John Maynard Keynes

V

Postwar Life

Returning to his academic duties at King’s, Keynes also became bursar of that college. He continued to write widely on economic conditions in Europe. Shortly after the war, he borrowed small sums of money from members of his family and invested first in foreign-exchange deals, later in commodities, and finally in stock-exchange securities. By 1937 he had built up a private fortune of over half a million pounds (then U.S.$2,500,000). He also greatly improved the financial condition of King’s College by his investment policy.

In addition to his academic life in Cambridge, Keynes had an active business life in London. In the early 1920s he served as a financial consultant to several firms on their investments and he founded three small investment trusts. He was editor of the Economics Journal from 1911 to 1944. Meanwhile he maintained close relations with his Bloomsbury friends and promoted various schemes for helping young, aspiring artists. In 1925 he married Lydia Lopokova, a Russian ballerina with Sergey Diaghilev’s Ballets Russes.

VI

Policy Views in the 1920s

In the immediate postwar period Keynes’s main economic interest was in the reparations tangle; he also warned against the evils of inflation. But with high unemployment in Great Britain he came to devote more of his attention to the evils of deflation. This concern began to appear in his Tract on Monetary Reform (1923). About this time he reached the conclusion that public works would be valuable in reducing unemployment. This view went against the opinion of more conservative economists, who held that such public spending merely diverted money from more fruitful private spending.

Keynes had been a lifelong member of the Liberal Party. When a split occurred during World War I between Liberal leaders Herbert Asquith and Lloyd George, Keynes had favored Asquith and was a bitter opponent of Lloyd George during the later part of the war and afterwards. But subsequently, he found a more sympathetic advocate in Lloyd George on questions of overcoming unemployment, and they formed an alliance that convinced the Liberal Party to support an active government role to this end. The Liberals’ campaign policies on unemployment in the 1929 election owed much to Keynes, but the Liberal vote was disappointingly small.

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VII

Major Economic Works

Keynes had decided that a stronger theoretical foundation was needed for what later became known as an “expansionist” economic policy. For a dozen years he had devoted most of his thinking to this problem, leading to the publication of his two major works—A Treatise on Money (1930; 2 volumes) and The General Theory of Employment, Interest, and Money (1936). In 1937 Keynes was stricken with a coronary thrombosis, and he never fully recovered his health.

In A Treatise on Money Keynes sought to explain why an economy operates so unevenly, with frequent business cycles of booms and busts. Like other treatments of the subject, his work failed to explain the problem of prolonged economic depression, a phenomenon that did not conform to the then generally accepted notion that recessions were self-correcting. It was then felt that during recessions savings would accumulate, causing interest rates to fall, and would thereby encourage business to invest and the economy to expand.

Keynes closely examined the problem of prolonged depression in The General Theory of Employment, Interest, and Money. This book, which provided a theoretical defense for government programs that were already being tried in Britain and by President Franklin D. Roosevelt in the United States, proposed that no self-correcting mechanism to lift an economy out of a depression existed. It stated that unused savings prolonged economic stagnation and that business investment was spurred by new inventions, new markets, and other influences not related to the interest rate on savings. Since business investment necessarily fluctuated, it could not be depended on to maintain a high level of employment and a steady flow of income through the economy. Keynes proposed that government spending must compensate for insufficient business investment in times of recession.

VIII

International Policy Planner

Shortly after the outbreak of World War II in 1939, Keynes returned to the treasury, where he was consulted on most of the important problems connected with the economic conduct of the war. After the Atlantic meeting between British prime minister Winston Churchill and U.S. president Roosevelt in August 1941, consideration began to be given to cooperation for postwar reconstruction. Keynes drafted a plan for an international organization to be called a “Clearing Union.” The purpose was to establish better order in international monetary relations and make it possible for nations to avoid the deflations and restrictions that had been rife in the period between the two world wars. Many features of his plan were embodied in the articles of agreement of the International Monetary Fund after the war.

In 1942 Keynes was made a member of the House of Lords and took the title Baron Keynes of Tilton. Keynes made a number of memorable speeches, the most important of which were devoted to expounding the ideas behind the Anglo-American postwar planning to an audience not well conversant with American points of view. In 1944 he headed the British delegation to the Bretton Woods Conference, an international meeting at Bretton Woods, New Hampshire. There he played a considerable part in the planning and adoption of the International Bank for Reconstruction and Development (World Bank) and the International Monetary Fund.

The crowning effort of Keynes’s diplomatic role was the negotiation of a loan from the United States after World War II was over in 1945. He is deemed to have had success under very difficult circumstances. Opinion in Washington, D.C., was not fully understood in London, and Keynes had to get the best for Great Britain despite ill-conceived instructions.

One further mission to the United States remained. This was to attend a conference at Savannah, Georgia, in March 1946 to decide constitutional points regarding the Bretton Woods institutions. In Keynes’s view the Americans assumed a domineering attitude, which was unlike their spirit of accommodation in earlier negotiations. They seemed unwilling to compromise, and insisted ruthlessly on all their points. Keynes did not take defeat easily, and on the train leaving the conference he had a severe heart attack. He died at his home in England on April 21, 1946.