The severity of the settlement seems in fact to have been the chief argument in its favour: a dramatic, determined step to restore confidence in the nation’s credit and currency. When Keynes published A Tract on Monetary Reform the same year, this was the sticking point. Although the Economist saw ‘immense advantages’ in his proposal for a flexible system of fixed exchange – linked to gold but based on a ‘tabular standard’ of key commodities – it also worried, ‘if the great trading nations of the world did not follow our lead they would not be likely for a long time to recognise that the pound sterling was the most stable unit in the world, and, in the meantime, London would lose her financial pre-eminence.’ Not only did gold compel nations to keep ‘balances in London’, it was safer than giving ‘absolute discretion’ to the Treasury and the Bank of England, as Keynes’s plan entailed.45 Whether the Economist really believed the gold standard ever operated independently of these institutions, the idea that it did mattered. Without this political cover, every decision to ease or restrict credit could be questioned by industrialists and merchants wanting easy money, on the one hand, or attacked as ‘monetary dictatorship’ from wage earners, on the other.46
The Economist was more frightened than Keynes about shining any light on the ‘grandmother of Threadneedle Street’, but it must be recalled that far from undermining the authority of the Bank of England or the Treasury, Keynes’s plan called for giving both more discretion to manage the economy for the sake of price stability. As a result, he could still in 1923 describe the Economist, in the Nation and Athenaeum, as a ‘gentle critic’ and ‘really with us on the main issue’.47 That began to change only when Churchill announced his intention to return to gold at the pre-war parity of $4.86 on 28 April 1925 – a move Keynes attacked in the Evening Standard, and then in The Economic Consequences of Mr. Churchill, as premature. Keynes saw two problems with the approach: first, since prices remained about 10 per cent higher in Britain than in the US, the policy entailed more deflation, and could ‘only attain its end by intensifying unemployment without limit, until the workers are ready to accept the necessary reduction of money wages under the pressure of hard facts’.48 Second, as boom time America hoovered up most of the world’s gold reserves, it meant, as he had argued earlier, ‘inevitably, that we surrender the regulation of our price level and the handling of the credit cycle to the Federal Reserve Board of the United States’.49
1925: Keynes and the Economic ‘Inconsequences’ of Gold
If a cordial dialogue over the policies needed to return to gold had reigned hitherto, the return to gold at parity launched the conversation on a new and acrimonious course – as the assumption that industrial and finance capital had the same stake in the gold standard came under strain in clashes over free trade and foreign investment, culminating in the crisis of 1931. ‘It is much to be deplored’, replied the Economist to Keynes, in a leader entitled ‘The Economic Inconsequences of Mr. Churchill’, that ‘distinguished economists should disturb the public mind by attributing far too much effect to our monetary policy as a cause of the depression’.50 The fall in Britain’s industrial output and employment was due above all to slackness in world trade, aggravated by other factors: abroad, currency depreciations; at home, higher wages and shorter hours, combining to raise costs of production, along with high municipal rates and a terminal decline in coal production. The rigours of gold would indeed pressure wages, but they would also propel industrial rationalization, amalgamation, modernization – business buzzwords of the era, aiming to restore the competitiveness of British firms in world markets.
When Keynes addressed the Federation of British Industries in Manchester, the paper professed to be shocked that so august an economist – in a style that ‘could not have been excelled by Mr. Lloyd George himself’ – would foster the idea that ‘there are real divergences between “finance” and “industry”’, or that monetary policy had been carried out in the sole interests of the former. All parties had endorsed a gradual return to the pre-war monetary setup, as outlined in the 1918 Cunliffe Report, while the Industrial Federation had implored Churchill to take the move a few short months before, assuming that gold would bring down costs and prices and restore stability of outlook. If banks were concerned only about their own profits, protested the Economist at the time of their annual shareholder meetings – which had come to play an ‘important part in forming public opinion’ since the war – they would have favoured a floating exchange, so as to bet on its fluctuations.51
The effects of the return to gold in 1925 were much as Keynes had predicted, and led to his most serious clash to date with the Economist. Organized labour resisted the wage squeeze, taking the unprecedented step of calling a general strike the next year. Britain, meanwhile, was hostage to a monetary system it no longer controlled: by 1928, the Wall Street boom not only stemmed the flow of dollars going abroad, it sucked foreign funds towards it – so that just when Britain needed cheap money, faced with a sharp rise in unemployment, it became dear, as interest rates rose to defend the reserves.52 In these circumstances, the Economist admitted the need for cooperation between central banks to curb the deflation caused by this uneven distribution of gold – publishing a memo to this effect by Sir Henry Strakosch, the financier with whom Layton was then trying to buy the Economist. Along with Sir Arthur Salter, they lobbied the League to adopt a resolution to study the problem, putting them at odds with Bank governor Montagu Norman, as worried as ever that public scrutiny of any kind might force central banks to admit they ‘could regulate prices through their gold and credit policies’.53
The belated shift to greater central bank coordination could not prevent a looming confrontation with Keynes, however, who in light of the same events began to ask fundamental questions not just about gold, but free trade – first, as it pertained to capital exports. The Economist had expected the rapid debt settlement with America and the return to gold at parity to jump-start foreign lending. In 1928, ‘Our Export of Capital’ posed two characteristic and related questions about the success of these measures: ‘whether America is taking our place as a supplier of world capital’ and ‘the amount we can afford to lend abroad’. The surplus of income account, which it used to measure capital exports, was £181 million in 1913, or £270 million in 1927 prices; fifteen years later, it was still less than half this, at £96 million. Citing the Liberal Industrial Inquiry, which Layton chaired and whose report Keynes largely wrote, the paper even suggested the pre-war heights might never be regained, before concluding, optimistically, that though ‘we shall irrigate the world with new capital on a somewhat smaller scale’, the ‘role of purveyor of capital is now shared by Great Britain with America’.54 Nor was it concerned that even this new, shared role actually reflected a worrying trend for the City to finance long-term investments with ‘hot money’ from abroad; these short-term funds were simply ‘filling the gap caused by the temporary disappearance of our available surplus’.55 ‘Is the Financier a Parasite?’ No, the Economist replied.56
When Keynes attacked the ‘timidities and mental confusions of so-called sound finance’ in the Evening Standard in August 1928, he had in mind the deflationary torsions that first the return and then the maintenance of gold had forced on the Bank of England. The Economist dismissed his claim that such polices had ‘reduced the wealth of Great Britain by no less than £500,000,000’ over the past five years – demonstrating that, even as Layton joined with Keynes to advise Lloyd George in the upcoming election, sound finance remained a dividing line over what Liberals should aim to do in office. It was one thing to call for state action to build roads and telegraph wires or to speed industrial rationalization to ‘conquer unemployment’, along with international accords to liberalize trade, repay debt, restore gold and create a world central bank. But Keynes went too far when he called for ‘stimulating prosperity by a moderate measure of inflation’, or suggesting this ‘could have saved us’ from post-war industrial readjustments, ‘which wo
uld probably have been more severe if artificially postponed’.57
The debate grew even more heated as the general election campaign began in February 1929. Tory MP Carlyon Bellairs – a retired naval officer and ex-Liberal – wrote to the Times to argue that classical free trade theory, forged on nineteenth-century assumptions that capital was immobile, no longer applied, since capital could now move anywhere in search of the best return; protection was a way of concentrating capital at home instead of sending it to employ foreign labour. The Economist replied immediately and revealingly: ‘Has the bottom fallen out of the Christian doctrine because circumstances changed since the days when the Gospels were written?’ There was no evidence that a ‘shortage of local capital is even a contributory factor in the troubles of our distressed industries’; besides, it added, capital exports ‘stimulate commodity exports – a statement which will be supported by all, only with a variety of emphasis and qualification’.58 Keynes seized on this last clause, relaunching a debate that had last flared up in the Economist in 1927 – when Layton had used it to publicize the World Economic Conference in Geneva, at which he and other businessmen and quasi-official experts had tried to reach the tariff-reduction agreements that eluded their governments.59
Posing his questions as humble points of clarification, Keynes began to write a series of letters to the Economist, asking it to explain the ‘train of causation’ linking capital and commodity exports. Railway loans of the Victorian era, subscribed in London and spent on British equipment, were a classic case, but such transactions probably accounted for no more than 20 per cent of loans today. What about the other 80? The Economist first replied that capital export increased the supply of sterling on world exchanges, making pounds cheaper and giving exports a fillip.60 Greater supplies of sterling would lower its exchange value, Keynes agreed, but only if they were not hitched to a precious metal preventing its depreciation. ‘Your argument does not make sense, unless your meaning is that foreign investment stimulates exports by driving us off the gold standard.’61 The Economist switched tack, arguing that foreign lending encouraged gold outflows, raising the discount rate, which lowered domestic prices until they were more competitive.62 Keynes affected surprise: ‘I think that exporters (who have not been as grateful as, on your theory, they should have been) would like to have it explained in what way a higher Bank rate improves their competitive position in foreign markets.’ He at last deigned to ‘decipher’ the Economist’s muddle in its own pages: either high interest rates raised exports by compelling manufacturers, in despair, to sell at a loss; or, it lowered costs of production by curtailing credit and creating unemployment. ‘Have I rightly interpreted your meaning?’
If the next time you applaud the tendency of foreign lending to stimulate exports, you will add the explanatory words ‘because it will make the maintenance of full employment impossible at the present level of wages, so that unemployment will continue until British wages are reduced, which will enhance our competitive power in foreign markets’, then I will promise to write you no more letters!63
The Economist apologized for the unusual step of devoting an article each to these letters, but it had little choice given the stakes. Keynes had gleefully laid traps for the Economist here and in the Nation and Athenaeum, in which he tried to show that industry and finance could be at odds, and that the management of the gold standard had needlessly deepened their divergence.64 It must be stressed again, however, that Keynes criticized the ‘mandarins’ in the Economist as much for the harm they had done to the City as to Britain’s industrial north: his support for ‘tied lending’ was meant to renew the virtuous mid-nineteenth century circle of foreign investment and exports – and to allow the City to compete with New York and Paris, which already engaged in similar breaches of free trade.65 And while Keynes may have outwitted the Economist, it was the latter that prevailed on the level of policy. A glance at the memoranda of Treasury officials makes clear how closely they relied on the Economist to combat not just capital controls but – going back to James Wilson’s writings on the 1840s railway mania, which still figured in the civil service exams – to loan-financed public works schemes in general, as ‘crowding out’ private investment.66
1929: Keynes, the Crash and Its Aftermath
It was the anvil of events, not superior cleverness, which eventually decided many of these issues in favour of Keynes, as the Wall Street bubble finally burst in 1929, precipitating the Great Depression. While this soon sent unemployment skyward, for a short time it relieved pressure on sterling, allowing the Bank rate to fall and easing credit; by May 1930, Britain was again losing gold, this time to France, resented for its undervalued currency and generally rosier outlook.67 Labour, whose tenure in office since May 1929 had so far hardly been the disaster the Treasury officials had imagined, met this crisis with calls for retrenchment. Philip Snowden, the Labour Chancellor and until recently vice-president of the Free Trade Union, pressed in Cabinet and Parliament for measures to restore confidence in sterling at all costs, including cuts to escalating expenditure on unemployment insurance. At the turn of 1931, Labour set up the ‘economy committee’ the Liberals had proposed in Parliament, appointing a retired City insurance executive, Sir George May, to lead its ‘non-partisan’ mission.
Just before the May Report appeared in July 1931, another government-appointed body with a remit to investigate the causes of the economic slump issued the results of its two-year inquest. The City, revealed the Macmillan Committee, had indeed been using short-term inflows for loan operations, and was thus vulnerable to just the sort of crisis then unfolding in bank runs abroad. As panicked investors reacted in a rush to withdraw funds from London, the Bank raised rates two percentage points, to no avail: half the gold reserves vanished in two weeks; credit lines from the gold-besotted Federal Reserve and Bank of France came and went. By August 1931, Labour prime minister Ramsay MacDonald, ignoring the alternative of devaluation, sought another loan to back the currency – this time from the bankers at J. P. Morgan, to whom he secretly submitted a budget based on the May Report.68 When his Cabinet balked at the cuts MacDonald wanted to unemployment benefit and public employee pay, he resigned along with Philip Snowden and J. H. Thomas to form a nominally all-party, but Conservative-dominated, National Government – the Labour Party soon expelled all three. An act to appease markets did the opposite when sailors in the Royal Navy affected by the pay cuts mutinied at Invergordon on 15 September. The stock market and sterling exchange crashed, forcing Britain off gold six days later; in addition to a virtual ban on foreign loans, the next year free trade went too, when preferential rates were adopted among the Commonwealth countries, as part of the 1932 Ottawa Agreements.
Keynes and Layton were not merely passive observers to this chain of crises; they actively shaped them. Their mirror reactions to 1931 said a great deal about their visions for liberalism: diverging over the parameters of sound finance, they continued to believe that the financial and mercantile resurgence of the City was a precondition for British survival as a great power, in a world system now in the inexpert, if not outright incompetent, hands of Americans.69
The Economist likened the summer of 1931 to that of 1914. But instead of sowing doubt as Hirst had, Layton projected calm, arguing the Macmillan Report showed short-term liabilities decreasing since 1928, from £302 to £254 million, while long-term investments of £4 billion would protect Britain against any ‘sudden or prolonged call’. Had London ‘deliberately placed itself in too vulnerable a position?’ ‘The answer to such criticism is that banking is one of our staple and most remunerative industries’, and ‘it is London’s business to encourage the influx of foreign money.’70 Such self-assurance bordered on denial, compounded by failure to foresee the approaching disaster. In May, Layton had authored a pamphlet reiterating that the City was holding its own in partnership with Wall Street, even as the Kreditanstalt bank failure in Vienna set off the crisis that would engulf it; in July, he was in G
eneva on behalf of the League, trying to avert the Austro-German customs union with a hugely ambitious alternative for a tariff union of pan-European scale.71
Britain was like an eccentric millionaire without enough change to pay a taxi fare, the Economist explained: anyone would lend it pocket money once it showed it had the political will to balance budgets by eliminating ‘extravagances’ and defending gold convertibility, with the alternatives of a tariff or devaluation (Keynes favoured the former) ruled out.72 The May Report ‘aroused the whole country’ to patriotic sacrifice, even if it erred in asking if ‘democracy is to be shipwrecked on the hard rock of finance’. The ‘real’ question: ‘Is sound finance to be shipwrecked upon the hard rock of democracy?’73 The National Government was the ‘swift, decisive and effective’ response, and Ramsay MacDonald ‘deserved well of his country’ for casting aside his own Labour Party to lead it. ‘Britain’s centuries old position as a Great Power’ was at stake; and it was not a naval mutiny but the ‘stability of sterling’ and ‘maintenance of our credit abroad’ that threatened it.74
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