Hansen and the Keynesian Network

Alvin Hansen, with whom Samuelson had begun to work very closely shortly before his move to MIT, and whose work had been the basis for Samuelson’s theory of the business cycle, had worked as a consultant to branches of the federal government throughout the 1930s, but after his move to Harvard, he became much more prominent as a public figure.

In any case, sometime in 1938 I believe it was, we welcomed Alvin Hansen with open arms as our most important recruit. I recall very well arranging for him to be our star witness in the TNEC hearings, rehearsing together our testimony and going over a long list of “good” and “bad” words prepared for the use of the government witnesses by Stuart Chase. Unfortunately, somebody slipped the list to the press, which had great fun with it.²

Keynes was not mentioned in this testimony, even though it would have been perfectly natural to do so—perhaps his name was one of the “bad” words that was not to be mentioned—but in correspondence with Dennis Robertson, a friend and colleague of Keynes, Hansen was less discreet.

In July 1939, Currie moved to the White House as an assistant to Franklin Roosevelt. More than anyone else, Currie was responsible for the recruitment of Keynesians to Washington during the war. His later memory of this describes the extensive network that was being created.^a In 1940, Hansen became part of this network when he took up position as an advi­sor to the Federal Reserve, where he remained throughout the war, and the National Resources Planning Board.⁵ He combined his work in Washington with his teaching duties at Harvard by spending Thursdays and Fridays in Washington and taking the overnight train there and back, spending the rest of the week in Cambridge, a commute on which Samuelson was soon to join him.

a. “By 1939 I had become the first economist in the White House and we were becoming a formidable group. I had recruited Dick Gilbert and his group—V. L. Bassie, Rod Riley, and the rest—for Harry Hopkins at Commerce, which gave support to Bob Nathan, long a lone outpost in hostile territory. I had turned my post at the Federal Reserve over to Emile Despres. I was, I am happy to say, responsible for bringing Ken Galbraith to Washington and for getting Gerhard Colm placed in the Bureau of the Budget, now moved to the Executive Office of the President. Walter and Bill Salant, Griff Johnson, Alan Sweezy, Arthur Gayer, Malcolm Bryan, George Eddy, Albert Hart and Martin Krost were my former students or associates and were occupying key posts. Our position in the Treasury was getting stronger as Harry White gained influence, and we had close working relationships with Gardner Means and Tom Blaisdell in the NRPB and the members of the Board, and with Ezekiel and Louis Bean in Agriculture, with Isador Lubin in Labor and, of course, with Leon Henderson and Jerome Frank in the SEC.

Hansen was winning converts outside” (Keyserling et al. 1972, p. 141). This list includes many people with whom Samuelson was to interact during the war.

In Washington, though the immediate problem was meeting the needs of war, Hansen was concerned from the outset with the problem of postwar prosperity.⁶ The scale and nature of his activities are shown in a long memo­randum he sent to Goldenweiser, a colleague at the Federal Reserve, detailing topics being investigated and interdepartmental conferences that had been held. Staff from the numerous government agencies had discussed various aspects of the defense program and its impact on the economy.⁷

A preliminary report, dated September 25, 1940, included in Hansen's memorandum, made clear both the scale of the problem and the extent of the uncertainty involved. On current plans, defense expenditure was pre­dicted to rise from $4.5 billion in 1941 to $10 billion in 1942 and $9 billion in 1943. In the event of a negotiated peace in which “England emerged as undisputed sea power,” these plans would be adequate, as the United States would feel safe even if Germany dominated the European continent. If Germany conquered England, defense spending would need to be higher, possibly $15 billion in 1942 and $25 billion in 1943. However, if the United States entered the war, expenditures might rise rapidly to $40 billion. To put this into perspective, national income in 1940 was esti­mated to be $74 billion.⁸ Hansen concluded that, given these uncertainties, it was hardly worthwhile to try to estimate the effect of the defense program beyond 1942.

Also included in his memorandum was a list of problems for which the Federal Reserve needed to reach conclusions. These included the obvious wartime issues of bottlenecks in specific industries, taxation, federal borrow­ing, and control of inflation through monetary and other means. At the end, Hansen included a section, “Long Range Planning with Respect to a Post­Defense Slump.”⁹ Taking the likelihood of a post-defense slump for granted, this section was very sketchy (half a page), focusing on financial issues, and comprising no more than a list of four policies that might be considered.

In May 1941, more than six months after he had flagged the issue in his memorandum at the Federal Reserve, Hansen wrote a paper in which he made the case for what he called “post-defense full employment.”¹⁰ It began with a bold statement about why military victory alone was insufficient; there was a need to plan for peace.

The immediate war aim is to defeat Hitler and to preserve and safe­guard political freedom. But a military victory for the democracies is not enough. If the victorious democracies muddle through another decade of economic frustration and mass unemployment, we may expect social disintegration and another international conflagration.

A positive program of postwar economic expansion and full employment, boldly conceived and set forth in a vigorous manifesto, is the only thing that can touch off any spark of mass enthusiasm at all comparable to Wilson's “Fourteen Points.” Such a manifesto would awaken a tremendous popular response in this country, in England, and in the conquered countries.¹¹

National income could be raised to $100 billion during the war, but because very different goods needed to be produced in peace and war, and because it would take time to retrain people and fit them into new types of productive work, planning was needed to make sure that national income did not fall when the war ended.

Hansen analyzed the problem using national income. In 1940, national income of $75 billion had been divided: $66 billion for consumption, $8 billion for investment (including inventories and foreign investment), and $3 billion for defense. He estimated that, given population and productivity growth, potential output would be at least $100 billion in 1943—44. If con­sumption per head remained at its 1940 level, consumption would take $65 billion of this. Investment could be reduced to $5 billion, leaving $30 billion for defense.

These were hardly forecasts, for they did no more than indicate the scale of the problem. However, they indicated a clear program for post-defense policy, all geared to maintaining consumption at the required levels. This created a need for a considerable program of public spending, requiring that the federal government keep a shelf of public investment projects ready to be implemented when the need arose.¹² The political implications of such analy­sis, based on simple calculations of national income, are obvious. It shows, moreover, that Hansen perceived the central problem in relation to post­defense planning to be maintaining consumption at a high level.

Though Samuelson had been involved in Hansen's work, he had remained in Cambridge for 1940 and much ofι941, outside the Washington circles in which ideas on maintaining full employment through regulation of saving and invest­ment were being worked out. His entry into Washington circles came through the NRPB.¹³ The NRPB originated in the National Planning Board (NPB), set up by Harold Ickes in 1933 as part of the Public Works Administration.

The NRPB also produced reports on how to avoid unemployment. In April 1937, Ickes, Merriam, and Beardsley Ruml had persuaded Roosevelt to agree to a survey of consumption spending, in order to be able to achieve “a more balanced economy,” which resulted, after interviews with 300,000 households, in the construction of new, highly detailed statistics, published in three reports, in 1938, 1939, and 1941.¹⁴ These reports revealed not only patterns of consumption spending but also the distribution of income, including the conclusions that most Americans were relatively poor and that most income was in the hands of a relatively small minority.¹⁵ One of the most marked findings concerned savings: households with incomes below $1,250 a year had negative saving, whereas at the other extreme, households with over $20,000 saved 40 percent of their income.^b In November 1940, the

b. Recognizing that the survey covered a period (1935—36) when incomes were abnormally low, the reports focused on normal income as influencing expenditure. It should, therefore, not be surprising that Samuelson's analysis of consumption in this period (see NRPB published a further report, prepared by John Kenneth Galbraith, on the effects of public works spending.

Thus when, in September 1939, with the outbreak of war in Europe, the NRPB turned to what it called “post-defense planning,” it had a body of data on which it could draw.^c At first, planning for the postwar world was contro­versial, for even Roosevelt thought this was looking too far ahead. However, in November 1940, Roosevelt authorized the NRPB to work on how to avoid a “post-emergency slump.” This was the project for which Samuelson was to be recruited.