Monetary Reformers, Amateur Idealists and Keynesian Crusaders

255 Pages·2007·0.81 MB·English

Monetary Reformers, Amateur Idealists and
Keynesian Crusaders

Australian Economists’ International Advocacy,
1925-1950

by

Sean Turnell

BEc (Hons)

A thesis submitted in fulfillment of the requirements
for the degree of

Doctor of Philosophy

Department of Economics
Division of Economic and Financial Studies
Macquarie University

1999
TABLE OF CONTENTS

Abstract

Acknowledgements

Chapter One: Introduction

1.0 Introductory Comments 9
1.1 Aims and Significance of this Research 11
1.2 Limitations of this Research 13
1.3 Outline of the Study 14

Section I: Monetary Reformers

Introduction 20

Chapter Two: Cheap Money and Ottawa

2.0 Australian Economists and Monetary Reform 22
2.1 The Wallace Bruce Report and Keynes 31
2.2 Ottawa 38
2.3 Matters of Theory 44
2.4 Chosen Instrument: British Monetary Policy 51

Chapter Three: The World Economic Conference

3.0 Preparation 54
3.1 The Conference 60
3.2 Aftermath
64

Section II: Amateur Idealists

Introduction 68

Chapter Four: F.L. McDougall

4.0 ‘Sheltered Markets’ 72
4.1 Disillusionment 74
4.2 The ‘Nutrition Approach’ 77
4.3 Economic Appeasement 82
4.4 Propagating Economic Appeasement 89
4.5 Influence, Achievements and Underconsumption 91

2
Section III: Keynesian Crusaders

Introduction 101

Chapter Five: The Beginnings of the ‘Employment Approach’

5.0 Article VII 105
5.1 The ICER Report 117
5.2 The ‘Clearing Union’ 119

Chapter Six: Coombs and Consolidation

6.0 Coombs 130
6.1 Old Themes at Hot Springs 137
6.2 Keynes, London and a Diversion in Philadelphia 145

Chapter Seven: Bretton Woods

7.0 The Joint Statement 157
7.1 The Conference 165

Chapter Eight: An International Employment Agreement

8.0 Approach to the United States 175
8.1 The United Nations 179
8.2 The Beginning and the End of the ITO 181

Chapter Nine: The ‘Employment Approach’ Reconsidered

9.0 Theoretical Coherence 190
9.1 The Approach as Political Economy 196

Section IV: Keynesian ‘Revolutionaries’

Chapter Ten: The Keynesian ‘Revolution’ in Australia

10.0 The Existing Literature 207
10.1 The Contribution of this Study 216

Section V: Concluding Comments

Chapter Eleven: Conclusion

11.0 Conclusion 227
11.1 Extensions of this Research 231

Bibliography 232
3
Abstract

Between 1925 and 1950, Australian economists embarked on a series of campaigns to
influence international policy-making. The three distinct episodes of these campaigns
were unified by the conviction that ‘expansionary’ economic policies by all countries
could solve the world’s economic problems. As well as being driven by self-interest
(given Australia’s dependence on commodity exports), the campaigns were motivated
by the desire to promote economic and social reform on the world stage. They also
demonstrated the theoretical skills of Australian economists during a period in which
the conceptual instruments of economic analysis came under increasing pressure.

The purpose of this study is to document these campaigns, to analyse their theoretical
and policy implications, and to relate them to current issues. Beginning with the
efforts of Australian economists to persuade creditor nations to enact ‘cheap money’
policies in the early 1930s, the study then explores the advocacy of F.L. McDougall
to reconstruct agricultural trade on the basis of nutrition. Finally, it examines the
efforts of Australian economists to promote an international agreement binding the
major economic powers to the pursuit of full employment.

The main theses advanced in the dissertation are as follows:

Firstly, it is argued that these campaigns are important, neglected indicators of the
theoretical positions of Australian economists in the period. Hitherto, the evolution of
Australian economic thought has been interpreted almost entirely on the basis of
domestic policy advocacy, which gave rise to the view that Australian economists
before 1939 were predominantly orthodox in theoretical outlook and policy
prescriptions. However, when their international policy advocacy is included, a quite
different picture emerges. Their efforts to achieve an expansion in global demand
were aimed at alleviating Australia’s position as a small open economy with perennial
external sector problems, but until such international policies were in place, they were
forced by existing circumstances to confine their domestic policy advice to orthodox,
deflationary measures.

Secondly, the campaigns make much more explicable the arrival and dissemination of
the Keynesian revolution in Australian economic thought. A predilection for
expansionary and proto-Keynesian policies, present within the profession for some
time, provided fertile ground for the Keynesian revolution when it finally arrived.
Thirdly, by supplying evidence of expansionary international policies, the study
provides a corrective to the view that Australia’s economic interaction with the rest of
the world has largely been one of excessive defensiveness.

Originality is claimed for the study in several areas. It provides the first
comprehensive study of all three campaigns and their unifying themes. It
demonstrates the importance to an adequate account of the period of the large amount
of unpublished material available in Australian archives. It advances ideas and policy
initiatives that have hitherto been ignored, or only partially examined, in the existing
literature. And it provides a new perspective on Australian economic thought and
policy in the inter-war years.
4
Acknowledgements

In undertaking a project as large as this, I have acquired a great many debts to a great
many people. Most of these debts are far too big and intangible ever to be repaid. One
of the nice things about doing a Ph.D thesis, however, is that you can make a small
down-payment by thanking some of these people in print.

First of all, I would like to thank my supervisor, Professor Rod O’Donnell. A great
teacher and scholar, Rod had to endure quite a number of drafts of this work, and his
advice and suggestions on these is greatly appreciated.

Two other members of the Economics Department at Macquarie University, Michael
Dobbie and Bill Junor, also read this thesis in its entirety. Both put aside work that
was far more urgent and undoubtedly more in their personal interests in order to do
so. Their generosity is more appreciated than I can say.

I would like to single out the ‘lunchtime mafia’ of Associate Lecturers in the
Economics Department for special thanks. Wylie Bradford, Michael Dobbie, Craig
Macmillan, Joe Macri and Alison Vicary have helped me in more ways than I suspect
they can imagine. First class intellects all, their generosity of spirit, their myriad of
kindnesses, the general joy I have experienced in their company, kept the dark times
at bay and gave to me the things that only true friends can give.

Three great friends (and former housemates), Tinzar Lwyn, Leanne Ussher and
Alison Vicary, had to live with this project for such a long time that it must have
seemed that Frank McDougall himself was a member of the household. My time with
them is something that I will treasure always.

Friends generally have been of great assistance to me in completing this work. Ross
and Maureen Brown, Tony Bryant, Hester Barrington-Ward, David Maher, Justin
Myatt, Gary Pflugrath, Lynden and Marelle Sharpe, Kathryn Matthews, Hermyleen
Walker - and many others whom I have undoubtedly, and unforgivably, forgotten to
mention, have helped me in myriad ways. I would also like to thank former
colleagues at the Reserve Bank of Australia for getting me started. I would like to
especially acknowledge Glenn Worley for a friendship that has lasted all my life.

Above all I would like to thank my parents, Peter and Diana Turnell, for
making possible the extraordinary idea that their son could work towards a
Ph.D. They sacrificed much to ensure that I had the opportunity to receive an
education that made this possible. More than this though, they created a loving
and liberal environment in which anything that was good and decent was seen
to be possible. My sister and brother-in-law, Lisa and Michael Brandt, occupy
a similarly central place. To the thrill of all, my new nephew, Timothy, arrived
just in time for the party.

5
Notwithstanding the help I have received from all of the above, this thesis remains
solely the responsibility of its author, who therefore deserves and accepts the blame
for any of its deficiencies.

6
This work is dedicated to

Peter and Diana Turnell

and to the memory of

William and Jessie Turnell

and

Reginald and Dulcie Fraser

7
The belief that we have come from somewhere is closely linked with
the belief that we are going somewhere. A society which has lost
belief in its capacity to progress in the future will quickly cease to
concern itself with its progress in the past.

E.H. Carr, 1961

8
INTRODUCTION

1.0 Introductory Comments

On 30 May 1945, Australia’s Minister for Post-War Reconstruction, J.J. Dedman,
tabled Full Employment in Australia before the Commonwealth Parliament. The
product of countless drafts and compromises, this ‘White Paper’ was an extraordinary
testimony to the extent to which ‘Keynesian economics’ had taken root in Australia.
Declaring that it was the responsibility of governments to stimulate spending on
‘goods and services to the extent necessary to sustain full employment’, the White
Paper explicitly recognised Keynes’s central point that aggregate demand was the
primary determinant of employment. Breaking aggregate demand into the components
familiar to any modern student of introductory macroeconomics - private
consumption, private capital expenditure, government spending and net exports - the
White Paper identified private capital expenditure as one of the chief sources of
instability of demand and employment. This was consistent with Keynes’s
prognostications and with similar documents issued overseas, as was its solution to
the problem of deficient demand by both compensatory public expenditure and
monetary measures to encourage private spending.

In contrast to its overseas counterparts, however, private capital expenditure was not
identified by the White Paper as the chief source of fluctuations in demand and
employment. The chief source of unstable demand in Australia, rather, was instability
in export income. Unstable export income was, indeed, doubly cursed - for not only
was it a source of demand instability itself, but it was also an important constraint on
government policies designed to alleviate other sources of deficient demand. Of
course, the White Paper’s identification of the external sector as the principal
constraint on the domestic economy was hardly new. A preoccupation with external
balance and a ‘brooding pessimism’ about its prospects has been a defining feature of
Australian economic thought for many years (Corden 1968, p.15). It was also the
motivation for the relatively numerous contributions of Australian economists to the
literature devoted to trade and protection, perhaps the area in which they have made
their greatest additions to the sum of economic knowledge.

The preoccupation with external balance had previously produced a number of
devices designed to manage it, but almost all of these (captured under the guiding
philosophy of ‘New Protection’) involved the restriction of imports in some way. In
the White Paper, ‘protection’ was not disavowed, but it took a back seat to a
complementary policy which its authors regarded as much more in keeping with the
spirit of its times.

This policy took the form of a proposal that the Commonwealth Government seek
agreement with other nations to enter into a binding commitment with each other ‘to
do all in their power to maintain employment within their own territories, and thereby
expand demand for internationally-traded goods’. Called variously by Dr. H.C.
9
(Nugget) Coombs, one of the principal authors of the White Paper, the ‘positive
approach’, ‘Australia’s international Keynesian crusade’ or, most popularly of all, the
‘employment approach’, it was a policy which informed Australia’s positions to all
the conferences concerned with the reconstruction of the world economy during, and
immediately after, the Second World War (Coombs 1981, p.35). Devised by Coombs,
Giblin, Melville and other influential economists from the ‘golden age of Australian
economics’, the ‘employment approach’ was motivated by the concerns for external
balance (Groenewegen and McFarlane 1990, p.118). It was also self-consciously an
attempt to apply what its authors believed to be Keynesian economics on a global
scale. Self-interested and theoretically innovative, the employment approach was the
product of a generation impressed by Marshall’s dictum that it was with ‘cool heads
but warm hearts’ that economists should go out into the world.1

This ‘radical and distinctly Australian’ approach was not, however, the first time
Australian economists had embarked upon a programme which combined the
traditional anxieties for external balance with theoretical innovation and a
Marshallian sense of mission. Two earlier campaigns, shorn of the model fully
developed by Keynes in the General Theory, but inclusive nevertheless of many of
the ideas which led to it, had been initiated by Australians in the previous two
decades. The first of these, the product of Giblin, Melville and the ‘older’ group of
professional economists in the vanguard of the employment approach, was concerned
with attempts to convince the world’s creditor nations of the efficacy of expansionary
monetary policies as the solution to the global Depression. These efforts, which were
the basis of Australia’s approach to the Imperial Economic Conference at Ottawa in
1932, and to the World Monetary and Economic Conference in London in 1933,
ultimately foundered upon the breakdown of the latter. With it went the last hope of a
multilateral solution to the problems of the global economy before the Second World
War.

The second campaign began after the failure of the World Monetary and Economic
Conference. Advanced by F.L. McDougall, an influential amateur in a long tradition
of Australian economics, the ‘nutrition approach’ was hawked around creditor nations
throughout the latter half of the 1930s. It called for a reorganisation of world
agriculture along lines of comparative advantage through the elimination of
agricultural protection, with simultaneous public spending initiatives designed to
improve living standards. These ideas were an intellectual extension of earlier efforts
by McDougall, in company with the then Prime Minister of Australia, S.M. Bruce, to
build a prosperous and well-populated Australia within a reforming British Empire.
Broadened into a campaign of ‘economic appeasement’, McDougall’s propagation of
his nutrition ideas continued into the war years where it interconnected with the
employment approach - completing a neat circularity of ideas which seemed to
foreign observers as something quite distinctively Australian.

This perception of foreign observers was a real one. It is a proposition of this thesis
that the approaches outlined above represented a consistent line of advocacy, one
which should be considered as a counter to the protectionist and syndicalist themes
traditionally associated with Australia’s interaction with the world.

1 Marshall cited in Smyth (1994), p.26.
10