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Abstract of conversation with Mr. John Maynard Keynes
Recorded by A. P. Chew

Publishing Information


May 8, 1936.

The President,
The White House.

Dear Mr. President:

In conformance with our conversation at Cabinet yesterday, I am sending you herewith the abstract of the conversation of A. P. Chew, Assistant to the Director of Information of this Department, with John Maynard Keynes.

I am also sending you abstract of the conversation Mr. Chew had with John A. Hobson and H. N. Brailsford.

Respectfully yours,
[Henry Wallace]



    Abstract of conversation with Mr. John Maynard Keynes.

  1. The problem of foreign trade, while important, is not the primary economic problem. It is necessary first to increase the domestic demand. With that accomplished, foreign trade will increase in actual volume, while declining in relative importance. If the industrial nations all set to work to increase their domestic demand, they would soon have a revival in their foreign trade without having to worry about it.

  2. Demand can increase through investment--through the creation of new capital goods. It is not necessary to depend either on price declines, or on wage-advances. Ultimately, of course, an increase in capital goods means an increase in consumers goods, and consumption per capita must go up if the balance between production and consumption is to be maintained. But the advantage, particularly in periods of recovery from depression, in raising demand through investment rather than mainly through direct increases in individual consumption is that the operation enlists the cooperation rather than the hostility of the investing groups.

  3. Low interest rates make this procedure possible. American attention should be turned to housing. Comparatively little has been done as yet in the United States, despite the passage of much housing legislation. It should be remembered that interest rates, though low on short-time loans, are not yet low on long investments. It is not yet cheap to finance housing.

  4. Britain appears to be about 18 months ahead of the United States in recovery. I think there is no doubt the United States will follow; but how long the recovery will endure cannot be foretold. I should think not very long. It is vitally important not to relinquish the social services and economic controls that have been developed during the depression, for they will be more necessary than ever in the next one. It is problematical if capitalism can stand another shock like the last one. Certainly, it cannot stand a succession of shocks without social means of alleviating the effects.

  5. Wall Street and the bankers will probably say, when the brief recovery comes, that it came of itself, and would have come more quickly had the government not interfered. They will use that argument as an excuse for going back to complete anarchy. But it is a false argument. The recovery in very large measure is a result of what the administration has done, and further government action is desirable to keep in existence the instrumentalities that have demonstrated their value.

  6. On this side we wonder how you will be able, with your foreign market for farm products drastically curtailed, to adjust output to demand, now that the Supreme Court has decided the federal government has no power to regulate agriculture. Perhaps the new legislation will enable you to accomplish indirectly what you did directly under the A.A.A. But the Supreme Court's decision looks like a pronouncement to the effect that there is no such thing as the United States, and in another great crisis it might precipitate marked separatism in your economic controls. The states will find themselves obliged to attempt singly what the court denies the country's right to do for all the states through the federal government. On this side we do everything you were undertaking under the A.A.A. We have acreage quotas, the equivalent of processing taxes, the compulsion of minorities, barriers against new competition, subsidies, and what not. Most other countries have developed similar devices. It is inconceivable to me that the United States can escape the necessity to do likewise, and efforts to alter the mind of the Supreme Court or to achieve the desired end in some other way seem highly probable. The only way of avoiding that would be through a permanent spontaneous recovery; and I do not expect that.

  7. With regard to the foreign trade problem of the American farmer, I attach great importance to a factor which seems not to have been much discussed in the United States. I refer to the European investment in American securities. This is now very large. It has been accomplished through a transference of gold in large measure; and at the same time Americans have been liquidating their European holdings and investing in American properties. As a result, the real creditor-relationship between the two hemispheres is very different from the theoretical one. On current, liquid account Europe is the creditor. Europe's credits are liquid, and can be withdrawn quickly subject only to the holder's natural desire not to take a heavy sacrifice, whereas your credits are frozen. When the gold bloc countries devaluate, as it seems probable they will in the near future, European capital now in the United States will be repatriated. There would be some repatriation should Wall Street discount the approaching recovery too generously, and make the European investor nervous. This whole movement will set up a movement of gold and goods toward Europe which may have a great temporary influence.

  8. As a means of developing the trade of the United States on a sound basis, I should recommend domestic in preference to foreign investment. Fighting for a reopened door in the Orient would be idle. You might as well dig a hole and bury your surplus capital. I believe that, as yet, the United States lacks the experience, the facilities, and the required investment psychology, for doing a large and successful business in foreign lending. This is largely an affair of experience, judgment and in fact tradition. You have lost enormously in foreign investments; in investments which you might have better studied, as well as in those that have to be written off as war losses. France has lost immense sums which she had placed in Russia, Mexico, the Balkans and South America. By contrast the British loss in commercial foreign investment, as distinguished from war loans, is small. It has lost a lot in Turkey; and for the time being the worst risk is the investment in China. But, in the main, its foreign investments have been extremely successful. I do not attach as much importance to British imperial power as a factor in achieving this result as many persons do.

  9. As interest rates fall in the United States, and capital accumulates, investors will be tempted to try the foreign field again. I should expect them to lose heavily. It would be much better to invest at home, even at low rates of interest; and the effect of that course is to increase the domestic demand and decrease the relative importance of foreign trade. I do not think the United States need fear a flight from the dollar for budgetary reasons. Your debt is nothing like ours, your resources and your margin are immense. There is little danger of inflation. It will not be a shock to the national credit that will cause a heavy exportation of capital, if any such movement occurs, but rather a desire to earn higher returns than can be obtained at home. I should consider unfortunate any considerable yielding to that temptation. The old effort to balance consumption with demand by means of favorable balances of trade does not work out in the long run. That is a lesson we have all to learn.

  10. The main defects in our present society are its failure to provide full employment, and its inequitable distribution of wealth and incomes. Perhaps these two defects may be considered dual aspects of a single basic trouble; for economists have long recognized a connection between unemployment and the maldistribution of purchasing power. In Great Britain, especially since the end of the nineteenth century, something has been done to correct very great disparities of wealth and income. Income taxes, death duties and public expenditure for social services have contributed to this result. Further progress in the same direction may be checked by two considerations: (1) the fear of putting an excessive premium on tax evasion; and (2) the belief that the growth of capital depends on the strength of the motive for individual saving. As to the first point, it has no doubt some weight; but with regard to the second, it appears that the growth of capital depends not on a low consumption, or in other words on a distribution of income that gives a minority a huge surplus for saving, but on the contrary that measures for the redistribution of incomes in a way likely to raise the propensity to consume may actually favor the growth of capital. (In Mr. Keynes latest book he develops this argument in detail.) Only when employment is full is the further growth of capital dependent on "A low propensity to consume."

  11. In the conditions that now exist the "abstinence" of the rich impedes the growth of wealth, and action to remove great inequalities increases it. There is social and psychological justification for significant inequalities of incomes and wealth, but not for such large disparities as exist today. The stakes need not be so high. What is still more important is the rate of interest. Hitherto economists have justified a moderately high rate of interest as a means of providing an inducement to save, but it appears that effective saving depends on the scale of investment, which varies inversely with the rate of interest. Thus it is socially advantageous to reduce the rate of interest. This criterion, should it be well founded and be generally adopted, will lead to a much lower rate of interest than has ruled heretofore. It would be possible to increase the stock of capital to a point at which the use of capital goods would cost little more than enough to cover wastage and obsolescence. This state of affairs, though it would leave scope for individual enterprise, would tend to eliminate the rentier, and to weaken the power of the capitalist to exploit the scarcity value of capital. The rentier aspect of capitalism would disappear when its work is done, and the functionless investor would have no place in the economy. This would simply be the prolonged continuance of what we have seen recently in Great Britain and would need no revolution.

  12. That these ideas have a significant bearing on the problem of international trade is obvious. As the question arises within the framework of our conventional views, the inquiry as to what the effect of Europe's economic nationalism will be on America's farm exports seems to admit of only one answer. It seems to indicate that economic nationalism and international trade are natural opposites. But that assumes a more or less unchanging level of production and consumption. Assuming a rising level, we can see the possibility of making various countries relatively more self-sufficient than they used to be, and at the same time more eager to trade with the outside world. With consumption raised domestically, the export surpluses would become relatively less burdensome, without necessarily being reduced in their absolute amount. They would move into world-trade channels more easily because purchasing power would be well enough diffused throughout the world to absorb them. From the standpoint of international advantage in consumption, we have not nearly exhausted the possibilities of international trade. The stumbling block is not a general lack of desire for foreign goods, but a distribution system that reduces the power to consume.

  13. Discussing the Lancashire view of the import question, Mr. Keynes said opinion there is very slow to change, stubbornly resistant to rationalization proposals, and inclined to hope that British world trade in cotton goods will revive. But Manchester is a decaying city.