Universal Man: The Seven Lives of John Maynard Keynes. Richard Davenport-Hines

was peppered with shot by a careless French marquis while shooting as the Duke of Portland’s guest in Nottinghamshire. It would have been better for the world if he had been killed outright, on English soil, in an accident; for seven months later the assassin’s shots that killed him at Sarajevo set Europe stumbling into war. Austria’s belligerent ultimatum to Serbia on 23 July 1914 started a breakdown in London’s financial markets – the foreign exchanges, the discount market and the stock market. Thus began the most severe financial crisis, worse than those of 1866 or 2007–8, ever to hit the City of London. In this emergency Keynes, at the age of thirty-one, made a decisive intervention.10

      The problem was that foreigners could not meet their liabilities in London. After Austria’s declaration of war on Serbia on Tuesday 28 July, the continental bourses shut; on Thursday 30 July a London stockbroking firm, which specialized in business with Germany, failed; and there was no doubt that other firms would be hammered because they could not get the sums due to them from Berlin or Paris for previous purchases. Therefore, on Friday 31 July, the London Stock Exchange closed in order to forestall further insolvencies: it did not reopen until 4 January 1915. Keynes regretted this closure, which he felt would have been avoidable if bankers had been less selfish and myopic in extending credit to stockbrokers. Newsreel photographers who went to capture pictures of gloom or panic outside the Stock Exchange and Bank of England were taunted by City workers brandishing their hats and sticks with defiant optimism, and were chased off. These images have been mistaken since as signs of jubilation in the City at the imminence of European war.

      The devil take the hindmost was the spirit of the times. Apprehensive of insolvency, the joint-stock banks began cashing their notes for gold at the Bank of England, and on Friday 31 July began (in Keynes’s words) ‘the suicidal policy of making difficulties all over the country in paying out gold coin even to old customers who wanted £5 or £10 for petty cash, endeavouring to fob them off with Bank notes or silver’. This was folly, because the banks had gold, but insufficient £1 notes. ‘Nothing could have been so well calculated to inspire the public with distrust or even panic, and to arouse in them the ancient instinct of hoarding.’ Yet it was not the public running to the banks that caused the internal drain on gold, Keynes judged, but the joint-stock bankers’ run on the Bank of England, which took three days to cut the Bank’s gold reserve from £17.5 million to £11 million.11

      The bankers devoted their weekend to cries of panic and despair. On Saturday 1 August a deputation of them called on Asquith and Lloyd George, the Prime Minister and Chancellor of the Exchequer, urging the suspension of the Bank Charter Act which obliged them to trade paper currency for gold (‘specie payments’). Their heads were in such a muddle that they could not distinguish between suspending specie payments and the more momentous outright suspension of the Bank Charter Act. Lloyd George was disposed to concur with the bankers, but the Treasury and Bank of England demurred. As one interim holding measure, a month’s moratorium on payments of bills of exchange was decreed.

      This was the Saturday when war was declared between Russia and Germany. Money was owed in London from all over world. Foreign remittances to London had broken down. Few capitalists could export goods, move holdings of gold or renew loans. In Keynes’s words, ‘just as the Stock Exchange was deranged by the failure of foreign debtors to remit what they were owing, so also the banks and discount houses, which had indirectly lent short money abroad, found their calculations utterly confounded by their inability to get this money back when they wanted it’. He deplored the precipitous way that the joint-stock banks recalled loans that they had made to London’s bill brokers and discount houses for money owed by foreign buyers in London. The debts on these bills of exchange stood at £350 million. Once foreign debtors had defaulted, London’s acceptance and discount markets juddered to a halt.12

      At King’s on Sunday 2 August Keynes received a letter from Basil Blackett of the Treasury. ‘I wanted to pick your brains for your country’s benefit and thought you might enjoy the process,’ wrote Blackett. ‘The Joint Stock Banks have made absolute fools of themselves and behaved very badly.’ He hinted that a meeting on Monday might be too late. Rather than entrain for London, on a bank-holiday Sunday when services were disrupted, Keynes persuaded his brother-in-law Vivian Hill to hurtle him to London in the side-car of his motorcycle. Bertrand Russell met him hurrying across the Great Court of Trinity. Asking what the hurry was, Russell was told that Keynes needed Hill’s motorcycle to reach London. ‘Why don’t you go by train?’ Russell asked. ‘Because there isn’t time,’ Keynes replied.13

      Keynes was thus recruited to an advisory role in the first bail-out by the British government of English bankers and London money-men. On Monday 3 August (with five European nations already at war on three frontiers, and the day on which English intervention became a certainty, but with London office-workers holidaying on day-trip excursions) he addressed a memorandum to Lloyd George which by its clarity and resolve changed the Chancellor’s mind. Keynes opposed the suspension of specie payments during the war except as a last resort. Gold convertibility, he believed, was essential to Britain’s ability to finance its allies. If specie payments were suspended at the outset of the crisis, trust in the credit of the City of London, and the word of its financiers, would be shaken for perpetuity. It was this international reliance on the City’s probity that made it surpass Paris or Berlin as a financial capital: this confidence should not be endangered when the foreign drain on gold was unlikely to be large, and the internal drain could be obviated by the issue of notes. Keynes’s advice that gold payments for foreign transactions should be protected, but that those for internal payments should be regulated, was adopted in essence. Gold payments for external debts survived, the joint-stock banks’ gold reserves were centralized in the Bank of England, the Treasury issued emergency currency notes of £1 and ten shillings, and bank rate was reduced to 5 per cent on 8 August.14

      In a further memorandum of 5 August, Keynes recommended that in order to restore the credit of the acceptance houses, revive discount business and restart foreign trade, the Bank of England should guarantee new pledges by the acceptance houses while a moratorium was declared on past acceptances – which would leave the banks and discount houses holding some bad debts but not on an intolerable scale. Instead, Lloyd George decided that the Bank of England should go the whole hog by guaranteeing all approved bills accepted before 4 August. Within four months the Bank had discounted bills worth £120 million. In effect, the government paid the City’s bad debts, and rewarded those privileged citizens who happened to be engaged in financial business.15

      ‘Financiers in a fright do not make an heroic picture,’ Lloyd George wrote of this crisis. ‘One must make allowances, however, for men who were millionaires with an assured credit which seemed as firm as the globe it girdled, and who suddenly found their fortunes scattered by a bomb hurled at random from a reckless hand.’ Whereas Lloyd George was impressed by the most robust of the joint-stock bankers, Sir Edward Holden of the Midland, Keynes (in an essay written in August 1914 for his Economic Journal) characterized Holden as ‘selfish’, and Holden’s chief abettor among the bank chairmen as ‘cowardly’. The rest of the joint-stock banks he judged to be ‘timid, voiceless and leaderless’. The trouble was that they were ‘largely staffed, apart from the directors, on what in the Civil Service is called a second division basis’. Half of their directors were appointed because of their ancestral claims, and ‘two-fifths, not on grounds of banking capacity, but because they are able, through their business connection, to bring to the bank a certain class of business’. By contrast, he admired the neutrality of servants of the Crown.

      The leaders of the City were many of them too much overwhelmed by the dangers, to which they saw their own fortunes and good name exposed, to have much wits left for the public interest and safety. At this point the Minister and the Civil Servant, with no affairs of their own to divert them from the affairs of the country, alone stood possessed of the qualities which were instantly required.

      Keynes predicted that the government’s intervention in City financial operations