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 would prove a lasting precedent. As he explained, ‘The world of borrowers and lenders, of bankers and discounters and stockbrokers, is to be galvanised by the wires of government into, at least, a marionette existence.’16
In January 1915 – again at the behest of Edwin Montagu – Keynes was recruited to the Treasury for the duration of hostilities. Six years later, when lecturing to the Society of Civil Servants, he depicted the department as an austere enemy of expenditure and waste, and regretted the destructive impact as Chancellor of Lloyd George, who ‘never had the faintest idea of the meaning of money’. The Treasury had perfected a bureaucratic style which shielded its officials from attacks as they curbed the spending of other departments: ‘precedent, formalism, aloofness, and even sometimes obstruction by the process of delay, and sometimes indefinite replies’, as Keynes said. ‘The aloofness of the Treasury was not a piece of old-fashioned absurdity, but a real part of the ritualism for the preservation of the prestige of the department.’ The mandarins stayed in their offices while the politicians won power and lost it: they outlasted ‘the whims of individual ministers and particular parties’; their longevity ‘was aided by their impalpable and invisible character’. The Treasury’s financial restraints shared some attributes with Church of England prelates, senior tutors in Oxbridge colleges and watch-committees in suppressing licence or immorality. ‘There is a good deal of it rather tiresome and absurd once you begin to look into it, yet nevertheless it is an essential bulwark against overwhelming wickedness,’ Keynes suggested. The Treasury cultivated wintry scepticism as the antidote to enthusiasm. Its group mentality was ‘very clever, very dry and in a certain sense very cynical; intellectually self-confident and not subject to the whims of people who … are not quite sure that they know their case’.17
Principia Ethica was a fine guide to success in the Treasury. Moore’s method hoped ‘to make essentially vague notions clear by using precise language about them and asking exact questions’, as Keynes said. ‘It was a method of discovery by the instrument of impeccable grammar and an unambiguous dictionary. “What exactly do you mean?” was the phrase most frequently on our lips.’ This Cambridge frame of mind – ‘a kind of combat in which strength of character was really much more valuable than subtlety of mind’ – fitted Treasury needs.18
Keynes began work as a Treasury official on 18 January 1915 (living in rooms in Bloomsbury, but returning to Cambridge from Saturday to Monday when he could). He prepared an urgent briefing document for Lloyd George, ‘Notes on French Finance’, signalling the French central bank’s conservatism (‘compared with the Bank of France, the Bank of England is almost skittish’), indicting the commercial banking system as ‘sordid, corrupt, disastrous and deeply intertwined with the basest features of French political life’, and deploring the swindling of investors. While preparing it he went to dine with Leonard and Virginia Woolf. ‘We gave him oysters,’ she noted. ‘He is like quicksilver on a sloping board – a little inhuman, but very kindly, as inhuman people are.’ (It was often a problem for Keynes that his friends with subjective literary minds mistook the attempted impartiality of people with technical training for a deficiency in deep feelings.) ‘We gossiped at full speed,’ Woolf continued. ‘Then we talked about the war. We aren’t fighting now, he says, but only waiting for the spring. Meantime we lavish money, on a scale which makes the French, who are fearfully out at elbow, gape with admiration. We are bound to win – & in great style too, having at the last moment applied all our brains & all our wealth to the problem.’19
Keynes accompanied Lloyd George, Edwin Montagu and the Governor of the Bank of England, Lord Cunliffe, to a conference in Paris in February. Traditionally Britain had granted outright war subsidies to its allies. But the pride of the chief borrower, France, and considerations involving Dominion borrowers such as Canada, to say nothing of the scale of the European war, made the old practice insupportable. The Paris conference attended by Keynes settled an Anglo-French loan to Russia accompanied by Russian and French gold transfers to the Bank of England. This arrangement inaugurated the complex system of war credits between the Allies which created the post-war debt problem that bedevilled Europe. Over the next two years, Keynes helped to develop
