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Macroeconomics After
the Financial Crisis

How should Europe cope with the negative and still unfolding economic conse-
quences of the current economic crisis? And why does Europe seem to be more
conservative than the USA in dealing with the crisis?
Since the outbreak of the current international economic crisis in 2008, the
USA and many of the European countries have been tormented by high levels of
unemployment and low levels of inflation, interest rates close to zero and fiscal
policies of austerity. As such, the modern economic mainstream has been chal-
lenged by these empirical facts. Today, several years after the outbreak of the
international economic crisis, supply side effects do not seem to be increasing
employment as the modern mainstream claimed they would. Aggregate demand
has to play a more important role in macroeconomic analysis than hitherto.
That is, there is a need for alternative explanations of how a modern macro
economy is expected to function and how the macroeconomic outcome could be
manipulated by the right economic policy proposals. As expressed by the
contents of the present book, a Post-Keynesian understanding proposes such an
alternative theoretically, methodologically and in terms of policy measures.
This book will present new materials and approaches, especially new evidence
and new views on the potential problems of public debt, the European Union and
the present crisis, Central Banking, hysteresis in an agent based framework, the
foundations of macroeconomics and the problems of uncertainty.

Mogens Ove Madsen is Associate Professor at the Department of Business and

Management, Aalborg University, Denmark.

Finn Olesen is Professor at the Department of Business and Management,

Aalborg University, Denmark.
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Macroeconomics After
the Financial Crisis
A Post-Keynesian perspective

Edited by Mogens Ove Madsen

and Finn Olesen
First published 2016
by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
and by Routledge
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Routledge is an imprint of the Taylor & Francis Group, an informa business
© 2016 selection and editorial matter, Mogens Ove Madsen and Finn
Olesen; individual chapters, the contributors
The right of Mogens Ove Madsen and Finn Olesen to be identified as the
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A catalogue record for this book is available from the British Library
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Names: Madsen, Mogens Ove, 1954-editor. | Olesen, Finn, 1959-editor.
Title: Macroeconomics after the financial crisis : a post-Keynesian
perspective / edited by Mogens Ove Madsen and Finn Olesen.
Description: New York : Routledge, 2016.Identifiers: LCCN 2015043502|
ISBN 9781138124486 (hardback) | ISBN 9781315648132 (ebook)
Subjects: LCSH: Keynesian economics. | Monetary policy–Europe. |
Investments–Europe. | Sustainable development.
Classification: LCC HB99.7 .M33 2016 | DDC 339.5/3094–dc23LC
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ISBN: 978-1-138-12448-6 (hbk)

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Typeset in Times New Roman

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Contents

List of figures ix
List of tables x
Notes on contributors xi

1 The Great Recession: an introductory view 1

M o g e n s o v e Mads e n and F i nn ol e s e n

2 Keynes ‘in the twenty-first century’: tradition, circumstance,

fad and pretence in the wake of the Great Crisis 10
J a Me s ga l b r a i t h

3 Public debt, secular stagnation and functional finance 20

Peter skott

4 Neoliberal economic policy, growth models and

the crisis in the Euro area 38
e n g e l b e r t s t ockha MMe r

5 Corporatism and capital accumulation: the fate of the

Nordic model 53
J o n a t h a n P e rrat on

6 Structural budget deficits: getting causality right 73

J e s P e r J e sP e rs e n

7 The making of a revolution: how important are

economic crises? 86
Finn olesen
viii Contents
8 The need for macro foundations for microeconomic
theory 98
c l a u d e gnos

9 Microfoundations: on the use and misuse of theories

and models in economics 105
l a r s P å l s s on s yl l

10 Böhm-Bawerk meets Keynes: what does determine the

interest rate, and can it become negative? 127
u l r i c h v a n sunt u M and toM n e uge bauer

11 The socio-economic philosophy of Keynes: lessons for the

twenty-first century 146
eric berr

12 Towards a theoretical foundation of Animal Spirits:

probability, uncertainty and intentionality 159
J o a c h iM günt z e l

13 Two generations of path dependence in economics? 171

M o g e n s o ve Mads e n

Index 192
Figures

3.1 Real interest rates on three-month treasury bills and the

debt–GDP ratio 28
5.1 Denmark unemployment rate (% of labour force) 58
5.2 Finland unemployment rate (% of labour force) 59
5.3 Norway unemployment rate (% of labour force) 59
5.4 Sweden unemployment rate (% of labour force) 60
5.5 Adjusted wage share (%) 63
5.6 Net returns on net capital (2010 = 100) 64
5.7 Denmark: net saving/borrowing (% of GDP) 65
5.8 Denmark: investments/profits 66
5.9 Finland: net saving/borrowing (% of GDP) 66
5.10 Finland: investments/profits 67
5.11 Norway: net saving/borrowing (% of GDP) 67
5.12 Norway: investments/profits 68
5.13 Sweden: net saving/borrowing (% of GDP) 69
5.14 Sweden: investments/profits 69
6.1 Euro area, rate of unemployment (1960–2013) 76
6.2 Euro15: real investment–GDP (1970–2013) 77
6.3 EU15: real investment rate and rate of
unemployment (1970–2013) 77
10.1 Overview of the model 134
10.2 Effects of expansionary monetary policy 137
10.3 Effects of expansionary fiscal policy 138
10.4 Monetized public debt taking 138
10.5 Effects of an increase in the household’s savings 140
10.6 Effects of expansionary monetary policy on the
household’s stocks 141
12.1 Keynes’s probability graphic 164
12.2 Probability-based attentism 166
Tables

4.1 Increase in household debt (% GDP), 2000–8 42

4.2 Increase in unit labour costs (%), 2000–8 43
4.3 Output gaps in major European countries (%), 2014 48
5.1 Annual growth rate of real capital stock, 1961–2010 64
13.1 Two generations of path dependence in social science 184
Contributors

Eric Berr, Professor at University of Bordeaux, France

James Galbraith, Professor at the University of Texas at Austin, USA
Claude Gnos, Professor at University of Burgundy, France
Joachim Güntzel, Professor at Baden-Wuerttemberg Cooperative State
University, Germany
Jesper Jespersen, Professor at Roskilde University, Denmark
Mogens Ove Madsen, Associate Professor at Aalborg University, Denmark
Tom Neugebauer, Research Assistant at University of Münster, Germany
Finn Olesen, Professor at Aalborg University, Denmark
Jonathan Perraton, Professor at University of Sheffield, UK
Peter Skott, Professor at University of Massachusetts Amherst, USA, and
Aalborg University, Denmark
Engelbert Stockhammer, Professor at Kingston University, UK
Ulrich van Suntum, Professor at University of Münster, Germany
Lars Pålsson Syll, Professor at Malmö University, Sweden
This page intentionally left blank
1 The Great Recession
An introductory view
Mogens Ove Madsen and Finn Olesen

When the economic crisis materialized in 2008, caused by the ongoing financial
crisis, hardly anyone from the modern macroeconomic mainstream expected it to
be a persistent crisis. Many argued that, this time, it would be a rather short-lived
period with only minimal negative economic setbacks. However, as we know
now, that was unfortunately not the case. As such, the macroeconomic system
showed beyond any kind of dispute that problems of instability are not randomly
determined. Rather, instability might be systemic and might be caused by built-in
malfunctions in the financial sector (see, for example, Leijonhufvud, 2014).1
Furthermore, you have to remember that such malfunctions were one of the main
results of a process of financial deregulation in the USA as well as in Europe. As
such, mature economies have undergone a general process of ever-increasing
financialization for years – a process whereby financial markets, financial institu-
tions and financial elites gain greater influence over economic policy and
economic outcomes.
That is, the setbacks were of such a magnitude that many economies had
tremendous problems maintaining a high enough level of effective demand
resulting in negative GDP growth rates, massive unemployment and huge budget
deficits. These effects were devastating to such a degree that it seems right to term
this crisis the ‘Great Recession’.
Internationally, Europe seems to have been hit harder than the USA. Presently,
recovery is ongoing with certainty in the USA while real recovery is still to be
seen within the European Union (EU) – not least because of differences in how
fiscal and monetary policies are conducted in the USA and in the EU.
As such, many important questions need an answer. For instance, why does
European economic policy – addressing the conduct of fiscal and monetary policy
within the EU – seem to be more conservative than in the USA in dealing with
the crisis, the latter having generally been more demand-oriented than has been
the case for the EU?2 In particular, many members of the EU have felt the restric-
tions of the fiscal policies of austerity keeping their economies in the trap of
permanent recession.3 The outcome of such a fiscal policy strategy has been one
of massive unemployment, budget deficits that would not come down, increasing
public debt positions and an inflation regime of, at best, zero inflation and, at
worst, even one of deflation. That is, the European process of integration has not
2 Mogens Ove Madsen and Finn Olesen
been a successful one in recent years. Rather than bringing prosperity to its
members it has delivered the opposite. As such, the Great Recession has high-
lighted the inadequacies of the institutional set-up of the European and Monetary
Union (EMU), actually reinforced by the tightening of the Stability and Growth
Pact in 2012.
More surprisingly, the huge negative economic consequences of such a devas-
tating fiscal policy strategy could easily have been foreseen, as explained by
Truger (2013); as he points out, that follows from careful textbook reading of
standard macroeconomic theory together with an eye on available empirical
results. Monetarily speaking, the strategy has, in general, traditionally been to
follow a Taylor rule-based interest policy. Nevertheless, such a strategy breaks
down when the nominal interest rates set by central bankers hit a floor of zero. In
such a situation, conventional monetary policy has no probability of success.4
Furthermore, with deflationary tendencies such a ‘zero-bound’ scenario only
makes the real interest rate to go up, which, of course, further decreases the
investment demands of firms and consumption demands of households. That is,
the modern macroeconomic mainstream has been serious challenged by empiri-
cal facts.
Today, more than seven years after the outbreak of the international economic
crisis, effects of the supply side policy do not seem to be able to combat the reces-
sive tendencies in Europe by themselves. That is, changes in relative prices are
not effective enough to make a disequilibrium situation of excess supply in the
goods and labour market go away and put the macro economy back on track on
its long-run optimal equilibrium path, as stated by the mainstream, with their
dynamic stochastic general equilibrium (DSGE) models – models that, with their
‘Lucasian foundations had less and less relation to reality’ (Skidelsky, 2014: 223).
Therefore, macroeconomics is not only a story of aggregate supply, low infla-
tion rates, full employment and structural budget deficits of around zero.
Presently, as was the case in the 1930s with the Great Depression, macroeconom-
ics is also still a story of lack of effective demand, existence of involuntary
unemployment and the need for the right fiscal and monetary policy to be pursued
to stimulate GDP growth rates. When there is an economic crisis, uncertainty
presents an urgent problem. That is, to some degree the future is truly unknown.
By the actions of today, households and firms, together with government, are
partners in creating what eventually will become the economic environment – the
economic institutional set-up – and thereby determine the macroeconomic output
of the future (see, for example, Dow, 2015).
Seen from a Post-Keynesian perspective, there is no room for a representative
agent with rational expectations. Processes of intertemporal consumption
optimization – the quest for first best solutions – is a fantasy that is not empiri-
cally supported by facts. Rather, such a statement has been falsified by evidence.
In general, we have to accept that the micro foundation of macroeconomics is
not one of perfection, as argued by most mainstreamers. Rational economic
behaviour can be different from that which lies behind the actions of the rational
economic man. Due to the existence of uncertainty, epistemologically as well as
 The Great Recession 3
ontologically, the economic behaviour of real-life households and firms is
conducted in a manner that is characterized by a kind of bounded rationality.
Mistakes occur, and these are not only of a stochastic nature; rather, errors in real-
life economic processes are often at least to some degree of a systematic nature.
That is, the macroeconomic system is not a closed deterministic functioning –
ergodic – system. Rather, it is an open, social dependent and changeable system –
in essence, it is a path-dependent system that works in a non-ergodic way (see, for
example, Lawson, 1997; Davidson, 2003–4, 1984; Chick and Dow, 2005).
As such, there is a need for an alternative macroeconomic understanding.
In correspondence with real-life phenomena, macroeconomics has to be able to
address the right way for economic processes to unfold. Likewise, macroeconom-
ics needs to change its views on economic policy. Fiscal policy, as well as
monetary policy, conducted the right way has a very important role to play in
trying to achieve the best macroeconomic outcome possible. That is, in general,
economic policy should focus on employment problems and not follow a strategy
of austerity; when creating more employment, both the problems of budget defi-
cits and public debt and deflationary tendencies go away by themselves. Seen
from a Post-Keynesian perspective, one way of pursuing economic policy in the
right manner could be to follow the strategy suggested by Hein (2013–14: 348),
which is built on three pillars:

the reregulation of the financial sector in order to prevent future financial

excesses and financial crises, the reorientation of macroeconomic policies
toward stimulating and stabilizing domestic demand… and the reconstruction
of international macroeconomic policy coordination and a new world financial
order, so as to rebalance the world and regional economies.

As expressed by the contents of this book, a Post-Keynesian understanding

proposes such an alternative to the modern macroeconomic mainstream theoreti-
cally and methodologically, as well as economic policy wise, in accordance with
the above-mentioned statements. Furthermore, following such an alternative
strategy, ‘the world we live in would be a more prosperous and civilized economic
society’ as pointed out by Davidson (2015: 382).

Economic policy aspects of real life

In Chapter 2, James Galbraith addresses the importance of the General Theory.
As in physics, where the Newtonian mechanics had been taken over by Einstein
and his theory of relativity, Keynes’s main achievement with his General Theory
was to break away from the old understanding of Euclidean economics and bring
light to a more modern, non-Euclidean world of economics. In such a new world,
the theoretical focus had to be put on an economic system where the financial
sector in a crucial manner interacts with the processes of production. As such, the
determination of employment is dependent on the economy as a whole and on the
level of effective demand. However, this was, in general, not how the messages
4 Mogens Ove Madsen and Finn Olesen
of Keynes were interpreted. Rather, he was ‘simplified, modified, he was under-
mined, he was forced into the intellectual coffin of equilibrium analysis. His
vision was obliterated,’ as Galbraith tells us. In modern times, this meant the
appearance of new Keynesianism, with its focus on trying to give an explicit
micro foundation for macroeconomic theory; that is, a story of intertemporal
optimizing agents using rational expectations. Policy wise, the rephrasing of
Keynes might seem appropriate. However, mainstreamers, in general, have had a
rather naive perception of the still ongoing crisis. It was perceived as just a matter
of getting more fuel on the tank – bringing back the economy to its equilibrium
trend. Unfortunately, the crisis is more severe than can be portrayed by a fuel tank
analogy. The crisis could be one of secular stagnation. But we need more than
this. We have to incorporate institutional matters as well, Galbraith argues. As
such, economists should take at least four questions into consideration: 1) the
limitation of the use of resources, 2) the potential lack of a stabilizing hegemonic
power, 3) the effect of technological change on employment and 4) the role of
bank money in creation booms and bobbles.
Chapter 3, by Peter Skott, addresses the important question of the interplay
between public debt and the case of stagnation. Furthermore, he also puts forward
a modern view on functional finance. As such, he argues that fiscal policy and
public debt may be required to maintain full employment and avoid secular stag-
nation. This conclusion emerges from a range of different models, including
overlapping generations (OLG) specifications and stock-flow consistent (Post-)
Keynesian models. One of the determinants of the required long-run debt ratio is
the rate of economic growth. Therefore, according to Skott, low growth leads to
high debt, and empirical correlations between growth and debt may reflect this
causal effect of growth on debt, rather than a negative effect of debt on growth.
Based on this result, Skott draws a very important conclusion regarding austerity
policies: the level of government consumption and the structure of taxation influ-
ence the required debt ratio and, paradoxically, austerity policies are counterpro-
ductive on their own terms: cuts in government consumption lead to an increase
in the required level of debt.
In Chapter 4, the Euro crisis and contradictions of neoliberalism in Europe are
discussed by Engelbert Stockhammer. In general, he finds that neoliberalism has
not given rise to a sustained profit-led growth process, but to a finance-dominated
accumulation regime in which growth relies either on financial bubbles and rising
household debt (‘debt-driven growth’) or on net exports (‘export-driven growth’).
The financial crisis that began in the market for derivatives on the US subprime
mortgage market has translated into the worst recession since the 1930s. In
Europe the crisis has been amplified by an economic policy architecture (the
Stability and Growth Pact) that aimed at restricting the role of fiscal policy and
insulating monetary policy and central banks from national governments. The
crisis has thus led to a sharp economic divergence between core and peripheral
countries. As such, the EU has been hit hard by the Great Recession. That is, the
European process of integration has not been one of prosperity for most members
in recent years.
 The Great Recession 5
In Chapter 5, Jonathan Perraton discusses the fate of the Nordic social demo-
cratic model. The recent crisis has generated renewed interest in more coopera-
tive national arrangements. As such, many contributions have focused almost
exclusively on the labour market and largely accepted mainstream economics
explanations of economic performance. Nevertheless, Perraton states, the post-
war success of corporatist economies, notably in Nordic countries, rested on high
rates of investment, particularly in internationally tradable industries. This was
seen by both policy-makers and scholars as central to generating prosperity
throughout the economy and sustaining living standards and government expend-
iture. Maintaining the profit rate in the tradable sector was seen as central to
sustaining growth and welfare in these economies. However, modern mainstream
contributions miss the capital side of the bargain. The neglect of corporatism’s
disciplining effect on business and the investment response in the 1990s is to miss
a key part of the story of corporatism. From a Post-Keynesian perspective, capital
accumulation is crucial to determining employment levels, as well as growth and
prosperity, and there is clear evidence among Nordic economies, as elsewhere,
that investment plays a key role in determining employment. This is the main
conclusion drawn by Perraton.
In Chapter 6, Jesper Jespersen addresses the problem of low growth rates in
Europe. With an empirical focus on EU(15), he is able to depicture three crucial
macroeconomic relationships which, since 1970, have undergone declining
development, making the macroeconomic environment of Europe a more pessi-
mistic one. First, the ratio of real investment/GDP has come down from a level
of approximately 26 per cent to around 18 per cent. Second, he establishes with
a high degree of statistical significance the negative relationship between the real
investment ratio and the rate of unemployment: the higher the level of private
investment the lower the rate of unemployment becomes. Third, as such, low
investment rates seem to influence labour productivity negatively. Based on these
empirical facts, Jespersen concludes that it is essential to get the causality right:
a higher level of investment has positive employment consequences, which
reduces both the level of unemployment and the public budget deficit. Or, stated
alternatively, with a keen eye, economically and politically, on maintaining a
high level of employment, potential problems with budget deficits go away by
themselves. That is, the European austerity policy is, in general, the wrong way
to try to achieve a higher level of economic prosperity within the member coun-
tries of the European Union.

The foundation of macroeconomics

In Chapter 7, Finn Olesen discusses if and how important macroeconomic events
change macroeconomic thinking. Historically speaking, as a consequence of the
Great Depression in the 1930s, the then mainstream economic understanding was
seriously challenged by empirical facts, theoretically as well as methodologically.
As such, the Great Depression gave way to what was later termed the ‘Keynesian
Revolution’, which for decades came to dominate the scene of macroeconomics
6 Mogens Ove Madsen and Finn Olesen
almost totally. Still later, the understanding of macroeconomics once again
became classical at its core as the Keynesian understanding was questioned by,
for instance, the monetarists. Nowadays, modern macroeconomic mainstream is
characterized and benchmarked by the use of DSGE models. These models are
populated with agents who perform a process of intertemporal consumption opti-
mization using rational expectations in an economic environment which might be
affected by exogenous shocks. However, in the longer run, the economy is
brought back to its equilibrium path with certainty. Due to the economic crisis of
recent years – the Great Recession – the mainstream macroeconomic understand-
ing is once again challenged (both theoretically and methodologically). However,
this time, it is debatable if the criticism raised against the mainstream core theo-
retical elements, based on the present economic crisis, will launch the making of
a new revolution in macroeconomics, as was the case in the 1930s. In general, the
macroeconomic mainstream, despite the empirical falsification of recent years,
seems to be deaf to criticism from non-mainstreamers such as Post-Keynesians,
as pointed out by Olesen. Macroeconomic theory will probably undergo some
changes, but change is not going to be of a fundamental kind. Somehow, it is
going to be business as usual.
In the 1950s and 60s a few economists in Cambridge (UK), especially Joan
Robinson, questioned the way neoclassical economists used to quantify economic
variables. The critique undermined the macro production function. Paul
Samuelson, who was a forceful advocate of macro functions, acknowledged the
relevance of the critique. Nonetheless, he decided to disregard it, and so did his
followers. The fact is that the scope of this critique may look overstated with
respect to neoclassical economics that is mainly concerned with micro economic
behaviours, and propounds micro founded models. Chapter 8, written by Gnos,
aims at closing this loophole: he shows that neoclassical micro economic theory
is actually affected by the Cambridge critique, and cannot overcome the latter
unless it is macro founded. To make the point, Gnos focuses on money prices
determination. He argues that, logically, money prices cannot result from the
interplay of supply and demand, except if the purchasing power of money pre-
dates the latter, as a result of the monetary conditions of the process of produc-
tion. This means that supply and demand equations cannot be solely founded on
micro behaviours; there is also a macro process at work that has to be taken into
consideration.
In Chapter 9, Pålsson Syll discusses various aspects of microfoundations for
macroeconomic theory. The modern mainstream seems to subscribe to a methodo-
logical individualist view, according to which the only ‘rigorous’, ‘acceptable’,
‘well-grounded’ or ‘secure’ way to do macroeconomics is to somehow reduce it
to microeconomic analysis, he tells us. Implementing a microfoundationalist
programme, these economists believe that macroeconomics is both dispensable
and/or basically reducible to microeconomics. That is, macroeconomic facts are
to be explained only in terms of facts about individual agents. But, as many
economists, philosophers, historians and methodologists have forcefully argued,
there exist overwhelmingly strong reasons for being critical and doubtful
 The Great Recession 7
regarding methodological individualism and reductionism and the urge for
microfoundations of macroeconomics. Microfoundations today, as Pålsson Syll
argues, mean, more than anything else, trying to reduce macroeconomics to
microeconomics by building macroeconomic models assuming ‘rational expecta-
tions’ and hyper-rational ‘representative agents’ optimizing over time. Both are
highly questionable assumptions as they are totally out of sync with empirical
evidence. Modern macroeconomic models of today are based on rational expecta-
tions microfoundations, basically assuming that people, on average, hold expec-
tations that will be fulfilled. This makes the economist’s analysis enormously
simplistic, since it means that the model used by the economist is the same as the
one people use to make decisions and forecasts of the future. That is, micro
founded macroeconomic models that are not able to pass a ‘smell test’ run the
risk of being taken as relevant quite uncritically when addressing real world
issues. Rather than assuming that people usually have the same expectations,
someone like Keynes, for example, would argue that people often have different
expectations and information, and that this constitutes the basic rational behind
macroeconomic needs of coordination – something that is rather swept under the
rug by the extreme simple-mindedness of assuming rational expectations in
representative agents models. But if all actors are alike, why do they transact?
Who do they transact with? The very reason for markets and exchange seems to slip
away with the sister assumptions of representative agents and rational expectations,
Pålsson Syll points out.
In Chapter 10, van Suntum and Neugebauer present a stock-flow consistent
overlapping generation macro model of a closed economy, which combines
aspects of both Austrian and Keynesian theory. As such, they argue that the inter-
est theories of Böhm-Bawerk and Keynes are both valid and ideally complement
each other, as they both accept that the interest rate is determined by real and
monetary factors. In particular, it is demonstrated that, with stable money,
the interest rate cannot become negative as a result of excess savings because
of the lower zero bound. However, expansionary monetary policy can, indeed,
turn the interest rate negative even with stable money, with private households
then becoming borrowers rather than lenders.

Macroeconomics and methodology

In Chapter 11, Eric Berr addresses, with respect to present-day economies, some
socio-economic philosophical aspects of Keynes’s understanding which had a
lasting impact on his views on economics, theoretically as well as methodologi-
cally. As such, Berr argues that Keynes’s economic analysis remains perfectly
relevant today. Most of his ideas and policy recommendations are still of a pecu-
liar importance, especially in times of crisis. Keynes’s main concerns, in the
historical context of the first half of the twentieth century, are about how to
correct monetary and financial imbalances, to fight against mass unemployment,
or, more generally, to implement an international environment aiming to favour
peace and economic prosperity. In such a context, Keynes appears to be more
8 Mogens Ove Madsen and Finn Olesen
than just an economist, giving us, in his writings, the foundations of a socio-
economic philosophy. The core ideas of such a philosophy are summarized in
chapter 24 of The General Theory, where Keynes provides us with central
elements as regards unemployment, inequality, uncertainty and the role of the
state. That is, he gives us the key to understand the failure of the present neoliberal
prescriptions – whether concerning developed or developing countries – while
giving a very interesting analysis of globalization, economic crisis and their conse-
quences. Thus, we can show that behind his economic understanding hides a
model of society which seems to be compatible with sustainable development.
Undoubtedly, also in this respect, Keynes appears to be in advance on his time –
his ideas are still fruitful for the twenty-first century, Berr concludes.
In Chapter 12, Joachim Güntzel highlights the crucial role of uncertainty,
suggesting it plays a vital role in Post-Keynesian macroeconomics. Furthermore,
there should be a focus on time aspects as economic processes unfold, acknowl-
edging that time is irreversible and the future is unknowable. The kind of onto-
logical uncertainty is a fundamental one, and there is no way, however
mathematically sophisticated it may appear, to enable us to reduce this funda-
mental characteristic of the world in which we are living to a calculable risk.
Uncertainty is like a veil, lying impenetrable between us and the future, Güntzel
tells us. Last, but not least, the term ‘Animal Spirits’, which was used by Keynes
in chapter 12 of The General Theory, has received new attention in recent years
due to the need for a fresh understanding of human economic behaviour after the
financial crisis of 2008. But this notion is sharply contrasted by the impression
that there exists a certain gap between this newly recurring interest in the Post-
Keynesian concepts mentioned above, and a thorough theoretical investigation
and – most of all – integration of these concepts within a concise theoretical
frame. That is, how should we conceive ‘Animal Spirits’ more precisely and how
can this concept be connected with Keynes’s understanding of probability and
uncertainty? The chapter by Güntzel tries to make a contribution in order to fill
this gap.
In Chapter 13, Mogens Ove Madsen has his focus on the concept of path
dependence. Generally, it is treated as a universal term without social and
historical content. As such, according to Madsen, there is still no clear analytical
framework for evaluating, integrating or developing the concept of path depend-
ence. Although there are some interesting features that can be observed by the
use of the concept in economics, this work should be seen in relation to much of
the work done in other social sciences. Within the New Institutional Economics,
for instance, ‘Qwerty-nomics’ describes a specific lock-in of a technological
development to a case of increasing returns and institutional reproduction.
In the Post-Keynesian case, there is room for institutional hysteresis, cumulative
causation and technological lock-in. In other social sciences the concept of path
dependence is much more nuanced in both focus and tracing sequences. As
such, the key question is, as pointed out by Madsen, whether it is possible to
introduce a new and more satisfying kind of understanding of path dependence
in economics.
 The Great Recession 9
Notes
1 As Leijonhufvud (2014: 763) points out about what had happened in the financial sector:
‘So the boom ended in 2007 with leverage ratios at historic highs, risk premia at historic
lows and maturity mismatches all around.’
2 However, concerning other aspects, e.g. labour-relations and the distribution of income,
the progressivism of the US policies is not that self-evident.
3 A thorough examination of such an austerity strategy, including social, political and
economic aspects seen in a historical perspective, is given by Konzelmann (2014).
4 Finally, at last, the ECB started – just as the case has been for the FED for some years
now – to conduct a more unconventional monetary policy (the QE strategy), in the
hope of getting long-run interest rates to come down somewhat, which should stimulate
effective demand within the EU area – thereby making unemployment problems less
severe.

References
Chick, Victoria and Dow, Sheila (2005) ‘The meaning of open system’, Journal of
Economic Methodology, 12: 3, pp. 363–81.
Davidson, Paul (1984) ‘Reviving Keynes’s revolution’, Journal of Post Keynesian
Economics, 6: 4, pp. 561–75.
Davidson, Paul (2003–4) ‘Setting the record straight on A History of Post Keynesian
Economics’, Journal of Post Keynesian Economics, 26: 2, pp. 245–72.
Davidson, Paul (2015) ‘What was the primary factor encouraging mainstream economists
to marginalize post Keynesian theory?’, Journal of Post Keynesian Economics, 37: 3,
pp. 369–83.
Dow, Sheila (2015) ‘Addressing uncertainty in economics and the economy’, Cambridge
Journal of Economics, 39: 1, pp. 33–47.
Hein, Eckhard (2013–14) ‘The crisis of finance-dominated capitalism in the euro area,
deficiencies in the economic policy architecture, and deflationary stagnation policies’,
Journal of Post Keynesian Economics, 36: 2, pp. 325–54.
Konzelmann, Suzanne (2014) ‘The political economics of austerity’, Cambridge Journal
of Economics, 38: 4, pp. 701–41.
Lawson, Tony (1997) Economics and Reality, London: Routledge.
Leijonhufvud, Axel (2014) ‘Economics of the crisis and the crisis of economics’, The
European Journal of the History of Economic Thought, 21: 5, pp. 760–74.
Skidelsky, Robert (2014) ‘Economics is not useless: it can either be very harmful, which
it often is, or very beneficial’, European Journal of Economics and Economic Policies:
Intervention, 11: 3, pp. 221–6.
Truger, Achim (2013) ‘Austerity in the euro area: the sad state of economic policy in
Germany and the EU’, European Journal of Economics and Economic Policies:
Intervention, 10: 2, pp. 158–74.
2 Keynes ‘in the twenty-first
century’
Tradition, circumstance, fad and
pretence in the wake of the Great Crisis
James Galbraith

My title is ‘Keynes “in the twenty-first century”’, with quotation marks carefully
placed around ‘in the twenty-first century’. It is both a reference and a wisecrack.
A book by that title might have potential, but I think I won’t write it.
The great economic crisis of the twentieth century began in 1930. ‘The world
has been slow to realize,’ John Maynard Keynes wrote, ‘that we are living through
one of the greatest catastrophes of modern economic history’ (1930b). In point of
fact, though, in the UK the mechanisms that launched the Depression had been
put in place years before, and many of the policy proposals that would later come
to be thought of by most people as Keynesian had already been made. They had
been made in the Liberal Party programme, ‘We Can Conquer Unemployment’,
on which Keynes collaborated in the campaign of David Lloyd George in 1929,
and they had been made in Keynes’s own pamphlet, ‘Can Lloyd George do it?’
Some of the concepts also, including the employment multiplier which Richard
Kahn had developed, were already in place. They were novel for most people, but
they were certainly in the back or even in the front of Keynes’s mind.
The task of reconstructing economics for the economists could proceed on a
slower schedule. Perhaps it wasn’t as urgent; certainly it wasn’t as urgent. It
wasn’t until 1936 that The General Theory appeared; that was three years already
into the New Deal. By that time to contemporaries – and this is a point which has
been very substantially forgotten, glossed over, neglected or got wrong, including
by many prominent Keynesians – the Great Depression in the USA was already
over. Contemporaries thought of the Great Depression as the years from early
1930 to the start of 1933. From March, 1933 through 1936 the USA had already
enjoyed what are still the most rapid rates of economic growth in peacetime
history. The success of those years was demonstrated by the fact that Franklin
Roosevelt was re-elected in 1936 with a crushing majority that included every
state except Maine and Vermont.
What The General Theory did – to revert to some parallels between economics
and physics – was to take a discipline that had been modelled after Newtonian
mechanics, with money playing the role of absolute time but with no active role
in the order of things, and it reconfigured that discipline in the spirit of (at least)
special relativity. The choice of title, The General Theory of… x, y and z, was
not incidental. It was, as Keynes (1936, p. 16) appreciated his contemporaries
 Keynes ‘in the twenty-first century’ 11
would know, a direct reference to Einstein and, in case you didn’t get it, there is
in the second chapter a specific passage – ‘the classical theorists resemble
Euclidean geometers in a non-Euclidean world’ – to drive the point home. There
was, in short, to be an economics universal whole and entire, where space would
tell matter where to go and matter would tell space how to curve. ‘Monetary
production’ was the title of lectures that Keynes gave in 1933. Monetary produc-
tion was Keynes’s analogue to space-time; that is to say, the linking together of
two concepts that had previously been held as distinct. It was a phrase coined to
underscore that we live in a monetary and credit world and that the monetary
processes cannot be separated from the processes of production. This was what
came to be known as macroeconomics.
In macroeconomics, the determination of employment does not happen in an
isolated market called the labour market. The purpose of chapter 2 of The
General Theory was to get rid of the concept of a supply curve of labour – to
abolish it like the axiom of parallels – and to place the determination of employ-
ment firmly in the context of the economic universe as a whole. Employment is
to be determined by total spending, which in turn is to be determined by the
summing up of the elements of total effective aggregate demand.
In the six or seven decades following this moment, and starting with the inter-
pretation of Keynes by his early reviewers as a fix-wage theorist – as just another
version of the Treasury View of 1929 – this insight into the structure of Keynes’s
thought was lost. Keynes was simplified, modified, he was undermined, he was
forced into the intellectual coffin of equilibrium analysis. His vision was oblite-
rated. It was a defeat as thorough as that of Malthus by Ricardo.
Microfoundations and rational expectations conquered economics as the Holy
Inquisition had conquered Spain. Controversy ceased. The great puzzle of effec-
tive demand disappeared once again, and John Maynard Keynes himself was
exiled to the underworld of Karl Marx, Major Douglas and Silvio Gesell.
And then a doctrine with the vile, reprehensible name of ‘new Keynesianism’
appeared. It bore no relationship to Keynes or his theory. It was not enough in the
end to kill the man and bury the body. In a manoeuvre straight from the pages of
Orwell, the anti-Keynesians went into the graveyard and stole the name from the
headstone over the tomb.
I don’t think this was accidental. That act of theft, of name-robbing, helped to
create an environment in which recovery of the original thoughts and the analysis
rooted in them became much more difficult than before. To have read Keynes,
and to have understood him, has become not merely eccentric. To be Keynesian
is not merely heretical. Rather, Keynes has become practically incomprehensible.
The old pre-Keynesian view now parades under his name, so that even a
‘Keynesian revival’ has anti-Keynesian overtones.
And, of course, the great declaration of consensus around these positions was
made at the most exquisite of all possible moments. In early 2008 the American
Economic Association held a session at its annual meetings on ‘How the world
achieved consensus on monetary policy’. The collapse, by that point, was already
underway – it had been ongoing since August 2007.
12 James Galbraith
When the collapse occurred, we were fortunate that there still walked among
us, at that point, a few distinguished veterans of the earlier battles. And they took
the chance to attempt to bring back the Keynes that they knew and whose spirit
and ideas continued to have a bearing on the circumstances because, in fact, they
continued to capture the essence of the issues. Robert Skidelsky and Paul
Davidson both rose to this task. We can see now that theirs was a brave but
not a successful effort. It proved much more difficult to bring back Keynes in the
intellectual climate of the Great Crisis than it was to advance his ideas in the
first place, in the original crisis of the 1930s, when he was, first of all, himself,
but, second, when the defences against his ideas had not been so effectively
prepared.
Another effort, more successful in the public realm at least for a time, was the
invocation of Keynes’s name in support of the policy measures, to stabilize the
economies of the USA and other wealthy countries. These measures and reflexes,
as I said before, pre-date The General Theory and while they took reinforcement
and support from The General Theory they did not actually depend on it. They
were policy measures – public works and relief – of the same type that in the early
1930s had been already supported by people like A.C. Pigou.
The initial purpose of ‘stimulus’ was to assist a process of economic recovery,
of return to normal, to speed the re-establishment of the previously existing,
alleged-to-be-expected economic conditions. This programme partook of some
phrases and metaphors that Keynes himself had used at various points. For
instance, Paul Krugman liked to quote Keynes from Essays in Persuasion, on the
question of magneto trouble: ‘we have magneto trouble’ – a small mechanical
problem. We have drivers who do not know the rules of the road. As Keynes said,
‘It is appropriate to the problem that the solution should be found in a device’
(1931, Vol. IX, p. 129). But if you examine the substantial content of the
programmes advanced by people who advocated stimulus, their underlying
apparent diagnosis is even simpler. It’s not mechanical difficulty at all. It’s an
empty fuel tank or a battery that has run out of charge. Power it up, turn the igni-
tion and off we go. Yet, six years later we find the vehicle has not moved very
far, and this does invite the riposte, which we have heard many times from those
corners, which is, ‘Well they should have listened to me. More gas in the tank, a
better charge on the battery and we could have been much further ahead.’
This line is very hard to refute. Perhaps the one-note ‘Keynesians’ of the early
post-crisis period were right. But as a political matter, the refrain ‘they should
have listened to me’ is not a winning one. After a while it begins to wear on
people’s nerves. And I think the advocates of that position six years ago, particu-
larly in the USA, to some degree sensed this. And so we have seen a move on
their part to adopt a somewhat stronger, but also more pessimistic analysis.
The initiative here was taken by Larry Summers, with Paul Krugman coming
quite quickly to his support. And that was to revive and invoke the doctrine of
secular stagnation. That doctrine goes back not to Keynes but to Alvin Hansen
and John Hicks; it is a vision drawn substantially from an investment-saving
(IS)–liquidity preference-money supply (LM) framework, but with a flat LM
 Keynes ‘in the twenty-first century’ 13
curve bounded at zero by the institutional nature of the interest rate, alongside a
collapse of animal spirits affecting the IS curve.
The invocation of secular stagnation gives a more coherent description of what
has happened in the last six years than the previous argument, which had held that
a cure could be based upon measures which were – to take another famous phrase
from six years ago – ‘timely, targeted and temporary’. It makes more sense to
recognize the psychological and institutional-financial obstacles that exist to full
recovery, than simply to invoke measures that would reanimate a system which
had been interrupted by an exogenous shock.
So we are moving from an analysis of a healthy system distracted momentarily
by outside events – an asteroid theory of crisis – to an understanding that there
are internal forces that have to be confronted. And yet the internal forces admitted
are not very tangible. They are essentially psychological; they could be over-
come. In his recent interventions Summers has become a full-throated fiscal
Keynesian. He argues that the obstacles can be overcome by animating the public
sector to do the investment which is needed at this point and which the private
sector is not interested in taking on. So thought is moving. But I would suggest
that thought is not moving quickly or far enough.
Keynes himself had a friendly correspondence – a letter or two anyway – with
John R. Commons; let me suggest that it is not anti-Keynesian at this point to
invoke a certain amount of institutionalism in thinking about the situation that we
face. Let me therefore invoke the particular Keynes text which I often use to intro-
duce students to him, and which anybody who knows his work must recognize as
a document of extraordinary power. The Economic Consequences of the Peace
combined an already-present macroeconomic insight, especially about the interde-
pendence of countries, with a very direct and topical – institutional – analysis of the
political and economic situation of the hour. That is what we need today.
Without trying to remain too strictly within this framework, let me bring up
four institutional questions that I would urge economists to take into account.
They are questions that, in many cases, have engaged the attention of some
economists already. But we need to integrate them into a joint and common
framework for thinking about the question of the crisis and its aftermath.
First, there is the matter of resources. Resources include the ultimate resource
of the atmosphere, but, especially (for our purposes), the direct problem of the
cost of fundamental raw materials, in particular energy. In the 1930s, especially
in North America, energy was cheap. Oil was the American fuel; 1930 was the
year when the East Texas oil field came online. And although an older generation
of technologies was in crisis, a newer generation was on the way and had been
since the First World War. The constraint of resource cost was not, therefore,
much of an issue for Keynes – although the situation was different in certain parts
of the European continent at that time.
After 1970 and again after 2000 resources became expensive. In the run-up to
the Great Crisis in 2008, the price of oil reached $148 a barrel before it collapsed.
That little aspect of history was quickly forgotten but it had, of course, an income
effect that contributed to the strong reaction of spending to later events.
14 James Galbraith
What’s the situation now? The present situation is characterized by, in the first
place, uncertainty about the outlook. When I first started trying to call attention
this in the summer of 2008, we did not have a clear picture of the scale of natural
gas from hydrofracking. It’s now clear, that whether you like this or not, it’s a
vast phenomenon. What is not clear is how long it will last. That’s what the
geophysicists are working on. But they do not know and they probably can’t
know until it starts to run out, at which point it will be a little late to have made
the discovery. So it goes.
A second point about resource costs is that, in contrast to previous eras, they
are now heavily financialized. And, therefore, they have an instability associated
with the capacity of the financial markets, speculators and hoarders to hold them
back when demand is rising, driving up the price. This is something we may call
the choke chain effect. It has a dual effect on investment. If you are an energy
user you have to worry the price may be too high. If you are a producer of alterna-
tive or renewable fuels you have to worry that it may be too low. That’s a prob-
lem and it hasn’t been overcome.
For the post-war period up to the 1970s and also for the generation afterwards,
the problem of access to resources was at least modified and mitigated by a world
system in which you had a stabilizing hegemonic power. Initially, a system
achieved a certain stability and balance between the East and the West in the Cold
War. After the decline and fall of the Soviet Union a system arose which sought
to be guaranteed by a single hegemonic power, the USA, with its centre of force
projected onto the Persian Gulf and Middle East. It is fair to say, as a general rule,
that no sensible person now has a lot of confidence in the long-term future of that
system.
A system of stabilization where power relies on a single country and in part on
its military force depends upon global confidence in the sensible governance of
that country. It depends on restraint in the use of power. And it depends on a
belief in the effectiveness of the military force. The USA has not done a very
good job of inspiring confidence on the first point. On the second, the effective-
ness of modern military force has actually been tested in the last decade, tested
in open country and in urban settings in Iraq, and then in the mountainous terrain
in Afghanistan. It did not prove durably effective in either place. The result, in
my judgement, is that many military professionals in the USA would be quite
content if they never deployed south of the Rio Grande or across an ocean again.
It’s plain, furthermore, that the world is not a self-governing place and so a
great deal of future instability will follow upon the disappearance of the stabiliz-
ing framework, whatever you may have thought of it at the time.
The third area concerns the effect of technological change on employment.
Schumpeter taught us that technological revolutions have a creative and a
destructive phase. The creative phase comes first when the ideas are being devel-
oped and when there is a rush of investment activity in this pursuit of large prizes,
which, in the nature of things, only a few people can gain – but the fact is many
people seek them and make investments, and their effort is an overall source of
economic growth. It was the source of the information technology boom that
 Keynes ‘in the twenty-first century’ 15
brought the USA to full employment for four solid years in the late 1990s. So,
technical revolutions have a creative and an expansive phase.
But once the technologies are established and they spread, they also have a
destructive phase. They undermine and ultimately destroy a vast array of previ-
ously existing activities, and that is plainly what is happening in the digital age.
The digital revolution has been underway for quite a long time, and the destruc-
tive phase is now the dominant one.
Economists tend to approach this issue from an econometric rather than a theo-
retical point of view. That is a risk because one can show that the relationship
between GDP and jobs hasn’t changed all that much, so it’s not a question of
capital–labour substitution in the neoclassical sense. And the great loss of jobs is
post-crisis, not before, so one can make the argument that the shortfall of jobs is
due to deficient demand rather than changes in the climate of employment. But
this is post hoc ergo propter hoc – a risky way to argue.
Let me argue that the timing and the substance cannot really be separated. That
is, one cannot use the (post-crisis) timing to make a definitive statement about the
substance of the cause of disappearing jobs. What actually happens in the world
is that businesses do not lay off their workers until they have to. Change is costly;
businesses like to go with their present business models. But when they are hit by
a major slump they do cut their staff. And in the aftermath, when things get a little
better, they have to choose: do we hire them back or do we look for a less expen-
sive way to operate? And the less expensive way to operate is available in many,
many cases. It’s available because the technologies replace both capital and
labour. It’s cheaper all around to adopt the new approach, in part because of the
low cost of technology and in part because the tax structures favour equipment
over employment. And this explains why the GDP/employment ratio doesn’t
change that much, even though there are many fewer jobs than before.
There’s something else going on here. I don’t have an estimate of its empirical
significance, but there are plenty of things which the statisticians will be the last
to know. And that is, if you look at the internal combustible engine revolution or
the electrical power revolution of the last century, it’s plain that having replaced
the horse – which was actually very bad for employment among the horses – the
motor vehicle created a large train of secondary occupations. Cars and trucks
have to be maintained, they have to be repaired, they require fuel, the roads have
to be built and maintained, the whole body of infrastructure depended upon this
particular technology, which created a lot of secondary jobs, outside the car or the
haulage industries proper. Also, electrical appliances displaced people from the
household to the market. From both these causes, for a long period you have an
increment to GDP that comes from the fact that what were previously household
activities are being marketized.
Do the digital technologies have the same effect? I think not. Repair and main-
tenance are a much smaller part of the picture than they were in transportation.
Infrastructure (in the form of fibre optic cable, for instance) is long-lasting and
cheap. There is at least a plausible case that we are going through a period in
which previously existing market activities are becoming de-marketized.
16 James Galbraith
Communication and information, all of which once occurred on a variable cost
basis, now occurs on a fixed cost basis: you pay once and get the incremental
units for nothing. That ought to give us a cumulatively lower level of measured
output.
For one example, a friend who is an economist for Federal Express tells me
that smartphones are having a bad effect on the airfreight business between Asia
and the USA. Now why do you suppose? Any thoughts? The answer is straight-
forward: these things are very small. You can put a lot of them into a large aero-
plane. They replace fax machines, cameras, televisions – God knows what – that
previously went on those aeroplanes. So the aeroplanes are sitting idle. It’s good
for the environment. It’s good for efficiency. It’s not so good for the pilots or the
ground crews.
Finally, Keynes, in his Treatise on Money (1930a), makes clear that there are
two sources of money creation: government and the banks. There’s government
money and there’s bank money. Particularly in the last generation, it has been
bank money that has driven our economy forward in periodic bursts of ever-
declining underlying credit quality. There was the saving-and-loan boom,
followed by the information technology boom, followed by a real estate finance
boom – interrupted only, in the USA, by a brief period of military spending using
old-fashioned government money.
Can we have another credit boom? In order for such a thing to happen again,
banks have to have in view profitable employment-generating activity that they
wish to finance. They have to have clients to whom they wish to lend. And the
problem with really major credit busts is that the clients tend to disappear. They
tend to disappear for a long time because the value of their collateral, which is
either business expectations or the value of real estate and housing, falls below
previously established levels of debt and bankers become very worried.
And on top of that you have the problem of fraud. The general model of bank-
financed, credit market-financed activity in the run-up to the Great Crisis was
suffused with criminal behaviour. When it becomes clear that all of the major
institutions with which one has to deal – the commercial banks; the investment
banks; the ratings agencies; the regulators – are part of, complicit in, or acces-
sories to a vast criminal conspiracy, then there is a tendency to lose trust in such
people and in the system as a whole. Which means that people who have financial
resources are also extremely wary of deploying them outside the safest instru-
ments, which, of course, in the modern world are US Treasury bonds and the
paper of other governments that are not going to collapse: Germany, France, UK,
Japan. It’s not a very large set.
The banks were saved in the aftermath of the crisis on the alleged hypothesis
that they would reanimate credit, get credit flowing again, restore confidence. The
underlying assumption was that the arbiters of the credit market were the judges
of morality and worthiness for everyone else. And that the real problem lay with
the borrowers, with the inept mortgage-takers in the USA (abetted by a well-
meaning but feckless government) and, of course, with the reckless Mediterranean
peoples in Europe.
 Keynes ‘in the twenty-first century’ 17
But even that’s not the full story. We saved the banks, but to what end and with
what result? If you want an analogy to the modern banking system in the USA
and Europe, it’s the machinery ministries of the late-period USSR, which
absorbed about 40 per cent of total output in the last years of that country and
produced nothing useful. Banks at their peak paid about 10 per cent of all wages
in the USA and earned 40 per cent of the profits, so the Soviet comparison is not
entirely out of scale. It is a big problem when you have to support large institutions –
in this case by the differential between the interest you get on deposits and the
interest you pay on loans – and when they don’t do anything in return.
There is an additional institutional complication, which, of course, afflicts
Europe and is distinctive to it. That is the confederacy that was created under the
various European treaties. A confederacy is a system of quasi-sovereign states
that do not act in mutual support of each other. So the constituent states operate
on the voluntary extension of credit and voluntary repayment.
In the USA, the debt problem is a problem largely of private debts, of house-
hold debts. And the thing about households is that they either default on their
debts, or they pay them down, or they die. And therefore, over time, household
debts after a crisis tend to diminish. The burden they place on overall activity
goes down over time, regardless of what the lenders do.
Sovereign debts in the Eurozone don’t have that property. Instead, they persist
until they are negotiated away, and to negotiate them away you have to have a
negotiation, which means an agreement between the creditors and the debtors.
The alternative is a series of cumulating Ponzis, or the de facto monetization of
the debts by the central bank. These expedients may defer the crisis, but they act
as a massive contingent tax or an actual tax on the crisis regions, and they are an
absolute obstacle to economic recovery. This is a formula for an eventual
confrontation.
These are complex questions; to come to the second part of my subtitle,
‘pretence and fad in the wake of the Great Crisis’. In certain quarters these ques-
tions trigger a customary response, which is simple-minded utopian extremism.
This response has two important dimensions. One is the assertion of a very simple
framework for the problem. That framework – which I note with a twinge of
regret because I have been working on this topic for twenty years – is clearly
inequality as a broad abstract idea. It is a framework capable of mobilizing a
certain political sensibility and of a certain level of abstract modelling. But if you
resolve everything to a Gini coefficient or the share of the top 1 per cent of the
top 1 per cent in income as recorded in income-tax filings, and if you treat those
phenomena as the fundamental realities of all economic systems, what you are
doing is sweeping everything else under the rug. This saves an enormous amount
of intellectual effort and spares the need for a very large amount of historical and
institutional knowledge.
And this feeds into the second part of the problem, which is a tendency to
advance extreme and impractical measures either in ignorance of how extreme
and how impractical they are, or in full knowledge of that, in order to incite the
naive.
18 James Galbraith
We have before us these days the proposition of a global annual tax on the
market capitalization of wealth in all of its marketable forms. As an employment
policy it’s an act of genius. It would take a vast army of accountants to assess the
capital value of outstanding financial wealth on the minute-to-minute basis that
would be required. There would never be a shortage of work under this system.
Enough said about that. More generally, one can see the phenomenon of the
sweeping fad warmly received in certain corners of the mainstream, which can
serve very effectively as a political diversion.
What’s the alternative? The alternative is a certain kind of hardworking
modesty. I’m the co-author, with Yanis Varoufakis and Stuart Holland, of a
proposal we call the Modest Proposal. I’m not going to lay that out as the one
true text, but the word ‘modest’ is important. It’s a double irony. Obviously it’s
a reference to Jonathan Swift, with his eating of the Irish babies. But it’s an irony
on top of that because our proposal really is modest. It has elements addressed to
specific identifiable problems within the framework of existing European institu-
tions, charters and treaties. It would deal with the debt; deal with the banks; get
an investment programme going; a jobs programme; it would set up a system of
social insurance and solidarity that provide basic protections which certain parts
of the European confederation now lack. These measures would buy time to have
an un-panicked discussion of institutional arrangements. They would buy time to
begin to refocus attention on the issues that we all know have to be dealt with if
we wish to avoid disaster in the longer run and, in particular, the problem of
global warming.
This is not easy stuff. It’s the hard way to proceed. But it is, let me suggest, the
path of common sense. And a diligent economist should be a common sense
economist. An economist should be someone who knows a particular area and is
capable of expressing, with some clarity and depth of knowledge in a persuasive
way, the best way to proceed. It’s an old and a Keynesian idea, for it was Keynes
who wrote that we should rise to the level of dentists if we can. And it was
Keynes who, in specific reference to the greatest problem that he faced which was
mass unemployment, wrote, the idea that it is ‘financially “sound” to maintain a
tenth of the population in idleness for an indefinite period, is crazily improbable –
the sort of thing which no man could believe who had not had his brain fuddled
by nonsense for years and years’ (1972, p. 90).

References
Davidson, Paul (2009) The Keynes Solution: The Path to Global Economic Prosperity,
New York: Palgrave Macmillan.
Galbraith, James K. (2014) The End of Normal: The Great Crisis and the Future of Growth,
New York: Free Press.
Goodfriend, Marvin (2007) ‘How the world achieved consensus on monetary policy’,
Journal of Economic Perspectives, 21: 4, pp. 47–68. doi: 10.1257/jep.21.4.47
Keynes, John Maynard (1919) The Economic Consequences of the Peace. London:
Macmillan.
 Keynes ‘in the twenty-first century’ 19
Keynes, John Maynard (1930a) A Treatise on Money, London: Macmillan.
Keynes, John Maynard (1930b) ‘The great slump of 1930’, The Nation & Athenaeum,
20 and 27 December (1st edn).
Keynes, John Maynard (1931) Essays in Persuasion, London: Macmillan.
Keynes, John Maynard (1936) The General Theory of Employment Interest and Money,
London: Macmillan.
Keynes, John Maynard (1972) The Collected Writings of John Maynard Keynes – Volume IX:
Essays in Persuasion, London: Macmillan.
Skidelsky, Robert (2010) Keynes: The Return of the Master, New York: PublicAffairs.
Summers, Lawrence (2008) ‘Fiscal stimulus issues testimony before the Joint Economic
Committee’, 16 January. http://tinyurl.com/ppbrx3r Accessed 28 February 2015.
Varoufakis, Yanis, Holland, Stuart and Galbraith, James K. (2013) A Modest Proposal for
Resolving the Eurozone Crisis. http://yanisvaroufakis.eu/euro-crisis/modest-proposal/
Accessed 28 February 2015.
3 Public debt, secular stagnation
and functional finance1
Peter Skott

Introduction
An influential study by Reinhart and Rogoff (2010) claimed to have shown that
a rise in the ratio of public debt to GDP above 90 per cent is associated with sharp
declines in economic growth. This finding was used repeatedly by policy-makers
as a justification for strict austerity policies. House Budget Committee Chairman
and former Republican vice-presidential candidate Paul Ryan declared that
‘[e]conomists who have studied sovereign debt tell us that letting total debt rise
above 90 percent of GDP creates a drag on economic growth and intensifies the
risk of a debt-fueled economic crisis’.2 Meanwhile, on the other side of the
Atlantic, European Commissioner Olli Rehn claimed that ‘it is widely acknowl-
edged, based on serious research, that when public debt levels rise about 90%
they tend to have a negative economic dynamism, which translates into low
growth for many years. That is why consistent and carefully calibrated fiscal
consolidation remains necessary in Europe.’3
The Reinhart and Rogoff numbers were wrong. When Thomas Herndon, a
graduate student at the University of Massachusetts, tried to replicate the study,
he discovered simple spreadsheet errors and a peculiar weighting scheme
(Herndon et al., 2014). The corrected figures still show a negative correlation
between economic growth and the debt ratio. But there is no cliff and this under-
mines the argument for austerity in the middle of a deep recession; if there is no
cliff, the debt problem – if it is a problem – can be addressed when the economy
has recovered, even if this postponement implies a temporary rise in debt.
More importantly, correlation does not imply causation. The policy argument
against debt relies on the explicit or implicit assumption that high debt causes low
growth. The causation, however, could go the other way – or a third factor could
explain both low growth and high debt, or the correlation could be completely
spurious. Reinhart and Rogoff do not make strong claims about causality in their
paper, but interviews and comments on the results paint a different picture. In the
words of Matthew O’Brien (2013), ‘R–R whisper “correlation” to other econo-
mists, but say “causation” to everyone else.’
One may try to address the causation issue empirically and, doing that, Irons
and Bivens (2010), Basu (2013), Dube (2013) and Ash et al. (2015) all find
 Public debt, stagnation and functional finance 21
evidence that slow growth tends to precede the rise in debt. This, indeed, is what
one would expect from a short-run perspective: tax revenues fall and deficits
widen in a recession, leading to a rise in the debt ratio. Results about short- and
medium-run Granger causality, however, have no direct implications for the
existence of possible long-run causal links between debt and growth. Theory is
needed to help sort out long-run causation.
In line with contemporary macroeconomic theory, policy discussions usually
assume that employment rates are unaffected by aggregate demand policy in the
long run. Demand policy plays a useful role in short-run stabilization but the
preferred instrument is monetary policy, complemented by automatic fiscal stabi-
lizers. Discretionary fiscal policy is seen as redundant for stabilization, if not
directly harmful, and fiscal policy should be geared towards attaining a target
debt ratio (Schmitt-Grohe and Uribe 2007, Kirsinova et al. 2009). These conclu-
sions, I shall argue, are quite fragile. More specifically, in this chapter I want to
make three main points.4
Fiscal policy and public debt, first, may be required to maintain aggregate
demand at levels consistent with full-employment growth. This result – which
emerges from a range of different models, including overlapping generations
model (OLG) specifications and stock-flow consistent (post-)Keynesian models –
sheds light on ‘secular stagnation’ and the discussions that followed Summers’s
(2013) intervention.
The presence of long-run aggregate demand problems, second, suggests a
‘functional-finance’ approach (Lerner, 1943). Following this approach, monetary
policy may be used for short-run stabilization, but variations in interest rates take
place around a level that induces the desired capital intensity (the desired choice
of technique). This assignment for monetary policy leaves fiscal policy to ensure
a long-run trajectory of aggregate demand that is consistent with full employ-
ment. The approach differs from analyses of debt dynamics in which the primary
budget deficit is taken as exogenous. There is no good reason to assume exoge-
nous deficits, and arbitrary policies typically produce bad results. The results of
this kind of analysis therefore say little about the potential benefits of a sensible
fiscal policy.
Both the rate of economic growth and the share of government consumption in
total income, third, are among the determinants of the required long-run debt
ratio. A low growth rate causes high debt, with clear implications for the inter-
pretation of the observed empirical correlations between growth and debt: there
are good theoretical reasons to expect a long-run causal effect of growth on debt.
Austerity policies – reductions in government consumption – also increase the
required debt ratio. Thus, austerity policies are counterproductive on their own
terms. Changes in the structure of taxation, finally, have implications for debt.
A standard recommendation has been to reduce the tax incidence on capital
income; changes of this kind increase the debt ratio.
The focus throughout the chapter is on closed economies with debt denomi-
nated in a fiat currency controlled by the central bank. Full employment is
assumed to be well-defined, the growth rate of the labour force is exogenously
22 Peter Skott
given, and the policy question concerns how to maintain full employment using
fiscal and monetary policy. Given these ‘domain’ assumptions, the analysis
clearly does not apply directly to debt problems in Greece (that does not control
its own currency) or employment problems in Brazil (with large amounts of
hidden unemployment). Before addressing open-economy and dual-economy
complications, however, it may be useful to consider a closed economy without
large informal sectors and hidden unemployment. It should be noted also that
I take as given the many non-fiscal and non-monetary policies that may influence
aggregate demand. Rising inequality, for instance, is likely to affect both aggre-
gate demand and household financial behaviour, and income distribution is itself
affected by, inter alia, industrial and financial regulation and labour market
policy. These interactions between income distribution and aggregate demand
may have been critical for macroeconomic developments over the last 30 years.
The focus in this chapter, however, is on fiscal and monetary policy.
Section 2 outlines a simple model of functional finance. Section 3 describes
some possible extensions, discusses the relevance of some key assumptions and
relates the analysis to contemporary macroeconomic theory, including the
Krugman–Summers rediscovery of secular stagnation. Section 4 summarizes the
main conclusions.

Functional finance
Lerner’s principle of functional finance,

prescribes, first, the adjustment of total spending (by everybody in the econ-
omy, including the government) in order to eliminate both unemployment
and inflation … second, the adjustment of public holdings of money and of
government bonds, by government borrowing or debt repayment, in order to
achieve the rate of interest which results in the most desirable level of invest-
ment; and, third, the printing, hoarding or destruction of money as needed for
carrying out the first two parts of the program.
(Lerner, 1943, p. 41)

The short-run policy problem can be illustrated using a simple model with an
investment-saving (IS) condition for the goods market and a central bank that sets
the interest rate. Thus, let

Y = C (Y , T , r ;W ) + I (Y , r ; K ) + G (1)

In equation (1), consumption C depends on (pre-tax) income Y, taxes T the real

rate of interest r and the stock of household wealth W; investment I depends on
income, the interest rate and the stock of capital K; government consumption
G is exogenous. The stocks of wealth and capital are predetermined in the
short run.5
 Public debt, stagnation and functional finance 23
If current inflation is already at the target, the policy problem becomes particu-
larly simple: choose fiscal and monetary instruments to achieve full employment
and the desired level of investment. If current inflation deviates from the target,
temporary deviations from full employment may be desired. The details
will depend on the determination of inflation – the specification of the Phillips
curve – and the precise intertemporal welfare criterion. These complications are
irrelevant for present purposes, and I shall take the targets Y* and I* as given.
Thus, we need

I (Y ∗ , r ; K ) = I ∗ (2)

Y ∗ = C (Y ∗ , T , r ;W ) + I ∗ + G (3)

Equation (2) pins down the interest rate, and equation (3) can be met by using
taxes T or government consumption G as the instrument.
The stock variables W and K evolve over time, but desirable full-employment
trajectories typically converge to a steady-growth path with a constant output–
capital ratio. (Some of) the long-run policy issues can, therefore, be addressed
by examining the fiscal and monetary requirements for steady growth at the
‘natural growth rate’ (the rate of growth of the labour force in efficiency units).
An obvious limitation of this kind of steady-growth analysis is that it leaves
stability questions unanswered; the stability question will be considered briefly
in section 3.
In steady growth the share of investment in income is determined by the capital
intensity of production and the growth rate. Putting it differently, investment
determines the evolution of the output–capital ratio, and achieving Lerner’s most
‘desirable level of investment’ translates into achieving the ‘most desirable capi-
tal intensity’ in the long run. As a particular example, if it is decided that social
welfare calls for the maximization of sustainable consumption per worker (in
efficiency units), the ‘golden rule’ stipulates that, with a well-behaved production
function, the net marginal product of capital must be equal to the growth rate of
the labour force (in efficiency units). If the marginal product were less than the
growth rate, the economy would be ‘dynamically inefficient’: the capital intensity
would be too high and a Pareto improving trajectory with higher consumption at
all times would be feasible.
A comment on the capital controversy may be in order here. The controversy
highlighted the difficulties of constructing an aggregate production function
and demonstrated, in particular, how theories that rely on movements along a
smooth production function face intrinsic problems and contradictions. But the
insights from the capital controversy do not imply that only one technique is
available; nor do they invalidate the long-run identification of a desirable path
of investment with a desirable choice of technique or the influence of the cost
of finance on the choice of technique. Even in the absence of a smooth aggregate
production function, any given cost of finance is associated with a particular
technique.6
24 Peter Skott
Having fixed the real rate of interest and the output–capital ratio (Y/K)*, and
assuming that output, capital and employment (in efficiency units) all grow at the
natural rate n, the equilibrium condition for the goods market can be written

∗
 Y  = C + I + G = C + (n + δ ) + γ (4)
 
K K K K K

where d is the rate of depreciation and g the ratio of government consumption

to capital. The need for schools, bridges, police officers, etc. will typically depend
on the size of the economy, and for present purposes it seems reasonable to treat
the long-run ratio of government consumption to the capital stock as exogenously
given. The appropriate size of government is fiercely contested, of course, but the
different positions on this issue are largely tangential to questions of how to
maintain full employment.
Turning to consumption, a simple specification assumes that private consump-
tion depends on disposable income and private sector wealth,

C = (1 − s )Y D + σ W (5)

Y D = Y + rD − T (6)

W =K+D (7)

C, YD and W denote consumption, disposable income and wealth, and (1 – s) and

s the consumption propensities out of income and wealth (equation 5). Pre-tax
private income is given by Y plus the interest on government debt rD, and dispos-
able income is found by subtracting taxes T (equation 6). Disregarding incentive
effects and assuming a homogeneous household sector, it is of no importance
whether taxes are lumpsum or levied on a particular type of income (wages or
capital income). The tax incidence, however, can be important for the debt
dynamics if households differ in the saving behaviour (Ryoo and Skott, 2013; see
also section 3 below). Total private wealth is the sum of fixed capital K and
government debt D (equation 7).
Equations (4)–(7) can be combined with a standard accounting equation for the
evolution of public debt. The result is a one-dimensional differential equation
with a globally stable stationary solution (see Appendix),

∗ Y ∗
 D  = s[( K ) − γ ] − σ − n − δ (8)
 
Y  [(1 − s )n + σ ]( YK )∗

Equation (8) gives the required debt ratio (which can be positive or negative,
depending on parameters). One of the determinants of the ratio is the rate of
economic growth. By assumption, the growth rate is exogenously given in this
model and causation is clear: low growth causes high debt. This inverse relation
 Public debt, stagnation and functional finance 25
between growth and government debt is quite intuitive. Deficits are needed if
households want to save ‘too much’, and the threshold defining ‘too much’
depends on the growth rate: a higher growth rate implies more investment
which means that a smaller deficit is required to maintain the overall balance
between investment and total (private and public) saving. Thus, the debt ratio
should be high in economies like Japan with a high saving rate s and low popula-
tion growth n.
A second result relates directly to austerity policies. Cuts in government
consumption reduce aggregate demand and, to maintain full employment, private
consumption must take up the slack. For this to happen, taxes have to fall more
than the fall in government consumption (the balanced budget multiplier in
reverse), the government deficit rise and there is an increase in the long-run debt
ratio; austerity policies are counterproductive on their own terms.7
Aside from their intrinsic importance, third, changes in income distribution
will influence aggregate demand and the required fiscal policy: an increase in
inequality is likely to raise the saving rate and thereby the required debt ratio.
A reduction in the real rate of interest, finally, may increase the capital intensity
and reduce (Y/K)*.8 A lower output–capital ratio, in turn, implies a decline in the
debt ratio.

Discussion
Robustness
The model in section 2 has an old Keynesian flavour, and the results are clearly
at odds with Ramsey-type models. But it is the Ramsey model that represents the
extreme case. Market economies do not automatically produce full-employment
growth with an optimal capital intensity, even in a world of perfect competition,
‘rational’ behaviour and perfect foresight (whatever one may think about these
assumptions as an approximation to real-world economies). The key assumption
behind the results in section 2 is simply that consumption depends on taxation
and the level of debt. This rejection of Ricardian equivalence does not depend on
irrational household behaviour.
Consider a neoclassical OLG setting with optimizing households and perfect
foresight. It has been known at least since Diamond (1965) that the real interest
rate required to maintain full employment may be low, even negative, in OLG
models, and that public debt becomes desirable if this happens and the economy
becomes dynamically inefficient. More generally, even if the economy is
dynamically efficient in the absence of public debt, it will not – except by a
fluke – generate a socially optimal capital intensity. Public debt – positive
or negative – can be used, however, to achieve the desired intensity and the asso-
ciated real rate of interest.
Empirically, the rate of return on capital exceeds the growth rate. This finding
has been interpreted as evidence that actual economies are dynamically efficient
(Abel et al., 1989), and in a dynamically efficient economy the socially optimal
26 Peter Skott
debt may well be negative: impatient households may save too little and the
economy will not get to the desired capital intensity without additional saving by
the public sector. The standard efficiency criterion, however, is based on an
assumption of perfect competition and does not apply without modification in
more realistic cases with imperfect competition: in the absence of perfect compe-
tition, high rates of profits may be due to monopoly rents rather than to a high
‘marginal product of capital’. This imperfect-competition argument is quite
general but the issue can be seen most clearly if the production function is
Leontief: profit-maximizing firms that maintain some degree of excess capital
capacity and set prices as a markup on marginal cost can show a positive rate of
return, even though with excess capacity the marginal product is zero (Ryoo and
Skott, 2014a).
A neoclassical OLG model assumes full employment at all times, and house-
hold saving automatically translates into investment. In a Keynesian setting, by
contrast, the saving and investment decisions are separated. Households save, but
firms make the investment decisions, and a low (expected) return discourages
investment. As a result, high saving rates can lead to aggregate demand problems
rather than dynamic inefficiency. Returning to the illustrative Leontief case, firms
will only want to expand their capital stock at a constant rate (a steady-growth
requirement) if the capital stock is being utilized at the desired rate. If firms
consider the utilization rate too low (too high), they will want to reduce (raise)
accumulation until the desired rate has been reached; thus, the economy would
not be in steady growth.9 In the absence of a public sector and with a given
growth rate of the labour force, this steady-growth condition on the utilization
rate defines a unique saving rate for goods market equilibrium.10 If households
wish to save at a higher rate, public sector deficits are needed to solve the aggre-
gate demand problem and avoid secular stagnation (Skott and Ryoo 2014b).
The analysis in section 2 can be extended in another direction. The model
included two assets, fixed capital and government bonds. Fixed capital, however,
does not enter households’ portfolios directly in a corporate economy. Households
may be the ultimate owners, but the ownership is mediated through financial
assets in the form of equity. Moreover, it may be reasonable to include ‘money’
as a financial asset in addition to equity and government bonds. Ryoo and Skott
(2013) analyse a post-Keynesian stock-flow consistent specification along these
lines. The results are qualitatively similar to those in section 2 and those derived
for OLG models: the long-run debt ratio is decreasing as a function of both the
growth rate and the share of government consumption.
Ryoo and Skott (ibid.) also examine the effects of changes in the structure of
taxation, showing that functional finance can produce unstable debt–income
dynamics in some cases. The stability of the debt ratio in section 2 derives from
two feedback effects. An increase in debt raises consumption both via the wealth
effect and because of the rise in interest payments associated with an increase in
debt. Functional finance calls for a rise in taxes to offset this stimulus to aggregate
demand; distribution effects, however, can weaken the magnitude of the required
tax increase and the stabilizing effect, if saving rates differ across households.
 Public debt, stagnation and functional finance 27
A small tax increase on workers with a low saving rate may be sufficient to offset
the demand effect from interest payments that go to high-saving rentiers.
Consequently, an increase in debt can lead to a rise in the deficit, and the debt
dynamics can become explosive. The remedy is straightforward: use taxes on
capital income as the fiscal instrument, instead of taxes on wage income.11
Staying with traditional Keynesian concerns, the steady-growth path may be
unstable. Monetary policy rules – Taylor rules – can contribute to the stabiliza-
tion of an unstable economy but may not be sufficient, even when interest move-
ments are not constrained by the zero lower bound (Franke, 2015; Ryoo and
Skott, 2015). Interactions between fiscal and monetary policy complicate the
picture: Taylor rules that are stabilizing for low debt ratios can become destabiliz-
ing if the debt ratio exceeds a certain threshold. Instability, moreover, may arise
from a combination of fiscal and monetary policy rules which separately would
stabilize the system (Ryoo and Skott, 2015).12

Relevance
The doctrine of functional finance may not have been widely embraced in its pure
form, but something close to it had widespread support within the profession
during the heyday of Keynesian economics from the 1950s to the 70s. Tobin
(1986) commented that in ‘almost every recession prior to the most recent pair of
1979–82, fiscal stimulus, temporary or permanent, was deliberately applied to
promote recovery’ (p. 7) and, criticizing the Reagan–Volcker policy mix,
commented that the tight-money-easy-budget combination ‘runs counter to long-
run growth because it encourages present-oriented uses of GNP relative to future-
oriented ones’ (p. 12). The policy mix, in other words, created too little
investment, thereby deviating from functional finance.
Macroeconomic theory swung away from Keynesian ideas in the late 1970s,
but aggregate demand still influences fiscal policy, both via automatic stabilizers
and discretionary policy. The stimulus package in 2009 may be the most promi-
nent US example of demand-motivated fiscal policy from this period, but the
Bush tax cuts in 2001 and 2003 were also in part motivated (or at least presented
as being motivated) by the weakness of aggregate demand at the time.
In OLG models an exogenous rise in public debt will be associated with a fall
in the capital stock and an increase in the return on capital. In this way – by rais-
ing interest rates and crowding out investment in fixed capital – public debt can
hurt future generations. The link between debt and interest rates does not exist
under functional finance: debt is only allowed to increase if an increase is neces-
sary to maintain both full employment and the interest rate associated with the
optimal capital intensity. The current obsession with austerity should be a
reminder, of course, that fiscal policy is not always conducted in accordance with
the principles of functional finance. But if governments pursue policies of ‘imper-
fect functional finance’ – that is, if there is a tendency for fiscal policy to become
more expansionary when unemployment is high – a plot of interest rates against
the public debt ratio will show variations around a horizontal line. In the stylized
 28 Peter Skott
model of perfect functional finance the real interest rate is constant and all obser-
vations fall on the horizontal line. Fluctuations around the line arise if variations
in interest rates are used for short-run stabilization and/or if there are variations
in the value of r that is deemed optimal.
Figure 3.1 shows a scatter plot of the real interest rate on three-month treasury
bills against the debt–GDP ratio for the USA, 1939–2014.13 The evidence fails to
support crowding out. The USA has seen large variations in the debt ratio but the
correlation with interest rates is, if anything, negative. This lack of support for
crowding out is confirmed by more detailed studies. In the words of Engen and
Hubbard (2005, p. 83), ‘some economists believe there is a significant, large,
positive effect of government debt on interest rates, others interpret the evidence
as suggesting that there is no effect on interest rates’. Bohn (2010, p. 14) makes
a similar statement about the difficulty of finding significant interest rate effects
of debt. He goes on to suggest that a ‘leading explanation is Ricardian neutrality’.
Imperfect functional finance, however, would seem a more plausible
explanation.
The relevance of functional finance can be questioned from another angle:
policy-makers may, it is suggested, be unable to control the real rate of interest
on public debt. Chalk (2000, p. 319) argues that some OECD countries ‘have
seen an explosion in their indebtedness to such an extent that the solvency of the
public sector is brought into question’, and Collard et al. (2015, p. 382) ‘take it
as the starting point for our analysis that maximum debt is determined by lenders:
a country can only borrow as much as lenders are willing to provide’. It is clearly
correct that countries with debt in foreign currency can face solvency problems
and may be unable to control the interest rate on their debt. But there is no
indication in these (and many other) papers that the argument is restricted in this

6
5
% change from a year ago

4
3
2
1
0
−1
−2
−3
−4
30 40 50 60 70
% GDP, 1939–2014

Figure 3.1 Real interest rates on three-month treasury bills and the debt–GDP ratio
Note: x axis shows Gross Federal Debt held by the public as % GDP; y axis shows Secondary
Market Rate–Consumer Price Index for all urban consumers.
 Public debt, stagnation and functional finance 29
way to a particular group of countries (like Greece or other Eurozone countries).
Chalk discusses the US economy and Collard et al. calculate their sustainable
debt levels using the same criteria for the USA and Korea (with debt in their own
currencies) and Greece and Ireland (whose situation is closer to that of a city like
Detroit).
How can a sovereign state become insolvent if its debt obligations are denomi-
nated in a currency that it can print at will? By the same token, it is unclear how
high debt can force a country to pay high interest rates; Japan has a gross debt ratio
that exceeds 240 per cent – almost all of it in yen-denominated obligations – and
the interest rate on its ten-year bonds is below 0.5 per cent. A country that
controls its own currency always has the possibility of monetizing the debt.
A standard counterargument suggests that the inflationary implications of mone-
tization rule out this policy. Inflation, however, is caused by excess demand pres-
sures in goods and labour markets, and under functional finance an overheating
economy calls for contractionary policy. To be persuasive, the inflation argument
would need to show that high debt erodes the ability of policy-makers to imple-
ment contractionary demand policies to counteract overheating. Otherwise
the inflation arguments, like the sustainability arguments, merely point to the
possibility of unhappy consequences from bad policy: Chalk and Collard et al.
succeed in showing how strange results may follow when arbitrary policies are
combined with various ad hoc assumptions about, inter alia, growth prospects and
default risks.

Secular stagnation and structural liquidity traps

Since the 1970s macroeconomists have been obsessed with the need for ‘micro-
economic foundations’. Inspired by the Lucas critique (Lucas, 1976), a genera-
tion of macroeconomists has preached the flimsiness of statistical correlation and
the imperative of grounding all policy analysis in optimizing behaviour. Yet, on
the issue of public debt, the same profession largely seemed to embrace Reinhart
and Rogoff’s bivariate correlations as indicative of causal links. This conflict
between the ruling theoretical paradigm and the nature of the policy debate is
sharpened by the irrelevance of the level of public debt in the benchmark Ramsey
model with Ricardian equivalence.
Recent interventions by Summers and Krugman (among others) become
particularly interesting from this perspective. In his presentation at an IMF
conference, Summers (2013) brought up the dangers of ‘secular stagnation’. The
argument was somewhat tentative, but the mere fact that someone of Summers’s
stature raised the issue at an IMF forum caused a stir. Summers (2015) elaborates
on the argument and concludes that ‘finding ways to increase the demand to
spend, no matter how counterintuitive, is likely to be an important part of the way
forward’ (p. 65). Krugman has been making similar points in his discussions of
liquidity traps and the lessons from Japan (e.g. Krugman, 2013a).
The rediscovery of ideas with a continuous history in heterodox circles should
be welcomed. But the unawareness (or deliberate neglect) of the work that has
30 Peter Skott
been done outside the mainstream is disappointing. Godley (1999) observed that
the growth of the 1990s had ‘come about only as a result of a spectacular rise in
private consumption relative to income’ and that ‘if, as seems likely, private
expenditure reverts to its normal relationship with income, there will be, given
present fiscal plans, a severe and unusually protracted recession’ (p. 1, italics in
original). He went on to argue that fiscal policy ‘is much too restrictive to be
consistent with full employment in the long run’ (p. 9, italics in original).
Wray (2000), along similar lines, suggested that unsustainable increases in
consumer indebtedness had been masking the underlying demand problems.
Palley (2002, pp. 28–9) argued that the adverse demand effects of a worsening
income distribution had been kept at bay by mechanisms – including household
borrowing and the stock market boom – that were ‘approaching exhaustion’, and
that ‘the US economy is entering a period when systemic demand shortage is
likely to be the major difficulty’. Skott (2001, p. 134) argued that ‘the mainte-
nance of sufficient aggregate demand to keep the economy at full employment’
may require fiscal intervention or a negative real interest rate (and hence a
positive, lower bound on the rate of inflation). Along similar lines, Nakatani and
Skott (2007, p. 307) used a formal (post-)Keynesian model to argue that Japanese
stagnation since the 1990s was caused by a ‘structural liquidity trap’; the proxi-
mate problem was ‘one of aggregate demand, but the demand deficiency is
structural’. More generally, the importance of income inequality for aggregate
demand – with derived effects on the growth rate and/or the level of employment –
has been a constant theme in the post-Keynesian and neo-Marxian literature.
It is not just a matter of acknowledging the existence of previous contributions.
The non-mainstream work has not been superseded by a more complete and
satisfactory account by Summers, Krugman and others. Summers’s (2015) analy-
sis remains quite sketchy and has as its centrepiece the notion that ‘equilibrium
real rates of interest’ have fallen. At best this seems unclear. The Euler equation
may pin down an equilibrium rate of interest in a rarefied world of infinitely lived
households and Ramsey optimization. Outside this world, however, fiscal policy
and public debt are among the determinants of the equilibrium interest rate asso-
ciated with long-run full employment. The implicit argument may be that shifts
in the natural rate of growth or in factors (like increased inequality) that affect
saving require a fall in interest rates (a rise in capital intensity) or a more expan-
sionary fiscal policy. If this is the argument, it would seem that Summers is grop-
ing towards the story outlined above in section 2.
Krugman has argued forcefully that the slump is not the time to cut the debt.14
This argument is fully in line with functional finance, but Krugman also suggests
that ‘the United States has a long-run budget problem’ that must be addressed at
some point.15 The nature of the long-run debt problem is not made clear, however.
This is not to say that there can be no adverse consequences of high public debt.
But these consequences have to be specified and balanced against the benefits.
DeLong (2015) discusses fiscal policy in the medium run, arguing that the
public sector needs to expand because of an increasing share of goods that are
subject to some kind of market failure. This is an important point, but the analysis
 Public debt, stagnation and functional finance 31
that follows is based on the premise that in the medium run ‘the economy is not
at the zero lower bound’ and that ‘monetary policy can adequately handle all of
the demand-stabilization role’ (p. 1).
DeLong also suggests that an increase in public debt may be desirable in the
USA because the interest rate on public debt has been below the growth rate.
From a functional-finance perspective, however, the interest rate on public debt
is itself a policy variable. Given any chosen level of government consumption,
fiscal and monetary policy can be adjusted to control both aggregate demand and
the interest rate, with public debt emerging as a relatively unimportant conse-
quence of the chosen policy combination. Policy-makers could aim for a higher
interest rate, but why finance the optimal level of government consumption
(whatever determines this level) in a way that leads to higher interest payments?
Is the aim to affect other interest rates that are also deemed too low? Are private
investment and capital intensity too high? Alternatively, DeLong’s implicit
assumption may be that, in the medium and long run, additional government
spending must come at the cost of higher debt and a rise in interest rates. This
assumption is at odds with the analysis in section 2: an increase in the share of
government consumption in income is compatible with an unchanged interest
rate, and it produces a long-run fall, rather than a rise, in the debt ratio.
To me, these (and many other) examples illustrate the continued relevance of
the macroeconomic work that has been exiled from the ‘big’ journals since the
1980s. Some of that work is very applied and policy oriented; some of it theoreti-
cal and mathematically rigorous. Thus, it is not correct when Eggertsson and
Mehrotra (2014, p. 1) suggest – undoubtedly in good faith – that there have been
no earlier attempts ‘to write down an explicit model in which unemployment is
high for an indefinite amount of time due to a permanent drop in the natural rate
of interest’.

Conclusion
Statistical regularities may break down if there are changes in the economic envi-
ronment, including policy regimes; the Lucas critique, in other words, is valid.16
But the attempted Lucas solution – the route that economics took from the late
1970s – represents a failed detour.17 And an immensely costly one. Following a
period of reckless deregulation and rising inequality, economies have been devas-
tated by misguided austerity policies.
Fiscal measures, according to the principle of functional finance, should be
judged by their implications for employment, inflation and investment, not by
moralistic notions of sound finance and the intrinsic virtues of balanced budgets;
there is no special virtue in balancing the budget ‘over a solar year or any other
arbitrary period’ (Lerner, 1943, p. 41). But perhaps it is not the objectives of func-
tional finance that are controversial, at least in academic circles. Economic analysis
of monetary policy looks for ‘optimal’ policies (or policy rules), given a welfare
function that includes employment and inflation and a model of the economy; a
growing mainstream literature approaches fiscal policy in the same way.
32 Peter Skott
The important conflict concerns not the objectives of policy, but the descrip-
tion and understanding of the economy in which the policies are meant to operate.
Unlike the functional-finance tradition, most of the recent literature considers a
world in which there can be no aggregate demand problem in the long run and in
which market mechanisms automatically produce full employment and an opti-
mal choice of technique. This setting represents a poor approximation to the
world in which we live. Thus, it is hard to disagree with Summers’s (2015, p. 60)
opening statement: ‘The events of the last decade should precipitate a crisis in the
field of macroeconomics.’
Abandoning the infinitely lived representative agent and Ricardian equiva-
lence, robust results from a range of models show that fiscal policy can be essen-
tial for the management of demand, also in the long run. They show that low
growth calls for a high debt ratio, that the required debt ratio increases if govern-
ment consumption is squeezed, and that by raising the saving rates, an increase
in inequality will also need to be compensated by more expansionary policies and
an increase in the debt ratio.

Appendix
The government budget deficit – and hence the change in debt – is given by

D = rD + G − T (9)

Now let e denote the budget deficit as a share of income,

D rD + G − T
ε= = (10)
Y Y

We want to derive time path of e (and hence D) that is consistent with growth at
full employment.
Using the definition of e, disposable income can be expressed as
Y D = (1 + ε )Y − G and the consumption–capital ratio becomes

C (1 − s )[(1 + ε )Y − G ] + σ W
=
K K
∗
Y  K+D
= (1 − s )(1 + ε )   − (1 − s )γ + σ (11)
K
  K

Combining equation (11) and the equilibrium condition (4) we can solve for e,

s (( YK )∗ − γ ) − σ − n − δ σ D
ε= − (12)
(1 − s )( YK )∗ 1− s Y

This expression shows the deficit–income ratio that is required in order to

achieve full employment. Notice that both a higher debt ratio and a higher ratio
of government consumption to income reduce the required deficit.
Other documents randomly have
different content
allotted, the machinery on the road to Perth, a hundred thousand
pounds will be the lowest valuation at which our half share in the
“Last Chance” can be calculated. A hundred thousand pounds! Think
of that! Of what it means for you, for me, for the children. For
everybody concerned. And a good many people will be concerned
beneficially in the venture as soon as the money is paid to my
account in the Bank of New Holland.
‘I don’t intend that there shall be any risk or uncertainty in the future
—apart from those apparently accidental occurrences from which,
under God’s providence, no man is free. But I will invest fifty
thousand pounds in debentures, well secured; so that, come what
will, a comfortable home, a sufficing income, will always be assured
to you and the children. Of course I shall resign my appointment as
soon as I return, giving the Government all proper notice. Our future
home
66 will be in Sydney or Melbourne, on whichever we may decide.
The children are just at the age when higher educational facilities
are required. They have not done badly so far. But they are growing
up fast, and upon what they assimilate, intellectually, for the next
few years will their social success largely depend.
‘It is needless to dilate upon the endless pleasures and the general
advantages of the possession of ample means, now, for the first
time in our lives, enjoyed, or about to be provided for us, before the
fruition is accomplished. I have always been averse to a too
sanguine appropriation of the probable treasure. Alnaschar’s basket
is still to be met with. And I must cross both desert sand, and ocean
wave, before I can pour into your ear the tale of my strange
adventures and their marvellous ending. For the present, I conclude,
full of thankfulness, but, I trust, not unduly elated. “People I have
met” will furnish many an hour’s talk, not the least of whom are my
two mates and partners—one of whom is now delving away at the
claim with old Jack Waters, as if to the manner born; and the other,
whom I expect will rejoin me before sunset, is unromantically driving
the light waggon containing all our goods and chattels. These
“labouring men” are of a type unlikely to be found in any land less
contradictory to all preconceived ideas than Australia. They are, in
fact and truth, genuine English aristocrats—one being Lord
Newstead, the other the Honourable Denzil, son of the Earl of
Southwater. They are quite young, hardly past their majority, in fact;
but
67 full of pluck, hungering for adventure, and resolving to see it out

before they turn their backs on this Eldorado of the West.

Particularly the Honourable Denzil, who is a born explorer and
pathfinder. He will make his mark, if I mistake not, before he is
many years older.
‘It is a great pleasure to me, as you may believe, to work with men
of this sort. No doubt we are mutually helpful—their high spirits, and
sanguine anticipations, tend to raise mine, which my experience (not
to mention that of old Jack) moderates. We have been, since we
forgathered, as Scotch people say, a cheerful and congenial party,
destined, I think, to become firm friends and attached comrades in
the future.’
The afternoon was well advanced when Newstead made his
appearance, having come quietly along, sparing his horses, as he
had already learned to do since his arrival in Australia. Mr. Banneret
had finished his letter and his walk; was therefore not disinclined to
have a companion with whom to discuss the situation. He was
pleased to find that a share of the only available bedroom had been
engaged for him, and deposited his personal property therein with
unconcealed satisfaction.
‘One can’t help being childishly pleased with the certainty of a real
bed, and a dinner to match, again,’ he said. ‘Denzil and I have
roughed it as thoroughly as any two “new chums” (which is
Australian for English here), and it’s done us no end of good. But
there’s a time for all things, and after six months’ hard graft, with a
trifle
68 of hunger and thirst thrown in, it’s awfully jolly to come to a
land of chops and steaks, sheets and blankets, with a prospect of
yet higher life in the near future. But on that we must not dwell yet
a while. I suppose you made it all right with the Bank?’
‘Yes; the nuggets are safe for the present, and I can draw against
them to any reasonable amount. That’s consoling. Our next move
will be to fix up about the lease, and so on. I’ve just bought the W.A.
Act and Regulations, which I needn’t tell you it is vitally necessary to
be well up in, on a goldfield. Any big show is sure to be well
scrutinised by the “jumper” fraternity, and any joint in the armour
pierced, if possible. Litigation, too, always means delay, if not loss
and anxiety.’
‘How long do we stay here?’
‘Only as long as it will take us to complete arrangements. Then you
return to the claim, “Waters’ Reward.” We must call it after old Jack,
who has certainly the best title to it, after doing such a “perish,” as
he would say, in its discovery. You’ll see it all in the paper to-morrow
morning, for, of course, I’ve been attacked by the ferocious reporter
of the “Dry, dry desolate Land” (with apologies to Mr. Kipling).’
‘And you told him all about it?’
‘Of course—he has a quasi-legal right to the information, now that
the Mining Registrar is in possession of the facts. Payable gold, as
you are aware, must be declared within so many days. And as any
miner, for a small fee, is entitled to search the Registration Book,
there is no object to be gained by secrecy.’
‘What
69 a rush there’ll be, directly it gets wind! No doubt about that.
When does the Miner’s Friend come out?’
‘At breakfast time to-morrow. We had better stable the horses to-
night, and keep a good lock on the door, for there’ll be many a nag
missing by the morning light.’
His conjecture was correct. The news had leaked out accidentally
through the office. Told to a few comrades at first, the group had
widened. Then like the trickling rill from the faulty reservoir, the
rivulet gained width and force, until the volume of sound and
objurgation swelled, echoing amid the encampment of huts, tents,
and shelter contrivances. The tramp of a thousand men, the
galloping of horses, the strange cries of Afghan camel-drivers,
formed no inadequate presentment of, in all but the discipline, an
army brigade on the march.

. . . . . . . . .

A few hours of the night were devoted to a carefully-thought-out list,

and programme of future proceedings, as well as the formation of a
list of requisites for Newstead to take back to the claim. A couple of
wages men were also engaged, it being thought expedient to
strengthen the man-power of the expedition, in view of the crowd of
probable fellow-travellers which would be heading for Pilot Mount on
the morrow—indeed on that very night. Mr. Banneret was fortunate
in picking up a couple of ex-residents on his old field.
They
70 had not been successful, so far, and so were only too ready to
embark under the auspices of the Commissioner, in whom, like all his
former subjects (so to speak), they had unbounded faith. ‘These
men,’ he said, ‘have been known to me for years, and two better
men than Pat Halloran and Mickey Doyle never handled pick and
shovel. They are perfectly straight, plucky, and experienced. In
anything like danger I would trust my life to them. We were lucky to
have fallen in with them. They have travelled, too, in their day, and
know New Zealand, from the Thames to Hohitika—as well as Ballarat
and Bendigo.’
‘So far, so good,’ said Mr. Newstead. ‘We shall want a lot of stores—
machinery too. All sorts of eatables and wearables. No end of
sundries, which will “foot up” to a total of some importance. Where
shall we get them in your absence? Everything seems to be at war
prices.’
‘I’ve fallen on my feet in that matter also. That you can get
everything on a goldfield, has always been a contention of mine. It’s
a sort of Universal Provider shop, once it’s been established
sufficiently long to attract the regulation army of Adullamites. A
goldfield is created for them, and they for a goldfield. We’ve got two
first-class wages men, and I’ve found the ideal storekeeper and
general agent.’
‘What’s he like?—has been a gentleman, Lord help him! I can’t say I
care for that brand.’
‘Wait till you see him, that’s all. He’s an old schoolfellow of mine, and
his wife’s a lady, if ever there was one, as I think you’ll admit. I
guarantee him.’
‘Well,
71 if you do that, it’s all right, of course.’
‘I vouch for him absolutely. We can depend on not paying a shilling
more than the current market price, and on getting everything good
of its kind.’

. . . . . . . . .

The return journey and voyage were so little eventful that they
require no mention in detail. The local papers were full of highly
coloured references to the phenomenal find at Waters’ Reward, for
which a lease had been granted to Messrs. Banneret and Waters.
‘The actual prospector was Mr. John Waters, a pioneer miner,
experience in California, Australia, New Zealand, and South America.
His name was sufficient among the mining community to account for
any fortunate discovery in the world of metals. It was not the first,
by a dozen or more. That he had not profited permanently by his
well-known rich finds in former days and other climes, must be
attributed to the spirit of restless change and hunger for adventure,
so characteristic of the miner’s life. He had “struck it rich,” in mining
parlance, again and again. But the “riches had been of the winged
description,” had flown far and wide—were, for practical purposes,
non-existent. There may have been a certain degree of imprudence,
but what golden-hole miner hasn’t done the same? The fortunate
rover lends and spends, ever lavish of hospitality and friendly aid, as
if the deposit was inexhaustible. “Plenty more where that came
from,” is the miner’s motto.
‘Doubtless
72 there is, but delays occur, protracted not infrequently
within our experience, until the prodigal, like his prototype, is
reduced to dire distress and unbefitting occupation. In our respected
comrade’s case the fickle goddess has again smiled on his
enterprise. Let us trust that he will learn from the past to be
independent of her moods for the future. The senior shareholder,
well known and respected as a Goldfields Warden in another State,
has gone east to arrange for the necessary machinery, and the
thousand-and-one requisites for a quartz-crushing plant of fifty
stamps, with everything, up to the latest date, in the way of
metallurgical reduction. No time will be lost in getting it on the
ground, and the results will be, it may be confidently stated by this
journal, such as will startle the mining world, and give fresh impetus
to all industrial occupation in our midst.’

. . . . . . . . .

At home once more. What a blessed sound! comprehensive,

endearing, filled with the domestic joys which wife and children
supply—a joy such as no other earthly pleasure can simulate. The
Commissioner was ‘once more on his native heath,’ so to speak; and
as he walked into his well-remembered office, earlier than usual, in
order to take a leisurely survey of the great mass of papers, private
and official, which awaited his return, and noted the gathering crowd
which had already formed around the Court House door, a certain
feeling of regret arose in his mind at the idea that his ministerial and
judicial
73 functions were about to cease and determine within so short
a time. True, at times his position had been one of great, even
painful responsibility.
It could hardly have been otherwise, when the hundreds, even
thousands, of disputes, inevitable on a rich and extensive alluvial
goldfield, had, as a Court of First Instance, to be decided by the
Commissioner hearing evidence ‘on the ground’—the centre of an
excited crowd; or in the district Court House, with counsel for and
against, and all legal accessories, but chiefly with the Commissioner
as sole adjudicator and all but final referee. To be sure, there was an
appeal to the District Court, attending quarterly; beyond that, if
doubt existed, and the claim was sufficiently rich to fee counsel and
support the great expense of a Supreme Court trial. A thousand-
pounds brief had been handed to the leader of the Bar, in his
experience, before now in an important claim. But, so far, his
decisions had been chiefly unchallenged. In fewer instances still, had
they been reversed. Long years of goldfields wars and rumours of
wars had given him such thorough knowledge of the intricacies of
that abstruse and (apparently) complicated subject, mineral law,
that he was seldom technically doubtful, while his staunch
adherence to equity, with an unflinching love of abstract justice,
were universally recognised. So, on the whole, as ‘a judge, and a
ruler in Israel,’ his reign had been satisfactory.
And now he was about to relinquish the trappings of office—the
prestige—the social weight and authority—which he had held and, in
a74 sense, appreciated for the last decade. True, the accompanying
distinctions were purely honorary. The salary was barely equal to the
family needs, for education, apparel, travelling, and other expenses.
But it had sufficed in time past. He was admittedly the leading
personage in his provincial circle; the universal referee in art, letters,
sport, and magisterial sway. And the declension to the status of a
private individual is after such prominence not unfelt.
On the other hand, what glories, even triumphs, lay in the future, if
this marvellous Reward Claim ‘kept up,’ or ‘went down’ equally rich!
Travel—books—pictures—education—society—all on the higher scale,
—money being no object in the coming Arabian Nights existence.
Aladdin’s lamp would speedily be brought into requisition. Sydney or
Melbourne would be their headquarters for the next few years. Of
course they would ‘go home’ as the children grew up. Harrow or
Eton—Oxford or Cambridge for the boys. Continental tours—lessons
in languages—Henley, in the green English spring. The Derby, the
Grand National—Kennington Oval (had they not a cousin a renowned
Australian cricketer, who had made the record score in a world-
renowned match!). It was too fairy-like—too ecstatic! They would
never live to go through the programme. Fate would interfere after
her old malign, mysterious fashion, to withhold such superhuman
happiness.
But more matter-of-fact mundane considerations had to be
considered, and primarily dealt with. Three months’ further leave
had
75 to be applied for ‘upon urgent private affairs,’ at the conclusion
of which period the applicant proposed to retire from the New South
Wales Civil Service. This was tolerably certain to be granted. The
appointment was a fairly good one, as such billets go. There are
always aspiring suitors for promotion, or officials of equal rank and
qualifications, who, from family or other reasons, desire removal.
Of course the truth leaked out after a few days. The departure of
the Commissioner and the old prospector had not been unnoticed.
No joint enterprise could have been possible in his own district; such
a partnership would have been illegal. Even if veiled, it must
inevitably have led to complications between private and official
relations. Against all such enterprises, however alluring, he had set
his face resolutely. So the public came to the conclusion even before
the first copies of the Western Watchman came to hand, that the
‘show’ must be in another colony; and so would result only in the
loss of their Commissioner and Police Magistrate—in addition to the
usual exodus of that section of the population which invariably
follows the newest ‘rush,’ whether to Carpentaria or Klondyke. Then
waifs and wasters could be well spared, while the steady workers
would be useful in sending back reliable information to their mates
and friends. Con Heffernan had started, Patroclus the Greek, Karl
Richter, and the two Morgans; they would write quick enough after
they got there, and if the find was half as good as was talked about,
every
76 man in Barrawong who wasn’t married, or had cash enough to
take him there, would be on the road within forty-eight hours.
Of course they would be sorry to lose the Commissioner; they
wouldn’t get another in a hurry who was as smart, straight, and
decided. He was fair, between man and man, and didn’t care a hang
what creed, country, or caste a man belonged to when he was trying
a case. All he wanted was to do justice, and he didn’t mind making
the law himself sometimes, so as he could give the claim to the right
man. Didn’t he fight the great No. 4 Black Creek Block case for Pat
Farrell and party against the Dawson crowd, and them having a lot
of money behind them—after it was adjourned, and remanded and
sent to the Full Court in Sydney—fresh magistrates being got to sit
on the bench; and, after all, old Pat Farrell got it, with heavy costs
against the jumpers? And Mrs. Banneret—wasn’t she the kind
woman to the diggers’ wives and kids?—though she had a young
family of her own, and little enough time or money to spare from
them. Well, good luck go with them, and the poor man’s blessing,
wherever they went, far or near! They’d be remembered in
Barrawong for many a year to come, anyhow—as long as there was
a shaft or a windlass left on the field.
What thoughts and emotions struggled for precedence in Arnold
Banneret’s breast when he reached the country town near his home,
and saw the familiar faces of the provincial inhabitants, mildly
interested in the arrival of the daily coach, bringing as usual
novelties,
77 human and otherwise—last from the sea-port, and by that
medium from the world at large. Casting his eyes around, after a
few hurried but warm greetings, they fell on the well-worn buggy
and the favourite pair of horses. His eldest son, a boy of fourteen,
held the reins, which he transferred to his father, after replying in
the affirmative to the important inquiry, ‘All well at home?’
As he gave the accustomed touch, the horses, needing no other
hint, started along the metalled high road at a ten-mile-an-hour trot,
which they showed no disposition to relax until they came to the
turn-off track leading to the home paddock.
‘Well, father,’ said the youngster, ‘you’ve had a fine time of it, I
suppose? I’d have given all the world to have gone with you. I
suppose you couldn’t take me when you go back?’
‘No, my man! You’ve got your education to attend to, and to see
mother and the children settled in Sydney first. I can’t afford to stay
long. So you’ll have to be mother’s right-hand man while I’m away.’
‘I suppose I’m to go to school when we get to Sydney?’—in a slightly
aggrieved tone.
‘Of course you are—and to the University afterwards, unless you are
not able to pass the Matric.—which I should be sorry to think for a
moment you couldn’t manage.’
‘Oh dear! I suppose it will be years and years of Latin and Greek,
and history and geometry, before I can make a start in life for
myself.
78 If I’m to be a squatter—and I’m not going to be anything
else—what is the use of losing all this time?’
‘My dear boy, you are to have the education of a gentleman.
Whether you decide for a bush life or a profession, a mining
investor’s or a soldier’s, it will be equally useful—I may say,
indispensable—to you. But there is ever so much time before us in
which to settle such a very important question. How well the country
is looking! I haven’t seen so much grass and water since I left
home.’
‘It ought to look well—we nearly had a flood in the river last week.
The flats were covered, feet deep, but it soon went off again. It
won’t do any harm, they say; but we thought it would come into the
house one evening, and mother sat up half the night. It began to fall
next day.’
‘That was fortunate. Everything looks flourishing now. Oh, here are
the children, all come out to meet Dad, who is a man from a far
country. Pull up, Reggie! and I’ll get out. Steady, Hector!’
Hector, the impatient, didn’t see the use of stopping so near home:
indeed, gave two or three tugs and rushes before Mr. Banneret got
clear of the buggy. Then there was great kissing and hugging, to be
sure, from the half-dozen children, who hung round Daddy’s neck
and kissed impartially, taking any part of him that came handy.
There were four girls and three boys of differing ages and sizes,
from Reggie, aged fourteen, and Eric, ten, to Jack and Jill, aged five,
and
79 a rose-faced pet of three, who demanded to be taken into the
buggy forthwith. So did the entire troop. But a compromise was
effected by the girls getting in, and the boys electing to walk home.
The load made no appreciable difference—eleven, including five
adults and six children, had been carted eight miles on their first
introduction to the district, in the same trap, the redoubtable Hector
being quite as hard to hold then as now.

. . . . . . . . .

Such a paradise as home (blessed place and blessed word) appeared

to the far-travelled father and husband! We pass over the mutual
greetings of wife and husband—matters too sacred for descriptive
analysis—‘with whose joy the stranger intermeddleth not.’ That they
‘kissed again with tears,’ on one side at any rate, may be conceded.
All had gone well during the house-father’s absence. Hector had
been lame for a week—which had led to anxiety. No cause could be
assigned; but the shoeing smith was suspected of a tap with his
hammer, as a hint to stand still. He declined to confess, but relieved
his mind by abusing Hector as the most impatient, troublesome old
wretch whose leg he had ever lifted. Anyhow, he was quite well
again, and ‘flasher than ever’—this was the second son’s contribution
to the case.
Next morning, in the pre-breakfast stroll, the springing crops—the
wide alluvial flats—the lucerne fields—the dairy herd—the stud of
well-bred horses—all appealed to the wanderer’s tastes and early
associations;
80 the delightful country attributes of a long-held fertile
estate—inherited by the present proprietor. The Commissioner was
indeed but a tenant, dwelling in the ‘barton,’ so to speak, in old
English term—the manor was the Squire’s by inheritance and
occupation since he had come of age. A new house had been built
soon after the auspicious occasion of his marriage; while, on the
Commissioner’s arrival in the district, the roomy, old-fashioned
cottage, with large rambling garden and aged orchard, had been
gladly rented by him. For a man in his position, no more suitable
place could have been found. The families became fast friends, and,
what is more to the purpose, remained so for the whole decade
during which the Commissioner’s official duties attached him to the
district. The green fields and pastures were as much his as their
owner’s, in the sense that a woodland scene belongs to him who can
appreciate the lovely, verdant landscape. In earliest spring—in the
bracing, but never severe winter of the South land—amid evergreen
forests and running streams, even in the torrid summer, when the
fresh, dry air has no enervating tendency—in the still dreamy
autumn, ere yet the first hint of frost has shown itself in the
yellowing oaks and elms—children they of the far north home-land—
how good was the outlook! The Commissioner loved these
demarcations of the changing year. In the river, which divided the
great meadows from the estate of a neighbouring potentate, his
boys learned to swim, and, both in the early summer morn and
lingering
81 eve, were eager to plunge into its cool depths, or unwilling
to return in time for the evening meal, to race and splash over the
pebbly shallows. There were well-grassed paddocks for their ponies
as well as for Hector and Paris, and their father’s hackney. They
established also, it may be easily surmised, trial races and contests
with the sons of the house, and by degrees developed the equine
association, which helped them notably in the aftertime of polo,
hunting, and four-in-hand driving—when such pastimes and practice
became suitable to their age and position.
It was a happy time then, with occasional exceptions, for the years
of early youth that the children spent at Carjagong; for the parents
also, though work was constant, and the just soul of Proconsul
Paterfamilias was often vexed by malign editors and Radical
demagogues, who stirred up strife in his kingdom, but he was
supported by the more thoughtful of the mining population, as well
as by the gentry of the district, with whom the family were always
on good terms. A yearly or biennial visit to the cities of the coast
gave all hands a taste of social life, and, with a breath of the sea
breezes, a sight of the ocean wave and the world-famed harbour. So
the family grew up: the girls into vigorous, independent maidens,
riding and driving, reading and dancing alternately—with equal
enthusiasm, as is the wont of the country-reared damsel, whether in
Britain or Australia, Galway or Goulburn. There is, it must be
allowed, in both hemispheres a note of freshness, vigour, and vitality
observable in the country cousins, to which the town denizens,
blasées
82 with unnumbered dissipations, rarely attain. Added to the
ordinary accomplishments, in which they were fairly proficient, they
had from time to time personal experience of the household duties,
which the dearth of female domestics—then as now a grave matter
of concern on the part of matrons—rendered necessary. Thus it must
be allowed that for the position of chatelaine, to which, in due
course of time, they might reasonably aspire, they were fairly
equipped.
And the sons of the house, destined in days to come to work in
distant States, or ‘outside’ regions, calling for leaders in the various
industries of a great, almost boundless continent, would be found
not unequal in brain or muscle to the duties imposed on them. Sons
and grandsons of pioneers, they inherited the thirst for adventure
which had brought the founder of the family, sea-borne in his own
galley, like a Viking of old, so far across the restless main, to the
new world under the Southern Cross. And now the abiding-place of
the Bannerets was again to be changed. Leaving on former
occasions their established residences in or near the principal cities
of the coast, where flower-gardens bloomed, and orchards bore their
annual store of tropical or British fruits, they had voyaged, or
journeyed, to new, unpeopled regions. The same experience had
been repeated—the building, the planting, the rearing of stock, the
turning of waste land into fields and gardens, vineyards and olive-
yards—sometimes for the benefit of the exiled family, more often for
the use and reward of others when the route was given once again.
There
83 had been sadness and heartburnings on all these occasions of
uprooting ties and friendships which more than once had struck
deep into a kindly soil; but the inherited pioneer instinct had
triumphed over all regrets. Sometimes the exodus had been from a
country life to that of cities; then the regret was softened by the
anticipation of metropolitan privileges—the meeting with friends and
relatives, the enchantments of novelty and romance. Still, again, the
departure from these new delights to a distant, untried region, a
strange environment, an unknown society, was proportionately
distasteful.
But the Bannerets were an adaptable race: they soon familiarised
themselves with new surroundings. Hot or cold, plain or forest, ‘out
back’ or near town, it seemed alike to them. They discovered
kindred spirits in the strangers amongst whom, for the first time,
they were thrown. They were sociable to the point of tolerating
those whom they could not admire; being civil and friendly to all
sorts and conditions of men, ready to do a kindness whenever such
opportunity came in their way, while preserving, as far as in them
lay, that standard of conduct and manners which had been habitual
from childhood. Small wonder, then, that they never left one of the
country towns, to which the exigencies of official or pastoral life
guided their steps, without public regrets being expressed. A
presentation in every case accompanied the address, which, in the
shape of coin of the realm, was not unwelcome. Their residence in
this,
84 a fertile as well as gold-bearing district, had exceeded the usual
term, and the manifestations of public sympathy were therefore
more general and pronounced.
To be sure, on the following morning after the Commissioner’s
arrival, when it was announced that he had decided to ask for three
months’ leave of absence, and to retire at the end of that time from
the Government service, there was a certain excitement, almost a
commotion.
Many of the inhabitants, who had accepted the rule of the
Commissioner without any particular enthusiasm, were always
willing to admit that he was a man ready to work in season or out of
season, whenever there was public duty to be performed—
considerate and impartial—treating the Christian or the Chinaman
according to the Act and Regulations in such cases made and
provided, and to no other code, moral or otherwise; an official
almost ceaselessly employed during the waking hours—often before
sunrise, or after dark, by the journeys which his duties of inspection
rendered indispensable; rarely known to be tired, ill, or discourteous;
ready alike to hear as patiently the case of the humblest miner as
that of the most powerful syndicate;—such was his record for the
ten long years that he had lived among them in almost daily
intercourse. A judge and a ruler, moreover, whose decisions, in the
words of an influential local journal, ‘had been rarely appealed
against, and still more rarely reversed.’
As in many other possessions and privileges, the benefits of which
are not sufficiently valued until in danger of being lost, great was the
outcry,
85 many the professions of regret, when the news of resignation
was confirmed. Where were they to get another man versed in their
mining laws?
Then the family, that was another important consideration. From the
lady of the house downward, they were favourites in the district.
Friendly and sympathetic with all classes, there was no case of
sorrow or distress where they were not helpful in aid, as far as their
means allowed. Fond of amusement in a rational way, they joined in
all the social and public entertainments with a cordiality which
notably tended towards their success—pecuniary or otherwise. At
bazaars for charitable purposes, hospital balls, race meetings, and
other enterprises, they were well to the fore—entering into the spirit
of the entertainments and giving unstinted personal service. And
now, the Commissioner and this exceptional family were about to
leave them and be replaced, possibly, by a formal, ceremonious
personage, who disliked the mining duties of his appointment, and
was concerned chiefly with the magisterial routine of Court, and
Petty Sessions duty, which he would (erroneously) consider more
dignified and aristocratic than riding hither and thither in all kinds of
weather, early and late, inspecting shafts, and, indeed, descending
occasionally into the bowels of the earth, where a feeling of
insecurity was painfully present. On the other hand, this gloomy
probability might not be realised. There were popular Commissioners
and able Police Magistrates yet to be found in the land. Many of
them
86 had wives and daughters capable of irradiating the social
atmosphere and helping in all good works. They must keep a good
heart, and hope for the best; and if they could not keep their
proconsul, so to speak, for the term of his natural life—which would
be unjust on the face of it, inasmuch as he had dropped on a
veritable ‘golden hole,’—they must wish him luck, and give him a
good ‘send off.’ And to that end, the best plan now was to hold a
public meeting, appoint a strong committee, and show what the
miners of the great alluvial field of Barrawong could do to show their
appreciation of ‘a man and a gentleman,’ a friend of every miner, rich
or poor, and a magistrate whom every man on the field respected,
even when he decided against him. This, of course, took time, but
everybody worked with a will, and the committee, composed of
leading miners, storekeepers, bankers, and magistrates of the
district, made great progress. Dinners were given in his honour,
speeches were made, even a ball was ‘tendered to him and his
amiable family’—such were the words of the invitation in which
reference was made to all the good qualities which could be packed
into any given official, and freely attributed to him. The ball was a
great success; the room was handsomely decorated with the great
fronds of the tree fern, the mimosa, and other botanical favourites,
intermixed with flags of all nations, which, indeed, the festive
company represented. The Mayor in the opening quadrille danced
with Mrs. Banneret, the Commissioner with the Mayoress, and
according to their degree, as in more aristocratic circles, the other
sets
87 were arranged. That ball was a pronounced success. It was
referred to, at intervals, for years afterwards, as the Commissioner’s
farewell ball. Not only were the élite of the mining community
present, but the families of the leading residents of the district for
many miles round, who had travelled long distances in order to
attend. Mrs. Banneret was driven home at a comparatively early
period in the evening, but the Commissioner, who had been devoted
to dancing in his youth, and was not now beyond the age when that
charming exercise can be enjoyed, remained until the ‘wee short
hour ayont the twal’,’ when finding that the gate of the stable-yard
was locked, and the groom asleep, he felt himself almost in a
quandary. However, being a man of resource, as from his varied
occupations he needed to be, he saddled his well-known cob, and
leading that well-trained hackney through the back door of the hotel
parlour, and across the floor, he made a safe exit by the front, and
reached home without let or hindrance.

. . . . . . . . .

After years of settled official work—not hard or distasteful, but still

compulsory and exacting—there is always an exhilarating feeling,
resulting from the knowledge that henceforth the trammels of
regulated occupation are loosed for ever. Like the freed bird darting
into the blithe sunshine, the wide world seems opened, as in our
boyhood, to an exhaustless series of wonders and privileges
impossible in the earlier stages of life for lack of time, opportunity,
money—if
88 you will. Travelling, the very salt of life, has been sparely,
if at all, enjoyed. There are cities to visit—art treasures in which to
revel—every kind and degree of rational enjoyment open to him and
those dear ones whose welfare had always been his highest aim and
consideration.
It is a matter generally of chastened, peaceful enjoyment to the
released official of any degree, when, as dear ‘Elia’ phrases it, he
can ‘go home for good’—with an income sufficient to provide suitably
for the declining years of life. But what must be his feelings when
such a man is suddenly translated into a position of affluence—to
wealth beyond his wildest dreams? Hardly that, perhaps, as every
one connected with a goldfield can dream, and generally does, of
the lease so slow ‘in beating the water,’ the reef so unwilling to
‘jump’ from pennyweights to ounces, floating him out to measureless
wealth, celebrity, and world-wide fame. Now, however, for the
Commissioner all the anxieties, uncertainties, and regrets of daily life
had suddenly come to an end. The ‘Last Chance’ was a proved,
triumphant success—seven to ten ounces to the ton, the great reef
doing better and better as it went down—the richest claim in the
richest and, for the future, the largest goldfield in Australia—the end
of doubt, debt, and difficulty had come. “His fortune was made!” The
well-worn phrase in commonest use among all classes and
conditions, trite and terse, even vulgarly so, but how
comprehensive! The open sesame to how many doors, gates, and
treasure-caves of delights innumerable, jealously guarded in the
past.
89 What a heaven in anticipation seemed opening before him! But
even then a half-regretful feeling arose—a sigh escaped for the old,
fully occupied life of ‘pleasure and pain,’ when ‘the hardest day was
never then too hard.’ Certainly there had been doubts, wearying
anxieties, troubles, burdens of debt, disappointments; but, as a set-
off, the family had enjoyed, on the whole, excellent health, high
spirits, and reasonable comfort.
He himself had never had, with one exception (an intrusive fever), a
day’s illness, or absence from work on that account. Would this
Arcadian state of matters be continuous in the future? He did not
know—who can tell what a day may bring forth? He would be
separated from his family for months at a time. This was inevitable.
The goldfield was distant, and at the most dangerous period of
occupation,—scourged with typhoid fever, pneumonia, influenza,
dysentery, what not? Afflicting fatally the young and brave, the old
and feeble, the hardy miner and the immature tourist, how would his
family fare? Of course he would not take his wife and children there
—the thought was impossible. Heat and dust, bad water, bad food,
flies in myriads, no domestic servants, or merely the outlaws of the
industrial army—the thought was too distasteful! So, even at this
stage, the prosperity was not unalloyed; what condition of human
existence is, when we come to think? Dangers thicken at every step
in the battle of life, but better they a hundredfold than the cankers,
the ‘moth and rust’ of inglorious peace. ‘However,’ thought Banneret,
as he roused himself from this introspective reverie, ‘here is a state
of
90 so-called prosperity, for which I have been longing, consciously or

otherwise, all my life; and now that it has come, why am I indulging
in useless regrets and imaginary, unreal drawbacks? Surely, as I
have fought against trouble and discouragement in the past, I ought
not to waver at the ideal fairyland in the future.’

. . . . . . . . .

The final arrangements which heralded the departure of the

Banneret family from Carjagong, where they had led a tranquil and,
on the whole, happy existence, were carried out successfully. The
address and testimonial were presented in due form. In the address
the departing official was credited with all the virtues; and the
testimonial, which took the form of coin of the realm, was a liquid
asset which had been decidedly useful in former flittings of
exceptional expensiveness.
They reached Sydney, by coach and train, without mishap or
difficulty. The children were joyous, and unceasing in their wonder
and admiration of wayside novelties, including snow, to a fall of
which they were, for the first time in their lives, introduced.
The day on which they re-entered Sydney will always be marked
with a white stone in the annals of the family. It was the opening
month of the southern spring, and no more brilliant specimen of that
gladsome season could have been presented to the eyes of the
travellers. They had left a region where, though the climate was
comparatively mild, the lingering winter months were austere. Hence
the
91 semi-tropical warmth of the air, the blue, cloudless sky of the

metropolis, were grateful as novelties to the wayfarers from the

interior. The younger olive-branches had of course in their ten years’
sojourn rarely seen the sea; the elder ones had but dim
remembrance of it; and when the first sight of the historic harbour
burst upon their gaze from the balcony of their hotel, a cry of
wonder and amazement could not be suppressed, in spite of the
nurse’s remonstrance.
‘Not quite so much noise, my dears!’ said the watchful mother. ‘You
must learn not to shout and cry out at everything you see, or else
people will think you are wild bush children, that have never been
taught anything. You will see so many new things every day.’
‘Yes, we know, mother,’ said the eldest girl. ‘But there is only one
harbour! Doesn’t it look bright and beautiful to-day? It is almost
calm, like a great lake. How the little white-sailed boats go skimming
over it, like sea-birds! There is a beautiful ship being towed in by a
little tug steamer. And, oh, here comes the mail-boat; how quiet and
dignified she is! She wants no tug, does she? That’s the best of a
steamer: she can get along, fair weather or foul.’
‘Sometimes, when a great storm catches her, even she has to “slow
down,” as sailors say; but generally, of course, she is independent of
wind and weather. And now it is nearly lunch time, so we must all go
and get ready.’
‘I went out in a sailing-boat,’ said Reggie, with an air of experience,
‘last summer when I was down. Didn’t she lean over, too? But, oh,
how
92 she did cut through the water! It was grand. And another day
Mr. Northam took out me and the Merton boys in his steam-yacht to
Middle Harbour. I liked that almost better. We had such a jolly lunch,
and went on shore afterwards. It was ever so hot, so we bathed,
and ate rock oysters, and had no end of fun. The country’s all very
well, but give me the sea at Christmas time.’
‘You’ll be at the King’s School next week,’ said his mother, with quiet
emphasis, ‘so I advise you to make the most of your time for a few
days. I can’t have you idling about town, and losing precious
opportunities.’
Reggie’s face fell just the least bit at this announcement, but soon
recovered its uniformly cheerful expression.
‘Can’t we stay till we go into the new house; that won’t be long, I
suppose?’
‘Not a day longer than I can help, my boy. School is your most
important affair for the next three or four years, and your father
expects you to distinguish yourselves—that is, you and Eric; Jack
must stay with Miss Charters for another year. Just fancy what a fine
time you’ll have! Ever so many playfellows—cricket and football,
hare and hounds, steeplechases, all kinds of games. You’ll be so
happy after the first week that you won’t want to come home.’
‘I shall never feel like that, mother!’ said the boy feelingly. ‘Don’t
make any mistake.’

. . . . . . . . .

The
93 eventful step was fully carried out; a comfortable house in one
of the picturesque suburbs of Sydney was rented and furnished; the
father’s farewells were made—those adieus sometimes temporary,
but which the heart is prone to suggest may be eternal; and as the
mail-boat majestically moved on her course through the great
sandstone gates of the landlocked haven, the tears fell fast from the
eyes of more than one of the little party as her smoke faded from
view behind the lofty headland.

. . . . . . . . .

Again the week-long voyage—the sighting of the far western ports—

the hasty landing—the railway crowding—the short stay at Perth—
the uneventful, uninteresting overland journey through country
which nothing but the possession of goldfields could render
interesting, though occasionally touching upon patches more or less
agricultural or pastoral. The motley crowd of pilgrims to the Mecca
of Mammon was indeed a medley, as are all goldfields crusades.
Runaway sailors, deserting soldiers, shepherds, stockriders, navvies,
nobodies, gentlemen ‘formerly in the army,’ Cambridge and Oxford
graduates, ex-Queensland squatters—some with two horses, some
with a packhorse only, but by far the greater number depending
entirely upon the all-sufficing ‘bluey’ (or blue blanket) carried on the
shoulders, and containing the owner’s food, wardrobe, cooking
utensils, and worldly possessions generally. Southern Cross, a year-
old town, was not materially different in architecture, dust, flies,
banks, and blasphemy, from ‘rushes’ with which the Commissioner
had
94 been familiar, only ‘more so,’ perhaps—every discomfort and
departure from civilised life being strongly accentuated. A much-
begrudged hour or two was spent, or rather wasted here, and
through the clear, starlit night the expedition pushed silently onward.
Taking counsel of past experience, the leader had left little to the
chances of the journey. He had provided a substantial waggonette,
heavier than the first vehicle in which he and old Waters had
travelled to the Pilot Mount; a forty-gallon cask for water—a good-
sized condenser, in case they ran short of the indispensable element
—chaff and oats sufficient for their four horses, with tinned meat
and fish to ensure a variety of ‘cuisine’; rifles, repeaters, and double-
barrels, with revolvers in good order, and plenty of ammunition; also
a fair-sized tent, with folding-table and seats, as a lengthened stay
at the claim, which was now a certainty, would need these
accessories for reasonable comfort, now that there was no doubt of
the reef being permanent, rich, wide, and going down equally so—
indeed better the deeper it went down. After leaving Southern Cross
the desert journey recommenced, but now there was no difficulty in
finding the road. Every kind of track was printed in large type upon
the broad sheet of the Waste. Carts and waggons, horses and
bullock teams, had been there. The camels, following one behind the
other, had left their soft, narrow paths through sand-hill and spinifex
plain, salt lake and clay pan. This they could note as they went
through
95 mulga and low acacia scrub until Pilot Hill, as the eminence
had been named, was sighted. Some of the ‘soaks’ emptied by the
horses and camel trains had not refilled, but their reserve of cask
water stood well to them in temporary need. And after a journey
neither protracted nor arduous, they greeted old Jack and
Southwater, who had managed to put up a comfortable shanty, and
pointed proudly to a ‘township’ of tents, and hessian edifices,
occupying a considerable stretch of country.
Great congratulations greeted them from the resident partners, and
much curiosity was expressed as to the nature of the supplies which
they had brought with them, as well as of those which were to
follow on, with the machinery, and all the component parts of the
up-to-date plant, which were even now on the road. As the
prospectors and shareholders in the Reward Claim, they were
objects of respectful admiration, and praised in the local newspapers
for endurance, high intelligence, courage, all sorts of heroic qualities
—the whole finished off with the golden crown of success, which
never fails to irradiate the wearer and his surroundings.
Awaking from his humble but not uncomfortable couch in the tent,
which had been pitched without loss of time, Arnold Banneret gazed
around the wide expanse with grateful and, indeed, enviable
feelings. Here was, if not the goal of his ambition, a near approach
to it. He had neared the winning-post, and though the trophy had
not as yet been placed in his hands, there was no moral doubt that
he
96 would shortly be in possession of the coveted prize—and what a

prize it would be! Well worth the toil, the risk, the anxiety which he
had gone through, the years of hard work—sometimes indeed
pressing closely upon his powers of mind and body. With but a
moderate income, he had cheerfully faced the task of providing for
the wants of a large family. They had been fed and clothed,
educated and prepared for their station in life as gentlefolk. At times
there had been but the narrowest margin—at times painful doubt,
depressing anxiety.
But the parents had never despaired. A gleam of hope—a ray of
sunshine even when skies were darkest—had never failed to illumine
the path. One of the partners in the social-personal-national
enterprise (it is unnecessary to inquire which) had never faltered or
swerved from the solemn contract; and now, after years of doubt
and struggle, the goal was won. Success was assured—it was almost
a moral certainty,—a life-long provision for him and his, an assured
position, a name and fame, even distinction, for all their future life.
As he stood before his tent door and watched the red-gold sun
invade the unclouded firmament, when the morning mists, unlike the
heavier masses of more favoured climes, made haste to disperse
and disappear, he could have fancied himself an Arab sheikh. There
were no Bedouins within sight, a fact on which he congratulated
himself. But a long line of camels with their turbaned drivers, coming
‘up from the under world,’ supplied proof that the desert conditions
were not wholly, absolutely non-existent.
How
97 differently indeed the point of view adds to or subtracts from
the treatment of any given situation. To the famished explorer with
beaten horses or starving camels, how drear and terrible the outlook
over the ‘sun-scorched desert, wild and bare’—the stunted shrubs,
the stony surface, the arid waste! Weak and low, faint with hunger,
or frantic with thirst, he can barely summon sufficient energy to
make one last effort for the hidden spring and—life.
Here, before the Commissioner, lay the same landscape—but for the
scattered huts and tents, as carelessly distributed over the forlorn
levels as if they had been rained down from the sky in some
abnormal storm-burst. Yet the man in front of the tent saw so much
besides the dusky levels—the stunted, colourless copses, with their
distorted, dwarfish acacia trees—the restless team and saddle horses
crowding around the drays as if imploring provender, too sensible of
the sterility of the land to waste time in wandering on a vain search
for pasture. The risen sun, which so many a fainting straggler
cursed, as the red globe rose higher through the pitiless firmament,
was to him the symbol of honour and happiness to come. The far
distance, in which a pale mist shrouded the naked rocks and scarred
cliffs of a barrier range, was grandly mysterious in his eyes, as
concealing treasure untold. The bells which now commenced to
mingle and blend as the teams came in, or were driven towards the
Pilot Mount, clanged and jangled not without a certain rude melody.
An
98 occasional flight of waterfowl on their way to the coast, or a far

inland lake, passed in swaying files high overhead—guided, who

shall say by what course of reasoning or memory, to river, mere, or
lake? And like the historic mariner, his heart went out to the birds,
and ‘he blessed them unawares.’ His heart, full of joy and
thankfulness, was softened by the relief from care which had been
granted to him, and he wished well to all living things. The day
which began with the sun’s blessing on him and his, so to speak,
continued and ended with the same—in strict consonance with the
feelings of the principal shareholder in the ‘Last Chance,’ now far
heralded as a treasure claim. As the sun rose high and yet higher at
mid-day, and lingeringly dwelt up crag and hollow, sand waste and
scrub, until the utmost limit of his course, it was more or less
oppressive to the crowd of toilers, who had worked since dawn. But
what of that? The air was dry, fresh, and, to the unworn
constitutions of the greater number of the workers on ‘the field,’
invigorating. There was no hint of enervating moisture in the heated
air which the north wind sent along, in steady waves, from the
innermost deserts. Clothing was of the lightest possible texture, and
as little of it as conventions would allow—though here, as in all
Australian congregations, when leisure and recreation cried truce to
the excitement of toil, the canons of British taste were observed.
And in favour of the climate, which had no tropical disabilities or
defects, the nights—inestimable blessing—were cool.
The
99 breakfast hour permitted a free and full discussion of ways and
means—men and machinery—past and present—with sketch notes
of the general rise and progress of the partnership during his
absence.
Nothing could have been more satisfactory. ‘The men had all worked
first-rate,’ old Jack said—‘the swell as hard as any of ’em—perhaps
harder.’ Mr. Southwater was a terror for hard graft, and would have a
claim of his own some day. He was a born bushman, could work
dead reckoning, and would make a smart sailor-man, if ever he got
the chance. He’d come to something, no fear! Con Heffernan was as
good a chap as ever handled a pick—a ‘rale white man.’ Everything
had gone on first-rate—no rows, and all as smooth as a greased hide
rope.
Mr. Newstead said he thought he would go home, now he could
raise the passage money on his shares; but he’d leave a good man
in his place. To which determination he promptly gave effect. All was
now plain sailing. Of course there was hard unremitting work. From
daylight to dark, no rest for head and hand; but then there was
much to show for it. The arrivals of men and merchandise were
large and exciting. Carpenters, machinists, ‘wages men’—as ordinary
mine labourers were called—arrived in hundreds.
Claims were taken up for miles around the Pilot Mount, in every
direction: claims for alluvial; reef claims, wherever there was a lump
of quartz as big as a cricket ball; water claims, wherever the
drainage from a ‘soak’ would fill a bucket in a day; ‘dry-blowing
claims,’
100 wherever a speck of gold could be extracted by one of the
most primitive of all processes. All this various assemblage
contributed doubtless to the name and fame of the far-bruited ‘Last
Chance,’ of which the shares rose in value until the original holders
looked on themselves as prospective, if not indeed, actual
millionaires. But there was another side to the shield, which
commenced to make itself clearly apparent through the somewhat
blurred and distorted social atmosphere.
Among the miscellaneous crowd of adventurers and tourists who
had dared the privations of desert travel, was a contingent of lady
nurses. These meritorious women, not less daring than the reckless
miners who had faced death in so many shapes, in so many lands,
had joined the army of hope at the earliest stage that transit could
be guaranteed. They knew, none better, how soon the fever scourge
of crowded camps, civil or military, would ‘take up a claim,’ ever
widening and expansive, sheltered by the dark wing of Azrael. How
many a day, how many a night, in burning heat or freezing cold, had
each volunteer for the ‘forlorn hope’ of Christian charity watched by
the delirious, fever-stricken patient, whose fate it was to sink lower
and lower, until he gasped out his life, holding the hand of his truest
friend in need, or, faintly rallying, lived to greet the ‘opening
paradise’ of ‘the common air, the fields, the skies,’ and to know
himself once more a man among men!
At first, in the inevitable turmoil, the rush and hurry of a big and
daily-growing
101 field, but scant attention was bestowed upon the
dread disease, or the ‘cases’ which began to multiply. The report
that Jack Wilson was ‘down with the fever,’ or Pat Murphy had ‘got it
bad, and mightn’t recover,’ was little heeded, but when poor Pat
died, and was followed to the grave by an imposing array of miners,
public interest was aroused. A committee of miners and citizens was
elected, a hospital site was determined upon, and on the following
day (Monday) a building of hessian and poles was commenced, and
notable progress made before nightfall. Subscriptions poured in: the
big mine gave twenty guineas, other firms and claims in proportion,
but all liberally, not to say generously, and, within a week, a building
not particularly ornate, but weather-tight, and suitably provided with
beds and subdivisions, with the all-sufficing corrugated iron roof,
was ‘inaugurated,’ as the local journal proudly described the opening
ceremony, by a large and influential gathering of citizens. It may be
mentioned that the mining arrangement of eight-hour ‘shifts’ was
resorted to, the urgency of the occasion justifying this departure
from routine and trade habitudes.
The ex-Commissioner had always, at his several commands and
headquarters, taken an interest in the hospital question, having in
his official life been brought into contact with the dreadful accidents
and deadly epidemics from which no mining communities are free.
So he made it his business to call in due form upon the nurses, who
formed
102 the vanguard of the Nightingale battalion, and assure them
of his sympathetic aid if such should be needed. He ordered
improvements to be made in the buildings, and guaranteed the
expense incurred. He also arranged a ‘little dinner’ in their honour at
the principal (and only) hotel, to which, besides his partner,
Mr. Southwater, he invited the Warden of the district, as well as
other persons in authority, and a few leading citizens with their
wives. The entertainment passed off extremely well, and was
appreciated by the mining contingent, as recognising the lady
nurses’ position and, as such, giving them social standing.
It was just as well that Mr. Banneret made himself acquainted with
the hospital and the personnel of its guardian angels—a term used
by himself in the aftertime—as, within a month after the official
opening, he was himself an inmate of the institution referred to.
Yes! there was no immunity, no safeguarding by means of careful
sanitation at the claim, temperate living, box baths (though these
were in the nature of luxuries), an elevated situation—precautions
which, under other circumstances, and in other places, had baffled
the fever fiend. First a queer feeling, half-cold and shivering, half-hot
and feverish; then a racking headache, vainly endured, and
struggled against in hope of relief—worse on the next day; then the
ordinary symptoms: a sleepless night, a half-conscious feeling of
‘lightheadedness.’ On the morrow, word went through the camp that
Mr.
103 Banneret, of the great Reward Claim at Pilot Mount, was in the

hospital, ‘down with typhoid.’ The building had been full for days, but
one bed had been vacated, at the instance of Head Physician Death,
and into the empty cot the ‘respected chief shareholder in the well-
known Reward Claim’ (see the Miner’s Mentor of the day, ‘Personal
Column’) and ex-Commissioner of Barrawong was deposited. On the
morning which followed, the patient was in a high fever, raving in
delirium, temperature 105 degrees. The doctor pronounced it a
definite case of typhoid. On the first day of the seizure—how sudden
and cruel it was!—he had written to his wife that he had dropped in
for a ‘feverish attack,’ but not to be alarmed—would probably pass
off in a day or two—she knew he had felt that way before; but had
thought it wiser, considering the heat of the climate, to go to bed for
a day or two. The hospital was really most comfortable, and well
managed; in Mrs. Lilburne he had, she would be glad to hear, a most
capable and attentive nurse. She was on no account to be alarmed,
or to dream of coming over—which would only be an expensive and
disagreeable journey for her. Mrs. Lilburne would write and tell her
how he was getting on. It was a great nuisance—indeed, most
disappointing—that this sort of thing should have happened, and
that he had more than once been tempted to wish himself back at
poor old Barrawong; though, of course, they had gone through the
same epidemic there, when poor young Danvers, the curate at the
township, and Mr. Thornton, who was past middle age, with ever so
many
104 other people, had died, and it seemed to be in the nature of a
lottery who should catch it and who should escape, who should live
and who should die. He was glad to hear that Reggie was getting on
so well at school, and that the other children were thriving. He had
got little Winnie’s letter, and would answer it to-morrow, etc. When
the morrow came, as before stated, he was not in a condition to
write or read letters, or indeed to perform any of the literary duties
which had previously occupied much of his time. The doctor and the
nurse were engaged in anxious consultation—the one taking his
temperature, which the nurse registered very carefully; both faces
wearing a very serious, indeed anxious expression.
‘You think it will go hard with him, doctor?’ queried she.
‘Can’t say at this stage,’ said the medico, with a professional air of
immobility; ‘must run its course. A great deal will depend on his
constitution and the nursing. I am glad it was your turn,
Mrs. Lilburne.’
‘He shan’t fail for that, doctor, if I keep going,’ said the pale, refined-
looking woman.
‘I know, I know,’ replied the man of life and death. ‘But don’t you get
laid up, or I don’t know what we shall do. Good morning!’ And the
hard-worked physician walked out, and drove off along the dusty
track at a pace much above the regulation rate.
‘That Mrs. Lilburne, as she called herself,’ thought he—‘I don’t know
whether it’s her right name, or, indeed, whether any of their names
105 really their own—a lot of mystery about nurses in back block
are
hospitals, I’ve always found—but this one is different from the rank
and file. I wonder what her history is—must have some sort of past,
as the new slang is: husband cleared out from her, or she from him;
married before, and forgot to mention it. Talk about lawyers having
secrets! we doctors could beat them hollow if we only chose to let
them out—which we don’t. We are the real father confessors, if the
world only knew. Anyhow, this poor chap is lucky to have Madonna
Lilburne to look after him. I’m afraid it’s a poor look-out for him;
hard lines, too, when he’s the richest man on the field. Fortune of
war, I suppose; can’t be helped.’
The patient had written a comforting letter, as he thought, to his
wife. It had, however, quite a different effect. Mrs. Banneret knew
her husband of old, and could gauge his every thought and action.
A man averse to speaking of minor ailments, he was always worse
than he appeared to be, in consequence of this habit of reticence.
He despised the habit of complaint with which men that he knew
were in the habit of disturbing the household and their wives.
Consequently he fell into the other extreme: delaying the notice
which would have procured aid or arrested illness. He had repeated
the imprudence, she could plainly perceive. Fever probably had set
in. He might be even now in the dangerous stage. How dangerous,
how short the interval between it and the last journalistic reference:
‘We
106 regret to have to announce,’ etc., she knew well. Had she not

seen from the West Australian papers, which she scanned so

eagerly, the portentous death-roll, in which she prayed to God—how
earnestly who can tell—that her husband’s name might never be
found? There was no time to be lost; join him of course she would;
was he to die, alone and untended except by unknown, perhaps
incapable women, who had been lured to the goldfield by
exaggerated reports of easily found fortune—adventuresses, or
worse? It was agony to think of his being left in such hands. She
read and re-read his letter—perhaps the last he would ever write. Of
course he had made the best of it; he always did. But there was
much to be done, much to be thought out. The mail steamer sailed
to-morrow. She would—she must go to him. The time was short—
too short. The Adelaide express would be in time? No! she would get
on board—the railway might meet with an accident—a strike was
threatened by the employees if wages or privileges were reduced.
Heartless wretches! What did they care for sickness and death—the
grief of the widow, the orphans left fatherless? It must be admitted
that in this hour of misery, almost of despair, her righteous
indignation was fervid, glowing, and would have burnt up the Trades
Hall delegates like so many priests of Baal had she had the prophetic
power.
With but a short interval granted to natural sorrow, action was
quickly taken. The children were too young to be left unguarded. But
in107the city where she, where her mother, indeed, had been born, she
had many relatives—not a few staunch family friends. They came
forward in her hour of need. A cousin, capable and sympathetic,
volunteered to supervise the household in her absence. Needful
preparation was quickly made. Far into the night she sat and wrote,
leaving minute instructions—even farewells, in case she took
infection. And at noon on the following day, amid the crowd of
passengers on board the Kashmir, bound for Europe via Western
Australia, stood Marcia, the wife of Arnold Banneret, lately the
Commissioner of Barrawong town and district, but now the largest
shareholder in the well-known Reward Claim and—a patient in the
fever ward of Pilot Mount local hospital.
Shipwreck rarely occurs among first-class liners like the Kashmir,
P. & O., but there is such a thing as a broken shaft. As a rule it is
calculable within a few hours when such a marine miracle of speed,
comfort, and ordered energy arrives at her destination. Such was the
case when the Kashmir arrived at Adelaide.
She was met at the landing by a friend of the family, who handed
her a telegram:—

On board P. & O. steamer Kashmir.—Mr. Banneret better. Dr. Horton considers

crisis past. No need for haste.
But the sick man’s wife was of a different way of thinking. ‘I shall be
for ever grateful to you for your kindness,’ she said, ‘but I can only
rest when I am where my husband lies sick. Pray God it may not be
unto death, and that I am not too late.’
‘I108can assure you,’ said the kindly matron, ‘that you may trust
Dr. Horton implicitly. He objects to messages that disguise the truth.
He would not have permitted this to be sent if not strictly reliable.’
‘Thank God! thank God! if it be so. And now when does the train
start?’
‘You won’t think of leaving to-night, surely? We counted upon your
staying with us till to-morrow.’
‘I am sorry to seem uncourteous, but I cannot lose an hour that may
be used in bringing me nearer to him. I ordered my luggage to be
sent to the railway station. The Captain assured me that it should be
done.’
‘You are very determined,’ said Mrs. Hampton, smiling, ‘but I will not
press you further, if you will stay with us on your return?’
‘Most willingly, and will do anything you like to ask me. If my
husband is well, and returning with me, as I trust he will, you will
find me quite a different woman.’
‘Then we’ll have a cup of tea, and I’ll drive you to the station. There
is sure to be some one we know going on, and I can assure you of a
guide, and perhaps a companion.’
Thus reassured, the wifely anxiety became somewhat lessened, and
she consented to a hasty meal before being driven to the railway
station. Here she found that an engaged carriage had been
thoughtfully secured for her, and that her lighter luggage had been
placed therein, while the attentive guard placed the checks in her
hand for the trunks.
With
109 hearty thanks, and a cordial handclasp, she said adieu to the
friend in need. Just before the train started, a well-dressed, ladylike
woman was introduced as Mrs. Wharton, and took her seat beside
her. ‘Nearly lost my passage,’ she said, ‘but you know how one is
rushed at the last moment. However, here I am, and as I live near
Kalgoorlie, I shall be glad to give you any information that may be
useful. This is your first visit, I hear.’
‘Yes, indeed! and but for my husband’s illness I should not have
thought of making it now.’
The strange lady’s face changed to an expression of sympathy and
regret, as she said, ‘Not too serious, I hope?’
‘He is in the hospital, ill with typhoid fever. I have had a telegram
from the doctor attending him. He thinks the crisis past, and that he
is mending.’
‘What was the doctor’s name?’
‘Horton. Mrs. Hampton said he was strictly reliable.’
‘So he is. He always thinks it better that people should be told the
truth—you may depend upon his report absolutely.’
‘Thank you so much! I feel encouraged to think that the worst is
over. You have been living at Kalgoorlie, I think you said?’
‘Oh yes! for several years; but I have only just returned from
England, where my young people are at school. They are all well, I
am thankful to say, and I am returning to live with my husband for
another
110 two or three years, after which, as our mine, the “Golden
Helmet,” is paying well, I trust we may go to England for good.’
‘And do you like living here?’
‘Oh! I have to like it, or be separated from my husband, which I
could not endure. After all, the life up here is not unendurable. The
winter is pleasant enough. And in the hottest part of the summer we
get away to the coast for a month or two. It’s not so bad as one
would think. We visit about among ourselves. There are a few nice
families, and the young people have polo, racing, and an occasional
ball. We see many English people of good family from time to time—
more perhaps than in the older communities—and manage to exist
very tolerably.’

. . . . . . . . .

So the day and the long night in the train passed not uncomfortably.
At the stopping stages refreshments were procurable.
The wearied women slept soundly at intervals, and as the morning
broke, and found them still speeding across the interminable waste,
the cool breeze, after they had dressed and breakfasted, refreshed
them considerably. Mrs. Banneret began to lose the haggard air as
of one expectant of evil—of nameless dread, and responded to her
companion’s efforts to induce a more cheerful frame of mind.

. . . . . . . . .

Pilot Hill was descried at last—the township reached; and then a

journey had to be taken by coach, for of course the mail service had
been contracted for by an American firm. Fast coaches, with well-fed
horses,
111 had succeeded to the slow and toilsome waggonette-
travelling. Short stages were alone thought of, and with only a
minimum of discomfort Mrs. Banneret found herself at the Royal
Palace Hotel, where a note written with a very shaky hand awaited
her:—

My darling Wife—I tried my best to prevent your taking this unnecessary journey—
you will own—but, as usual, you would have your own way. A week ago it looked
as if you would arrive just in time to see my grave—in the cemetery, which is
filling all too quickly. Now, thanks to Mrs. Lilburne and Dr. Horton, you will discover
what is left of me. I must leave off, and lie down to gather strength to welcome
you.—Always your fond husband, Arnold Banneret.
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