Loan Negotiations with the US (Draft) ― Faced with a “Financial Dunkirk” Toshiaki Hirai (Sophia University)

Loan Negotiations with the US (Draft) ― Faced with a “Financial Dunkirk” Toshiaki Hirai (Sophia University) It was on August 17, 1945 - immediately after the end of the WWII -  that the Lend-Lease Act (LLA) was abolished. This was a snap  judgment by President Truman, a successor of Roosevelt from April on, indicating the beginning of the so-called “Stage III” with the end of the “Stage II” (the period from the defeat of Germany to that of Japan). Faced with this emergent situation, Clement Attlee, the leader of  the Labour Party, who became a prime minister just in July through an unexpectedly overwhelming victory in the general election, defeating Churchill, held a cabinet meeting on August 23, based on Keynes’s  proposal produced on August 13. Between August 17 and 23, Keynes  wrote a memorandum, “Our Overseas Financial Prospects” (Keynes  [1945]), warning a “financial Dunkirk”. On the next day, the delegation with Keynes as the top for the  negotiation with the U.S. was announced at the Commons. It left for the U.S. on August 27. Concerning a financial negotiation with the U.S., there had been one leading up to the “Anglo-American Mutual Aid Agreement” (February  1942) based on the LLA (March 1941), followed by a further negotiation due to the changed political and economical situation. As Keynes was a representative of these negotiations, his selection above-mentioned  was a natural course of event. What this paper aims at is an examination of the process of the  negotiation which started on late August and came to the conclusion of “The Anglo-American Financial Agreements” (December 6), and an  evaluation of how Keynes showed his stance as a negotiator during this process. 1. Introduction 2. Preparatory Stage: August 1945 2.1 Proposals for Financial Arrangements in the Sterling Area and between the U.S. and the U.K. to Follow after Lend Lease 2.2 Some Highly Preliminary Notes on the Forthcoming Conversations: 9 September 1945 3. Favorable Phase 3.1 Top Committee (U.S.-U.K. Financial and Economic Negotiations Top Committee): September 13― 20 3.2 Favorable Proceeding: September 20 ― October 12 4. Offense and Defense of Tactics and the Stalemate Phase: October 12 ―November 18 5. Confusion and Outcome: November 19 ― December 6 5.1 Organizational Confusion and Lack of Understanding in the US side 5.2 Internal Conflict in the UK Side ― Cabinet Meeting vs. Delegation 5.3 Vinson’s Behavior and The Anglo-American Financial Agreement (December 6) 6. Chilly Response in the UK and Keynes’s Speech at the House of Lords 6.1 Chilly Response 6.2 Keynes’s Speech at the House of Lords 7. Conclusion

Alberto Giacomin and Maria Cristina Marcuzzo (eds.), Money and Markets: A Doctrinal Approach, Oxon and New York: Routledge, 2007, pp. 252. Toshiaki Hirai (Sophia University, Tokyo)

History of Economic Ideas (Book Review)

Alberto Giacomin and

  Maria Cristina Marcuzzo (eds.),

Money and Markets: A Doctrinal Approach,

Oxon and New York: Routledge, 2007, pp. 252.

Toshiaki Hirai

 (Sophia University, Tokyo)

This book brings together a selection from the papers read at the 2004 ESHET conference.

  “What is money and what is market? How should we understand the relation between the two?” – these are fundamental questions for us. In the Seng period (China), the Edo period (Japan), to take but two examples, markets developed fully where goods were exchanged for money.

  The history of economics as social science, however, goes back no more than 230 years. Classical economics ruled the roost in the first half of the 19^th century, followed by neoclassical economics from the third quarter of the century right up to the present day.

  As an alias of neoclassical economics, “catallactics”, shows, this school focuses research on markets where economic agents buy and sell goods. Essentially, it boils down to Walras’s general equilibrium theory (GE), which was to occupy a central place in neoclassical economics. It is a system in which money does not work, so the quantity theory of money was adopted as monetary theory in order to adapt it to the real world. This system has dominated the economics field over many years. Moreover, the so-called New Classical Macroeconomics (NCM), similar to the above system in some respects, has prevailed over the last thirty years in the macroeconomics field.

1. Presentation of Alternative Theories

What attracts the reviewer most are six papers in support of theories which come to grips with the economic system from alternative points of view, criticizing GE and/or NCM paradigm.

  In Chapter 2 Goodhart criticizes NCM, arguing that because it tries to construct economic models based on assumptions disregarding reality, it is empirically absurd, lacking in relevance to the real world. He favors the line which Shubik takes, combining theory with the empirical realism. In Chapter 3 Davis stresses ‘socially embedded individuals as a network conception’ envisaged by the complexity theory, differing from the picture of individuals envisaged by GE and game theory.

    In Chapter 4 Israel appeals for the reinstatement of ‘genuine’ game theory. He argues that the axiomatic methodology adopted by GE does not explain actual economic phenomenon and, what is more, that economics had been and is moving in the wrong direction due to (i) Debreu’s elaboration of GE; (ii) the tendency for game theory to be incorporated into GE through ‘Nash equilibrium’; (iii) the argument that cooperative games can be reduced to non-cooperative ones. Israel insists that it is the ‘genuine’ game theory based on cooperative games which von Neumann and Morgenstern aimed at that should be pursued.

In Chapter 5 Heinsohn and Steiger advocate property economics, criticizing the view on the relation between money and markets taken by the classical and neoclassical schools that “First markets emerged. Then money came into being to reduce transaction cost”. They argue that the right of possession is the source from which money and markets derived, stressing the right of possession - a legal right based on which its possessor is endowed with non-physical rights - in all types of economic activities including the right to issue money and the right to procure it (borrowing).

  In Chapter 6, “Money and markets as twin concepts?”, Cartelier answers “in the case of Arrow-Debreu and Neo-Walrasian models the answer should be ‘no’, while in the case of ‘monetary approach’ represented by Shapley-Shubik ‘yes’”.

In GE transaction can be made only in equilibrium and there is no place for money. In the 1970s, moreover, it was demonstrated that the Arrow-Debreu model might not attain equilibrium and global stability – the Sonnenshine-Mantel-Debreu theory. Attention then turned to modeling GE under disequilibrium – the Neo-Walrasian model which reveals the dichotomy between price determination and transaction realization.

In both models Cartelier sees divergence from the actual markets and favors the ‘monetary approach’ of Shapley and Schubik, without this shortcoming.

In Chapter 10 Spahn emphasizes money as a social bookkeeping device, which indicates the following properties in the market economy: (i) the principle of efficiently guided incentives; (ii) the need for money as a medium of payment due to lack of information and mutual trust; (iii) a social mechanism or convention that ensures the overall acceptance of money. Although the view was to come into discredit due to the prevalence of GE, Spahn argues that it merits attention.

To sum up, the above chapters share the perception that the methods of analysis in orthodox economics suffer from fatal shortcomings in analyzing the actual economy. 

2．Various Aspects of Economists

Next we will turn to the chapters focusing on certain economists.

2.1 Certain Theoretical Thought

In Chapter 9 a reappraisal of Jean Bodin, a 16^th-century French thinker, is conducted from the point of view of his theory of money. Blanc argues that Bodin should not be regarded as the founder of the quantity theory of money and that his originality lies in aiming at constructing an ideal system - a part of his theoretical system of sovereignty - which would exclude all forms of false money.

  Chapter 12 offers a reappraisal of Adam Smith’s theory of money. So far Smith’s has been regarded as a convertible paper money theory. Giacomin emphasizes that it should be evaluated, rather, as an inconvertible paper money theory. Smith derived this inspiration from the monetary system in Pennsylvania, America.

  Then come two chapters focusing on Keynes’s ideas.

In Chapter 7 Rossi first states that the international monetary system should be reformed along the lines of the International clearing union plan (the Keynes plan). He then argues that the Keynes plan pays attention only to the ‘money purveyor’ in negligence of the ‘credit purveyor’, and the creation of a genuine monetary system requires two divisions (Rossi stresses Schumacher’s remarks on the Keynes plan).

In Chapter 8, “Price and prejudice”, Simonazzi and Vianello, referring to the deflation which afflicted the Japanese economy, focus on how the ‘prejudice’ that downward flexibility in money wages (and prices) can bring about full employment has survived Keynes’s criticism. On the basis of the ‘dynamic’ argument in chapter 19 of the General Theory, they criticize the ‘static arguments’ (‘prejudice’) developed later, stating that the static arguments neither address the present economic situation nor put forward economic policies to be implemented.

In Chapter 13 attention turns to Lavington, an economist active in interwar Cambridge. Dangel-Hagnauer and Raybaut emphasize that Lavington’s fundamental view on the market economy is that money exists there right from the beginning and economic agents have a limited capacity to see through the future. Lavington sees entrepreneurs as the most important economic agents. They conduct their business activities in the opacity of a situation in which the future is evolving from the present. He sees that this ‘incalculability’ entails ‘risk and uncertainty’. Well-known is his distinction between risk (decrease in efficiency of production) and uncertainty (irregularity of incomes).

  Lavington, moreover, argues that the market economy, as compared with state socialism, brings about effective production, while, since many entrepreneurs conduct their business activities independently, adjustment in the markets is open to uncertainty; consequently, the market economy can not prevent individual incomes from fluctuating. 

Chapter 14 offers some considerations on Marco Fanno, an Italian economist of the first half of the 20^th century.

The theory of cumulative process developed by Wicksell had a great influence on theoretical economics in the interwar period. It seems to be worth stressing, as Spiller and Pomini argue, that Fanno put forward his own theory of business fluctuations as early as 1912, succeeding Wicksell’s theory critically.

After WW2 Fanno turned his focus on economic growth, which he analyzed applying the ‘progressive economy’ concept and distinguishing three kinds of growth lines, adopting an approach similar to Harrod’s and the Keynesian analysis of economic fluctuations by means of an accelerator factor and multipliers but developing his own analysis by bringing in changes in income distribution.

2.2 Way of Life

In Chapter 11, as the subtitle announces, attention turns to John Law as art collector, monetary theorist and corporate financier.

Law, who was sentenced to death in relation to a duel, fled from London to the Continent, where he came to show an interest in the banking system in Italy and the Netherlands. He rapidly worked out and sent to several governments his financial proposal, which argues that money is not to be regarded as possessing intrinsic value, and that, should it run short, the government can vitalize the economy by printing more paper money. The Law System, as it came to be known, was adopted by France but came to a sorry end with the Mississippi bubble, and Law fled to Venice.

Murphy argues that given his financial innovations in money and the capital market he might well be called the father of corporate finance.

  During his stay in Venice Law collected many works of art. Murphy describes Law as showing keen appreciation, with some interesting episodes.

In Chapter 15 the focus falls on Ezra Pound, a Fascist and anti-Semite who came close to being executed by the US. He came to take an interest in money under the influence of Silvio Gesell. As regards the banking system, however, he waxed increasingly critical as time went by. Pound insisted that interest should be kept at zero, and the state should achieve full employment by printing money.

＊＊＊

The book collects papers which show a wide range of views on “Money and Markets”. The reader has the opportunity, among other things, to encounter various new and stimulating theories which he or she can explore further by following up the references.

Reparations and Keynes：September 1941 - December 1945 （Draft) Toshiaki Hirai (Sophia Univ.)

Reparations and Keynes：September 1941 - December 1945　（Draft)

Toshiaki Hirai (Sophia Univ.)

1. Introduction

2. Motivator

3. Opening

4. Malkin Committee
4.1 Keynes’s two papers
4.2 Keynes’s explanatory meeting on the Malkin Report － At the State 
Department

5. On the Demolition and Reparations of Germany
5.1 Morgenthau Program (“Program to Prevent Germany from Starting a World War III”)

5.2 Keynes’s response to the Morgenthau Program

6. Keynes’s View thereafter

7. Conclusion

Keynes’s Stance over Commercial Policy ― What Emphasis on “Imports Regulation” and “Bilateralism” Indicate Toshiaki Hirai (Sophia Univ.)

Keynes’s Stance over Commercial Policy （Draft) ― What Emphasis on “Imports Regulation” and “Bilateralism” Indicate Toshiaki Hirai (Sophia Univ.) 1. Introduction 2. Response to Meade’s Proposal on Commercial Union 2.1 Comment:“Project of a Commercial Union” 2.2 Response to: Overton Committee Draft Report 3. Keynes’s Comment and Meade’s Response ― over Imports Regulation and Bilateralism 4. Keynes’s Comment and J.M. Fleming’s Response ― Regulations of Imports vs. ExchangeDepreciation 5. Proceeding Situation within the British Government 6. Keynes’s Messages － from Washington 7. Conclusion Appendix 1. “My Notes on Mr Pasvolsky’s Memo” Appendix 2. “A Proposal for an International Commercial Union”

The Anglo-American Mutual Aid Agreement Viewed through Keynes as a Negotiator

The Anglo-American Mutual Aid Agreement Viewed through Keynes as a Negotiator

    

- Amid the Conflict/Cooperation between the Two Powers

Toshiaki Hirai (Sophia University)

1. Introduction

2. Pre-Lend Lease Act

3. Lend Lease

4. The Financial Negotiation with the US

4.1 The Major Moot Points

4.2 The Process Leading up to the Anglo-American Mutual Aid Agreement

Keynes’s Skeleton Plan (June 21, 1941)
On the latter part of “Article 7”
The Process Thereafter

4.3 Development after the AAM － Changed financial situation of the U.K. (Problem of increased sterling debts)

5. Keynes’s Observations on High Officials and Political Institutions

5.1 The Top Officials

President Roosevelt
Morgenthau, Treasury Secretary
The Feeling of Those Close to the President

5.2 Political Institutions － Fragile Relations between the Departments

6. Conclusion － On Keynes’s stance

[Appendix] Discussion with American Economists

[Abstract]

The main purpose of this paper is to examine the process of negotiation of the mutual aid agreement between the UK and the US during the years 1941 - 1943, and to clarify what sort of stance Keynes as a representative of the UK took throughout it.

Firstly we will explain the Lend Lease Act (March 1941), and proceed to how, after the Act, the UK came to conclude the Anglo-American Mutual Aid Agreement with the US (February 1942) through complicated negotiations. We will then assess Keynes’s fundamental stance, recognizable throughout these negotiations. This problem differs markedly in nature from the problem of the post-war international monetary system. The problem here was how to procure resources from the US amidst the financially and militarily dire situation – quite different from the atmosphere in which proposals for the future could be discussed.

Relations between the UK and the US were basically cooperative, and yet episodes of conflict often occurred due to geopolitical interests. Among other things, the UK took for granted the maintenance of the Sterling Bloc as the symbol of the British Empire, so that even if the UK got aid from the US, it aimed at a financial agreement which should as far as possible not interfere with the Bloc.

The fundamental line which Keynes took in the negotiation runs thus: The UK should always endeavour to keep resources at her own disposal. It is essential that the UK would be ready to preserve its independence by being able to use its own resources at any time when necessary. Keynes himself took maintenance of the Sterling Bloc for granted.