John Maynard Keynes

Based on Wikipedia: John Maynard Keynes

The Man Who Told Governments to Spend Money They Didn't Have

In 1919, a young British economist stormed out of the Versailles peace conference in disgust. He believed the Allied powers were about to make a catastrophic mistake—one that would destabilize Europe for a generation. Within months, he published a book predicting exactly what would happen if Germany was crushed by impossible war debts.

He was right. The harsh terms helped create the economic chaos that fueled the rise of fascism.

That economist was John Maynard Keynes, and his willingness to challenge conventional wisdom would eventually transform how every major government on Earth thinks about money, employment, and economic crises. When Time magazine named him one of the most important people of the twentieth century, they noted that "his radical idea that governments should spend money they don't have may have saved capitalism."

It's a remarkable claim. And to understand it, we need to understand both the man and the world he was arguing against.

An Unusual Beginning

Keynes was born in Cambridge, England, in 1883, into what we might call academic royalty. His father lectured at the University of Cambridge. His mother became the town's first female mayor. This was a household where ideas mattered, where dinner conversation might range across economics, philosophy, and social reform.

The young Keynes showed early signs of exceptional ability. By age eight, he was attending preparatory school. By fourteen, he had won a scholarship to Eton College, England's most prestigious school, where he excelled at mathematics, classics, and history. His headmaster wrote that Keynes was "head and shoulders above all the other boys in the school."

At Eton, something else happened that would shape his life. He fell in love—with Dan Macmillan, whose younger brother Harold would later become Prime Minister. Keynes was gay, a fact he never tried to hide among his intellectual circle, though it remained largely private in his public life.

Despite his middle-class background, Keynes moved easily among the aristocratic students at Eton. This social confidence would serve him well. Throughout his career, he would need to persuade prime ministers, presidents, and bankers—and he learned early that ideas alone weren't enough. You had to know how to work the room.

Cambridge and the Apostles

In 1902, Keynes entered King's College, Cambridge, on a mathematics scholarship. But mathematics alone couldn't hold him. He was drawn to philosophy, particularly the ethical system of G. E. Moore, who argued that the highest goods in life were personal relationships and the appreciation of beauty.

These weren't just abstract ideas for Keynes. He joined a secret society called the Cambridge Apostles—a debating club for the university's brightest minds. The Apostles valued intense intellectual discussion, deep friendship, and a certain disdain for conventional morality. Many members went on to become writers, artists, and thinkers who would reshape British culture.

Keynes also became president of the Cambridge Union, the university's famous debating society, and led the Liberal Club. He was already practicing the skills that would define his career: arguing persuasively, building coalitions, challenging orthodox thinking.

The great economist Alfred Marshall—one of the founding fathers of modern economics—practically begged Keynes to become an economist. Keynes hesitated. Philosophy seemed more important. But eventually, he took Marshall's advice, though his formal economics education amounted to just one term of lectures.

Think about that. The man who would revolutionize economics took one term of economics classes. Everything else, he figured out on his own.

The Optimist's Worldview

Keynes belonged to the last generation of British intellectuals who felt entitled to govern by culture rather than credentials. He grew up when the British Empire was at its peak, when an educated Englishman could reasonably believe that smart, well-meaning people could solve almost any problem if they just thought hard enough about it.

This optimism would prove crucial. Keynes always believed there was a solution. He never accepted that economic suffering was inevitable, that governments were helpless against market forces, that mass unemployment was just the way things had to be.

His critics called this naïve. His supporters called it visionary. Both were probably right.

India and the First Book

After Cambridge, Keynes took a job in the India Office—part of the British government that administered colonial India. He found the work interesting at first, but grew bored within two years. Still, the experience gave him material for his first book, published in 1913: Indian Currency and Finance.

This might sound like dry stuff, but it established Keynes's method. He wasn't content to theorize abstractly. He wanted to understand how money actually worked in specific places, with specific institutions, facing specific problems. He analyzed India's monetary system in meticulous detail, tracing the complex relationships between rupees, silver coins, gold, and British pounds.

The book was successful enough that Keynes was appointed to a Royal Commission studying Indian currency—at age thirty, advising the government on the same topics he'd just written about. He showed a remarkable talent for applying economic theory to practical problems.

This practical bent would define his career. Keynes never wanted to be a professor who published papers that only other professors read. He wanted to change policy. He wanted to influence the people who actually made decisions.

The First World War

When the Great War began in 1914, the British government called on Keynes's expertise. Within days of hostilities starting, he was in London advising the Treasury.

The immediate crisis was financial. British bankers wanted to suspend the convertibility of banknotes into gold—essentially, they wanted to admit that the government couldn't honor its promises. Keynes helped persuade the Chancellor of the Exchequer that this would be a mistake. Britain's financial reputation depended on keeping its word as long as possible.

By 1915, Keynes had taken an official position at the Treasury. His responsibilities were enormous: designing credit terms between Britain and its wartime allies, acquiring scarce currencies, managing the complex financial relationships that kept the war machine running.

His nerve became legendary. On one occasion, he was tasked with acquiring Spanish pesetas—a currency that had become desperately scarce. He assembled enough to provide a temporary solution for the British government. But instead of handing them over immediately, he sold them all at once, deliberately crashing the market. When the pesetas became much cheaper and more plentiful, he had solved the problem more thoroughly than anyone expected.

It was classic Keynes: bold, unconventional, effective. He was thinking several moves ahead while everyone else was focused on the immediate crisis.

The Conscientious Objector Who Kept Working

Here's a curious fact. When Britain introduced military conscription in 1916, Keynes applied for exemption as a conscientious objector. He believed the war was a disaster for civilization.

Yet he continued working for the Treasury throughout the war, helping to finance the very conflict he opposed.

How do we square this? Keynes seemed to believe that if the war was going to happen anyway, he should try to minimize the damage. He could do more good managing Britain's finances than he could as a soldier or a protester. It was a pragmatic compromise, though not everyone in his pacifist social circle agreed with it.

For his wartime service, he was made a Companion of the Order of the Bath—one of Britain's significant honors. He was also appointed to the Belgian Order of Leopold. By the end of the war, Keynes was one of the most important financial minds in the British government.

Which is how he ended up at Versailles.

The Disaster at Versailles

The 1919 peace conference was supposed to create a stable postwar order. Instead, it planted the seeds of the next war.

Keynes went to Versailles as the Treasury's financial representative. His goal was straightforward: prevent the Allied powers from crushing Germany with impossible reparations demands. He wasn't being sentimental about Germany. He was being practical. If Germany couldn't pay, it wouldn't pay. And if Germany's economy collapsed, it would drag down the rest of Europe with it. Impoverished Germans couldn't buy British exports. A destabilized Germany would become a breeding ground for extremism.

But Keynes was outmaneuvered.

The three major players at Versailles were Britain's Prime Minister Lloyd George, France's Georges Clemenceau, and American President Woodrow Wilson. Keynes had access mainly to Lloyd George—and Lloyd George had a problem. During the 1918 election, he'd discovered that British voters wanted Germany punished harshly. "Hang the Kaiser!" and "Make Germany pay!" weren't just slogans. They were what got politicians elected.

Lloyd George had personally promised to demand high reparations. He couldn't back down without losing power.

Meanwhile, the Treasury was largely excluded from the formal negotiations on reparations. The job went instead to Lord Sumner and Lord Cunliffe, nicknamed the "Heavenly Twins" because the compensation they demanded was "astronomically" high. Keynes was reduced to lobbying behind the scenes.

Clemenceau wanted France protected from any future German attack. He pushed for the most severe possible terms. Wilson, the American idealist, initially favored leniency—he worried that crushing Germany would foster exactly the extremism it was meant to prevent. But Lloyd George and Clemenceau pressured Wilson into accepting harsher and harsher terms.

The final blow came when the conference agreed to include military pensions in Germany's reparations bill. This massively increased the total. Germany would have to pay not just for physical war damage, but for decades of payments to Allied veterans and their families.

A Radical Proposal Ignored

Near the end of the conference, Keynes proposed an alternative. He suggested a radical write-down of all war debts—not just German reparations, but the money that Britain and France owed to the United States.

His logic was elegant. If everyone forgave each other's debts, international trade could resume. Germany could recover. France and Britain could rebuild. The whole European economy could start growing again. Yes, America would bear most of the cost, but American businesses would benefit from selling to a prosperous Europe rather than an impoverished one.

Lloyd George thought Britain might accept it. But America refused. The United States was the world's largest creditor nation, and it wanted its money. Wilson, having already compromised on so many other points, wasn't willing to take this proposal home to the American people.

The treaty that emerged disgusted Keynes on both moral and economic grounds. He resigned from the Treasury and went home to write what many consider his best book.

The Economic Consequences of the Peace

Keynes wrote quickly. By the end of 1919, The Economic Consequences of the Peace was published. It became an immediate sensation.

The book combined rigorous economic analysis with vivid character sketches. Keynes portrayed Clemenceau as a vengeful old man, Wilson as a naïve moralist outmaneuvered by European cynics. He described the conference with the eye of a novelist and the mind of an economist.

More importantly, he made predictions. Germany, he argued, simply could not pay what the treaty demanded. The attempt to extract impossible sums would destabilize the German economy, breed resentment, and make future conflict more likely.

The book was controversial. Many people thought Keynes was being soft on Germany. But as the 1920s progressed, his predictions proved remarkably accurate. Germany struggled to pay. The reparations burden helped fuel hyperinflation that wiped out the German middle class. The resulting chaos created fertile ground for Adolf Hitler.

Keynes had seen it coming. And he had tried, and failed, to prevent it.

The Road to the General Theory

The Versailles experience changed Keynes. He became convinced that the conventional economic wisdom was dangerously wrong—not just about reparations, but about how economies worked in general.

The orthodox view, called neoclassical economics, held that markets were self-correcting. If unemployment rose, wages would fall, making workers cheaper to hire. Businesses would hire more workers, and employment would recover. The economy would automatically return to full employment, as long as governments didn't interfere.

This sounded logical. It was also demonstrably false.

During the Great Depression of the 1930s, unemployment soared to catastrophic levels. In Britain, it exceeded twenty percent. In the United States, it was even worse. Millions of people wanted to work. Businesses wanted to sell products. But the economy refused to recover. The supposed automatic adjustment never happened.

Keynes watched this disaster unfold and developed a revolutionary explanation. The problem, he argued, was aggregate demand—the total amount of spending in the economy. When people lost their jobs, they stopped buying things. When businesses couldn't sell products, they laid off more workers. This created a vicious cycle that could spiral downward indefinitely.

Moreover, wages weren't as flexible as the neoclassical economists assumed. Workers resisted pay cuts. Unions fought them. Even in desperate times, wages tended to stay stuck rather than falling to clear the market. The automatic mechanism simply didn't work.

The Radical Solution

If markets couldn't fix themselves, what could?

Government, Keynes answered. When private spending collapsed, governments should step in and spend. Build roads. Construct bridges. Pay workers to do anything useful. The specific projects mattered less than the fact of spending.

This was heretical. Orthodox economics taught that government spending merely crowded out private spending—every dollar the government spent was a dollar that wouldn't be spent by businesses or consumers. Balanced budgets were sacred. Governments that ran deficits were living beyond their means.

Keynes turned this logic upside down. During a depression, he argued, there was no private spending to crowd out. Resources sat idle. Workers wanted jobs. Factories stood empty. Government spending wouldn't take resources away from productive private uses—it would put idle resources to work.

And here was the really radical part: governments should be willing to run deficits. They should borrow money and spend it, even if they couldn't pay it back immediately. In a depression, increasing the national debt was better than letting the economy collapse.

This idea—that governments should spend money they don't have—seemed almost insane to orthodox economists. It violated everything they had been taught. It was irresponsible. It was dangerous. It would lead to inflation, debt crises, financial ruin.

Keynes disagreed. The real irresponsibility, he argued, was letting millions of people suffer unemployment when the government had the power to help.

The General Theory

Keynes published his magnum opus in 1936: The General Theory of Employment, Interest and Money. It's a difficult book. Even professional economists find parts of it obscure. But its central insights were revolutionary.

The book attacked the fundamental assumptions of classical economics. It argued that the economy could get stuck in a state of high unemployment with no automatic tendency to recover. It showed how expectations and psychology—what Keynes called "animal spirits"—could drive booms and busts. It made the case for active government intervention to stabilize the economy.

Keynes also made a surprising intellectual move. He abandoned his earlier commitment to free trade. For most of his career, he had accepted the classical argument that countries benefit from trading freely with each other. But the Depression convinced him otherwise. He came to believe that countries might sometimes need to protect their domestic industries, especially during economic crises.

This was a significant break. Free trade had been a cornerstone of British economic policy for nearly a century. The theory behind it—David Ricardo's comparative advantage—was one of the most elegant in all of economics. Keynes didn't reject the theory entirely, but he argued that its assumptions were unrealistic for the modern world.

Victory and Vindication

By the late 1930s, Keynes's ideas were catching on. Governments began experimenting with deficit spending. The outbreak of World War II accelerated the process—governments spent massively on the war effort, and unemployment vanished almost overnight.

This was accidental Keynesianism, but it proved the point. When governments spent enough money, they could create full employment. The question was whether they would keep doing so after the war ended.

Keynes hoped they would. He spent his final years helping to design the postwar international economic order. As a leader of the British delegation at the Bretton Woods conference in 1944, he helped create the International Monetary Fund and the World Bank—institutions that still exist today.

But Keynes was increasingly frail. He had suffered a serious heart attack in 1937. The stress of wartime work took its toll. He died in April 1946, just as the world was beginning to implement his ideas.

The Keynesian Era

Almost all capitalist governments adopted Keynesian policies in the decades after his death. Governments accepted responsibility for maintaining full employment. They used fiscal policy—adjusting taxes and spending—to smooth out the business cycle. When recessions threatened, they boosted spending. When inflation rose, they pulled back.

The result was the greatest period of sustained prosperity in human history. From the late 1940s through the early 1970s, Western economies grew rapidly with low unemployment and manageable inflation. This "golden age of capitalism" seemed to vindicate everything Keynes had argued.

It couldn't last forever.

The Stagflation Challenge

In the 1970s, something unexpected happened. Inflation and unemployment rose simultaneously. Orthodox Keynesian theory said this shouldn't be possible—you could have one or the other, but not both. Yet there it was: stagnant economic growth combined with rising prices. Economists called it stagflation.

Milton Friedman and other monetarist economists attacked Keynesian policies. They argued that government spending couldn't permanently reduce unemployment—it just caused inflation. The only sustainable way to manage the economy was through careful control of the money supply. Governments should stop trying to fine-tune the economy and stick to stable, predictable rules.

Keynes's influence waned. Margaret Thatcher in Britain and Ronald Reagan in the United States championed free-market policies and skepticism of government intervention. The Keynesian consensus seemed to be collapsing.

The Return of Keynes

Then came 2008. The financial crisis sent the global economy into the worst downturn since the Great Depression. Banks failed. Credit froze. Unemployment soared. The world stared into an economic abyss.

Governments responded with massive Keynesian stimulus. The United States, under President Barack Obama, passed a nearly eight-hundred-billion-dollar spending package. Britain, under Prime Minister Gordon Brown, pursued similar policies. Central banks slashed interest rates and pumped money into the financial system.

The economy recovered. Another Great Depression was avoided.

Keynes was back. The crisis had reminded everyone what happens when governments don't act—and what can be achieved when they do. His ideas, updated and refined by generations of economists, remained essential tools for managing capitalist economies.

The Complete Person

It would be a mistake to remember Keynes only as an economist. He was also a civil servant, an investor, a patron of the arts, a director of the Bank of England, and a member of the Bloomsbury Group—that circle of writers, artists, and intellectuals that included Virginia Woolf and E. M. Forster.

He was bisexual, enjoying relationships with men throughout his youth before marrying the Russian ballerina Lydia Lopokova in 1925. Their marriage, by all accounts, was genuinely happy.

He was an extraordinary investor. Despite nearly losing everything in the 1929 crash—his father had to bail him out—he eventually accumulated a substantial fortune through shrewd speculation. He applied the same bold, unconventional thinking to markets that he applied to economics.

He was often right when everyone else was wrong. He saw the folly of Versailles when the Treaty was popular. He understood the Depression when others were mystified. He grasped what governments could do when conventional wisdom said they were powerless.

He was also arrogant, impatient with lesser minds, and not above personal attacks on those who disagreed with him. His brilliance could be cutting.

The Father of Macroeconomics

Today, Keynes is known as the father of macroeconomics—the study of how entire economies behave. Before him, economists focused primarily on individual markets, individual firms, individual consumers. Keynes taught them to think about the economy as a whole, with its own dynamics that couldn't be understood by just adding up individual parts.

His intellectual descendants span the political spectrum. New Keynesian economics forms the foundation of mainstream macroeconomics taught in universities worldwide. Central bankers, whether they consider themselves conservative or liberal, use frameworks that Keynes helped develop.

Even his critics work within a world he helped create. When economists debate fiscal stimulus, they're having an argument Keynes started. When governments respond to recessions with spending programs, they're using tools he invented. When we talk about aggregate demand, the business cycle, animal spirits—we're speaking his language.

The man who walked out of Versailles in 1919, disgusted by the shortsightedness of the world's leaders, would eventually change how all of them thought. His radical idea—that governments should spend money they don't have—really may have saved capitalism.

Whether that's a good thing depends on your perspective. But there's no denying its impact.