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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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of use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/UPO9781139520188.003
 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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of use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/UPO9781139520188.003
 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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of use, available at https://www.cambridge.org/core/terms. https://doi.org/10.1017/UPO9781139520188.003
 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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