Keynes and the Market Part 1

Keynes and the Market.

by Justyn Walsh.

Introduction

John Maynard Keynes conferred a distinct glamor on the dismal science of economics. He was a Cambridge don, key member of the Bloomsbury set, best - selling author, husband of a world - famous bal-lerina, father of modern macroeconomics, valued government adviser, enn.o.bled member of the House of Lords, and midwife to the IMF and the World Bank. His bracing response to the doldrums of the Great Depression - " The patient needs exercise, not rest " - heralded the Keynesian era of managed capitalism and pump - primed Western econ-omies. Renowned almost as much for the variability of his opinions as for the vigor, style, and intelligence with which they were advanced, Keynes delighted in a.s.saulting conventional wisdom and deployed pun-gent prose as his weapon of choice.

Despite affecting an aristocratic disdain for the profession of money -making, Keynes was also an incredibly successful stock market player. At the time of his death, his net worth - largely accrued through his investment activities - amounted to the present - day equivalent of $30 million.The Cambridge college fund administered by Keynes recorded a twelve - fold increase in its value while under his stewards.h.i.+p, a period during which the broader market averages failed even to double.

In his role as chairman of one of Britain ' s most venerable life a.s.surance companies his speeches were, according to a journalist at the time, " so highly regarded by the City that his prediction of a trend was enough to jiggle the stock market." Keynes was that rarest of beasts - an econo-mist who, having clambered down from his ivory tower, mastered the . nancial markets in practice as well as in theory.

Notwithstanding his .nancial success, one might reasonably query how an a.n.a.lysis of Keynes ' stock market techniques can pro. t the modern investor. Keynes was, after all, a child of the Victorian era and died over half a century ago. He lived in a different, more decorous time than our own - Keynes could have been describing himself when he conjured the image of " the inhabitant of London . . . sipping his morning tea in bed," languidly contemplating whether to " adventure his wealth in the . . . new enterprises of any quarter of the world." He invested in whaling companies and other now - defunct industries, and was directed by editors to ensure that his magazine articles were of suf-.cient length to allow readers to work through at least three gla.s.ses of port. Redolent as he is of another age, is there anything to be gained from an appraisal of Keynes ' investment principles in this era of day traders, delta ratios, and dot - coms?

The answer, perhaps surprisingly, is a resounding " yes " . After a couple of false starts, Keynes alighted on a set of precepts that won him singular stock market success. In the twilight of his long investment career, he declared with characteristic immodesty that: The .nancial concerns where I have had my own way have been uniformly prosperous . . . My dif.culties in . nancial quarters all through have been the dif.culty of getting unorthodox advice accepted by others concerned.

These unorthodox tenets antic.i.p.ated, to a remarkable degree, the invest-ment philosophies of some conspicuously successful contemporary " value investors," most notably Warren Buffett of Berks.h.i.+re Hathaway. Noting that Keynes ' " brilliance as a practicing investor matched his brilliance in thought," Buffett has on a number of occasions recognized his intellectual debt to the English economist. Just as importantly to the modern reader, Keynes ' observations were set out in the limpid, casually elegant language for which he was rightly acclaimed. As his friend, the newspaper baron Lord Beaverbrook, averred, Keynes made " exciting literature out of . nance " - truly a Herculean feat.

Keynes ' upbringing and personal philosophy deeply in. uenced his att.i.tude toward money and its pursuit. Any investigation of the man ' s investment principles must, therefore, also chart some of the key land-marks of his life. One of Keynes ' closest friends, the iconoclastic Lytton Strachey, remarked that his professional task as a biographer was to: . . . row out over that great ocean of material, and lower down into it, here and there, a little bucket, which will bring up to the light of day some characteristic specimen, from those far depths, to be examined with a careful curiosity.

Our inquiry is necessarily very focused-we will be hauling to the surface those " characteristic specimens " relating chie. y to Keynes ' investment precepts. Nevertheless, in carrying out these soundings, hopefully at least a .avor of Keynes ' ample life will also be conveyed to the reader.To extend Strachey ' s metaphor, occasionally we will have cause to divert our gaze beyond the objects of our immediate scrutiny and toward the expansive, sometimes turbulent ocean that const.i.tuted the life of John Maynard Keynes.

Chapter 1

The Apostle Maynard

The Worldly Philosopher Some surprise has been expressed about the large fortune left by Lord Keynes.Yet Lord Keynes was one of the few economists with the practical ability to make money.

-FINANCIAL TIMES, September 30, 1946 In September 1946, .ve months after his death, the bequest of John Maynard Keynes was made public. His net a.s.sets totaled just under 480,000, or around $30 million in today ' s money. Although Keynes had secured a number of board positions at leading City inst.i.tutions and had received considerable royalties from some of his better-selling books, general amazement greeted news of his fortune. He had, after all, spent most of the preceding six years as an unpaid Treasury adviser; his parents had outlived him and therefore provided no inheritance; and Keynes, a great arts patron, had funded many cultural ventures out of his own pocket.

As suggested in the salmon - pink pages of the Financial Times, it was indeed Keynes ' skill in the art of moneymaking that contributed to the bulk of his riches. Keynes ' facility with money was not just limited to his own account, however. King ' s College - Keynes ' spiritual, intellectual, and sometimes temporal home - was also a bene. ciary of his .nancial ac.u.men. In its obituary on Keynes, the Manchester Guardian reported that: As bursar of his own college in Cambridge . . . he was conspicuously successful, and by bold and unorthodox methods he increased very greatly the value of its endowments.

Although little known to the wider world, in certain circles Keynes ' investment expertise was prized.There are stories of other college bursars making the pilgrimage to King ' s College, where Keynes would lounge Buddha - like and regally impart investment wisdom to an eager audience. A colleague noted that " such was his in.uence in the City and his rep-utation abroad " that markets would move in response to his speeches delivered as Chairman of the National Mutual Life a.s.surance Society. He sat on the boards of numerous investment companies, from which he would, with the unwavering conviction of a papal nuncio, declaim his views on the stock market and government economic policy.

This aspect of Keynes - the shrewd investor, the canny player of . nancial markets - is rather unexpected in light of the man ' s early life and beliefs. Keynes was an aesthete, his .rst allegiance to philosophy and the art of living well. At school and university he displayed little interest in worldly matters, and for the remainder of his life exhibited an intensely ambivalent att.i.tude to the pursuit of wealth. He believed in Francis Bacon ' s dictum that money makes a good servant but a bad master - in Keynes ' formulation, money ' s merit lay solely in its ability to secure and maintain the conditions allowing one to " live wisely and agreeably and well." Like economics itself, money was a mere expedi-ent, nothing other than " a means to the enjoyment and realities of life," and moneymaking little more than an " amus.e.m.e.nt."

Before proceeding to an examination of Keynes ' investment activities and techniques, a brief survey of the early in. uences on the man ' s life is appropriate. For although Keynes did not take up speculation and investing with any particular ardor until his mid -thirties , the att.i.tudes that shaped his views on moneymaking were largely formed in his early years.

Enter the Hero I like the name suggested - John Maynard Keynes sounds like the substantial name of the solid hero of a sensible novel.

-Keynes ' grandfather, June 6, 1883 In the late nineteenth century, Britain was still the world ' s most powerful nation - " workshop of the world " and boasting an empire on which, famously, the sun never set. Other than occasional episodes of colonial disobedience, it had been decades since Britannia had been obliged to .ourish her spear at an enemy of any substance. Before the Crimean War of the mid - 1850s the last general European con. ict was the Battle of Waterloo in 1815, in which the United Kingdom and its allies .nally ended Napoleon ' s quest for French glory. Compared with the horrors and madness of the succeeding century, the Victorian era was a remarkable oasis of peace.

Emboldened by Adam Smith ' s paradoxical doctrine that sel. sh private actions trans.m.u.ted into public virtues, and later by Darwin ' s observations on natural selection and survival of the . ttest, .n de si e cle British society embraced free trade and a substantially laissez - faire government.The spirit of compet.i.tion and endeavor pervaded Queen Victoria ' s nation. Notwithstanding attacks on the .anks by the likes of Oscar Wilde and George Bernard Shaw, Britons fervently believed in the virtues of duty, hard work, and thrift.The stiff upper lip would, just occasionally, quiver and curl into a slight smirk of satisfaction when the British contemplated the patent superiority of their race.

Into this world of security, prosperity, and solid bourgeois values came John Maynard Keynes. He was born in June 1883 in the univer-sity town of Cambridge, his father an economics fellow at the University and his mother one of its .rst female graduates. Maynard, as he was known to family and friends, was subsequently joined by two siblings who themselves would .gure in English public life - Geoffrey, later an eminent surgeon and bibliographer, and husband to Charles Darwin ' s granddaughter; and Margaret, like her mother a prominent social reformer and destined to marry a n.o.bel Prize winner in medicine.

A Privileged Boy Education: the inculcation of the incomprehensible into the indifferent by the incompetent.

-Keynes (attributed) Appropriately for one of the .rst true offspring of Cambridge University - for it was only in the late 1870s that the ancient statutes preventing Cambridge dons from marrying were repealed - Keynes shone intellectually.After a precocious childhood, bolstered by a rigor-ous study regimen devised by his father, Keynes secured a scholars.h.i.+p to Eton College, school of choice for British royalty and the nation ' s elite. Once at Eton, Keynes maintained his academic ascendancy, winning over sixty prizes during his . ve years there. Unlike some other Old Etonians such as Eric Blair - better known to the reading public as George Orwell - he also prospered socially and was elected College prefect in his . nal year at school.

Even at Eton, an inst.i.tution not generally known for the humility of its inc.u.mbents, Keynes displayed an inordinate degree of intellectual haughtiness. One schoolmaster remarked, " I should like in certain things to see him a little more dissatis.ed, a little more ready to note the points in which he fails." Another observed that " [Keynes] gives one the idea of regarding himself a privileged boy with perhaps a little intellectual conceit." He was quick - witted and cutting - he wrote of one of Charles Darwin ' s sons that " his hands certainly looked as if he might be descended from an ape," and complained that one particular schoolmaster was " dull and soporiferous beyond words . . . I shall not suffer from want of sleep this half." He embraced the prejudices of the upper middle cla.s.s, holding in equal contempt the " absurd " aristocracy and the " boorish " lower cla.s.ses - only the " intelligentsia," of which the Keynes family was a prime example, commanded his respect.

Like most other Establishment inst.i.tutions of the time, Eton evinced a sn.o.bby disregard for commercial matters. The school had long been the proving ground for young gentlemen of the Empire - the Duke of Wellington famously, if apocryphally, af.rmed that the Battle of Waterloo was won on Eton ' s playing - . elds - and there was little room for the ungallant trade of the businessman in this sanctu-ary of old - world values.The only hint of Keynes ' subsequent career as an economist and investor was the schoolboy ' s almost autistic preoc-cupation with lists and numbers - Keynes obsessively recorded cricket scores, train times, hours worked, variations in his body temperature, and even " the comparative lengths of some long poems " during his time at Eton.

The Cambridge Idyll The appropriate subjects of pa.s.sionate contemplation and communion were a beloved person, beauty and truth, and one ' s prime objects in life were love, the creation and enjoyment of aesthetic experience and the pursuit of knowledge.

-Keynes on the Apostles, MY EARLY BELIEFS On the back of a scholars.h.i.+p to King ' s College, Keynes returned to Cambridge in 1902 to study mathematics and cla.s.sics. With custom-ary chutzpah, he announced in his freshman year that " I ' ve had a good look round the place and come to the conclusion that it ' s pretty inef. -cient." Although a gifted mathematician, he was by no means a prodigy, and in late 1905 placed twelfth of those receiving a First Cla.s.s degree. While at university Keynes also found time to cultivate his social interests, and in his .nal undergraduate year became president of the Cambridge Union and president of the Liberal Club.

The most important in.uence on Keynes while at Cambridge was a secret society known to initiates as " the Apostles." This group recruited from the promising young men of Cambridge - E. M. Forster, Wittgenstein, and Bertrand Russell were fellow members - and its de. n-ing principles were best expressed in G. E. Moore ' s Principia Ethica, pub-lished during Keynes ' .rst year at Cambridge. Moore ' s philosophy was profoundly nonmaterialistic and unworldly - Keynes once commented that, in comparison to the Principia, " the New Testament is a handbook for politicians." Moore, a Cambridge academic, believed that: By far the most valuable things, which we know or can imagine, are certain states of consciousness, which may be roughly described as the pleasures of human intercourse and the enjoyment of beautiful objects.

Many of the Apostles applied a very particular interpretation to Moore ' s endors.e.m.e.nt of the pleasures of human intercourse. In the cloistered and covert world of the society, where aesthetic experience and intimate friends.h.i.+ps were paramount, relations often transcended the merely pla-tonic. Keynes reminisced many years later that " we repudiated entirely customary morals, conventions, and traditional wisdom . . . [and] rec-ognized no moral obligation on us, no inner sanction, to conform or to obey."

Standing aloof from the ma.s.ses, the Apostles developed a superior-ity complex to match the belief that only they possessed the requisite sensitivity to truly appreciate the .ner things in life. Keynes likened the group to " water - spiders, gracefully skimming, as light and reasonable as air, the surface of the stream without any contact at all with the eddies and currents underneath." Others, less charitably, dismissed the group as self - indulgent and ridiculous, twisting Moore ' s philosophy into " a metaphysical justi.cation for doing what you like and what other peo-ple disapprove of."

An India Man Cecily, you will read your Political Economy in my absence.The chapter on the Fall of the Rupee you may omit. It is somewhat too sensational.

Even these metallic problems have their melodramatic side.

-Oscar Wilde, THE IMPORTANCE OF BEING EARNEST Reality eventually intruded into Keynes ' life and, after graduating in mathematics, the practical question of how to earn a living confronted him. He toyed with the idea of undertaking a second degree in economics, and for a while attended lectures given by Professor Alfred Marshall, a personal friend of the Keynes family and probably the world ' s most in.uential economist at the time. Despite Marshall ' s entreaties - " I trust your future career may be one in which you will not cease to be an economist," the Professor implored - Keynes even-tually opted for a career as a government man. In August 1906 he sat for the nationwide Civil Service examination, where he placed second overall. Ironically, his worst mark was in economics, prompting Keynes to remark that " the examiners presumably knew less than I did."

Unable to secure his .rst choice of government department - the Treasury - Keynes became a cog in the machine of Empire, moving to London and joining the India Of.ce as a junior clerk in October 1906. In those days of the " gold standard " - the convention then prevailing in most Western nations, whereby a country ' s exchange rate was determined by its reserves of gold - India ' s rather less domesticated monetary system attracted considerable interest among theoretical economists, and may have been in.uential in Keynes ' career choice. Despite the alleged allure of the maverick rupee, however, Keynes found the India Of.ce singularly unexciting. Unedifying tasks such as arranging the s.h.i.+pment of ten stud bulls to Bombay, Keynes ' . rst a.s.signment, undoubtedly presented a rude contrast to the rare. ed climes he had inhabited in Cambridge.

The Bloomsbury Rebellion We were out to construct something new; we were in the van of the builders of a new society which should be free, rational, civilized, pursuing truth and beauty. It was all tremendously exhilarating.

-Leonard Woolf on the Bloomsbury group Offsetting the dullness of the Civil Service was the loose and . uctuating coterie of artists, writers, and philosophers who coalesced at the resi-dence of Virginia Woolf and her siblings. Like the Apostles before them, the Bloomsbury group - named after the London district of garden squares and grand houses - reveled in confounding the traditional pieties and restraints of society. A herald of the counterculture movement later that century and the original bourgeois Bohemians, one " Bloomsberry " later recounted: We found ourselves living in the springtime of a conscious revolt against the social, political, religious, moral, intellectual, and artistic inst.i.tutions, beliefs, and standards of our fathers and grandfathers.

The group ' s willingness to slough conventional modes of thought and behavior naturally extended to the more intimate domain of per-sonal relations.h.i.+ps. Bloomsbury affairs were notoriously labyrinthine and p.r.i.c.kly - it was said that Bloomsberries " lived in squares but loved in triangles." Romantic intrigues, betrayals, and sniping provided a diver-sion from earnest discussions on art, ideas, and the meaning of life, and members of the group sometimes used their artistic gifts in the serv-ice of less than genteel verbal a.s.saults.Virginia Woolf, in a . t of pique, once likened Keynes to " a gorged seal, double chin, ledge of red lip, little eyes, sensual, brutal, unimaginative," although this outburst could quite possibly have been in response to Keynes ' gentle suggestion that she stick to non. ction.

The more conservative elements of society regarded the Bloomsber-ries with open hostility. John Buchan, author of The Thirty - Nine Steps and a stalwart Victorian, dismissed them as: . . . the usual round - up of rootless intellectuals . . . terribly knowing and disillusioned and conscientiously indecent . . . a smattering not so much of facts as of points of view . . . They took nothing for granted except their own surpa.s.sing intelligence . . .

Although indeed possessed of a stratospheric self - importance, the group ' s pretensions were not completely unfounded. They were outriders for new styles of thought and artistic expression, and - ironically for a med-ley of such unrestrained egos - were instrumental in shepherding other, greater, artists and thinkers before the public eye. Pica.s.so, Freud, Proust, Cezanne, and Matisse, among others, entered the English - speaking world largely through the Bloomsbury portal.

The Uncivil Servant I work for a Government I despise for ends I think criminal.

-Keynes to Duncan Grant, December 15, 1917 Defeated by the tedium of the job, Keynes resigned from the India Of.ce in June 1908 and returned to King ' s College, where he submitted a dissertation on probability - according to one newspaper, " a thesis on mathematics so advanced that it was said that only three people on earth could understand it." He was elected to a fellows.h.i.+p in March 1909 and, although having no formal quali.cations in the subject, taught econom-ics and .nance at Cambridge. Keynes became a polished and popular teacher, with some lectures - particularly those relating to the stock exchange - drawing capacity crowds.

During this time at Cambridge Keynes began to ascend the lad-der of academia and public life. In 1911 he was appointed editor of the Economic Journal, perhaps the world ' s leading professional economics periodical at the time. Less than two years later, his .rst book, Indian Currency and Finance, was published and Keynes became a member of the Royal Commission on Indian Finance - a prestigious appoint-ment for someone not yet thirty years of age. Keynes ' Cambridge idyll was shattered, however, in the balmy summer of 1914 when Queen Victoria ' s grandsons w.i.l.l.y and Georgie - Kaiser Wilhelm II of Germany and King George V of Britain - led their nations into the . rst great con.ict of the new century.

The declaration of war in August 1914 drew Keynes back to the Civil Service, this time at Treasury where he advised on the . nancing of the British war effort. Keynes ' Bloomsbury acquaintances, . ercely paci. st, objected to his new role. One challenged Keynes: What are you? Only an intelligence that they need in their extrem-ity . . . A genie taken incautiously out of King ' s . . . by savages to serve them faithfully for their savage ends, and then - back you go in to the bottle.

Despite their high - minded criticism of his role as a hired gun in the " European blood feud," as Keynes labeled the Great War, the Bloomsberries were not averse to exploiting Keynes ' increasing in. u-ence within the Establishment. He often appeared before tribunals as an advocate for those male members of the group seeking to avoid the draft. In a hearing for Lytton Strachey - delicate aesthete and Keynes ' one - time paramour - the army prosecutor demanded to know what Strachey would do if a Hun attempted to rape his sister. Poker - faced, he replied in his peculiarly squeaky voice, " I should try and come between them."

Keynes was " absolutely and completely desolated " by the carnage of the war and the government ' s determination to pursue victory at any cost. Many of his university friends, including the celebrated poet and patriot Rupert Brooke, remained forever on the foreign . elds where they fell. In a tragic ambush of the old world by the new, these sons of the upper cla.s.ses were invariably ordained " of. cer material " and, honoring the traditions of ages past, obliged to march into battle at the head of their men - only to be met by the murderous steel storms of modern weaponry. Keynes ' letters to his former cla.s.smates were sometimes returned to him unopened, the bleak epitaph " Killed " scrawled across them.

Frustrated and con.icted over his role as an intellectual mercenary for the war effort, Keynes ' reputation for arrogance and condescension ripened. On a trip to the United States in 1917 he made a " terrible impression for his rudeness." The British Amba.s.sador to the United States noted in his high camp style that: This morning we got a visit from [Keynes] . . . who was very Treasuriclarkacious and reduced d.i.c.ky to silentious rage and Malcolm to a high treble. He was really too offensive for words and I shall have to take measures. He is also a Don and the combination is not pleasing. He is also a young man of talent and I presume the rule for such nowadays is to show his immense superiority by crus.h.i.+ng the contemptible insigni. cance of the unworthy outside.

Keynes was beginning to .nd his voice - the impudent junior rebuk-ing his masters, the gad.y nipping at the .anks of a complacent Establishment, the double agent within the citadel, valuing truth above expediency.

A Carthaginian Peace Words ought to be a little wild, for they are the a.s.sault of thoughts upon the unthinking.

-Keynes, NATIONAL SELF- SUFFICIENCY Expected by most to last only a few months, it was four years before the war .nally gave way to an armistice in November 1918. France, which lost a staggering 1.4 million men during the con.ict, was determined to make Germany pay dearly for its perceived belligerence. Britain, which together with its dominions recorded close to a million men dead, was initially more conciliatory. The British Prime Minister, David Lloyd George, observed in March 1919 that the preservation of peace on the Continent would depend " upon there being no causes of exasperation constantly stirring up either the spirit of patriotism, of justice, or of fair play, to achieve redress." Accordingly, he advocated peace terms: . . . dictated . . . in the spirit of judges sitting in a cause which does not personally engage their emotion or interests, and not in a spirit of savage vendetta, which is not satis.ed without mutilation and the in.iction of pain and humiliation.

Despite these lofty words, the Paris Peace Conference degenerated into an unseemly auction of the aggrieved, a contest among the victors as to which could carve the most from the husk of central Europe. In an effort to appease const.i.tuents at home and deliver on promises to "make Germany pay," the Allied leaders imposed a war guilt clause on Germany - an explicit statement that the German state and its confederates were solely responsible for the Great War - and also a reparations clause requiring Germany to " make compensation for all damage done to the civilian pop-ulation of the Allied and a.s.sociated Powers and to their property."

Keynes, attached to the British delegation as an economic adviser, scorned the short sightedness of the Allied leaders: The future life of Europe was not their concern; its means of live-lihood was not their anxiety. Their preoccupations, good and bad alike, related to frontiers and nationalities, to the balance of power, to i mperial aggrandizements, to the future enfeeblement of a strong and dangerous enemy, to revenge, and to the s.h.i.+fting by the victors of their unbearable . nancial burdens on to the shoulders of the defeated.

On his thirty - sixth birthday, June 5, 1919, and as the Treaty of Versailles was being .nalized, Keynes resigned in protest at the " Carthaginian peace " to be imposed on the vanquished nations.

Freed from the constraints of the Civil Service, he produced in only a few months a withering critique of the Conference. The Economic Consequences of the Peace, published in December 1919, was a sensation - translated into eleven languages and selling over 100,000 copies in its .rst full year of publication. The book was celebrated as much for its bravura portraits of key Conference partic.i.p.ants as for its political and economic arguments. Keynes depicted the American President Woodrow Wilson as a " blind and deaf Don Quixote " who " like Odysseus . . . looked wiser when he was seated," and the French leader Georges Clemenceau as a xenophobe with " one illusion - France; and one disillusion - mankind." Warming to his theme, he par-odied Lloyd George as " this goat - footed bard, this half - human visitor to our age from the hag - ridden magic and enchanted woods of Celtic antiquity." Cooler heads eventually persuaded Keynes to withhold this last pen portrait from the published version of his book.

In a conclusion of frightening prescience, Keynes declared that the aggressive reparations terms would return to haunt the Continent: If we aim deliberately at the impoverishment of Central Europe, vengeance, I dare predict, will not limp. Nothing can then delay for very long that .nal civil war between the forces of reaction and the despairing convulsions of revolution, before which the horrors of the late German war will fade into nothing, and which will destroy, whoever is victor, the civilization and the progress of our generation.

Disestablished The book in a certain sense was the turning point in Lord Keynes ' career.Thereafter he was no longer a mere economist but a prophet and pamphleteer, a journalist and the author of a best seller.

-THE NEWYORK TIMES on THE ECONOMIC CONSEQUENCES OF THE PEACE In a pattern that would be repeated over the rest of his life, Keynes ' robust take - no - prisoners style polarized opinions. Many derided his perceived pro - German sympathies - some mockingly referring to him as " Herr Johann von Keynes," others suggesting he be awarded an Iron Cross - and he was cast on the outer by the government he had so effectively ridiculed. The Economic Consequences of the Peace marked Keynes ' transformation from a mere government functionary operating on the periphery of diplomacy and academia to an in.uential and dis-sident public . gure - he commented that, following publication of the book," I woke up like Byron, famous and disreputable."

Notwithstanding his newfound notoriety, Keynes - jobless after resigning from Treasury - desperately needed another source of income to sustain the rather lavish lifestyle to which he and the Bloomsbury circle had become accustomed. Putting his money where his mouth was, Keynes decided to back the pessimistic views expressed in Economic Consequences by speculating heavily on the foreign exchange market, taking short positions on key Continental currencies and long positions on the U.S. dollar. Keynes believed he was ideally equipped to play the speculation game - having lectured on the subject at Cambridge, he knew something of .nance and exchanges; his stint at Treasury had provided an insight into global realpolitik and the interplay of capital .ows; and he had ready access to a pool of investors willing to back his trading activities.

Additionally, speculation offered the pleasing prospect of earning considerable amounts of money relatively painlessly. Like his contem-porary Winston Churchill, much of Keynes ' business was transacted while lounging in his bed.As one of his biographers noted: Some of this . nancial decision - making was carried out while he was still in bed in the morning; reports would come to him by phone from his brokers, and he would read the newspapers and make his decisions.

It is to this incarnation of Keynes - the aesthete, the outsider, the lan-guid speculator - that we now turn.

Chapter 2

Citizen Keynes

The Lapsed Apostle . . .Yet I glory More in the cunning purchase of my wealth Than in the glad possession . . .

-Ben Jonson, VOLPONE Maynard Keynes was a paradoxical . gure - a Bohemian eventually embraced by the Establishment, an aesthete who prospered in the world of Mammon, the savior of capitalism with scant regard for the free enterprise system. In his opinions, too, Keynes was mercurial, embody-ing Emerson ' s dictum that a foolish consistency is the hobgoblin of little minds. He was notoriously contradictory and capricious - Churchill is said to have remarked that " whenever I ask England ' s six leading econ-omists a question, I get seven answers - two from Mr. Keynes." David Lloyd George - still smarting from Keynes ' hatchet job in The Economic Consequences of the Peace- complained that Keynes " dashed at conclu-sions with acrobatic ease. It made things no better that he rushed into opposite conclusions with the same agility."

Perhaps nowhere was Keynes ' capacity for contradiction more evident than in his att.i.tude to money and the pursuit of wealth. The righteous author who railed against the " rentier bourgeoisie " for subor-dinating " the arts of . . . enjoyment " to compound interest in Economic Consequences considerably softened his invective only a couple of years later. In a 1921 speech to a new batch of Apostles, Keynes referred to a recently deceased member of the club who had forsaken academia for life in the business world - a man whose intellectual capacities, Keynes remarked acidly, " were much in excess of those usually a.s.sociated with the love of money." Keynes ventured the opinion that the deceased ' s mercantile acts were perhaps more in the nature of " artistry, not of ava-rice," and he summoned the image of a curious hybrid, a type of poet -plutocrat, partic.i.p.ating in " the stir and bustle of the world, pitting his wits, at a price, against all comers . . . [and] exercising a variety of con-joined gifts." Moneymaking, Keynes suggested to the undergraduates, could be viewed as a great game, a kind of high - stakes chess where the nimble minded could cash in on their intellectual superiority.

Although ostensibly a valedictory to a former Apostle, there is little doubt that Keynes was attempting to justify his own move into the world of .nance and speculation. One part of Keynes despised the pursuit of wealth. In a later paper he would invoke a glowing future where: The love of money as a possession . . . will be recognized for what it is, a somewhat disgusting morbidity, one of those semi - criminal, semi - pathological propensities which one hands over with a shudder to the specialists in mental disease.

The more pragmatic side of Keynes accepted, however, the incontro-vertible fact that money was, to use Dostoyevsky ' s phrase, " coined lib-erty " and that " the enjoyments and realities of life " were withheld from those of little means.

From these two competing insights arose a typically Keynesian compromise: Keynes would leap headlong into the world of . nance, but the task of moneymaking would not consume him. It would remain an amus.e.m.e.nt, a means to an end, a way of supporting his more worthy ventures.And if he could win at the expense of those who pro-fessed an overweening love of money, then so much the better.

The Speculation Racket [Speculation is] my diversion, to avoid the possibility of tedium in a country life.

-Keynes to his mother, September 3, 1919 Before 1919, Keynes had shown only . tful interest in the . nancial mar-kets. His .rst recorded investment was in 1905, at twenty - two years of age, when he bought shares in an insurance company and later an engi-neering .rm using his " special fund " of birthday money and cash from academic prizes. Clive Bell, a close acquaintance, hazarded a guess that Keynes ' real interest in the markets was not sparked until early 1914: Maynard, who at Cambridge and in early London days had barely glanced at " Stock Exchange Dealings," grew so weary . . . of reading the cricket - scores in The Times that, while drinking his morning tea, he took to studying prices instead.

Keynes ' investments until 1919 were relatively sporadic, but his portfolio - princ.i.p.ally in the form of ordinary shares - enjoyed a steady increase in value, and by the end of 1918 he owned securities worth 9,428, around $625,000 in today ' s money.

Keynes began speculating in earnest in August 1919, in between correcting drafts of The Economic Consequences of the Peace. His activities were focused on the currency markets, where exchange rates, shorn free from the bedrock of the prewar gold standard, would often jag wildly. Keynes ' strategy was simple - backing the views expressed in his book, he was bearish on certain Continental currencies and bullish on the U.S. dollar. This policy proved extremely successful, and in the s.p.a.ce of . ve months Keynes realized pro.ts of just over 6,000, the equivalent of around $375,000 today. Buoyed by this, Keynes wrote to his mother that: Money is a funny thing . . . As the fruit of a little extra knowledge and experience of a special kind, it simply (and undeservedly in any absolute sense) comes rolling in.

Keynes ' initial triumph engendered a grander scheme. He teamed up with a former Treasury colleague, Oswald Falk, to form a syndicate to speculate on currency movements." Foxy " Falk, a partner in the aptly named stockbroking .rm Buckmaster and Moore, was, like Keynes, a charismatic .gure of .rm views. One City acquaintance recalled of Falk that he: . . . would not look after any private client unless he was given carte blanche to do what he liked.The poor victim either made a killing in the market or was wiped out completely.

Although Keynes had predicted that his . nancial speculation " will shock father," the enterprise was enthusiastically supported by family and friends, and the sum of 30,000 was quickly raised.