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).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within the Macmillan Committee that Keynes summarised his current economic thinking as he had developed it in the yet unpublished A Treatise on Money.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).
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).
On 30 March 1930, Heinrich Brüning became Chancellor of Germany, an office which he held from 30 March 1930–30 May 1932. Brüning 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).
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.