John Maynard Keynes and the Great Depression

 

The Great Depression is a hallmark event in American history that has long been a source of debate by economists, politicians and historians.  When attempting to answer the question, “What caused the Great Depression?” the student and scholar alike must look inward to assess what biases, or preconceived notions, are being brought to the table. After all, the historiography of the Great Depression is riddled with copious amounts of partisan sway meant to twist the causes of the Great Depression in order to avoid assuming blame or responsibility.  For this reason, determining the ultimate causes of the Great Depression is no simple task. 

Of the many economic theories that have been presented over the years, the Keynesian theory/model seems to have caused the most controversy.  This model, created by British economist John Maynard Keynes, was an attempt to better understand the origins of the Great Depression by demonstrating how economies, when in depression/recession, are best remedied through increased government intervention and expenditures while simultaneously lowering the tax burden on the working class.[1]  In Keynes’ mind, the value of all money and goods had been rendered virtually worthless since the market had lost all trust in the debt/credit structure of world markets.  Or as Keynes himself put it: 

The immediate causes of the world financial panic—for that is what it is—are obvious. They are to be found in a catastrophic fall in the money value, not only of commodities, but of practically every kind of asset. The 'margins,' as we call them, upon confidence in the maintenance of which the debt and credit structure of the modern world depends, have 'run off.' In many countries the assets of the banks are no longer equal, conservatively valued, to their liabilities to their depositors. Debtors of all kinds find that their securities are no longer the equal of their debts. Few governments still have revenues sufficient to cover the fixed money charges for which they have made themselves liable.[2] 

 In Keynes’ estimation, the key to restoring trust in world markets was for government to take a more active role in “stimulating” the economy, especially since it had done little to prevent the depression in the first place.  The government had a duty to ensure that workers had jobs, even in tough economic circumstances, and to not ensure employment was “capitalism’s greatest cause of inefficiency and human suffering.”[3]  In addition, Keynes argued that it was inappropriate and irresponsible to blame workers for the Great Depression, since the blame (in Keynes’ mind) rested squarely on the inefficiency of governments to prevent the crisis in the first place.  As Keynes himself stated:

It is not very plausible to assert that unemployment in the United States in 1932 was due either to labour obstinately refusing to accept a reduction of money-wages or to its obstinately demanding a real wage beyond what the productivity of the economic machine was capable of furnishing...Labour is not more truculent in the depression than in the boom—far from it. Nor is its physical productivity less. These facts from experience are a prima facie ground for questioning the adequacy of the classical analysis.[4]

For Keynes, the answer was simple.  First, the government needed to spend more money and create more of a “presence” in the struggling economy, and second, cut taxes to relive pressure on the working class.[5] 

In the United States, Keynes’ economic theory was met with mixed reviews.  President Hoover, who clearly elected to take a different approach to solving the crisis, did not put much stock into government intervention in the American economy.  President Roosevelt, however, had a different perspective.  While he too fell short of embracing all of Keynes’ ideas, Roosevelt was a proponent of greater government intervention that took an active role in shaping and assisting the downtrodden economy.  Roosevelt’s “New Deal” certainly drew on many of Keynes’ ideas for greater government presence, but FDR never did accept Keynes’ second suggestion, which was to cut taxes.[6] 

In retrospect, it is easy to pass judgement on Keynes’ economic theory with the advantage of hindsight.  One can easily find evidence to both support and to criticize Keynes’ views and opinions.  As stated earlier, such has been the case with much of the history surrounding the origins of the Great Depression.  But Keynes’ views and suggestions should not be judged from the vantagepoint of 21^st century economists and historians.  Instead, it should be seen in the light of 1930s post-depression experience, based on what was known to the people, at the time, living in the moment.  Seen from that angle, John Maynard Keynes’ economic perspective was extremely valuable, for it placed importance on government giving immediate assistance to the working class. 

  

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[1] Jahan, Sarwat, Ahmed Saber Mahmud, and Chris Papageorgiou. "What is Keynesian Economics?: Finance and Development." Finance & Development, vol. 51, no. 3 (September, 2014): Pp.53-54, http://ezproxy.liberty.edu/login?qurl=https%3A%2F%2Fwww.proquest.com%2Fdocview%2F1561748797%3Faccountid%3D12085.

[2] John Maynard Keynes, “The World's Economic Outlook” The Atlantic (May, 1932).  https://www.theatlantic.com/magazine/archive/1932/05/the-worlds-economic-outlook/307879/

[3] KAUFMAN, BRUCE E. "Wage Theory, New Deal Labor Policy and the Great Depression: Were Government and Unions to Blame?" Industrial and Labor Relations Review vol, 65, no. 3 (2012): Pp. 504.  http://www.jstor.org/stable/24368882.

[4] John Maynard Keynes, The General Theory of Employment, Interest, and Money By John Maynard Keynes (February, 1936).  International Relations and Security Network: Primary Sources. Pp. 13-14. https://www.files.ethz.ch/isn/125515/1366_KeynesTheoryofEmployment.pdf

[5] Aspromourgos, Tony.  “Keynes’s General Theory After 75 Years” Economic Record, vol. 88, no. s1 (June, 2012).  Pp. 149-157.

[6] John Maynard Keynes to President Franklin D. Roosevelt, December 16, 1933.  http://la.utexas.edu/users/hcleaver/368/368KeynesOpenLetFDRtable.pdf

Thomas Edison: Business Mogul

 

All of us are familiar with Thomas Edison, the inventor and scientist.  Edison's name is virtually synonymous with invention.  Whether it be the (alleged) creation of the lightbulb, the telegraph, his motion camera or alkaline battery, Edison is forever etched into history as one of America's most successful and accomplished inventors and scientists.  His achievements remain with us and bless our lives even today.  And while these numerous accomplishments should continue to be hailed by historians for generations to come, one aspect of Edison's life is oftentimes ignored: his status as an important American businessman who left a definite and unique impression upon the era in which he lived.  

When studying Edison's life and business prowess, author Neil Baldwin makes some important observations.  First, Edison's brilliance as a marketer, who used his own name in all his ventures.  This gave Edison's businesses, which were not as well-known as his inventions, instant credibility in the eyes of consumers.[1]  Historian Edmund Morris also notes that Edison’s marketing was a stroke of genius, especially when one considers the fact that his competitors often had a better product.  For example, as a proponent of DC (Direct Current) electricity, Edison was forced to construct numerous power stations to supply the necessary electricity to his customers, since DC current loses its power when transported long distances by wire.  Edison’s competitors, who used AC (Alternating Current) electricity did not have to deal with this impediment, and thus had an advantage.  Edison reacted by labeling his competitors as dangerous and offering a service that was less reliable than his own.[2]  Edison himself recognized this strategy when he wrote, “Just as certain as death, Westinghouse will kill a customer within 6 months after he puts in a system of any size.”[3]

Eventually, Edison’s infatuation with DC current would fail as the superiority of AC current became abundantly clear to consumers.  As a result, Edison had to adapt yet another business tactic.  Instead of simply admitting defeat or continuing in a futile battle with a competitor who already has a far superior product, Edison elected to unite his forces with those of his foe.  Edison’s merger with Thomas-Houston Electric, which used AC, allowed Edison to continue operating his business as the new General Electric, which would last long into the subsequent decades. 

This merger cannot be seen purely as a victory for Edison, however.  As author Tom McNichol points out in his book, AC/DC: The Savage Tale of the First Standards War, Edison may have been the public face of the new General Electric, but he had suffered a massive loss.  McNichol writes:

Although Edison was the public face of the company, he owned only about 10 percent of the firm’s stock. The rest was controlled by Wall Street bankers, among them J.P. Morgan. Henry Villard was a financier himself; he had organized the highly profitable Northern Pacific Railroad, and like Westinghouse, was more a dealmaker[4] 

Electricity became a booming industry during the early years of the twentieth century and remained one of the few businesses that remained relatively untouched by the Great Depression.  As Gene Smiley, historian from Marquette University points out, the electricity industry began a mad rush to earn the services of their customers.  Westinghouse, General Electric and other companies began producing not just electricity coverage, but various appliances to help make life for everyday Americans easier and more efficient.^[5]  As can be seen from the charts below, electricity, during the early years of the twentieth century, was a booming business that had tons of promise: 

 

 

Historians note that Edison’s loss in the business arena that was electricity left him at a substantial disadvantage.  Edison was no longer a heavy hitter in the industry but instead had been reduced to a mere side note.  And while their observations are sound, they ignore Edison’s tenacity to remain a part of the game.  Edison did not simply die away, he had to evolve and change, which is why his experience as an entrepreneur is worthy of taking note.  Though Edison could have remained simply a scientific figure, known for his many amazing inventions, he elected to be more.  Edison remained inside a booming American industry that he had not only helped to create, but had seen evolve, even beyond himself.  And while that evolution took electricity to newer heights that even Edison could not imagine or reach, he still managed to remain a relevant and important figure within the business world.     

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[1] Niel Baldwin, Edison: Inventing the Century University of Chicago Press edition. Chicago: University of Chicago Press, 2001.

[2] Edmund Morris, Edison (New York: Random House Publishing, 2019) Pp. 238-242.

[3] Thomas Edison, in George Westinghouse, Westinghouse Electric Co., October 6^th, 1892.                  http://edison.rutgers.edu/digital/document/SC92085a1

[4] Tom McNichol, AC/DC: The Savage Tale of the First Standards War (San Francisco: Jossey-Boss Publishing, 2006). Pp. 133.

[5] Gene Smiley, “The U.S. Economy in the 1920s.”  EH.net.  Economic History Association.                  https://eh.net/encyclopedia/the-u-s-economy-in-the-1920s/

The Transcontinental Railroad and the Dawn of Modern America

On a beautiful spring day in May of 1869, workers and representatives of both the Union Pacific Railroad and the Central Pacific Railroad met in the barren high ground of Promontory, Utah to celebrate the completion of a six-year project meant to join a continent together.  The completion of the first Transcontinental Railroad was more than just a feat of engineering but also a means of spreading economic prosperity and opportunity to remote western lands.  This economic expansion helped to create new opportunities for both individuals, particularly immigrants, and for the United States, whose legitimized federal power in the wake of the Civil War had little opposition to its growth. 

There are numerous sources that help to shed light on how the completion of the Transcontinental Railroad impacted economic growth in the west.   One of the most interesting sources comes from various newspapers of the time immediately following the completion of the railroad.  A plethora of articles on the economic opportunities to be found in the west demonstrate how Americans of the time understood what the Transcontinental Railroad had brought to their nations.  This was particularly true for immigrants.  As one newspaper of the time noted, not only were immigrant workers fundamental to the construction of the Transcontinental Railroad, and to the budding industries that grew in towns along its route, but even foreign investors found opportunities to increase their capital by investing in this grand American expansion west.  “German, Dutch and Austrian bankers [have] left Europe…for the purpose of examining the condition of the work and financial prospects of the railway.”[1]  In his book, The Filth of Progress, historian Ryan Dearinger notes that immigrants, along with Mormons already living in the Utah territory, benefited tremendously from the new railroad.  “In the Utah Territory…the construction of the transcontinental railroad accelerated a new peopling of immigrants and emigrants on a wageworkers’ frontier…These groups, whose brains and brawn built the railroad, would test the litmus of racial democracy in the American West, that place of endless opportunities, a proving ground for national progress.”[2]

In addition to immigrants benefiting from expansion west, the American government found new opportunities to strengthen its control over the republic.  In the wake of the Civil War, western expansion brought with it ample opportunities to influence how expansion westward was to be achieved.  In what became the main stage in a heated political battle, western expansion, and the construction of the Transcontinental Railroad itself, became a heated topic in the halls of government.[3]  Historian Xavier Duran notes that almost every aspect of the Transcontinental Railroad was controlled and oversaw by a nee federal government that was determined to be involved in as many aspects of western expansion as possible.  “Government intervened, although high private profits were expected, because the project involved high political risk.  Competition in Congress over the location of the route and appropriation of the gains of the project caused political deadlock…Subsidies acted to ameliorate the negative long-term effects of political risk – not market failure – on private investment.[4] 

When one compares how the Transcontinental Railroad improved economic opportunities for both immigrants and for the growing United States federal government, it is important to understand how western expansion transformed American economics.  As Historian Richard White points out, “The idea that railroads remade North America and in doing so created the modern corporate world is hardly new…All of the possibilities that arose with railroads seemed magnified in the transcontinentals, which came to epitomize progress, nationalism and civilization itself…All I would change is that they created modernity as much by their failure as their success.”[5]  Historian Robert Fogel emphasizes these points when he discusses how the rise of railroads coincided with the rise of other industries like coal, iron, etc.^[6]

In short, western expansion and the dawn of the modern American economy that accompanied, were the incubators which gave rise to the emerging immigrant working class and the newly legitimized post-Civil War federal government, both of which found new opportunities for growth, expansion and legitimization in the American West.  As America moved west, it also moved into the future.  The archaic models of an American economy, devoted primarily to agriculture and small communities, was replaced with iron, steel coal and rails, carrying on its back a modern interpretation of capitalist economics in which a strong working force, along with an even stronger federal government, existed in a symbiotic relationship that brought with it greater prosperity than ever before. 

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[1] “Northern Railways to the Pacific.”  The Missouri Republican (St. Louis, MO.: July 25, 1871). Pp. 1.  Newspapers: Publisher Extra.  https://www.newspapers.com/image/666862675/?terms=transcontinental%2Brailroad%2Bjobs

[2] Ryan Dearinger, “Hell (and Heaven) on Wheels”: Mormons, Immigrants and the Reconstruction of American Progress and Masculinity on the Transcontinental Railroad.”  From, The Filth of Progress: Immigrants, Americans, and the Building of Canals and Railroads in the West (University of California Press, 2016).  Pp. 109.  http://www.jstor.org/stable/10.1525/j.ctt196331g.8.

[3] “Fight in Both Houses Over Railroad Land Jobs.”  The New York Daily Herald (New York: May 6, 1870).  Pp. 3.  Newspapers: Publisher Extra.  https://www.newspapers.com/image/329421318/?terms=transcontinental%2Brailroad%2Bjobs

[4] Xavier Duran,  "The First U.S. Transcontinental Railroad: Expected Profits and Government Intervention." The Journal of Economic History vol. 73, no. 1 (March, 2013).  Pp. 180.            http://ezproxy.liberty.edu/login?qurl=https%3A%2F%2Fwww.proquest.com%2Fdocview%2F1326735764%3Faccountid%3D12085.

[5] Richard White, Railroaded: The Transcontinentals and the Making of Modern America (New York: W.W. Norton & Company, Inc., 2011).  Pp. xxi.

[6] Robert W. Fogel, Railroads and American Economic Growth: Essays in Econometric History. (Baltimore: Johns Hopkins Press, 1964). Pp. 296.