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Keynes, John Maynard (1883–1946), 1st Baron Keynes, economist Imagem Com objeto digital
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Letter from Lord Boothby to Lord Pethick-Lawrence

1 Eaton Square, [London].—Explains why he considers the amount of international monetary reserves inadequate, and suggests remedies.



1 Eaton Square.
March 20, 1961.

Dear Pethick,

Thank you for your letter.

I am sorry my debate {1} had to be postponed until March 28, but the Government rightly wanted it taken as a separate subject.

My point is that the amount of international monetary reserves are inadequate to support the ever-growing volume of production and trade in the free world; with the result that the two great international currencies, the dollar and sterling, are under alternate but continuous pressure.

After the war it was assumed—by all except Keynes—that we could rely upon increased gold production and continued growth in holdings of dollars and pounds sterling. This has proved a false assumption. The total amount of funds capable of international movement is now very large indeed, compared to our reserves and IMF drawing rights. And it is this vulnerability that has caused us to adopt what has been described as the “Stop-and-go” policy of recent years, with disastrous effects upon our own economic growth and productivity.

The truth is that the price paid at Bretton Woods for fixed exchanges was supposed to be adequate international monetary reserves; and, owing to the rejection of Keynes’s scheme for the creation of international money in the form of “Bancor”, the necessary reserves were not in fact provided. The monetary system of the free world is therefore obsolete.

Various remedies have been propounded, and I shall touch on some of them.

A rise in the price of gold (now pegged at a wholly artificial level) is obviously one. But it would not be permanent; and I think that at present it is politically impossible.

It is, however, not insuperably difficult to devise means of creating more international liquidity and of converting present holdings of national reserve currencies—sterling and dollars—into holdings of reserves with international backing.

The culmination of a radical revision of the international monetary system should, in my view, be the transformation of the International Monetary Fund into an international central bank, the deposits of which would be an international currency on the lines of Keynes’s “Bancor”. This could be achieved in successive stages; but would ultimately require a revision of the Bretton Woods Charter. The main objective is a reorganisation of the international financial system designed to facilitate economic growth, and to remove the constant threat to balances of payment caused by the movement of “hot” money.

I therefore intend to ask for an international economic conference to consider the whole problem. And I am encouraged by the fact that the Radcliffe Committee saw “great merit in the proposal for a transformation of the I.M.F. into an international central bank”; and that President Kennedy said in his Inaugural Address, “We must now, in co-operation with other lending countries, begin to consider ways in which the international monetary institutions—especially the International Monetary Fund—can be strengthened and more effectively utilised, both in furnishing needed increases in reserves, and in providing the flexibility required to support a healthy and growing world economy”.

I do not know how many speakers there will be. But Derick Amory, Robbins and Bob Brand are certainties. Walter Monckton will be there. And I am hoping to persuade Cyril Radcliffe to do his duty!
It should be an interesting debate on a topic which, in my belief, is of major importance—perhaps the most important of all.

Yours ever,
Bob B.


Letter-head of the House of Lords. At the head have been written ‘File.’ and ‘620’.

{1} A debate on ‘International Liquidity in the Free World’. See Parliamentary Debates (Hansard): House of Lords, vol. ccxxx, pp. 51–107.

Letter from Hugh Dalton to F. W. Pethick-Lawrence

107 Albert Bridge Road, S.W.11.—Is in favour of stabilising the price level and therefore does not believe the Treasury Minute should be abrogated at present (see 1/192), as it is a defence against inflation.

(Printed letter-head of the London School of Economics, which Dalton has enclosed in square brackets.)



107 Albert Bridge Road, S.W.11.

Dear Pethick Lawrence,

I should like a talk with you sometime before the next Finance Committee meeting. I regret to find that I shall again have to leave early, as I have an engagement at 6.30 on that day to dine with Charles Latham and the London Accountants.

Shortly, my view is the following.

I am in favour of stabilising the price level now & in the near future, though, looking further ahead, I hesitate to commit myself to a definite policy. Many factors seem to me to complicate the distant view.

I am more afraid of inflation in the near future than, I think, you are. I want stabilisation as a defence against the F.B.I., no less than against the old-fashioned deflationist authorities, who are, I think, the weaker of the two possible disturbers of the price level.

I don’t, therefore, feel happy about abrogating the Treasury Minute at this stage. It is our only real defence against inflation at present.

Nor am I so certain as, I think, you are that the Minute will operate to check a healthy, as distinct from a hectic & inflationist, trade revival in the near future.

Keynes said a few months ago at a Committee, of which I am a member, that he thought there was a good deal of margin in the situation, even with the Treasury Minute unchanged. In addition to the margin in the Currency Note Issue, he attached importance to the prospect, with reviving trade, of a more rapid circulation of bank deposits. I would add another factor, pointing in the same direction, namely the prospect of an increase in trade credits (between business men,—I don’t mean bank credits), as confidence grows.

Further, our situation may be eased by a rise in American prices, sufficient to restore the pre-war parity of exchange & lead to British imports of American gold. This has been long in coming, but it may come quickly, if the Federal Reserve Board’s stabilising policy gives way before the strong forces opposed to it.

My present feeling, therefore, is to pronounce in favour of a stable price level as our immediate objective, without committing ourselves to anything very general in the way of economic principles, & not to mention explicitly the Treasury Minute. Nor would I say that a future rise in bank rate is undesirable. If prices continue to rise as they have been doing lately, it may be desirable to raise bank rate in order to secure stability. My belief, (in opposition to that of others, I hear) is that you can stabilise any level of price you choose, & that there is no causal relation between the level chosen & the volume of unemployment.

If, for the time being, we could get the Govt to agree to stabilisation of the price level as a principle, and, implicitly, to whatever measures may be required to secure it, I should feel satisfied.

But I wouldn’t meet trouble half way, or give any encouragement to profiteers, by proclaiming in advance that more money shall be printed than the Treasury Minute allows.

Yours sincerely
Hugh Dalton.

Letter from J. M. Keynes to F. W. Pethick-Lawrence

Charleston, Firle, Sussex.—The American economists and financiers most likely to be interested in a capital levy are Seligman, Taussig, and Norman Davis.



Charleston, | Firle | Sussex
18. 9. 19

Dear Lawrence,

I am really rather at a loss as to how to answer your letter about Americans interested in a Capital Levy;—the project is so remote from their ideas and their necessities. Amongst economists there is Seligman of Columbia and also old Taussig. Amongst financiers I hardly know whom to mention,—perhaps Norman Davis, whom you may find in Washington, is the best. With any of these, if you meet them, and with any others who know me, certainly make use of my name to any advantage you are able. I presume you will be seeing the New Republic crowd in any case.

Yours sincerely,
J M Keynes

Letter from J. M. Keynes to F. W. Pethick-Lawrence

King’s College, Cambridge.—Has written to Snowden proposing an amendment (to the Gold Standard Bill) repealing Section IV of the Bank Act, 1844. He overlooked the importance of this point in his article in this week's Nation.



King’s College, Cambridge
3 May 1925

Dear Pethick-Lawrence,

In my article in this week’s Nation, which you may have seen, I made a bad mistake and gave the Treasury more credit than they deserve. I forgot Section IV of the Bank Act, 1844, which they are not proposing to repeal. This Section obliges the Bank of England to buy gold bullion in unlimited amounts at £3-17-9.

Thus all the dangers, which in my article I thought they were avoiding, they are in fact inviting.

If an amendment could be carried on Monday, repealing Section IV of the Bank Act 1844, it would be an enormous improvement.

I have written a letter to Snowden on the same lines as the above. If you agree with me, I wish you would go round to see him on Monday morning.

Yours sincerely,
J M Keynes

Letter from J. M. Keynes to F. W. Pethick-Lawrence

King’s College, Cambridge.—Commends Pethick-Lawrence’s contribution to a debate in the Commons. Is disappointed by Arthur Greenwood’s response in the Daily Express to his own articles in The Times on compulsory saving.

Carbon copy of a letter from F. W. Pethick-Lawrence to J. M. Keynes

His visit to Germany has suggested to him the idea of paying the fixed charges of railways out of taxation, leaving running costs to be borne out of the traffic. Asks whether this idea has been developed by economists. Alludes to French activities in Germany. Refers to Charles Trevelyan’s speech at the Political Economy Club propounding the capital levy.

Carbon copy of a letter from F. W. Pethick-Lawrence to J. M. Keynes

Clarifies his ideas about the provision of free public services, and discusses Pell’s book The Riddle of Unemployment.



20th. February, 1923.

Dear Keynes,

Thank you very much for your letter of the 14th inst. {1} in reply to mine.

I quite understand your point of caution with regard to offering public services to people below cost. This would of course not occur if the public relief was confined to payment of interest on capital already expended. In the case of the road it actually goes beyond this and covers current capital expenditure. I think probably I shall attack the problem in a very general way and consider simply the question of “Prices under National Ownership”. Assuming there is going to be no move in the direction of Socialism this is certainly a very important question.

If I put anything together suitable for “The Economic Journal” I will let you see it in case you care to use it. In the meanwhile if you happen to have in mind the name of any special book on Municipal Finance and Municipal Trading which bears on the subject, you might put it on a postcard and let me have it.

I have just been reading Pell’s book on “The Riddle of Unemployment” {2} which all boils down to his proposal that prices should be kept stabilised through manipulation of the bank rate with an inconvertible paper currency. If you are reviewing it yourself in “The Economic Journal” I shall be interested to see your views about it; if not I should like to know some time what you think of it. It is somewhat arrogantly written but it seemed to me offhand a very valuable suggestion. The two points of criticism that occur to me are, firstly, that there would be considerable opposition among business men to raising the bank rate just at the very time trade began to revive and prices show their first upward tendency, and secondly, whether even this proposal would in fact keep prices stationary or only make the oscillations in prices less intensive than at present. In the metaphor which I used in my little book on prices published by the Oxford Press {3}, would Pell’s machinery produce a completely sensitive governor?

Don’t trouble to reply to this if you are too busy.

Yours sincerely,

J. Maynard Keynes Esq.,
46, Gordon Square,


{1} PETH 2/198.

{2} The Riddle of Unemployment and its Solution (1922), by Charles Edward Pell.

{3} Why Prices Rise and Fall (1920). A revised edition was issued in 1923.

Letter from J. M. Keynes to F. W. Pethick-Lawrence

46 Gordon Square, W.C.—Invites him to contribute an article to the Economic Journal on the subject of ‘Deflation after the War’.

(Dated ‘21.9.10’, but the year is wrong: Pethick-Lawrence’s article ‘Deflation and Prices after the War’ was published in December 1918.)

Letter from J. M. Keynes to F. W. Pethick-Lawrence

46 Gordon Square, Bloomsbury.—Thanks him for a copy of his speech and for Hansard. Is thinking of writing another article for The Times (about the re-armament loan). Points out that Pethick-Lawrence and the Chancellor of the Exchequer (Chamberlain) disagree only about what level of borrowing would be inflationary.

Text of an article by J. M. Keynes entitled ‘Is the Rearmament Loan Inflationary?: A Justification of the Chancellor of the Exchequer’s Programme: A Plea for an Organised Policy’

(Carbon copy of a typed original.)



A Justification of the Chancellor of the Exchequer’s Programme

A Plea for an Organised Policy
By J. M. Keynes

The Chancellor of the Exchequer having published his prospective borrowing plans for re-armament, the question properly arises whether this programme can be super-imposed on the present business situation without risking a state of inflation. The question is hotly debated. The Chancellor declares that a loan of £80,000,000 a year is not excessive in the circumstances. His critics dispute this conclusion. Clearly it is a matter of figures. The Chancellor would agree that £200,000,000 a year would be dangerous; his critics are disposed to accept £40,000,000 a year as safe. What calculations are relevant to the answer? I believe that we can carry the argument a stage further than mere assertions based on vague individual judgments.

What is Inflation?

To begin with, what do we mean by “Inflation”? If we mean by the term a state of affairs which is dangerous and ought to be avoided—and, since the term carries to most people an opprobrious implication, this is the convenient usage—than we must not mean by it merely that prices and wages are rising. For a rising tendency of prices and wages inevitably, and for obvious reasons, accompanies any revival of activity. An improvement in demand tends to carry with it an increase in output and employment and, at the same time, a rise in prices and wages. It is when increased demand is no longer capable of materially raising output and employment and mainly spends itself in raising prices that it is properly called Inflation. When this point is reached, the new demand merely competes with the existing demand for the use of resources which are already employed to the utmost.

The question is, therefore, whether we have enough surplus capacity to meet the increase in demand likely to arise out of an expenditure of £80,000,000 raised by loans and not by diverting incomes through taxation. Now the resulting increase in demand will be greater than £80,000,000; since we have to provide for increased expenditure by the recipients of the £80,000,000, and for further similar reactions. There are reasons, too detailed to repeat here, for supposing that the total effect on demand will, in existing conditions in this country, probably lie between two and three times the primary increase. To be on the safe side, let us take three times as our preliminary estimate, which means that the total increase in the national income resulting from the Chancellor’s borrowing will have to be in the neighbourhood of £240,000,000 at present prices,—an increase, that is to say, of about 5½ per cent. Have we sufficient surplus capacity to provide such an increase? Or will the Government demand merely serve to raise prices until resources, already in use, are diverted from their present employment? This is certainly not a question to be answered lightly.

The number of insured persons who are still unemployed is, indeed, as high as 12½ per cent. But although the new demand will be widely spread (since it will not be limited to the primary employment for armaments but will also spread to the secondary employments to meet the increased demand of consumers), we cannot safely regard even half of these unemployed insured persons as being available to satisfy home demand. For we have to subtract the unemployables, those seasonally unemployed etc., and those who cannot readily be employed except in producing for export. Unless we make a liberal allowance for overtime and more output from those already in employment, it would need more planning and transfer of labour than is practicable in the time to increase the national output in 1937 by 5½ per cent over what it was in 1936; although over (say) a period of three years it might be possible.

Thus it is not plain sailing. If we suppose the full rate of Government spending to begin immediately, without any improvement in the export industries or any reduction in other activities, unsupported by organised overtime, by careful planning and an interval for the planning to take effect, there is a risk of what might fairly be called inflation. Is the Chancellor’s claim that he can avoid inflation nevertheless justified? For the following reasons I believe that it is.

How to Avoid Inflation

In the first place, my ‘multiplier’ of three times may, in present circumstances, exaggerate the scale of the repercussions. As prosperity increases, saving probably increases more than in proportion; particularly when profits are rising. It may well be that the total increase in expenditure, resulting from loans of £80,000,000, will be no more than (say) £170,000,000 or 4 per cent of the national income—an improvement which it would be much easier to accomplish than 5½ per cent.

In the second place, some part of the new demand will be met, not by increasing home output, but by imports (which I have not allowed for in the above calculation). This means either that the imports will be offset by increased exports or, failing this, that there will be a diminution of net foreign investment. Probably there will be a bit of both. We can look forward to an increase of ‘invisible’ exports through the increased earnings of our shipping and our foreign investments and, perhaps, from visitors to the Coronation. But it remains particularly advisable to do anything possible to stimulate our staple exports. For it is there that our reserves of surplus labour are chiefly to be found. It is no paradox to say that the best way of avoiding inflationary results from the Chancellor’s loan is to increase both imports and exports. In any case, we can make a deduction of (say) 15 to 20 per cent on account of increased imports, which brings down the increase in the national output (apart from exports) necessary to avoid inflation to a figure between 3½ and 4½ per cent.

Thirdly, measures to ensure that all possible orders are placed in the Special Areas where surplus resources are available, will greatly help. It is a mistake to suppose that this is merely a form of charity to a distressed part of the country. On the contrary, it is in the general interest. Whether demand is or is not inflationary, depends on whether it is directed towards trades and localities which have no surplus capacity. To organise output in the Special Areas is a means of obtaining re-armament without inflation. I am not sure that this is properly understood. One feels that the War Departments are inclined to regard a Special Areas measure as a form of charity, doubtless praiseworthy, which interferes, however, with their getting on with the job in the most efficient way. On the contrary, it is only by using resources which are now unemployed that the job can be got on with, except at the cost of great waste and disturbance. The Special Areas represent our main reserve of resources available for re-armament without undue interference with the normal course of trade. They are not a charity, but an opportunity.

We are still assuming that new capital investment, apart from re-armament, will continue on the same scale as before. It seems possible, however, that there will be some reduction in new building. By an extraordinary and most blameworthy short-sightedness, our authorities do not think it worth while to collect complete statistics of new building, the figures for the County of London being omitted from the published aggregate. But new building may easily fall short of last year by £20,000,000, which would provide a quarter of the Chancellor’s requirements. There remains capital development carried out by the railways, public boards and local authorities, which should be to some extent controllable by deliberate policy. On the other hand, increased investment may be necessary in some directions, to provide new plant where marked deficiencies exist. Nevertheless a net increase in output of 3 per cent might see us through, after allowing for the other offsets we have mentioned; and that is an improvement we might reasonably hope to accomplish in the near future.

The Need for Careful Planning

I conclude that the Chancellor’s loan expenditure need not be inflationary. But, unless care is taken, it may be rather near the limit. This is particularly so in the near future. It is in the next year or eighteen months that congestion is most likely to occur. For ordinary investment is still proceeding under the impetus of the recent years of recovery. In two years[’] time, or less, re-armament loans may be positively helpful in warding off a depression. On the other hand, the War Departments may not succeed—they seldom do—in spending up to their time-table.

This conclusion is subject, however, to an important qualification. The Government programme will not be carried out with due rapidity, and inflation will not be avoided, by happy-go-lucky methods. The national resources will be strained by what is now proposed. It is most important that we should avoid war-time controls, rationing and the like. But we may get into a frightful muddle if the War Departments merely plunge ahead with their orders, taking no thought for general considerations affecting foreign trade, the Special Areas, and competing forms of investment.

I reiterate, therefore, and with increased emphasis the recommendation with which I concluded my former articles in the Times. It is essential to set up at the centre an organisation which has the duty to think about these things, to collect information and to advise as to policy. Such a suggestion is, I know, unpopular. There is nothing a Government hates more than to be well-informed; for it makes the process of arriving at decisions much more complicated and difficult. But, at this juncture, it is a sacrifice which in the public interest they ought to make. It is easy to employ 80 to 90 per cent of the national resources without taking much thought as to how to fit things in. For there is a margin to play with, almost all round. But to employ 95 to 100 per cent of the national resources is a different task altogether. It cannot be done without care and management; and the attempt to do so might lead to an inflation, only avoidable if a recession happens to be impending in other directions. The importance of collecting more facts deserves particular attention. For my estimates, given above, are of course no better than bold guesses based on such figures as are accessible. They are obviously subject to a wide margin of error.


† Sic.

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