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

cent of total war expenditure by September 1916). This sum was paid from dwindling gold reserves, the sale of American and Canadian securities under British ownership, the sale of Treasury bills, bond issues and collateral loans. Keynes estimated that British borrowing would soon have to rise to over $200 million a month in the USA. In a memorandum of 10 October 1916, he advised: ‘the policy of this country towards the USA should be so directed as not only to avoid any form of reprisal or active irritation, but also to conciliate and please’. Robert Skidelsky has identified these words as fixing the moment when New York replaced London as the world’s chief financial power.22

      McKenna submitted on 24 October a Cabinet memorandum which Keynes had prepared for him on Britain’s financial relations with the USA. In it McKenna warned of insolvency and concluded as a ‘certainty that by next June or earlier the President of the American Republic will be in a position … to dictate his own terms to us’. This infuriated Lloyd George, who rejected these views. On 27 November the US Federal Reserve Board instructed American banks to reduce their credit to foreign borrowers and warned private investors against advancing loans secured by Allied Treasury bills. The chief motive for this was to pressurize the Allies towards a negotiated peace, as Keynes had long wished the Americans to do. In early December gold flowed out of Britain with startling speed.23

      Chalmers and Sir John Bradbury, who were Joint Permanent Secretaries at the Treasury from 1916, were committed to the belief (as Keynes later wrote) ‘that in a run one must pay out one’s gold reserves to the last bean’. As a result, although they had prefigured this crisis to the War Cabinet, they kept the extent of the gold outflow from ministers. This was because they feared that politicians, in a funk, would jettison sterling’s gold convertibility. ‘I thought then, and I still think, that they were right,’ Keynes judged in 1939 of Chalmers and Bradbury. ‘To have abandoned the [gold] peg would have destroyed our credit and brought chaos to business; and would have done no real good.’ He recalled one occasion when the Treasury mandarins bamboozled the politicians. ‘Well, Chalmers, what is the news?’ Lloyd George, who became Prime Minister on 7 December 1916 after forcing Asquith’s resignation, asked at the first meeting of his War Cabinet. Chalmers replied ‘Splendid!’ in his high, quavering voice. ‘Two days ago we had to pay out $20 million,’ he added, ‘the next day it was $10 million; and yesterday only $5 million.’ Chalmers did not add that a continuance at this rate for a week would finish Britain, and that the Treasury thought an average of $2 million too heavy. After outfoxing his political masters, Chalmers returned triumphant to his room at the Treasury, where Keynes was waiting apprehensively.24

      In the government reconstruction of December 1916 the Canadian-born Andrew Bonar Law replaced McKenna as Chancellor of the Exchequer. Keynes found his dealings with Law easy: ‘there was no one who could be briefed quicker than he and put au courant with the facts of the case in those hurried moments which a civil servant gets before his chief before a conference’. He found the Chancellor a grateful man: mistrustful of intellectual schemes, but with ‘an inordinate respect for Success’, and therefore ‘capable of respecting even an intellectualist who turns out right’. As a Glasgow iron merchant, who had been reared in a wooden Presbyterian manse in New Brunswick, Law had (as Keynes wrote in 1923) ‘no imaginative reverence for the traditions and symbols of the past, no special care for vested interests, no attachment whatever to the Upper Classes, the City, the Army, or the Church’. He regarded himself as ‘a plain business man, who could have made a lot of money if he had chosen to, with a good judgment of markets rather than of long-term trends, right on the short swing, handling wars and empires and revolutions with the coolness and limited purpose of a first-class captain of industry’. It was to both men’s credit that Keynes had a reciprocated liking for Law, an ‘extreme partisan, a vehement mouthpiece for the Conservative party, who distrusted any emotional enthusiasm which grasped at an intangible object’.25

      In an important memorandum of 17 January 1917, Keynes warned that if Britain suspended gold convertibility, the Germans would be alerted to Britain’s dire position: ‘“If England has gone off the gold standard, she can’t last six months more,” is what everybody would say, whether it is true or not.’ Keynes was striving to ensure Britain’s financial survival while not relinquishing his hope that President Wilson in Washington would force a negotiated peace by severing financial supplies and thus threatening Britain with ruin. On 22 January Wilson issued his manifesto for ‘peace without victory’ in the form of a message to the US Senate. He demanded freedom of the seas, limitation on military and naval armaments, self-determination of peoples, and a supranational world executive with overriding powers. ‘In other words, an immediate utopia, machine-made and thoroughly American,’ commented the German liberal Count Harry Kessler.26

      In February 1917, at the age of thirty-three, Keynes was appointed to head a new Treasury department managing Britain’s external finances and reporting directly to Chalmers and Law. His responsibilities covered banking, currency, foreign exchanges, inter-Allied finance. (As an Acting Principal Clerk at the Treasury, Keynes’s toil never relented: contrary to Chalmers’s peacetime hopes that his officials would make time for their hobbies, Keynes on the weekend of 18–19 August 1917 took home on Saturday some eighty-nine Treasury papers, which he had despatched by Sunday evening.) Keynes expected Britain’s resources to be exhausted by the end of March. But the Germans – not realizing that the US Federal Reserve Board had already delivered a death-blow to the Allied effort – on 1 February launched unrestricted submarine attacks to stop American material supplies from reaching the British Isles, France and Italy. The German navy believed that they could defeat England in four months – and might have succeeded if the Admiralty had not introduced the convoy system whereby merchant ships put to sea in a tight group under escort from protective Royal Navy warships. German submarine attacks destroyed Wilson’s notions of a negotiated peace, without victory. Publication of the Zimmermann telegram, in which the German Foreign Minister promised control of Texas, Arizona and New Mexico to Mexico as recompense for siding with Berlin in a war against the USA, outraged American opinion. On 6 April the US declared war on Germany.

      After the American entry into the war, the US Treasury began limiting the release of dollars to Britain. In June US funds were withdrawn from London for investment in a $2 billion Liberty Loan. In a message drafted by Keynes, and sent on 20 July by Bonar Law, the US government was warned that the European Allies’ finances would collapse within days unless the Americans undertook to pay all of the Allies’ expenses in America, including exchange costs. Initiatives by Keynes were crucial in obtaining the release of funds by the US Treasury at the last moment. This emergency was for Keynes the worst period of strain since the beginning of the war. It confirmed that, by the summer of 1917, British financial dominance in the world had been ceded to the United States. After the resolution of the exchange crisis, Lord Cunliffe of the Bank of England demanded the dismissal of Chalmers and Keynes as punishment for their high-handed conduct. It was however Cunliffe whose retirement Bonar Law obtained.

      Officials deal in public action: they operate in the public interest, they regulate civic affairs, they seek public stability; but Keynes was a man who cherished private intimacies, and cultivated the private domain. The tension between his official duties and personal loyalties was disturbing throughout the war.

      Keynes wanted the war to be waged efficiently and to end swiftly. Its calamities convinced him that his early trust in the rationality of other people’s feelings and conduct was specious. He said of the Apostles before August 1914, ‘we completely misunderstood human nature, including our own’. He had no presentiment until the war that ‘the springs of action lie deep in ignorance and madness’. He was not a pacifist who objected to fighting in principle, but a liberal who objected to compulsion in the form of conscription. ‘He would not fight because Lloyd George, Horatio Bottomley and Lord Northcliffe told him to,’ as Clive Bell recorded. ‘He held that it was for the individual to decide whether the question at issue was worth killing and dying for; and surely he was … a better judge than the newspapermen who at that time ruled the country.’