“Money, Banks and Finance in Economic Thought”, University of Lille, Lille (France), 23-25 May 2019

EARLY REACTIONS TO THE KEYNES PLAN: THE RADICAL CRITICISMS FROM SCHUMACHER, BALOGH AND KALECKI

ESHET Conference 2019 on “Money, banks and finance in economic thought”, University of Lille, Lille (France), 23-25 May 2019

DRAFT PAPER PLEASE DO NOT QUOTE WITHOUT PERMISSION

Adrien Faudot, PhD1 CREG, Université Grenoble Alpes, France Edoardo Beretta, PhD2 Università della Svizzera italiana (USI), Lugano, Switzerland & Franklin University Switzerland (FUS), Sorengo-Lugano, Switzerland.

Abstract

The Keynes plan was considered upon its release, thanks to the international prestige of the British economist as well as the cleverness of his proposal, as particularly worthy of interest. If (as expected) economists embracing orthodox views on money criticized the plan, less known criticisms came from the Keynesian circles. Several former close collaborators of J. M. Keynes offered comments and asked for amendments to his draft plan as well as for the improvement of the scheme of the Clearing Union, which the British economist wanted to design. In the light of the aforesaid, the following paper analyses the publications of Ernst F. Schumacher, Thomas Balogh, and Michal Kalecki appeared right after the Keynes plan. In fact, these authors provided early as well as radical judgements anticipating some faults in his proposal and targeting the sustainability of an effective Clearing Union.

JEL classification codes: B2, B3, E42. Keywords: International Clearing Union, Balogh, Kalecki, Schumacher

Introduction

The Keynes plan is the most commented project to reform the international monetary system to this day. It was rejected by the United States delegation and had, therefore, no chance to be endorsed at the Bretton Woods conference in 1944. As explained by Raymond Mikesell, a US delegate at Bretton Woods, “the clearing-union principle was foreign to the American financial community and to the Congress and was, therefore, unacceptable.” (Mikesell, 1994, p. 14). The rejection of the Keynes plan can also be explained by the opportunity to set the stage for the US dollar hegemony. De Cecco (1979, p. 52) once wrote that “the New York financial community saw itself as the natural heir to the international role traditionally played by the City of London.

1 contact: [email protected] 2 c/o Università della Svizzera italiana (USI), Faculty of Economics, Via Giuseppe Buffi 13, 6904 Lugano, Switzerland, [email protected]; c/o Franklin University Switzerland (FUS), Department of Economics and Finance, Via Ponte Tresa 29, 6924 Sorengo-Lugano, Switzerland, [email protected].

The immediate post-war period seemed the appropriate time for the transfer of power to take place.” At the top of the concerns inspired by the Keynes plan finally laid the fact that the plan seemed too much in favour of debtor countries and needed of a foreign exchange apparatus. The US delegation had a much more liberal stance on the international monetary system and believed in the classical principle of international adjustment3.

However, the Keynes plan was also criticized by a handful of Britain-based Keynesian scholars. This paper deals with the criticisms of Thomas Balogh, Ernst F. Schumacher and Michal Kalecki (hereafter BSK). Their criticisms started in April 1943 with the release of the White Paper representing the Britain position in the Bretton Woods negotiations. They became more severe as of Keynes’ rallying behind the 1944 Joint-Statement of the US and UK delegations. These three authors shared several common features. They were refugees in Britain during the late 1930s and the Second World War. Balogh was Hungarian, Schumacher was German and Kalecki was Polish. They were staff members of the same institute at this time, the Oxford Institute of Statistics, which had been created in 1935. Another common feature is that all of them had experienced academic collaboration with John Maynard Keynes. Keynes had even helped to find them an academic position in Britain, given that the British mandarin had a great influence on academic recruitment in Britain at this time. However, all of them experienced then the deterioration of their relationship with Keynes.

After the war, they took different ways, although all of them became celebrated economists. Schumacher had probably the most atypical career. He became after the war in charge of planning the reconstruction of Germany and in 1950 the chief economist at the National Coal Board. During one of his trips in Burma, he converted to Buddhism. His work on the international monetary reform is less well-known than his 1973 book Small is beautiful – which made him famous – including his writings on Buddhist economics (Leonard, 2019). Several institutions survived to him and have been promoting his ideas, such as the Schumacher Center for a New Economics, the Schumacher Institute, or the Schumacher College.

Kalecki was considered one of the most famous economists of the twentieth century (Worswick, 1977). He remains a much-quoted reference of post-Keynesian economics. After starting his career in Poland as an economic journalist, he went to Sweden, then in England where he stayed at LSE, Cambridge and eventually Oxford. The career prospects in Oxford were less promising since, at the end of the war, the return of British scholars involved in war planning jeopardised the position of the refugees. Kalecki moved to the International Labor Office in Montreal and then at the United Nations (New York) before coming back to Poland in 1955 as an economic advisor of the Polish government.

3 The Keynes plan had many admirers amongst the US officials. He was nevertheless facing both the US national interests and the classical view that dominated the US delegation. As Joseph Burke Knapp (from the Treasury Department during the war) emphasized, “The Keynes plan was a far simpler and intellectually more satisfying structure for monetary affairs.” (...) “The United States view was that if one country had a surplus and another country had a deficit in its balance of payments, it was the responsibility of the deficit country to adjust its position and get out of the hole. There was no problem with the surplus country; the surplus country was just a godfather that was carrying the other fellow over until he could put his house in order. So, the deficit country was exhorted to cut down on imports, push up exports, and cut back on the scale of internal economic development in order to dampen the demand for imports and release commodities for export rather than consumption on the domestic market.” Retrieved from https://trumanlibrary.org/oralhist/knappjb.htm.

Only Balogh remained at Oxford. Balogh was a tireless activist and well-known scholar, although his foreign economic policy was broadly considered as extreme in the academic world. He was an advisor of many UK politicians from the Labour Party including the Prime Minister James Harold Wilson who made him Baron in 19684.

On the ground of their criticisms directed to Keynes, the three economists have elaborated an innovative plan in 1943 which remains largely ignored to this day. The plan was rediscovered by a few economists that are developing Post Keynesian views of the international monetary reform (Sawyer, 2001; Rossi, 2007; Toporowski, 2018b). The objective of our paper is to introduce this plan and the thought of its authors on the issue of international monetary reform. The paper is organised as follows. The first section introduces the three economists. The second section expounds the principles and making of the Keynes plan until its endorsement by the British Treasury. Section 3 sets out the criticisms from Balogh, Schumacher and Kalecki with regard to the conception of the clearing union in the spirit of Keynes. Section 4 emphasizes the issue raised by the Keynes plan with regard to developing economies, which was dear to the three Oxford economists.

Balogh, Schumacher and Kalecki at Oxford

Balogh (1905-1985) was a Hungarian-born economist, trained in Hungary and Germany5. He was taken up by Lord Keynes, who had been impressed by his study of gold movements into France during the 1920s. Keynes was the editor of the Economic Journal and decided to publish an English version of Balogh’s study (Balogh, 1930). He helped Balogh to find a job in England by asking a former colleague who worked in the City a favour (Graham, 1992, p. 195). Balogh became then a lecturer at the University College, London, before his appointment at Oxford.

Balogh remained at Oxford from 1939 to 1970. He was well acquainted with foreign exchange procedures and the first establishment of exchange controls in the 1930s, which were formally applied within the sterling area in March 1940 (Balogh, 1940). Balogh took the advent of exchange controls in the United Kingdom as the natural outcome of the 1930s liquidity crisis and considered that these measures were judicious. He had warned in his 1938 article that the German economy was expanding owing to new and effective interventionist policies and that the implementation of exchange controls and payments agreements in the UK would be the appropriate answers to muster the necessary resources before the coming war (Balogh, 1938). He was seen in the 1940s as a left-wing economist (Mikesell, 1954, p. 141; Kindleberger, 1984, p. 432). Balogh has consistently defended during his career the arguments emphasised by Schumacher, Kalecki and himself even after the two other economists had left Oxford and moved on other fields of interest (Balogh, 1946a, p. 311; Balogh, 1960; Balogh, 1970, p. 97).

Schumacher (1911-1977) was at Oxford from March 1942 until 1945. He had been a student in Britain where had met for the first time Keynes in 1929 (Wood, 1984, p. 20). Then he completed his education in England and in the United States, at Columbia. He decided to go home in 1934 and started a non-academic career. Interestingly Schumacher had worked in Germany for two

4 The other Hungarian-born economist close to Balogh, Nicholas Kaldor, became Baron six years later, in 1974, also while Wilson was in office. 5 Incidentally, Balogh had been the student of Ernst Fritz Schumacher’s father, Prof. Hermann Schumacher, who taught economics in the 1920s in Berlin.

3 years as of 1935 as an employee of a Syndicate – including the firm Unilever – whose task was to arrange trade in the absence of the usual monetary transactions, due to the exchange controls and clearing agreements decreed by Hjalmar Schacht. This experience gave him a practical knowledge of trade within the particular conditions of bilateral clearing agreements and exchange controls. Unhappy to live in Hitler’s Germany, he decided to move to London in 1937 where he had previously studied and still had connections. He worked as an investment adviser for a Syndicate’s client Georges Schicht, the Head of Unilever in London. He definitely resigned from this job in 1939 to live in a cottage of the small village of Eydon, between London and Birmingham. The owner of the farm was Robert Brand, who worked for the Treasury and rubbed shoulders with John Maynard Keynes. Robert Brand was the uncle of David Astor, who was Schumacher’s faithful friend from the period when they were both students at Oxford.

As a German resident in Britain, Schumacher was interned in a camp in 1940 and spent ten weeks there. Once back in his farm in 1940 Schumacher worked during extra-hours on his project for a multilateral clearing union. During this period, Schumacher elaborated on a world-improvement plan for international trade and payments. The Schumacher proposal for a multilateral clearing union was sent to Keynes through Brand on September 16, 1941. Schumacher was also in correspondence with Rosenstein-Rodan who ran the Royal Institute of International Affairs and who circulated Schumacher’s paper on Multilateral Clearing6. Schumacher’s paper was widely discussed outside the Institute, including in the United States. For instance, Charles Kindleberger analysed it among the outstanding unorthodox proposals aiming post-war monetary stabilisation7.

Keynes was particularly interested in the Schumacher’s plan and replied in November. He started corresponding with him and invited him to attend a tea party (on November 23). Integrated into the Keynesian circle, Schumacher was recruited in the Balliol College in 1942 thanks to Frank Burchardt, who was himself a German émigré and an Oxford scholar he met in the internment camp. In following letters to Keynes, Schumacher then alluded to the publication of the proposal in the Economic Journal but Keynes repeatedly asked him to wait for the release of the official British proposal, adding that his [Keynes] proposals “go perhaps rather further than yours” (quoted in Leonard, 2018, p. 8). Schumacher felt languished and became frustrated that he could not use his own theoretical results.

“One day I met him; then there followed an exchange of letters. He always said to me, keep at it. At one point I could go no further because I was completely isolated from the outside world. I could not get in touch with colleagues. Then I wrote to him asking if he could not publish my article in a journal published by Keynes. He wrote back to me that the time of publication had not yet come. Shortly thereafter, my plan was issued as a white paper by the Ministry of Finance. Keynes had made changes to a number of minor points. Thus he changed what I called “banking entity” to “banker”. But that was really too bad. It was my plan.” (quoted by Leonard, 2018, p. 10).

Schumacher was frustrated because his proposal had not the impact he had wished. A Spanish version of the article on “Multilateral Clearing” in Economica was nevertheless published (Schumacher, 1943c) in a special issue gathering the contributions of major authors on this topic

6 Rosenstein-Rodan published in 1943 a celebrated paper on the problem of industrialisation of newly independent countries of Eastern Europe. He was considered one of the fathers of development economics. 7 Kindleberger noteworthy did not mention the name of the author of the “pool clearing” proposal, stating that the paper was circulating only within the Oxford Institute as an unpublished document.

(including those of J.M. Keynes, Jacob Viner, John H. Williams and Henry Morgenthau Jr). Schumacher continued to dialogue with Keynes. As Schumacher was involved as economics editor in The Times, he wrote his obituary in 19468.

Kalecki (1899-1970) started to work in the Oxford Institute at the beginning of 1940 and resigned in March 1945. He had arrived in England in 1936, as a visiting fellow at the London School of Economics, then in Cambridge in 1937 with a 6 months grant. He was in a precarious material situation at that time. In 1938, several Cambridge fellows who were impressed by Kalecki’s academic results feared that Kalecki would be constrained to go back to Poland with bleak perspectives (Marcuzzo and Rosselli, 2005). They managed to arrange a Research Project to provide him with a position in Cambridge in 1938: Keynes was the chairman of the Research Project commission, which included also Kahn, Austin Robinson, Sraffa and Champernowne.

The relationship between Keynes and Kalecki deteriorated progressively. When he presented his results in front of the commission one year later in 1939, he was harshly criticized. He decided to resign and a few weeks later started to work at Oxford. The methodological gap between the two scholars was huge, owing to different training and traditions. In the Oxford Institute, “Kalecki was back in his element, commenting on policy and the most recent statistics and data, as he had done at the Institute for Business Cycles and Prices in Warsaw only five years before, and with little competition since British experts were now mostly working for the government and subject to official secrecy requirements.” (Toporowski, 2018a, p. 35).

Kalecki seems at first sight less important for our study than Balogh and Schumacher because international monetary reform does not appear as a central topic in his academic career and he devoted much fewer articles to this question. Kalecki was nevertheless the “towering intellectual figure” of the Oxford Institute (Hagemann, 2007, p. 338)9. Furthermore, he had been concerned by the influence of international factors on the national economy and on full-employment policies. He made also contributions on the issue of multilateralism when he was working for the International Labour Office (Kalecki, 1946), as well as on the financing of economic development (Kalecki, 1955).

The Keynes plan

Keynes was one of the most famous British economists of his time. Already famous for his General Theory, he started to work on the project of an International Clearing Union only as of November 1940. As Skidelsky (2000) emphasized, he had not commented the clearing agreements policy of Hjalmar Schacht10 before 1940. He had nevertheless a well-known interest in international monetary issues, as evidenced by his writings of the 1920s and 1930s. In the Treatise on Money, he devoted several chapters to the international monetary issues. In the 1930s, he already formulated several proposals of international monetary reforms, even though none of them stood out as did the proposal for an International Clearing Union.

8 This obituary (The Times, April 22, 1946) was reproduced in Harris (1947, p. xvii-xxii) 9 He was a “guru” according to Steindl (2012). 10 Dr Hjalmar Schacht was the Reichsminister of Economics (1934-1978) and President of the Reichsbank (1923-1930 and then 1933-1939)

In 1940, he was asked by Lord Halifax (at this time the Secretary of State for Foreign Affairs) to prepare a reply to the Funk Plan, which renewed Keynes’ research on the reform of the international payments system. The German policies of Schacht and Funk regarding the international monetary order were a great source of inspiration for Keynes during the years 1940 and 1941. Keynes publicly praised the pioneering ideas contained in the clearing policies of Schacht and Funk11. He wrote that Schacht’s clearing policy “was able to return to the essential character and original purpose of trade whilst discarding the apparatus which had been supposed to facilitate, but was in fact strangling it” (Keynes, 1980a, CW XXV, p. 23). He also stated that Britain should offer the same plan that what Dr Funk proposed (Keynes, 1980a, CW XXV, p. 8). The first version of the plan was born in September 1941, after a few months of reflections and discussions with close collaborators. The plan has been refined and redrafted several times, with amendments.

As of 1942, Keynes departed from this German influence and started to denounce the “Schachtian minds” assumed to be opposed to multilateralism. This watershed was raising against him opponents in Britain, such as Thomas Balogh and Hubert Henderson12. Balogh (1976, p. 67) argued that Keynes was – badly – influenced by the economists around him. The Keynesian Revolution had benefitted in the 1930s from the views of radical thinkers surrounding Keynes, like Richard Kahn and Joan Robinson. The fact that Keynes had remained far from his two colleagues during the BW negotiations explains his disappointing remoteness from his revolutionary views: “When Keynes was working with Meade or Robbins he effortlessly slipped back into a well- remembered old groove” (Balogh, 1976, p.73)13.

The Keynes plan was finally officially released as a government White Paper (Cmd 6437)14. The plan opposed the liberal stance on the international monetary system and aims at avoiding the deflationary biases of a self-regulated international monetary order, which had been punctuated during the interwar period by exchange rate instability and recurrent currency depreciations as well as discriminatory tariffs. After a decade of bilateral clearing agreements, the idea of “multilateralism” had become then more concrete than ever. Concretely, it means that a country A could be in deficit with a country B without having to contract its imports as it records a surplus with country C. Any country should target the equilibrium with the Clearing Union as a whole, which tolerates bilateral disequilibrium. The plan aims at the expansion of the world trade on a sound basis.

All the Member States’ currencies would have fixed (but revisable) parities with a newly created international currency unit (Horsefield, 1969, p. 22). Keynes conceived of a supranational currency to perform international payments. It should be both a unit of account and a means of

11 Dr Walther Funk was the Reichsminister of Economics (1938-1945) and President of the Reichsbank (1939-1945). He proposed in 1940 a plan for a German-centered New European Order based on a European clearing union. 12 Hubert Henderson had been also a close collaborator of Keynes previously. They proposed a common plan to reform the international monetary system in 1931, the Keynes/Henderson proposal (Moggridge, 2017). Henderson had contributed to the foundation of the Oxford Institute in 1935 and had remained associated with the Institute during the war. 13 This feeling of a growing hostility between the two men was reciprocal. Keynes wrote to Kalecki in 1944 “What is happening to Balogh? He has done some excellent stuff in the past, but much of what I have seen of late strikes me as extremely confused.”(quoted in Toporowski, 2018a, p. 136). 14 This White paper was reproduced in Horsefield (1969, p. 19-36).

6 payments created by overdraft facilities. The unit of account was named “grammor”15 in the second draft of the proposal (November 1941) and “bancor” in the third draft (December 1941). It remained so in the following drafts until the official release of the white paper. The bancor should be the only international means of payments, while it should have no purpose within the national economies. Hence it is the means of payments which is used by central banks to settle debts to other central banks. This supranational currency would be issued by a newly created supranational central bank (the International Clearing Bank, ICB), which could be considered as the central bank for national central banks. Each national central bank would have an ICB account and represent its country. The International Clearing Union was actually assumed to function as a banking system by applying the principles of banking.

“The idea underlying my proposals for a Currency Union is simple, namely to generalize the essential principle of banking, as it is exhibited within any closed system, through the establishment of an International Clearing Bank. This principle is the necessary equality of credits and debits, of assets and liabilities.” (Keynes, CW XXV, 1980, p. 44).

The equilibrium can be defined as the absence of bancor credit or debit on the national central bank’s account at the International Clearing Bank. To reach international equilibrium, the scheme organises a set of incentives based on interests charged on debtors as well as creditors. According to Keynes, “if the purpose of the overdraft facilities is mainly to give time for adjustments, we have to make sure, so far as possible, that they will be made. We must have, therefore, some rules and some machinery to secure that equilibrium is restored.” (Horsefield, 1969, p. 28). The well- known rule is the fines on bancor balances:

“A member State shall pay to the Reserve Fund of the Clearing Union a charge of 1 per cent, per annum on the amount of its average balance in bancor, whether it is a credit or a debit balance, in excess of a quarter of its quota; and a further charge of 1 per cent, on its average balance, whether credit or debit, in excess of a half of its quota. Thus, only a country which keeps as nearly as possible in a state of international balance on the average of the year will escape this contribution. (Horsefield, 1969, p. 23).

The quota is a percentage (75%) of the sum of exports and imports on the average of the three pre- war years (Horsefield, 1969, p. 22).

As reminds Rossi (2007, p. 98), Keynes was “one of the first proponents of an international payment system in which a non-national book-entry money, instead of a commodity like precious metals, is used by participating countries to settle their trade imbalances − hence an international bank money (instead of gold)”. The Keynes plan involved indeed the removal of the gold as it was conceived before the war – as a means of regulating the international economic order. Although as pointed out in Beretta (2012a, 2012b) the contribution by some now neglected German-speaking economic thinkers might have inspired him too, what remains true is that the Keynes plan is maybe the first “mainstream” (namely widely known and discussed) proposal to reform the international monetary order by setting up common institutions, procedures and standards.

15 As a further proof that the British economist has been positively inspired by other economists it seems worth mentioning that the term “grammor” has been also used by Carl Knies in his Weltgeld und Weltmünzen appeared in 1874 in Berlin.

The Clearing Union under the Balogh/Schumacher/Kalecki scheme

As a preliminary remark, a distinction should be made between the criticisms against the Keynes plan (1943) and those directed against the US-UK Joint Statement (1944), the latter being the result of the negotiations between the US and the UK delegations. This part focuses on the former. It is widely acknowledged that the latter reflects much more the position of the United States, in such a way that it would be more accurate to say that the criticisms heaped on the Joint Statement were directed against the US position. Nevertheless, the criticisms directed against the Keynes plan in 1943 were replicated more vigorously against the 1944 Joint Statement16.

When they reviewed the two proposals in 1943, BSK had a clear preference for the British plan (Schumacher 1943b; Kalecki & Schumacher, 1943). They considered that the US plan was nothing more than the return to a new version of the old-fashioned gold standard. “It adds nothing to the present position” and “(…) does not seem to offer a workable system” (Schumacher, 1943b, p. 28). Furthermore, it did not provide a long-term device to shelter the world economy from a liquidity shortage.

While clearly supporting the British plan, BSK however criticized it and insisted on the institutional design of the future international monetary system. They put the emphasis on the primary objective of full-employment which needs proper institutions. According to them, this objective cannot be reached with counterproductive rules and erroneous concepts.

Kalecki and Schumacher were opposed to charging interest on the surplus countries as well as the deficit countries, due to the deflationary bias it may induce. Such a rule could result in a deflationary adjustment in the surplus country, with a slump in exports rather than an increase in imports. They argued that the international machinery aiming at the equilibrium – such as the International Clearing Union in the Keynes plan – could be restrictive in two ways: “by inducing the surplus countries to ration their exports and by inducing the deficit countries to ration their imports” (Kalecki and Schumacher, 1943, p. 29).

International reserves accumulation by surplus countries should therefore not crowd out the possibility for deficit countries to benefit from international loans and import more. This problem could be solved by the amendment of the Keynes plan and the creation of an International Investment Board alongside the International Clearing Office.

The issue of long-term lending and the financing of developing countries

The above-mentioned bancor equilibrium equals the short-term capital account as a counterpart for current account transactions. However, the equilibrium of this account does not mean that the long-term capital account is necessarily balanced. Keynes’ proposal is not clear on this aspect whether this long term capital flows are assumed to be balanced or non-existent in his scheme (Schumacher, 1943b, p. 11, see also Toporowski, 2018b). In International clearing and long-term lending, Kalecki and Schumacher (1943) expressed the need to explore precisely the notion and

16 According to the Britain foreword to the Joint-Statement (1944), the proposed Fund is supposed to perform the same functions as the Clearing Union. It has however proved easier to obtain agreement on the mechanism of the Fund, “which has the appearance of being closer to what is already familiar.” (Horsefield, 1969, p. 129). However, as Schumacher and Balogh (1944) have shown, this was not true.

8 implications of the international “equilibrium”. They also contested the target of international equilibrium in itself.

“There is no merit in a general policy aiming at Current account equilibrium for all countries, because different countries are at different stages of economic development, and a regular flow of investment from the more highly developed to the more backward regions of the world may redound to benefit of all.” (Kalecki and Schumacher, 1943, p. 29).

Undoubtedly the current account should not be necessarily equilibrated among different countries. In fact, while some nations might already have achieved a high standard of living and industrialisation, others might find themselves in need to finance their economic growth through external resources. Exceeding imports of goods and services are a way to compensate for “insufficient” internal resources to foster growth. As a result, as in the case of excessive exports of financial securities, the external debt position of the deficit country would worsen.

The BSK proposal combines clearing and lending functions. An International Investment Board granting credits in specific situations should join the International Clearing Office (namely the supra-national institution topping this global clearing scheme). The advanced country should not be prevented to run an export surplus. Simultaneously, developing countries should be permitted to run a current account deficit and to import capital (Sawyer 2001, p. 257). In that sense, BSK distinguished from the Keynes plan, which aimed at the international equilibrium whatever the discrepancies of development levels between trade partners. BSK claim the necessity of a balance of payment disequilibrium to enable the catch-up process.

The nations that record deficits would be divided into “(a) deficit countries in the course of industrialization reconstruction, or readjustment (A countries); (b) countries whose deficit in the current balance of payment is due to other reasons (B countries).”

Regarding A countries:

“The Board advances long-term bancor loans out of newly created bancor at an interest rate of, say, 3% per annum. When the loan is granted an ‘investment account’ is opened for the borrowing country, in addition to its normal account in the International Clearing. The loan is credited to the ‘normal account’ and debited to the ‘investment account.’ When the loan has been spent the balance on normal account will have fallen to its previous level; the balances of other countries on their normal account will have pro tanto increased (i.e. credit balances will have increased or debit balances diminished); and the debt on ‘investment account’ of the debtor country will, of course, be unchanged. Amortisation payments are debited to the ‘normal account’ of the debtor country and credited to its ‘investment account. Interest payments are also debited to the 'normal account' of the country concerned, and an equal amount is credited to the Clearing Accounts of all creditor countries, proportionately to their average credit balances in the Clearing during the year.” (Kalecki and Schumacher, 1943, p. 31).

These measures are assumed to help A countries to catch-up industrialized countries. However, in spite of these loans, if these countries exhaust their quotas, they will be treated as B countries – that is countries “whose deficit in the Clearing Account is not due to industrialization” (Kalecki and Schumacher, 1943, p. 31).

The deficit of B countries could be resorbed thanks to the implementation of exceptional discriminatory measures: “The Board should have the power to direct borrowers receiving development loans to use them fully or partly for increasing their imports from specified ‘B’ countries.” (Kalecki and Schumacher, 1943, p. 32).

Not astonishingly, Schumacher and Balogh wrote in 1944 an article called An International Monetary Fund (1944) pleading for a structured way of defining and governing economic policies among countries:

“as long as that trade is not carefully planned and stabilised, [it] is a risk rather than an advantage to the pursuit of a full employment policy by any one individual country. As long as the world is divided into a large number of sovereign national units, these units are likely to follow divergent policies and will thus make international trade an element of uncertainty and instability” (Schumacher and Balogh, 1944, p. 83).

If their analysis was focused on developing international lending on a sound basis, BSK were less interested in exploring the relevance of introducing an “international money unit” as Keynes pleaded for. In his Multilateral Clearing article, Schumacher proposed that all member countries of the agreement would be connected through National Clearing Funds and they would buy or sell a share of the International Pool depending on their debit/credit position in such a way that all the surplus countries are made “the joint owners of the balances in all the deficit countries” (Schumacher, 1943a, p. 154). As Schumacher (1943a, p. 153) wrote, “It will be clear that the International Clearing Office requires no finance of its own, nor does it have to create a new international currency.”

“If a new international currency were created, this would be of no economic significance. The holding of “a share in the Pool” would then be called a holding of “world currency”, but the backing of the world currency would none the less be nothing else but the cash balances in the deficit countries.” (Schumacher, 1943a, p. 153)

Schumacher believed in the fact that the international economy is an economy of exchange, while the national economy is a monetary economy of production. The objective of the international monetary reform is therefore to create a proper way of coordinating the national economies to preserve their capacity to enforce domestic full-employment policies17. The creation of an international currency unit should not create any illusion.

“The creation of bancor quotas […] costs nothing; consequently, it produces no new incomes and no new spending. It cannot ‘turn a stone into bread’.” (Schumacher, 1943b, p. 17).

The bancor does not create any production in itself. Its sole purpose is to avoid any deflationary bias by making possible the international trade which otherwise would not take place. In a sense, this argument recalls the pragmatic policy of bilateral clearing agreements led by the Reichsminister of Economics Hjalmar Schacht in the 1930s Germany, which did not involve any monetary creation with Germany’s trade partners. As stated above, Schumacher was well

17 Keynes recognized this as he once wrote that the task was “to discover some orderly, yet elastic method of linking national currencies to an international currency, whatever the type of international currency may be” (Keynes, 1980b, CW XXVI, p. 39).

10 acquainted with these agreements when he was working in Berlin for the Syndicate of foreign firms in 1935-1936.

Currency convertibility and exchange controls

BSK did not advocate autarky or financial blockades. They tried to solve the contradiction in the Bretton Woods system. The exchange controls and the “machinery of record” espoused in their proposal did not mean autarky; quite the opposite, they were designed to develop international financial relations on a sound basis, in particular toward underdeveloped countries. A major point of contention with the Bretton Woods plans was, therefore, the issue of exchange controls and currency convertibility. In 1942, Keynes argued that under the bancor scheme, the national central banks should have the monopoly of foreign exchanges transactions (Horsefield, 1969, p. 33). It would involve a machinery of record and control. The Keynes plan even recommended that it would be “of great advantage if the United States, as well as other members of the Clearing Union, would adopt machinery similar to that which the British Exchange Control has now gone a long way towards perfecting.” However, this was expressed in a tentative way18. The following sentences in the same paragraph of the Keynes plan read as follows: “the universal establishment of a control of capital movements cannot be regarded as essential to the operation of the Clearing Union; and the method and degree of such control should therefore be left to the decision of each member State” (Horsefield, 1969, p. 31).

The United States on the opposite side claimed for the dismantlement of the trade and payments barriers within and outside the Sterling Area19. Once the UK’s delegation accepted the preliminary agreement with the United States, Keynes defended it at the expense of crucial arguments of its initial draft (Balogh, 1976). One of the obligations of the April 1944 Joint statement (article IX) requires:

“Not to impose restrictions on payments for current international transactions with other member countries (other than those involving capital transfers or in accordance with VI, above) or to engage in any discriminatory currency arrangements or multiple currency practices without the approval of the Fund.” (Horsefield, 1969, p. 135)

The three Oxford Institute scholars were upset by this obligation. A few days after the publication of the Joint-Statement, Schumacher and Balogh (1944) published a comment in the Bulletin: “This scheme provides no certain credit facilities for large surpluses and at the same time outlaws ‘discrimination” (1944, p. 86). This would inevitably result in hasty, unprepared exchange controls as well as deflationary policies in the Western world.

Although the scheme of their plan was the “free access to trade” through multilateralism, BSK had championed exchange controls as a servant of full-employment policies. These authors had already produced some papers in this vein. For instance, Kalecki considered that exchange restrictions were a necessary basis for implementing Keynesianism in one country, as exemplified the attempt in France during the Front Populaire experience of 1936-1937: “In order, however, to go forward with the stimulating of production by budgetary deficit, the Blum Government needed a basis

18 According to Schumacher (1943b, p. 12), the British proposals “do not fully face this issue.” 19 The White plan aimed to reduce the necessity and use of exchange controls, considering that “foreign exchange controls usually constitute an interference with trade and capital flows.” (Horsefield, 1969, p. 47).

11 which they failed to secure from the very beginning: the exchange restrictions.” (Kalecki, 1938, p. 39).

Schumacher had pointed out in 1943 that the British Treasury plan did not mention explicitly the necessity to establish both “a machinery of record” and machinery “as an instrument of policy” to “leave the accumulation of bancor credits and debits as the sole vehicle of net short term lending” (Schumacher, 1943b, p. 12). Hence Schumacher alluded to the practical necessity of a machinery of controls that lurks behind any clearing scheme, at least “simply for want of a reliable indicator of disequilibrium”. Two years later, Schumacher (1945a, p. 96-97) argued again that the “perfectly sound argument for more international trade has become mixed up – as is unfortunately so frequently the case – with a highly questionable argument for the removal of controls.”

Balogh had repeatedly promoted the exchange controls which would be necessary for the UK to be properly prepared to the war and which would need to be maintained during the reconstruction period. This was baffling for American economists, for understandable reasons.

“The United States (and to some extent Canada) have in the last decades been not merely surplus countries but (apart from a short period in 1933) also the recipients of vast capital imports. Britain has been liquidating her foreign investments since 1930, and will emerge from this war almost a net debtor nation, quite apart from the fact that her current balance of trade will need substantial readjustment. Most European countries will be pauperised and in dire need of foreign help. This vast difference in economic background necessarily imprints itself on economic thinking, which is subject to influences emanating from contemporary problems. One must, therefore, expect differences in national approach, differences which cut across and mode political differences within countries. Progressive U.S. economists such as Professor Viner condemn exchange control as a reactionary measure, thinking of the Nazi New Order, because, given the U.S. position, the problem of the foreign balance does not influence, much less determine, internal social policies in the U.S. They are utterly uncomprehending when a European economist points out that exchange control is – barring international agreements on the lines suggested – the conditio sine qua non of progressive internal policies. They do not see that by their attitude they help the very reactionaries in Europe whom they oppose at home.” (Balogh, 1943, p. 346-347)

Balogh was sometimes recalled as an adversary of multilateralism. The conception of multilateralism that Balogh opposed was that of the mainstream economics accepted mainly in the United States, involving currency convertibility and non-discriminatory trade. To reconcile full- employment policies with open-economies, Balogh had also a preference for exchange controls rather than devaluation or market adjustment mechanisms, due to the potential effects of the latter on workers. This was a political dissent between Keynes and BSK, the latter being on the left of the political spectrum. Balogh and Schumacher were members and advisors of the Labour Party, while Kalecki was socialist. Liberals – as was Keynes at the end of his life – had a preference for devaluation and eventually considered that the sterling inconvertibility can only be of a temporary nature. According to Skidelsky (2000), Balogh represented within the left the “nationalist socialist” point of view (however not in the sense of the German national-socialism of the 1930s)20.

20 Balogh was even called a “Jewish Nazi” by Keynes due to his opinions (Toporowski, 2018a, p. 143).

Balogh had early denounced the contradictions inherent in the Bretton Woods agreement and the scheduled restoration of the free convertibility of currencies, which would prevent full- employment policies: “As long, however, as Britain is threatened with a restoration of free convertibility of sterling balances alluded to in Annex VII (iii), and which would be the necessary consequence of the acceptance of the Bretton Woods agreement after a relatively short transitional period, Britain will have to restrict her purchases in order to procure as much international liquid means of payment as possible, in anticipation of the restoration of convertibility.” (Balogh, 1945, p. 141). Hence Britain would be eventually constrained to revert to trade restrictions as well as austerity measures, which proved true21.

Concluding remarks

This paper shed light on the criticisms from Balogh, Schumacher and Kalecki (BSK) toward the Keynes plan. These criticisms put on the agenda the question of the accuracy of the international monetary reform. While the agenda was eventually determined by the US interests, the international monetary reform remained consistently recalled as a priority issue of Post Keynesian scholars. This research has also enabled us to observe the state of the art of the discussions during the war. Keynes seems to have evolved from the project of radical reform to a compromise that has created an increasing discontent amongst scholars from the radical circles, who became even more critical once Keynes rallied the 1944 Joint Statement.

After the Bretton Woods Conference, the notion of “international liquidity” (namely the international money unit to be used in cross-border commercial and financial transactions) has soon become an “international liquidity problem” also known as “Triffin dilemma” (or “Triffin paradox”). In fact, “[i]n a dollar-based system, net holdings of dollar assets by the rest of the world depend on the United States running current account deficits. If the United States stopped running deficits, the shortage of international liquidity would stifle global trade, investment and growth. If, on the other hand, the United States runs growing deficits and supplies adequate liquidity to the world economy, the accumulation of liabilities could undermine confidence in the dollar” (Sundaram 2011, [no indication])). Within the financial globalization, a few innovations have however enabled the US dollar to overcome this constraint and provide the global economy with liquidity somehow (Mehrling, 2016).

It can be argued that a combination of elements of Keynes’ proposal (i.e. international money unit; supra-national monetary architecture) and Schumacher’s, Kalecki’s and Balogh’s conclusions (i.e. no need for current account equilibrium; long-term lending; international clearing office) would have led to a sound reform of international payments, which would have allowed for a multilateral structured system of short- and long-term lending together with a common medium of exchange. That this did not happen is, for sure, still hampering today’s international payments system.

21 The 1947 convertibility crisis in Britain ruled in favour of Balogh’s prediction.

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Appendix 1: Important dates

1940

- February: Kalecki starts working in Oxford - February: Balogh starts working in Oxford - 25 July: Walther Funk’s Plan for a “new European economic order” released

1941

- 8 September: First draft of the Keynes Plan - 16 September: Schumacher draft plan sent to Keynes - 18 November: Second draft of the Keynes Plan (‘Grammor plan’) - 15 December: Third draft of the Keynes Plan (‘Bancor plan’)

1942

- 11 February: Fourth draft of the Keynes Plan - March: “Free Access to Trade”, unpublished Schumacher’s paper circulating in the Royal Institute of International Affairs - March: Schumacher starts working in Oxford

1943

- 6 April: Publication of the US Treasury White Paper - 7 April: Publication of the British “Proposal for an International Clearing Union” as a White Paper - May: Publication of “Multilateral Clearing”, by E.F. Schumacher in Economica - 7 August: Publication of New Plans for International Trade as a special issue of the Bulletin, by Balogh, Schumacher and Kalecki - October: Publication of “The Currency Plans and International Economic Relations”, by T. Balogh in The Political Quarterly

1944

- 21 April: Publication of the US-UK Joint Statement - 29 April: Publication of “An International Monetary Fund”, by E.F. Schumacher and T. Balogh - 23 May: Hansard, House of Lords, speech of J.M. Keynes - October: Publication of The Economics of Full Employment by the economists of the Oxford Institute

Appendix 2: A comparative table

Thomas Balogh, Michal Kalecki and John Maynard Keynes22 Ernst Friedrich Schumacher Clearing N/D23 Bancor unit Institution International Clearing Office (ICO) International Clearing Union (ICU) Reserve Share of the International Pool Book entry at the ICU holding Monetary Fix but alterable. Exchange controls in Fix but alterable − not more than 5 parity case of a persistent disequilibrium (i.e. percent without approval current account deficit) are more preferred than devaluation or market adjustment mechanisms due to the potential effects of the latter on workers Quotas No quotas Average of exports and imports of the last 3 years Credit limit No limit. If loans are granted by an No limit but excess credit above 50 International Investment Board, an percent of the quote leads to measures by ‘investment account’ is opened for the the governing board borrowing country, in addition to its ‘normal account’ in the International Clearing Union. Advanced countries should continue being able to accumulate foreign reserves from current account surpluses Debt limit No limit. Separation between deficit Payment of 1 percent of debit above one countries in the course of quarter of the quota and additional 1 industrialization, reconstruction or percent for debit above half of the quota readjustment and countries whose − additional measures by the governing deficit in the current balance of board. Above three quarters the country payment is due to other reasons. A can only make new debts with approval balance-of--payment disequilibrium is, of the governing board therefore, not problematic if it enables the catch-up process Adjustment Reimbursement of the funds lent by Countries with current account deficit mechanism buying up the exported goods/services are asked to take measures to improve from developed countries their terms of trade in order to gain competitiveness and reduce the current account deficit − on the other side surplus countries should reduce their competitiveness by wage increase or change of the exchange rate, or increasing local demand, or give loans to deficit countries

22 This entire colum has been taken from Klaffenböck (2008, p. 49). 23 N/D: Not defined.