E. 7. [Tariffs and Development Policy] [a] , [1]

Tariffs and Development Policy

An important part of liberal aspiration and achievement in the last thirty years has been concerned with social reform, with the provision of various services tending to increase the security and raise the standard of living of the people, with redressing grosser forms of economic inequalities and injustices. At different times Liberals and Socialists have been able to co-operate, since, while Liberals might have no sympathy for the violent methods or the extreme collectivist ideals which some forms of socialism desiderate, the immediate objectives have been similar. Liberals may claim it as their special virtue that they hold the hope of modifying the social order by the inherent rightness and reasonableness of their proposals without invoking class hatred as a weapon. [2] The process of social betterment is a continual and endless one; no sooner has one goal been achieved than another appears. It is an essential part of Liberal doctrine that the process, if carried out in an orderly manner, in no sense jeopardises the position of the country considered as a competitor with the other countries in the race of progress, but on the contrary should confirm and increase her efficiency, prestige and influence.

In the period from 1925 to 1929 in addition to the usual tasks confronting statesmen of progressive inclination, there was a special problem arising from the unemployment situation and the mal-adjustment of costs and prices in this country to the world-level of prices. [3] The Liberal Yellow Book may well be regarded as one of the most important contributions which a political party has ever made towards the solution of a set of technical problems. [4] The suggested remedies for a special situation, of which the most important were concerned with schemes of national development, [5] were not only in conformity with general liberal principles, but themselves contributed to enlarge and enrich the liberal conception of the functions of the state in contributing to progress.

After the beginning of the world slump in 1929 the maladjustment, which this policy was designed to overcome, became more intense. It was therefore all the more desirable [b] that the policy should be carried out. [6] As time went on, the position grew so bad that some thought that a general tariff, [7] in spite of all its drawbacks, would be necessary in addition to the development policy, to ease the situation caused by the maladjustment between English and world prices and the consequent unemployment. [8]

In July 1931 the Report of the authoritative Macmillan [c] Committee on Banking and Finance [9] appeared and largely fitted in with the general policy advocated in the Yellow Book. This publication with all the prestige it carried should have been a great source of strength to the Liberal party in the advocacy of its recipes.

By the beginning of August 1931 the world crisis had grown so much more intense that it was becoming apparent to thoughtful people that a still more drastic remedy was needed. [10] There were two and really only two possible lines of action. (1) One was to make a general all-round attack on productive costs including money wages in England. (It should be emphasised that this would not be essentially an attempt to reduce the workers' standard of life, but to reduce both money wages and the internal cost of living in England and get them into line with world prices. The most that the British workers should have suffered by such a policy, properly conducted, would have been a loss of the fortuitous gains they had made through the fall in food prices, in the period immediately preceding.) (2) The other alternative was to devaluate the pound. Both these lines of action were beset with the most formidable difficulties. Expert opinion might well be expected to differ about which remedy should be preferred; the difference of opinion would not necessarily go on party lines.

Then there was the subsidiary problem of the unbalanced budget and the danger of inflation to which it gave rise. [11] All parties agreed that the budget must be balanced but there was difference of opinion about the proper method.

When a National Government was formed to deal with the situation and "save the pound", it was naturally expected that those who consented to make difficulties for their parties by entering a coalition had more in store than an expedient for balancing the budget, which was a comparatively easy matter. [12] If the Government was to save the pound, the only possible line of policy adequate to the situation was a concerted effort to secure, by all round negotiations or otherwise, a reduction in wages and prices. Such a policy, even if judged less desirable than the alternative of devaluation, would have been a worthy task for the National Government. But from the first it was obvious from the speeches of Ministers that nothing of the sort was intended. What is most extraordinary, it subsequently became apparent that the Cabinet was not agreed on the milder, and by that time probably quite ineffective, expedient of a general tariff. A National Cabinet had been formed without any previous understanding that it was agreed on the essential objective. As soon as this became obvious to the world, the pound collapsed.

Two points must be made about the National Government.

One part of their policy was to reverse the mild attempts of the Labour Government to introduce schemes of national development. To this the Liberal members unaccountably agreed. Since the policy was essentially devised to meet the problem of unemployment with which the country was faced, but now in far severer form, the development policy was more and not less necessary and its reversal was bound to cause a serious aggravation of the unemployment situation. Did Liberal ministers not believe this? If not, was their former subscription to the policy mere lip-service? Or were they driven to sacrifice what they believed to be right to secure agreement? But for what purpose was the sacrifice made? Agreement was just what was not secured. To sacrifice this fundamental part of recent Liberal doctrine was folly in these circumstances. But if they did not really believe in the Liberal doctrine and had merely paid lip-service to it before, then indeed they must be accused of having first fooled and then betrayed their followers.

The second and even more serious point about the National Government is this. The Tories have clearly been exploiting the national crises for two purposes. One is to foist upon the country not an emergency general tariff to regulate the balance of trade, made adverse by the mal-adjustment already mentioned, but a full-blown policy of protection. The second Tory object is to make people believe that the present troubles (in fact produced by world conditions) are due to or aggravated by the policy of social amelioration which has been the prevailing national policy in recent years, but is especially associated with the Liberal and Labour parties. This is a feature in the political situation which should give rise to most serious apprehension in Liberal minds. It is always the Tory tendency to suggest that the causes of national affluence and social reform are mutually inimical. It is the Liberal belief on the other hand that the two may go hand in hand. It is that fundamental article in the Liberal creed which is now challenged by the Tory attitude. They wish to take full advantage of the unreasoning sentiments and alarms, which are always aroused in a time of national emergency, to check or reverse the policy of social reform.

There were only two possible remedies for the situation which had arisen by August. The suspension of gold payments on September 21st has thrust the second upon us. No responsible opinion now holds that we should return to the old gold parity, unless there is some unforeseen [d] and spectacular improvement of conditions in the outer world, accompanied by a very great rise of prices there.

The enforced adoption of the second remedy carries two corollaries.

1. There is no need to desire a reduction of money wages. Only imperative necessity, if anything, could make an all-round reduction practicable, and sectional reductions carried out where workers happen to be weakest are inequitable and economically unsound. The relation of our wages to the world prices had been automatically adjusted. We have had one remedy with its unpleasant consequences; there is no need to strive for the other; we may legitimately avoid seeking the worst of both worlds. Employment will automatically increase and, were it not for the black situation elsewhere, might rapidly rise to a high level.

The Tory element in the country will no doubt [e] continue to press for a reduction of wages. So much was said of this before September 21 [13] that uninformed opinion probably continues to think it desirable, the Tories will endeavour to exploit this opinion. In the new situation any attack upon wages takes on a wholly new aspect. Now that there is no longer any question of a reduction in the cost of living, it will constitute an attack on the standard of life. It would have been justified before as part of an attack on the whole of the internal price-structure, including the cost of living. Now it becomes merely predatory.

2. The case for a general tariff has gone. We have got what is more than the most ardent tariff-mongers could ever have hoped, a high barrier against all imports combined with a bounty on all exports. If the present barrier is not thought quite high enough the Bank of England can easily make it a little higher. We have achieved the object which those Liberals who toyed with the tariff idea wanted, while avoiding all the characteristic evils of a tariff which Liberals of all time have rightly tilted against.

Again uninformed opinion will not appreciate that the reason which led Liberals of judgement to toy with the idea have vanished; again the Tories will exploit uninformed public opinion.

What is the present position?

We have the following cogent reasons why Liberals who believe in Liberalism should strenuously oppose the National Government:

1. Whatever the formula adopted, the country will have no assurance, should the National Government be returned, that a policy of protection will not be adopted.

2. The National Government has no intention of proceeding with and intensifying the policy of national and local development schemes. This has been a leading element in liberal policy in recent years and is now more important than ever. As a remedy for unemployment it is quite unlike the tariff which would only be justified so long as there was mal-adjustment between home and foreign prices, and which might well cause difficulties abroad. The development policy is a partial remedy for the world situation itself, easing the condition of glut, increasing and not decreasing employment abroad, and so redounding indirectly as well as directly to our advantage.

3. There is bound to be a preponderant [f] Tory element in the National Government. By an attribution (almost totally false) of present difficulties to recent measures of social reform, it will hold up normal progress in these matters for a period of five years, the later part of which may well include a period of world recovery. This will be bad, both in itself and because it will exacerbate the rank and file of labour and drive it to an extremist position.

4. Unless a large body of men of Liberal views retain their independence now, the Tory and Liberal parties will be merged, and the Liberal hope that a better social order may be achieved without the extremity of class bitterness and strife will be irretrievably lost.

This is the psychological moment at which reaction may triumph, and the Tories know it.

What is the constructive side?

1. The policy of national development must be pursued. There are the other items of the Yellow Book programme, some more, others less relevant to the present emergency.

2. The world crisis is so closely connected with the waterlogging of capital, that the plan of a National Investment Board should probably be brought to the fore at an early stage. [14]

3. The whole future of the country depends on the proper attitude towards stabilization. There is grave danger that the National Government may be too much at the beck and call of narrow banking interests and rush us into hasty and injudicious stabilization with all the disastrous consequences of that of 1925.

4. This country is in the position to take an immediate lead in the international economic crisis. [15]

In the present situation a policy of national development pursued by this country alone would be insufficient. National development on a world scale is required and can alone solve the problem of the uneven distribution of gold and of floating resources generally. Crisis will whip foreign bankers into amenability to wise leadership on these lines. How can a national government take a bold and vigorous lead in this matter, when its own economic ideas, as its domestic policy shows, are rooted in the past?

But what is the practical course for men of Liberal mind? There is much to be said for joining the Labour Party. Elements therein, with which they are out of sympathy, may not be more irksome to them than are the nonsensical utterances of extreme Primrose-Leaguers or the narrow outlook of monied interests to intelligent Conservatives.

Something may depend on Liberal leaders. Some are lost to the cause. Mr. Lloyd George is to be commended for expressing opposition to a general election; [16] but this is not enough; if the Liberal Party is worth saving, he must express opposition to any perpetuation of a Government with the policy of the present National Government. That section of the party which throws in its lot with that Government will undoubtedly be merged and lost.

Some Tories may genuinely believe that it is unpatriotic to oppose the National Government; but it is in their party's interest to spread that belief. The situation is undoubtedly critical (though the crisis is now a world crisis and not a specifically national one). An emergency always makes some lines of action unpatriotic. The question remains what particular lines of conduct are unpatriotic in precisely this emergency? It is unpatriotic to be panicky, it is unpatriotic not to spend or find a good investment for money in hand, it is unpatriotic to take money out of the country. It cannot be unpatriotic to oppose a government root and branch if one believes that their policy is detrimental to national and world interests, and that there is a better policy available.

If unity is really desirable in the national interest, the present government must come to terms with the opposite section of opinion. If it does not do so, the label "national" is misleading and the Liberals should not be duped by it. If they join in the hue and cry, the intelligent members of the Labour Party will be confirmed in their belief that there is nothing to choose between the capitalist parties. And they will be rightly confirmed; for this is a real test whether the Liberal Party is capable of acting up to its own convictions in an emergency, not a severe test, but the more decisive for that.

  1. 1. The pamphlet is not dated or signed. However, several elements--besides the fact that it was found among Harrod's papers: see source note a to this document--suggest that it was written by Harrod.

    Firstly, the date can be inferred from the text with some precision. It was certainly written after Britain abandoned the gold standard on 21 September 1931 and before the general election of 27 October 1931 was called. In fact there is no explicit reference to the coming election, which however was in the air, while there is a reference to Lloyd George's opposition to it. It is therefore likely that the pamphlet was written at a time when it was generally believed that an election would be called but before the writs were actually issued (7 October), that is, early in October. A letter Harrod received from Maurice Hastings on 3 October and a letter he wrote to Gilbert Murray two days later (letters 216 R and 217 R) indicate that Harrod "hurriedly" wrote a document on the political situation, which was eventually printed as a pamphlet ( Rowse to Harrod, 15 October 1931, letter 218 R). The dating of Harrod's document and of the pamphlet thus fall both within the same narrow margins.

    Secondly, the pamphlet was written by a liberal opposed to the National Government, and Harrod was one. More precisely, the author of the pamphlet suggests that as a practical course liberals may join the Labour Party, and Harrod himself later in October campaigned for Labour free trade candidates in constituencies where no Liberal candidate was contesting the seat (see letter 220 ), and later took part in some activities of the New Fabian Research Bureau (see note 1 to essay 8 ). The sympathy for the Labour party on social reform (if not on the means to achieve it) is consistent with Harrod's opinion expressed in the 1919 manifesto for the Oxford University Liberal Club (see note 2 below).

    Thirdly, Rowse's letter cited above indicates that Harrod's pamphlet was concerned with tariffs, and the pamphlet reproduced here is. This, in itself, does not provide strong evidence, as the political debate at the time, in particular within the Liberal party, mainly regarded tariffs versus free trade.

    Fourthly, the pamphlet defends the free trade point of view. This, of course, was a position shared by many liberals. Harrod, however, seems to have been known among liberals as an ardent free-trader: see, for instance, Robertson's letter to Harrod of 5 April 1933 (letter 302 , [jump to page] ).

    Fifthly, the theme of Britain taking the lead in the international economic crisis by enacting a policy of development later appears in Harrod's letters to Walter Runciman of June and July 1932 (letters 240 , 243 and 249 ) and in his contributions for The Economist ("Monetary Policy", 1932:3 , here reproduced as press item 2 ), The Times ("The Dilemma in the Economy. How to Restore Demand", 1932:7 , press item 4 , [jump to page] ) and the Daily Telegraph ("Britain's Lead in Currency Policy", 1933:4 , press item 6 ). Development policy, moreover, soon became a dominant topic of Harrod's policy and theoretical reflections.

    Sixthly, the style of this pamphlet resembles Harrod's own, in particular in the frequent use in political writings of the rhetorical reference to authoritative sources when supporting a specific policy (see, for a comparison, Harrod's letter 249 to Runciman of 6 July 1932, [jump to page] ).

    There are, however, in the pamphlet two references somewhat at odds with the remainder of Harrod's writings. The Liberal Yellow Book, in fact, is nowhere cited in Harrod's interwar papers and correspondence, while the Macmillan Report was referred to once only, in Harrod's November 1934 article in The Times ( 1932:7 , press item 4 , [jump to page] ), and there it was inserted only on the suggestion of the editor (Barrington-Ward to Harrod, 6 July 1932, letter 250 R).

    It is suggested that the concordances prevail over this lack of reference elsewhere of the Liberal Yellow Book, and that this pamphlet can be attributed to Harrod with a good margin of confidence. Whether this is correct or not, the document Harrod wrote early in October 1931 on the wave of the "disgust" at the evolving of the political situation marks the revival of his interest for current events--which seems to have been sleeping since his nervous breakdown in July 1928-- which at first eventuated in his canvassing for the Labour party, in the participation in some of the activities of the New Fabian Research Bureau and in the writing of numerous letters to and articles for the press on policy matters. Moreover, it seems likely that the tariff problem contributed to stimulate Harrod's interest for a theoretical justification of free trade and eventually to his interest in the writing of International Economics (which was put to one side after the nervous breakdown--see note 1 to letter 135 --but was in the process by March 1932: see letter 229 ), the last chapter of which was indeed dedicated to tariffs.

    2. Harrod held this view since at least 1919, as expressed in the "Suggestions for draft of a manifesto" presenting the newly re-founded Oxford University Liberal Club: the passage is cited in note 1 to letter 7 .

    3. Between 1925 and September 1929 prices in terms of gold fell in Britain by 13 per cent, against a world average of 6.7 per cent fall (of which United States 6%, Germany and France 4%). Wages remained approximately constant in Britain during the period. See the report of Committee of Economists, "The Causes of the Present Depression", in S. Howson and D. Winch, The Economic Advisory Council 1930-1939. A Study in Economic Advice during Depression and Recovery (Cambridge: Cambridge University Press, 1977), pp. 184-87 and 232.

    4. Liberal Industrial Inquiry, Britain's Industrial Future (London: Ernest Benn, 1928).

    5. A large programme of national development as "the only sound way of dealing with unemployment" was the gist of book 4 of Britain's Industrial Future (see also the summary of conclusions on p. 476) and of Lloyd George's pledge We Can Conquer Unemployment (London: Cassell, 1929), in particular pp. 9-10.

    6. Although free trade and electoral reforms were practically the only subjects of political discussion within the Liberal Party, a program of vigorous national development had been strongly advocated by Lord Lothian in a letter to Lloyd George on 29 May 1930. However, by mid-May 1931 the positive policy of the Yellow Book disappeared from the agenda (see A. Thorpe, The British General Election of 1931, Oxford: Clarendon Press, 1991, pp. 61-62).

    7. When this pamphlet was written, tariffs were the hottest issue on the political agenda; this explains why this topic is taken as the pivot for the whole narrative of the events leading to the present political and economic situation.

    The Conservatives strongly favored a protectionist policy, Labour was divided. The Liberal official policy was based on the defence of free trade, but the party was actually also divided on the issue. MacDonald's National Government did not take a clear stand on tariffs, as the Prime Minister feared that a protectionist programme would provide a banner under which the opposition could unite. The coalition eventually agreed to appeal for a "free hand" in a situation of emergency, specifically including a tariff. This solution exasperated the division in the ranks of the Liberals. While the official position of the party was in favor of free trade, since the end of 1930 John Simon led a strong minority (including Runciman and Hore Belisha) ready to advocate and support tariffs; by early October this Liberal National group had set up a separate party with paid organizers (see Thorpe, The British General Election of 1931, chapter 5. On Simon's position see his autobiographical Retrospect. The Memoirs of The Rt. Hon. Viscount Simon, London: Hutchison, 1952, pp.169-72).

    8. Specific reference is probably to the report of the Committee of Economists--Keynes, Henderson, Stamp, with a safeguarding note by Pigou and Robbins's strong dissent--"The Causes of the Present Depression" (now in S. Howson and D. Winch, The Economic Advisory Council, 1977: on tariffs see pp. 202-11 and 221-31, on the "ways of increasing home investment" see pp. 199-201).

    9. Harrod is actually misnaming the Committee on Finance and Industry, Report (London: HMSO, 13 July 1931).

    10. After two months of ravaging in Europe, the financial crisis hit Britain after mid-July, causing the Bank of England to lose one-quarter of its official reserves. As the second Labour government was not prepared to meet the emergency--in spite of advice being supplied by several bodies: see Howson and Winch, The Economic Advisory Council (1977), chapter 4--it underwent more and more serious difficulties eventually leading to MacDonald's resignation and to the formation of the National Government. On the other factors contributing to deepen the crisis in Britain see for instance D. Moggridge, "The 1931 Financial Crisis--A New View", The Banker 120 (1970), pp. 832-39; R. Skidelsky, Politicians and the Slump. The Labour Government of 1929-1931 (London: Macmillan, 1967); and P. Williamson, National Crisis and National Government. British Politics, the Economy and Empire, 1926-1932 (Cambridge: Cambridge University Press, 1992), part III.

    11. On 31 July the May Report was published forecasting a budget deficit of £120 million and recommending cuts of £97 million in public expenditure.

    12. The National Government, under the guidance of MacDonald, was formed on 24 August 1931 with the explicit purpose to save sterling by balancing the budget (see for instance A. Thorpe, The British General Election of 1931, chapter 5).

    13. See for instance the leaders in The Economist on "Tariffs, Wages and Exports" (11 April 1931, pp. 771-72) and "The Wages Problem" (30 May 1931, pp. 1143-44).

    14. The Liberal Party was proposing a loan-financed programme of public expenditure controlled by a Board of National Investment, which should organize the means of financing the national development policy (see note 5 to this essay): see Liberal Industrial Inquiry, Britain's Industrial Future, pp. 111-15.

    15. Harrod expressed this belief on other occasions, both in the early and in the late 1930s: see in particular Harrod's letter to Walter Runciman of 6 July 1932 (letter 249 , [jump to page] ), his articles cited in note 1 to this essay, and his letter to Simon of 11 August 1938 (letter 804 , [jump to page] ).

    16. Lloyd George, the leader of the Liberal Party, was indeed firmly opposed to a general election. However, he was in poor health, and was substituted in the management of current affairs by Herbert Samuel.

    1. a. Printed D, not signed nor initialled, untitled, not dated, eight pages, in HPBL Add. 72734/148-151.

      b. Doc.: «deisrable».

      c. Doc.: «MacMillan».

      d. Doc.: «unforseen».

      e. Doc.: «dount».

      f. Doc.: «prepondering».

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