152

13th September, 1928

PERSONAL AND CONFIDENTIAL

(Due to arrive Canberra 12.10.28)

My dear P.M.,

In conversation with Batterbee [1] in this last week, he asked if you had given any thought as to whom you wanted as the next Governor-General in Australia. Although there is, I think, about two years still to run before the expiration of the present regime, it appears that you will have to put in a fairly early application if you want to get either the Duke of York or the Earl of Athlone. The latter, I understand, has thoroughly proved himself as a most admirable and effective Governor-General in South Africa [2]-I have heard nothing but praise for him in all quarters. Since the death of his son in a motor accident, I understand that life in England in the immediate future has not the attraction for him that it would otherwise have had. I know no more than this-I don't know in the least whether he would want to come to Australia.

I don't know how your mind is working on the subject or whether you want a Royal Prince out there at all. As regards the Duke of York, as I have said before, I think it would be a good deal of an experiment, the success of which could not be foretold. I have had indications that South Africa may try and get the Duke of York.

I hear from Hankey [3] that the stories about Chamberlain's [4] health have been much exaggerated. The cheap press had him killed off and done for. I hear that he has every intention of standing again next election but that efforts will be made to relieve him of as much work at the Foreign Office as possible between his return from his trip and the election.

Hankey seems sure that the election will be in May or June 1929.

The House meets in November and will sit (with a month's break at Christmas) until it rises for the election.

Hankey thinks that if by chance Chamberlain's health did not allow him to go back to the Foreign Office after the election, and if Birkenhead [5] remains in politics, then he (Birkenhead) would probably go to the Foreign Office.

One of the papers here has the story that Birkenhead is leaving politics to take the Chairmanship of the Cables-Wireless Merger Company at a high salary. Birkenhead, so Hankey tells me, has since written privately to Baldwin [6] denying the truth of this story and also, I believe, denying the many rumours that he is leaving politics for the City.

I have heard a little about the Cables-Wireless business to the effect that neither Company will agree to the other's nominee as Chairman. [7] Sir Robert Horne [8] and Lord Reading's [9] names have been mentioned. Hankey himself, I believe, is vaguely in the running and I think is just a little intrigued with the idea.

A development of interest has taken place lately in this country in the shape of trials of the use of pulverised coal as a fuel for ships. I am told from the Admiralty that the initial installation in a merchant vessel was a success and that the firm (Blue Funnel, I think) intend to convert several more of their ships from oil burning to coal dust firing. The coal is carried in the ordinary way in bunkers and is pulverised and blown into the firebox as it is wanted.

Such pulverised coal firing for steam raising and other industrial purposes on land has been in successful use for many years but its use at sea is a novelty. The application might be a lifebelt for the coal industry if it makes good.

J. M. Keynes [10] contrives to deplore the return of this country to the gold standard. In an article published lately he says that he thinks it very possible that it has cost us 500 millions. The 'Economist' tackles him on this statement and, to my untutored mind, floors him. The issue between the gold standard protagonists and those who advocate a moderate inflation by a devaluation of sterling comes down to an issue between those who hold that the 'money' business of the country is the most important consideration and those who put the prosperity of industry first.

The 'Economist' invades Keynes' camp by doubting at some length whether inflation would be a permanent assistance to industry. It would apparently wreck London as the monetary centre of the world.

However, we are on the gold standard and the question is therefore quite academic.

The question of whether or not it is right and proper for the Bank of England and the Federal Reserve System to try and control credit still exercises some of the financial writers in the press and certain economists. As you will remember, the major countries of the world agreed at the Genoa Conference in 1922 that ... once the foreign exchanges have been stabilised on a gold basis, monetary policy should aim at regulating credit, not only with a view to maintaining the currencies at par with one another, but also with a view to preventing undue fluctuations in the purchasing power of gold.

This was the resolution on which the Bank of England and the Federal Reserve Board got their mandates from their respective Governments. After reading a good many of the arguments, it seems to the ordinary individual that this control has been a good thing. It has not been completely successful in ironing out all fluctuations and upsets, but one feels that things would have see- sawed much more violently in its absence.

However, in spite of the efforts at control that the Federal Reserve Board have instituted in America, something is happening there that they do not seem to understand and that they do not seem to be able to cope with. In spite of their assurance, I don't believe the economists really know much about the large scale activity of money and its equivalents in the mass. Either that or the control-machine in America is defective. They can only control credit in the mass and cannot apparently differentiate between legitimate industrial credit, essential crop-moving credit (the white-haired boys of the family), and their black-leg brother, Stock Exchange operation credit-and the latter is running wild down the street and wearing out his brother's clothes!

The degree of control by the Central Banks is very difficult in London and New York. In London there are only the Bank of England and a limited number of Joint Stock Banks with many branches. The Bank of England, although in daily relations with the Treasury, cannot be said to be susceptible to political control. In America there are twelve Federal Reserve Banks and their policy and that of their coordinating centre, the Federal Reserve Board, has been the subject of criticism in informed quarters by reason of their being amenable to pressure to ensure easy financial conditions rather than sound banking. The money market in London is well organised; the discount market in New York is young and relatively small. There are 28,000 independent banking institutions in the United States, of which only 10,000 belong to the Federal Reserve System.

The present is a fruitful period in which to carry out even the meagre study that I am able to devote to these matters, as there is sufficient movement going on to facilitate recognition of the various joints that are articulating. The Bank Rate here is 4 1/2%, and 5% in New York; both the Bank of England and the Federal Reserve System have been buying securities to defend themselves;

sterling exchange is just about at the gold point at which bullion will begin to move to America. New York has been tardy in putting up her Bank Rate so as not to disturb unduly ordinary industrial financing, with the result that credit has flowed into the Stock Exchange and has inflated market prices into boom proportions.

Barclays Bank Review for September implies that it would have been wiser for them to take more definite action at an 'earlier date to prevent the speculative position developing to the proportions it has. It will be interesting to see if this last renewed outburst of speculation in New York forces them to raise their Bank Rate again, which would be awkward for them just as the crops have to be financed-and if such an upward move would induce a rise in the Bank Rate in London.

The best of the pundits seem to agree that the period of dear money will continue in the next three months, and that cheaper money cannot be predicted before the New Year.

I have had two jobs in hand for some time which I hope to get off to you shortly. One is a file of curves showing all the important Australian statistics in graphic form, and the other a summary of the 'Economic Impact of America'.

The important resolution of the Trades Union Congress in this country in this last week will have interested you. I enclose 'Times' cutting recording the continuance of the policy of co- operation with the Mond Industrial Enquiry. [11]

I will continue to write you both 'Personal and Confidential' and 'Confidential' letters, although I expect election preoccupations will stop you reading them for the next month or two. [12]

I am, Yours sincerely, R.G. CASEY

1 Sir Harry Batterbee, Assistant Secretary at the Dominions Office.

2 The Earl of Athlone, a son of the Duke of Teck and husband of Princess Alice of Albany (a granddaughter of Queen Victoria) was Governor-General of South Africa 1923-31.

3 Sir Maurice Hankey, Secretary to the Cabinet.

4 Sir Austen Chamberlain, Foreign Secretary.

5 Lord Birkenhead, Secretary for India.

6 Stanley Baldwin, Prime Minister.

7 For details of the merger see Letter 170. Lord Inverforth was appointed first President of the court of directors of Cables and Wireless Ltd.

8 Sir Robert Horne, philosopher, barrister, Cabinet Minister (Chancellor of the Exchequer 1921-22), and at the time chairman and director of several large firms.

9 Lord Reading had been, inter alia, Lord Chief Justice 1913-21 and Viceroy of India 1921-26.

10 John Maynard Keynes, economist, Fellow and Bursar of King's College, Cambridge.

11 Despite harsh criticism from the left, the Trades Union Congress at Swansea endorsed efforts by moderates Walter Citrine and Ernest Bevin to achieve industrial change through discussion with capitalists like Mond. See note 10 to Letter 92.

12 The campaign got under way with Bruce's policy speech on 8 October. The elections, held on 17 November, saw the return of the Government with a reduced majority.