War is Keynesian economics by other means

by Brian M Downing

Events of the thirties are much discussed today as we look for insight on present-day problems. Both parties today grab “facts” out of the past like breathless contestants on a ruthless game show, eager to go on for the grand prize. As someone from that period used to say, let’s look at the record.

FDR ran for president on a platform of balancing the budget. Yes, balancing the budget. FDR claimed his opponent, Herbert Hoover, was squandering money at a time when belt-tightening was called for.

I accuse the present Administration of being the greatest spending Administration in peace times in all our history. It is an Administration that has piled bureau on bureau, commission on commission, and has failed to anticipate the dire needs and the reduced earning power of the people. (FDR: Sioux City, Iowa, September 1932)

I regard reduction in Federal spending as one of the most important issues of this campaign. In my opinion, it is the most direct and effective contribution that Government can make to business. (FDR: Pittsburgh, Penn, October 1932)

(Quotes from William E. Leuchtenburg, Franklin D. Roosevelt and the New Deal, 1932-1940, p 11.)

Hmmmm. . . . Well okay, FDR became president in 1933 and campaign talk notwithstanding, embarked on large-scale government spending based on the economic thought of John Maynard Keynes. This ended the Great Depression. Right?

Nope.

FDR’s government spending, profligate though it was thought to be back then, was far from the large-scale spending advocated by Keynes (and pursued successfully by a few European countries). FDR opted for “pump priming” – smaller expenditures that tried to get the economy flowing again, without incurring great public debt.

So pump priming ended the Depression, right?

Nope.

The economy began to recover, but by 1937 it slumped. Keynes publicly chastised Roosevelt for his timidness and a prominent publication stated:

FDR now realizes that the New Deal is stopped, that he is not making a dent on the unemployment situation, that the present tremendous spending is doing very little to restore prosperity and that he has lost control of congress.

That must have been The Wall Street Journal or The Chicago Tribune or Father Coughlin.

Nope. It was The Nation. (Quoted in Robert Dallek, Franklin Roosevelt and American Foreign Policy, 1932-1945, p 182.)

So what ended the Depression? Well, in 1938 Europe was on the eve of one of its periodic bloodbaths and several countries started buying weapons and oil from us, in large quantities. That’s when the Depression began to wane for good. Then we joined the fray and GNP more than doubled, and unemployment fell from 17% in 1940 to under 2% in 1944.

So then, this discredits Keynesian economics – the idea that large-scale government spending will end a downturn and we must turn back to monetary policy?

Nope.

World War Two’s impact on the economy actually supports Keynesian principles. Beneath all the political and military events, wars are essentially massive government spending programs. Governments buy a lot of ships, tanks, guns, uniforms, and food. A whole lot. US government spending went up eleven-fold during World War Two, dwarfing New Deal spending. The insentient economy can’t tell the difference between buying military stuff and buying school stuff, or between building battleships and building bridges. They’re all injections into the system.

Now of course this doesn’t mean that war is good for us or that we are headed for another world war. It does mean that Keynesian policies were not disproved by the New Deal or by World War Two, and hence they have relevance for today.

I’ve always wondered if Keynes got his ideas from looking at the economics of World War One – another burst of government spending that stimulated economies. If so, he went through history more thoughtfully than most thinkers today do. Maybe if Clausewitz had been around in the thirties he’d say that war is Keynesian economics by other means.