Keynes accepted a lectureship at Cambridge in economics funded personally by
Alfred Marshall, from which position he began to build his reputation. Soon he was appointed to the Royal Commission on Indian Currency and Finance, where he showed his considerable talent at applying economic theory to practical problems.
His expertise was in demand during the First World War. He worked for the Adviser to the Chancellor of the Exchequer and to the Treasury on Financial and Economic Questions. Among his responsibilities were the design of terms of credit between Britain and its continental allies during the war, and the acquisition of scarce currencies.
At this latter endeavor Keynes’ “nerve and mastery became legendary,” in the words of
Robert Lekachman, as in the case where he managed to put together — with difficulty — a small supply of Spanish
pesetas and sold them all to break the market: it worked, and pesetas became much less scarce and expensive. These accomplishments led eventually to the appointment that would have a huge effect on Keynes’ life and career: financial representative for the Treasury to the 1919 Paris Peace Conference.
Keynes' career lifted off as an adviser to the
British finance department from 1915 – 1919 during
World War I, and their representative at the
Versailles peace conference in 1919. His observations appeared in the highly influential book
The Economic Consequences of the Peace in 1919, followed by
A Revision of the Treaty in 1922. Using statistics provided to him by the German delegation, he argued that the reparations which
Germany was forced to pay to the victors in the war were too large, would lead to the ruin of the German economy and result in further conflict in Europe. These predictions were borne out when the German economy suffered in the
hyperinflation of 1923. Only a fraction of reparations were ever paid.
Keynes published his
Treatise on Probability in 1921, a notable contribution to the philosophical and mathematical underpinnings of
probability theory, championing the important view that
probabilities were no more or less than truth values intermediate between simple truth and falsity. He attacked the deflation policies of the 1920s with
A Tract on Monetary Reform in 1923, a trenchant argument that countries should target stability of domestic prices and proposing flexible exchange rates. The
Treatise on Money (1930) (2 volumes) effectively set out his
Wicksellian theory of the credit cycle.
As Keynes recognizes in his
magnum opus which was published in 1936, the
General Theory of Employment, Interest and Money, his efforts challenged the
economic paradigm. In the foreword to the German edition of the General Theory , Keynes states that "the theory of aggregated production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state [eines totalen Staates] than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire."
In this book Keynes put forward a theory based upon the notion of
aggregate demand to explain variations in the overall level of economic activity, such as were observed in the
Great Depression. The total income in a society is defined by the sum of consumption and investment; and in a state of unemployment and unused production capacity, one can
only enhance employment and total income by
first increasing expenditures for either consumption or investment. The book was indexed by Keynes's student, later the economist
David Bensusan-Butt.
The total amount of saving in a society is determined by the total income and thus, the economy could achieve an increase of total saving, even if the interest rates were lowered to increase the expenditures for investment. The book advocated activist economic policy by government to stimulate demand in times of high
unemployment, for example by spending on public works. The book is often viewed as the foundation of modern
macroeconomics. Historians agree that Keynes influenced U.S. president
Roosevelt's New Deal, but disagree as to what extent. Deficit spending of the sort the New Deal began in 1938 had previously been called "pump priming" and had been endorsed by President
Herbert Hoover. Few senior economists in the U.S. agreed with Keynes in the 1930s. With time, however, his ideas became more widely accepted.
In 1942, Keynes was a highly recognized economist and was raised to the
House of Lords as
Baron Keynes, of Tilton in the County of Sussex, where he sat on the
Liberal benches. During
World War II, Keynes argued in
How to Pay for the War that the war effort should be largely financed by higher
taxation, rather than
deficit spending, in order to avoid
inflation. As Allied victory began to look certain, Keynes was heavily involved, as leader of the British delegation and chairman of the
World Bank commission, in the negotiations that established the
Bretton Woods system. The Keynes-plan, concerning an international
clearing-union argued for a radical system for the management of
currencies, involving a world
central bank, the
International Clearing Union, responsible for a common world unit of currency, the
Bancor. The USA's greater negotiating strength, however, meant that the final outcomes accorded more closely to the less radical plans of
Harry Dexter White.
Keynes wrote
Essays in Biography and
Essays in Persuasion, the former giving portraits of economists and notables, whilst the latter presents some of Keynes' attempts to influence
decision-makers during the
Great Depression. Keynes was editor in chief for the
Economic journal from 1912. He was also a member of the
Liberal Party.
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