John Maynard Keynes is credited with economic policy that focuses on aggregate consumption as the primary driver of the economy, and the use of government spending to impact aggregate consumption. In his judgment the problem of production had been solved and was capable of meeting all the consumer’s needs if they only had the means to acquire them.
This was a radical departure in economics in its day and can be dated in its acceptance to the recession of 1937. In several measures it was more severe than the market crash of 1929. FDR won a landslide victory in 1936; securing 60.8% of the popular vote and 523 out of 531 electoral votes. By the end of 1937 the stock market had fallen by a third and had fallen by 48% by the following spring. The timing was quite similar to the market crash after Herbert Hoover’s election.
FDR was shaken by this crash and his advisors were of two thoughts. One more traditional view was that it was a crisis of confidence of the producers; because of deficits, regulation, and high taxes they were reluctant to invest. FDR entertained a conspiracy theory that it was an intentional strike of capital by the 60 wealthiest families intent on disrupting the New Deal.
A new school of thought saw the focus on production to be misguided; the problem was the lack of consumption and the best tool to stimulate this consumption was government spending. While Keynes is credited with this idea, it was not developed in isolation. Other thinkers had also developed this idea.
William Trufant Foster, a former college president, and Waddill Catchings, an industrialist and financier wrote Profits in 1925 and The Road to Plenty in 1928. A decade before Keynes these amateur economists challenged the fundamental principle of Say’s Law that production generates its own supply. They reversed the principle to ‘consumption drives production.’
FDR scribbled into the margins of his copy, “Too good to be true- You don’t get something for nothing.” In 1934 Marriner Eccles was appointed Chairman of the Fed and he was sympathetic to this notion; he was more influenced by Foster and Catchings than Keynes. FDR did not immediately embrace Keynes, but a crisis will often be a fertile environment for new, even radical ideas.
Keynesianism took root not in the Depression of 1929 but in the Recession of 1937. The New Deal entered its second phase with new leadership that embraced the radical consumption philosophy of Keynes. The first phase was a period of experimentation and legal challenges, with the signature National Recovery Act ruled unconstitutional. The second phase was the birth of American Keynesianism, soon followed by the buildup for the war on the horizon.
Keynesian economic policy remains controversial but generally accepted. The economy develops with the new reality, however, and mitigates its effect. It remains difficult to isolate the impact of economic policy aimed at consumption from the other influences such as increased government and consumer debt, technology, war, and changing consumer patterns. Policy designed in reaction to a crisis increases political power that is not readily relinquished when stability returns. It is easy to get addicted to crisis in politics.
New Deal economists of the day thought that the growth of the last half of the 19th century could not be repeated. Population was stagnating and no further land was left to be developed. But this was just a phase, even if it was a long one. This end of growth alarm made them consider government as a more active force in the economy. Growth was not dependent on unlimited natural resources. Human ingenuity and technology propelled us to a level that made their concerns look foolish. Yet the same ‘end of growth’ fears re-emerged during the recessions of the 1970’s and after the 2008 recession.