I.

Introduction

John Maynard Keynes (1883-1946), British economist, one of the most influential economists of the 20th century. His ideas profoundly influenced the economic policies of most non-Communist governments after World War II (1939-1945). The approach to economic policy based on his theories is known as Keynesianism or Keynesian economics.

II.

Early Years and Education

Keynes was born on June 5, 1883, in Cambridge, England. His father, John Neville Keynes, was a logician and economist and for 15 years chief administrator (registrar) at the University of Cambridge. His mother, Florence Ada, was one of an early generation of women students at Cambridge, a pioneer in social welfare, mayor of Cambridge, and a writer. The younger Keynes, who was called Maynard, won a scholarship to Eton College, where he distinguished himself academically and made many friends among the more intellectual members of the British upper classes.

Keynes entered King’s College, Cambridge, also on a scholarship, and took his degree in mathematics in 1905. At the university he became a close friend of members of an intellectual group led by writer Lytton Strachey. Brilliant, witty, somewhat skeptical, but earnest in purpose and thought, these friends drew him into wider realms of speculation than prevailed either in academic Cambridge society or among the sophisticated Eton aristocracy. This group of intellectuals, who became known as the Bloomsbury Group, was also deeply interested in the fine arts, and this opened a new interest for Keynes that stayed with him throughout his life.

After obtaining his degree, Keynes studied economics for a year, with the help of Cambridge economists Alfred Marshall and A. C. Pigou, in preparation for the civil service examination. In 1906, after taking the exam, he began his career in the India Office of the British government.

Keynes spent his spare time, and even some office time, working on the theory of probability for submission as a dissertation for a King’s College fellowship. He won the fellowship in 1908. The dissertation was afterwards enlarged and published in 1921 as A Treatise on Probability. His aim was to give a more modern and systematic substructure to the theory of probability, which would be to some extent analogous with the work done for deduction and mathematics by Bertrand Russell and Alfred North Whitehead in Principia Mathematica (1910). Keynes’s treatise proved to be a work of vast erudition.

III.

Early Work in Economics

Keynes was bored at the India Office, and in 1908 he resigned to take up his fellowship at King’s College, Cambridge. At the request of Alfred Marshall he began to teach on the economics faculty. Following his work on probability, he wrote Indian Currency and Finance (1913), drawing in part on knowledge acquired at the India Office. This was a pioneering work, and many people who could not accept some of his later doctrines liked to cite it as his best work. Just before the book appeared, he was asked to be secretary of a royal commission on Indian finance and currency under the chairmanship of Austen Chamberlain, who later became British foreign secretary.

IV.

World War I and the Peace Conference

Keynes was asked to work for the British treasury shortly after the outbreak of World War I in 1914. He rose rapidly to a position of great importance and before the end of the war was in overall charge of foreign-exchange arrangements.

After the war Keynes served as the British treasury delegate at the Paris Peace Conference and through this experience underwent the main crisis of his life. He was passionately opposed to British (and Allied) policy at the conference. Keynes held that, on the moral plane, the peace treaty (see Treaty of Versailles) should show magnanimity to the fallen foe and that, on the economic plane, the demands for reparation were fantastically impractical and that unsuccessful attempts to enforce them would lead to the ruin of Europe. He resigned his position in June 1919 in a biting letter to British prime minister David Lloyd George. This resignation made it unlikely that Keynes would be employed again officially for a considerable time.

Within three months Keynes published a devastating attack on the Versailles treaty settlements: The Economic Consequences of the Peace (1919). In it he correctly predicted that the staggering reparations levied against Germany would goad that country into economic nationalism and a resurgence of militarism. In addition to its remorseless economic argument against the reparations, this book contained vivid and brilliant character sketches. It was quickly recognized as a masterpiece of polemical writing and became one of the best-selling books ever composed on a topic in economics. Keynes achieved worldwide fame through it.

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.

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.