Was FDR influenced by Keynes?

I had pointed to this wonderful resource PBS- a few days back.

I was reading this interview of John Kenneth Galbraith placed on PBS website. It has some excellent Q&A with the great economist

INTERVIEWER: Can you give a sense of how bleak and how despairing things seemed in the early ’30s?

JOHN KENNETH GALBRAITH: Well, there were two ways of that. A university was in many ways a poor way to see that, because you were surrounded by people with secure income and a happy life, relatively speaking. But one couldn’t go to the docks in San Francisco, one couldn’t go to the farms, one couldn’t go to the slums of Oakland without seeing how many people were on the edge of despair and how fortunate you were as compared with the ordinary citizen at the time. And that was, I hope, the factor that involved me more deeply in progressive economics….

The diamond feature of those years, of that decade, [was] the sense that nothing was working. And those of us in universities—I was then first at California and then at Harvard, profession was economics. We were supposed to know not only what was wrong, but also what was right. But there was also a more important effect, that in a university, we were very comfortable; we weren’t faced with unemployment. And therefore, if we had any sense of compassion, which I hope we did, we were concerned with what others were suffering [and] that we were escaping.

🙂 That is so honest I must say.

There are some interesting Q&As on Keynes:

INTERVIEWER: Did Keynes create a sense of hope where there’d been despair?

JOHN KENNETH GALBRAITH: Did Keynes create a sense of hope Oh, unquestionably. There was this breath of hope and optimism, and I came back from Cambridge to find a whole group of people here who had also read  The General Theory.

And the younger Harvard community, coupled with one or two older professors, the most distinguished being the famous Alvin Hansen, I’ve said many times I think had something, maybe quite a bit, to do with bringing Keynes across the Atlantic.

INTERVIEWER: Tell me if Keynes attempted to influence Roosevelt directly. Didn’t he try once in person and once with an open letter? Was he successful?

JOHN KENNETH GALBRAITH: Well, Keynes had a couple of conversations with Roosevelt, very famous, and they were deeply unsuccessful. Roosevelt’s system of thought did not extend to a conceptual notion of Keynesian economics. There were other people around Roosevelt, the most notable being Lauchlin Currie… who had read Keynes, and became abreast of Keynes.

Currie had even anticipated him to some extent, but the influence on the master was zero. Let me correct that. The influence was zero, but on the other hand, one of the advantages of zero was that any digit could be inserted. And while he didn’t accept Keynes as a doctrine, he didn’t resist it, either. He had no other system of economic thought [or] economic theory that excluded it.

INTERVIEWER: Would you describe FDR as an instinctive Keynesian?

JOHN KENNETH GALBRAITH: No, I would not describe him as that. I would describe him as an available Keynesian.

INTERVIEWER: Can you describe the process by which Keynes’s ideas did get accepted in Washington? Young economists were actively promoting him, weren’t they?

JOHN KENNETH GALBRAITH: Oh, we all knew each other and were all in touch with each other, all making the case for the basic Keynesian idea, which I must emphasize to you them from unemployment. That was the basic essential, and that you didn’t worry about accumulating debt, or, more precisely, you worried about it but did it anyway. That was the substance of Keynes as it was manifested in the Public Works Administration, [as] it was manifested in the Works Progress Administration (WPA), which was directed at the unemployed. That captured Roosevelt, not the underlying theory.

Fascinating stuff. This was all pre-war Keynes. What about post-war?

INTERVIEWER: How widespread and influential was Keynes after the war?

JOHN KENNETH GALBRAITH: Well, his postwar years were very brief. The Bretton Woods [institutions]—the [International Monetary] Fund and the [World] Bank—were his last two great contributions in which he was very influential, no doubt about that. But his health was failing, and in a very few years he was dead.

INTERVIEWER: And how influential were his ideas?

JOHN KENNETH GALBRAITH: His ideas as distinct from Keynes himself? Keynes became Keynesian economics, and the Keynesian view of economic policy collected the whole liberal left movement in the United States. That became part of the accepted policy, the accepted doctrine. And you ask was he influential? Nobody could have been more influential. He changed the nature of what we call liberal economics.

INTERVIEWER: How about outside the USA? Was he influential on the rest of the world?

JOHN KENNETH GALBRAITH: Well, the USA, Canada, Britain, and, after the war ended, Western Europe were the total. And there was no place other than Britain where he was such  a contentious figure. But there was certainly no doubt about his influence on all the Western economies. 

INTERVIEWER: What do you think Richard Nixon meant when he said “We’re all Keynesians now”?

JOHN KENNETH GALBRAITH: Oh, nobody should interpret Nixon to the larger public. He probably didn’t know himself.

INTERVIEWER: What was it that happened to make “the age of Keynes,” as you put it, visibly important?

JOHN KENNETH GALBRAITH: Well, two things. First, one I must attribute to Ronald Reagan, once one of my fellow practitioners on the liberal left [who] came into the presidency as an economist. He came into the presidency as the country was experiencing a rather disagreeable recession and [implemented] lots of strong Keynesian policy—borrowing, unfortunately, for arms. It was the arms expenditure that cut the attention and created the sense of necessity, rather than putting people to work. But in any case, one of the results was an improving economy in the ’80s under Ronald Reagan, and one of the amusing facts of that was that this was done by people who didn’t really understand Keynes and who were critical of  him. We had involuntary anonymous Keynesianism.

Superb again. Finally:

INTERVIEWER: You’ve written somewhere that the age of Keynes is over, it’s dead. Why did it end?

JOHN KENNETH GALBRAITH: Oh, I don’t think it ended for a moment. If we were to have another recession, which is possible, we would be back to using some of the crude government surplus to create employment and to get the economy moving again. That would be something you would advocate; it is something that would be done automatically.

This is so true. Keynes is back big time. Though apart from his suggestion to involve government in a recession like this, it is his other suggestions on reforming international monetary system which are really worth exploring (see this for instance).

Galbraith also discusses Hayek, Friedman, Volcker etc. He has some fantastic things to say on so many things.

INTERVIEWER: (laughs) Is your main criticism of Friedman about monetarism? Is monetarism socially neutral?

JOHN KENNETH GALBRAITH: No, it’s not socially neutral. It is politically purposeful to say that everything can be done by controlling the money supply and the interest rate, the bank rate, to say that you exclude a large area of social activity that costs money and which you would like to get rid of. And it enormously simplifies economics so that it leaves nobody intellectually able to grasp it.

The great strength of the Federal Reserve is that it has a formula for managing the economy, which takes it away from the enormous complexity of the subject and restricts it to what you do to the interest rate. Well, it’s awfully nice to simplify life, and one can only question the desirability of doing so.

INTERVIEWER: Whom do high interest rates help, and whom do they hurt?

JOHN KENNETH GALBRAITH: Well, there’s no doubt about that. A high interest  rate, believe it or not, is very agreeable to anybody lending money. And therefore the financial community, or that part of it that has to do with money lending, is very attracted by the idea of high interest rates.

But what it does more than that—and this is a point that is not emphasized enough—by concentrating on the Federal Reserve, concentrating on the interest rate, and excluding everything else, [it] exclude[s] a lot of unwelcome state activity as having to do with the way the economy is working. You worry about unemployment, you worry about pensions, you  worry about schools, and you can say, “But we’ve got control of the matter on the interest rates, and we don’t have to bother about all that junk.” It’s a wonderful conservative device.

INTERVIEWER: Is that why conservatives applaud Milton Friedman?

JOHN KENNETH GALBRAITH: Absolutely. That’s one of Milton’s undoubted  strengths, and one of Greenspan’s undoubted strengths—a wonderful concentration of economic policy on something with which you need not be immediately concerned and excluding a lot of things that cost money. And those are involved social programs, relief, welfare, things of that sort, that you don’t want the government monkeying with. If I were a conservative, I would be a devoted supporter of Alan Greenspan.

Wow. Again this explains (in english) what was wrong with the policy mindset before the crisis. Leave everything to central bankers and monetary policy. And how it also was in line with broad policy/political thinking.

Great insights. More interviews to follow…..

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