TO BE A KEYNESIAN OR NOT TO BE A KEYNESIAN? The

Economic Debate in Australia during the 1930s and its relevance

for today.

Elisabeth Kirkby, The University of Sydney

Refeered Abstract

During the Great Depression of the 1930s, economists in Australia were divided

between ‘inflationists’ and ‘deflationists’, basing their views on whether or not they

had previously supported free trade or tariff protection. So this paper fits the theme of

this conference … ‘The Future is in the Past’ … as it will discuss the alternatives of the

1930s, and consider what alternatives exist today.

In the 1920s and 1930’s economists no longer had the luxury of observing events from

academic isolation as three very different Prime Ministers turned to them for advice and

support. , believing that Australia would prosper and develop as the

United States had developed in the nineteenth century, borrowed money extensively

during the 1920s to promote his ‘Men, money and markets.’ policy. ,

elected Prime Minister only ten days before the Wall Street crash in 1929, had to deal

with overseas debt and rising unemployment. Joseph Lyons, one – time Labor Premier of Tasmania, resigned from the Australian Labor Party in 1931 to lead the new United

Australia Party and embraced austerity. All three Prime Ministers turned to Australia’s

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academic economists, L.F. Giblin, D. B. Copland, J.B. Brigden, E.O.G Shann and L.G.

Melville.

Many academic papers have been written about the close working relationship forged in

Hobart between Giblin, Copland, and Brigden, a relationship that led to the establishment of the Economic Record in 1925, and to the enquiry into Australian tariffs requested by

Stanley Bruce in 1927 when the three economists were joined by C.H. Wickens, the

Commonwealth statistician and E.C .Dyason, a Melbourne businessman well known to

Bruce. But the enquiry dragged on into 1928 as the Hobart group led by Brigden and the

Melbourne group led by Copland held different views on protection and were forced to compromise. Even though Bruce decided to set up an Economic Research Bureau in

1929, Labor Members of Parliament including Scullin, Chifley and Forde were opposed to non - elected members deciding government policy. Curtin (who became Labor Prime

Minister during World War Two) believed that such a Bureau might have value, but only if it was given the power to examine social problems.

Although the Economic Research Act was passed in 1929, the Bureau was never established, as Bruce lost office in December 1929, when Scullin became Prime

Minister, facing rising unemployment, industrial unrest and an escalating trade deficit. The deflationary policies, imposed first by the Commonwealth Bank through Sir Robert Gibson, and strengthened by the Melbourne Agreement (August

1930) demanded that the Commonwealth government and the State governments balance their budgets, borrow no more overseas money until the short term overseas debt was paid, also that all money borrowed internally would be spent on schemes that were revenue producing. It was an agreement dictated by the

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at the behest of Sir Otto Niemeyer, and approved by conservative financiers and businessmen with little sympathy for a Labor government. They were convinced that the Australian standard of living was too high, and Australian workers would have to accept that productivity had to be increased; in their terms, this meant that wages had to be cut.

In short, the Australian academic economists were asked to formulate policies that reduced costs to primary producers, and ensure that public expenditure would be confined to income producing schemes; the states were expected to follow decisions made in Canberra at the whim of Australian bankers, acting on the advice of the Bank of England. Opponents of such harsh measures were regarded with contempt, at best unpatriotic, at worst inspired by communism.

While Giblin, Shann and Brigden had visited Keynes in Cambridge and invited Keynes to

Australia, they had reservations about his theories. But their views were challenged by a small group of Australian economists who supported Keynes’ ideas, including R.F. Irvine,

R.C. Mills and E.R. Walker. Irvine was Professor of Economics at the University of

Sydney until 1921. Mills had succeeded to the Chair when Irvine resigned, as Dean of the

Faculty Economics and appointed Walker as a lecturer in economics in 1930. Walker was to teach economics at the University of Sydney, concentrating on unemployment, wage and monetary policy, public works and the exchange rate until 1938.1

In 1931, Walker wrote a textbook for high school students ‘An Outline of Australian

Economics ‘ in collaboration with R.B. Madgwick, lecturer in Economic History. This

1 S. Cornish, Walker, Sir Edward Ronald, (1907 – 1988), Australian Dictionary of Biography, Volume 18, (MUP), 2012.

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book became a standard text, it was revised three times and the third edition was

published in 1936. In his introduction, Walker states that the revision was necessary as by

1936, the teaching of economics in schools was ‘of a higher standard’. Walker had been

awarded a Rockefeller scholarship to St John’s College, Cambridge, where he was

awarded a PhD in 1933. He had joined the Political Economy Club founded by J.M.

Keynes, and Keynesian economic philosophy was the foundation on which his academic life was based.

It was on his return to Sydney, that Walker wrote two books that reflected his personal views, ‘Australia in the World Depression’, and ‘Unemployment Policy with special reference to Australia’ in 1936. It is the first of these books that I want to discuss today as it shows that he had been influenced not only by Keynes, but through detailed research

in Europe, which included research in Russia and in Italy.

Unlike the established Australian economists of the 1930s, Walker stressed that all forms

of unemployment relief should be designed to alleviate distress; that the social need has to

be assessed against economic theory. His book emphasises the different types of

unemployment that bedevil the capitalist system.

He discusses ‘Intermittent unemployment, structural unemployment and depression

unemployment’ in chapter one of his ‘Unemployment Policy’. When he was writing the

book, he was aware that although Australia might be coming out of the Depression,

unemployment rates were still unacceptably high. According to trade union percentages,

unemployment was 13.7% in the fourth quarter of 1935.2

2 E.R.Walker. Unemployment Policy, Angus and Robertson, 1936, p. 66.

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Walker also points out, in some detail, the ‘unreliability of trade union

percentages’.3 There is ample evidence to show that the trade union figures did not reflect the full extent of unemployment; as during the Depression, many workers were no longer members of a union (because they could not afford the dues); also, the majority of women

workers could not join a union, either because there was no union to cover them or

because the relevant union discouraged women workers in order to boost the employment

of males. Walker refers to Keynes frequently in his text, stressing that the Keynes who

was his mentor had moved on from ‘underemployment equilibrium’ to ‘uncertain

expectations’; that his aim was to promote a theory of ‘uncertainty and uncertainty

reduction’.4

As a result, Keynes’ influence on Walker differed from his influence on the earlier

generation of economists in Australia, Giblin, Copland, Melville, Brigden and Shann.

Walker knew Keynes when the latter was developing his theory of ‘radical uncertainty’,

he was taught by Keynes the moralist and philosopher, not just Keynes the economist.

I would like to explain the conclusions Keynes reached, and then compare them with the

views Walker promulgates in his two books, ‘Unemployment Policy’, and ‘Australia in

the World Depression’. I believe this is important since the current debate in Australia is

being fought over ‘balanced budgets, deficit reduction and productivity.’ Keynes condemned the practice of usury, defined as ‘the rate of interest set by the market as the

3 Ibid. p.70. 4 R.Skidelsky, Keynes, The Return of the Master, Penguin, 2010, p. xix.

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foremost ‘unjust price’ in the economic system’. 5 He believed that interest rates should

be kept low. 6 His idea of a ‘just price’ according to Skidelsky:

depends on being able to measure effort in terms of things produced rather than money produced. One cannot have a just society in Keynes’s sense if the main purpose of economic activity is the manufacture of money.7

In Essays in Persuasion, Keynes wrote that the British Economy Bill of September 1931

was ‘replete with folly and injustice’8 and goes on to explain:

The objects of national policy, so as to meet the emergency, should be primarily to improve our balance of trade, and secondarily to equalise the yield of taxation with the normal expenditure of the Budget by methods which would increase, rather than diminish, output, and hence increase the national income and the yield of the revenue, whilst respecting the principles of social justice.9

He maintained that none of these principles had been met in the Economy Bill:

It will have comparatively little effect on the balance of trade. It will largely increase unemployment and diminish the yield of revenue. And it outrages the principles of justice to a degree I should have thought inconceivable.10

Keynes was condemning the big cuts in the wages of school-teachers, (15 per cent later

reduced to 10 per cent) with the small cuts made to the incomes of the well-to do; cuts of

only 2½ to 3½ per cent. Later in his essay, Keynes condemns the ‘principle of

discriminating against persons in the service of the State, because they can be reached

most easily, is not right.’ Today, of course, it is axiomatic that the salaries of public

servants should be cut and their contribution to the economy is routinely under – valued.

In Unemployment Policy with special reference to Australia, Walker does not only discuss the different types of unemployment, he also has chapters on ‘a shorter working

5 Ibid. p. 147. 6 Ibid. p.146. 7 Ibid. 8 J.M Keynes, Essays in Persuasion, Rupert Hart Davies, , 1952, p.162. 9 Ibid.p.163 10 Ibid.

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week’, ‘a shorter working life’, the impact of ‘women on the labour market’, ‘tariff

policy’; all important issues in the 1930s, but of over-riding importance is the chapter on

‘public works and budgets’. As mentioned earlier, the debate about expenditure on public

works was paramount during the Depression. As far as Commonwealth Bank was

concerned, money could only be loaned for public works if they were likely to be

profitable. They were following what Walker describes in the case of Britain as ‘the

Treasury view’:

That public works instead of adding to the volume of employment, merely divert resources from private employment to public employment. 11

Walker contended: Public works, such as railroad construction, irrigation schemes, roads, and harbours, require large quantities of unskilled labour. The suspension of loan expenditure throws on to the labour market men without technical skill that can be used in manufacturing industry; their re-absorption into any other form of employment than public works must be extremely difficult. 12

Walker also points out when private employers do not need workers,’ there is no difficulty in finding workers for public works’. He also counters the argument that

‘public works are too costly’.13 This argument had been used by the British Government

at a League of Nations Conference in 1934. In a statement worthy of Sir Humphrey

Appleby in ‘Yes Minister’, the British delegate had offered the view:

Experience in recent years in this country has shown that the stimulation of special works, primarily in respect of their employment – providing capacity, has an effect on the employment position which is small relatively to the heavy expenditure incurred, and the works when completed, leave burdens on national and local finances which impeded the recovery of normal activity.14

11 E. R. Walker, Unemployment Policy’, Angus and Robertson, 1936, p.137. 12 E. R .Walker, Australia in the World Depression, p.75. 13 Unemployment Policy, p.138. 14 Ibid.

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When Walker was absorbing Keynes views at Cambridge in the 1930s, he would have been aware of the essay written after had returned to the

in 1925, Keynes was critical of this decision because:

Mr Churchill’s policy of improving the exchange by 10 per cent was, sooner or later, the policy of reducing everyone’s wages by 2s in the £.15

Keynes believed this reduction would bear more heavily on coal miners than on other

workers as their skills did not allow them to transfer easily to other forms of

employment, and asked:

Why should coal miners suffer a lower standard of life than other classes of labour. They may be lazy, good – for-nothing fellows who do not work as long or as hard as they should. But is there any evidence that they are more lazy or more good – for- nothing than other people?16

He continues, equally tongue in cheek,

The plight of the miners is the first, but not —unless we are very lucky— the last of the Economic Consequences of Mr Churchill. 17

The Economic Consequences of ‘the plight of the miners’ led to the General Strike of

1926; and according to Stiglitz, the need for government action to restore full

employment and growth that Keynes promoted ‘ did more to save the capitalist system

than all the pro – market financiers put together.’18

Skidelsky insists that Keynes believed in a ‘just’ economic system:

He accepted the classic view that reward should be proportioned to merit or contribution, with its Aristotelian corollary that’ nothing is more unjust than to treat unequals equally.19

15 Essays in Persuasion, p.245. 16 Ibid.p.261. 17 Ibid. 18 J. Stiglitz Making Globalization Work. Penguin , 2006, p. xvii. 19 Skidelsky , Keynes, The Return of the Master, p.145.

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But eighty years before Skidelsky and Stigliz, Walker compared the theories of

Keynes and Hayek and made his own assessment:

Although Mr Keynes advocates inflation in a slump, and Professor Hayek regards it as disastrous, our conclusion is that (apart from the panic and similar psychological problems) inflation can bring unemployed, available resources into employment (Keynes), but if continued once all available resources are employed, a recession must follow. (Hayek with our modifications). 20

Walker agrees that ‘workers earning and spending wages’ will create further employment,

but admits that this fact was ignored:

Although Mr. J. M Keynes has attempted to popularize this notion it has failed to make any impact on the mind of the British Government.21

Walker quotes the view expressed by Keynes that ‘the total effect of public works upon

the British employment position would be twice that estimated by the Government'. 22

However, he warns that resources shouldn’t be wasted and ‘prudent finance’ will be necessary.

But he stresses that:

If unemployed resources are available … by using resources that would otherwise be idle, the public works cost nothing at all in terms of foregone production.23 EMPHASIS IN THE ORIGINAL.

Keynes failed to convince the British Government, just as he failed to convince the

Australian economists. Walker‘s books also had little effect on his fellow economists,24 as the influence of Sir Robert Gibson and Sir Alfred Davidson was overwhelming. Even so, his books show that during the 1930s he studied various programs to combat

20 E.R.Walker, Australia in the World Depression, p.200. 21 E.R Walker, Unemployment Policy, p.138. 22 Ibid.,p.139 23 Ibid. 24 Schedvin points out in ‘Australia and the Great Depression’ that Walker had urged the adoption of Keynesian economics in a succession of publications’. p. 374.

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unemployment in Austria, Denmark, Finland, Holland, Norway, Poland Sweden and

Switzerland; and was particularly impressed by the Civilian Conservation Corps established by President Roosevelt as part of the New Deal.

The Civilian Conservation Corps (CCC) was reported in The Listener by a BBC journalist, Raymond Swing, in 1935,

600, 000 young men were working in the camps all over the USA. Unlike the work camps set up in Australia, the men were paid $30 a month, $25 sent to their families, $5 paid to the men. Food, clothing and lodging were provided, their weekends were free and they could leave the camp if they wished to take up employment elsewhere when it was available.25

Many authors have given a detailed account of how the unemployed were treated in

Australia, but there is no doubt that the Lyons Government ignored reasonable alternatives that were known to Australian economists; because Dickensian attitudes towards the ‘undeserving poor’, coupled with the belief that public money spent on infrastructure was money wasted, were entrenched.

When he appeared before the Royal Commission into monetary and banking systems

(1936 – 37), Walker stressed that monetary policy ‘should have two objectives, the avoidance or mitigation of depressions, and the stabilisation of the purchasing power of money, with priority given to the former.’26 He took his Keynesian views to the NSW

Treasury when he was appointed adviser in 1938. Although they didn’t adopt his

Keynesian views, Walker’s ability was recognised and during World War Two, he became deputy director general of the Department of War Organisation of Industry, and in

1945 he led the Australian Delegation to the Paris Conference on Reparations.27

25 Walker, Unemployment Policy, p. 174. 26 Ibid. 27 Ibid.

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Why is it important to go back to the views expressed by Walker, why should we consider his books eighty years on? I believe that his advice, based on Keynesian theory, offered to conservative and Labor politicians in the 1930s is still relevant today, as the United States,

Britain and Europe are still trying to manage the Global Financial Crisis. The proponents of austerity continue to oppose the supporters of fiscal stimulus and quantitative easing

(QE); yet Britain has been warned by the International Monetary Fund (IMF) that there is still a need to kick- start the economy. A view that is rejected by many academic economists trained in the 1970s, even though there is ‘massive long - term unemployment in the United States and massive youth unemployment in southern Europe’

(Krugman.2013). Austerity failed in the 1930s when ‘inflationist’ policies were disregarded. The social consequences of ‘deflationism’ were ignored then, just as they are being ignored today although the gap between the ‘haves’ and the ‘have nots’ is now wider than ever.

REFERENCES.

Appleyard, R.T. and C.B. Schedvin, (eds), Australian Financiers, Biographical Essays, 1988, Macmillan.

Boehm, E.A. Twentieth Century Economic Development in Australia, Longman Cheshire, 1971.

Coleman, C, Cornish, S, Hagger, A, Giblin’s Platoon, The Trials and Triumph of the Economist in Australian Public Life, ANU E Press, 2006.

Holder, R.E. Bank of New South Wales, A History, Vol 11, 1894 – 1970, Angus and Robertson. 1970.

Irvine, R.F, The Midas Delusion, The Hassall Press, Adelaide, 1933.

Kewley, T.H, Social Security in Australia, Social Security and Health Benefits, from 1900 to the present, Sydney University Press, 1965.

King, J.E, A Biographical Dictionary of AUSTRALIAN AND NEW ZEALAND ECONOMISTS, Edward Elgar, 2007.

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Millmow, A, THE POWER OF ECONOMIC IDEAS, The Origins of Keynesian Macroeconomic Management in Interwar Australia, 1929 – 1939, ANU E Press,

Shann, E.O.G, An Economic , Georgian House, Melbourne, 1930.

Schedvin, C.B, Australia and the Great Depression, Sydney University Press, 1970.

Skidelsky, R, Keynes, The Return of the Master, Penguin, 2009.

Stiglitz, J. Making Globalisation Work Penguin, 2006.

Walker, E.R, & Mills, R.C, Money, 1935,

Walker, E.R, & Madgwick, R.B. An Outline of Australian Economics, Whitcombe and Tombs Limited, 1931.

Walker, E. Ronald, An Outline of Australian Economics,

Walker, E. Ronald, Australia in the World Depression, P.S. King, London, 1933.

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