[발췌 Part III of Chapter 2: M.J. Flanders's International Monetary Economics 1870-1960] Policy-Oriented Academic─Keynes

출처: M. June Flanders, International Monetary Economics, 1870-1960: Between the Classical and the New Classical (Cambridge University Press, 1989)
목차 | 자료: 구글도서

※발췌 / Excerpts of which

Part III: Policy-Oriented AcademicㅡKeynes 

( in Chapter 2 | pp. 155-206 )

p. 160

[소제목] A Tract on Monetary Reform

The gap between ^Indian Currency and Finance^ and the ^Tract^ is the intervening period of ten yearsㅡand World War I. Keynes was writing about a very differenet world and he was keenly aware of this: the ^Tract^ is, in fact, an attempt to describe the world as it appeared after Armageddon. The time was 1923, and the international monetary system was in disarray. Britain was "off" gold. Exchange rate were "unregulated and left to look after themselves." They fluctuated seasonally and in other ways irregularly. In the long run they depended on relative price levels, which were influenced by domestic monetary policies in the several countries. But while there was de facto floating, this was not "as yet, the avowed or consistent policy of the responsible authorities." The authorities were still aiming at a restoration to prewar parities ^vis-a-vis^ the dollar, and Bank rate might still be used in a manner counter to the interests of domestic price and credit considerations in order to influence the exchange rate (Keynes 1923: 184-5).

  The first third of the book is fairly general monetary theory: Keynes describes vividly the evils of inflation and deflation and the role of the government in causing one or the other, or choosing between them and other policy tools. The remainder of the book is devoted to the "foreign exchanges" and, in particular, the aims of monetary policy and its effects on the exchange rate.

 [소절] The adjustment mechanism

The quantity theory of money, Keynes allegies, is incontestably correct. The question is how stable the Cambridge ^k^ is in the short and medium runs, since "^In the long run^ we are all dead" (Keynes 1923: 80, italics his). A painstaking analysis of the purchasing power parity doctrine, augmented by non-traded goods and capital movements, leads to the conclusion that exchange rates under a floating rate regime will be volatile. This brings him to the issue of the forward rate and its sensitivity both to expectations regarding future spot rates and to interest rate differential between countries. His well-known discussion of interest parity and the role of the forward exchanges in establishing it is first to be found here.

 [소절] Floating exchange rates

He set forth the two prongs of the neoclassical position, and adds that under floating exchange rates interest rates are a poor tool for influencing exchange rates. Neither private nor central banks should try to distinguish and discriminate between forward exchange dealings which are "speculative" and those which are "hedging," he insists; in the first place, this is an impossible task, and in the second place, speculation may be stabilizing. Interest parity, however, leads to stabilizing short-term capital movements only under fixed rates, when the extent of fluctuation of forward and expected future spot rates is highly restricted; this constraints the difference between spot and forward rates. The relation between spot and forward exchange rates is important and often improperly understood, thereby leading to inappropriate policy. "Dear money" has the indirect effect of diminishing the supply of bank credit. And money which is dearer in one place than in another used to have the effect of drawing gold. "But nowadays the only immediate effect is to cause a new adjustment of the difference between the spot and forward rates of exchange between the two countries" (Keynes 1923: 136-7).

The reasons given for the maintenance of a close relationship between the Bank of England's rate and that of the American Federal Reserve Board sometimes show confusion. The eventual influence of an effective high bank-rate on the general situation is undisputed; but the belief that a moderate difference between bank-rates in London and New York reacts directly on the sterling-dollar exchange, as it used to do under a regime of convertibility, is a misapprehension. ... [T]his difference ... cannot much affect the absolute level of the spot rate unless the change in relative money-rates is comparable in magnitude (as it used to be but no longer is) with the possible range of exchange fluctuations. (Keynes 1923: 138-9)

  Here follows a discussion of appropriate actions for various European countries, which were choosing between deflation and devaluation, with Keynes arguing that many of them could, or should, do neither. Italy wanted to try (presumably by deflation) to appreciate the lira to its former value. "Fortunately for the Italian taxpayer and Italian business, the lira does not listen even to a dictator and cannot be given caster oil." [4] Czechoslovakia ( ... pp. 162-163 unavailable ...)

[4] It may be necessary to point out to younger readers that this was a commonly used instrument of torture in Fascist Italy.

p. 164

  Under flexible exchange rates prices of traded goods change instantly when the exchange rate moves, and prices are subject to

the most fleeting influence of politics and of sentiment, and by the periodic pressure of seasonal trades. But it also means that the post-war method is a most rapid and powerful corrective of real disequilibria in the balance of international payments arising from whatever causes, and a wonderful preventive in the way of countries which are inclined to spend abroad beyond their resources. (Keynes 1923: 161)

This quotation represents a relatively rate statement of a price mechanism (flexible exchange rates in this case) working, quickly and fairly effectively, to redress an imbalance caused by basic or structural disequilibrium or by what has since been called overspending. The same kind of structural disequilibrium is mentioned briefly (as we shall see in Chapter 10) in his plans for Bretton Woods and there too he recognized the need for a fundamental adjustment under such circumstances.

  The gold standard system was stable, in the sense that adjustment would come about eventually, but it might be very slow and difficult if gold and silver outflows led to a reduction in the money supply "faster than social and business arrangements allow prices to fall" (Keynes 1923: 162)

We shall look on Edward III's debasements of sterling money with a more tolerant eye if we regard them as a method of carrying into effect a preference for stability of internal prices over stability of external exchanges, celebrating that monarch as an enlightened forerunner of Professor Irving Fisher in advocacy of the "compensated dollar," only more happy than the latter in his opportunities to carry theory into practice. (Keynes 1923: 163)

 [소절] Predictions and recommendations

What then, Keynes muses, of the future? Should the world return to a gold standard? The world supply of gold had always been erratic and serendipitous. Stability had been attained in spite of this, in the past, by variations in the ratio of reserves to liabilities for countries, banks, and individuals, generally acting independently. But "gold now stands at an 'artificial' value, the future course of which almost entirely depends on the policy of the Federal Reserve Board of the United States" (Keynes 1923: 167). If everybody kept reserves of gold, there would be a shortage; if the gold exchange standard is adopted, the "actual value of gold will depend ... on the policy of three or four of the most powerful Central Banks, whether they are independently or in unison." (He is surely referring here to the central banks of Britain, France, and the United States. What the fourth would be I am not quite sure.) Furthermore, there is the danger that the U.S. will demonetize gold, since it seemed irrational for it to continue to receive and store gold and yet "maintain the value of dollar which is irrespective of the inflow or outflow of gold." "Confidence in the future stability of the value of gold depends therefore on the United States being foolish enough to go on accepting gold which it does not want, and wise enough, having accepted it, to maintain it at a fixed value" (Keynes 1923: 168-9).

p. 165

  Restoration of the old system of a fixed ratio of central bank liabilities to gold reserves (the "proportion") was not a feasible alternative. In fact, even before the war, "the system was becoming precarious by reason of its artificiality. The 'proportion' was by the lapse of time losing its relation to the facts and had become largely conventional. Some other figure, greater or less, would have done just as well" (Keynes 1923: 171). He maintained this position strongly through the Macmillan sittings. See, for example, Keynes 1929-31 [1981]: 152.)

  Note, however, that Keynes is not saying here that the fixed proportion between reserves and domestic money (or high-powered money) did not exist before the war; what he is saying is that the multiplier was an arbitrary one. I fail to see anything in the "standard" description of the gold standard mechanism that contradicts that; unless we accept Hayek's argument that the multiplier should be unity as in gold coin standard, it is indeed completely arbitrary.

  He also made the point, frequently, that the fixed proportion is a bad idea. He argued very explicitly (for example, Keynes 1923: 193-4) that there should be no relationship between gold stocks of the central bank and the domestic money supply, since domestic contraction is the wrong way to go about defending the exchange rate, and since the fixed reserve both immobilizes the gold stock and makes it unusable; furthermore it forces adjustment too late, after the disequilibrium has already led to a movement of gold.

  The note issue should be separated completely from the gold reserves. The money supply should be adjusted to maintain internal balance, and the gold reserves should be used by the Bank of England "for the purpose of avoiding short-period fluctuations in the exchanges" (Keynes 1923: 196). The idea of a fixed proportion of reserves having been abandoned, interest rate policy had been turned to purely domestic goals, "to regulate the expansion and deflation of credit in the interests of business stability and the steadiness of prices. In so far as it is employed to procure stability of the dollar exchange ... we have a relic of pre-war policy and a compromise between discrepant aims" (Keynes 1923: 172).

In truth, the gold standard is already a barbarious relic. All of us, from the Governor of the Bank of England downwards, are now primarily interested in preserving the stability of business, prices, and employment, and are not likely ... deliberately to sacrifice these to the outworn dogma, which had its value once, of ￡3:17:10.5 per ounce... A regulated non-metallic standard has slipped in unnoticed. ^It exists.^ Whilst the economists dozed, the academic dream of a hundred years, doffing its cap and gown, clad in paper rags, has crept into the real world by means of the bad fairiesㅡalways so much more potent than the goodㅡthe wicked Ministries of Finance. (Keynes 1923; 172-3, italics his)

  Even the advocates of a return to gold, such as Mr. Hawtrey, Keynes notes, view the future of gold standard as necessarily managed one, with central bank cooperation directed at maintaining the purchasing power of gold. If this not achievable, it is preferable, Hawtrey says, to stabilize the value of sterling in terms of commodities. Keynes objects, however, to "reinstating gold in the pious hope that international co-operation will keep it in order." On the other hand, hope of cooperation between the Bank of England and the Federal Reserve Board is unrealistic because of the preponderant strength and power of the latter. On the other, the Federal Reserve Board cannot be trusted to run the international monetary system alone; it is too new and inexperienced, and too much subject to sectional and political interests (Keynes 1923: 174-6).

  What is needed is a scheme which will permit the supply of money and credit to be regulated to maintain stability of the internal price level and avoid changes in the supply of foreign exchange as a result of seasonal or temporary disturbances. Domestic price stability should be announced as the primary goal of the Bank of England. If the Americans behave, and avoid deflation, Britain can have fixed exchange rates ^vis-a-vis^ the dollar as well as stable prices. If not, she(Britain) must choose domestic price stability over exchange rate stability (Keynes 1923: 186).

  Given the prevailing situation of more or less floating exchange rates, this should be codified and the authorities "should adopt the stability of sterling prices as their ^primary^ objective." If the Federal Reserve maintains dollar prices steady, this is consistent with a policy of stabilizing the exchange rate. What Keynes very specifically wishes to avoid is to let "sterling prices ... plunge with [dollar prices] merely for the sake of maintaining a fixed parity of exchange" (Keynes 1923: 186). This fear of American deflationary proclivities continued to be a theme of his for the next twenty years.

  Objecting to the gold standard's tyranny of control over domestic goals, Keynes yet coveted the short-run stability he felt it proffered. Seeking a criterion for stabilizing internal prices, he is in favor of stabilizing the price of a composite bundle of commodities, but wants a number of additional countercyclical policy objectives added. He rejected Fisher's proposal of a "compensated dollar" on the grounds that it was too mechanical and that it was an ex post rather than ex ante policy. On this he cites Hawtrey approvingly: "It is not the ^past^ rise in prices but the ^future^ rise that has to be counteracted" (quoted from ^Monetary reconstruction^ 105. Keynes 1923: 187).

  Intervention for short-term smoothing was desirable, and should be carried out publicly. He suggests that the Bank of England be free to "regulate" the price of gold and announce a weekly buy and sell price just as it announces Bank rate. The spread between its buying and selling price should be somewhat wider that the prewar spread. If gold flowed out for seasonal or temporary reasons, it should be allowed to continue unchecked. If it "seemed to be due to a tendency of sterling to depreciate in terms of commodities, the correct remedy would be to raise the bank rate" [5] (Keynes 1923: 191). This last sentence suggests a reasonably strong faith in the workings of the neoclassical mechanism.

[5] The authorities should also try to mitigate the destabilizing influence of their own activities. "The service of the American debt will make it necessary for the British Treasury to buy nearly $500,000 every working day. It is clear that the particular method adopted for purchasing these huge sums will greatly affect the short-period fluctuations of the exchange. I suggest that this duty should be entrusted to the Bank of England to be carried out by them with the excess object of minimising those fluctuations in the exchange which are due to the daily and seasonal ebb and flow of the ordinary trade demand. In particular the proper distribution of these purchases through the year might be so arranged as greatly mitigate the normal seasonal fluctuation" (Keynes 1923: 191-2).

  Keynes emphasized even more than I have done the importance of the changes in attitudes (on his part and that of others) since the prewar and wartime days. This is most clearly spelled out in his critique of the Cunliff Report. This was published, as he notes, i 1918,

three months before the Armistice. It was compiled long before the unpegging of sterling and the great break in the European exchange in 1919, before the tremendous boom and crash of 1920-21, before the vast piling up of the world's gold in America, and without experience of the Federal Reserve policy in 1922-23 of burying this gold at Washington, withdrawing it from the exercise of its full effect on price, and thereby, in effect, demonetizing the metal. The Cunliffe Report is an unadulterated pre-war prescriptionㅡinevitably so considering that it was written after four years's interregnium of war, before Peace was in sight, and without knowledge of the revolutionary and unforeseeable experiences of the past five years.
  Of all the omission from the Cunliffe Report the most noteworthy is the complete absence of any mention of the problem of the stability of the price-level; and it cheerfully explains how the pre-war system, which it aims at restoring, operated to bring back equilibrium by deliberately causing a "consequent slackening of employment." The Cunliffe Report belongs to an extinct and an almost forgotten order of ideas. Few think on these lines now; yet the Report remains the authorised declaration of our policy, and the Bank of England and the Treasury are said still to regard it as their marching orders. (Keynes 1923: 194-5)

  Gold should be held only by the Bank of England and used only as a "war-chest" in case of a temporary adverse balance of payments, in order to smooth day-to-day fluctuations in exchange rates (Keynes 1923: 195). Thus it was possible to benefit from having and using gold, "without irrevocably binding our legal-tender money to follow blindly all the vagaries of gold and future unforeseeable fluctuations in its real purchasing power" (Keynes 1923: 197, italics mine [* but no italics shown(this reader)]). His main objection to gold was, evidently, the threat to the world supply of it and the danger, perhaps, of the Americans again adopting the benighted policy of sterilizing gold inflows, as in 1920-1, rather than a conviction that a government should avoid policies leading to balance-of-payments adjustment. However, here as elsewhere, my reading is that Keynes vacillated between, on the one hand, thinking that balance-of-payments adjusting was impossible and, on the other, feeling sanguine that it was not so difficult to attain and did not constitute a problem of its own.

  The United States, Keynes is pleased to note, has started in the same direction: it is demonetizing gold. The evidence of this is that the Federal Reserve Board seemed to be motivated primarily by considerations of internal stability in establishing its interest rate policy. In fact, the economists of the United States, he argued, were far ahead of their British counterparts in developing the theory of the business and credit cycle and it would be more difficult even for the Federal Reserve Board than it was for the Bank of England to ignore such considerations, even if it was not entirely conscious of their influence. Thus, regarding the Federal Reserve System: "Out of convention and conservatism it accepts gold. Out of prudence and understanding it buries it" (Keynes 1923: 197-198 [제5장]). The United States, he said, has "^pretended^ to maintain a gold standard. ^In fact^ it has established a dollar standard; and, instead of ensuring that the value of the dollar shall conform to that of gold, it makes provision, at great expense, that the value of gold shall conform to that of dollar" (Keynes 1923: 198, italics his).

  But Keynes thinks that the fiction may be dropped some day. Some Senator may "read and understand this book. Sooner or later the fiction will lose its value ... The economists of Harvard know more than those of Washington, and it will be well that in due course their surreptitious victory should swell into public triumph." The British should consider the possibility "that some day soon the Mints of the United States may be closed to the acceptance of gold at a fixed dollar price" (Keynes 1923: 199-200).

  However, the United States cannot get rid of its gold by lending it, unless it inflates. Approaching the keen awareness of the accounting identities and economic forces that link the current and capital account, an awareness that, we shall see, informs the ^Treatise^ throughout, he argues that an increase in foreign lending by the United States, if matched by an increase in savings, "will no more denude the United States of her gold than they denude Great Britain of hers." Only foreign lending which is an addition to purchasing power, that is, inflationary, will do that, by depreciating the dollar (Keynes 1923: 202-3). Managed currency was essential and inevitable, but there was no single authority available to manage it. The best alternative then, was to ( ... pp. 169-170 unavailable. On p. 170 begins a new chapter 9 Treatise on Money. ... )

p. 171

  If the shock is a current account deficit, gold flows out, Bank rate is raised, and prices and money incomes fall as a result; when this has been completed, Bank rate can be lowered again and the capital account can be restored to its previous position. That is to say, the equilibrium capital flow is unchanged, therefore the equilibrium level of trade imbalance is the same as it was; the price changes are required to clear world commodity market at the level of trade balance. As we shall see in Chapter 16, this anticipate Metzler's treatment. Implicit here is the assumption that the gold outflow plus the higher Bank rate have resulted in a permanently reduced money supply. (Compare the discussion in Chapter 7, pages 146ff, on Hawtrey's debate with Keynes over the latter's gold points proposal.) Provided, he says, that there is no change in relative factor prices within the country, nothing real will have changed (Keynes 1930: Volume I, 327). (As noted in Chapter 6, Keynes was less sanguine about the possibility of flexibility of prices and money incomes with no real effects when he was testifying before the Macmillan Committee at roughly the same time the passage above was being written.)

  If, on the other hand, the disturbance consists of a higher interest rate abroad, gold will flow out because of the deficit on capital account. The final equilibrium depends on many considerations; this is, of course, the transfer problem, which exercised the Harvard School and Ohlin, among others. Keynes's views here are consistent with his frequent statement that this is a more difficult adjustment, since historically the capital account has more frequently adjusted to the current account than conversely (Keynes 1930: Volume I, 327 ff; also 1929a[1949: 167]). In this discussion, a disturbance in the trade account leads directly to an adjustment in the trade balance, whereas a shock to the capital account also leads to a change in the current account (compare Metzer 1960[1973]).

[A]t the new point of equilibrium, the prices of all home-produced goods will have fallen relatively to the rices of all foreign-produced goods. The ^amount^ of this relative fall will depend ... on the change in the terms of trade resulting from the physical characteristics of the productive forces at home and abroad. (Keynes 1930: Volume I, 328, italics his)

  What is Wicksellian is that the link between gold movements and prices, through the quantity of money, is the interest rate. Thus the transfer mechanism works, presumably exclusively, through the effect of an imbalance on the transfer of gold, hence on Bank rate, hence on domestic interest rates and investment in both countries, leading to the required changes in relative prices, in both countries (Keynes 1930: Volume I, 329).

  He set out to mediate between what he sees as two opposing doctrines regarding the adjustment mechanism. The first he attributes to Ricardo and Taussig, and it is a version of the price-specie flow mechanism. The second he attributes to Ohlin and some earlier, unspecified

traditional doctrine which was widely held in Great Britain, mainly on empirical grounds, during the 19th century, and is still held to-day. According to this view foreign lending stimulates foreign balance directly and almost automatically, and the actual movement of gold plays quite a minor part. This conclusion was, I think, based much more on British experience during the 19th century than on ^a priori^ reasoning. But recently ... it has been supported by argument also, notably by Professor Ohlin. (Keynes 1930: Volume I, 330)

  It is not clear to me what literature he is referring to in general here. The reference to Ohlin is obviously to the latter debate with Keynes in the ^Economic Journal^ the previous year, in which Ohlin (1929a, 1929b) was arguing that the changes in buying power associated with a transfer would in themselves have a direct influence, in an equilibrating direction, on trade flows. Surprisingly, Keynes never seemed to have grasped what Ohlin was driving at in that debate (see Keynes 1929a, 1929b).

  The final equilibrium terms of trade will depend on the elasticities of demand and supply (including the supply of output), that is, on Marshall-Lerner conditions. The change in the terms of trade "is independent of the character of the transition and of the means by which it is brought about." It depends on the real determinants of supply, factor endowments and techniques and on the elasticities of demand in the several countries. Thus, the British lending for railway construction in North America in the 19th century resulted in a very small deterioration in Britain's terms of trade because Britain "was herself the only efficient producer of much of the materials required for these new investments ..." and not because the act of lending conferred a bias in favor of exports (Keynes 1930: Volume I, 334-5).

  The terms of trade are likely to deteriorate more if the borrowing country impose a high tariff of if the capital movement is sudden, such as capital flights and hot money flows. Here follows an aside which is, in fact, a strong attack on the purchasing power parity doctrine. "For this not only upsets the validity of [Prof. Cassel's] conclusions over the long period, but renders them even more deceptive over the short period, whenever the short period is characterised by a sharp change in the attractions of foreign lending" (Keynes 1930: Volume I, 336). As for the tariff, however, it seems that he is here stating the optimal tariff argument, which has nothing conceptually to do with the transfer problem.

  Part of the mechanism he describes (which does not arise in the simplest, aggregative versions of the analysis) involves the lending country's having to slide down the ranking of comparative advantage in order to generate an export surplus and suffering a deterioration in the terms of trade as a result of this. This was implicit in the debate with Ohlin on the German reparations as well (Keynes 1929a). What is new, and Keynesian in spirit, is the idea that the distribution of the burden of changing the relative level of money wages between the two countries depends on the attitudes of the several countries (the central banks, actually, and their respective credit policies) toward gold flows. This kind of argument is very similar to much of the analysis in the seminal paper by Metzler(1960[1973: Chapter 8]), discussed in Chapter 16. Metzler's argument about the distribution of the burden, however, is more involved and sophisticated than this (see also Eaton and Flanders 1987).

  In his criticism of Ohlin (hers as in the ^Economic Journal^ debate Keynes 1929a and 1929b and Ohlin 1929a and 1929b) it is quite clear there is no sense of income effects in the mechanism, to the point where he evidently does not understand what Ohlin is trying to say. One might argue that this effect would be more relevant and obvious in the reparations case, where each country's permanent income has changed, than in the foreign lending case, where it has not, except for the interest differentials. [1]

[1] There has long been some discomfort attached to treating all transfers the same in the literature: it was clear that lending is not the same as giving aid or paying forced reparations. The recent literature which handles international trade as a problem of intertemporal optimization implies the distinction, since a transfer lowers permanent income, whereas a loan does not. In defense of Ohlin (who is discussed in detail in Chapter 13) I should note that he spoke of changes in "buying power" or " purchasing power" and not in income.

  Actually, Keynes comes very close to this last point (Keynes 1930: Volume I, 345) when he notes that in general a lending country experiences a loss because of deterioration in the terms of trade and a countervailing gain from the additional interest income, whereas in the case of reparations there is "no set-off corresponding to the higher rate of interest earned or to the subsequent improvement in the terms of trade" when the interest is paid. he does not take the additional crucial step of connecting the income loss of the transfer to a direct change in the balance of trade, that is, of injecting the income effect into the demand function for foreign and home goods, thus lessening the terms of trade deterioration required to effect the transfer, which was Ohlin's point.

  In the transfer problem discussion, he gets into the issue of the international external balance dilemma. This provides a justification, in Keynes's view, for interfering with short-term capital movements. Thus, maintaining equilibrium becomes a matter of being passive to large changes in gold flows. If both foreign capital movements and domestic investment are highly elastic with respect to the rate of interest, demand for exports inelastic, and domestic wage rates inflexible, "then the transition from one position of internal equilibrium to another required by the necessity for preserving external equilibrium may be difficult, dilatory and painful" (Keynes 1930: Volume I, 349-50).

  He has a fully developed view, as noted, of the general-equilibrium interaction, and of the national income accounting identities of the balance of payments. He notes that for every level of the interest rate there is always a price level at which the balance of payments is zero, and there is always an interest rate at which savings and investment are equal. "Consequently there is always a pair of values of bank-rate and of P at which both I＝S and B＝L [the current and capital accounts are equal, and opposite in sign[" (Keynes 1930: Volume I, 215).

  As an example, he cites the automatic gold standard mechanism in which the money supply is uniquely related to the gold stock and interest rates are market determined. Then there will always be equality between S and I and between L and B "(assuming an absence of economic frictions and of time-lag, and in particular that the rates of money-earnings are free to move in response to the competition of entrepreneurs for the services of the factors of production)" (Keynes 1930: Volume I, 216).

[소제목] Short-term capital flows and the policy dilemma (p. 174)

Bank rate should be a powerful instrument in restoring external equilibrium, according to Keynes, since it demonstrates "extraordinary efficacy ... for effecting" equilibrium internally and externally. The reason is that it operates on both L, the capital account, and B, the current account, in the right direction. "Thus Bank-rate is both an expedient and a solution. It supplies both the temporary pick-me-up and the permanent cureㅡprovided we ignore the malaise which may intervene between the pick-me-up and the cure" (Keynes 1930: Volume I, 214).

  The cause and the role of short-term capital movements in the balance-of-payments adjustment process are discussed more fully in the ^Treatise^ (1930: Chapter 13, "The Modus Operandi of Bank-Rate") than in any of Keynes's other writings. His survey of the theories regarding the working of the Bank rate in the mechanism is instructive:

[인용] 1. The first of these regards Bank-rate merely as a means of regulating the ^quantity^ of bank-money ... Lord Overstone, for example ... regarded Bank-rate as the correct and efficacious method for reducing the demand on the Bank for discount, and so for contracting the volume of circulation. (Keynes 1930: Volume I, 186-7 italics his)

  The association of a higher Bank rate with a lower quantity of money Keynes attributes also to Marshall (1887[1926], 1888[1926]), Sir Robert Giffen, Pigou and Hawtrey (1919, 1927, 1950) (Keynes 1930: Volume I, 188). The second path of influence is to attract short-term loans from abroad. Keynes says that the Bank rate was thus used by the Bank of England for twenty years following 1837, and notes that the first "clear account" of the mechanism was presented by Goschen(1861). But Goschen, he said, argued that Bank rate changes followed the market and did not influence it. "It was left to Bagehot ... to complete the story by emphasizing the extent of the Bank of England's power ... to determine what the market conditions should be" (Keynes 1930: Volume I, 189-90), and he states the dilemma which has confronted every attempt to formalize the neoclassical position.

[I]t is by no means obvious how [this] ... is connected with our first strand and I know of no author who has attempted the synthesis. Moreoverㅡsuperficially at leastㅡ^it seems to pull in the opposite direction^ ... It may be objected that the higher Bank-rate can only be made effective if the Central Bank reduces its other assets by more than it increases its stock of gold, so that the effect on balance is to decrease the aggregate of credit. (Keynes 1930: Volume I, 190, italics mine)

A third potential influence of Bank rate policy is to reduce "foreign lending" (long-run investment as distinct from the short-term loans discussed above). But this can lead to a permanent change only if there is finally a change in the rate of return on investment (Keynes 1930: Volume I, 208).

[소제목] The domestic impact of the interest rate

The major theme of the ^Treatise^ in the international arena, as noted, is the dual role of Bank rate in influencing domestic spending and hence the balance of trade and in encouraging short-term accommodating capital movements (we saw this distinction already very clearly in the ^Tract^; see Chapter 8); and he emphasizes also the distinction between the effect of Bank rate on the quantity of money and on the level and composition of domestic spending, that is, on investment decisions.

"Bank-rate Policy", in the modern sense, was originated in the discussions which followed the monetary crisis of 1836-7 and preceded the Bank Act of 1844. Before 1837 such ideas did not existㅡin the works of Ricardo, for example, nothing of the sort is to be found; and the explanation is not far to seek. For throughout the life of Ricardo, and up to the repeal of the Usury Laws in 1837, the rate of interest was subject to a legal maximum of 5% ... The traditional doctrine, which has been developed in the ninety years which have since elapsed, has been woven of three distinct strands of thought, difficult to disentangle, to which different writers attach differing degree of stress. All of them have been obscurely present from the beginning of the discussion. (Keynes 1930: Volume I, 186-7)

  These strands are the effect of changes in interest rates directly on the money supply; the effect on short-term capital flows; and, third, the effect on investment. The last, according to Keynes, is the heart of matter. The argument is that the rate of interest influences "in some way the rate of investment, or at least the rate of some kinds of investment, and, perhaps in the case of Wicksell and Cassel ... the rate of investment relatively to that of savings" (Keynes 1930: Volume I, 190).

  ( ... pp. 176-177 unavailable ... )

p. 178

( ... ... ) ^theory^. Short-term interest rates affect long-term ("bond-rate") and the demand for capital goods responds responds to this promptly and elastically. Anticipations of future government policy play a role, as do expectations in general. And availability of funds at existing rates is here as well. So the initial and "^primary^" effect of a rise in Bank rate is a decline in the price of capital goods, and a rise in saving "of which the former is more likely to be quantitatively important than the latter" (Keynes 1930: Volume I, 204, italics his). The secondary effects are a fall in the output of capital goods and, to the extent that savings increases, a decrease in the demand for and output of consumption goods. The tertiary effect is a further decline in prices of consumer goods due to the reduced income of the producers of capital goods.

  Thus far, then, we have reductions in the prices of all types of goods, losses of all classes of entrepreneurs, and a reduction in employment. This unemployment will continue either until there is a decline in Bank rate or, fortuitously, there is a change(a rise) in the natural rate of interest (Keynes 1930: Volume I, 206). The unemployment may actually increase, since initially employers may try to avoid laying off workers if they expect their losses to be temporary. In addition, the prospects of losses lowers the natural rate of interest below its normal level and widens the gap between the natural and the market rate.

  Eventually wages will fall, and this is the "consummation of the whole process of pressure," but if they do not, unemployment will continue. There is a tendency to view with satisfaction the decline in prices, which improves the balance of trade, and the decline in the demand for money. This is unjustified, however. The lower prices involve losses to entrepreneurs, as indicated by the existence of unemployment: wages have not yet fallen. As long as this situation continues, unemployment continues to grow. If the monetary pressure can be alleviated only by reduced employment and output, "then monetary equilibrium will continue to require the indefinite prolongation of chronic unemployment" (Keynes 1930: Volume I, 207-8).

  Here Keynes has left completely the mechanical quantity theory. In his avowedly Wicksellian approach, it is the initial deficiency of investment, resulting from higher interest rates, which causes prices to fall. The subsequent process is that which brings costs (wages) down "at which point a new position of equilibrium can be established" (Keynes 1930: Volume I, 191). The issue of the importance of reducing "costs"(wages) is a theme which pervades Keynes's discussion of the international mechanism throughout the ^Treatise^ and the Macmillan Committee testimony.

[소제목] The dilemma and what to do about it

Keynes emphasized heavily and discussed extensively a problem close to that which later become known as the "policy dilemma", the conflict between internal and external equilibrium. But not quite. Keynes is not really worried here about the difficulties of achieving structural equilibrium in the balance of payments. He is more concerned, in general, with the question of short-term equilibrium and short-term capital mobility.

  A particularly clear and explicit statement of the problem is embedded in his discussion of the reasons that though business cycles are highly concurrent between countries the world nevertheless does not behave exactly like a single country on a gold standard. This account is combined with an intense questioning of the desirability of a gold standard in particular or fixed exchange rates in general. [3] The major villain in the piece (then as now!) is the high degree of capital mobility. International capital flows are highly elastic with respect to the rate of interest (specifically, to interest rate differentials). The trade account, as noted above, respond more sluggishly; thence the problem.

[3] It would take me too far afield to cite or discuss the passage, but Keynes's brief section on the history, mythology, and psycho-analytic aspects of the gold standard is a sheer delight. The reader is urged to peruse it in the original (Keynes 1930: Volume II, Chapter 35, (i) Auri Sacra Fames, 289-92).

This high degree of short-period mobility of international lending, combined with a low degree of short-period mobility of international trade, means ... that even a small and temporary divergence in the local rate of interest from the international rate may be dangerous. In this way adherence to an international standard tends to limit unduly the power of a Central Bank to deal with its own domestic situation so as to maintain internal stability and the optimum of employment. (Keynes 1930: Volume II, 309)

  The implication of this is that given enough time, the basic balance of payments (the current account and long-term capital flows) would recover its equilibrium, even if the country maintained an independent monetary policy. But the rate of interest which keeps the overall capital account in balance (since the current account responds more slowly [his constant theme]) may well not be "the optimum rate for maintaining the equilibrium of domestic industry" (Keynes 1930: Volume II, 318). Stated alternatively, under a fixed exchange rate regime a country participating heavily in international capital markets will be hard put to maintain an independent monetary policy, one designed to influence domestic expenditure.

The belief in an extreme mobility of international lending and a policy of unmitigated ^laissez-faire^ towards foreign loans, on which most Englishmen have been brought up has been based, as I have repeatedly urged above, on too simple a view of the causal relations between foreign lending[the capital account] and foreign investment[the current account]. Becauseㅡapart from gold movementsㅡ^net^ foreign lending and ^net^ foreign investment must always exactly balance, it has been assumed that no serious problem presents itself ... All this, however, neglects the painful, and perhaps violent, ( ... pp. 180-181 unavailable ... )

p. 182

creditor countries, Keynes notes that contemporary major financial centers, such as London and New York, probably had small net positions, since short-term debits were very high. Since the balance sheet totals were also large, this meant that such a market was "very much at the mercy of the initiative of its foreign clients" who make portfolio adjustments between long- and short-term assets, gold and paper, or moving their holdings between various international centers. (Keynes 1930: Volume II, 316).

  Regarding restrictions on foreign lending, Keynes has a number of ideas regarding both the long run and the short. In the long run, he argued, British banking and capital institutions were biased toward lending abroad, and habits and institutions were geared to foreign investment.[4] Discriminatory taxation (as in France) might be necessary. It might be necessary also for another, more fundamental, reason, apart from discouraging short-term capital mobility. With capital mobile and labor not, real efficiency wages could not remain different in different countries. Thus workers in rich old countries could not enjoy the fruits of the country's wealth in the form of higher wages unless foreign lending were restricted, and foreign lending postpones

the day at which the workers in the country can enjoy, in the shape of higher wages, the advantages of this growing accumulation of capital. [5] 19th-century philosophy was wont to assume that the future is always to be preferred to the present. But modern communities are more inclined to claim the right to decide for themselves in what measure they shall subscribe to this austere doctrine. (Keynes 1930: Volume II, 313)

[4] Brown (1940: Volume I, 158-60) discusses the change in attitude after World War I, in Britain, toward control over capital flows. "The prevailing attitude [in Britain before the war] was that new capital issues stimulated trade in general, and therefore, British trade as a whole." If they had imposed restrictions, like the French, they would have challenged the primacy of the London money and capital market, which was characterized by "the lack of restriction imposed by the London market upon the utilization of sterling as a world medium of exchange. The war ended with a victory in Great Britain of the principle that the proceeds of foreign loans should be sent in the lender's country."
[5] This is reminiscent of some much later arguments to the effect that a number of countries would have been better off (with higher incomes and higher rates of growth) if they had restricted their foreign lending. One hears this argued particularly with respect to Great Britain in the 19th century and the United States in the post-World War II period. Harrod (1933: 128-9) wrote, for example: "It is arguable that in the post-war decade ... [Britain] clung too tenaciously for her lending habit in a period when for various reasons her ... [traded goods] output was checked in its normal rate of expansion, and that unemployment and depression in the country would have been less had she lent less." White made a very similar point about fin-de-siecle France (See Chapter 12, page 236). 

  This is an interesting precursor of the literature of the 1960s on the optimal rate of taxation of capital export (Kemp 1966, Jones 1967), as well as of much of the contemporary literature on the theory of international trade as a problem in intertemporal optimization (see Chapter 1, note 5). His restrictionism with respect to capital movements came to full flower, as we shall see below, in the memoranda of the 1940s leading up to Bretton Woods.

  ( ... ... ) p. 183.