Keynes and Wartime Finance: A Clarification

I

In the recent concluding volume of his biography of John Maynard Keynes, Robert Skidelsky (2000) discusses Keynes's influence on British financial policy in the Second World War and for the eventual debt-laden peace. Effectively, that influence stemmed from Keynes's critique of rearmament policy in 1937, a critique further developed in How to Pay for the War, published in 1940. From mid-1940 Keynes dominated economic policy discussions in the British Treasury. These concerned basic domestic aspects of war finance, such as taxation and management of the national debt. Increasingly, however, external financial issues, notably Britain's shrinking overseas assets and mounting sterling debt, Lend-Lease, and bold Anglo-American proposals for international financial cooperation, became Keynes's major, though not sole, concern. Rightly, Skidelsky gives considerable attention to the six missions to the United States—four during the war, two after—in which Keynes was involved. The most important were in spring 1941 and autumn 1945.

II

In 1941, the imaginative U.S. device of Lend-Lease ensured for Britain's war effort massive supplies that could not otherwise have been financed. But there was a price: surveillance of Britain's exports and gold and dollar reserves. The United States did not intend Lend-Lease materials supplied to Britain to be used to boost her exports, to the detriment of America's. Further, the United States did not wish to provide aid if that was not really necessary. She would therefore carefully watch Britain's gold and dollar reserves; any sign of an appreciable increase would signal that Lend-Lease aid was not needed. Moreover, U.S. legislation required a "Consideration," known also, when embodied in the Mutual Aid Agreement of February 1942, as "Article VII": a commitment to liberalization of international trade and payments, including eventual elimination of British imperial preference, resented as discriminating against U.S. trade. Against this background Keynes, in the words of Skidelsky's title, would be "fighting for Britain," while sustaining the entente with the United States: to retain financial independence after the war.

That fighting reached its climax in autumn 1945, following the sudden end of the war in August. Three arduous months of negotiations then brought generous settlement of Lend-Lease; cautious movement on trade liberalization; and, above all, aid for Britain's postwar economic recovery on terms and conditions bitterly disappointing to the British, and controversial ever since. Open to serious question, however, is Skidelsky's evaluation of Keynes's judgment in advocating such wide-sweeping and unsatisfactory negotiations, and the tactics he unsuccessfully deployed.

III

To take first the wide-ranging 1945 negotiations for postwar aid—a "line of credit"—to Britain, Skidelsky borrows the arguments of R. W. B. ("Otto") Clarke (452). The Treasury's best brain after Keynes's death in 1946, Clarke (1982, 57) considered that it would have been better to have sought simpler, interim arrangements; but he was writing long after those negotiations. Limited borrowing for the first year or so of peace would have minimized British commitments to the United States and allowed time to assess postwar conditions. With engagingly heroic hindsight, Skidelsky makes much of one of those postwar conditions: the rising consciousness of the Soviet threat. In a development that Keynes could scarcely have foreseen, the Soviet threat eventually motivated the United States, through the Marshall Plan, to direct further aid to Britain, with fewer strings than those attached to Lend-Lease assistance and to the postwar line of credit. Skidelsky's fantasy is that a less impatient Keynes, willing to contemplate limited, interim assistance, could have ensured abundant postwar help from the United States in due course, as the severity of the Soviet threat emerged, prompting the Marshall Plan to aid Western Europe.

Had the war ended gradually rather than abruptly, a more measured approach than eventually prevailed might indeed have been possible. But the war did end abruptly, presenting Britain with drastic time...