Year XXVII, 1985, Number 2, Page 143
KEYNES AND FEDERALISM*
Was Keynes, the famous economist, really a defender of the absolute sovereignty of national States, ready to choose protectionism and autarky if free trade proved incompatible with the pursuance of equilibrium (i.e. a balance in world power)? This was the thesis put forward in a recent article in The Federalist which attempted to compare a shackled Keynes, with long-standing prejudices, with a Robbins presented as a coherent partisan of international free trade, in other words, of a liberalism organised as a supporter of a series of supranational federal institutions.
The judgement on Robbins was based on a number of texts which prove his federalist commitment beyond a shadow of a doubt. On the other hand, the criticism of Maynard Keynes is based on nothing more than a few sentences taken from an occasional article. Now a more profound examination of his writings leads us to soften the argument put forward in The Federalist quite considerably. We may ask ourselves whether it is worthwhile returning to this matter. The Editor of this review will answer this question by publishing this comment or not. As for us, we feel it is useful to correct the impression that the readers of The Federalist may have formed as regards Keynes, for the following reason: it is certainly interesting to understand how a liberal like Robbins was led, by the mere force of reason, to envisage a federal organisation of the world. But the case of Keynes is even more interesting. Indeed, whereas Robbins’ mark is far from indelible, Keynes still remains today the greatest economist of our century, the man who influenced and continues to influence both theorists and those in government. Is it not important to know whether a man who is unanimously recognised as being a genius – and whose interests were, moreover, inextricably economic and political – really was a defender of the national State? Indeed, if one is a federalist, it is inconceivable that a genius, who was a specialist in the sector, could take up a radically different position. Unless, of course, he is not a genius, or unless the federalists are completely mistaken.
1. It is certainly useless to look for any profession of federalist faith in Keynes’ work. The word “federation” itself was not to his liking. He hardly ever used it and when he did it was as a type of extreme and scarcely credible solution between existing States. It is, moreover, true that he upheld protectionism, but only as a lesser evil, not as a panacea. All this took place in the course of the Great Depression, in particular in 1931, when Great Britain came up against difficulties because of the overvalued pound. Keynes immediately criticised the return, in those years, of the pound to its pre-war gold parity, but in vain. Now, Keynes was not just a great theorist, he was also a very pragmatic man, keen to put forward immediately applicable solutions in the light of all existing constraints. In 1931, with an over-valued pound and a creeping crisis, it was obviously not possible to relaunch the British economy without the protection of a “substantial revenue tariff”. Two years later, when Keynes wrote the article quoted in the previous issue of The Federalist, Great Britain had restored its currency to a more reasonable level, but the world economy had become so unstable that free trade could not have had any other result but to increase the divergencies. In a storm, it is much better to be tucked up safely at home.
2. Keynes never was, not even remotely, a federalist militant. However, he argued in favour of federalism without even realising it. Nowhere is there any reference to federalist doctrine and despite that, in a certain sense, all his work tends towards the realisation of this doctrine. It is known that he took part in the British delegation at the Paris Conference at the end of the First World War. In total disagreement with the conditions placed on the vanquished, because he foresaw that they would have borne in them the seeds of a future war, he resigned before the Peace Treaty was signed and expressed his opinions in a book which was a resounding success, The Economic Consequences of Peace. Here is how at the end of the book he criticised the institutional pact of the Society of Nations: “But alas! Article V provides that ‘Except where otherwise expressly provided in this covenant or by the terms of the present treaty, decisions at any meeting of the assembly or of the council shall require the agreement of the members of the League represented at the meeting’. Does not this provision reduce the League, so far as concerns an early reconsideration of any of the terms of the peace treaty, into a body merely for wasting time?” The matter could not be expressed better and it is at least curious to note that, on this point, the situation in Europe has not improved since 1919.
A few pages later, he protested against the ‘Balkanisation’ caused by the 1919 and 1920 Treaties in terms which are a far cry from an anthem to the Nation. It was on this occasion that he proposed the creation of a European free trade zone which is referred to in the article comparing Robbins to Keynes. “By the proposed free trade union some part of the loss of organisation and economic efficiency may be retrieved which must otherwise result from the innumerable new political frontiers now created between greedy, jealous, immature, and economically incomplete, nationalist States “.
3. Keynes’ first important economic work was the 1930 Treatise on Money. It is much more than a treatise in the traditional sense of the word (an exhaustive treatise on the matter) because it contains a number of important theoretical statements, in particular on the demand for money. And what concerns us even more, is that it also includes a planned reform of the international monetary system which deserves some consideration.
In 1930, the main economic powers (United States, Great Britain, France, Italy and so on) still used the gold standard, but Keynes considered this to be a “barbaric inheritance”. Indeed, the value of gold depended on the quantity of gold available vis-à-vis other goods. The discovery of new gold deposits created inflation and, conversely, rapid economic growth without a parallel increase in gold reserves caused deflation. Keynes considered the second possibility as being more likely. But deflation was not welcome because the transfer of wealth operated in creditors’ favour. The Treatise gave two solutions to this type of situation. The first solution may be defined “confederal”, the banks must agree to modify reserve ratios between non-metallic currencies and gold, so that the quantity of money can increase at an adequate rate. The second solution went much further. It aimed at nothing less than the creation of a “Supranational Bank Currency” issued in particular when national central banks borrowed from a supranational bank”. “The ideal arrangement would surely be to set up a supernational bank to which the central banks of the world would stand in much the same relation as their own member banks stand to them”.
4. Such a solution, which in practice consists in adding a supranational level without suppressing the national level, is federalist in nature. The main outline of this solution was subsequently adopted in the 1943 plan, which proposed a model of international monetary organisation for the post-war period. Under this scheme, a supranational bank, called Clearing Union, was empowered to issue a credit currency, then called bancor, to be used among central banks. There was, however, an essential difference between the two projects: in 1930, with sterling tied to the gold-standard, Keynes’ ideas on the subject could have no practical effect. On the other hand, in 1943, when Keynes went back to work for the British Treasury, his plan constituted Great Britain’s official proposal and was discussed, in particular, with the Americans.
Thus, the negotiations which preceded the Bretton Woods Conference brought the two main “contenders” together: Keynes, on the one hand, and Harry White, for the United States, on the other. White’s plan initially concealed a certain amount of supranationality, but the same was not true of the United States’ official plan which was only internationalist. Given the power relationships existing at the end of the war, the American plan, of course, predominated. The result was the International Monetary Fund, so rightly denominated because it really was international, i.e. dictated by the law of the strongest. From this standpoint, monetary relationships from 1945 onwards evolved in a perfectly predictable way and, more exactly, the drift from the gold standard to the dollar standard is perfectly in keeping with the basic tenets of the organisation set up at Bretton Woods.
To conclude, the considerable role played by Keynes on this occasion needs to be stressed: a federalist in action who was not content to think up an institutional system, however perfect, and who put himself in a position to communicate his ideas to all, but who in actual fact went so far as to turn them into reality. Certainly, he failed, although in the short term, but there is no blame to be attached to being defeated and, on the other hand, the establishment of special drawing rights in 1970 and the subsequent steady development of their role shows that the reform of the international monetary system is beginning to move in the direction indicated by Keynes.
5. Federalism does not stop perforce at supplanting the nation State in favour of a “higher-stage” of State organisation. It can also be a “downwards” movement designed to achieve the maximum autonomy possible for infra-State public collectivities. Keynes very early on declared his support for this development and held that it had become necessary because of the foreseeable growth of functions guaranteed by public power. A short time after this, Keynes completed his thinking along these lines in a step where he clearly showed the idea of self-management, in the sense that individuals, or companies, who have common interests, agree to defend them collectively. “I believe that in many cases the ideal size for the unit of control and organisation lies somewhere between the individual and the modern State. I suggest, therefore, that progress lies in the growth and the recognition of semi-autonomous bodies within the State-bodies whose criterion of action within their own field is solely the public good as they understand it, and from whose deliberations motives of private advantage are excluded, though some place it may still be necessary to leave, until the ambit of man’s altruism grows wider, to separate advantage of particular groups, classes, or faculties-bodies which in the ordinary course of affairs are mainly autonomous within their prescribed limitations, but are subject in the last resort to the sovereignty of the democracy expressed through Parliament”.
In the continuation of the paragraph quoted, Keynes refers to medieval corporations. More or less at the same time, in France, an openly federalist movement, the Ordre Nouveau, was to “upgrade” the notion of “corporation”. In both cases, a more co-operative form of economic organisation, which was less individualistic than capitalist enterprise, was being called for.
In conclusion, the picture of Keynes put forward in The Federalist is in danger at the very least of being misleading. It is true that he was never avowedly a federalist. It is equally true that on certain specific occasions he sought purely national solutions to his country’s difficulties. But the fact remains that when the question of world economic organisation arose, and in particular in the monetary field, he proposed federal institutions. Finally, his attempts to define decentralised economic relationships, appropriate to the society of his time, place him very close to the positions held by his contemporary federalists.
*(Editorial Note) Mr. Herland’s attempt to defend Keynes’ image as a federalist is not convincing. In all the cases mentioned – the Customs Union, the international monetary system and local autonomy – Keynes’ proposals either went in a purely confederal direction, as regards the supranational level, or alternatively favoured administrative decentralisation, but were never directed towards constructing a federal State. Keynes was always careful to avoid questioning the sovereignty of States and in particular the sovereignty of Great Britain. It is true that at Bretton Woods Keynes defended free– trade positions, but could he realistically have adopted a different position, faced with the USA’s manifest desire to create a vast open world market? Outright defence of the British Empire, with all its privileges, was no longer possible because of the irreversible decline of Great Britain as a world power. Indeed, Keynes always acted and drew up proposals with a view to recreating Great Britain’s hegemonic position. In other words, on the international scene, he went against the course of history, as ought to be clear today.
Put in a nutshell, an intelligent and realistic internationalist defends autarky or free trade according to whether the international order is moving towards anarchy or stability as a result of the world balance of power, but has never known how to, or wanted to propose an alternative supranational order. Keynes never knew how to or wanted to indicate the institutions which are indispensable for a rational and democratic government of the world market (why for example did he never openly support the idea of a United States of Europe?). And today’s Keynesian economists really seem incapable of removing the same nationalist blinkers (the closed national market or the world market as a simple arithmetic sum of national markets) within which the General Theory was drawn up. For this reason, today, in a deeply interdependent world, there is a growing crisis in Keynesian economics, which is in danger of becoming a dusty museum piece unless it manages in some way to renew itself radically. For precisely this reason, The Federalist believed that it was important to draw the world’s attention to the thinking of a federalist economist like Robbins, who was able to look beyond the narrow horizons of Keynes.
“Federalism in the History of Thought: Lionel Robbins”, The Federalist, October 1984.
He is known above all by economists for his definition of economic science, a classic definition but not less criticisable and criticised for this. Cfr. An essay on the Nature and Significance of Economic Science, Macmillan, London, 1932. For criticism see, for example, M. Godelier, Rationalité et irrationalité en economie, Paris, Maspero, 1968.
See The Collected Writings of John Maynard Keynes, Macmillan, London, vol. XXVI, p. 249. Following the customary procedure, we will quote the works in this series placing the number of the volume in Roman upper case letters after Keynes’ initials (in this case: JMK XXVI).
See The Economic Consequences of Mr Churchill, 1925, republished in Essays in Persuasion (1931), JMK IX.
“Mitigation by Tariff”, 1931, in Essays in Persuasion, op. cit., p. 236.
The Economic Consequences of the Peace, 1919, JMK 11.
Ibid., p.169. My underlining.
A Treatise on Money, 1930, JMK VI, p. 358.
Proposals for an International Clearing Union, 1943, JMK XXV,
p. 168 et seq., p. 453 et seq.
p. 168 et seq., p. 453 et seq.
A fuller discussion can be found in our work Keynes, UGE 10/18, Paris, 1981, ch. 6.
“I believe that in the future the government will have to take on many duties which it has avoided in the past. For these purposes Ministers and Parliament will be unserviceable. Our task must be to decentralise and devolve wherever we can...” in Am I a Liberal?;· JMK IX, pp. 301– 2.
The End of Laissez-faire, 1926; JMK IX, pp. 288– 9.
See in particular the Movement’s manifesto in number 9 of L’Ordre Nouveau (March 1934).