Tribute to Premiers' Plan


In the striking article which follows, The Herald presents the taken of Australia’s financial and economic problems by one of the most brilliant of Britain’s economists – Mr J. M. Keynes.

Mr Keynes has an international reputation.  He was commissioned by The Herald to write on the economic problems confronting this country, dealing particularly with the Premiers’ Plan and the report of the Experts Committee.

His views are not presented as those of The Herald.  They are given as a valuable contribution to the discussion of our problems by an eminent authority whose opinions inevitably stimulate thought and provoke discussion.


It is a rash thing to write from a great distance on a matter which demands practical judgment more than theory. If I can contribute anything to the discussion it will be by envisaging Australia's problem in a setting of the world crisis, for whilst the imponderables no one can weigh who is not on the spot must govern the handling of the purely local problem, it is no less important to know the jungle outside, which those dwelling amongst their own trees can scarcely hope to see.

I sympathize intensely with the general method of approach which underlies the new proposals of the economists and under-Treasurers. I am sure the Premiers' Plan last year saved the economic structure of Australia. I am not prepared to dispute that another dose of the same medicine may be necessary, but there are some aspects of the Experts' Report which cause me hesitation. I am fearful lest a degree of readjustment should be attempted which is impracticable in the environment of present world conditions. What is, perhaps, a more vivid apprehension of affairs outside Australia may enable me to contribute to the discussion by shifting the emphasis a little.

Limit to Wage Cuts

It is a serious mistake, in my judgment, for any country to attempt a complete adjustment to the present level of wholesale prices whether measured by gold or sterling. Long continuance of this level of prices is not a practicable working hypothesis. It is one of the things, like the end of the world, against which, although possible, it is not sensible to insure, for, unless prices rise, the existing financial structure between nations cannot possibly survive. Every country in the world has the same problem as Australia in some shape or form. If each attempted to solve it by competitive wage reductions and competitive currency depreciations nobody would be better off. There is no exit along that route. Indeed, the tendency of wage reductions must necessarily be to rivet more securely the existing level of prices, for, in the long run, it is the wage level which mainly determines the price level, especially with currencies not rigidly linked with gold.

Higher World Price-Level

Do not suppose I am so foolishly optimistic as to rely on adequate or even material rise of prices in the near future. I am pessimistic regarding the progress of the time-table. I believe the leading financial centres of the world will have to enjoy a prolonged period of ultra-cheap money before enterprise lifts its head again. Until enterprise puts more spending power into circulation prices cannot rise. I am saying that a prudent country will lay its plans for orderly reconstruction on the assumption of a much higher world price level than the present, because unless this assumption is realized so much else will happen, so many other things will be broken, and the whole structure of national and international indebtedness will have collapsed so completely that its pains will have been wasted.

Australia’s Success

If, therefore, I were an Australian economist advising Mr Lyons, I should be decidedly moderate in my ideas. I should recommend him to ride his difficult suffering steed with as light a rein as he dare. I should not press for heroic measures. It is a time to chastise gently. Moreover, I should have sufficient confidence to take this line precisely because Australia has done so much already, and has been relatively so successful in the programme of necessary adjustment. If only, in spite of disappointments, she could, by comparison with the state of others, know it.
There is more chance of improving the profitableness of business by fostering enterprise and measures like public works than by further pressure on money wages, or further forcing exports. Problems of budget and unemployment are more pressing than balance of trade. The latest figures plainly indicate that the Australian balance to-day is a result of the measures already taken, which are not unsatisfactory in the circumstances.


Let me review the proposals before the Premiers in the light of these general notions. They can be examined under three main heads: (I) A further reduction of wages. (2) Further depreciation of exchange. (3) Extension of bank credits, loans for relief works, and other measures to increase enterprise.

Equality of Sacrifice

I understand that the reduction of wages so far effected has been unequal. It is of the essence of what has been happening in Australia that there should be equality of sacrifice. It would seem obvious that New South Wales should be brought into line with the rest of the country. Indeed, this must be in her own interest if she is not to suffer more than her share of unemployment.

But a policy of a further general reduction in money wages would be a double-edged weapon. It would tend to curtail purchasing power, and, consequently, aggravate, rather than assist, the problem of the budget. I do not clearly see in what way it would help the general situation, unless it were to expand the physical volume of exports. I should have supposed, in the present circumstances, that it would have no considerable effect in that direction. So far as the internal production and consumption are concerned, sale receipts would fall off just about as much as costs have been cut.

Avoiding Wage Reduction

The experts recognize that it is impracticable to reduce costs and debts by a further 40 per cent, but I go much further than this. I do not believe that unemployment would be remedied by measures of this kind, even if they could be enforced.

I was, I think, the first to propose what I have sometimes called a "national treaty," namely, an all-round cut in costs and debts such as Australia has already had courage to adopt and, except in New South Wales, to apply, but I proposed this as an alternative to exchange depreciation for remedying maladjustment between one country and the rest of the world. It has no efficiency except in improving the trade balance.

Apart from local anomalies, I do not believe that a further general cut in money wages could do anything which a further exchange depreciation could not do better, nor is the fact of an increased real wage for the employed, in spite of the reduced national wealth, sufficient argument for cutting money wages. For this is a world-wide phenomenon to-day, which, indeed, is an inevitable accompaniment of the slump.

Depreciation of Exchange

We come next to the proposal for further depreciation of the exchange. I see nothing wrong, in principle, in this. I have not the detailed knowledge to say whether £125, £130, or even £140 is optimum level today. But I am clear upon what considerations the decision should depend. In the first place it is desirable to increase the trade balance further, and would a fall in Australian exchange have much effect in this direction?

As I said, the trade balance seems now to be fairly satisfactory. But apart from this is it safe to assume that a further exchange depreciation would much improve it? For the aggregate sterling value of Australia's exports would only be increased if the effect was to increase their physical volume, for which there may not be much scope without lowering their sterling price, of which there might be some risk, while, as for imports, the existing restrictions are surely more than adequate.

In the second place, what rate of exchange will create most confidence and will be most likely to discourage a flight from the Australian pound? If everyone expects a further depreciation and endeavours to anticipate it, there is something to be said for giving way.

Tariff and Exchange

On the other hand, each de facto depreciation may lead to expectation of a further depreciation. On the whole, I doubt if I should alter the exchange unless either the Australian banks and financial institutions were to tell me that it would make them feel more comfortable and more willing to expand credit, or a proposal was put forward as a substitute for tariffs. If alteration of the exchange were accompanied by a corresponding rectification of tariffs, I should support it.
For aggravation of the existing tariff by exchange depreciation being superimposed upon it is probably the principal cause of those remaining maladjustments which are purely Australian, and not just a reflection of world conditions. The tariff should reduce in proportion to the depreciation of the exchange.

Importance of Sterling Rate

But I hope that the Australian authorities will not overlook the fact that what would really suit them is further depreciation, not of the Australian pound, but of sterling, for this would raise export prices without increasing the burden of the external debt. It is the recent appreciation of sterling by 10 per cent which is the mischief. I suggest that the importance of consulting the interests of the Dominions in settling the value of sterling should be a major topic at Ottawa.

We come finally to a variety of suggestions put forward by the experts for attacking directly the volume of unemployment. I am in complete agreement with these, especially the proposed loan for relief works. They should be pushed forward as rapidly as prudence permits. Thus my counsel would be:

  • Reduce budget deficits to a figure allowed by the experts.
  • Satisfy yourselves that the trade balance is adequate to meet pressing requirements
  • Perhaps depreciate the Australian pound 5 or 10 per cent unless sterling itself is allowed to fall a little.
  • Under cover of this, undertake the necessary down ward readjustment of tariffs, which are crippling efficiency.

Above all, expand internal bank credit and stimulate capital expenditure as much as courage and prudence allow. The substitution of wages for doles needs more credit, but not necessarily much more currency.

Let me repeat that, broadly speaking, I take my stand with the experts against their critics and differ from the former on two points only. The first is a matter of degree. I feel that they are inclined to be too drastic. The second is a point of theory. I suspect that they are too much under the influence of precarious statistics relating costs to prices, and the dubious theory as to how one can be made to catch up with the other unless fresh purchasing power is realized. It may be that prices are related to costs in the same fashion as the tail to the cat.


Foster London Credit

One word in conclusion as to Australia's credit in London. I feel most strongly that it is immensely worth while to foster it. I believe that Australia has heavily over-borrowed in the past. I have often advised her securities to be avoided, but I do not, therefore, conclude the days of Australia's oversea borrowing are over.
In my opinion, the intrinsic quality of Australia's credit, though still very sensitive to passing events relatively to that of other borrowers, is higher to-day, in spite of Mr Lang, than it has been for several years.
Apart from what I may think, I believe that Australian credit is rising rapidly in the estimation of the London market. Australia's heroic measures to fulfil her bond may have been apprehended in England somewhat slowly, but they have not escaped notice. The acuteness of your domestic political struggle has at least had the advantage of throwing into the limelight the quality of the intentions and principles of the Commonwealth Government, which London, though undemonstrative, profoundly appreciates. Moreover, if my prognostications are right, it may not be too long before this has practical importance.

Period of Cheap Money

I believe that a period of ultra-cheap money is in prospect, that the day is not far off when respectable borrowers will be greatly sought. I should not be surprised if the first recovery from the slump begins within the Empire. At any rate, the best contribution towards world recovery which London can make will be the earliest possible resumption of her position as oversea lender and the extension of a helping hand to those debtor countries who have shown that they deserve it. Why should not Australia be one of the first of these? It lies within her power.

J.M. Keynes

  Institute of Public Affairs