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What if the Labour government of 1929 takes a more interventionist approach to the national economy?

Britain, 1930-1950: The Era of Reform
or
Keynes Tames The British Bear



John Maynard Keynes

http://www.selfed.org.uk/docs/units/2001/pdfs/19.pdf

Gold Standard: First used in Britain in 1821, the gold standard signifies a monetary system under which gold is the only standard
of value, freely convertible at home or abroad into a fixed amount of gold per unit of currency. By definition limited to the actual gold
reserves of the Earth, the gold standard was phased out in the 1920s for the gold bullion standard, under which nations backed
their currencies with gold bullion and agreed to buy and sell the bullion at a fixed price.

British capitalism and its development is very different from that in the rest of Europe. European governments saw the economic
dominance which the industrial revolution brought to Britain and soon realised that, if they were going to compete with Britain, they would
have to speed up their own industrialisation process. As a result, the state sought to encourage the growth of capitalism. This resulted in
the development of a ‘state interventionist’ tradition in mainland Europe, where governments have long-practised active policies to
control and develop the economy.

Broadly, the two approaches have developed to become known as free market capitalism (the British model) and social market
capitalism (the European one). Thus, in Britain, the central idea of free market capitalism has dominated - that the running of society
should be left wherever possible to market forces and that market forces perform best when they are free from state interference.
Social market capitalism, on the other hand, looks to state regulation, both to direct the markets and ensure greater co-operation within
society, which it is argued, leads to greater stability and efficiency. Major long-standing differences between Britain and Europe
also exist in the development of the financial sector. Britain’s financial position largely grew out of the enormous profits gained from
being the world’s first industrial economy. As such, the banking system was a response to the industrial revolution, and only began to
expand after it was well underway. As a result, British banks did not evolve to provide finance for the emerging capitalist system. Rather,
they evolved in order to deal with the massive wealth being created by British capitalism. This is in marked contrast to financial sectors in
countries such as Germany and Japan, where banks were developed to meet the investment needs of the growing industrial sector. Here,
the banks were also regulated by the state in order to ensure that enough money was available to fund the industrialisation process.
From the outset, the banking system in Europe was closely linked to domestic industry and specifically, to the provision of long term loans
for inward investment.

Since banks did not actively finance Britain’s industrial revolution, they had no strong links with industry and were not
dependent on its success. Instead, Britain’s banks found themselves with vast sums of money pouring in from the proceeds of the
industrial revolution. These vast sums were soon attracting foreign borrowers keen to draw on these surpluses and willing to pay high
returns in order to fund their own industrial process. As a result, Britain’s financial sector quickly became internationally orientated,
and most of its energies were devoted to channelling funds into and out of Britain, rather than to the provision of finance for domestic
industry. As demand for British money grew from abroad, sterling strengthened. In turn, as the strength of sterling rose, the City of
London became the world’s leading financial centre. Pounds sterling became the world’s trading and reserve currency, and it took on a
similar role to that played in today’s world markets by the US dollar.

Since the British banks were first and foremost about protecting the wealth of the industrial revolution by investing it abroad, British
finances rapidly became dominated by the need to maintain the conditions in which export capital was safe. This meant defending the
value of sterling and ensuring international commercial and financial operations could freely function (therefore ensuring British capital
could continue to dominate in world markets). British industrialists therefore found their bankers and government preoccupied with such
issues, and not with investing in British industry.

With little support from the state, British industry had no means of persuading bankers to make long-term loans to industry
on any scale, or put up risk capital in sufficient quantities, and hence it was forced to heavily rely on its
own inadequate internal funds for innovation and modernisation. Starved of investment, Britain’s domestic economy began to
decline, while at the same time, the financial sector became the most vibrant part of Britain’s economy. As a result, the City of London
acquired a powerful and often dominant position within domestic affairs, both economically and politically. This was to have far
reaching consequences for the British economy. As the importance of the financial sector grew, Britain’s political class increasingly directed
policies aimed at maintaining dominance as the world’s financial centre. This centred on maintaining the high level of the pound
(incidentally making British goods expensive abroad), and increasingly intervening militarily and politically in order to protect
overseas financial interests.

At first, this extension of British imperialism benefited domestic
industry. The maintenance of the empire ensured the continuation of protected markets for increasingly uncompetitive British-made goods,
as colonies were forced to accept and pay for them. But under-capitalised British industry could only be sheltered from modern
competitors for so long. As Britain’s share of world trade began to steadily decline, the need for state intervention to protect domestic
industry and to boost investment became increasingly urgent. However, the investment needs of the domestic economy could
only be met at the expense of the financial sector. Boosting British industry meant reducing the level of the pound, lowering interest rates
and new protectionist measures to prevent the import of cheaper foreign goods. The financial sector, dependant on free trade and a
high pound, would suffer, and thus Britain’s position as a leading world power would be threatened. Each new generation of Britain’s
political elite saw the problem but couldn’t face the solution consequently, maintaining Britain’s ‘greatness’ as a world power won
the day time and again, and government policy repeatedly supported the financial sector, at great cost to the domestic economy. The
result being that Britain’s manufacturing base was in serious decline from the first years of the 20th Century.

With exports falling and imports pouring in from the US and Europe, some British politicians, academics and industrialists sought
increased support for Britain’s domestic sector. Even as early as 1903, Tory leader Joseph Chamberlain launched a campaign to
abandon the free market and introduce protectionist measures, mainly on employment grounds. This was fiercely resisted by the
City of London, and a bitter debate ended once again in victory for them, with free trade policies maintained.

In the City, the victory brought yet further investment abroad.Between 1905 and 1914, some 7% of national income was invested
abroad; more than that invested in Britain. It was during this period that Britain’s dual economy was firmly established, with the dynamic,
powerful financial sector servicing imperialism and operating profitably, and the investment-starved domestic economy fixed in
relative decline, unable to compete with the high-tech US, German and Japanese economies.

After a brief period of state intervention during the First World War, Britain returned to free market policies, and 1925 saw it return to
the ‘gold standard’, with the pound set at its pre-war value, overvalued by some 10%. The result was the collapse of British
exports and a flood of cheap imports. Again, it was the working class that bore the brunt of the economic stagnation that followed, as
unemployment rose and wages fell. Elsewhere, the world economy was booming. Britain’s disastrous return to the gold standard led to
further demands for the state to support the domestic economy. The influential economist, John Maynard Keynes, headed these demands
but, for the rest of the 1920s, both the Tory and Labour governments resisted the calls. The 1929-31 Labour government was particularly
loyal to the free market philosophy, as it attempted to prove to capitalists that they had nothing to fear from a Labour government.
The “socialist” government eventually fell over its attempt to cut dole provision, as part of a package to cut public spending in the face of
rising unemployment.
What if the Labour government of 1929 takes a more interventionist
approach to the national economy? If they take Keynes as their
policy guru, could he unravel the Gordian knot of domestic and
international finance....?

http://www.spartacus.schoolnet.co.uk/TUkeynes.htm
Keynes became increasingly interested in what he called "the management of the economy". According to Alec Cairncross: "Two forms of economic instability preoccupied him. Of these the first was instability of prices, inflation, deflation, and all that went with them; the second was unemployment and the fluctuations in economic activity giving rise to it. The two were, of course, interconnected since the movement of prices reacted on the level of activity: but the analytical approach to the problem of inflation, for example, was very different from the analysis necessary for an explanation of unemployment."

Keynes visited the Soviet Union in 1926. He was interested in the economic measures being taken by the communist regime and when he returned to England he wrote The End of Laissez-Faire. After the onset on the Great Depression in 1929, Keynes began to address the problems of unemployment. In a series of articles, The Means to Prosperity, written in The Times, Keynes argued that the government should "spend its way out of the depression".

During this period he was a member of the Liberal Party and worked closely with its leader, David Lloyd George. In 1929 Lloyd George published a pamphlet, We Can Conquer Unemployment, where he proposed a government scheme where 350,000 men were to be employed on road-building, 60,000 on housing, 60,000 on telephone development and 62,000 on electrical development. The cost would be £250 million, and the money would be raised by loan. Keynes also published a pamphlet supporting Lloyd George's scheme.

These views impressed Richard Tawney who wrote a letter to Ramsay MacDonald, the leader of the Labour Party, about the forthcoming election: "If the Labour Election Programme is to be of any use it must have something concrete and definite about unemployment... What is required is a definite statement that (a) Labour Government will initiate productive work on a larger scale, and will raise a loan for the purpose. (b) That it will maintain from national funds all men not absorbed in such work." MacDonald refused to be persuaded by Tawney's ideas and rejected the idea that unemployment could be cured by public works.

In the 1929 General Election the Conservatives won 8,664,000 votes, the Labour Party 8,360,000 and the Liberals 5,300,000. However, the bias of the system worked in Labour's favour, and in the House of Commons the party won 287 seats, the Conservatives 261 and the Liberals 59. MacDonald became Prime Minister again, but as before, he still had to rely on the support of the Liberals to hold onto power.

The election of the Labour Government coincided with an economic depression and Ramsay MacDonald was faced with the problem of growing unemployment. In January 1929, 1,433,000 people were out of work, a year later it reached 1,533,000. By March 1930, the figure was 1,731,000. In June it reached 1,946,000 and by the end of the year it reached a staggering 2,725,000. That month MacDonald invited a group of economists,including John Maynard Keynes, J. A. Hobson, George Douglas Cole and Walter Layton, to discuss this problem.

In March 1931 Ramsay MacDonald asked Sir George May, to form a committee to look into Britain's economic problems. The committee included two members that had been nominated from the three main political parties. At the same time, John Maynard Keynes, the chairman of the Economic Advisory Council, published his report on the causes and remedies for the depression. This included an increase in public spending and by curtailing British investment overseas.


Ramsey MacDonald

Let's say he is persuaded as a POD. Perhaps on merit of a better argument, partly because he has to keep the Liberals on board.


Philip Snowden presented his recommendations to the MacDonald Committee that included the plan to raise approximately £90 million from increased taxation and to cut expenditure by £99 million. £67 million was to come from unemployment insurance, £12 million from education and the rest from the armed services, roads and a variety of smaller programmes. Arthur Henderson and William Graham rejected the idea of the proposed cut in unemployment benefit and the meeting ended without any decisions being made.
Lets get off the gold standard here. This will save tens of millions of pounds over the ensuing weeks.
The cabinet met on 19th August but they were unable to agree on Snowden's proposals. He warned that balancing the budget was the only way to restore confidence in sterling. Snowden argued that if his recommendations were not accepted, sterling would collapse. He added "that if sterling went the whole international financial structure would collapse, and there would be no comparison between the present depression and the chaos and ruin that would face us.".
That prediction is under test now. True enough, sterling is droppping like a stone, but at least this drop isn't underwritten by the UK treasury. Snowden resigns?
The following day MacDonald and Snowden had a private meeting with Neville Chamberlain, Samuel Hoare, Herbert Samuel and Donald MacLean to discuss the plans to cut government expenditure. Chamberlain argued against the increase in taxation and called for further cuts in unemployment benefit. MacDonald also had meetings with trade union leaders, including Walter Citrine and Ernest Bevin. They made it clear they would resist any attempts to put "new burdens on the unemployed"..
Keynes is invited? Ramsey MacDonald sees Keynesian project spending against credit as a way to avoid higher unemployment, but the UK credit rating is dropping fast. He orders a massive cycle of ten year government loans to be started at once.
At another meeting of the Cabinet on 20th August, Arthur Henderson argued that rather do what the bankers wanted, Labour should hand over responsibility to the Conservatives and Liberals and leave office as a united party. According to Malcolm MacDonald, the opposition to the cuts in public expenditure was led by Henderson, Albert Alexander and William Graham. MacDonald went to see George V about the economic crisis on 23rd August. He warned the King that several Cabinet ministers were likely to resign if he tried to cut unemployment benefit..
Sounds familiar, topical even. This offers some political weight to justify the POD.
After another Cabinet meeting where no agreement about how to deal with the economic crisis could be achieved, Ramsay MacDonald went to Buckingham Palace to resign. Sir Clive Wigram, the King's private secretary, later recalled that George V "impressed upon the Prime Minister that he was the only man to lead the country through the crisis and hoped that he would reconsider the situation." At a meeting with Stanley Baldwin, Neville Chamberlain and Herbert Samuel MacDonald told them that if he joined a National Government it "meant his death warrant". According to Chamberlain he said "he would be a ridiculous figure unable to command support and would bring odium on us as well as himself.".

On 24th August 1931 MacDonald returned to the palace and told the King that he had the Cabinet's resignation in his pocket. The King replied that he hoped that MacDonald "would help in the formation of a National Government." He added that by "remaining at his post, his position and reputation would be much more enhanced than if he surrendered the Government of the country at such a crisis." Eventually, he agreed to form a National Government.
So Labour stay in government, with Liberal support until 1934 (if all goes well).
John Maynard Keynes was extremely active in his campaign to encourage the government to take more responsibility for running the economy. In 1931 he agreed an amalgamation of the Nation with the New Statesman, a journal owned by the Fabian Society. Keynes now became a regular contributor to what was now Britain's leading intellectual weekly..
Buy making his case in committee rather than across the pages of the New Statesman, Keynes has a lower profile and is less influential abroad.
In 1936 Keynes published his most important book A General Theory of Employment, Interest and Money. It revolutionized economic theory by showing how unemployment could occur involuntarily. In the book Keynes argued that the lack of demand for goods and rising unemployment could be countered by increased government expenditure to stimulate the economy. His views on the planned economy influenced President Franklin D. Roosevelt and was a factor in the introduction of the New Deal and the economic policies of Britain's post-war Labour Government..
Busy in the treasury (as an unpaid advisor to the Chancellor of the Exchequer) acting on his theories, Keynes has less time for publishing. If "A General Theory of Employment, Interest and Money" is published at all it will be much later. FDR is on his own.
During the Second World War Keynes was an unpaid advisor to the Chancellor of the Exchequer and wrote the influential How to Pay for the War (1940). He attended the Bretton Woods Conference in 1944 and the Savannah Conference in 1946. He was also involved in the negotiations on Lend-Lease and the US loan to Britain.

John Maynard Keynes, who had suffered from heart problems for many years, died on 21st April 1946.
The post-war labour government offers some indications of how this New Deal UK might pan out as does FDR's approach in the pre war USA, but
the circumstances are different so we will have to speculate a little.


Dividing the City from the UK domestic economy


Back the domestic pound with gold but have a free floating international pound for trading in the city? Government (gold) secured loans to domestic businesses might fit this bill by a different mechanism. However currency fluctuations are still going to impact the domestic economy. Dropping the gold standard will really push up interest rates and lower the UK government credit 'rating'.

The USA, Germany, France and so on all make use of loans from the city to finance industrial expansion and modernisation. If this stops being subsidised relative to domestic credit, then there will be less credit available abroad and less return on foreign investment. Unless domestic industries can return a good profit on investment then the economy will tank and capital will flee from the City.

In the middle of a world recession is a good time for disruptive policies as there is less 'business as usual' to disrupt.

Regional development banks? Not like the 1960s world region banks to aid development in poorer nations, more nationalised banks, each limited to operating within a region of the UK. Perhaps the existent building societies could have a wider license to allow government secured lending to local businesses and start ups? The viability of the loans would have to be policed to stop 'charity loans' that are bound to fail. Making the banks regional stops all the investment gravitating to London, while still allowing a wide area of search for viable investments.

Government orders for modern plant and infrastructure in times of economic decline, to sustain businesses and come out of recession renewed, rather than stagnant. Government owned plant privatised upon 'full recovery'. This might work well for modernising the shipyards, steel production, machine tool manufacture, etc.. Nationalised shipyards make nationalised ships with nationalised steel. A floating capital reserve. Modernises the merchant fleet too. A Labour government would have no problem with a nationally owned merchant fleet. That will make obtaining raw materials cheaper and can be sold off when things pick up.


Ten year plan

First five years (1929-1934)

Raw materials for public works:

  • Aggregate and sand.
  • Dry Cement
  • Iron Ore (stock pile near steelworks if cheap)
  • Coal (stock pile against strike action)
  • Pit prop and building timber (stock pile props to sell to the mine owners later)
  • Brick clay
  • Paper and printing ink

Public works:

  • Public information and text books
  • Defence infrastructure (deep magazines, airbases, AAA mounts, dry docks, barracks/housing, etc.)
  • Greater rail capacity (nationalised rail infrastructure, increasing in gauge under bridges and tunnels)
  • Port capacity (rail infrastructure, new bulk freight handling facilities)
  • Farm access (category C and D) roads
  • Schools
  • Hospitals
  • Libraries
  • Council housing
  • Shipbuilding (merchant marine, fishing trawlers, etc. with secondary naval uses as un-armoured vessels - coastal and oceanic escorts, minesweepers, oilers, etc.)
  • Transport aircraft (passenger, mail and rapid freight)
  • Rail rolling-stock (reserve - passenger and freight)
  • Farm machinery
  • New quarries and mines
  • Defence machine tools (reserve)
  • Sewer, storm drainage and water supply repair
  • Research
  • Education and (re)training
  • Development of research into products and small businesses
  • Power plants (including Hydroelectric projects)
  • Regional port warehousing (Barry, Liverpool, Belfast, Port of Glasgow, Inverness, Newcastle/Sunderland, Hull, Harwich, Southampton, Plymouth, Avonmouth/Bristol)



The second five years (assuming re-election for 1934-1939) will see an easing off of publicly funded projects and a cashing in of capital goods to the private sector as the world economy recovers.

http://www.henley.reading.ac.uk/mana...esearch-6.aspx
This strand of research examines the spectacular transformation of building societies during the 1920s and 1930s.What had been a collection of local or regionally-based organisations in 1914 rapidly became dominated by a relatively small group of societies with national ambitions. In 1922 the largest eight building societies had collective assets of only £39 million; by 1939 this had risen to £361 million. Furthermore, with the exception of the Halifax, the emergence of 'nationwide' building societies during this period occurred almost entirely via internal growth and territorial expansion, rather than amalgamation. The research analyses case-studies of several societies that ranked among the top eight during the interwar period, including both rapidly expanding southern societies such as the Abbey Road and Woolwich, and major northern-based societies such as the Halifax.
These might be divided into regional societies that have to keep capital separate. This would inhibit the spread outside of a region. Each society would have more invested locally in one of the (based on civil defence regions) regions outside greater London. Government backing and seed capital of 'business society' loans and public works to improve infrastructure biased towards regions with high unemployment.

I'd love to put my hobby horse (land tax) in this, but I don't think I can justify it.

http://www.cooperativeindividualism....iberalism.html
During the key political fights for the land tax in Great Britain, the premier British economist of the era, John Maynard Keynes, was apparently silent. Roy Douglas, in his history of the land question in the United Kingdom, observes that Keynes was among the economists providing advice to Lloyd George on land policy but does not tell us what opinions the economist held. Lloyd George, for his part, was focused on agricultural land and wanted the state to take over ownership of land from the great landlords (with compensation) and turn it over to cultivators.

In 1926, Keynes wrote: "…I believe that [the Land Question], in its traditional form, has now become, by reason of a silent change in the facts, of very slight political importance." I read on but Keynes did not write further on what this "silent change in the facts" was. Nonetheless, subsequent events proved Keynes to be correct.

Between 1930 and 1934, the Labour Government was unsuccessful at getting a bill adopted to implement the taxation of land values. "For the remainder of the 1930s," wrote Roy Douglas, "the chief preoccupation of statesmen lay at first with industrial unemployment and later with international questions. Arguably, the land problem really stood at the root of both of these issues; but whether this be true or false, most men did not see things that way." Clearly, Keynes was in this group.
It seems that if unemployment can be solved before rearmament starts to be the issue (1935) then a Land Tax Bill to help repay the depression loans might be acceptable. A little less stress and Keynes might live into 1950.

Not long ago, I finished reading the third volume of Robert Skidelsky's biography of Keynes. This book covers the last decade of Keynes's life, during which he was constantly troubled by the effects of severe and ultimately terminal heart disease. Off and on, he was charged with representing Britain's interests and position as a core power at a time when the British empire was nearing its end. Ironically, he spent very little time leading what would become the Keynesian revolution. Keynes in mid-1937 was simply too weak for the moment to engage his critics. Then, somewhat recovered, he began to write at a steady pace, including a letter of advice to the U.S. President, Franklin Roosevelt. He was becoming increasingly fearful over the world situation. To Virginia Woolf he wrote: "[The] state of foreign politics is nearly giving me a heart attack. I always knew that Neville [Chamberlain' was the lowest (I can't spell it) flattest-footed [sic] creature that creeps." Keynes may have sensed that the world he knew was about to implode.

As Britain inched closer to war, Keynes went public with his views on how to manage a wartime economy. He called for the shifting of resources to the more depressed northern cities and the availability of credit at low rates of interest. He argued that the government could achieve rearmament by borrowing, and that taxation of the resulting increased incomes would bring in enough revenue to service the debt. As the looming menace of fascism emerged, Keynes worried that the nation's defenses were not being strengthened and that this increased the possibility of war. In a published article on foreign policy, he declared: "Britain should build up its naval strength and wait for the dictators to make mistakes."

At this critical point in the coming conflict, Keynes hoped an alliance with the United States could be achieved. Once the war began and Keynes was dispatched to the United States to negotiate assistance, he would have to deal with Americans who had no interest in providing the means by which Britain could hold on to its empire. Skidelsky concludes that "Keynes never appreciated the extent of Anglophobia in the United States."
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