Why John Maynard Keynes Supported the New Deal

Economist John Maynard Keynes endorsed the New Deal in an open letter to President Franklin D. Roosevelt in 1933.

The economist John Maynard Keynes advocated real-world implementation of economic ideas. His predictions and policy recommendations would become increasingly relevant as government leaders struggled to revive their economies during the Great Depression.

Having skillfully managed the U.K.'s finances during World War I, Keynes became the Treasury's representative to the Paris Peace Conference in 1919. As the victors dictated a grossly punitive "Carthaginian Peace" to cripple Germany, Keynes resigned from the discussions and publicly denounced the Versailles Treaty.

Keynes made a dreadfully accurate prediction of the treaty's consequences:

If we aim at the impoverishment of Central Europe, vengeance, I dare say, will not limp. Nothing can then delay for very long the forces of Reaction and the despairing convulsions of Revolution, before which the horrors of the late German war will fade into nothing, and which will destroy, whoever is victor, the civilisation and the progress of our generation.

The economic chaos of the early 1930s, particularly in Germany, confirmed Keynes's vision. Paying war reparations drained the Weimar Republic's funds even as the Depression wrecked revenue, employment and production.

Keynes advocated massive deficit spending to offset markets' failure to recover. "Falling prices, contracted incomes, diminishing trade, rising taxation and obstinate unemployment will yield to nothing but a policy of confident loan expenditure upon schemes of capital development, nationally fostered and internationally concerted," he said.

Keynes argued that the worldwide credit collapse, not the stock-market crash, had triggered the Depression. He blamed the end of expenditures financed by U.S. international loans for causing the economic slump.

In the spring of 1933, Keynes drafted a series of clear, witty articles for the Times of London, outlining a recovery strategy. First, he argued, the U.K. should undertake a huge program of public works -- hiring many of the unemployed to create needed, durable infrastructure.

Second, increased purchasing power, caused by the rise in public-works employment, would restore prices. Third, trade barriers needed to be reduced through international cooperation, because austerity and autarky would prevent a return to growth.

Using cutting-edge technology of the time, Keynes promoted his plan in the U.S. in June 1933 via a live transatlantic radio conversation with Walter Lippmann, an eminent American journalist. NBC broadcast the exchange nationally. They agreed on the main policy goals for recovery: cheap money, public works and help for farmers.

But at the World Economic Conference in London later that month, Keynes overestimated the opportunity for international cooperation as the lack of U.S. commitments prevented international policy agreements.

With global cooperation sunk, Keynes turned to national economic efforts. Only the New Deal strived toward the three goals he and Lippmann had outlined, while preserving democratic practices.

Keynes endorsed the New Deal in an open letter to President Franklin D. Roosevelt in the New York Times on Dec. 31. He criticized some policies, but supported the New Deal's creativity.

"If you fail, rational change will be gravely prejudiced throughout the world, leaving orthodoxy and revolution to fight it out. But if you succeed, new and bolder methods will be tried everywhere, and we may date the first chapter of a new economic era from your accession to office."

These words would mark another potent prediction from Keynes.

(Philip Scranton is a Board of Governors professor of the history of industry and technology at Rutgers University, Camden, and the editor-in-chief of Enterprise and Society. He writes "This Week in the Great Depression" for the Echoes blog.)

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

    To contact the author on this story:
    Philip Scranton at scranton@camden.rutgers.edu

    Before it's here, it's on the Bloomberg Terminal.