[OPE-L:2954] Re: Re: Rx Economics/Keynes

From: Michael Perelman (michael@ecst.csuchico.edu)
Date: Sat Apr 29 2000 - 12:48:17 EDT

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I had a section on the General Strike in my book, The Natural Instability of

 The General Strike
Reality soon shattered Keynes' hopes for monetary stability. Despite Keynes'
protestations, the Chancellor of the Exchequer, Winston Churchill, announced on
28 April 1925 that Britain was returning to the pound at its prewar gold value
(Skidelsky 1992: 200). Churchill himself had expressed deep fears about the
wisdom of his policy, recognizing that it would create great hardship (Gilbert
1977: 97-8). In the middle of July, Keynes responded with a scathing set of
articles entitled "The Economic Consequences of Mr Churchill" (Keynes 1925).
He warned:
  Mr. Churchill's policy of improving the exchange by 10 percent was, sooner or
later, a policy of reducing everyone's wages .... Deflation does not reduce
wages automatically. It reduces them by causing unemployment. The proper
object of dear money is to check in incipient boom. Woe to those whose faith
leads them to use it to aggravate a depression. (Keynes 1925: 208 and 220)
Indeed, on 30 June, coal owners had already demanded a new agreement with the
Miners' Federation that included a 10 percent wage reduction. To reduce the
social tensions, Prime Minister Baldwin agreed to a subsidy that would allow
the coal industry to forgo the pay cut. The subsidy was set to expire on 30
April 1926 (Skidelsky 1992: 242).
 Keynes protested: "On grounds of social justice no case can be made out for
reducing the wages of the miners. They are the victims of the economic
juggernaut .... They (and others to follow) are the 'moderate sacrifice' still
necessary to ensure the stability of the gold standard. (Keynes 1925: 223).
 The coal industry was never far from the policy makers' minds at the time.
According to one study of the industrial turmoil that followed:
  The history of the coal industry in the years from 1880 to 1926 epitomized
Britain's fall from world-wide industrial supremacy. Prior to the first world
war coal mining had maintained an incomparable record of growth and
prosperity. Its product was both the basis of Victorian industrial enterprise
and by the twentieth century the second most valuable of Britain's exports. It
employed by 1914 almost one in ten of the male labour force, and afforded them
more job security and higher average wages than were enjoyed in any other
important occupation. It was also the subject of close political and
legislative attention. By 1925, however, mining had become an indicator of all
the problems and deficiencies of the national economy. Miners formed the
largest single numerical group among the unemployed, though the rate of
unemployment (excluding short time) was only just above the national average.
Real wages fell more drastically between 1920 and 1924 than in most trades
elsewhere. (Phillips 1976: 23)
By 1925, half of Britain's miners worked in collieries that had started work
before 1875. International forces also worked against the interest of the coal
miners. The Versailles peace treaty required Germany to supply free
reparations of coal to its former enemies, Italy and France (Phillips 1976:
25-26). In response to the demands of the owners of the coal mines, the
British labor movement was strong enough to mount a general strike. Together
with the other consequences of the return to the gold standard, the general
strike toppled the government, but the neither the mines nor the miners ever
regained their Victorian glories.
 The experience of the coal mine strife and the general strike that followed it
provided a harsh lesson to those who were willing to learn from it. The events
leading up to the General Strike amply demonstrate the human costs of trying to
make the economy conform to the abstract rules of the market. Churchill
himself seems to have realized the folly of his policy. In a 1927 letter to
Sir Richard Hopkins, a high-ranking Treasury official, he wrote:
  The comfortable [Treasury Department] attitude of letting everything smash
into bankruptcy and unemployment in order that reconstruction can be built up
upon the ruins, is neither sound policy nor wise economics .... This
comfortable Victorian doctrine may have the consequences of throwing scores of
thousands of men out of employment and leading to immense expenditures in other
directions. What is airily called 'cutting out dead wood' means transferring
vast masses of workmen and their families from productive industry into Poor
Law .... I should think on the whole with 300,000 miners unemployed we have
cut out enough dead wood for the moment. (Churchill 1927: 1310)
The gold standard was an especially unforgiving master. Indeed, Peter Temin
has recently made the case that the Great Depression as a whole was an almost
inevitable result of a policy of responding to the economic shock of World War
I with an attempt to return to the austere dictates of the gold standard (Temin
1989). In this sense, Keynes' warning in 1923 that "The fluctuations in the
value of money since 1914 have been on a scale so vast as to constitute ... one
of the most significant events in the economic history of the modern world"
does not seem so farfetched. The eventual departure from the gold standard
offers further evidence that the market just does not adjust very well.
 Unfortunately, the lesson of the General Strike was lost on most conventional
economists. They tend to explain the existence of any economic difficulty as
conclusive evidence that some impediment to the market was at work.

Michael Perelman
Economics Department
California State University
Chico, CA 95929

Tel. 530-898-5321 E-Mail michael@ecst.csuchico.edu

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