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. ( ... ... )

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