John Maynard Keynes Volume Three Fighting for Freedom 1937-
Roberts Skidelsky Viking N.Y. 2000
This is the third and final volume of his Skidelsky`s biography of Keynes. Its 500 pages of rather small print promise a look at the struggle, not between the Allies and the Axis, but between Britain and the U.S., for dominance of the world. The Americans were using Lend -
Page four. Keynes`s magnum opus, the "General Theory of Employment, Interest and Money" claimed to have proven that full employment might be out of the reach of an unmanaged market economy. Capitalism's natural 20th century state was one of invalidism. Bereft of its old vigor, it might still get along with the aid of stimulating tonics.
By the spring of 1937 Britain had four years of recovery from the depression. Balanced budgets and huge conservative majority has had restored business confidence; cheap money had fueled the business boom, and lower taxes and rising incomes had led to a consumption boom. Yet after four years of recovery of the American economy went into recession in the summer of 1937, and the British economy followed it. Then Hitler forced a Keynesian economics on to Neville Chamberlain's anti-
Page 15. In the spring of 1937 Keynes began a year of terrible decline in which he lost nearly 2/3 his personal money. The institutions whose investment policy he largely dictated also suffered heavy losses. He had a policy of hanging on to the stocks for a rise, and felt that any other policy was anti-
Page 20. In the General Theory Keynes argued, pace at the Smith, the capitalism had no natural tendency to full productivity, and that during a depression saving money and a balanced budget were counterproductive. The same people who rejected those arguments when public works was at issue found them persuasive when they put when they pointed to rearmament. It was a case of making a virtue of necessity. Keynes´ argument was the only one which promised rearmament without inflationary balance of payment pressures, or a rise in the interest rates that would strangle the export sector.
Page 20. From 1937 to 1939 he used the Times newspaper to push his ideas that there was enough spare capacity in the economy to absorb the rearmaments spending without inflation, provided the work was done in areas of high unemployment; that this goal, not monetary policy should be the instrument for controlling booms; that the central planning of demand was needed as the limits of capacity approached; and the national income and output statistics were needed to estimate the size of the gap between aggregate supply and demand.
Page 21. His "boom control" advocated that the government might incur debt in the downswing and repay it on the upswing of the business cycle. The boom, and not the slump, was the right time for austerity measures. He also advocated countercyclical variations in trade policy: just as in a slump tariffs should be raised to check imports, so in a boom they should be lowered to divert the temporarily inflated demand in the home market for imports. In the longer run "as the profits to be gained from adding to our capital goods (falls), tax policy should be directed toward increasing consumption".
Page 22. Keynes also advocated permanently cheap money. Short term interest rate should be kept continuously low, in order to avoid uncertainty about the future of long-
The traditional view of interest rates held that a rise signaled that demand for money was approaching the limit of supply. Four years into a recovery, rearmament loans must surely push up the interest rates, which alarmed the Treasury which wanted the loans at the cheapest rate possible. Keynes countered that interest rate rises signal not a shortage of savings but of liquidity.
Page 23. Keynes held that if savings were insufficient for investment purposes the government could print the money needed, and the income generated by the investment will contain a surplus that when saved would pay for the investment. This was not in the General Theory and constitutes what has been called "making up the theory on the hoof" to account for objections to his proposals. Another example of this Keynes presented in February 1938: the interest rate rise of 1937 resulted not from the rearmament loans themselves, but from the fact that the loans were raised before they were spent. Those who objected to this ad hoc explanation he castigated as "congenital deflationist".
Page 24. The problem as Keynes saw it was not one of interest rates-
Page 25. The problem of government spending increasing the proportion of income spent on imported goods raises the danger of worsening the balance of payments, which ordinarily is resolved by letting a currency depreciate. This would damage Britain's position as a financial center, so Keynes recommended creation of a clearinghouse to make sure that countries that sold to Britain also bought from Britain, with the stockpiling of commodities possibly playing a role. This stockpiling would not only bolster war time security, but in peacetime would moderate price fluctuations, and stabilize the business cycle as well as the exchange rates.
Page 27. Keynes´ political writings in this period were not as influential as his economic writing, nor as "the Economic Consequence of the Peace" had earlier been. His connections in Whitehall in the City of London nourished his economic work, but his political work had no corresponding inside track. Like most British liberals he was largely pacifist, believing that war should be resorted to only in the case of dire national interest. This left him little footing in dealing with a Hitler or Mussolini who would risk war over the most minor points. The "Economic Consequences" could fairly be seen as the spiritual father of appeasement, its message being precautions should be taken against German grievances, not against German aggression.
Page 31. His proposal to counter Hitler and by a pact between France, Britain, the U.S., and Russia, was simply unacceptable to the British right. His argument over the Spanish civil war was mainly with the left, who favored civil resistance to rearmaments, arming the Spanish Republic, and military sanctions against Italy, all of which Keynes saw as counterproductive. Those of his critics on the left who saw these positions as pro-
Page 33. Stalin´s purges, of which Keynes´ Russian émigré wife kept him appraised, appalled him. He felt there are only two ideologies: liberalism and totalitarianism. The former put peace and personal liberty first, and the latter had no place for them at all. He foresaw the Hitler-
Bates 34. He saw in the insistence of a small minority of the necessity of sending the common man to fight the old non-
Page 37. He saw the Austrian and Czechoslovakian appeasement as dishonoring Britain, especially in the underhanded diplomacy involved, but realize the necessary coalition against Hitler was lacking at this time. Russian inclusion he saw as necessary, if repugnant. In the end Keynes´ differences with Chamberlain were a matter of degree, not of kind: he thought Chamberlain could have gotten better deals if he had played his hand better. Like many others, Keynes was convinced that both sides had been play acting, the purpose being opening Hitler's path to the East.
Page 45. The case of Poland was different, she was not as easy to manipulate as was Czechoslovakia. Hitler invaded Poland on September 1, 1939, and Britain declared war on Germany two days later. The resentment of the British a common people against both Hitler and the British rulers had been building since Munich and now they got their way. Keynes´ most important test for going to war had been met.
Page 52. The "Keynes plan" on how to pay for the war first saw light in the 27 September 1939 war budget, but it was the crystallization of what Keynes had been writing and saying in the previous two years. Between 1937 and 1939 the Treasury had borrowed heavily to fund rearmament, fearing an increase in taxes would lead to unemployment and a decrease in tax revenue. In the March 1939 budget a 1000 million pound deficit was projected, Keynesian deficit financing with a vengeance. With unemployment still at 9 percent, inflation was no danger.
But Keynes had moved on to another topic-
Page 55. The Keynes plan called for a low tax and enforced savings for a significant part of the lowest paid workers' wages, and a comparable increase in taxes and the portion of forced savings as wages increased. The loans would pay interest and be paid back in installments after the war, also alleviating the post war slump. Keynes made it plain that he was attached to the logic and not that the details of his plan.
Page 58. The plan found favor with most economists, but was opposed by the labor party and unions. Keynes tried to make clear that he had designed a plan to do the least possible harm to the working class. He pointed out that the choice was not between increased consumption and voluntary saving, but between compulsory savings or compulsory inflation. True, full employment was not here yet, but when it came it would come fast and inflation would be close behind.
Page 60. Had Keynes done his homework, he would have been better prepared for labor's opposition, for they had a plan of their own. It involved barrowing, moderate inflation, and tax on capital after the war to pay down the debt. Of course that plan would have been opposed by the wealthy, and may have hit the working class harder if, as happened after world war one, the city of London forced deflation onto the country after the war. Auth Keynes would have done better to spend much of his time arguing against Labor's plan.
Page 63. Critics of the plan came from both the left and the right. The left wanted the rich to pay for the war, and the right saw compulsory savings as merely postponing inflation, but his deepest contempt was for rationing, saying that comprehensive rationing would turn Britain into a slave state. He felt his solution would be would best preserved rights and the interest of the individual. It is for the state to decide how much of his wages a man may spend, and is it is for him to say how he will spend it. He eventually compromise with a low priced ration for necessities, but would have preferred a per child stipend.
Page 67. There are two main views as to how to run a war economy-
Page 67. Keynes is often put in the planning camp, but he is not only of the fiscal camp, he invented the fiscal camp as an alternative to what he saw as "totalitarian" planning. As a war became more threatening he was forced to yield to centralized control more and more. At some point he found his own equilibrium point between individualism and collectivism and stuck to it.
Page 67. Keynes fiscal theory was also an alternative to inflation, which he believed would lead inevitably to a planned economy, a conclusion strikingly similar to that of Hayek in his "Road to Serfdom" published in 1944. Keynes saw "How To Pay For The War" as the quintessence of his thought; a middle way between a totally free market economy and complete state control of the economy. If the community's aggregate rate of spending can be controlled, the manner in which it is spent can be safely left to the individual.
Page 68. In this summary address to America he asked the reformers to concede a great deal in order to preserve that the decentralization of decisions and power that was a prime virtue of the old individualism. The variously woven fabric of society must be protected even at that means the survival of some abuse. We must escape the invalidism promoted by the left, which has eaten up the wisdom and inner strength of many good causes. The right must recognize that the existing system is disabled, with half the world in dissolution, and with a rottenness at the heart of our society.
Page 69. The British Treasury held veto power over any fiscal plan. They saw little alternative to Keynes, but we're in a reluctant to move without public approval. Keynes´ disapproval of using high interest rates to check a boom coincided with Treasury´s wish to borrow of money at the cheapest possible rate. Both agreed that the press and social and political climate would not permit the large loans at attractive rates that paid for the First World War. The Treasury thought the war could be paid for without inflation through taxation and loans. Keynes replied that borrowing could be inflationary when the savings being borrowed were themselves being created by increased government spending. In the end, Keynes argued, the war must be paid for by reducing severity of consumption, and achieving this in a politically acceptable manner was the challenge.
Page 70. A big problem was the lack of the statistics that would allow in the central planning to occur, a laissez faire business climate obtaining not needing them, they had never developed. The government needed to know total national output and income, and its distribution. They could appraise how much purchasing power had to be removed from the consumer goods market and how to distribute the burden of sacrificed.
Page 71. In the April 1939 budget Treasury declared that "volunteerism is on trial", and with "absurdly optimistic estimates" of voluntary landing set forth a budget with 1500 million pounds deficit. Keynes predicted inflation and shop shortages, remarking on how little the country understood what sacrifices victory would require.
Page 72. On May 10 Hitler invaded Belgium, Chamberlain´s government fell, Churchill became prime minister and formed labor liberal government. The next day Keynes´ precarious health gave way, seemingly and sympathy with political events, a common pattern. With the war news getting worse and worse his wife shut off his radio. He did not recover until the British were evacuated from Denmark on 17 th of June.
Page 74. Two days after the fall of France Keynes replied to an American professor who had sent him a lecture on Hobbes: the recent events were confirmation of Hobbes´ diagnosis of human nature and of what is required to preserve civilization… the final destruction of Locke´s optimistic liberalism…. return to the pessimistic views of the 17 th century impressed on Hobbes.
Early in 1948 Keynes became convinced that foreign exchange vital to the importing of war supplies was leaking out in gaps in the exchange control system Treasury had set up at the beginning of the war, both by letting non-
Page 75. Keynes, in formulating his reply, had the opportunity to meet with the Bank of England officials. There, for the first time, he found people in executive positions who were in a drastic state of mind, completely competent, and equal to their jobs. Montague Norman, head of the Bank, sought to draw Keynes in, but under a misapprehension. Keynes saw all his remedies as temporary while Norman wanted them permanent. The bank would lead to opposition to the Clearing Union Plan and, even more emphatically, to the Bretton Woods agreement and the American loans.
Page 76. When Hitler invaded Belgium Treasury passed a raft of exchange control and bilateral payment plans. Keynes proposed giving freely to France, hoping to set a precedent for the U.S. aid to Britain. Churchill proposed an "indissoluble" union of France and Britain. Both were aimed at keeping France in the war, ending with French surrender on June 17. Oh
Page 81. At the beginning of 1940 teams had estimated eight financing gap of about 4 to 500,000,000 pounds which he had proposed closing by compulsory savings. In practice it had been plugged by voluntary savings from increased output, with negligible "budgetary inflation". By the autumn of 1940 the workforce was fully employed, inviting inflation. Keynes worked to convince the governments that the reduction in the standard of living would be just as great regardless if inflation or taxation were it to cause, and that the working class would ascend to higher taxes if the cost of living were stabilized.
Page 84. Work proceeded it on the various schemes to fund the war until intention was focused by an article in the February 1, 1941 Economist suggesting that the national income had almost doubled since before the war, implying that inflation was spinning out of control. At issue was the amount of purchasing power that had to be withdrawn either by taxation or primary savings in order that the remaining purchasing power should be equal to the available supplies on the market at the existing level of prices.
Keynes´ work on the budget tapered off. In 1943 he advised on a compulsory deduction at the source on current earning on all incomes under 600 pounds a year, considered indispensable for widening the tax base. In 1944 and 1945 he worked to get rebates on the excess profit tax made unconditional, and taxes on small businesses reduced, lest higher taxes kill the private enterprise system.
Page 86. Keynes´ original "How to Pay for the War" addressed the government budget deficit and post-
Page 88. The improvement in government taxation allowed it to pay for 54% of its spending in the six 1940-
Keynes´ work at this time was not just to fund the war, but to do so in a manner that satisfied the popular sense of social justice while maintaining adequate incentives to work and economy. The Achilles heel of cost push inflation under full employment in a free society was elucidated it not solved: failure to satisfy the cost of living would push wages up and failure to absorb the extra purchasing power would make it difficult to hold the cost of living down. With Keynes´ proposed wage deferral ruled out and wage controls impracticable, the government was inevitably driven back to subsidies, price controls and rationing.
Page 89. Keynes was attacked from both the left and the right. The left thought him too protective of the interest of capital, the top marginal tax of 97.5% and the 100% excess profits tax had been opposed by him. He also opposed the rationing favored by the left. The right opposed the central planning they thought Keynesianism implied, perhaps brief presented resented his low tax position, and complained that the greater tax burden on British business put them at a disadvantage after the war.
Page 90. That Britain was damaged by the war was incontestable. Critics must be asked if there was a better way. Should she have made a pact with Hitler as Stalin had done? Fought the war on the cheap as France had done?
Page 92. Britain always assumed that the U.S. would come to the democracies´ aid against totalitarianism, but he underestimated the depths of middle America´s disgust over Europe’s constant wars, and overestimated Roosevelt’s control of the political process, it’s taking the East Coast elites opinion for public opinion, and discounting Congress’s ability to block Roosevelt. Much of the American left, and the new dealers in particular, saw the British as imperialistic and the center of world banker´s capital, who they were struggling with at home. Economic rivalry also stood in the way. The U.S. resented that Britain’s imperial preference system discriminated against American exports. There was resentment over Britain´s reneging on its world war one war debts.
Page 93. In November 1939 a "cash and carry" act passed U.S. legislation allowing this sales of arms to belligerents who paid cash and transported them in their own ships, obviously designed to favor Britain, but Britain’s gold and dollar reserves, which stood at 545 million pounds in December 1939, were running down at 200,000,000 pounds a year. Hitler’s advances in the spring of 1940 focused attention on what a British defeat would mean for American shipping in the Atlantic.
Page 94. American public opinion feared that large loans to Britain would drag the U.S. into a war on Britain´s side. America’s negotiators insisted that Britain drain her and her dominion’s reserves dry, including overseas securities and physical property, and would not commit to loans even at that point. Churchill and his ministers gave up on budgeting for a three year war and began buying arms as requested by the armed forces, leaving its fate "in the hands of the gods" when the money ran dry.
Page 95. After Dunkirk 95% of Americans thought Britain done for, and a movement to retain arms for the defense of this hemisphere gained strength. 1940 was in an election year, and both parties pledged to keep America out of the war. As Britain´s peril became greater Roosevelt began to skirting the edges of the neutrality act. Old rifles were sold cheap through third parties, an old ships were traded for a lease on naval bases in Newfoundland and the Caribbean. The view that "the longer we keep Britain in the war, the longer we can keep out of it" was promoted and took hold, but with no loosening of the requirement that arms be paid for. If Britain continued to mobilize her foreign assets, arms would continue to flow. Roosevelt’s reelection, for third time, and victory over the Luftwaffe in the battle for Britain ease pressure, but Britain was rapidly running out of money.
Page 97. Keynes had been in the overseas finance division of the treasury during world war one, and after his return to the treasury he prepared a memorandum for Sir Fredrick Phillips and David Whaley who now control the branch, and we’re going to Washington to negotiate. His paper proposed that the U.S. finance all approved British purchases in the United States, which would let Britain and the sterling area pay its way with the rest of the world. This must happen before Britain was stripped bare in order that the U.S. not be saddled with British liabilities should she default. British direct investment in the U.S. should not be liquidated because it was part of her exporting capacity and its loss would mean Britain must limit imports from the U.S. after the war. U.S. aid to Britain should be in the form of grants, not loans, in order to avoid a repetition of the debt repayment problem which soured relations between the wars. Keynes implicitly threatened to close the markets Britain control to U.S. commerce after the war rather than accept satellite status under the U.S.
Page 98. Sir Phillips U.S. counterpart in negotiation with Roosevelt’s treasurer was treasury Secretary Henry Morgenthau, a German Jew who hated Nazism more than he liked Britain, and you had long-
Page 99. In 1940 Morgenthau began pressuring Britain to sell off its U.S. assets, Shell Oil, Lever Brothers, and Brown and Williamson Tobacco. Morgenthau realized that this would cripple Britain after the war, but maintained she could not afford to worry about that in 1940.
Page 100. On December 8 Churchill sent Roosevelt a letter outlining the desperate position Britain was in, and the disadvantages Britain’s removal from the war would pose for the United States in both the Atlantic and the Pacific. Roosevelt, a master at persuasion, had a fireside chat with America, and on December 17 proposed a "lend-
Page 102. Harry Hopkins, Brenda interest adviser to Roosevelt, was sent to Britain to ascertain her needs, and came back an enthusiastic supporter of lend-
Page 104. Washington and continued pressure on London to liquidate assets, and London continued to insist that the British government did not own these lock, stock, and barrel, and that forced sales in the next six months would be ruinous. Keynes took up a plan by the Canadian Purchasing Mission´s chief of staff, Arthur Purvins, whereby a new deal agency, the reconstruction finance corporation, headed by secretary of commerce Jesse Jones, might loan Britain $900,000,000 with Britain´s U.S. assets as collateral.
Page 105. In the spring of 1941 America’s new ambassador to Britain, John Gilbert Winant, suggested to Keynes to that he (Keynes) should go to Washington to represent the Chancellor of the Exchequer personally. Keynes went without specific instructions, but with the general mandate to replenish Britain’s reserves up to a minimum of $600,000,000.
Page 109. Keynes came to the U.S. with a mixed reputation. He impressed people as rude when he came in 1970, and was considered to be arrogant. His attack on Woodrow Wilson in the "Economic Consequences of the War" had not been forgotten nor forgiven. Two conservative bankers he was the intellectual author of the destruction of the gold standard and the unsound experiments of the New Deal. On the other hand, there were young economist working in Roosevelt’s New Deal who considered themselves young Keynesians. Henry Dexter White considered Keynes the greatest living economist, and Keynes had supporters sprinkled around in the Washington bureaucracy.
Page 110. To many Americans Keynes epitomized the subtle traps a declining civilization could set for a rising one. And of course, there were traps. The British were trying to maximize American support at the least long-
Page 112. Keynes and Morgenthau were not kindred spirits. Morgenthau was not familiar with financial technicalities, and Keynes lacked the common touch. At a deeper level, both sides were jockeying for post war position. Keynes wanted to reduce Britain’s dependence on lend-
Page 113. The war news while Keynes was in working in Washington made his task harder. Britain was driven out of Greece and Crete, Rommel was on the offensive in North Africa, German air raids continued, and 1/3 of American supplies to Britain were sunk by German U boats. Not until Hitler invaded Russia on June 21, 1941 was pressure taken off Britain.
Page 115. Keynes expressed bafflement on his return at the American way of government. In reality it was Roosevelt’s style of administration rather than the U.S. system itself at fault. Roosevelt’s technique for preserving his own freedom of action was, in the words of JA Salinger "to keep the grants of authority incomplete, jurisdictions uncertain, and charters overlapping". Keynes only gradually came to understand that it was Morgenthau´s lack of authority, rather than any ill will, which prevented him from fulfilling his promises.
Page 118. Keynes was appalled at the amount of lawyers in Washington ("like an Egyptian plague-
Page 121. Keynes´ opening gambit of minimizing British reliance on Lend-
Page 123. The U.S. government came to the agreement that Keynes, working with Harry Dexter White, director of monetary research at the U.S. treasury, would extend Lend-
Yet Britain emerge from negotiated since more, not less, depended on Lend-
Page 124. It would be a mistake to see Keynes as responsible for Lend-
Page 125. The lend-
Page 126. Lend-
Page 130. By this time they were into July, Keynes sent Britain a proposed draft agreement that the British feared would outrage Washington, and they forbid him presenting it. They sent Keynes a draft which he considered so barren that he presented it as an aid-
Page 131. Keyns knew only partially what he wanted, but he did clearly what he didn’t want: A return to 19 th century a laissez faire which sacrificed domestic employment to free trade and the gold standard, and the 19 th century reactions against laissez faire of protectionism and imperialism.
Page 136. Keynes continued throughout the war as an unpaid representative of the Chancellor of the Exchequer, a position without responsibilities, duties, or authority. His function was primarily analyzing problems. If he decided to engaged himself in a problem, his influence tended to be decisive. Once the main structure of Britain’s war time finance, domestic and external, had been decided in 1941-
Churchill’s interest in finance was limited to its not being an impediment to deploying British power on a global scale, so the main spheres of Keynes´ activity largely escaped his notice. This attitude was shared by most of his party’s high command, as well it as his Labor colleagues. Their policies were economic imperialism, and its advocates comprise the main opposition to Keynesian economics.
Page 137. U.S. Secretary of State Cordell Hull and secretary of treasury Morgenthau had economic war aims. Britain, other than holding on to what she could, had none. This allowed British technical expert great latitude to develop their own initiatives. Keynes took full advantage of this opportunity.
Page 138. Keynesian financial planning needed administrators. When total war showed this system to be too slow, the British government’s shifted to physical planning, which needed technicians. These were formed into an economic branch and a statistical branch. Many were Keynes´ former students and had in any case been educated after the Keynesian revolution.
Page 142 When the war was going poorly, Britain spared no expense in the pursuit of victory. When victory was all but assured, Keynes did his best to rein in costs, to little avail.
But now person editor’s comments.
On pages 22-
As part of fritzthecat´s tongue in cheek attempt to aid the Keynesian system builders in their ever closer approximation to truth I suggest they need to incorporate Nietzsche’s "will to power" and Marx’s "class struggle" into their theory. For example, in the three way struggle for power between the rich, the poor, and the government, might not the holders of wealth trying to starve their opponents into submission by withholding their capital from productive use be a better explanation for the $18,000,000,000,000 that corporate America holds offshore in untaxed an unused accounts, than in their preference for liquidity?
Similarly, might not the Keynesian desire for permanently low interest rate be a means that the government uses to starve the rich into submission, and the Keynesian remedy for the refusal of people to loan out their money be simply printing more money, (thus making all existing money and loans worth less). Thus the position that I am working on would seem to be that economic theories, Keynes´ and all others, are part of a power struggle between the rich and the gov’t, or perhaps sectors within the government, that must be obfuscated presumably to present a facade preserving the myth that we are all in this together.
Not that Fritz the Cat is proposing that one or another theory of replace Keynes´ theory, but, with Kierkegaard and Heidegger, that all theories are inadequate to explain the reality of human existence, that they are all flawed, fall short, are ad hoc, created "on the hoof" to account for or explain away its flaws and shortcomings, and that the paradox and enigma of human existence is to try to explain or come to terms with that which, by its very nature, cannot be explained or came to terms with.
Why do we do it? Perhaps as a subset of that subset of human existence that Nietzsche called the "will to power", that is, the ability of the powerless to throw back into the face of the proponents of the theory that is oppressing them, regardless whether that theory be of man, god, or nature, and say "Sorry, this just won´t do. Either come up with something better or come out of the shadows and exploit me openly". But back to our book.
Page 151. The inability of the British Chancellor of the Exchequer to leave for any extended period of time allowed Keynes to make six trips to the U.S. between 1941 and 1946 for negotiations. His style was once compared to the pike that the Romans used to put into their carp ponds to chase the carp around and keep them from being too fat. His hunches usually ran well ahead of his knowledge of the facts, but he never let his ignorance stop him from forming an opinion, which he then defended passionately. If shown that his plan was unsound or unworkable he would rapidly modify or abandoned it. His mind was constantly on the move, partly out of playfulness, partly out of the love of argument, partly from enjoyment in shocking the conventional.
Page 156. Keynes could use both devastating putdowns to defeat a good argument and irreproachable logic to defend his own bad arguments, he was always ready to change tack in mid argument, and knew from his early study of Edmund Burke the difference between logic and tactics, between the central fortification that had to be defended and the outpost which could be conceded. He had a quick grasp of political constraints and was adept at maneuvering his forces within them. Though not a politician, it sometimes looked as if he carried a principled pursuit of pragmatism too excessive lengths. He used his linguistic and poetic abilities to win arguments he should not have.
Page 180. Keynesian the majority of the British elite felt that it was in Britain’s long-
Page 181. Keynes made clear that the British refuse to go back to the gold standard and free trade agreements that had underpinned trade expansion in the 19 th century. The gold necessary it was either a chronic short supply or mal distributed. In August 1941 Keynes began thinking about future currency arrangements. In Washington and Harry Dexter hite was also thinking about future currency arrangements. Their comprised thoughts would become the Bretton Woods system.
Page 182. Britain´s position in negotiations was that if the debtor, the U.S. is was that of a creditor: Britain wanted to borrow money without strings attached, America wanted strings; Britain´s plan came from a banking tradition and wanted a scheme based on potential maxims, the American plan came out of the legal tradition and wanted a scheme backed by law.
Keynes and White were technicians who assumed that the right technical details could bypass or finesse national self-
Page 183. Before the thirties that the U.S. was protectionist and Britain was internationalist, after the thirties they change places, largely reflecting in the changed relations of power. The troubles of the thirties were possibly due to the incompleteness of the transfer, with the British no longer capable of stabilizing the international economy, and the Americans reluctant to. This would have seemed bizarre to the central bankers who reestablished the gold standard after this the disruptions of world war one, who envisioned a self-
With hindsight it is now agreed that the problem lie with the misaligned values of the currencies with respect to gold. The pound sterling was overvalued and the French franc was undervalued, with both sides disagreeing as to who should adjust. The U.S. had raised its tariff barriers to keep out foreign goods, and later repatriated its loans to England and Latin America, forcing their respective recipients into default. When Britain the left the gold standard in 1931 the pound lost value and British exports once again became competitive in the world market.
Fritz the cat comments.
We are now to chapter six, entitled "Keynes´ New Order", about 1/3 way through the book. Skidelsky does not explain sufficiently the "why" of these economic goings on, which I will attempt to fill in. Recall these economic stages: feudalism, the physiocrats, mercantilism, and free traders. All held different assumptions about how best to make money, and tried to manipulate the economic variables, the interest rate, tariffs, the relationship between the amount of goods produced in the country and the amount of money available to buy these goods, (when there is more money than things to buy those who hold the things to buy are able to raise prices and still find buyers. This is inflation and favors manufacturers. Because there’s plenty of money and it is moving freely, the amount of people needing to borrow money is low, so the law of supply and demand determines that interest rates remain low, working against bankers. The opposite the case when there are more goods to buy than there is money. Those wishing to sell must lower their prices to find buyers. This is deflation and favors bankers, the law of supply and demand setting the interest rate high.
Other economic variables include the relationship of the value of one currency against another. As we saw earlier, the French franc was undervalued with respect to gold and so against the other currencies pegged to gold. This made her manufactured goods and commodities cheaper when bought with foreign currencies. Why is this so? According to "monetary" theory, a government with a fiduciary monetary system (one not backed by gold, silver, or other commodity, call "specie") should print just. enough money to purchase all of the goods and commodities produced in its country. If someone in a country, say Britain, wants to purchase something in another country, say France, he has to first purchase French francs with British pounds sterling.
Under the gold standard each country sets its currency value in grains of gold, each grain being the average weight of a grain of wheat taken from the center of an ear. After it is said, according to the "rules of the game" it can’t be changed. When the European countries went off the gold standard early in world war one, they could print all the money they wanted, provoking inflation. This was good for manufacturing because manufacturers could borrow money to buy supplies or invest in new production and pay the loan back with money that wouldn´t buy as much as before, i.e. it was worth less. Also people tend to spend money quickly if it is losing value.
According to these "rules of the game" the countries going back onto the gold standard should have gone back on at the same equivalent grains of gold as when they left the gold standard. This was done by neither Britain nor France. Britain went back on gold with a pound that was a 10% overvalued in respect to its old value, that is it would buy a 10% more. This also meant that any country that wished to import British manufactured goods had to pay 10% more for the pound sterling that it necessarily had to buy to pay for its British goods. This sometimes made goods produced in other countries cheaper to buy, resulting in a loss of trade for Britain. Britain was not able to peg itscurrency to which pre-
Britain sought to deflate her money supply, that is to remove paper money from circulation until the amount of paper money in circulation could be backed by the same amount of gold as in pre war times. Since Britain had paid for its American war purchases with gold, it had less gold and so could back less currency. This made the existing currency worth more, favoring the rich, savers, and banking. It favored banking because the scarcity of money restricted trade, which forced bankruptcies, which required loans, and which raised interest rates.
Under the "rules of the game" of country losing gold had to raise its interest rates to attract foreign currency into its country, with which it then could either buy gold or let stand as a reserve to back the creation of more money, thus stimulating the economy of the receiving country and depressing in the economy of the depositing country, and so maintaining a balance between the countries currencies.
However, as has been shown throughout the Dark Side series, the economic condition favoring one segment of a country’s economy often works against other segment´s interest. In the war Britain had lost gold and should have raised interest rates, but was reluctant to do so as the resulting stagnation could have could have triggered riots among the unemployed.
France, for its part, since it had chosen to undervalue its currency, made it exports attractively priced but its imports costly, favoring its manufacturing sector. The influx of foreign currency should have resulted in an increase in francs in circulation and inflation, which further favored manufacturing at the expense of savers.
The U.S., according to the rules of the game, should have used its vast increase of European gold to purchase European manufactured goods, thus re-
This disruption of trade caused the collapse of European manufacturing and the concomitant reduction oh government tax revenue. Thus the loans the U.S. had made to both European and Latin American governments and private industry could not be repaid, leading to defaults and bankruptcies. If
This perhaps brings us back to where we left the book. Recall that Keynes wished to devise a system that would maintain a balance of payment equilibrium between all countries without forcing deflation, unemployment, or debt bondage on the deficit countries. ( page 182). Yet as we have seen all of these things not only favor one country over another, but also favor one segment of a country over another segment. If every individual, sector, and country were working according to the rules of the game for the good of the system as a whole, the gold standard would have served its purpose.
Recall that both Keynes on the British side and Harry Dexter White on the American side were thinking about the future currency arrangements to replace the gold standard, that would have the gold standard´s benefits, but replacing it with this system based on laws rather than a gentleman’s agreement regarding the rules of the game. These future currency arrangements would eventually become the International Monetary Fund.
As anyone who is conversant with current political affairs is only all too familiar, the IMF has changed hardly a thing. The European continent is once again sinking into unemployment, deflation, stagnation, and debt bondage, with another Hitler, Putin, waiting in the wings to force a Keynesian solution onto a reluctant European community, as has been the purport of this Dark Side series. I could go over the similarities but this particular comments section has gone on for too long, and there will surely be another opportunity. So back to the book.
Page 184. The various countries blamed each other for the collapse of the gold standard system. This collapse did, once again, explode the myth of the gold standard´s automatic adjustment. Monetary conditions depended on policy; an international monetary system had to have agreed exchange rate rules, adjustment mechanisms, and escape clauses. The gold standard was just too inflexible. When a country adjusted its currency to incorporate changed conditions it was seen and treated as a default.
Efforts to reestablish the gold standard in 1933 came to grief over disagreements, mainly between Britain and the U.S., over what had happened and who had done what wrong. The U.S. consider Britain to have voluntarily abandoned the gold standard, in effect defaulting on its obligation. She should have reduced labor’s wages, tightened the government deficit, and continued borrowing until her exports brought her back into balance. (The same recommendations / demands the European community, the IMF, and Northern Europe are making on the Southern Europe now, Europe being not in the hands of an inflexible gold standard but in the hands of an inflexible single currency). The British blamed the undervaluation of the French franc and the protectionist tariffs of the United States, and made the claim that it’s a leaving the gold standard was forced on it by these actions and thus not voluntary. A claim echoed in Southern Europe and Argentina’s claim that the haircuts taken by the holders of government bond were voluntary and thus not a default, complicated further by the trillions of dollars of hedge fund and bank purchases of default insurance, so called derivatives, that if collected will bankrupt many banks beyond any possible taxpayer bailout.) When the U.S., in 1933, followed the British off the gold standard (though it had a great deal of gold reserves) the dollar´s 30% devaluation wiped out both Britain’s newly acquired and France´s long held competitive export advantage.
The New York bankers blamed Europe for the 1929 Wall Street crash. If the European had enforced stricter austerity measures they wouldn’t have needed the low interest loans America felt forced to give them to hold the system together, and the U.S. could have raised interest rates to stifle the stock market bubble. (Editor´s comment: this is more ad hoc, after the fact special pleading. The bankers were glad to take the credit for their spectacular gains, but placed the blame elsewhere when the house of cards fell down.) The U.S. government, for its part, blamed Britain´s abandonment of the gold standard for the collapse of the American economy.
Franklin Delano Roosevelt, elected president in 1932, in 1933 began purchasing gold on the world market, causing a rise in the price of gold and the corresponding drop in the value of the dollar, further acerbating British trade problems but popular in America, especially with debtors, as it decreased the value of debt, and with primary commodity producers, up as it raised prices. These competitive devaluations, known as "beggar thy neighbor" tend to drive countries into trading blocs. If a country cannot compete successfully under the given rules of the game, it is tempting for them to gather together with others of their kind, and establish their own rule to play under such as we now can see in MERCORSUR, Bolivia, Ecuador, and Venezuela, or in Putin’s effort to draw Asia it under its hegemony, or perhaps even the European Union.
Page 186. When the British went off the gold in 1931, 25 other countries followed her and linked their currency to the pound sterling for trading convenience, to protect their position in the British market, and to prevent a rise in the cost of their debt to Britain. At the heart of the sterling area were a dozen countries and dependencies of the British empire that used sterling, not gold, to settle their accounts with each other, and held their reserves (sterling balances) in London.
Page 187. This compounded the American offense at Britain´s devaluation of the pound, and retarded America´s foreign trade and the emergence of the dollar as the world’s premier currency. A trade war between the U.S. and Britain continued apace with the currency wars. The imperial preference system of 1932 was Britain’s response to the U.S. Hawley-
Page 188. U.S. Secretary of state Cordell Hull attempted to break up the preference system and open world trade to so that America’s matured industries could dominate and smother in the cradle the infant industries of the rest of the world, thus ensuring the dollar’s dominant position. Cordell would have relaxed the sterling dollar exchange rate in Britain´s favor in exchange for tariff reductions, but was over ruled by President Roosevelt and secretary of treasury Morgenthau.
Page 189. Frances´ 1936 devaluation of the franc threatened another round of competitive currency depreciation until the Tripartite Monetary Agreement, signed 25 September 1936 by Britain, France, and the U.S., In which the U.S. agreed to sell Britain and France gold in return for a set French devaluation of 30% and U.S. acquiescence in a gradual decline in the value of sterling against the dollar. In addition the Bank for International Settlements arranged for central banks to grant each other reciprocal credit for commercial transactions and pave the way for White´s 1941 International Stabilization Fund supporting a fixed exchange rate system.
Germany in 1933 had its own variant of the BIS of and imperial preference system: instead of the multilateral agreements where credits among the various members were shuffled around in either Geneva or London, Germany arranged a set of strictly bilateral agreement, mostly with the countries of Central Europe and Latin America, where pearl and would issue credit to say, the central bank of Hungary, to pay for imports, with the Hungarian bank paying the exporter. The Hungarian central bank could only use these credits to buy German exports. In essence it was a form a border. This was known as the Schachtian system after Hjalmar Schacht, Hitler´ banker and Finance Minister.
This is the illiberal Germany version of Keynesian economics, and was useful to Hitler’s rearmament program. As we have seen, France, Britain, and the U.S. sought to undervalue their currency so as to make their exports cheaper than their competitor, thus leading to full employment and the growth of industry in the home country. Under the Schachtian plan Germany overvalued the mark, leading to full employment and the strengthening of the infant industries of Germany´s trading partners. Ger many largely exported manufactured goods and imported raw material, it’s overvalued mark allowing it to run a surplus of raw materials rather than gold or foreign currencies. By 1938 Germany had made the clearing agreements with 27 countries, covering half of its foreign trade.
Page 190. Where as Britain during this time had seen its overvalued sterling lead to mass unemployment, deflation, and the failure of industry to modernize itself, Germany´s illiberal version of Keynesian economics was able to avoid these problems by forcing owners to modernize (Hitler actually jailed some reluctant owners), and by imposing wage controls on workers and price controls on businesses.
Editors comment. We can see here that whereas an undervalued currency tends to vacuum in gold and foreign currency, favoring a country’s financial sector and economic predation under "liberal rules of the game", under "illiberal rules of the game", (wage, price, currency exchange controls, forced loans and industrial investment, etc.) an overvalued currency can be used to vacuum in raw materials to be stockpiled for military predation were physical conquests substitutes for debt peonage.
Thus it would seem that state capitalism in one variant or another has ruled since the theocracy of the Roman Catholic church was overthrown in 1500s and 1600s, with now the state dominating as in fascism or communism or authoritarian regimes, or now the capital side dominating as in laissez faire, free trade, and liberal democracy. But back to our book.
Page 198. Britain and the U.S. spent the thirties with differing views regarding the gold standard, and whether exchange relations or trade relations should be regulated. Had Britain not faced threats from her illiberal neighbors, Germany and Russia, she would have declined American lend-
Keynes did what he could during the thirties to prevent Britain’s drop into second tier status. His 1930 "Treatise on Money" required the interest rate to be set with full employment in mind, which would require control of international gold flows. Also in this Treatise were plans for a super national bank with power to create a fiduciary asset which would count, along with gold, as a nation’s reserve assets. The super national bank would create and destroy these fiduciary assets with a view to stabilize the value of a basket of commodities.
Page 194. Early in world war two Keynesian multilateralism and Britain’s free trade stance came under pressure from the flow of gold and dollars to America to fund lend-
Page 195. On 25 July, 1948 Walter Funk, Schacht´s successor as Economics Minister, announced plans for Germany’s post war new order, with Germany managing a central clearinghouse, a division of labor, and exchange rates for non Soviet Europe (the Nazi-
Page 198. Keynes´ plan for a post war world at this time, with neither Russia or the U.S. at war, envisioned a British post-
Page 200. In August and 1941 a joint plan of the British treasury and the bank of England began circulating through the British Administration, it’s designed being to avoid as much as possible falling under the dome domination of the United States, as envisioned in Cordell Hull´s U.S. plan, especially article seven requiring equal access to the imperial preference region. Keynes´ sometimes ally and sometimes antagonist was Herbert Henderson, also at treasury with Keynes. Andersen was much more Schachtian than Keynes, favoring national planning, exchange controls, centralized purchasing of food and raw materials, and regulation of imports, none of which were compatible with British prospective post-
Page 201. Henderson was a supply sider in contrast to Keynes’s demand side views. Unlike the Thatcherite supply siders of the 1980s, he doubted that market mechanisms could resolve supply side problems. That being so, Britain should hold onto her imperial preference position, much as Schacht favored the "rational planning" of European labor. Keynes saw the post-
Page 204. In September of 1941 Keynes outlined his position, hoping to make his opponents come up with concrete objections and proposals: he get dismissed the gold standard, saying its placing of the burden of adjustment on the weaker party could only lead to deflation or devaluation, neither of which could produce a redistribution of trade through price and wage adjustments; he rejected notions that loans, unless put to productive work, could alleviate a country´s balance of payments problems. Government tariffs, preferences, and subsidies all failed. Schacht had stumbled onto barter as a means of cutting this Gordian knot, unfortunately Hitler chose to barter for guns rather than butter. But Keynes’s plan suffered from the same weaknesses as Schacht´s: its assumption of willing partners to export raw materials and import finished goods into the indefinite future, in the fact the same fate Britain was struggling so hard to avoid vis-
Page 206. Keynes also proposed that this time and International Currency Union, which he described as utopian in that it would require cooperation among countries long accustomed to competing, its proposed remedies to trade problems mirroring current European Union solutions to its trade problems, both foundering on the reef of a creditor nation´s refusal to forgo its advantage over a debtor nation. The plan also suffered through its failure to deal adequately with its imperial preference zone. Clearly Keynes had done a lot of wishful thinking.
Page210. The Bank of England, wishing to continue Britain’s financial and banking tradition, insisted on a renewed imperial preference and sterling area system, assuming that "solidarity" would prevent member countries from trading with third countries for products Britain did not produce, or produced at a higher price. This seemed a strange lesson to draw from the 30s. The bank also assumed its continued leadership and ability to transfer a surplus country´s reserve to clear a debtor member´s (its own) deficit, which implied exchange controls under its power, more wishful thinking. The Atlantic Charter, signed by Churchill and Roosevelt in August 1941, envisioned no type of Schachtianism ran out of London. Voices began to moot Britain´s dependence on the U.S. after the war, that economic arrangements disagreeable to the U.S. must be scrapped, and their benevolence must be hoped for.
Page 213. By mid November the bank of England’s plan had been undermined on all sides and Keynes’s utopian plan came to the fore, not because people believed in it but because, like his plan to pay for the war, it was the only plan on the table with a reasonable chance of maintaining the British way of life. One economic commentator opined that Keynes had politicized the argument by catering to America´s professed devotion to progressive (liberal, idealist, expansionary) internationalism while diverting attention from their (entirely self-
Page 215. Further criticism evolved around the problem of how to avoid abuse by a weak, reckless, or corrupt country; reconciling international cooperation with national sovereignty, how to police domestic policies affecting currency values equally as much as did trade conditions; and whether in fact the plan would meet Britain´s particular problem-
Page to 16. Criticism of the Bank of England´s Schachtian, bilateral plan convinced the once Schachtian and bilateralist Keynes of the beauty of multilateralism.
Page 23. Keynes held that if savings were insufficient for investment purposes the government could print the money, and the income generated to this way…. This is not in the general theory, it is ad hoc theory creation after the fact. In the thirties, as at present, the capitalist were on strike in the U.S., which was the occasion of massive government money printing(?) The gov’t is inflating the money supply to force the rich to invest their money or watch it lose value. The U.S. has printed $1.7 trillion since the stock market crash of 2007, buying up housing stock and bonds. Perhaps the income generated will pay, but probably not. It would seem that if it could fund itself through its own investments, and cut itself off from having to collect taxes but especially campaign contributions, that would be a thing much to be desired by politicians. Could the IranGate scandal of the Reagan years be a prototype of how the government funds itself?
I have passed over in silence over 80 pages of the Keynes book dealing with his customs union proposals and his wartime involvement in Britain’s efforts to promote the arts during the war, the latter because it forms no part of his economic theory, and the former, both because it was never more than Britain’s bargaining position leading up to the Bretton Woods negotiations, which did become concretized in the form of the IMF, and more importantly because I couldn’t understand his argument and didn’t want to spend a lot of time trying to understand the hypothetical economic arguments which are destined to be decided on power relationships anyway.
It is interesting to note that, of as was earlier mentioned, Keynes´ Customs Union plan may have been the basis for much of the European Community’s founding documents, as many of America’s objections to the plan seemed to be mirrored in the turmoil the community is now going through. Was Britain’s reluctance to give up her imperial preference and sterling area plan somewhat assuaged by the creation of a "special relationship" with the United States under which she could be given a certain degree of hegemony over Europe? Is Britain a junior partner in America Incorporated, with European responsibilities? But back to the book.
Page 300. In March of 1943 Roosevelt proposed a United Nations (as the Allies of World War Two called themselves) meeting to resolve post-
The U.S. proposed a stabilization fund which would perform the same function of resolving balance of payments issues, but without a bank’s prerogative of expanding its money supply. But the debate between the U.S. stabilization fund and the British clearing union was a struggle between a creditor nation (the U.S.) and the debtor nations (Britain and the rest of the world) over how best to keep trade flowing freely to the maximum advantage to the agonistic sides. The European Allies wanted their contributions to the war and the new world order to be recognized by a plan which would not subject them to eternal second tier status under the U.S., While the U.S. wanted a system that would ensure a merit based hierarchy, norms and controls for forcing a prodigal nation to put its economic house in order, and above all a plan which would not leave it holding a bag of worth less currency should the plan fail. As the discussions in Hot Springs proceeded, the realization that the U.S. was paying the piper and would call the tune gradually shifted the plan in the stabilization fund direction. Keynes´s position was that the most important thing was to get some agreement, and secondarily to get maximum value for every concession made.
Page 302. The plan had to ensure the British public that an initial error in setting the exchange rate would not drive the country into deflation, has happened in the thirties, and the American public had to be assured that it would not be open to attack by competitive currency devaluations.
Editors comment. It is on the horns of these two dilemmas that the world is apparently impaled on as we speak. ( November 2014). The European Southern tier is being driven deeper and deeper into deflation by its initial overvaluation of its currency vis a vis the Euro, just as Britain was being forced into deflation when it joined the proto-
This was done with the overt objective of propping up the banking system at preventing short term liquidity problems from threatening the system as a whole, as happened in the last great depression, examined in Dark Side 4. In that depression the buyers were forced to sell securities into a depressed market, depressing the market further, causing bankruptcies and driving the nation and to deflation, to the advantage of creditors and the disadvantage of debtors.
The bank of Japan recently followed suit with its own QE, printing billions of new yen in the attempt to end what is now decades of stagnation and deflation caused by the collapse of the Japanese property bubble. Just prior to the bubble´s burst of the ground under the Imperial Palace in Tokyo was valued at more than the state of California, perhaps not wholly unreasonable the given that state´s tangled finances.
Note that this currency devaluation not only makes a country´s manufactured goods cheaper in the international market, it also would alleviate the burden of debt in favor of the debtor, both items together tending to shift power relationships from the old (often savers and creditors) to the young (often borrowers and debtors).
Recall that Keynes´s later theory encouraged fiscal measures rather that interest rates to dampen the business cycle, interest rates having the unfortunate character of not determining rigidly they use to which borrowed money is put, whether to productive uses as overtly intended or speculative use as usually happens, the productive use of money being limited as a matter of course in depressed times. Thus the low interest rate punishes savers by not giving them a return on capital they thought they were going to get, and rewards debtors by decreasing the burden they thought they were going to have to pay.
Reflection on these issues through the Dark Side´s war of all against all lenses produces some interesting conclusions. The interest rate, according to pre Keynesian orthodoxy, is set by supply and demand. This gives the holders of large capital supplies a huge say in determining the interest rate through their ability to release more or less of their stockpile into the system as loans. When they release more the interest rate goes down and business stimulated, when they release less businesses go bankrupt. When they don’t release any at all the result is depression.
As we saw earlier, Keynes challenged orthodoxy by declaring in "how to pay for the war" that the interest rate is result of wealth holders liquidity preferences, and the gov’t could set the interest rate at whatever it chose and then vary the length of maturity on the loan until the loans were sold. If the government could not the loans even at the shortest maturity date, it should just print the money it needed for investment (recall that money for rearmament leading into World War Two was at issue), and the excess savings generated, presumably out of worker´s wages and owner´s profits, could be used to pay for the loan. (page 23) When interest rates rose in 1937 as predicted by orthodox economics, Keynes explained that it was a result of selling the loans too far in advance of their use, the gov’t was essentially hoarding that money in the interim between its sale and its use.
We saw (Dark Side 4, chapt 3 pg 9-
FDR is credited with saving capitalism from itself, or of reinventing capitalism. Under laissez faire capitalism as it largely prevailed up until FDR’s time, the rich made to rules of the game. With the example of Lenin and Hitler weighing heavily on their minds, the more important sectors of the rich realized that this was no longer possible. Keynes’s theories came government arguments it could use to ship power in its direction. The aristocrats who had ruled Europe for so long, and had bungled World War One so badly were now largely out of power. The struggle for power became between big business and big government, and so it continues to this day. If Keynes and White bonded to fight for big government, that does not mean that they ceased struggling for their respective country´s business interest. Britain needed business assets to generate profits that could be taxed, the more business, the more taxes. But back to our book.
For ages 306. In September 1943 a large and high powered delegation of British politicians and senior civil servants sailed for Washington to reach agreement on a plan for the post war world economy they would present to the rest of the world for ratification. This grand design consisted of proposals regulating money, investment, trade, buffer stocks, and employment. The problem was that only the money plan had reached an advanced stage of technical development, possible compromise, and political support. All the rest for ideas floating around departments of the two governments. They were all Article seven (of the Atlantic Charter) matters and interdependent.
Page 307. The team worked on the latest wrapped of the stabilization fund, said from or she can just before sailing, dated July 10. It required a large larger gold contribution from debtor nations and had canceled earlier concessions to Britain regarding greater flexibility for exchange rate adjustments. It had already circulated in the U.S. Congress, limiting the American negotiators ability to make compromises. The team also possess the latest draft of the U.S. proposals for reconstruction of war torn economies, and a plan to stabilize raw material and commodity prices. No new money creating powers were envisioned. Keynes objected to the proposal that debtor nations contribute as much to the bank’s capital as creditor nations, and two the severity of sanctions on defaulters. On board ship Keynes developed a proof that the international investment always had been and always would be defaulted.
Page 308. Keynes gave a moving speech on the second day of the opening plenary session on September 21 in which he proclaimed the shift from an era of scarcity to an era of plenty, and he observed that get different countries were in different phases of development and moving at different speeds in their development. The problem would be one of maintaining sufficient demand, and that debts could not always be repaid.
Page 310. Keynes´s initial assumption that he and White could quickly work things out proved to be unfounded. The meetings became, according to one observer, "not unlike two vain and rather jealous economic professors striving to impress a university seminar". Keynes was the intellectual superior, but White held the better cards. The meetings began to follow the pattern of the British proposing and the Americans disposing. Technical details masked larger political differences. The war was going well and Britain realize that with peace these enormous collection of debts would begin coming due. The scale of the loans America envisioned was in no way a commensurate with Britain’s debts, but Keynes hoped that if the proper groundwork were laid the loans could later be enlarged.
Page 312. Dominating discussions, and never fully resolved, was how much the countries would be required to contribute (in gold and non-
Page 314. The exchange rates were another bone of contention, with the debtor country wanting maximum freedom and the U.S. wanting maximum restrictions. Connected to this was the absolute size of the fund, Britain wanting it set at $26,000,000,000 and the U.S. arguing for three billion dollars, this amount essentially being the maximum amount the U.S. was prepared to lose should things go wrong.
Editors comment. This crucial point was apparently never satisfactorily resolved because it continues to bedevil the world as we speak. Perhaps it is the built in sloppiness the machine requires to avoid jammed gears. So far too little mention have been made at the solution the IMF eventually came up with, floating exchange rates. I have made the argument surrounding inflation, deflation, over and undervalued currency, and their effect on different segments of society throughout the Dark Side series, and don’t want to repeat them here, but they must be understood, as they are at the heart of the Dark Side. So we return to the book.