RDP 2000-04: Keynes and Australia 4. The ‘General Theory’ in Australia

The Australian economics profession – academic and bureaucratic – was a small community with much personal contact between individuals (for example, at conferences of the Australian Association for the Advancement of Science).^[162] As Schedvin put it in discussing the formation of the Premiers' Plan:^[163]

The teaching of economics as a separate university discipline was still in its infancy in 1930. There were only five full Chairs of Economics in Australian universities and a sixth was linked with history. Relative to the number of professors, sub-professorial staff members were even fewer. Small numbers did, however, make for ease of contact and for familiarity with one another's views, and this made unanimity comparatively easy to achieve when policy measures were under discussion during 1930–31 … this appearance of complete agreement was successfully maintained despite wide differences of conviction.

That early 1930s unanimity was in support of moderate deflation. In the late 1930s, the pages of the Economic Record are strewn with references to Keynes and the General Theory; many of them seem almost to take for granted that Keynes was basically right, though there are also some critical discussions. By the Second World War the Australian economics profession was overwhelmingly Keynesian – though with different degrees of enthusiasm.

The word ‘Keynesian’ is used here to mean placing the central focus on aggregate or effective demand, and acceptance of policies of public works, with budget deficits, and ‘cheap credit’ as the appropriate policy response to a depression or recession, rather than wage cuts and ‘economy’. I am less concerned with acceptance of Keynes's theoretical propositions – that income and employment are determined by consumption and investment, with investment determined by the marginal efficiency of capital and interest rates, the latter determined by liquidity preference, and all this in a context of uncertainty. I will add nothing to the debate on ‘Keynes versus the Keynesians’, except to say that the evidence is strong that Keynes, unlike some Keynesians, regarded deficit financing as strictly for counter-cyclical use, did not think it could necessarily ensure full employment, and was concerned to keep both inflation and interest rates low.

The differing degrees of enthusiasm for Keynesian ideas can be seen in the attitude, already quoted, of Sir Douglas Copland to the Premiers' Plan. He chaired the committee on whose report it was based; but in the 1950 lecture quoted above, he accepted the Keynesian verdict that it was too deflationary.^[164] Especially during the Second World War, Copland became a strong supporter of a public works policy to maintain employment levels post-war.^[165] But Copland declared himself ‘certain that Keynes … would not have been guilty of the mistake which so many of his followers make in concentrating too much attention on aggregative remedies for depression and too little on internal price relationships’.^[166] Copland said:^[167]

The more extreme devotees of the doctrine of full employment are much too confident of their ability to control the powerful forces arraigned against them .... I suggest that the reason for this excess of confidence lies in too much emphasis being placed on the Keynesian doctrines in circumstances in which it is difficult to apply them.

The smallness of the Australian economics profession in the 1930s enables us to consider the transmission of ‘Keynesian doctrines’ to Australia by examining the careers and writings of the major Australian economists of the time. What follows will necessarily be cursory and incomplete. After some general remarks, I will give details of several economists of note in this period, and then briefly consider three issues – the Banking Royal Commission of 1936–37, aspects of wartime economic policy, and the Full Employment White Paper of 1945.

As I have already suggested, Keynes's writings – such as the Treatise and The Means to Prosperity – gained considerable attention in Australia. Some of the older economists, such as Giblin and RC Mills were receptive to them,^[168] and the recent, younger arrivals from Cambridge – especially Walker, Reddaway and Clark – created, in turn, greater impetus towards general acceptance.^[169]

In general, the degree of awareness and acceptance of Keynesian ideas declined with age, and increased with the extent and recentness of direct contact with English, especially Cambridge, economics (though there are a number of exceptions to this). As there was much youth and much contact with Cambridge, it is not surprising that the General Theory had a profound and immediate impact in Australia. More important still, no doubt, was the climate of receptiveness to new ideas – to an analysis that offered real hope of preventing a repetition of the depression.

The successful application of Keynesian analysis to the problems of the war economy confirmed the Keynesian ascendancy, which reached its apogee in the 1945 Full Employment White Paper, in the preparation of which almost every Australian economist of any note contributed.^[170]

I have already indicated Copland's cautious approach to ‘Keynesian doctrines’, and, earlier, showed Dyason's early and enthusiastic Keynesianism. EOG Shann died in May 1935, nearly a year before General Theory reached Australia. His staunchly anti-interventionist views, especially as expressed in the 1920s and very early 1930s, have gained some renewed prominence in recent times;^[171] what is perhaps less well known was recorded by Copland in 1935:^[172]

He was against undiluted deflation as a solution, and as the depression deepened his belief in monetary policy as a way of escape increased. He carried this belief to Ottawa in 1932 and to the World Economic Conference in 1933. In both places he worked untiringly to bring about a declaration of policy by the British Commonwealth of Nations. It was a ‘wider planning, a monetary policy that would permit of recovered equilibrium, and an expansion of consumers' demand’ that was the goal of his endeavours in these years.

After Shann's death in 1935, a heavy teaching load at the University of Adelaide fell on to JA La Nauze, in whose classes the General Theory was much studied and discussed, and received with enthusiasm by many students.^[173] Such students included DG Badger and the late LF Crisp, both of whom went on to play, inter alia, a part in shaping the Full Employment White Paper of 1945.^[174] On the other hand, notwithstanding the quotation later from Gifford, it was possible to be an intelligent economics student at the University of Queensland from 1935–1939 without being aware of the General Theory making much impact.^[175] Even in the mid-1940s at the University of Western Australia it was ‘necessary for students to organize their own group, meeting ‘once a week to discuss, successively, chapters of the General Theory’.^[176]

The economists to whom I will pay particular attention are: LF Giblin, E Ronald Walker, WB Reddaway, some other recent arrivals from Cambridge (especially Colin Clark), LG Melville and HC Coombs.

(i) LF Giblin: Schedvin has written that ‘the intellectual leader and politically most influential’ of ‘the Australian economists of 1930–1931’ was LF Giblin.^[177]

Giblin, born in 1872, was educated at King's College, Cambridge, and, in 1929, after a career of statistical, political and other work mostly in Tasmania, was appointed the first Ritchie Professor of Research in Economics at Melbourne University. He served on the Board of the Commonwealth Bank from 1935–1942, and during and immediately after the Second World War chaired the influential Financial and Economic Committee. At the age of 75 he began writing the history of the Commonwealth Bank that was published after his death in 1951.^[178]

When Keynes died in 1946, it was Giblin who wrote his obituary – or, rather, ‘some personal notes’ – for the Economic Record. Giblin wrote: ‘Economic thinking has been revolutionized by his work; and his planning and negotiations in world economic affairs have been the outstanding contribution of any individual to the economic reconstruction of the world’.^[179]

Giblin had first met Keynes in 1918, and they had some correspondence over subsequent years – for example, in 1933 about Keynes's The Means to Prosperity;^[180] during the Second World War about war finance and rationing;^[181] about planning for the International Monetary Fund;^[182] and on other occasions.^[183] Giblin had been an architect of the Premiers' Plan, and a signatory to the Wallace Bruce proposals of 1932 (which Keynes himself, with reservations, broadly supported). Giblin's favourable review of The Means to Prosperity in 1933^[184] with his endorsement of public works programmes to combat unemployment, reflects his shift towards ‘Keynesian’ policies. Cain says of Giblin: ‘he must be bracketed with Walker as the precursor of a new philosophy, [but] his views fell short of Walker's in coverage and sophistication’.^[185]

In 1938, Giblin spent several months in residence as a supernumerary Fellow of King's College, Cambridge, where he had been a student over forty years before.^[186] He had use of Keynes's rooms in King's, and visited him at his farm at Tilton, Sussex.^[187]

But Giblin was not swept off his feet by the General Theory. He wrote of ‘a leisurely reading in one piece of Keynes's General Theory – with not much more definite result than the need to read it again’. He wrote:^[188]

In so many places I cannot get the convincing picture of things happening just so – there are so many alternatives and qualifications to be thought out. So much seems to require a careful statistical analysis and testing before one can feel that it is safely based, and Keynes is a bit offhand on that side – rather the amateur trusting to the impressions of a shrewd and sensitive intelligence than the professional seeker after facts – and not demanding and relying on the professional investigator as a necessary partner in the business.

It has been said that in England in 1938 Giblin had ‘many fruitful talks with Keynes as well as other economists, and with some of their pupils. Occasionally he was proud to think he had converted Keynes on some points to his own view’.^[189]

It has been claimed that Giblin anticipated Richard Kahn and Keynes on the multiplier. For example, at the ANZAAS meeting of January 1939 in Canberra, in the reported discussion of a paper by GL Wood focussing on the operation of the multiplier in the US, Dr (later Sir) Roland Wilson ‘deplored the absence of reference in the paper to the work of ‘one in our midst' on what had been called the ‘Keynes-Kahn’ multiplier’.^[190] He said that ‘possibly Mr Clark could explain to what extent Keynes and Kahn had been anticipated by an eminent Australian economist’. Colin Clark, having referred to the US as ‘the most beautiful laboratory for the working of the multiplier’, went on to say:

The evidence was satisfactory that Professor Giblin, in his Inaugural Lecture in Melbourne in 1930, first put the multiplier on the map. The multiplier appeared to have been in the minds of economists in Australia long before it had been thought of in America or Great Britain.

PH Karmel has pointed out that the multiplier analysis in Giblin's 1930 lecture was a foreign trade multiplier, less complete than (and different in other ways from) Kahn's formulation of an investment multiplier.^[191] Karmel says that ‘for Giblin savings are automatically invested and there is no problem of insufficiency of effective demand in the Keynesian sense’.^[192]

Giblin's lecture, on 28 April 1930, was entitled ‘Australia, 1930’.^[193] He was speaking of ‘a direct loss of income from the fall in exports and the cessation of external loans of the order of £50m.’, and asked: ‘What will be the effect on other income?’ He then set out an argument with ‘a woolgrower receiv[ing] £900 less income than his average’, reducing his expenditure, thus reducing the incomes and therefore expenditure, of others and so on until ‘there has been … a reduction of Australian income of … three times the direct shortage of income of the wool-grower’. Giblin then applied this argumemt to the drop in Australian ‘income’ of £50 million, saying it would mean a shortage of Australian incomes of £150m., which would imply an addition to unemployment of at least one-sixth of our population'. This was a prescient warning of the enormity of the crisis engulfing Australia.

Two points should be made. First, Giblin had not worked the concept out clearly, and was somewhat uncertain; he said:

Is, then, this appalling result likely to happen, or is the whole argument affected by a fundamental error? The matter is obscure. I confess I do not see my way clearly through the tangle of price reactions that must follow the loss of income.

Secondly, Giblin's analysis was the basis for the Austrailian economist's stress on ‘spreading the loss’ in, for example, the Premiers' Plan;^[194] Giblin went on:

I will only say that my somewhat muddled belief is that the tendency will be broadly to this result, to the extent that the Australian standard of living fails to adjust itself to the diminished income; but that if the loss is evenly spread through the community, it may be very nearly confined to the first direct loss of £50m., and there need be no serious addition to unemployment.

Giblin had in the late 1920s evolved the multiplier concept to analyse the effect on national income of a Victorian railway construction project.^[195] But in 1930 he appears to have ignored this domestic investment multiplier.^[196]

Kahn's famous article setting out the multiplier was published in the Economic Journal of 1931.^[197] It is true, as AL Wright has said, that Kahn ‘first popularized’ the multiplier^[198] it was Kahn, not Giblin (nor anyone else) who set out the multiplier in clear detail in a journal that would give it prominence amongst economists. (But E Ronald Walker wrote in his Unemployment Policy (1936) of the secondary employment effects of expenditure: ‘Although Mr JM Keynes has attempted to popularize this notion [in The Means to Prosperity], it has failed to make any impact upon the mind of the British Government’.)^[199]

It is clearly the case that Giblin anticipated Kahn, in that his brief exposition of a form of multiplier was published before Kahn's article. In this, Giblin was not alone. Wright^[200] and Patinkin^[201] have cited a number of other writers, some before Giblin, who developed similar concepts, and even used expressions such as ‘multiplying principle’ and ‘multiple spending’.^[202] In Australia, JB Brigden was thinking along comparable lines.^[203] And, as Patinkin points out, Keynes and Hubert Henderson had in their 1929 pamphlet Can Lloyd George Do It? referred to ‘indirect employment’ effects of ‘schemes of capital expenditure’, without using the term ‘multiplier’.^[204]

In 1933, after publication of Keynes's The Means to Prosperity (in which he used the expression ‘the multiplier’), Giblin wrote to Keynes criticising his multiplier calculations; Keynes largely rejected the criticism.^[205] One of Giblin's letters told Keynes: ‘I have at times made similar computations here, e.g. on the total increase in income following from a given increase in export production’.^[206] Whether Giblin informed Keynes of his own pre-Kahn work on the multiplier, I do not know. But it seems Keynes did not acknowledge that work as influencing his own. Indeed, he wrote in the General Theory that ‘the conception of the multiplier was first introduced into economic theory by Mr. RF Kahn in his article on “The Relation of Home Investment to Employment”…’^[207] In a brief note on the ‘history of the multiplier doctrine’ Keynes sent Colin Clark in 1938, Keynes made no reference to Giblin, even though Keynes's accompanying letter mentioned his seeing Giblin in Cambridge.^[208]

Giblin became a practical and cautious Keynesian. In comments by him (and by HC Coombs) at the ANZAAS meeting of January 1939, there was concern at the adverse effects deficit spending could have on business confidence and so on investment;^[209] this was a concern Keynes also had.^[210] During World War II, Giblin supported Keynes's Clearing Union plan ahead of the American Stabilisation Fund plan (of which he was very critical); but he was less convinced than many other Australians of the need for an international agreement on full employment before Australia could commit itself to such a scheme.^[211] During this time, Giblin took a more cautious line on post-war economic policy than many ‘Keynesians’; as Copland put it, ‘Giblin was far too realistic and cautious in his approach to succumb to the allurements of so extravagant a doctrine’ as ‘over-full employment (more jobs than there are people to fill them)’, which Copland says ‘was the theme song of a new generation of economists who might perhaps be classed as neo-Keynesians’.^[212] But Giblin played an important role in the shaping of the 1945 White Paper on Full Employment, and, though he recognized the difficulties, supported the commitment to achieving full employment through demand management.^[213]

(ii) ER Walker: The writings of E Ronald Walker in the 1930s, some already quoted, represent ‘the first formal deployment of [Keynesian ideas] in a comprehensive critique of Australian policy during depression and recovery’.^[214] Having graduated from and taught at the University of Sydney, Walker was a graduate student at St John's College, Cambridge, in 1931–1932, staying into 1933, and was exposed to aspects of the development of Keynes's thinking from the Treatise to the General Theory. His doctoral thesis, published in 1933 as Australia in the World Depression, aimed ‘to consider Australian wage and monetary policy in the light of Keynesian analysis’;^[215] but Keynes, with whom Walker certainly had contact,^[216] was not credited with giving assistance to him, though Robertson, Pigou, Gregory and Guillebaud were.^[217] Neville Cain has recently contributed a valuable article on Walker, reviewing his contributions to both theory and policy debates from his return to the University of Sydney in 1933 through to 1936.^[218]

(iii) WB Reddaway: When Giblin was appointed to the Commonwealth Bank Board in 1935, he devoted a large part of his fees to an Economic Research Fellowship at the University of Melbourne. ‘Keynes was consulted and a young Cambridge man, WB Reddaway, came to Australia as the first Research Fellow’.^[219] Reddaway was then 23 and had come from what Sir Austin Robinson called ‘that astonishing vintage of 1934’.^[220] Though he returned to Cambridge in 1938, teaching economics until his retirement (as Professor of Political Economy) in 1980, he has retained links with Australia.

Reddaway reviewed the General Theory for the Economic Record (June 1936). It is a confidently written piece, expounding clearly the General Theory, and expressing strong, though not totally uncritical, support for it. Reddaway wrote to Keynes in July 1936 with some thoughts on aspects of the General Theory – the nature of money, Keynes's underemphasis (as Reddaway saw it) on confidence in considering the marginal efficiency of capital and the effect of money wage cuts.^[221] Keynes replied saying he had ‘somewhat reconsidered the argument’ in chapter 17 of the General Theory, ‘entirely’ agreeing with Reddaway that ‘the schedule of the marginal efficiency of capital … depends on confidence as well as on physical facts’, and agreeing with him on money wages.^[222] Keynes wrote: ‘I enjoyed your review of my book in the Economic Record, and thought it very well done’.^[223] Neville Cain has described Reddaway's review as ‘one of the finest contemporary reviews of the General Theory, giving a flying start to that technical discussion with which, it might reasonably be said, Australian economics came of age. The Keynesian revolution had arrived, and was soon to be consummated in war and post-war planning’.^[224]

(iv) Other arrivals from Cambridge: Walker and Reddaway, on coming from Cambridge, were important and active agents of the Keynesian revolution in Australia. But they were not the only recent Cambridge economics graduates to make a mark in Australia. J.M. ‘Pete’ Garland had studied at King's in the early 1930s, attended ‘the Keynes Club’ (the Political Economy Club, a group that met on Monday nights under Keynes's guidance to discuss a paper), and been aware of the exciting developments underway. He recalls, for instance, Joan Robinson telling him of her troubles in keeping Keynes to the true path of the revolution. On returning to Australia, he went into the wool industry, with the Australian Estates Company, but started work at the Commonwealth Bank in 1938. During the Second World War, he played some role, inter alia, in preparation of the Full Employment White Paper.^[225]

SJ Butlin, later Professor of Economics at Sydney University (1946–1971), and of Economic History at the ANU (1971–1975), had studied in Cambridge in the early 1930s. Butlin wrote on Keynes's death in 1946:^[226]

… and fascinating lectures they were too. It was a refreshing experience to listen to a man who thought as clearly and originally as Keynes, thinking out aloud for the benefit of students … I heard his lectures in 1933 and 1934. They were concerned with the central themes of the General Theory and, in fact, the second set was given using galley proofs in place of lecture notes.

Butlin aimed to convey the excitement of Keynes's developments to his students as a young lecturer at the University of Sydney from 1935 to 1941.^[227] But Butlin argued in 1946 that ‘it was the Treatise, not the General Theory which accomplished the Keynesian revolution’; he wrote: ‘the Treatise was the really revolutionary book, as those who read it when it appeared and wrestled and sweated over it will agree’.^[228] But he acknowledged that the General Theory which he regarded as an especially untidy book, ‘was immediately recognised as a great, original book’.^[229] He noted somewhat scornfully that, as the Keynesian revolution gathered momentum in Australia, ‘those who differed from Keynes had little chance of getting a hearing, especially from the younger men’.^[230] And Butlin was certain that much of what passed for Keynesian economics, especially Keynesian policies, would have aroused ‘vigorous attack’ from Keynes himself.^[231]

The Australian (as he became) with the closest personal links with Keynes was, of course, Colin Clark;^[232] his arrival in Australia in 1937 helped to maintain ‘the momentum of acceptance’ of Keynesian economics that had built up through the work of Giblin, Walker, Reddaway and others.^[233]

Clark was born in London in 1905, and educated in England. Although he first met Keynes in 1929^[234] Clark came to know Keynes well while on the staff of the British Government's Economic Advisory Council in 1930–1931; Keynes was a member of the Council. Their links were strengthened when Clark went to Cambridge in 1931 as a lecturer in statistics. It was while with the Economic Advisory Council and at Cambridge that Clark developed a very considerable reputation for original statistical work, especially in the development of national income statistics. In the General Theory, Keynes referred favourably to Clark's first major work, The National Income, 1924–1931,^[235] and cited his statistics on many other occasions.^[236] References to Clark's statistics are made in letters from DH Robertson,^[237] Harrod,^[238] Hawtrey,^[239] Kahn,^[240] and in drafts of chapters of the General Theory.^[241] Clark had what he recalls as ‘frequent discussions’ with Keynes as the General Theory was evolving, not least on the multiplier^[242] (and Keynes sent Clark a complimentary copy of the General Theory).^[243]

A number of Keynes's references to Clark are extraordinarily glowing. For example, in December 1931 Keynes wrote to Daniel Macmillan, the publisher, to recommend Clark's work The National Income, 1924–1931. Keynes wrote ‘that Clark's work, on this and allied subjects, is quite outstanding, and that he is likely to become the recognised authority, in the course of time … Clark is, I think, a bit of a genius: almost the only economic statistician I have ever met who seems to me quite first class’.^[244] Nearly a decade later, in How to Pay for the War, Keynes declared that ‘there is no one today, inside or outside government offices, who does not mainly depend on the brilliant private efforts of Mr Colin Clark (in his National Income and Outlay, supplemented by later articles)’. But, in the vein of his complaint of government disregard of the need for good statistics, Keynes went on: ‘but, in the absence of statistics which only a government can collect, he could often do no better than make a brave guess’.^[245]

Patinkin reads a great deal into remarks such as this. He seeks to imply that, ‘in the early 1930s’, Keynes had ‘little faith’ in national income statistics, and ‘even less faith in the aggregate estimates of Colin Clark’.^[246] There seems to me little evidence to support this contention; certainly Patinkin provides little.^[247] And he simply fails to mention some important evidence: though he places considerable stress on unfavourable reviews of Clark's 1932 book, he does not mention Keynes's own reaction. Keynes wrote to Clark on 2 January 1933:^[248]

I have just finished reading your book carefully … I think that it is excellent. An enormous step forward.

(This letter was published in Keynes's Collected Writings three years before Patinkin's book.) Surely Sir Alec Cairncross is right to say that ‘it was with [Keynes's] encouragement … that Colin Clark and, later, James Meade and Richard Stone laid the basis for national income accounting’.^[249]

It is certainly the case that Keynes more than once criticized aspects of Clark's work. For example, in the Economic Journal in 1940 Keynes strongly criticized Clark's concept of ‘gross national income’, which Keynes found misleading.^[250] Keynes prefaced his criticism, trenchant as it was, by saying that Clark's ‘views must be much respected because we all owe to him an immeasurable debt within this field’.^[251] In 1938, in a letter to Harrod,^[252] Keynes criticized economists for converting models into quantitative formulae; to do this, Keynes said, was ‘to destroy [the model's] usefulness as an instrument of thought’; having referred to Tinbergen, he went on:

All the statisticians tend that way. Colin [Clark], for example, has recently persuaded himself that the propensity to consume in terms of money is constant at all phases of the credit cycle. He works out a figure for it and proposes to predict by using the result, regardless of the fact that it is not constant, in addition to the strong a priori reasons for regarding it as unlikely that it can be so.

Neither of these two adverse references to Clark provides any evidence for lack of faith at any time in aggregate estimates in general: in the first case, Keynes was using aggregate estimates to consider ‘the income and fiscal potential of Great Britain’;^[253] and in the second case, Keynes's comments on the danger of quantifying models came in the same letter in which he told Harrod it was ‘most important … to investigate statistically the order of magnitude of the multiplier’.^[254]

This letter to Harrod came not long after Keynes had received an article from Clark for the Economic Journal. Keynes was very critical of it,^[255] and there was a considerable correspondence between Clark and Keynes about it.^[256] But only weeks before Keynes had urged Clark to return to Cambridge rather than stay in Australia. Clark had written of ‘having an excellent time in Australia where economics ranks next after cricket as a topic of public interest’^[257] and that he was ‘reaching the conclusion that I want to stay in Australia’, where there were open minds and great potential.^[258] Keynes replied:^[259]

I am rather dismayed with the last paragraph in your letter, though not taken entirely by surprise. Don't make too quick a decision. Come back here in the first instance anyhow. You will be able to get back to Australia at any subsequent moment you may choose. The problem of doing anything here might be more difficult – indeed it is – but it may be more important. It is very necessary to lay the foundations for a proper department of statistical realistic economics at Cambridge …

But Clark was not persuaded. He replied:^[260]

… [The] Queensland Government have appointed me Director of their Bureau of Industry and State Statistician … [When] Queensland made their offer I thought it was too remarkable an opportunity to be missed for putting economics into practice. My job is to advise the Premier on practically everything connected with economic matters, to plan the public works programmes, and to manage the state statistical office.

Cornish, in outlining the wartime discussions on full employment policy, described Clark as ‘a leading expositor of Keynes's General Theory’.^[261] By then, of course, he was far from alone as a Keynesian in the corridors of power.

(v) LG Melville: Professor LG (now Sir Leslie) Melville had joined the Commonwealth Bank as its Economist in 1931; this appointment marks the start of what is now the Research Department of the Reserve Bank of Australia. Melville, born in 1902, had been appointed Professor of Economics at the University of Adelaide at the age of 26. In the early years of the depression, Melville was one of the Australian economists most committed to deflationary policies.^[262] Giblin wrote to Walker in April 1934 that ‘Melville gradually and reluctantly has moved [since 1930] a very long way, but with always a hankering backwards’.^[263]

Melville, already familiar with Keynes's work, first met Keynes in London in 1932 after the Ottawa Conference, and, as we have seen, obtained his views on Australian exchange rate policy. Back in London for the world Economic Conference in 1933, Melville was a guest at a dinner party hosted by WS Robinson, an Anglo-Australian businessman; other guests included Keynes, Ohlin, Hawtrey, Robbins and Shann. Keynes strongly advocated expansionary policies, and Hawtrey strongly opposed them.^[264]

Melville's published comments on the General Theory were far from uncritical. For example, in his evidence to the Banking Royal Commission in May 1936, Melville advocated counter-cyclical fiscal policy^[265] but, referring to the fact that in Australia, ‘money wages have not been rigid, but have varied with prices’, Melville said:^[266]

Hence, if profits and prices give way before a contraction of credit, and cause a fall in the cost of living, wages also fall, reducing money costs of production and correcting the passive balance of payments. It may be, however, that a new philosophy in regard to money wages is in the course of development. Perhaps in future wages will be increased from time to time, but never decreased. This may be one of the economic consequences of Mr. Keynes. If this philosophy spreads to Australia and affects wage policy, I believe that it will at times cause depressions to be unnecessarily acute.

This is presumably a reference to Keynes's expression of support in the General Theory for ‘the maintenance of stable general level of money-wages’, provided (in the case of an open economy) ‘that equilibrium with the rest of the world can be secured by means of fluctuating exchanges’.^[267] It was in this context that Keynes made the sole and ‘very scornful’^[268] reference to Australia in the General Theory: it is a reference to Australia's attempt ‘to fix real wages by legislation’.^[269]

In stressing the static nature of economic theory in an article in 1939, Melville wrote:^[270]

Keynes has attempted to break away from the concepts of the ‘classical’ economists and has given us a brilliant start in formulating a theory suitable for a dynamic world. Nevertheless, he is often unable to shake off the earlier mode of thought. Throughout his book … we can see him struggling to give expression to two conflicting ideas, the one static and the other dynamic. In his discussion of the principle of effective demand, savings and investment, the propensity to consume, the marginal efficiency of capital and the general theory of interest, the dynamic approach is struggling for expression. It bursts out triumphantly in his discussion of expectations and employment. However, Keynes surrenders to the equilibrium viewpoint in formulating his statement of the general theory. Moreover, in this statement he adds to the old duality a new concept of three independent variables, the rate of interest, the marginal efficiency of capital and the propensity to consume.

Melville had in a two-part article on ‘The Theory of Interest’ in 1938^[271] argued that ‘these variables are highly interdependent in a dynamic world’. His 1939 article continued:

Thus, despite the epoch-making nature of the whole book, it seems to me that Keynes's general theory fails to break away from the older concepts.

It is clear from his war-time writings that Melville accepted that public works programmes could enable governments to maintain high levels of employment.^[272] He played a major role in shaping the Full Employment White Paper. As we shall see below, he also played a key role in the execution of the Australian policy, which he contributed to shaping, of favouring the more expansionist Keynes plan for a Clearing Union to the American plan for a Stabilisation Fund, and of stressing the need for agreement between countries to pursue full employment as a prerequisite for Australian membership of the International Monetary Fund that grew out of these earlier plans.

(vi) HC Coombs: HC Coombs, who had read Keynes's Treatise with care, was surprised when he went to the LSE in the early 1930s to do his doctorate to find that Keynes was not especially highly regarded; Hayek and Robbins dominated, and Kaldor was Keynes's only real supporter. Coombs studied the General Theory closely as part of an informal group at the University of Sydney which discussed contemporary developments in economic theory; participants included RC Mills, E Ronald Walker, RB Madgwick, Trevor Swan, and JG (later Sir John) Crawford. The General Theory seemed to Coombs, and to many of his contemporaries, ‘to answer a lot of problems’.^[273] Coombs presented a paper to the 1939 ANZAAS conference, in which he, in effect, suggested that Swedish economic theory and policy were developing along Keynesian lines in advance of the General Theory;^[274] this notion has subsequently gained considerable attention.^[275]

Coombs was seconded from the Commonwealth Bank (where he was Assistant Economist) to the Treasury in 1939; in 1942 he became Director of Rationing, and from 1943 to 1948 was Director-General of Post-War Reconstruction. The tenor of his work can be seen in chapter headings of his memoirs: ‘The Keynesian Crusade – Domestic’ and ‘The Keynesian Crusade – International’.^[276] Coombs wrote of prominent economists such as Melville and Giblin:^[277]

It was among these men that the ideas were being formulated which were to make the conduct of the war when it came and the planning of the transition from war to peace exercises in the application of Keynesian economic theory.

But Cornish has written of the war-time planning:^[278]

The dominant voice, however, among the economists on the subject of full employment was that of Coombs. He had for a long time been an ardent supporter of demand management along Keynesian principles, and his advice was often the most decisive influence on the governments of Curtin and Chifley.

Indeed, Coombs was an advocate of over-full employment^[279] which (as we have seen) more cautious economists such as Copland and Butlin deprecated.

The Banking Royal Commission

The General Theory first became available in Australia in March 1936.^[280] The Royal Commission on Monetary and Banking Systems (1935–1937) was sitting. Professor RC Mills of Sydney University was its ‘leading light’;^[281] he worked very closely with another member, Ben Chifley, later Treasurer and Prime Minister; and, at Mills's instigation, a former student of his, JG (later Sir John) Phillips was its economist.^[282]

Keynes was quoted or referred to by several witnesses before the Commission: Alfred Davidson of the Bank of New South Wales on a minor point^[283] (Davidson made extensive reference to Hawtrey, and argued for credit expansion in depression);^[284] LG Melville, as quoted above; as Cain puts it, ER Walker ‘rendered for the Commission Keynes' new view of saving-investment equilibrium and the alternative theory of interest it had summoned forth’;^[285] GL Wood of the University of Melbourne cited Keynes on the desirability of low interest rates;^[286] and others, such as Professor Torleiv Hytten,^[287] Dr Roland Wilson,^[288] Sir Herbert Gepp,^[289] and FW Eggleston^[290] referred to or quoted Keynes.

One exchange warrants mentioning.^[291] JLK Gifford of the University of Queensland was advocating credit expansion against depression. A Commissioner, HA Pitt, asked him: ‘Your policy is based on similar lines to that of Mr Keynes?’ Gifford replied:

Yes. I have been influenced by Mr Keynes' way of thinking for a number of years and I was very pleased to see the recent development of his theory in his last book.

Pitt asked: ‘He supports your view?’ Gifford replied: ‘I support his view to be more modest’.

Chifley's biographer, LF Crisp, wrote:^[292]

Chifley, with mills beside him, was perfectly placed to gain an early appreciation of the Keynesian ‘revolution’. Experience and instinctive inclination had predisposed Labour men to Keynes' approach and central theses. Allowing for the lag in the appearance of Keynes' book and ideas in Australia, Chifley in a broad sense became a ‘Keynesian-of-the-first-hour’, a fact of enormous significance for Australia in the years after 1941.

The Commission laid down in its Report certain broad guidelines of decidedly Kenyesian bent:^[293]

In general, the proper policy for the governments to pursue if a depression is developing is to expand public works, refrain from increasing taxation, and avoid a general contraction of government expenditure even although deficits are incurred. When conditions have improved as private enterprise revives and full employment is approached, the proper policy is to contract public works expenditure, maintain or increase taxation, budget for surpluses, and reduce the debt which has been incurred through the depression policy … The assistance which can be given by the central bank in meeting or preventing a depression is to expand or control credit in conformity with the general policy. If an expansion of central bank credit is to be successful in promoting recovery, the credit must be used, and this comes about mainly through government spending or a supplement to private spending.

The Commission criticised the Commonwealth Bank for delaying the depreciation and the expansion of credit during the depression.

How to Pay for the War

By the Second World War, the Australian economics profession was largely Keynesian; and the war placed many economists into positions of great influence on war-time economic policy and planning for the post-war period. T.W. Swan wrote in the Economic Journal in June 1940:^[294]

… whatever criticisms we may have for specific proposals, it cannot be denied that the major battle of war finance is already won when recognition is given, as it has been given by the Commonwealth Treasurer [Mr, later Sir, Percy Spender], to the conception of the problem as one of the organization of resources rather than of money … [In] this respect, the Commonwealth Treasurer is at one with the economists of his own generation … If the beneficence of contemporary economic ideas be granted, it is greatly to be hoped that the Treasurer's future financial proposals will confirm Mr. Keynes' confidence that ‘soon or late, it is ideas, not vested interests, which are dangerous for good or evil.

Keynes himself had adapted his analysis to the problem of war-induced economic boom and the need to divert resources from consumption to the war effort in his 1940 pamphlet How to Pay for the War. It is ‘a discussion of how best to reconcile the demands of war and the claims of private consumption’.^[295] The argument is this:^[296] In wartime, as more are employed, total earnings will rise. However, given the demands of the war effort, civilian consumption must be constrained. Unless consumer purchasing power is reduced, the excess demand will produce inflation. Because prices will rise faster than wages, as the act of spending the wages sends prices higher still, this will redistribute the increased earnings to ‘profiteers’. These profits will be partly taxed and partly borrowed by the State for the war effort, giving them a right to repayment post-war. Keynes aimed to break this chain, reduce civilian consumption and increase the ‘savings’ forthcoming for the war. Keynes proposed a scheme of ‘deferred pay’ or ‘compulsory savings’ to do this. In essence, it was to take in tax a proportion of earnings (above a certain minimum) which would be returned after the war, financing this refund by a general capital levy.

How to Pay for the War was much discussed by Australian economists.^[297] SJ Butlin said in a review of the ILO's Studies in War Economics:^[298]

Mr Riches, as one might expect of an economist, comes down on the side of the [Keynes] Plan (provided it is on the principles of Mr Keynes), because he believes taxation will not be used sufficiently to avoid inflation, and deferred pay appears, therefore, as the next best.

A variation on the Keynes Plan was contained in Fadden's September 1941 Budget: a proportion of tax would be collected as a compulsory loan – called a ‘wartime contribution’ – to be repaid with interest (at 2 per cent) after the war.^[299] This proposal was bitterly attacked – amongst other things, as an attack on living standards of those on low incomes.^[300] The Labor Party had made clear its opposition to such schemes ‘ever since Keynes had first published in England his proposal for deferred pay’.^[301] The Budget was defeated when two independents voted against the Government, Fadden resigned as Prime Minister, and Curtin was appointed.

The Full Employment White Paper

It was under the Curtin Government that a White Paper was prepared, and tabled on 30 May 1945, committing the Commonwealth to the maintenance of full employment and the use of ‘pump-priming’ to do this. Selwyn Cornish has written a detailed and impressive history of the White Paper.^[302] He shows that the Australian White Paper was partly stimulated by a British White Paper of May 1944,^[303] in which Keynes had some role (though not a dominant one).^[304] Keynesian ideas were crucial to the development of both White Papers:^[305]

The publication of JM Keynes' General Theory … was of signal importance, for it seemed to provide both an explanation of the causes of general unemployment, and a framework for the formulation of remedial measures. The war itself appeared to demonstrate, by practical application, the success of Keynesian economics, for much expanded levels of government expenditure served to convert a chronic situation of excess supply of labour into one of labour … Above all, perhaps was the large wartime influx into Whitehall and Canberra of academic and other professional economists, among whom were many who had been converted to Keynesian principles .... By the time work commenced in earnest upon postwar employment policy, most Australian economists were confirmed Keynesians. Doubts which had been expressed in the early 1930s about the efficacy of expansionary policies – especially fiscal policy – to ameliorate the unemployment problem had virtually disappeared by 1942.

The commitment to full employment was also reflected in the Banking Act of 1945.