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PETH/2/213 · Item · 3 Mar. 1937
Part of Pethick-Lawrence Papers

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.

PETH/2/214 · Item · 7 Mar. 1937
Part of Pethick-Lawrence Papers

46 Gordon Square, Bloomsbury.—Agrees with his views (on the re-armament loan). Does not think it necessary to impose punitive measures to stop alternative projects. Sends a copy of his article for The Times (2/215).

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Transcript

46 Gordon Square, Bloomsbury
March 7, 1937

The Rt. Hon. F. W. Pethick-Lawrence, M.P.
House of Commons,
Westminster, S.W.1.

Dear Pethick-Lawrence,

The line of thought you indicate in your letter of March 5th is in my judgment entirely the right one. Fundamentally this is not a matter of finance, but of calling out, as you say, new sources of production. The answer must depend upon the elasticity of supply.

Personally I believe that the programme can be carried through without any punitive measures to stop alternative projects; though doubtless there will be cases where shortage of plant will for the manufacturer to choose between one thing or another.

I have, as I said I might, written a further article for the Times and enclose a copy of it herewith.

J M Keynes

PETH/2/215 · Item · c. 7 Mar. 1937
Part of Pethick-Lawrence Papers

(Carbon copy of a typed original.)

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Transcript

IS THE REMARMAMENT† LOAN INFLATIONARY?
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.

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† Sic.

FRAZ/32/136 · Item · 29 Mar. 1937
Part of Papers of Sir James Frazer

54 Cours Napoléon, Ajaccio (Corse), Easter Monday - Thanks her for the photographs; reacts to her news that they are thinking of getting a bigger place, and that Sir James can work 5 hours a day; discusses arrangements to visit Paris in May; Martine [Giamarchi, a great niece]loves to read what Lilly sends; his nephew has retired and they will be going to Cannelle earlier; will be attending a wedding of the daughter of old friends and relatives.

FRAZ/33/407 · Item · 15 June 1937
Part of Papers of Sir James Frazer

Trinity Lodge, Cambridge - Her husband has asked her to report on the College Council discussions of the Wyse Fund: the Statutes do not allow a double Fellowship being allocated, and no funds allowed for Beneficent purposes may be voted to a Fellow; she does hope 'that a successful plan will quietly be carried out by the user of The Wyse fund'.

PETH/1/163 · Item · 2 July 1937
Part of Pethick-Lawrence Papers

Freeland, Holders Hill Road, Hendon, N.W.4.—Has arranged for Pethick-Lawrence to receive a copy of his new book, The People’s Front, which he hopes will explain the motives of most of those who advocate progressive unity over a wide front.

PETH/3/184 · Item · 30 July 1937
Part of Pethick-Lawrence Papers

British Embassy, Tokyo.—Has heard news of him from Mrs Geoffrey Young (his sister-in-law). Asks for news of Mary Higgins (formerly of the West London Mission), and discusses the crisis in Japan, which appears to be leading to war.

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Transcript

British Embassy, Tokyo
July 30, 1937

My dear Lawrence,

I have been hearing about you lately from my wifes† sister (Mrs. Geoffrey Young) who lives near you: and of course I have often seen your name in print—the latest occasion not political, but as a puzzle expert in the “New Statesman”. Anyhow, I have always very happy memories of your kindnesses during the war, of walks together and of the Capital Levy. But I am a bad correspondent, and an overworked official—which means that I lose touch sadly with my friends—though I don’t forget them!

One friend I have been worrying about lately—Mary Higgins. I got a magazine from her some time ago, from Spain, but no address. And now I wonder how she is faring. Can you give me any news, or put me in touch with her. I hope all goes well.

We are in the middle of a crisis here, which may develop into war of a serious kind. At present the Japanese seem to be crazier than the average of humanity, which is saying a good deal. They are on the verge of the kind of hysteria which I remember as a boy, during the early part of the Boer war. But they are worse off than we were then, because nobody dare utter an anti-war sentiment.

My best remembrances to Mrs Pethick Lawrence, please.

Yours very sincerely
G B Sansom

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† Sic.

FRAZ/32/145 · Item · 19 Aug. 1937
Part of Papers of Sir James Frazer

54 Cours Napoléon, Ajaccio (Corse) - Doesn't know why she is complaining of heat when the papers show London flooded, while in Corsica they are pining for water for their gardens and vines; writes of Martine [Giamarchi, a great niece] who is staying with him; reacts to the change from Baba to Pascha [for 'Pasha the Pom'].

PETH/3/185 · Item · 26 Aug. 1937
Part of Pethick-Lawrence Papers

Is pleased to have renewed his acquaintance with Mr and Mrs Geoffrey Young. Reflects on the progress of the Sino-Japanese crisis. Gives news of Mary Higgins.

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Transcript

26th. August, 1937.

Dear Sansom,

I am very pleased to get a letter from you again and to know that your wife’s sister is Mrs. Geoffrey Young who is now our neighbour and whose acquaintance together with that of her husband we have had the pleasure of renewing.

I am much interested in your views on the Sino-Japanese crisis, which, since you wrote, has broken out in full conflagration. {1} My own view is that it might have been prevented if wiser counsels had prevailed at our Foreign Office a few years back. But now it will not be stopped until very grave events have taken place. But I cannot believe that in the long run China will become a prey of Japan.

You ask about Mary Higgins. She has been living with her husband at 5, Cokeham Lane, Sompting, Nr. Worthing, for several years. Her husband appears to be now permanently bedridden—though to tell the truth—I do not know exactly what is the matter with him. Mary remains her own buoyant self in spite of all her troubles and difficulties, and in some ways she looks as young as ever.

All best wishes to you both in which my wife joins. I remain,

Yours sincerely,
[blank]

G. B. Sansom Esq.,
British Embassy,
Tokyo,
Japan.

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{1} The Second Sino-Japanese War is usually considered to have begun with the Battle of Lugou Bridge (also known as the Marco Polo Bridge Incident), which took place on 4 July, but China and Japan did not formally declare war against each other till after the attack on Pearl Harbor on 7 December 1941.

PETH/1/367 · Item · 16 Nov. 1937
Part of Pethick-Lawrence Papers

Offers to send him the typescript of her autobiography, to be entitled The Old Order Changeth (published as My Part in a Changing World), the substance of which deals with the suffrage movement and the peace movement.

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Transcript

16th. November, 1937.
Victor Gollancz Limited, | Publishers,
14, Henrietta Street, | Strand, W.C.2.

Dear Mr. Gollancz,

I have been engaged during the last year in writing the story of my life and I should like to submit it to you if you would be interested to see it.

The title I have chosen is “The Old Order Changeth” with a sub-title “An Autobiography” over my name.

The substance of the book which deals with the suffrage movement and with the peace movement, both of which had international aspects, will be of interest in the Dominions and also in America which I have visited five times.

There are twenty-two chapters and I am just finishing the twenty-second. The whole consists of about 150,000 words.

Would you care for me to send the typescript in a few days when it is quite finished, to be submitted to your reader? If so, and his report is favourable, we could perhaps then meet to decide details,

Yours sincerely,
[Added in pencil] Signed E P L