I would like to ask you an honest question – but the title of this blog will have given you the answer already. Who do you think the author of the following text is?
“We have reached the conclusion that there is no means of raising world prices except by an increase of loan-expenditure throughout the world. There are, I think, three, and only three, possible lines along which we can lend assistance.
- The first, and perhaps the most obvious, means is that of direct foreign loans, in the style to which we have been accustomed in the past, from the strong financial countries, which have a favorable foreign balance or excessive reserves of gold, to the weaker, debtor countries.
- The second, and more promising, means is for the stronger financial countries to increase loan-expenditure at home.
- Yet, once again, it seems obvious that we are discussing, so far, remedies of which the quantitative effect is hopelessly disproportionate to the problem of raising world prices. I see no reliable prospect of a sufficient rise in world prices within a reasonable time, except as the result of substantial, and more or less simultaneous, relief of taxation and increase of loan-expenditure in many different countries. We should address great important to the simultaneity of the movement towards increased expenditure. For the pressure on its foreign balance, which each country fears as the result of increasing its own load-expenditure, will cancel out if other countries are pursuing the same policy at the same time. Isolated action may be imprudent. “
You are correct to conclude that this is none other than John Maynard Keynes. And to be honest, I have to admit that I have not changed any text whatsoever but I did remove a few extra words and/or lines that provided additional context but do not detract from the base message. So now the second question – when was this written? Many of you will know that Keyenes died a young man – he left us only just a short while after the adoption of the Bretton Woods Agreement (1944). The passage above refers to “gold” too – which is a bit of a give-away, surely. To help you gauge from when this narrative was plucked, here is another related comment from the same paper:
“We all agree that the settlement of war debts and of reparations are, first of all, indispensable. For these are of primary importance in creating fear of acute tension in the foreign exchanges.”
Here the reference is to war debts. That is a give-away, right? This refers to, of course, the war debts and reparations owed between the Allied and Central powers at the conclusion of the Great War. I will put you out of your misery – the text above is taken from The Means to Prosperity, published March 1933, as four articles in The Times.
What I find most fascinating about this passage is the fact that, baring the reference to gold, this problem, and the solution, are very similar to what we face today. The passage above, when read completely, refers to advice Keynes is giving regarding pending World Economic Conference due to take place later in 1933. And what is most interesting item about this is that in the run up to this famous conference, the major economic powers of the world – including the US – were in agreement about the need for stable exchange rates over stable prices. What made this conference famous was not the agreement, but that newly elected President Roosevelt famously “torpedoed” the conference before it concluded by announcing, unexpectedly that the US was leaving the fixedly exchange model and going to devalue the dollar, to initiate the New Deal.
What is hard to get one’s head around is this: The US effectively told the world to ‘go away’ and survive on your own. But in so doing, the very size, homogenous nature, and unique balance of domestic demand versus global trade, resulted in the US, some years later, helping the world as a whole. The one, minor downside to all of this was that as the US walked away from global leader and economic monitor, the decision left Europe off the hook and any reigns that might have slowed the rise of economic Germany and its new deal were dashed.
Moving beyond the politically incorrect conclusions this might bring, let’s look at what Keyne was saying in 1933. His comments are no less true then as they are now:
- We have a beggar-thy-neighbor policy by each nation in terms of currency exchange and domestic interest rates
- We have each central bank suggesting that others need to do more for each other, as they each do more for their own economy
- We have no global agreement or coordinated effort
We need a new World Economuc Conference. Perhaps it should take place in New York, or perhaps Bejing. We need to align interest rate raises together, at the same time. We need to coordinate infrastructure investment; we need to coordinate tax reduction and regulatory simplification to help spur new business growth. We have to do this altogether. As it stands today, we have no hope, and Bob Hope, and he left the building.
And if you think Keynes is too outdated? Check out one of his last comments in the third article: “Thus what is to the advantage of each of us regarded as a solitary individual is to the disadvantage of each of us regarded as members of a community.” He was righ then – he is right now.