Lords of Finance

by Liaquat Ahamed

  But for all his passion for abstract ideas and philosophical discussions, Keynes also had wider and worldlier ambitions. In addition to his teaching duties and the book on probability, he spent the years before the war as a member of the Royal Commission on Indian Currency and Finance, even publishing a book on the subject; he took over the investment portfolio of his college; wrote occasional pieces on financial matters for the Morning Post and the Economist; and became the editor of the Economic Journal, to which he also contributed articles and reviews. Then there were his hobbies—the magnificent collections of old books and modern paintings, his golf, his passion for the ballet—and his many remarkable and varied friends. Indeed, there were times when he almost seemed to have too many interests.

  To accommodate all these activities, he would spend a couple of days every week in London, where he shared a house at 38 Brunswick Square with some of his Bloomsbury friends—among them Adrian Stephen and Adrian’s sister Virginia and her husband Leonard Woolf—many of whom he had met as an undergraduate at Cambridge. But while his bohemian comrades viewed the world of money and power as somehow tainted, he very much wanted to be part of it.

  His chance to return to government came with the war. On Sunday, August 2, he was in Cambridge when he received a letter from an old colleague at the UK Treasury, Basil Blackett. “I tried to get hold of you yesterday but found that you were not in town. I wanted to pick your brains for your country’s benefit and thought you might enjoy the process. If by chance you could spare time to see me on Monday, I should be grateful, but I fear the decisions will all have been taken by then.” Such an invitation from a man he respected, offering access to the center of world affairs, was irresistible. Unwilling to wait for the next train up to London, he persuaded his brother-in-law, A. V. Hill,16 to take him up to London in the sidecar of his motorcycle. By the end of the day, Keynes was ensconced in the Treasury Building in Whitehall, busy drafting a note for the chancellor on whether Britain should follow the rest of Europe into abandoning the gold standard. Within a few months, he had a job as a junior economic adviser within the Treasury.

  He quickly rose within its rank. In early 1917, he became chief of the external finance division responsible for securing enough dollars on reasonable terms to pay for the war effort and keep the UK economy afloat. It was perhaps the most critical economic issue confronting Britain during the war, and put Keynes at the heart of economic policy making.

  He became completely absorbed in the heady atmosphere of life as an establishment mandarin, thrown into the highest social and political circles. He was invited for country weekends by the prime minister and his wife, played bridge at No. 10 Downing Street, spent the weekend at the home of the chancellor of the exchequer, dined with the Duke of Connaught and the Princess of Monaco. He was, in the words of the society hostess Ottoline Morrell, “greedy for work, fame, influence, domination, admiration.”

  That combination of success and cleverness could at times make him insufferable. His Bloomsbury friends, who inhabited a rarified world of art and literature and ideas, were able to tease him about his newfound connections in high places. They were even willing to tolerate his irritating cocksureness. He was redeemed in their eyes by the subversive pleasure he took in challenging authority. No one was immune from his witty and biting ripostes. Within just a few months of joining the Treasury, he told no less than Lloyd George, the chancellor of the exchequer, during a meeting, “With the utmost respect, I must, if asked my opinion, tell you that I regard your account as rubbish.” But to the many other people to whom he was rude or insulting, he was simply an arrogant young man with an overblown sense of his own intellectual superiority.

  One would not have guessed at all of this by looking at him. He looked so very ordinary—receding chin, thinning hair, feeble military mustache—and he dressed so conventionally—dark three-piece suits and a homburg, or sometimes a bowler. At first glance he might have been a modestly successful City drone—an insurance broker maybe—or possibly a minor civil servant.

  Beneath that superior façade he actually harbored some profound insecurities—especially about his looks. “I have always suffered and I suppose always will from a most unalterable obsession that I am so physically repulsive that I’ve no business to hurl my body on anyone else’s,” he once confessed to his friend Lytton Strachey. But most of those who were close to him agreed that he could be the most attractive and charming of companions, his conversation sparkling, brilliant, and witty. He was “gay and whimsical and civilized” with “that gift of amusing and surprising, with which very clever people, and only very clever people, can by conversation give a peculiar relish to life,” remembered the art critic Clive Bell.

  Most of Keynes’s Bloomsbury crowd were conscientious objectors. As the war dragged on, he himself became increasingly disillusioned with its terrible waste, the relentless loss of lives, the refusal of the politicians to contemplate a negotiated settlement, and the steady erosion of Britain’s financial standing. In 1917, he wrote to his mother that the continuation of the war “probably means the disappearance of the social order we have known hitherto. With some regrets I think I am not on the whole sorry. The abolition of the rich will be rather a comfort and serve them right anyhow. What frightens me is the prospect of general impoverishment. . . . I reflect with a good deal of satisfaction that because our rulers are as incompetent as they are mad and wicked, one particular era of a particular kind of civilization is very nearly over.”

  When the war ended, Keynes was appointed the principal Treasury representative at the Paris Peace Conference. Though his official titles included deputy to the chancellor of the exchequer on the Supreme Economic Council, chairman of the Inter-Allied Financial Delegates in the Armistice negotiations, and representative of the British Empire on the Financial Committee, he soon found himself completely excluded from the most important economic negotiations at Paris, those on reparations. He had to watch impotently from the sidelines as the “nightmare” of the Peace Conference was played out. As he later wrote, “a sense of impending catastrophe overhung the frivolous scene.” When the terms of the treaty were finally announced in the middle of May, exhausted and disgusted, he felt he had no alternative but to resign. He wrote to Lloyd George, “The battle is lost. I leave the Twins [Sumner and Cunliffe] to gloat over the devastation of Europe.”

  THE ECONOMIC CONSEQUENCES of THE PEACE was a strange book to have sold so well. Two-thirds of it comprised a detailed, often technical, polemic against reparations. At the time and even after, the whole debate over reparations was obfuscated by the enormous figures involved. They were simply too large and abstract for most people, including politicians and many bankers, to comprehend, particularly in an era when few people knew what the GDP of Germany or Britain was or even what the term meant. Keynes was able to pierce through all of this confusion and translate the tens of billions of dollars that were being bandied about so readily into something more tangible for the average man to grasp.

  A book replete with figures and tables on the value of the housing stock of France and Belgium, the composition of German exports and imports in 1914, and estimates of the size of the German railway rolling stock may have been unlikely material for a best seller. But the sheer physicality of the technical details served as a chilling reminder that behind all of the abstract figures, this was an argument about the concrete things necessary to sustain standards of living.

  Its success was partly due to the artfully mordant portraits he drew of the Big Three at Paris: Clemenceau, “dry in soul and empty of hope, very old and tired”; Wilson, “his thought and his temperament . . . essentially theological not intellectual”; “his mind . . . slow and unadaptable”; and Lloyd George, “with six or seven senses not available to ordinary men, judging character, motive and subconscious impulse, perceiving what each was thinking and even what each was going to say next.” Keynes was persuaded by several people, including his mother, to omit some of the best
but most inflammatory descriptions—especially the portrait of Lloyd George, “rooted in nothing; he is void and without content . . . one catches in his company the flavor of final purposelessness, inner irresponsibility, existence outside or away from our Saxon good and evil, mixed with cunning, remorselessness, love of power.”

  What seemed to have captured the public imagination was the outline of the world economy that Keynes was able to draw. In bold broad strokes, he described the workings of the prewar Edwardian world, the fragile foundations on which it had been built, and the mutilation to its financial fabric left by the war. He gave a foreboding picture of the future as the forces that had sustained the old economic order began to come asunder. Sounding at times like an Old Testament jeremiad, the book spoke of “civilization under threat,” of “men driven by starvation to the nervous instability of hysteria and mad despair.” The tone of impending doom may seem overwrought to our ears, but to a generation that had just emerged from the most horrendous and apparently pointless apocalypse, it rang true.

  THE ECONOMIC CONSEQUENCES had an enormous impact on thinking about reparations throughout the world. The biggest change occurred in Britain. Even before the Peace Conference had adjourned in June 1919, Lloyd George had already begun to have second thoughts about the treaty. At the eleventh hour, he even tried to convince the other two leaders that perhaps they should soften the terms, but Wilson had adamantly refused, saying that the prime minister “ought to have been rational to begin with, and then would not have needed to have funked at the end.” It was not simply Lloyd George’s guilty conscience that led to the British change of heart. Britain, that nation of shopkeepers keen to get back to business, rediscovered the economic centrality of Germany. As foreign minister, Lord Curzon announced to the cabinet, Germany “is to us the most important country in Europe.” France, however, clung resolutely to its implacable hostility to its ancient enemy, and with the United States out of the European picture and Britain increasingly sympathetic to Germany, it found itself isolated.

  In the four years after the Peace Conference, from early 1919 until the end of 1922, Europe was treated to the spectacle of one international gathering after another devoted to reparations. With governments in both France and Germany constantly falling—during those four years France went through five and Germany six—the one constant fixture at all these gatherings was the British prime minister, Lloyd George. As if trying to make up for his failure in Paris, he threw himself into the process. By one calculation, he attended thirty-three different international conferences in those few years. So many of them were held in the gambling resorts and spas of Europe—at San Remo in April 1920, in Boulogne in June, at Wiesbaden in October 1921, at Cannes in January 1922, and the final “circus” at Genoa in April 1922—that the French prime minister, Raymond Poincaré, dismissed them as “la politique des casinos.”

  For all the magnificent and luxurious settings, these gatherings were painful affairs, not least because the French were so unclear in their own minds what they wanted. As Poincaré said in June 1922, “As far as I am concerned it would pain me if Germany were to pay; then we should have to evacuate the Rhineland. Which do you regard as better, obtaining cash or acquiring new territory? I for my part prefer occupation and conquest to the money of reparations.” Or as Lloyd George more pithily put it, “France could not decide whether it wanted to make beef-stew or milk the German cow.”

  All the age-old animosities between the British and the French, buried for a decade under the common purpose of confronting Germany, resurfaced. The old stereotypes of the French—those “vainglorious, quarrelsome, restless and over-sensitive” people—on which previous generations of Englishmen had been reared, were revived. Foreign Minister Curzon complained of the French proclivity for “the gratification of private, generally monetary, and often sordid interests or ambitions, only too frequently pursued with a disregard of ordinary rules of straightforward and loyal dealing which is repugnant and offensive to normal British instincts.” At one point, in 1922, he became so frustrated in a confrontation with French Prime Minister Poincaré that he collapsed in tears, crying, “I can’t bear him.”

  Dealing with Germany was no easier. Before the war, an American journalist had remarked on that “uneasy vanity, that touchiness that has made Germany the despair of all the diplomats all over the world.” The initial outrage over the Versailles Diktat had now curdled into frustration, bitterness, and resentment, which only made the defeated nation more difficult to deal with. From that first moment in May 1919, when the German foreign minister, Count Ulrich Graf von Brockdorff-Rantzau had insulted the Allied statesmen at Versailles by refusing to stand while addressing them, the Germans caused offense by their arrogant demeanor.

  It was not simply their bad manners. They calculated, very correctly, that the longer they could string out the bargaining over reparations, the less they would end up paying. Their whole strategy was therefore to negotiate in bad faith. In the first two years after signing the treaty, Germany desperately scraped together what it could, and paid $2 billion out of the $5 billion of interim payments due.

  Meanwhile, the Reparations Commission, established in Paris in mid- 1920, finally put a figure of $33 billion on the table as its estimate of the amount Germany should pay. The Germans responded by subjecting this figure to a series of adjustments to take into account what they had already paid—so transparently bogus as to embarrass even its own representatives in Paris—and concluded this meant they now owed the Allies just $7.5 billion, provoking Lloyd George to say that if the discussions continued any further in this vein, Germany would soon be claiming reparations from the Allies.

  In May 1921, British Treasury officials developed a proposal that they believed to be so reasonable that Germany would find it difficult to turn down. The reparations bill was to be set at the equivalent of $12.5 billion, roughly 100 percent of the German prewar GDP. To meet the annual interest and principal repayments on this new debt, Germany was required to pay between $600 million and $800 million, a little over 5 percent of its annual GDP.

  In May 1921, the British proposal was accepted at a conference in London. It seemed as if agreement had finally been reached. The German delegation, led by Foreign Minister Walter Rathenau, made much of the new departure in policy. Henceforth Germany would abandon its resistance to the terms of the treaty, and instead would adopt a policy of “fulfillment.”

  The problem was that the Germans never really believed that they could meet even this commitment. Despite the fact that the new reparations bill was now closer to the amounts originally proposed by liberal commentators such as Keynes, German officials remained convinced that even $12.5 billion of reparations would prove an intolerable burden. As a consequence, they made no real effort to meet the terms of the London schedule. They paid on schedule just once. Within six months of the London settlement, they were in arrears and back before the Reparations Commission, pleading for a moratorium. Of the $1.2 billion that Germany owed during the first eighteen months of the schedule, it paid little more than half.

  WHILE GERMANY WAS grimly trying to negotiate relief from the burden of reparations, its domestic economic policy, bad as it had been during the war, became worse. The country was in perpetual turmoil, constantly on the brink of revolution, run by a series of weak coalition governments, and was quite unable to control its finances. In addition to large residual expenses from the war—pensions to veterans and war widows, compensation for those who had lost private property in the territories forfeited under the Treaty of Versailles—the governments took on enormous new social obligations: an eight-hour day for workers, insurance for the unemployed, health and welfare payments for the sick and the poor. Germany’s financial problems were mostly self-inflicted. Nevertheless, reparation payments made what was already a difficult fiscal situation impossible. To finance the gap, the various governments of Germany resorted to the Reichsbank to print the money.

  In 1914, the mark
stood at 4.2 to the dollar, meaning that a mark was worth a little under 24 cents. By the beginning of 1920, after the full effects of the inflationary war finance had worked through the system, there were 65 marks to the dollar—the mark was now worth only 1.5 cents—and the price level stood at nine times its 1914 level. Over the next eighteen months, despite an enormous budget deficit and a 50 percent increase in the amount of currency outstanding, inflation actually slowed down and the mark even stabilized. Foreign private speculators, betting that the mark had fallen too far, moved some $2 billion into the country. After all, this was Germany, not unjustly viewed before the war as the epitome of discipline, orderliness, and organization. It seemed inconceivable that it would allow itself to sink into an orgy of monetary self-abasement and give up on restoring order.

  “Nothing like this has been known in the history of speculation,” wrote Maynard Keynes. “Bankers and servant girls have been equally involved. Everyone in Europe and America has bought mark notes. They have been hawked . . . in the streets of the capitals and handled by barbers’ assistants in the remotest townships of Spain and South America.”

  A series of events, however, in the middle of 1921—French inflexibility over reparations, a campaign of political murder by right-wing death squads—broke the public’s confidence that Germany’s problems were soluble. It abandoned the mark in droves.The foreign speculators who had bought marks the previous two years also bailed out, losing most of the $2 billion they had pumped in. A visitor in the late 1920s to the game rooms of Milwaukee or Chicago would find the walls papered with German currency and bonds that had become worthless.

  As the mark plummeted, Germany became caught in an ever-deepening downward spiral. On June 24, 1922, the architect of fulfillment, Foreign Minister Walter Rathenau, one of the most attractive political figures in Germany—cultured, rich, scion of a great industrial family—was gunned down in his car by yet another group of crazed reactionaries. Panic set in. Prices rose fortyfold during 1922 and the mark correspondingly fell from 190 to 7,600 to the dollar.