This 'special case' was the one where, in a country with an overvalued gold-standard exchange rate, it was impossible to reduce domestic interest rates to achieve the level of investment necessary for full employment at that level of costs. Once Britain left gold and exchange-rate movements could remove the overvaluation, the 'general case' of the treatise - a reduction in long-term interest rates sufficient to ensure full employment - became relevant. In short, there were theoretical reasons within his own system that led Keynes to change his policy recommendations.
There is then the matter of history. According to the published record, in the six months after Britain left gold, Keynes did not take up the position that ' 'conservative finance' might be psychologically necessary as a temporary measure once the pound had been floated in order to secure the lower long-term interest rates to which he attached supreme importance'.
The line of argument referred to by Professor Lord Skidelsky did not begin to appear until Keynes's comments on Chamberlain's April 1932 Budget, and, even there, it was coupled with an attack on the Chancellor for being too cautious. Rather, in the first months after Britain left gold, and the authorities, following Keynes's advice, allowed sterling to fall substantially, the characteristic tone of the published record is caught in Keynes's Halley-Stewart lecture, given to an audience of more than 2,000:
It is a high social duty today for everyone to use his influence, whatever it may be, in private and in public, in favour of every kind of expansion and expenditure, which is financially possible to those who incur it, and which in better times would be generally admitted to be legitimate and useful.
Keynes would again become a strong advocate of what we call deficit finance. But by then he was well into developing a different set of theoretical ideas - those associated with his General Theory.
D. E. MOGGRIDGE
The writer is Professor of Economics at the University of Toronto.Reuse content