(Carbon copy of a typed transcript.)
Mr Pethick-Lawrence thinks Keynes might be interested in the enclosed (see 2/238b).
Asks his opinion of certain arguments in Abbati’s book The Unclaimed Wealth.
Commends Keynes’s pamphlet.
Congratulates him on his forthcoming marriage. Commends his articles on the gold standard. Will raise a question on the subject in the Commons in connection with the Appropriation Bill. Asks why the price of bread has not fallen with the rate of exchange.
Apologises for missing a meeting of the Royal Economic Society. Comments on Keynes’s evidence (about the capital levy) before the Colwyn Committee (on the National Debt). Asks for his opinion of an annual tax on capital.
Thanks him for his ‘important’ letter (2/201). Refers to his own comments on the subject (in the Commons?) the day before and to Keynes’s public statement in today’s Times.
Was sorry to miss this afternoon’s meeting on the stabilisation of prices. Is writing a book on the national debt. Asks whether American bankers oppose the repayment of the English debt to America, and for details of the German indemnity.
Clarifies his ideas about the provision of free public services, and discusses Pell’s book The Riddle of Unemployment.
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Transcript
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,
[blank]
J. Maynard Keynes Esq.,
46, Gordon Square,
W.C.1.
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{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.
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.
Hampstead.—Sends good wishes (on their marriage).
Deplores the behaviour of the English, French, and German premiers at the indemnity negotiations. Suggests issuing a pamphlet on the present financial situation as a postscript to Keynes’s book (The Economic Consequences of the War).
Is writing a paper on the finances of Europe for the Royal Statistical Society. Asks who to contact for national budget figures. The Treaty of Versailles is gradually being recognised as a foolish thing.
Sends his article on deflation (‘Deflation and Prices after the War’). Nothing in the report of Lord Cunliffe’s committee upsets any of the views he has put forward.
Asks for copies of his article ‘War Economics’. Has been attending Keynes’s lectures at University College.
Offers to write an article for the Economic Journal on the economics of war, a hitherto neglected subject.
Treasury Chambers.—Sends cuttings showing Canada’s current attitude towards Britain. Denies having said that Britain had no intention of borrowing in Canada after the war.
Treasury Chambers.—The Commons debate (on monetary co-operation after the war) was characterised by isolationism and anti-Americanism, but he has no doubt that the House will eventually change its mind.
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Transcript
Treasury Chambers, Great George Street, S.W.1
16th May, 1944.
My dear Pethick-Lawrence,
It was very comforting to get your letter. I spent seven hours in the cursed Gallery, lacerated in mind and body, and the only moment of satisfaction came when you rose to speak followed by the Chancellor. I thought both these contributions were first-class. For the rest, apart from another brave speech from Spearman, the whole thing was smeared by this unreasoning wave of isolationism and anti-Americanism which is for no {1} obscure reason passing over us just now. Somewhat superficial perhaps but nevertheless to be reckoned with.
However, I do not feel that any real harm was done. The thing will grind along. We shall produce a further version and when at a later date the House is eventually faced with the alternative of turning their back on all this sort of thing and begin to appreciate what that means, I have not the slightest doubt that they will change their minds.
Sincerely yours,
Keynes
The Rt. Hon. F. W. Pethick-Lawrence, M.P.
House of Commons.
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{1} ‘? an’ written above in pencil, probably by Pethick-Lawrence.
(Carbon copy of a typed original. Marked ‘Sent to Keynes’.)
Treasury Chambers.—Returns Pethick-Lawrence’s annotated copy of the White Paper (on employment policy), with a revised version incorporating the suggested changes (see 2/222).
46 Gordon Square, Bloomsbury.—Thanks him for his suggestions on the White Paper (see 2/222), which will be carefully examined.
14 Heath Mansions, Hampstead Grove, N.W.3.—Is glad that the last (Cecil Houses) Finance Committee meeting concluded amicably (see 2/31). Will attend on the 16th.
46 Gordon Square, Bloomsbury.—Commends Pethick-Lawrence’s Commons speech on post-war international currency.
Treasury Chambers.—Thanks him for his congratulations (on his peerage). Is back again at the Treasury, but attitudes are different from what they were in 1918.
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Transcript
21. 6. 42
Treasury Chambers, Great George Street, S.W.1
My dear Pethick Lawrence,
Thank you for your very kind note of congratulation. Much appreciated—as was also your previous note to my wife. Here I am back again in the Treasury like a recurring decimal—but with one great difference. In 1918 most people’s only idea was to get back to pre-1914. No-one to-day feels like that about pre-1939. That will make an enormous difference when we get down to it.
Sincerely yours,
J M Keynes
King’s College, Cambridge.—Explains his views on compulsory saving (see 2/250-1), and suggests that the term ‘deferred pay’ might be preferable.
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 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.
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
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.
(London.)—Has never heard of the Monetary Reform League (see 2/248). Thanks him for his broadcast.
(Postmarked in London, W.C.)