Keynes and interwar diplomacy: anti-communism, arms spending and the rentier interest


I ended a recent post with a long quotation from Thorstein Veblen’s The Higher Learning in America (1918).

It gave a taste of Veblen’s impressive candour  his verdict on the university bureaucracy making a painful contrast with the supine academic ‘critics’ of today: ‘[From] the point of view of the higher learning, the academic executive and all his works are anathema, and should be discontinued by the simple expedient of wiping him off the slate.’

Veblen, who edited the University of Chicago’s Journal of Political Economy, made few concessions to collegial decorum or to the canting pieties of official liberalism.

In the September 1920 issue of Political Science Quarterly, he reviewed J.M. Keynes’s book on the Versailles Treaty, Economic Consequences of the Peace.

His assessment of the book  ‘Mr. Keynes only reflects the commonplace attitude of thoughtful citizens’  gives some idea  the Cambridge Apostle as philistine!  why the later Veblen has been so neglected by that selfsame polite opinion, his scholarly contribution reduced to a few unthreatening slogans: the ‘leisure class’, ‘pecuniary emulation’ and ‘conspicuous consumption’.

In skewering the greatest liberal economist of the twentieth century, Veblen summed up, without euphemism, the predatory character of post-Great War diplomacy.

The latter, while draped in the Wilsonian finery of liberal internationalism, was devoted to the tawdry ‘pursuit of political chicane and imperialistic aggrandizement’, and above all to the ‘suppression of Bolshevism and all its works’, so that the planet could be ‘made safe for that Democracy of Property Rights on which the existing political and civil order is founded.’

The Allied ‘peace’ conference, he showed, marked the true beginning of the Cold War: President Wilson’s Fourteen Points, Churchill’s wish to see Bolshevism ‘strangled in its cradle’, Clemenceau’s hopes for a cordon sanitaire in central Europe, and the intervention of Allied forces on the side of counter-revolution in Russia’s Civil War:

[Keynes’s Economic Consequences of the Peace] is an altogether sober and admirably candid and facile argument, by a man familiar with diplomatic usage and trained in the details of large financial policy; and the wide vogue and earnest consideration which have been given to this volume reflect its very substantial merit.

At the same time the same facts go to show how faithfully its point of view and its line of argument fall in with the prevailing attitude of thoughtful men toward the same range of questions. It is the attitude of men accustomed to take political documents at their face value.


Mr Keynes was continuously and intimately in touch with the Peace Conference during all those devious negotiations by which the Elder Statesmen of the Great Powers arrived at the bargains embodied in this instrument. These negotiations were quite secret, of course, as is fitting that negotiations among Elder Statesmen should be.

But for all their vulpine secrecy, the temper and purposes of that hidden Conclave of political hucksters were already becoming evident to outsiders a year ago, and it is all the more surprising to find that an observer so shrewd and so advantageously placed as Mr Keynes has been led to credit them with any degree of bona fides or to ascribe any degree of finality to the diplomatic instruments which came out of their bargaining…

Instead of its having brought a settlement of the world’s peace, the Treaty (together with the League) has already shown itself to be nothing better than a screen of diplomatic verbiage behind which the Elder Statesmen of the Great Powers continue their pursuit of political chicane and imperialistic aggrandisement. All this is patent now, and it needs no peculiar degree of courage to admit it. It is also scarcely too much to say that all this should have been sufficiently evident to Mr Keynes a year ago.

But in failing to take note of this patent state of the case Mr Keynes only reflects the commonplace attitude of thoughtful citizens.

His discussion, accordingly, is a faithful and exceptionally intelligent commentary on the language of the Treaty, rather than the consequences which were designed to follow from it or the uses to which it is lending itself. It would perhaps be an ungraceful overstatement to say that Mr. Keynes has successfully avoided the main facts in the case; but an equally broad statement to the contrary would be farther from the truth.

The events of the past months go to show that the central and most binding provision of the Treaty (and of the League [of Nations]) is an unrecorded clause by which the governments of the Great Powers are banded together for the suppression of Soviet Russia…

Apart from this unacknowledged compact there appears to be nothing in the Treaty that has any character of stability or binding force. Of course, this compact for the suppression of Soviet Russia was not written into the text of the Treaty; it may rather be said to have been the parchment upon which the text was written. A formal avowal of such a compact for continued warlike operation would not comport with the usages of secret diplomacy, and then it might also be counted on unduly to irritate the underlying populations of the Great Powers, who are unable to see the urgency of the case in the same perspective of the Elder Statesmen.

So this difficult but imperative task of suppressing Bolshevism, which faced the Conclave from the outset, has no place in Mr. Keynes’s analysis of the consequences to be expected from the Conclave’s Treaty.

Yet it is sufficiently evident now that the exigencies of the Conclave’s campaign against Russian Bolshevism have shaped the working-out of the Treaty hitherto, beyond any other consideration. This appears to be the only interest which the Elder Statesmen of the Great Powers hold in common; in all else they appear to be engrossed with mutual jealousies and cross purposes, quite in the spirit of that imperialistic status quo out of which the Great War arose.


[It] seems necessary to call to mind the main facts of the case, as these facts confronted [President Wilson] in the negotiations with the Conclave.

It is to be remarked, then, that Bolshevism is a menace to absentee ownership. At the same time the present economic and political order rests on absentee ownership. The imperialist policies of the Great Powers, including America, also look to the maintenance and extension of absentee ownership as the major and abiding purpose of all their political traffic.

Absentee ownership, accordingly, is the foundation of law and order, according to that scheme of law and order which has been handing down out of the past in all the civilized nations, and to the perpetuation of which all the Elder Statesmen are committed by native bent and by duties of office. This applies to both the economic and the political order, in all these civilised nations, where the security of property rights has become virtually the sole concern of the constituted authorities.


Bolshevism is a menace to absentee ownership; and in the light of events in Soviet Russia it became evident, point by point, that only with the definite suppression of Bolshevism and all its works, at any cost, could the world be made safe for that Democracy of Property Rights on which the existing political and civil order is founded.

So it became the first concern of all the guardians of the existing order to root out Bolshevism at any cost, without regard to international law.

Despite their shortcomings, the 1920s polemical pieces and newspaper articles of Keynes are still useful guides to their era and to Britain’s intra-elite conflict between industrial/commercial and financial interests.

Between the two world wars, industrial firms on the one hand and the City on the other were the contending constituencies behind, respectively, Keynes’s Liberal views and the policies of his critical targets: the Conservative Party and Montagu Norman’s Bank of England.

The power of the British rentier class had been reduced, domestically and internationally, by the Great War.

The gold standard had been suspended to fund military spending. Prices, wages and currency issue were inflated by war expenditure, reducing the real value to creditors of debts denominated in money terms.

The war also concentrated gold reserves in creditor countries, especially the US.

But in 1919 the Lloyd George government accepted the report of the Cunliffe Committee (whose members included Keynes’s Cambridge colleague, A.C. Pigou), which recommended a return to the metallic standard.

The Bank of England allowed the pound to appreciate and in 1925 Winston Churchill returned to gold convertibility at (greatly overvalued) prewar parity.

Stanley Baldwin and Winston Churchill

As described by Keynes in his article ‘The Economic Consequences of Mr. Churchill’, the Chancellor and his PM Stanley Baldwin, ‘deafened by the clamorous voices of conventional finance’, had opted for ‘dear money and credit restriction’.

Keynes noted that the objective of this ‘so-called sound policy’, which brought about a high rate of interest, was to create a ‘great depression in the export industries’, chiefly coal, iron and textiles, producing ‘an atmosphere favourable to the reduction of wages.’

Deflation openly favoured the saving classes over both borrowers (i.e. commercial and industrial firms) and the employed population:

When we raise the value of sterling by 10 per cent we transfer about £1,000,000,000 into the pockets of the rentiers out of the pockets of the rest of us…  For it is of the essence of any policy to lower prices that it benefits the receivers of interest at the expense of the rest of the community; this consequence of deflation is deeply embedded in our system of money contract…

The object of credit restriction, in such a case, is to withdraw from employers the financial means to employ labour at the existing level of prices and wages. The policy can only attain its end by intensifying unemployment without limit, until the workers are ready to accept the necessary reduction of money wages under the pressure of hard facts.

This is the so-called “sound” policy, which is demanded as a result of the rash act of pegging sterling at a gold value, which it did not — measured in its purchasing power over British labour — possess as yet. It is a policy, nevertheless, from which any humane or judicious person must shrink…

The credit restriction already in force has been effected in several ways which are partly independent. First, there is the embargo on new issues which probably retards the normal rate of the circulation of money; then in March the bank-rate was raised; more recently market-rate was worked up nearer to bank-rate; lastly—and far the most important of all—the Bank has manoeuvred its assets and liabilities in such a way as to reduce the amount of cash available to the Clearing Banks as a basis for credit. This last is the essential instrument of credit restriction.


What we need to restore prosperity to-day is an easy credit policy. We want to encourage business men to enter on new enterprises, not, as we are doing, to discourage them.


Like other victims of economic transition in past times, the miners are to be offered the choice between starvation and submission, the fruits of their submission to accrue to the benefit of other classes… They represent in the flesh the “fundamental adjustments” engineered by the Treasury and the Bank of England to satisfy the impatience of the City fathers to bridge the “moderate gap” between $4.40 and $4.86. They (and others to follow) are the “moderate sacrifice” still necessary to ensure the stability of the gold standard. The plight of the coal miners is the first, but not—unless we are very lucky—the last, of the Economic Consequences of Mr. Churchill.

This transfer of income ‘into the pockets of the rentiers’ (as interest or dividends), shaped Britain’s long-run developmental trajectory during the interwar decades and thereafter.

It reduced that portion of the net surplus available, as the retained earnings of firms, to invest in new fixed capital, i.e. to augment the stock of buildings, machinery, equipment, etc.

Capital intensity in interwar Britain

Thus growth in labour productivity was impeded, freezing material standards of living.

But meanwhile this slowdown in the growth of fixed assets had the salutary result of raising the level of output per unit of capital. This (with wages and salaries held down) implied an increase to the rate of return on capital.

Interwar British profit rate

Thus, in a glittering foretaste of our own finance-led age since 1980, the social pre-eminence of creditors during the interwar decades raised overall profitability and bolstered the social position of the propertied classes, whose lavish consumption spending sustained effective demand even as it held back the productive capacity of the economy.

Cecil Beaton 1928

I’ve explained previously how the state’s appropriation of labour and resources through unproductive spending on armaments accomplishes much the same trick as luxury compensation.

It absorbs a chunk of the social surplus, preventing it from being invested productively, thus raising the output-capital ratio.

Yet Churchill proposed to cut military expenditure by £90 million pounds in the three years to 1928. As part of massive fiscal retrenchment, British military spending had already fallen by £50 million in a single year (1923).

Why didn’t British policymakers choose instead to expand military expenditure during the early interwar period, given the ‘continued warlike operations’ described by Veblen and the naval arms race of the early 1920s?

For, as predicted by Keynes and as transpired with the bursting of the equities bubble in 1929, finance-led growth would have macroeconomic consequences – falling prices, falling money wages, mass unemployment, high real interest rates and higher real indebtedness – that became politically destablizing and threatened the survival of capitalism itself.

Surely Britain’s ruling elite, as a simple matter of prudence, could have pursued a different course of action, reflating aggregate demand in line with Keynes’s recommendations?

HMS Hood

The answer to this apparent historical puzzle comes by enlarging the optic from the domestic scene to the capitalist world system as a whole.

Britain and France had emerged from the Great War as the only European powers with colonial empires still intact.

But the accumulation of wartime inter-ally debts and the emergence of the United States as the world’s creditor gave Washington leverage over the military and external policies of these states.

As delegates from Paris and London negotiated repayment schedules for wartime liabilities, US state leaders sought to use their favourable position to dismantle the European empires, pry open their exclusive colonial possessions to competition, seize assets and markets, win freedom of the seas and remake relations between the advanced capitalist economies.

One tool used by the so-called ‘isolationalist’ Republican administrations was to restrict the arms spending of these European powers. This they did by attaching conditionalities to loans, as well as via a succession of diplomatic manoeuvres including the Washington Naval Conference (1921-22), the Five Power Treaty and the Kellogg-Briand Pact (1928).

Through these means Washington secured parity with the Royal Navy, internationalized the Open Door policy in China, strived for a stake in the energy resources of southwest Asia and prohibited (at international law, though not in reality) the European powers from resorting to wars of aggression to make up for competitive disadvantage.

Delegates sign the Washington treaty

Thus the character of interwar diplomacy, as well as the spending priorities of the British state and the domestic organization of British society, all were symptoms of a transition from sterling to the dollar as world monetary standard.

Dismantling of the British empire and gold standard eventually brought the US state to the apex of the international monetary and credit pyramid.

Washington would emerge as ultimate guarantor of a world payments system based on dollar-denominated liabilities, able to finance its own military activities outside of any budget constraint.

But it would take the carnage of the Second World War, not the lofty blandishments of disarmament treaties, to ratify this bright new outcome.


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2 Responses to “Keynes and interwar diplomacy: anti-communism, arms spending and the rentier interest”

  1. Short of force: US debt diplomacy in the 1920s | Churls Gone Wild Says:

    […] the suppression of Bolshevism being the foremost concern of postwar diplomacy, an embargo (not airtight) was imposed on lending to Soviet […]

  2. Swimming in it | Churls Gone Wild Says:

    […] of the Pax Britannica and the Gold Standard had broken apart into rivalrous autarkic blocs, each armed to the teeth and engaged in zero-sum competition for resources, colonial possessions and […]

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