The future looks dismal
Keynes acknowledged that his trip to the USA had left him much more pessimistic about the future than he had been when he left Britain. His long-held belief that only radical change in the political economy of Britain could prevent economic disaster was strongly reinforced by this trip.
Before I went to the United States I was disposed to hold with some confidence that the first impetus to recovery would have to come from America. I held this view so firmly that it was some time before I even questioned it. But eventually it was put to me point-blank in discussion that perhaps the opposite was true. And in the end I began to wonder whether this might be the more probable opinion.
(CW 20, p. 586)
Meanwhile, government economic policy in Britain had become even more deflationary. Ramsay MacDonald, a Labour Party member who served as Labour Prime Minister in 1924 and in 1929-1931, became Prime Minister of a National Unity Government from 1931-1935. He was committed to a priority of savage budget-cutting to reduce the government deficit and to a defense of the exchange rate of the pound. As a result, MacDonald was expelled from the Labour Party. Keynes wrote to his mother in August 1931: "One's hopes were always precarious and now they have disappeared. The country has been stampeded into an attempt to make this deflation effective, and heaven knows how it will all end" (CW 20, p. 596).
Keynes's mood was equally somber when he addressed a group of MPs in September 1932. He attacked the draconian budget proposed by the MacDonald government, arguing both that it was deflationary and that it violated tenets of social justice.
Keynes said that the MacDonald "budget will increase the number of unemployed by more than 10 per cent by Christmas" (CW 20, p. 609). He proposed instead a large increase in debt-financed public investment projects that were economically and socially desirable - "things which have some utility such as education, public health and public works" (CW 20, p. 608).
The following quotations are taken from the notes Keynes made for this speech.The budget fails on every test. In my opinion the Govt's programme is one of the most wrong and foolish which Parliament has deliberately perpetrated in my lifetime. I should like to say a word first of all on social justice. Can barely trust myself to speak. The attacks on the school-teachers seem to be a most foul iniquity. The well-to-do suffer 3 or 4 per cent, the schoolteachers 15... Cutting schoolteachers' salaries will not help us capture lost markets.
(CW 20, pp. 608-609)
He was extremely pessimistic about the future.
I speak from a full heart. The course of policy pursued so far has reduced us to a point of humiliation one could not have conceived. During the last 12 years I have had very little influence, if any, on policy. But in the role of a Cassandra, I have had considerable success as a prophet. I declare to you, and I will stake my reputation on it, that we have been making in the last few weeks as dreadful errors of policy as deluded statesmen have ever been guilty of.
(CW 20, p. 611)
One effect of this qualitative decline in economic prospects was that Keynes was now more confident than ever that even after the demise of the gold standard in Britain, cheap and abundant credit by itself could not restore prosperity. In early 1932, Keynes wrote: "I am not confident, however, that on this occasion the cheap money phase will be sufficient by itself to bring about an adequate recovery of new investment" (CW 21, p. 60). For this reason, "there will be no means of escape from prolonged and perhaps interminable depression except by direct state intervention to promote and subsidise new investment" in the context of greater autonomy from the avalanche of destructive forces now crushing the global economy (CW 21, p. 60).