The Fiscal Policy Seminar
Samuelson's contact with Hansen came through the Fiscal Policy Seminar that was run in the new Littauer Center by Hansen and John Williams, which was to be the main location for the development of Keynesian ideas at Harvard.
This seminar was the result of careful planning by the Harvard Economics Department, as part of the new center and a venture to which they were devoting significant resources. In May 1937, Wilson had discussed its purpose with Burbank, when he had explained that he envisaged the seminar as concerning not traditional problems of taxation and the efficiency of government spending but the broader problem of the proportion of the national income being disbursed through government. “We are,” he wrote, “dealing with even larger and more basic matters involving the division of income between government and other spending, being for these purposes regarded as a device for supplementing income in times of need and decreasing it (by debt paying) in good times.”54 The syllabus he proposed for the seminar, and the title he had proposed to Williams two days earlier,55 was:I. Government and the National Income
The economic, political, legal, social, and international effects of spending a considerable fraction of national incomes through governmental agencies and the rigidities or elasticities thereby introduced. The relation between public and private credit. The possibility of a compensatory mechanism for the business cycle. Deficit financing and debt retirement. Monetary aspects of expenditures and revenues. The possibility of creating or destroying vested interests.56
Though stressing national income, recently calculated by Simon Kuznets for the U.S. Commerce Department, this was framed in terms that reflected the American discussions of the cycle to which Hansen had contributed. However, it placed problems that were central to Keynesian economics squarely on the seminar's agenda.
When the seminar was eventually advertised, as one of a series of experimental seminars that would “bring together consultants drawn from the public service and a faculty group representing economics, politics, law, and business administration” to study “questions of broad governmental policy” in their “administrative, economic, political, social and legal aspects,” it was given the title “Problems of Fiscal Policy,” and was described in terms that were less precise than those suggested by Wilson:
This seminar is concerned with public finance in relation to economic, political, and social institutions and systems. It deals with the monetary aspects of expenditures and revenues, with public finance as a compensatory mechanism in the business cycle, and with the social and political implications of government spending.57
The importance of this agenda became even greater once war broke out in Europe, and it was clear that the major policy problem to be solved would be how to finance a massive rise in government spending on defense. But in 1937, that spending was still far in the future.
As the academic year began, news came in that the recovery, under way since early 1933, had begun to falter. Over the following four months, this turned into the most dramatic fall in output that the United States had experienced so far, with the possible exception of 1920—21. Yet unemployment was still well over 10 percent and manufacturing production was barely higher than it was in 1929.58 This dramatic change challenged existing theories more profoundly than had the events of 1929, for it was not explicable in terms of existing theories of the cycle. These events and the policies appropriate to deal with them dominated the seminar, as well as Hansen's own thinking.
Samuelson's friends included two brothers, Walter and William (Bill) Salant. Bill had been in the same graduating class as Marion, and for a brief period Walter had been Samuelson's roommate.59 Like Bryce and Tarshis, Walter Salant had attended Keynes's lectures in 1933—34, before spending four years at Harvard.
He attended the Fiscal Policy Seminar in its first year and attested that the unexpected downturn in the economy established its character. Economic analysis was to be applied to current and anticipated policy problems. It was, however, a while before the attention turned to these events, because the program for the first term, involving many student papers, had been outlined early in the year, before the depth of the recession had become apparent. On Monday afternoons, from 4 to 6 p.M., in a crowded room with auditors often outnumbering enrolled students, there would be discussions either of student papers or of topics proposed by Hansen or Williams. On Fridays, there were informal talks by outside speakers, again late in the afternoon, but followed by dinner and further discussion, often till 9 or 10 in the evening. Given Hansen's and Williams's connections, these speakers naturally included government officials and figures from the private sector concerned with policy, as well as academics.Walter Salant has written about the difference in temperament between Hansen and Williams. Hansen was continually advocating policy measures, but Williams was more skeptical and hence more cautious. They clearly disagreed, but did not confront each other openly, sometimes to the frustration of the students present. The advantage was that, at least in the first year, when the challenge of the 1937—38 recession was being confronted, and Keynesian ideas were being debated, neither of them dominated discussions: “they were more like mother hens encouraging the participants; the main intellectual pressure came from the graduate students.”60 Hansen and, less frequently, Williams, used the seminar to try out their own ideas. Thirty years later, Hansen wrote to Salant, “When I say that I learned so much [from the seminar in 1937—38]... I am simply telling the naked truth. And I think you will agree that I was never afraid to display my own ignorance. The great thing about that year was the fact that we were all students trying to find our way about.”61
The reason why Samuelson took time to become committed to Hansen and the Fiscal Policy Seminar was probably that the year began with papers on technical aspects of taxation in which he would have had little interest, even though many of the Monday papers were given by his fellow graduate students, with some of whom he was later to work closely.’ Apart from a talk on monetary and fiscal policy in Germany by Heinrich Bruning, former chancellor of Germany, on November 15, it was not until December that there was a paper relevant to the general economic situation.62 Just before Christmas, Jacob Viner spoke on “The General Relations Between Fiscal Policy and the Cycle.” The following term, there was a series of papers on monetary and fiscal policy, their interrelationships, and measures to achieve full employment, culminating with two sessions in which the Swedish economist Gunnar Myrdal, whose Monetary Equilibrium had just been published in English, discussed monetary and fiscal policy in Sweden.
Samuelson remembered dropping in on the seminar in its first year, and then attending it often in the second year.63 A plausible reconstruction of what happened is that he attended Viner's talk, or Bruning's presentation, in the latter case attracted by the eminence of the speaker, and that he then got drawn into the seminar, falling under the spell of Hansen. By the following December, when the seminar hosted previews of three round tables scheduled for the forthcoming meeting of the American Economic Association, Samuelson's first paper on fiscal policy was among those under discussion.64 After that, with speakers including Lauchlin Currie, then at the Federal Reserve, and Marriner Eccles, chairman of the Federal Reserve, there would have been much to interest him once he had started thinking seriously about fiscal policy and the business cycle. The seminar will have helped him to understand the arguments of the young economists involved
j. The list of graduate-student speakers included Richard Musgrave, Emile Despres, and Walter Salant.
in the Harvard-Tufts seminar, with some of whom he was to work during the war. However, though his career was to become increasingly entwined with Hansen's, this did not mean that he had become converted to Keynes: like his new mentor, he continued to distance himself from Keynes. The process of converting to Keynes involved the creation of a distinctive version of Keynesianism that owed as much to American sources as to Keynes.