Summary of William Schmidt's Ph.D. Dissertation
for Columbia University,
"The Role of the
Chancellor
of the Exchequer in British Cabinet
Politics"
IGNORING BRITISH ECONOMIC
HISTORY
WOULD IMPERIL AMERICA
1. When Keynes Was
Ignored.
For my dissertation, I spent
nearly a year collecting and
reading documents relating to the role of the Chancellor
of the Exchequer in British Cabinet policy discussions
from 1919 to 1937.
The British Official Secrets Law had just been changed
from 50 to 30 years, thereby opening up these records.
(
I was fortunate to be advised about this by Benjamin Schwartz
at the London School of Economics. The Public Records Office
at this time was only a few blocks away.)
I did not start my research with the intention to disparage
these Chancellors or their advisors. I certainly did not
initially connect the British financial community (through
the medium of the Chancellor) to Neville Chamberlain's
disastrous policy of appeasement and the start of
World War II. This very real connection is still not made
among historians. This shows how dominant financial
communities are and how good they are at avoiding public
accountability.
But I soon discovered Chancellors always seemed to be against
expenditures for social goals like housing, public works or
rearming. They based their opposition invariably on the need
to balance the national budget, to strengthen the Pound and
to protect the British financial community from new taxation
and not to cause any reductions in the amount of private capital
available for investments.
In this they always adhered to the "Orthodox" policy views
promoted by the British Treasury civil servants and their
clientele, London's financial community, the "City".
This financial orthodoxy dominated British Cabinet discussions
of nearly all spending proposals even before the Chancellor's
yearly budget was decided. So pre-eminent were the Chancellors
in the 1920s within the Cabinet, budgetary surpluses occurred in
most years in the 1920s.
The direct result of this was England's "Locust Years: 1919-1937."
Year after year, Britain suffered much higher unemployment
than elsewhere in Europe and North America at the same
time.
These policies also prevented the Baldwin and Chamberlain
Governments of the 1930s from taking more steps to rearm in the
face of the rise of German militarization under Hitler.
Three Conservative Prime Ministers in this period, Bonar Law,
Stanley Baldwin and Neville Chamberlain had been Chancellors
of the Exchequers before becoming Prime Ministers. They
are examples of the #2 man in the Cabinet becoming Prime
Minister after faithfully adhering to views and values of the
Treasury civil servants and the British financial community.
Every British Chancellor of The Exchequer I studied followed the
the "Orthodox" advise of the British Treasury Civil Servants
and the financial community in the "City", including the one
Labour Chancellor, Phillip Snowden.
It is the contention of my dissertation that they did so,
despite the mounting evidence of the destructiveness of these
policies, not only because it was easier to simply accept the
Treasury's "departmental view", but also because they did
not want a spending minister to gain too much public
popularity. I found no evidence that they were themselves
directly pressured by the financial community. Rather,
the financial community pressured the Treasury and the
Chancellors said and did what their Treasury civil servants
advised. This may or may not be a critical distinction.
Either way, by opposing all big new expenditures they could
better forestall and prevent other spending proposals
and, more importantly, as Chancellors retain their status
as the #2 man, after the Prime Minister, in the British
Cabinet and thus be the man most likely to become the next
Prime Minister.
What was really needed from 1919 to 1935 was a massive program
of public works and housing. After 1935, much more spending
on the Navy and Air Force was needed. All such policies were
relentlessly opposed in the Cabinet by the #2 man there, the
Chancellor of the Exchequer.
It cannot
be truthfully argued that every English economist or
politician believed in the absolute need to balance the national budget
very year, as the Chancellors seem to have. Alfred Mond, for example,
made a strong argument for public housing after World War I. The
economist Keynes warned starting in 1924 that the then Chancellor's
(Winston Churchill) strict financial orthodoxy and restoring the Pound
to the Gold Standard and the pre-war value of one Pound being equal
to $4.80 (US) would in five years bring on a deep economic depression.
Keynes was proven right. The stock markets of the world all collapsed
in 1929 right after Labour's orthodox Chancellor of the Exchequer backed
the raising of Britain's "key" lending rate to 6 1/2 % to attract money back
to England and out of the bloated American stock market.
The orthodox viewpoint even in the 1920s was not everywhere so
dominant as many American economists still think. A massive program
of Public Works and deficit spending were the central ideas in the Liberal
Party's 1928 campaign. But by then, the Liberals could no longer
compete
nationally with the Conservative and Labour Parties.
(For a discussion
of the decline of Liberal Party see
https://rgshistory.com/wp-content/uploads/2018/04/full-reader-the-decline-of-the-liberal-party.pdf
The failure to appreciate
Keynesian economics caused England's near-economic
depression conditions to start in 1919, America's did not start until
1930s.
as did most of Europe. In the 1930s, America suffered from
"deflation"
and a thoroughly frightened Wall Street. Who is to say this can't
happen
here again. High interest rates and severe cutbacks in
government spending
could have that effect again, especially if the rich become frightened
because
of collapsing stock and real estate prices. Lower interest
rates, a massive
program of Public Works and the restoration of a truly progressive system of
taxation are the best guarantees at America will not suffer its own "Locust
Years".
Looking at the world before Keynes, we
should go well beyond the UK experience.
We would do well to study the policy-responses in the US, France and Germany
to the high unemployment of the 1930s.
FDR's Public Works programs were started in 1933. They did have a
positive
impact on the US economy. As Keynes expected, they providing relief,
they modestly lowered the very high unemployment rate, they inserted
spending money into the economy and they got the stock market to go
up instead of down. In a word, FDR's early Public Works programs saved
Capitalism in America.
But in 1937, FDR reversed course and took the "orthodox" advise of his
Treasury Secretary, who wanted the President to cut back on national
spending and balance the Federal budget. This was disastrous advise.
Soon there was a second Depression and the stock market fell 45%
from September 1937 to March 1938. FDR was no fool. After this,
he
cautiously became more Keynesian.
But only World War II really ended
the Depression in America.
War preparations, it can be said, are a necessary component for full
employment in America. Interestingly, a near-Depression
had occurred
between 1912 and 1914 in the US. It was only the European
belligerents'
war-time that saved the American economy from a Depression. This is
another untold bit of American economic history.
============================================================================
READ
KEYNES IN THE ORIGINAL.
INVESTORS' "ANIMAL SPIRITS":
Despite the need for new investments, if capitalists
are sufficiently frightened and expect a deep recession, they will
curb their investments
and spending AND lay off their workers and cut production.
THE "MULTIPLIER EFFECT":
Each Dollar spent on Public Works has a 3-4x effect
on GNP.
TARIFFS and
PROTECTIONISM -
"They do the trick."
INEQUALITY - MARGINAL
PROPENSITY TO CONSUME
Poor people spend all their money very quickly. The rich do not.
They have no need to. The Government can spur a
weak economy
along much more effectively by providing jobs for
working people
than giving money to rich people and expect them to
spend it
or invest it, epecially if they are frightened and
bearish.w, not contract.
OVER
SPECULATION:
BOOMS and BUSTS
"Wall Street , as
an institution ...to direct new investment into the most profitable
channels in terms of future yield, cannot be claimed as
one of the outstanding
triumphs of laissez-faire capitalism…"
|
=============================================================================
2. The British Experience with
Financial Orthodoxy: 1919-1937
The
British experience with Financial Orthodoxy should be a warning to all.
Unfortunately memories quickly fade after a generation, especially when
the dominant elites suppress the truth about how destructive
their policies were.
The story of the harm done working people in United Kingdom by
the dominant
financial Orthodoxy of the 1920s and 1930s is seldom told in
America. Still, I think
the main ideas that make up this Orthodoxy are easy enough to
understand. Perhaps,
Americans will wake up and see what dire fate awaits them if
they let their leaders
follow the very same Orthodoxy, wherein the highest priorities
are:
Unlimited Private
Wealth
Subservience to Private Financial Markets
Austerity
Budget Balancing Each Year
Limited or No Public Works Expenditures
Deflation
A Strong National Currency
Throughout the 1920s and 1930's, this 'orthodoxy' was also
called the
"Treasury view". The primacy of
tradition and departmentalism is seen
here. Treasury officials always advised their Chancellors,
who were
nominally their superiors, whenever the subject of Public Works
came up in
Cabinet discussions to to tell their Spending Minister
colleagues, first, that Government
borrowing money for Public Works would inevitably take away
funds from
private borrowing and thereby hurt trade and, second, the
private economy was
self-correcting and business conditions would soon improve, so
that no such
special Public Works programs were necessary.
See
https://books.google.com/books?id=mWysZtLVQ2AC&pg=PA60&dq=stanley+baldwin+%22public+works%22&hl=en&sa=X&ved=0CEoQ6AEwCGoVChMIspmdl5-ZxwIVCUqICh1ligB8#v=onepage&q=stanley%20baldwin%20%22public%20works%22&f=false
A
Recipe for Deflation
Americans will readily recognize these dictates of Financial
Orthodoxy as applied
by Presidents, Reagan, Clinton, Bush and Obama. Someone in
Britain now would
immediately see that these are still central features of
Conservative Party thinking,
especially under Margaret Thatcher and David Cameron.
Each one of the Chancellors of the Exchequer in the inter-war
period were staunch
defenders of this Financial Orthodoxy. We might expect this
from the Conservatives
who held sway throughout most of this period:
Austen Chamberlain (January 1919-April 1921),
Robert Horne (April 1921- October 1922),
Stanley Baldwin (October 1922- August 1923),
Neville Chamberlain (August 1923-January 1924)
Winston Churchill (November 1924-June 1929)
Neville Chamberlain (November 1931- May 1937)
The very same policies were pursued by
Labor's Chancellor Philip Snowden (January 1924-November
1924,
June 1929-November 1931.
Some might excuse these Chancellor's ever unyielding attachment
to
Financial Orthodoxy in the face of so high a rate of
unemployment year
after year from 1920 to 1938, by saying that Chancellors were
only doing
what was expected of them, namely:
1) fight government waste,
2) keep government expenditures within the limits
of Government
revenues,
3) maintain the value of the Pound Sterling and
prevent
a Weimar hyper-inflation,
4) gradually pay off the World War I indebtedness
and,
5) above all, steer clear of the "event horizon" of
the black hole
of Soviet-like socialism and central planning.
All these excuses pale when compared to the human cost of
persistently pursuing
policies which promoted high unemployment and a stagnating
capitalist economy
year after year, throughout the 1920s and 1930. Defenders of
Financial Orthodoxy
in this era utterly ignored the emergence after World War I of
widespread demands
that the Government properly compensate the soldiers who fought
in the Great War
with decent jobs and housing. They ignore the long history of
Public Works
and Council (public) Housing in the UK. And they ignore the
leading
figures in the Liberal Party, like
Auckland Geddes, Alfred Mond and Christopher
Addison
who advocated for a vast public works program as early as 1919,
nine
years before Keynes set out a grand plan for Public Works on
behalf of
the Liberal Party in 1928.
Always
High Unemployment
British Unemployment in the inter-war
years, 1920-1939, never went much below 8%.
Think of the suffering, povery and the wasted
potential. This did not have to happen.
This path was chosen by the political and financial elites.
UK Unemployment
UK Unemployment
US Unemployment
Unemployed Insured
Unemployed
As a Pct. of All as a Pct of
insured
Employees Employees
1920 2.1% 3.9%
5.8%
1921 12.2% 16.9%
16.9%
1922 10.8% 14.1%
10.9%
1923 8.9% 11.7%
4.6%
1924 7.9% 10.3%
8.0%
1925 8.6% 11.3%
5.9%
1926 9.6% 12.5%
2.8%
1927 7.4% 9.7%
5.9%
1928 8.2% 10.8%
6.4%
1929 8.0% 10.4%
4.7%
1930 12.3% 16.1%
13.0%
1931 16.4% 21.1%
23.3%
1932 17.0% 22.1%
34.0%
1933 15.4% 19.9%
35.3%
1934 12.9% 16.7%
30.6%
1935 12.0% 15.5%
28.4%
1936 10.2% 13.1%
23.9%
1937 8.5% 10.8%
20.0%
1938 10.4% 12.9%
26.4%
1939 8.5%
23.5%
Despite these dreadful numbers, year after year, the British
Chancellor of the Exchequer
and the Prime Minister always, whether they were from the
Conservative or the
Labour Party, followed and preached the same financial
Orthodoxy. This Orthodoxy
was the only path to economic salvation, they always claimed.
The
Conservative Mind
While High Unemployment was not the stated aim of Financial
Orthodoxy, that is exactly
what its policies produced. I think it can be argued that the
Conservative Party
in Britain and the "City", London's financial community, knew
very well that
Orthodoxy was an excellent way to keep the workers subservient,
to contol their
wage demands and to protect the rich from a successful political
challenge.
If true, it means that their devotion to Orthodoxy was callous,
cruel, self-serving
and based on greed. Were they biologically born without a
compassion
gene? Or were the social/economic classes so separated in
Britain? Certainly,
the physical separation of classes in England must have played
some role.
The Cabinet Papers do not show much discussion at any time from
1921-1937
of the human costs of high unemployment. So, it was much easier
to de-humanize
and disregard legitimate needs of the people one does not know.
As one
English gentleman-officer in World War I famously commented: >I
was quite
amazed to discover that Welsh coal miners were as "white" as I
am, once the
Army washed away all their coal dust. <
Conservatives were definitely afraid a big national program of
Public Works
might actually succeed. Not satisfied with criticizing Public
Works as inefficient
and unnecessary, they claimed such Government expenditures would
crowd
out legitimate private commerce and put the Government on a path
toward
"Bolshevism". They loved using this word. It stopped further
thought.
When under-paid workers rebelled by the millions in 1926 and
there was a
General Strike, this too was called "Bolshevism". It must be
suppressed.
No mercy was to be shown them, said Chancellor of the Exchequer
Winston Churchill.
(All this reminds me an old IWW song.
Have a listen -
https://www.youtube.com/watch?v=eUifliF0rBU )
Some Conservatives did think more thoroughly about Public
Works. But they
never set forth a plan to reduce unemployment in this way. I
suspect that they
secretly feared that such a government spending program would
become very
popular and more such government programs would be demanded.
After all,
the Government, had just successfully organized a massive war
effort. It's reasonable
to think, therefore, that many Conservatives at this time must
have guessed the obvious:
namely, that millions would have loved a decent wage and the job
security of
Government work, especially when working in private industry
paid little and
was nearly always punctuated by long periods of enforced
idleness.
So, a much bigger but unspoken fear developed, namely: if public
works
programs actually succeeded, what was the proper role for rich
and for the "City".
What would be their justification then for having so much wealth
while so many
had so little. Where would bankers, stock brokers,
industrialists, and
Conservative politicians position themselves in a world where
the government
guaranteed everyone a decent paying job. Bankers and their rich
friends
might not be needed much. Surely they would not be as
important or so well-paid.
It would be wrong to assume that Chancellors were troubled by
the unemployment
and suffering they caused. The Cabinet Papers do not show they
cared one whit
about the pain their policies were inflicting on millions. By
going back on the
Gold Standard in 1925, Churchill immediately caused a sudden
plunge in coal exports.
Miners were laid off or had their wages cut. They went on strike
in strike.
The strike quickly spread. Nearly 2 million workers struck in
sympathy. (For
details.)
Churchill who was then the Chancellor of the Exchequer advocated
in the Cabinets
for a full show of lethal force, including machine guns.
"Either the country will break
the General Strike, or the General Strike will break the
country." He praised the
Fascist dictator Mussolini for showing the whole world the right
way to deal with
"subversive forces." The Cabinet Papers showed that Churchill
wanted to force
the miners back to work by denying their families Unemployment
Relief and threatening
them with starvation. (Source.)
Tory Officer cadets were encouraged to volunteer as
strike breakers
Churchill insisted on an armed escort for a
food convoy
The Minds of The Labour Leaders
The British Labor Party's official loyalty to the Financial
Orthodoxy in the
inter-war had different motivations. Realize that its leaders,
MacDonald and Snowden,
saw the Liberal Party, not the Conservative Party, as their
main political enemy.
It was the Liberal Party they fought most often in urban
constituencies.
When the Liberal Party fully accepted and highlighted J. M.
Keynes' Public Works
proposals in their official "programme" for the national
election at the end of 1928,
Labour's leaders could not very well accept the same ideas.
Keynes was a well-known
Liberal economist. Instead, they quickly proclaimed their
loyalty to orthodox
Budget Balancing and the supremacy of Private Finance. They
resolutely refused
to endorse public borrowing (deficit spending) to create new
public jobs and
to rebuild England's infrastructure.
These two Labour leaders apparently wanted to prove to the
Electorate
and to the financial Establishment that they could run the
British capitalist
system better than either of the other political parties
could. Were they
still socialists? Who knows. They were chosen to lead.
This was certainly
a strange position for the leaders of a Socialist Party, but
MacDonald and
Snowden had reputations for independent thinking that went back
to their pacifism
at the start of World War I. The rank and file in the Labour
Party was expected
to follow their leaders, not challenge them. So, in the 1920s
and until 1931,
when their leaders sought respectability and wanted to be
accepted by the
financial Establishment, the rank and file accepted the Labour
strategy of
first proving that they could run the country, before they
would start talking
"Socialism".
Also because their Labour Party never won an outright majority
in the House
of Commons, these two Labour Party's leaders in their 1924 and
1929-1931
governments, chose to follow the Orthodox Financial Policies,
much like
Conservatives at the time had. They definitely did not want to
give credibility
to the upstart Liberal economist Keynes.
This was even more true as the Financial Panic worsened in
1931. Seeing how
completely Private Finance froze up, they may have blamed
themselves and
tried to offer the "City" even more concessions. In full
crisis, the Labour
Prime Minister MacDonald and Labour Chancellor of the Exchequer
agreed
to cut the Government's budget to the point even of drastically
cutting back wages
for those in Government, including even sailors in the British
Navy. They also
agreed to dramatic cuts in the Unemployment Insurance benefits
that millions
depended on.
I think this is proof that these two leaders themselves
panicked. They could not
reverse course and admit they had been wrong. There was too
much public spotlight
on them. They rightly feared the wrath of the public. So they
panicked and clung
even more tightly to the tenets of the Orthodoxy and said they
had no other choice
but make severe spending cuts. This was, of course, not true.
Keynes and the
Liberals had shown their were other choices. MacDonald and
Snowden simply lost their
nerve. They hid behind the orthodox Treasury view.
In the end, so upset were rank and file members of the Labour
Party. that these
two "leaders" were expelled from the Labour Party in 1931.
The Labour
rank and file, however, were so disillusioned by the Labor
Party Elite's subservience
between 1929 and 1931 to the "City" and Financial Orthodoxy,
that they refused
to vote in large numbers for Labour until after World War II,
by which time
Labour's leader
Clement Atlee had
fully embraced Keynesian Public Works and
deficit spending to promote recovery and employment. In 1945,
he was elected
Prime Minster by a landslide.
The Tenets of The British and American
Financial Orrthodoxy
1. Balance the Budget no matter the
costs.
2. Private sector jobs are more legitimate than Public
Sector.
3. Take pride in a rising and lofty Dollar (Pound
Sterling).
4. Wall Street rules. (The "City" know best.)
5. No taxes on stock trades. No limits on executive pay.
6. Encourage Absolutely Free International Trade.
(British Conservatives did put up some
tariffs on non-Empire imports.)
7. Permit private investment capital freely to go abroad.
8. Lower prices were desirable.
The only aspect of the British orthodoxy not followed now in
America was in the
area of the Bank of England's relatively high Lending Rate.
The American FED, of course,
has made the interest rate on their loans to the the biggest
banks very low and has been
buying long-term mortgages in the open market. US Big Banks,
it should be said, are
the real beneficiaries of the Fed's very low interest rates
loans, though home buyers
theoretically can save a lot of money buying a home, provided
they can borrow the
money from a bank for a mortgage.
American Bankers now pay very low interest on loans from the
Federal Reserve.
This seems nice, until you realize that the big banks can do
whatever they want
with the cheap money. They can Buy foreign bonds, make loans to
allow American
corporations to export jobs, speculate aggressively, using
leverage to the fullest,
in stocks, commodities, bonds currencies. They are under no
obligation to pass
along the low rates to the American Public or even make any
loans. And they
can and do use this cheap money make huge campaign contributions
to American
politicians to bribe them so that Wall Street always gets the
inside track and
its way when policies are being made. Thus, the exception of
lower interest rates
has been twisted by Wall Street to ensure its hegemony
continues In America,
Main Street is of lesser importance, just as working people and
small shop keepers
were when the "City" in London ruled England so absolutely in
the 1920s and 1930s..
This Orthodoxy, apart from the experiment in low interest
rates, is
fully supported by all Republicans. Most Democrats in
Congress and the President
also uphold the American Orthodoxy. In this they are doing
just what
the richest Americans and the biggest corporations want, apart
from occasional
rhetorical lapses by Democrats made in the middle of their
political campaigns.
The reign of financial Orthodoxy in England had the same
underlying basis:
National financial and budgetary policies always had to
protect and promote
the interests of the richest Englishmen and the "City",
London's financial
community, just as they saw these interests.
My hope is by seeing just how badly England was served by this
Orthodoxy, we Americans
may better come to understand why we have such high
unemployment still and
why the Super Rich here seem to be the biggest benefactors of
the Obama Administration's
financial, banking and budgetary policies. The dire economic
consequences of the
British Orthodoxy are familiar to most British economists, not
just Keynesians.
In America, Government was seen as the source of economic
problems by Reagan
and his followers. De-Regulation was preached for two decades
by Milton Friedman
and Alan Greenspan. Clinton's Treasury Secretary, Robert
Rubin, continued this
laissez-faire, conservative ideology. The pervasiveness of
their Orthodox thinking
has prevented Americans from seeing that Keynes was not a
"Red". He
believed that Capitalism in Recession could only be saved from
itself if the
Government launched Public Works' programs when Private
Investment failed.
Government De-Regulation is now no longer held in high esteem.
Most Americans
understand that the loan policies leading to the Housing
Bubble, the Bank's excessive
speculation and the fraud in selling sub-prime mortgage back
securities were all
caused by a lack of government regulation. On the other hand,
the great need for
Public Works is not yet widely accepted by the Political and
Financial Elites in America.
But it is growing among the people. They want decent jobs!
They are tired of waiting.
Americans understand that the American Financial Orthodoxy and
"Trickle-Down"
is not working. The bull market since 2009 has not seen a
comparable increase in
jobs. Rising stock prices are making the rich a lot richer.
But they corporations
are not investing in new manufacturing here. They continue to
sit on billions hidden
away in foreign tax havens. Some times the corporations use
this money to buy
out a competitor But mostly, big Corporarions are replacing
American
workers with new overseas factories. As costs go down, the CEOs
can report higher
earnngs, make Wall Street happy and get even higher pay.
Good paying manufacturing jobs in America are too scare. The
Unemployment
Rate for the unskilled is way over 12%. (2010)
Americans are told by Obama and the Democrats to be
patient. "Don't rock the boat."
"The Republicans would make things worse". "We Democrats know
what we're doing."
"The slow recovery is the fault of Republican obstructionism."
Do not buy these excuses.
If the English experience of the 1920s means anything, it
means that the American
Financial Orthodoxy will keep tens of millions of America
unemployed for a decade or
tow. Almost nothing is being done by Democrats and their
Wall Street backed,
free-trade, free-market Orthodoxy to rapidly increase the
number of decent paying
manufacturing jobs.
. Even though the dire economic consequences of Orthodoxy are
becoming clearer
and clearer in America, just like the terrible, high
unemployment was to people in
England in the 1920s, before the 1930s, the elites ignore
these contradictions
almost totally. So, the political problem remains. As in
England in 1926 or 1931,
what can the average American worker do? Both major political
parties' leaders
support the failing policy of Orthodoxy. What will change
their economic policies?
England's experience does not make for hope. Protest marches
did not work.
Even a General Strike in the UK did not work. The best hope,
sadly I conclude,
would seem to be to show the Elites that even the Wealthy will
better promote their
own long-term interests much better if they work to expand
the domestic American economy,
and create real jobs here, let the Government re-build our
aging public infrastructure and
take away Wall Street's exceptional powers.
There should be no need for so many retiring Americans to have
to gamble their
savings in the stock market. Wall Street may be essential,
but it should not be so dominant.
Should not more people make things than service investors and
short-term trading,
which is often parasitic and has no social value. Of course,
the Big Banks must be broken up.
They're bigger than ever. They could easily shut down the
whole economy in the next "Crash".
That they have not been broken up and there are no plans to do
this shows clearly
how all-powerful the Financial Elite are politically. America
is every bit as much dominated
now by Wall Street as England was in the 1920s, when the
Treasury view and the needs of
the "City" over-ruled the needs of millions who were out of
work and desperately needed
Public Works jobs since the Private Sector could not and would
not provide them
year after year, after year, after year.
To seek change we must, I think, explain how and why the
British political and
financial elites clung so stubbornly to an Orthodoxy which was
clearly so destructive,
even of their own interests in the long run. It's important
to see that each of the
different actors on the political stage had somewhat different
reasons for refusing
to reconsider their loyalty to Orthodoxy, even in the face of
the terrible Unemployment
caused by it.
As you read what I write here, keep in mind the next set of
statistics. They
could very well be what is in store for America if our
political and financial elites
do not shake off their ideological blinkers.
British Unemployment in the inter-war
years, 1920-1939, never went much below 8%.
UK Unemployment
UK Unemployment
US Unemployment
Unemployed Insured
Unemployed
As a Pct. of All as a Pct of
insured
Employees Employees
1920 2.1% 3.9%
5.8%
1921 12.2% 16.9%
16.9%
1922 10.8% 14.1%
10.9%
1923 8.9% 11.7%
4.6%
1924 7.9% 10.3%
8.0%
1925 8.6% 11.3%
5.9%
1926 9.6% 12.5%
2.8%
1927 7.4% 9.7%
5.9%
1928 8.2% 10.8%
6.4%
1929 8.0% 10.4%
4.7%
1930 12.3% 16.1%
13.0%
1931 16.4% 21.1%
23.3%
1932 17.0% 22.1%
34.0%
1933 15.4% 19.9%
35.3%
1934 12.9% 16.7%
30.6%
1935 12.0% 15.5%
28.4%
1936 10.2% 13.1%
23.9%
1937 8.5% 10.8%
20.0%
1938 10.4% 12.9%
26.4%
1939 8.5%
23.5%
What Underlay The Tenets
of Financial Orthodoxy?
The supreme concerns of this Orthodoxy were: balance the
national budget, pay-off
past government debt and restore the Pound Sterling to the Gold
Standard.
Deflation was welcomed, too. In all these things, the central
policy makers,
the Chancellor and the Prime Minister heeded only the advice of
Treasury
bureaucrats and the private bankers in London's financial
community, the "City".
Orthodoxy's undeclared assumption must be noted, because of
whose immediate
interests it best served. Only the private allocation of
capital was considered legitimate
in peace time. Government expenditures should be strictly
limited. Borrowing money
for Public purposes always took money away from Private
investment. More jobs
could not be created by government housing or Public Works
programs, because
such funds as would be used could only come from the same pool
of Investment
Money that private investment drew from.
This was the financial Orthodoxy that underlay all budgetary
decisions in the UK
for nearly 20 years. Its consequences grew more and more
dire. In many ways,
England hibernated. Its economy stagnated. Its industrial
north suffered most.
But everywhere there was high unemployment, widespread poverty,
industrial
obsolescence and a decline in competitiveness internationally.
Still the political and financial elites allowed no breaches or
challenges to their
Orthodoxy. It was like a religious faith. The more its
economic consequences
brought economic suffering and pain, the more this was
considered a positive development.
It meant society was paying off the price for some past
indulgence or extravagance. Soon,
purged of this sin, the economy would emerge cleaner, stronger,
purer and
more efficient. The champions of this financial Orthodoxy
never wavered. Their loyalty
to it was never shaken. Heretics were excluded from positions
of power and
publicly scolded. Only loyal followers of the Orthodoxy became
Chancellors and
Prime Ministers.
We Americans now seem doomed be victimized in the same way by
our own leadership.
It repeats all the same mistakes and for the same reasons. The
millions who
are unemployed are not heeded by our policy makers. The 40
million who rely
on food stamps are considered "takers" by the Republicans and
never mentioned
by President Obama. Small business owners are forgotten and
their stores are
replaced by big multi-national corporations who import most of
what they sell.
In this, the Republican and Democratic Party elites only hear
and heed the orthodox
views of Wall Street, the Chamber of Commerce and the National
Association of
Manufacturers.
As in England, it does not seem to matter how badly the
Orthodoxy fails working
people. Clearly, it is making the rich much richer. And that
is all that seems to
count to Republicans. And truthfully, campaign rhetoric aside,
this is also all that
matters to most Democrats in Washington, too.
Four years after the Housing Bubble broke, American real
unemployment remains
very high. Wall Street is happy, but Main Street is not. Why
do our government's
leaders, Republicans and Democrats, year after year, cry always
for budget-balancing
Austerity and a Strong Dollar as their only solutions to what
ails our economy?
Why do they not re-think their failed policies. When will they
admit they were wrong?
Studying the English experience shows how entrenched and
self-perpetuating the
orthodox "Treasury view" was. Their political leaders could no
more abandon
their rich supporters, stop balancing national budgets on the
back of working people.
or cease calling for Deflation and a much stronger national
currency than ours can.
England was a Plutocracy in the inter-war years. America is a
Plutocracy now.
The inter-war years in England are known as the
"locust years". The English
"roaring 1920s" were years of needless high unemployment,
rusting industry,
plant obsolescence, widespread poverty and needless suffering.
There were
marches. There were demonstrations. There was even a General
Strike.
Still the financial experts and elites clung to their erroneous
and destructive views and
solutions. This is also the story of WHY the so-called
experts and leaders, year
after year, government after government, never changed their
thinking. . .. .
Unemployment in Britain was always very
in the "roaring" 1920s. There were even
hunger marches to London in 1922, 1923, 1927
and 1929. There were also frequent clashes
between the unemployed and the police.
(Source.)
The lowest English Unemployment fell to in the whole long
period between 1921
and 1939 was 7.4%. Employment conditions were steadily poor
in the 1920s
and awful in the 1930s. As in America now, "the incidence
of unemployment
throughout the interwar period was generally higher for men
(50% higher)...
and for older workers and youths between 21 and 25...It was
particularly acute
amongst unskilled manual workers".
(Source.)
From 1921 to 1939, British Unemployment was always above a
million people.
In 1933 it reached 3 million. The number of hours typically
worked also fell.
National unemployment rates can be compared, I think, even
though methodologies
for their computation surely must have differed. The data
above shows
that England's rate was much higher in 1923, 1925, 1926,
1927, 1928 and 1929
than in the 1920s. America's boom was brought about by new
inventions,
cars, radios, washing machines... England's industry, in
contrast, was slow to
adapt. Investments went overseas and imports were
deliberately made cheaper
to allow England's financial community to enjoy the prestige
of the Pound being
backed by Gold.
Orthodox British Policy Making
Except for the post war Lloyd George government's acceptance
of the principle
that the severe housing shortage in the UK should be
alleviated by the subsidizing of
council houses in 1919-1920
(The Addison Act) and the start of paying a
small amount of unemployment relief to manual workers in
1920, the economic
policies of the various British Governments from 1920 to 1939
were
always subordinate to a Financial Orthodoxy that was
sometimes called the
"Treasury View".)
In this, the highest Cabinet priority was placed on
Governmental Austerity and Balancing the
Budget at all costs, no matter the levels of Unemployment.
There was a strong preference
for Limited Government. Furthermore, England was expected to
strive to return to,
and then say on, the pre-war Gold Standard, even if it meant
Deflation. Free trade
was a Liberal Party and Labor Party Preference. The
Conservative Governments
were mildly more protectionist.
By 1921, Conservatives accused the Ministry of Housing of
high-handed
Bolshevism and the national government's role in helping to
finance
council houses was
rendered almost meaningless.
In the Cabinet's many deliberations on economic policies,
always the
the financial community's interests were placed above
the needs of the average worker and the small shop keeper.
In England,
the most power political exponents of this Financial
Orthodoxy were
the Chancellor of the Exchequer, the Prime Minister who
usually had
been a Chancellor and the Treasury Department who
advised the
Chancellor and conveyed to the Chancellor the "City's"
preferences
and perspectives on "investor confidence" and the likely
success of
government borrowing.
Why Did The British Government
Pursue Only A Policy of
Financial Orthodoxy between 1921 and 1937 despite the
continuing
high level of Unemployment?
Economists typically place the blame for the stagnant inter-war
British economy
on the failure of private investment to keep up the country's
infrastructure and
technology. The cotton, coal, steel and iron industries became
uncompetitive
internationally. Newer industries, like cars and chemicals,
grew more slowly
in the UK than in the US or Germany.
Why did private
investment fail in this?
The primary answer: it was was not sufficiently profitable to make
such investments.
Interest rates were kept high to support the Pound. Domestic
demand was too strictly
limited to buy what was already produced, primarily because so
many
consumers were poor, this a result of the high long-term
unemployment.
The
UK's budget showed a surplus throughout the 1920s. Excluding interest
payments on World War I debt, tax revenue was greater than
government
spending. By 1928, Conservatives might have asked themselves
if balancing
a budget just for the sake of balancing a budget served any good
national
purpose. They did not. The political reasons for laissez-faire
were just
too strong.
In 1925, the Pound Sterling was restored to its pre-1914 value of
$4.80/Pound
by Chancellor of The Exchequer Winston Churchill and Stanley
Baldwin, the
Prime Minister. The cost to the British economy and to the British
working class
of this largely symbolic, patriotic victory was immense.
Setting the Pound artificially high from 1926 to 1931 and from
1934 to 1939
brought Deflation. Wholesale actually prices in Britain fell by
23%
between 1921 and 1929. Going back on the Gold Standard
necessitated
high interest rates to induce foreigners to buy British bonds.
But this
made loans more expensive and also reduced consumer borrowing.
The high international value of the Pound ($4.80 = 1 Pound
Sterling)
made it much harder for foreigners to buy British goods. British
manufactured
exports fell while imports increased. It also became easier and
much more profitable
for British investors to take their money overseas. The wealthy,
of course,
enjoyed being able to import more foreign products. Restoring the
Pound
to its pre-War levels also made them feel that England had not
lost its status
as a world power. Tory nationalists like Churchill were cheered
by this.
Unfortunately, the poor and the working classes lacked sufficient
employment
and income to benefit from the Deflaton.
And things got steadily worse. The working class as a whole
steadily lost
buying power due to the high unemployment and the way an abundance of men
seeking work tended to reduce wages that were paid. And without sufficient
domestic buying power, English factories hired fewer and fewer workers.
This vicious
circle turned into a vortex in 1930.
Of course, Conservatives in the UK, just as they do in the US now,
blamed the introduction of unemployment benefits in 1920. These
"benefits"
were so meager, it hardly seems likely that many Englishman chose
them
voluntarily over employment.
The biggest irony of all: Years of Austerity, Budget Surpluses,
the Gold
Stand and Financial Orthodoxy did little to reduce British national
debt as
a percentage of its GDP. In 1922 the number was 180%. In 1932 it
was
still 180%. It remained little changed. Even by the
Conservative's
own measuring stick, their policies had failed. But the human
costs were
huge and awful. Look the Unemployment Percentages below. England
experienced for 17 years the same level of unemployment that
Americans
have today.
Unemployment
1920 2.1%
1921 12.2%
1922 10.8%
1923 8.9%
1924 7.9%
1925 8.6%
1926 9.6%
1927 7.4%
1928 8.2%
1929 8.0%
1930 12.3%
1931 16.4%
1932 17.0%
1933 15.4%
1934 12.9%
1935 12.0%
1936 10.2%
1937 8.5%
1938 10.4%
1939 8.5%
The
1926 General Strike in Britain was called to highlight
the continuing high unemployment and wage reductions forced on
coal miners
in the aftermath of Churchill's return to the Gold Standard.
Who Was To Blame?
I blame the governments, one after another,
in this period for failing to put
the millions of unemployed to work rebuilding the country's
rusting infrastructure
and thereby also losing the chance to boost their buying power so
that they
could buy more British goods. This callous stubbornness doomed
millions of
people in England quite unnecessarily to long-term Unemployment,
Depression
and Poverty between 1919 and 1937.
Why were the governments so callous?
Why did they always ask what would
be the consequences of a program of deficit-financed Public Works
to the "City",
London's financial community, and so seldom ask why the unemployed had to
remain
unemployed so long?
The answer is that the cold economic orthodoxy of Austerity held
sway in
the "City", in the Treasury, and in the thinking of each
Prime Minister
and Chancellor of the Exchequer. It was the dominance of this
Financial
Orthodoxy among all the political and financial elites that should
be
blamed. The same orthodoxy rules American political and financial
elites
now. America seems eventually doomed to repeat the English
experience
of the
1920s and 1930s, even more unnecessarily than Britain did. You might think
that American politicians might be aware of and learn
something from England's
locust
years' experience. Apparently, that is asking too much.
The reasons for America's ideological blindness and
stubbornness now
seem remarkably similar to what I learned was true in England. We
should, I think,
study the British experience closely.
US Policy-makers, both Republicans and Wall Street Democrats like
Obama
must somehow wake up and learn about the mistakes made year after
year
by England's top policy-makers in its dismal locust years:
1919-1937.
To the extent American policy-makers adhere
to the same Financial Orthodoxy,
they
may doom America to its own "locust years", with the same tragically
unnecessary
consequences: high unemployment, badly neglected infrastructure,
flight of capital abroad and poverty and poor health for tens of
millions
of Americans.
I have organized the discussion below as follows:
UK - 1919-1937:
Each Chancellor of The Exchequer Demanded The Rule
of Financial Orthodoxy,
despite the Continuing High Unemployment and
Substantial Long-Term Poverty.
Financial Orthodoxy:
Austerity,
Budget Balancing,
Limited Government,
Going Back to Gold Standard and
Special Preeminence of the "City" (London's
Financial Community)
Why Did Financial Orthodoxy Prevail?
1) The Recruitment Process for the
Chancellor of the Exchequer and Prime Minister
2) The Chancellors' Political Goals Made Him
More Orthodox.
3) The Treasury Department was Home to the
High Priests of Orthodoxy. Why?
4) The Rich Man's Financial Orthodoxy.
Orthodox Chancellors:
Austen Chamberlain
Robert Horne
Stanley Baldwin
Winston Churchill
Phillip Snowden
Neville Chamberlain
The Fabian Socialists' View of the Financial
Orthodoxy.
Inter-War Year Challenges to the Financial
Orthodoxy
1) Addison's Proposals for Health Care in
1919
2) Alfred Mond's Proposals for A Large-Scale
Public Works Program in 1920
3) Keynes vs. Chruchill's Return to Gold
Standard: 1914-1926
4) Liberal Party's Public Works Program:
1928
5) Keynes vs. The Treasury's Orthodoxy
6) Labor's Mosely Proposes A Massive Public
Works Program: 1930-1931
7) Churchill Seeks To Dramatically Boost
Spending on RAF: 1933-1936.
Keynesian Deficit Spending and Public Works
Turned down by Snowden and Neville
Chamberlain: 1929-1935
Adopted by Germany and Sweden, whose
economies recovered quickly.
FDR and Keynesian Deficit Spending: 1933-1936
------------------------------------------------------------------------------------
UK - 1919-1937
The theme of
my 1972 dissertation at Columbia, The Role of the Chancellor
of The Exchequer in British Cabinet Politics:
1919-1937", was quite simple.
As
second in
command in the British Cabinet and heir-apparent to be
the next Prime Minister, the orthodox financial perspective
and policies
of every Chancellor in this period did immense, unnecessary
harm
to England and its people in its "locust years", 1919-1937.
This
became clearer and clearer. Yet there was no change in
their
thinking, year after year. Liberal and then Keynesian
criticisms of
this financial orthodoxy were always rejected.
It cannot be said that there were no other alternatives than
cutting
government spending more and more deeply to balance the
national
budget. And it cannot be said accurately that these
alternatives did
not get sufficient political expression to allow the
Chancellors and
their defenders correctly to say that no one advised them of
anything
different than the prevailing financial orthodoxy. Other
solutions,
especially, massive Public Works programs and large-scale
Rearmament
spending were set forth by spending ministers within the
inter-war
Cabinets. Yet every Chancellor, regardless of party, year
after year,
invariably fought all new government spending proposals,
no matter their merits, no
matter how many jobs they might
have created,
no matter how unprepared the RAF was as Germany rearmed.
Surely, the Chancellors must have read the dismal economics
news
month after month, year after year. They could see the
suffering and
poverty that extended high unemployment and then Depression
brought. Yet, they all dismissed these dismal facts as
inevitable
and unalterable. They chose not to see them as the direct
consequences
of years and years of Austerity, Balanced Budgets and their
own
"No"s to all new spending programs.
In this period, only financially orthodox policies were
approved by the
British Cabinet despite 18-years of steadily high
unemployment and
misery for the millions of people stuck in poverty and poor
health.
The
political leadership and the political system utterly failed, much like
has now in the US.
Each year it should have become clearer and clearer
that completely new financial policies were needed.
Instead, the Prime Ministers
and Chancellors, year after year, stuck to the same old
policies which had
always failed to bring about a real economic recovery and
full employment.
Such suffering we now realize was the result of the way
Prime Ministers
(who were often ex-Chancellors) and Chancellors of the
Exchequer
clung stubbornly to a financial orthodoxy that still grips
manypoliticians
in the US, the UK on in Europe. This was the Ideology of
Austerity.
Its principal tenets were:
1) Always, they said, "Balance The National Budget", no
matter how much
unemployment it causes and no matter how much suffering
would ensue
among the poorest in society.
2) Always Protect or Enhance the National Currency. The
Gold Standard
represented the natural order of things. Returning to it
would bring
pre-war imperial greatness, glory and normalcy. Clearly,
the reasoning here
had a big emotional component. But it utterly failed to
restore the old order
and the smug satisfaction that went with it of owning a rich Empire and
the middle class enjoying a very high standard of living.
.
3) Never Challenge the Financial Community in their
assessment of
how best to ensure sufficient confidence to accommodate
government
borrowing needs and maximize private investment and economic
growth.
If the Treasury said that the "City"'s confidence would be
jeopardized
by public borrowing to finance Public Works, then that
should be
the end of discussion. Always there was the danger that
Public borrowing
would "crowd out" private finance.
Why did the
political leadership fail so badly?
1)
The
Political Recruitment Process
The complete adherence to the Financial Orthodoxy, just laid
out, by each
Chancellor of the Exchequer and each inter-war Government
came about, first, because each Conservative Prime Minister
in this period
had himself been Chancellor and it was the Prime Minster, of
course,
who picked who would be his own Chancellor in his Cabinet.
Naturally,
these Prime Ministers picked as their Chancellor and #2 man
in
the Cabinet, someone who held views and opinions like their
own.
That their official residences, #10 and #11 Downing Street,
were right next
to each other also reinforced like thinking.
Strikingly, except for the Labor Governments, 1924 and
1929-1931, the
man who picked the Chancellor, had himself been Chancellor
and, therefore,
had himself been heavily influenced by the same recruitment
process
that favored orthodoxy. In addition, the high priests of
Orthodoxy in the Treasury
Department heavily influenced the thinking of the
Chancellors
who became Prime Ministers as well as the current
Chancellors of the Exchequer.
2)
The Conservative Chancellor's Political Goals
Chancellors
chose financial Orthodoxy and Austerity because
they thought it served their political interests. They
were already
second-in-command and heir-apparent to the office of Prime
Minister.
Why, they thought, take a chance and risk becoming Prime
Minister?
Why surprise or shock others, and there were many, who
expected the
Chancellor to stick to an orthodox financial path.
In fact, many of the inter-war Chancellors did become Prime
Ministers.
(Austen Chamberlain, an exception, did become the
Parliamentary leader
of his party, but chose to remain loyal to Liberal Lloyd
George's
government rather than seek the Prime Ministership when
Conservative
back-benchers decided to break free.) Four inter-war
Conservative Prime
Ministers, Bonar Law, Stanley Baldwin, Neville Chamberlain
and
Winston Churchill, were each very orthodox Chancellors before
they
became Prime Ministers.
Importantly, as heir apparent, the Chancellors saw no reason
to give
the wherewithal to a spending minister that potentially
might enable
that minister to build up such a favorable reputation on his
own that it
would allow him to successfully challenge the Chancellor
when a
a new Prime Minister was to be selected. Why help a
spending minister
up the same promotion ladder the Chancellor was on?
Intra-Cabinet,
political alliances were less important to the Chancellor
than keeping
the favor and trust of the Prime Minister. They knew that
the Prime Minister
could ask the Chancellor to resign at any time.
Furthermore, It clearly would not help the Chancellor's
chances to succeed
to the Prime Ministership if he said anything that would
disturb the "City"
or weaken the Pound Sterling. So, why not continue being a
strict budget
balancer and make a reputation for fighting government waste?
I believe that this deep-rooted ideology of Austerity and
Orthodoxy
were promoted by the Chancellor not because the Financial
Community secretly pulled political strings, as Marxists
might allege.
The Financial Community did not have to pull any strings or
make
make big campaign contributions, as in America, There was
no such need.
All the Chancellors were already their natural allies. The
Chancellors shared
the same thinking and fully appreciated the political
advantages of adhering
to the financial orthodoxy. They were already on the
fast track to become
Prime Minister provided they did not do something foolish
and provided they
did not allow a spending ministers to gain a grander
reputation that would
threaten their own. .
Their adherence to the prevailing financial orthodoxy was
thus a matter
of political convenience. Chancellors in this period
opposed all increases
in government spending. Exceptions I could not find. They
did not pick
and chose some new spending proposals to reject and some to
accept. When they were over-ruled in the Cabinet, they
formally dissented.
They believed that encouraging any one spending proposal
would
encourage others. And they said this quite openly. In this
way there
was no need to think hard and develop a subtle, layered,
nuanced
view of national finance and macroeconomics. Rather, they
could claim
to be maintaining the grand tradition of the Treasury and
the Chancellor.
Chancellors of the Exchequer were not part of a hidden
financial cabal
Their Orthodox views and loyalties were openly expressed.
And it served
their political goals to work hard to reinforce, rather than
challenge,
the Financial Orthodoxy in the mind of the Public and the
Press.
A complete acceptance of the tenets of Austerity and
Orthodoxy were
viewed by the Chancellor as the best way to keep the
financial community
happiest and to avoid financial panics. Interestingly,
Snowden the
Labour Chancellor was as devout a believer of Austerity and
Financial
Orthodoxy as any of the Conservative Chancellors. We will
look at his
case closely further below.
Orthodoxy was expected of Chancellors in the secret and
private Cabinet
discussions of public policy and finance. Orthodoxy is what
they delivered
behind the scenes. One might think that given the secret
nature of Cabinet
deliberations (This is the so-called "collective
responsibility"), they
might have voiced a heterodox view now and then. I could find
no instances of this in all the Cabinet memoranda and minutes
I read
at the Public Records office in London.
It was as though they turned off their "free will" and their
ability to do
critical thinking. All the inter-war Chancellors played this
orthodox role
in exactly the same way. The arguments a Chancellor used
against spending
proposals to build Council Houses in 1920, to launch a Public
Works program
in 1920 or 1930, or to expand and modernize the RAF (Royal
Air Force) in 1934
were always the same. Such expenditures would cost too much.
The budget
could not afford them. They would cause a budget deficit.
In turn, this
would jeopardize investor confidence, hurt the Pound (and the
stock market)
and drive up the costs of borrowing from home and abroad. At
best, such
spending proposals were "ill-timed". Usually, they were
considered "wasteful",
"dangerous if they encouraged others to also seek new
spending" and
"damaging to investor confidence".
3) The
Treasury Was Home to The High Priests of Financial Orthodoxy.
.
The Chancellor depended upon the Treasury's civil servants
to advise
him and give him the arguments and numbers that he used in
the
Cabinet papers and discussion, as well as in his speeches in
Parliament,
including his annual presentation of the Government's
budget. It was
much easier to get the Treasury to do what it had always
done, namely
demonstrate how a budget must be balanced, than to get it
to
advance arguments in favor or public borrowing that would
break
with its traditions. None of the Chancellors I studied
questioned the
traditional, orthodox view that each year the national
budget must always
be balanced.
The Chancellor with Cabinet approval could seek or modify
taxation.
But with one exception, he never challenged the Treasury's
position
on how much revenue might be raised by different taxes and
through
government borrowing. The Treasury's views and
recommendations
seem always to have been accepted. They were never
challenged.
The only exception, perhaps, was Chancellor Bonar Law in
1915, when
he proposed that the Government issue War Bonds with a lower
interest rate than the Treasury advised. Law claimed
correctly that
an appeal to patriotism would be successful.
Why were
the Treasury civil servants so orthodox in their thinking?
Wikopedia says Treasury
orthodoxy was the view that fiscal policy
has no effect on the total amount of economic activity. In
his 1929
budget speech, Winston Churchill said the
"The orthodox Treasury view ... is that when the
Government borrow[s]
in the money market it becomes a new competitor
with industry and
engrosses to itself resources which would
otherwise have been employed
by private enterprise, and in the process raises
the rent of money to all
who have need of it."
Chicago's
Milton Friedman agreed with the Treasury view. He helped make
Libertarian economics popular in the 1980s and 1990s. The
Crash of
2008 showed just how fatally flawed this orthodoxy was.
Bankers
investment decisions as in the case of Lehman Brothers or Washington
Mutual could be disastrously wrong.
Rebuttal
is easy. In the first place, the Government could instruct
the Bank of England to print a lot more money, which the
government
would borrow and then spend on Public Works. The pool of
money
to be borrowed could thereby be made much bigger.
But let's assume there was no new printing of money. The
Treasury
orthodoxy falsely assumed that what the private sector
borrowed was
soon invested in the UK with the result that national employment nuumbers
would be raised. Only by making this assumption, could they assume
that private sector borrowing would be exactly as effective
in boosting
employment. Yet, clearly relying on private investment
failed to
create enough jobs for nearly two decades in England.
Showing its own bias, and how completely its collective
thinking was
captured by the ideology of the promoters of
financial capitalism, the
Treasury managed to assume that private investors would (1)
use
borrowed money at least as constructively as the Government
would,
(2) that it would help create jobs in the UK,(3) that such
private investments
would rebuild the infrastructure as needed, (4) that it
would bring about
innovation and a modernization of the manufacturing base
and (5) otherwise
would make more of the things that working people needed.
All of these assumptions were clearly not true and did not
happen. A lot of
the borrowed money in this era went overseas and to the U.S., in particular.
This was encouraged by the artificial pegging of the Pound to the Gold
Standard.
Some of the borrowed money also went to rich Englishmen who bought
yachts, took around-the-world trips or purchased homes on the Riviera.
A lot of the privately borrowed money allowed British brokerages and banks
to speculate in stocks.
Certainly, there is little evidence to make us believe
that private investments
boosted employment as much as planned public works would
have.
Even more telling problems arose for the Orthodoxy when the
speculative
bubble in shares broke and the economy turned down. In a
deflationary
period, there is every incentive for rich people to borrow
money and then
just to sit on it, waiting for lower prices to deploy it.
In the severe Depression
of the 1930s, the private sector lost its nerve
completely. Private investment
was paralyzed. It largely stopped altogether. Left to sort
itself out, there is
no telling how long the Depression would have lasted. The
private sector
froze up in panic and chose to wait for someone else to
boost the economy
and start buying things again. Private borrowing for plant
modernization
stopped completely.
,What was the government to do, just wait around until the
private sector
got their nerve back? This inter-war era shows how readily
corporations
in panic mode choose to hoard rather than spend their savings, though some
may buy out competitors when their shares have fallen far enough.
Banks also enter a panic mode. They refuse loans to even reliable and
good customers. So the "velocity" of money flow may in these bad times
slow down to close to zero and unemployment sky-rockets up and falls
only very slowly, until the inventories of necessities is finally exhausted.
By contrast, when massive Public Works jobs were launched, as they were
by FDR in 1934-1936, thousands and thousands of workers gained badly
needed employment. And they, unlike rich people, spent almost 100% of their
new income immediately. The benefits did not stop there to the economy.
The money spent in this public employment meant immediate income for
shop-keepers in poorer areas. As their inventories started finally to go down,
they would buy more inventory and even hire new help themselves.
These points seem simple enough. The real question is why
did the Treasury side with the rich against the unemployed
poor?
When
Churchill wanted political arguments to make on behalf of
Laissez-faire, Austerity, Balanced Budgets and Going back
on the
Gold Standard, the Treasury was happy to comply and produce
a lengthy series of "rebuttals" to Keynesian arguments on
behalf
of the 1928 Liberal Public Works' investments' Plan.
Why?
First, and foremost, Orthodoxy was their "meal ticket".
The Treasury
enjoyed their special financial position. In trying to
refute Keynes,
they fought to maintain their authority and prestige. They
wanted to
pretend and believe that only they were masters of the
arcane complexities
of national finance. After all, they knew the sum of all
the spending
departments' demands on the Treasury. They liked to pretend
that
only they, among civil servants, could argue from a national
viewpoint
and responsibly match government spending with government
revenue..
They enjoyed their authority vis-a-vis other departments.
They were the
ones most responsible for preventing wasteful spending.
They could
get and challenge the spending of any other department.
There is another answer to the question of why they clung to
their orthodoxy
in the face of so much evidence in the Unemployment numbers
that their preferred policies were failing the country.
This was TRADITION.
It was always easier for Treasury civil servants to do what
they had always done.
Using the long familiar techniques to measure Spending and
Revenue
was a lot easier than developing new measures of Marginal
Consumption,
Marginal Investment, Hoarding, Money Flow, Capital Outflow
or the Multiplier.
There is another reason why the Treasury was home to
Financial Orthodoxy
in the British civil service. Years of close relations with
the London
Financial community took their toll on independent
thinking. The Treasury
depended on stock and bond brokers to carry out the
government's
financing needs. They got many of their numbers from the
big banks
of the times. "Public" finance was completely dependent on
the "City";
The Bank of England did not print more money in bad times.
Always, it was the Treasury that articulated the "City's"
views
on changing events to the Chancellor.
Treasury officials seem to have accepted with no debate or
question
the City's preference for keeping the Pound as strong strong
as possible,
The City naturally wanted London to remain the dominant
international
financial center of the era. They wanted the Pound back on
the Gold
Standard, so it would be widely used as an international
currency, thereby
attracting foreign capital to and making bigger profits for
London's
key banks and brokerages. It was the Treasury, on behalf
of the"City"
that persuaded Churchill as Chancellor to return to the Gold
Standard
in 1925.
Lastly, the simple answer is that Treasury bureaucrats, like
any groups
of government workers is apt to do, sought security. Why
draw attention
to themselves by doing anything unconventional? Why risk
demotion or
dismissal. There was nothing to be gained by challenging
the Orthodoxies
of Austerity, Budget Balancing, the Gold Standard and the
Supremacy
of Private Finance and the "City". Reading the Treasury's
rebuttals of
Keynesian Public Work proposals in 1929-1931 makes it clear
that all
the higher Treasury officials, namely the ones who wrote the
official papers
the Chancellor circulated in the Cabinet and the ones who
communicated
regularly with the Chancellors, fully accepted the
prevailing Orthodoxy.
Implicit or explicit in everything they wrote or said was
that the national
budget had to be balanced. Otherwise, the financial trust
needed for the
government to continue to borrow successfully from rich
people would
be jeopardized. Under no circumstances except in war-time,
should
the government's borrowing needed be allowed to threaten the
private
investment market or the London financial community in the
"City".
community.
4)
The Rich Man's Perspective
Rich people bought most of the government's bonds. They
paid most of the taxes that the government ran on. The
Conservative
Political Party leadership in the 1920s and 1930s were all
very well-off.
To understand why Austerity, Balanced Budgets , Limited
Government
and the Gold Standard always dominated the Chancellors
perspectives
and policies, we have to consider what I call the "Rich
Man's Perspective."
Why court disaster with new economic policies? I'm rich.
I don't
want my savings to deteriorate in value? I want it to
appreciate in value.
I want my loans paid back in money that is more dear than
when I loaned it?
By all means, return to the Gold Standard. I want my
expensive
imports to be cheaper. And if the Pound goes up, will not
my Shares
on the Bourse also rise? And what's this about more
public employment?
All my friends at the Club agree, they are lazy and
drunken incompetents.
The only honest work is private work. Worse, why should
we let the people
see that the government can provide council houses
cheaper than
our private builders can make? Soon, workers will want
public
health care? They'll want the trains to be run by the
government? They'll
start thinking that there need not be millions who are
unemployed
for years and years, at a time? What if they realize
that we wealthy
people are really good job creators, at all? Keep
workers dependent
on us employers. We'll take care of them. We don't need
government
to tell us how to run our factories or stores.
The
Socialists' Perspective
The Treasury's view was not accepted by rank and file
members of the
Labor Party. They had a more Marxist view of "financial
orthodoxy",
budget balancing and protecting the Pound Sterling at all
costs.
They saw the private interests' resistance to government
spending
to build public housing, better railroads, new parks,
schools and
libraries, etc. as class warfare. Public works were very
badly needed
after World War I. Millions of returning soldiers were
looking for
jobs. Why they wondered were the jobless not put to work
building houses?
Why did orthodox financial thinking reject such obvious
solutions to
social needs?
Both revolutionary and Fabian socialists considered the
government's
policies to protect the financial community at all costs as
proof that the
government was controlled by rich and powerful capitalists,
especially
those in high finance. Marx had taught that capitalists
seeking higher
profits inevitably try to drive wages down. Capitalists
are actually quite
pleased when high unemployment causes real wages to fall.
Such was exactly the experience of England's large working class.
There can be little doubt that the capitalist upper class
had always
been afraid that the masses would use greater economic
security,
such as Keynesian public works programs would provide, to
organize
workers for higher wages. This the financial community
and the
business community knew full well would threaten their
political power
as well as their profits.
Even more fearful for the well-to-do, was that the masses
would
see that Government actually could do a fine job in many
areas
of the economy. Health care. Schools. Housing.
Transportation. BBC.
This was very dangerous for the rich.
Once the
lower class majority
saw that the rich were dispensable and that private
interests seeking
profits (1) hurt the general welfare, (2) deprived
ordinary people of much
needed goods and services, then more and more sectors of
the economy
might be nationalized and run as public charters.
Private interests would
then no longer be able to compete. Weakened, the
special influence of
the rich would gradually shrink until it was not
significant. This was
the Fabian view of Sydney and Beatrice Webbs and George
Barnard Shaw
who founded the London School of Economics.
In their view socialism could come about peacefully
through small,
discrete changes. Sadly, we realize now, the Webbs
seriously
underestimated how fiercely the wealthy would fight even
piecemeal
growth of government services and how the career
interests of Chancellors
of the Exchequer would sustain the failing status quo.
Fabians also
did not understand how entrenched orthordoxies like
"balanced budgets",
"austerity" and a strong Pound Sterling were in the
Treasury bureaucracy
and civil service. If only to keep themselves on a
status above bureaucrats
in other spending ministries, these orthodoxies fit
the needs of the Treasury staff.
They delighted in thinking themselves as the Elite among
civil servants in the UK.
What better way to promote the status and importance
of the Treasury
and its staff in all intra-governmental
relationships, than enshrine as gospel
the Orthodoxy of Budget Balancing, No Matter The
Cost. In this way,
even moderate sized expenditures elsewhere had to be approved by the Treasury.
London School
of Economics was founded by Fabians.
Chancellors of The Exchequer: 1919-1937
Conservative Austen Chamberlain, brother of Neville
Chamberlain.
Chancellor of the Exchequer: 1918-1921 and then
Conservative
Party Leader.
Following the victory of the Lloyd George coalition in
the
elections of 1918,
Austen Chamberlain was appointed to the position of
Chancellor of the
Exchequer in January 1919. In his view, his major task
was to return
war time government spending to more normal levels. He
fervently
resisted efforts within the Cabinet by Liberal spending
ministers
to put returning veterans to work building public
housing and
hospitals.
Government spending was cut by 75% from 1918 to
1920.
Austen Chamberlain served as Chancellor until 1921 when
he rose to
the pre-eminent position of Leader of Conservatives in
the
House of Commons. Bonar Law, himself a Chancellor
during
the war, stepped down for reasons of health. It
appeared that
Austen Chamberlain was in position to become the next
Prime Minister.
Lesser known Robert Horne became Chancellor for a few
months.
But Chamberlain's loyalty to the Liberal Prime
Minister, Lloyd George,
cost him politically among Conservative MPs. Because
of the rules
of Cabinet Secrecy, they had no way of knowing how
fiercely
Chamberlain had fought Liberal spending ministers. "In
the autumn
of 1922, Chamberlain faced a backbench revolt (largely
led by
Stanley Baldwin)
designed to oust Lloyd George, and when he summoned a
meeting of Conservative MPs ...a motion was passed in favor of
fighting the forthcoming election as an independent
party. Chamberlain
resigned the party leadership ...and was succeeded by a
revived Bonar Law.
In the aftermath of the back benchers's revolt, Bonar
Law formed a
new government and Chamberlain was not offered a
position. Instead,
Stanley Baldwin was made the new Chancellor in
recognition of his
role in ending the Lloyd George national government.
Robert Horne, who was Chancellor between 1921 and
1922,
refused work in Bonar Law's new Cabinet in a lesser
role.
Two years later, he also refused to be Minister of
Labour in
Baldwin's government, preferring private work in the
"City"
in the area of foreign investments.
Stanley Baldwin was Chancellor of The Exchequer,
1922-1923,
in the Bonar Law Conservative Government. He was
Prime Minister
between 1923-1929 and 1935-1937. In 1923 he
served as Prime Minister
and Chancellor of the Exchequer.
Baldwin's career points to how positions with the Treasury
served as
among the best political posts to step up from to become
Prime Minister.
His relationship as Chancellor to the spending ministers
was typical,
apart from his efforts to get the rich to voluntarily pay
more to the Government
based on a patriotic appeal during World War I and his
promotion of
tariffs while Chancellor and later as the new Prime
Minister. He imbibed
the standard Treasury financial orthodoxy not just as
Chancellor but
as Financial Secretary to the Treasury.
Baldwin's
Background
"After receiving a
third-class degree in history at Cambridge, he went into
the family business of iron manufacturing... Baldwin
proved to be very adept
as a businessman, and acquired a reputation as a
modernizing industrialist.
Later he inherited £200,000 and a directorship of the
Great Western Railway
upon the death of his father in 1908...During the
First
World War he
became
Parliamentary Private Secretary to Conservative leader
Andrew Bonar
Law...
In 1917 he was appointed to the junior ministerial post of
Financial Secretary to the Treasury where he sought to encourage
voluntary donations by the rich in order to repay the
United Kingdom's
war debt...He personally donated one fifth of his
fortune...in the form of
£120,000 of war loan stock to the Treasury.[3
In late 1922 dissatisfaction
was steadily growing within the Conservative Party over its
coalition
with the
Liberal
David Lloyd George. At a
meeting of Conservative MPs
at the
Carlton
Club in October, Baldwin announced that he would no longer
support the coalition and famously condemned Lloyd George
for being a
"dynamic force" that was bringing destruction across
politics. The meeting
chose to leave the coalition, against the wishes of most of
the party leadership.
As a result
Bonar Law, the new Conservative leader, was forced to search
for new ministers for his Cabinet and so promoted Baldwin
to the position
of
Chancellor of the Exchequer. In the November
1922 general election
the Conservatives were returned with a majority in their
own right. Bonar
Law resigned in January 1923 and Baldwin succeeded him,
serving
as Prime Minister and until August 1923, as Chancellor.
1923 was a year of falling prices and rising unemployment.
The Bank of England
paid no heed to these Deflationary signs. They sought to
prepare the way for
the return of the Pound Sterling to the Gold Standard so
that the City of
London could again become the center of international
finance. With the
Chancellor of the Exchequer's (Stanley Baldwin) approval,
they raised the
base interest rate from 3% to 4%. In July 1923, Keynes
publicly condemned the
the City's "narrow" interest in this, saying such a
deflationary policy
would soon prove to be a "horrible" mistake. Liberal Party
Lloyd George
went further and called for a large scheme of Public Works.
(Source.)
Neither the Conservatives nor the Labour Party Leadership
seriously
considered such a plan. Baldwin, Neville Chamberlain (the
new Chancellor
in August 1923) and then Phillip Snowden, the next
Chancellor in 1924
dismissed an expansionary program of massive Public Works
quite
of hand. (Source.)
Snowden claimed Lloyd George had made false
proposals like this at the end of the Great War and nothing
had come
of it when he was Prime Minister.
Baldwin appointed Winston Churchill as Chancellor in January
1924.
Churchill's Admits His
Biggest Mistake
Churchill said that the biggest mistake of his long
political career was trying in 1924
to push up the Pound by putting it back on the Gold
Standard in the middle of an
economic slow-down and trying then to cut government
spending to balance
the budget. He claimed he wanted Britain to return to
pre-war conditions.
The actual result was deflation, higher unemployment, and a
miners' strike
that led to the
General Strike of 1926. Interestingly, Churchill was advised by
Keynes not to take England back to the Gold Standard, but
chose to
accept the advise of a former Chancellor of the Exchequer,
Robert McKenna,
(1915-1916).
"The
return to the pre-war exchange rate and to the Gold Standard depressed
(British) industries. The most affected was the coal
industry. Already suffering
from declining output as shipping switched to oil, as basic
British industries
like cotton came under more competition in export markets,
the return to the
pre-war exchange was estimated to add up to 10% in costs to
the industry."
See
http://en.wikipedia.org/wiki/Winston_Churchill
With Unemployment above 8%, the ex-Chancellor, now Prime
Minister,
Stanley Baldwin, fell back onto slogans like "Safety First"
and "Trust Baldwin"
rather than produce any new policy to reduce unemployment.
Churchill
must have sensed that his policies had contributed to the
weak economy
in 1928. He sought better justification from the Treasury
for his policies
to ward off the Liberal Party call for a massive public
works program.
It took 25 years, but Churchill did to his credit, come to
see his mistakes
as Chancellor and to appreciate that an the economist J.M.
Keynes
had been correct. At the time, J.M. Keynes, penned in the
"Consequences
of Mr. Churchill" (1926). In it he warned that taking
England back on
the Gold Standard would add deflation to the already high
unemployment
and that would certainly cause a Depression. Keynes was
exactly right.
A Depression followed three years later.
Public Works Advocates in British Cabinet, 1919-1930
Even before
Keynes, Liberals had advocated Public Works to reduce
unemployment. Prime Minister Asquith's 1909 Development
Plan did
this. It was not just the more radical members of the
Labour Party
that saw
what a dead-end laissez-faire
capitalism. Several members
the Coalition Cabinet in 1919 and 1920 advocated greatly
expanded
Public Works to ensire fuller national employment, most
notably:
Auckland Geddes, 1919-1920(Conservative - Unionist)
See
http://filestore.nationalarchives.gov.uk/pdfs/small/cab-24-75-gt-19-6880.pdf
Dr.
Chistopher Addison 1919-1920, (Liberal)
Alfred
Mond (Liberal) in 1920 founder of Imperial Chemical Industries),
ex-Prime Minister Lloyd George starting in 1923 and
Labour Party maverick
Oswald Mosley in 1930. Mosley put
forth a
memorandum in January 1930, calling for the public control
of imports and
banking as well as an increase in pensions to boost
spending power.
John Meynard Keynes
In July 1923, Keynes lambasted the Baldwin government and
the Bank of
England for raising the base interest rate from 3% to 4% and
then 5%,
despite the high unemployment. They did this to shore up
the Pound and
make it easier to go back on the Gold Standard.
Keynes wrote
in the Nation:
"The Bank of England acting under the influence of a narrow
and
obsolete doctrine has made a great mistake." In November
1923,
Keynes published A Tract on Monetary Reform. He
called the
Gold Standard "a barbarous relic". Devaluation was much
more
preferable than deflation.
In May 1924, when British Unemployment reached 1 million, he
called
for a massive government program of Public Works. Keynes
explained
that the chronic high unemployment in the 920s was caused by
inadequate private investment. He claimed that deficit
spending by the
government could make up for this and reduce unemployment.
Meanwhile, speculators who expected Britain to return to the
Gold Standard,
were busy driving up the value of the Pound. This made
imports easy.
It encouraged saving and speculation. It discouraged
exports and
investments in industrial production and hiring.
On April 29, 1925, Chancellor of the Exchequer, Winston
Churchill, accepted
the advise of his economic advisers at the Treasury and Bank
of England.
Britain officially returned Sterling to the Gold Standard.
Between 1925 and 1926, British coal exports plummeted. Mine
owners
cut the mine owners pay. A general strike in support of the
miners
occurred in May 1926.
May 10, 1930,
Keynes wrote
in the Nation:
"The fact is - a fact not yet recognized by the great public -
that we are now in the depths of a very severe
international slump,
a slump which will take its place in history amongst
the most acute
ever experienced. It will require not merely passive
movements of
bank rates to lift us out of a depression of this
order, but a very active
and determined policy."
December 1930
Keynes
publishes A Treatise on Money.
in it, he distinguishes between Investment and
Saving.
If Investment exceeds Saving, there will be
inflation Keynes says.
If Saving exceeds Investment there will be
recession.
Thus, in the midst of an economic depression, the
government's
correct course of action should be to encourage
spending and
discourage saving.
see
http://www.maynardkeynes.org/keynes-career-timeline.html
At that time, he did not mention such concepts as "the
multiplier effect", "marginal
consumption" or the "liquidity trap", which were only
incorporated into his larger
macro-economic analysis in 1936.
Keynes' seminal "The General Theory of Employment, Interest
and Money" (1936)
grew out of his many years of confrontation with the
economic orthodoxy
of the British Treasury. Keynes knew the Treasury and its
orthodox fiscal
thinking all too well. He had worked there in WWI. In
fact, he was one of
Lloyd George's key economic advisors at the Paris Peace
Conference of 1919.
He totally disagreed with the harsh terms placed on
Germany. He predicted
disastrous economic and political consequences would
follow. Germany's
hyper-inflation in 1923 was a direct consequence of the
Carthaginian reparations
demanded of Weimar Germany for the Kaiser's Imperial German
war. Keynes
willingness to challenge orthodox thinking must have been
boost mightly
by how exactly hist predictions were borne out. It is
often said by wiping out
Germany's middle class, it was much easier for the Nazis to
rise to power
and for Jewish politicians and bankers to be blamed by the
extreme right
in Germany. In college, Yale, we had to read Keynes
The Economic
Consequences of the Peace
(1919)
It was a superb lesson in how prescient someone can
be and yet still not
be listened to by the establishment, by policy makers or by
the public.
In early 1929, Keynes wrote much of the Liberal Party's
manifesto on the
desirability of Public Works. Amazingly, the Labour Party
would have no
part of this program. Perhaps, many felt there was no way
to reform Capitalism.
Ex PM Lloyd George, March 1, 1929
"If the nation entrusts the Liberal Party at
the next General Election with
the responsibilities of Government, we are ready
with schemes of work which we can put
immediately into operation, work of a kind which is
not merely useful in itself but essential
to the well-being of the nation. The work put in
hand will reduce the terrible figures of
the workless in the course of a single year to
normal proportions, and will, when completed,
enrich the nation and equip it for competing
successfully with all its rivals in the business
of the world. These Plans will not add one penny to
national or local taxation. It will require
a great and sustained effort to redeem this pledge,
but some of us sitting at this table have
succeeded in putting through even greater and more
difficult tasks in the interests of the nation."
Extract from Mr. Lloyd George's
address to
Liberal Candidates on 1st March, 1929.
WE CAN
CONQUER UNEMPLOYMENT
"THE word written to-day on the
hearts of British people, and graven on their minds is
Unemployment.
For eight years, more than a million British workers, able and eager to
work, have been denied the opportunity. At the end of 1928 the total
reached a million and a half; a quarter of a million more than a year
before. These workers with their dependents, represent four or five
million souls. They are a very nation, denied the opportunity to earn
their daily bread, condemned to hardship, to wearing anxiety and often
to physical and mental demoralisation. What a
tragedy of human suffering;
what a waste of fine resources; what a bankruptcy of statesmanship! This
is by far the biggest single issue before the country. All parties will
claim to have a solution, It is the task of the electors to decide which
solution is the most likely to achieve success. In making a decision,
they must consider not only the superficial attractiveness of the
various proposals, but the extent to which they are based on sound
reasoning and patient enquiry, and will be backed by driving power and
by experience. This is a brief outline of the proposals of the Liberal
Party. They have been developed as the result of enquiries of the most
exhaustive character, lasting over years; indeed, even political
opponents have paid tribute to the thoroughness and the ability put into
the work of investigation. |
In 1929, Keynes himself made numerous speeches mocking the
balance-the-budget
Treasury bureaucrats and the City's orthodoxy above all
else.. He showed that
putting a man to work would make needed improvements to
the country's
infrastructure and would only cost the government half of
what it paid him,
because the Treasury was already paying him an unemployment
"dole".
Keynes Described but Did Not Quantify The
Multiplier Effect"
The new employee, he argued, would spend all his money, as
would the
merchants that he then made purchases from, thus producing
a chain of
additional economic activity which would boost country's
economy. This was
to become the famous "multiplier effect". Other
economist like
R.F.Kagan
took this concept and first quantified it in 1931.
As merchants' profits rose again, so would the revenue the
to the national
Treasury. That would, in turn, boost business confidence
and interest rates
would not go up, as the Treasury's pundits warned. For
details see
http://www.personal.kent.edu/~edechena/1929%20Multiplier%20Arithmetic%20by%20Keynes%204-06.pdf
Keynes
was not advocating socialism or central planning. He simply wanted to
find ways to restore full employment and business
confidence when, left to
laissez-faire alone, all he could see was economic
stagnation, poor housing,
high unemployment and a worsening public infrastructure.
Britain's locust years,
1919-1938, increasingly sound like America after 2009.
BUDGET BALANCING MADE THINGS
MUCH WORSE UNDER LABOUR PARTY.
Philip Snowden, Labour's Chancellor of the Exchequer, 1924
and 1929-1931.
Clement Atlee who served in the Labour Cabinet with Snowden
and later became
Prime Minister after World War II, wrote the Snowden was a
"docile disciple of
orthodox finance". "I had not thought him (Snowden)
capable of such virulent
hatred" for and "betrayal" of those in the rank and file of
the Labour Party.
See
As It Happened (1954).
Sadly,
Phillip Snowden, Labour's Chancellor from 1929-1931, bought "hook, line
and sinker" the anti-Keynesian orthodoxy put out by
Treasury officials,
the Bank of England and the "City" (London's financial
community.
He reduced taxes on some popular items but allowed no new
public
works programs to pass. He later claimed he could not do
so because
Labour was a minority government that survived by getting
Liberal
votes in the House of Commons and the Liberals would not
permit
deficit spending.
His September 1931 Budget severely cut public spending and
public sector
wages while raising income taxes on average workers from
22.5% to 25%.
It also reduced unemployment benefits by 10%. Snowden
had
wanted
a 20% cut. He warned that
balancing the budget was the only
way to
restore confidence in sterling;
that if his recommendations were not
accepted, sterling would collapse and
"if sterling went the whole international financial structure
would collapse, and there would be no
comparison
between the present depression and the chaos
and
ruin that would face us."
These brutal measures utterly failed to do any good. They
made the lives
of many poor working people much more miserable.
Unemployment
actually rose to 3,000,000. There was a Mutiny in the
Royal Navy.
And despite all the austerity measures, there was still a
run on the
Pound and in Britain was forced leave the Gold Standard in
panic mode.
As a consequence, the Pound Fell 25% and world wide stock
markets
collapsed. .
http://en.wikipedia.org/wiki/Great_Depression_in_the_United_Kingdom
They also led directly to the fall of the Labour
Government. Several
ministers refused the cuts in benefits and resigned. The
Prime Minister
and then formed a new national government with
Conservative
and Liberal ministers. Neville Chamberlain, was soon to
become the new
Chancellor of the Exchequer. He had previously called for
further government
cuts and no new taxation on the wealthy. Meanwhile, both
Snowden and
MacDonald were expelled from the Labour Party.
Why did the Labour Chancellor support Austerity?
It cannot be said that Snowden sought to his increase his
popularity
within the Labour Party by adhering to the same financial
Orthodoxy
that Conservative Chancellors did. This made him immensely
unpopular. So, why did he accept its dictates so
completely?
He and MacDonald, as the Labour Party leaders first to come
to power
in the UK, apparently wanted to prove that they were worthy
of the trust
of their "betters" when they were called to form a
government.
(Doesn't this sound like President Obama's subservience to
the big
banks?)
An additional reason why these Labor leaders refused to
embrace
a massive scheme of public works was that they did not want
to bring credit to the Liberal Party, their main political
opponents in
many working class constituencies. Unlike Snowden and
MacDonald,
Lloyd George and the Liberals had listened to Keynes call
for public works
and deliberate deficit spending to increase Consumption and
reduce
the chronic high unemployment.
Exchequer Chancellor, Philip Snowden, was formerly a
passionate
Christian Socialist. In his autobiography, he proudly
proclaimed
he had never read anything Karl Marx had written. He did
not
believe in a general strike by labor. He believed moral
appeals
would gradually bring about a more just, socialist
society. He had
no "clue" what to do about the Depression as Chancellor.
He is
alleged to have said in office in 1930: "No one told us
what to do".
Snowden seems to have been prone to public dissembling.
Within the
British Cabinet, he fought harder than anyone else against
Public Works
expenditures and measures to ease the burden on the
unemployed.
What surprised me as I did my dissertation's research at
the Public
Records Office in London and read the previously sealed and
secret
Cabinet Papers was that Snowden used the very same language
as each
of the other Conservative Chancellors of the 1920s. There
was no
difference. He denounced new spending proposals because
they
would further unbalance the national budget and worsen
confidence
in the Pound.
He piously called for the nation to spend only what it
could presently
afford, implying just like Republicans in America in 2011.
that past
profligate spending was to blame for the crisis of
finance. Never in
any of his Cabinet memoranda, which were then circulated to
other
ministers in the MacDonald Government, did he ever question
the
financial advise given him by his Treasury advisers and the
London
Financial establishment. Perhaps, he was afraid to ask
what exactly
would be the consequence of a decline in Sterling, for fear
that simply
asking the question would make it seem that Devaluation was
being actively considered. This is the explanation he gave
in his
memoirs. But why did he not even ask such questions as:
"Would not some British exports be increased by
a
weakened Pound? Who would benefit? Who would
lose?
"Would not the unemployed who might be provided
new
government jobs boost Labour Party voting?
"Would not their new public employment reduce
government
expenditures by getting them off the
'Dole'?
"And would not their spending help the
economic condition
of local grocers, the cobblers and the dry
goods' haberdashers?"
As I say, there is no evidence that Snowden ever asked any
of
these questions of the Treasury civil servants under his
command.
My judgment us that he did not have enough understanding of
his responsibilities as Chancellor to ask such questions.
Worse,
he even seems to have taken a perverse delight in telling
his Labour
colleagues that they were not privy to the information and
the
superior understanding he had about public finance. They
were quite
wrong, he lectured them as school children, to ask the
government to
break tradition at such a dangerous time of financial
crisis, deliberately
unbalance the budget and launch a massive scheme of Public
Works,
as the Liberal Party had proposed in its 1928 Platform.
His air of
superiority in this matter as he spoke in Commons grated
upon
Labout back-benchers.
"In
February 1931, Philip Snowden made a speech in the House which
created a sensation. He hinted at large economy
measures, including cuts
in the social services and unemployment benefit, in
order to balance the coming
Budget and maintain the gold standard. Meanwhile
wholesale prices continued
to fall on a world scale, businesses were losing money
in some cases and making
very little in others, so that revenue from taxes was
declining. A big budget deficit
was foreseen. In this debate I remember Lloyd George
spoke and referred
to the Chancellor sitting on ice surrounded by 'the
penguins of the City'.
Having received Snowden's speech with stony silence,
we on the Labour
benches roundly cheered Lloyd George.
"The next day there was a meeting of the Parliamentary Labour Party. Snowden
soundly rated us like naughty schoolboys for having
done this. I remember many
of us, including myself, replied that we would applaud
anyone who talked sense,
but we did not get that from some of our leaders."
Morgan Philips
Price,
My Three Revolutions (1969)
His obstructionism was politically disastrous. The Labour
Government fell and did poorly in subsequent elections.
Many
rank and file Labour supporters became discouraged and
turned away from the Party. Many probably reasoned:
"What
was the point of voting Labour?".
Out of office, Snowden continued to defend the Treasury
view that there was no way to pay for massive public works
programs.
He called such talk "Bolshevism run mad". For this he
was knighted.
Snowden was expelled from the Labor Party. As Viscount
Snowden,"
he was in political limbo until 1937. In that year, he
must have taken
the the time to actually read Keynes. With colossal
disingenuousness,
he bitterly blamed the Labour Prime Minister for not
launching a
Public Works program.
Neville Chamberlain, Chancellor of the Exchequer,
1931-1937.
Prime Minister, 1937-1940.
Year after year, as Chancellor in the MacDonald National
Government
and then the Baldwin Conservative Government, Neville
Chamberlain
fought against boosting military expenditures, especially
for the RAF,
as proposed by Churchill, who was then back in the
Cabinet as
a spending minister. This was Chamberlain's doing.
"His
biographer,
Andrew J. Crozier, has argued: "He (Baldwin)proved a powerful
Chancellor of the Exchequer...who as leader of the
Conservatives was happy to
leave formal power in the hands of MacDonald... (and) the substance of power
in Chamberlain's hands. From the beginning Chamberlain was in complete control
of budgetary and economic policy and added to that social and industrial policy
as well. Furthermore, once the international crisis of the 1930s deepened, he
became a dominant voice in both rearmament and foreign policy. His was a
formidable presence in the cabinet: not only did he read his own departmental
briefs, but he seemed to read everyone else's as well."
On 8th March 1935 Chamberlain wrote in his diary: "I
am more and more
carrying this government on my back. The P.M.
(MacDonald) is ill and tired,
S. B. (Stanley Baldwin) is tired and won't apply his
mind to problems. It is
certainly time there was a change".
http://www.spartacus.schoolnet.co.uk/PRchamberlain.htm
It is said that Chamberlain changed course in 1936 and
backed
such spending. The Cabinet Papers that I read in doing my
dissertation show exactly the opposite. Again, Cabinet
Secrecy
and the doctrine of Collective Responsibility make it hard
for
outsiders to know what positions individual ministers took
in
internal cabinet debates.
Some of the Cabinet papers are now
available on the internet.
https://discovery.nationalarchives.gov.uk/SearchUI/register?returnUrl=%2FSearchUI%2FDetails%3Furi%3DD7653854
Treasury Responses to Keynes: 1925-1946
http://books.google.com/books?id=mWysZtLVQ2AC&pg=PA114&lpg=PA114&dq=ramsay+macdonald+keynes&source=bl&ots=O8-DYuqmm0&sig=idgXTtOOBDBZUuIts-PFPRFPXyg&hl=ru&sa=X&ei=hEyIUa3bMIHOiwKEx4HYCg&ved=0CE8Q6AEwBA#v=onepage&q=ramsay%20macdonald%20keynes&f=false
Much of what is quoted below comes from
http://www.spartacus.schoolnet.co.uk/TUkeynes.htm
Keynes' Advocacy of Public Works
Was Ignored by Policy-Makers
In 1925 John Maynard Keynes married the ballerina,
Lydia Lopokova,
and moved to Tilton, a farmhouse near
Firle in
East Sussex. The
marriage proved a great success and when
apart they wrote every day. The couple had no children.Other members of
the Bloomsbury
Group, including
Virgina Woolf,
Leonard Woolf,
Vanessa Bell,
Clive Bell,
and Duncan
Grant also lived in the area.
Keynes challenged as false the analogy between national and individual
finances.
Keynes became
increasingly interested in what he called "the
management of the economy". According to
Alec Cairncross: "Two forms of economic instability preoccupied him.
Of these the first was instability of prices, inflation, deflation, and
all that went with them; the second was unemployment and the
fluctuations in economic activity giving rise to it. The two were, of
course, interconnected since the movement of prices reacted on the level
of activity: but the analytical approach to the problem of inflation,
for example, was very different from the analysis necessary for an
explanation of unemployment."
Keynes visited the
Soviet Union
in 1926. He was interested in the economic
measures being taken by the communist regime and when he returned to
England he wrote
The End of Laissez-Faire. After the onset on the
Great Depression
in 1929, Keynes began to address the problems of unemployment. In a
series of articles, The Means to
Prosperity, written in
The Times,
Keynes argued that the government should "spend its way out of the
depression".
During this period he was a member of the
Liberal
Party and worked closely with its leader,
David Lloyd
George. In 1929 Lloyd George published a pamphlet,
We Can Conquer Unemployment, where he
proposed a government scheme where 350,000 men were to be employed on
road-building, 60,000 on housing, 60,000 on telephone development and
62,000 on electrical development. The cost would be £250 million, and
the money would be raised by loan. Keynes also published a pamphlet
supporting Lloyd George's scheme.
These views impressed
Richard
Tawney who wrote a letter to
Ramsay
MacDonald, the leader of the
Labour Party,
about the forthcoming election: "If the Labour Election Programme is to
be of any use it must have something concrete and definite about
unemployment... What is required is a definite statement that (a) Labour
Government will initiate productive work on a larger scale, and will
raise a loan for the purpose. (b) That it will maintain from national
funds all men not absorbed in such work." MacDonald refused to be
persuaded by Tawney's ideas and rejected the idea that unemployment
could be cured by public works.
In
the 1929
General Election the Conservatives won 8,664,000 votes, the Labour
Party 8,360,000 and the Liberals 5,300,000. However, the bias of the
system worked in Labour's favour, and in the
House of
Commons the party won 287 seats, the Conservatives 261 and the
Liberals 59. MacDonald became Prime Minister again, but as before, he
still had to rely on the support of the Liberals to hold onto power.
The election of the
Labour
Government coincided with an economic depression and
Ramsay
MacDonald was faced with the problem of growing unemployment. In
January 1929, 1,433,000 people were out of work, a year later it reached
1,533,000. By March 1930, the figure was 1,731,000. In June it reached
1,946,000 and by the end of the year it reached a staggering 2,725,000.
That month MacDonald invited a group of economists, including John
Maynard Keynes,
J. A. Hobson,
George Douglas
Cole and
Walter Layton, to discuss this problem.
In
March 1931
Ramsay
MacDonald asked Sir
George May,
to form a committee to look into Britain's economic problems. The
committee included two members that had been nominated from the three
main political parties. At the same time, John Maynard Keynes, the
chairman of the Economic Advisory Council, published his report on the
causes and remedies for the depression. This included an increase in
public spending and by curtailing British investment overseas.
Philip
Snowden rejected these ideas and this was followed by the
resignation of
Charles
Trevelyan, the Minister of Education.
"For some time I have realised that I am very much out of sympathy with
the general method of Government policy. In the present disastrous
condition of trade it seems to me that the crisis requires big Socialist
measures. We ought to be demonstrating to the country the alternatives
to economy and protection. Our value as a Government today should be to
make people realise that Socialism is that alternative."
When the May
Committee produced its report in July, 1931, it forecast a huge
budget deficit of £120 million and recommended that the government
should reduce its expenditure by £97,000,000, including a £67,000,000
cut in unemployment benefits. The two
Labour Party
nominees on the committee,
Arthur Pugh
and Charles
Latham, refused to endorse the report. As
David W. Howell has pointed out: "A committee majority of actuaries,
accountants, and bankers produced a report urging drastic economies;
Latham and Pugh wrote a minority report that largely reflected the
thinking of the TUC and its research department. Although they accepted
the majority's contentious estimate of the budget deficit as £120
million and endorsed some economies, they considered the underlying
economic difficulties not to be the result of excessive public
expenditure, but of post-war deflation, the return to the gold standard,
and the fall in world prices. An equitable solution should include
taxation of holders of fixed-interest securities who had benefited from
the fall in prices."
The cabinet decided to form
a committee consisting of
Ramsay
MacDonald,
Philip
Snowden,
Arthur
Henderson,
Jimmy Thomas
and
William
Graham to consider the report. On 5th August, John
Maynard Keynes wrote to
MacDonald, describing the May Report as "the most foolish document I
ever had the misfortune to read."
He argued that the committee's recommendations clearly represented "an
effort to make the existing deflation effective by bringing incomes down
to the level of prices" and if adopted in isolation, they would result
in "a most gross perversion of social justice". Keynes suggested that
the best way to deal with the crisis was to leave the
gold standard
and devalue sterling. Two days later, Sir Ernest Harvey, the deputy
governor of the Bank of England, wrote to Snowden to say that in the
last four weeks the Bank had lost more than £60 million in gold and
foreign exchange, in defending sterling. He added that there was almost
no foreign exchange left.
Philip
Snowden presented his recommendations to the MacDonald Committee
that included the plan to raise approximately £90 million from increased
taxation and to cut expenditure by £99 million. £67 million was to come
from unemployment insurance, £12 million from education and the rest
from the armed services, roads and a variety of smaller programmes.
Arthur
Henderson and
William
Graham rejected the idea of the proposed cut in unemployment benefit
and the meeting ended without any decisions being made.
The cabinet met on 19th
August but they were unable to agree on
Snowden's proposals.
He warned that
balancing the budget was the only way to restore confidence in sterling.
Snowden argued that if his recommendations were not accepted, sterling
would collapse. He added "that if sterling went the whole international
financial structure would collapse, and there would be no comparison
between the present depression and the chaos and ruin that would face
us."
The following day MacDonald
and Snowden had a private meeting with
Neville
Chamberlain,
Samuel Hoare,
Herbert
Samuel and
Donald MacLean to discuss the plans to cut government expenditure.
Chamberlain argued
against the increase in taxation and called for further cuts in
unemployment benefit.
MacDonald also had meetings
with trade union leaders, including
Walter
Citrine and
Ernest Bevin.
They made it clear they would resist any attempts to put "new burdens on
the unemployed".
At another meeting of the Cabinet on 20th August,
Arthur
Henderson argued that rather do what the bankers wanted,
Labour should had over responsibility to the Conservatives and Liberals
and leave office as a united party. According to
Malcolm
MacDonald, the opposition to the cuts in public expenditure was led
by Henderson,
Albert
Alexander and
William
Graham. MacDonald went to see
George V
about the economic crisis on 23rd August. He warned the King that
several Cabinet ministers were likely to resign if he tried to cut
unemployment benefit.
After another Cabinet meeting where no agreement about how to deal with
the economic crisis could be achieved,
Ramsay
MacDonald went to
Buckingham
Palace to resign.
Sir Clive Wigram, the King's private secretary, later recalled that
George V
"impressed upon the Prime Minister that he was the only man to lead the
country through the crisis and hoped that he would reconsider the
situation." At a meeting with
Stanley
Baldwin,
Neville
Chamberlain and
Herbert
Samuel MacDonald told them that if he joined a
National Government it "meant his death warrant". According to
Chamberlain he said "he would be a ridiculous figure unable to command
support and would bring odium on us as well as himself."
On 24th August 1931 MacDonald returned to the palace and told the King
that he had the Cabinet's resignation in his pocket. The King replied
that he hoped that MacDonald "would help in the formation of a National
Government." He added that by "remaining at his post, his position and
reputation would be much more enhanced than if he surrendered the
Government of the country at such a crisis." Eventually, he agreed to
form a National Government.
John Maynard Keynes was extremely active in his
campaign to encourage the government to take more responsibility for
running the economy. In 1931 he agreed an amalgamation of
the Nation
with the
New Statesman, a journal owned by the
Fabian
Society. Keynes now became a regular contributor to what was now
Britain's leading intellectual weekly.
In 1936 Keynes published his most important book
A General Theory of Employment, Interest and Money. It
revolutionized economic theory by showing how unemployment could occur
involuntarily. In the book Keynes argued that the lack of demand for
goods and rising unemployment could be countered by increased government
expenditure to stimulate the economy. His views on the planned economy
influenced President
Franklin D. Roosevelt and was a factor in the introduction of
the
New Deal
and the economic policies of Britain's post-war
Labour
Government.
During the Second
World War Keynes was an unpaid advisor to the Chancellor of the
Exchequer and wrote the influential
How to Pay for the War (1940). He attended the
Bretton
Woods Conference in 1944 and the
Savannah Conference in 1946. He was also involved in the
negotiations on
Lend-Lease and the US loan to Britain. |
British Research Sources on-Line now:
When the Conservatives were in power:
When the Labour was in Power.
|
3.
THE CONSEQUENCES OF
FINANCIAL ORTHODOXY
IN THE US, GERMANY AND
FRANCE
USA - 1930-1939
Germany -1930-1933
France - 1930-1932
The Growing Depression Worsens
Hoover - 1930-1932
Much too late,
towards the end of his life, President Hoover rued following the
laissez-faire advise of Andrew Mellon, his Treasury
Secretary, as they dealt with
the gathering Depression. Tragically, Hoover ran a
Federal Budget surplus in 1930
and engaged only in paltry increases (under $257
million / year) in federal government
spending in 1930 and 1931, just when private investment
and government revenue
were collapsing. 1932 did see a big increase in government
spending, but
the next year Hoover's budget again reduced government
spending, despite
national unemployment levels of 25%.
"Tea Party" types champion Keynes critics like Freidrich
Heyek. They seem not
to understand that Hayek was essentially, a hands-off
liquidationist. Hayek argued
it was "difficult to see what lasting good effects can come
from credit expansion. The
thing which is most needed to secure healthy conditions is the
most speedy and complete
adaptation possible of the structure of production. If
the proportion as determined by the
voluntary decisions of individuals is distorted by the
creation of artificial demand
resources [are] again led into a wrong direction and a
definite and lasting adjustment is
again postponed. The only way permanently to 'mobilise' all
available resources is,
therefore to
leave it to time to effect a
permanent cure by the slow process of adapting
the structure of production."
http://www.j-bradford-delong.net/tceh/slouch_crash14.html
Keynesianism -1936
The
economist JM Keynes in 1936 wrote that in a panic, the government must
intervene directly to create jobs with public works'
programs. In that way, the booms
and busts of a capitalist, market driven economy could be
greatly reduced.
He warned of the "liquidity
trap", when monetary policy is unable to stimulate much
of an economic recovery.
A Depression, Keynes showed, is self-perpetuating and
self-accelerating, in large part
because the working class has so little money and cannot
buy what is produced.
The wealthy, of course still have money. But the savings
of the rich do not always
translate automatically into investments and jobs. In a
panic and recession, there
is just too much fear.
He introduced the term, the "multiplier effect" and made
much of how the "rates of
marginal consumption" vary enormously according to where
the Government
spends its money and on whom. Bribing officials in
Afghanistan has very few,
if any downstream economic benefits in the US . Paying a
poor person to dig
ditches in a depression has a high multiplier effect. Each
additional dollar of income
for the poor person is immediately spent. The recipient of
the money thus spent,
then has money to spend and so on.. On the other hand,
the rich person may just
save his extra dollar and put it into a bank that is too
scared to make loans.
Accordingly, Keynes reasoned that the best way out of the
Depression would be
for the government to hire the unemployed in massive
Public Works programs.
he people hired would spend 100% of their money and this
would stimulate
business, such that a Dollar in public works' wages would
bring three to four
dollars in new buying. The additional business produced
by a massive public
works program would restore confidence and unfreeze
spending and private
investment. In the end, Government Revenues would rise
much more than the
initial government expenditures.
Wikpoedia writes:
"In the 1930s, Keynes spearheaded a
revolution in economic
thinking, overturning the older ideas of
neoclassical economics that held that
free
markets would in the short to medium term automatically provide full
employment,
as
long as workers were flexible in their wage demands.
Keynes instead argued that
aggregate demand determined the overall level of economic activity, and that
inadequate aggregate demand could lead to prolonged
periods of high
unemployment.
Following the outbreak of World War II, Keynes's ideas
concerning economic policy
were adopted by leading Western economies.
During the 1950s and 1960s, the success
of Keynesian economics resulted in almost all capitalist
governments adopting its
policy recommendations,..."
http://en.wikipedia.org/wiki/John_Maynard_Keynes
Keynes now is
often over-simplified in order to better criticize him. He did not believe
in hiring men to dig a ditch and others to fill it in.
Carefully planned public works
were what he wanted, those which would repair the nation's infrastructure and
thereby provide badly needed jobs. Who now challenges the benefits of TVA or
Boulder Dam?
"Supply-side" economics is not Keynesian. Cutting taxes to
grow the economy
and ultimately to increase federal revenues works well
if it induces investors
to create and expand US enterprises. But if it only
serves to increase speculation
in Gold and Commodities, make other countries' economies
grow at the
expense of American jobs or lets millionaires take more
excursions abroad,
then there is no "trickle down". Keynes did not believe
that tax breaks for investors
would build the roads, trains, houses, hospitals and schools that were
needed
by society.
FDR - 1937
Few Americans
were familiar with Keynesian thinking even in 1932. FDR, for
example, promised that he would balance the budget. Fortunately,
once in
office his federal budget deficits were much bigger than Hoover's. This
did
not prevent a big rally in the stock market. The DJI roared back from 50
to 170
from 1933 to 1937. Unemployment was slower to recover. Even so,
U.S.
Treasury Secretary Morgenthau put the fear of "over-speculation" and "inflation"
in FDR's ear. Despite warnings from his Brain Trust, who were familiar
by
then with Keynesianism, FDR in the spring of 1937 decided to get southern
Democrat support for his policies by announcing new spending cut backs and a
desire to balance the budget despite the unemployment of 14%. This meant
drastic
reductions of WPA and other New Deal jobs' and public works' programs.
The
fragile economic recovery immediately stalled out, the stock market fell 47%
in six months while unemployment rose sharply. This was the Roosevelt
Depression.
To his credit, FDR in early 1938 saw his mistake and no
longer sought to
balance the budget in the middle of the
Depression.
( See
http://www.tigersoftware.com/TigerBlogs/Obamas1937/index.html )
The Federal Budget and The Unemployment Rate: 1929-1945
Tax Federal GNP Unemp.
Year Receipts Spending Growth Rate
-------------------------------------------------
1929 -- -- -- 3.2% < Hoover era, Great Depression begins
1930 4.2% 3.4% - 9.4% 8.7
1931 3.7 4.3 - 8.5 15.9
1932 2.9 7.0 -13.4 23.6
1933 3.5 8.1 - 2.1 24.9 < FDR, New Deal begins; contraction ends March
1934 4.9 10.8 + 7.7 21.7
1935 5.3 9.3 + 8.1 20.1
1936 5.1 10.6 +14.1 16.9
1937 6.2 8.7 + 5.0 14.3 < recession begins, May
1938 7.7 7.8 - 4.5 19.0 < recession ends, June
1939 7.2 10.4 + 7.9 17.2
1940 6.9 9.9
1941 7.7 12.1
1942 10.3 24.8
1943 13.7 44.8
1944 21.7 45.3
1945 21.3 43.7
(Source: http://www.huppi.com/kangaroo/Timeline.htm )
Germany - 1929-1932
When the Great Depression hit Germany in 1930, successive German Chancellors
responded in orthodox ways. Mainly they sought to balance their budgets by
cutting government expenditures. Predictably, this only deepened the country's
economic and political slide downward.
As unemployment worsened, and lowered still
further government revenues. A series of political crises and national elections
folowed,
which brought in a new Chancellor who followed the same policy of cutting government
spending. In 1932, Hitler rose to power in large part because of the failure of
the moderate parties to adopt a pragmatic Keynesian approach. His policies
put Germans back to work by the millions, most notably by building the Autobahn
and massively rearming.
http://histclo.com/essay/war/ww2/tol/ger/seiz/ger-dep.html
Chancellor Hermann Muller (1928-1930) headed a very broad and unweildy
coalition of his own Social Democrats, Centre Partyand the nationalist German
Peoples' Party.
Brüning (1930-1932) as chancellor said he wished to free Germany from
Reparartions, but would have to tighten credit, raise taxes, reduce government
spending and roll back wage increases. Working people were hit the hardest.
His policies only served to increase the popularity and Reichstag voting strength
of the Nazis and Communists.
France - 1930-1935
Keynes counter-cyclical fiscal writings were not translated int French until
1942.
The Third French Republic featured a parliamentary system
of government with
a high degree of political fragmentation. Coalition
governments were inherently
unstable and had no power to boldly provide government
employment or
taxation of the rich. This increased discontent, bred
more extremeism and
hurt business confidence further.
| From
http://en.wikipedia.org/wiki/Great_Depression_in_France
France
The distress of the population had political consequences. A riot on
6 February 1934 led to the fall of the government and a nation which had
traditionally leaned to the right elected the socialist
Popular Front government in 1936.
The Popular Front, an alliance of Socialists and Radicals with
support outside the government of the Communists, was led by
Léon
Blum. The Popular Front introduced many measures such as the 40-hour
working week and holidays with pay, but Blum felt handicapped in
introducing more than limited changes to the economy because of his
dependence on the more right-wing Radicals. This did little to placate a
population anxious for change and a wave of strikes broke involving two
million workers
[9] Factories were occupied and membership of the Communist
party rose to 300,000 in 1937.
In the night of 7–8 June 1936, employers and unions signed the
Matignon agreement by which they raised wages by seven to 15 per
cent to increase workers' buying power, to stimulate the economy and to
bring an end to the strikes. Blum brought in measures to control cereal
prices, to insist that the Banque de France place the national interest
above that of the shareholders, and nationalised the armaments industry.
That upset the Left, which saw too much legislation, and did nothing to
please the Right, which believed that state involvement in a capitalist
economy would bring about disaster.
The Radicals would not accept currency controls and the result of the
unrest was that capital fled abroad. That weakened the economy and
employers tried to minimise the results of the Matignon agreement, which
created more social tension and in turn a further flight of capital.
Devaluation of the franc by 30 per cent became inevitable, despite
government assurances that it would not happen. In January 1937, Blum
went further and announced "a pause" to social reforms. The Senate
refused to give him emergency powers to cope with the recession and he
resigned on 20 June 1937 and the first Popular Front began to fall
apart. A second had even less success.
The
President, Lebrun, called on the Radical leader
Édouard Daladier to form a new government without the Socialists.
Daladier relied on liberal economics to rescue, or at any rate keep
afloat the economy on a worldwide sea of financial difficulties.
Employers and police acted harshly against strikers and determined to
root out "troublemakers". In 1938 the Senate gave Daladier the emergency
powers that Blum had been denied and the government favoured employers
over workers in industrial disputes, particularly in companies which had
come close to coming under the control of their workers.[10] |
Sweden - 1935
"Sweden's
quick recovery was astonishing. By 1934, real output had
recovered to 1929 levels. By 1935, it was 7 percent above
it. Growth would
continue well into World War II. Sweden's success owed
everything to its liberal
government. In 1932, Labor returned to power. The Swedish
Finance Minister was
heavily influenced by a group of economists led by Gunnar
Myrdal, who had been
advocating Keynesian-like solutions for years. The Labor
government promptly
ran large deficits, and within two years had spent itself
out of the Depression. "
http://www.huppi.com/kangaroo/Sweden.htm
-----------------------------------------------------------------------------------------------------------
4. Worries about
The Present
Keynes' Multiplier Now Is Smaller.
America's Manufacturing Base Needs Restoration
In the
1930's international trade was not nearly so important as now. Cheap
imports were not so plentiful as today, when if a worker
is hired to help build,
say, a public high speed transit system with federal
government money, he might
well spend some of his stimulus-paycheck at Target,
Walmart or Home Depot,
where so many things are imported, especially from
China. In this, the Public Works'
expenditures boost the Chinese economy, and to that
amount, less the American
economy,
What's worse, if the steel to be used for the cars and
rails is not American made,
the multiplier drops some more. In fact, the US
Federal Government is very lax
compared to other industrialized countries when it comes
to requiring special
efforts first be taken to buy American. Again the
Keynesian multiplier is reduced
in our times, compared to the 1930s.
Another factor that reduces the Multiplier, is that some
of those hired in this
Public Works project would very likely have been
hired by a private employer
somewhere else in, say, 3, 6 or 12 months. To consider
this worker's employment
to be completely due to public infrastructure
expenditures, one would have to
have the Public Works project heavily employ the
unskilled and untrained. In fact,
"creaming" of the of the unemployment pool would be
quite common. To the extent,
that this is so, the multiplier is made smaller and GNP
does not grow so fast as one
might hope because of these projects..
Obama's modest 2009 stimulus, used "shovel-ready
projects" which State
and Local Governments were intending anyway to undertake
in the not too distant
future. Obama's stimulus did have the positive effect
in these cases of
speeding up the expenditures and hiring. But it is less
clear that it helped
employ the less skilled and untrained or made any dent
in the problem of the
long-term unemployed. At least half of the current
unemployed have been so for
more than 6 months.
Wars and military bases are hugely expensive.
Literally, trillions are spent
overseas where there is relatively little secondary or
tertiary benefits to the US
economy. Private contractors like Blackwater and
Halliburton have even become
foreign based. From the view point of increasing jobs
and GNP, it would be hugely
beneficiary to shift from Military Spending to
Public Works.
The financing of a
massive public works program might slightly serve to
increase interest rates.
But since 1/2 of all Federal Expenditures is for the
military, any conceivable
shift of priorities and spending on Public Works would
not be much of a threat
to the bond market or inflation, except perhaps locally
where skilled workers'
wages might go up. And if the Dollar were actually
weakened, because of more
public sector spending, it would serve to reduce
imports of manufactured goods
and increase their exports from the US.
Presently, the slack in the economy is too
great to cause any chance of wage inflation.
From this, it is clear that if Obama really wanted to
increase US employment
and help the economy the best way, he would act quickly
to prevent the flight of
investment capital overseas. He should impose tariffs
and rethink all those trade
agreements that have allowed foreign imports to supplant
domestic manufacture.
KEYNES SWITCHED TO PROTECTIONISM. WHY WON'T OBAMA?
In
1932,
Keynes told a Parliamentary committee that "The
thing about tariffs is -
they do the trick"
. He grew to consider tariffs to be vital to smooth the economic
cycle and provide greater employment through
government intervention.
( See -
http://www.jstor.org/pss/2120714 ) Keynes considered tariffs to be
necessary
where the government sought to maintain its currency
and at the same time
increase employment at a time when wages were falling.
His Favorite
Solution
"(D)omestic
investment could be indirectly subsidized to increase domestic output and
reduce foreign lending. Keynes called this "my own
favourite remedy," which could be
accomplished by a tax on foreign bonds, by changes
in the banking system to increase
domestic lending, or even by direct capital
expenditures by the government."
http://www.go2cio.com/articles/index.php?id=3668
OBAMA - 2011
Mr. President, Community
Colleges Are Not The Problem
Obama
simplistically asserts that American workers don't have the skills to compete.
That is not the problem. It is how easily corporations
can locate overseas
where wages and safety conditions are much lower. In
this, he is the mouthpiece
of the free traders on Wall Street, who are only
interested in coroporate profits,
not in American workers or even American consumers.
Obama will
not release his college transcripts. So, maybe he did study
history and economics at some point. What is clear, is
he shows NO
awareness
whatsoever of these economic lessons or the general
theories of Keynes.
Instead, to get campaign contributions, he has called
himself a Free Marketer
of the Chicago school. Milton Friedman is his hero, not
Keynes. Friedman's
position on the Depression is that it was caused by tight
Fed monetary policies.
Obama and Bernanke have made interest rates about as low
as possible. Wall
Street has benefited, but Main Street has not. Low
interest rates do not ensure
that banks will loan money or that those who do borrow
will invest in job-creating
ventures in the US. Instead, the low interest rates
have fueled American
investments overseas and speculation in stocks and
commodities. The
only nod Obama gave to Keyes was his drop-in-the-bucket
sized public works
programs in 2009. These did create some jobs, but not
nearly enough of them.
Obama ignored Keynes completely, In not insisting on new
taxes on the wealthy
and corporations in 2010 when his party had a majority.
He keeps relying on
on the self-serving advise of his Wall Street-based
advisors. I see no evidence
that he understands the basics of Keynes, taught in
every ECON-101.
The 1930's All Over Again.
History seldom gives
us a second chance. The tragedy is that Obama has lost
a perfect opportunity to use the Presidential "bully
pulpit" and raise the public's
knowledge of Keynes' arguments for a massive public
works program. Instead,
he accepts completely the premise that comes from the
right-wing talk show hosts,
that government spending is inherently wasteful, that
government is a "barren
whore" and the Federal, State and City budgets must be balanced by lay-offs
and
reduced spending. I fear this will be disastrous, even
calamitous in the years
to come. The stock market may rally, but bigger Wall
Street profits do not
mean decent jobs and prosperity on Main Street. The
British experience
in the 1920s should show our political leaders that
Austerity, a Strong Dollar
and no new national Public Works program will utterly
fail to produce Prosperity,
Full Employment and a restored infrastructure in
America.
And that is what the stock market is now saying.
Tea Party
Terrorism Show How Vulnerable The Economy
Is To Small
Minority Terrorism
Newsweek's
Queen of Rage
has said she would vote to bring the
government down, rather than increase the Debt limit.
The Tea Party
people are entitled to their opinions, but not to their own
facts. They also not entitled to threaten the default of
the US Treasury
when the country is at war.
Treason?
They are lucky they are dealing with
the spineless Obama. Lincoln would have had them
arrested. He jailed and
suspended habeas corpus for far less grave offenses to the
nation in the Civil War.
Wilson put pacifists and union strikers in jail in World
War I. He would not have
tolerated the tea party putting a dagger at the US
government.
Congress voted the very appropriations that have rung up
the debt. They can
vote to increase taxes or not, and to stop spending, as
they wish. But they ought not
come back and threaten to bring down the entire government
when their deficits
reach a certain point, and certainly not while the country
is at war. That is
contemptible.
What's worse, the deficits occurred, first, because of
Republican tax cuts for the
wealthy These have cost $800 billion over the last 10
years, not including the
reduction in the Estate Tax. And second, the deficits
have occurred because of
the wars started by a Republican President. The most
expensive war, the Iraq War,
was started with utter lies about WMDs and to serve the
personal interests
of Bush and Cheney. Bush who needed a nice little war to
save his Presidency
from defeat in 2004 because of the collapsing economy. VP
Cheney sought to
help his former company Halliburton which was badly
faltering in 2002, just before
the war. The Iraq war probably saved it. And it made
billions off the war as the #1
inside-track contractor that never even had to bid to get
billions of open-ended,
cost-plus Iraq war contracts. The Iraq War will cost the
US more than 3 trillion.
Bush-Cheney did nothing to raise the revenues to pay for
this war!
I wrote at the time, the Bush-Cheney plan, all along, was
to bankrupt the US Treasury,
so that the social programs of the New Deal, The Fair
Deal and The Great Society,
for the elderly and the needy would each have to be
shredded.
Right wing corporate ideologues like the Koch brothers
seem quite ready to take us
back to the Gilded Age of robber barons, bullies, moguls
and monopolies. They
seem to actually want us to go back to an era of
dangerous 12 hour work-days,
poverty wages, banned unions, child employment, water
and air pollution,
contaminated food and unsafe drugs. To the Tea Party
cultists, government is a
barren whore and the free market solves every thing.
They are closet fascists who
believe in Ayn Rynd's superman. In the
Fountainhead’.
One of her heroes boasts
that he is the polar opposite of Robin Hood:
“He
was the man who robbed the rich
and gave to the poor. I’m the man who robs the poor and
gives to the rich, or to be
more exact, the man who robs the thieving poor and gives
back to the productive rich.”
CONCLUSION
Obama is trapped by his Chicago free market thinking and
Wall Street advisors.
He desperately needs to read some American history. And
he needs to grow a
backbone and realize he is dealing with liars, thugs and
bullies. They should not be
appeased or coddled. They should be called out for what
they are, fanatical,
know-nothing, cultist pawns of the predator
super-rich.
Obama's failure to show backbone and lead the country
will have a devastating
effect on all Americans in 2011 and 2012. In serving
his rich political
campaign financiers, Obama may actually be doing them
more long term harm
than FDR ever did.
Further Reading -
http://dagblog.com/reader-blogs/buffet-and-bank-america-connundrum-11414
http://us.macmillan.com/thekeynessolution
Obama as Confidence Man and Puppet?
His coziness with
Wall Street elites has largely gone un-noticed. But
the truth is Obama
never really challenged Wall Street despite their high
crimes in causing
the 2008-2009 Crash. He told Jay Leno that their elites
had committed no
punishable crimes. He said this without any real
investigation and
he brought on no investigation of the many cases of
fraud they
committed. It was this statement that sent the stock market
soaring back up in
March 2009.
Obama does have his
critics.
See
http://theupliftingcrane.wordpress.com/2011/08/05/the-us-dictatorship-and-the-puppet-obama/
- "Obama is but a figurehead of an unelected
government in the US"
- "In the ...US budget debacle, Obama is
pathetically doing the bidding of Wall Street."
- "He’s a fraud, a crime boss, a moral coward and serial liar,
fronting for wealth, power and privilege."
- "He empties your Social Security funds to bail out the arch
financiers who swindled your pension
investments. He appoints and praises the architects of collapsed pyramid schemes
to high office
while promising” better times ahead."
- "Under Obama, however, corporate crooks take the money and run, rewarding
themselves with
generous bonuses, stock options and benefits, investing some abroad, and
stashing the rest in offshore tax havens."
- "The debt ceiling crisis is a manufactured one,
engineered to extort concessions that will lock
the middle class in debt peonage for decades to come. "
- "Recall that Obama’s bid for presidential
election in 2008 was avowedly based on ending the
US-led wars in Afghanistan and Iraq. He also denounced his incumbent rival
George W Bush over
the use of special powers that enabled such aberrations as the Guantanamo Bay
concentration camp
and a host of draconian home security policies infringing on civil rights. But
on every count, Obama has
reneged on his supposed opposition to the US “war on terror”. Indeed, under his
watch, the
US has expanded its militarist foreign policy....
- Obama has done nothing to roll back draconian home security
policies... The end result is the
banana republicanization of America...where a small percent of the population
has a disproportionate
share of wealth and power, where ordinary people are exploited, often
persecuted, and where profits
are privatized while working households bear the burden of debt."
- "Harry Reid came out of a meeting with Obama over the weekend “visibly
shaking” he was so angry
at how little the president seemed to care about the process and related details
of the agreement, and
how flip and dismissive he was toward Senator Reid. “Just get something for me
to sign Harry…”
