RECOLLECTIONS OF KEYNES by

COLIN CLARK

My most vivid personal recollection of Keynes, and the most apt to our present circumstances, was an occasion in May 1932, a t the very lowest point of the world depression-when he was talking to Joan Robinson and me. Keynes had been a n advocate of public works as a remedy for de- pression, particularly in view of the expected multiplier effect. But it had become apparent [as we also found in Australia) that most public works required an inordinately long time for preparation and planning. By 1932 Keynes had come around to the simple conclusion that the same bene- ficial effects (also with multiplier) could be obtained by substantial budgetary deficits. But how, he asked in a striking metaphor, could the physician prescribe when the patient vomited as soon as he received the medicine? Political, financial, academic, public opinion were unani- mously and implacably opposed to budget deficits. In Australia this was probably even more the case. Keynes did indeed write an article which was published in the Melbourne Age, also in May 1932-but probably written a few months earlier. But he could not quite bring himself to open advocacy of budget deficits, although he hinted that the question should be examined-perhaps owing to his personal friendship with Giblin and Copland. Keynes was indeed impressed by the apparent purposefulness of the “Premiers’ Plan“, in which all Australian economists participated. It is now apparent that the sustained [and unsuccessful) attempts to re- duce budget deficits in the early 1930s simply made the recession worse.

This story about Keynes in May 1932 has a tailpiece. In his conver- sation on that occasion he had less to say about the depression crisis than about the purchases he was making on the New York Stock Exchange. “Perfectly good stocks going a t rubbish prices.” He had hit almost the exact low point of the market.

But what is ominous is that, from the point of view of public policy, Keynes might never have lived. Today we are in the same position of vomiting when offered our medicine. A large, though strictly temporary, increase in public sector borrowing is what is now required-and the proceeds should be used, not to increase expenditure, but to reduce both direct and indirect taxation.

This is also the opinion of Sir John Hicks, with whom I recently dis- cussed this question.

The objections to this policy now a re just the same as were raised in the 1930% namely that the deficit would lead to higher interest rates, adverse balance of payments and a rapid increase in wages and prices. The balance of payments can be protected by sufficient devaluation of the ex-

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change rate, as it was in the 1930s-except that in this case the Bank of New South Wales was strong enough to act independently, against the wishes of the Reserve (Commonwealth) Bank. The best available evidence indicates that the effect of public borrowing on the rate of interest is slight-this mainly depends on the expectation of future rates of inflation. The suggestion that increased employment will further wage demands brings us back to the “Phillips Curve”-that misleading theorem that unemployment would check wage demands and full employment increase them. There is increasing evidence that wage demands bear little if any relation to the extent of unemployment. Like the rate of interest, these are mainly determined by expectations of the rate of inflation.

I first met Keynes in the later months of 1929 at a party in Hampstead in London. I cannot remember who the host was, or what brought me to London at that time, when I was working on the Social Survey of Liver- pool. It may well be true, as Koestler said, that “Sociology rots the mind”; but I am glad to have had a short experience in this field, especially work- ing under such a capable and original sociologist as Carr-Saunders.

On meeting Keynes I plied him with the doctrine most fashionable in the 192Os, that it was the duty of central banks so to adjust their credit policies as to keep the general price level stable, and was this the policy of the US Federal Reserve? Keynes replied lightly that the US Federal Reserve had practised several different policies during recent years.

The next episode I remember very clearly, though Robbins says that he cannot remember it at all. I was walking with Robbins on the Thames Em- bankment in London on the last day of 1929. He had just been talking with Keynes, who had agreed that the fall in the US stock market had been a temporary recession, and that conditions were expected rapidly to im- prove. This view was widely held at the time. When economists a re wrong, they are often wrong unanimously; this had also been the case when Keynes was completely isolated in objecting to the return to the gold standard in 1925. At the beginning of 1930, Irving Fisher in the USA had made the same mistake, and so had Keynes’s great opponent on the gold standard issue, T.E.G. Gregory. I remember Gregory telling me, with great conviction, that the US economy was expected to turn upwards in May.

Early in 1930 the Prime Minister, Ramsay Macdonald, formed, for the first time, an Economic Advisory Council. This was an over-large, cumbrous organisation containing economists, bankers, businessmen, scientists, and others. Recommended by Professor G.D.H. Cole, I was ap- pointed to the staff of the Economic Advisory Council, and began work in March 1930.

As the national and international economic situation continued rapidly to deteriorate, the economists on the Council began to attempt a closer analysis of the situation, and before long the Prime Minister specifically nominated a committee of five economists with instructions to prepare a policy. The five leading economists of the day were judged to be Keynes, Pigou, Henderson, Stamp, and Robbins. The exclusion of Beveridge is

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perhaps understandable-the exclusion of Robertson is not. Both before and after the formation of this Committee, I prepared a good deal of statistical information for the economists on the Council, which is how Keynes came to know me well. Much of the work which I did would seem completely obvious now but appeared highly original then. I compared the index figures of industrial production with information about numbers employed, and showed that, during the 192Os, per man productivity had shown a moderate increase. The distinguished economists, except for Keynes, just refused to believe this now obvious fact. Even before the disasters of the 1930s, the 1920s had been subject to an overwhelming mood of deep and unnecessary pessimism. We may well speculate that this was a psychological reaction to the appalling losses of life in the First World War.

Keynes at this time was changing his ideas and becoming protectionist, though not to an extreme degree. He did not, however, make a public an- nouncement of his changed views until early in 1931. Harrod records in his biography that Keynes had planned to make such an announcement in October 1930, but that he [Harrod) had persuaded him not to. The meetings of the Committee of Economists became the occasion of violent dispute between Keynes and Robbins. Keynes advocated an expansionist policy, but with restriction of imports to confine the benefits to his own country. Robbins sought to maintain free trade, but believed that a con- tinuing contractionist policy was unavoidable-he had been following the strange ideas of Professor Hayek. It may not be too much to say that the whole history of the world might have been different if these two had been reconciled. What was necessary, we can now see, looking back- wards, was an expansionist policy accompanied by free imports, so that other countries could also benefit: and also a devaluation of the ex- change, which finally occurred in September 1931. At this time, however, Keynes refused to advocate devaluation. The only public figure to do so was the Trade Union leader Ernest Bevin.

During this period I had several short personal conversations with Keynes. On the issue of protection, I raised the question, frequently discussed at that time, as to whether it would lead to political corruption. A certain amount of political corruption did little harm, Keynes lightly replied-say to the level then prevailing in Germany.

Keynes had only recently published the Treatise on Money, the whole force of which was the difference between savings [peculiarly defined) and investment. It was not until a year or two later that Keynes re- formulated the situation, with savings being equal to investment, but with this situation brought about by increases or decreases in output. While the difference between savings and investment was still in his mind, he made the interesting prediction that governments were generally 20 years out of date, and that by the 1950s Treasury officials all over the world would be discussing the difference between savings and invest- ment,

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The Committee of Economists majority report was guardedly in favour of protection, with Robbins writing an eloquent minority report. But with or without this encouragement, the ideas of the Labour Government were changing, and a majority of them had become protectionists before the Labour Government broke up in 1931.

By 1931 I had begun work on updating the information about national product, or national income as it was then generally called, on which the most recent available information, the works of Bowley and Stamp, and of Flux, related only to 1924. Keynes gave me a strong recommendation to Daniel Macmillan, the publisher, saying that he had been very impressed by my work, and Macmillans published my first book in 1932. Keynes also recommended me to the Faculty in Cambridge for the University Lecture- ship in Statistics, which was then falling vacant, and which I held from 1931 to 1937.

The Cambridge Faculty had then only seven or eight members, and got through its business in half an hour-how different from today. The meetings were held on Monday afternoons, to suit Keynes’s timetable. He spent part of each week in London, where he was chairman of an in- surance company, and had numerous other business and professional in- terests, but during term time he caught the 5.49 train on Friday after- noons to Cambridge, where he stayed until early on Tuesday morning. In Cambridge, as well as conducting lectures and tutorials, he was Bursar of Kings College, a large and successful investment operation, and con- ducted the famous seminar on Monday evenings, for staff and selected undergraduates.

One of the interesting episodes in these seminars was after Roosevelt, in June 1933, suddenly took the United States off the gold standard, thus torpedoing the World Economic Conference, on which Ramsay Mac- donald had set such hopes. Roosevelt a t the time was advised by two Cornell economists, Warren and Persons. Warren and Persons had advised Roosevelt, according to one speaker a t the seminar, that all that he had to do was to raise the dollar price of gold, and that this would necessarily bring about a rise in the dollar prices of all other com- modities. Keynes denied that anyone could possibly have advocated such nonsense. A copy of a large treatise by Warren and Persons happened to be in the room, and Guillebaud (Keynes fervently congratulating him on his acuity) found the relevant quotation within five minutes.

Postan, the Russian-born economic historian, addressed one seminar on the economy of Soviet Russia. In the peasant economy, he said, land was always regarded with the greatest respect, indeed in polite conversa- tion you would not just say “land”, but “My Mother the Land”. The greatest objective of any present proprietor was not to acquire any other object, but to devote any possible savings to the purchase of land. This led Kahn to interject “Do they import land?” This led to some confused dis- cussion, until it was agreed that there must be a few bad characters who sold their land and then dissipated the proceeds. But Postan went on to

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point out what is generally recognised now, but was a startling novelty at the time, that the loss of livestock and other capital in the process of agricultural collectivisation was of an order of magnitude similar to the entire gains in industrial capitalisation in the first Five Year Plan. The attempt to displace horses by tractors had proved to be highly costly. Sraffa interjected that factories constructing tractors would be available for building army tanks in war time. “That’s the sort of rot they do talk!” Keynes snorted.

Keynes in 1925 (at the height of the gold standard controversy) married Lydia Lopokova, the Russian ballet dancer, and it was a marriage of genuine affection. She had a mother and other relatives in Russia, whom Keynes went to visit, which led him to some reflections on Russia, “the beautiful but foolish youngest child of the European family”, and also on Marxian socialism (quoted below). Keynes found a way of sending rubles to his wife’s mother through some underground channel.

Between the Treatise on Money and the General Theory Keynes’s ideas were in continuous transition, and I had frequent discussions with him about current information on savings, investment, multiplier, national product, etc., some of which information was used in the General Theory. He also began looking for historical illustrations to his ideas-though he had earlier warned his followers that once they found him writing economic history they would be able to tell that his originality was finished. He set out to identify some historical periods in which there had been a general inadequacy of demand, such as he diagnosed for the 1930s; and other periods of expansion and adequate demand-these questions are still very much a matter of debate among economic historians. Such an expansionary period, Keynes thought, occurred in the late 16th century, with significant consequences. “Shakespeare wrote his plays to make money.” Sir Dennis Robertson, already much annoyed by Keynes’s ideas, found this one particularly outrageous.

Apart from these episodes, I must recount one long conversation which I had with Keynes one evening, which has a real and sinister bearing on world history. It related to the events of late 1916, when Asquith lost the Prime Ministership to Lloyd George. Keynes had for some time enjoyed a personal friendship with Asquith. By late 1916, after the appallingly costly failure of the Battle of the Somme, and Russia’s approaching disintegration, Asquith, according to Keynes, thought that there were real prospects of a negotiated peace. There is still some unrecorded history about a secret visit to Switzerland by General Smuts representing the British Government, and possible mediation by President Wilson of the United States. How different world history might have been, if this had been brought about, is literally beyond imagination. Lloyd George, who wrecked the possibilities of a negotiated peace, and displaced Asquith in the Prime Ministership, was, according to Keynes, led by the equal genius of Beaverbrook, who represented nothing more than

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businessmen making a lot of money out of the war, and wanting it to continue.

I cannot give first-hand evidence for the unsuccessful meeting between Keynes and Roosevelt, though the story appears plausible. Roosevelt, sometimes given to hasty decisions, decided that Keynes’s ideas would be of no use to him. Keynes, on the other hand, compared Roosevelt to an electrician sitting in front of an unfamiliar switchboard, pulling each switch in turn to see what happened. This is indeed not far from being a precise description of what happened in 1938, when Roosevelt’s monetary decisions were largely responsible for bringing about a second recession, short-lived but severe.

If not to economic history, Keynes turned his mind to biography, in- cluding a superb biography of Jevons. To Jevons’s basic paper of 1862 we owe the distinction between marginal and average costs and produc- tivities, misunderstood up to that date-and still misunderstood by Marxists. “Jevons chiselled in stone”, wrote Keynes, “where Marshall knits in wool”. At the first reading of this text, at which I was present, one of the audience was Mrs Marshall, still living, who took this accusation without resistance.

In Australian economic policy in the 1930s the central issue was the attempt at an expansionist policy, led unsuccessfully by the State Govern- ments of New South Wales and Queensland (though they were of opposing political parties), and the successful resistance of the Commonwealth and the other States, largely on the pretext of danger to the balance of payments. In 1936, the Premier of New South Wales, “Tubby” Stevens, accompanied by his statistician Carver, having business in London, went out of their way to go to Cambridge to call on Keynes, who was impressed by their proposals for an expansionist policy.

Shortly afterwards my first son, Gregory, was born, and Keynes came to our house and had lunch with Gregory and his mother in the bedroom. On looking at the infant (who was quite hairless) Keynes thought that he resembled a piglet.

In 1937 Sir John Crawford (then an officer of the Rural Bank of New South Wales) and I set to work on the inadequate information available about the national income of Australia, a subject which had been neglected for many years. The book was completed on the last day of 1937, and included a chapter on the multiplier, as we understood it a t that time. In Australia not only public and private investment but also export earnings, we thought, should be regarded a s multiplicands, and in this way we reached the highly provisional conclusion that Australia in the 1930s had a multiplier of the order of magnitude of 2. These results we sent to Keynes. But estimating multiplier from money incomes and money products, he replied, was wrong. What was required was to make all estimates in terms of employment. How to convert rapidly changing Australian export values into employment equivalents is another question.

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In these early months of 1938, Keynes was commenting strongly on the renewed world recession. “Commodity prices seem to have become com- pletely unstuck”, he wrote in a private letter.

I had some further correspondence with Keynes on various matters, by slow wartime ship mails, and he asked if I would be willing to come back to Cambridge to organise the Department of Applied Economics, which they then had in mind. But the next long discussion came in 1944-45, when I prepared my article on 25% of the net national income as the safe upper limit for taxation. How I came to work on this problem was itself a strange story. The initiative came from Hanlon, the Labor Premier of Queensland, with whom I had been discussing possible post-war social services. “All these mean more taxation”, was his unexpected reply. How many em- pires in the past had collapsed through excessive taxation, he added, and he gave me the task of trying to estimate the safe economic limits of taxation.

The original idea came from Keynes himself, writing on the problem of the fall in the exchange value of the French franc in the 1920s. On two separate occasions he concluded that the franc would settle to an equilibrium value when taxation (a large part of which was required in those days for debt interest) fell to a manageable proportion of national income. In my article, which after some discussion Keynes accepted for publication in Economic Journal (December 1945), I followed up these ideas by examining the other evidence then available from European countries, coming to the tentative conclusion that rates of taxation above 25% of net national income generated inflationary pressures, in one way or another. Keynes wrote me a personal letter in March 1945. from his office in the Treasury, giving general agreement to my conclusion. Papers found on his desk after he died showed that he was still thinking about it.

Enough-perhaps too many-episodes. Let us conclude with a look a t some of Keynes’s ideas.

We are accustomed to thinking of Keynes as a celebrity, and tend to forget how much unpopularity he had to face in his earlier years. When he wrote his attack on the Treaty of Versailles in 1919, The Economic Con- sequences of the Peace, it was so contrary to the general force of public opinion that his publisher Macmillan, though a personal friend, refused to take the book on normal publishing terms, and instead required half- shares (the author and the publisher each bearing half the publishing costs and taking half of the proceeds). The book sold unexpectedly well, and Keynes made a profit on it. But the readers of the book were quite unrepresentative of general public opinion.

The statesmen preparing the Treaty of Versailles should have had in mind Machiavelli’s dictum, that when you have defeated an enemy you must either crush him or embrace him-there is no practicable third course. The two extreme opposing positions were taken by the United States and France. The US Senate rejected the Treaty of Versailles, and signed a simple treaty with Germany saying that the war was ended, that

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there were to be no annexations or indemnities, and that everything else should be as it had been before. France under Clemenceau took the line that Germany must be so weakened that she could never go to war again. Britain under Lloyd George took the uneasy middle position. Keynes, who by 1918 held an influential position in the Treasury, did not quite take the American position, but suggested that “reparations” payments should be kept a t a low level. Keynes’s ideas a t the time looked like being accepted by the British Government, until they were overthrown by the inter- vention of none other than our own Billy Hughes.

While the United States Senate could have its decisions respected, in Britain Keynes, and the few who thought like him, found themselves very unpopular as “pro-German”. It is true that throughout he felt some sym- pathy for the German people, and had strong anti-French prejudices. By 1923, however, the absurdity of the “reparations” claims was becoming obvious to nearly all, except the French (and Belgian) Governments, who sent an army of occupation into the Ruhr Valley, thereby collapsing the German economy and provoking the hyper-inflation of that year. British policy on the whole had become more “pro-German”. It was indeed widely held in the 1920s (quite mistakenly) that a powerful France had become a menace to the peace of Europe.

But in the discussion of the restoration of the gold standard in 1925, Keynes again found himself in a totally unpopular position. Everyone was against him-the academic economists, the bankers, the financial journalists, and the politicians. It is not surprising that Churchill acted as he did, though it is now universally agreed that he was mistaken.

Keynes’s visit to Russia in 1925 prompted him to say what he thought about Marxian socialism, one of the strongest expressions of opinion he ever made: “Marxian socialism must always remain a portent to the historians of opinion-how a doctrine so illogical and so dull can have exercised so powerful and enduring an influence over the minds of men, and through them, the events of history”.

In 1926, with the prolonged coal dispute and the accompanying but short-lived general strike, Keynes was able to point out, justifiably, that the restoration of the gold standard in the previous year had been largely responsible for this state of affairs. But public opinion in general, par- ticularly business opinion, was still strongly opposed to him.

In 1926 also he appeared in public to advocate a solution for the troubles of the cotton trade, namely cartelisation-not one of his best pro- posals. It was not until many years later that economists and politicians came to understand that the cotton trade, with its low wages and its dependence on the work of married women, was an economic liability rather than an asset, and that its replacement by other industries in Lancashire was all to the good.

Keynes’s reconciliation with Lloyd George and his large part in prepar- ing the Liberal “Yellow Book” (Britain’s Industrial Future) in 1928 attracted considerable attention. This book recommended a considerable

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degree of government regulation of investment. But attention might be drawn to another passage in the book, namely objection to the secrecy of much important economic information. Although this was not made known until very much later, the British Government a t the time was receiving a report from the Inland Revenue, presenting a fresh official analysis of national income (admittedly not up-to-date) which showed, for the first time, the factor distribution of the product of leading industrial groups. Prominent industrialists got to know about this, and feared that the figures would be used against them in wage negotiations, and on their persuasion the British Government suppressed the report. Keynes wrote, in the Yellow Book, that economics was a science which might benefit the human race as much as all other sciences put together (there may be some truth in this), but that it was intolerable that economists had to “fumble and grope” for the essential information which they required.

The first development of these ideas about the need for regulation of in- vestment had appeared in Keynes’s booklet, The End of Laissez Faire, some years previously. One thing which seemed obvious to everyone in the 1920s was that rates of population growth were going to slow down (which was not in fact the case). But Keynes made the important point that, with growing population, errors in investment decisions would do comparatively little harm, because they would soon be overtaken by population growth. This idea was further developed in subsequent years by Professor Everett Hagen, of Massachusetts Institute of Technology, who coined the striking phrase that population growth “absolves” a country from the consequence of errors in public and private investment.

But in his 1937 address to the Eugenic Society, on the same reasoning, Keynes neatly inverted his conclusions. A restoration of population growth, he stated, was desirable on the grounds that it would make possible freedom of business investment decisions, which he preferred to regulated investment.

By 1937 Keynes‘s ideas were beginning to receive wider support, and a t the same time a brisk business recovery was on its way. In a short series of articles in The Times in early 1937, Keynes strongly warned against carrying his ideas of expansion too far. About half the present British unemployment, he warned, must be regarded as structural, namely unemployed in occupations, or in regions, where they were un- likely to be employed again, even under strong pressure of demand. Government expenditure on re-armament, which was then beginning to grow, should be diverted to the regions with higher unemployment.

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