real transfer of equal amount in the opposite direction (i.e. from the deficit to the surplus country) or a financial transfer from the surplus to the deficit country.

  All this is undoubtedly true in the traditional context, in which the focus of the analysis is the current account. In this context the only way of effecting the initial transfer of funds is to achieve a trade surplus (i.e. to make a real transfer) and, inversely, a deficit country, by receiving (in value) more goods than it releases, receives a real transfer. Bus as soon as one consider the overal balance of payments which includes capital movements, none of the above statements is necessarily true. The initial transfer of funds can also be effected by way of a capital flow determined by an increase in the interest rate ( ... pp. 112-113 unavailable ... )

p. 114

( ... ... ) (4) induced changes in imports, u1Δy1 and u2Δy2.

Let us then introduce the following relations:

ΔC(01)=-b1'T, ΔC(02)=b2'T,
ΔI(01)=-h1'T, ΔI(02)=h2'T,
Δm(01)=-u1'T, Δm(02)=u2'T,

where ΔC(01), ΔI(01), Δm(01) denote the changes, concomitant to the transfer, in the exogenous components of country 1's expenditure functions, and b1', h1', u1' are coefficients that relates these exogenous changes to the transfer (the minus sign indicates that these changes are negative, since country 1 is the transferor). The primes are used to distinguish them from the "normal" marginal propensities referring to the induced changes depending on "ordinary" changes in income. Similar considerations hold for country 2, the transferee.

  If we examine country 1's balance of payments we see that

ΔB1=-T+(Δm(02)-Δm(01))-u1Δy1+u2Δy2,  (8.29)

which are the effects mentioned in points (1), (2), (4), in the order. Note that Δm(01), Δm(02) come from (8.28) while Δy1, Δy2 come from the multiplier with foreign repercussions (the effect under (3) above).

  The net result of all these effects can be determined only through a formal mathematical analysis (see Appendix), but it is easy to understand that all will depend on the various propensities (to spend on domestic good and on imports) as well as on the size of the transfer-induced changes in the autonomous components of expenditure (determined by the primed coefficients).

  Hence call cases are possible, though the case of undereffectuation is more likely. Paradoxically again, the Keynes in his debate with Ohlin is validated through an application by other authors of his later multiplier theory.

  If the transfers is undereffected, thenㅡin the context of the traditional theoryㅡa deterioration of the terms of trade of the transferor will have to take place so as to effect the residual adjustment. Hence the conclusions are qualitatively similar to those of the classical theory.

8.6.3 Observations and Qualifications

The traditional opinion (whether classical or multiplier) represents a simplification because it amounts to saying that the effectuation of the transfer can be separated into two phases. The first consists of ascertaining whether the transfer is effected, by applying the chosen model (either the classical or the Keynesian). If it is not, there will remain a balance-of-payments disequilibrium, which must be corrected by some adjustment process (second phase). This process is a change in the terms of trade (according to the classical theory), or some other adjustment process (excluding, of course, the multiplier mechanism which has already worked itself out in the first phase of the Keynesian approach).

  But, more rigorously, the transfer problem ought to be tackled from the very beginning in the context of the adjustment process chosen for the second phase in the two-stage traditional approach (note that this phase is not only possible but very likely, since the conditions for the transfer to be effected are unlikely to occur).

  This approach does not present any special difficulty, because the ^transfer problem can be examined as any comparative-static problem in the context of the model chosen^. It excludes, however, the possibility of enunciating a ^general theory^ of the transfer, as the traditional approach (whether classical or Keynesian) proposed to do. In fact, different comparative-static results and so different conditions for the transfer to be effected will prevail according as one or the other model is used. We shall give examples in the following chapters (see Sects, 9.1.3 and

[발췌: Keynes's] The German Transfer Problem (1929)

지은이: J. M. Keynes

출처: The Economic Journal, Vol. 39, No. 153 (March 1929)
자료: Jstor.org

※ 발췌(excerpts):

The Dawes Committee divided the problem of the payment of German Reparations into two partsㅡinto the ^Budgetary^ Problem of extracting the necessary sums of money out of the pockets of the German people and paying them to the account of the Agent-General, and the ^Transfer^ Problem of converting the German money so received into foreign currency.

  As times goes on, opinion has become even more sharply divided than it was on the question whether this dichotomy has theoretical and practical significance. The view has been widely expressed that the Transfer Problem is out quite secondary importance and that, so long as the Budgetary Problem is solved, the Transfer Problem will, in the main, solve itself. The following note is directed to a theoretical discussion of this issue.

  Those who think that the Transfer Problem is secondary argue thus. The German people receives its income in return for its current output of goods and services. If an appropriate part of this income is sequestrated, there will be no buyers for a corresponding amount of goods, which will therefore be available (in addition to what would be available otherwise) to expand exports or in diminution of imports. Since not all the consumption of goods and services, which the German people are compelled to forgo, is suitable for export, there will have to be a certain amount of change-over in the character of production. There is, however, no reason to suppose that ordinary economic forces will not bring this about within a reasonable space of time. Thusㅡaccording to this schoolㅡthe real question is, how much cash can the German Government raise by sound financial methods and pay over to the Agent-General. Once this is settled, we can be sure that a way will be found of looking after the Transfer Problem.

  Now I do not doubt that there are sets of premisses from which this conclusion follows. For example, there is one very simple set from which it obviously follows. For let us suppose that the German factors of production produce nothing but exports and consume nothing but imports; in this case it is evident that there is only a Budgetary Problem and no Transfer Problem;ㅡor rather the Transfer Problem is removed from the shoulders of Germany and becomes a problem as between the recipients of reparation and the countries from which Germany previously drew her imports.

  But, on the other hand, if we suppose that Germany is already exporting all the goods which she has facilities for producing on any terms on which the rest of the world will buy themㅡsuppose, for example, that, not so unlike Russia to-day, her exports are limited to caviare and platinum, of which the output cannot be increasedㅡthen the Transfer Problem is paramount and, indeed, insoluble. Or, again, let us suppose that, whilst, as before, Germany's exports are limited to caviare and platinum, she is, this time, in a position to increase their output, but unfortunately the demand of the rest of the world for these articles has an elasticity of less than unity. In this case the more she exports, the smaller will be the aggregate proceeds. Again the Transfer Problem will be a hopeless business.

  The first question to consider is, therefore, a question of factㅡwhereabouts between the two extremes exemplified above is present-day Germany situated? In other words, our first question is, whether there exists an ideal distribution of Germany' factors of production as between different uses which, if it could be arranged, which would solve the Transfer Problem?

  When this question has been dealt with, there remains a second question,ㅡHow completely and by what train of causation is the machinery of the Dawes scheme capable of bringing about this ideal distribution?


(1) If £1 is taken from you and given to me and I choose to increase my consumption of precisely the same goods as those of which you are compelled to diminish yours, there is no Transfer Problem. Those who minimise the question of transfer seem sometimes to imply that the above is a fair representation of the present facts. To the extent that high taxation causes German consumers to buy less foreign goods, it is a fair representation. But clearly only a proportion of their abstention from consuming will be in respect of foreign goods, and, so far as one can judge at present, not a very large proportion. Moreover, the German balance of trade ^already^ has most of the benefit of this, inasmuch as individual Germans are already paying enough, or nearly enough, taxes to solve the Budgetary Problem, and are, therefore, already reducing their personal consumption to the requisite extent.

  (2) For the last two or three years the Transfer Problem has been temporarily solved by Germany borrowing abroad for capital purposes at home, cash which she does not bring home in the shape of imports. She has been using this cash to buy back from the Agent-General the proceeds of taxes paid over to him, out of which she then pays the wages of German workmen employed on capital improvements within Germany. Clearly this process of borrowing from abroad cannot go on indefinitely. When it comes to an end, it will be necessary to divert the labour which it now employs to producing for exports.

  Thus it will not beㅡin the mainㅡa question of reducing German consumption. In so far as the Budgetary Problem has been already solved, the necessary reduction of consumption is already effective. When the foreign borrowing comes to an end, it will be a question, not of reducing current consumption in Germany, but of transferring labour from capital works in Germany to the export trades. Only in so far as additional savings within Germany take the place in future of foreign loans will there be any surplus of resources which were previously directed to supplying German consumers. On the other hand, where output of capital improvements, financed by foreign loans is not in an exportable form (and much of it will not be in such a form), the diversion of production out of other employments into the export trades (or to produce goods previously imported) will have to be on a great scale than is required by the payment of Reparations alone, since it will be necessary to provide also for the interest on the foreign loans.

  (3) I conclude, therefore, that the solution of the Transfer Problem must come about, in the main, not by the release to foreign consumers of goods now consumed by Germans (e.g. wheat, sugar, cotton), but by the diversion of German factors of production from other employments into the export industries.[1]
[1] For brevity, I include in these in what follows the production of goods previously imported.
  (4) Now, what prevents Germany from having a greater volume of exports at the present time? Is it that the export trades cannot attract more labour at the present level of remuneration? Or is it that they cannot sell an increased output at a profit unless they can first reduce their costs of production? The available facts seem to indicate that the first, namely, inadequate supplies of labour at the present rates of remuneration, plays little or no part, and that the second is the real explanation.

  That is to say, the solution of the Transfer Problem required a reduction of German gold-costs of production relatively to such costs elsewhere. There are three ways of bringing this about. Either German industrialists must increase their efficiency faster than industrialists elsewhere; or the rate of interest in Germany must be lower than elsewhere; or the gold-rates of efficiency-wages must be reduced compared with elsewhere. Since German industrialists are reputed to be already at a fairly high level of efficiency relatively to those of other countries, I do not know why we should assume that they will outstrip us yet further. For it is not enough that they should increase their efficiency (that they will doubtless do); they must increase it faster than others increase their efficiency. Nor is there any prospect of relatively cheap money for Germany; though there may be some future gain from a fall of German interest rates below their present high level. It follows that the Transfer Problem required a reduction in the present gold-rates of efficiency-wages in Germany relatively to efficiency-wages elsewhere.

  That is the first point to establish. The expenditure of the German people must be reduced, ^not only^ by the amount of the reparation-taxes which they must pay out of their earnings, but also by a reduction in their gold-rate of earnings below what they would otherwise be. That is to say, there are two problems, and notㅡas those maintain who belittle the difficulties of transferㅡone problem. Indeed, a short way of putting the case is this. The ^Transfer^ Problem consists in reducing the gold-rate of efficiency-earnings of the German factors of production sufficiently to enable them to increase their exports to an adequate aggregate total; the ^Budgetary^ Problem consists in extracting out of these reduced money-earnings a sufficient amount of reparation-taxes. The ^Budgetary^ Problem depends on the wealth and prosperity of the German people; the ^Transfer^ Problem on the competitive position of her industries on the international market.

  (5) If x is the percentage by which German efficiency-wages in terms of gold have to be reduced in order to develop an excess of exports sufficient to pay for Reparations, xㅡwe may sayㅡis the measure of the gravity of the Transfer Problem.

  So far we have no experience to guide us as to the valueof x. Nor shall we, so long as the Reparations payments are provided by borrowing abroad. It is quite certain that this must come to an end some day. But when, no one can say. Meanwhile the new committee, now sitting in Paris, has very little more evidence to guide it as to the value of x than the Dawes Committee had five years ago.

  ( ... ... ) Very roughly, therefore, Germany has to increase the value of her exports of finished goods by (say) 40%. It is a formidable task.

  Now, a reduction in the money-rate of efficiency-wages does not help her, and may injure here, in the following cases:

 (i) Where the output, e.g. personal services or buildings, cannot be exported anyhow;
 (ii) Where the world's demand for Germany's goods has an elasticity of less than unity, i.e. where a reduction in price stimulates demand less than in proportion, so that the greater quantity sells for a less aggregate sum;
 (iii) Where Germany's foreign competitors fight to retain their present trade connections by reducing their own rates of wages ^pari passu^;
 (iv) Where Germany's foreign customers, reluctant to allow this more intentive competition with their home producers, meet it by raising their tariffs.

  Moreover, if a reduction in price of 10% stimulates the volume of trade by 20%, this does not increase the value of the exports by 20%, but only by 8%. (1.20×90=108).

  Two points should be noted in passing. The reduction in real wages would be by no means so large as the reduction in money-wages, since the prices of home-goods for home consumption might be expected to fall. [1] It does not follow, however, that it would be any the easier to reduce money-wage, as we have found in this country in the last four years. On the other hand, such reduction in real wages as does occur may reduce efficiency, in which case a still greater reduction in money wages per head would be necessary to secure a given reduction in efficiency-wages.
[1] For the reverse phenomenon see the figures quoted on the next page, from which it appears that the recent increase in money-wages has caused the cost of living to rise by more than half the amount of the increase in money-wages.

  In the light of these considerations, what reduction in the money-rates of German wages will be required to increase German exports of finished goods by 40%? I do not venture to guessㅡexcept that I should expect it to be substantial. Only those who believe that the foreign demand for German exports is very elastic, so that a trifling reduction in German prices will do what is required, are justified in holding that the Transfer Problem is of no great significance apart from the Budgetary Problem.

  My own view is that at a given time the economic structure of a country, in relation to the economic structures of its neighbours, permits of a certain "natural" level of exports, and that arbitrarily to effect a material alteration of this level by deliberate devices is extremely difficult. Historically, the volume of foreign investment has tended, I think, to adjust itselfㅡat least to a certain extentㅡto the balance of trade, rather than the other way round, the former being the sensitive and the latter the insensitive factor. In the case of German Reparations, on the other hand, we are trying to fix the volume of foreign remittance and compel the balance of trade to adjust itself thereto. Those who see no difficulty in thisㅡlike those who saw no difficulty in Great Britain's return to the gold standardㅡare applying the theory of liquids to what is, if not a sold, at least a sticky mass with strong internal resistances.

  Meanwhileㅡso far from a start having been made in reducing wagesㅡthe breathing space allowed by foreign borrowing has weakened Germany's competitive position by allowing German wages to rise again from the very depressed position which they occupied in 1924 after the Great Inflation. Mr. Parker Gilbert reckons that money-wages in Germany have risen by 40% since 1924 and real wages by 23%, with the result that real-wages are now estimated 8% higher than they were before the war.


Thus the Transfer Problem involves a reduction of x% in the rates of gold-wages in Germany relatively to rates elsewhere, the value of x being determined by the factors outlined above. The next question isㅡHow does the Dawes scheme propose to bring about this reduction of wages? The answer is that it make almost no contribution to the solution of this problem.

  The easiest method would be to allow the exchange value of the German mark to fall by the amount required to give the necessary bounty to exports and then to resist any agiation to raise money-wages. But it is precisely this method which the Dawes scheme's device of "transfer protection" expressly forbid. Norㅡas I read the Dawes schemeㅡis there any compulsory deflation when the "transfer protection" comes into play and the proceeds of the reparation-taxes accumulate within Germany, since these proceeds are to be invested in the short-loan market.

  If, however, we suppose that, by agreement with the Reichsbank, deflation is enforced, how will this help? Only if, by curtailing the activity of business, it throws men out of work, they will then accept the requisite reduction of their money-wages. Whether this is politically and humanly feasible is another matter. Moreover, an attempt by foreign financiers to withdraw some part of their vast short-term loans to the German Money Market, estimated at £300,000,000, might be a by-product of a violent political and economic struggle aimed at the reduction of wages in the interests of foreign creditors.


( ... ... )

2013년 5월 30일 목요일

[자료] transfer problem (and current account ... )

1. International Transfers of Income and the Terms of Trade

2. “The German Transfer Problem” (Keynes, Economic Journal, 39, 1929, pp. 1–7)

3. “The German Transfer Problem: A Discussion” (Ohlin, Ibid, pp. 172–182)

4. Mr. Keynes' Views on the Transfer Problem, The Economic Journal, Vol. 39, No. 155 (Sep., 1929),

5. Keynes, Hobson, Marx (Robert Skidelsky, 2012)

?. Transfers,  Productivity,  and Taxes (Robert Mundell, 1968)

[발췌: Keynes's] Mitigation by Tariff (1931), in “Essays in Persuasion”

출처: J. M. Keynes, Essays in Persuasion (London, Macmillan, 1931)
자료: gutenberg.ca 

※ 발췌(excepts): Chapter 6 "Mitigation by Tariff," in Part III "The Return to the Gold Standard"

Contents of which:

(ⅰ) Proposals for a Revenue Tariff (March 7, 1931).
(ⅱ) On the Eve of Gold Suspension (Sept. 10, 1931).
(ⅲ) After the Suspension of Gold (Sept. 28, 1931).
* * *

Note to this chapter by Keynes: 

For some months before the collapse of the gold standard it had become obvious that this collapse was becoming inevitable unless special steps were taken to mitigate the gravity of our problem. Somewhat in desperation, I made various suggestions, and, amongst them, a proposal for a Tariff combined, if possible, with a bounty to exports. Mr. Snowden, endowed with more than a normal share of blindness and obstinacy, opposed his negative to all the possible alternatives, until, at last, natural forces took charge and put us out of our misery.


(ⅰ) Proposals for a Revenue Tariff (March 7, 1931)

Do you think it a paradox that we can continue to increase our capital wealth by adding both to our foreign investment and to our equipment at home, that we can continue to live (most of us) much as usual or better, and support at the same time a vast body of persons in idleness with a dole greater than the income of a man in full employment in most parts of the worldㅡand yet do all this with one quarter of our industrial plant closed down and one quarter of our industrial workers unemployed? It would not merely a paradox, but an impossibility, if our potential capacity for the creation of wealth were not much greater than it used to be. But this greater capacity does exist. It is to be attributed mainly to three factorsㅡthe ever-increasing technical efficiency of our industry (I believe that output per head is 10% greater than it was even so recently as 1924), the greater economic output of women, and the larger proportion of the population which is at the working period of life. The fall in the price of our imports compared with that of our exports also helps. The result is that with three-fourths of our industrial capacity we can now produce as much wealth as we could produce with the whole of it a few years ago. But how rich we could be if only we could find some way of employing four-fourths of our capacity to-day!

  Our trouble is, then, not that we lack the physical means to support a high standard of life, but that we are suffering a breakdown in organisation and in the machinery by which we buy and sell to one another.

  There are two reactions to this breakdown. We experience the one or the other according to our temperaments. The one is inspired by a determination to maintain our standard of life by bringing into use our wasted capacityㅡthat is to say, to expand, casting fear and even prudence away. The other, the instinct to contract, is based on the psychology of fear. How reasonable is it to be afraid?

  We live in a society organised in such a way that the activity of production depends on the individual business man hoping for a reasonable profit, or at least, to avoid an actual loss. The margin which he requires as his necessary incentive to produce may be a very small proportion of the total value of the product. But take this away from him and the whole process stops. This, unluckily, is just what has happened. (A) The fall of prices relatively to costs, together with the psychological effect of high taxation, has destroyed the necessary incentive to production. This is at the root of our disorganisation. It may be unwise, therefore, to frighten the business man or torment him further. A forward policy is liable to do this [※ 앞으로 전진하는 정책, 즉 확장 정책도 기업가에게 겁을 줄 수 있고 더 고통을 줄 수도 있다]. For reasoning by a false analogy from what is prudent for an individual who finds himself in danger of living beyond his means, he is usually, when his nerves are frayed, a supporter, though to his own ultimate disadvantage, of national contraction.

  And there is a further reason for the nervousness. We are suffering from international instability. [:]
  • (B) Notoriously the competitive power of our export trades is diminished by our high standard of life. 
  • (C: due to A) At the same time the lack of profits in home business inclines the investor to place his money abroad, whilst high taxation exercises a sinister influence in the same direction. 
  • (D) Above all, the reluctance of our creditor countries to lend (which is the root-cause of this slump) places too heavy a financial burden on London. These, again, are apparent arguments against a forward policy; for greater activity at home due to increased employment will increase our excess of imports, and Government borrowing may (in their present mood) frighten investors.
  Thus the direct effect of an expansionist policy must be to cause Government borrowing, to throw some burden on the Budget, and to increase our excess of imports. In every way, thereforeㅡthe opponents of such a policy point outㅡit will aggravate the want of confidence, the burden of taxation, and the international instability which, they believe, are at the bottom of our present troubles.

  At this point the opponents of expansion divide into two groupsㅡ [:]
  • those who think that we must not only postpone all ideas of expansion, but must positively contract, by which they mean (a) reduce wages and (b) make large economies in the existing expenditure of the Budget
  • and those who are entirely negative and, like Mr. Snowden, dislike the idea of contraction (interpreted in the above sense) almost as much as they dislike the idea of expansion.
  The policy of negation, however, is really the most dangerous of all. For, as time goes by, it becomes increasingly doubtful whether we can support our standard of life. 1,000,000 unemployed we certainly can; with 2,000,000 unemployed we probably can; with 3,000,000 unemployed we probably cannot. Thus the negative policy, by allowing unemployment steadily to increase, must lead in the end to an unanswerable demand for a reduction in our standard of life. If we do nothing long enough, there will in the end be nothing else that we can do.

  Unemployment, I must repeat, exists because employers have been deprived of profit. The loss of profit may be due to all sorts of causes. But, short of going over to Communism, there is no possible means of curing unemployment except by restoring to employers a proper margin of profit. There are two ways of doing thisㅡby increasing the demand for output, which is the expansionist cure, or by decreasing the cost of output, which is the contractionist cure. Both of these try to touch the spot. Which of them is to be preferred?

  To decrease the cost of output by reducing wages and curtailing Budget services may indeed increase foreign demand for our goods (unless, which is quite likely, it encourages a similar policy of contraction abroad), but it will probably diminish the domestic demand. The advantages to employers of a general reduction of wages are, therefore, not so great as they look. Each employers sees the advantage to himself of a reduction of the wages which he himself pays, and overlooks both the consequences of the reduction of the incomes of his customers and of the reduction of wages which his competitors will enjoy. Anyway, it would certainly lead to social injustice and violent resistance, since it would greatly benefit some classes of income at the expenses of others. For these reasons a policy of contraction sufficiently drastic to do any real good may be quite impracticable.

  Yet the objections to the expansionist remedyㅡthe instability of our international position, the state of the Budget, and the want of confidenceㅡcannot be thus disposed of. Two years ago there was no need to be frightened. To-day it is a different matter. It would not be wise to frighten the penguins and arouse these frigid creatures to flap away from our shores with their golden eggs inside them. A policy of expansion sufficiently drastic to be useful might drive us off the gold standard. Moreover, two years ago the problem was mainly a British problem; to-day it is mainly international. No domestic cure to-day can be adequate by itself. An international cure is essential; and I see the best hope of remedying the international slump in the leadership of Great Britain. But if Great Britain is to resume leadership, she must be strong and believed to be strong. It is of paramount importance, therefore, to restore full confidence in London. I do not believe that this is difficult; for the real strength of London is being under-estimated to-day by foreign opinion, and the position is ripe for a sudden reversal of sentiment. For these reasons I, who opposed our return to the gold standard and can claim, unfortunately, that my Cassandra utterances have been partly fulfilled, believe that our exchange position should be relentlessly defended to-day, in order, above all, that we may resume the vacant financial leadership of the world, which no one else has the experience or the public spirit to occupy, speaking out of acknowledged strength and not out of weakness.

  An advocate of expansion in the interests of domestic employment has cause, therefore, to think twice. I have thought twice, and the following are my conclusions.

  I am of the opinion that a policy of expansion, though desirable, is not sage or practicable to-day, unless it is accompanied by other measures which would neutralise its danger. Let me remind the reader what these dangers are. There is the burden on the trade balance, the burden on the Budget, and the effect on confidence. If the policy of expansion were to justify itself eventually by increasing materially the level of profits and the volume of employment, the net effect on the Budget and on confidence would in the end be favourable and perhaps very favourable. But this might not be the initial effect.

  What measures are available to neutralise these dangers?  A decision to (a) reform the grave abuses of the dole, and a decision to (b) postpone for the present all new charges on the Budget for social services in order to conserve its resources to meet the schemes for the expansion of employment, are advisable and should be taken. But the main decision which seems to me to-day to be absolutely forced on any wise Chancellor of he Exchequer, whatever his beliefs about Protection, is the introduction of (c) a substantial revenue tariff. It is appropriate. The Tariff which I have in mind would include no discriminating protective taxes, but would cover as wide a field as possible at a flat rate or perhaps two flat rates, each applicable to wide categories of goods. Rebates would be allowed in respect of imported material entering into exports, but raw materials, which make up a important proportion of the value of exports, such as wool and cotton, would be exempt. The amount of revenue to be aimed at should be substantial, not less than £50,000,000 and, if possible, £75,000,000. Thus, for example, there might be import duties of 15% on all manufactured and semi-manufactured goods without exception, and of 5% on all food stuffs and certain raw materials, whilst other raw materials would be exempt.[27] I am prepared to maintain that the effect of such duties on the cost of living would be insignificantㅡno greater than the existing fluctuation between one month and another. Moreover, any conceivable remedy for unemployment will have the effect, and, indeed, will be intended, to raise prices. Equally, the effect on the cost of our exports, after allowing for the rebates which should be calculated on broad and simple lines, would be very small. It should be the declared intention of the Free Trade parties ascquiescing in this decision to remove the duties in the event of world prices recovering to the level of 1929.

  Compared with any alternative which is open to us, this measure is unique in that it would at the same time relieve the pressing problems of the Budget and restore business confidence. I do not believe that a wise and prudent Budget can be framed to-day without recourse to a revenue tariff. But this is not its only advantage. In so far as it leads to the substitution of home-produced goods for goods previously imported, it will increase employment in this country. 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. Some fanatical Free Traders might allege that the adverse effect of import duties on our exports would neutralise all this; but it would not be true.

  Free Traders may, consistently with their faith, regard a revenue tariff as our iron ration, which can be used once only in emergency. The emergency has arrived. Under cover of the breathing space and the margin of financial strength thus afford us, we could frame a policy and a plan, both domestic and international, for marching to the assault against the spirit of contractionism and fear.

  If, on the other hand, Free Trader reject these counsels of expediency, the certain result will be to break the present Government and to substitute for it, in the confusion of a Crisis of Confidence, a Cabinet pledged to a full protectionist programme.


(ⅱ) On the Eve of Gold Suspension (Sept. 10, 1931)

The moral energies of the nation are being directed into wrong channels, and serious troubles are ahead of us unless we apply our minds with more effect than hitherto to the analysis of the real character of our problems.

  The exclusive concentration on the idea of "Economy," national, municipal, and personalㅡmeaning by this the negative act of withholding expenditure which is now stimulating the forces of production into actionㅡmay, if under the spur of a sense of supposed duty it is carried far, produce social effects so shocking as to shake the whole system of our national life.

  There is scarcely an item in the Economy Program of the May Reportㅡwhether or not it is advisable on general groundsㅡwhich is not certain to increase unemployment, to lower the profits of business, and to diminish the yield of the revenue; so much so that I have calculated that economies of £100,000,000 may quite likely reduce the net Budget deficit by not more than £50,000,000, and we are just hoodwinking ourselves (unless our real object is to ^pretend^ to balance the Budget for the benefit of foreign financiers) if we suppose that we can make the economies under discussion without any repercussions on the number of the unemployed to be supported or on the yield of the existing taxes.

  Yet if we carry "Economy" of every kind to its logical conclusion, we shall find that we have balanced the Budget at nought on both sides, with all of us flat on our backs starving to death from a refusal, for reasons of economy, to buy one another's services. 

  The Prime Minister has said that it is like the war over again, and many people believe him. But this is exactly the opposite of the truth. During the war it was useful to refrain from any avoidable expenditure because this would release resources for the insatiable demands of military operations. What are we releasing resources for to-day? To stand at street corners and draw the dole.

  When we already have a great amount of unemployment and unused resources of every description, economy is only useful from the national point of view in so far as it diminishes our consumption of imported goods. For the rest, its fruits are entirely wasted in unemployment, business losses, and reduced savings. But it is an extraordinarily indirect and wasteful way of reducing imports.

    If we threw men out of work and reduce the incomes of Government employees so that those directly and indirectly affected cannot afford t buy so much imported food to this extent the country's financial position is eased. But this is not likely to amount to more than 20% of the total economies enforced. The remaining 80% is wasted, and represents either a mere transference of loss or unemployment due to a refusal of British citizens to purchase one another's services.

  What I am saying is absolutely certain, yet I doubt if one in a million of those who are crying out for economy have the slightest idea of the real consequences of what they demand.

  This is not to deny that there is a Budget problem. Quite the contrary. The point is that the state of the Budget is mainly a symptom and a consequence of other causes, that economy is in itself liable to aggravate rather than to remove these other causes, and that consequently the Budget problem, attacked merely along the lines of economy, is probably insoluble.

  What are our troubles fundamentally due to? Very largely to the world depression, immediately to the unbelievable rashness of High Finance in the City, and originally to the policy of returning to the Gold Standard without the slightest appreciation of the nature of the difficulties which this involved. To say that our problem is a Budget problem is like saying that the German problem is a Budget problem, forgetting all about Reparations.

  Now as regards the world depression, there is at the moment absolutely nothing that we can do, for we have now lost the power of international initiative which we seem to be regaining last May. The results of unsound international banking by the City are also, for the time being, irreparable. The choice left to us was whether or not to adhere to the present gold parity of the exchanges.

  This was decided in the affirmative for reasons which I understand but with which I do not agree. The decision was taken in a spirit of hysteria and without a calm consideration of the alternative before us. Ministers have given forecasts of what might have been expected if we had taken a different course which could not survive ten minutes' rational discussion.

  I believe that we shall come to regret this decision, just as we already regret most of the critical decisions taken during the last ten years by the persons who form the present Cabinet.

  But this is not the point at this moment. The decision to maintain the gold standard at all costs has been taken. The point is that the Cabinet and the public seem to have no clear idea as to what has to be done to implement its own decision, apart from the obvious necessity of raising a foreign loan for immediate requirements; which simply has the effect of replacing money which we had previously borrowed in terms of sterling, by money borrowed in terms of francs and dollars. But they cannot suppose that we can depend permanently on foreign loans. The rest of the problem is primarily concerned with improving our current balance of trade on income account. This is what the Cabinet ought to be thinking about.

  There are only two possible lines of attack on this. The one (which is the milder measure open to us) consists in direct measures to restrict imports (and , if possible, subsidise exports); the other is a reduction of all money wages within the country. We may have to attempt both in the end, if we refuse to devaluate.

  But the immediate question is which to try first. Now the latter course, if we were to be adequate, would involve so drastic a reduction of wages and such appallingly difficult, probably insoluble, problems, both of social justice and practical method, that it would be crazy not to try first the effects of the alternative, and much milder, measure of restricting imports.

  It happens that this course also has other important advantages. It will not only relieve the strain on the foreign exchanges. It would also do more than any other single measure to balance the Budget; and it is the only form of taxation open to us which will actually increase profits, improve employment, and raise the spirits and the confidence of the business community.

  Finally, it is the only measure for which there is (sensibly enough) an overwhelming support from public opinion. It is credibly reported that the late Cabinet were in favour of a tariff in the proportion of three to one. it looks as if the present Cabinet may favour it in the proportion of four to one. The only third alternative Cabinet unanimously for it. But sacrifice being the order of the day, we have in the spirit of self-immolation conceived the brilliant contrivance of a "National" Government, the basis of which is that every member of it agrees, so long as it lasts, to sacrifice what he himself believes to be the only sound solution for our misfortunes.

  For if we rule out Devaluation, which I personally now believe to be the right remedy, but which is not yet the policy of any organised party in the State, there are three possible lines of procedure.

  The first is to take the risks of brisk home development, as being preferable to enforced idleness.

  The second is to organise a general reduction of wages, and, in the interests of social justice, of other money-incomes as well, so far as this is feasible.

  The third is a drastic restriction of imports.

  The "National" Government is pledged, if I understand the position rightly, to avoid all three. Their policy is to reduce the standard of life of as many people as are within their reach in the hope that some small portion of the reductions of standard will be at the expense of imports. Deliberately to prefer this to a direct restriction of imports is to be ^non compos mentis^.


2013년 5월 29일 수요일

[발췌 10장: W. R. Garside's] British Unemployment 1919-1939

출처: W. R. Garside, British Unemployment 1919-1939: A Study in Public Policy (Cambridge University Press, 2002)

자료: 구글도서

※ 발췌(excerpts)

Chapter 10. Pricing Jobs: the real wage debate and interwar unemployment

During the 1920s few observers inside or outside of government could resist the temptation to blame industrial stagnation, rising unemployment and falling overseas trade upon the failure of money wages to respond freely or adequately to market signals. Accepted economic doctrine taught that the demand for and supply of labour would be rendered equal by the operation of free market forces. The persistence of unemployment convinced contemporaries, therefore, that particular institutional and attitudinal forces were creating market imperfections to the detriment of Britain's economic revival.

  This preoccupation with apparent labour market failure proved to be an important element in the evolution of the radical plea for a more interventionist and managed economy in Britain. Mass unemployment convinced Keynes in particular that whatever pure theory might proclaim, once money wages and prices could not and so obviously did not clear markets, for whatever reason, then some alternative strategy had to be adopted. If aggregate demand fell but money wages did not, he was to contend, the labour market would not clear. Even if money wages did fall, there was no guarantee that planned output would settle at a full employment level. This contention raised the intriguing question of whether the unemployment associated with a level of interwar real wages above market clearing levels could have been reduced earlier and more substantially by a mildly inflationary policy of fiscal expansion. The substance of that debate is taken up in subsequent chapters. First we must examine why the 'problem of wages' figured so prominently in the diagnosis of interwar unemployment.

The Neo-Classical Theory of Wages and Employment [1]

Many government officials, industrialists and economists between the wars saw a distinct connection between the crisis of unemployment and the prevailing level of money wages and prices. There were differing interpretations, however, as to the precise nature of this alleged association and of its consequences for public policy. Nevertheless, the contrast between employment conditions and the behaviour of real wages in the pre-war and post-war periods, and more particularly the co-existence in Britain in the early 1920s of increased labour costs and falling international competitiveness, convinced many contemporary observers the real wages, already 'too high', were a fundamental cause of the prevailing economic malaise.

  It was generally conceded that before 1914 British nominal wages possessed a sufficiently high degree of flexibility to prevent excessive unemployment. Although there is evidence of standard wage rates being maintained while prices fell during the 1880s and early 1890s, in contrast to the experience of the previous thirty years, labour unions during the Edwardian period proved generally unable to prevent wage reductions in times of rising unemployment. Collective bargaining procedures and statutory unemployment insurance had yet to be fully developed; thus the temptation to accept wage reductions rather than endure extreme poverty was strong. At that time, Clay noted:
It was impossible to maintain wage rates generally at a level that restricted employment throughout industry; somewhere, usually at many points, wages (in relation to efficiency) could be reduced to the level at which expansion could take place.[2]

  According to the classical equilibrium theory of the labour market, both the demand for and supply of labour were functions of the real wage. The demand price of labour was equal to its marginal product, that is, the extra unit of labour. The supply price of labour was that at which the marginal product of labour equalled the value which the marginal unit of labour assigned to the leisure forgone by working (the marginal disutility of labour). Aggregate labour demand  was a negative function and labour supply a positive function of the real wage. It was the real wage, therefore, which served to equate the supply of and demand for labour. Providing that real wages were flexible, market forces would ensure that all those willing to work at a given real wage would in fact be employed; prices would adjust through market competition to reduce any temporary unemployment, leaving those not willing to work at the prevailing level of real wages voluntarily unemployed. As Pigou put it:

( ... ... )

( ... p. 283 unavailable ... )

p. 284

( ... ... ) recorded unemployment levels in excess at times of 16% of insured workers. By 1929 money wages were only 1.2% below their 1925 level. The fall in British unit wage costs during the same four-year period, moreover, was only one-half of that achieved in the United States and only one-quarter of that in Sweden. [7] Even the tightly skewed industrial and regional distribution of unemployment did not produce any significant widening of wage differentials between depressed and growing regions or between expanding and contracting industries. The general impression for most of the years after 1923, in other words, was of rather stable nominal money wages in the face of falling prices.

( ... ... )

Unemployment and Wages in the 1920s (p. 289)

Keynsian Theory, Unemployment and Wages in the 1930s (p. 293)

It was in these circumstances that Keynes, already convinced of the folly of deflation as a cure for depression and deeply suspicious of the free market system as a guarantor of full employment equilibrium, vigorously attacked any notion of reformulating economic policy along strictly classical lines. ( ... pp. 294-297 unavailable ... )

[발췌: S. Howson & D. Winch's] The Economic Advisory Council 1930-1939

출처: Susan Howson & Donald Winch, The Economic Advisory Council 1930-1939: A Study in Economic Advice during Depression and Recovery (Cambridge University Press, 1977)
자료: 구글도서


  1. Introduction
  2. The council and the slump
  3. Economic advice during the crisis
  4. The committee on economic information 1932–9
  5. Conclusions 
  6. Appendices

* * *
※ 발췌 (excerpts)

of which 

Chapter 2. The Council and the Slump

wherein are found some sections entitled “The Prime Minister's Questions”, and then The Committee of Economists some excerpts of which are taken below:

* * *
p. 47

( ... ?diag)nosis of our present problems, and a reasoned list of possible remedies'. Although the letter stressed diagnosis rather then remedies, there is little doubt that Keynes hoped to be able to secure a high degree of consensus on remedies as well. (Pigou ... ) Nevertheless, this must have been the first occasion that an official body consisting entirely of economists was entrusted with such a far-ranging brief. Of the many reports produced under the auspices of the Economic Advisory Council the one submitted by this committee has certainly aroused most comment so far, though the course of the discussion leading up to the report has not been dealt with fully before.[39] For these reasons it seem worth tracing the genesis and subsequent history of the report in some detail.

  In his original letter to MacDonald, Keynes admitted that the committee would be an experiment. Economists, he claimed, have a language and a method of analysing problems which though unfamiliar to businessmen 'enables them to understand one another fairly quickly'. The results could be made intelligible to everyone, and would therefore be available for criticism.

  ( ... a quote ... )

( ... ) Even without Clay and Robertson the committee was a strong one, and well primed for its purpose. Keynes had just put the finishing touches to his about-to-be-published ^A Treatise on Money^, the book which provided the analytical framework for the diagnosis and remedies which he had been canvassing for the past year or so. He had given an extended exposition of this framework in his private evidence to the members of the Macmillan Committee; it featured in a long letter of advice written to the Governor of the Bank of England in May; and it provided the basis for his answers to the Prime Minister's questions on the state of trade in July. Pigou and Stamp had also given evidence before the Macmillan Committee. In fact Pigou stated initially that there was little he wished to add to his Macmillan evidence, which, together with that of Stamp, D.H. Robertson, and A.L. Bowley, was among the first documents circulated to the Committee of Economists.[40] Robbins, the youngest member of the group at 32, had not appeared before the Macmillan Committee; but he had assisted Sir William Beveridge in producing the second edition of his book on ^Unemployment: A Problem of Industry^, and made a thorough study of trade-cycle theories, particularly the monetary over-investment theories associated with the names of von Mises and Hayek.

  Keynes's main hopes of producing an agreed diagnosis rested explicitly on the assumption of a common language, and implicitly perhaps on confidence in his powers of persuading his fellow economists to accept the diagnostic framework of his ^Treatise^. In his letter to the Governor of the Bank of England in May, after giving a brief account of one of his main theoretical propositions to the effect that business losses and unemployment followed 'inevitably and mathematically' from the inequality of savings and total investment, he had said that is was 'very important that a competent decision should be reached whether it is true or false. I can only say that I am ready to have my head chopped off if it is false!' [41] The Committee of Economists was obviously seen by Keynes as an appropriate body to make this 'competent decision'. From the outset, therefore, an attempt was made to tackle the brief on a fundamental theoretical level.

  Most of the members of the committee knew something about Keynes's ^Treatise^ position prior to the meetings of the committee. Pigou had received and commented on galley proofs of the ^Treatise^ in 1929; he had also crossed swords with Keynes on a number of related issues when he appeared before the Macmillan Committee. (Henderson ... Stamp ... ) Robbins was more of an outsider, he was probably aware of some features of Keynes's position at this time; he received a copy of proofs of the ^Treatise^ when the committee began its meetings.

  ( ... ) An early version of Kahn's multiplier idea, together with an attempt to measure the relationship between primary employment and secondary employment, was circulated to the Committee of Economists.[42] Keynes tried to use the idea to argue for public works in the report, but Pigou's and Henderson's objections ensured that there was no sign of this in the final report.[43]

  ( ... ... )

p. 50

  Kahn's document served as the agenda for the committee's first discussion of its line of approach, but during  the second meeting, held on the following day, the committee decided to proceed on the basis of members's replies to a much shorter, and ostensibly less ambitious, questionnaire drawn up by Keynes. This ran as follows:
In what way would (a) British employment (b) British prices (c) British real wages be affected by (i) an increase of investment (a) in the world at large (b) in Great Britain, (ii) a tariff (iii) a reduction of British money wages (a) all round (b) in the relatively highly paid industries?
How much too high (in order or magnitude) are (a) real wages (b) money wages at the existing level of world prices?
What is your estimate of the increase (a) of real wages (b) of productivity per head since 1910-14? If your estimate of the excess of real wages is greater than your estimate of the increase in real wages per unit of productivity, how do you explain this? [45]
  When the committee met again two weeks later for a weekend session at Stamp's home (...) on 26-28 September, they had before them each members's written answers to these questions. This marks the opening of the real proceedings, which were to develop rapidly in the next three weeks or so under pressure from the Prime Minster to produce the report by 20 October so that it could be considered by the government before Parliament assembled on the 28th. After four meetings in London, the committee held another weekend session on 18-19 October at King's College, Cambridge. Controversy resulted in two more meetings in London, but the committee finally managed to complete its report by 24 October.

  Although the final report did contain an agreed diagnosis, and a majority of the committee endorsed some of Keynes's policy proposals, the outcome fell short of Keynes's hopes. The agreement reached did not result from whole-hearted acceptance of Keynes's theoretical framework, and was often based on uneasy compromise between points of view that remained deeply divided on fundamental questions of analysis and terminology. Such divisions were more serious than the usual kinds of disagreements (which also figured in the report) over remedies and the weight to be attached to particular pieces of empirical evidence, where political and other value-judgments were inevitably brought into play. In order to understand the nature of the underlying divisions over both theory and policy it is necessary to consider the main features of Keynes's ^Treatise^ position and the response which it evoked from Robbins, Henderson, and Pigou. Stamp played a fairly passive role throughout the proceedings; he was not interested in theoretical questions ^per se^, and tended to defer to Keynes's authority on such matters. [46]

p. 51

By virtue of his ^Tract on Monetary Reform^(1923), and his contribution to the gold standard debate, Keynes had established himself as the leading exponent of a monetary interpretation of Britain's economic difficulties. Throughout the latter half of the 1920s he was a consistent opponent of deflationary monetary policies, and became one of the chief advocates of loan-financed public works. But over this period the theoretical rationale underwent considerable refinements as a result of Keynes's abandonment of the purely monetary approach of the ^Tract^ in favour of one couched in terms of the relationship between savings and investment, which attempted to bring 'real' and monetary variables into closer relationship. [47] As in the ^Tract^, though, one of Keynes's chief concerns was with the possibilities of conflict between the conditions required for internal and external stability. He also retained his earlier interest in short-run analysis, though in the ^Treatise^ this interest became focussed primarily on the problems of moving from one equilibrium position to another in a world of large-scale change but reduced flexibility. 

  From an insular British point of view the essence of ^Treatise^ positin can be approached as an elaboration of the special problems faced by the nation prevented from achieving domestic equilibrium at full employment by gold standard constraints which precluded actions to reduce the long-term rate of interest to a level consonant with  the expectations of domestic investors.[48] It is important to underline the fact that Keynes depicted dilemma as occurring withing an international context; in spitte of his criticisms of the gold standard, and his espousal of what many regarded as insular solutions, Keynes's theoretical system was essentially an 'open' one. According to the ^Treatise^ explanation of post-war maladies, the root of world problems lay in the height and stickiness of long-term rates of interest. A combination of circumstances, chiefly of tight money associated with the return to the gold standard, had kept post-war interest rates at a level which was too high in relation to profit expectations, particularly in older countries such as Britain. The United States, with its greater buoyancy, had not suffered from this problem until 1929-9, when speculation had driven rates above what could be borne by 'genuine' borrowers. For Keynes the world slump was not simply a dramatic departure from a normal state of affairs, but a product of these post-war strains, as well as being a possible means of finding release from them. Hence his ( ... pp. 52-53 unavailable ...)

p. 54

  For a country in Britain's position the ^Treatise^ analysis furnished dual criteria for judging policy measures: 'Nothing is any good which does not either increase our favourable balance or find an increased outlet for our savings at home'. In his attempt to counter what he described as the negative 'grin and bear it' school of thought personified by Snowden, he was willing to support almost all the active remedies being canvassed in 1930 which met one or other of these criteria. In his answer to the Prime Minister's questions in July he said that 'the peculiarity of my position lies, perhaps, in the fact that I am in favour of practically all the remedies which have been suggested in any quarter. Some of them are better than others. But nearly all of them seem to me to tend in the right direction.' He commended with varying degrees of warmness as 'means to increase our favourable foreign balance' rationalisation, reduced aggregate taxation, reduced efficiency-wages, tariffs, import boards, and international reflationary action. As 'means to increase the outlet for our savings at home' he supposed public investment, subsidies to private investment, discrimination in favour of home investment, an embargo on foreign loans, and budget economies designed to foster business confidence.

  Several negative policy conclusions also followed from his savings and investment analysis. Since high rates of interest were not evidence of a deficiency in the supply of savings relative to the demand for savings for investment purposes, thrift and economy campaigns were the very opposite of what was needed.[55] On the other hand, although reductions in the level of total savings would have the desired effect in reducing deflationary pressure on the economy, such a policy was a 'council of despair' because the savings could have been used to finance additions to the community's capital stock. [56] He was in favour, however, of temporary suspension of the sinking fund. A related argument concerned the negative savings resulting from financing the dole out of borrowing. Keynes pointed out that under the right conditions an increase in the rate of dole, in common with other unproductive expenditure similarly financed, would have the effect of reducing unemployment; the objection was simply, but crucially, that it had a less beneficial effect on 'the rate of accumulation of our capital wealth' than other expedients which had the same effect on unemployment.[57]

  Another negative conclusion to emerge from the ^Treatise^ position concerned the controversial question of wage reductions as a remedy for unemployment. When drawing attention in 1925 the deflationary implications of return to gold at the pre-war parity, Keynes had contended that it would result in an overvaluation of sterling of around 10%, and that this in turn would required reducing prices and wages in the export industries by the same amount. He called the theory 'that wages should be settled by economic pressure, otherwise called "hard facts" ' , the 'theory of the economic juggernaut', contrasting it unfavourably with a theory which holds 'that wages should be fixed by reference to what is "fair" and "reasonable" as between classes'. At this time his main objection to wage-cuts was solely on grounds of equity; since there was no way of reducing incomes and prices generally,  the decision to return to gold involved singling out a vulnerable group of workers. But he did not rule out the possibility of achieving a fair and economically desirable result from a national treaty to reduce all income s simultaneously.[58]  By the time he reached the ^Treatise^ position the argument about the effect of wage reductions was more sophisticated. Keynes's attitude to the moral aspect of such a policy had not changed: if anything it had hardened as a result of his examination of the ineffectiveness and harmful side-effects of monetary policy as a way of reducing prices and wages. As a member of the Macmillan Committee he was also impressed by public opposition to the policy of general wage-cuts: 'The unwillingness of employers and associations of employers, who have appeared before the Macmillan Committee to recommend this solution has been truly remarkable. In order to test this feeling, I have often in examination pressed them to fall back on this recommendation and almost always without success.'[59]

  He acknowledged, however, that wage-cuts could have beneficial effects. A reduction of money wages, or an undertaking by trade unions to increase efficiency without demanding commensurate increases in pay, could have a favourable effect on profit expectations and hence domestic investment; and it would also improve the foreign balance over the long period, provided that elasticities of demand were favourable and other nations did not follow suit. It certainly could not be ruled out of account, and Keynes kept returning to the question.
The almost complete rigidity of our wage-rates since 1929, in spite of the great reduction of all other price levels, is very striking to the imagination. The fact that, in spite of all adverse circumstances, we have been increasing real wages faster than ever before in our history, has undoubtedly much aggravated our other difficulties. We have been going aheadㅡby force of circumstances rather than by any deliberate decisionㅡrather faster than is wise. [60] 
He frequently urged restraint on trade union and pointed out that specific wage-reductions in the sheltered trades were in the interests of the workers themselves. During the Council's discussion of the Economists' report he committed himself to 'a theoretical case for, say, a 10% cut in wages and salaries accompanied by an extra 2/- income tax on other sources of income'. [61] Earlier he had raised doubts as to whether it was not preferable to raise working-class living standards by means of taxes and public welfare expen- ( ... ... )

2013년 5월 28일 화요일

[Search for the context of] Keynes's position on import tariffs around 1930

※ Basic documents:

[1] J. M. Keynes, “Mitigation by Tariff” (1931) in Essays in Persuasion
There were reportedly some counter-arguments against the above column of Keynes, and his ripostes against them are no. 2 below.
[2] J. M. Keynes, “Economic Notes on Free Trade” (1931) in his Collected Writings, vol. 20.

[3] J. M. Keynes, “Memorandum by Mr J.M. Keynes to the Committee of Economists of the Economic Advisory Council” (1930), in his Collected Writings, vol. 13.

※ Other comments:

[자료 1] Free Trade Nation: Commerce, Consumption, and Civil Society in Modern Britain (Frank Trentmann, 2008)

[자료 2] “Elusive Stability: Essays in the History of International Finance, 1919-1939” (Barry Eichengreen, 1993)

Chapter 8. Sterling and the tariff, 1929-1932
p. 180
1. Introduction

In February of 1932, less than six months after leaving the gold standard, Great Britain adopted a 10% ad valorem tariff on imports from foreign countries.[1] For nearly two years, a number of politicians and economists had argued that Britain should abandon her traditional commitment to free trade and impose a general tariff, initially as a means of reducing unemployment and raising prices without driving herself off the gold standard, and later as a way of balancing her external accounts in order to defend the gold standard directly. Yet It was only after Britain was forced off the gold standard in September of 1931 by a combination of domestic and foreign events, and a floating exchange rate was adopted, that a a general tariff was finally imposed.

  With the demise of the gold standard, a tariff would seem to have retained no special advantage over increased public spending, a reduction in Bank Rate, or other remedies for domestic unemployment. Furthermore, with the adoption of a floating exchange rate, there was a sense in which there no longer remained a balance-of-payment "problem." [2] Thus, the decision to impose a tariff in 1932 has remained an unsolved mystery in the history of British economic policy.

Some historians have argued that this decision was ill-conceived and counterproductive. For example, Drummand(1974, pp. 178-9) writes:
As Professor Mundell has shown, when a country had a floating exchange rate a new tariff is likely contractionaryㅡthat is, it will increase the number of unemployed, reducing national output and income, other things being equal. ... The National Government itself believed that it was following an anti-unemployment policy. With respect to its own goals, therefore, we must find its measures inconsistent.[3]
According to this view, at the very time when their concern with unemployment reached its peak, British policy-makers adopted the one policy guaranteed to make unemployment even worse. Their decision is seen as an undiscerning actionㅡan example of the British tendency, when two courses have long been urged, to adopt both (see Skidelsky, 1967).[4]

  This chapter tells the story of the circumstances leading to the imposition of the General Tariff of 1932 and offers a new explanation for its adoption.

  It is argued that the General Tariff was not imposed as an anti-unemployment policy but rather as an attempt to strengthen the trade balance and prevent the exchange rate from depreciating excessively. Policy-makers were not convinced that Britain's departure from the gold standard had solved the balance-of-payment problem. They had little faith in the curative power of flexible exchange rates. Specifically, they feared that exchange-rate depreciation would set off a "vicious spiral" of inflation, wage increases, and further depreciation, with no improvement in the external accounts. The ( ... p. 182 unavailable ... )
p. 183

  Proposals for reducing the level of unemployment by expansionary monetary policy and large-scale public works programs were advanced outside the Government but were rejected by the authorities. In 1923, when the Conservatives advocated the imposition of a tariff as a response to the unemployment problem, the party suffered such a decisive electoral defeat that it campaigned thereafter on the basis of a pledge not to impose new duties.[6]

  When the second Labour Government took office under Prime Minister Ramsay MacDonald in June 1929, the British economy finally appeared to have embarked on the road to recovery. The percentage of insured persons registered as unemployed had fallen from 12.2 to 9.6 since the beginning of the year. The value of total imports and exports was rising, while the level of retail prices and the Bank of England's gold and foreign exchange reserves appeared to be holding steady.

  Initially, the members of the Labour Cabinet were united in their opposition to a tariff. They considered protection to be a regressive method of indirect taxation that would impoverish the working class. Free trade symbolized the labor movement's commitment to internationalism and was justified by the principles of classical political economy. The most committed free trader was Philip Snowden, who based his views on moral, intellectual, and political precepts. The Government's initial attitude toward the tariff question was signaled by the appointment of Snowden as Chancellor of the Exchequer, and of Snowden's disciple William Graham as President of the Board of Trade. The Government announced that it would not consider applications for protection, nor would it renew the safeguarding duties, which had been imposed in 1921 to shelter a limited number of key industries against foreign competition. Instead, the Government put its faith in a campaign for an international tariff truce. Graham submitted to the League of Nations a proposal for a two-year moratorium on commercial initiatives, to be followed by a round of multirateral tariff reductions. The final version of this plan that emerged from Geneva, however, was highly diluted, and by the time the Cabinet at last agreed upon ratification, rapidly deteriorating economic conditions had destroyed foreign support for the truce. [7]
p. 184

  The subsequent development of Labour attitudes toward protection was influenced by a variety of individuals, among the most prominent of whom was John Maynard Keynes. While one must take care not to exaggerate the impact of Keynes's views, since in some quarter they were received with considerable skepticism, Keynes frequently dominated the deliberations of the Government's economic advisors, and he had the ear of the Prime Minister. Furthermore, the way in which his views on the tariff question evolved is representative of the response of other influential economists to changing economic conditions.

  For much of the Labour Government's terms in office, Keynes was the principal advocate of innovative policies for dealing with Britain's economic problems. When he first came to advise the Labour Government, he was widely perceived as a proponent of free trade, a reputation he had acquired as a result of his activities during the 1923 General Election. In an article published that year in the Nation and Athenaeum (Dec. 1, p. 336), Keynes distinguished between a tariff's ability to stimulate production in protected industries and its inability to influence the overall level of activity. His analysis was based upon the classical presumption that, under full employment, any reduction in import demand will be offset by a fall in export supply. In a remark that returned to haunt him in 1930, Keynes labeled the claim that a tariff can be used for employment purposes "the Protectionist fallacy in its grossest and crudest form." [8]
[8] For Lionel Robbins's subsequent resurrection of Keynes's 1923 views, see PRO C58/150 EAC(E.) 13, "Answers by Professor L. Robbins to Questionnaire Prepared by the Chairman," 23 September 1930. Keynes's own reflection on his 1923 views appear in J. M. Keynes, ^The General Theory of Employment, Interest and Money^ (London, 1936).
  It was the recognition that the British economy was behaving differently in 1930 than it had in 1923 that led Keynes to modify his position on the tariff question. Keynes's first rehearsal of his new espousal of tariff protection came in his private evidence before the Macmillan Committee in February of 1930.[9] The committee, set up to carry out Labour's electoral pledge to investigate the relations between finance and industry, heard Keynes to present a variety of unconventional proposals for dealing with unemployment. These included import duties, export bounties, import boards (to be empowered to issue import licenses), tax cuts, public investment, subsidies on private investment, an embargo on foreign loans, and bold action by the Bank of England to lower interest rates. These proposals reflected the conclusions to which Keynes had been drawn while putting the finishing touches on his Treatise on Money.[10] To the bankers, industrialists, and labor leaders who made up the Macmillan Committee, Keynes explained that [:]
  • output responded to changes in the ratio of prices to costs, which in turn depended on the relationship of saving to investment. 
  • Britain's economic malaise could be traced to the high interest rates that the Bank of England maintained to defend the gold value of sterling
  • High interest rates encouraged saving and depressed investment. High levels of saving reduced the demand for consumer goods, while low levels of investment depressed the demand for producers' goods. 
  • The result was downward pressure on commodity prices, which, in conjunction with the limited flexibility of wages, gave rise to unemployment.[11]
Each of Keynes's proposals was designed to stimulate employment by raising investment relative to saving. A tariff, for example, would [:] (1) increase domestic profits and (2) improve Britain's trade balance, (3) enabling the Bank of England to reduce Bank Rate and thereby (4) stimulate investment without undermining the stability of the exchange rate [※ 1930~1931년 9월 금본위제 존속 하의 파운드 평가 유지를 기정 사실로 전제한 상태에서 이 같이 주장 ].
[9] The report of the Committee on Finance and Industry was almost two years in appearing. Keynes's Macmillan Committee evidence is contained in PRO T200/4 and T200/6.
[10] When the ^Treatise^ finally appeared later in 1930, it too contained an admission that the author was coming around to the view that it might be advisable to use commercial policy to reduce unemployment. Keynes, ^Treatise^, Vol. 2, p. 189.
[11] The ^Treatise^ framework is analyzed in detail in D.E. Moggridge, ^Keynes^ (London, 1975), and D. Patinkin, ^Keynes's Monetary Thought^ (Durham, 1976). But see also J. Robinson, "What Became of the Keynesian Revolution?" in M. Keynes (ed.) ^Essays on John Maynard Keynes^ (London, 1975), pp. 124-5. Keynes's full exposition of the framework came before the Macmillan Committee on 21 February 1930. See PRO T200/4, especially pp. 38-46.
  The limited flexibility of wages was a critical component of Keynes's analysis. In his view, the single most significant change in the structure of the British economy was in the labor market's response to price changes. While wages had been far from fully flexible in a downward direction in previous decades, it appeared that the degree of flexibility had declined over the course of the 1920s. Between 1921 and 1922, wages and prices ( ... p. 186 unavailable ... )
p. 187

( ... ... ) [?... dis]rupt international trade. This would be particularly devastating to Britain, where unemployment was already concentrated in the export industries.

  As a result of the gold standard's supposed indispensability, any measure for combatting unemployment that threatened the stability of the exchange rate could not command widespread support. Keynes, himself, placed little emphasis on this proposals' implications for exchange-rate stability.
  • Although he realized that increased public spending or Bank of England initiatives to reduce interest rates might force the balance of payments into deficit and undermine confidence in sterling, he suggested that complementary measures by American and French authorities could neutralize the potentially damaging impact of domestic reflation on the stability of the exchange rate.[14] 
  • Nonetheless, Keynes was attracted to the idea of a tariff as a response to the unemployment problem precisely because a tariff was the one measure consistent with both the target of lower unemployment and the constraint of remaining on the gold standard.
[14] Keynes and Hubert Henderson disagreed on this point. Henderson argued that the probability of international cooperation was low, so that, in the interest of exchange-rate stability, recommendations for reflation should be limited to fiscally responsible proposals. Henderson argued that the public works programs should be financed "in ways which will not do more harm to industrial activity by depressing business confidence than the stimulation of capital expenditure will do good." Henderson's own scheme for pubic investments entailed an import duty on manufactured goods to provide the necessary finance and maintain balance-of-payments equilibrium. See Henderson's memo, PRO C24/212 CP196(30), 3 June 1930, "Unemployment Policy-Industrial Reconstruction Scheme."
The debate in the Economic Advisory Council

The first Government agency in which the virtues of a tariff were actively debated was the Economic Advisory Council. Established by Prime Minister Ramsay MacDonald in February 1930 to provide the Cabinet with expert economic advice, the Council was made up of a disparate collection of economists, trade-union leaders, and businessmen.[15] Soon thereafter, an EAC Committee of Economists was established to consider the causes of Britain's industrial difficulties. This committee, under Keynes's chairmanship, included among its members A.C. Pigou, Lionel Robbins, and Hubert Henderson. Precisely how influential the advice tendered by the EAC proved to be is a matter of dispute (see, e.g. Winch, 1969, p. 124). However, the body's deliberations are noteworthy if only because this was the first instance in which British politicians systematically solicited the theoretical and empirical analyses of economists. Moreover, the minutes of the EAC document the evolution of opinion on the tariff question.
[15] A definitive history of the EAC is provided by Howson and Winch, Economic Advisory Council.
  As early as the summer of 1930, the idea of imposing a general tariff to reduce unemployment had considerable support within the EAC. Several of its members, while still contending that protection could not affect employment under normal circumstances, admitted that a tariff might reduce unemployment insofar as present conditions resulted from the abnormal rigidities of wages. The idea that wage rigidities impeded adjustment in the labor market was still unfamiliar in 1930, as is evident in the work of William Beveridge, the reigning British expert on unemployment. In his earlier writings on the causes of unemployment, Beveridge (1909, pp. 197-214) had emphasized the impact of part-time employment, impediments to the exchange of information between employers and workers, and the imperfect mobility of labor. By 1930, Beveridge(1930, pp. 368-9) had come to stress the tendency of money wages to lag behind prices during periods of deflation.[16] This drove up production costs, providing an important part of the explanation for the unemployment of the 1920s. Beveridge thought the change in the behavior of the labor market resulted from the spread of collective bargaining and the extension of unemployment-insurance coverage. That he did not devote the same systematic attention to the question of whether money wage tended to lag behind price during periods of inflation is understandable in light of the decade of persistent price deflation Britain had just experienced. Yet the question of whether wages were equally inflexible in the upward and downward directions was to prove central to the subsequent debate over a tariff.
[16] The evolution of Beveridge's view is described by J. Harris, ^William Beveridge: A Biography^ (Oxford, 1977)
  As they became aware that the labor market was not functioning normally, the members of the Committee of Economists began to reassess their attitudes toward a tariff. Evidence of this reassessment appears in their responses to the series of questionnaires submitted to the Committee in 1930. In July, Prime Minister MacDonald asked for views of the causes of the slump and recommendations for Government action. Among the opinions mentioned were a general tariff, selective import duties, import boards, and import prohibitions. The realization that the international character of the depression limited the prospect of basing recovery on the export trade moved several respondents to consider measures for restricting imports. Together these memoranda reflected a desire to promote what ( ... p. 189 unavailable ... )
p. 190

( ... ... ) ment follows in the same ways as when the primary employment occurs in the form of home investment." [19] At the same time, the absence of unanimity is apparent. Robbins's announcement that he was prepared to submit an alternative list of topics for discussion indicates his fundamental dissatisfaction with the direction in which the debate was moving.

  A short questionnaire drawn up by Keynes and used in lieu of Kahn's instructed the members of the Committee to consider how "(a) British output (b) British prices (c) British wages [would] be affected by (i) an increase in investment ... (ii) a tariff (iii) a reduction of British wages." [20] The members' responses indicate thatㅡwith the exception of keynes, who was unambiguously in favor, and Robbins, who was unambiguously opposedㅡthe economists supported with certain reservations a general tariff to combat unemployment. Henderson, for one, warned that protection would hinder the recovery of the export trades and emphasized that he supported a tariff only as a part of a comprehensive program for economic retrenchment. Pigou lent cautious support to the concept of a tariff but suggested that, in practice, the higher retail prices created by a tariff were likely to generate increase wage demands, thereby destroying the tariff's ability to stimulate profits.[21] This was a theme that appeared again and again in the debate over the macroeconomic effects of a general tariff.

  Keynes's response to this questionnaire summarized the case for a tariff as it stood in the autumn of 1930. [:]
  • He found the principal justification for a tariff in the rigidity of nominal wages. A tariff would succeed in stimulating employment if it raised prices relative to wages. 
  • Along with a general tariff, Keynes presented a number of alternative remedies for British unemployment. Among these were measures designed to restore flexibility to the labor market. 
  • In 1930 Keynes still believed that, in principle, money-wage reductions provided a way out of Britain's economic predicament. Raising prices rather than lowering wages might have the large effect to the extent that saving out of profits exceed saving out of wages, but, in theory, money-wage reductions would still increase employment. 
  • In practice, the situation was different. Price increases were preferable to wage reductions on grounds of both equality and feasibility. As Keynes put it to the Committee of Economists, the "almost complete rigidity of our wage-rates since 1929" rendered inflationary tactics such as tariff protection the expedient course.[22]
[22] Keynes also mentioned the danger of offsetting wage reductions abroad as another argument against wage cuts. PRO Cab 58/11 EAC(H.) 106, "The State of Trade: Answer by Mr. J.M. Keynes, C.B.," 21 November 1930, p. 5.
  It was when Keynes referred to the "almost complete rigidity" of wage rates that he and his critics parted company. Pigou and Robbins both argued that, if wages were flexible in an upward direction, a tariff would have no effect on profits or employment. Keynes's response to this objection came in two parts.[:]
  • He first suggested that a tariff was less likely than alternative measures to provoke union demands for wage increases, but he left the claim unsubstantiated. 
  • Owing perhaps to his own doubts about the validity of this argument, Keynes went on to claim that even if money wages rose along with import prices and left real wages unchanged, a tariff would still increase domestic employment. Keynes reasoned that a tariff which improved the current account of the balance of payments would give rise to increase foreign investment. This investment eventually would raise the foreign demand for British goods.[23] 
Beveridge and his colleagues at the LSE countered this argument with the suggestion that a tariff would impoverish foreigners by depressing the British demand for their exports and reducing foreign consumption of British goods.[24]
[23] PRO Cab 58/150 EAC (E.) 13, "Memorandum by Mr. J.M. Keynes, C.B.," 23 September 1930.
  Robbins was quick to capitalize on the weakness of Keynes's argument. He admitted that in some hypothetical society in which money wages remained constant, "it is theoretically possible that a tariff might reduce unemployment." Robbins judged, however, that conditions in Britain were completely different. In reality, a tariff would stimulate the import competing sectors, where there was comparatively little excess capacity and unemployment, and impede the recovery of the export industries, where there was considerable unemployment but wages were already as low as they could be pushed. Hence wage rates had nowhere to go but up. The workers, Robbins wrote, would soon demanding "a share of the loaves ( ... pp. 192-193 unavailable ... )

The impact of the 1931 financial crisis (p. 196)

3. Commercial policy and the floating pound sterling, 1931-32 (p. 199)

4. Conclusion (p. 214)

[자료 3] Maynard Keynes: an Economist's Biography (D.E. Moggridge, 1992)
p. 503:

( ... ) The range of replies to Keynes's questionnaire revealed such significant divergences of view among the members of the Committee that drafting an agreed report was likely to prove a difficult business. So it did, especially when, in the course of the weekend discussions at Stamp's house, Keynes produced 'A Proposal for Tariffs Plus Bounties' recommending a 10% tariff on all imports and a 10% subsidy for all exports.[81] By this means ( .... pp. 504-505 unavailable .... )
p. 508

( ... ... ) With the remarkably moderate discussion of wage reductions and Henderson's successful qualification of the argument for public works, the real centerpiece of the report became the discussion of tariffs. In an addition to a revenue tariff, Keynes, Stamp and Henderson came down mildly in favour of safeguarding duties on iron and steel, of a serious examination of the case for protecting pig and poultry products and of imperial preference. Furthermore, although only stamp supported it, Keynes's tariff-bounty scheme went in almost word for word from his original proposal.[88]  ( ... ... )

  During the final drafting of the Macmillan Report, Keynes took his case for protection to the public. His public announcement of his support for a revenue tariff coincided with another important event. Throughout the year after 1923 the ^Nation and Athenaeum^ had not made money and had depended on financial help from its backers. ( .... ) 

  The first issue of the New Statesman and Nation appeared on 28 February 1931. Two days later, Keynes sent Kingsley Martin his 'Proposals for a Revenue Tariff'[95] The article appeared on 7 March. Before publication, Keynes sent copies to the Prime Minister and the Chancellor of the Exchequer. MacDonald sent a limp reply, while Ethel Snowden refused to show it to her husband, who was ill, and returned it unread. As Maynard put it to Lydia when he sent on Mrs Snowden's letter, "Evidently "we" have made up our minds'. [96]

  The article caused a considerable stir. For week the columns of the New Statesman and Nation were full of criticism and defence of Keynes, the strongest criticism coming from Robbins, Sir William Beveridge, T.E. Gregory, Arnold Plant and G.L. Schwartz, who were engaged in preparing a free-trade counterblast Tariffs: The Case Examined(1931).[x] Keynes met his critics head on in both in the New Statesman and The Times, as well as producing a more 'popular' version of his proposals for the Daily Mail.[97] In many respects, this was one of his more successful controversies, at least on scoring points, if only because he had brooded about the arguments for so long, but it left him depressed. He concluded his 'Economic Notes on Free Trade', his three-part reply to critics in the New Statesman on 11 April:
Perhaps controversy with one's friend and colleagues is an essentially barren thing. But I come to the end of my attempt to deal with the controversy which I provoked ... with an unusually arid flavour in my mouth. There is a great deal to be said on both sides about this tariff question. It is a difficult decision. But in this discussion we have not been reaching more than the fringe of what are for me the real problems. ... [My critics have not take any notice of, or shown the slightest interest in, the analysis of our present state, which occupied most of my original article and led up to my tariff proposal in my last paragraph. Is it the fault of the ^odium theologicum^ attaching to free trade? Is it that economics is a queer subject or in a queer state? Whatever may be the reason, new paths of thought have no appeal to the fundamentalists of free trade. They have been forcing me to chew over again a lot of stale mutton, dragging me along a route I have known all about as long as I have known anything, which cannot, as I have discovered by many attempts, lead one to a solution of our present difficultiesㅡa peregrination of the catacombs with a guttering candle.[98]
( ... ... )

[자료 4] National Crisis and National Government: British Politics, the Economy and Empire, 1926-1932 (Philip Williamson, 2003)
p. 194.

( ... pp. 192-193 ... ) Unemployment insurance was a special target, as moral or social assumptions fused with arguments about cost. The system was 'sapping the independence and enterprise of the people'; eradication of 'abuses' would 'improve [their] morale'.[8] Balfour so doubted that 'any party politician' had the 'courage' to tackle the issue that he now spoke publicly of a need for a 'national agreement'. Morris talked about industry giving politicians 'the sack'.[9]

  Some industrialists also became openly critical of wage levels. A NCEO document sent in February to party leaders, MPs, and newspapers, not only ascribed Britain' economic problems largely to high living standards relative to its international competitors. It also placed the blame squarely upon government, arguing that these standards were determined mostly through 'high rates' of unemployment benefit, statutory wage-fixing machinery, and central and local government wages. It wanted a Committee on National Economy to reduce social service expenditure 'considerably' below the 1929 total; reduction of unemployment benefits to 1921 levels (a 33% cut) and transference of transitional claimants to a means-tested system; repeal of wage-fixing legislation, and reduction of all government wage-levels to those prevailing in the export industries.[10]

  City financiers too were offensive, especially as they began receiving reports of foreign lack of confidence in British financial stability.[11] In January most clearing bank chairmen demanded 'a drastic reconsideration of all ... expenditures'.[12] Even those bankers who thought gold maldistribution a contributory cause of depression now despaired of the chances of international co-operation, and believed that domestic adjustments could no longer be avoided.[13] On 27 January the Friends of Economy, supported by many leading financiers, inaugurated their campaign in the City with a crowded public meeting. They called upon the government and local authorities 'to cease from all expenditure which is not absolutely essential'.[14]

  Although this meeting was addressed by Grey and Horne, the decline in financial confidence was exacerbated by fears that politicians generally would ultimately baulk at the unpopularity of retrenchment. The collapse of the Commons debate on retrenchment in mid December seemed indicative, as did the reluctance of many MPs to become associated with the Friends of Economy.[15] The extreme nervousness of responsible financial opinion is exemplified by Brand, whose politics were Liberal:

( ... quotation in p. 195. ... )

Such opinions and the pressure of economic and financial deterioration resulted in the advocates of expansionist policies or improved living standards becoming increasingly isolated or defensive. Although the TUC pressed for extension of unemployment insurance to agricultural workers, its greater concern was to preserve the existing system against the threat posed by the Royal Commission on Unemployment Insurance.[17] In March it issued a statement proposing international economic co-operation and nationalisation of industries to enforce rationalisation: yet ts principal purpose was to defend existing wage-levels against the NCEO criticism.[18]

  The gravity of the situation certainly pushed a few towards monetary heterodoxy. Bevin hardened in his view that 'the deterioration of the conditions of millions of workers was too high a price to pay for the maintenance of ... international banking in London.' Some replacement should be found for the gold standard, from which 'only the ^rentier^ classes stood to gain'.[19: EAC 13th meeting, 16 April 1931.]  Hawtrey moved from criticism of the Bank of England's 'extreme conservatism' to public advocacy of credit expansion even at the risk of gold losses, and (apparently) to private belief in the desirability of devaluation.[20] According to Keynes, there were now 'quite a number' of people, some of a 'surpris[ing]' sort, favouring abandonment of the gold standard.[21]

  These, however, remained highly untypical, and they included neither Keynes himself, nor McKenna. Paradoxically, Keynes's and McKenna's desire for reflation now brought them to positions very similar to those of the financial authorities. McKenna alone of the bank chairmen continued to look largely to monetary remedies for the depression: cheap and easy money, renewed American and French overseas lending, central bank co-operation. But these objectives required a high degree of financial confidence, which was now plainly in short supply. His reaction consisted of rare expression of optimism: there was '[no] danger of devaluation', and 'those who advocated a devaluation before we returned to the Gold Standard ... no longer ... favour ... such action'.[22]

  Keynes similarly recognised that expansionist policies now required serious attention to matters of confidence, for both financial and political reasons. This evoked some of his most sinuous reasoning. in case events forced abandonment of the gold standard he did not want to be 'too much committed' to it, yet he was 'ready to support [it] for the time being and give it every chance in [his] power'[22] In fact he thought the City's pessimism 'complete moonshine' and considered that a real crisisㅡ'if there is going to be one'ㅡwas 'some appreciable way off' and still avoidable, because the 'fundamental position remain[ed] extraordinarily strong'.[24] Nevertheless Keynes acceptedㅡbelatedly, given six months of Bank of England and Treasury statementsㅡthat in current conditions it was 'absolutely hopeless' to expect an early international financial conference, and futile to continue giving priority to loan-financed public works. For the Bank and Treasury successfully to initiate international co-operation and for the Labour government to survive and introduce an expansionist 'policy of the left',[25] it had become necessary to re-establish suitable conditions. His solution was a 'confidence package' of firm measures to reassure foreign financial opinion, obtain a budget surplus, and strengthen the trade balance.[:]
  • The exchange position should be 'relentlessly defended' and the Bank of England's gold reserve increased. 
  • 'Grave abuses' of the dole should be 'reform[ed]' and further social service expenditure postponed. 
  • Above all, for budget as well as for 'macroeconomic' reasons, Keynes now wanted a revenue tariff. He campaigned vigorously for this from early March with private appeals to ministers and a much-discussed public pronouncement of his apostasy from free trade.[26] So vital did a tariff seem to Keynes, that in trying to frighten MacDonald into pressing for it he contradicted his own private view in asserting that 'a crisis of financial confidence ... [was] ... very near.[27]
[26] 'Proposals for a Revenue Tariff', in ^JMK^ IX, 238
[27] Keynes to MacDonald, 5 March 1931 (original emphasis), JRM 677.
  Although Keynes's ultimate objectives remained avoidance of wage cuts and defeat of 'the spirit of contractionism and fear',[28] to slower minds he must have seemed a convert not merely to protection but to orthodox financial prescriptions. His March statement made public the previous autumn's clash between leading economists, and triggered the pre-concerted counter-attack of his critics. Robbins, Beveridge, and Gregory (the other professional economist on the Macmillan Committee) argued on conventional free-trade lines that the greatest need was for that 'readjustment of wages' which Keynes most wanted to avoid.[29] But this tariff controversy obscured the fact that most economists now agreed upon[,] the urgency of restoring budget equilibrium and 'reforming' unemployment insurance. H.D. Henderson had probably prompted Keynes's new initiative, appealing in February for a 'responsible approach to the whole financial situation'. Gregory thought the Royal Commission on Unemployment Insurance had a 'clear duty' to denounce 'the stupidities of the present system', and 'had a chance of doing good far more important than anything the [Macmillan Committee] could do'.[30]

[자료 5] British Unemployment 1919-1939: A Study in Public Policy (W. R. Garside, 2002)

Part III The International Context
Chapter 5. On and off gold: unemployment, monetary policy and the exchange rate
  • Golden sacrifice? Unemployment and the sterling parity, 1919-31 (p. 115)
  • A tarnished existence: living with gold (p. 124)
  • Mixed blessings: the managed pound and persistent unemployment, 1932-38 (p. 134)
Chapter 6. Trade, tariffs and the stimulation of exports (p. 140)
  • The problem of exports (p. 141)
  • Export competitiveness and the restoration of trade (p. 144)
  • The rise of protectionist sentiment (p. 149)
  • The coming of the tariff (p. 168)
  • Bargaining for trade (p. 172)
  • Resort to Empire (p. 175)
p. 134

Mixed Blessings: The Managed Pound and Persistent Unemployment, 1932-38

To recap. The return to gold at a fixed exchange rate in 1925 meant that the activities of the monetary authority within the domestic economy had been severely constrained by external conditions, insofar as the Bank of England was obliged to maintain currency convertibility. In practice, the pressure of heavy and persistent unemployment prompted a degree of discretion in the conduct of monetary policy which prevented the most beleaguered sections of British industry and society from bearing the full blunt of international monetary stabilization. Nonetheless, monetary policy had remained inherently restrictive and deflationary prior to the world slump and proved incapable in the immediate aftermath of safeguarding domestic interests when faced with dwindling confidence in sterling and a succession of banking crisis abroad.

  The abandonment of gold removed an important element of rigidities in policy and provided the authorities with substantially more scope to pursue deliberate objectives, both internally and externally. The pre-1929 desire to insulate the domestic economy (particularly the export sector) from undue external pressure was replaced in a surprisingly short time by a positive desire to expand economic activity, output and employment. Immediately after the suspension of gold convertibility the pound depreciated sharply on the foreign exchange, falling by March 1932 to $3.40, some 30% below par. By that time the Treasury, now more formally in control of monetary policy than hitherto, had begun to look favourably on a low pound as a direct means of promoting prosperity. In its view a low exchange rate would raise British export competitiveness overseas and encourage a rise in wholesale prices sufficient to boost domestic capital formation, all to the benefit of output and employment.

  Officials recognized, however, that widespread currency speculation or undue appreciation of sterling would threaten the recovery of exports and jobs and the Treasury acted swiftly to instigate a measure of exchange rate management to avoid either danger. In co-operation with the Bank of England, it established the Exchange Equalization Account(EEA) in 1932 to provide a means of managing the floating pound in such a way as to deliberately keep down the exchange rate or, at the very least, to reduce the amplitude of its fluctuations in order to protect the domestic economy from the destabilizing effects of short-term capital flows. ( ... ... ) In principle, such a 'dirty float' enabled balance of payments problems to be met by controlled exchange rate movements rather than by Bank Rate changes, thus permitting a low interest rate policy to dominate for the sake of raising employment at the existing level of wages.[45]

  Domestically, the National Government kept Bank Rate at a historically low level from 1932 for a number of reasons. ( ... ... )

p. 137

( ... ... ) But the management of sterling failed to induce anything like the export-led recovery or reduction in unemployment which Treasury officials eagerly anticipated following the collapse of gold. By 1935 British domestic prices were no higher than they had been in 1931, the balance of payments remained in deficit until mid-thirties, whilst registered unemployment remained over 13% of the insured population (and never less than 10% of all employees during the entire period 1931 to 1936).
p. 141

Problem of Exports

A dominant element in Britain's post-war economic decline was the marked fall in the volume of her export trade, both in absolute terms and in relation to the foreign trade of the outside world. Old established export industries lost an important fraction of their overseas business, without there accruing any compensating advantage from newer trades, many of which were in their productive and competitive infancy compared with countries such as Germany and the United States. Although in 1929 British exports reached their highest level between the wars, they were 19% lower in volume than in 1913. Export volumes rose by 1.2% per year between 1920 and 1938, but this compared unfavourably with a 4.2% annual increase during the period 1900 to 1913.
p. 142

  ( ... ... ) By 1913 the country was seriously overcommitted to the export of cotton manufactures, coal and steel. By then Britain was providing some 70% of the entire world's exports of cotton manufactures, 80% of the world's coal exports and practically the entire volume of the export of ships. The scale and direction of overseas investment, moreover, enabled the demand for such staples to be sustained in old established markets and to be created in new ones.

  ( ... ... ) Serious though these problems were, the more damaging aspect was the rise of international competition. Indeed so far as changes in overal shares of world trade are concerned, the evidence is that before 1913 Britain's losses were due more to a loss of market shares because of the intensification of overseas competition than from unfavourable shifts in the commodity and area composition of trade. And it was the continuation and deepening of such competitive losses that were to prove so devastating between the wars. ( ... ... )

p. 162

( ... ... ) By February 1930, as chapter 10 demonstrates he had become convinced that the cost reduction customarily regarded as a necessary pre-requisite to industrial and trade revival could not be achieved for practical and political reasons by enforced cuts in money wages.
  • The virtue of protection, on the other hand, was that it was much more likely bring down real wages and to relieve the pressure on the balance of payments. 
  • The foreign balance, Keynes maintained, could be increased just as effectively if imports were reduced as if exports were increased, once it was recognized that one of the underlying assumptions of free tradeㅡthat wages would always fall to their strict economic levelㅡno longer held. 
  • In his view of a tariff, by raising import prices relative to wages, could reduce real wage costs in an equitable way with the minimum of social strife. 
  • Moreover, it would stimulate foreign investment and thus help to offset the damage inflicted by the government's refusal to expand domestic investment on a scale sufficient to absorb the prevailing excess of domestic savings. 
  • A moderate degree of protection, in other words, would relieve the pressure on the exchanges, boost the foreign demand for British goods and expand output for use at home, without adverse reactions on the price of exports, given the prevailing surplus men and plant.[43]
[43] Keynes's call for increased public spending to help combat unemployment itself threatened exchange rate stability, but he anticipated in 1930 that there would be sufficient international co-operation, particularly from America and France, to neutralise the supposed damage that domestic reflation might bring. B. Eichengreen, Sterling and the Tariff, 1929-32 (Princeton, 1981)
Increasingly, Keynes found himself unable to defend free trade as vehemently as he had done in the past. The critical question, he reminded the Macmillan Committee:
is how far one is prepared to be governed by short [period] considerations ... If we are jammed for some time I think we should get some immediate relief by well-adjusted tariffs ... If it is essential for equilibrium that we should invest abroad on a larger scale than at present, the protectionist way of doing it may be the method of least resistance because it does not require a reduction of money wage and has less effect ... in turning the terms of trade against us ... With protection we should have lower real wages but less unemployment; with free trade, if it works, we should have no unemployment. But free trade assumes that unemployment is an abnormal break in prosperity of which one should not take account. It assumes that if you throw men out of work in one direction you re-employ them in another As soon as that link in the chain is broken the whole of the free trade argument breaks down. The protectionist method serves to restore equilibrium by seek some way of increasing the volume of foreign investment without reducing money wages.[44]
[44] ^JMK^, Vol. 20. 115-17.
The misgivings expressed by Henderson and Keynes over the prospect of a beneficial revival in staple exports clearly influenced the Economic Advisory Council in its reports to government. Although it was universally accepted that a major boost in exports would be desirable, the Council pointed out in May 1930:
to expect an increased efficiency in these trades sufficient to absorb within a moderate period of time the bulk of the persons now unemployed, both in these industries and in other industries, would be quite unreasonable.
Rationalization schemes for the export trades, it confessed, would be likely:
for the time being to increase profits, but they are not so likely to increase exports or employment. The remaining possibilities seem to be tariffs, bounties, import control and the like, on the one hand, and a programme of home development on the other ... We see no third alternative, so far as the near future is concerned, except a policy of inactivity in the hope of some favourable development turning up in the outside world.[45]
It was the Report of the Committee of Economists in October 1930 that alerted the government to the real possibility of adopting a revenue tariff to ease the economic malaise. The Committee proposed a uniform 10% tariff on all imports, including food, and a bounty of an equivalent amount on all exports. Tariffs would remain only until such time as 'abnormal unemployment' had ended or until prices had recovered '(say) to he 1925-8 standard'.[46] Keynes contended that the effect of such a tariff on the foreign balance could be equivalent to that obtained from a 20% average reduction of money wages, but without the 'guerrilla warfare' that would result from any concerted effect to cut workers' incomes directly.[47]

Not all contemporary economists agreed with this prognosis. Indeed, the final report of the Committee of Economists failed to reflect the bitter opposition amongst some of its members to the policy proposals being pressed upon the government. Robbins, for example, maintained that a tariff could only help unemployment if money wages were rigid in both an upward and downward direction. If they were flexible in an upward direction, then increased import prices would encourage trade union demands for wage increase, thereby exacerbating the unemployment problem. Pigou and Beveridge were equally sceptical, fearing that a 'temporary' tariff would quickly become a permanent feature destined to raise prices relative to costs, thereby eliminating any stimulus to activity. Moreover, Beveridge complained, it was ludicrous to presume either that the surplus unemployed were in the trades likely to be stimulated by protection or that the labour and plant in the export trades destined to lose markets through a reduction in international trade could immediately be used to meet the demand of a protected home market. "The existence of prolonged widespread unemployment', wrote Beveridge, 'is by itself no reason for trying protection as a remedy ... The plight of Britain's principal industries to-day is due, not to more imports, but to fewer exports, not to an increase of our international trade, but to the decrease of it. Almost certainly it could only be made worse, not bettered, if international trade was hampered still further by a British tariff." [48]

The rapid deterioration in the economic climate during 1930/31 convinced Keynes that, such criticisms apart, the case for a revenue tariff as an anti-unemployment measure was stronger than ever. In an addendum to the Macmillan Committee's report drafted largely by himself, and in various articles and speeches, he argued during 1931 for comprehensive import taxes averaging 10% (15% on manufactured and semi-manufactured goods and 5% on foodstuffs). As in earlier months, Keynes maintained that a revenue tariff represented the only reflationary initiative available which could improve confidence and employment without threatening to gold standard. Although he had previously denied that protection could reduce unemployment, he now regarded the imposition of a tariff of as a 'second-best' solution necessary to defend the fixed parity of sterling. The views he spelled out in the Daily Mail in March 1931 are worth quoting at length. Unqualified free trade, he wrote:
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 ... When a free trader argues 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 it is sheer nonsense. Nevertheless, even so, I should be afraid of the long-run effects of introducing the whole apparatus of discriminating protection. It would be much wiser to keep to a measure of a general all-round character, dictated by the requirements of the present emergency, and to employ other measures for the protection of particular industries ... What are the troubles in our way? There is a lack of confidenceㅡthat subtle, intangible, priceless quiddityㅡat home and abroad(1) There is a pressure on our foreign exchanges, a tendency for what we lend abroad to exceed the surplus that we have to lend, which makes us nervous and uncomfortable.(2) There is a lack of profit for home producers. And (3) because of this lack of profit men are unemployed who are capable of producing goods which we are now importing. Above all, (4) we have an unbalanced Budget. Yet we need not only to balance the Budget by means which will not upset business confidence or put new burdens on industry, but to provide ourselves with a financial margin under cover of which we can make progressive, constructive plans for more far-reaching remedies to improve the demand for our products. Then we should reduce business losses and unemployment without serious detriment to our standards of life.
Observe how appropriate a revenue tariff is to all these objects. Assuredly there is no other tax which, so far from diminishing confidence, will actually increase it. At the same time a tariff of 15% on all manufactured and partly manufactured goods will keep out some goods which we now import and cause home-produced goods to be substituted for them. In so far as this happens, the pressure on our exchanges will be relieved, while profits and employment will be increased in the industries which are thus enabled to supply the home market. And finally, from the revenue levied on the goods which would still be importedㅡsome part of which might, in the exceptional conditions of today, be paid in effect by the foreign exporterㅡwe could put the Budget on a thoroughly sound basis. I regard a revenue tariff as a high card in hand which we have not yet played.[49]
Given the pressure of circumstances, Keynes explained to readers of the ^New Statesman and Nation^ some days later, it was essential to adopt measures to facilitate internal expansion and industrial recovery.
If I knew of a concrete, practicable proposal for stimulating our export trades, I should welcome it. Knowing none, I fall back on a restriction of imports to support our balance of trade and to provide employment. Moreover, even if we were to agree that we cannot recover a sufficient volume of exports without a large cut in wages, what exactly one does about it I do not know. I wish that someone, who relies on this alternative, would tell me. [50]

[50] 'Economic Notes on Free Trade', ^New Statesman and Nation^, 28 March 1931.
Colin Clark, secretary to the Cabinet Committee appointed in April 1930 'to survey the trade position in the light of changes ... that had taken place in world trade since the war', estimated that if all the manufactured goods imported in Britain in 1930 had been produced at home, unemployment would have fallen by 875,000. [51]
[51] Howson and Winch, ^The Economic Advisory Council^, 84.
Nor was it only the economists who were questioning the fate of the unemployed under a free-trade regime. Members of the Federation of British Industries, who retained a noticeably neutral stance over protection in the 1920s for the sake of institutional unity, later declared their conversion to tariffs. ( ... ... )