KEYNES COMES TO AMERICA
THE CIRCULATION OF
IDEAS AND POLICIES
CLASS 3
HARVARD SPREADS
THE REVOLUTION
SECTION 1
THE CONTAGION MODEL
“To have been born as an economist
before 1936 was a boon – yes. But not
to have been born too long before! The
General Theory caught most economists
under the age of thirty-five with the
unexpected virulence of a disease first
attacking and decimating an isolated
tribe of South Sea Islanders. Economists
beyond fifty turned out to be quite
immune to the ailment.”
[ Paul Samuelson, “The General Theory”,
1946 ]
PATIENT ZERO
“Keynes is far beyond my hopes and
expectations – cleverer, wittier, and
more genial. In any pedantic sense
Keynes was not my best teacher, but
in terms of impact and influence he
was incomparable.”
[ Wynne Plumptre, letter from
Cambridge, 10.1928 ]
THE DISEASE SPREADS
ROBERT BRYCE
LORIE TARSHIS
 Attended Keynes’ lectures and the Keynes Club – a discussion group
gathering faculty and students – from 1932 to 1935(RB)-1936(LT)
 Became a “a missionary for
Keynesian ideas” by presenting
them in Hayek’s seminar at the
London School of Economics in
early 1935
 Furthered his missionary work at
Harvard by organizing an informal
seminar on Keynesian economics in
1935-1937
 Taught Keynesian economics at
Tufts (1936-1946) and then at
Stanford (1946-1971)
 Co-authored a book offering a
Keynesian interpretation of the
depression in 1938
 Wrote a popular (and controversial) introductory textbook to
Keynesian economics in 1947
ENDEMIC PROPORTIONS
“A Keynesian school formed itself, not a school in
that loose sense in which some historians of
economics speak of a French, German, Italian
school, but a genuine one which is a sociological
entity, namely, a group that professes allegiance
to One Master and One Doctrine, and has its
inner circle, its propagandists, its watchwords, its
esoteric and its popular doctrine. Nor is this all.
Beyond the pale of orthodox Keynesianism there
is a broad fringe of sympathizers and beyond
this again are the many who have absorbed, in
one form or another, readily or grudgingly, some
of the spirit or some individual items of Keynesian
analysis. There are but two analogous cases in
the whole of history of economics – the
Physiocrats and the Marxists.”
[ Joseph Schumpeter, Ten Great Economists From
Marx to Keynes, 1951 ]
ACADEMIA INFECTS POLITICS
 Alvin Hansen, who was primarily
focused on explaining and extending
Keynes’ ideas as they related to
policy, ran a fiscal policy seminar at
Harvard from 1937 to 1956, where
policy makers from Washington, DC
exchanged ideas with academics
 In 1935, Hansen advised government
on the Social Security Act and, in
1946, he assisted in the drafting of
the Full Employment Act
THE IMMUNE RESPONSE
“Keynes’s name had taken on a
symbolic value. Among economists, his
book was controversial. To a certain
type of businessman, it was the
proverbial red rag. In the eyes of
many economically illiterate but
deeply patriotic (and well-to-do)
citizens, to accuse a professor of being
a Keynesian was almost equivalent to
branding him a subversive agent.”
[ James Conant, My Several Lives,
1970 ]
THE ROOSEVELT
ADMINISTRATIONS
SECTION 2
A LETTER TO THE PRESIDENT
“In the field of domestic policy, I put in the
forefront a large volume of expenditures
under Government auspices. It is beyond my
province to choose particular objects of
expenditure. But preference should be
given to those which can be made to mature
quickly on a large scale, as for example the
rehabilitation of the physical condition of
the railroads. The object is to start the ball
rolling. The United States is ready to roll
towards prosperity, if a good hard shove
can be given in the next six months.”
[ Keynes, “An Open Letter to President
Roosevelt”, 31.12.1933 ]
AN INTERVIEW WITH THE PRESIDENT
“Keynes had been a fervent public
admirer of Roosevelt, but now, face
to face, was disappointed that he
was not ‘more literate, economically
speaking’. He was also prone to
judge people by their hands and
found Roosevelt’s strong and large
but lacking finesse, and with ‘short
round nails like a businessman’s’.”
[ Conrad Black, FDR: Champion of
Freedom, 2012 ]
AN INTERVIEW WITH THE PRESIDENT
“I didn’t understand one word
that man was saying.”
[ Attributed to FDR after his
meeting with Keynes ]
SKEPTICISM ABOUT KEYNES’ INFLUENCE
“I had been at special pains to find
out whether the President was
profoundly influenced by this interview
and guided his policy thereafter to
some extent in the light of Keynes’s
theories. The evidence is conflicting.
The preponderant opinion among
those in a good position to know is that
the influence of Keynes was not great.”
[ Roy Harrod, Keynes’ first biographer ]
THE FIRST ADMINISTRATION
 Keynesianism was not accepted or even generally respectable up to
the second Roosevelt administration
 Roosevelt denounced the budget deficit and advocated balancing
the budget during his first presidential campaign and made moves
to cut government expenditures during his first year in office
 During Roosevelt’s first term, the New Deal was not an exercise in
Keynesian economics – the centerpiece of the recovery program in
the early years was the National Recovery Administration which put
floors under prices and hourly wages and did not expand demand
for goods and services
THE FIRST ADMINISTRATION
 Most of the federal budget deficits during the first years of the New
Deal were the result not of deliberate expansionary fiscal policy but
of the Depression and the consequent fall in tax revenues and the
expansion of relief and other Depression-related expenditures
 Although some economists supported monetary and fiscal expansion,
only a few who did so were prominent in the Roosevelt administration
before 1937 – the original New Deal intellectuals were not mainly
economists, and of the economists among them only a few were
students of economic fluctuations or money or macroeconomics
MORE SKEPTICISM
“The things that we think of in connection with
Keynes’s contribution to economic policy
happened long, long before hardly anybody had
heard of Keynes. I’m talking about what was
being done, rather than what was being studied.
From the very beginning of the rising unemployment
in 1930, in ’30 and ’31 and ’32, a number of
years before the general public really heard of
Keynes, public officials – senators like Robert
Wagner of New York and Edward Costigan of
Colorado and Bob La Follette of Wisconsin –
were introducing bill after bill on public works to
take up the unemployment, which was raw
Keynesianism but didn’t come from Keynes. The
idea that the government should spend money to
employ people goes back a long, long way.”
[ Leon Keyserling, member and then chairman of
the Council of Economic Advisors, 1946-53 ]
THE SECOND ADMINISTRATION
 Keynesian doctrines and practices were not accepted as part of
government policy and respectable thinking until Roosevelt’s second
term, beginning in 1937 and lasting until the expansion of defense
and World War II expenditures in the early 1940s
 In the spring of 1938, the government launched a $5b spending
program in an effort to increase mass purchasing power
 Roosevelt, who had so far denied the efficacy of “mere spending”
for the sake of recovery, declared in a fireside chat that it was up
to the government to “create an economic upturn” by making
“additions to the purchasing power of the nation”
EVEN MORE SKEPTICISM
“In the spring of 1938, we had
reached the stage in which we would
not only accept a deficit in depression
but would deliberately and
substantially increase expenditures for
the purpose of raising the general
level of the economy. This stage had
been reached without a significant
contribution from what is now called
Keynesianism.”
[ Herbert Stein, chairman of the
Council of Economic Advisors, 1971-4 ]
THE THIRD ADMINISTRATION
 When war broke out in Europe, the Keynesians in government pressed hard for
increases in the defense program and expansion of industrial capacity
unaccompanied by curtailment of public and private spending
 Unemployment, which was later estimated to have been 25% of the labor forces
in 1933 and 17% in 1939, was brought down to less than 2% in 1943, 1944,
and 1945 under the combined pressure of the great increase in the armed
forces and the government’s largely deficit-financed war expenditures
 The elimination of unemployment during the war was one of the great influences
on postwar views about the role of government in attaining and maintaining high
employment and production, and the possibility of avoiding serious depressions
in the future; the idea that this was a responsibility of government had become
widespread enough to result in passage of the Employment Act of 1946
YET MORE SKEPTICISM
“It is a fallacy to think that John
Maynard Keynes had anything of
substance to do with the idea behind
the Employment Act of 1946 or with
the policies of the Truman
administration.”
[ Leon Keyserling, “The View from
the Council of Economic Advisors”,
1981 ]
EXPLAINING THE
KEYNESIAN TURN
SECTION 3
CIRCUMSTANTIAL FACILITATORS:
THE EXPERIENCE OF THE GREAT DEPRESSION
 In the wake of the 1929 crash, market forces proved unable to
restore high employment quickly enough to avoid an unacceptable
amount of human suffering and loss of production
 The Great Depression showed beyond reasonable doubt that the
economy was not self-adjusting and that state intervention was
necessary to stabilize capitalism
CIRCUMSTANTIAL FACILITATORS:
THE EXPERIENCE OF THE 1937-1938 RECESSION
 The index of industrial production plunged 29% in the five months
between Sept. 1937 and Feb. 1938 and 33% in the ten months
between July 1937 and May 1938, the fastest fall on record
 Fiscal actions in 1936 and 1937 were major causes of that recession:
the budget deficit fell more than $3b from 1936 to 1937, a change
in one year of about 3.5% of the 1936 GNP
 The recession led the administration to abandon budget-balancing
(which had been achieved in 1937) and to consciously start using
deficit-financed public spending to stimulate the economy
IDEATIONAL FACILITATORS:
THE RELEVANCE OF THE GENERAL THEORY
 The General Theory provided an alternative to classical/neoclassical theory
which the other supporters of countercyclical fiscal policies did not offer and
gave advocates of the heretical policies a weapon they could use against the
theoretical objections of the orthodox economists
 The perceived lack of correspondence between classical/neoclassical theory
and the disastrously deep Depression created an unsatisfied appetite for a
more convincing explanation of what was going on
 The 1937-8 recession happened when GT was under debate; the book’s main
theme being that involuntary unemployment could persist in a market economy,
those who doubted that classical/neoclassical theory was applicable to the real
world and who supported expansionary fiscal policy as a means to prosperity
took the reversal of the recovery as support for this anticlassical idea
IDEATIONAL FACILITATORS:
ASSESSING KEYNES’ INFLUENCE
“Although I considered myself a
Keynesian from way back, I felt (and
still feel) that we had little to learn
for policy purposes from the General
Theory. We did not, I fear,
appreciate fully its novelty or
importance for theory.”
[ Lauchlin Currie, “Discussion”, 1972 ]
ADMINISTRATIVE FACILITATORS:
THE INFLUX OF KEYNESIAN PERSONNEL
 Marriner Eccles, the chairman of the Federal Reserve System, created
an institutional niche within the national government for advisors with
Keynesian leanings because he was convinced that a deficit-financed
expansionary fiscal policy was needed to combat the Depression and
engineer economic recovery
 In 1934, he recruited as his main economic advisor the Harvard
economist Lauchlin Currie, who developed a statistical series designed
to measure the monthly net contribution of the federal government’s
fiscal operations to the flow of money income (or purchasing power)
 In 1935, Currie estimated that the income-producing deficit of the
federal government had been $254m per month on average during the
first half of the year and advocated a figure of $400-500m
ADMINISTRATIVE FACILITATORS:
ASSESSING KEYNES’ INFLUENCE
“In 1971, when I was asked to organize a session on
‘Keynesians in Government’ for the 1971 annual
meeting of the American Economic Association, Alvin
Hansen threw cold water on the idea of such a
session. One of his objections was that it was hard to
know whom to identify as a Keynesian. He said, ‘You
mention Eccles for whom I have great respect – a
brilliant and original mind – but by no stretch of the
imagination a Keynesian. He never knew anything
about Keynesian economics. He strongly favored
public spending in the deep Depression, but that
does not make him a Keynesian.’ And similarly about
Ickes, Wesley Mitchell, and others.”
[ Walter Salant, “The Spread of Keynesian Doctrines
and Practices in the United States”, 1989 ]
ADMINISTRATIVE FACILITATORS:
ASSESSING KEYNES’ INFLUENCE
“My theoretical approach had been
influenced by Keynes since my London
School of Economics days in 1922-25,
and at Harvard throughout the
Depression I had bootlegged his
heretical views on fiscal policy, so that
in Washington a large part of my time
was spent in learning and practicing
the arts of persuasion and of getting
views, already mostly formed,
accepted and implemented.”
[ Lauchlin Currie, “Discussion”, 1972 ]
ADMINISTRATIVE FACILITATORS:
THE INFLUX OF KEYNESIAN PERSONNEL
 Through the recruiting efforts of Currie and others, young proKeynesian economists, mostly graduate students and young
instructors from Harvard, were brought into the government
 In 1939, Currie was named presidential assistant for economic affairs
and, by the late 1930s, Keynesians occupied key positions in the
Treasury, the Budget Bureau, and the Department of Commerce
 During the war, Keynesians moved into additional strategic positions
in the Office of Price Administration, charged with maximizing
production while controlling inflation, and the National Resources
Planning Board, charged with getting postwar planning underway
ADMINISTRATIVE FACILITATORS:
THE DEVELOPMENT OF KEYNESIAN TOOLS
 GT defined concepts that could be quantified and invited quantification,
and the development of statistics on economic variables (production,
unemployment, prices, expenditure on consumption and capital goods,
etc.) permitted increasing application of those theoretical concepts
 Economists in government developed the National Income and Product
Accounts, which made it possible to evaluate the relative importance of
components of aggregate production, consumption, and other variables
and to trace the aggregates and their components over time
 The results of the work were used in the development of US economic
policy for the prewar defense program and for the prosecution of the
war, and in wartime planning for the postwar period
THE INSTITUTIONALIZATION
OF KEYNESIANISM
SECTION 4
THE 1946 EMPLOYMENT ACT:
EARLY DRAFTS
 The early versions of the bill made full employment the target and
consequently called the proposed law a Full Employment Act
 They also prescribed countercyclical change in government spending
as the means of attaining full employment
 They were strongly and successfully resisted by Conservative
congressmen acting on behalf of the business community
THE 1946 EMPLOYMENT ACT:
FINAL VERSION
 The legislation that was finally enacted was purged of expressions
such as “full employment” or “investment and expenditure”, thus
deleting both the target and the means of reaching it
 The final legislation set targets – maximum employment, production,
and purchasing power – but did not and still does not specify the
substantive means of attaining or maintaining them
 It only prescribed organizational means for giving the president and
the Congress economic advice through the creation of the Council of
Economic Advisors and of the Joint Economic Committee
THE 1946 EMPLOYMENT ACT:
AN AMBIVALENT STATUS
 If the term “Keynesianism” is interpreted to mean fiscal policy, and
still more if it is interpreted to mean only countercyclical fiscal policy,
the Employment Act of 1946 was not a step in the progressive
adoption of Keynesian doctrines and policy
 If, however, the term is used in the loose sense of belief that
government has both the ability and the obligation to maintain high
output and employment, then the enactment of the Employment Act
of 1946 marked a major step in its official acceptance
KEYNES AT THE BRETTON
WOODS CONFERENCE
SECTION 5
UNDER THE SPELL
“At such moments, I often find myself thinking
that Keynes must be one of the most
remarkable men that have ever lived – the
quick logic, the birdlike swoop of intuition, the
vivid fancy, the wide vision, above all the
incomparable sense of the fitness of words, all
combine to make something several degrees
beyond the limit of ordinary human
achievement. He uses the classical style of our
life and language, it is true, but it is shot
through with something which is not traditional,
a unique unearthly quality of which one can
only say that it is pure genius. The Americans
sat entranced as the God-like visitor sang and
the golden light played around.”
[ Lionel Robbins, private diary, 24.6.1944 ]
TWO RIVAL PLANS
THE BRETTON WOODS SYSTEM
OBJECTIVE
INSTRUMENT(S)
RESPONSIBLE AUTHORITY
Full employment
Demand management
(mainly fiscal)
National governments
Balance-of-payments
adjustment
Pegged but adjustable
exchange rates (capital
controls)
IMF
Promotion of
international trade
Tariff reductions etc.
GATT
Economic development
Official assistance
World Bank
IMPLEMENTING CLASSICAL FREE TRADE
“The outstanding characteristic of the plans
is that they represent the first elaborate
and comprehensive attempt to combine the
advantages of freedom of commerce with
safeguards against the disastrous
consequences of a laissez-faire system which
pays no direct regard to the preservation
of equilibrium and merely relies on the
eventual working out of blind forces. Here is
an attempt to use what we have learnt from
modern experience and modern analysis,
not to defeat, but to implement the wisdom
of Adam Smith.”
[ Keynes, speech to the House of Lords,
18.12.1945 ]
THE INTERNATIONAL SPREAD OF
KEYNESIANISM FROM THE US
SECTION 6
HIRSCHMAN’S DIFFUSION MODEL
 To achieve worldwide influence, an economic idea must first acquire
dominant influence within a single country by winning over the elites
 This country must exert a measure of world leadership through
economic, political and military power
 The country’s elites must be motivated and find an opportunity to
export the doctrine to other countries
A FAVORABLE SET OF CIRCUMSTANCES
 In the US, an energetic and influential core group of Keynesians formed
during the years just prior to and during World War II; they were
based in various government agencies in Washington and in a still quite
small number of the major universities; in government, they had mostly
influential advisory, rather than outright managerial positions (in line
with the notion that economists should be “on tap, but not on top”)
 Through the war’s outcome the US was propelled to world leadership,
and proceeded to promote Keynesian-type policies not only because of
its new superpower status, but also because it acquired, through its
postwar aid programs, considerable direct influence on the economic
policies of other major countries
A FAVORABLE SET OF CIRCUMSTANCES
 The difficulties of maintaining their grasp on domestic policy in the
contentious and conservative climate of the postwar era convinced
many prominent and gifted US Keynesians that they would have a
far easier and more profitable time applying their skills in the newly
opened overseas theaters of operation
 Backed up by US power and prestige, US Keynesians occupied
positions with the military governments established in Germany and
Japan and provided much of the qualified manpower needed for
the administration of Marshall Plan aid
VARIEGATED DEGREES OF INFLUENCE
 When the US government was called upon to set up an apparatus of
military government in Germany and Japan, the top positions were
given to military officers and to experienced businessmen, bankers,
lawyers, and other managerial types
 These groups had not been converted to Keynesianism and tended in
fact to be hostile to it to the extent they had an opinion on the matter
 Although US power was strongest in these two countries which were
under US military occupation and government, the influence of
Keynesian ideas on policy making was by far the weakest
VARIEGATED DEGREES OF INFLUENCE
 In the other countries, the top jobs available to Americans were those
of economic advisors to Allied governments, and they largely went
to the US Keynesians
 They therefore had virtually the last word on the economic policy
that was being urged on the local government by the US
 Hence they were more influential in those countries where the US
had less power and exercised it indirectly via advisors rather than
directly, via outright administrators
GOING FURTHER
CHAPTER 1
Introduction
CHAPTER 3
Interview with Lorie Tarshis
CHAPTER 12
Interview with Leon Keyserling