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 the collected writings of
J O H N M AY NA R D K E Y N E S
Managing Editors:
Professor Austin Robinson and Professor Donald Moggridge

John Maynard Keynes (1883–1946) was without doubt one of the most influ-
ential thinkers of the twentieth century. His work revolutionised the theory
and practice of modern economics. It has had a profound impact on the
way economics is taught and written, and on economic policy, around the
world. The Collected Writings of John Maynard Keynes, published in full in
electronic and paperback format for the first time, makes available in thirty
volumes all of Keynes’s published books and articles. This includes writings
from his time in the India Office and Treasury, correspondence in which he
developed his ideas in discussion with fellow economists and correspondence
relating to public affairs. Arguments about Keynes’s work have continued
long beyond his lifetime, but his ideas remain central to any understanding of
modern economics, and a point of departure from which each new generation
of economists draws inspiration.

This volume, the fourth of six dealing with the Second World War, is con-
cerned with the origins of what became the International Monetary Fund
and the World Bank. It traces the origins of the ideas involved, the process
of argument and redrafting that occurred in Whitehall and the subsequent,
primarily Anglo-American, negotiations themselves. It takes the story up
to the Joint Bretton Woods Conference. As it contains copies of all drafts
of Keynes’s Clearing Union proposals, together with extensive sampling of
discussions with economists such as Dennis Robertson, James Meade, Roy
Harrod and Harry White, it combines the presentation of a set of ideas of
continuing relevance, with essential background material on the origins of an
important post-war international institution.

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 THE COLLECTED WRITINGS OF
JOHN MAYNARD KEYNES

VO LU M E X X V

ACTIVITIES 1940–1944
SHAPING THE POST-WAR WORLD:
THE CLEARING UNION

edited by
DONALD MOGGRIDGE

CAMBRIDGE UNIVERSITY PRESS

for the
ROYAL ECONOMIC SOCIETY

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 © The Royal Economic Society 1980, 2013

All rights reserved. No part of this publication

may be reproduced or transmitted, in any
form or by any means, without permission

Published for the Royal Economic Society

throughout the world by
cambridge university press
Cambridge, New York, Melbourne, Madrid, Cape Town,
Singapore, São Paulo, Delhi, Mexico City
Cambridge University Press
The Edinburgh Building, Cambridge cb2 8ru, UK

Published in the United States of America by

Cambridge University Press, New York

www.cambridge.org
Information on this title: www.cambridge.org/9781107610460

This publication is in copyright. Subject to statutory exception

and to the provisions of relevant collective licensing agreements,
no reproduction of any part may take place without the written
permission of Cambridge University Press.

This edition published 2013

Printed and bound in the United Kingdom
by the MPG Books Group

A catalogue record for this publication is available from the British Library

isbn 978-1-107-61046-0 Paperback

30-volume set isbn 978-1-107-67772-2

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 CONTENTS

General introduction page vii

Editorial note xiii
1 THE ORIGINS OF THE CLEARING UNION, 194O-I942 I
2 FROM CABINET AGREEMENT TO WHITE PAPER, 1942-
1943 145
3 FROM WHITE PAPER TO JOINT STATEMENT, APRIL 1943
TO APRIL 1944 238

Appendix 1 Changes from Draft of 4 August 1942

in Version sent to H. D. White on 28 August 1942 449
Appendix 2 Changes from Draft sent to H. D. White
on 28 August 1942 in the Version sent after the
Dominions Discussions, 9 November 1942 453
Appendix 3 Changes from the Draft of 9 November
1942 in the White Paper published on 7 April 1943
other than the Preface 459
Appendix 4 Joint Statement by Experts on the
Establishment of an International Monetary
Fund 469
List of Documents Reproduced 478
Acknowledgements 483
Index 485

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 GENERAL INTRODUCTION

This new standard edition of The Collected Writings of John

Maynard Keynes forms the memorial to him of the Royal
Economic Society. He devoted a very large share of his busy
life to the Society. In 1911, at the age of twenty-eight, he
became editor of the Economic Journal in succession to Edge-
worth; two years later he was made secretary as well. He held
these offices without intermittence until almost the end of his
life. Edgeworth, it is true, returned to help him with the
editorship from 1919 to 1925; Macgregor took Edgeworth's
place until 1934, when Austin Robinson succeeded him and
continued to assist Keynes down to 1945. But through all these
years Keynes himself carried the major responsibility and
made the principal decisions about the articles that were to
appear in the Economic Journal, without any break save for
one or two issues when he was seriously ill in 1937. It was only
a few months before his death at Easter 1946 that he was
elected president and handed over his editorship to Roy
Harrod and the secretaryship to Austin Robinson.
In his dual capacity of editor and secretary Keynes played
a major part in framing the policies of the Royal Economic
Society. It was very largely due to him that some of the major
publishing activities of the Society—Sraffa's edition of
Ricardo, Stark's edition of the economic writings of Bentham,
and Guillebaud's edition of Marshall, as well as a number
of earlier publications in the 1930s—were initiated.
When Keynes died in 1946 it was natural that the Royal
Economic Society should wish to commemorate him. It was
perhaps equally natural that the Society chose to commem-
vii

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 GENERAL INTRODUCTION
orate him by producing an edition of his collected works.
Keynes himself had always taken a joy in fine printing, and
the Society, with the help of Messrs Macmillan as publishers
and the Cambridge University Press as printers, has been
anxious to give Keynes's writings a permanent form that is
wholly worthy of him.
The present edition will publish as much as is possible of
his work in the field of economics. It will not include any
private and personal correspondence or publish letters in the
possession of his family. The edition is concerned, that is to
say, with Keynes as an economist.
Keynes's writings fall into five broad categories. First there
are the books which he wrote and published as books. Second
there are collections of articles and pamphlets which he
himself made during his lifetime (Essays in Persuasion and
Essays in Biography). Third, there is a very considerable
volume of published but uncollected writings—articles writ-
ten for newspapers, letters to newspapers, articles in journals
that have not been included in his two volumes of collections,
and various pamphlets. Fourth, there are a few hitherto
unpublished writings. Fifth, there is correspondence with
economists and concerned with economics or public affairs.
It is the intention of this series to publish almost completely
the whole of the first four categories listed above. The only
exceptions are a few syndicated articles where Keynes wrote
almost the same material for publication in different news-
papers or in different countries, with minor and unimportant
variations. In these cases, this series will publish one only of
the variations, choosing the most interesting.
The publication of Keynes's economic correspondence
must inevitably be selective. In the day of the typewriter and
the filing cabinet and particularly in the case of so active and
busy a man, to publish every scrap of paper that he may have
dictated about some unimportant or ephemeral matter is
impossible. We are aiming to collect and publish as much as

vni

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 GENERAL INTRODUCTION
possible, however, of the correspondence in which Keynes
developed his own ideas in argument with his fellow econ-
omists, as well as the more significant correspondence at times
when Keynes was in the middle of public affairs.
Apart from his published books, the main sources available
to those preparing this series have been two. First, Keynes in
his will made Richard Kahn his executor and responsible for
his economic papers. They have been placed in the Marshall
Library of the University of Cambridge and have been avail-
able for this edition. Until 1914 Keynes did not have a
secretary and his earliest papers are in the main limited to
drafts of important letters that he made in his own hand-
writing and retained. At that stage most of the correspondence
that we possess is represented by what he received rather than
by what he wrote. During the war years of 1914-18 and
1940-6 Keynes was serving in the Treasury. With the
opening in 1968 of the records under the thirty-year rule,
many of the papers that he wrote then and between the
wars have become available. From 1919 onwards,
throughout the rest of his life, Keynes had the help of
a secretary—for many years Mrs Stephens. Thus for the
last twenty-five years of his working life we have in most
cases the carbon copies of his own letters as well as the
originals of the letters that he received.
There were, of course, occasions during this period on
which Keynes wrote himself in his own handwriting. In some
of these cases, with the help of his correspondents, we have
been able to collect the whole of both sides of some important
interchange and we have been anxious, in justice to both
correspondents, to see that both sides of the correspondence
are published in full.
The second main source of information has been a group
of scrapbooks kept over a very long period of years by
Keynes's mother, Florence Keynes, wife of Neville Keynes.
From 1919 onwards these scrapbooks contain almost the
IX

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 GENERAL INTRODUCTION
whole of Maynard Keynes's more ephemeral writing, his
letters to newspapers and a great deal of material which
enables one to see not only what he wrote but the reaction
of others to his writing. Without these very carefully kept
scrapbooks the task of any editor or biographer of Keynes
would have been immensely more difficult.
The plan of the edition, as at present intended, is this. It
will total thirty volumes. Of these the first eight are Keynes's
published books from Indian Currency and Finance, in 1913,
to the General Theory in 1936, with the addition of his Treatise
on Probability. There next follow, as vols. ix and x, Essays
in Persuasion and Essays in Biography, representing Keynes's
own collections of articles. Essays in Persuasion differs
from the original printing in two respects: it contains the full
texts of the articles or pamphlets included in it and not (as
in the original printing) abbreviated versions of these articles,
and it also contains one or two later articles which are of
exactly the same character as those included by Keynes in his
original collection. In Essays in Biography there have been
added a number of biographical studies that Keynes wrote
both before and after 1933.
There will follow two volumes, XI-XII, of economic articles
and correspondence and a further two volumes, already
published, XIII-XIV, covering the development of his thinking
as he moved towards the General Theory. There are included
in these volumes such part of Keynes's economic correspon-
dence as is closely associated with the articles that are printed
in them. A supplement to these volumes, xxix, prints some
further material relating to the same issues, which has since
been discovered.
The remaining fourteen volumes deal with Keynes's Activi-
ties during the years from the beginning of his public life in
1905 until his death. In each of the periods into which we
divide this material, the volume concerned publishes his more
ephemeral writings, all of it hitherto uncollected, his

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 GENERAL INTRODUCTION
correspondence relating to these activities, and such other
material and correspondence as is necessary to the under-
standing of Keynes's activities. These volumes are edited by
Elizabeth Johnson and Donald Moggridge, and it has been
their task to trace and interpret Keynes's activities sufficiently
to make the material fully intelligible to a later generation.
Elizabeth Johnson has been responsible for vols. xv-xvm,
covering Keynes's earlier years and his activities down to the
end of World War I reparations and reconstruction. Donald
Moggridge is responsible for all the remaining volumes
recording Keynes's other activities from 1924 until his death
in 1946.
The present plan of publication, with two of the wartime
volumes already published, is to complete the record of
Keynes's activities during World War II with the group of
volumes of which this forms one. These five volumes cover
not only the problems of war finance, internal and external,
but also his contributions both in the Treasury and at
Bretton Woods and elsewhere to the shaping of the post-war
world. It will then remain to fill the gap between 1923 and
1939, to print certain of his published articles and the
correspondence relating to them which have not appeared
elsewhere in this edition, and to publish a volume of his social,
political and literary writings.
Those responsible for this edition have been: Lord Kahn,
both as Lord Keynes's executor and as a long and intimate
friend of Lord Keynes, able to help in the interpreting of
much that would be otherwise misunderstood; Sir Roy
Harrod as the author of his biography; Austin Robinson as
Keynes's co-editor on the Economic Journal and successor as
Secretary of the Royal Economic Society. Austin Robinson has
acted throughout as Managing Editor; Donald Moggridge
is now associated with him as Joint Managing Editor.
In the early stages of the work Elizabeth Johnson was
assisted by Jane Thistlethwaite, and by Mrs McDonald, who
xi

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 GENERAL INTRODUCTION
was originally responsible for the systematic ordering of the
files of the Keynes papers. Judith Masterman for many years
worked with Mrs Johnson on the papers. More recently Susan
Wilsher, Margaret Butler and Leonora Woollam have
continued the secretarial work. Barbara Lowe has been
responsible for the indexing. Susan Howson undertook much
of the important final editorial work on the wartime volumes.
Since 1977 Judith Allen has been responsible for seeing the
volumes through the press.

xn

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 EDITORIAL NOTE

This volume, the first of three concerned with Keynes's efforts

to shape the post-war world, has as its focus the origins of
the Clearing Union and the progress of subsequent discus-
sions in both London and Washington up to April 1944. Two
further volumes will be concerned with the negotiations
surrounding the founding of the International Monetary
Fund and World Bank after that date and with Keynes's
activities in such areas as employment policy, commodity
policy, relief and reparations.
The sources for this volume are Keynes's surviving papers,
materials available in the Public Record Office and the papers
of colleagues and friends. Where the material used has come
from the Public Record Office, the call numbers for the
relevant files appear in the List of Documents Reproduced
following page 478.
In this and the other wartime volumes, to aid the reader
in keeping track of the various personalities who pass through
the pages that follow, we have included brief biographical
notes on the first occasion on which they appear. These notes
are designed to be cumulative over the whole run of wartime
volumes.
In this, as in all the similar volumes, in general all of
Keynes's own writings are printed in larger type. Keynes's
own footnotes are indicated by asterisks or other symbols
to distinguish them from the editorial footnotes. All intro-
ductory matter and all writings by others than Keynes are
printed in smaller type. The only exception to this general
rule is that occasional short quotations from a letter from
Xlll

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 EDITORIAL NOTE
Keynes to his parents or to a friend, used in introductory
passages to clarify a situation, are treated as introductory
matter and are printed in the smaller type.
Most of Keynes's letters included in this and other volumes
are reprinted from the carbon copies that remain among his
papers. In most cases he has added his initials to the carbon
in the familiar fashion in which he signed to all his friends.
We have no certain means of knowing whether the top copy,
sent to the recipient of the letter, carried a more formal
signature.

xiv

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 Chapter i
THE ORIGINS OF THE CLEARING
UNION, 1940-1942

The Second World War was not, of course, the first occasion on which
Keynes concerned himself with international monetary reform. One need
only think of the proposals in A Tract on Monetary Reform (JMK, Vol. iv,
pp. 141-60), A Treatise on Money (JMK, Vol. vi, pp. 346-67), 'Notes on the
Currency Question' (JMK, Vol. xxi) and The Means to Prosperity (JMK, Vol.
ix, pp. 355-66).
Apart from occasional discussions with the 'Old Dogs' and parts of How
to Pay for the War (JMK, Vol. ix), Keynes's first essay on the post-war world
came as the result of a request from Harold Nicolson1 of the Ministry of
Information. Nicolson told Keynes that the Ministry was contemplating a
campaign to counter Dr Funk's2 proposals for a German 'New Order'. He
hoped that Keynes would launch the campaign with a broadcast and
enclosed notes prepared for the purpose. Keynes replied:

From a letter to H. NICOLSON, 20 November ig^o

Dear Harold,
The question you raise in your letter of November 19th
wants a good deal of consideration. The following are some
preliminary notes on it.
(1) The dossier which you sent along with your letter seems
to suggest that we should do well to pose as champions of the
pre-war economic status quo and outbid Funk by offering good
old 1920-21 or 1930-33, i.e. gold standard or international
exchange laissez-faire aggravated by heavy tariffs, unem-
ployment, etc. etc. Is this particularly attractive or good
1
Hon. Harold Nicolson (1886-1968); entered Foreign Office, 1909; diplomatic
service, 1910-29; M.P. for W. Leicester, 1935-45; Parliamentary Secretary to
Ministry of Information, 1940-1; Governor of the BBC, 1941-8.
2
Dr Walther Funk, German Minister of Foreign Affairs, 193&-43; President of the
Reichsbank, 1939-45.

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 ACTIVITIES 194O-1944
propaganda? If you think it is, I am certainly not the man
to put it across.
Your Department think that they are making a good joke
at Funk's expense by saying 'gold will have no place in this
brave new world' and quoting German propaganda to the
effect that 'gold will no longer control the destinies of a
nation' etc. Well, obviously I am not the man to preach the
beauties and merits of the pre-war gold standard.
In my opinion about three-quarters of the passages quoted
from the German broadcasts would be quite excellent if the
name of Great Britain were substituted for Germany or the
Axis, as the case may be. If Funk's plan is taken at its face
value, it is excellent and just what we ourselves ought to be
thinking of doing. If it is to be attacked, the way to do it would
be to cast doubt and suspicion on its bona fides. The point is,
I should have thought, not that what Funk purports to do
is objectionable, but what he will actually d o . . .
(5) To sum up, it is my opinion—
(a) that we should not pose as champions of the status quo;
(b) that we should not produce at this stage any post-war
economic scheme of our own, if only on the ground that no
one I have yet seen has the foggiest idea of what such a plan
ought to be (it would be too hypothetical both in the minds
of ourselves and of our audience);
(c) that so far as exchange goes the right line to take is that
in our Spanish article, namely, that we are doing the same
thing as Funk, but much better, much more honestly and with
much more regard to other people's interests;
(d) that the counter-propaganda should take the form of
casting doubt, not on the value of what Funk purports to offer,
but on his bona fides and good intentions.
I do not feel greatly inspired at this moment of time to the
composition of a broadcast even on these lines. But, if you
press me, I will take my first moments of leisure to attempt a
draft and would prefer to see what it looks like before
committing myself further.

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 THE ORIGINS OF THE CLEARING UNION
One of Keynes's enclosures in his letter to Nicolson was a note he had
written earlier that month with Mr Play fair, eventually published by the
British Embassy in Madrid as counter-propaganda.

£QUE QUIERE DECIR EL AREA?

Years ago, money was an international thing: if you had the
money of one country you could change it into the money
of another at a fixed rate, and you never had to think which
currency you held. Exchange control changed all that: before
anyone accepted payment in a controlled currency, he had
to discover where he could spend it and what he could buy
with it. One by one, the currencies of the world, like their
national economies were becoming independent of one
another.
Sterling was one of the last currencies which you could
freely change into any other currency and so spend anywhere.
The custom of using sterling as an international currency was
generations old, all over the world: London was an unrivalled
financial centre and it was the most convenient of all cur-
rencies for trade between one country and another.
When England, at the beginning of the war, imposed some
measure of exchange control, there were many who said that
this was the end of the international use of sterling and of
the predominant usefulness of the London financial market.
Once England had accepted the territorial view of money,
people in other countries could not continue to accept it
without thinking: it was no longer a universal means of
payment, but a means of spending money within a certain
area, buying certain commodities and certain services. What
was that area, and what were those commodities and services?
Were they useful to Spain? These were the questions which
had to be answered before it was clear whether Spain could
continue to sell her goods and services for sterling as she had
done in the past.
The answer came in the 'area pound sterling' which is now

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 ACTIVITIES 194O-1944
as familiar a conception as the 'pound sterling' sans phrase
which everyone knew and used before the war. The English
system of exchange control does not mean that the expen-
diture of the 'area pound' is confined to England. 'Area
pounds' can be used throughout a great part of the world.
The area it covers is not a political entity, but a group of
territories based on economic and financial organisation.
Canada and Newfoundland, which are in the British Empire,
are not in the sterling area: Egypt and Iraq are in the sterling
area, but outside the Empire.
The essential point is this: that the area pound sterling can
be used throughout the wide territory which contains vast
resources of manufactured products, animal and vegetable
products of every type, grown under every climate, and
enormous mineral wealth. The Funk mark is inevitably
restricted to a narrow geographical and climatic range:
whereas the area of the pound sterling comprises territories
in every part of the world.
So the 'area pound' is a good name, and lays emphasis on
its most important characteristic. It can be used over a wider
territory and for more purposes than any other currency.
What is the comparison between this and the compensation
schemes of Dr Funk? Can Central Europe produce tin,
rubber, jute, sisal, vegetable oils? It is some convenience to
Germany's customers to have a bureau which will provide the
financial machinery for remittance between different regions
of a rationed and war-ravaged Europe, cut off from overseas
trade. It is a still more obvious convenience to Germany
herself to have a financial dodge by which she can acquire
the produce of the countries she occupies without having to
pay for them in goods. But the real test between the two
currencies is what each of them will buy. The Funk mark is,
in its essence, an instrument of tribute and corruption; an
up-to-date variant of the exchange devices for obtaining
something for nothing which Germany has worked so hard

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 THE ORIGINS OF THE CLEARING UNION
in recent years. The area pound sterling remains, in its
essence, an instrument of trade which preserves to the full
extent that is possible in time of war the former universality
and lasting worth of the old pound sterling. Let any Spaniard
ask himself which he would rather hold, either for present
use or for future value, the area pound or the Funk mark,
comparing his recent experience of the various Schacht
marks with his experience how even after the war the rights
of all foreign holders of the old pound sterling were fully
preserved. Can he hesitate?
Spain has a clearing with the United Kingdom. In the
normal clearing, there is an exact bilateral arrangement of
trade; if this was of the ordinary type, the proceeds of
everything which Spain sold to England would have to be
spent in England. The existence of the sterling area makes
a different system possible, which is far more advantageous
to Spain. Part of the proceeds of her sales to England are
reserved for purchases there; these serve to buy such neces-
sary goods as coal, machinery, tin smelted in England from
ores which come from the sterling area, textiles, chemicals,
motor-cars, machinery and tools; but an equal part may be
used anywhere in the sterling area, for goods which are vital
to the Spanish economy and some of which could not be
obtained anywhere else, or only with the greatest difficulty.
Let us examine a few of Spain's greatest needs: which can
be purchased with the area pound. It will buy wheat from
Egypt and Australia; rubber and tin from the Straits Settle-
ments; jute from India; cotton of different grades from
Egypt and India; oilseeds from the British African colonies.
This short list, which could be greatly extended, is enough
to show the vast difference between the surplus resources of
the sterling area and the restricted resources of Germany
and the German-occupied territories. However skilled the
Germans are at manufacturing substitutes and synthetic
imitations, they can never change a part of Europe into an

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 ACTIVITIES 1940-1944
area which can produce vegetable products which grow in
tropical, semi-tropical and temperate climates; nor can they
manufacture deposits of minerals where they do not exist.
The sterling area is not merely useful; it is essential, and
those who are deprived of its resources know this best.
But that is not the end of the uses of the area pound. At
first it seemed that it might have to be confined to expenditure
within the sterling area; but events have shown that other
countries, who themselves have equal need of the products
of the sterling area, are willing to sell their goods for area
pounds. Many deals of this kind have been arranged, and the
system is developing day by day. To take one or two examples:
Spain has bought from Portugal valuable stocks of colonial
products, such as vegetable oils and sisal, and paid for them
with area pounds; Chile has sold nitrates to Spain for area
pounds; and Spain makes large importations of Bacalao from
Newfoundland, Iceland and the Faroe Islands and pays for
them out of the Anglo-Spanish Clearing.
Exports to England, therefore, provide a means of payment
with which no other controlled currency can be compared.
The sterling area is vast, but Spain must naturally think of
her old trading connections with Portugal, South America
and other countries; and owing to the universal need of area
pounds, she is able to keep those up, paying, as she so often
has done in the past, in sterling.
This is the answer to the question which many have asked:
"What is behind sterling? Is there anything beside the con-
venience of the London market? Cannot we do without the use
of sterling which has become a habit, and shall we not have
to do without it now that England has imposed exchange
control?"
A particular kind of money is a mere mechanism, which
works well or badly. The important thing is the goods which
that money will buy: the territorial division of present-day
economy makes this clearer than ever. The sterling area is

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 THE ORIGINS OF THE CLEARING UNION
the largest and richest of all the territories which have a
controlled economy: and the area pound is a simple mech-
anism to make the resources of the area available to traders
all over the world. When you use it, you use the long-
established and smooth, reliable machinery of the City of
London, which has grown up on conducting international
trade on the simplest, most honourable and cheapest basis.
It avoids the complications of barter and compensation, which
hide the lack of resources and - too often - the juggling of
prices to the organiser's benefit which lie behind them; and
owing to its true usefulness and the backing of material
behind it, the area pound is naturally maintaining the inter-
national position which sterling has always had. It is not
sterling itself which is useful; it is the sterling area, to which
it is the key, and that is necessary to all the world.

At this point Nicolson's request was caught up with another request. Lord
Halifax asked the Chancellor if Keynes would prepare' some authoritative
statement exposing the fallacious character of the German promises' for
a 'New Order'. Keynes agreed to do so and drafted a series of 'Proposals
to Counter the German "New Order'", first dated 25 November 1940. He
circulated the proposals on 1 December with a covering note.

PROPOSALS TO COUNTER THE GERMAN NEW ORDER

German propaganda purports to offer her neighbours a
stable currency system, adapted to the commerce of countries
which have no gold, and above all a system of economic order
and organisation. Its object is to appeal to the wide circles and
powerful interests in each country which are inclined in
present circumstances to value social security higher than
political independence. I have been asked to draft a possible
basis for counter-propaganda.
It is not easy to be convincing on a purely negative basis.
If we have nothing positive to say, we had better be silent.
Tentatively, therefore, I have introduced in what follows

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 ACTIVITIES 1940-1944
some positive declarations. The first step is to examine the
advisability of these and perhaps to approve them.
(1) I have assumed that our policy of acquiring surplus
commodities, with the intention of putting them at the dis-
posal of Europe after the war, is already a going concern.
For a comprehensive policy on these lines the cooperation
of U.S.A. is necessary and is not yet obtained. If we are to
wait for definite American participation before we commit
ourselves, no immediate propaganda on these lines is pos-
sible. I do not consider such delay is necessary, because
we are already acquiring, and the Empire, taken as a
whole, already possesses, sufficient surplus stocks to make
a large contribution to Europe's most urgent post-war
requirements.
(2) I have assumed that we shall continue our existing
exchange controls after the war, and that we do not propose
to return to laissez-faire currency arrangements on pre-war
lines by which goods were freely bought and sold inter-
nationally in terms of gold or its equivalent. Since we ourselves
will have very little gold left and will owe great quantities of
sterling to overseas creditors, this seems only common sense.
(This does not mean that gold will cease to play its part as a
reserve of purchasing power and as a means of settling
international indebtedness.) I have, therefore, taken the line
that what we offer is the same as what Dr Funk offers, except
that we shall do it better and more honestly. This is important.
For a proposal to return to the blessings of 1920-33 will not
have much propaganda value.
The virtue of free trade depends on international trade
being carried on by means of what is, in effect, barter. After
the last war laissez-faire in foreign exchange led to chaos.
Tariffs offer no escape from this. But in Germany Schacht
and Funk were led by force of necessity to evolve something
better. In practice they have used their new system to the
detriment of their neighbours. But the underlying idea is
8

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 THE ORIGINS OF THE CLEARING UNION
sound and good. In the last six months the Treasury and the
Bank of England have been building up for this country an
exchange system which has borrowed from the German ex-
perience all that was good in it. If we are to meet our
obligations and avoid chaos in international trade after the
war, we shall have to retain this system. But this same system
will serve to protect the impoverished European countries
and is an essential safeguard against a repetition of what
happened last time.
(3) An optimistic assumption as to the ultimate outcome of
our financial arrangements with U.S.A. is implicit through-
out. To prevent misunderstanding I must emphasise this.
But, obviously, there is not much scope for convincing econ-
omic propaganda except on this assumption.
(4) I have assumed that, this time, there will be no post-
armistice starvation of Germany herself and that she will
share, equally with her neighbours, in the surplus stocks; i.e.
that after the war is over we shall not continue starvation and
unemployment as an instrument for enforcing our political
settlement. This is necessary, if our propaganda is to have
value within Germany itself. It is also important in the minds
of those who are fearful that, in the event of our victory, we
shall allow a general collapse of organisation and social
security in Europe.
(5) In one passage I have gone further than this and have
indicated that Germany under new auspices will be allowed
to resume that measure of economic leadership in Central
Europe which flows naturally from her qualifications and
geographical position. I cannot see how the rest of Europe
can expect effective economic reconstruction if Germany is
excluded from it and remains a festering mass in their midst;
and an economically reconstructed Germany will necessarily
resume leadership. This conclusion is inescapable, unless it
is our intention to hand the job over to Russia. To admit it
is good European propaganda in every quarter which at-

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 ACTIVITIES 194.O-I944
taches importance to social security. It is compatible with any
desired degree of severity in respect of political and military
conditions. I am assuming, in short, that our post-war policy
towards Germany will favour her economic reconstruction
and will concentrate all our punitive and preventive measures
in the political and military settlement. It is vital to make this
distinction if we are to make effective propaganda on the basis
that we too, and indeed that we only, can offer Europe
economic health.
It is argued in some quarters that our propaganda should
aim at an appeal to revolutionary sentiment in Europe. I
believe that this is a mistake. The following is based on the
idea that we should do better to compete with Germany, for
which we are well-qualified, in an appeal to the craving for
social and personal security.
I append the following (rather slight) draft to focus dis-
cussion, with the idea that its substance could be revised,
adapted and greatly improved in the light of such discussion.
I have not attempted at this stage, to make the document
suitable to any particular orator or to any particular occasion.
A campaign of propaganda ought to be initiated by an impres-
sive and authoritative declaration on broad lines, supplying
positive basis for the Ministry of Information to build upon.
It should be followed up by a continuous bombardment of
up-to-date and illustrative details in five-minute weekly broad-
casts to all the relevant countries; giving particulars, for
example, of our Surplus Commodities Policy at each stage of
its development, of the working of our payments agreements
in practice, of Germany's exactions and impositions etc., etc.
J. M. KEYNES
/ December

10

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 THE ORIGINS OF THE CLEARING UNION
Keynes's Draft Statement ran as follows.
The authors of the Peace Treaty of Versailles made the
mistake of neglecting the economic reconstruction of Europe
in their preoccupation with political frontiers and safeguards.
Much misfortune to all of us has followed from this neglect.
The British Government are determined not to make the
same mistake again. Mr Bevin said recently that social security
must be the first object of our domestic policy after the war.
And social security for the peoples of all the European
countries will be our policy abroad not less than at home.
Indeed the one is hardly possible without the other; for we
are all members of one family. We must make it our business,
above most other purposes, to prevent the starvation of the
post-armistice period, the currency disorders throughout
Europe and the wild fluctuations of employment, markets
and prices which were the cause of so much misery in the
twenty years between the two wars; and we shall see to it that
this shall be compatible with the proper liberty of each
country over its own economic fortunes.
Very little reflection is necessary to convince anyone that
we, acting in friendly collaboration with the United States,
and we alone, will be in a position to implement such a policy.
For, irrespective of the nature of the political settlement,
Europe will end this war starved and bankrupt of all the foods
and raw materials, for supplies of which she was accustomed
to depend on the rest of the world. She will have no means,
unaided, of breaking the vicious circle. For she will possess
no gold worth mentioning and can export very little until she
has, first of all, received the necessary raw materials. She will
face the vast problem of general demobilisation with an
almost total lack of the necessary means to put men to work.
The depletion of livestock, seed, manures, and agricultural
implements, and the omission during the war of necessary
cultivation will leave agriculture as prone as industry. The
whole continent will face a situation comparable with the

11

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 ACTIVITIES 194O-1944
famine in Russia which followed the Revolution in the early
twenties. For today no one pretends, whatever else may
happen, that Germany can hope to end this war with control
over the raw materials of the other continents.
The German Government are attempting to cover up the
emptiness of their hands and the bleakness of the prospect
by much vague talk about 'the New Order'. Mostly words,
no doubt. But let us try to discover its content and compare
it with the British policy for Europe.
The most definite of the German plans, so far, is the
currency scheme of Dr Funk. The Funk mark pretends to
offer a stable currency for post-war purposes. How can this
be so if it has no command of resources outside Europe? It
has only one merit, namely that it avoids some of the abuses
of the old laissez-faire international currency arrangements,
whereby a country could be bankrupted, not because it lacked
exportable goods, but merely because it lacked gold. But let
no one suppose that we for our part intend to return to the
chaos of the old world. To do so would bankrupt us no less
than others. The arrangements we are now slowly perfecting,
by which international exchange returns to what it always
should have been, namely a means for trading goods against
goods, will outlast the war; though in a form which will retain
a proper place for gold as a central reserve and as a means
of international settlement, completer and more mutually
advantageous than is easily worked out in war conditions.
We pledge ourselves to the establishment of a system of
international exchange which will open all our markets to
every country, great or small, alike, and will give equal access
for each to every source of raw material which we can control
or influence, on the basis of exchanging goods for goods. We
pledge ourselves to radical remedies for our own unemploy-
ment and to assist the same object in all other countries both
by the means we employ at home and by taking whatever
measures are necessary to pass into consumption goods which
otherwise could not be produced.
12

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 THE ORIGINS OF THE CLEARING UNION
At the start, nevertheless, this will not be enough to fill the
vacuum. The liberated European countries will require an
initial pool of resources to carry them through the transitional
period. We therefore contemplate a European Reconstruc-
tion Fund out of which the central bank of each liberated
country will be supplied immediately with the credit to pur-
chase food and raw materials from outside.
We shall have the means to do this, because the British
Empire will actually possess overseas enormous stocks of food
and materials, which we are already accumulating so as to ease
the problems of the overseas producers during the war and
of reconstructed Europe after the war. The Prime Minister
has already made clear the importance he attaches to this. We
are now actively engaged in working out the details. And in
all this we hope for the collaboration of the United States.
What has Germany to offer on her side? Absolutely
nothing. An official of the Reich Economics Ministry, in a
moment of hard realism which is, in truth, more characteristic
of the German mind than transparent and worn-out propa-
ganda, published recently a statement that the present
German rationing system must continue for at least one year
after the restoration of peace, and perhaps for several. The
huge latent demand for food, clothing and other articles of
prime necessity which cannot be satisfied under war condi-
tions will, he went on to say, again become operative after the
signature of peace, but the production of such commodities
will not for a long while exceed war-time output. All this is
not only true, but obvious. Yet can social security survive such
conditions, continuing, beyond the disciplined period of war,
as a frightful disappointment after the peace?
It is not easy to find much else which is definite in
Germany's New Economic Order, except the plan by which
high-grade industry is to be mainly concentrated within Ger-
many herself, the satellite and tributary states being com-
pelled to confine themselves to the kinds of production which
suit the convenience of Germany and chiefly to agriculture;

'3

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 ACTIVITIES 1940-1944
and by which the terms of exchange between Germany's
high-grade products and the output of the other states will
be fixed so as to maintain a standard of life in Germany
much above that of her neighbours. Meanwhile all foreign
commerce would become a German monopoly. It would be
a surprising triumph for propaganda to make an up-to-date
version of imperialist exploitation verging on slavery seem
attractive to the victims. Superimposed on this there will doubt-
less be prohibitions against teaching to tributary nationals
engineering or any other modern technique, perhaps
(since one thing leads to another) including medicine, with
the destruction of all local universities and technical schools.
In this way intellectual darkness would aggravate low physical
standards, in the hope that thus the much-to-be-feared
nationalist resorgimentos [sic] might be indefinitely
postponed. Finally, to what could all this be the prelude
but a new war which would carry overseas the imperialist
exploitation which had already devoured Europe with-
out finding satisfaction? Such is 'the New Order'.
No one can suppose that the economic reorganisation of
Europe after the British victory will be an easy task. But we
shall not shirk our opportunity and our responsibility. The
peaceful brotherhood of nations with the proper liberty to
each to develop its own balanced economic life and its
characteristic culture, will be the object. But it is the transition
to this end and the establishment of an international economic
system, capable of translating the technical possibilities of
production into actual plenty and maintaining the whole
population in a continuous fruitful activity, which is difficult.
We cannot expect to solve the economic riddle easily or
completely. But we alone possess a command of the material
means. And, what is perhaps more important, we alone have
the will and the intention to evolve a post-war order which
seeks no particularist advantage but only that each member
of the European family shall realise its own character and

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 THE ORIGINS OF THE CLEARING UNION
perfect its own gifts in liberty of conscience and person. We
cannot perform miracles. But we have learnt the lesson of the
interregnum between the two wars; and we know that no
escape can be found from the curse which has been lying on
Europe except by creating and preserving economic health
in every country.
From which it follows that this same principle must apply
to the German people themselves. Under new leadership they
will not be excluded from the benefits of the European
Reconstruction Fund or from the comfortable relaxation of
the economic revival. On suitable conditions they will receive
their proper share of the accumulated stocks of food and
materials. Their opportunities of recovery shall not be less
than those of their liberated neighbours. It is not our purpose
to reverse the roles proposed by Germany for herself and for
her neighbours. It would be senseless to suppose that her
neighbours can develop an ordered, a prosperous, or a secure
life with a crushed and ruined Germany in their midst.
Germany must be expected and allowed to assume the mea-
sure of economic leadership which flows naturally from her
own qualifications and her geographical position. Germany
is the worst master the world has yet known. But, on terms
of equality, she can be an efficient colleague. Our political and
military conditions will be sufficiently strict to make Germany's
economic and social recovery safe and beneficial to her
neighbours.
The right outcome after the war requires on our part no
exceptional unselfishness but merely common sense. It is
obvious that we have no motive of self-interest prompting us
to the economic exploitation either of Germany or of the rest
of Europe. This is not what we want or what we could
perform. The lasting settlement and internal peace of the
continent as a whole is the only thing which suits us. It is the
ultimate source of our strength in the secular European
conflicts in which we have played a part, that at the bottom

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 ACTIVITIES 1940-1944
of his heart every participant knows this. To every neutral,
satellite or conquered country it is obvious that our victory
is, for the most fundamental and unalterable reasons, to their
plain advantage; and their only hope. This situation is always
the same; and in the end it plays a significant part in the defeat
of the aggressor which ultimately ensues.
J.M.K.

The draft was then subjected to Treasury, Bank of England, Foreign

Office and Ministry of Economic Warfare comment. As well, Keynes dis-
cussed the draft with Mr Harry Hopkins during his January 1941 visit
to London to discuss President Roosevelt's lend lease proposals. After
comments and revisions to met them, Keynes's proposals went to the Prime
Minister on 30 January 1941.
The re-draft that went to Mr Churchill had markedly cut down Keynes's
original proposals on post-war currency, although the Governor of the
Bank of England had commented:
The currency system to which the statement pledges us presumably
commits us to maintaining exchange control after the war. This is as
it should be, but the Cabinet should do it with its eyes open.
Similarly, the specific proposal for a European Reconstruction Fund dis-
appeared although the references to surplus materials remained. Also
the passages on Germany became stronger to make it clear that a peace
settlement would prevent a repetition of Germany's past behaviour and that
starvation and mass unemployment would not be a weapon for use against
Germany after the war. Finally the document pledged that the U.K. would
begin discussions on post-war relief.
There matters stood until May 1941, beyond a letter of 25 April in which
Keynes elaborated some of the currency notions of his earlier drafts.

To F. T. ASHTON-GWATKIN, 2j April ig^l

Dear Mr Ashton-Gwatkin,
The best short replies I can make to the questions you pass
on to me in your letter of April 21st are these:
1. My words meant that international capital movements
would be restricted so that they would only be allowed in the
16

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