Keynes continues his efforts to gain political support for the radical policies in Britain's Industrial Future

For several years following the publication of BIF, Keynes continued to try to gather political support for his radical policy proposals using all of the means at his disposal, including speeches, newspaper and maga­zine articles, radio broadcasts, interaction with important government, business, and party officials, and membership on important government committees.

In November 1929, the Chancellor of the Exchequer appointed a Committee on Finance and Industry under the chairmanship of a Scottish judge named Macmillan to propose policies to resolve Britain's economic problems. Keynes was one of a large number of committee members, as was Ernest Bevin of the Transport and General Workers Union. The Macmillan Committee met about 100 times; it issued its Report in May 1931, after the onset of the Great Slump. Though the financial market collapse in the USA was well underway at this point, it is not mentioned as a matter of importance in the record of the Committee hearings. This may be because Britain did not suffer from a financial crisis.

Donald Moggridge, the editor of Keynes's Collected Writings, commented that Keynes "dominated the proceedings of the Committee, both in exam­ining witnesses and shaping [its] report" (CW 20, p. 38). The transcript of his own testimony before the committee occupies 270 pages of Volume 20 of the Collected Writings. We can only select a few points here to emphasize the consistency of his analysis as it appears in this record with the major themes he had been expressing for years.

In his testimony to the Committee, Keynes critically analyzed all of the main proposals - good and bad - for dealing with Britain's now almost decade-old economic malaise. He declared that his "own favorite remedy - the one to which I attach the greatest importance," was a program of public investment (CW 20, p. 126). Hazarding a guess that a permanent

On the edge of the Great Depression 117 increase in investment would ultimately induce new imports equal to about a quarter of the spending on new investment, Keynes observed that "in order to increase the total investment by £100,000,000 you might have to increase the home investment by £125,000,000" (CW 20, p. 132). Home investment of £100,000,000 per year, "which is only 2.5 per cent of the national income, would cure nearly half of the existing unemploy­ment" (i.e. decrease it from 12.3 percent in 1930 to perhaps 6 percent) (CW 20, p. 132). When you take account of the multiplier, he said, the program will substantially raise income and profits (and thus taxes) and will dra­matically reduce spending on the "dole." With "the increase of employ­ment you automatically get the resources for at least half of what you are doing out of the 'dole' and analogous resources" (CW 20, p. 131). Keynes believed there would be no significant long-run budget deficits generated by the rise in public investment.

His opponents, he said, contend "that it is in fact impracticable to find objects of an economic character which are, as it is sometimes expressed, sufficiently productive to justify the expense" (CW 20, p. 137). What they mean is that the projects to be undertaken will yield less than the going rate of interest. Suppose the interest rate is 5 percent and the projects are expected to yield only 4 percent. Should they be undertaken?

[The] choice may be between investing at four per cent and not investing at all; between getting a four per cent return and getting nothing with the savings...

The problem, Keynes said, comes from confusing sensible policy under the current dismal economic conditions with policy when the economy is in market-clearing equilibrium. Under the assumption of perpetual static full-employment equilibrium, net present value calculated at the current rate of interest may be an efficient criterion for the selection of invest­ment projects - though this is not likely to be the case.¹ But under current conditions of stagnation:

new investment yielding four per cent or in special cases three per cent would be naturally preferable to [continued high] unemployment and business losses. It is better that we should have a man employed in using plant which will produce an investment to yield four per cent in perpetuity than that the man and the plant should be unemployed. It is not a choice between investing at four per cent or five per cent; it is a choice between investing at four per cent and having 80 per cent of the [national] savings wasted and spilled on the ground.

(CW 20, p. 138)

Keynes went on to argue that the current division of direct responsi­bility for large-scale investment programs among public and semi-public bodies gave the central government - the most effective level of govern­ment to coordinate public investment spending - responsibility for only about 20 per cent of public investment funds. To remedy this problem, he suggested that the central government should be given control over all public investment funds. It could then allocate these funds among the government bodies that do most of the public investment through loans at subsidized interest rates. That is, Britain needs:

encouragement by the Treasury, and other Whitehall Departments, of expenditure by local authorities and public boards. I believe that this might be on a very large scale, as soon as one admits that it is legitimate to let them have money at a lower rate of interest than that which is fixed by conditions abroad...

(CW 20, p. 144)

Keynes understood that many of the largest long-term public or semi­public capital projects under the state's influence were very interest elastic. This is one reason why he focused so strongly over the interwar period on the necessity of substantially lowering the long-term interest rate. Housing was perhaps the most important example. Each 1 percent decline in the interest rate paid on borrowed capital would significantly reduce the rent or mortgage payments needed to make the purchase of a house financially viable.

He reiterated here his argument that capital controls were needed to prevent capital flight from keeping domestic interest rates at a level far too high to sustain domestic capital accumulation at the rate consistent with full employment. Britain invested a very large percentage of its saving overseas, which forced the Bank of England to keep interest rates high enough to prevent a loss of gold. The combination of high interest rates and a low expected profit rate on new capital investment caused chronic­ally high unemployment. Since capital controls would enable a substantial reduction in interest rates, they would be necessary to adequately reduce unemployment.²

Keynes also repeated here, in an especially strong form, something he said from time to time when offering policy advice to official government bodies. A large increase in public and semi-public investment to kick-start economic growth in the midst of high unemployment would eventually

On the edge of the Great Depression 119 raise the profit rate on private capital investment.

then private enterprise will be revived. I believe you have first of all to do something to restore profits and then rely on private enterprise to carry the thing along... [W]e must look to a bold Government programme to lift us out of the rut; and if this is done, if it has the result of restoring business profits, then the machine of private enter­prise might enable the economic system to proceed under its own steam; and since I should look forward to that, I shall also look for­ward to being able gradually to diminish the amount of Government intervention.

(CW 20, p. 147)

This statement is strange! Had Keynes changed his mind about the need for permanent economic planning? Keynes had stated over and over again, including in BIF, that a massive and sustained period of public investment under the control of a Board of National Investment would be necessary to achieve and maintain full employment. In May 1931, he called for a "comprehensive scheme of national planning" (CW 20, p. 495). In The General Theory, he would argue that sustained full employment would drive the profit rate to zero; sustained full employ­ment based on private investment was therefore impossible. So, what is going on here?

I believe the solution to this puzzle lies in the fact that when Keynes was asked to advise official government bodies about the best policies to move the country out of the current slump, he would typically pro­pose nothing stronger than the most aggressive intervention he thought the government would possibly support. This was usually a far weaker policy than he actually believed necessary to permanently solve Britain's economic problems in the interwar years. This approach to policy advice disappeared when Britain's entry into WWII seemed inevitable.

A five-person drafting committee was formed to work on the Committee Report over the winter of 1930-1931.

In the end, a fairly innocuous Report was prepared with four addendum items setting out the views of various contending members. One addendum was written by "a group centred around Keynes" (CW 20,

p. 280). The group of six included Ernest Bevin, the union leader. Keynes and Bevin agreed on most of the issues considered by the Committee.

The addendum argued that there were only three policies arguably capable of achieving a substantial reduction in unemployment: cutting wages and salaries; import tariffs and export subsidies; and state action or state subsidies to raise domestic investment. The signers believed that the first option - the one favored by the government and conservative economists - was likely to be disastrous: "the social costs of an attempt which failed would be incalculable" (CW 20, p. 308). They supported the second and third options. Keynes's support of the third option showed that he was, at least temporarily, willing to oppose free trade.

The section on "Schemes of Capital Development" began with a refu­tation of the government claim that public investment will cause private investment to decline - the standard "crowd-out" perspective referred to at the time as the "Treasury View." The crowding-out thesis is embedded in many macro models even today. The signers supported the counter­thesis sometimes referred to as the "crowd-in" thesis, which stated that when the economy has substantial excess capacity, a permanent stimulus to AD through government policy will increase private investment.

But in general, provided the schemes are wisely chosen, we see no presumption in favour of the view that "official" investment need seriously compete or interfere with "unofficial" investment. Indeed, on the contrary, if "official" investment is successful in restoring the volume of output and of profits, this may help restore the business optimism which is a necessary condition of expansion.

(CW 20 p. 302)

The signers offered some general observations about the process through which public investment should be dramatically expanded. First, there must be a central institution whose job is to design and direct the program as a whole, especially in light of the current fragmentation of authority over public investment. They specifically supported the creation of a powerful Board of National Investment broadly similar to the one proposed by BIF.

It may be that we should develop an improved organisation for hand­ling all matters of this kind. It would be outside our scope to pursue this subject in detail. But we think that efficiency and forethought might be much increased if a body were to be set up which might be designated the Board of National Investment, in the hands of which all matters relating to the deliberate guidance of schemes of long-term national investment would be concentrated. This Board might be entrusted with the duty of raising funds not only for the local author­ities which now borrow through the Local Loans Fund but also for

other local authorities including municipalities, for the telephones, for the roads and for such further schemes of national development as those we have suggested above.

(CW 20, p. 307)

Second, the scope of important productive public investment projects is extremely large. For example:

A considerable part of the larger towns and industrial centres of the country need rebuilding and replanning on a comprehensive scale... Much of the industrial housing of the country is of an age when buildings of that character are, of necessity, only fit to be demolished. It seems an insanity to keep a large proportion of the building trade out of employment when this is the case. Some of our staple industries need to be refitted and replanned on modern lines, at the cost of a sub­stantial capital expenditure. In several cases, there is much to be said for replanning an industry as a whole. In cases of proved necessity, we should not be opposed to measures of compulsion, in conjunction with the provision of adequate and cheap finance.

(CW 20, pp. 306-307)

Keynes was also a member of the government's Economic Advisory Council. On July 10, 1930, at Keynes's suggestion, the Prime Minister appointed a five-member subcommittee called the Committee of Economists with Keynes as chair. Though this committee, in the end, could not agree on either the cause or the solution to Britain's economic problems, Keynes's contributions are of interest. Publicly supported investment remained the key. Now having a firmer estimate of the value of the multiplier - his best guess at this time is about two (CW 20, p. 442) - Keynes was aggressive in arguing for a considerable state subsidy to investment programs not under direct government control. This is an important point to understand about Keynes's plan: the Board of National Investment was to be empowered to finance at below-market interest rates a substantial volume of non-public capital investment projects as long as they were congruent with the Board's overall objectives.

In cases where it is clear that the projects would not be entered upon without a subsidy, it would be easy, generally speaking, to justify a subsidy amounting to fully one-third of the interest cost. Indeed, on certain assumptions as to the [value of the multiplier], a subsidy up to a half of the interest cost which would have to be paid in the open market would be justified. We think, therefore, that any projects, of which the prospective yield reaches 2.5 to 3 per cent, are worthy of assistance.

Turning to projects directly under the auspices of either the central gov­ernment or local governments, Keynes simply states that the case in their favor is now so widely accepted by economists that there is not much point in reviewing it.

We should dwell in this remedy at greater length if it were not for the fact that the advantages of such schemes are now generally accepted, and that the obstacle to pushing this remedy still is to be found, not so much in theoretical views, as in the difficulty in finding suitable schemes to assist.

(CW 20, pp. 447-448)

Keynes's draft report for the subcommittee was too optimistic about public investment for the conservatives on the Council and was rejected. Lionel Robbins, with the enthusiasm of the true believer in classical theory, and Hubert Henderson, Keynes's former ally in the Liberal Party who had recently shifted to the right, argued that wage cuts and balanced budgets, not a large public investment program, were the only viable approaches to resolving the crisis.³

In December 1930, Sir Oswald Mosley, a right-wing Member of Parliament (MP) and the founder of the British Union of Fascists, resigned from the Cabinet. He published a widely discussed "Manifesto" signed by 17 Labour MPs that called for national economic planning centered on public investment, arguing that this was the only viable solution to what he believed to be a politically explosive economic situation. He had been substantially influenced by Keynes's long-term support of a policy of this perspective.⁴ Keynes reviewed the Manifesto in The Nation and Athenaeum. In the review, his language and his enthusiasm for a radical approach to national planning are obviously liberated from the substan­tive restrictions and muted tone he imposed on himself in the official gov­ernment discussions and reports we have been reviewing. Keynes stated that he did not agree with every detail in the Manifesto:

But I like the spirit which informs the document. A scheme of national economic planning to achieve a right, or at least a better, balance of our industries between the old and the new, between agriculture and manufacture, between home development and foreign investment; and wide executive powers to carry out the details of such a scheme. That is what it amounts to.. [The] manifesto offers us a starting point for thought and action.

(CW 20, pp. 473-474)

The Manifesto will shock many readers of The Nation and Athenaeum, he said, "who have laissez-faire in their craniums. But how anyone professing and calling himself a socialist can keep away from the manifesto is a more

On the edge of the Great Depression 123 obscure matter" (CW 20, p. 475). Note the clear implication embedded in the following quotation that Keynes considers himself to be a socialist. The choice faced by Britain:

will be ever more openly and obviously set between forcing a reduc­tion of wages and a scheme of national planning. But, however this may be, looking further ahead I do not see what practical socialism can mean for our generation in England, unless it makes much of the manifesto its own - this peculiar British socialism, bred out of liberal humanitarianism, big-business psychology, and the tradition of public service.

(CW 20, p. 475)

Finally, we consider an article Keynes published in March 1931 titled "Proposals for a Revenue Tariff." It is Keynes's first public rejection of free trade. Of course, in private correspondence and internal government documents he had been in support of a revenue tariff for some time. Moggridge notes that "as the recantation of an avowed free trader, it caused a sensation" (CW 9, p. 231). Its relevance for our purpose is that Keynes defended a tariff on the grounds that it would facilitate, under the restrictions of the existing gold standard, a program of vigorous domestic expansion. The stress on the budget and on "confidence" may reflect his desire to assuage the concerns of others that he did not himself share.

I am of the opinion that a policy of expansion, though desirable, is not safe or practicable today, unless it is accompanied by other measures which would neutralise its dangers... There is the burden on the trade balance, the burden on the budget, and the effect on [business and financial] confidence.

(CW 9, p. 236)

Keynes proposed that the tariff rate be set such that it would generate between £50 and £75 million per year, enough to finance a very large program of public investment of the kind he had in mind.

In a follow-up piece, Keynes argued that the only permanent solution to Britain's economic problems would be a "comprehensive scheme of national planning."

But if I look into the bottom of my own heart, the feeling which I find there is, rather, that a tariff is a crude departure from laisser-faire [sic], which we have to adopt because we have at present time no better weapon in our hands, but that it will be superseded in time, not by a return to laisser-faire [sic], but by some comprehensive scheme of national planning.

(CW 20, p. 495)

The takeaway point from Keynes's activities in the opening years of the 1930s is that he remained committed to the radical economic policies described in detail in BIF.