Keynes' investments: their relation to the general theory

American Journal of Economics and Sociology, The,  Jan, 1995  by Piero V. Mini

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I

Keynes' activities as an investor were of two types: those dealing with his own account and those he performed as chairman or director of companies managing other people's money. Data on the first type of activities leave no doubt that Keynes' income from investment and speculation soon dwarfed his income from academic activities, including royalties from books and articles. Already in 1916-17, about three fourths of his income was from investment sources. Academic income surged in 1919-20 because of the substantial royalties earned by The Economic Consequences of the Peace, but by 1924-25, speculative income again represented seventy-five per cent of the total. Thereafter, the relation between the two portions of income was affected by the impact of the various depressions, but in the last seven years of his life investment income averaged around eighty per cent of the total. At his death in 1946 his gross security assets were about 436,000 pounds(1) or approximately 9 million pounds (13.5 million dollars) in today's prices.

Skidelsky has already disposed of the myth, propagated by Harrod, that Keynes' involvement in the stock market before 1919, when he was attached to the Treasury, was minimal.(2) His security holdings of [pounds]539 in 1910 had by 1919 grown to [pounds]14,453,(3) a not inconsiderable amount when one considers that a King's fellowship in 1909 paid [pounds]120 a year.(4) After leaving the Treasury in 1919, Keynes' investment activity certainly broadened. He entered into a partnership with an old Treasury war associate, Mr. O.T. Falk, investing not only his savings but those of some of his friends, of his parents and of his brother. The resulting syndicate began with a capital of [pounds]30,000 and invested its funds mainly in foreign exchange. Months of concentrated thinking and learning about the European financial situation resulted not only in The Economic Consequences but also in his going bearish on European currencies and bullish on the dollar. But, in what turned out to be the first shock of his life as an investor, it was the dollar that depreciated, the ten per cent margin on the basis of which he had speculated providing insufficient cover, so that by April 1920, the whole position had to be liquidated at a loss of [pounds]22,575.(5)

In the aftermath of the debacle, we find Keynes appealing to a millionaire banker in Cologne, Sir Ernest Cassel, for a loan of [pounds]5,000. Presenting himself as one who "knows the ropes" (a claim that makes sense only if we grant that he had been an investor for many years prior to 1920), Keynes noted that the European currencies bore no relation to their "real value." The forthcoming Brussels and Spa Conferences, he added, do not justify these values and talk of an international loan is "pure deception." Anyone "prepared to stand the racket" for a couple of months would make substantial profits.(6)

Keynes' 1919-20 foreign exchange dealings were the result of an invitation he received in October 1919 to meet other influential people at Amsterdam in a gathering that was "entirely private, confidential and unofficial," as he wrote.(7) The Economic Consequences of the Peace had not yet appeared but his views on European problems and reconstruction were so well known to influential people that he was asked to join an unofficial body formed to lobby the United States and other neutral countries to come forth with an international loan to rescue Europe from the coming catastrophe. Dr. Visserling (Governor of the Bank of the Netherlands), Fred Kent (once head of the foreign exchange department of the Federal Reserve and U.S. representative at Versailles), Paul Warburg (the influential banker), all took "an exceedingly pessimistic view" of the European situation following the Treaty of Versailles.

The information gained at the Amsterdam meeting led Keynes to write four aides de memoir which formed the basis for a lecture delivered three months later at Manchester on "The Present State of the Foreign Exchange," in which he noted the "extraordinary" speculative purchases of marks and expressed foreboding at the possible negative impact of this speculation: what would "the vast army of speculators" do in the future? How would they take their gains and when?(8) The debacle in the spring of 1920 represented an early shock to his belief in the rational possibilities of assessing the economic behavior of the market crowd. Quite possibly the experience affected his revision of The Treatise on Probability.(9)

The 1919-20 experience raises another point, namely the extent to which Keynes had sources of information not available to the public. Apparently, rumors to that effect had been common enough for Roy Harrod to go to some length to scotch them in his 1954 biography.(10) He denies, of course, that Keynes was guilty of using inside information in his speculative dealings, alleging, among other things, that between June 1919 and July 1940 Keynes had no official government position. This may well have been so, but it does not mean that the economist was cut off from centers of private economic and political knowledge and power. On the contrary, after 1919, Keynes was at the center of evolving European financial history. Most of the Activities volumes of The Collected Writings testify to this. Let us only note that in February 1925 Keynes wrote to his wife Lydia, "I heard today the important news that the Governor [of the Bank of England] is going to put up the bank-rate."(11)