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Keynes’s Last Stand

The war largely destroyed Britain’s export trade, so a fully mobilized Britain fighting a full-scale war world-wide would inevitably run down reserves and pile up debts. There were other possibilities, such as fighting a more defensive war, abandoning large parts of the Empire to the enemy, and trying to win a war of attrition. None of the alternatives was palatable, and all involved risks as great as assembling the resources to fight a global war. There was, however, only one place to look for help, and that was the United States.

The complications were innumerable. When war started, the United States was still governed by the Neutrality Acts of 1935 to 1937, which forbade the sale of arms and war material to belligerents and forbade the making of government loans. Private loans were ruled out by the Debt Default Act of 1934, which banned private loans to any country “delinquent in its war obligations.” An amendment to the Neutrality Acts, pushed through Congress in November 1939, saved Britain from disaster. This invented “cash and carry,” which allowed belligerents to buy what they could purchase in cash and import in their own vessels. For the next eighteen months, American help to Britain was given on this strictly commercial basis.

It could not go on. The British could only pay for their purchases by selling gold or dollar securities—and could only transport gold one way and their supplies the other for as long as there were enough ships for the purchase. The German submarine war eroded the supply of ships, and the gold and dollar reserve was good for at most two years; by the fall of 1940, the hemorrhage was such that British reserves were worth $400 million against debts of $1 billion. The system might have survived a short war, but once Hitler had conquered most of Europe in the summer of 1940, a short war was not in prospect. Something else was badly needed.

What was negotiated was Lend-Lease, under which the United States supplied Britain with anything Britain needed, and shipped in American vessels, and provided a loan of $7 billion to pay for the goods. Roosevelt defended it to Congress with the observation that when your neighbor’s barn is on fire you lend him your hose and discuss what he owes you for it afterward. But negotiations on the terms of the loan and on what the United States would accept as a quid pro quo were long and difficult. Keynes was not a good negotiator. His opposite numbers, now and until the end of the war, were Henry Morgenthau and Harry Dexter White. The former disliked Keynes’s cleverness, and the latter was, if not an active Soviet agent, closely in touch with Soviet intelligence and more interested in the welfare of the Soviet Union than in that of Great Britain. Morgenthau was willing to work for a generous settlement, so long as it only aimed to defeat Germany and not to preserve Britain as a great power. White admired Keynes as an economist, but was more interested in ensuring that American policy served Soviet needs.

The outline of the conflict between the United States and Britain is not difficult to perceive. The reason why it was impossible to resolve remains obscure. The American view was that Britain was a supplicant, that the British must spend whatever they could before they were entitled to assistance, must commit themselves to a level playing field for commerce after the war, and must during the war avoid using in their export trade anything originating in the Lend-Lease program.

The British—Keynes in particular—had their eye on the need to preserve something for the postwar years. Keynes could not bring himself to beg for help, and almost none of the British negotiators could do so. Pearl Harbor meant that there could be no further suggestion that the United States might simply stop Lend-Lease; but it did not reduce the suspicions of the US Treasury and State Department that the British were not being frank about their economic condition, or the outrage of the British that their American allies could not understand the disproportionate burden being shouldered by the British.

It was under these shadows that Keynes began to put together the schemes for a postwar world that led thirty months later to Bretton Woods and—eventually—to the IMF and the World Bank. Once more, the basic conflicts are simple to discern, their resolution appallingly complicated to describe; since we are living with the aftermath, it is also a history about which complete neutrality is hard to maintain. The aim of Keynes’s scheme for what he described as a Clearing Union was to ensure that world trade did not collapse after the war: it was—to summarize brutally—a scheme for ensuring that there would be no deflation, no depression, no shortage of liquid funds in the international banking system. It was a debtor’s scheme, since it was intended to get funds out of the hands of countries that hoarded their assets—France and the United States being the two pre-war villains of this story.

It was also an assault on the nineteenth century. Keynes’s anxieties about a shortage of international liquidity led him away from any return to a gold standard. They also led him into head-on conflict with the American view of the world. The United States owned most of the world’s gold reserves, and as the world’s largest creditor nation, it was not in the country’s interest to put its reserves at the disposal of whatever hard-up country needed them. Since foreign trade was still a small proportion of American economic activity, it took some time for the US to recognize that it could not easily trade with countries who had neither exports to sell to the United States nor reserves with which to purchase imports. Harry White was a good-enough Keynesian to take the point unhesitatingly. Indeed, it is hard to imagine that there could have been a “White Plan”—and therefore an IMF—at all, unless he and Keynes had been of one mind most of the time. The political constraints imposed by Congress and its staunchly non-Keynesian paymasters and lobbyists were another matter.

The Bretton Woods conference, held in New Hampshire in the summer of 1944, was high drama in more than one sense. The fact that the representatives of so many Allied nations were sitting down to plan the postwar economic order marked, among other things, the certainty of an Allied victory in the near future. But the conference was also, as Skidelsky’s account makes clear, something of a charade. The outline of what came to be known as the Bretton Woods system had been fought out between Keynes on the one side and Harry White on the other long before the delegates showed up. The detailed discussions during the conference were exhausting, but the United States had the votes to win any argument, and they came down to what concessions Keynes could extract.

What emerged was the IMF and the parent of the World Bank—the Bank for Reconstruction and Development—described by Keynes as a bank which is called a fund and a fund which is called a bank. What the United States insisted on building into the IMF’s constitution was exactly what Keynes wanted to avoid; this was the insistence that debtor countries had to seek the agreement of the IMF before they could devalue their currencies. In the intervening fifty-five years, of course, there have been many periods when Keynes’s anxiety about a shortage of international liquidity seemed absurd. It was the hemorrhage of gold and dollars out of the United States that seemed alarming to many. But the fundamental problem has always been that the IMF was an organization controlled by the United States, run out of Washington, and most of the time committed to the conventional wisdom of domestic central bankers. The Argentine government is nearly bankrupt after following conventional advice to firmly link its currency to the dollar. Whether Keynes would have anything useful to say to the Argentine government today is another of those questions that are irresistible but futile and unanswerable. Still, it is plain enough that he would almost always have advised a country against tying its currency to the dollar without, at least, some escape route in an emergency.


After Bretton Woods, it was time for Keynes to return to the vexed question of how Britain was to survive after the war. Ideally, the British would have wanted the war in Europe to finish in 1944 and the war in the Pacific to finish at the end of 1945. This would have allowed time to pick up the pieces of British export trade, rebuild currency reserves, negotiate transitional arrangements with countries in the Empire—notably Egypt and India—that had enormous sterling balances that they could not convert into any other currency, and negotiate with the United States over what kind of regime would follow the end of Lend-Lease.

Instead, everything that could go wrong did go wrong. The war in Europe dragged on six months too long, and Japan surrendered four months too early. When Roosevelt died, the special relationship between Roosevelt and Churchill died with him. To the dismay of the British, the American reaction to the end of the war was simply to turn off the tap of Lend-Lease and assume that Britain would carry on as if it was 1939 and no war had happened. This was, as Skidelsky points out, almost unintelligible to Keynes. Keynes assumed that it was as obvious to Americans as it was to the British that the British had fought a much harder war than they had; a million British civilians had been killed by German air raids, while the British had fought for nearly six years and the Americans for less than four.

Keynes went to Washington in the autumn of 1945 looking for what he had—with fatal confidence—charmed the new Labour government into believing he could deliver, namely “Justice.” Justice, in Keynes’s view, required the United States to make Britain a gift of sufficient credit to restart overseas trade, and rebuild British credit. Many on the left were both less optimistic than he and less interested in preserving relations with the United States. They would have settled for what they called “austerity,” and Keynes called “Starvation Corner.” Essentially, this would have involved a near-Soviet degree of planning at home, managed trade on a bilateral basis, and many years of belt-tightening by an already exhausted population.

Keynes understood the degree of distrust with which the American government approached all such discussions no better than he had four years earlier. Negotiations were made harder by the hangovers from the Lend-Lease negotiations. The British had agreed to trade liberalization after the war, and their American creditors now wanted to see them deliver on the promise. The ins and outs of the negotiations are hard going even with Skidelsky as one’s guide; but once again, the basic issue is simple enough. The United States was willing to lend Britain a good deal of money but wanted convertibility of the two currencies; the British were fearful that convertibility would simply open the floodgates and drain Britain’s dollar reserves, with or without an American loan to bolster them. Faced with an ultimatum, the British accepted the American terms, and their fears were soon proved to be justified. But by the time the British had run through the loan and had been forced to abandon convertibility and devalue, Keynes himself was dead.

This final struggle left Keynes completely exhausted. He had also had enough of the Labour government and its leaders felt the same about him. The chancellor of the exchequer, Hugh Dalton, had known Keynes at King’s College, Cambridge, some forty years before and neither liked the other. And Keynes was not a natural ally of the Attlee government. He had lost his political credit not so much by charming the Labour leaders with the vision of a postwar settlement in which American aid would support their mildly socialist plans as by having to disenchant them with the cold truth that no such aid would be forthcoming. He had to make it clear that the nationalization of the railways, the coal industry, iron and steel, and shipbuilding was not a project to appeal to an American government.

In retrospect, the astonishing thing is that Keynes died regarded as a hero. When his heart failed him, in April 1946, it was universally agreed that he died on active service, and had killed himself struggling to rescue an essentially bankrupt undertaking. Robert Skidelsky is cautious about this hero-worship. It might, he thinks, have been better if Britain had never looked for American help at the end of the war and had passed the ruinous cost of behaving like a great power over to the United States by just walking away from southeast Europe and the Middle East. Many thoughts in the same vein must occur to anyone contemplating the cost of hanging on to the remnants of the Empire.

But Keynes defies such criticism. For one thing he never saw himself as setting the wider political agenda; economists he thought were a sort of technician—perhaps like a doctor who cannot teach his patient how to live a decent and worthwhile life, but can keep him alive to do it. Economists were neither the cream of civilization nor a threat to it; they might usefully help to make civilization possible by freeing humanity from the curses of overwork and unemployment. Nor did he think of himself as providing a fixed and timeless truth about the functioning of the economy; fellow economists who complained that he dressed up policy advice as pure theory were quite right, but even more importantly wrong. His sense of the vulnerability of the national and international economy to unpredictable historical mutations meant that he fashioned tools for thinking on the move. The tools might be useful indefinitely, but the situations to which they applied would hardly ever recur twice.

If there had been no World War II, Keynes would still have done his country good service. Even in the middle of the war, he put together what became the Arts Council and carried on the fight for a home for ballet and opera—just before he died he attended the opening of Covent Garden. If he had not been fighting for Britain by inducing the United States to act as banker to the free world, he would have been fighting for Britain by inducing his pragmatic and philistine countrymen to put their hands in their pockets for the sake of a higher culture. The presence of this other Keynes, allowed by circumstances to appear only intermittently in this story of the economics of total war, is not the least of the pleasures of Robert Skidelsky’s memorable and moving account. For those who have not the stamina for the trilogy, Skidelsky says he is now writing a one-volume account of the whole life. It was on just that one-volume work that he embarked in 1972; and in view of his great accomplishment since, the prospect of his presenting a relatively short, unified account of Keynes’s life and work arouses high expectations.

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