November 3rd 2001

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Articles from this issue:

Cover Story: Afghanistan - Why the war on terrorism will be long and risky

Editorial: Why the ALP could win by default

TESTIMONIAL: A policy agenda for Australia's future prosperity

Election 2001: When will the parties support a new bank?

Defence: US Navy commissions Australian high speed catamaran

Canberra Observed: Nationals looking down the barrel

Straws in the Wind: Varieties of evil / Russian fears / My enemy's enemy is my friend

Law: Family Court redefines man

Government spokesmen confirm WTO threats

Media: Moral equivalence / Will they be invited back?

Letter: Settlement deaths

Letter: Beazley defended

Letter: Defence solution

Comment: The evil face of terrorism

Drugs: The case against medical cannabis

Obituary: Vale Phyllis Boyd

China: Can the Chinese Communist Party survive the market?

Books: 'John Maynard Keynes: Fighting for Britain 1937-46' by Robert Skidelsky

Books promotion page

Books: 'John Maynard Keynes: Fighting for Britain 1937-46' by Robert Skidelsky

by Colin Teese

News Weekly, November 3, 2001

Keynes' war

John Maynard Keynes: Fighting for Britain 1937-46
by Robert Skidelsky

Rec. price: $49.95

In this, Lord Skidelsky's third volume on the life and times of John Maynard Keynes, the author traces the period of the economist's life from 1937 to his death in 1946.

Keynes was the greatest economist of his age and the period covered by Skidelsky should have been the most fruitful of his career. It did not, however, turn out that way.

Most of the book is concerned with Keynes' efforts to help Britain fund World War II and emerge from victory with something left of its self-respect.

Yet, for all his work during this period, his efforts have to be considered, overall, as relatively unsuccessful. Due perhaps to a combination of ill-health, bad luck, and, it must be conceded, bad judgment.

He had only limited success in helping marshal the forces of the British economy for the fight against Nazism at the start of the war.

Nor were his efforts at negotiation with the United States on Britain's behalf throughout the war, and shortly afterwards, any more successful.

Indeed, the period from 1937 until his death could be considered the most unsatisfactory of Keynes' adult life. Curiously, Skidelsky makes very little of this point. Neither are we given insights into what Keynes himself thought about it - though it must surely have been one of his great disappointments.

During the inter-war period Keynes made his reputation as an economist, and practised successfully as a businessman. His most remarkable work, the famous General Theory, emerged during the latter part of this period. And, by judicious investment, he had managed to become independently wealthy.

When he returned to the Treasury in 1940 after a 21-year absence, it was as no ordinary bureaucrat. He accepted no salary, but enjoyed the position of personal representative of the then Chancellor of the Exchequer, whose Cabinet-level position did, and still does, place him as the political head of the Treasury.

Keynes worked from the Treasury offices and mixed freely - usually on the best of terms - with Treasury officials on a day-to-day basis. Unlike his bureaucratic colleagues, he was answerable, not to the Permanent Secretary of the Treasury, but to that official's political boss, the Chancellor of the Exchequer.

By all the rules of bureaucratic behaviour, this relationship should never have worked, but Keynes worked harmoniously alongside a number of Permanent Secretaries of the Treasury: though naturally enough, he found some more congenial than others.

From this unusual position Keynes was modestly successful in helping shape an initial wartime economic policy in Britain, which allowed the country to finance and prosecute the war. It was to be his greatest achievement in government.

Nevertheless his revolutionary plan to fund the war was rejected by Treasury and only partially accepted by the Government.

He argued, correctly and cogently, that as the economy switched to war production and full employment, the problem would be how to contain inflation. Conventional wisdom judged that increased taxation, rationing and price controls were the best means of dealing with the problem.

Keynes had a better way. It was to provide for a graduated percentage of all incomes above a stipulated minimum to be paid to the Government, partly as direct taxation, and partly as enforced savings. The idea was to avoid punitive taxes against the rich, and to reward the working classes for additional effort by giving them a claim on future resources.

His idea was warmly received in academic circles, including by F.A. Hayek, but condemned elsewhere. The Treasury rejected it, on the grounds that there was not the information available to keep aggregate purchasing power in line with the supply of goods.

The Government did partially implement the plan; but instead of 15 per cent of domestic spending being financed from compulsory savings (as Keynes wanted), the Government limited the savings contribution to only three per cent, thereby leaving the disadvantages of heavy taxation untouched.

With those debates behind him, Keynes became the British envoy to negotiate with the United States. His purpose was to gain US support (financial and otherwise) to allow Britain to continue to prosecute the war alone before December 1941.

What Keynes (and most other Britons) did not understand is that Congress and Americans generally (other that those living on the East Coast) were unenthusiastic about supporting Britain in the war against Germany before 1942.

Tactically, Keynes and his delegation seem to have erred in placing so much reliance on the President. There was not much support for Britain outside Roosevelt while ever there remained the view within the United States that however hard the bargain it drove in withholding financial and other support, Britain would fight on regardless.

In making this assessment the US wisely assessed British intentions. The mistake of the British was to allow this view to flourish. It is at least possible that had the British negotiators left the Americans with the view that without US support (both logistical and financial) the British might have to negotiate a peace with Germany in 1940, the US reaction may well have been different.

Keynes wasn't the man for this kind of bargaining. He harboured the misguided view that the better argument would always prevail.

Keynes and his colleagues, Skidelsky also suggests, probably placed too great a reliance on what they considered was an inherently favorable US disposition towards Britain. Such a disposition did not, in fact, exist. And certainly not on the part of the US Secretary of the Treasury, Henry Morgenthau, who was crucial to the early negotiations.

Much the same mistakes seem to have been made at the negotiations towards the end of the war, when Britain and the United States were shaping the multilateral instruments which were to guide post-war international economics.

A kind of sideshow to those negotiations was the arrangements which would define the economic relationships between Britain and the US, particularly as these concerned the basis for clearing the debt owed by Britain to the US.


Keynes was at the centre of these negotiations, and it has to be said that they did not go well for Britain. While it is true that for much of these negotiations Keynes was quite ill (he died soon after they were concluded), it must also be recognised that the same misjudgments about how to negotiate with Americans were made as had been the case four years earlier.

And while, again, he had the best arguments, these counted for nothing against a combination of US economic power and intransigence.

In dealing with these circumstances, the British were not helped by their inability to negotiate from a position of weakness, and by an incapacity to come to terms with the US system of government.

Keynes' activities immediately before, during, and just after the war, may well have enhanced his already established reputation as an economist and an intellect, but it also exposed serious weaknesses in his ability as a strategist and negotiator.

It was a sad end to an otherwise outstanding career.

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