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Review of Robert Skidelsky (2000), "John Maynard Keynes: Fighting for Britain": Hoisted from the Archives from Twelve Years Ago

Review of Robert Skidelsky (2000), "John Maynard Keynes: Fighting for Britain" (London: Macmillan: 0333604563), pp. xxiii, 580.

J. Bradford DeLong

July 2001

Each of the first two volumes of Robert Skidelsky's biography of John Maynard Keynes--Hopes Betrayed, and The Economist as Saviour--was an astonishing intellectual achievement. Now that it is complete, it is clear that as a whole the three-volume biography is the finest biography of an economist that I have ever read, or that I ever expect to read. However, this third volume--Fighting for Britain--does not quite measure up to its predecessors. Nevertheless, it is still a superb book. It falls short only because its predecessors have raised the bar so very high indeed.

Skidelsky's first two volumes gave us John Maynard Keynes's life up to 1937. Sidelsky wrote with wit, charm, control, scope, and enthusiasm. You read these books and you knew Keynes--who he was, what he did, why what he did was important, and how he managed to live more different lives in one than the rest of us are granted. Keynes was an academic; but he was also a best-selling author. Keynes was a politician, trying to advance the chances of Britain's Liberal Party between the wars; but he was also a bureaucrat, at times a key civil servant in the British Treasury. He was a speculator, trying to make his fortune on the stock market; but he was also at the core of the "Bloomsbury Group" of artists and intellectuals that raised the aesthetic high above the practical, and that did so much to shape interwar British culture.

For the litterati it is Keynes of Bloomsbury--his loves, enthusiasms, acts of patronage, and wit--who is the most interesting. For economists like myself, it is Keynes the academic who is the real Keynes: the founder of the half-science half-witchcraft discipline of macroeconomics, the man whose arguments and theories still shape how we think about the determinants of production, unemployment, and inflation. For those interested in the political and economic history of the twentieth century, it is Keynes the author and politician--the crusader against the Versailles peace treaty, the foe of the restoration of the gold standard, and the parent of the post-World War II international economic order--who is primary. But each has only a partial view of the whole man. One of Skidelsky’s greatest achievements is that he gives us Keynes, entire.

How did this multifaceted man come to be? That question is answered in Hopes Betrayed, the first volume of Skidelsky's biography. Skidelsky writes about growing up as a smart and privileged children of academics. He writes of how Keynes was one of a relatively small number of brilliant students thrust as a leaven into the mass of Britain's upper class at Eton, and thus became part of "an intellectual elite thrust into the heart of a social elite" (HB, page 77). An entire cohort of Britain's upper class learned before they were twenty that Keynes was very smart, very witty, very entertaining--and very helpful if there was a hard problem to be thought through. Skidelsky writes of Keynes at Cambridge, his joining the secret society of the Apostles, and his eager grasping with both hands of the philosophy of the aesthete. Keynes left Cambridge convinced that "one’s prime objects in life were love, the creation and enjoyment of aesthetic experience, and the pursuit of knowledge. Of these love came a long way first..." (HB, page 141).

This embrace of aestheticism was and remained the key to the "Bloomsbury" avatar of John Maynard Keynes, for whom the lodestars were to be in love with one’s friends, in love with with beauty, and in love with knowledge. However, Keynes also acknowledged a duty to apply one's knowledge, to try to make the world a better place. His industry and intelligence made him a trusted and effective member of Britain's intellectual and administrative elite well before World War I. Thus it was no surprise that Keynes spent World War I in an important and powerful job at the British Treasury, trying to answer questions like: How would you mobilize the financial resources of Britain to support the war effort? How large a war effort could the British economy stand? How could an international trade system geared to consumer satisfaction be harnessed as an instrument of national power?

Time passed. The death toll from WWI mounted toward ten million, Keynes became angrier and angrier at this civilization-breaking catastrophe, and angrier and angrier at the politicians who could see no way forward other than mixing more blood with the mud of Paaschendale. At the Versailles peace conference the new democratic German government was treated as a foe rather than a potential ally, and the object became to extract as much in plunder and reparations from Germany as possible. Jan Christian Smuts wrote about how he and Keynes sat at night and "rail[ed] against the world and the coming flood. And I tell him that this is the time for Grigua’s prayer (the Lord to come himself and not to send his Son, as this is not a time for children). And then we laugh, and behind the laughter is [Herbert] Hoover’s horrible picture of thirty million people who must die unless there is some great intervention. But then again we think that things are never really as bad as that; and something will turn up, and the worst will never be. And somehow all these phases of feeling are true and right in some sense..." (HB, page 373).

So Keynes exploded with a book called The Economic Consequences of the Peace. It condemned Versailles. It prophesied doom if the treaty were carried out: "If we aim deliberately at the impoverishment of Central Europe, vengeance, I dare predict, will not limp. Nothing can then delay for long that final civil war between the forces of reaction and the despairing convulsions of revolution, before which the horrors of the late German war will fade into nothing, and which will destroy... the civilization and progress of our generation..." (HB, page 391).

Before The Economic Consequences of the Peace Keynes was an academic with some government experience and many literary friends. Afterwards he was a celebrity. He became "the monetary reformer, the adviser of governments, the City magnate, the feared journalist whose pronouncements caused bankers and currencies to tremble... conferences jostled with holidays, intimacy merged into patronage. In 1925 the world-famous economist would marry a world-famous ballerina in a blaze of publicity..." (HB, page 400). He had written "like an angel with the knowledge of an expert," and had proved to be the master not just of the economics but of the words needed to make the economics persuasive.

In Skidelsky’s view, The Economic Consequences of the Peace is the key to understanding Keynes. It "marked a radical shift in Keynes’s thought." Before, he had held to "the nineteenth-century assumption of ‘automatic’ economic progress sustained by liberal institutions." After the experiences that had generated The Economic Consequences of the Peace, Keynes looked forward to a future "in which prosperity would have to be strenuously won in the teeth of the adverse circumstances which the war had created."

How did Keynes use his new-found prominence? After World War I Keynes used what power he had to--don't laugh--try to rescue civilization from chaos. Yet chaos came. The 1920s saw Keynes engaged in a doomed struggle against forces that wanted to block the rebuilding of international economic policy on sound foundations, against political insanity, and against the approaching Great Depression. Keynes spent more than a decade arguing against central bankers who "think it more important to raise the dollar exchange a few points than to encourage flagging trade." He tried to prevent Britain's return to the gold standard in 1925 at an overvalued exchange rate, for by overvaluing the exchange rate Britain's Treasury Minister, Winston Churchill, was willing "... the deliberate intensification of unemployment."

However, Keynes was unable to persuade British governments that economic policy should be decided upon by rational thought rather than by obedience to old poorly-understood verities. He failed to achieve any material easing of the terms of the Versailles treaty. He failed to prevent deflation and high unemployment in Britain. And he failed to convince people that the Great Depression was a man-made catastrophe that could be cured relatively easily. His pen--though strong--was not strong enough.

Thus the 1930s saw a retreat and then a return, as Keynes concentrated his attention on writing a book which he thought "...will largely revolutionize--not, I suppose, at once but in the course of the next ten years--the way the world thinks about economic problems." Keynes believed that his new theory would, when "...duly assimilated... mixed with politics and feelings and passions," produce a "great change" (ES 520-521). He was right. The General Theory of Employment, Interest, and Money changed the world. And it is at this point in Keynes’s life, with the General Theory published but not yet dominating economic thought, that this third volume of Skidelsky's biography begins.

Skidelsky is superb at summarizing the key contributions of Keynes and his General Theory was in the context of the late 1930s. As Skidelsky puts it, it is a mistake to think that Keynes's key contribution was to find a middle way between "laissez-faire and central planning... conservatism and socialism." Laissez-faire and conservatism promised individual freedom, but what good was individual freedom without prosperity--without the resources and incomes to make that freedom valuable? Central planning and socialism promised full employment and the "rational" use of society’s resources, but what good was full employment without individual freedom? Keynes found not a middle but a genuine Third Way. His proposals did not split the difference between the two main poles of politics. Instead, Keynes promised to achieve the benefits each of the traditional poles had claimed but had never been able to deliver. In Skidelsky’s words (p. xvi), Keynes's thought was "...a break-out into a new dimension--in which one could have continuous full employment without suppressing political and economic freedom."

Having written his revolutionary book, Keynes spent the last ten years of his life managing the ongoiong Keynesian Revolution. Skidelsky argues that the key to his success was his ability to show that the General Theory was not a call for ever-increasing stimulus and inflation but instead an addition to economists' technocratic analytical toolkit. Aggregate demand management could be as useful in dealing with situations in which aggregate demand was too high (and thus inflation was rising) as with situations in which aggregate demand was too low.

Skidelsky is also superb at bringing out the liberal--classical liberal--nature of Keynes's thought. Keynes saw the market economy as having two great flaws. The first was that demand for investment was extraordinarily and pointlessly volatile as business leaders and investors attempted the hopeless task of trying to pierce the veil of time and ignorance. The second was that the fluctuations in the wage level that classical economic theory relied on to bring the economy back into balance after such an investment fluctuation either did not work at all or worked too slowly to be relevant for economic policy. (No, I am not going to be drawn into a debate about "unemployment disequilibrium.") However, Keynes believed that if these problems could be fixed, then the standard market-oriented toolkit of economists was very relevant, and very worthwhile.

Hence Keynes was "moved... to remind contemporary economists that the classical teaching embodied some permanent truths of great significance.... There are in thse matters deep undercurrents at work, natural forces, one may call them, even the invisible hand, which are operating towards equilibrium..." (FB, p. 406). Hence Keynes's eagerness to find a way to let the market work and substitute for simple, crude rationing and command to achieve the necessary balance of resources in time of war. As he wrote at World War II’s start, it would be "sounder in every way to make motoring expensive than to make it the subject of wangling" to get additional petrol coupons.

His How to Pay for the War showed that the Keynesian aggregate demand toolkit could be useful for figuring out how to curb aggregate demand when it was too high as in how to boost it when it was too low. The point of How to Pay for the War was to reject inflation and to reject rationing as ways of assembling the resources to fight the war. Compulsory saving was to take its place, reducing aggregate demand in the present while preserving for the wartime generation a claim on the future production of the economy.

Keynes's views on war finance won broad intellectual (although not policy) acceptance remarkably quickly. The idea that positive steps had to be taken to diminish aggregate demand, and thus create the potential savings that would finance the war effort, was a remarkable shift in the way in which the British Treasury had traditionally thought. Keynes appears to have prevailed by raw force of argument, by sheer intellectual power. From this beginning, Keynes quickly became the informal but powerful leader of the British Treasury's wartime international economic policy.

Skidelsky is very good at pointing out things Keynes knew during World War II that other economists would only learn decades later. Skidelsky (FB, p. 277) quotes Keynes as arguing against fiscal stabilization via the tax system, for "...a remission of taxation which they could rely on only for an 'indefinitely short period' might not stimulate their consumption by much," and as biased "against fiscal fine-tuning. The emphasis should be placed on prevention, not cure; on maintaining a steady stream of investment, not offsetting fluctuations..." But both these points--the dependence of consumption not on transitory but on permanent income, and the limits imposed on stabilization policy by ignorance and uncertainty"--did not register on economists’ minds. They did not enter the consensus vision of the economy until they were forcefully brought up and argued by Milton Friedman a decade and more later.

Skidelsky skillfully recreates the milieu in which Keynes moved during World War II. The British Treasury faced three different tasks. It tried to manage the British economy. It negotiated with the United States over the details of the terms for wartime aid. And it exerted as much influence as it could on U.S. planning for the post-World War II world.

But there are a few places in Fighting For Britain where Skidelsky seems to me to lose his way. In Hopes Betrayed we saw John Maynard Keynes as a developing intellectual, seeking to figure out his place in the world and how to use his talents. In The Economist as Saviour we saw Keynes as politician, trying to influence events by analyses based on the standard monetarist toolkit of a Cambridge economist between the wars, and only at its end turned to Keynes's--successful--attempt to develop an entirely new analytical framework. Skidelsky was at home on the terrain of those two volumes, whether Cambridge, Bloomsbury, Versailles, or interwar British politics.

However, after 1937 Keynes was neither growing up nor fighting doomed political battles, but was instead either analyzing issues with other professional economists, or was designing and implementing policies. After 1937, Keynes’s life took a turn that made the technocratic details of the essence. And on this terrain Skidelsky is less at home, and his touch is less sure.

For example, Skidelsky overstates the gap between John Maynard Keynes and U.S. Treasury official Harry Dexter White in their joint design of the post-World War II international monetary system called Bretton Woods. Skidelsky (FB, p. 239) writes of the relationship between Keynes and White as a "battle between the two... one of the grand political duels of the Second World War, though it was largely buried in financial minutiae..." But this is not what I see when I look at the process that led to Bretton Woods. When I look at the competing Keynes and White plans for post-WWII monetary reconstruction, I am struck not by their differences but by their extraordinary similarities. The White plan called for a World Bank to finance investment and reconstruction. It called for an IMF to repair the flaws in the interwar gold standard. The IMF was to make explicit and to enforce the rules of international economic behavior expected of countries. I was to manage exchange rate changes, to assist in resolving balance of payments problems, to encourage tariff reduction and free trade, and to control destabilizing movements of "hot money" (like we saw in Mexico in 1995 and in East Asia in 1997).

The Keynes plan called for the same two institutions with the same two roles.

There were important differences. Keynes envisioned a much better-funded institution than White did. Keynes’s institution would have been capable of taking action on a larger scale. (The IMF we have now, however, is smaller than either envisioned.) Keynes saw a balance of payments imbalance as a problem for both surplus and deficit countries, both of which needed to be encouraged to change their policies. White saw a balance of payments deficit as the problem of the country running the deficit alone.

These are important differences. When Keynes disagreed with White, he usually lost the point because of the greater power of the United States. And in almost every case it seems to me that Keynes was probably right: it was a bad thing that he lost the points at issue. But compared to their common view of the institutions to be built and of the goals to be accomplished, the--important--differences between Keynes and White are orders of magnitude less important than the broad areas on which they agreed.

Skidelsky, however, widens these differences into an immense gulf (FB, p. 245). The White plan required countries to commit capital to fund the IMF; the Keynes plan created the IMF's resources ex nihilo, by fiat. Skidelsky sees this as a significant difference--that the White and Keynes plans were "based on different concepts." But he can take this point of view only because he does not look up and see that the dollars contributed by the U.S. Treasury and the yen contributed by the Japanese Treasury were just as much fiat money created ex nihilo as were Keynes's proposed "bancor." Skidelsky thinks that for the British "the White Plan spelled financial orthodoxy, the gold standard, and deflation" while for the Americans "the Keynes plan spelled reckless experiment and inflation..." Both of these claims are overstatements. The link of the dollar to gold under the White plan was tenuous. The link to required deflation such as had happened during the Great Depression weak. And on the other side the Keynes plan did not propose a bias toward inflation at all.

Skidelsky sees the differences as the result of American malevolence (FB, p. xx): "Harry Dexter White of the US Treasury wanted to cripple Britain in order to clear the ground for a post-war American-Soviet alliance..." But he is wrong. Skidelsky himself quotes (FB, p. 253) a critic of both plans who had a much clearer view: "both plans set up a super-national Brains Trust which is to think for the world and plan for the world, and to tell the governments of the world what to do.' They were both British plans... both reflected trends in Keynesian thinking and British monetary policy..." They were fraternal if not identical twins.

Keynes would have agreed. In his view, what was accomplished at Bretton Woods was "... a revolutionary change for the better compared with the position in the interwar period..." (FB, p. 328). The Bretton Woods system did attain Keynes's three most important goals for Britain: the external value of sterling was to conform to its internal value, not the other way around; British monetary policy was to be made in London and not by flights of hot money; and external circumstances would have a hard time enforcing deflation on any country. If the modified version of the White plan that underpinned Bretton Woods was not Keynes's full loaf, it was much more than half of one.

What about American malevolence seeking to cripple Britain? It is only fair to counterbalance Skidelsky's view of Harry Dexter White--a complex man, probable Russian agent of influence, commited New Dealer, ruthless bureaucratic infighter, accomplished technocrat, and co-architect of the post-World War II international monetary system that played a key role in giving the world economy its fastest generation of growth ever--with John Maynard Keynes's view. As Keynes put it (FB, p. 323): "With Harry White, as you may suppose, we have been spending a vast amount of time... over-bearing, a bad colleague, always trying to bounce you, aesthetically oppressive... not the faintest conception of how to behave.... At the same time, I have a very great respect and even liking for him. A very able and devoted public servant, carrying an immense burden of responsibility and initiative, of high integrity and of clear-sighted idealistic international purpose, genuinely intending to do his best for the world. Moreover, his over-powering will combined with the fact that he has constructive ideas mean that he does get things done, which few here do. They way to reach him is to respect his purpose, arouse his intellectual interest (it is a great softener to intercourse that it is easy to arouse his genuine interest in the merits of any issue), and to tell him very frankly and firmly without finesse when he has gone off the rails..."

Keynes's true adversary wasn't Harry Dexter White. His true adversaries were those who feared any form of international financial management, or (alternatively) those who wanted tight controls over all international economic transactions: a planned economy applied to international trade and finance, at least.

I do not know why Skidelsky seems to lose his moorings on this set of issues, but he does. He appears to accept the argument of a set of British imperial conservatives who believe that somehow the U.S. during World War II provided aid to Britain on niggardly terms, terms guaranteed to destroy Britain’s "greatness." Skidelsky writes (FB, p. xx) of the "...intensity and often bitterness of the struggle between Britain and America for post-war position which went on under the facade of the Grand Alliance. When the European war started, Britain, not Germany, was seen by most American leaders as America's chief rival..." The chief accusation seems to be that America squeezed Britain's financial resources dry before it would open the spigots of Lend-Lease aid, and so destroyed Britain as a great power.

Anyone who has solid economic moorings who is confronted with this argument can see that this makes no sense at all. Britain imported 17 billion pounds' worth of goods during World War II, of which America paid--in Lend-Lease and in post-World War II Marshall Plan and MSA aid--for 7 billion. Had America paid for all 17 billion pounds, then Britain would have had an extra 10 billion pounds' worth of overseas assets at the end of World War II. At a 5% real return on overseas investments, this would have boosted post-World War II British GNP by four percent.

Would Britain with four percent more GNP have been a truly "great" power, the post-World War II leader of the western alliance? No. Britain after WWII had 1/4 the population of the United States. Its factories were only 2/3 as productive as American workers. It was willing to spend only 2/3 as large a share of national product on the military. These add up to an eightfold gap in relative politico-military strength. These fundamental factors had 175 times more to do with American headship of NATO than did America's failure to pay for all rather than one-third of Britain's World War II imports.

Nevertheless, Skidelsky writes of how (p. xv) "Churchill fought to preserve Britain and its Empire against Nazi Germany. Keynes fought to preserve Britain as a Great Power against the United States. The war against Germany was won; but, in helping to win it, Britain lost both Empire and greatness..." He complains of "...the deference [Churchill] paid to [Roosevelt's] wishes... and [his] failure to exploit crucial elements in its bargaining position--like fighting a more limited war, or even making a separate peace with Germany..." (p. 180).

But this makes no sense at all. On the first level, a Britain that made a separate peace with Hitler would not have been stronger vis-à-vis the United States. It would have had no more workers and factories no more productive than Britain did in reality. On the second level, there is the question of what "Greatness" is. In my view--and in Winston Churchill’s view--a Britain that made a separate peace with Hitler and became a junior partner in Nazi dominion over Europe would not have been "Great." It would have been small indeed.

In the last analysis, however, it is not that important that there are places where Skidelsky’s interpretation of events comes loose from its moorings. These blemishes do not greatly mar his achievement. The meat of the biography lies in the amazingly well-constructed narrative, and in the magnificent portraits of Keynes and his age. In this third volume, as in volumes one and two, the skill and care with which Skidelsky has drawn his portraits is breathtaking.

I do not believe I will ever see a better intellectual biography than what Robert Skidelsky has given us. We are all deeply, deeply in his debt.