Could Lloyd George have Done It? The Pledge Re-Examined

A complete macroeconomic model is estimated for the UK interwar period that can be described as monetarist in nature. The model is simulated to determine whether Lloyd George's pledge to create employment would have been effective. The proposed model draws from the new classical macroeconomics in its treatment of expectations and from the pre-Keynesian classical school for the supply side. The overriding analytical principle is that of equilibrium, and although the model has classical-monetarist properties in the long run, it exhibits short-run properties that are Keynesian. The analysis reveals that, if the level of money benefit had been held fixed, a temporary money-financed expansion in government spending would have reduced unemployment permanently. The mechanism by which this works is through the inflationary impact of the policy reducing real benefits and, consequently, real wages. Lloyd George could have accomplished his goals - but not for the reasons imagined by the Keynesians.