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date: 18 February 2020

Keynes, John Maynard, Baron Keynesfree

  • Alec Cairncross

John Maynard Keynes, Baron Keynes (1883–1946)

by Gwen Raverat, c. 1908

Keynes, John Maynard, Baron Keynes (1883–1946), economist, was born on 5 June 1883 at 6 Harvey Road, Cambridge, the eldest of the three children of (John) Neville Keynes (1852–1949), a Cambridge don, and his wife, Florence Ada Brown (1861–1958) [see Keynes, Florence Ada], who had come to Cambridge in 1878 at the age of seventeen as an early student of Newnham College. Keynes's father was a prominent figure in the university and was a friend of Alfred Marshall, Henry Sidgwick, and Henry Fawcett. Keynes's mother, more self-confident than her husband, who had something of an inferiority complex and was a great worrier, took an active interest in social work and was in turn justice of the peace, alderman, and mayor. Her father, the Revd John Brown (1830–1922), was the well-known Congregationalist minister of the Bunyan Chapel in Bedford. Both parents outlived their eldest child. Keynes's younger brother, Sir Geoffrey Langdon Keynes, became a distinguished surgeon and bibliophile and his sister, Margaret Neville, married Professor Archibald Vivian Hill CH, secretary (1935–45) of the Royal Society.

Early years

The family was comfortably off. Neville started married life with an income of £1000; by the time Maynard was twenty-five his father had accumulated the substantial total of £35,000. The family kept three servants—a cook, a parlour maid, and a nursery maid—and there was a German governess. In his first few years Maynard was a sickly child, suffering to begin with from frequent attacks of diarrhoea and thereafter from feverishness. His physical development was punctuated by sudden spurts of growth that left him exhausted, and from time to time he had to be taken away from school. In the summer of 1889 he had an attack of rheumatic fever and a few months later he had to give up attending his kindergarten for a time, suffering from what was diagnosed as St Vitus's dance. A year later the kindergarten he was attending was given up altogether and throughout 1891 he was taught at home. At the beginning of 1892 he began to attend a preparatory school in Cambridge as a day boy, but again his parents became worried that he was overexerting himself and in the autumn of 1893 he was moved for a term to Bedford, where his grandmother reopened her schoolroom for him. When he returned at the beginning of 1894 his father thought him 'not quite up to the mark', but he soon appeared more robust and began to show outstanding talent as a mathematician. It was observed, however, that although he was quick to grasp the point, he was careless about details.

As a child, Maynard was deeply attached to his mother but from the age of about eight onwards he became increasingly close to his father; he worked with him in his study, and they shared a common interest in hobbies such as stamp-collecting and leisure activities such as golf. When his parents entered him for the Eton College scholarship examination in 1897, Maynard was given special tuition and in spite of his father's constant worries, he attained the tenth out of fifteen places and was first equal in mathematics.

Eton and King's

At Eton, Keynes's interests broadened and he resisted the efforts of his mathematics master to get him to concentrate more exclusively on mathematics. He read widely, including a good deal of poetry, and his prose style began to take on some of its later characteristics. He won prizes and scholarships of all kinds, including the Tomline prize in mathematics and in his final year an Eton scholarship to King's College, Cambridge, in mathematics and classics. He was one of the seventy scholarship boys at Eton who enjoyed free board and tuition and lived together in the same house—College—while ten times as many fee-paying oppidans were accommodated in other houses. He was surrounded by an intellectual élite among boys who were highly intelligent and knew that they would later have to work for their living and would be wise to make a beginning at Eton. Keynes showed many later characteristics: quickness of understanding, facility in grasping facts and getting to the nub of the matter, command of words, 'a decided talent for history', and an outstanding ability in mathematics. He did not shine in classics as a versifier but could write with feeling and imagination on classical drama. Although he won an extraordinary number of prizes and his father set great store by his position in class, he took his success quite casually, won golden opinions from his teachers, and was popular with the other boys. But he did not suffer fools gladly: and his letters to his parents were full of critical comments on the stupidity or dullness of those in authority.

It was a mark of his popularity that Keynes was elected to college Pop, the Eton debating society, in January 1901 and latterly spoke almost every week, often at considerable length and without notes. He also revived and presided over the Eton literary society, to which he contributed a paper on Bernard of Cluny. He was much struck by St Bernard's verse and developed a particular interest in medieval Latin poetry. The next three years, from 1902 to 1905, were spent as an undergraduate at King's, nominally in the study of mathematics, in practice mainly in a host of other pursuits: in debates, moral and political, in meetings of societies, and above all as a member of the Apostles—a small group of gifted undergraduates to which he was elected in his second term after preliminary scrutiny as an ‘embryo’ or potential recruit by two of its members, Lytton Strachey and Leonard Woolf. At the time he was elected the ideas of G. E. Moore, whose Principia ethica appeared at the beginning of Keynes's second year, were highly influential among its active members. Moore's Principia treated good states of mind as the ultimate object of moral endeavour.

The older, less active, members of the society included philosophers of great distinction such as Russell, Whitehead, Moore, and McTaggart as well as some whose interests were aesthetic rather than philosophical: for example, Roger Fry, E. M. Forster, and Desmond McCarthy. Both interests were absorbed into a common 'search for truth' carried over by some of them into what became the Bloomsbury group, whose members also included Vanessa Bell (née Stephen), Clive Bell, Virginia Woolf (née Stephen), and Duncan Grant.

Early beliefs: probability

Keynes wrote a number of papers for the society analysing the implications of Moore and in 1938 looked back on his influence on the group in a paper read to the memoir club of his Bloomsbury friends on My Early Beliefs (not published until 1949, after his death). The key difference in the attitude of Keynes and his friends was that the basis of the calculus of moral action was seen as exclusively personal, not as rules imposed from without. There could be no objective measure of what was good since, if the good consisted of states of mind, these states could be known and judged only by the minds in question. Duty, action, social need simply did not enter. Intuitive judgements were all one could turn to. In a paper he wrote after his tripos he split ethics into speculative and practical, the first establishing 'the usage and significance of the more fundamental terms' and the second concerning itself with conduct and 'the probable grounds of action'. Goodness would be confined to states of mind alone but it would also be necessary to consider fitness as an attribute of objects inspiring good feelings: 'My goodness and the goodness of the universe may both have claims on me but there is no way in which I can weigh one against the other on a common balance.' 'One's prime objects in life', Keynes wrote, 'were love, the creation and enjoyment of aesthetic experience and the pursuit of knowledge. Of these love came a long way first' (Collected Writings, 10.436–7). The emphasis on personal states of mind is curious in an economist whose analysis is so much in terms of social interactions and in efforts to make these interactions work to better effect. As Skidelsky has pointed out, there is something suggestive of a monastic ideal in Moore's religion. There is also something of the academic's neglect of the part the community plays in what occurs to us, to our welfare, and to our states of mind.

Keynes was by no means monastic. His years at Eton in exclusively male company helped to produce a homosexual phase in his life that lasted for many years, in which he had a succession of lovers. This does not appear to have led to acts of sodomy until after he completed his degree. Although he was at pains to keep such acts secret, he left a record of them from which it would seem that they were not confined to university friends but occasionally extended to chance encounters with young boys, picked up almost at random. They persisted for a year or two after the war and then ceased completely once he had fallen in love with his future wife. At this stage Keynes's future career was not settled. He might have taken the moral sciences tripos or the economics tripos; in 1906 he might have taken up law as a student of the Inner Temple. He was given weekly supervisions by Alfred Marshall and found pleasure in reading Jevons. As secretary of the Apostles he also set about finding new members.

What occupied Keynes most after completing his degree in 1905 was the preparation of a fellowship dissertation on probability. It was a subject that had been neglected for a generation by philosophers, and economists seemed content to leave it to the statisticians. Keynes was able to submit his dissertation two years later and when not awarded a fellowship produced a new version in 1908, which proved successful. He continued to work at intervals on the subject for a decade more, developing new lines of thought, and adding several chapters on statistical inference. It was only after a final struggle in 1920 to complete it that he was able to publish it as A Treatise on Probability in August 1921. The book was largely ignored by economists and treated as a study of interest to philosophers. By the end of the century, however, the significance of probability to life and economic behaviour in an uncertain world had come to be appreciated. What Keynes sought to do in the book was to extend the principles of valid thought to arguments that were not conclusive and certain but to which it was rational to attach some weight: matters of belief and opinion based on limited knowledge and subject to uncertainty. Probability was always relative to the evidence available and changed if the knowledge available changed. It had to do with what it was rational to believe, not with truth. On this basis Keynes examined a succession of issues including induction, statistical inference, and the bearing of probability on conduct.

The India Office, 1906–1908

After a visit to Lytton Strachey in London, Keynes decided to concentrate on the civil service entrance examination. He did his usual six hours a day in preparation for the examination, came second to Otto Niemeyer, and by October was at work in the India Office; his first job, which lasted several months, was to arrange the shipment of ten young Ayrshire bulls to Bombay. The work was light, Keynes was quick in getting through it, and he was able to make progress in office hours on his fellowship dissertation. It was not long, however, before he made up his mind to leave. He was bored, frustrated, and repelled as always by the stupidity with which he had to contend. More and more time went on his dissertation as the means by which he might leave the India Office on a prize fellowship. His father sought to dissuade him without success, but he then learned in March 1908 that two other candidates had been placed ahead of him. He was furious with the examiners (A. N. Whitehead and W. E. Johnson) and the fellowship electors, who had taken into account that he could try again the next year.

A Cambridge economist

A fortnight later Marshall suggested that Keynes might take the place of D. H. MacGregor, whom Marshall had employed as a lecturer in economics, paying him £100 a year out of his own stipend, and who had just been appointed to a chair in economics in Leeds. Neville Keynes again advised caution. But Keynes had no hesitation and, once Pigou was elected to succeed Marshall and the offer was renewed, he resigned from the India Office. A year later Keynes's revised dissertation was accepted and he was also awarded the Adam Smith prize for an essay on index numbers—an essay on which he drew twenty years later in A Treatise on Money. Until the outbreak of war Keynes remained in Cambridge, combining lecturing in economics with an increasing range of other activities. His two years in the India Office had familiarized him with Whitehall, brought him into contact with senior civil servants, and trained him to look at problems through the eyes of an administrator, so laying the foundation for much of his later work.

In Cambridge, as he extended his knowledge of economics and continued to give thought to the logic of probability, he pursued an interest in Indian finance and published in 1913 his first book, Indian Currency and Finance. This was based on lectures he had delivered at the London School of Economics in the spring of 1911. A contract (with Macmillan) in mid-December 1912 was followed by proofs at the beginning of March and publication in June 1913. Meanwhile the government had decided to set up a royal commission on Indian finance and currency, on which Keynes (by this time on holiday in Egypt) was asked to act full-time as secretary. When he asked for freedom to publish his book the offer was changed to one of a seat on the commission and he took his place on it at just under thirty years of age.

Keynes made a deep impression on the other members of the commission, including the chairman, Sir Austen Chamberlain, the secretary, Basil Blackett, and Sir Robert Chalmers, later permanent secretary to the Treasury, and the recommendations reflected his views. In his book he had traced the history and argued the virtues of the gold exchange standard under which there was neither a gold currency nor dependence on a substantial holding of gold as a reserve against external liabilities but a holding of some key currency such as sterling. This he took to be the way of the future. The commission was almost unanimous in supporting the continuation of India's gold exchange standard but was in doubt about a proposal for a state (central) bank and asked Keynes to take part in drawing up a detailed scheme. His draft proposals were circulated over his sole name but were not accepted and were instead included as an annexe to the report, to the applause of Marshall. Keynes had been unsuccessful in persuading the commission to unite the three presidency banks under a federal system with a federal board, exercising its own professional judgement, in charge of operations, but he managed to secure agreement to some less important amendments to the draft report.

In 1912 Keynes took on the editorship of the Economic Journal in succession to F. Y. Edgeworth, a post he held until March 1945 and through which he exercised great influence on the next generation of economists. This post was combined from 1913 with that of secretary of the Royal Economic Society, again for over thirty years. Until almost the last moment Keynes doubted whether a European war would break out. On Sunday 2 August he received a letter from Basil Blackett asking him to call at the Treasury the next day and he set off at once in the side-car of his brother-in-law's motorcycle. The joint-stock banks had been agitating for a suspension of the Bank Charter Act and so of specie payments and had started refusing their customers' sovereigns, thus forcing them to cash £5 notes at the Bank of England. Lloyd George was inclined to agree with them, with the Bank of England and the Treasury in disagreement. A memorandum by Keynes on 3 August made a strong case against suspension and convinced Lloyd George, who, however, rebuked Blackett for 'consulting an outsider without authority' (Harrod, 107).

The Treasury

In January 1915 Keynes was recruited to the Treasury, after pressure from Edwin Montagu. It was through Montagu that he was introduced to Lloyd George, Reginald McKenna, and Margot Asquith and the private gatherings of cabinet secretaries and leading ministers. He was at first an assistant to Sir George Paish, who was Lloyd George's chief adviser. In a short time, however, Paish faded from the scene. Initially Keynes's duties were varied but in May 1915 he joined the finance division, where he was responsible for banking, currency, the exchanges, and inter-allied finance. He thus took a prominent part in the organization of inter-allied finance and in the arrangements for raising the necessary dollars.

As 1915 proceeded, Keynes and his Treasury colleagues became doubtful whether the war effort could be enlarged or even sustained with the resources available. Privately he was strongly in favour of a negotiated peace, which he hoped the United States would engineer. In December a proposal to increase the army to seventy divisions by introducing conscription divided the cabinet and threatened to cause several ministerial resignations—including those of the chancellor of the exchequer, Reginald McKenna, and the president of the Board of Trade, Walter Runciman. Legislation was introduced in January to permit conscription of all single men between the ages of sixteen and forty-one; those claiming conscientious objection were allowed to state their case before a local tribunal. At that stage Keynes appears to have considered resignation: the positions of McKenna and Runciman remained in doubt and Keynes said he would resign if they did. His Bloomsbury friends were also pressing him strongly to resign, since he claimed to hold views similar to theirs, to do as they did and claim conscientious objection. On the other hand, it was Keynes's belief that the war would not last much longer, since President Wilson seemed likely to summon a peace conference. He may have been influenced also by the intellectual pleasure that his work afforded him and his greater power to help his friends when they were called before a tribunal. Whatever the reason, he remained in the Treasury to the end.

On 23 February 1916 Keynes was given a certificate of exemption for the next six months in view of his duties. Nevertheless he applied to the tribunal five days later for exemption on grounds of conscientious objection, possibly because he still had resignation in mind. 'I am not prepared', he said, 'on such an issue as this to surrender my right of decision, as to what is or is not my duty, to any other person, and I should think it morally wrong' (Moggridge, 260). Yet when summoned to a hearing to be held on 28 March he sent a note to say he was too busy to attend, and made no further application in August when his exemption was renewed by the Treasury. Presumably he no longer thought it likely that he would resign. Two years later he expressed his opposition to government policy more decisively, writing to Duncan Grant: 'I work for a government I despise for ends I think criminal' (ibid., 279).

Keynes's part in the First World War is not nearly so well known as his part in the second. But his role was at least as demanding and carried somewhat similar responsibilities, although he was less senior in rank and lacking much of the authority he later acquired. In the first he had to struggle against his conscience and the strong disapproval of his friends, while in the second the company was much more congenial. In both he suffered repeatedly from spells of ill health, and in the second his exertions had often to be rationed in the interests of survival. After the early part of 1915, and until the United States entered the war, there was what amounted to a continuing exchange crisis that became increasingly severe as the war went on and the gold reserves ran down. By the autumn of 1916 the United Kingdom was spending over $200 million a month in the United States, largely on behalf of allied governments. For three weeks at the end of the year gold flowed out of Britain at the startling rate of £5 million a day while the Treasury left ministers in the dark in case they reacted by unpegging the pound. Towards the end of February 1917 Keynes reckoned that the available resources would run out within four weeks. At this point the Germans launched unrestricted submarine attacks to cut off American supplies, and on 6 April America declared war on Germany.

Three months earlier Keynes's experience in managing Britain's external finances led to his appointment as head of the Treasury's newly established A division, responsible for all aspects of external finance and reporting directly to the permanent secretary and the chancellor. In May 1917 he was created CB, an award that was denied him earlier by Lloyd George, who, remembering a disagreement with Keynes, deleted his name from the list at the last moment.

A fresh crisis developed in 1917 as the American treasury released dollar funds 'in weekly dribs and drabs' and US funds were withdrawn from London for investment in a $2 billion liberty loan. Again it fell to Keynes to handle the situation and obtain funds from the US at the very last moment. Friction with the Bank of England, which shared management of the exchange rate through a committee of bankers without responsibility for the borrowing operations this entailed, came to a head in July 1917, just after the exchange crisis was resolved. Lord Cunliffe, the governor, demanded the dismissal of Keynes and Chalmers (the permanent secretary) but was himself forced into submission by the chancellor, Bonar Law.

America's entry into the war confirmed its dominant position in financing it. All that Keynes could achieve was to turn over to the US the direct financing of the war needs of France and Italy instead of meeting them indirectly out of Britain's dollar borrowings. Keynes took an increasingly gloomy view of the future: the Americans were set on reducing Britain 'to a position of complete financial helplessness and dependence' (Collected Writings, 16.287); the prolongation of the war was likely to mean 'the disappearance of the social order we have known hitherto' (ibid., 16.265). Food rationing was the last straw: he feared he would have to take frequent trips abroad to get a square meal.

Reparations and the treaty of Versailles

After the armistice on 11 November 1918 Keynes was 'put in principal charge of financial matters for the Peace Conference' and early in January moved to Paris as the chief Treasury representative, with a wide range of duties and inadequate staff. In the absence of the newly appointed chancellor (Austen Chamberlain) he represented the British government on the supreme economic council with full authority. In practice he had little influence on Lloyd George. As he told Margot Asquith, the British were the best-equipped delegation, but for all the use made of them by the prime minister 'we might have been idiots' (Skidelsky, 1.367).

In the period after the armistice Keynes had worked on a Treasury brief on reparations (a matter not mentioned in Wilson's fourteen points). The brief included an estimate both of Germany's capacity to pay and of reparations if limited to the direct damage done to the civilian population of the allies and their property by German aggression, which might be twice as much. The Treasury's estimates, however, were not circulated before much larger sums were under discussion, thanks partly to the views expressed by a cabinet committee under W. M. Hughes, the prime minister of Australia, and partly to popular feeling whipped up in the December election. The Hughes committee claimed that Germany would pay £24,000 million in reparations at an annual rate of £2000 million—rejected by the cabinet as 'a wild and fantastic chimera', while Keynes regarded a total of £2000 million as 'a very satisfactory achievement' (Skidelsky, 1.378).

In Paris, Keynes initially had little to do with the actual terms of the peace treaty. The British government had appointed Hughes, Lord Cunliffe (a member of his committee), and Lord Sumner (a judge) as its representatives on the committee on reparation of damage. Instead, he continued to worry about inter-allied finance and became concerned with post-war relief policy. He was also much engaged in negotiating a limited lifting of the naval blockade so as to allow the import of food and other necessities into Germany, provided the German merchant marine was surrendered to the allies. However, he became increasingly involved with the non-reparations financial clauses of the peace treaty and, from the middle of March, the reparations clauses as well. In the end no agreement was reached on what Germany owed or could pay in reparations. Instead, the issues were referred to a reparations commission, which was to report before 1 May 1921. In the interim Germany would be required to pay £1 billion on account. Central to the arrangements over reparations was article 231 of the treaty, the ‘war guilt clause’ drafted by Keynes and John Foster Dulles.

In a last attempt to permit the financial rehabilitation of Europe, Keynes put forward a plan, after discussion with the South African defence minister, J. C. Smuts, for the raising of funds through the issue of reparation bonds to the value of £1445 million, by Germany and its defeated allies, and jointly guaranteed by the issuing and allied governments. Interest would be paid at 4 per cent, but only after five years, and the bonds would be divided: £1000 million would be delivered as reparations to the European allies (representing the £1 billion due on account) to assist in their reconstruction and most of the balance of £445 million would be used for purchases of food and raw materials by the ex-enemy governments. The bonds were to be acceptable as collateral and jointly guaranteed by the issuing and allied governments. The plan won the support of Austen Chamberlain and was submitted by Lloyd George to President Wilson. The Americans, however, gave the plan no support. It was unlikely to be given congressional approval; it would give the impression that the European countries were insolvent and would permit of larger payments in reparations than the Americans could approve. Lloyd George's reparations policy had torpedoed any effort to finance German recovery or to induce the United States to forgo part of its European debt. What might have repeated the success of France's borrowing in 1871 to pay an indemnity to Germany came to nothing.

When he saw the complete draft treaty early in May, Keynes, like others, was horrified and sent a hasty note to Bradbury and Austen Chamberlain attacking it as showing 'a high degree of unwisdom in almost every direction' (Skidelsky, 1.453). It was 'a paper settlement which even if it is accepted cannot be expected to last' (ibid., 1.455). He remained for a month briefing the prime minister, who had become thoroughly alarmed at the prospects and asked for 'a thoroughgoing revision of the Reparations Clauses'. But it was too late. Keynes resigned his Treasury post on 19 May. Early in June, three weeks before the treaty was signed, Keynes left Paris after telling the prime minister 'I can do no more good here … The battle is lost' (ibid., 1.469). Before the end of the month he had begun The Economic Consequences of the Peace.

Economic Consequences was written at high speed and with passionate conviction and often in extravagant terms. Begun on 23 June 1919, it was written in just over three months and published on 12 December. Never afterwards did Keynes complete and publish a book so swiftly. 'I don't really start until I get my proofs back from the printer', he said in 1935. 'Then I can begin serious writing.' As Macmillan did not expect the book to be a best-seller and were conservative in their proposals, Keynes reversed the normal author–publisher relationship: he put up the costs of production, paid Macmillan 10 per cent on those costs as well as 10 per cent on the sale price, and kept any resulting profits. He would use this arrangement for everything else he would publish with Macmillan other than How to Pay for the War. For the American edition he made his own arrangements with Harcourt Brace and received a royalty of 15 per cent.

The book was an international best-seller and brought Keynes instant celebrity. Much of it was written in August and September at Charleston, Vanessa Bell's farmhouse on the Sussex downs, but he found time for a whirlwind ten days in London in July: Diaghilev's ballet, an end of ballet season dinner party of thirty-three which he hosted at 46 Gordon Square (the lease of which he had taken over from Clive Bell in 1917), business appointments, a speech, evidence to a government committee on Indian exchange and currency, a discussion at the Tuesday Club (a dining club of City men, public servants, journalists, and academics), lunching and dining out day after day. Although normally a late riser who got to the Treasury a little before noon, he spent his mornings at Charleston writing from 8 a.m. to 1 p.m. and averaged 1000 words a day fit for the printer.

The early chapters were suffused with a sense of impending catastrophe. Keynes drew a vivid picture of the fragility of Western civilization and laid particular stress on the growth of population, the precariousness of Europe's claims on the resources of America, and the prospect of a slow-down in capital accumulation as social inequality diminished. He drew a wickedly brilliant picture of the deliberations of the council of four. When he turned to the havoc of war and the Carthaginian peace just concluded, he reproduced verbatim passages from the memoranda he had prepared on reparations and the rehabilitation of the European economy. Again he called for a cancellation of inter-allied debts and for a revision of the treaty provisions for reparations once new governments showing 'a profounder wisdom and greater magnanimity' (Collected Writings, 3.165) were in power. Reparation payments should be well within Germany's capacity to pay: he proposed a total of $10 billion, less the value of merchant ships surrendered, state property in ceded territory, war material, and so on, which he put at $2.5 billion. This would be payable over thirty years at $250 million a year (with no interest liability), beginning in 1923.

Keynes also proposed a fund of $1 billion to provide credits to all the continental belligerents, allied or ex-enemy, and that discharge of capital should rank ahead of all other governmental obligations. The money would be raised from the neutrals, the United Kingdom, and above all from the United States. A second guarantee fund of $1 billion would contribute to the stabilization of European currencies without needing to be drawn upon extensively. Other proposals included the creation of a European free trade union, comprising the former empires of Germany, Austria-Hungary, Russia, and Turkey, but extending if possible to other European countries and to India and Egypt. This would help to limit the disorganization and inefficiency resulting from 'the innumerable new frontiers created between greedy, jealous … nationalist states' (Collected Writings, 3.169).

Keynes's thinking in 1919 was remarkably similar to the thinking behind the Marshall plan in 1947. Without economic recovery Europe could not prosper and without prosperity the obligations of the treaty would be disregarded and national conflicts would revive. Above all, lasting recovery hung more on the rehabilitation of Germany than on any other single factor. The future of Europe had to be assured, not by concentrating exclusively on the potential struggles between nations but by bringing to light the powerful economic forces holding back recovery and redirecting these forces through co-operative action, backed by magnanimous and imaginative assistance. As Keynes put it, 'the perils of the future lay not in frontiers and in sovereignties but in food, coal and transport': to which, later in life, he might have added jobs.

Economic Consequences was followed by a flood of comment in Britain, France, and America. Comment in Britain was generally very favourable, American critics thought Keynes unjust to President Wilson, and French writers brought a variety of charges. Some readers thought his account of the conference too rhetorical; others have since attacked the book as contributing to the sense of guilt towards Germany that inhibited policy in later years. This line of attack was developed in Étienne Mantoux's The Carthaginian Peace, published in 1946, after Keynes's (and the author's) death. Mantoux may have been right in thinking that Keynes's passionate attack on the treaty was still influencing opinion twenty years later, encouraging sympathy for Germany and acceptance of a policy of appeasement. But there were more obvious reasons for shrinking from war in the late 1930s.

Although Mantoux does convict Keynes of repeated overstatement and at times of mis-statement and of doing less than justice to French fears of future German aggression, he assumes too readily a parallel between the scale of rearmament expenditure under Hitler (RM 15 billion per annum) or of what Germany procured in wartime from occupied countries, and what might have been paid in reparations. This is to ignore the problem of transfer across the exchanges: the most that Germany paid in any year—RM 2.5 billion in 1929, close to Keynes's estimate of RM 2 billion—represented 20 per cent of German exports in 1929 (40 per cent of exports in 1925) and was more than offset by net capital inflows, so that no net transfer in fact occurred.

Where Keynes was more open to criticism was in building on the assumption that the United States would take part in a cancellation of inter-allied debts, so that France and Britain would be under less pressure to recoup the means of debt repayment in reparations from Germany. He was more severe on Wilson and Lloyd George than was justified, given the political pressures they were under and the differences in their priorities. Both points were discussed in The Revision of the Treaty, published in January 1922. On the first, Keynes argued that the American balance of payments would not be sufficiently adaptable to permit of repayment of European debt and that the choice could be between default and cancellation. On the second, he accepted that politicians had to give weight to public opinion but drew a distinction between the opinion expressed in the newspapers and what ordinary people suspect to be true. He surmised that the average Englishman in 1919 'never really believed in the indemnity' and took it with a grain of salt; 'for the time being there could be little harm in going on the indemnity tack' (Collected Writings, 3.4). As for Lloyd George, he could claim to have been 'by devious paths, a faithful servant of the possible' (ibid., 3.2).

Journalism: money and foreign exchange

Keynes continued to comment on the problems of the inter-allied debts and reparations, contributing frequently to the press on this and other subjects. In July 1921 he was asked to serve on a royal commission on Indian tariffs and agreed. In October he was invited by C. P. Scott, the editor of the Manchester Guardian, to edit a series of supplements discussing the economic and financial problem of European reconstruction. He had intended to leave for India at the end of January, but on 21 January 1922 he resigned from the Indian fiscal commission. Instead he concentrated on finding Guardian contributors and himself made three contributions to the first reconstruction supplement in April. There were eventually twelve monthly supplements, to which he contributed thirteen articles, and recruited a highly impressive list of contributors from many different countries, including some of the leading continental economists. In advance of the first issue he published in the Manchester Guardian on 6 April a plan for the Genoa conference, which began shortly afterwards and which he attended as the newspaper's special correspondent. His article made proposals that reappeared in later Keynes plans; he suggested stabilizing exchange rates at or near their current level; gold was to be withheld from internal circulation and reserved for international use; and central banks were to be allowed to maintain a gap of 5 per cent between their buying and selling price for gold.

Keynes's interests were increasingly directed towards what would later be called 'the management of the economy'. Two forms of economic instability preoccupied him. Of these the first was instability of prices, inflation, deflation, and all that went with them; the second was unemployment and the fluctuations in economic activity giving rise to it. The two were, of course, interconnected since the movement of prices reacted on the level of activity: but the analytical approach to the problem of inflation, for example, was very different from the analysis necessary for an explanation of unemployment. Broadly speaking, Keynes concentrated on price instability in the 1920s but took instability in output and employment as his point of departure in the 1930s.

Keynes began in 1922 with the articles he published in the reconstruction supplements of the Manchester Guardian Commercial. Four of these were drawn upon, much revised, in the first three chapters of his Tract on Monetary Reform, published in December 1923, and two additional chapters dealing with aims and proposals for future policy were added. From the point of view of economic theory the Tract was not particularly original, but was based on the work of Marshall and Pigou. Keynes accepted the quantity theory of money as beyond question and with it the theory of purchasing power parity. But his analysis did contain some novel ideas, such as estimating the value as 'an inflation tax' of the levy exacted on all other holders of cash by a government inflating the currency, or the theory of interest parity in the market for forward exchange. The proposals he put forward were certainly novel. Keynes developed the case for a managed currency in place of the gold standard, which he dismissed as 'a barbarous relic' (Collected Writings, 4.138). To return to the gold standard would mean giving priority to stability in the exchange rate and the external value of the currency over its internal value and forcing inflation or deflation on the economy if prices rose or fell in other countries. The report of the Cunliffe committee in 1918 in favour of an early return to gold at the pre-war parity, adopted as official policy, belonged to 'an extinct and almost forgotten order of ideas' (ibid., 4.153) and spelt inevitable deflation and unemployment. Earlier Keynes had proposed pegging to gold at the current (devalued) rate and allowing the rate to appreciate if, as he expected, there was a gradual fall in the price of gold. The Bank of England, through its control over bank rate and the banking system, would seek to maintain price stability and fix buying and selling prices each week at the same time as it fixed bank rate. The exchange rate would then change at intervals, not float freely, as happened later.

The return to gold

In July 1924 Keynes was called to give evidence to the ChamberlainBradbury committee, which was considering a return to gold. He made it clear that he favoured indefinite control over gold exports and imports but wanted to abandon the practice of holding gold as backing for the note issue and to free it for use exclusively in helping to steady the exchange rate. He continued to express concern at the steady rise in the exchange rate towards the pre-war parity and to emphasize the danger to Britain's competitive position of what was increasingly an overvalued rate. Since nothing was said, speculators assumed that the rate would shortly be fixed at the pre-war parity, and by moving into sterling at a lower rate to profit from the rise, helped to bring it about. Keynes also argued in 1924 for less foreign and more home investment, drawing attention to the low rate of return on foreign investment in relation to the uncertainties, and its more favourable tax treatment. He did not, however, at this stage attack foreign investment as damaging to employment, but confined his objections to the effect on the exchange rate and income levels.

In the summer of 1924 Keynes began a fuller academic treatment of monetary theory. This took shape slowly over the next six years and ultimately appeared in two volumes in October 1930 as A Treatise on Money. During these years Keynes was rethinking his theories of economic fluctuations, writing parts of the book at intervals while occupied in many other directions. In the official deliberations leading up to the announcement of the return to gold on 28 April 1925 Keynes's writings were often discussed. Just before the decision to return, Keynes took part in a dinner discussion with the chancellor (Churchill), an ex-chancellor (McKenna), and the two top Treasury officials on the issues involved. Keynes and McKenna argued that at the pre-war parity sterling would be overvalued by 10 per cent, and that this would result in higher unemployment and labour unrest as employers tried to get back into profit by reducing wages. These arguments were ineffective. After the announcement Keynes developed his arguments in The Economic Consequences of Mr. Churchill, a republication of articles rejected by The Times and published by Beaverbrook in the Evening Standard.

Marriage to Lopokova

Less than a week after The Economic Consequences of Mr. Churchill appeared, Keynes married, on 4 August 1925, Lydia Barocchi [see Lopokova, Lydia Vasilievna (1892–1981)]. Lydia's appearance on the London stage in Diaghilev's Ballets Russes towards the end of the war at first left Keynes unimpressed: 'she's a rotten dancer—she has such a stiff bottom', he commented (Skidelsky, 2.93). When he saw her again towards the end of 1921 in other Diaghilev ballets, including The Sleeping Princess, he fell deeply in love with her, much to the astonishment of his Bloomsbury friends, who could not think it possible he would marry her. She was one reason for his resignation from the Indian fiscal commission in January 1922. They did not marry until 1925, in part because of the need to obtain annulment of Lydia's earlier marriage to Diaghilev's former business manager, Barocchi. By then they had secured sole possession of 46 Gordon Square and shortly afterwards Keynes took a long lease of Tilton on the Sussex downs near Lewes, a property that had once belonged to his Jesuit forebears. These became his normal residences when free of duties requiring his presence in Cambridge.

The marriage proved a great success and was a turning point in Keynes's life. Lopokova had gifts to which Bloomsbury was blind and she had a firm hold on his affections. When apart they wrote every day and she took charge of him in his illnesses and in wartime, when his energies had to be carefully husbanded. The couple had no children.

An unorthodox Liberal

In the 1920s Keynes's frequent articles in the press made heavy demands on his time: not just the Manchester Guardian and The Times but a host of other papers. Many of his articles were syndicated and appeared in the foreign press. He wrote regularly in the 1920s for the Nation and Athenaeum, which he and a group of Liberals had taken over in 1923 and of which he was chairman from 1923, and in the 1930s rather less regularly for the New Statesman, with which the Nation was merged in 1931 and of which he remained chairman until his death. He again became active in the Liberal Party, lecturing at their summer schools, speaking on behalf of Liberal candidates at elections, and contributing to the Liberal industrial inquiry which Lloyd George set on foot in 1926. Of the inquiry's report, Britain's Industrial Future, popularly referred to as the Liberal Yellow Book, a substantial part was drafted by Keynes and contained many important proposals by him. He argued for public corporations as the most suitable form of organization for state-owned industries, a national investment board, regulation of stock exchange issues by overseas public bodies, and the reform of budgetary accounts. Before the 1929 election Keynes and Hubert Henderson, the editor of the Nation, prepared the pamphlet Can Lloyd George do it?, supporting the Liberal Party's proposals. This pamphlet took issue with the Treasury doctrine that loan-financed government investment would make little net addition to employment and no permanent addition since an equivalent amount of investment would be 'crowded out'. But Keynes was not able to rebut the argument by the reasoning he subsequently developed, that in an underemployed economy additional investment would expand employment and so generate the income and hence the savings necessary to finance the investment.

From the 1920s onwards Keynes put his faith in a mixed economy. Though a Liberal, he was no believer in laissez-faire; nor was he ever tempted to extreme reliance on the state, such as was implied in a planned economy. What he kept writing about was 'management'. It is a word that appears again and again in the headings of chapters in Book VII of A Treatise on Money: 'Management of money', 'National management', 'International management', 'Supranational management'. Similarly, in The General Theory it is the management of demand rather than the planning of supply that Keynes prescribes. He may talk about plans in How to Pay for the War in a situation where the state had to take complete control with unmistakable objectives; but in peacetime, with no similar agreed objective, more flexible arrangements were required. Apart from the odd piece of journalism, Liberal speech, or the lecture 'The end of laissez-faire' (1926), however, he nowhere provided a systematic analysis of the scope for government action.

Keynes was, par excellence, the Treasury man, and believed in financial agencies of control, looking initially to monetary policy to regulate the pressure of demand but coming in the 1930s to see in the budget a more comprehensive, direct, and powerful 'organ of action' able to operate over the whole area of spending and saving, not just selectively like credit control. Monetary policy had proved too weak a stimulant after 1932 and was likely to prove too expensive on the restrictive tack in wartime in terms of the interest burden it would leave behind. But Keynes was never one to rely on a single instrument of control and spurn so indispensable a weapon as monetary policy.

The Macmillan committee and A Treatise on Money

In November 1929, shortly after the Wall Street crash and the rise in bank rate to 6 per cent, Keynes was appointed a member of the Macmillan committee on finance and industry, set up by the Labour government to report on how the banking system affected the working of the economy. Two months later he was asked to join the Economic Advisory Council, made up of senior ministers and an assorted group of outside experts, with the prime minister (MacDonald) in the chair.

Keynes was the dominant figure on the Macmillan committee; he took a leading part in the examination of witnesses and the drafting of the report. He also addressed the committee on five occasions in February and March 1930 and a further three in November on his own views on how the monetary system worked. These followed the lines developed in the Treatise on Money, beginning with an exposition of the operation of bank rate and dwelling on the difficulty of managing an economy so dependent as Britain on foreign trade when wages were too high and had become inflexible. He went on to develop his theory of saving and investment, explaining that if bank rate was put up to protect the balance of payments it would work by lowering investment, upsetting the balance between investment and saving, and producing business losses and falling prices. If this was not carried through into a fall in costs and the losses continued, the economy would jam and unemployment would result. It is doubtful whether the committee understood Keynes's exposition.

Keynes also attempted to shape the thinking of the Economic Advisory Council, both through its regular deliberations and its specialist committees, most notably the committee of economists, which met between August and October 1930. However, even among the economists a consensus proved elusive, so divided were they over the role of public works and Keynes's 1930 conversion to a revenue tariff and export subsidy scheme to make British industry more profitable at the 1925 gold standard exchange rate. The full Economic Advisory Council did not survive the collapse of the second Labour government, but the continued existence of its committee on economic information, which produced regular reports on various issues of economic policy, gave Keynes access to officials until the outbreak of war in 1939.

Simultaneously with the end of the committee of economists, the first of Keynes's two major contributions to economic theory, A Treatise on Money, was published on 24 October 1930. The Treatise was the product of a long intellectual struggle to escape from the ideas in which he had been reared, later dubbed 'classical economics'; for example, the Ricardian view that supply creates its own demand. The focus of the book was on money and prices rather than on output and employment: it contained a full study of the operation of the monetary system, national and international. Fluctuations in prices were no longer explained in terms of changes in the stock of money as in the quantity theory, but in terms of the pressure of demand on the available supply of resources; and the pressure of demand was represented as varying with the magnitude of any divergence between the volume of investment and the availability of savings to finance it. The significance attached by Keynes to such a divergence reflected the success of Dennis Robertson (on whose ideas Keynes drew heavily in the years of the Treatise) in convincing Keynes that the major fluctuations in activity originated in booms in investment and that these could not be accounted for solely in terms of banking policy.

In the Treatise Keynes's thinking was still in transition and continued to evolve. The fluctuations he had so far considered were largely cyclical and differed from prolonged periods of underemployment of available resources. Moreover, he had not found a conclusive reply to the Treasury's objection to public works: that borrowing to finance additional capital expenditure would absorb savings already financing an equivalent amount of investment, crowd it out, and leave no net increase in expenditure and employment. It was clearly necessary to explain what governed the level of output and employment as a whole and show what set limits to any increase or decrease.

Keynes started from the idea of effective demand for output as a whole and its interactions with savings and investment under conditions of substantial unused resources. In those circumstances fluctuations in output could serve to equate savings and investment with little change in prices and costs. A given increase in investment would start off a multiple increase in income and output as those who were brought into employment spent their income, bringing others into employment; they, in turn, others; and so it would go on. But since the addition to spending would fall short of the addition to income, the expansionary process would slow down and peter out in the absence of a fresh stimulus. Income and output would be higher and savings would increase to match the original increase in investment. Similarly, an initial fall in expenditure would multiply and bring down income and employment but would be limited by the resulting reduction in savings.

The General Theory of Employment, Interest and Money

Keynes was never afraid to abandon one set of ideas for another of greater explanatory power. Soon after the publication of the Treatise he had begun to reconsider what governed the level of output and employment. In this he was assisted by a group of young Cambridge dons, who referred to themselves as the Circus, whose views and suggestions were relayed to him by Richard Kahn. The outcome of his rethinking was the publication in February 1936 of the chief of his major theoretical works, The General Theory of Employment, Interest and Money. This contained a new and radical analysis of economic instability.

Keynes asked not what made output fluctuate but what governed the level of output in the aggregate. Why in particular did it fall so persistently short of what existing resources—especially manpower—might be expected to permit, leaving a residue of involuntary unemployment? Keynes's answer was in terms of what he called 'effective demand'. This, like output and employment, had to be looked at in terms of aggregates. As effective demand expanded, output would grow, and as it contracted, output would fall. If output in the aggregate fell short of the potential level at the limit of capacity, this would normally reflect a deficiency of demand. There might be other obstacles to full employment, such as a mismatch between the kind of labour seeking employment and the kind of labour in demand. An increase in effective demand might then do little to increase output; but without effective demand there would be no output at all.

Economic policy should therefore provide for the management of demand as a means of controlling the level of output and seek to ensure the fullest possible use of available resources. This might seem to imply little difficulty in reaching full employment; and indeed there was full employment in nearly all the industrial countries in the 1950s and 1960s. But it would be a mistake to attribute that result to the skill of governments since for most of the time governments were seeking to restrain demand. Expanding demand may fail for a variety of reasons to ensure higher employment: by giving rise to inflation, or a balance of payments deficit that cannot be sustained; or because domestic resources are incapable of taking advantage of expanding demand in the direction that it takes.

Keynes had also to answer those who thought that a deficiency of demand would disappear of itself. As he pointed out, while commodity markets can nearly always clear themselves through price adjustments, the labour and capital markets do not. A reduction in money wages throughout the economy would be unlikely to do much to expand employment. It would, of course, lower costs; but competition would soon translate the fall in costs into a fall in prices and this in turn would remove the fall in real wages and leave employers no better off.

If efforts were made to restore profits in a depression by cutting wages, it might be possible after great social upheaval to regain competitiveness with other countries, but a general reduction in wages that was soon followed by a general reduction in prices would do little or nothing to expand domestic demand. It is difficult enough to cut money wages but far more difficult to cut real wages: not so much because of trade union resistance as because of the competitive spirit of employers.

With the capital market there are other difficulties. Increased saving does not automatically drive down interest rates: it may have quite the opposite effect if a falling-off in spending produces hesitation over future demand. The act of saving does not by itself add to investment. The saver may simply add to his cash holdings while the diminished flow of spending obliges businessmen to borrow more, not for investment but to meet their obligations. Moreover, if additional saving lowers interest rates, which is far from certain, there will be a limit to the reduction because as bonds rise in price, the risk of a reversal and a consequent capital loss becomes ever greater.

As a way of managing demand, Keynes looked first to the encouragement or discouragement of investment. He was not in favour of adding to the government's current expenditure and deliberately running a budget deficit to meet a deficiency of demand. No doubt, he argued, budgets would become unbalanced in a depression in any event, but he had no wish to tempt chancellors to become more spendthrift. Additional government expenditure should be on capital account and financed from a separate capital budget while the regular budget remained, as far as possible, in balance. Apart from public works financed out of the capital budget, there was also scope for operating on investment through changes in interest rates.

If these were not ruled by thrift on the one hand and the productivity of capital assets on the other, how were they determined? Keynes's answer was that interest rates had to match what he called 'the liquidity preference' of the investing public, or their willingness to part with the liquidity afforded by cash for bonds over a range of maturities. By matching the maturity of bond issues to the liquidity preference of investors, it would be possible to borrow at more stable interest rates; and by operating on the stock of money and the supply of liquidity, the government could push interest rates up or down. This part of Keynes's new doctrine had influenced monetary policy in wartime, when the government was able to borrow heavily at a steady 3 per cent. But the view of liquidity preference as determining interest rates to the exclusion of thrift and capital productivity was the subject of long controversy.

In the management of demand there were also difficulties on the side of supply. As employment expanded there was always the risk of wage inflation in major centres of industry, with wages rising faster than productivity as labour became scarcer. Keynes regarded wage inflation as a political problem. But in an overheated labour market wages are unlikely to be easily controllable; and there is the further danger that while skilled labour is very much in demand and earning substantial rises in pay, unskilled labour may remain superabundant, with expanding demand producing inflation rather than additional employment. In those circumstances Keynes accepted that it might be necessary to call a halt to expansion, as he urged in 1937, when unemployment was still in excess of 12 per cent. He never envisaged expanding employment to the point at which unemployment fell below about 5 per cent.

While Keynes provided a framework of thinking about inflation and unemployment, he did not provide prescriptions that would be effective in all circumstances. He was well aware of the difficulties of managing demand successfully after the devastation of a long war and of the problems that a high level of demand would pose for the management of the economy. In the General Theory the discussion ran exclusively in terms of a closed economy. This led Keynes to neglect the difficulties of an export economy such as Britain in a world depression (although in fact the United States, a much more self-contained economy, was hit very much harder in the 1930s by depression). He never lost sight of the importance of market opinion, particularly in financial markets, but believed that, suitably handled, it could be made to respond positively to expansionist policies rather than thwart them. He accepted that inflation might take root on the side of costs rather than excess demand and did not profess to know how to keep money wages from rising in a fully employed economy. As he told a correspondent in December 1943, 'The task of keeping efficiency wages reasonably stable (I am sure they will creep up steadily in spite of our best efforts) is a political rather than an economic problem' (Kahn, 361).

The General Theory gave rise to intense and prolonged controversy. Older economists tended to be highly critical of Keynes's ideas, and many thought them a recipe for inflation, while younger economists in general accepted them with enthusiasm. In 1936 the committee on economic information of the Economic Advisory Council discussed a report by its subcommittee on the trend of unemployment, which forecast a rise to a peak of 20 per cent in 1940. Keynes, troubled by the apparent exhaustion of investment opportunities except in housing construction, took an even gloomier view. In January 1937, when unemployment stood at 12½ per cent, he published three articles in The Times on 'How to avoid a slump', arguing in favour of keeping the long-term rate of interest steady, holding back postponable public investment, and planning to have investment projects ready for adoption in the impending slump. On this occasion the official response was a good deal more favourable than previously, thanks to Sir Frederick Phillips in the Treasury and Humbert Wolfe in the Ministry of Labour. But if the course of events turned out to be in keeping with Keynes's recommendations it was not to any great extent because the government adopted his views. On the other side of the Atlantic the expansionary policies adopted owed little to Keynes's urgings.

Heart trouble

From the summer of 1936 Keynes was affected by a prolonged spell of illness, beginning with chest pains and breathlessness. After a complete collapse in May 1937 heart trouble was diagnosed and a complete rest prescribed. He gradually improved, and was writing occasional letters and even the odd article by July 1937. But when he returned to London and Tilton in late September he still needed Lydia's constant care to prevent overexcitement and overwork, and he continued to need it for the rest of his life.

In the run-up to war in 1939 Keynes by his standards at first said little. In March 1937 he had commented in The Times on borrowing for rearmament and entered 'a plea for organised policy'. On 10 July 1937 he argued in the New Statesman that it was our duty 'to prolong peace, hour by hour, day by day, for as long as we can! We do not know what the future will bring except that it will be quite different from anything we could predict' (Collected Writings, 25.62). Keynes spent much of the autumn of 1938 in Cambridge busying himself with the Arts Theatre, which he opened in February 1936 and which he was to give to the city and university of Cambridge as a tribute to his parents, his books, and bursaring, but he was still tiring easily and suffering set-backs. He continued his long-standing controversy in the Economic Journal with Dennis Robertson on the determination of the rate of interest. However, in February 1939 his health suffered a set-back. Under radical treatment by a new physician, Dr Janos Plesch, from the spring of 1939, he began to feel better and was able to take more exercise. He wrote more for the Economic Journal and resumed attending meetings of the committee on economic information. In April 1939 he published a two-part article in The Times on 'Crisis finance'. In this he developed further the argument for avoiding increases in short-term interest rates and unsettling the long-term rate when it was important to hold it steady. As he continued to argue throughout the war, the interest rate structure should remain fixed while the public decided freely how it should distribute its holdings between different maturities.

Even in August 1939 Keynes did not expect war and was still optimistic as late as 30 August. After the Nazi incorporation of Austria into the German Reich he had argued for a British initiative to conclude a European pact between Britain, France, Russia, and any of the smaller states that wished to join. This was to negotiate an end to the Spanish Civil War and settlement of the Sudeten question. But it was an illusion to imagine that such a pact (if it could be concluded) would restore to the democracies 'the capacity to appear formidable' (Collected Writings, 28.104).

Keynes as an investor

By 1939 Keynes had become a rich man as a result of successful investment. But he was not always successful and success followed a radical change in investment policy. He had begun on a small scale before the First World War and after the war began speculating in foreign exchange on his own account and that of his friends during the winter of 1919–20. At first there was a handsome profit, but by May 1920 he was wiped out and there were heavy losses on each of the currencies sold forward on behalf of his friends. Undeterred, Keynes borrowed for further speculation in currencies and also in commodities and by the end of 1922 had paid off all his debts and accumulated net assets of over £20,000. From November 1919 he was also investing on behalf of his college as second bursar and held the post of first bursar from 1924 until his death. By that time the initial funds, with no net addition, had multiplied in value twelve-fold.

From 1919 onwards Keynes became increasingly involved in the City, advising prominent figures on financial matters, accepting the chairmanship of the National Mutual Life Assurance Society in 1921, but rejecting the offer of the chairmanship of the foreign-owned British Bank of Northern Commerce. On the other hand, he resigned his Girdlers' lectureship in economics and became a supernumerary fellow of King's. He did a limited amount of supervising at King's and limited himself from 1920 to eight lectures, in the Michaelmas term, on his work in progress.

In the 1920s Keynes was not conspicuously successful in his investments; he lost between 1923 and 1929 on the stock exchange but initially made substantial net gains in currencies and commodities. However, he lost heavily in further commodity speculation at the end of the decade, when his net worth fell to under £8000. In the early 1930s, however, his investment policy was extremely successful, and carried his net worth to a peak of over £500,000 in 1936. In the slump that followed his net assets fell to less than £200,000 before more than doubling again by 1946. In those years he ceased to be an active dealer seeking short-term gains on a prediction of turning points in the credit cycle and preferred to take a long-term view, concentrating his investments on a limited number of enterprises of which he had knowledge and in whose management he had full confidence.

Wartime activities

It had been Keynes's intention to limit himself to additional teaching duties so as to release his younger colleagues for essential duties in the event of war. But almost immediately he started drafting memoranda on price policy and exchange control. He and a number of similarly aged administrators from the First World War—Walter Layton, William Beveridge, and Arthur Salter—who had not found niches in Whitehall began to meet at 46 Gordon Square to co-ordinate their attempt to influence the war effort. The deliberations of the ‘Old Dogs’ resulted in a Keynes memorandum of the blockade and a set of notes for President Roosevelt, including one on the finance of post-war reconstruction. After describing the imposts of the first wartime budget as 'chicken-feed to the dragons of war' (Collected Writings, 22.31), he developed his own proposals for a comprehensive system of war finance involving compulsory savings. These appeared in The Times in November and were supplemented by statistical estimates in the Economic Journal and by a series of consultations and exchanges before the publication in February of his most successful 'essay in persuasion': How to Pay for the War. Apart from suggesting ways of adding greatly to the financial resources of the government, this inaugurated the idea of an iron ration at low, fixed prices of a list of necessities in lower-income budgets, with government subsidies if required. He proposed also to assist families with low incomes by introducing family allowances payable directly to the mother. The net effect of these concessions would have been to effect an actual improvement in the condition of the worst-off compared with pre-war years. It was reassuring that the intense campaign with which all this was accompanied did not tell on his health, although he still had to spend long periods resting.

In June 1940 Keynes accepted appointment to a consultative council to the chancellor and in August moved into an office in the Treasury with access to official papers and government officials. He was then free to take a hand in any problem that interested him and at any level with no formal position in the administrative machine. By the autumn of 1940, as his health improved, he was often working twelve hours a day. After a land-mine exploded near his house in Gordon Square he moved to Tilton, from where he left for London by 8 a.m. and where he returned about 8.30 p.m.

Keynes was soon on the chancellor's budget committee and discussing budget strategy with the chancellor and his top advisers. He supported the preparation by James Meade and Richard Stone of national income estimates as a basis for budget calculations and was deeply involved in the 1941 budget proposals and the drafting of the budget speech. Together with the white paper (Parl. papers, 1940–41, 8, Cmd 6261) that accompanied it, it represented in Keynes's words, 'a revolution in public finance' (Collected Writings, 22.354), moving away from the criterion of balancing the budget to a policy based on balancing the economy and closing what was estimated as 'the inflationary gap'. Over the next four years the official cost of living rose by no more than 4 per cent and a more comprehensive index of consumer prices by 11 per cent. That there was an intelligible and relatively successful policy was largely attributable to Keynes.

As in the First World War, Keynes's energies were increasingly taken up with the problems of external finance, coupled with his part in shaping the post-war world economy. Late in 1940 after a request from the foreign secretary, he drafted a set of 'Proposals to counter the German “New Order”'. In Washington in the summer of 1941 for talks on lend-lease, he became involved in discussions of the 'consideration' for it required by the Americans. This was likely to take the form of a declaration by the British government binding it after the war to non-discrimination in trade and equal treatment of all countries: something that worried him as it paid no regard to the prospective post-war deficit in Britain's balance of payments. On his return to London, after an enforced rest at Tilton, he took part in further negotiations over the 'consideration', which finally took shape in February 1942 in article VII of the master lend-lease agreement.

The clearing union and Bretton Woods

For two years from the autumn of 1941 Keynes was mainly occupied with proposals for the post-war international monetary system. In the immediate post-war years the existing system of exchange controls and bilateral payments agreements would have to continue, but in the long term these arrangements should be superseded by a multilateral scheme with currencies freely convertible. Keynes prepared a plan for an international clearing union to supersede the gold standard and put forward a set of rules for balance of payments adjustment that required creditor countries to take the main initiative. His plan underwent many revisions before being submitted to the Americans, who had prepared a plan of their own—the White plan—for a stabilization fund and (in the initial version) an international bank for reconstruction and development.

The two plans were published in April 1943 and were the subject of negotiations in Washington between the Americans and a British mission in the autumn of 1943, with Keynes and Richard Law in the lead. The American plan rather than the British formed the basis of discussion. On his return to London, Keynes encountered opposition from several ministers, the Bank of England, and some members of the Treasury, based largely on accepting early convertibility, which carried with it the need to deal with Britain's enormous liquid liabilities in the form of sterling balances which they believed would weaken the international role of sterling. Keynes took the view that Britain faced such a desperate balance of payments problem at the end of the war that a substantial loan or grant from the United States was indispensable and that such prospective dependence made it inevitable that America should call the tune on the key elements in international financial arrangements. His opponents disagreed. Agreement was reached on a number of outstanding points, however, and in April 1944, a joint statement by experts on the establishment of an international monetary fund was issued, six months after the conclusion of the Washington discussions. This set the stage for the final conference, attended by representatives of forty-four governments at Bretton Woods, New Hampshire, in July and August. Again the burden fell heavily on Keynes as leader of the British delegation and chairman of the conference commission on the world bank. As he told the chancellor once it was over:

The pressure of work has been quite unbelievable. It is as though, in the course of three or four weeks, one had to accomplish the preliminary work of many interdepartmental and Cabinet committees, the job of the Parliamentary draftsman, and the passage through several Houses of Parliament of two intricate measures of major dimensions, all this … (with) up to 200 persons in rooms with bad acoustics, shouting through microphones, many of those present, often including the Chairman, with an imperfect knowledge of English.

Collected Writings, 26.106–7

The strain told on Keynes, who suffered an evening of prostration at the preliminary conference in Atlantic City, two in the first week at Bretton Woods, and three in the third, together with a mild heart attack running upstairs.

The part played by Keynes in the conference was indicated when, in his concluding speech, he moved acceptance of the Final Act and the delegates paid him tribute 'by rising and applauding again and again' (Wartime Diaries, 193). The Final Act might do no more than provide a record of the conference; but in practice it established the articles of agreement for fund and bank.

Although Keynes spent most of the war years on external Treasury policy and after 1941 was never as deeply involved in budget preparations until 1946, he found time to pursue other interests of a domestic nature. He had taken an active interest in the visual arts since 1914 and had bought the works of modern French artists on his own and on the National Gallery's account at the sale of Degas's collection in Paris in March 1918. It was an interest fostered by his Bloomsbury friends and quickened by his marriage to Lopokova. In the 1930s he had conceived, planned, and financed the Arts Theatre in Cambridge. In wartime he was offered one appointment after another in 'the civilising arts of life' (Collected Writings, 28.368). First he became a trustee of the National Gallery in November 1941. Two months later he accepted chairmanship of the Council for the Encouragement of Music and the Arts, a body to assist the continued provision of music and drama in wartime out of private funds, with matching grants from the government. Although it took up more of his time than he had bargained for, Keynes put new life into the council, obtained an expanding Treasury grant, got the government to undertake to continue the council after the war, and secured the adoption of his proposal for an arts council, funded by the Ministry of Education, to provide an appropriate administrative framework. In 1944, while at Bretton Woods, he accepted the chairmanship of a committee to transform Covent Garden from a dance-hall into the home of national opera and ballet companies. He was able, shortly before his death, to attend their first production, The Sleeping Beauty.

Other concerns of Keynes in wartime were the Beveridge proposals for social security and unemployment policy after the war. The Treasury took a highly pessimistic view of what level of unemployment was likely after the war and hence, given the likely level of national income, of what could be afforded in benefits. Keynes, who was enthusiastic about Beveridge's proposals and much more confident than the Treasury about employment prospects, acted as a go-between, bringing Beveridge into touch with a small committee reporting to the Treasury and negotiating some reduction in the prospective cost of Beveridge's proposals. The Treasury remained fearful of the burden on the exchequer and put pressure on Keynes not to use his maiden speech in the House of Lords in May 1943 (he had been made a peer, Baron Keynes of Tilton, in June 1942) to welcome the Beveridge plan as the cheapest scheme on the map. (He made it instead on his proposals for an international clearing union.)

On unemployment Keynes resisted efforts to set on foot a Keynes plan and left it to James Meade and the economic section of the cabinet to make the running, while he limited himself largely to comments on the papers circulated. In stabilizing employment his emphasis then and later was on relying principally on changes in investment, although he accepted Meade's proposal for variations in national insurance contributions over the business cycle as a means of stimulating or checking consumer spending. He expected that after the war a period of excess demand would last for some five years and would be followed by a second period of five to ten years in which supply and demand could be roughly in balance, given appropriate counter-cyclical policies. Thereafter capital saturation would make it necessary to discourage savings and stimulate spending. But since the later phases were speculative it would be wise to concentrate on the immediate post-war situation in the early stages of policy making.

On deficit financing, with which his name has become associated, Keynes was far from enthusiastic. If there was to be a departure from budget balance it should take the form of increased investment, not consumption: chancellors were only too easily tempted into spendthrift policies. 'If serious unemployment does develop', he wrote, 'deficit financing is absolutely certain to happen, and I should like to keep free to object hereafter to the more objectionable forms of it' (Collected Writings, 27.353).

Keynes tried hard to get the Treasury to change the tone of the report it prepared on employment policy, warning them of how it would appear to younger economists as showing the Treasury 'intending to stone-wall on everything to the last' (Collected Writings, 27.355). But he was delighted to find it calling in Appendix B for the improvement of statistics that an active employment policy was bound to require. He took little part in the preparation of the white paper on employment policy (Parl. papers, 1943–4, 8, Cmd 6527) that appeared in May 1944, since he was either heavily engaged on external policy or ill and not in the office. Its opening statement, accepting government responsibility for 'the maintenance of a high and stable level of employment after the war', seemed to him to concede what mattered most.

Early in 1945 Keynes became involved in a joint study of post-war debt management and monetary policy by a committee of the Treasury, economic section, and Inland Revenue officials. Keynes once more took the view that, for at least as long as physical controls, rationing, and other instruments could be used to limit demand, expectations should not be disturbed by using higher interest rates to curb inflation. The public should be left as in wartime to determine freely how it would distribute its holdings between different maturities at the given structure of interest rates. The Treasury might, however, aim at some reduction in bank rate and Treasury bill rates in the interests on saving on payments on sterling balances; and slightly lower rates might be possible even on five- to ten-year bonds. Meade and Robbins, both members of the committee, were not convinced that the use of higher interest rates against the danger of inflation should be abandoned, and Meade was alarmed at Keynes's insistence that employment policy should operate exclusively through variations in public investment in an annual capital budget while what then became an exclusively revenue budget remained balanced in all circumstances. Even the Treasury allowed that budget deficits resulting from business depression should be allowed to remain. The committee was discontinued after the July 1945 election so that, after a preliminary report in May, these issues went unresolved.

The American and Canadian loans

For the rest of 1945 Keynes was absorbed in an effort to obtain from the United States and Canada the financial assistance necessary to cope with the large prospective deficit in the balance of payments. Lend-lease had been brought to an abrupt stop with the end of the Japanese war, exports over the next three years were likely to fall short of imports by £1 billion or more, and invisible income (mainly shipping freights and income from foreign investments), which had covered the trade deficit before the war, was now very much smaller. The cabinet would have liked a grant from the United States; and Keynes, who did not himself think such a grant likely, recommended that the negotiating team should be empowered to agree only to a grant of $4–5 billion. He hoped also for satisfactory terms on outstanding issues of commercial policy to which the Americans attached major importance, and even planned himself to conduct the discussion on the subject. Unfortunately, ministers had not included commercial policy specialists in the negotiating team, although it had been made clear that an understanding on trade would have to precede a request to congress for financial aid. Thus after a series of brilliant expositions by Keynes of the British position in mid-September, the financial talks lost all momentum until the commercial policy experts arrived at the end of the month and by mid-October had reached agreement, deferring some of the more controversial issues to a later international conference.

Keynes now had the problem of persuading the cabinet that a large grant-in-aid was out of the question. While ministers still hoped for a substantial grant, they were reluctant to borrow on any scale and fixed $100 million as a limit to annual commitments in interest and amortization. Keynes thought that a limit of $150 million, beginning in five years, might permit a loan of $5 billion, the amount ultimately lent by the Americans and Canadians together. By mid-October he was already showing signs of strain and he was fearful of a breakdown, while ministers insisted on unrealistic deals and sent telegrams that had Keynes 'white with rage' (Collected Writings, 24.568). There were also disagreements on Keynes's proposals for dealing with the sterling balances and his account for the Americans of how the sterling area functioned. When the Treasury, advised by the Bank of England, sought to deny that the sterling area system had been discriminatory, Keynes commented that 'some fig leaves that may pass muster with old ladies in London, wilt in a harsher climate' (ibid., 24.584).

A new set of instructions from the cabinet early in November proved entirely unrealistic. Keynes became more and more exhausted, rude, and difficult for his colleagues to deal with. Again ministers provided fresh instructions, which shocked the Americans but seemed to offer the prospect of agreement until the chancellor sought to retract a promise on sterling convertibility made by Keynes in September with ministerial authority. In the last week of November Keynes was on the verge of collapse and resignation. The Bank of England and senior Treasury officials were opposed to Keynes's ideas and 'felt that they were negotiating with Keynes rather than with the Americans' (Moggridge, 813). Following a suggestion Keynes had made earlier, it was decided to send Sir Edward Bridges out to conduct the final negotiations. He rapidly vindicated the line the mission had taken, and ministers were asked to agree to terms virtually unchanged from those previously offered. Even at that point ministers contemplated a breakdown over three points of disagreement, on one of which—the attempt to postpone convertibility until the end of 1948—the Americans still refused to yield.

The loan agreement was signed on 6 December and Keynes returned to Britain on 17 December, the day when the debate opened in the House of Lords on the loan and the Bretton Woods agreements. He attended on the first day and his speech on the second, after a weak presentation of the government's case, was decisive in securing the passage of a vital measure.

After resting for some weeks at Tilton, Keynes felt 'completely recuperated' (Collected Writings, 27.427) and was able to resume work at the Treasury, but with considerable distrust in official policy. He was particularly disturbed by what he considered lavish political and military expenditure overseas and expressed his fears of 'a financial Dunkirk' in the absence of an early and drastic change of policy. He wanted to see British forces outside Europe cut in half and policy towards Germany radically revised so as to free Britain from the burden of feeding the Germans. He attached some urgency to settling the problem of the sterling balances but matters were allowed to drift.

On two issues Keynes is widely thought to have been over-optimistic. While in America he had drafted for his superiors in London a memorandum arguing that there was unlikely to be a dollar shortage in post-war years and indeed that, as America became a high-cost country, a dollar surplus would not be very long in emerging. He later worked it up for publication in the Economic Journal. The article did not appear until after his death and the beginning of the dollar shortage was still some months away; but before very long Keynes had been shown to be too optimistic. Keynes also lent encouragement to Dalton's unfortunate attempt to lower long-term interest rates to 2½ per cent, suggesting in March and April 1946 the conversion of 3 per cent local loan stock to a 2½ per cent basis.

Keynes's last public appearance was an unhappy one. He took part, expecting 'something of a holiday' in the inaugural meetings of the governors of fund and bank in Savannah early in March 1946. He suffered two disappointments. The Americans were unwilling to reconsider their unilateral decision to locate both institutions in Washington, not, as the British much preferred, in New York. They were also insistent on the appointment of full-time executive directors (and, at first, full-time alternates as well) at salaries that in no way corresponded to the burden of work. There were other set-backs. He suffered great physical distress from walking too fast through swaying carriages in a very long train to the restaurant car; and on the very rough voyage back he suffered severely from a stomach bug through travel in a badly cleaned cabin used for the transport of the brides of American soldiers and their babies.

Keynes returned exhausted. He spent a busy fortnight in London before going down to Tilton and even then continued to work on official papers and draft a post-budget memorandum. He went on walks round the farm, read in the garden, had tea with his Bloomsbury friends. Then on 21 April, after walking down from Firle Beacon the previous day, he had another heart attack from which he died within minutes. His ashes were scattered on the downs above the farm.

Keynes had a commanding presence. He was rather tall and broadly built, with a large head, thick, prominent lips, lively eyes, and a bushy military moustache. He could sit very still in a discussion with his legs stretched out in front of him and his hands tucked into the sleeves of his jacket. His voice had resonance and was carefully modulated. He spoke without gestures in a matter-of-fact way, appealing with deliberation and precision to the intelligence with lucid, orderly reasoning enhanced by wit. Lionel Robbins, not always an admirer, came to think of him at Bretton Woods

as one of the most remarkable men that ever lived. The quick logic, the bird-like swoop of intuition, the vivid fancy, the wide vision, above all the incomparable sense of the fitness of words, all combine to make something several degrees beyond the limit of ordinary human achievement.

Wartime Diaries, 158

Keynes was always kind and understanding with students, and his lectures to them drew a large audience by no means confined to economists. At meetings of his Monday nightclub for selected students in his rooms at King's he always had something new to say in his summing-up and provided memorable illustrations of his wit: as when in 1933 a speaker remarked that Professor Rexford G. Tugwell (a member of Roosevelt's brains trust) was on a razor's edge, Keynes interjected quick as a flash: 'then there will soon be two Tugwells'.

The quickness of his mind was coupled with an extraordinary range of interests. He had read widely when young and retained a great deal of what he read. Starting as a philosopher, he had no difficulty in mastering economics, although his major contributions to the subject came well after he had become famous. He was interested in history and archaeology as well as in the arts; he associated with artists almost throughout his adult life and spent much of his time at concerts, ballets, and plays and helping to make fuller provision for their production.

In his lectures Keynes once explained the role of intuition in the emergence of new ideas, pointing out that they never had the precision that later critics assigned to them. Ideas were apt to be like balls of wool, with no sharp edges; and the relations between concepts, when first perceived, were equally woolly. Intellectual rigour of the Ricardian type was apt to get in the way of original thinking. He himself thought intuitively and tended to hit on a conclusion before finding a logical path to it. He was less interested in elaborating a theory than in ensuring that it rested on valid premisses and relied heavily on his firm grasp of practicalities and magnitudes.

There were many different sides to Keynes: philosopher, economist, editor, pamphleteer, company chairman, college bursar, patron of the arts and intimate friend of writers and artists, government spokesman and adviser. In each capacity he excelled. More than perhaps any other person of his time, he had the power to arouse and persuade informed opinion to the acceptance of novel ideas and proposals. As a speaker he combined lucidity, eloquence, and wit with a penetrating intelligence that no one else could equal. In personality he had great charm, though he was impatient and often biting in the face of stupidity. It is difficult to convey the brilliance of his conversation, the quickness of his wit, his remarkable powers of intuition, and his inspiring devotion to the public good, which finally killed him.

It is primarily as an economist that Keynes is remembered. He was in the line of great British economists from Adam Smith onwards, and it was he who opened up the whole area of macroeconomics, which seeks to explain what governs the level of output, income, and employment. His name will continue to be associated with what has been a major transformation in economic theory.

The world has changed since Keynes's day and the limitations of his ideas have become more apparent. National governments are often unable to play the role he assigned to them. They have not been able to get rid of inflation and unemployment. They have been unequal to the task of making the movement of domestic wages consistent with stable prices or international capital movements consistent with a stable rate of exchange. Public spending has been an unreliable instrument for expanding demand and has usually left behind an added burden of debt that has narrowed the options of policy. Keynes neither solved all the old problems nor foresaw all the new ones. We do not know what fresh solutions he might have offered to current problems. But at least he has provided us with a better starting point for reviewing the workings of the economy and given us an impressive demonstration of the power of economic ideas to remedy some of its defects.


  • The collected writings of John Maynard Keynes, ed. D. Moggridge and E. Johnson, 30 vols. (1971–89)
  • R. J. A. Skidelsky, John Maynard Keynes, 3 vols. (1983–2000)
  • D. E. Moggridge, Maynard Keynes: an economist's biography (1992)
  • R. F. Harrod, The life of John Maynard Keynes (1951)
  • P. F. Clarke, The Keynesian revolution in the making (1988)
  • D. Patinkin and J. Clark Leith, eds., Keynes, Cambridge and the general theory (1977)
  • W. Eltis and P. Sinclair, eds., Keynes and economic policy (1988)
  • M. Keynes, ed., Essays on John Maynard Keynes (1975)
  • É. Mantoux, The Carthaginian peace (1946)
  • A. P. Thirlwall, ed., Keynes and laissez-faire (1978)
  • The wartime diaries of Lionel Robbins and James Meade, 1943–45, ed. S. Howson and D. E. Moggridge (1990)
  • R. F. Kahn, ‘On re-reading Keynes’, PBA, 60 (1974), 361–91
  • D. E. Moggridge and S. Howson, ‘Keynes and monetary policy, 1910–46’, Oxford Economic Papers, 26 (1974)
  • personal knowledge (2004)


  • BL, letters to O. T. Falk, Add. MS 57923
  • BL, corresp. with Duncan Grant, Add. MSS 57930–57931, 58120
  • BL, corresp. with Macmillans, Add. MSS 55201–55204
  • BLPES, corresp. with Lord Beveridge
  • BLPES, letters to Edwin Cannan
  • BLPES, letters to F. A. Hayek
  • BLPES, corresp. with J. E. Meade
  • Bodl. Oxf., corresp. relating to Society for Protection of Science and Learning
  • CAC Cam., corresp. with Paul Einzig
  • CAC Cam., papers and corresp. with Sir Ralph Hawtrey
  • CAC Cam., corresp. with A. V. Hill
  • CUL, letters to G. E. Moore
  • JRL, letters to Manchester Guardian
  • King's AC Cam., corresp. with A. E. Felkin
  • King's AC Cam., corresp. with Richard Kahn
  • King's AC Cam., corresp. with Joan Violet Robinson
  • King's AC Cam., corresp. with John Saltmarsh
  • King's AC Cam., letters to Sir J. T. Sheppard
  • King's AC Cam., letters to W. J. H. Sprott
  • NA Scot., corresp. with Lord Lothian, memorandum, GD40
  • Parl. Arch., corresp. with John St Loe Strachey
  • PRONI, corresp. with Edward Carson, D1507
  • TNA: PRO, papers relating to Chancellor's consultative committee
  • Trinity Cam., corresp. relating to Hume's treatise
  • Trinity Cam., corresp. with Sir D. H. Robertson [copies]
  • U. Birm. L., corresp. with Austen Chamberlain
  • U. Sussex, letters to Vanessa Bell [copies]
  • U. Sussex, corresp. with Kingsley Martin


  • BL NSA, ‘Maynard Keynes’, NP798W&R C1
  • BL NSA, documentary footage
  • BL NSA, performance footage


  • D. Grant, oils, 1908, King's Cam.
  • G. Raverat, watercolour drawing, 1908, NPG [see illus.]
  • W. Stoneman, photographs, 1930–40, NPG
  • W. Roberts, oils, exh. 1932, NPG
  • D. Low, pencil caricatures, 1933, NPG
  • photograph, 1933 (with Jan Smuts), NPG
  • B. Elkan, bronze bust (posthumous), King's Cam.
  • B. Elkan, bronze head, King's Cam.
  • R. Fry, charcoal drawing, King's Cam.
  • Ginsberg, charcoal drawing, King's Cam.
  • Ramsey & Muspratt, photographs, NPG
  • W. Rothenstein, pencil and chalk drawing, King's Cam.

Wealth at Death

£479,529 12s.: probate, 19 Sept 1946, CGPLA Eng. & Wales

Bodleian Library, Oxford
Cambridge University Library
British Library, National Sound Archive
British Library of Political and Economic Science
University of Birmingham Library
British Library, London
Trinity College, Cambridge
King's College, Cambridge
National Archives of Scotland, Edinburgh
National Archives of the United Kingdom, Public Record Office, London
John Rylands University Library of Manchester
Public Record Office of Northern Ireland, Belfast
National Portrait Gallery, London
University of Sussex, Brighton
King's College Archive Centre, Cambridge
Churchill College, Churchill Archives Centre, Cambridge
Parliamentary Archives of the United Kingdom
Proceedings of the British Academy