KEYNES AND AUSTRALIA Donald J Markwell Research Discussion Paper 2000-04 June 2000 Research Department, Reserve Bank of Australia, and New College, Oxford Reserve Bank of Australia A paper presented at a seminar at the Reserve Bank of Australia on 18 September 1985. Foreword This paper concerns itself with the various interactions between John Maynard Keynes and Australia. An unlikely topic perhaps, but the result is a gem – a paper that provides a fascinating insight into that period of huge economic and social turmoil from the end of World War I to just after World War II, when Keynes died. There is a broad sweep of topics here – from Keynes’s dealings with the Australian Prime Minister, William Morris Hughes, over demands for reparations against Germany after World War I, to Keynes’s opinions and influence on the handling of the Depression in Australia, to the early impact of Keynesian ideas in Australia, to Australia’s approach to the creation of the International Monetary Fund and World Bank, of which Keynes was co-founder. The paper was presented at a seminar at the Reserve Bank fifteen years ago. It is being released now as a Research Discussion Paper, after a rather longer delay than usual, to make it available to a wide readership. Happy reading. David Gruen Head of Economic Research Department May 2000 I am grateful to the Economic Research Department for their recovery of this paper, and for allowing it to see the light of day. Fifteen years on, it would be written in a different style – but I would not wish to alter any of its conclusions. Donald J Markwell May 2000 i Acknowledgments This paper was presented at a Seminar in the Research Department of the Reserve Bank of Australia on 18 September 1985. However, it should be regarded as in the nature of a draft. I owe a very great debt of gratitude to the Bank for my Research Internship from July to September 1985, and especially to Peter Jonson and Austin Holmes for their great help and encouragement with this paper. In the preparation of it, I have spoken with Professor HW Arndt, Dr DG Badger, TJ Bartley, Miss Judy Butlin, Dr HC Coombs, Professor WM Corden, Ernest Eyers, JM (‘Pete’) Garland, JB Kirkwood, Sir Leslie Melville, Sir John and Lady Phillips, and Sir Frederick Wheeler. I am very grateful to all of them. The staff of the Reserve Bank Research Library have been extremely helpful (and tolerant), as were the Archives staff of the Bank. Miss Margery Kent very kindly typed the paper. To her, and to all others who have helped, I am most thankful. The interview and archival research done for this paper would allow a more detailed account of Australian policy towards the Bretton Woods institutions in the years 1942 to 1947 than it is possible to give here; but this must await another day. Needless to say, I alone am responsible for all opinions and any errors in this paper. Donald J Markwell 18 September 1985 ii Abstract JM Keynes was more important to Australia than Australia was to him. Yet the connections are many and varied, and worthy of some attention. As has been said, ‘a survey of the rise and fall of Keynesian economics in Australia’ is ‘an important story which still has to be written’; but it ‘is the subject for at least three years arduous research’ (Groenewegen 1983). This paper is less ambitious. An exercise in economic, personal and political history and in the history of economic thought, it briefly outlines: 1. Keynes’s dealings with the Australian Prime Minister, William Morris Hughes, over the reparations demands against Germany after World War I; 2. some incidental economic issues; 3. Keynes’s opinions and influence on the handling of the Depression in Australia; 4. the early impact of Keynesian economics in Australia; and 5. Australia’s approach to the creation of the International Monetary Fund and World Bank, of which Keynes was co-founder. JEL Classification Numbers: E65, N17, N27 Keywords: Australia, institutions, Keynes, post-war iii Table of Contents 1. JM Keynes, WM Hughes and Reparations 1 2. Incidental Economic Issues 8 3. Keynes and the Depression in Australia 12 4. The ‘General Theory’ in Australia 28 5. Australia and Bretton Woods: More Keynesian Than Keynes 52 References 63 iv KEYNES AND AUSTRALIA DJ Markwell 1. JM Keynes, WM Hughes and Reparations One of the first important (and least creditable) Australian forays into international diplomacy was the campaign of the Australian Prime Minister, William Morris Hughes, in 1918–1919, to have Germany forced to pay in reparations the full cost of the First World War. It was his burning, passionate condemnation of the magnitude of the reparations demands in The Economic Consequences of the Peace that first brought John Maynard Keynes to popular international prominence. Keynes had worked in the British Treasury during the war. During the latter half of 1916, he and Professor Sir William Ashley prepared a ‘Memorandum on the Effect of an Indemnity’ at the request of the Board of Trade.1 It was one of the earliest documents prepared for the British government relating to possible reparations demands. It has a special significance because in 1938, in The Truth About the Peace Treaties, Lloyd George, referring to the Ashley-Keynes memorandum, described Keynes as ‘the sole patentee and promoter’ of exactions from Germany ‘over a long period of years’.2 In fact, the memorandum made no recommendations, and was ‘based throughout on the assumption that [Britain] would make no claim for reparation’;3 it was on the effect of an immediate post- war indemnity, paid by Germany to France and Belgiun, ‘to make good damage in the territories overrun’.4 Keynes stressed these points in defence against Lloyd George’s 1938 attack on him - an attack Lloyd George had not made in, for example, his 1932 book, The Truth About Reparations and War-Debts.5 1. From The Collected Writings of John Maynard Keynes (hereafter JMK, with volume and page numbers in parenthesis). See JMK (16, p 311). 2 Lloyd George (1938), pp 445–446. See also JMK (16, pp 311–312, 334–336). 3 JMK (16, pp. 312, 334, 335). 4 JMK (16, p 333). 5 Lloyd George (1932). See reference to Keynes at pp 18, 105. 2 Keynes did not make the point that his role in preparation of the memorandum was very much subsidiary to Ashley: he said in 1938 that ‘I remember a document of Ashley’s though not distinctly what part I played in it’.6 Though the editor of Keynes’s Collected Writings says ‘there is no evidence in Keynes’s papers or in the Treasury files to show what was his particular share in writing this memorandum’,7 the Ashley papers in the British Library contain correspondence between the co-authors and typed drafts by Ashley with hand-written suggestions by Keynes; these drafts make it possible to show with much clarity Keynes’s contribution to the paper. The Ashley papers also reveal an error in the Collected Writings and other accounts: though the memorandum bears the date 2 January 1916, it was actually signed by Ashley and Keynes on 2 January 1917; the typist put the wrong year by mistake, and no one corrected it.8 In October 1918, Keynes made a preliminary estimate of Germany’s capacity to pay reparations.9 He suggested £1,000 million (half in securities, capital goods and the like; half in annual payments) could be obtained ‘without crushing Germany’.10 In November–December 1918, Keynes ‘was occupied with the Treasury’s study of the whole question of reparations’.11 The extent of Keynes’s authorship of the resulting memorandum12 is uncertain.13 It argued that the cost of the war to the Allies far exceeded Germany’s ability to pay;14 that an annual payment would be alternative to taking the maximum amount of transferable property (put at £1,370 million),15 because ‘if Germany is to be “milked” she must not first of all be ruined’;16 and since Britain would be disadvantaged by promoting German exports (which would be necessary if she were to make annual payments), the 6 JMK (16, p 312). 7 JMK (16, p 313). 8 It is not obvious why Skidelsky (1983, p354) dates the Ashley-Keynes paper from ‘as early as 2 December 1916’. 9 JMK (16, p 338–343). 10 JMK (16, p 342). 11 JMK (16, p 311). 12 JMK (16, pp 344–383). 13 Keynes (1975, pp 156–157, 163). But see Skidelsky (1983, pp 354–355). 14 JMK (16, p 382). 15 JMK (16, p 369). 16 JMK (16, p 375). See also Keynes (1975, p 156). 3 taking of transferable property was preferable.17 Combining both, ‘the limit of what we can safely exact’18 was closer to £2,000 than £3,000 million.19 But on 7 November 1918, Hughes, in England for the Imperial War Cabinet, ‘publicly demanded that Germany be made to pay the costs of the war; his cry was taken up by leading newspapers’.20 Hughes was apparently aware that the negotiations between the Allies and with Germany for an Armistice agreement were leading to a formula for reparations that would confine them to ‘compensation ... by Germany for all damage done to the civilian population of the Allies and to their property by the aggression of Germany by land, sea, and from the air’.21 This represented a broadening from the ‘restoration of invaded territories’ talked of in Wilson’s Fourteen Points, which were the fundamental basis of the Armistice.