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

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“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“Money, banks and finance in economic thought”, University of Lille, Lille (France), 23-25 May 2019 DRAFT PAPER PLEASE DO NOT QUOTE WITHOUT PERMISSION Adrien Faudot, PhD1 CREG, Université Grenoble Alpes, France Edoardo Beretta, PhD2 Università della Svizzera italiana (USI), Lugano,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]. 1 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. 2 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.
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