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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 brings together Keynes’s attempts to influence the course

of public opinion and public policy in Britain and elsewhere between the
autumn of 1929 and Britain’s departure from the gold standard on 21
September 1931. At its centre are Keynes’s activities as a member of the
Macmillan Committee on Finance and Industry (including the eight days
of ‘private evidence’ he gave, setting out the theory of his then unpublished
Treatise on Money and applying it to Britain’s contemporary problems) and
the Economic Advisory Council and its committees. It also includes all his
related journalism and his correspondence both with senior politicians and
with other men of affairs. As such, it is a companion to the volumes dealing
with the development of his more formal economic theory during these years,
most notably A Treatise on Money.

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 THE COLLECTED WRITINGS OF
JOHN MAYNARD KEYNES

VO LU M E X X

ACTIVITIES 1929–1931
R ET H I NKI NG EMP LOYMENT AND
U N E M P L OY M E N T P O L I C I E S

edited by
DONALD MOGGRIDGE

CAMBRIDGE UNIVERSITY PRESS

for the
ROYAL ECONOMIC SOCIETY

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 © The Royal Economic Society 1981, 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/9781107624580

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 978-1-107-62458-0 Paperback

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

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 CONTENTS

General introduction page vii

Editorial note xii

1 'I AM BECOMING MORE FASHIONABLE AGAIN' I

2 THE MACMILLAN COMMITTEE 38

3 FIRST REACTIONS TO THE SLUMP 312

4 THE COMMITTEE OF ECONOMISTS 402

5 UNEMPLOYMENT AND PROTECTION 467

6 AN AMERICAN VISIT 529

7 THE 1931 FINANCIAL CRISIS 589

List of Documents Reproduced 623

Acknowledgements 629

Index 631

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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 Edgeworth: two
years later he was made secretary as well. He held these offices
without intermittence until almost the end of his life. Edge-
worth, 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 commemorate

vn

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 GENERAL INTRODUCTION
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 thefieldof economics. It will not include any private and
personal correspondence or publish many letters in the posses-
sion 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 written for news-
papers, 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 newspapers 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 possible, however, of

vin

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 GENERAL INTRODUCTION

the correspondence in which Keynes developed his own ideas in

argument with his fellow economists, 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 available
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 handwriting 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, 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 interchanges
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 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
ix

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 GENERAL INTRODUCTION
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 two later pamphlets 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 pub-
lished, 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 correspondence 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 Ac-
tivities 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 ephe-
meral writings, all of it hitherto uncollected, his correspondence
relating to these activities, and such other material and cor-
respondence as is necessary to the understanding of Keynes's
activities. These volumes are edited by Elizabeth Johnson and
Donald Moggridge, and it has been their task to trace and

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 GENERAL INTRODUCTION
interpret Keynes's activities sufficiently to make the material
fully intelligible to a later generation. Elizabeth Johnson has
been responsible for vols. xv-xvin, covering Keynes's earlier
years and his activities down to the end of World War I
reparations and reconstruction. Donald Moggridge is respon-
sible for all the remaining volumes recording Keynes's other
activities from 1922 until his death in 1946.
The record of Keynes's activities during World War II is
now complete with the publication of volumes xxv-xxvil. It
remains to fill the gap between 1922 and 1939 with three
volumes of which this is the second; to print certain of Keynes's
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; the late 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 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. Since 1977 Judith Allen has been responsible for
much of the day-to-day management of the edition, as well as
seeing the volumes through the press.

XI

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 EDITORIAL NOTE

This volume is the second of three concerned with Keynes's

activities between 1922 and 1939. It concerns itself with
Keynes's writings and policy advice between the autumn of 1929
and Britain's departure from the gold standard on 21 September

The sources for this volume are Keynes's own surviving

papers, material available in the Public Record Office and the
papers of colleagues and friends. Where the material comes from
the Public Record Office, the call numbers for the relevant files
appear in the List of Documents Reproduced following page
623.
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 introductory 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 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.

xn

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 Chapter i
'I AM BECOMING MORE
FASHIONABLE AGAIN' 1

During the autumn of 1929, between the rise in Bank rate in London on 26
September and late October, stock exchange prices in New York remained at
high levels even though the trend was slightly downwards. However, in the
third week in October the market had a series of bad days culminating in a
sharp break on 24 October. Keynes commented to Lydia the next day:

Wall Street did have a go yesterday. Did you read about it? The
biggest crash ever recorded . . . I have been in a thoroughly
financial and disgusting state of mind all day.

It was in this state of mind that he cabled a comment on events for the next
day's New York Evening Post.

From The New York Evening Post, 25 October iQ2Q

A BRITISH VIEW OF THE WALL STREET SLUMP

No-one can welcome a Wall Street crash who thinks of it in
terms of the individuals involved. But it is easier for an
Englishman than it would be for an American to take an
objective view of what is happening from the standpoint of world
business. Looking at it this way we in Great Britain can't help
heaving a big sigh of relief at what seems like the removal of an
incubus which has been lying heavily on the business life of the
whole world outside America. This is actually reflected already
in certain markets on this side. We have had our own troubles
affecting certain groups of speculative stocks, but first-class
British securities are stronger in the market now than they have

1
Letter to Lydia, 25 October 1929.

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 ACTIVITIES 1929-1931
been for some time and there is in authoritative circles a new
spirit of hopefulness about the future.
Is this a paradox? I do not think so. The extraordinary
speculation on Wall Street in past months had driven up the rate
of interest to an unprecedented level. Since the gold standard
ensures a high degree of mobility of international lending, this
meant dear money everywhere. But nothing has happened to
enable industry and enterprise outside America to support a
higher rate than before. The result is that new enterprise has
been damped down in countries thousands of miles from Wall
Street and commodity prices have been falling. And this was due
to a wholly artificial cause. If the recent high rate of interest had
lasted another six months, it would have been a real disaster.
But now, after the drastic and even terrible events of the last
few weeks, we see daylight again. There seems a chance of an
epoch of cheap money ahead. This will be in the real interests of
business all over the world. Money in America has already
become very cheap indeed. The Federal Reserve Bank of New
York will probably take the first opportunity of putting its rate
even lower. If so, I am sure that the Bank of England and the
other European central banks will not be slow to follow suit.
And then perhaps enterprise throughout the world can get going
again. Incidentally commodity prices will recover and farmers
will find themselves in better shape.
I may be a bad prophet in speaking this way. But I am sure
that I am reflecting the instinctive reaction of English financial
opinion to the immediate situation. There will be no serious
direct consequences in London resulting from the Wall Street
slump except to the limited number of Anglo-American
securities which are actively dealt in both here and in New York.
On the other hand we find the longer look ahead decidedly
encouraging.
I must, however, add the warning that the improvement in
world trade must not be expected to follow instantaneously. We
shall probably have a bad winter of unemployment in Great

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 'I AM BECOMING MORE FASHIONABLE AGAIN'
Britain; and the same will very likely be the case in Germany.
But this will be the result of the dear money which prevailed
during the summer and early autumn. Moreover in Europe we
have not yet got the cheap money for which we are hoping. After
cheap money has arrived, a few months have to elapse before the
business decisions to which it gives rise can materialise in new
trade and industrial activity. But if cheap money does come, I do
not doubt its remedial efficacy. The world always underestimates
the influence of dear money as a depressing influence and of
cheap money is a reviving one, precisely because there is a time
lag between cause and effect which leads to the real connection
being overlooked.
The day before the crash Keynes had spoken to the National Liberal Club
on 'The Public Concern as an Alternative to Socialism'. No substantial
record of his remarks survives.
On the day of the crash, at Bedford College, London, and on 7 November at
the University of Manchester, he lectured on 'The Advisability of Methods
other than High Wages as a Means of Improving the Conditions of the
Working Class'. The substance of the lectures appeared as 'The Question of
High Wages' in the first issue of a new periodical for which Keynes served on
the editorial board.

From The Political Quarterly, January-March igjo

THE QUESTION OF HIGH WAGES

The earlier generation of economists was extremely suspicious
of attempts to raise wages; so much so that they became suspect
themselves among certain sections of social idealists. Their
general case was that there existed a certain level of wages fixed
by external circumstances—by economic law, as they would
have expressed it—and that any attempt to lift wages above this
level was doomed to failure and would do harm. In particular,
they were extremely suspicious of trade unions, and they were
inclined to sympathise with the then state of the law, which was
designed to hamper their activities in every way.
Some of their arguments are now universally admitted to have

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 ACTIVITIES 1929-IO.31

been bad arguments—for example, their theory of the wages

fund. But quite apart from whether their arguments were good
or bad, the tide of events was against them; and their arguments
and point of view became discredited irrespective of their merits,
and, I think it may be said, out of proportion to their demerits.
For one thing the rapid strides of economic progress caused
wages to rise substantially. This seemed to contradict their
theories, though, of course, in the new circumstances, there was
nothing necessarily inconsistent between the theory of a natural
wage level and the fact of a rising level of real wages. Apart from
the tide of events the growth of democracy and the social
conscience made the attitude of the economists seem both
impolitic and hard-hearted.
Accordingly, when—fifty years later—we reach the age of
Marshall we find a change of heart out of proportion, perhaps, to
the amount of change of theory. One of Marshall's earliest
publications was a gentle defence and justification of trade
unionism as a means of ameliorating the conditions of the
working class; and all living economists were brought up to
respect and plead for the activities of trade unions as they existed
in the latter half of the nineteenth century and before the War.
But to-day, with the present generation of post-war econ-
omists, we find an increasingly sharp cleavage of opinion. The
more old-fashioned people are disturbed as to whether the long
continuance of unemployment may not suggest that there is
some disequilibrium between the level of wages and the facts of
the external world. For they have not abandoned the belief that
there is in some sense what one might call a natural level of wages
with which it is unsafe to tamper. Public opinion in modern
conditions is so decidedly opposed to a retrograde movement in
wages that scarcely anyone, whatever he might think, dares to
breathe in public the view that wages may be too high. People
grumble under their breath; they maintain that all other
solutions of present difficulties are futile; but they are reluctant
to put forward their own.

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 'I AM BECOMING MORE FASHIONABLE AGAIN'
While this is the attitude of some of the more old-fashioned
people, there is a growing scepticism abroad as to the psycho-
logical and theoretical validity of the orthodox theory of value
which leads others to dispute that there is any natural level of
wages at all, or, at any rate, one that is rigidly fixed; and this
attitude of mind accords much better with popular aspirations.
Limits there are, no doubt, this school of thought would admit;
but there is a fairly wide margin, they would maintain, within
which the determining factor is, not so much what used to be
called economic law, as social and political habits and practices,
and the trend of public opinion.
Advocates of such views are employing two distinct types of
argument. The first of them involves no radical departure from
orthodox analysis. It follows from the assumption that the
existing efficiency of industry and the existing efficiency of
production are decidedly below what is humanly possible with
our existing possessions of knowledge and technique; and the
only respect in which it departs from the orthodox hypothesis is
to be found in the denial that the entrepreneur—the business
man—is always making as much profit as he can. For this view
goes a long way beyond the old notion that if you pay a man
better you will make him more efficient. This view expresses the
more up-to-date maxim that if you pay a man better you make
his employer more efficient, by forcing the employer to discard
obsolete methods and plant, and by hastening the exit from
industry of less efficient employers, and so raising the standard
all round. By hustling the employer, and making him pay wages
which he cannot afford to pay at the moment if he is to make a
normal profit, you will have the effect of increasing the efficiency
of what is called, in the language of Marshall's analysis, 'the
representative firm'. In short, the average business man is no
longer envisaged as the feverishly active and alert figure of the
classical economists, who never missed a chance of making a
penny if it was humanly possible, and was always in a state of
stimulus up to the limit of his capacity. The new view of him

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 ACTIVITIES 1929-1931
seems to be that he is a fellow who is easy-going and content with
a given income and does not bestir himself unduly to increase it
to what would be for him the maximum attainable. Therefore, in
raising wages you bring into activity latent energies in the
entrepreneur out of which the additional wages can be paid. Mr
J. W. F. Rowe, in his Wages in Practice and Theory, has pro-
duced some interesting facts and statistics intended to support
this point of view.
The second type of critic makes a much more fundamental
attack on the old theory. He questions altogether the rigidity of
what economists call the theory of distribution. This theory
flows from two sets of assumptions: The first is that the supply
of a given factor of production responds in a very sensitive way to
the absolute reward offered to it; and the other is that there is a
possibility of substitution between the factors of production
depending upon the relative rewards offered to them. In popular
language, you cannot get the services of a factor in sufficient
quantity if you offer it less; on the other hand, if you offer it more
relatively to the others, then the other factors will tend to be
substituted for it as being more economical. The new theory
attacks the rigidity of the solution offered on the basis of these
assumptions. It would not dispute that such considerations fix
limits within which the actual situation must lie; but it contends
that these limits are somewhat wide, and that within them the
situation is determined first and foremost by historical in-
fluences as gradually modified by contemporary social and
political forces.
For example, if the nature of man and the technical means at
his disposal were to remain quite unchanged, but everyone was
suddenly to forget what has been hitherto the usual range of
salaries and remuneration for business men, workers, clerks, and
so forth, so that it all had to be worked out again de novo, these
critics contend that there is no reason to expect that the answer
would come out the same as it is now. We should not find that the
dividends of the shareholders, the salaries of the managerial

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 'I AM BECOMING MORE FASHIONABLE AGAIN'
staff, and the wages of the office boy would work out just in the
existing proportions. These relative rates of remuneration are,
they contend, the product of historical and social forces. There
are no actual physical or psychological laws which compel them
to be what they are now; and if they were to be worked out again
in a new situation, we should reach a different answer.
Accordingly there is a large arbitrary element in the relative rates
of remuneration, and the factors of production get what they do,
not because in any strict economic sense they precisely earn it,
but because past events have led to these rates being customary
and usual. So there is nothing sacrosanct about them. If the
working class have the political and bargaining power to get a
larger share of the product of industry than formerly, well, that
is a new historical fact; historical evolution is this time on their
side. The business men will have to get less, and that is all there
is to it.*
But it is not only in academic circles that the old orthodoxies
about the dangers of high wages are being forgotten. How far
the old notions are being overlooked even by the orthodox them-
selves, and in the homes of the orthodox, is shown, I think, by
what happened on the occasion of the return to the gold standard
in 1925, when it was believed—I think I have proof positive of
this—by the Governor of the Bank of England, the Secretary to
the Treasury, and the editor of The Economist, that it was
possible to increase real wages some 10 per cent by an arbitrary
act without producing any untoward consequences—a conclu-
sion which would have shocked, more than one can say, their
predecessors in these offices of fifty years ago.
Now I am not here concerned to defend the orthodox analysis
and the orthodox hypotheses against these attacks. To a large
extent I sympathise with the attacks. I think there is a great deal
in what the critics say. I believe that the best working theories of
the future will own these assailants as their parents. All those,
* For an able advocacy of the theoretical basis of this point of view, see Mr Maurice Dobb's
article 'The Sceptical View of Wages' in The Economic Journal, December 1929.

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 ACTIVITIES 1929-1931
who want to improve economic theory and to make a contri-
bution to it, ought to pay a great deal of attention to what Mr
Dobb and Mr Rowe and others are saying.
My present purpose is, rather, to propose certain qualifi-
cations which are in my judgement of great practical importance
when it is a question of applying these ideas in the actual world of
today, and to express grave doubts whether an indiscriminate
public opinion, reinforced by the votes of wage earners, in favour
of raising wages, whenever possible, is really the best means
open to us, within the existing framework of society, for attaining
what is presumably the object, namely, the betterment of the
material conditions of the working class.
For the high-wage party forget that we belong not to a closed
system, but to an international system; and to an international
system, moreover, for which we have deliberately contrived a
very high degree of mobility of international lending. What are
the consequences of this? Let me illustrate by an artificial
example.
Let us suppose two countries where the factors of production
are of exactly equal efficiency, with relations between them in
respect of trading goods and lending money much the same as
exist today between, let us say, Germany and England. Let us
suppose that the high-wage party have their way in one
country—England—but not in the other—Germany. It follows
that the capitalist will receive a smaller proportion of the product
here than abroad. His reward for a given amount of energy and
risk will be less. Consequently he will prefer to invest his money
abroad. It may be that the proportion that he gets in both
countries is, in a sense, arbitrary, and the result of historical and
social influences. But if you have extreme mobility of inter-
national lending capital resources will tend toflowtowards those
countries where the relative remuneration is greatest. If our
currency standard is not an international one the effort to lend
more money abroad would put the exchanges against us, and by
raising English prices, would bring back real wages in England
8

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 'I AM BECOMING MORE FASHIONABLE AGAIN'
to the lower level which previously existed. But under the gold
standard the consequences are much more complicated. If
English business men are finding the employment of their funds
in English businesses relatively unprofitable, and endeavour,
therefore, to increase the proportion which they employ abroad,
the first effect will be a tendency for gold to flow abroad, for the
Bank rate to rise, and for enterprise in England to be yet further
embarrassed. From this increased unemployment would ensue,
and perhaps, if the unemployment goes on long enough and rises
to a sufficiently high level, the final result would be that real
wages in England would be driven down again to the old parity.
The Bank rate, in its internal aspect, is essentially a means of
ensuring that there shall be enough unemployment to put
effective pressure on wages so as to cause them to fall to a level
which is in equilibrium with external conditions; though this
may be attended by friction and opposition, and there may be a
great waste of the forces of industry before the new equilibrium
is finally brought about.
In short, the extent to which one country can move in these
matters, independently of other countries, is greatly affected by
the mobility of lending which exists between countries having
the same monetary standard.
The consequences of the extreme freedom for foreign lending
which we actually enjoy has troubled me ever since I first studied
economics. In recent times only have I reached a clear-cut
opinion on this subject. That opinion I must not stop to
elaborate in this place; for it is relevant to wider subjects than
that which I am now discussing. But one thing is clear, namely,
that the free field for foreign lending means that the capitalist is
free to direct his resources to those parts of the world where the
proportion of the product he receives is greatest. How much he
gets in any particular place may be due more to social than to
economic causes; but that is no obstacle to his preferring to
invest where his share is the greatest.
This argument also helps us to answer the old question how

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 ACTIVITIES IQ.29-1931

far sweated labour abroad may be injurious to labour at home.

The old answer which economists used to give maintained that
we do not suffer by sweated labour abroad because we gain as
consumers. But whether that be true or not, I think it is true to
say that if labour gets a less proportion of the product abroad—if
its efficiency wages are less—then capital will get more;
consequently capital will tend to drift abroad, putting the
exchanges against us, and so, through the concatenation of
circumstances I have outlined, producing unemployment, the
express purpose of which is to bring wages down to a parity with
what they are in the outside world.
So I conclude that even if Mr Rowe and Mr Dobb and others
are right—one of them as to the possibility of getting more
exertion out of the capitalist, and the other as to the possibility of
giving him a smaller conventional share of the total product—
there are nevertheless very narrow limits to the practical
application of these notions unless they are applied internation-
ally, or unless we place obstacles in the way of the mobility of
foreign lending.
It is obvious that this analysis, if it is correct, has some
application to the existing position in Great Britain. The period
of restoring sterling to gold parity, which culminated in the
return to the gold standard in 1925, meant a fairly substantial
increase in real wages relatively to what was .going on elsewhere.
The first effect was to make it difficult for us to export at a profit.
People have become fairly familiar with that. But there was a
second, more delayed consequence which must not be over-
looked. The result of this increase in real wages—the result of
leaving money wages unchanged—was a fall of profits; a fall so
severe as to make many branches of English business definitely
unprofitable.
Now the man who has embarked his capital in a business is
generally unable to get it out quickly. But that does not apply to
the investment of new resources. When, therefore, English
business in many of its branches has been for several years
10

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 'I AM BECOMING MORE FASHIONABLE AGAIN'
unprofitable, and the outlook is discouraging, it inevitably
happens that the active investor, striving to get the maximum
return, tends to lend his money to enterprises operating abroad.
And in our case, this comes on the top of the natural tendency of
new countries to be able to offer higher returns to capital than
we can. We already had a situation where the tendency of
capital to flow abroad was perhaps in excess of our favourable
balance of trade. The additional factor—the high wage
movement—has consequently provoked an almost chronic
tendency in the direction of dear money, the technical object of
which has been partly to prevent excessive lending abroad but
also, by damping down home enterprise itself, to put pressure on
the whole business world against the high wage movement.
Of course, that is not the only reason for the existing situation,
which is extremely complex. But perhaps it is the most
permanent, the most obstinate influence. Today, this influence
is aggravated by other troubles. At other times, perhaps, we can
overlook it for a year or two because other factors are helping us.
But all the time there is the underlying tendency for a large part
of British business to be relatively unprofitable owing to the
existing level of wages, compared with the level of wages abroad;
hence capital avoids more and more such outlets as there may be
at home and seeks outlets elsewhere.
All this relates to the past. So far as the existing dis-
equilibrium is concerned, I believe that it is impracticable and
undesirable to seek the remedy of reducing wages. We must
contrive somehow or other, first to mitigate the tendency to
excessive foreign lending by finding new openings at home at
attractive rates; and for the rest we must, as opportunity offers,
try to solve what is still left of our problem by squeezing the
higher wages out of increased efficiency. It may not be easy. But
I believe it to be easier than the alternative.
But what has happened, should, I suggest, be a warning to us
for the future. If we want to better the condition of the working
class, it is inexpedient to attempt to do it by the method which
II

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 ACTIVITIES 1929-1931
reduces the rewards of capital below what is obtainable in other
countries. Or, at any rate, if we do adopt this method, we must
supplement it by abandoning or diminishing the existing
freedom of foreign investment. For it never pays to render the
entrepreneur poor and seedy. It is impossible in the present
order of society to secure the optimum level of output and
employment by any other way than by paying the capitalist his
full rate, and, if anything, a little over. As a producer be sure that
he makes a good income. That will not prevent the application of
a sound system of taxation to the recipient of this income as a
citizen, after the income has been earned. Once a capitalist has
embarked on a given business in a given country he is
undoubtedly highly squeezable. But this will not encourage the
others. To squeeze him in the act of earning his profits is, I
suggest, to squeeze him in the wrong place. Unless, therefore, we
make radical changes in the internal structure and external
relations of our economic system we shall do well to turn to what
I should call the liberal solution, or what I have heard Mr
Ramsay MacDonald call the socialist solution, of the problem of
bettering the working class, as against the trade union solution.
Compare high taxation with high wages in its effect on the
incentive to the business man to increase his output. The taxes
only fall on profits after he has earned them, and take only a
proportion. Thus, broadly speaking, his inducement to earn
profits and to raise his output to the socially optimum level is just
as great as if the taxes did not exist. But if you force him to pay
higher wages then his less profitable business becomes definitely
unprofitable, and you necessarily cause him to abandon it—or
part of it—and to reduce his output.
In short, we must not starve the goose that lays the golden
eggs before we have discovered how to replace her. We must tax
her eggs instead.
But there is another and an even more important point.
Artificially high wages burden an industry in direct proportion
to the amount of labour employed. Businesses which may be
12

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 'I AM BECOMING MORE FASHIONABLE AGAIN'
earning high profits and employing relatively little labour get off
very lightly. In particular, finance and the like escape almost
scot-free. Taxes, therefore, spread the cost of bettering the
material condition of the working class over a much wider area.
Finally, the taxation of profit does not discriminate against the
use of a particular factor of production, as artificially high wages
do. They have no tendency to make employers economise in the
use of labour and so throw men out of work.
It is therefore, to my way of thinking, a great misfortune that
the concerted self-conscious efforts of the working class to better
themselves should be so much concentrated on the effort to raise
wages, even to the point of being suspicious, as I fancy the trade
unions are, of alternative methods of bettering conditions. For
the main raison d'etre of a trade union as a corporate body is gone
if the perpetual struggle for higher wages is to be abandoned.
For, once we face the fact that the level of wages which is
socially desirable, having regard to justice and charity in the dis-
tribution of wealth, may represent a larger share of the total pro-
duct than is awarded to labour in some other countries—it be-
comes very clear that to throw the burden of the betterment onto a
particular section of employers is to put them at a hopeless
disadvantage with their competitors, and calculated to reduce
their output and the volume of employment which they can
offer. If we decide that the interests of justice and charity require
that the income of the working class should be higher than that
which they receive from the economic machine, then we must, so
to speak, subscribe to that end. Taxation is a method of
compulsory subscription, and the subscription must be spread
over the whole community. But if that subscription is made to
fall solely on a particular body of employers then we must not be
surprised if the level of employment and output is below what it
should be.
In the decade immediately before the War there was a strong
movement in this direction in the shape of social insurance and
free education. Since the War we have gone a great deal further,

13

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 ACTIVITIES 1929-1931
particularly in increased insurance and pensions, and in sub-
sidies to working class houses, paying for these things by taxes of
a kind which are not specially deterrent to business enterprise.
If we want to better the condition of the working class there
are plenty of alternative ways of doing it, and plenty of ways of
assigning to them a larger proportion of the total national income
than they have enjoyed in the past otherwise than by increasing
their wages.
First, there is social insurance. It is open to the state to make a
much larger contribution than hitherto, even to the point of
bearing the whole cost of insurance for sickness, old age, and
unemployment. The trade unions would do much better to press
for their insurance to be paid out of taxation than for wages
which are higher than their employers can truly afford.
Second, pensions. It would be possible to increase pensions
substantially without raising them to a level disproportionate
with incomes generally.
Third, there is room for a great increase of useful expenditure
by the state on health, and recreation, and education, and the
facilities for travel.
Fourth, we have by no means reached the limit of what it
would be in the social interest to expend on improving the
housing of the working class, by making it possible to provide
houses for the workers at below the economic rent. It is better to
provide houses below the economic rent out of taxation than to
ask employers to pay more than economic wages.
And finally, there is the possibility of children's and family
allowances. In this case I believe that the trade union movement
is actively hostile on the express ground that it fears such
allowances would be what I wish them to be, namely, an
alternative to higher wages. It would be much better that a man
with heavy family burdens to support should receive assistance
out of taxation, which is thrown on profits generally, than that an
attempt should be made to raise wages paid by his employer to a
disproportionate level.
It is commonly held, I know, that higher taxes would be just

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 'I AM BECOMING MORE FASHIONABLE AGAIN'
as bad for business enterprise as higher wages, if not more so.
Personally I believe that view to be false. Of course, it would be
better for the capitalist to pay both lower wages and lower taxes;
but if it is a question of choosing between the two then I believe
that higher taxes are a better expedient than higher wages.
The real objection to a policy of higher taxes is, of course, the
difficulty of making sure that they would be an alternative and
not an addition to higher wages. If the business man has already
been weakened by higher wages, we should think twice before
adding the burden of higher taxes. What we really need in the
interest of the well-being of the country as a whole is a new
bargain—though I know it is not humanly possible—by which
wages are reduced or stabilised in return for other advantages
procured by means of higher taxation.
I express no opinion as to whether we can, at the present
juncture, afford any further material betterment of the condition
of the working class. It may be that we should postpone the next
important movement forward until after the return of normal
prosperity. Moreover, it is necessary and important to admit that
there is a limit to the level to which taxes can be raised without
reacting injuriously on industry. My present purpose is limited
to expressing a preference for taxation as a method, rather than
to raise wages to what is, internationally, an uneconomic level.
When we have raised wages as high as possible without
driving the investor to invest abroad, and raised taxes as high as
possible without producing other injurious consequences, we
shall have done all that we can—otherwise than by an increase of
efficiency—to better the conditions of the working class within
the existing framework of society. We can do no more without
abolishing the entrepreneur system; and whether that is worth
doing must depend on our judgement as to the technical efficiency
and the moral attractiveness of the alternative.
Well, as in the case of some past economic judgements, those
for example of Ricardo, these frank conclusions of an economist
are capable either of a conservative or of a revolutionary
interpretation. The conservative will conclude that his instinct-

15
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 ACTIVITIES 1929-1931
ive feeling, that it is exceedingly dangerous and difficult to stir
from the ancient paths and that the old dispensation of serious
inequalities in the distribution of wealth is rooted in the nature
of things, has received in what I have said an ample justification.
On the other hand the liberal and the moderate socialist will be
pleased to find that they have been right in their suspiciousness
towards extreme trade unionism, that the best way is to continue
and to amplify the programme of social services initiated in 1906,
and that there is still room for substantial progress along these
lines. Finally, the revolutionary will learn from this paper that
the position is just what he supposed it to be, namely, that there
is practically nothing to be done within the existing framework
of society, that it is sheer waste of time tinkering with it, and the
only thing worth doing is to organise and prepare for re-
volutionary changes. So I am hopeful that for once I may have
been able to please everybody.

After Keynes gave his lecture in Manchester, a Mr W. S. Jones wrote to

The Manchester Guardian asking two questions: was the rate of interest in his
discussion of foreign lending net of differential degrees of risk, and what
would greater nonwage benefits do to working-class character (foresight,
thrift and independence)? Keynes replied on 16 November.

To the Editor of The Manchester Guardian, 16 November ig2g

Sir,
By an accident Mr W- S. Jones's questions addressed to me in
your issue of November 9 have only now come to my notice.
To his question whether the nominal rate of interest on
foreign investment or a net rate [discounted for additional risk
is the one relevant to my argument I answer that it was the latter I
had in mind.
His suggestion, however, that benefits to the working class,
other than high wages, would have a harmful effect 'on the
character of the individual' reminds me of an answer which I
once received from a little girl, when examining in the local
16

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 'I AM BECOMING MORE FASHIONABLE AGAIN'
examinations, to the question,' What is it that the Socialists want
to do?' Innocence answered: 'The Socialists think it would do
the poor good to make them just like the rich. It would not. It
would spoil their characters.'
Yours, &c,
J. M. KEYNES

On 5 November the Chancellor of the Exchequer formally appointed a

Committee on Finance and Industry under the chairmanship of H. P.
Macmillan, a Scottish judge. Keynes was among the members, who also
included Sir Thomas Allen of the Co-operative Wholesale Society; Ernest
Bevin, of the Transport and General Workers Union; Lord Bradbury form-
erly of the Treasury; R. H. Brand of Lazards, the merchant bankers; Professor
T. E. Gregory of the London School of Economics; Lennox Lee of the
Federation of British Industries; Cecil Lubbock of Whitbreads the brewers,
and a former Deputy Governor of the Bank of England; Reginald McKenna of
the Midland Bank and a former Chancellor of the Exchequer; J. T. Walton
Newbold, editor of The Social Democrat; Sir Walter Raine, a coal exporter; J.
Frater Taylor of Armstrong Whitworth; and A. R. G. Tulloch of the District
Bank. The terms of reference of the Committee were:
To inquire into banking, finance and credit, paying regard to the factors
both internal and international which govern their operation, and to make
recommendations calculated to enable these agencies to promote the
development of trade and commerce and the employment of labour.
The Committee held its first preliminary meeting on 21 November.
Keynes's role in its deliberations is the subject of Chapter 2.

Four days later Keynes was invited to a luncheon with the Prime Minister
on 2 December. The invitation was the basis of his remark that he was
'becoming fashionable again'. The meeting was to discuss the current
industrial situation and ways of improving the information and advice
available to the government. The meeting was announced in the press,
leading Keynes to expect little from it. As he told Lydia the day before,

I don't know what sort of a party Ramsay's is to be tomorrow.

But they are announcing it in the press, and today Garvin's
leader in The Observer is about nothing else. It probably means
that there will be too many people there for anything useful to be
said.

17

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 ACTIVITIES 1929-IO.31
At the luncheon, in addition to Keynes, were Lord Weir, Sir Andrew
Duncan, Sir Warren Fisher, Walter Layton, G. D. H. Cole, Professor Henry
Clay and Thomas Jones. After the discussion, those present were asked to
send in memoranda on the topics discussed and to meet again a week later.
Keynes obliged with a memorandum.

THE INDUSTRIAL SITUATION

The Prime Minister to announce that he has been considering
with the leaders of the financial and business world, with the
trade unions and with certain economists whether there is a real
justification for a certain atmosphere of business pessimism and
lethargy which he seems to detect; or whether, on the contrary,
the present may not be a favourable time for a drastic
reorganisation and re-equipment of the industry of the country
on a considered plan, having regard to what, with reasonable
optimism, we can expect to be the economic prospects of the
country five or ten years hence; and for a determined and united
onslaught by all sections of the community on the problem of
unemployment.
The result of these enquiries, backed up by the various
statements to be appended, is to persuade him that it is now
practicable to attack the problems of the future in a new spirit of
optimism and energy.
The Government, wishing for their part to provide the best
possible atmosphere for confidence and new developments,
think it appropriate at this moment to give certain undertakings
to the business world in order to enable industrial leaders to lay
their plans in conditions of as much security and freedom from
sudden surprises as is in any way possible.
The Government announce, therefore, that without in any
way abating their objection in principle or their freedom to
introduce modifications at some later date, no change will be
made in the McKenna or Safeguarding Duties during the year
1930; that no changes in the coal industry will be introduced
during this period which are calculated on balance to worsen the
18

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