Friday, July 19, 2019

Keynes’ Life: 1931

I give an account below of Keynes life in 1931.

January–May 1931
On 27 January 1931, Friedrich Hayek arrived in London at the London School of Economics (LSE). Hayek gave four evening lectures at 5 p.m. from 27 to 30 January 1931 on “Prices and Production” (Howson 2011: 196), and these lectures were later published in England as the book Prices and Production (September 1931), an exposition of the Austrian Business Cycle Theory (ABCT). Hayek himself had returned to Austria by 14 February 1930, but he moved to Britain to take up a visiting professorship at the LSE in October 1931. Keynes did not attend Hayek’s LSE lectures, but Nicholas Kaldor had been at the LSE since April 1927 (to undertake a BSc. in economics), and presumably attended.

From winter 1930–1931 and the spring of 1931, Keynes was involved in drafting the report of the Macmillan Committee (Moggridge 1992: 509). This report was signed by Keynes on 29 May and made available on the 13 July 1931 (Moggridge 1992: 511).

On 15 January 1931, in a radio broadcast, Keynes pointed to the problem of a lack of public and private spending as a major role in causing the depression, and urged increases in public and private spending to lower unemployment (Skidelsky 1992: 383–384).

Keynes helped to organise the merger of the New Statesman and the Nation in January–February 1931, and Keynes himself became chairman of the combined board in February until he died (Moggridge 1992: 508). On the 7 March 1931, Keynes published an article called “Proposals for a Revenue Tariff” in the New Statesman and Nation, which presented the case for protectionism in Britain (Moggridge 1992: 509). Keynes proposed a tariff of 15% on manufactured and semi-manufactured imports and 5% on foodstuff imports, mainly to reduce the need for budget cuts or tax increases (Moggridge 1992: 512–513). Lionel Robbins wrote a reply to Keynes’ case for protectionism, published on 14 March 1931 (Howson 2011: 198).

In late February Keynes became ill with tonsillitis and influenza (Skidelsky 1992: 389).

On 4 May 1931, Piero Sraffa was appointed as Marshall Librarian at Cambridge.

From May to July 1931, Nicholas Kaldor attended the summer term at the University of Vienna as part of his research studentship at the LSE (Thirlwall 1987: 23), and on 1 August 1931, Kaldor was first appointed to a temporary lecturing position at the LSE (Thirlwall 1987: 27; in October 1932, Kaldor became a permanent Assistant Lecturer).

June–11 July 1931: Keynes in America
On 30 May 1931, Keynes sailed for New York with his wife and his visit lasted from June–11 July 1931. Keynes spent two weeks in New York and met numerous officials and bankers including Walter Case and Eugene Meyer (president of the Federal Reserve Board) (Skidelsky 1992: 390).

Keynes had been invited to the Harris Foundation seminars at the University of Chicago (an annual event) where he was to give a talk called “Unemployment as a World Problem” (Moggridge 1992: 518), and he gave three lectures on 22 June, 26 June, 2 July 1931 (Skidelsky 1992: 391).

Keynes was in Chicago from 22 June to 2 July 1931 (Moggridge 1992: 518). Curiously, Keynes, at this stage in his thinking, did not advocate a large-scale public works program in America, but thought interest rate policy should be the main tool for fighting the depression (Moggridge 1992: 518), and Keynes found that some Chicago economists were more supportive of public works programs to bring down unemployment than he was (Skidelsky 1992: 392). Skidelsky has suggested that some Chicago school economists were more “Keynesian than Keynes” in 1931 (Skidelsky 1992: 392).

Keynes spent his last weekend in America in New Hampshire, and on 11 July 1931 Keynes and his wife left New York for England, and during his return voyage Keynes wrote a memorandum called “Economic Conditions in the United States” which was later circulated to the Prime Minister, the Economic Advisory Council (EAC) and the Bank of England (Moggridge 1992: 519).

18 July–December 1931
When Keynes returned to England on 18 July, the 1931 world financial crisis was in progress, and Keynes was generally at Tilton over the months from July to September. On 11 May 1931 (before Keynes had left for America), the Austrian bank Kreditanstalt had collapsed. By late May 1931, the financial crisis had spread to Germany, where the Reichsbank suffered from serious losses of reserves. On 20 June 1931, Herbert Hoover announced the Hoover Moratorium, which was a one year moratorium on German debt re-payments, approved by Congress and, after some initial resistance by France, by fifteen other nations. Hoover also provided $100 million for the Reichsbank. But this did not prove sufficient and by late June and early July a severe external run on foreign exchange hit Germany (Moggridge 1992: 521).

By 13 July 1931, Germany was forced to introduce a two-day bank and stock exchange holiday, after the collapse of the Danat Bank (Moggridge 1992: 521). Britain was also hit by a severe outflow of capital: from July to September the Bank of England lost over £200 million in reserves in its attempt to maintain the pound sterling on the gold exchange standard (Moggridge 1992: 522).

In response to a request for advice from the Prime Minister, Keynes replied on 5 August 1931, and opposed austerity measures and declared that it is “now nearly certain that we shall go off the existing gold parity at no distant date” (Moggridge 1992: 523).

The crisis was so serious that Ramsay MacDonald (British Prime Minister) returned from summer holidays on 11 August, and held emergency meetings and a full Cabinet meeting on 19 August 1931 (Moggridge 1992: 534). Remaining on the gold standard was now impossible for Britain as borrowing in foreign currencies required severe cuts to government spending and tax increases, as the price of borrowing from the Bank of France, the Federal Reserve of New York and J. P. Morgan was their demand to balance the budget (Skidelsky 1992: 395). The conflict within the Labour party also destroyed the Labour government, as the Cabinet voted by 15 to 5 in favour of a revenue tariff, and also a majority would not support more than £56 million of budget cuts (Skidelsky 1992: 395).

In August 1931, there appeared the first of a two-part review of Keynes’ A Treatise on Money by Friedrich von Hayek in the journal Economica. The second part appeared in February 1932. Keynes did reply to Hayek, but the criticisms of Hayek were mostly irrelevant since Keynes soon came to repudiate many of the ideas in the Treatise.

On 24 August 1931, Ramsay MacDonald formed a National Government with the Conservatives, Liberals and a new National Labour group.

The history of governments in Britain in these years can be summarised as follows:
5 June 1929–24 August 1931 – Labour government with Ramsay MacDonald as British Prime Minister
24 August–27 October 1931 – First National Government with Ramsay MacDonald as British Prime Minister with Conservatives, Liberals and a new National Labour group
27 October 1931 – United Kingdom general election
5 November 1931–7 June 1935 – the Second National Government
7 June 1935–28 May 1937 – Stanley Baldwin is Prime Minister of Britain.
On 27 August, the new National coalition government decided to implement a program of austerity, with expenditure cuts and tax increases, and by 10 September 1931 it began to implement these measures.

On 16 September, Keynes addressed a group of MPs in the House of Commons, and he condemned the austerity budget as folly (Skidelsky 1992: 395–396).

But none of the measures adopted by the new National government stopped the capital flight from Britain, and when the Bank of England lost over £18 million on 18 September, it was decided to suspend the gold convertibility of the pound sterling after noon on 19 September 1931 (Moggridge 1992: 527).

On 20 September the government announced that Britain would abandon the gold exchange standard the next day, which then happened on Monday (21 September 1931) when a Gold Standard (Amendment) Bill was passed in Parliament (Moggridge 1992: 527).

Keynes went to London and stayed from 21 September to 10 October 1931, when he attended three meetings of the Economic Advisory Council’s Committee on Economic Information as well as a meeting of the Other Club (Moggridge 1992: 528). Keynes dined with the Prime Minister on 5 October 1931 and then visited Lloyd George at Churt (Skidelsky 1992: 400).

On 30 September, Keynes recorded a British Movietone newsreel, where he defended the suspension of the gold standard and predicted that British trade would benefit from the currency depreciation that resulted (Moggridge 1992: 528). This newsreel was screened in October 1931 and Keynes appeared in many cinemas in Britain, and can be seen here:

It was also in September 1931 that Ludwig von Mises visited London for an annual meeting of the British Association for the Advancement of Science, and Mises attended a dinner held for him at the LSE on 24 September (Howson 2011: 210). In September 1931, Friedrich Hayek also published Prices and Production.

From autumn 1931, a number of students and economists at Cambridge began to meet informally in Richard Kahn’s rooms in King’s College, Cambridge, to analyse and discuss Keynes’ A Treatise on Money. These included Piero Sraffa, Richard Kahn, Austin Robinson, James Meade, Joan Robinson, and Dennis Robertson (Moggridge 1992: 531).

By Lent term 1932 (January–March 1932), these meetings became a formal seminar held in the Old Combination Room of Trinity College, Cambridge, and were known as the “Circus,” though Keynes himself did not attend these meetings and Richard Kahn acted as an intermediary for Keynes (Moggridge 1992: 531–532).

On 5 October 1931, Hayek began teaching at the London School of Economics (LSE) as a visiting professor (Howson 2011: 206). Hayek and his family lived in Constable Close in Hampstead Garden Suburb (Howson 2011: 206).

From late October to November 1931 (in the course of the Michaelmas term at Cambridge), Keynes was ill with heart problems (Skidelsky 1992: 432–433).

Late in the year on 5 November 1931, Philip Snowden stood down as Chancellor of the Exchequer and was replaced by Neville Chamberlain (Chancellor of the Exchequer from November 1931–May 1937). On 27 November 1931, Keynes’ book Essays in Persuasion was published, which included many of his writings and essays from the 1920s onwards.

On 13 December 1931, Keynes addressed a socialist group on “The Dilemma of Modern Socialism.”

Howson, Susan. 2011. Lionel Robbins. Cambridge University Press, New York.

Moggridge, D. E. 1992. Maynard Keynes: An Economist’s Biography. Routledge, London and New York.

Skidelsky, Robert. 1992. John Maynard Keynes: Volume Two. The Economist as Saviour 1920–1937. Macmillan, London.

Thirlwall, A. P. 1987. Nicholas Kaldor. Wheatsheaf, Brighton.

Wednesday, July 17, 2019

Keynes’ Life: 1930

I give an account below of Keynes life in 1930, the second year of the Great Depression.

January–May 1930
In January 1930, the second Hague Conference adopted the Young Plan on German reparations, and, as we saw in the last post, Keynes had corresponded with the leading members on the issue of German reparations. By early 1930, Keynes was beginning to think that an international slump was a possibility (Moggridge 1992: 483).

On 19 January 1930, Keynes’ friend Frank Plumpton Ramsey died after an operation for jaundice, which deeply saddened Keynes (Skidelsky 1992: 380).

On 24 January 1930, the British government established an “Economic Advisory Council (EAC),” chaired by the Prime Minister, which included the Chancellor of the Exchequer, the President of the Board of Trade, the Minister of Agriculture, Hubert Henderson (as senior economist), and Keynes, among others (Moggridge 1992: 481–482). This council had its first meeting on 17 February 1930 (Moggridge 1992: 482), and seems to have met once a month (Skidelsky 1992: 363). At the council’s first meeting a further “Committee on the Economic Outlook” was created and Keynes as the chairman (Skidelsky 1992: 363). To add to the confusion, yet another small committee of economists was established on 24 July 1930, with Keynes as the chairman, and Arthur Pigou, Hubert Henderson, Sir Josiah Stamp and Lionel Robbins as the other members, and Richard Kahn as one of the secretaries (Skidelsky 1992: 364). This committee met for the first time on 10 September 1930 (Skidelsky 1992: 364).

We can list these committees in which Keynes was involved in these years as follows:
(1) the Macmillan Committee (Committee on Finance and Industry) (21 November 1929–31 May 1931), chaired by Lord Macmillan (Dostaler 2007: 192).
This committee included Ernest Bevin, Lord Bradbury, R. H. Brand, Theodore Gregory, Keynes, and Reginald McKenna. The Macmillan Committee’s report was completed in May 1931, and published on 13 July 1931.

(2) Economic Advisory Council (EAC) (24 January 1930–1938)

(3) Committee on the Economic Outlook, created on 17 February 1930 with Keynes as the chairman.
This committee held meetings on the 21 March, 3 April, and 1 May 1930 (Moggridge 1992: 495).

(4) Committee of Economists (which met from the 10 September–23 October 1930), established on 24 July 1930, with Keynes as the chairman. This committee produced a report on 24 October 1930 (Dostaler 2007: 192).
In 1930, Keynes also participated to a great extent in the Macmillan Committee (which included Ernest Bevin). He was active in the examination of witnesses and in the production of the final report (Skidelsky 1992: 345), and it was in the debates within the Macmillan Committee that Keynes summarised his current economic thinking as he had developed it in the yet unpublished A Treatise on Money. Keynes also criticised general equilibrium theory by pointing to the relative rigidity of money wages in Britain in the 1920s, and Keynes even came to question whether money wages had ever been highly flexible even in the 19th century (Skidelsky 1992: 347; Keynes did, however, sometimes slip into Neoclassical explanations of money wage rigidity when he invoked the role of unemployment relief in February 1930: Skidelsky 1992: 347).

On 30 March 1930, Heinrich BrĂ¼ning became Chancellor of Germany, an office which he held from 30 March 1930–30 May 1932. BrĂ¼ning inflicted an austerity regime on the Weimar Republic, which exacerbated the Great Depression, and which effectively destroyed democracy in Germany.

Meanwhile in March 1930 in Britain, Keynes proposed deficit-financed public expenditure as a remedy to Britain’s economic malaise to the Macmillan Committee (Skidelsky 1992: 353). On 26 March 1930, Sir Ernest Harvey (deputy governor of the Bank of England) appeared before the Macmillan Committee, and Keynes’ role in questioning him, along with others, was considered a disaster for the Bank of England (Skidelsky 1992: 356). Curiously, as a defence against Keynes’ attack on bank policy, Harvey retreated into a version of the Real Bills doctrine and the idea that the Bank of England was mainly responsive to the needs of trade and could not directly control the volume of credit demand, which drifts into the modern endogenous theory of money (Skidelsky 1992: 357). It was in May 1930 that the Treasury official Sir Richard Hopkins appeared before the Macmillan Committee, and used an altered form of the now famous “Treasury View” against Keynes: Sir Richard Hopkins claimed that government deficit-financed public works might cause “psychological crowding out,” that is to say, a blow to business confidence and expectations (Skidelsky 1992: 361). Keynes now was forced to think more explicitly about the role of business “confidence” (or what would later be called “subjective expectations”) in determining investment (Skidelsky 1992: 361).

Skidelsky (1992: 362) notes that the inspiration for Keynes’ General Theory was in part a response to the opposition that Keynes had encountered to his ideas from the British Bank of England and Treasury officials during the Macmillan Committee.

On 23 April 1930, Keynes sent Ralph Hawtrey drafts of the Treatise, but Keynes himself did not have time to mull over Hawtrey’s criticism until November 1930 after the book was published (Moggridge 1992: 483).

In May 1930, the ruling Labour party was split in a great controversy over government policy in relation to the depression and the need for unemployment relief. The crucial figure within the British Labour party was the MP Oswald Mosley, who strongly supported deficit-financed public works programs. On 23 January 1930, Mosley had sent a memorandum to the Prime Minister in which he advocated direct government control of banking, protectionism, and large-scale public works programs financed by deficits (Dorril 2007: 130). These policies, along with an abandonment of the gold standard (which soon happened anyway in 1931), would certainly have cured the Great Depression in Britain. Mosley, influenced by Keynes, was therefore effectively proposing his own “New Deal” for Britain (Skidelsky 1992: 378).

On 8 February 1930, Mosley’s memo was leaked to the newspaper the Telegraph and provoked a minor crisis within the Labour party (Dorril 2007: 131). However, leading figures in the Labour party opposed this. In particular, Philip Snowden (1st Viscount Snowden), who was Chancellor of the Exchequer from 7 June 1929–5 November 1931 – despite being a socialist – favoured free trade, balanced budgets, and rejected public works programs to reduce unemployment. He also favoured export-led growth as a primary solution to the depression. This crisis within the Labour party in May 1930 is dramatised in this movie scene where Mosley appears before the Cabinet and his proposals are dismissed by Snowden:

These bizarre and Neoclassical policies held by influential figures in the Labour government – and in particular the appeal to export-led growth – destroyed the Labour government of 1929–1931, and, remarkably, also wiped out the German Social Democratic Party in Germany by 1933, as they too supported balanced budgets, sound money and crackpot Marxism.

On 28 May 1930, Oswald Mosley gave a powerful resignation speech in the House of Commons (Skidelsky 1992: 364), in which he attacked the Labour government’s “do nothing” policy. That speech can be read here, and Mosley rightly condemned “the belief that the only criterion of British prosperity is how many goods we can send abroad for foreigners to consume” (that is, by export-led growth).

June–December 1930
As the Great Depression deepened, Keynes rejected Marxist dogma that this was the final crisis of capitalism (Skidelsky 1992: 379).

His fundamental optimism – despite the disaster of the depression – can be seen in his essay “Economic Possibilities for our Grandchildren,” which was first given to the Winchester Essay Society, and then as a public lecture in Madrid on 9 June 1930 (Skidelsky 1992: 379). Keynes spent some ten days in Spain and returned to his home at Tilton, South Downs, where he continued to work on the Treatise over the summer (Skidelsky 1992: 380).

Keynes continued to be involved in the Macmillan Committee, which heard witnesses until the end of July 1930 and then adjourned until 16 October 1930 (Moggridge 1992: 495). It was also in July 1930 that Keynes came to endorse industrial protectionism as a policy to protect British industry (Moggridge 1992: 500).

On 25 September 1930, the British Cabinet of the Labour government rejected any further fiscal stimulus by public works and even accepted the need for limiting unemployment insurance (Moggridge 1992: 507).

In September and October 1930, Keynes also continued his work as chairman of the “Committee of Economists,” but the final report on 24 October 1930 was a complex mix of analysis and possible solutions to the economic problems faced by Britain because of the intense disagreements between Keynes, Pigou, Hubert Henderson, and Lionel Robbins (Skidelsky 1992: 374–377; Dostaler 2007: 192). The report was undoubtedly a failure in either advocating or urging any sensible Keynesian policy. Lionel Robbins, in particular, had been advocating the Austrian Business Cycle Theory (ABCT) in his analysis. Astonishingly, leading figures in the Labour party government favoured austerity and free trade, and rejected Keynes’ thinking (Skidelsky 1992: 377).

On 16 October 1930, the Macmillan Committee resumed its meetings normally for two days a week (Moggridge 1992: 507). Keynes took the lead in discussions by November and early December 1930 (Moggridge 1992: 507).

In October 1930, Keynes finally published his short essay “Economic Possibilities for our Grandchildren” in two parts in the The Nation and Athenaeum (see Keynes 1930a and 1930b), which was later reprinted in Essays in Persuasion (London, 1933). I have previously analysed Keynes’ essay here.

Keynes’ A Treatise on Money was published on 24 October 1930. I will not describe Keynes’ arguments in this book in detail. In brief, Keynes still assumed in this book that there were long-run forces bringing an economy to full-employment equilibrium; he assumed that investment was the most important driver of a capitalist economy, and that the rate of interest was in turn the main driver of investment (Moggridge 1992: 484–486). Keynes also adopted versions of Knut Wicksell’s concepts of the natural rate of interest (the rate at which savings would equal investment) and the market rate of interest (Moggridge 1992: 486).

Dorril, Stephen. 2007. Blackshirt: Sir Oswald Mosley and British Fascism. Penguin Books, London and New York.

Dostaler, Gilles. 2007. Keynes and his Battles. Edward Elgar, Cheltenham.

Keynes, John Maynard. 1930a. “Economic Possibilities for our Grandchildren II,” The Nation and Athenaeum 48.3 (October 18): 96–98.

Keynes, John Maynard. 1930b. “Economic Possibilities for our Grandchildren II,” The Nation and Athenaeum 48.2 (October 11, 1930): 36–37.

Keynes, John Maynard. 1933. Essays in Persuasion. Macmillan, London.

Moggridge, D. E. 1992. Maynard Keynes: An Economist’s Biography. Routledge, London and New York.

Skidelsky, Robert. 1992. John Maynard Keynes: Volume Two. The Economist as Saviour 1920–1937. Macmillan, London.