RDP 2000-04: Keynes and Australia 2. Incidental Economic Issues

Not all Australians were as mean-spirited as Hughes. It had been under the influence of Alfred Marshall that Keynes came to devote himself to economics. And, as Keynes himself recorded in his 1924 memoir of Marshall, it was through the generosity of a rich uncle from Australia that Marshall himself had gone to Cambridge as a student (and, later, visited the United States for some months). This uncle had sought and made his fortune as a wily pastoralist during the Australian gold-rushes of the 1850s. As JB Brigden wrote in 1928, ‘had there been no gold-rush in Australia it is conceivable that there might not have been the same Marshall’.^[48] Not the same Marshall, not the same Keynes.

Marshall was largely responsible for Keynes's return to Cambridge in 1908, after two years in the India Office, to lecture in economics. In his early lectures, before the First World War, Keynes made many references to the gold discoveries in Australia in the 1850s and 1890s. These, he said, were partly responsible for ‘the enormous increase in recent times’ in ‘the supply of gold’.^[49] He said that ‘where gold is newly discovered …, as in Australia or California during the ‘50's [1850s], we have interesting examples of the direct action of new currency on prices’.^[50] Keynes told his students that these ‘Californian and Australian discoveries gave rise to the second [great?] discussion amongst economists and even the public’ of monetary theory; he cited Chevalier, Cairnes, and Jevons.^[51]

The Australian and South African gold mines contributed to what Keynes in June 1914 described as the emerging ‘supremacy of the British sovereign’.^[52] Gold sovereigns and half-sovereigns were then minted by the Royal Mint in England and by branch mints in Sydney, Melbourne and Perth, and were legal tender in Australia; ‘in September 1931, Australian mints ceased to mint gold coins’.^[53] In writings before World War I, Keynes made various references to the minting of British sovereigns in Australia;^[54] the only reference to Australia in Keynes's first book, Indian Currency and Finance (1913), is to the remittance of gold sovereign from Australia to India.^[55]

While Keynes made later references – such as in 1924^[56] – to Australia as an important producer and holder of gold, many of his other references to Australia relate to its role as a commodity producer and to economic aspects of the imperial (later, the Commonwealth), link. Keynes wrote in a 1933 article:^[57]

By virtue of our [i.e. Britain's] trade, our investments and our personal ties, our economic life is more closely linked with that of the other continents, and with our own Dominions in particular, than with the economic autarchies of Europe. London is the financial centre of Asia, Africa, Australia, and South America. Our investments, for example, in Australia alone are more than double our total investments in Europe.

In his Treatise on Money, Keynes gave as a factor in Britain's ‘famous and curious depression of the eighteen-nineties’ the fact that ‘Australia was overwhelmed by her great banking crisis in 1893’.^[58] This bank crash, through disturbing the British investor, had contributed to the decline in British overseas investment in the 1890s.^[59] He had earlier written that the drying-up in the Australian market (among others) was a major cause of the British slump of 1920–1921.^[60]

Keynes served in the British Treasury during both world wars, and dealt with such issues as Australia's role as a commodity supplier (e.g. of wheat), the currency link (such as the implications of Britain's going off the gold standard in World War I, and the problem of sterling balances during and after World War II), the American determination during World War II to end Imperial preference in trade, and Lend-Lease and the Dominions.^[61] In his Tract on Monetary Reform (1923), Keynes urged both the UK and the US to stabilize the commodity value of their currencies (rather than its gold value), and concluded the book:^[62]

Perhaps the British Empire (apart from Canada) and the countries of Europe would adopt the sterling standard; whilst Canada and the other countries of North and South America would adopt the dollar standard. But each could choose freely, until, with the progress of knowledge and understanding, so perfect a harmony had been established between the two that the choice was a matter of indifference.

Every year from 1923 to 1930, except 1928, Keynes prepared a memorandum, published by the London and Cambridge Economic Service, detailing Stocks of Staple Commodities.^[63] These showed Australia as an important supplier of wool, lead, spelter (zinc), tin and wheat. These surveys also showed that Australian producers of, for example, tin were badly hit by a drop in prices in 1930.^[64] Keynes wrote favourably of a wool price stabilisation scheme, BAWRA (British-Australian Wool Realisation Association), developed during World War I when the British Governrent purchased the whole available Australian wool supply, and continued after the war with the gradual sale of the large unsold stocks accumulated during the war.^[65] In the Treatise on Money (1930), Keynes cited BAWRA as a ‘valorisation scheme’ that ‘was of inestimable benefit to the producers, and indeed to the world at large, by preventing a debacle in the industry which would have caused a famine in wool later on’.^[66] This instance may have contributed to Keynes's later advocacy of buffer stocks for stablisation of commodity prices.^[67]

British investment in Australia attracted Keynes's attention both as economist and investor. Before World War I, Keynes saw British investment abroad as benefiting both Britain and the recipient.^[68] However, from at least 1924 he favoured less investment abroad and more at home to promote employment,^[69] and amendment of Trustee Acts (regulating the securities in which trustees could invest) which, he said, ‘provide an artificial stimulus on a great scale to foreign investment within the Empire’.^[70] In a 1924 article, he cited the previous week's borrowing by New South Wales of £5.5 million in the London market for public works as an instance of foreign investments not leading ‘to the placing of orders in’ Britain.^[71] In 1925, he said that ‘British investors … who are prepared to lend to the Commonwealth of Australia at a lower rate of interest that will content the people of Australia for similar loans are surely in an unsatisfactory situation’.^[72] In the Treatise, Keynes used an ‘imaginary Australia’ to illustrate the pitfalls to the lending country of excessive lending overseas under the gold standard.^[73]

More particularly, Keynes was concerned at what in 1923 he called ‘the great weight of foreign debt accumulating in Australia in proportion to population’.^[74] Early in 1929 he wrote of ‘undue complaisance towards excessive Australian loans, and the like, in the shape of new overseas issues in London’.^[75] Schedvin describes Australia as a ‘voracious borrower’ in the London (and New York) capital market in the 1920s, and cites Keynes and others to show ‘the increasing suspicion and uncertainty surrounding Australian issues’ as the 1920s wore on.^[76] Schedvin insists that, despite some faulty practices, Australian stock remained ‘a secure and attractive investment’, and that ‘the basic reasons for Australian loans being marked out for special attention’ were, first, ‘the growing feeling that British capital exports were being made at the expense of domestic employment’, and, secondly, ‘the dramatic post-war rise in the relative importance of Australian borrowing’ to a point where ‘Australia was easily the largest government borrower’.^[77] As Schedvin puts it, ‘As in so many other matters, Keynes gave expression and intellectual content to a feeling that was only dimly appreciated’.^[78]

In January 1931, Keynes told the annual meeting of the National Mutual Life Assurance Society (of which he was chairman) that ‘we have taken particular precautions to avoid risk on foreign government securities’, and said that ‘for many years past we have held no securities of the Australian Government or States’.^[79] Keynes went on to speak of the collapse of commodity prices ^[80] and continued :^[81]

I told you a few minutes ago about the ultra-cautious attitude of your own board towards foreign bonds, and from our own individual standpoint it is a wise and necessary precaution. Yet, from another point of view, it is absolutely the opposite of what is needed to put things right. For someone must lend to these countries if a catastrophe is to be avoided.