Keynes The Speculator

John Maynard KeynesJohn Maynard Keynes began his career as a speculator in August 1919, at the relatively advanced age of 36 years.

Keynes traded on high leverage – his broker granted him a margin account to trade positions of £40,000 with just £4,000 equity.

He traded currencies including the U.S. dollar, the French franc, the Italian lira, the Indian rupee, the German mark and the Dutch florin.

His work as an economist led him to be bullish on the U.S. dollar and bearish on European currencies and he traded accordingly, usually going long on the dollar and short selling European currencies.

Easter 1920 found Keynes vacationing in Rome. He learned that his open currency trades had made him a profit of £22,000 on francs and a loss of £8,000 on U.S. dollars. A jubilant Keynes wrote to his mother from Italy on April 16 to say that he was, “indulging in an orgy of shopping… I think we have bought about a ton so far…”

Keynes soon learned that short-term currency trading on high margin, using only his long-term economic predictions as a guide, was foolhardy. By late May, despite his belief that the U.S. dollar should rise, it didn’t. And the Deutschmark, which Keynes had bet against, refused to fall. To Keynes’s dismay, the Deutschmark began a three-month rally.

Keynes was wiped out. Whereas in April he had been sitting on net profits of £14,000, by the end of May these had reversed into losses of £13,125. His brokers asked Keynes for £7,000 to keep his account open. A well known, but anonymous, financier provided him with a loan of £5,000. Sales of Keynes’s recently published book The Economic Consequences of Peace had turned out to be healthy and a letter to his publisher asking for an advance elicited a cheque for £1,500.

Keynes was thus able to scrape together the money he needed to continue trading. He had learned a valuable but painful lesson – markets can act perversely in the short-term. Of this, he later famously commented:

“The market can stay irrational longer than you can stay solvent.”

Determined to achieve financial independence, Keynes began trading again. He traded more prudently than in his dramatic early months, using shorter-term trading indicators and, by December, he was able to pay back the £5,000 loan to his benefactor.

In the following four years, Keynes continued to trade using high margin.

In 1921 he expanded his trading activities to include commodities – first cotton and then metals, rubber, jute, sugar and wheat – and stocks.

By the end of 1924 he had amassed net assets of £57,797.

R.F. Harrod – The Life Of John Maynard Keynes, 1951
John Maynard Keynes – The General Theory of Employment, Interest and Money, 1936