Keynes and Grand Strategy

A new biography of John Maynard Keynes is welcome for many reasons. Keynes was among the intellectual giants of the 20^th century and—in terms of global influence—of perhaps any century. He helped shape both domestic and international economic decision-making from World War I to today. In this latest treatment, The Price of Peace: Money, Democracy, and the Life of John Maynard Keynes, his exhaustive biographer Zachary Carter casts Keynes as a man in full, who projected his lanky six-foot seven-inch shadow not just over fiscal theory and practice but also over Anglo-American high culture as a founding member (and ultimately financial sustainer) of the Bloomsbury Group. More generally, Carter convincingly shows that Keynes championed the global-historical project to protect Anglo-American culture from its three gravest threats—two world wars and the Great Depression—while helping to liquidate the empire that had long nourished it.

The book is a long slog. Readers with little interest in the endless debates over price levels, interest rates, monetarism, deficits, taxation, international trade, government regulation, banking practices, and the many other levers of economic policy will find it rough going. Yet if such readers persist, they will be rewarded by Carter’s clear explanations of these fields, and will value his account of the intriguing interstices that the multifaceted Keynes filled with his vitality and comprehensive genius. No “dismal scientist” he.

Carter’s chronicle begins with the Great War, which almost no one had expected and into which the thirty-one-year-old Keynes, like the rest of the world, was inadvertently drawn. Keynes was raised in Cambridge, and Bertrand Russell and older certified geniuses early deemed him a fellow genius. As a freshman he was recruited into the artistically intense, deeply interconnected (sexually and otherwise) community known as Bloomsbury. There, Virginia Woolf, the Bells, Lytton Strachey, Duncan Grant, and other luminous aesthetes lived in intimate association (Carter tells an arch story of how Vanessa Bell once used a ruse to steal a favored Grant painting from Keynes, who had bolted it to his bathroom wall!). Keynes, although not an artist, was a “prolific lover” and his passionate marriage to a leading Russian ballerina whom he had recruited to Bloomsbury was his deepest relationship.

Keynes was only twenty-one years old when he was tapped to help Chancellor of the Exchequer David Lloyd George, who in the first hours of the war was desperately seeking economic advice. Keynes quickly devised an audacious remedy for the deteriorating banking system: a very limited adherence to the gold standard while shifting to a paper currency, in order to stave off a disastrous bank run. Before long, the indefatigable, audacious lad became indispensable to the government. He would remain so until his death in 1946.

Keynes unceremoniously jettisoned some of the economic and philosophical orthodoxies of the day. Although economic efficiency and utility were important, often decisive policy criteria, he maintained, they might sometimes be sacrificed for fairness and political sustainability. By the Great War’s end, Keynes was firmly committed to an activist public role in the economy, but he also foresaw that American strength and private economic dynamism would increasingly supplant British leadership even as American culture coarsened.

Keynes opposed imposing stiff reparations and war debts on Germany, putting him at odds with his fellow planners. (Carter, echoing Keynes, savages President Woodrow Wilson’s follies at the Versailles peace conference, including his hypocritical call for self-determination in devastated Europe but not for American minorities back home.) The European allies’ demands for harsh reparations and other Procrustean penalties would, Keynes predicted, seed the Central Powers’ bitter revanchism. After resigning from the Versailles negotiating team, Keynes published his widely influential work The Economic Consequences of the Peace (1919). Carter, somewhat confusingly, excoriates the book despite the accuracy of its harsh diagnosis of Allied blunders, its critique of Wilsonian hypocrisy (“this blind and deaf Don Quixote”), and its baleful but tragically accurate predictions about the conflicts those blunders would engender, culminating in World War II.

During the 1920s, Keynes rusticated in Cambridge and Bloomsbury, growing famous (and wealthy) as the leading expositor of 20^th-century capitalism. He increasingly opposed the economic policies pursued by Prime Minister Stanley Baldwin and Exchequer Chancellor Winston Churchill, which continued a modified gold standard in the face of economic depression and widespread unemployment. The United States had emerged from the war as Britain and Europe’s largest creditor, so gold flowed constantly westward across the Atlantic. When Baldwin and Churchill restored the gold standard and an overvalued pound, unionized workers, supported by Keynes, protested with strikes and slowdowns. (Churchill later conceded error, but only privately.)

During this same decade, Keynes developed a theoretically bold alternative to the gold standard and free trade: massive government spending on new infrastructure, housing, and other public works. Under Keynes’ policy tutelage, Lloyd George led the Liberal Party toward (in Carter’s words)

a wholesale rejection of laissez-faire individualism as an engine of social progress… fundamentally redefin[ing] what it meant to be a Liberal. The party of free trade and the gold standard had become the party of massive government investment programs and deficit spending.

Alas for the Lloyd George-Keynes alliance, this concession was too little too late. In the 1929 election, the Labour Party polled so well that it almost gained an outright majority in Parliament. Keynes’ Liberals gained many seats but still fell far short of what it needed to play a leading role in Parliament.

When the Great Depression struck the United States and Europe, Keynes harbored no illusions about where the main source of reform lay. It would be the United States, not Britain and Europe, who would largely determine the range of feasible, effective policies. The economic world was now sufficiently interconnected that Britain had little scope for independent action. It was hampered by political leaders and cultural encrustations that made bold change far more difficult than in the United States, at least once Franklin D. Roosevelt gained the White House and established new administrative structures, agency leaders, and congressional support.

Keynes paved the way for Roosevelt’s innovations with a number of historical and theoretical claims. First, capitalism’s pedigree was ancient; far from being an excrescence of the 19^th and early 20^th centuries, it had functioned for thousands of years; indeed, it was responsible for much of humanity’s progress. Second, the use of gold as a store of value was merely instrumental to a particular form of capitalism. What drove the system, he argued, apart from individual enterprise, was the political force of government—its perceived legitimacy, its effective wielding of law and institutions to build popular support for (or at least acquiescence to) the rules and practices of capitalism.

Laissez-faire was only one kind of approach—and a misnamed one at that. As Carter puts Keynes’ point, “There was no such thing as a free market devoid of government interference. The very idea of capitalism required active state economic management—the regulation of money and debt.” If today these claims seem obvious, they were novel when Keynes advanced them just before the Depression.

In the dire years that followed, Keynes had to promote his interventionist ideas in the face of formidable opponents like Friedrich von Hayek, leader of the Austrian School of Economics, and, much later, Milton Friedman, Hayek’s American counterpart. By the 1930s, Carter notes, Keynes “had transformed himself into the world’s foremost public intellectual.” Most importantly, his ideas about banking regulation, the tyranny of the gold standard, and similar points were increasingly echoed by President Roosevelt, whom he flattered shamelessly.

Keynes had more difficulty selling his idea, advanced in his landmark book The General Theory of Employment, Interest and Money (1936), that politicians must contrive prosperity through active engineering of economic factors, including low interest rates and frequent deficits. Carter tells well the story of how Keynesian thought infiltrated the New Deal both through young, well-placed acolytes who had FDR’s ear, and also through the muddled economic advice of Walter Lippmann. But Carter’s account is premised on “the success of the New Deal,” and is seemingly untroubled by evidence that it was World War II, and not the late New Deal’s turn to deficits, that re-launched our economic prosperity.

A substantial portion of Carter’s book takes place after Keynes’ death in 1946. In these chapters, the author traces Keynes’ influence up to the present day, finding it at best intermittent and often repudiated. Carter does so partly by assessing the work of Keynes’ economist epigones (such as Paul Samuelson and John Kenneth Galbraith). But more important in Carter’s analysis—and more dismaying to him—is the fact that on issue after issue liberal Democrats, especially the Clinton and Obama administrations and their congressional allies, betrayed Keynes’ vision of an economic order in which the pursuit of equality was a principal goal and a key constraint on other policy objectives.

These later chapters are substantively weaker than the earlier ones; Carter tendentiously assigns policymakers’ policy positions to pro- and anti-Keynesian boxes without the kind of nuanced policy analyses that might convince an open-minded reader. “[P]overty,” Carter proclaims, “could be eliminated around the globe by redistribution of private wealth and corporate profit…. The economic problem of humanity is no longer a problem of production but of distribution—inequality.”

This dismissal of incentives as a factor in production and thus of distributive capacity is simplistic, dogmatic, and, in my view, quite wrong. On the evidence of the rest of the book, I doubt that the great Keynes would have agreed with it.

Peter H. Schuck, Baldwin Professor of Law Emeritus at Yale Law School, is Distinguished Scholar in Residence at NYU Law School and author of many articles and books on law, public policy, diversity, immigration, and other subjects.

Caricature of Keynes by David Low, 1934, public domain