Fifteen years after the Global Financial Crisis: Recessions and Business Cycles in the History of Economic Thought

Liberals and Protectionism: Keynes, Runciman, and Britain's International Trade Policy between the World Wars.

Levkovych Oksana, London School of Economics and Political Science

Since Kindleberger’s analysis of Britain’s inability and the United States’ unwillingness to assume responsibility for stabilising the international economic system, hegemonic stability theories have pointed at Britain’s loss of relative economic power as one of the key reasons for the breakdown of the international economic cooperation, which dramatically affected international trade openness between the World Wars. Taking into consideration Britain’s particular economic circumstances in the late 1920s and early 1930s – its downwardly inflexible wages, the government’s commitment to the Gold Standard and a fixed exchange rate, and persistently high unemployment - John Maynard Keynes recommended tariff protection to generate employment and ensure a positive trade balance through restriction of imports and improved terms of trade. If Britain had followed Keynes’s suggestion and adopted a temporary revenue tariff in early 1930, the eventual concerns about adverse trade balance and depreciation of the foreign exchange rate would have been alleviated. That would have removed at least one source of international trade contraction, enabling Britain to remain on the gold standard. Domestic output and employment would have been boosted ahead of the worst of the depression. Although the abandonment of the Gold Standard “shocked the world”, it proved a liberating experience: making cheap credit possible had an expansionary effect on the economy, just as Keynes predicted. After the crushing victory in the 1931 general election, the Conservatives used devaluation as an urgent and pragmatic justification for adopting permanent protection. However, when finally introduced, the general tariff was significantly more modest than anticipated by the “free hand” protectionists dominating the government. Moreover, the free traders supported its introduction after it was no longer necessary, according to Keynes, following the sterling float. This was because for the Liberals in key positions of power, balancing trade through tariff protection became a strategic goal in its own right. Walter Runciman, the President of the Board of Trade (1931-1937) and a Liberal Free Trader used Keynes’s idea of a 10 per cent revenue tariff as the basis of legislation instead of a three-decker high tariff structure prepared by the protectionists. He then used this low tariff for reciprocal bargaining and bilateral agreements shaping Britain’s inter-war trade policy as a move towards international and imperial trade liberalisation for domestic welfare creation and reversal of systemic closure. Drawing from the selected archival records, the paper offers a novel international political economy analysis of structural change that engenders active human agency. In doing so, it contributes to our understanding of why and how pivotal actors were so important and highlights the contingency involved in economic policymaking.

Area: Eshet Conference

Keywords: liberalism, protectionism, hegemonic stability theory, trade policy, structure-agency

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