Keynesianism

The term Keynesianism refers to the economic analysis and policies based on ideas advanced by the British economist John Maynard Keynes, especially in his General Theory of Employment, Interest, and Money, published in 1936. Keynesian ideas and policies had little impact on New Deal policy until the late 1930s, but after the recession of 1937-1938 and especially during World War II, Keynesianism was increasingly embraced by liberal policymakers, played a major role in the redirection of liberalism as part of the Third New Deal, and came to be accepted at least in part by many economists and some businessmen as well.

At the heart of Keynes’s ideas was his view that capitalist economies do not inevitably and automatically reach or sustain full-production, full-employment prosperity. This understanding led Keynes to focus on the dynamics of a market economy, which he said depend upon the sum total of private investment, consumer spending, and government spending. If there were enough of these sources of spending taken together, an economy could reach and maintain full-employment, full-production prosperity; if not, the economy might languish at lower levels. This insight pointed to the importance of government spending, for if there were not sufficient private investment and consumer spending, then there was a clear role for additional, or compensatory, government spending to produce full-production full-employment prosperity. And to have its fullest impact, compensatory spending by the government should be deficit spending—for if the government raised revenues in order to balance the budget while spending more, it would take money from the hands of consumers and investors. Keynesianism had an important place for monetary policy (interest rates and the volume and value of currency); but it focused especially on fiscal policy (taxation and spending).

Down to the late 1930s, New Deal fiscal policy was not Keynesian. Though some New Dealers—Marriner Eccles, for example—had emphasized the importance of government spending and some knew about Keynes’s ideas, President Franklin D. Roosevelt, Treasury Secretary Henry Morgenthau, and other important administration officials remained devoted to fiscal prudence and balanced budgets. The New Deal did of course incur defi-cits—but in order to finance essential programs, including RELIEF assistance to the unemployed and impoverished, rather than for the purpose of compensatory economic stimulus. The largest deficit was just some $4.4 billion dollars in 1936.

The recession of 1937-38 then led to a departure in economic thinking and policy. As some policymakers and economists looked at the pattern of the economy after 1933, they saw mild deficits and economic expansion from 1933 to 1937, followed by reduced spending and a plummeting economy in 1937 and 1938. Harvard economist Alvin Hansen was the foremost American mediator and proponent of Keynesian ideas, and he had a significant impact on key New Dealers, including Harry L. Hopkins, Henry A. Wallace, Leon Henderson, and others. In the policy debates over how to address the recession, proponents of spending won out over advocates of fiscal restraint and balanced budgets—and the economy began to recover from the 1937-38 downturn.

But World War II turned out to be the real proving grounds for Keynesianism. With less than half of the high costs of wartime mobilization financed by current revenues, deficits skyrocketed to some $50 billion per year from 1943 to 1945—more than 10 times the highest annual deficit during the 1930s. The result was full-production, full-employment prosperity, with the gross national product soaring, unemployment plummeting from 15 percent in 1940 to just 1 percent in 1944, and living standards rising. Massive deficits had produced economic recovery and prosperity. Although it is not clear that Roosevelt himself ever fully understood or accepted Keynesianism, many in his administration did, and Keynesian ideas increasingly shaped economic policy and analysis. The 1943 report of the National Resources Planning Board, Post-War Plan and Program, provided especially clear evidence that many liberals had come to understand that government spending on liberal programs could underwrite social reform as well as full-employment prosperity.

This liberal version of Keynesian compensatory spending on social reform did not, however, triumph in policymaking. Postwar fiscal policy (like that of the war years) was often more a “military Keynesianism” of national security spending in the cold war than it was “reform Keynesianism” of progressive taxation and spending on domestic reform programs. Postwar fiscal policy tended also to reflect the “commercial Keynesianism,” preferred by business, with deficits incurred by tax cuts more than by increased spending on liberal social programs. And the Keynesian Full Employment Bill that was the centerpiece of the liberal agenda at the end of the war became the attenuated Employment Act of 1946 that did not commit the government to compensatory spending to ensure full employment. But if Keynesianism did not usually take the form preferred by liberals, Keynesian ideas had become central not only to the liberal agenda but also to economic analysis and policy more generally by the postwar era. The use of fiscal policy to manage the postwar economy was abetted by another wartime development, the Revenue Act of 1942, which greatly expanded the number of Americans paying income taxes, led to implementation of the withholding system, and permitted more effective use of taxation in economic policy.

Further reading: Robert M. Collins, The Business Response to Keynes, 1929-1964 (New York: Columbia University Press, 1981); Robert LeKachman, The Age of Keynes (New York: Random House, 1966); Herbert Stein, The Fiscal Revolution in America (Chicago: University of Chicago Press, 1969).

King, Ernest J. (1878-1956) chief of naval operations during World War II

Admiral Ernest Joseph King served as chief of naval operations during World War II. Born in Lorain, Ohio, on November 23, 1878, King graduated from the U. S. Naval Academy in 1901, having already seen combat on the USS San Francisco during the Spanish-Ameri-can War. Commissioned as an ensign in 1903, he served on the USS Cincinnati, the USS Alabama, and the USS New Hampshire, and also as an instructor at the Naval Academy. In command of the USS Terry, King participated in operations at Vera Cruz, Mexico, in April 1914, and in 1916 joined the staff of Admiral Henry T. Mayo, commander, Atlantic Fleet, where he remained through World War I.

In the early 1920s, King commanded Submarine Divisions Three and 11, and the New London, Connecticut, submarine base. In 1928, at the age of 49, he underwent aviation training, one of the few senior naval officers to gain such qualifications. The next year he became the assistant chief of the Bureau of Aeronautics. In 1930 King took command of the aircraft carrier USS Lexington. After graduating from the Naval War College three years later,

Fleet Admiral Ernest J. King (Naval Historical Foundation)

He was named chief of the Bureau of Aeronautics. Made vice admiral and commander of the five-carrier Aircraft Battle Force in 1938, King served on the General Board in 1939-40 and in February 1941 was appointed chief, Atlantic Fleet.

A few days after the Japanese attack on Pearl Harbor in December 1941, King succeeded Admiral Husband E. Kimmel as commander in chief, U. S. Fleet, with the rank of admiral. In March 1942, he became the first officer to combine this post with the position of chief of naval operations, the top position in the U. S. Navy. In the Atlantic, the navy took on the role of convoy protection, antisubmarine patrol, and amphibious operations support, which King undertook only after pressure was exerted by the president and the British. The World War II Pacific theater was more clearly a naval conflict and was King’s main interest, marked as it was by frequent fleet actions on sea and in the air, and by amphibious warfare assaults by the U. S. Marines. The principal Pacific units under King’s overall command, through his Pacific Ocean Area subordinate Admiral Chester W. Nimitz, were the Third Fleet under Admiral William

F. Halsey, the Fifth Fleet under Admiral Raymond A. Spruance, and the Seventh Fleet under Admiral Thomas C. Kincaid. By 1945, King commanded the largest naval armada ever created, consisting of some 4 million men and more than 92,000 ships and boats. Although directing the naval war from Washington, D. C., King was present during the landings of the invasion of Normandy in June 1944. That December he was given the temporary five-star rank of fleet admiral, which was made permanent in April 1946.

King also served as the chief naval adviser to President Franklin D. Roosevelt and was involved in all of the major wartime Allied conferences. A gruff, fiercely determined, and plainspoken man, he was a staunch advocate of sea power and a well-known Anglophobe, who constantly battled with the U. S. Army and the British to maintain U. S. Navy predominance in the Pacific. He vocally disapproved of the “Europe first” strategy and the secondary role the U. S. Navy played there.

The post of commander in chief, U. S. Fleet, was abolished in October 1945, and King relinquished his additional post of chief naval operations to Nimitz that December. On inactive status, King returned to limited duty in 1950 as an adviser to the secretary of the navy and President Harry S. Truman. He died on June 25, 1956, at Portsmouth, New Hampshire.

Further reading: Thomas B. Buell, Master of Sea Power: A Biography of Fleet Admiral Ernest J. King (Boston: Little, Brown, 1980).

—Clayton D. Laurie

Knox, Frank (1874-1944) secretary of the navy William Franklin Knox was born in Boston, Massachusetts, on January 1, 1874. He was attending Alma College when the Spanish-American War erupted in 1898, and he left college to serve with Colonel Theodore Roosevelt’s Rough Riders in Cuba. Knox subsequently entered the field of journalism, and in 1912 he founded the Manchester Leader in New Hampshire, which espoused a strong prointerventionist line during World War I. Once the United States entered the war, Knox enlisted in the army at the age of 43 and served as an artilleryman in France. Afterward he resumed his journalism career and gained appointment as general manager for newspaper magnate William Randolph Hearst before editing the Chicago Daily News in 1931. Knox also developed a taste for politics, and he identified with the progressive wing of the Republican Party. In 1924 he made an unsuccessful bid for the party’s gubernatorial nomination in New Hampshire. He grew more conservative in the 1930s and openly criticized the New Deal legislation of President Franklin D. Roosevelt. Knox unsuccessfully sought his party’s presidential nomination in 1936, and then served as vice presidential candidate with Alfred M. Landon in the crushing defeat of the election of 1936. Within a few years events in Europe had increased the cries for intervention abroad, and Roosevelt, seeking to make his administration more bipartisan, invited Knox to serve as his secretary of the navy in 1939. Knox hesitated until 1940 before finally agreeing and was roundly accused of treason by many fellow Republicans.

Despite his lack of experience in naval matters, Knox proved himself an able and energetic naval secretary during World War II. He was instrumental in helping shape the destroyers-for-bases deal with Great Britain and urged stronger defense measures in anticipation of war with the Axis powers. In June 1941 his calls for American warships to escort Lend-Lease convoys to Great Britain resulted in isolationist demands for his removal. Following the December 7, 1941, attack on Pearl Harbor, Knox immediately flew to Hawaii, returned shortly after, and candidly admitted that the navy had been caught unprepared. Shortly thereafter he made two of his most important personnel changes by appointing Admiral Chester W. Nimitz as head of the Pacific Fleet and Admiral Ernest J. King as chief of naval operations. Knox was also active in coordinating ship procurement efforts and presided over the largest wartime expansion of the U. S. Navy from 160,000 in 1940 to 3.5 million sailors and marines. He also rendered valuable service by opposing Admiral King’s suggestion of reorganizing the navy by subordinating naval procurement within his office. Knox died suddenly in Washington, D. C., on April 28, 1944, and was lauded by President Roosevelt as a patriot who placed country above politics.

Further reading: Paolo E. Coletta, ed., American Secretaries of the Navy, 2 vols. (Annapolis, Md.: Naval Institute Press, 1980).

—John C. Fredriksen