Keynes
and the Postwar World Order Planning
– Internationalism, the British Empire Interests
and Pragmatism
Toshiaki Hirai
Sophia University, Tokyo
1. Introduction
Keynes revealed three aspects in his activities for
the postwar world order planning in the 1940s – internationalist as a planner,
pragmatist during the negotiations, and a defender of the British Empire interests.
Keynes as an international system designer worked out proposals, which showed
excellence of “internationalism” while he revealed himself, in the process of
negotiations, as a sort of political pragmatist for the interests of the
British Empire. We would verify this point mainly through commodity plans,
rescue (and reconstruction) plans, and international monetary system, based on
my three papers. *
(Evaluation
of his creative plans and their present significance, which is another theme of
this project and is dealt with in the three papers, is to be reported on
another occasion).
2. Commodity Control Scheme
Keynes’s
activities of primary commodities can be seen from two points of view; (1) the
significance of a buffer stock plan in Keynes’s economic thought , and (2) how
and why the plan was to be transmuted in the changing political situation.
(1) 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 that in order to
stabilize prices (and guarantee some living standard to producers) an
international organization should be set up.
The
Fifth Draft (“The International Control of Raw Materials” [April 1942]), the
main emphasis of which was put on the price stabilization through buffer stock
management, almost putting aside production restriction, ideally epitomizes his
stance. It was filled with internationalism and is firmly grounded in his
social philosophy ─ the New Liberalism, manifested since the mid-1920s.
<Central idea of the Fifth Draft>
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 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, among
others: (i) fixing the basic price, (ii) management of stocks.
(2) However, the buffer stock plan made a series of transformation due to
political concessions and compromises. Keynes went on revising his
commodity control plan due to criticism from various governmental departments.
(i) What
is clear is that Keynes's plan has receded further and further as he
The essential transmutation is that in the drafts
following the Fifth Draft restriction on output was increasingly emphasized. The Sixth Draft (“The International
Regulation of Primary Products” [May 1942]) 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 (the
same title [August 1942]),
completely disappeared. The Eight Draft (the same title [February
1943]) has no
clear-cut objective due to this change.
(ii)
The Fifth Draft and the Sixth Draft were criticized by Leith-Ross (British
representative for the negotiation), the Bank of England, and Fergusson (Permanent
Secretary, Ministry of Agriculture and Fisheries), who argued that it is filled
with laissez-faire, and asked for restriction of production, while Harrod (and
probably, Robbins and Mead) supported the Fifth Draft in earnest, criticizing
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]”.
We cannot find any document or letter to show Keynes’s
dissatisfaction with this
transformation. Keynes seems to recognize that the following drafts have not
been in contradiction, in spirit, with the Fifth Draft. He seems not to have expressed some
anger or complaint against those who vehemently supported restriction of
production.
We can see Keynes work as a sort of
political pragmatist among political
(It
should be noted here that this happened not so much in the international scene
as in the domestic one.)
(iii) The destiny of the international
regulation plan for primary commodities runs as follows.
In May
1943 the Eighth Draft was accepted by the War Cabinet. In the Anglo-American Conference
on Postwar Economic Problems in September, the official document of the Eighth
Draft was handed over to the United States.
The
American side was negative toward a buffer stock article. Even on the British
side, moreover, severe opposition was put up from the Ministry of Agriculture and
Fisheries and the Bank of England, 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 GATT and
the Economic and Social Committee of the United Nations.
3. Relief and Reconstruction Problem
One might indeed
ask: to what extent was Keynes a nationalist, an internationalist, and an
imperialist? This is no simple question, and to some extent it has to do with
the position of the UK in world politics. For a British citizen, loving the
nation meant being a nationalist, an internationalist and an imperialist.
It might, however, be inappropriate to
take Keynes in these terms. In the case of the relief and reconstruction problem
he made great efforts towards relief and reconstruction of the post-war world,
drawing up an elaborate design, while also seeking to keep the British Empire’s
position in world politics ─ somehow
or other ─ on an equal footing with the US, under
the disadvantageous circumstances that the British Empire desperately needed
financial and military support from the US. He labored over international plans
in a spirit of internationalism as far as possible, but sought in any case to
defend the British Empire from the colossal powers of the US.
(1) In October 1941 Keynes put forward the Central Relief and Reconstruction
Fund (CRRF) Plan filled with internationalism (“Treasury Memorandum on
Financial Framework of Post-war European Relief”. When he first put forward the CRRF Plan, there was manifestly
broad agreement between himself, Leith-Ross, and the U.S. Government.
<Central idea of the CRRP>
The central idea here was that the CRRF
should operate a joint fund comprised of money donations or contributions in
kind from many countries. The CRRF should be responsible for collecting and
distributing all required relief materials (it should be authorized to buy the
commodities required at fair prices from any country). It should determine, on
the basis of some appropriate principle, the proportion of the relief materials
which a country should receive gratis or should be liable to pay.
All transactions were to be
booked in the joint fund. To allow the CRRF to estimate the scale of
transactions, the following conditions were proposed: the CRRF should request
allied governments to produce lists of their requirements; it should make
estimates of the quantities of commodities available to it; it should
investigate the financial position of each of the countries concerned,
knowledge of which would be prerequisite for equitably determining the
proportions in which assistance should be granted free of charge or made
payable.
Keynes considered the CRRF, conceived as
above, greatly superior to the idea of having various countries giving relief
in kind separately, and sincerely wished to see it set up. He argued that
establishing the CRRF would obviate the need for making separate financial
arrangements for each commodity, whilst the alternative idea would result in
the distribution of commodities becoming a messy affair, due to the absence of
any necessary correspondence between the commodity quantities available and an
appropriate financial burden.
(2) However,
Keynes changed his stance several times in response to the changing
circumstances in which the British Empire found itself.
Around
February 1942, Keynes’s thinking altered considerably. He now perceived the
necessity of a change of tack, foreseeing that Britain’s post-war balance of
trade situation would be likely to be grim, and Britain would be unable to make
the contributions required by the CRRF Plan without borrowing from abroad.
For
this reason he abandoned the CRRF Plan in favor of a pragmatic effort to try to
get the (existing) Lend-Lease continued. Faced with the grim reality of the
situation in which Britain found herself, Keynes responded in a way revealing
the weight of the British interests, one consequence of which was confrontation
with Leith-Ross.
Keynes’s
next move was to put forward a compromise plan “Finance of Post-war Relief” (January
1943) which maintained the pragmatic approach to Lend-Lease whilst also
retaining a degree of internationalism in the form of the role assigned to the
Combined Boards. This, after some revision, became the official plan of the
Treasury.
(3) From around the end of 1943
on , however, the relief issue was to be placed and addressed under the
leadership of Harry White of the United States. In the final stage he was able
to do little more than criticize the UNRRA (United Nations Relief and
Reconstruction Administration) from the sidelines.
(4) Our documentation reveals
that Keynes tried to work out international plans, if possible, on a spirit of
internationalism, but if not, to defend the British Empire from the US by means
of sophisticated devices. In that sense Keynes was a designer for the international
order as well as a defender of the British Empire.
(5) The
following is what occurred after Keynes’s death and an ‘if’ story.
In the end, it was under the Marshall Plan
(the “European Recovery Program”), which took effect in 1948, that relief (and
reconstruction) was carried out. Loans were systematically allocated by the Economic
Cooperation Administration (ECA) of the U.S. through the Organization for
European Economic Cooperation (OEEC). In the US-occupied territories, GARIOA-EROA
was set up on the basis of American loans.
Roused
from complacency by the onset of the Cold War, the U.S., which even in the
immediate post-war period had been extremely reluctant to get involved in
European affairs, became ─ well aware of the role it was taking on ─ the leader
of the West in the new international order from 1949 on. The world in which
Britain, now suffering from a hugely adverse balance of payments and massive
war debts, could have assumed leadership was no more. It was, in fact, Britain that
was to receive the largest share of the Marshall Plan.
How
would Keynes have acted if he had lived long enough to see the development of
the Marshall Plan? In a word, the Marshall Plan, which made a great
contribution to the path leading up to the EU, might be regarded as an
amalgamation of Keynes’s ideas expressed in his Economic Consequences of the Peace and the CRRF plan. He
would probably have endorsed the Marshall Plan, the principal architects of
which were Clayton and Acheson; they were on good terms with Keynes, and led
the planning and management of OEEC (remember that it was Bevin, Foreign
Secretary of the Attlee Government, UK, who led the initiative on the European
side). This seems clear enough.
What
remains uncertain, however, is how he would have dealt with the other aspect –
the position of the UK in the power politics of the world. To what extent would
he have reacted to the elements recognizable in the Marshall Plan ― scant or no consideration for the UK as the British Empire? Taking
the subsequent story – the deteriorating situation of the UK, the emergence of
the two hegemons (USA and USSR), the Suez Crisis – into account, he could not
have done anything to save the British Empire from the disintegration to be
seen during the Macmillan Government. Confronting this situation together with
de Gaulle’s opposition to UK participation in the EEC, how would he have felt and
acted? The question is destined to remain unanswered.
4. International Monetary System
How did Keynes
reveal the three aspects, which appeared in his activities for the commodity
problem and the relief problem, in the
sphere of international monetary system ? To what degree are these three facets
recognizable?
Our research here comes to the same
evaluation. Keynes as a system designer worked outdevised
proposals, which showed excellence in terms of
“internationalism”. However, he revealed himself,in the process
of negotiations he revealed
himself as a sort of political pragmatist who would defend, or
give clear priorities on to , the interests
of the British Empire.
(1) Initially he put forward a plan
which is, in nature, based on internationalism. The
International Clearing Union (ICU) Plan has the value filled with
internationalism. (The ICU Plan should be of important and urgent value in
reconstructing the present international monetary system known as “non-system”.)
If
he had been a purely academic scholar and put forward his own idea from the university
or journalism,
he would have critically argued the process developed in the sphere of
international political economy from an internationalist
point of view of internationalism.
(2) However, Keynes was not that sort of
man. He put himself in the forefront of the reconstruction
of international order. He also represented the interests of the British
Empire, and was situatedfound himself in the a position
in which he needed to adjust the whole, looking for some sort of compromise
with the US in negotiation. Thus his political stance – of course, much
influenced by his own political thought – greatly governed his action, making much entailing
considerable sacrifice for Keynes as a of his
aspect as a scholar and a system designer.
<Central idea of the ICU Plan>
The “genuine” ICU proposal (August
1942) basically runs as follows.
(i)
The “parity” of a member nation defined as the exchange rate between its
currency and the “bancor” is set u established p
on agreement among the member nations. Thereafter, when fundamental
disequilibrium occurs, the nation concerned is allowed to change the parity
subject to consultation. Thuserefore ,the ICU
adopts a kind of fixed exchange rate system.
The
Bbancor is an
international currency only used only between
central banks. It has a fixed exchange rate with gold. Each central bank of a
member state has its own account in terms of bancor , through which
international settlement is to be made. All the
international transactions are carried to a the bancor
account of a the central bank
concerned. A firm, which exports (imports ) goods,
receives (pays) the currency required at a fixed rate
in exchange for an export (import) bill, from (to) a the central
bank concerned. Though a foreign exchange market exists and firms or
individuals are free to exchange foreign currencies there , the rate is set up ,
in advance, at as a fixed rate
by agreement. Even if the rate departs from the parity , it
will soon
return to itthe parity soon
It should be noted that an adjustment
is made not made bythrough the
intervention of a government but by means of transaction between a the central
bank and firms or individuals, which would comparing e
the parity with the exchange rate. In that sense, the ICU system is closer to
the Gold Standard than the IMF system which operated up to the 1960s, albeit although all
the three
are fixed exchange rate systems. In the former two a the government
does not intervenefere with on a the foreign
exchange market but directly transacts with firms or individuals, while in the
latter a
the government intervenesferes with on the
foreign exchange market but does not directly transacts
with firms or individuals.
(ii)
The ICU proposal stipulates that, in order to prevent a persistent
increase in the balance of payments of a member nation, whether in the direction
ofboth surplus and or deficit direction ,
a penalty
should be imposed on it if the sum exceeds a prescribed value.
(iii)
The ICU proposal stipulates that, in order to contribute to the growth in the
world economy, overdraft facilities should be provided.
(iv)
The ICU proposal advocates that, in order to provide funds for the primary
commodity problem and the relief problem which the postwar world economy should be found itself
faced with, the international institutions
concerned should open their own bancor accounts.
(3) The negotiations between the UK
and the US over an international monetary system started with a face-off of between the
ICU plan (Keynes plan) and the SF plan (Stabilized Fund plan [White plan]) (October
1942). Through these negotiations Keynes played an outstanding role as a representative
of the British side.
However,
we can say that at an early stage, the initiative was gripped seized by
the US side, as was seen in June 1943 when Keynes tried
to integrate the two plans based on the White plan, meaning that he put the ICU
aside. Although the British side made an effort partially to incorporate the features
of the ICU pinto the White plan by monetizing unitas since as from September
1943, it finally gave it up the attempt in
April 1944 due to a decline by the US.
(4) After thatSubsequently
Keynes even came round to justifying the White
plan on the
British
Empire in the postwar world through financial aid from the US, by cooperating
with it rather than holding out against it.
Keynes
initially aimed at came to be completely foiled at an early stage (February
1942 – February 1943). Under these situationssituations
US
plan, albeit incomplete.
Keynes had been considered that without the help
from the US the British Empire might collapse. It should be noted, in this
respect, that he had not a the slightest
idea of emancipating the colonies (for example, as a strategy which the UK
should adopt after the Far East area was liberated, Keynes argued that the
problem should be coped with, without resort to Roosevelt for help, through
cooperation within the British Empire.
Cf. his letter to Eady of 3 January 1945 on “UNRRA and British Liberated
Territories in the Far East”).
How could we interpret the changed stance
which Keynes showed through
(5) Therefore, when considering
these problems, we need to think ofbear in mind the
fact
5. Conclusion
There were three aspects in Keynes
– an advocate of internationalism as a planner and a defender of the interests
of the British Empire – and he had a pragmatist tendency to change his stance
accordingly as the situation developed.
In the initial period, Keynes designed and put forward plans filled with
the spirit of internationalism for the commodity problem, the relief and
reconstruction problem, and the international monetary system, which were
considered to be important in constructing the postwar world order. These
clearly showed Keynes’s excellence in internationalism as a system planner, although
they were also to safeguard the interests of the British Empire.
As the political and economic matters proceeded, however, Keynes came to
show his pragmatic side, among other things making it a priority to protect the
interests of the British Empire.
We
would refer to Keynes’s view on international political mechanics as seen in
Nothing can suit us better, therefore, than
that international institutions, where we are free to play a very important
part, should administer what will be largely American funds for the succor of
these regions. Nor is there any obvious ground why we should not refer to these
bodies in the same way the difficulties of other regions, such as Malaya and
Burma, where the initial responsibility is primarily ours. (CWK.26, p. 230)
… I
firmly believe that the whole of the British Commonwealth and the
Sterling Area
and of Europe stood closer to us than to the Americans and
This is almost his last statement. In fact, the
British Empire was thereafter to go on declining. The lifting of the frozen
sterling balance abroad was to bring about the pound crisis. And above all, due
to the surge of the USSR, the world politics was to be ruled by the US and the
USSR, while the British Empire was to expose its fragility to the world in the
Suez Crisis, which was soon to cause the independence of many colonies.
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.
We will conclude this report by saying
that, from the point of view of world politics, Keynes was an architect of the
international order as well as a defender of the British Empire, although from
the perspective of social philosophy he was a champion of the ‘New
Liberalism’.
* The three
papers are
Paper 1: Commodity Control Scheme
Paper 2: Relief and Reconstruction Plan
Paper
3: Keynes’s Battle over the International Monetary System
[Original Papers]
Hirai, T. (2011), “Keynes and the
Transmutation Process of the Plan for Commodity Control Scheme”, ESHET
Conference (Bogazici University, Istanbul), May.
Hirai,
T. (2013), “International Design and the British Empire”, History of Economics Review, 55, 2.
Hirai,
T. (2015), “Keynes’s Battle over the International Monetary System”,
ESHET Conference (University of Rome <Tre>) , May.
