J. M. Keynes and the Exchange Rate Crisis of July 1917

Abstract

TNTEREST in Keynes has, not unnaturally, centred on the development of his theories and their influence on policy-makers, and the years before i919 Have not attracted the same attention as the later period. It has been taken for granted that the practical problems of the war years must have influenced Keynes's development-He was, I am convinced, immensely influenced throughout his life by . . . his four wartime years in the Treasury 2-but little work has apparently been done on his time there, apart from the annotation in volume xvi of the Collected Writings.3 Keynes's main duties during the war were concerned with external finance, essential in particular to Britain's overseas purchases. In this capacity he had to come to terms with Britain's growing dependence on the United States, and the influence that the latter could bring to bear on the British exchange rate. It has been noted4 that Keynes was deeply committed to the policy of the peg-that is, to paying out (to the last bean) 5 the gold necessary to keep up the exchange rate of the pound against the dollar; this contrasts with the attitude he assumed in the i920s against the return to the gold standard at the prewar parity of 4.86.6 What has not been generally recognized is that when the most serious exchange crisis of the war did arrive (which crisis is the subject of this article), Keynes did clearly contemplate letting the rate go in preference to paying out the last bean. In December i9i6 there occurred a run on the pound which constituted the worst financial crisis of the war thus far. Keynes later described this crisis (which in fact was directly caused by President Wilson for political and diplomatic reasons, rather than as a matter of banking policy) :7