Paper 1
Commodity Control Scheme
Toshiaki Hirai
Sophia University, Tokyo
1. Introduction
In
this paper we examine Keynes’s activities as a planner of buffer stocks of
primary commodities in the context and background of the UK political scene in
the interwar period. Among other things, it is our aim to clarify (i) the
significance of a buffer stock plan in Keynes’s economic thought, and (ii) how
and why the plan was to be transmuted in the course of the political situation.
In July 1940 the Chancellor of the Exchequer’s
Consultative Council was
established with the aim of helping and advising “the Chancellor on special
problems arising from war conditions” (Moggridge, 1992, p. 636). Keynes
accepted to be a member of the Council. It was for the first time since 1919
that Keynes entered into any formal connection with the Treasury. In August he
“took a further step into the Treasury: he received a room in the building”
(Moggridge, 1992, p. 638). This was to get him deeply involved in Treasury
matters, though he continued to act as an unpaid adviser. Thereafter he was to
be engaged on a range of important assignments, which can be classified in
three categories:
(i) as a negotiator with the United States
over external war finance and the balance of payments crisis (e.g., the
Anglo-American Mutual Aid Agreement (1942) and the Anglo-American Financial
Agreement (1945));
(ii) as a planner of the post-war world
economic order (e.g., the International Clearing Union (1942) and the Central
Relief and Reconstruction Fund plan (1941)) ─ the commodity problem examined in
this paper belongs to this category;
(iii) as a planner of the post-war domestic
order (e.g., the White Paper on Employment (1944) and the Beveridge Plan (1944)).
As will be imagined from the above, Keynes
occupied a powerful position in the United Kingdom as a policy maker. Within
the British Empire, too, his authority and influence stood secure. On the wider,
international front, however, he repeatedly saw setbacks in seeing his aims
realized, chiefly as a result of the power of the United States.
This paper proceeds as follows. In Section 2
the initial situation surrounding the commodity problem is explained. In
Section 3 the Fifth Draft (14 April 1942) of the buffer stock plans ─ the important
version that Keynes would have really placed his hopes in ─ is
examined. In Section 4 comparison is made among the Fifth Draft and the
following three drafts; we then go on to see how Keynes was forced to come to a
compromise with other camps. Section 5 discusses the road along which the world
proceeded thereafter up until today, while Section 6 presents the conclusion.
2. The Initial Situation
2.1 The
First Stage
Commodity policy
was at first discussed in close connection with the relief problem. At the
outbreak of World War II, Britain made a desperate effort to prevent strategic
commodities from falling into the enemy’s hands. To achieve this objective it
was necessary to buy up large quantities of primary commodities, as a result of
which the U.K. found herself in possession of excessive stockpiles.
To cope with this situation, in July 1940 a
‘Ministerial Sub-Committee on Export Surpluses’ was set up to discuss what
measures should be adopted “to deal with surpluses in producing countries of
commodities which should be denied to the enemy by our blockade” (JMK.27,
p. 3) ─ restriction of
production, purchase and storage, destruction, etc. It was when the Prime
Minister stated in August that Britain should be committed to “a policy of
building up stocks of food and raw materials for post-war relief purposes” (JMK.27,
p. 3) that the surplus commodity problem came to be connected with the post-war
relief problem.
The Sub-Committee recommended that Britain
“should purchase, with or without American help, £200 million pounds in surplus
commodities, linking the purchase with the goal of restricting or regulating
future production” (JMK.27, p. 3). In November Leith-Ross was appointed
to represent Britain in the negotiations concerned.1 Keynes became
the Treasury representative on the official committee set up to advise him.
Keynes believed that “if this is [to be]
anything at all it [must be] a world scheme of the greatest possible post-war
significance, which the United States, if they understood it, would want to be
very much in at the first row” (JMK.27, p. 5). He insisted that any plan
should be drawn up on the principle of internationalism and in complete
collaboration with the U.S.
In November Leith-Ross suggested that any
plan concerning the surpluses problem should have the following three
objectives:
(i)
to
accumulate commodities in preparation for post-war relief initiatives;
(ii)
to
relieve producing countries of the collapsed markets due to the war;
(iii)
to carry
out production adjustment in order to prevent (a) the re-emergence of surplus
commodities during the war, and (b) the occurrence of disequilibrium after the
war.
Keynes whole-heartedly agreed that these
objectives should form the basis of any plan for the surpluses problem. In
December he recommended that commercial firms be set up, part of the capital of
which should be raised in the relevant producing country. In this connection,
in February 1941 he advised that the U.K. should not purchase surpluses other
than at a price at least 10 per cent below the yearly average in the lowest
year of recent years (examining the buying prices of various commodities, he had
reached the conclusion that the U.K. had until then been paying too high
prices). He put this policy before the official committee on 19 February, which
was accepted — this proposal allowed for Britain’s rapidly deteriorating financial
position.
In May 1941 Keynes put forward an
international version of the “ever-normal granary” (an international buffer
stock plan). On a visit to Washington in the same month, he discussed the
surpluses problem with Dean Acheson of the State Department. Keynes took this
opportunity to explain his thoughts on the problems that could be anticipated
after the war. His ideas, with which Acheson was in accord to a degree well
beyond his expectations, included: (i) an outline of a post-war relief and
reconstruction program for Europe (this might be an embryo for the Central
Relief and Reconstruction Fund2); and (ii) a conception of the
“ever-normal granary” for a unification of primary commodity prices throughout
the world.
Keynes wrote a letter to Acheson dated 4
June 1941:
The
international discussions relating to particular commodities, taken in
conjunction with the arrangements for carrying and financing surpluses, might
naturally lead on to a more ambitious policy for stabilizing within reasonable
limits the prices of the leading internationally traded raw materials and even
for some kind of international holding cartel which would apply the idea of the
ever normal granary to the international field (JMK.27, p.24).
Keynes believed that the commodity surpluses accumulated
throughout the world could be turned to advantage in the task of putting Europe
back on its feet once the war was over. In other words, the solution of the
commodity problem could assist in that of the relief problem.
Since
the end of 1941 he became more deeply involved with the commodity problem. His
efforts began with the First Draft of his international buffer stock plan
(January 1942), followed by the Second (February), the Third (March), and the Forth
(April), none of which are extant. The surviving drafts are the Fifth (April
1942) through the Eighth (May 1943).
2.2
Background
In order to
understand Keynes’s activities regarding the commodity problem in the 1940s, we
need to know his social philosophy and past activities. The following points
are, among others, worth noting.
A.
His Social Philosophy and Past Activities
The
first point is Keynes’s view of the market society (social philosophy)
underlying his buffer stock plan. Since the early 1920s he had been advocating
the “New Liberalism” and finding his way towards Monetary Economics,
criticizing laissez-faire philosophy and economics. This approach runs through The
End of Laissez-Faire (1926), the Treatise (1930) and the General Theory (1936).
A similar criticism of the laissez-faire
credo is clearly seen in his later years in the underlying idea of the International
Clearing Union3.
Keynes does not hold the view that if
left to the law of supply and demand, an optimal resource allocation will be
attained, arguing that it rests on an unrealistic assumption. Rather he
maintains that some intervention or adjustment by the government (or some
organization) is required in order to stabilize the market economy. This is the
so-called “New Liberalism” 4.
The
second point is concerned with his activities relating to the Lancashire cotton
industry in mid-1920s. Keynes recommended setting-up cartels and merger for
rescuing it. The view that some sort of organization is required in order to make
the market economy adjustable is here recognizable5.
The
third point is that Keynes had been studying and investigating the commodity
problem with great care since 1923.
He
had been compiling and analyzing statistics on staple commodities, believing that
“a certain amount of information … as to the correlation between changes in the
volume of stocks, and successive phases of the trade cycle, is necessary to a
full understanding of the latter” (JMK.12, p. 268).
His main investigations were published
in The London and Cambridge Economic Service, which started in 19236.
Keynes is responsible for the following issues: April 1923, June 1924, July
1925, February 1926, March 1927, August 1929, and September 1930. He also
published the following in the Memorandum Series by the Royal Economic Society:
“Stocks of Staple Commodities” (with J. Rowe, No.3, September 1927); “Stocks of
Staple Commodities” (with J. Rowe, G. Schwartz and others. No.17 (Aug. 1929),
No.24 (Oct. 1930), and No. 69(Nov. 1937))7.
In fact, he was a great and reckless
speculator of the commodity markets from 1920 through 1937, especially wheat,
while developing his theory of futures market. According to Fantacci, Marcuzzo
and Sanfilippo (2009), which analyzes the relation between Keynes’s theory and
his speculative activities, “[t]he most striking characteristic of Keynes’s
speculative activity in wheat futures is the systematic prevalence of long
position over the period 1935-1937”. He is also regarded as the “overlooked”
forerunner of the modern theory of finance8. It was Keynes (1923)
that first put forward his “theory of normal backwardation (forward prices
below spot prices)” in relation to the commodity markets9.
B.
The Earliest Buffer Plans
The
earliest paper of the series which eventually leads to the international buffer
plan is “The Control of Raw Materials by Governments” (The Nation and
Athenaeum, 12 June 1926; JMK.19, Part II, pp. 546-552), in which he
argues that in the case of primary commodities characterized by violent
oscillations in price and supply, government intervention by some means or
other is inevitable and proper. This was followed by “The Policy of Government
Storage of Foodstuffs and Raw Materials”10 (Economic Journal,
Sep. 1938; JMK.21, pp. 456-470), in which he suggests that the British
government “should offer storage to all Empire producers of specified raw
materials, either free of warehouse charges and interest or for a nominal
charge” (JMK.21, p. 465).
As will
be shown below, the buffer stock plan rests on the perception that the competitive
market system causes violent fluctuations in prices because it abhors “the
existence of buffer stock”, so that in order to prevent them (and stabilize
producers’ incomes) an international buffer stock plan would be required.
3. “The International Control of Raw
Materials” (The Fifth Draft11)
―
A Stabilization Plan for Prices
The Fifth Draft is a 19+v page
type-written paper entitled “The International Control of Raw Materials” (14
April 1942: Univ. of Tokyo; JMK.27, pp. 112-134) composed of
four sections and two appendices with “J.M.K.” at the end. This was drafted “in
the Treasury after informal consultations with other departments”, and sent “for
consideration and criticism to” the Board of Trade, the Ministry of
Agriculture, the Economic Section, Leith-Ross, Harrod and so forth (“Official
Committee on External Economic Problems” dated 30 April 1942, Univ. of Tokyo).
This draft was stimulated by Harrod, who had
been moved by a paper read at a meeting which was to be published as Keynes
(1938) 12. Harrod was an important figure who drove Keynes toward
various international schemes. In his letter to Keynes dated 4 May 1942 (No.29,
Univ. of Tokyo) Harrod wrote: “... It will be the business of the economists to
draw a list of the spheres in which internationa1 or concerted action is
desirable. I suggest a tentative list as follows: 1. International bank. 2.
Stabilization of primary commodity prices. 3. Other measures to combat the
trade cycle, including concerted action upon interest rates, public works
expenditure, etc. 4. Regulation of international capital movements and of the
rate and nature of such capital developments as depend on foreign capital. 5.
Welfare. 6. Tariffs et loc genus omne.”
Let us now turn to examine the Fifth Draft except for Appendix II which is a table.
Let us now turn to examine the Fifth Draft except for Appendix II which is a table.
3.1
“The Internationalisation of Vice-President Wallace’s ‘ever-normal granary’, in
Preference to Restriction, is the Basis of These Proposals” [Section I]
The significance
and purpose of this plan emerge clearly from the above title. There are two
methods of conducting international control of raw materials: (i) restricting
production, and (ii) stabilizing prices. The plan declares that method (i) does
not bring about general advantages, so that individual and general stabilization
of prices should be aimed at. This corresponds to the international version of
Vice-President Wallace’s “ever-normal granary”.
This policy is required because the
international competitive system is incapable of preventing violent
fluctuations in commodity prices, which not only jeopardize trade but also make
it difficult for firms to hold sufficient buffer stocks. In depression prices plunge
and a quantity of stock piles up because firms cannot abruptly vary scales of
production, while in boom prices rise rapidly and stock is depleted, which will
induce un-economical over-production and thus sow the seeds for the next
collapse.
It is
an outstanding fault of the competitive system that there is no sufficient
incentive to the individual enterprise to store surplus stocks of materials
beyond the normal reserves required to maintain continuity of output. The
competitive system abhors the existence of buffer stocks which might average
periods of high and low demand, with as strong a reflex as nature abhors a
vacuum, because such stocks yield a negative
return in terms of themselves. It is ready without remorse to tear the
structure of output to pieces rather than admit them, and in the effort to rid
itself of them13; which should be no matter for surprise because the
competitive system is in its ideal form the perfect mechanism for ensuring the
quickest, but at the same time the most ruthless, adjustment of supply or
demand to any change in conditions, however transitory (JMK.27, p. 131).
This serious failing occurs on account of a comparatively
high cost of storage, speculators’ operations, and a lack in incentive for
retailers or manufacturers to purchase commodities in advance. Over a long
period laissez-faire orthodoxy has prevented the creation of an institution
that could usefully bridge a remarkable gap in the production mechanism. In
order to rectify the defect afflicting the present system we need to take
international collective action.
Having thus stated, the essence of this
proposal is clarified:
[P]rices are
subject to gradual changes but are fixed within a reasonable range over short
periods; … Thus we should aim at combining a short-period stabilization of
prices with a long-period price policy which balances supply and demand and allows
a steady rate of expansion to the cheaper-cost producers (JMK.27,
pp.114-115).
The main
purpose of the plan is to stabilize the violent short-run price fluctuations in
international commodities and to allow for price changes in the long run so
that supply and demand might be balanced and cheaper-cost producers might be
given scope for a steady rate of expansion, and, through this, a certain level
of living standard for producers might be secured.
3.2
“The Outline of a Plan” (Section II) — Setup
of the “Commod Control”
In order to
attain the above-mentioned goal, international buffer stock organizations,
called Commod Controls, are proposed here, through which (price) stabilization
policy should be implemented to redress the shortcomings of the competitive
market system.
Each Commod Control, which deals with an
individual commodity, is to be composed of representatives of the major
producing and consuming countries while its management is to be entrusted to
independent specialists.
The object of each Commod Control is to
perform the following tasks:
to stabilize the
price of that part of world output which enters into international trade, and
to maintain stocks adequate to cover fluctuations of supply and demand in the
world market (JMK.27, p.115).
A. Price Stabilization
The central function of the Commod
Control is to stabilize the price of the commodity concerned (therefore to
stabilize producers’ incomes) through buffer stock management. This is the crux
of the plan, and to this end each Commod Control has the following tasks.
(i) Fixing
the Basic Price
Each Commod Control should fix the
initial “basic price” of its Commod (which denotes the commodity) at a
reasonable level, on the basis of the existing conditions, and thereafter be allowed
to lower (raise) the price by an appropriate amount if stocks exceed (dip from)
a stipulated figure, or increase (decrease) at a rate faster than a stipulated
rate. Change in the basic price should be small and gradual. In particular,
downward revision should not exceed 5 percent.
(ii) Management of Stocks
Each Commod Control should be allowed to
keep stocks at the most convenient place, and be willing to buy (sell) its Commod
at any time at a price of, say, 10 per cent below (above) the basic price. In
order to prevent stock from deteriorating, it should also be allowed to make
transactions independently, or enter into agreements with merchants. No Commod
Control takes on any responsibility for holding purely domestic stock. It
should not accept more than (e.g.) 25 percent of the annual average value of
exports from an exporting nation.
B. Restriction of Production
The
plan does not rule out restriction of production, but rather assigns it a
supplementary role. The following are envisaged:
(i)
Export Quotas
If, for unforeseen reasons, the
necessity of contracting output at a rate faster than that to which producers
could adjust themselves should arise, or if production should fail to fall in
response to a fall in price, then producing countries would be allotted export
quotas in proportion to the average value of exports in the last three years
(this plan is generous to producing countries which would protect their own
producers through subsidies, although in this case the quota allotted should be
reduced).
(ii) The Maintenance of Production Capacity
It might be necessary to provide producers
with appropriate incentives so that they would possess potential production
capacity in excess of normal requirements, which will alleviate the difficulty
of accurately adjusting supply to demand.
As stabilization policy alone would not be sufficient,
the additional measures indicated above should be implemented. The plan,
moreover, allows the producing countries to grant subsidies to their producers
in emergency situations so that the producers might be assured of incomes which
could not be otherwise guaranteed.
C. Finance
As for financing these arrangements, the plan
envisages the following: (i) profits arising from the difference between
selling prices and buying prices; (ii) provisions through either the
International Clearing Union14 or an arrangement between central
banks; (iii) issues of permanent or semi-permanent loans secured on the stock
of each Commod Control.
D. The General
Council for Commodity Controls
The plan proposes the “General Council for
Commodity Controls” to regulate and coordinate the various Commod Controls.
The General Council should be
responsible for: (i) ensuring that the provisions of each Commod Control are in
conformity with the general principles; (ii) reviewing the conditions of each
Commod Control, and making policy recommendations for the sake of the general
interest, the maintenance of stable prices, and control of the trade cycle;
(iii) authorizing or imposing modifications in the basic prices and the
stipulated level of stocks.
The buffer stock plan clearly regards the
stabilization of commodity prices as
its overriding objective, arguing that this is superior to any restriction plan,
for it avoids the difficult task of fixing fair quotas and making adjustments acceptable.
It also requires no policing. Furthermore, any restriction plan would forfeit
the advantages of international free competition which the buffer stock plan
does not deny.
In fact, the buffer stock plan aims at
combining the advantages of price stabilization in the short term with the
realization of the long-term “economic price” (defined as “the long-period
equilibrium costs of the most efficient producers on the assumption that the
return to the latter is sufficient to provide them with proper nutritional and
other standards in the conditions in which they live” (JMK.27, p. 123),
without impairing the workings of international free competition.
3.3 Commodity Control as a Means Contributory to the Prevention
of the Trade Cycle [Section III]15
Commodity
control by means of the buffer stock — that
is, the procurement of commodity surpluses resulting from falling effective
demand, and the release of commodity stock in the contrary case — can
also, according to the plan, contribute to the prevention of the trade cycle.16
This is considered to be superior to public works policy because it works
effectively in both directions in terms of scale and speed.
buffer
stock controls to deal with the epidemic of intermittent effective demand are
therefore the perfect complement of development organizations ... to offset a
deficiency of effective demand which seems to be endemic (JMK.27, p.
122).
… we have at our
disposal a weapon capable of producing large effects by rapid action, and of
operating in the negative as well as in the positive direction, so that it can
function as a stabilizing factor both ways. … Organised public works, at home
and abroad, may be the right cure for a chronic tendency to a deficiency of
effective demand. But they are not capable of sufficiently rapid organization
(and above all they cannot be reversed or undone at a later date), to be the
most serviceable instrument for the prevention of the trade cycle (JMK.27,
pp.121-122).
If a
Commod Control can stabilize the incomes of producing countries by procuring at
stable prices the Commod in surplus which emerge due to an initial fall in
effective demand, then a vicious cycle can be controlled at the initial point in
time (in the reverse case, it can check excessive boom by releasing stock).
The
buffer stock plan is here advocated not only as a solution to deficient
effective demand which was the main concern in the General Theory, but
also as a solution to excessive boom.
3.4 Some Difficulties Reviewed [Section IV]
The difficulties likely to emerge with this
plan are here reviewed. The section starts by emphasizing that the plan aimed
at stabilizing prices has the following advantages over a restrictive plan.
(1)
It
can avoid the difficult task, which can easily provoke rancor on one side or
another, of determining fair rationing and providing acceptable means of
adjustment.
(2) Monitoring is not required.
(3) Even if there were a few producers who preferred
to keep out of the plan, there would be no problems. These firms lose the right
to share in the management of the plan, and are not able to get help in storage
problems in the places concerned, while it is not clear what they will gain by
doing so.
The fundamental idea of this plan is that an
appropriate international policy should be to stabilize short-term price
fluctuations, and bring the long-term “economic price” to fruition.
If everything were left to the buffer
stock plan alone, however, there might be cases in which matters get worse. Then
some restriction plan might be required as a temporary and complementary
measure. Certainly it should be temporary, for otherwise the advantage of international
free competition would be lost.
Restriction
schemes, when they are unavoidable to supplement the buffer stock
arrangements, should be regarded as a means of temporary relief ─ not a normal or a persisting expedient.
For they tend to crystallize the price and the distribution of output between
different countries as they exist at the date of the scheme’s inception … In
this way the signal advantages of free international competition, namely its
adaptability to changing conditions, both of demand and supply, and the proper
advantage it gives to the cheapest producers, are needlessly thrown away.
“Stabilisation” must not rest on the absurd assumption that conditions of
demand and of supply are fixed, or that the chief purpose is to protect the
increasingly uneconomic producer from the natural effects of world competition.
Our object should be to combine the long-period advantages of free competition
with the short-period advantages of ensuring that the necessary changes in the
scale and distribution of output should take place steadily and slowly
in response to the steady and slow evolution of the underlying trends (JMK.27,
p.126).
In
Section IV, besides these, the following are examined: (i) the definition of
commodities, the difference between the highest and lowest price, the largest
and smallest size of stock, and the valuation for basic prices as entrusted to
the General Council of Commod Controls; (ii) an estimation of the size of stock
which a Commod Control should possess (a figure between three months’ and a
year’s international trade); (iii) the advantages which the introduction of the
International Clearing Union (supposing it came into existences) as to finance
would bring about; (iv) the advantages of the stock of raw materials of
producing countries being fluid in all cases.
This plan has another important
implication. It also secures stable living standards for the producers
concerned by guaranteeing adequate incomes. If a country should be seen to
attain a low cost by lowering its living standard, a Commod Control is faced
with the choice of either holding excess stock or cutting the basic price,
which would bring the living standard of many countries below an adequate level.
In order to avoid such a situation, each government, the plan says, should be
allowed to provide its producers with subsidies which should be confined within
a reasonable range since the system is flawed in much the same way as a
restrictive plan.
3.5 Appendix I
Here Keynes’s view of the market society recognizable in the Introduction,
emerges most vividly. After presenting the data which show that internationally
traded commodities are subject to violent price fluctuations, he states that
this comes from a fatal defect of the competitive market system which abhors
buffer stocks.
Now, we have seen the principal contents
of the Fifth Draft. This type of plan will not suffer from such conflict
between internationalism and nationalism as will complicate the relief problem.
In the case of the relief problem, it can not be
addressed without taking into consideration who the rescuers, and who the rescuees are. Thus according as the position of a
country changes with the development of the state of affairs, the voice of nationalism
should become larger and larger.
On
the other hand, the buffer stock plan aims at stabilizing the short-run price volatility
of primary commodities, and securing the living standard of producers, through
realization of the long-run economic price. Thus it embodies, in its very
nature, a strong tenet of internationalism.17
3.6 Criticism of the Fifth Draft
The earliest criticism
of the Fifth Draft came from the Bank of England that it “was too laissez-faire and that no alternative to
long-term planning existed” (JMK.27,
p.110). In a minute to Hopkins dated 15 April 1942 Keynes reponded to it,
which interestingly enough reveals his stance:
I infer … that the Bank considers the
buffer stock proposals to be far too laissez-faire, in as much as they
still allow a place for private trading. International agreements, by which
prices were absolutely fixed and quotas rigidly determined for every producer
and perhaps for every consumer also, so as to freeze or stereotype world trade
into a mould … seem to me terrifying, not least from our own special point of
view. … I suspect that this bias towards rigidly controlled state trading on
Russian lines influences the general critical approach. The same bias seems to
appear in … the Deputy Governor’s letter. In reply to … I can only plead guilty
of aiming at a plan which does take a middle course between unfettered
competition under laissez-faire conditions and planned controls which try to
freeze commerce into a fixed mould (JMK.27, pp.110-111).
It
was Leith-Ross who wrote “Note on the Treasury Memorandum” (7 page typescript
dated 20 May, 1942. No.83, Univ. of Tokyo), which is critical of the Fifth
Draft. It emphasized the importance of regulation of production rather than the
buffer stock plan.
In the case of most of the principal raw
materials, price control through buffer stocks on the lines proposed would not
be an effective means of regulating production and trade in the conditions
which are then likely to exist (p.7)
Regulation of production … would be of
importance, not only from the point of view of the commodities as such, but
also from the point of view of general economic recovery and particularly of
the recovery of our export markets (p.7)
4.“The International Regulation of Primary
Products” (The Sixth to
the
Eighth Draft) ― Transmutation
Process
The buffer stock plan drafts which
follow the Fifth Draft - all of which are entitled “The
International Regulation of Primary Products” (the Sixth Draft [28 May 1942],
the Seventh Draft [August 1942. JMK.27, pp.135-168], and the Eighth Draft
[February 1943. JMK.27, pp.168-194]) - underwent
significant transformation18 due, in the main, to the drastic
introduction of a “restrictive plan”; so drastic that they lost the clarity and
the first principle which characterized the Fifth Draft. Actually, they are the
product of having accommodated the claims of various governmental departments.
After explaining how the Sixth Draft
came to be written and responded, we will examine the following three drafts in
order.19 20 Our main concern is with how the plan went on
changing.
4.1
The Preparation for the Sixth Draft and Response
In a letter to Harrod (who had read and
been very critical of Leith-Ross’ Note above-mentioned) dated 26 May (No.32,
University of Tokyo), Keynes said: “… I have endeavoured in the revise to give
him [Leith-Ross] a fair show and bring in substantial passages providing a
schematism for restriction whilst, nevertheless, maintaining the general
atmosphere of approach of the former document [the Fifth Draft]”.
Keynes swiftly drafted the Sixth Draft.
Moggridge explains this as follows:
In his attempt to meet his critics, Keynes
went to considerable lengths, as he did to meet suggestions concerning the
government of the scheme, the role and scope of price changes, the transition
period after the war and long-term price policy. His re-draft, dated 28 May
1942, went to the Official Committee on Post-War External Economic Problems on
1 June (JMK.27, p.135).
This means that Keynes wrote up the Sixth
Draft in just a week after having got Leith-Ross’ memorandum.
Having read the Sixth Draft, Harrod wrote “Note
on ‘The International Regulation of Primary Products’ ” dated 9 June (No.88,
University of Tokyo), distinctively criticizing the Sixth Draft and insisting
on the superiority of the Fifth Draft, which shows the difference in stance
between Keynes, who wrote the above-mentioned letter to Harrod, and Harrod. For
Keynes judged that the Sixth does not contradict the Fifth Draft, while Harrod
judged that it does.
The revised
draft on buffer stocks [the Sixth Draft] differs from its predecessor [the
Fifth Draft] mainly by the matter now contained in paragraphs 15 and 16 [which
correspond to, respectively, paragraphs 13 and 14 in the Seventh Draft]
together with consequential changes. The original draft [the Fifth Draft]
contemplated that by restriction schemes and quotas; the new draft stresses the
supplementary schemes giving them a prominence which, in my submission, might
endanger the main plan and be contrary to public policy (p.1).
Even if
restriction are to be considered, Harrod argues, it must be reduced to the
minimum.
Restriction cum quota schemes, unlike the
buffer stock plan, are plainly contrary to our vital national interests;
according to the best opinion they militate against world prosperity also. In
giving restriction a place in the buffer sock plan we should do so with the
deliberate idea of removing control of it from the producers, of securing that
the schemes are well contrived and of reducing their scope to the minimum. … It
is to be hoped that the self-contained character of the buffer sock plan may be
preserved… (p.6).
It was Fergusson, Permanent Secretary,
Ministry of Agriculture and Fisheries, who dissented the Sixth Draft, from an
opposite side to Harrod, saying that “The buffer stock scheme thus seeks to
continue the principle of unregulated production and free international
competition in primary products. … This is not, I think, a principle which is
likely o be acceptable to Mr. Wallace or to representatives of most primary
producing countries … Agricultural Departments in most countries believe that
under modern conditions the adjustment of supply to demand can only be achieved
by schemes for the regulation of production and marketing” in “Note of Dissent
by Sir D. Fergusson” (30 July 1942. No. 97, University of Tokyo, p.1).
Keynes remarked Fergusson, who continued to
express the above stance, as “barmy”, showing “an almost lunatic
misunderstanding” (Jan. 1943, JMK.27,
p.168).
Three members of the Official Committee on
Post-War External Economic Problems and Anglo-American Co-Operation - Harrod,
Robbins and Meade – had issued a memo on Fergusson’s note, stating that “The
buffer stock plan seems to be the most potent weapon available for ready use in
the early years after the immediate post-war period. We connect it particularly
with the agreed wish to have an ‘expansionist’ monetary system” (U.S.E. (42)
20. 22 July, 1942).
4.2 The Sixth Draft
─
Drastic Introduction of a “Restrictive Plan” in Disguise
We will examine the Sixth Draft (U.S.E.
(42) 10, 2nd June 1942, Keynes Papers) dated 28 May in comparison
with the Fifth one. The main difference between the two lies in the fact that
the Fifth Draft sets the “stabilisation of prices” (= ‘stabilisation’) as a primary
objective, and clearly states that the “regulation of the volume of output” (=
“restriction”) should be avoided, while the Sixth Draft are written in a
delicate way. Truly, the Sixth Draft explicitly puts priority on buffer stock stabilization,
“whilst providing for the expedient of quota-regulation where it seems
unavoidable” (p.5). Nevertheless, far more space is in fact allotted to restriction
─
and this to such an extent that the plan can hardly be said to regard
restriction as a temporary or supplementary measure. This is revealed in Paragraphs
15 and 16, which deal, respectively, with restriction in the form of quota
regulation of exports or organized restriction, and with the relationship
between stabilization and restriction.
This qualitative transformation gives us an
impression of distinct retreat from the first principle which characterized the
Fifth Draft, as Harrod pointed out. It was, as we saw above, made, as a result
of having accepted criticism, mainly from the Ministry of Agriculture and
Leith-Ross, that the articles concerning “restriction” were insufficiently
dealt with.
A.
Preface [Section I]
In the Sixth Draft
as in the Fifth Draft, the problem of regulation has two main objectives: (i) “it
aims at limiting and smoothing out the short-term fluctuations of price which
in the past have been disastrous to the operations of producers and consumers
alike”, and (ii) “it aims at securing an economic price and a gradual
transference of trade in cases where it would appear likely that otherwise
over-production would inevitably involve producers generally in prolonged
distress”.
That is, the former objective is the
“stabilization” of prices, while the latter the “restriction” of output. The plan
states that the first objective is to be attained through buffer stock
operations, while references to the second objective is made in relation to
restriction, putting priority on the first.
[The buffer stock operations] seem to go to the root of the matter and
are likely to promote the general interest more completely than can be
claimed for any projects which are primarily directed to restriction (p.6).
And
yet the Sixth Draft refers to the possibility to the necessity of restriction.
There is likely to be general agreement that
such schemes [restrictions] may prove to be
necessary in the
case of certain commodities even in the new circumstances (p.15).
The Fifth Draft clearly
stated that the two objectives could be attained with the buffer stock
operations while the Sixth refers to the “restriction” from the beginning, indicating
significant retreat. The next passage follows the above quotation.21
any proposals
for the international regulation of primary products must … provide for their
[restrictions’] possibility (p.15).
B. The
Internationalisation of Vice-President Wallace’s “Ever-Normal Granary” to
provide buffer stocks and steady prices [Section II]
This
is, in substance, similar to section I in the Fifth Draft, but it contains the
following
passage.
The following
proposals, … whilst providing for the expedient of quota regulation
[restriction] where it seems unavoidable, are particularly directed to buffer
stock stabilization (p.5).
C. The Outline of a Plan [Section III]
This section qualitatively differs from Section II, “The
Outline of a Plan” of the Fifth Draft, in that the former has additional
paragraphs — Paragraph 15 dealing with restriction and Paragraph 16 marrying “the
ideas of buffer-stock regulation [stabilization] and quota regulation
[restriction]”.
Paragraph 15
This deals
with the quota rationing of exports, the need for which is delicately expressed:
But there is likely
to be general agreement that such schemes [quota rationing of exports, and
organized restriction] may prove to be necessary in the case of certain
commodities even in the new circumstances, that any proposals for the international
regulation of primary products must, therefore, provide for their possibility,
and that careful precautions should be taken in handling an instrument which,
if abused, is so liable to impoverish the world as a whole and waste its
potential resources. In any event, there is one use of quota restriction which
is in principle acceptable, namely, where it is avowedly temporary and for the
purpose of effecting a smooth and gradual transfer from one source of supply to
another (p.7).
The following
suggestions are mainly directed to the provision of suitable machinery within
the general framework of international control, to decide when organised
restriction is justifiable and the general lines it should follow with a view
to keeping it within the narrowest practicable limits (p.8).
Very intricate expression, indeed, to the
effect that a restriction plan, hazardous as it may be, might be temporarily
required. Thus, it argues, although a stabilization system by means of buffer
stock should be the crux of the plan, a restriction plan as an auxiliary means needs
to be taken into consideration without impairing the stabilization plan.
The
provisions of “suitable machinery” suggested there are summarized as follows: (i)
conditions and methods for exporting governments’ applying rationing regulation
to the General Council; (ii) temporary export rationing based on the last three
years’ exports; (iii) the necessity of inquiring into the fundamental causes if
rationing regulation should be required to be continued; (iv) the role of a
Commod Control while rationing is in effect (the determination of the basic
price, the determination of the total amount of rationing, the volume which a
Commod Control should purchase, and so forth); (v) the period of a regulation
plan.
Here also, in
conflict with the point hitherto asserted that rationing regulation should be
temporary, it is treated as acceptable if reasons for continuation exist. Thus
the overall intention of the plan becomes blurred.
Paragraph 16
Here a link is
proposed between the “stabilization of prices” and the “restriction of output”.
Having emphasized once again that the regulation of rationing should work as an
auxiliary means for stabilization, the following procedure is set out.
The
regulation plan begins by deciding on “standard rationing” for each exporting
country. When a tendency to accumulate stocks is observed, a Commod Control
undertakes buffer stock operations in such a way that it lowers the price, and
accepts the commodity concerned based on the “standard rationing”. If
this tendency were to drag on, and the price were to go down below a reasonable
economic price, the Commod Control should implement a “genuine restrictive
plan”.22
D. Some
Difficulties Reviewed [Section V]
This differs from Section IV of the Fifth
Draft on the following points.
(i) In the Fifth Draft priority of
“stabilization” over “restriction” was clearly stated, and a “restriction” plan
was treated as the last resort. In the Sixth Draft these expressions are deleted.
(ii) In Paragraph 23 a passage which stresses the
raison-d’être of a restriction plan is inserted.
(iii) Paragraph 16 of the Fifth Draft emphasized
that a restriction plan should be temporary; this remark is deleted from the Sixth
Draft.
(iv) In Paragraph 26 a passage in which
commodities suitable for buffer stock control are examined is inserted.
(v)
The last passage dealing with excessive
liquidity in Paragraph 18 of the Fifth Draft is deleted from the Sixth Draft.
(vi)
In Paragraph 29 a passage to the effect
that the plan is compatible with further development of the state trading is
added.
As
is clear from (i), (ii) and (iii), much attention is paid to a “restriction
plan”.
E. Appendix
Here the following are added.
(i) In Appendix I,
some examples of the damage to consumers that come from price instability are shown,
and a passage to the effect that stabilization will contribute to ironing out
wage negotiations and social policy is added.
(ii) In Appendix
II, some examples are given of the consequences of uneconomical production
fostered with subsidies and protection policies — chronic surplus capacities,
high prices, and reduced volume of international trade —and the need to do away
with them is stressed.
4.3 The Seventh
Draft
The Seventh
Draft (U.S.E.(42) 21; JMK.27,
pp.135-162), dated 30 July, with minor amendments, was submitted to Ministers
together with “Sir Donald Fergusson’s Note of Dissent)” (U.S.E. (42) 5th Mtg,
p.1).
The Seventh Draft differs from the Sixth
One on the following points.
(i) Paragraph 4 in the Seventh Draft.
(a)
The function of a Commod Control.
In the Seventh Draft the “new sources of
supply” are “left to the state of nature” while in the Sixth draft some form of
“regulation” was taken into consideration.
The
Six Draft aimed at (i) “limiting and smoothing out the short-term fluctuations
of price”, and (ii) “securing an economic price and a gradual transference of
trade in cases where it would appear likely that otherwise over-production
would inevitably involve producers generally in prolonged distress”.
(ii) Paragraph 12(i) of the Seventh
Draft.
In
the Sixth Draft concrete figures were mentioned concerning the voting right of
exporting and importing countries in a Commod Control.
The
Sixth Draft here contained the same item (dealing with excessive liquidity) as
the last passage of Paragraph 18 in the Fifth Draft. It was stated that the regulation
plan concerned is compatible with further advancement of the state trading.
4.4 The Eighth Draft ─ Enlargement
of the Commod Control and Further Degeneration
The Eighth Draft
is organized as follows: I. Preface; II.
The Outline of the Plan (10. General Assembly, 11. Commod Control, 12. Buffer
Stocks, 13. Finance of Buffer Stocks, 14. Export Rationing); III. Conclusion
(which was put as the closing passage of the “Preface” in the Seventh Draft).
The Eighth Draft differs from the Seventh
in that the provisions of the Commod Control are greatly enlarged. It rather
comes to the Fifth and Sixth Drafts as far as composition and expression are
concerned.
What attracts us is an elaborate
presentation of organization, followed by statement of the objectives of this plan.
The expression, “an international version of
the ever-normal granary” which had been used up to the Seventh Draft, is deleted
(in general the items peculiar to America are deleted), and an argument in
favor of preventing the trade cycle is put in Appendix II. Finance, in
contrast, comes to the fore. The section, “Some Difficulties Reviewed”, which
had been seen from the Fifth Draft on, is deleted and incorporated in the various
places concerned.
On the whole, here in the Eighth Draft a
system is elaborated with great clarity.
A.
Preface [Section I]
This was greatly changed. In Paragraph
2, the reasons are mentioned why the producers of primary commodities suffered
in the 1930s (this was not seen in the Seventh Draft). The two objectives of
the plan are the same in the two drafts, and what follows has the same contents
as the Seventh Draft.
B.
The Outline of the Plan [Section II]
This
has a distinctive feature, as compared with the Seventh Draft, in that the role
of the organization is clearly and concretely worked out. At first the General
Council is dealt with. Membership, obligations, the voting right of
participating countries, and the way of electing the “General Executive” and so
forth are prescribed.
We
then come to Commod Controls, whose functions are greatly enlarged ― “price
control, buffer stocks, export rationing, regulation of production,
encouragement of new sources of supply, maintenance of reserve capacities” (In
the drafts up to the Seventh Draft buffer stocks were the only task for Commod
Controls to be performed). The main Commod Controls are those dealing with
buffer stocks and export rationing, for which provisions are stipulated
respectively in Paragraph 12, “Buffer Stocks” and Paragraph 14, “The Quota
Regulation of Exports”. In addition, constraints to the general rights of the
Commod Control and the function of the General Executive are specified.
Paragraph 13, “The Finance of Buffer
Stocks”, which is newly written, specifies in great detail how to procure the finance
required, the role which the International Clearing Union (a stabilizing
factor) should play, and how to deal with mal-administered Commod Controls.23
In
the Eighth Draft, it should be noted, the stabilization of prices recedes even
further in terms of the main objectives. In the Seventh draft, the importance
of buffer stocks was still emphasized in the form of “an international version
of the ever-normal granary of Vice-President Wallace” (albeit the position of
buffer stocks was played down as compared with the Fifth Draft). Now, in
addition to a buffer stock plan and quota regulations, so many other
regulations are introduced that the nature and function of a Commod Control
drastically change. Moreover, while in the Seventh Draft the “rationing
regulation” was declared to be temporary, in the Eighth Draft this expression
disappears. Each Commod Control is supposed to be responsible for any or all of
the above-mentioned tasks24, albeit the principal Common Controls
are those responsible for buffer stocks and export quotas.
4.5
Keynes's Stance as Political Pragmatist
We have so far
examined how Keynes went on revising his commodity control plan. From this we
can see what his stance is.
What is clear is the fact that Keynes's plan
has receded further and further as he revised it. The Fifth Draft is, in
principle, very clear and excellent in that it emphasizes the price
stabilization through buffer stock management, almost putting aside restriction
of production. However, the Sixth Draft came to incorporate Restrictive Plan in
disguise, while the Eighth Draft came to include various kinds of Commod
Controls, which works for several regulations, so that the original function,
which Commod Control was intended to play not only in the Fifth Draft but also
in the Sixth and Seventh ones, completely disappeared.
As we saw, the Fifth Draft and the Sixth
Draft were criticized by Leith-Ross, the Bank of England, and Fergusson who
argued that it is very laissez-faire, and asked for restriction of production,
while Harrod (and probably, Robbins and Mead) supported the Fifth Draft in
earnest, and criticized the Sixth Draft.
Keynes, who wrote the Sixth Draft, giving
Leith-Ross a "fair show", responded to Harrod's criticism, saying
that it maintains"the general atmosphere of approach of [the Fifth Draft].
However, as we saw, the Eight Draft has no
clear-cut objective because of various kinds of Commod Controls.
From the above, we can see Keynes worked as a
sort of political pragmatist among political interests, to such a degree that
he lost the basic standpoint envisaged in the Fifth Draft. He seems not to have
express some anger against those who vehemently supported restriction of
production. It should be noted that this is what happened not so much in the
international scene as in the domestic one.
In this connection, we can mention the two
things:
(1) In the
sphere of international rescue, Keynes clearly wavered between Internationalist
and
the defender of the British Empire. He first
put forward the CRRF plan, then changed
into the maintenance of the Lend-Lease
system as the British Empire's financial position
rapidly deteriorated.25
(2) Keynes, who
put forward the International Clearing Union (ICU) as a new international
monetary system, was forced to concede to
the White Plan and accepted it. In this case
Keynes showed anger and frustration in the
negotiation. But he could not help recognizing
the powers of the US.
5.
The Commodities Problem Thereafter Up Until Today
5.1 The Final Result of Keynes's
Plan
We will
briefly trace the destiny of the international regulation plan for primary
commodities.
In May 1943 the Eighth Draft was accepted by
the War Cabinet. Its broad outline was handed over to the United States in the
conference on food at Hot-Springs, which discussed the general principles of
the commodity policy.
In the
Anglo-American conference on postwar economic problems in September in which
the official document of the Eighth Draft was handed over to the United States,
the following agreement was reached:
The agreed document contained somewhat less
emphasis on buffer stocks and probably greater safeguards against the improper
use of quantitative restrictions than the original British plan. However, it
also contained few restrictions on national sovereignty (JMK.27, p.196).
That
is, the American side was negative toward a buffer stock article. On the
British side, moreover, severe opposition was put up against any such agreement,
among others, from the “Ministry of Agriculture [which wanted to see stricter
quota regulations] and the Bank of England [which wanted greater scope for
State trading]” (Mizels, 1992, 93 n.14), and the need for a commodity-by-commodity
approach was advocated.
Thereafter the commodity problem took
the form of a proposal to the Conference on Trade and Employment in Washington
in autumn 1945. On the whole this proposal represented a position against the
idea of buffer stocks, and included articles of commodity agreement among
governments.
The final result was a survival of the commodity
agreement articles in the GATT26 and the Economic and Social
Committee of the United Nations.27
In the event, notwithstanding Keynes’s self-sacrificing
efforts this plan bore no more fruit than did his plan for an International
Clearing Union.28
5.2 The Path
Thereafter Up Until Today29
A. UNCTAD
Programme
The commodity problem has been a serious
issue between the (producing) developing and the developed countries ― a
North-South issue. After the WWII it has been dealt with based on a
Commodity-by-Commodity Approach until 1968, when the secretariat proposed a
comprehensive programme at the UNCTAD II. In May 1976 the UNCTAD General
Assembly discussed the Integrated Programme for Commodities (IPC). Henceforward
there occurred a long battle between the producing countries, which suffered
from the falling prices of commodities and put forward the IPC, and the
developed countries which opposed it. It was in July 1989 when the two sides
have, at long last, agreed to set up the Common Fund with the purpose of the
stabilization of commodities and the improvement of exports incomes.
Dr Corea [the
then UNCTAD Secretary-General] had stressed in his report that the essential
purpose of the proposed Fund would be the provision of the finance needed for
the creation and operation of buffer stocks that might be established under
commodity agreements to be negotiated under the Programme. … A further function
envisaged was that where no such agreements yet existed, the Fund would be
empowered to intervene under agreed conditions in particular commodity markets
in exceptional emergency situations (Maizels, 1992, p.116).
As far as the buffer stock operations
are concerned, the Fund had the “First Account” (however, it has not been made
use of). Although the International Natural Rubber Agreement was equipped with
the buffer stock system, it did not apply to the Fund for the First Account.
Even this agreement ended in October 1999, and now there exists no
international commodity agreement equipped with the buffer stock system.
Therefore, the Common Fund has not been successfully operated from the very
beginning ….
The idea of the Common Fund can be
traced back to Keynes’s buffer plan in the 1940s.30
B. Index
Speculation and Commodity Problem at Present
Enron Loophole - The
price of crude oil saw a sharp rise since the beginning of the 21st
century. Among others, the surge which was seen in the first half of 2008 was
dreadful.
This phenomenon occurred not from actual
demand but from "index speculation" which was made possible due to
"the Enron loophole" by way of the Commodity Futures Modernization
Act of 2000 (CFM). The Enron loophole was set in a series of market
liberalization campaigns and made by the progenitors of the Gramm-Leach-Bliley
Act (1999). This liberalization is problematic, for it is based on the OTC
(over the counter) in which nobody knows how many transactions are being made
and operators are set free from any reporting obligation. That is why the
loophole is dubbed as "futures-look-like".
It is not "genuine oil" but
"paper oil" in which large speculators are dealing. They show no
interest in other than making a margin of profit through speculative
activities. Financial engineering has done some service, enabling such
activities to be operated in a "scientific" way. Liberalization
beyond a certain limit, however, has a tendency to lose transparency and make
everything a target for speculation. This just took place in the crude oil
market.
While in the 1970s it was the OPEC, a price
cartel, which determined the price of crude oil, it has now come to be determined at the world
markets - especially, the Brent oil at the London market and the WTI oil at the
New York market - where the index speculation is hugely involved. Thus the
markets have turned into the field for money game to such a degree that
"60 percent of the price of the crude oil now comes from pure
speculations".
Target for index speculation, in fact, was
not confined to crude oil. It has been extended since 2003, to commodities such
as corn, wheat and others, with a vast amount of money being flown into the
futures markets from MMF, investment banks, hedge funds, pension funds and so
forth.
This has caused a cataclysmic disaster. The
surging price of crude oil has enabled the production of ethanol from corn,
which has become a target for speculation, and caused a surge in corn price.
This caused, in turn, a huge rise in the price of wheat, and food items as a
whole, causing starvation of a large number of people throughout the world. It must
be added that these phenomena have greatly helped the economic resurgence of
Russia, a big resourceful nation, which the progenitors of the CFM Act never
would have imagined.
Problem with
Speculation- We learn the following at the first
lesson of economics: "the price is determined at the point where demand
equals supply. This would satisfy both firms and households, making the social
surplus maximal".
This is, however, a story about a spot
market. In the case of goods the price of which violently changes (such as
agricultural goods subject to weather conditions), a forward market emerges.
The persons involved are concerned with the uncertainty of future prices, so
they would participate in the forward markets in order to offset the risk. The
system, so far, is "sound", for the participants are confined to
those who make a living through the buying and selling of the goods concerned.
When everybody comes to be allowed to
participate in these markets, however, speculators would also enter them. They do
not show any interest in the goods concerned, but would aim at making
speculative profits through capitalizing price fluctuations. As pure
speculators would enter the markets, the prices come to show an
"unsound" movement. The commodity markets at present have been thus
racked by index speculation.
Warning from
Keynes - We
saw Keynes made great efforts to set up the Commod Controls as an international
buffer stock in order to stabilize the prices of commodities which had
violently fluctuated in the interwar period. The idea was that Commod Controls
should possess buffer stock with the aim of stabilizing the prices of
commodities through operations . His idea bore no fruit, albeit it was referred
to when the world tried to address the international commodity problems, as
exemplified by the Common Fund (1989).
During these three decades the situation
surrounding commodities have moved into the direction of using market
facilities, quite contrary to what Keynes hoped and envisaged, to such a degree
that almost all the commodities have come to be traded on the market racked by
speculative activities. We are now living in the period of an un-controlled
system, or "the speculation-racked market system".
What is now required is how we could address
the present situation of commodities. Keynes's idea is a warning toward
liberalization, beyond the reasonable limit, which modern market system has
attained - To what degree should we leave commodities to market and to what
degree to international control? The problem might be tough and untractable,
and yet a reasonable solution for the stable and smooth development of the
world economy is desperately needed.
Due to the financial instability caused by
the financial globalization as characterized by the rapidly growing Shadow
Banking System (SBS) and vigorous speculative activities, the world has
experienced several crises in the 1990s, and finally plunged into the chaotic
situation due to the Lehman Shock in 2008. Four and a half years passed, and
yet the world has no mechanism to oversee the financial system, except for the
Dodd-Frank Act (US), the Tobin Tax proposal (EU) and the Vickers Report (UK),
all of which stand just at the initial stage. As far as the commodities problem
is concerned, index speculation remains intact.
6. Conclusion
In this paper we have sought to clarify
(i) the significance of a buffer stock plan in Keynes’s economic thought, and (ii)
how and why the plan was transmuted in the political situation of the time.
Our conclusions are:
(i)
Keynes firmly believed that violent fluctuations in the prices of primary
products were attributable to the fatal defect that the competitive system
abhors buffer stocks, and in order to stabilize prices (and guarantee some
living standard to producers) an international organization should be set up.
The Fifth Draft, the main emphasis of which was placed on the stabilization of
prices, ideally epitomizes his stance, for it is firmly grounded in his social
philosophy ─ the New Liberalism.
(ii) However, the buffer stock plan made a series of
transformation due to political concessions and compromises. The essential
transmutation is that in the drafts following the Fifth Draft restriction on
output was increasingly emphasized. The Sixth to Eighth Drafts are quite
different, in spirit, from the Fifth Draft.
We cannot find,
however, any document or letter to show Keynes’s dissatisfaction with this
transformation. Different from Harrod, who praised the Fifth Draft and has been
very critical of the following drafts, Keynes seems to recognize that the
following drafts have not been in contradiction, in spirit, with the Fifth
Draft. We can see Keynes
worked as a sort of political pragmatist among political interests, to such a
degree that he lost the basic stance envisaged in the Fifth Draft.
The Second World War started with hostilities
between the United Kingdom and Germany. At the outset the UK hardly imagined that
the war would prove so long and arduous. In fact, the country was in desperate
straits up to the end of 1941 in military and economic terms.
It was then that the Pacific War broke
out. The United Kingdom’s colonies in the South East Asia were occupied by the
Japanese Army, but this in turn was to have the USA, which had hitherto kept a
neutral position, as an ally. This was to greatly salvage the British economy
from possible disaster although the price to be paid was an overwhelming influences
of the USA and retreat of the UK in the international political and economic scene.
Keynes’s influence on the international
economic problem in the UK was very powerful. For the postwar world order he
drafted various plans, some of which were approved as official plans, and, as a
representative of the UK, entered into negotiations with the USA. However,
faced with military and economic exhaustion the UK received massive assistance
from the USA through the Lend-Lease system, and Keynes’ proposals such as the
regulation plan for primary commodities and the plan for the international
monetary system (the International Clearing Union) were given short shrift to.
It was the USA which was to rule the roost all round.
Keynes himself was deeply concerned with the deterioration of the
British financial position as the war proceeded. As in the First World War,
Keynes was to play a key role in loan negotiations with the USA. This was
indeed a continuum of humiliation.
The USA, which had been the largest
nation in terms of economic performances before the First World War, showed an
odd attitude on the international political and economical scene in the
inter-war period.31 There
is no doubt that a tradition of non-interference or isolationism vis-à-vis Europe
contributed to this attitude, together with American people’s widespread
aversion to war even in 1941. Taking these into consideration, it was not clear
how the USA would act in the post-war international order. No wonder many
proposals concerning the post-war world system were put forward by the British
side, followed by alternative proposals by the American. As a matter of fact,
it was not until 1949 that the USA came consciously to play a leading role in
the post-war world order.32
The Common Fund in 1989 worked out by the
UNCTAD inherited the essential characteristics from Keynes’s buffer plan. If
Keynes, who never dreamt of the demise of the British Empire and the
independence of the Colonies, would have been told by a new-comer into the
Heaven that the Common Fund had been a long struggle between the South and
North Sides, how would he have responded to it?
Then the world has seen the development of
globalization in which commodities have been dealt with not only as goods per
se, but also as an object of pure speculation - index speculation. We discussed
the problem with speculation and how we should learn a lesson from Keynes's
warning.
1) He became the head of Post-war
Commodity Policy and Relief Department.
2) On which see JMK.27, p.46.
3) See JMK.25, pp. 21-23, and
31-33 in his memorandum, “Post-War Currency Policy” (dated 8 Sep. 1941). See
also his argument on commercial policy (Chapter 2, JMK.26).
4) On Keynes’s “New Liberalism”, see Clarke
(1988, Chapter 4, “The Politics of Keynesian Economics, 1924-1929”) who takes
Keynes as a New Liberalist succeeding to the Edwardian New Liberalism (pp.
13-14, 78-80); Freeden (1986), and Cranston (in Thirlwall ed., 1978) both of
whom regard Keynes as a “Centrist Liberalist”, distinct from a “New (or Left)
Liberalist”, in that the former refuses faith in the state as a disinterested
agent of the community, stresses an ideological difference between liberalism
and a socialist/trade-unionist Labor party, and has less reflective,
philosophical and synthetic mind (see Freeden, 1986, pp. 128-129, 12-14, and
171-172); and Skidelsky (1992, Chapter 7, “Keynes’s Middle Way”) who supports
Freeden and Cranston subject to several qualifications. In his paper, “Keynes’s
How to Pay for the War: A Reinterpretation”, read at the History of
Economic Thought Conference (University of Bristol, 1997), Skidelsky maintains
that Keynes (1940) advocated his fiscal policy (deferred pay) based on the
spirit of “the middle way”. See also Fitzgibbons (1988, Chapter 9, “The
Political Ideals”). Moggridge (1992, Chapter 18, “Industry and Politics”)
maintains that Keynes’s political thought evolved from the New Liberalism in
the 1920s to the “Liberal Socialism” in the 1930s and later. Peacock (in
Crabtree and Thirlwall eds., 1993) describes Keynes as an “end-state”
liberalist in contrast with a “contractarian (or “procedural”) liberal”.
Peacock seems to take Keynes within the context of classical liberalism rather
than that of the “New Liberalism”. See also Maloney (1985, pp. 159-161) in
relation to Freeden’s (1978) evaluation of Hobson as leader of the New Liberal
movement.
It
should be noted that Robertson and Henderson, both of whom took part in the
Liberal Summer School and the writing of Britain’s Industrial Future
(1928), are in the same camp as Keynes as far as social or political philosophy
is concerned: see Freeden (1986, pp. 172-173). Furthermore, Hawtrey’s social
philosophy is much like Keynes’s. For example, Hawtrey (1926) states that “The
defects of the market as a test of value taken in the fundamental ethical sense
arise partly from the imperfection of human judgment in selecting objects of
consumption, and partly from the inequality of incomes. On both grounds the
individualist system is open to criticism” (p. 216). See also Hawtrey (1944,
pp. v-vi).
5) See Harrod (1951, pp. 379-386).
6) They are reproduced as Chapter 3 of JMK.12.
7) See also J. Rowe, “Studies in the
Artificial Control of Raw Material Supplies” (No.23, “Sugar” (Oct. 1930),
No.29, “Rubber” (April 1931), and No.34, “Brazilian Coffee” (Feb. 1932)).
8) See De Cecco, “J.M. Keynes and
International Finance” and Kregel, “Some Overlooked Contributions of Keynes's
to the Theory of Finance and to Economic Policy”, both in Bateman, Hirai and
Marcuzzo, eds. (2010).
9) See Dimand=Dimand (1990, 114-115) and
Fantacci, Marcuzzo and Sanfilippo (2009, section 2).
10) This is brilliantly analyzed by
Dimand=Dimand (1990, pp.113-118).
11) This buffer
stock plan was endorsed by Harrod, Meade, and Kahn.
12) For this draft, see Maizels (1992,
pp.92-93). Also see Harrod (1951, p.531).
13) This perception might be related to
the following: “the present economic system lacks in proper preparation for
dealing with excessive circulating capital” (TM.2, p.130).
14)
In Sections VIII and IX in “Proposals for an International Clearing Union”
(August 1942. JMK.25, pp. 169-195), there appear provisions for control
over primary commodities.
15) How seriously Keynes thought of this aspect (as a tool
for aggregate demand management) is emphasized by Dimand=Dimand (1990, p.118).
It should be also noted that Keynes endorsed Meade’s “variations in social
insurance contributions” as a tool for aggregate demand management. See JMK.27,
p.318.
16) For a similar view, see an idea,
which Meade put forward and Keynes accepted in the Beveridge Plan in the
making, to the effect that the trade cycle could be prevented by changing the
rate of contribution according as the economy goes.
17) Keynes thought that this plan (although
it should by its very nature be internationalist) should be discussed only
between the UK and the USA as far as the initial stage is concerned. See his
note to Sir Richard Hopkins dated 23 February 1942 (JMK.27,
pp.106-107).
18) Dimand=Dimand (1990, pp.118-121) does not
refer to how Keynes’s successive drafts suffered qualitative degeneration, for
the description there is confusing due to inadvertent use of quotations from
various versions of drafts.
19) We cannot
find, however, the Sixth Draft dated 28 May as indicated in JMK.27 in the Keynes Papers, so we would
rather use the draft written around 9 July (which is very close to the Sixth
Draft), which is at our disposal. Hereafter let us call it the Sixth Draft
(U.S.E.(42)15). This is kept as No.85 of Keynes=Harrod Correpondence, Department
of Economics Library, University of Tokyo.
20) In JMK.27 the Seventh is taken
up in the text while the Sixth is dealt with in an appendix (JMK.27.
pp.488-501) in terms of points of difference.
21) Immediately
after this the importance of the “stabilization of price” is emphasized, while
it is underlined that the restriction of production should be temporary.
22)
Section IV, “Buffer Socks as a Measure Contributory to the Prevention of the
Trade Cycle” is, in substance, the same as Section III of the Fifth Draft.
23) Paragraph 12 was originally the crux
of the plan. This can be said to be substantially the same as in the Seventh Draft. Paragraph
14 almost succeeds Paragraph 13 of the Seventh Draft, both of which stipulate
that this regulation would be required if the “basic price” equating supply and
demand through the operation of buffer stocks were to prove lower than the
“international economic price” that would provide producers with a reasonable
living standard.
24) “In the following plan carefully
guarded proposals for restriction have, therefore, been added to the less
questionable proposals for stabilizing prices with which it begins” (JMK.27,
p.171).
25) For this
see Hirai (2013).
26) For this
see Maizels (1992, pp.104-105).
27) The above is based on JMK.27,
pp.196 and 199. Some ideas found in Keynes’s regulation plan of the primary
commodities (buffer stocks, export rationing and so forth) were to be
incorporated into some international commodity agreements such as the
International Wheat Agreement (cf. Keynes’s memorandum, “The Wheat Problem”),
the International Coffee Agreement, the International Sugar Agreement and so
forth although they were concluded under the aegis of ICCICA (Interim
Co-ordinating Committee for International Commodity Arrangement). For this see
Maizels (1992, p. 104) and Gordon-Ashworth (1984).
28) Kahn was involved with “the post-war
situation of raw materials” at the Ministry of Supply in 1943-1944, and worked
with Keynes on buffer stocks at the Board of Trade. On this, see
Marcuzzo=Rosselli (2005, p. 33). Kahn went on advocating a buffer stock plan
along the same line as Keynes, criticizing the commodity-by-commodity approach
in the 1950s. For his manuscripts on buffer stocks which were commissioned by
FAO ― Kahn’s Papers, RFK/2/10-12 ―, see Palma (1994).
Davidson (1991, Chapter 9) emphasizes
the necessity of this type of plan in order to make the world economy stable.
He maintains that the collapse of the buffer stock plan implemented during the
1945-72 period led to the marked instability in the world economy. See p. 177.
29) For this see Hirai (2012).
30) For the Common Fund, see Maizels
(1992, pp.116-124), and for a relation between the Common Fund and Keynes’s
buffer plan, O’Neill (1977, pp.14-16).
31) See Kindleberger (1973, p.292).
32) See Kattner (1991, Ch.1).
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