The "Treasury View" on Public Works and Employment in the Interwar Period

Author(s): G. C. Peden
Source: The Economic History Review, Vol. 37, No. 2 (May, 1984), pp. 167-181
Published by: Wiley on behalf of the Economic History Society
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THE

ECONOMIC

HISTORY

REVIEW
SECOND

SERIES,

XXXVII, No. 2,

VOLUME

MAY

i984

SURVEYS AND SPECULATIONS, XXII

The
and

"Treasury
View"
Employment in the

on

Public
Interwar

Works
Perio&

By G. C. PEDEN

Feweconomicdoctrineshave been apparentlyso fully discreditedin the

lifetime of thosewho held themas the "Treasuryview"of I929 that "very

little additionalemploymentand no permanentemploymentcan in fact and
as a generalrule" be createdby loan-financedpublicworks.1 The "Treasury
view", based as it was mainly on a belief that governmentwould tend to
'crowdout' privateinvestment,even thoughabout IOper cent of the insured
labourforce was unemployedat the time, seemedabsurdin the light of the
new insights provided by J. M. Keynes's GeneralTheoryof Employment,
InterestandMoneyin I936. For JoanRobinson,one of the economistsclosely
associatedwith the "KeynesianRevolution",the Treasury'sargumentsin
I929 were "simple"and "laughable".2A. J. Youngson,on the other hand,
writingat the end of the I950s, thoughtthat "whatthe Treasuryview really
was is somethingof a mystery", but he believed that the Treasurymade a
"culpableomission"in leaving the multipliereffect of public works out of
accountwhen estimatingtheir effects on unemployment.3
These early judgementswere necessarilybased upon the Treasury'spublishedstatements,but since the I970Sresearchershaveuncoveredmuchmore
evidenceof Treasurythinking. An earlierarticlein this seriesof Surveysand
Speculations
rightlydrewattentionto the dangersof uncriticaluse of evidence
fromthe state papersnow in the Public RecordOffice,4but at least we now
* In additionto the publishedworkscitedbelow,the authorhasbenefitedfromreadingtwounpublished
Ph.D. theses: Roger Middleton,'Fiscal Policy and EconomicManagementin the I930s' (Cambridge
University,i98i) and AnthonyRowley,'La politique6conomiquedu gouvernementbritanniquede i919
a I924' (L'Institutd'EtudesPolitiquesde Paris, I979).
1 Statementby the Chancellorof the Exchequer(WinstonChurchill),Hansard(Commons),5th ser.
CCXXVII, I5 April I929, col. 54.
2 Joan Robinson, Economic Philosophy (i962),

p. 73.

3 A. J. Youngson, The British Economy, I920-I957

(i960), pp. 254f.

4 Alan Booth and Sean Glynn, 'The Public Recordsand Recent BritishEconomicHistoriography',
EconomicHistory Review, 2nd ser. XXXII (I979), pp. 303-I5.

I67
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i68

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have access to argumentswhich the Treasurychose not to put in print.

Moreover,the problemsof managingthe economyin the I970s and i980s
haveprovideda severetest of Keynesianeconomicdoctrines,and economists
have come to take "crowdingout" hypothesesmore seriously. As N. von
Tunzelmannhas remarkedin a recentEconomicHistoryof Britain,developments in economictheorymay yet give the "Treasuryview" "a new lease of
life" in historiesof the interwaryears.5If that shouldbe so, a surveyof the
existingknowledgeand understandingof the "Treasuryview"maybe timely.
Moreover,given currentcontroversynot only over economictheorybut also
overthe problemsof controllingpublicexpenditure,some speculationsabout
the enduringnatureof the problemsfaced by the Treasuryin the interwar
period may be in order.
Interpretationsof the "Treasuryview" may be dividedroughlyinto those
which have emphasizedthe importanceof "orthodox"economictheoryas an
impedimentto the TreasuryadoptingKeynes'sideas, and those which have
emphasizedthe importanceof political and administrativefactors. Of the
interpretationsemphasizingthe importanceof economic theory, the best
researchedhas been that of Susan Howson and Donald Winch. They have
pointedout thattheoreticaljustificationsfor Treasurypolicyin the I920S were
providedby Ralph Hawtrey, an officialwith a reputationas an economist.
Hawtrey had a quantity theory of money, whereby the supply of money
determinedthe generallevel of prices in the long run, and productivityand
thriftdeterminedincomeandemploymentlevels. Hawtreysawthe tradecycle
as largelya monetaryphenomenon,to be treatedby monetarymeasuresrather
than by public expenditure.6While recognizingthe importanceof Howson
and Winch'swork, in that policy-makers'understandingof economictheory
is bound to influencetheir perceptionsof economicproblems,it has to be
pointed out that policy-makers'experienceof political and administrative
problemsmay explainwhy economictheoriesare more or less acceptableto
governments.
RecentlyRoger Middletonand J. Tomlinsonhave drawnattentionto the
importanceof politicaland administrativeconstraintson policy in the I930s,
constraintswhich Keynes, as an economist,couldignore,but whichTreasury
officialscould not.7 The importanceof these non-economicconstraints,comparedwith economictheory,in influencingpolicycan be exploredby looking
at developmentsafter the "Treasuryview" was put forwardin I929-30.
Accordingto HowsonandWinch,therewasa significantshiftin the Treasury's
theoreticalposition by I934-5, which amountedto an abandonmentof the
"Treasuryview", even if not yet a full acceptanceof Keynes'stheory.8If this
5N. von Tunzelmann,'Britain,I900-45: a Survey',in RoderickFloud and DonaldMcCloskey,eds.
The EconomicHistory of Britain since I700 (Cambridge,i98i), II, p. 249.
6 S. Howsonand D. Winch, The EconomicAdvisoryCouncil, i930-i939
(Cambridge,I977), p. 27. This

workdrawsuponHowson'sextensiveknowledgeof the TreasuryrecordsgainedwhenwritingherDomestic

MonetaryManagementin Britain, i919-38 (Cambridge,I975).
7Roger Middleton,'The Treasuryin the I930s: PoliticalandAdministrative
Constraintsto Acceptance
of the "New" Economics',Oxford EconomicPapers, new ser. xxxiv (i982), pp. 48-77; RogerMiddleton,

'TheTreasuryandPublicInvestment:a Perspectiveon InterwarEconomicManagement',

PublicAdministrai870-I945
(i98i), ch.

tion, LXI (i983), pp.35I-70; and J. Tomlinson,Problemsof British EconomicPolicy,

5.
8 Howsonand Winch,Economic Advisory Council, pp. I I2n, I31.

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is so, and if the theory underpinningthe "Treasuryview" of I929-30 had

been an importantinfluenceon policy, thereshould,ceterisparibus,havebeen
a significantshift in the Treasury'sattitude to public works as a cure for
unemployment.If, however,Treasuryofficialscontinuedto be scepticalabout
the valueof public worksafter I934-5, thereis a primafacie casefor believing
that Middletonand Tomlinsonhave been right to emphasizethe importance
of politicaland administrativefactorsin determiningthe "Treasuryview".
(Therewouldremainan alternativeexplanationin the possibilitythatHowson
and Winch have exaggeratedthe significanceof the shift in the Treasury's
theoreticalposition in the I930s.)

It has to be admittedthat any attemptto constructa logicalargumentabout

the "Treasuryview" in the interwarperiodis liableto founderon ambiguity.
There is some doubt about how consistentthe "Treasuryview" was. After
questioningthe Treasurywitness, SirRichardHopkins,beforethe Macmillan
Committeein I930, Keynes remarkedthat the "Treasuryview" had been
"gravelymisjudged",in that it was not, as he and others seemed to have
supposed, a rigid economic dogma. Indeed, Keynes complainedthat the
"Treasuryview" bent so much that he had difficultyin getting hold of it.9
Moreover,while Hopkins was an outstandingcivil servantwho showed a
willingnessto reconsiderthe theoreticalbasis of Treasurythinking,10there
is, as K. J. Hancockremarked,some doubt whetherHopkins'sevidencein
I930 reflectedthe quality of earlierTreasuryadvice to governmentsin the
I920S.11 For that reasonit may be best to surveybrieflyvariousstatementsof
the "Treasuryview", with their attendanttheoreticalarguments.
The interwar "Treasuryview" seems to have been a response to the
action of Lloyd George'sgovernmentin setting up, in December I920, an
UnemployedGrantsCommittee,which was to allocateExchequerfunds to
encouragelocal authoritiesto embarkon public works schemes. It seems to
have been assumed originally that the unemploymentarising out of the
breakingof the post-warboomwouldbe temporary,andthat, as beforeI9I4,
temporaryrelief schemes could be used to alleviatesocial problems or to
dampendown social unrest during a difficultphase of the tradecycle.12As
high unemploymentpersistedlonger than expected, the Treasurybegan to
stiffen its resistance to this approachto the problem. In I922 the new
ConservativeChancellorof the Exchequer, Stanley Baldwin, warned his
Cabinetcolleaguesthat "money taken for governmentpurposesis money
taken away from trade, and borrowingwill thus tend to depress trade and
increaseunemployment."'13
9 Minutes of Evidence TakenBefore the Comitteeon Finance and Industry(H.M.S.O., I931), II, Qs. 5625
and 5689.
10 Anon. 'Sir Richard Hopkins', Public Administration,XXXIV(I956), pp. II5-23; G. C. Peden, 'Sir
Richard Hopkins and the "Keynesian Revolution" in Employment Policy, I929-45', Econ. Hist. Rev.,
2nd ser. xxxvi (i983), pp. 28i-96.
11 K. J. Hancock, 'The Reduction of Unemployment as a Problem of Public Policy, I920-I929',
Econ.
Hist. Rev., 2nd ser. xv (i962), p. 338.
12 For pre-I1I4 experience see Jose Harris, Unemploymentand Politics (Oxford, I972).
13 Keith Middlemas and John Barnes, Baldwin: A Biography (i969), p. I27.

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This early version of the "Treasury view" seems to have rested, at least
implicitly, on a pre-Keynesian theory that savings determined the level of
investment when the economy was at less than full employment. There would
certainly be nothing unreasonable about Treasury officials thinking along
these lines at that date, since Keynes, who had been their colleague between
I9I5 and i919, held just such a "pre-Keynesian" theory of savings and
investment as late as I924. When starting work on his Treatiseon Money in
November of that year Keynes wrote:
A supply of new capital . . . can only come into existencein so far as those who
have claims on the community'sflow of income are willing to defertheir claims,
i.e. out of savings .... The expenditure,on the productionof fixedcapital,of
public money which has been raised by borrowing,can do nothing of itself to
improvematters;and it may do actualharmif it divertsexistingworkingcapital
awayfrom the productionof goods . . . .14
Keynes thereafter embarked upon what he later described as a struggle to
escape from habitual modes of thought and from theories which he had held
with conviction for many years,15 and it is not surprising if in the process he
ascribed central importance to these theories in the thinking of his former
colleagues at the Treasury, and perhaps rather more importance than they
themselves would have done.
In fact, advice to the Chancellor in I92i by Sir Otto Niemeyer, already a
leading official dealing with financial policy, and soon to be in charge of the
Treasury's Finance Department, suggests that the Treasury at least considered
the possibility that inflation could alter the proportions of the community's
flow of income going to capital and labour. Niemeyer, like some latter-day
Treasury officials, believed that the root cause of unemployment was that the
costs of production (mainly wages) were too high compared with Britain's
competitors abroad. He noted that, if government borrowing for loan-expenditure were inflationary, it was possible that real wages might be reduced, and
employment increased. However, given the increased bargaining power of
trade unions since I9I4 it seemed "not improbable" to him that labour already
in employment "would succeed in passing the burden [of higher prices] on to
. . .the possessor of capital by obtaining proportionately increased wages."16
Niemeyer had thus anticipated one of the fundamental criticisms of Keynesian
employment policy in the I970S and i980s-that
is, contrary to Keynes's
assumption in The General Theory,trade unions might render a full-employment policy nugatory by demands for increased wages.17 It hardly needs
saying, however, that Niemeyer, one of the chief architects of the policy of
14

The CollectedWritingsofJohn MaynardKeynes (hereafterJ.M.K.),

XIII,

pp.

I9-23.

For a brief account

of the evolutionof Keynes'sideassee D. E. Moggridgeand SusanHowson,'Keyneson MonetaryPolicy,

Ox. Econ. Pap., new ser. XXVI (I974), pp. 226-47. For a surveyof beliefsof othereconomists
I9I0-I946',
newser. xxvii (i960), pp.
andthe Economistsin the I920S', Economica,
see K. Hancock,'Unemployment
305-2I.
15 Preface to The General Theory, (J.M.K. VII).
16 RobertSkidelsky,'KeynesandtheTreasury
View:TheCaseForandAgainstanActiveUnemployment

Policy,

I920-I939',

(i98i),

pp. I7If.

in WolfgangMommsen,ed. The Emergenceof the WelfareState in Britain and Germany

"circus"involvedin discussionson draftsof The

17 EvenLordKahn,once a memberof the Cambridge
GeneralTheory,was by the I970S describingKeynes'streatmentof the wagesquestionas "unsystematic
and unsatisfactory".See 'On Re-ReadingKeynes',Proceedingsof the British Academy, LX (I974), p. 375.

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THE

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goingbackon the gold standard,had no intentionof carryingout inflationary

experiments.18
An apparentlyunambiguousstatementof the importanceof the quantity
theoryof moneyin Treasurythinkingis to be foundin the formin whichthe
"Treasuryview" was expressedto the InternationalLabourOrganizationin
I927: "The decision taken by the governmentat the end of I925 to restrict
grantsfor relief schemes was based mainly on the view that, the supply of
capitalin this countrybeing limited, it was undesirableto divertany appreciable proportionof this supply from normaltrade channels."19It should be
noted, however, that, in additionto economictheory, the "Treasuryview"
was also basedon otherimplicitassumptions:that the properscopefor relief
schemeswas such that they would differin naturefrom "normaltrade";that
the stateshouldnot competewith the privatesector;and thatrecoverywould
come throughprivateenterprise.
The "Treasuryview"receivedits fullestairingin I929, whenthe Conservative governmentpublisheda WhitePaperto rebutclaimsmadeby the Liberal
leader, Lloyd George, and supportedby Keynes, that loan-financedpublic
workscould reduceunemploymentto "normal"proportionswithin a year.20
(This claim implied a reductionin unemploymentfrom the officialfigureof
betweenI0 and I I per cent of insuredworkersto the pre-914 average,then
estimatedto havebeen between5 and7 percent.) The Treasury'scontribution
to the White Paperstatedthat in the circumstancesof thatyear "a very large
proportion"of any additionalgovernmentborrowingsfor publicworkscould
only be procured,withoutinflation,by divertingmoney which would otherwise have been used "soon" by privateindustry,and that thereforethe net
addition to employmentresulting from the Liberal scheme would not be
large.21This seems a weakerstancethan in the early I920S, perhapsbecause
by I929 Niemeyerhadbeensucceededby themoreflexibleHopkins.Nevertheless, Winch, in an earlybook, expressedthe belief that the "Treasuryview"
of I929-30 rested, at least implicitly,on a theorythat "therewas a fixed and
fully employed lump of capital in existence at any given time, such that
increasesin any direction implied diversionfrom 'normal'channels", and
that the "real difficulty"preventingthe Treasuryfrom acceptingKeynes's
argumentfor public works "aroseon an intellectuallevel", in that Keynes's
case was novel and requiredthe use of unfamiliartheory.22
Study of the Treasury'scontributionto the I929 White Papershows that
the Treasury agreed with the Liberals that money accumulatedin time
depositsin banks representeda "slackeningin the circulationof money in
employment";and, in responseto a question by Keynes in the Macmillan
Committee,Hopkinssaid that it was "verylikely that all the capitalavailable
18 For Niemeyerand the gold standardsee D. E. Moggridge,BritishMonetary
Policy, I924-I93I
(Cambridge, I972), esp. pp. 262-9.
19Citedby von Tunzelmannin Floud and McCloskey,EconomicHistory of Britain, II, p. 249.
20 Memorandaon Certain Proposals Relating to
Unemployment,(P.P. I928-9, xvi). The proposalswere

thoseoutlinedin David Lloyd George,WeCan ConquerUnemployment

(I929). For Keynes'ssupportsee
J. M. KeynesandHubertHenderson,CanLloydGeorgeDo It? ThePledgeExamined(I929), reprintedin
J.M.K. ix. For a fullerstatementof Liberalideassee LiberalIndustrialInquiry,Britain'sIndustrial
Future
(1928, reissued1977).
21 Memorandaon
Unemployment,(P.P. 1928-9, xvi), esp. pp. 50f.
22
DonaldWinch,Economicsand Policy (i969), pp. 110-12.

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for investment"is not in use-and it was difficultto see how the Treasury
could be describedby Winch as believingin I929-30 in a "fixed and fully
employedlump of capital".What the Treasurydid believewas that the idle
balanceswhich the Liberalswishedto attractinto a gilt-edgedloan for public
worksrepresentedeithermoneywhichbusinessmenwishedto keep liquidfor
the moment, but which they would not in any circumstancesput into longterm investments,or balancesbelongingto foreigners.Keyneshad agreedin
I929 that it would be necessary to offer a rate of interest which would
competewithforeignborrowers-which, in the contextof the New YorkStock
Exchangeboom, would not have been a low rateof interest-although it was
the policy of the Treasuryand the Bank of Englandto try to lower the rate
of interest, as far as was consistentwith maintenanceof the gold standard,
both to reduce the burden of the National Debt and to stimulateeconomic
recovery.23

Again, study of Hawtrey'spublishedwork showsthat his economictheory

did not totallyprecludeuse of loan-financedpublicworksto increasedemand
for labour.Hawtreyhad arguedin I925 that publicworksfinancedby money
borrowedfrom "genuinesavings", that is without creatingadditionalbank
credit,wouldmerelydivertprivateexpenditureinto government'shands,and
thus not increase the demand for labour, except in "exceptionalcircumstances". The exceptionalcircumstanceswere a period of depressionwhen
the velocity of circulationof money was low, because potential investors,
lackingprofitableoutletsfor surplusfunds, accumulatedidle balances.When
thathappened,an attractivegilt-edgedloancouldsecurethesesavingswithout
displacingany normaltradeor investment.Hawtreyalso arguedthat public
worksfinancedby the creationof bankcredit,eitheras a resultof government
borrowingfrom the banks or of increasedlending by the banks, would give
additionalemployment.But, assuminga normaldegreeof enterpriseon the
partof business, he concludedthat creationof creditalonewould be equally
effective in giving employment,and that public works would be necessary
only when businessdid not respondto a reductionof bankrateto 2 per cent,
as happened in i894-5.24 Hawtrey regarded unemployment as a special case,

and full employmentas normal,whereasKeyneswas to arguethe reversein

the GeneralTheory.Even so, a Treasuryguidedprimarilyby a theorysuch as
Hawtreyoutlined ought, ceterisparibus,to have been willing to embarkon
public works once bank rate had fallen to 2 per cent, if business did not
respondin a mannerwhich absorbedunemployedlabour.These conditions
were reached after I932, and it is not clear that a shift in the Treasury's
theoreticalpositionwas necessaryfor it to dropsomeof its oppositionto public
worksthereafter.As we shall see, however,there were othermattersfor the
Treasuryto considerapartfrom the meritsof economictheories.
II
The success of Lloyd George's scheme for loan-financedpublic works
depended not only on the receptivity of the Treasuryto Keynes's ideas
23 Memoranda on Unemployment,(P.P. I928-9, xvI), pp. 48-50; Minutes of Evidence Taken Before the
Committeeon Finance and Industry, Q.5622. For monetary authorities' policies see Howson, Domestic
MonetaryManagement, esp. pp. 35-4i and 66-8.
24 R. G. Hawtrey,'PublicExpenditure
V (I925), pp. 38-48.
and the Demandfor Labour',Economica,

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but also, and perhapsmore so, on institutionalarrangementsfor handling

governmentdebt andon the attitudeof thosewho lent to government.Howson
and Winch have no doubt of the existence of a pre-Keynesianorthodoxy
among most businessmenand bankers at the time,25 and this orthodoxy
contributedto the difficulty experiencedby the monetary authoritiesin
marketinggovernmentstock. While the Treasury'sconcernaboutthe "burden" of the NationalDebt may seem anachronisticto Keynesianeconomists,
the scaleof the war-swollenDebt was enormous,and the MacmillanCommittee (of which Keynes was a member)recommendedthat there shouldbe no
increasein centralgovernmentindebtednessuntil the futurecourseof prices
wasmorecertain.26Hopkins,in givingevidenceto the Committee,waswilling
to concedein I930 that, on Keynes'sassumptions,the Liberalschememight
pay for itself partly by divertingcapitalfrom abroad,partly by mobilizing
idle balances, partly by diminishingthe cost of unemploymentrelief and
partlyby setting up a cycle of prosperity,but he believedthat, if the public
works seemedextravagantor wasteful,the schememight also lead investors
to believe that governmentstock would fall in value and that it would be
better to invest abroad,therebyincreasingpressureon interestrates and on
the exchangerate.27The nature, as well as the quantity,of public workswas
importantbecauseof the then accepteddoctrineof publicfinancethat central
governmentexpenditureof non-self-liquidating
charactermust be met out of
revenue;on the other hand, capitalexpenditure,for exampleon telephones,
where there would be a monetaryyield to pay off both the capitaland the
intereston the loan, could be financedby loans outside the budget.28Such
rules necessarilylimited the possible scope of public works which could be
initiatedby centralgovernment.
Some ?254 million were voted by Parliamentbetween I925 and I929 for
loan-financedexpenditureon roads, telephones,housingand other development schemes (these public works themselves being carried out by local
authorities,the Post Office, or the Central ElectricityBoard). What the
Liberalswantedin I929 was additionalexpenditureof ?25I million over the
next two years to expedite public works which would not directly pay for
themselvesbut which would raise the demandfor labour.The whole point
of the Liberalschemewas that it shouldbe startedswiftlyand simultaneously
to stimulatethe economy, but the Treasurydid not believethat expenditure
of ?25I million could be carriedout in two yearswithoutraisingprices and
creatingexcessive profits where there would be bottlenecks, and without
interferencewith the rights of local authorities.29
25
26

Howson and Winch, EconomicAdvisory Council, p. i62.

Middleton,'The Treasuryin the I930s', p. 54; J. Tomlinson,'Unemploymentand Government

PolicyBetweenthe Wars:A Note', Journalof Contemporary

History,XIII(I978), p. 72. One of the main
conclusionsof Howson'sDomesticMonetaryManagement(esp. pp. I40, I43f) wasthat,becauseof the debt
problem,Treasuryofficialshad to change their theory about monetarypolicy and the way it works.
However,the changeswhichshe describesin the Treasury'sideasin the laterI930s shouldhavemadethe
Treasurymore favourablyinclinedtowardspublic works, which makescontinuedTreasuryscepticism
(see pp. I76-8)more striking.
27
28

Minutes of Evidence Taken Before the Committeeon Finance and Industry, Qs. 56I3-i8.
Minutesof Evidence TakenBefore the Royal Commissionon UnemploymentInsurance(H.M.S.O., I93I),

pP.382f.
29 Memorandaon Unemployment,(P.P. I928-9, xvi), pp. 43-5; Minutes of Evidence Taken Before the
Committeeon Finance and Industry, Q. 5565.

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Hopkins, as Controllerof the Finance and Supply ServicesDepartments

of the Treasury,was responsiblefor Treasurycontrolof public expenditure
from the point of view of satisfyingthe ParliamentaryCommitteeof Public
Accounts,as well as for financialpolicy, and it was naturalthat he shouldbe
more concerned than a monetary economist would be with the practical
problemsof carryingout public works. More than half the Liberalscheme,
in terms of expenditureor employment,was for roads, for which county
councilswould be responsible.Hopkinsarguedthat, beforea road could be
begun, time would have to be allowed for surveys and plans to be made,
objectionsheard,landvaluedandbought,andlabouraccommodated,perhaps
farfromhome. Morethanone localauthority,eachwith its own views, would
be involved, and Hopkins believedthat any attemptby centralgovernment
to force the pace of decision-makingand implementationwould lead to an
andpoliticalproblems
outcryagainstbureaucracy.Giventheseadministrative
it seemedto him "reallybeside the point" to arguein theoreticaltermshow
much of the money for the scheme could be obtainedby restrictinglending
abroad,or from idle balances,or from savingson the unemploymentfund,
or fromincreasedprosperity.Hopkins,however,did not believethatschemes
of capitaldevelopmentwere of no use for reducingunemployment,and he
agreedwith Keynes that nearlyall the Treasury'sevidenceto the Macmillan
Committeeamountedto saying that it was difficultto find schemes which
satisfiedthe rules of public finance.30
It might be arguedthat these administrativeobjectionswere mere excuses
fornot doingwhatthe Treasurywishedto avoiddoingforeconomicor political
reasons.But in the I930s economistssuch as HubertHendersonand Ursula
Hicks, and (by I933) Keynes himself, thoughtthat therewas real substance
in the Treasury'sarguments.31Increasedcentralgovernmentgrantsmight
not necessarilybring about a proportionatenet increasein investment-they
might merelyresult in centralgovernmentpayinga higherproportionof the
cost of work which would have been undertakenby local or other public
authoritiesanyway. It is significantthat the first section of the Mosley
memorandumon unemploymentpolicy in I930 dealt with the machineryof
government,from the point of view of strengtheningthe powersof the Prime
Ministerandleadingeconomicministersmeetingin an executivecommittee.32
Behind the administrativeproblemsrelatedto public works lay the broader
politicalquestion of the decentralizednatureof Britishgovernment.
Thereis an alternativeexplanationto the view thatadministrative
problems
wereused as excusesto avoiddoingwhat the Treasuryobjectedto on a priori
groundsof economic theory; that is that the "Treasuryview" of I929 was
reallya "Whitehallview", being basedon practicalexperienceof implementing public works in the I920S. The Treasurycontributedonly one of the
memorandain the I929 White Paper-the othersbeing contributedby other
interestedministries,such as the Ministryof Health (whichsupervisedlocal
30 P.R.O. Treasury Papers, series I75, file 46 (hereafterP.R.O. T I75/46): 'The Liberal Plan', Hopkins's
draft notes for evidence to the Macmillan Committee; and Minutes of Evidence TakenBefore the Committee
on Finance and Industry, Qs. 5565 and 5600-23.
31 J.M.K. xxi, pp. i64-6, 293; Ursula Hicks, The Finance of British Government,I920-I936
(Oxford,

I938), pp. 222f, 228.

32

Robert Skidelsky, Oswald Mosley (I975), p. I99.

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authorities)and the Ministryof Labour.These memorandarepresentedthe

fruitsof experienceof men who hadwrestledwith the problemsof government
paid
at firsthand, and thereis no hint in the WhitePaperthat administrators
much attentionto the views of theoreticaleconomists.It may be significant
that the only academicauthoritycited in the White Paper was a work of
economic history, W. Cunningham's Growthof English Industryand Commerce

in ModernTimes(I903).
Moreover,the Treasurywas concernedwith a range of policy issues. In
particular,Hopkins placedmaintenanceof governmentcredit, for which he
hada majordirectresponsibility,higherin importancethanthe unemployment
problem.When Keynesaskedin the MacmillanCommitteewhetherit would
make any differenceto the economiceffect on unemploymentif the money
for public workswere borrowedon Ways and Means, Hopkinsrepliedthat,
"discussingit from the point of view of economics",he did not think that it
would, but he thoughtthatthe adverseeffectson governmentcreditof raising
money by "what is ordinarilycalled plain inflation"would be incalculable.
Keynesagreedthatborrowingon WaysandMeanswouldnot be "areasonable
thing to do".33He understoodthat budget orthodoxypreparedthe way for
conversionof War Debt and tended to lower the long-termrate of interest.
Indeed, in March I93i he wrote to the Prime Minister(MacDonald)to say
that a crisis of confidencewas "very near" and that the budget must be
34
balanced.
Again, both the Treasuryand the Liberalsplaced a high priorityon the
gold standard,with which they believed world economic confidencewas
boundup. Keynesiancriticsof the "Treasuryview" have not alwaysnoticed
that Lloyd George's plan to conquer unemploymentin I929 called for
maintenanceof the gold standardand free trade, as well as advocatingloanfinancedpublic works.35It has been pointed out by Sean Glynn and John
Oxborrowthat, even had the TreasuryembracedKeynesianeconomicsin
I929-30, it would still have had to make painfuldecisionsaboutsterling,the
gold standard,and, possibly, about protection.36After all, the economic
policiesof the secondLabourGovernmentcanfairlybe describedas deflationary, despite unbalancedbudgets,37and the experienceof I93i does not
suggestthat the gold standardcould have surviveda departurefromfinancial
orthodoxy.
Did the Treasuryhave a purelyfatalisticattitudeto economicpolicy?The
fact seems to be that it was far more optimisticthan Keynes was about the
abilityof privateenterpriseto overcomethe depression.Even earlyin I930
Hopkinsbelievedthat the properroadto recoverylay in raisingthe efficiency
of industryto enable it to compete on world markets,whereasthe Liberal
schemewasconcernedsolelywith raisingdomesticdemand.Hopkinsthought
that, in so far as the Liberalschemeinvolvedan increasein the internalprice
level (which Keynes regardedas characteristicof any recoverywhen existing
Minutes of Evidence Taken Before the Committeeon Finance and Industry, Qs. 5685-8.
Middleton, 'The Treasury in the I930s', p. 56.
35 We Can ConquerUnemployment,esp. pp. 7, 56f.
36 S. Glynn and J. Oxborrow, InterwarBritain, a Social and EconomicHistory (I976), p. I33.
37 See Roger Middleton, 'The Constant Employment Budget Balance and British Budgetary Policy,
g929-39', Econ. Hist. Rev., 2nd ser. XXXIV (i98i), pp. 266-86.
33
34

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prices were below the cost of production),it would tend to increase the
difficultiesof the exporttrades,whereunemploymentwas concentrated;and,
given an open economy(to which, it must be emphasized,the Liberalswere
committed),would do little for iron and steel, becauseof foreignproducers'
of industry,
greaterefficiency.Hopkins saw the solutionin "rationalization"
forthen pricesneed not rise abovethe I929 level, if firms,whichwereworking
at a loss at, say, 70 per cent of capacity,could find a means to work at I00
per cent capacity. He felt that increasingdomestic demand would simply
makefirmsless likely to face up to foreigncompetition-hence his dismissal
of the Liberal scheme as likely to create "a singularlylopsided form of
prosperity,and one which could not possibly be permanent".38Industrial
efficiencywas seen by the Treasury,then as now, as a more fundamental
problemthan unemployment.It may, or may not, have contemporaryrelevance that Hopkins's hopes that somehow industry could become more
rationalization
seemto havebeendisapcompetitivethroughdeflation-induced
pointed.ForrestCapieandMichaelCollinshaveprovidedconvincingconfirmation of the view that much of the I932-7 recoverywas cyclical,representing
recoveryfrom severe depression,and not an increasein the competitiveness
of Britishindustry.39
III
By I930, however,doubtswere alreadyenteringthe minds of some Board
of Trade officialsabout whetherthe exporttradeswould ever be able to reabsorbthe unemployed,and Hopkins included these doubts in a reportto
the Chancellorin June of that year, a month after giving evidence to the
MacmillanCommittee.40As high unemploymentpersistedduringthe I930S,
and as by I935 Britishexportswere still only 75 per cent by volumeof their
I929 level, it becameharderto claim that increasedindustrialefficiencywas
a sufficientcure for unemployment,even if it was a necessaryconditionfor
increasing,or even maintaining,economic activity. In I935 Lloyd George
once more took up the question of public works, financedby government
borrowing,as a cure for unemployment(alongwith proposalsfor a back-tothe-landmovementbased on small-holdings),and public supportfor these
proposalswas sufficientto make ministersin the NationalGovernmentfeel
that they ought to be seen to be doing something. Treasuryofficials still
believedthat public works as a remedyfor unemploymentwere quite futile,
in that they could provideonly temporaryemployment,but Treasuryofficials
also believed that an expansionof public borrowingwould be useful for
keepingup the impetusof economicrecovery,andfavouredencouraginglocal
authoritiesto raise loans for public works.41
In I937 the Treasuryaccepted,in a limited way, Keynes's idea of using
38

and 'The Liberal

P.R.O. TI75/46: Hopkins'sdraftnotes on 'Gold Standardand Rationalization'

Plan'; Minutes of Evidence Taken Before the Committeeon Finance and Industry, Qs. 5565, 5632 and 5690.
39 F. Capieand M. Collins, 'The Extent of BritishEconomicRecoveryin the I930s', Economy
and
History, xxiii (ig80), pp. 40-60.
40 Skidelsky,Mosley, pp. 2I8-20.
41 Howsonand Winch, EconomicAdvisory Council, pp. I3of; G. C Peden, 'Keynes,the Treasuryand
Unemploymentin the LaterNineteen-thirties',Oxford EconomicPapers, new ser. XXXII (ig80), pp. 4f.

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publicworksexpenditureto offsetchangesin the tradecycle, but the countercyclicalpublic works contemplatedin I937 were not intended to raise the
averagelevel of such expenditureoverthe level of that year(whenthe official
rateof unemploymentwas, as in I929, betweenI0 and I I per cent), and were
far more modest in their aim than the Liberals'reflationaryideas of I929.
LloydGeorge,afterall, hadthen claimedthathis programmeof loan-financed
public works could reduce unemploymentby up to half. Keynes's ideas of
I937, however,were aimednot at reducingunemploymentbelow io per cent
of the insured labour force, but rather at mitigatingthe next slump. In
FebruaryI937 the Economic AdvisoryCouncil'sCommitteeon Economic
Information,which includedSir FrederickPhillips, an under-secretary
serving under Hopkins, as well as economists,anticipateda downturnin home
investment as demand for housing was satisfied, and as expenditureon
industrialequipmentinducedby recoveryfromthe depression,andby rearmament, cameto an end. The CommitteeadoptedKeynes'sviewthatat the stage
of the trade cycle reachedin early I937 an attempt to increaseinvestment
outsidethe specialareasof high unemploymentwouldraiseprofitsratherthan
employment,and that public investmentin roads, housing and telephones
shouldbe postponed,except in the specialareasof high unemployment,and
heldin reserveforwhenthe totalamountof investmentactivityfell.42Hopkins
commentedthat while the practicaldifficultiesof slowingdownpubliccapital
expenditurewould not be very great,the politicaldifficultieswould certainly
be substantial.43This remarkreflectedthe particulardifficultyof slowing
down local authorityexpenditure,a problemnot unknownin more recent
times.
An InterdepartmentalCommitteeon Public Capital Expenditureunder
Phillips'schairmanshipexaminedthe question,andreportedto ministersthat
"it might be possible"to reduceby ?20 million the "normal"annualcapital
expenditureof ?250 millioncontrolledby the state(includingthatcarriedout
by local authorities). In a depression the work so postponed, plus new
schemespreparedin advance,mightmakeit possibleto increasepubliccapital
expenditureby ?30 million above "normal".Thus the differencebetween a
year of maximumreduction and a year of maximumaccelerationwas ?5o
million, with the transitionbetween these stages being at least a year while
new projectsgot underway. HowsonandWinchstressthe "realvalue"which
Phillipsplacedon havinga reserveof publicworks,but they do not point out
thatPhillips'sfiguresfell far shortof the Liberalschemeof I929 for additional
publiccapitalexpenditureof ?25 I millionovertwo years,or thatthe Chancellor of the Exchequerwas advisedto tell his Cabinetcolleaguesthat "skilful
timing" of capital expenditurealone, while "not unimportant",could not
solve the problemof stabilizingemployment.Phillips'sreport,in fact, made
plain that the Treasuryhad not moved far from its attitudein I929-30. The
report argued that any programmewhich forced governmentto borrow
repeatedlyin the market "might give rise to seriousapprehensionas to the
stateof the nationalfinances".This would makeit difficultfor the Bank "to
produce that lowering of the rate of interest which must always remain
42
43

Howson and Winch, Economic

AdvisoryCouncil,PP. 343-53;J.M.K. XXI, PP. 383-95.
P.R.O. TI77/38: Hopkins to Warren Fisher (the Treasury's Permanent Secretary), I3 March I937.

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the principalweapon in the hands of the authoritiesduring times of trade

depression."To relyprincipallyon a worksprogrammein a depressionwould,
accordingto Phillips, "in effect, be gamblingon the chancethat a demand
for economywould not arise", althoughpreviousexperiencesuggestedthe
contrary.It would be impossible,he thought, for governmentto resist such
a demandif it arose, and to abandona works programmein a depression
would retard recovery." It is plain, therefore, that although Phillips is
identifiedby Howson and Winch as one of the Treasuryofficialsmost open
to Keynes'sideas,45he placedmoreimportanceon politicalcalculationsthan
on economictheory.
The same was true of Phillips'sargumentsin favourof public works. In
I938 Phillipsobservedto Hopkinsthat in the next depression-which might
be in I94i-the pressurefor extendedroad works could be expectedto be
"irresistible",not becauseroadswerea good formof unemploymentmeasure
but because the supply of other unemploymentrelief works would be too
small. The position of the budget would be such that the roadswould have
to be financedby borrowing,whateverthe notionaleconomicreturn.46
In additionto domesticpublic opinion, internationalopinionand Britain's
place in the world economy had to be taken into account in formulating
employmentpolicy. Experienceof the World EconomicConferencein I933
did not suggestthatinternationalco-operationwouldbe forthcomingfor loanfinancedunemploymentprogrammesto be begun simultaneouslyin different
countries, to relieve each country'sfears for its foreign balance, along the
lines suggestedbeforethe conferenceby Keynesin TheMeanstoProsperity.47
Abandonmentof the gold standardin September I93I might have been
expectedto relievesome of the Treasury'sconcernaboutthe foreignbalance,
if, as Keynes suggestedin the GeneralTheory,equilibriumwith the rest of
the world could be securedby means of fluctuatingexchangerates,48but in
practiceit proveddifficultfor the Britishmonetaryauthoritiesto managethe
"floatingpound"as they desired.Sometimesspeculativepressuresthreatened
to drive the pound down too low; more often speculativepressuresdrove
sterlinghigherthanthe Britishmonetaryauthoritieswished.Evenhadit been
possible to keep sterling down through the operationsof the Exchange
EqualizationAccount, the U.S. Treasurymade plain that it would not allow
British industrialiststo be given a competitiveadvantagethrough sterling
depreciation,and would have been preparedto achievethe exchangerate it
desiredby deliberatedepreciationof the dollar,as in I933.49Significantly,in
44 Howsonand Winch,EconomicAdvisoryCouncil, PP. I4If, I47; P.R.O. CabinetOfficePapers,series
27, vol. 640: Interdepartmental
Committeeon PublicCapitalExpenditure,Report, I3 Aug. I937, and
memorandumby the Chancellor,20 Jan. I938.
45 Howson and Winch, EconomicAdvisory Council, pp. I43, I45, I49-5 .
46 P.R.O. TI77/42: Phillips to Hopkins, 25 June I938.
47J7.M.K. IX, P. 356.
48J7.M.K. VII, P. 270.
49 'The SterlingSituation',I June I935; 'Devaluationof the Franc',22 May I936, and 'Agendafor
Conference on the Sterling Situation', 29 Nov. I938, Reading files of Harry Dexter White, General Records
of the Treasury, Record Group 56, National Archives, Washington. For this aspect of economic policy see
Ian M. Drummond, The Floating Pound and the Sterling Area, i93i-39
(Cambridge, i98i) and Susan
Howson, Sterling'sManaged Float: The Operationof theExchangeEqualisationAccount, I932-39 (Princeton,
i980). I am grateful to the S.S.R.C. for funding my research in America.

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Keyneshimselfurgedthatstepsbe takento increaseexportsas a response

to the worseningtradebalancebroughtaboutby rearmament;and, as foreign
confidencein sterlingwaveredin I938, he describedthe balanceof payments
as "the key to the whole position"broughtabout by this particularform of
loan-financedexpenditure.
The possiblerepercussionson foreignfinancialopinion, and thereforeon
the exchange rate, thus continued to be a constrainton the adoption of
new economicideas. As Hopkins observedin I932, projectswhich British
economistsmight accept as at least matters for serious considerationwere
regardedabroadas heresies, and care had to be taken in case a belief that
the Treasury supported "debatabledoctrines" should precipitateforeign
withdrawals.51
On the other hand, domesticpoliticalpressurefor some kind
of employmentpolicymeantthat by I937 the Treasurywas anticipatingextra
work for its home finance division because of what Phillips called "the
whole rangeof ideas connectedwith the control of capitalexpenditureand
investment".It was also realizedthat the Treasuryhad to keep up with the
latesteconomicideas, this taskbeing the particularresponsibilityof Hawtrey,
since, if the Treasurycould not provide expert economicadvice, ministers
"wouldcome to rely on unofficialadvice from divers quarters".52
Therewas, however,a politicaldimensionthroughoutthe interwarperiod
which made it likely that the Treasurywould be prejudicedagainstschemes
of loan-financedpublic expenditure.Experienceduringthe First WorldWar
hadshownthatwhen Treasurycontrolwas relaxed,andwhenministerscould
press ahead with schemes without having to risk electoral unpopularity
by raisingtaxes, extravaganthabits developedin governmentdepartments.
Consequently,in i919 the Cabinethad strengthenedTreasurycontrolover
Whitehall,makingthe PermanentSecretaryof the Treasuryheadof the Civil
Servicein the expectationthateconomiesin publicexpenditurewouldresult.53
Nevertheless,despite the Geddes "axe" of I92I-2, public expenditureon
socialand economicdevelopmentwas perceived,not inaccurately,to be on a
risingtrendin the I920S, as politicalpartiescourtedelectoralpopularity,and
governmentssought to avoid social unrest. As the May Committeepointed
out, one governmentcould embarkon schemeswhich, becauseof contractual
or moralobligations,for all practicalpurposescommittedfuturegovernments
to continuingexpenditure.54The demandfor balancedbudgets,both outside
andwithinthe Treasury,was a productof the beliefthat only by confronting
advocatesof new expenditurewith the need to raisethe money out of taxes
couldtherebe a check on inflation.Middletonhas shownthat, at leastby the
I930s, Treasuryofficialsdid not believethatloan-financed
centralgovernment
expenditureled immediatelyto inflationfor economicreasons;rather they
I937

50

G. C. Peden, 'Keynes,the Economicsof Rearmament,and Appeasement',in WolfgangMommsen

and Lothar Kettenacker, eds. The Fascist Challenge and the Policy of Appeasement(i983).
51
52
53

P.R.O. TI75/57: 'The PresentPositionof the Pound', I2 Jan. I932.

P.R.O. Ti99/50c: TreasuryOrganization
Committee,minutes,9 MarchI937.
See KathleenBurk, 'The Treasury:From Impotenceto Power' in her War and the State: The

Transformationof British Government,I9I4-I9I9

(i982).
54 Committeeon National Expenditure, Report, (P.P. I930-I, xvi), esp. pp.

I2-I4,

I44-7, 274f. For a

more impartialanalysissee Alan Peacockand Jack Wiseman,The Growthof PublicExpenditure

in the
United Kingdom (i967), esp. pp. 84f.

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believed that, once the principle that such expenditure should produce a
monetary yield to pay off both the capital and the interest on the loan had
been abandoned, it would be impossible politically to stop a rising tide of
expenditure.55 The policy-goal of returning to the gold standard in the I920S
can similarly be seen as an automatic check on government expenditure, as
well as a means of restoring world trade by stabilizing exchange rates. The
policy involved a cessation of central government borrowing for unproductive
purposes, a reduction in the National, especially the floating, Debt, a legal
limit to the issue of fiduciary notes and a restoration to the Bank of England
of the management of interest rates (which had been managed by the Treasury
during the war). This was a programme for placing the nation's money supply
outside the political arena, subject to supposedly automatic "economic"
forces. 56

IV
The evidence reviewed above suggests that writers who have assumed that
the "Treasury view" arose out of intellectual attachment to an outworn
economic theory about the supply of money, or capital, being fixed and fully
employed, have overstated the importance of theory in Treasury thinking. It
is understandable that academics who have been trained only in economics
should tend to emphasize the importance of economic theory in studies of
public policy, but Treasury officials, who have to control public expenditure
as well as deal with monetary variables, were, and are, bound to have a
different perspective. Balanced historical research suggests that Treasury
doctrine in the I920s arose from an intention that the money supply should
not be varied according to political discretion, and by I929, if not earlier, the
Treasury accepted that the nation's fund of capital might not be fully employed. The Treasury saw the lowering of interest rates as the principal
weapon for dealing with a depression, both in the I920s and the I930s. This
did not mean that Treasury officials' ideas were fixed, but the main shift in
their position by I937-that of admitting that public works could have a
limited counter-cyclical role-was not incompatible with the theory outlined
by Hawtrey in I925, once Bank Rate was at 2 per cent.
On the whole, economic historians have been harshly critical of Treasury
scepticism about the efficacy of loan-financed public works in employment
policy. Stephen Constantine, for example, thought those who refused to adopt
large-scale public works programmes were guilty of "timidity".57 However,
recent econometric work, using Keynes's assumptions, has suggested that
Lloyd George could not have made good his claims to reduce unemployment
to pre-I9i4 levels, partly because the multiplier effect of loan-financed public
works which he advocated would have been less than has been commonly
assumed hitherto, and partly because the scale of a Keynesian solution
required to solve unemployment in the early I930S would have created balance
55 Middleton, 'The Treasury in the I930s',

pp. 50, 56-62.

First InterimReportof the Committeeon Currencyand ForeignExchangesAfter the War, (PP. i9i8, vii),
para. 47.
57 S. Constantine,Unemploymentin Britain betweenthe Wars (i980), pp. 78, 8o.
56

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of payments problems.58 To be fair to Keynes, he never suggested that public

works alone would be able to offset the unemployment brought about by the
unprecedented decline in Britain's foreign balance after I929; he merely
claimed that public works would reduce the scale of that problem.59 Proving
that Keynes had only a partial solution does not prove that the Treasury was
right to reject it, but it does suggest that the Treasury made a less "culpable
omission" than Youngson supposed when it left the multiplier out of account
in its estimates of the effects of the Liberal programme in I929.
Moreover, it would seem that the assumption that Keynes had the answer to
unemployment-an assumption which began to change only in the I970S60-is
open to a different kind of criticism. Economic historians supporting Keynes's
ideas have rarely troubled to specify the complete range of new central
government controls which would have been necessary to control investment.
Nor has there been sufficient questioning of Keynes's belief that loan-financed
public works could be brought forward in a depression, and also held back
at the upper stages of trade cycles. Post-war experience of how government
departments and local authorities (and their employees and clients) have
become powerful interest groups, with vested interests in increasing public
expenditure in good times as well as bad, does not suggest that the brakes can
easily be applied.61 Treasury officials in the interwar period had long experience of the self-generating character of public expenditure; hence their desire
for financial discipline.
Experience of public finance, and in particular the experience of the
inflationaryyears from I9I4 to I920, would also seem to provide an explanation
of why the Treasury in the I920S adopted the gold standard, a quantity theory
of money, and a belief that public works might crowd out private investment.
Prolonged experience of chronic unemployment subsequently made them
open to the theory which Keynes was formulating in the I930s, as Howson
and Winch have shown. Perhaps future researchers in the Treasury records
will detect a similar cycle of theory following the experience of inflation and

unemploymentin the I970S and i980s.

Universityof Bristol
58 T. Thomas, 'Aggregate demand in the United Kingdom, i9i8-45', in Floud and McCloskey, Economic
History of Britain, II, pp. 332-46. See also S. Glynn and P. G. A. Howells, 'Unemployment in the I930s:
The "Keynesian Solution" Reconsidered', Australian Economic History Review, XX (ig80), pp. 28-45.
Thomas reckons the multiplier to have been unity in the short run, and I 5 in the long run, whereas in
William Beveridge's widely used Full Employmentin a Free Society (i944) the multiplier was taken as
approximately two, with no allowance for lags.
59 Moreover, in I933 he was prepared to accept that the multiplier might be as low as I3: J.M.K. xxi,
pp. I7I-8.
60 For examples in standard works of economic history or economics of the assumption that Keynes had
the answer to unemployment see Derek Aldcroft, The Inter-warEconomy:Britain, I9I9-39 (I970), pp. 3I422, and Michael Stewart, Keynes and After (I972). Robert Skidelsky, Politicians and the Slump (i967), pp.
x-xiv, 387f, argued that the fact that Keynesian theory was not fully developed in I929 was not a decisive
barrier to "what might loosely be termed Keynesian economics". In contrast, Ross McKibbin, 'The
Economic Policy of the Second Labour Government, I929-31', Past and Present, 68 (I975), pp. 95-I23,
argued that no developed multiplier theory existed in I929, and that comprehensive means of economic
management by the state have yet to be developed despite subsequent developments in economic theory.
61 See Joel Barnett, Inside the Treasury(i982) and Leo Pliatzky, Gettingand Spending:Public Expenditure,
Employmentand Inflation (Oxford, i982).

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