Ramsay MacDonald christened it an ‘economic blizzard’, suggesting that the world slump of 1929-32 was an Act of God which his hapless Labour Government could not be expected to have foreseen or averted, much less mastered. John Maynard Keynes, by contrast, reached for a mechanical metaphor appropriate to the current state of the art. ‘We have magneto trouble,’ he wrote in December 1930. ‘How, then, can we start up again?’ Keynesian policies, at the time and subsequently, were presented as a magic toolkit which could not only patch up the machine but, with fine tuning, keep it running smoothly so as to develop maximum horsepower. In the enlightened post-war world, nearly everyone swore by the magic toolkit: then, faced with an old-fashioned breakdown, they swore at it.
Economists have not had much luck in applying the lessons of the last slump in order to get us out of this one. Historians have been more fortunate in using the lessons of this slump to understand the last one. In the Eighties we have a fellow-feeling for the bumbling politicians, the fumbling officials, and the stumbling economists of the inter-war period – whom we merely looked down upon in the Sixties. What can now be said about their perplexities, faced with intractable and interlocking difficulties in a real world for which no textbook adequately prepared them? And what can we make of Keynes’s confident proposal of a revolution in ‘the way the world thinks about economic problems’?
The first set of issues is addressed by Harold James in his impressive study, The German Slump. In explaining an apparent economic recovery under the Nazis, following the bankruptcy of the Weimar regime, there is a plausible argument that ‘the right blocked Keynesianism, and were only prepared to accept deficit finance dressed up in clothes (specifically, in the 1930s, military uniforms) which were acceptable to the German élites.’ James, however, writes against this view, and suggests instead that industrialists should be seen as grudgingly complaisant towards all political solutions since their power to influence political events was limited. Nor, on this reading, did such power reside elsewhere. The unions were frightened of the employers, the employers obsessed by union power, so that ‘what survived longest in the debris of Weimar corporatism was the image of the enemy.’
In a well-organised appraisal, James examines in turn five aspects of the Weimar predicament: public finance, industrial organisation, wages, agriculture, and finally the banking crisis of 1931. The picture he paints is a still-life: one of ideological immobilism, institutional ossification, social rigidities. Weimar’s attempts at crisis management led to ‘a complex network of vicious circles’, in which public spending pushed up taxes, which depressed profits, which cut investment, which caused depression, which reduced tax revenues, which intensified the crisis over public spending. Borrowing was the short-term expedient, adopted alike by openhanded Oberbür germeister like Konrad Adenauer and by big business – right up to the day of reckoning. ‘A fundamentally unsound structure required only a small push, then, to topple it,’ James argues, pointing to the ultimately inescapable consequences of instability. The collapse of confidence was more than financial. As the former socialist finance minister, Rudolf Hilferding, wrote in October 1931, ‘there is no socialist solution to the crisis, and this makes the situation unprecedentedly difficult and allows the Communists and National Socialists to grow stronger.’
For the Nazis, it was a godsend. Weimar stood for the policies that had failed before, and Hitler could hardly do worse. What was his recipe for recovery? He massaged the unemployment figures, of course, by eliminating the deadweight of married women, not to mention political opponents and Jews. But it was not all done with mirrors, nor even rubber truncheons: employment increased by over five million between January 1933 and July 1935. In a notably lucid account, James makes it clear that there was no open espousal of deficit finance. With Hitler repudiating any hint of inflation – ‘I have pledged my word’ – his economic wizard, Dr Schacht, presided over a regime of fiscal conservatism, at least on the surface. Under price controls, forced savings found their outlet in public spending, and devices like the Mefo-Bill helped conceal the costs of the rearmament programme. For it was rearmament which represented the big increase in spending and the crucial stimulus to the economy.
Its importance may have been obfuscated because it was part of the Nazi scenario to disguise military projects as work creation in the early years. Yet up to 1935 Reich spending on public works like roads merely compensated for the cuts that local communes had made in their construction programmes since the Twenties. Less money was invested in transport in 1936 than in 1928. For James, Nazi economic policy was not generally innovative; it was as incapable as Weimar of dealing with problems of rigidification and merely suppressed their symptoms. Hence his claim: ‘Fundamentally, the Nazis “solved” only one economic problem: unemployment.’ Everything else was subordinated to this single priority.
No such charge could be levelled against the British Government, which consistently adopted other priorities. The crucial obstacle to the implementation of Keynes’s proposals for public works in his own country has traditionally been identified as the ‘Treasury View’. As Conservative Chancellor of the Exchequer in 1929, Winston Churchill gave it classic utterance. ‘It is the orthodox Treasury dogma, steadfastly held,’ he assured the House of Commons, ‘that whatever might be the political or social advantages, very little additional employment and no permanent additional employment can, in fact, and as a general rule, be created by State borrowing and State expenditure.’ Keynes directed his fire onto this proposition in the pamphlet he wrote with Hubert Henderson, ‘Can Lloyd George do it?’ As a member of the Macmillan Committee on Finance and Industry, moreover, Keynes looked forward eagerly to debating it with Sir Richard Hopkins, the Treasury’s official spokesman. Yet this contest, for one reason or another, was never joined on level terms, for neither in the Treasury Memorandum of 1929, countering the Liberal scheme, nor in Hopkins’s evidence to the Macmillan Committee later, did he state the proposition in the robust terms of his political chief. Why not?
Lord Kahn, in his uniquely authoritative inside view of The Making of Keynes’s General Theory, has one answer. He says that Keynes was guilty of ‘an elementary blunder’ in giving away the case in advance of ‘Can Lloyd George do it?’, by publishing his criticisms prematurely in the Evening Standard. ‘Sir Richard Hopkins was warned and the “Treasury view” no longer appeared in the White Paper as fundamental and decisive, taken by itself, as Winston Churchill had made it appear in his Budget statement.’ Instead, the objections were dressed up in a great deal of administrative detail, designed to deflect attention from the central proposition. For if Keynes could only have shown the dogma itself to be fallacious, would he not immediately have discredited an entire series of practical objections which depended upon it?
Another answer, however, has been suggested in recent years by several economic historians who have worked on the Treasury papers, and it is reiterated in Roger Middleton’s book on the debate over fiscal policy in the Thirties. He contends that ‘the opposition to large-scale public works was essentially a “Whitehall view”. Whilst the theoretical, or strictly economic, constituent of this view was publicly articulated by the Treasury, the views so expressed reflected interdepartmental experience of administering public works schemes since the early 1920s.’ When Hopkins talked of administrative obstacles, therefore, he was merely revealing the preoccupations of a good civil servant’s mind, and if he preferred this to the temptation of an interesting debate with a clever Cambridge don, he was doing no more than his duty. There is plainly a lot to be said for this interpretation, and Middleton says it: but it does not wholly dispose of the issue. There remain questions about the extent to which the Whitehall view embodied a theoretical axiom; about how that axiom should be understood; and about Keynes’s own conception of the Treasury View.
Of these points, it is the second which most concerns Middleton, notably in his sophisticated and illuminating discussion of ‘crowding-out’. He makes a distinction between two versions of this theory. In the first, ‘the financing of a deficit purely by bond sales crowds-out private expenditure because extra transaction balances are required for a higher level of incomes and these will be released from asset balances only as interest rates rise.’ This is the proposition, with which we have become familiar in recent years, that government covers its own deficit only by forcing up interest rates for everyone else. It should be noted that it assumes full employment, so that all movements are then shifts in allocation or displacement effects.
Middleton’s originality, however, lies in identifying a second version as crucial – ‘a form of psychological crowding-out’, which depends essentially upon confidence. This leads him to conclude that ‘the theoretical basis of the “Treasury view” has been misconstrued, and the whole basis of the 1929 policy debate interpreted too narrowly.’ For on this reading, crowding-out can take place at less than full employment because the loss of confidence precipitated by large government loans is itself a cause of the rise in interest rates. Hence Hopkins’s opinion of the Lloyd George scheme, as given to the Macmillan Committee in 1930, that ‘so far from it producing a general willingness to invest in these vast government loans I should have thought that the loans would have to be put out at a very high price.’ This makes for a coherent account of the conditions under which crowding-out takes place, but, in working out its implications, the author admits that ‘the textual evidence is far from conclusive.’ There must still be some doubt, not so much as to whether this account makes sense, but whether it makes more sense as articulated here than it did in the minds of the Treasury officials at the time.
Certainly Keynes and his immediate associates held a simpler conception of the Treasury View, and directed considerable attention to subverting it. What concerned them was not a multi-faceted problem reflecting the constraints on policy of diverse real-world complications: it was a theoretical proposition, the more tenacious because it was not an explicit contention but an implicit assumption. It was this assumption which preoccupied the so-called ‘Circus’ of younger economists in Cambridge in their discussions of Keynes’s Treatise on Money in the months following its publication in October 1930.
We are fortunate that further first-hand reminiscences of the Circus from two surviving participants have now been published. Not only is there Lord Kahn’s own book: he has also contributed to the fascinating volume edited by G.C. Harcourt which reprints the proceedings of the centennial ‘Keynes Seminar’ at Canterbury in 1983. Kahn was joined on this occasion, moreover, by Sir Austin Robinson, whose graceful caveat – ‘Richard Kahn has very rightly reminded you of the fallibility of memories forty years later; and 53 years later they are even more fallible’ – was belied by the verisimilitude of his remarks. In particular, Robinson affirmed that the Circus’s ‘initial thinking was pretty well complete by March 1931’: ‘we learned to distinguish very clearly in those months between those propositions that are universally true and those propositions that are only true in conditions of full employment.’
That the hypothesis of absolute crowding-out belongs to the latter order is immediately clear to Kahn. Undeceived by its modern disguise, he greets it as ‘our friend “the Treasury View” ’. Its significance, however, may well be different in the history of policy and that of theory. Middleton may well be right to argue that such a proposition was not in itself a barrier to the adoption of Keynesian policies. Yet Keynes’s theoretical analysis underwent a fundamental reorientation in the early Thirties, as Kahn vividly conveys. His own concept of the multiplier became assimilated into Keynes’s thinking. No longer was Keynes, as in the Treatise, pointing to the real-world difficulties which prevented Britain from adjusting properly to market forces, thereby thwarting an assumed tendency towards equilibrium at full employment. Instead the General Theory questioned the assumption itself, under the impact of a world slump which suggested that there was no need of special cases to explain a peculiarly British problem.
The basis of Keynes’s analysis is deftly delineated by G.C. Harcourt and T.J. O’Shaughnessy in their paper to the Keynes Seminar. They point to some interesting convergences in recent interpretations. In particular, they bring out the inescapability (even for economists like Patinkin, who have earlier resisted this point) of recognising that Keynes postulated an equilibrium at less than full employment. To describe this as a disequilibrium misconstrues his theory in a fundamental way: for it implies a theoretical recognition of self-righting market forces, albeit forces which are impeded in the real world. The authors’ discussion of the ambit of the ‘short period’ for this analysis is perhaps their most incisive contribution. Other papers in this volume, by J.A. Kregel on Harrod, by M.K. Anyadike-Danes on Robertson, and by Susan Howson on Hawtrey, will be read with profit by anyone interested in what precisely divided Keynes from those of his contemporaries with whom he shared so much.
The Policy Consequences of John Maynard Keynes is also the outcome of a centenary conference held in 1983, and it reveals a wide spectrum of opinions about the meaning of Keynesianism. John Eatwell, indeed, in a paper that speaks cogently on both empirical and theoretical issues, offers a comment on why this should be so, and points to ‘two closely related failings in the General Theory’ which laid it open to misprision. It contains, to be sure, a measure of ambiguity which Keynes did not succeed in eliminating, though J.K. Galbraith exaggerates both its extent and Keynes’s consciousness of it: ‘In using complexity, obscurity, and not infrequent contradictions, Keynes was in the great tradition of Karl Marx and the Holy Scriptures, and it is not certain that Keynes was entirely without understanding and purpose in this matter.’ To Galbraith, such diversionary tactics helped bamboozle economists into receiving Keynes’s ‘central point’ about the primacy of deficit finance by government.
If this were the central point of his magnum opus, however, Keynes might have been expected to mention it. As James Tobin points out, ‘the General Theory itself contains little in the way of concrete policy recommendations; for the most part, these are left for the reader to infer.’ From a more radical perspective, Paul Sweezy reinforces the point that Keynes’s basic purpose was lost sight of in the post-war period, when ‘his great achievement was now seen not as a highly original contribution to the understanding of capitalism’s basic modus operandi but as the invention of a set of clever recipes to counteract the ups and downs of the business cycle.’
Perhaps it should not surprise us that it was the magic toolkit which became official Keynesianism, not the new economic spectacles of the General Theory. The official mind, after all, has its own logic, which is not necessarily that of economic theory. This is really Middleton’s point when he claims that black-and-white versions of the Treasury View are inappropriate in the Whitehall context. Just as, in 1929-30, there was no Treasury blackball on each and every public works proposal, so in 1936 there was no inclination on the part of the mandarins to pounce upon the General Theory as the white hope of economic management. Instead the Treasury abjured 19th-century financial orthodoxy while continuing to resist the ‘new economics’ up to the Second World War, if not beyond.
Even when rearmament presented an opportunity for shedding the albatross of ‘confidence’, British official priorities remained distinctive. Hopkins was still conscious of danger ‘if the country began to think of a Defence Loan as a comfortable Lloyd Georgian device for securing not only larger forces but also lower estimates, Budget surpluses and diminishing taxation’. The decision to finance rearmament partly by borrowing, starting in 1937, nonetheless created a precedent which could not be ignored. Indeed, it could not even be concealed from the Labour Party. ‘If you can do that for armaments,’ said A.V. Alexander, ‘you are going to have great difficulty in persuading the working men of the country that it is a wrong policy to borrow for real assets in public works.’ But that was a calculation about electoral credibility, not financial confidence, where persuasion that they were different cases was less necessary.
Middleton concludes ‘that our answer to Keynes’s and Henderson’s question, “Can Lloyd George do it?” must be firmly in the negative.’ On the one hand, the actual programme of 1929 would have been too small, measured by economic criteria; on the other, a programme adequate to tackle the peak of unemployment in 1932-3 would have been too large, measured by financial and political criteria. These conclusions are no longer novel but they are forcefully put: ‘Without a willingness to allow major economic and political changes, the obstacles to large-scale public works appear insuperable.’ It may be observed that this is an all-or-nothing judgment, in contrast to the author’s incrementalist appraisal of the Treasury View. Suppose Lloyd George had tried and failed to ‘do it’: would the impact on employment have actually been adverse?
Reading Middleton alongside James, one is impressed by a number of parallels. Both are children of their time, duly sceptical about a Keynesian analysis: one from a radical and the other from a conservative perspective. Their own conclusions are not beyond challenge, but it ought to be acknowledged that they both raise not only awkward questions but also the level of historical inquiry. Keynes himself wrote in 1941: ‘It is, it seems, politically impossible for a capitalistic democracy to organise expenditure on the scale necessary to make the grand experiments which would prove my case – except in war conditions.’ In Britain, to be sure, work creation had to be passed off as rearmament, but in Germany, it appears, rearmament had to be passed off as work creation.
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