Hansen’s New World

As the war drew to a close, plans for the postwar world had to be implemented and debates in the political arena became more active. On January 3, 1945, President Roosevelt presented his Annual Budget Message to Congress.⁷³ He made it clear that government spending would be dictated by the military situation, and though he estimated that $73 billion would be needed for war purposes in 1946, this would depend on the course of the war.

Roosevelt linked domestic prosperity with foreign policy. The United States had learned that it could not stand “the malignant effects of economic isolationism” and that “full employment after the war is not only a matter of immediate self-interest, but also part of our stake in world stability and prosperity.” He concluded with a statement about what needed to be done.

We must develop the human standards and material resources of the Nation, which in turn will tend to increase our productivity and most effectively support business expansion and employment.

Though it stopped short of saying how much spending would be needed, this was a clear statement of the policy Samuelson had long been arguing for. In an unsigned editorial Samuelson had written for The New Republic, published on January 29, immediately preceding an article by Henry Wallace on “Jobs for All,” he welcomed the president's message as “a landmark of progress toward a rational fiscal policy.”⁷⁴ Roosevelt's figures showed that “even amid the cre­scendo of total war,” federal spending accounted for less than half of national income.^m However, Samuelson claimed that this did not go far enough. The budget should be defined in terms of “full-employment income.” If this were calculated, it would define national goals and the president could plan federal spending so as to avoid unemployment or inflation. The national accounts would cease to be a mere record of past history and would become a method of control.

On March 26, as the Bowman Committee deliberations were drawing to a close, Samuelson took up another theme from Roosevelt's message— the need for the United States to support international institutions—this time in a signed article in The New Republic.

Economic problems were, Hansen argued “infinitely complex and dif­ficult” and though we had “only reached the Kindergarten stage in learning how to manage complex economic problems,” a start had been made.

We have freed ourselves in large measure from the restraints that for­merly tied us hand and foot and made it impossible to act. We are increasingly developing the tools and mechanisms needed for the task. But we have yet to work out a comprehensive, far-reaching program both on the domestic front and the international, adequate to give us confidence and faith that our economic future is secure.⁷⁸

m. He could have pointed out that the rise in national income from 1939 to 1944 more than covered the rise in government spending.

The international institutions being put in place were needed to make sure that the world did not experience another Great Depression.⁷⁹ This was a call for both an end to isolationism and for policies to ensure full employment. Hansen endorsed the measures being taken in Britain to establish the welfare state and establish full employment, along with Australian calls for govern­ments to enter into an international agreement to maintain full employment in their own countries.

Samuelson pointed out that this was Hansen's first book aimed at the general public and the most important of the many books to appear on international problems. Central to the book, he explained, was the argument that the best contribution the United States could make to the world economy was to put its own house in order and to maintain a high level of income and employment. Samuelson left the reader in no doubt that, like Hansen, he supported the new institutions being created; the nearest he came to criticizing his mentor was when he accused him of being “much too gentle” in his criticisms of the “Key Kurrency” objection to the International Monetary Fund (IMF), an objection that Samuelson claimed neither he nor even Time magazine could understand. It was a very clear public identification with Hansen's internationalism.⁸⁰’"

Hansen's book had avoided technical discussions of economic theory, but in his concluding paragraphs, Samuelson used an analysis of Hansen's career to tell readers about the Keynesian revolution, about which his student Klein had recently written his dissertation.^o

Hansen himself illustrates beautifully the painful process by which the economist divested himself of old misconceptions and inched laboriously toward a better comprehension of economic reality. Trained just before the First World War, he began to stand out among American business-cycle theorists in the decade of the twenties. Toward the end of that “new era” there grew up the belief that the business cycle was gone forever and even Hansen thought that the business cycle represented simply the growing pains of the capitalistic system and might be expected to disappear in the years ahead; as may be seen in his Business Cycle Theory (1927).⁸¹

Describing the 1927 Hansen as “Neanderthal,” Samuelson continued,

Possessing that quality, rare among academic persons beyond the age of thirty, of being able to change his mind, Hansen became one of

n.

o. See chapter 24 this volume.

the most important contributors to the revolutionary innovations in thought associated with the name of Keynes. The revolution is in eco­nomic theory; the new doctrines themselves are profoundly capitalistic in nature. After reading this book, every intelligent reader will know which are the true friends of the enterprise system: Keynes or Hayek, Ruml or Queeny, Stuart Chase or Carl Snyder, Alvin Hansen or Henry Simons.

The friends of enterprise were those who supported measures to maintain full employment, not those who branded government intervention as socialist.^p The internationalism and full employment policies that he and Hansen sup­ported were linked explicitly to the Keynesian revolution in economic theory. Equally significant, Samuelson was arguing forcefully that it was Keynesians, not critics of the state, who were the real defenders of the free enterprise system. The bankers who opposed such ideas did not know what they were talking about.

The notion that a banker understands money or finance is a quaint one which will not stand up under empirical observation. A barber can dis­cuss as cogently whether or not banks create money, while from time immemorial economic sophomores have had a field day at the expense of bankers' writings. It is for this reason that bankers always employ hack economists to server as their trigger-men and ghost-writers.

He does not seem to have worried about making enemies.

Arrangements for a postwar economic order had been thrashed out at an international conference in Bretton Woods, New Hampshire, in July 1944, but the proposals still needed to be ratified by Congress. In April, Samuelson contributed to the debate with another article in The New Republic, “Bretton Woods, Pro and Con.” He took five of the accusations made by critics of the plans and attempted to rebut each one.

Two objections were quickly disposed of. Despite claims to the contrary, no economist, banker, or international trade expert had been able to find any

p. The first name in each of these pairings was a liberal; the second, a conservative. fundamental technical flaws, and the plans were far from hastily devised. The objection that the plans involved a radical departure from the gold stan­dard was also misconceived. Because the plan of Harry Dexter White, the U.S. negotiator, was adopted instead of the Keynes plan, gold would be at the center of the Bretton Woods system. To see what the plans might mean, Samuelson speculated on how the economic history of the interwar period might have been different had Bretton Woods been in operation after the First World War. Several bad mistakes in exchange rate policy would have been avoided. Those who argued against Bretton Woods (notably the bankers he had lambasted in his previous article) had opposed Roosevelt’s abandonment of the gold standard in 1933, as well as his establishment of the Securities Exchange Commission and the Federal Deposit Insurance Corporation, mea­sures that were widely accepted to have been beneficial.

The most frequently heard argument, according to Samuelson, was that the agreement would make “Uncle Sam a Santa Claus.” This was clearly wrong, because there were strict limits on what other countries could bor­row from the IMF, and U.S. liabilities were limited to $3 billion. Critics were inconsistent in arguing both that overseas dollar holdings were much too large and that the IMF would run out of dollars within a couple of years. The argument that the agreement needed to be amended was no more than an attempt by its opponents, in the face of strong public support for it, to pretend to compromise. Amending the agreement would be to destroy it, because everything would need to be renegotiated. The only real issue before Congress, Samuelson argued, was “isolationism.” If the proposals were defeated, he added, “let those responsible for the resulting interna­tional anarchy be clearly recognized.”⁸³ His support for Bretton Woods was uncompromising.^q

Alongside his efforts to create a new international order Hansen was arguing for domestic reforms, and to this end he had helped draft the Full

q. Though not teaching at MIT during 1944—45, Samuelson had continued to teach budding diplomats at the Fletcher School, where his courses on The United States in the World Economy and Commercial Policies of the United States covered the same issues as he had discussed in The New Republic. He provided his audience of specialists in international relations with arguments for the liberal, internationalist world order for which Hansen was arguing. It is tempting to conclude that what he was doing here echoed arguments he heard as an undergraduate in Chicago, when he was himself taking a broad social science course with the thought of becoming a diplomat. The following year (1945—46), he reverted to teaching the course in International Economic Relations in place of U.S. Commercial Policy, and the year after that he dropped the latter course. In 1948—49, after his textbook was published, he stopped teaching at Tufts.

Employment Bill that had been brought before the Senate in January 1945. The bill sought to establish a right to work and to ensure that the federal govern­ment had an obligation to make sure jobs were available to those who wanted them.8⁴ Rather than simply requiring that the president be asked to report on the state of the economy and make recommendations on how to achieve full employment, Hansen proposed a carefully planned program to stabilize investment.

My proposal is more specific with respect to recommendations by the President on an integrated program of public construction and devel­opment projects, Federal, State and local, with a view to placing con­struction public and private on a high and stable level.⁸⁵

The president’s recommendations at the beginning of each session of Congress should include “a long-range program of Federal public works and develop­mental projects together with an integrated plan for Federal aid to State and local public works and capital projects” covering at least six years.⁸⁶ Hansen wanted to make it clear that the goal of policy was stability of public and private construction and the avoidance of both inflation and deflation.

Discussion of the bill was delayed by more pressing matters—such as approval of the Bretton Woods agreement—but with the sudden end of the war in Japan on August 15, 1945, anxiety about the need to avoid unemploy­ment during the process of reconversion became acute. There were to be pub­lic hearings on the bill until September ι, after which closed sessions began. Samuelson had been busy during the summer, both writing his textbook and advising Goldsmith, and there had been a lull in his journalism, but on September 2, the Washington Post carried a piece he had written to influence congressional deliberations.⁸⁷

In this article, Samuelson did not try to explain any of the technical economic arguments, but focused entirely on the political case. It was, he argued, “well wishers of the capitalist system who have by far the greatest stake in the maintenance of a high level of jobs and of effective demand.” The fact that liberals and unionists supported the bill was no reason for business to oppose it. “If the CIO were to come out against sin,” he wrote, “it would not be in the true interests of the Chamber of Commerce to come out in its favor.” Well-functioning markets needed high employment, without which individual initiative could not be rewarded. Responding to the publicity sur­rounding Friedrich Hayek’s Road to Serfdom (1944b), which had emphasized the dangers in government intervention, Samuelson contended that it was wrong to draw a sharp distinction between “serfdom” and “laissez-faire”; the United States had a mixed economy in which government was needed to act as a “balance wheel” against booms and slumps. In a mixed economy, busi­ness and government had different but “mutually helpful” responsibilities. In an italicized paragraph he wrote,

Business enterprise cannot be expected to create its own market and generate demand in just the right amount, avoiding on the one hand excessive pur­chasing power and inflation and on the other hand deflation and widespread unemployment.

Without government action, economic progress would be bumpy, for busi­nesses had no incentive to adjust their actions so as to regulate economic activity. Objectors to the bill were, Samuelson contended, really offering arguments about the desirability of full employment itself, which was a mistake. He argued strongly that to deny either the desirability of achiev­ing full employment, or that government had a role to play in achiev­ing it, was “to play into the hands of the avowed enemies of free private enterprise.”

Though the bill passed the Senate, when it was considered by the House of Representatives in November, conservative opposition was much stronger, and after tortuous negotiations, a substitute “Employment Act” became law in February 1946. In place of a right to work, guaranteed by the use of com­pensatory spending, the president was simply urged to aim for a high level of employment. The president would be advised by a three-person Council of Economic Advisers, and there would be an annual report on economic conditions. It seems safe to conjecture that Samuelson would have endorsed Hansen's view that the most important feature of the original bill was its spending provisions, and these had been removed.⁸⁸