BOOKS

Left, Right, but not wrong

Tim Congdon

JOHN MAYNARD KEYNES: THE ECONOMIST AS SAVIOUR 1920-37 by Robert Skidelsky Macmillan, £20, pp. 634 The title of the latest volume in Robert Skidelslcy's biography of John Maynard Keynes is The Economist as Saviour 1920- 3 7. The question immediately arises, 'What was it that Keynes saved?'

He can be seen as an analyst and defend- er of managed capitalism, the man who showed how harmful fluctuations in busi- ness activity could be smoothed out by well-judged government action and who therefore made the market economy work more efficiently. As such, he is a hero of the Right. Alternatively, he can be inter- preted as the champion of the public sec- tor, the foremost advocate of the large-scale nationalisation of the British economy which occurred in the late 1940s. If so, he is one of the great thinkers of the Left.

Many of the tensions in Keynes's career, and much of the interest in Skidelsky's excellent book, stem from the difficulty of locating Keynes in the political life of 20th- century Britain. Born in 1883, he grew up in the ordered and stable world of late- Victorian and Edwardian England. He was the son of a Cambridge don and was him- self to become a Fellow of King's College. One aspect of the order and stability of British society at that time was its currency, the pound sterling. It had been tied to gold since the late 17th century and had much the same value (in terms of the things it would buy) in 1910 as 200 years earlier. When Keynes first started to think about the theory of credit and money, most peo- ple believed that the value of money would be roughly the same when they died as when they were born.

Britain's currency stability was ruptured by the first world war. The government resorted to the printing presses to finance military spending, suffered severe inflation and was forced to suspend the gold stan- dard. The central question for economic policy in 1919 was 'Should Britain return to the gold standard and, if so, at what exchange rate?' The consensus of the great, the good and the orthodox was that Britain should return to gold as soon as possible, with the gold price (in terms of sterling) the same as it had been in 1914. There was much to be said in favour of the orthodox view,not least that it had been the traditional response in previous post-war contexts. Britain's rulers had refused to accept a permanent devaluation of the pound (against gold) after the wars of William III and the Napoleonic Wars.

Keynes's most important insight in the early 1920s was that the gold standard was obsolete. As is well known, he opposed the particular exchange rate against the dollar

($4.86 to the pound) implied by the restoration of the pre-war gold price. He thought, correctly, that the British and American price levels were out of line at the $4.86 exchange rate and that the attempt to bring the price levels into balance (ie. to reduce British prices) would be unnecessarily painful. But his attack on the gold standard was over a much wider front than the criticism of one particular gold price.

Keynes saw that the growth of banking systems in the century of peace before 1914 had dramatically reduced the use of gold in transactions. By the beginning of the 20th century virtually all significant payments, including international payments, were in paper money. In a formal sense gold remained the ultimate bedrock of the system and people appeared to be right to believe that their paper was 'as good as gold'. But, in truth, changes in the quantity of paper money (ie bank notes and deposits) had become both the principal regulator of the business cycle and the main determinant of the price level. In this new world fluctuations in the quantity of gold were accidental, their impact on monetary policy was capricious and their relevance to meaningful policy goals (the stability of output and prices) was highly debatable. What was the point of the gold link? Surely, it was now a barbarous relic.

This was the theme of two short books, The Tract on Monetary Reform (published in 1923) and The Economic Consequences of Mr Keynes (1925). They were based on newspaper articles and were not serious academic tomes. As Skidelsky shows, Keynes's journalistic activity was frantic in this period and was largely motivated by the desire to have a large income. (He received £4,000 for organising some supplements to the Manchester Guardian Commercial in 1922, a sum equivalent to almost £90,000 in 1992's money). However, the two books identified the vital monetary question of the 20th century. If govern- ments could no longer rely on the gold standard, how should the task of monetary management be performed?

Keynes's answer, in essence, was to con- trol the amount of bank credit by a number of instruments which were just beginning to be understood. Obviously, Bank rate was a traditional weapon of considerable power. But Keynes was also attracted to the practice of influencing banks' reserves by open market operations, being devel- oped in the USA by the new Federal Reserve System under the leadership of Benjamin Strong. He had no doubt that currency stabilisation was essential to the preservation of the market economy. As he remarked in the Tract:

The individualistic capitalism of today presumes a stable measuring-rod of value, and cannot be efficient — perhaps cannot survive — without one.

Keynes took his analysis further in a two- volume work, the Treatise on Money, pub- lished in 1930. It was a remarkable production, combining abstract theory with detailed descriptions of monetary institu- tions and particular historical episodes. It expressed Keynes's considerable interest in international currency matters and analysed the role that banking arrange- ments might play in macro-economic instability. It went much further than the Tract and his miscellaneous pamphlets in setting out an agenda for monetary reform in a world which had outgrown gold.

But its publication coincided with the worst collapse in demand and output ever inflicted on the international economy, and the most humiliating setback for the capitalist system. American industrial production fell by 45 per cent between 1929 and 1932; Even worse, in some countries (although not Britain) the recov- ery from slump was gradual and reluctant. Political extremism took hold in leading industrial nations, notably Germany, Italy and the Soviet Union, and many intellectu- als thought that the serious political debate had been polarised between Communism and Fascism. Keynes decided that yet more analysis and explanation were needed. In 1936 he published his General Theory of Employment, Interest and Money, a book Which is usually regarded as the start of modern macro-economics. It is often described as the greatest book on economics written in the 20th century.

Its emphasis was rather different from the Tract and the Treatise. Like its predecessors, it contained ample discussion of interest rates and money, and the role they played in the economy. But its main innovation was a new theory of the deter- Mination of national income. National Income could be seen, according to Keynes, as a multiple of the level of investment. Unfortunately, investment undertaken by Private agents was highly variable from Year to year, because it was susceptible to volatile influences from financial markets and erratic swings in business sentiment. In an extreme case (the famous 'liquidity trap') businessmen might be so traumatised by the lack of confidence that monetary Policy would be ineffective in boosting demand. The answer, so Keynes told the world, was for investment to be undertaken to a much greater extent by the public sector. In his words, there should be a Somewhat comprehensive socialisation of Investment'. Moreover, fiscal policy should be used actively to stimulate spending in recessions and to restrain spending in booms.

The message of The General Theory was Political dynamite. Governments were right to.nationalise important industries, because this would make it easier for them to Prevent economic instability and reduce unemployment. Further, they were wrong to rely on the old technique of Bank rate (and even some of the new American tech- niques of monetary policy), which had seemed adequate in the predominantly Private enterprise economy of the Victorian era (and the USA in the Roaring Twenties). A careless reader of The Gener- al Theory might conclude that monetary policy was of little interest in understand- ing macro-economic fluctuations.

The author of The Tract of Monetary Reform in 1923 had seemed concerned to preserve 'individualistic capitalism'. The author of The General Theory in 1936 cele- brated the imminent prospect of `somewhat comprehensive socialisation'. Who was the authentic Keynes? What did he really say? Or were there several contradictory spirits in the same man, and did his work have many meanings?

Skidelsky does not give a final answer to these questions, even though he has clearly been fascinated by them while writing this biography. But he does offer some fresh and controversial judgments. Perhaps his most startling is his suggestion that 'the Treatise and not The General Theory was Keynes's classic achievement'. From the standpoint of 1992 that verdict looks far more persuasive than it would have done in, say, 1952 or 1962.

The 'somewhat comprehensive socialisa- tion of investment' of the late 1940s led to mismanagement and inefficiency in nation- alised industries on a scale which has only been fully recognised following privatisa- tion in the 1980s. Fiscal activism has failed to stabilise economic activity anywhere, while the large budget deficits endorsed by vulgar Keynesians (but not by Keynes him- self) threaten financial ruin for Italy and other significant countries. By contrast, the issues raised by the Tract and the Treatise remain very much alive. Indeed, they have looked more pertinent than ever since the USA ended the convertibility of the dollar into gold in 1971 and thereby broke the last remnant of a gold-based currency system. Keynes's proposed method of currency management (to stabilise the growth of bank credit and the money stock) looks surprisingly close to the actual behaviour of the great central banks of our times, the American Federal Reserve and the German Bundesbank. (Sadly, the Bank of England — most of whose key officials were told to read The General Theory and not the Tract and the Treatise when they were at Cambridge — is not even at the starting-line.) The General Theory is in fact a weird per- formance, more undisciplined and meretri- cious than Keynes's previous books, and far less readable than his journalism. Perhaps its main failures are that it has little to say about banks and credit creation, and almost nothing about international finance. But, as the author of the Tract and the Treatise well knew, any attempt to under- stand the real-world problems of monetary management in the 20th century is also necessarily an attempt to understand the behaviour of banking systems and interna- tionally-traded currencies. The General Theory has misled two generations of British economic policy-makers, with disas- trous results for the British economy.

But, as Skidelsky's book shows, Keynes's contribution is far more substantial than his overrated General Theory. For all his ambiguities, complexities and wrong turn- ings, Keynes is the central intellectual influence on British public life in this century. Anyone who wants to understand modern Britain has to read Skidelslcy's biography.

C. H. Sisson

Broadmead Brook

0 you haunting ghosts, I move towards you.

Could I go over these flooded plains It would not be to any Paradise: I came from none and I expect to find none; It was a long journey, or so it seemed.

I went from ignorance to ignorance. The scene changed, and thoughts went through my head, But even the possibility of knowledge — Never coveted — seemed no more than a slide From one thing to another. First the child Tasting the world, and finding that it hurt; Then the youth, felled by the bolt of love, Then labouring where the knowledge was acquired In self-defence or else in mere ambition.

But late in time and after all deceits, I came to stand beside Broadmead Brook As in the very hollow of my hand.

A woman stood there who had been a child Where in another century my mother Had played and laboured. Now all was changed, Yet Broadmead Brook flowed, exquisite woods Marked her course, for in my fantasy It was she guarded the bounding deer, The rabbits and the partridges and all Who dare to dream, and be, of England still.