Re: Keynes and the balance of payments (1946)

["Esteban Perez" <eperez@xxxxxxxxxxxx>]

This is a very late reply to Ted Winslow.
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1.	The issue of debtors and creditors seems to have been preoccupied Keynes at least since his Indian Currency and Finance. In that book (1924 MacMillan Edition, p.18) Keynes wrote:  ¨When we come to consider how this can best be done, it is to be noticed that the position of a country which is preponderantly a creditor in the international short-term market is quite different from that of country which is preponderantly a debtor¨. And referring to the bank rate policy to regulate loans to foreign countries p.25: ¨This indirect policy is less feasible in countries where the Money Market is already a borrower rather than a lender in the international market¨. And pp.29-30: ¨The Currency problem of each country is to endure that they shall run no risk of being unable to put their hands on international currency when they need it, and to waste as small a proportion of their resources on holdings of actual gold as is compatible with this. The proper solution for each country must be governed by the nature of its position in the international money market and of its relations to the financial centres...and national customs in currency which it may be unwise to disturb¨.

2.	In The Economic Consequences of Mr. Churchill (1925) Keynes opposed the revaluation of the pound (to its pre-war value in gold): ¨we have to reduce our sterling prices ....to be on a competitive level unless prices rise elsewhere¨. In Economic Consequences (Harcourt Brace. P.268) there are two ways to bring about a reduction in money wages: (a) ¨intensify unemployment...until wages are forced down. ...hateful and disastrous way..becuase of its unequal effects...and of the economic and social waste...¨. and (ibid, p. 247-248) ¨Deliberately to raise the vaule of sterling money ...means...engaging in a struggle with each separate group in turn, with no prospect that the final result will be fair and no guarantee that the stronger groups will not gain at the expense of the weaker  ....it must be war, until those who are evonomically weakest are beaten to the ground¨. (b) a uniform reduction of wages: p. 268 ¨the practical difficulty is that money wages and the cost of living are interlocked¨. Keynes recommendation is ¨raise prices in the outside world¨ (p.269).
Thus international assymetry means domestic adjustment with consequent assymetry (weak and strong). The solution is reflation.

3. The problem of assymetry is again mentioned in the Macmillan Report on which Keynes had a significant influence (1931), the equalization of prices requires countries that are losing gold to lower prices and countries that are gaining gold to increase prices. But debtor countries countries can only adjust slowly (¨the economic structure must be sufficiently elastic to allow these policies to attain their objective¨) and creditor countries sterilize.

4. In the Means to Prosperity (1933, CW, Vol. IX, p. 356) Keynes focusses agian on the need for expansion. ¨We should attach great importance to the simultaneity of the movement towards increased expenditure. For the pressure on it foreign balance which each country fears...will cancel out if other countries are pursuing the same policy at the same time¨.

5.	In the GT. P.349 : ¨It is the policy of an autonomous rate of interest, unimpended by international preoccupations, and of a national investment programme directed to an optimum level of domestic employment which is twice blessed´ and p.322: ¨The right remedy for the trade cycle ...in abolishing slumps and thus keeping us in a quasi-boom¨.

6.	The need for bouyancy is emphasized again in Keynes´proposals for an ICU (Vol. XXV) p.180: ...there is great force in the contention that, if active employment and ample purchasing power can be sustained in the main centres of the world trade, the problem of surpluses and unwanted ex