UNEMPLOYMENT
One of the resources in question of course is manpower. It was the perception of Keynes (and Oswald Mosley and Ernest Bevin) that unemployment placed in the hands of government a substantial resource. It could be used by government on projects not being provided by the non-government sectors. This was one of the bases for the 'counter-cyclical' economics associated with Keynes - that government could and should spend more, not less, in times of depression, and less not more in times when the economy was booming. Job creation was one of the policies adopted by both the United States and Germany in the 1930s - the two countries that proved best prepared to withstand the financial pressures of the war. At the risk of jumping ahead of my argument I might mention here that Roosevelt and Morgenthau, knowing they were going to have to engage in an unprecedentedly large amount of government spending, set about collecting and hoarding all the gold they could lay their hands on, making it illegal for private individuals to possess more than $100 worth of it. Neither Morgenthau nor, in Germany, Schacht, would have regarded themselves as 'Keynesians'. There was a time, as we shall see, when Keynes might have regarded himself as a 'Schachtian'.
According to the classical 'laissez-faire' doctrine an economy reached 'equilibrium' when prices stayed at a fairly constant level and it was assumed - an assumption severely questioned by Keynes - that under those circumstances there would be full employment, somewhat loosely defined (it generally seems to have meant 5% unemployment). Left to its own devices the economy would have a tendency to settle on equilibrium but through a process of swings towards 'boom' (too much money in the economy with production failing to keep up with it resulting in inflation) and 'bust' (the production of goods outpacing the ability of people to pay for them, producing deflation). This was, put very crudely, the 'business cycle' but it was, left to its own devices, thought to be self correcting. Booms produce busts, busts produce booms and the whole would wobble back into their normal condition which was equilibrium. Part of the process required that firms would be free to vary their costs of production according to the demands of the market. The only cost that was in the power of the individual producer was wages. But owing to the power of the trade unions, backed by government legislation, wages were 'sticky' - they could only be reduced with great difficulty. How, then, could they be forced down if that was considered necessary for the overall good of the economy?
In his 1925 pamphlet The Economic consequences of Mister Churchill, Keynes pointed out that the increase in the value of the pound as a consequence of the return to the gold standard at the pre-war rate, would result in an equivalent decrease in the income gained from exports. This would necessitate a reduction in costs, principally wages. He asked how this could be achieved, given the determination of the unions to resist it:
'In no other way than by the deliberate intensification of unemployment. The object of credit restriction, in such a case, is to withdraw from employers the financial means to employ labour at the existing level of prices and wages. The policy can only attain its end by intensifying unemployment without limit until the workers are ready to accept the necessary reduction of money wages under the pressure of hard facts ... Deflation [as a result of the restriction of the money supply to maintain the value of the currency - PB] does not reduce wages "automatically". It reduces them by causing unemployment. The proper object of dear money is to check an incipient boom. Woe to those whose faith leads them to use it to aggravate a depression.' (4)
(4) Quoted in Robert Skidelsky: John Maynard Keynes, the economist as saviour, 1920-1937 Vol II of Skidelsky's biography, London, Macmillan, 1994 (first published 1992), p.203.
The pamphlet was published just as the miners and the TUC were preparing for a general strike. In the event, the Prime Minister, Stanley Baldwin, agreed to give the coal industry a subsidy of £10m to enable wages to be paid at the existing rate, thus further - given the policy of maintaining an overvalued pound - reducing the credit available to other parts of the economy. As we know this only postponed the problem. The General Strike, followed by a long effort on the part of the miners alone, took place in 1926, ending in defeat for the miners and a reduction in wages. And the widespread discontent which brought Labour back to power in 1929.
The leading French liberal economist, Jacques Rueff, was in London in 1930 as financial attaché in the French embassy. Rueff had been adviser to the French Prime Minister, Raymond Poincaré, who had followed Churchill's lead in putting the franc back on the gold standard at a high rate. Rueff was subsequently, in the 1930s, Deputy Governor of the Banque de France and later adviser to Charles De Gaulle (advising him to exchange the dollars France was holding for gold, one of the elements that led to the collapse of the gold standard in 1971). In a note prepared for the French Ministry of Finance, submitted in October 1931, (5) Rueff explained the British crisis as a consequence of the inflexibility of wage settlements. This resulted in an uncompetitive industry, resulting in a large unemployment problem, and an unfavourable balance of payments, which resulted in an outflow of gold made worse by the government policy of paying unemployment benefit, which left the Bank of England with only a very narrow margin for manoeuvre in the event of a major financial crisis - in the event the collapse of the Credit Anstalt in Vienna earlier in the year. Rueff admitted that the problem could be alleviated by a devaluation of the pound (to increase the money available to the domestic economy) and the introduction of protective duties to reduce the attraction of imported goods, but this would do enormous harm to the international reputation of sterling and therefore to the international economy as a whole which was largely dependent on sterling as a reliable, and desirable asset.
(5) Rueff's letter is reproduced in Marc Flandreau: '1931: la chute de la livre sterling et la crise internationale vues par Jacques Rueff', Politique étranger, Vol. 63, No 4, Winter 1998-9.