Summary Overview

The British economist John Maynard Keynes is considered a paragon of liberal thought because of his contributions to economic theory and policy that emphasize government intervention, social welfare, and pragmatic solutions to economic problems—principles aligned with liberal values of supporting individual well-being and social justice. His advocacy for active government policies to manage economic cycles, reduce unemployment, and promote economic stability reflects a commitment to social responsibility and the belief that markets should serve the broader interests of society rather than operate solely through free-market forces. Additionally, his ideas helped shape modern social liberalism by promoting policies that aim to create a more equitable and prosperous society through government action.

In 1933, the New York Times invited Keynes to give economic advice to President Franklin D. Roosevelt (FDR), then nearing the end of his dramatic first year in office. Keynes considered the president to be the greatest champion of the new type of thinking needed to bring the United States—and the world—out of the Great Depression. He suggested that conventional economic thinking that emphasized the importance of balanced budgets and a stable currency needed to be abandoned in favor of a program of debt-financed government spending to revive the U.S. economy. Keynes also favored giving the economy more liquidity by holding down interest rates. Keynes’s opinions were considered of such importance that the president’s emissary Felix Frankfurter sent a copy to the president directly, so that he could see it before it appeared in the newspaper.

Defining Moment

President Roosevelt took power at the height of the Great Depression, a crisis of economic contraction and mass unemployment affecting much of the world and particularly the United States. In the 1932 election, Roosevelt defeated incumbent president Herbert Hoover, who had been discredited by his failure to solve the problems of mass unemployment. In order for Roosevelt’s presidency to be considered a success, he had to get people back to work, and with the desperation of the times, he had considerable leeway to do so. The package of reforms his administration instituted was known collectively as the New Deal, representing a seismic shock in American political life. Among the many dramatic and controversial reforms of the early New Deal was Roosevelt’s decision to take the United States off the gold standard. The National Industrial Recovery Act (NIRA) guaranteed the rights of organized labor, allowed for government regulation of prices, and set up codes regulating business competition, bringing the government into the day-to-day life of business like never before. Generally, the New Deal was associated with government action to rescue the economy, as opposed to the laissez-faire approach of minimal government interference with business that had dominated Republican administrations in the 1920s and was backed by much of the economic establishment.

Many, including Keynes, believed that the masses of unemployed could pose a radical threat to the American political system if the New Deal failed to put them back to work. The serious difficulties of capitalism were causing many to turn to the Soviet Union and Communism as a model, although this was less true in the United States than in many European countries. Another possible danger presented itself on the extreme right. Around the time of Roosevelt’s inauguration, Germany had turned to Nazi leader Adolf Hitler, whose appeal was largely based on taking vigorous action to end mass unemployment. The recovery of the American economy, the largest in the world, was central to the recovery of the world economy and to avoiding the toppling of the liberal democratic order to the benefit of fascism or Communism.

Author Biography

Born June 5, 1883, in Cambridge, England, John Maynard Keynes is considered by many to be the greatest economist of the twentieth century, although many of his ideas also remain controversial. He is generally associated with the notion that governments should counteract the business cycle by cutting spending when times are good and increasing spending, financed by debt, when times are bad, in order to promote economic recovery. Keynes was a believer in a liberal capitalist approach to economics, but he was dubious about the conventional wisdom of the dominant school of “classical” economists that supported balanced budgets and the gold standard. He was an activist who engaged with the political elite of the day on a range of issues, not an isolated academic writing principally for other scholars. The classic statement of his ideas is his book The General Theory of Employment, Interest and Money (1936). He died April 21, 1946, in Firle, England.

Historical Document

An Open Letter to President Roosevelt

In response to the New York Times‘ request for his views on the American outlook, Keynes has written “An Open Letter to President Roosevelt,” which is scheduled to appear in the Sunday issue of December 31st and is to be syndicated in other parts of the United States.

So that you may see what he has to say before it is published, Keynes this morning sent me the enclosed copy of his article, which I hasten to get off directly to you through Miss LeHand (without forwarding it through the pouch) in the hope that it may catch the Bremen, which leaves tonight.

Yesterday’s Times carried illuminating extracts from Wallace’s Annual Report. What a good Secretary of Agriculture you have!

With warm regards,

Faithfully yours,

Felix Frankfurter

* * *

Hon. Franklin D. Roosevelt

Enc.

AN OPEN LETTER TO PRESIDENT ROOSEVELT

By John Maynard Keynes.

Dear Mr President,

You have made yourself the Trustee for those in every country who seek to mend the evils of our condition by reasoned experiment within the framework of the existing social system. 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. This is a sufficient reason why I should venture to lay my reflections before you, though under the disadvantages of distance and partial knowledge.

At the moment your sympathisers in England are nervous and sometimes despondent. We wonder whether the order of different urgencies is rightly understood, whether there is a confusion of aim, and whether some of the advice you get is not crack-brained and queer. If we are disconcerted when we defend you, this may be partly due to the influence of our environment in London. For almost everyone here has a wildly distorted view of what is happening in the United States. The average City man believes that you are engaged on a hare-brained expedition in face of competent advice, that the best hope lies in your ridding yourself of your present advisers to return to the old ways, and that otherwise the United States is heading for some ghastly breakdown. That is what they say they smell. There is a recrudescence of wise head-waging by those who believe that the nose is a nobler organ than the brain. London is convinced that we only have to sit back and wait, in order to see what we shall see. May I crave your attention, whilst I put my own view?

You are engaged on a double task, Recovery and Reform;—recovery from the slump and the passage of those business and social reforms which are long overdue. For the first, speed and quick results are essential. The second may be urgent too; but haste will be injurious, and wisdom of long-range purpose is more necessary than immediate achievement. It will be through raising high the prestige of your administration by success in short-range Recovery, that you will have the driving force to accomplish long-range Reform. On the other hand, even wise and necessary Reform may, in some respects, impede and complicate Recovery. For it will upset the confidence of the business world and weaken their existing motives to action, before you have had time to put other motives in their place. It may over-task your bureaucratic machine, which the traditional individualism of the United States and the old “spoils system” have left none too strong. And it will confuse the thought and aim of yourself and your administration by giving you too much to think about all at once.

Now I am not clear, looking back over the last nine months, that the order of urgency between measures of Recovery and measures of Reform has been duly observed, or that the latter has not sometimes been mistaken for the former. In particular, I cannot detect any material aid to recovery in N.I.R.A., though its social gains have been large. The driving force which has been put behind the vast administrative task set by this Act has seemed to represent a wrong choice in the order of urgencies. The Act is on the Statute Book; a considerable amount has been done towards implementing it; but it might be better for the present to allow experience to accumulate before trying to force through all its details. That is my first reflection—that N.I.R.A., which is essentially Reform and probably impedes Recovery, has been put across too hastily, in the false guise of being part of the technique of Recovery.

My second reflection relates to the technique of Recovery itself. The object of recovery is to increase the national output and put more men to work. In the economic system of the modern world, output is primarily produced for sale; and the volume of output depends on the amount of purchasing power, compared with the prime cost of production, which is expected to come on the market. Broadly speaking, therefore, an increase of output depends on the amount of purchasing power, compared with the prime cost of production, which is expected to come on the market. Broadly speaking, therefore, an increase of output cannot occur unless by the operation of one or other of three factors. Individuals must be induced to spend more out of their existing incomes; or the business world must be induced, either by increased confidence in the prospects or by a lower rate of interest, to create additional current incomes in the hands of their employees, which is what happens when either the working or the fixed capital of the country is being increased; or public authority must be called in aid to create additional current incomes through the expenditure of borrowed or printed money. In bad times the first factor cannot be expected to work on a sufficient scale. The second factor will come in as the second wave of attack on the slump after the tide has been turned by the expenditures of public authority. It is, therefore, only from the third factor that we can expect the initial major impulse.

Now there are indications that two technical fallacies may have affected the policy of your administration. The first relates to the part played in recovery by rising prices. Rising prices are to be welcomed because they are usually a symptom of rising output and employment. When more purchasing power is spent, one expects rising output at rising prices. Since there cannot be rising output without rising prices, it is essential to ensure that the recovery shall not be held back by the insufficiency of the supply of money to support the increased monetary turn-over. But there is much less to be said in favour of rising prices, if they are brought about at the expense of rising output. Some debtors may be helped, but the national recovery as a whole will be retarded. Thus rising prices caused by deliberately increasing prime costs or by restricting output have a vastly inferior value to rising prices which are the natural result of an increase in the nation’s purchasing power.

I do not mean to impugn the social justice and social expediency of the redistribution of incomes aimed at by N.I.R.A. and by the various schemes for agricultural restriction. The latter, in particular, I should strongly support in principle. But too much emphasis on the remedial value of a higher price-level as an object in itself may lead to serious misapprehension as to the part which prices can play in the technique of recovery. The stimulation of output by increasing aggregate purchasing power is the right way to get prices up; and not the other way round.

Thus as the prime mover in the first stage of the technique of recovery I lay overwhelming emphasis on the increase of national purchasing power resulting from governmental expenditure which is financed by Loans and not by taxing present incomes. Nothing else counts in comparison with this. In a boom inflation can be caused by allowing unlimited credit to support the excited enthusiasm of business speculators. But in a slump governmental Loan expenditure is the only sure means of securing quickly a rising output at rising prices. That is why a war has always caused intense industrial activity. In the past orthodox finance has regarded a war as the only legitimate excuse for creating employment by governmental expenditure. You, Mr President, having cast off such fetters, are free to engage in the interests of peace and prosperity the technique which hitherto has only been allowed to serve the purposes of war and destruction.

The set-back which American recovery experienced this autumn was the predictable consequence of the failure of your administration to organise any material increase in new Loan expenditure during your first six months of office. The position six months hence will entirely depend on whether you have been laying the foundations for larger expenditures in the near future.

I am not surprised that so little has been spent up-to-date. Our own experience has shown how difficult it is to improvise useful Loan-expenditures at short notice. There are many obstacles to be patiently overcome, if waste, inefficiency and corruption are to be avoided. There are many factors, which I need not stop to enumerate, which render especially difficult in the United States the rapid improvisation of a vast programme of public works. I do not blame Mr Ickes for being cautious and careful. But the risks of less speed must be weighed against those of more haste. He must get across the crevasses before it is dark.

The other set of fallacies, of which I fear the influence, arises out of a crude economic doctrine commonly known as the Quantity Theory of Money. Rising output and rising incomes will suffer a set-back sooner or later if the quantity of money is rigidly fixed. Some people seem to infer from this that output and income can be raised by increasing the quantity of money. But this is like trying to get fat by buying a larger belt. In the United States to-day your belt is plenty big enough for your belly. It is a most misleading thing to stress the quantity of money, which is only a limiting factor, rather than the volume of expenditure, which is the operative factor.

It is an even more foolish application of the same ideas to believe that there is a mathematical relation between the price of gold and the prices of other things. It is true that the value of the dollar in terms of foreign currencies will affect the prices of those goods which enter into international trade. In so far as an over-valuation of the dollar was impeding the freedom of domestic price-raising policies or disturbing the balance of payments with foreign countries, it was advisable to depreciate it. But exchange depreciation should follow the success of your domestic price-raising policy as its natural consequence, and should not be allowed to disturb the whole world by preceding its justification at an entirely arbitrary pace. This is another example of trying to put on flesh by letting out the belt.

These criticisms do not mean that I have weakened in my advocacy of a managed currency or in preferring stable prices to stable exchanges. The currency and exchange policy of a country should be entirely subservient to the aim of raising output and employment to the right level. But the recent gyrations of the dollar have looked to me more like a gold standard on the booze than the ideal managed currency of my dreams.

You may be feeling by now, Mr President, that my criticism is more obvious than my sympathy. Yet truly that is not so. You remain for me the ruler whose general outlook and attitude to the tasks of government are the most sympathetic in the world. You are the only one who sees the necessity of a profound change of methods and is attempting it without intolerance, tyranny or destruction. You are feeling your way by trial and error, and are felt to be, as you should be, entirely uncommitted in your own person to the details of a particular technique. In my country, as in your own, your position remains singularly untouched by criticism of this or the other detail. Our hope and our faith are based on broader considerations.

If you were to ask me what I would suggest in concrete terms for the immediate future, I would reply thus.

In the field of gold-devaluation and exchange policy the time has come when uncertainty should be ended. This game of blind man’s bluff with exchange speculators serves no useful purpose and is extremely undignified. It upsets confidence, hinders business decisions, occupies the public attention in a measure far exceeding its real importance, and is responsible both for the irritation and for a certain lack of respect which exists abroad. You have three alternatives. You can devalue the dollar in terms of gold, returning to the gold standard at a new fixed ratio. This would be inconsistent with your declarations in favour of a long-range policy of stable prices, and I hope you will reject it. You can seek some common policy of exchange stabilisation with Great Britain aimed at stable price-levels. This would be the best ultimate solution; but it is not practical politics at the moment unless you are prepared to talk in terms of an initial value of sterling well below $5 pending the realisation of a marked rise in your domestic price-level. Lastly you can announce that you will definitely control the dollar exchange by buying and selling gold and foreign currencies so as to avoid wide or meaningless fluctuations, with a right to shift the parities at any time but with a declared intention only so to do either to correct a serious want of balance in America’s international receipts and payments or to meet a shift in your domestic price level relatively to price-levels abroad. This appears to me to be your best policy during the transitional period. In other respects you would regain your liberty to make your exchange policy subservient to the needs of your domestic policy—free to let out your belt in proportion as you put on flesh.

In the field of domestic policy, I put in the forefront, for the reasons given above, a large volume of Loan-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. Could not the energy and enthusiasm, which launched the N.I.R.A. in its early days, be put behind a campaign for accelerating capital expenditures, as wisely chosen as the pressure of circumstances permits? You can at least feel sure that the country will be better enriched by such projects than by the involuntary idleness of millions.

I put in the second place the maintenance of cheap and abundant credit and in particular the reduction of the long-term rates of interest. The turn of the tide in great Britain is largely attributable to the reduction in the long-term rate of interest which ensued on the success of the conversion of the War Loan. This was deliberately engineered by means of the open-market policy of the Bank of England. I see no reason why you should not reduce the rate of interest on your long-term Government Bonds to 21/2 per cent or less with favourable repercussions on the whole bond market, if only the Federal Reserve System would replace its present holdings of short-dated Treasury issues by purchasing long-dated issues in exchange. Such a policy might become effective in the course of a few months, and I attach great importance to it.

With these adaptations or enlargements of your existing policies, I should expect a successful outcome with great confidence. How much that would mean, not only to the material prosperity of the United States and the whole World, but in comfort to men’s minds through a restoration of their faith in the wisdom and the power of Government!

With great respect,

Your obedient servant

J M Keynes

Document Analysis

Keynes views economic recovery as the central priority of political leadership during the Depression. Although he agrees with many New Deal reforms, he cautions that long-term structural reforms, however praiseworthy in themselves, should not be allowed to interfere with the immediate goal of economic recovery. (Keynes is frequently associated with the quotation “In the long run we are all dead,” which endorses putting priority on short-term crises.) He uses the NIRA, which allowed the government to set prices, as an example of a reform that interfered with recovery, although he did not oppose the act itself.

The short-run solution to the challenge of the Depression was an increase in government spending, which Keynes and his followers viewed as the most efficient way to get a stalled economy back into recovery. Keynes cautions that new government spending will not significantly help the economy if it is financed primarily by taxes, which would take more money out of the economy and diminish purchasing power. Instead, spending should be financed principally by government borrowing, he believes. Keynes views himself as a revolutionary in the field of economic thought, and his line of reasoning goes against the orthodoxy of classical economists, who valued balanced budgets and laissez-faire policies. The power of “orthodox” economics was not restricted to academia; conservative beliefs were also held by financiers and bankers—the “City men” (with “City” referring to London, the financial center of Britain and the British Empire), whom Keynes describes as skeptical of Roosevelt’s policies. Even government officials and leaders of Britain’s nominally socialist Labour Party were believers in economic orthodoxy; therefore, Keynes—and, he believes, Roosevelt—face formidable foes. Keynes also recommends lowering interest rates, a policy he believes has already been successful in Great Britain.

Keynes points out that a program of economic reform that lifts economies out of the Depression is one way to stave off political revolution. The Soviet Union seemingly avoided the worst of the Great Depression, and many Western intellectuals unaware or unconcerned with the massive scale of Stalinist repression became Communists or Communist sympathizers. However, Keynes was not one of them. He accepted liberal democracy and free-market capitalism, and, like Roosevelt and his advisers, he hoped that economic experimentation would take place within “the framework of the existing social system.” Keynes believes that, by providing an example of how an economy can recover without Communist revolution or fascist dictatorship, American recovery could also inspire the world in a positive direction. Keynes’s letter ends on a note of optimism for both the United States and the world.

Essential Themes

President Roosevelt’s New Deal, as Keynes advised, incorporated deficit-financed spending, although the degree to which this was a result of Keynes’s advice is debated among historians. This deficit financing went against Roosevelt’s own predilection for working with a balanced budget. Historians generally believe the New Deal successfully promoted economic recovery, although some economists and political conservatives argue that it did not. Nonetheless, the New Deal brought political stability, as the U.S. political system was not seriously challenged by either the extreme right (fascism) or the extreme left (Communism). However, the United States fully emerged from the Depression only with the tremendous stimulus applied to the economy by World War II. Although the New Deal did have some international influence, the American example of stimulating the economy through democratic government action did not spread as widely as Keynes had hoped. In 1933, Hitler came to power in Germany, another depression-racked country, and revived the economy in a militarized fashion, providing an alternative authoritarian model of recovery to the democratic one favored by Roosevelt and Keynes.

Keynes’s advocacy of deficit spending during recessions and depressions as a way of stimulating the economy remains controversial. Conservative economists remain suspicious of any form of government interference in the business cycle, and to many people, the idea that government should cut spending or “tighten its belt” during an economic downturn seems intuitively obvious. (The other half of the Keynesian idea, that the government should cut spending during good times, also seems counterintuitive.) The debate over Keynesian economic policy remains controversial, as seen in the disagreement among American policy makers during and after the economic downturn that began in 2008.

Bibliography and Additional Reading