by David Boyle
Dear Maynard, why are you still at the Treasury?
Yours Lytton.
He finally broke down at the Paris peace conference in 1919, resigning from the British delegation and struggled home in despair. Back in London, he denounced the disastrous peace treaty that was to impoverish Europe over the next decade, condemning Lloyd George for threatening the peace of Europe. He described him later, in a more forgiving mood, as ‘this goat-footed bard, this half-human visitor to our age from the hag-ridden magic and enchanted woods of Celtic antiquity’. His book on the subject, The Economic Consequences of the Peace, made him a world figure but flung him out of his cosy position of influence with the establishment.
Keynes was brilliant, charming, rude and peculiar. He judged people by the cleanliness of their hands and fingernails. He always wore silk underpants, though sometimes until they were so old that they barely held themselves together. He was also staggeringly efficient, holding down a weight of committee work and teaching, with writing laborious articles and newspaper supplements, as well as playing a leading role in a range of other projects from speculation to farming. Even so, he managed to find time to play bridge in college, go riding, spend an hour or so gossiping in the Bloomsbury manner, and his stooping gowned figure would be seen throughout the 1920s dashing across the quadrangles, then ambling around the second-hand bookshops of Cambridge. Or into the little local stores which he described as ‘shops which are really shops and not merely a branch of the multiplication table’. To Keynes, life was always more important than numbers.
In London, his life was at the heart of Bloomsbury, where the vermilion front door of his home at 46 Gordon Square proclaimed the fact that no ordinary people lived here. Upstairs the walls were covered by murals by Vanessa Bell and Duncan Grant. Downstairs was the high-pitched sensitive intellectual talk that made Bloomsbury such a powerhouse. Lady Strachey lived at No 51, James Strachey at No 41. Virginia Woolf’s brother, Adrian Stephen, lived at No 50. It was all a little incestuous.
It was also a home from home, though his increasing worldliness – and what his friends described as his increasing stinginess – divided him from it as the years went by. Especially when he shocked his friends by marrying the divorced Russian ballerina Lydia Lopokova, the daughter of an usher at the Imperial Alexandinsky Theatre. She shocked Cambridge because she fitted their category of chorus girl. She shocked Bloomsbury because she didn’t talk the same language: ‘a half-witted canary,’ said Lytton Strachey. ‘She has no headpiece, poor little parakeet,’ moaned Virginia Woolf, complaining that she threw her sanitary towels into the empty fire grate. But it was no marriage of convenience: they loved each other for the rest of their lives.
The world was changing fast. The next generation was embracing extreme politics, and the intellectuals were embracing a whole new philosophy of measurement, known as logical positivism. If you couldn’t measure something, they believed it was meaningless. ‘What can be said at all must be said clearly, and whereof one cannot speak thereof one must be silent,’ said Keynes’ mad friend, the philosopher Ludwig Wittgenstein. God was swept away. Mankind could take control by measuring and counting, and by sitting themselves down at the controls of a complex universe. There would be no more original sin, no more old men with their prejudices leading youth to the trenches. And by demonstrating that there were controls for an economy too, Keynes would only strengthen the mood.
Despite his disapproval of figures, counting and statistics, he was also ushering in the world of the technocrat. The idea that an elite of intelligent men (it usually was men) could take control of the forces shaping the world and make it work like a well-tuned machine. He could imagine a world run by a King’s College high table all too well, and the generation that came after him clearly felt the same. The elite would run the machine.
But it was an elite who could see beyond numbers. Economic statistics would have to take into account the ‘state of employment, the volume of production, the effective demand for credit as felt by banks, the volume of new issues, the flow of cash into circulation, the statistics of foreign trade and the level of exchanges,’ Keynes wrote in the early 1920s No wonder at the end of all that, they couldn’t count or measure themselves into the right answer but had to allow for what he called the ‘the play of judgement and discretion’.
He was about to use his judgement to overturn all the accepted economic rules.
‘No Congress of the United States ever assembled, on surveying the state of the Union, has met a more pleasing prospect than that which appears at the present time,’ said President Calvin Coolidge in his State of the Union address at the end of 1928. Within less than a year, the Wall Street Crash heralded a worldwide economic disaster. Even Keynes lost a packet.
He hated international crises – they stopped him from sleeping. Throughout the depression he kept up an articulate and fiery bombardment to persuade the world’s politicians that simply cutting back wasn’t going to work this time. As he scribbled away in his study in Cambridge and unemployment rose, he became more and more optimistic in his public pronouncements – urging that the answer was to unbalance the budget and get life moving again. ‘It is often said by wiseacres that we cannot spend more than we earn,’ wrote Keynes in a letter to the Manchester Guardian in 1932. ‘That is, of course, true enough of the individual, but it is exceedingly misleading if it is applied to the community as a whole.’
There would be no more puritanical urgings for self-sacrifice to save the British economy. The whole idea of urging people to sacrifice themselves seemed horrific to Keynes after all those Kitchener posters. But economic sacrifice was the accepted wisdom. One economist back in 1899 who argued (like Keynes) that too much saving was bad for the economy, was told that he couldn’t teach, not even to consenting adults in private. Even today, the Treasury copy of Keynes’ pamphlet Can Lloyd George Do It? has been defaced by a junior mandarin with the words ‘EXTRAVAGANCE, INFLATION, BANKRUPTCY’ scrawled over the front.
The crunch came in early 1933. Sidney and Beatrice Webb were hard at work praising Stalin in their final tome Soviet Communism: a New Civilization. The Apostles now included the future Soviet spies Anthony Blunt and Guy Burgess. Hitler took power in January, and in March, Franklin Roosevelt took office as president of the USA. It was a moment of supreme crisis. About a quarter of working Americans were out of work, and on the early morning of the day before the inauguration, 4 March, every bank in America locked its doors. Revolution seemed almost inevitable. Even Keynes was confused: ‘Even I would hardly think that I could know what to do if I were president,’ he told his wife. But Roosevelt inspired the world with his speech warning America that ‘we have nothing to fear but fear itself’, thrilling Keynes as he listened to it on the radio at Lloyd George’s country house.
Roosevelt’s New Deal owed a great deal to Keynes’ influence. So, in their own way, did Europe’s dictators, though as a good Liberal, Keynes always recognized Nazism for what it was. When the Blackshirt leader Sir Oswald Mosley provided him with unexpected political support, Keynes warned him that his new economics was intended ‘not to embrace you but to save the country from you’. The point was that Keynes believed the First World War had destroyed the social connections that underpinned the economic system. Somehow it had to be rebuilt to ‘keep alive the possibility of civilization’. Keynes was no revolutionary in any other sense. He was trying to rescue the capitalist system from itself – it was just that he saw the system differently.
For Keynes, the whole idea wasn’t counting things, and it certainly wasn’t dictatorship, it was about life. Encouraging people to save doesn’t make anybody rich, he said. If we saved everything and spent nothing, we’d all die – leaving us simply ‘a peregrination of the catacombs, with a guttering candle’. We are healthy children, he urged, so we should experiment. ‘Over against us, standing in the path, there is nothing but a few old gentlemen tightly buttoned-up in their frock coats, who only need to be treated wi
th a little friendly disrespect and bowled over like ninepins. Quite likely, they will enjoy it themselves, once they have got over the shock.’
The shock came with the war, and it shocked Keynes into setting aside his usual dislike of statistics.
III
When Hitler marched into Poland, Keynes was fifty-six and not very well. Battling to rescue the world from depression had seriously damaged his health, and in the month of the coronation of George VI in 1937, he collapsed with coronary thrombosis. He never fully recovered, but like so many others he was raring to help the war effort. He gathered around him a group of friends who had been involved in Whitehall during the First World War (including Sir William Beveridge, who had been in the Ministries of Munitions and Food) and they met once a week in Gordon Square to discuss financial aspects of the war. Keynes called them the ‘Old Dogs’. It was a frustrating time.
On health grounds, he turned down the umpteenth offer to stand for Parliament for Cambridge University in a by-election, and set to work spraying his usual trenchant advice. He sent a stream of notes to Roosevelt about how to finance the postwar reconstruction of Europe, and wrote letters to The Times criticizing Sir John Simon’s budget as ‘chicken-feed to the dragons of war’.
But then paying for the war was the most intractable problem of the moment. British finances were in no state to pay for it, and gigantic loans would soon be flooding into the British exchequer from abroad – within the year, for the sake of national liberty, there would be no limit on borrowing at all. By default, the government was doing exactly as Keynes had urged for the past decade – they were unbalancing the budget and spending their way out of the depression because they had to.
The problem was that these vast sums would soon be swirling around the economy and there was no knowing where they might end up. With full wallets after twenty years of near poverty, and a U-boat blockade stopping luxury goods from appearing in the shops, anything could happen. It might not produce what the war effort desperately needed. It might produce rampant, morale-sapping inflation. Prices had more than doubled during the First World War – though they had barely moved before in the century since Waterloo.
What could be done? Precious little without a set of national accounts to sum up the whole intricate complicated web and show where there was spare capacity and when the economy was overheating. But there wasn’t one. The Soviets managed their intractable five-year plans by plucking numbers out of thin air and enforcing them with death or Siberia. But Britain had no way of providing any kind of overview of an economy in numbers. In his General Theory in 1936, Keynes had complained that the economic figures for Britain were completely inadequate, and it was impossible to manage an economy along the principles he set out without a figure for what he called ‘aggregate real income’. The British government in 1939 had no such thing, though Keynes’ younger Cambridge colleagues Erwin Rothbarth and Colin Clark were struggling to produce them.
Luckily for the British, some of the work was already being carried out across the Atlantic. The US Congress had called an urgent meeting of economists as they struggled with the depression in 1931, with the sounds of bank crashes in the not too far distance. To their horror, they found there were hardly any of the figures they needed either. The following year – the last year of the Hoover administration – the Senate finally asked the Department of Commerce to prepare a comprehensive set of national accounts. The department called in a quiet and unassuming young economist called Simon Kuznets from the University of Pennsylvania. They set him to work on what turned out to be the start of a lifetime as the international guru of aggregate real income – or, as we call it these days, gross national product or GNP.
National Income means counting money flowing through the economy. At last you could sum up a whole country in one number – one figure on top of a map of a machine called the economy. When the war came, the strategic importance of these numbers was only clear to a few. But at least there did seem to be a possible answer to the critical questions economists ask in wartime – how much can we produce and what impact will it have on the economy as a whole?
Thanks to Kuznets, the American government had the first set of national accounts in the world as early as 1935, the year before Keynes’ General Theory was published. And by 1939, he had managed to carry out statistical work on 33 other countries – though not Britain. It was Kuznets’ idea, but it needed Keynes’ special insight for it to be possible in the first place. It was Keynes who realized that money was a flow. One economist was to call Kuznets’ work the anatomy for Keynes’ physiology. The two bits came together as one of the crucial pieces of the jigsaw that would eventually beat Hitler. But the pieces were not yet in place.
While the ‘Old Dogs’ were struggling through the winter streets – with the kerbs and lampposts painted black and white to help navigate during the blackout – Keynes was applying his considerable intellectual resources to the problem. Luckily there seemed to be a breathing space: ‘There is still an astonishingly general belief, or hope, or perhaps a mixture of both, that something will happen,’ wrote the American columnist Mollie Panter-Downs in the New Yorker. Almost nothing did, it was the period known as the ‘Phoney War’. So Keynes had time to set out his ideas on war potential to the Marshall Society in Cambridge. Afterwards, he turned his lecture notes into two articles called ‘Paying for the War’, and a peculiar leak meant that they actually appeared for the first time in a German newspaper, the Frankfurter Allgemeine Zeitung of 7 November – an extraordinary mistake given how important it would be for the war effort. The Times didn’t get round to publishing them until 14 and 15 November. The result was a blueprint for keeping inflation down during wartime.
Keynes’ proposal was based on the idea of national accounting, and using the crucial figures to plan how much to spend and where. It also showed how the government could take some of the spending out of the economy, to avoid inflation – but at the same time pay for what people actually needed. He suggested a family allowance of five shillings a week per child up to the age of 15, paid directly to the mother, and a list of the basic necessities of life which would be kept at a level price by subsidizing them. He suggested a top rate of income tax of 80 per cent and he had a brilliant masterstroke – compulsory savings. Part of people’s pay packets would not be taxed, but they would be saved for them, and then given back with interest during the post-war slump when they and the economy would really need it.
The articles provoked an excited response. The right-wing Beaverbrook press didn’t like it because of the tax rate. The Labour Party and TUC didn’t like confiscating people’s wages – even temporarily. The National Savings Movement hated it. But then it’s all too easy not doing anything about inflation, Keynes complained because then nobody has to take responsibility for it. Next he incorporated the debate into a pamphlet, published in February 1940. It was called How to Pay for the War: A Radical Plan for the Chancellor of the Exchequer. At last he was back in the thick of things. There was a discussion in the House of Lords about it on February 28, a meeting with the Chancellor on March 7 and on March 8 a meeting with the Governor of the Bank of England – Keynes’ old enemy Montagu Norman. Norman had been the governor during the Wall Street Crash (even the psychologist Carl Jung had pronounced him ‘mad’) and they had deeply distrusted each other ever since.
Then there was the Norwegian campaign, and suddenly in May, the Blitzkrieg attack on western Europe. Britain was fighting alone and for her life and suddenly money was no object and national counting was really urgent. Keynes shuttled from meeting to meeting, struggling at the same time to get his assistant Rothbarth released from internment – ‘the most disgraceful and humiliating thing which has happened for a long time’ – and spending long periods resting in his room with an ice-bag. By the time France at fallen, Keynes was suffering from chest pains. By the Blitz, he and Lydia were sleeping in the corridor at Gordon Square.
Chunks of his life seemed to be un
ravelling. A landmine on the square in September broke every door and window in the centre of Bloomsbury. Virginia Woolf was on the verge of suicide. But he was finally asked by the government to help them prepare the 1941 Budget. On Budget Day 1941, the white paper was published setting out the national accounts and figures on which the Budget was based. ‘It was,’ said Keynes, ‘a revolution in public finance.’
And after all that, they only partially put his ideas into practice. Low interest rates were fixed on both sides of the Atlantic, as he suggested, and family allowances came in towards the end of the war (we have had them ever since). But his deferred pay scheme only saved £120 million, rather than the £550 million he planned, so there wasn’t much to plough back into the sickly peacetime economy. It was still a key foundation stone for the postwar welfare state.
If the British adopted his ideas for a wartime economy, that was nothing to the Americans. In the first six months of 1942, Roosevelt’s government – urged on by Churchill and his aircraft production minister Lord Beaverbrook when they arrived in Washington – placed orders for more than $100 billion in war equipment, more than their entire GNP. Donald Nelson, the Purchasing Vice President of Sears Roebuck, was appointed to lead the War Production Board and was given unprecedented powers.
To make sure this didn’t lead to inflation, the Americans put up their top rate of tax to 91 per cent. The economist John Kenneth Galbraith was drafted in to make sure prices didn’t go up – a process, without the powers to enforce it, which became known as ‘jaw-boning’. The vast capacity of the USA was brought to bear on the war, and if the contracts were too generous, a fearsome committee of Congress – chaired by Harry S. Truman before his unexpected rise to the Vice Presidency – chased them like terriers. By the end of the war, the figures were staggering: 86,338 tanks had been produced in the US factories, 297,000 planes, 17.4 million rifles, carbines and side arms, 64,500 landing ships. Cargo vessels were being laid down and launched within four days, and the Kaiser Yard in California even once managed to produce a ship in 24 hours flat.
