A Keynesian Inspiration

by Eric Swanson

            After the election of 1932, the new President Theodore Roosevelt introduced a series of government laws and programs to stimulate the ailing American economy.  Eventually by the end of 1945, through tremendous government intervention, the American economy was considered finally back on her feet.  Though much political credit can be given to Roosevelt to convince Congress and the American people to allow him to start these economic programs he called the “New Deal”, the fundamental ideas of these programs were not Roosevelt’s.  Roosevelt was not an economic theorists or genius to understand what was needed in the ailing American economy.  However, John Maynard Keynes, a British economist, did.  Keynes threw off the traditional and widely accepted theories of economics and government intervention laid down by years of experience and held secure by the word of many famous economists, and created his own answer to a more efficient capitalism.  When the staff of Roosevelt understood Keynes’s principles, and after trying every other economist’s ideas, they found that Keynes’s ideas worked in the extreme situation America found herself in.  In hindsight, Keynes inspired the turn around of the Great Depression.

            Before the Great Depression, America enjoyed prosperity based on economic fundamentals that were incorrectly contributed to Adam Smith.   Originally, nations believed that they must protect their trade and exploit other nation’s trade and economy, thereby securing their own future.  This mercantalistic belief of economics allowed nations to try, through any means necessary, to control factors of production, finished goods, and markets. [i]  Though this system had its faults it set the world up for its understanding of capitalism and the benefits and explosive growth that came during the Industrial Revolution.[ii]  In Smith’s book, The Wealth of Nations, he outlined the initial concepts of capitalism.  He rejected the idea of government intervention to control markets and factors of production.    However, he did not believe that that meant that government had no place in the market.[iii]  Smith believed that governments needed to provide revenue for its people and to provide enough resources to provide for the public services.[iv]  However, economist from that time till 1929 did not listen to Smith’s message.  The only thing they heard and understood was the laissez faire attitude of government intervention.[v]

            This misconception of Smith’s ideas affected all forms of other economic thought.  In the nineteenth century Jean-Baptiste Say created his Law of Markets, which stated, “Supply creates its own demand.”[vi]  This led everyone to believe that no matter what you produced that there were would always be a buyer for your product.  Of course, up till the Great Depression this seemed like fact.  American economy was growing by leaps and bounds and emphasis on supply seemed like the correct theory.  This can be especially seen in the stock market.  During the years of 1924 to 1927, share prices on average had increased 2.5 times.[vii]  Stocks like Montogomery Ward increased from a share price of $133 to up to $400.  Companies were not able to keep products shelved fast enough before consumers would buy.  All this growth was misperceived that supply was the side of economics that needed to be protected and aided if the economy slipped.

            In addition, this classical theory incorrectly characterized the changes in the economy.  Many studies of the economy from 1896 helped prove the classical theory that economies always go up and down at random times.  The classical theory concluded that the market swings up and down and that unemployment is just a factor that cannot be avoided.[viii]  With this understanding, economist suggested to politicians that when an economy is going under it should be left alone because in due time it will recovery.  This theory was very present during the first couple years of the Great Depression.  This belief also helped contribute to the problems of the economy.  Since the government believed that it should not mettle with the economy and that it should be patient, much harm was done to the economy because during the Great Depression the economy never bounced back on its own.

            These theories of laissez faire, supply creating demand, and economies bouncing back crippled President Hoover to have any affect to the economy during the Great Depression.  America believed for quite some time that anyone could achieve the American dream if they worked hard enough.  This pioneering attitude of enterprise was boosted by the economic theories of the day.[ix]  Government was not looked at as an entity that was supposed to interfere with commerce.  The market was viewed as being able to rebound and always in an upward trend.  Also that no matter how much stuff the producer produced and no matter the price of the product, someone would pay it.  President Hoover bought into this ideal whole-heartedly.  Even when this American fantasy bubble busted, he proclaimed that it was only temporary.  Since it was only temporary, Hoover cut taxes, encouraged industry and state governments to continue capital investments, supported agricultural aid, and urged the Federal Reserve to increase credit.[x]  For a time some thought that the economy would recover with these measures, but in the end, as Keynes would say, “in the long run we are still dead.”[xi]  The basis for Hoover’s actions was that the economy would bounce back and that if the producers were given the right amount of encouragement to supply more, than the demand would follow and the economy would continue to grow. Hoover insisted that the fundamentals of capitalistic enterprise should be left untouched by government regulation.[xii]  Since the government was ideologically bound to restrain itself from intervention, in turn the economy never recovered.

            Keynes, on the other hand, proposed massive government intervention and support.  It did not take a Great Depression for him to see that capitalism had tendencies for instability.[xiii]  He noticed that the automatic mechanisms that are in place within capitalism would not produce full employment and that serious government intervention was necessary.[xiv]  In 1932 John Maynard Keynes, Hubert Henderson, and Seebohm Rowntree published an article named We Can Conquer Unemployment.[xv]  This article was to aid in the recovery of the British economy.  The authors stated that the only solution was “direct large-scale government intervention.”[xvi]  The ideas introduced in that report were the same ideas applied by Roosevelt in his New Deal scheme and taken for granted by all capitalist governments.[xvii]  Keynes suggested that the government intervention into the economy should be in the form of progressive taxes, unemployment insurance, creation of public work projects, and accepting of the idea of deficit spending.[xviii]  Keynes understood that his ideas were radical and he accepted the idea that most of his ideas would not be able to be put into practice without a major catastrophe happening within politics, such as a war.[xix]  Keynes knew that his ideas could bring Britain back to economic normalcy and possibly America as well.

            However, Keynes ideas were not represented in the American elections in 1932.  Presidential politicians tried to rally support for their different ideas on how to ensure America would return to prosperity that were contrary to Keynesian ideas.  This was very pertinent then, because 1932 could easily be considered the worst of year of the Great Depression.[xx]  Many people had lost all faith that there was anything the government or any of their leaders could do to stop the slide of the economy, until Roosevelt became the Democratic candidate for president.[xxi]  Roosevelt knew that it was the job of the government to protect and provide for its citizens.[xxii]  However, he did not feel it was through government intervention that would provide economic relief that was so characterized in his later presidential years.  In Roosevelt’s opinion, the most important issue of the campaign was federal spending and he truly believed that reduction in government spending was the key to the economic recovery.  In 1932 to a group of supporters in Pittsburgh, he actually accused Hoover’s Administration of being the “greatest spending Administration in peace time in all our history.”[xxiii]  Little did he know that soon his Administration would own that title.  In Roosevelt’s campaign speeches he never mentioned, “deficit spending, public works, public housing, slum clearance, the National Industrial Recovery Administration, the Tennessee Valley Authority, progressive taxation, liberalized treatment of trade unions, or massive relief programs.”[xxiv]  Even once Roosevelt was elected he did not know of the ideas of Keynes.  Frances Perkins, Secretary of Labor during the Roosevelt years, admitted, “Roosevelt himself was unfamiliar with the economics of Keynes.”[xxv]  In the beginning, Roosevelt was not inspired by Keynesian ideas.

            During the first few years of Roosevelt’s presidency, Roosevelt adopted the traditional balanced budget mindset.  Roosevelt knew the country craved for change, so his advisors implemented all kinds of different government intervention programs under the heading of the New Deal.[xxvi]  By definition the actions of Roosevelt were Keynesian in nature, but were only so by coincidence.[xxvii]  Furthermore, it lacked the potency because it did not do enough to help stimulate the market toward recovery.  American people were impressed that Roosevelt was trying so many new programs to help the American People, which in turn increased confidence in the presidency and America.  But the fact remained that the Depression was continuing, the economy was not bouncing back, people were suffering, and more was needed from the government than what was Roosevelt comfortable with.  Keynes wrote the President after The General Theory of Employment, Interest, and Money was released in 1936, suggesting that he increase government expenditure, which would be “financed by Loans and not by taxing present incomes.”[xxviii]  His idea of deficit spending seemed simple enough in his book and looked as though it could easily be the answer to America’s problem, but Roosevelt’s top advisor warned against it.[xxix]  Though many people within both political and academic circles were realizing the truth with Keynes’s ideas, Henry Mangeuthau, the Secretary of Treasury under Roosevelt, convincingly supported having a balanced budget.  Therefore, all measures of the New Deal up till 1936 where made so by a balanced budget under Mangeuthau’s leadership, therefore those measures did not accomplish all that was needed to excite the market. 

However, on October 19, 1937 America experienced another Black Tuesday that reaffirmed to the Administration and to the People that the Depression was still keeping America down.[xxx]  After that time, the Treasury Secretary was in support of Keynes’s idea of deficit spending to help prime the pump of American businesses.  Roosevelt started a new “New Deal” with an emphasis on deficit spending.  He was very hesitant about spending the amount of money that was recommended to him to help start the engine of the economy.[xxxi]  What spending he did do over the budget, he promised the People that it was temporary and that he would return to a balanced budget.[xxxii]  With this new knowledge and recommendations, Roosevelt’s fledgling new bureaucracy went to work to weed out the mindset of laissez-faire and stagnation and to create a strong public presence in the private sector.[xxxiii]

This new commitment to deficit spending came into full swing in 1938.  At that time, war broke out in Europe.  War was what Keynes said would need to happen for complete acceptance of his ideas and the complete rejuvenation of an economy.  One European country after another was able to completely overhaul their political and economic condition due to the war effort.  Democracies were easily convinced for the need for deficit spending and a more intense level of government intervention into the market.  Through the War effort of America four things were found to be true.  First, not until 1938 was Roosevelt’s major advisors convinced by Keynes’s ideas.[xxxiv]  Secondly, the New Deal through most of the 30’s had not done enough to stimulate the economy.[xxxv]  Through Roosevelt’s many efforts there were too many contradictory programs that did not help stimulation.  Thirdly, the War showed that the country that spent enough and borrowed enough could eliminate unemployment.[xxxvi]  This was one of Keynes’s ideas stated in his General Theory book as one of the respectable ways to end unemployment.  Lastly, Keynes’s ideas were not considered a matter of public policy until after World War 2.[xxxvii]  These four things being true helped get America back on its feet.  The War was able to bring to a close the worst depression of American history due to high government expenditures that motivated the economy to progress.[xxxviii]

In 1941, Walter S. Salant spoke with Keynes after a speech in Chicago for the National Press Club and discovered that “it was satisfactory to Keynes” that his own tools for framing public policy were being used by the Americans.[xxxix]  Keynes was the creator of a new economics that inspired President Roosevelt to make a “New Deal” that lifted America out of the Great Depression.  Roosevelt was a political genius to ensure the New Deal passed, but Keynes was the genius that saw the instabilities in capitalism and was able to focus a solution through deficit spending, progressive taxes, creation of public work programs, and unemployment insurance to re-stabilize capitalism.

Bibliography

Clarke, Simon.  Keynesianism, Monetarism, and the Crisis of the State. Edward Elgar

Publishing.  England, 1988.

Collins, Robert M. The Business Response to Keynes, 1929 – 1964. Columbia University

Press.  New York, 1981.

Lekachman, Robert. The Age of Keynes. McGraw Hill Book Company. New York,

1966.

Rees, Goronwy.  The Great Slump.  Harper & Row Publishing.  New York, 1970.

Wector, Dixon.  The Age of the Great Depression 1929 – 1941. The MacMillan

Company.  New York, 1948.

								Search this site: search tips sitemap
Who is Eric?	Economics	English	Ethics	History	Interests	Leadership	Psychology	Politics	Links

Date this page was last updated: 12/06/2002