Keynes on Exchange Control

Post-Keynesian literature has not paid much attention to the issue of exchange controls, despite the fact that Keynes wrote in March 1940 that "There is nothing else which offers such a combination of difficulty of policy, difficulty of theory, difficulty of fact and difficulty of technique." Exchanges controls can be defined as the set of regulations that restrain the external convertibility of a currency, including for current transactions. Keynes had to take a position on the attitude to adopt with regard to the possibility of implementing such controls, in the 1930s and then more urgently between 1940 and 1944. In 1940, he was very much in favour of strict exchange controls. It can be assumed that exchange controls and the International Clearing Union project were two sides of the same coin. The multilateral clearing system that Keynes supported would have facilitated trade in a world where liquidity shortages had made exchange controls absolutely necessary, which contributed – even before the war – to reducing the volume of goods traded. Clearing therefore represented an expansionary measure in a world characterised by drastic restrictions on trade. On the other hand, Keynes recognised the need to impose a system of exchange controls within the framework of the International Clearing Union in order to protect it. However, our study of Keynes' views on the issue shows that he was strongly influenced by the context of the British economy at the time, as well as by the opinions of his contemporaries, particularly those at the Treasury, who were largely hostile to controls. This study draws on secondary literature covering the period, as well as Keynes' archives (King's College, Cambridge; and Keynes' Treasury Papers at Kew).