The Army, the New Deal, and the Planning for the Postwar

      Because of their duties in the Philippines and later in World War II, MacArthur, Eisenhower, and Clay missed what came to be called the Keynesian Revolution. In 1936, John Maynard Keynes wrote The General Theory of Employment, Interest and Money.¹ Prior to Keynes, most economists saw savings as the key to economic growth, where the more parsimoniously a people lived, the wealthier they would become. As Adam Smith argued, “Whatever a person saves from his revenue he adds to his capital.” What was true for one proved true for all: “As the capital of an individual can be increased only by what he saves … so the capital of society … can be increased in the same manner.”² In short, savings did not disappear from the economy; they made economic growth possible.

      Among the many arguments in his enigmatic book, Keynes reversed Smith’s argument by pressing precisely on the question of what happened to savings.³ Nothing guaranteed their automatic conversion into investment Keynes believed. Entrepreneurs invested based on the expectations of future profits. If, for some reason (Keynes posited “animal spirits”), they lost confidence in the future, they would hold their money rather than invest. “With the separation between ownership and management which prevails to-day,” he explained, “and with the development of organised investment markets, a new factor of great importance has entered in.” A well-developed and efficient financial system “sometimes facilitates investment,” but just as often, it “adds greatly to the instability of the system.”⁴ In short, the creation of capital markets lent itself to a kind of “mass psychology of the market,” which could “change violently as the result of a sudden fluctuation of opinion.”⁵ Investment depended on the mood of the investors, not the supply of savings, interest rates, or thrift. In pessimistic times money sat idly, waiting for investors to feel courageous again. Economists ultimately called the phenomena a “liquidity trap”—a term meant to contradict Adam Smith’s claim that savings easily made their way back into circulation. Thus, “the equilibrium level of employment, i.e. the level at which there is no inducement to employers as a whole either to expand or to contract employment, will depend on the amount of current investment.”⁶

      Keynes showed how, ironically, a high savings rate could kill growth. It could facilitate depression. He argued that a perfect balance of savings and investment was rare, “an optimum relationship” that “can only exist … by accident or design,” but hardly in the natural state of the economy.⁷ Put in simplest terms, Keynes argued that the economy’s vulnerability came from the investor class—rich capitalists and their hired guns—who could, in their flightiness and timidity, choke the economy into depression.

      But an alternative existed. Government could “compensate” for the investor class by spending those idle savings when investors lost their nerve. It could “prime the pump” and return the economy to full employment. Indeed, only government could pursue the public interest over the narrow anxieties of the investor class and restore the economy to a full employment equilibrium.⁸

      While it took time and developed piecemeal, eventually the Keynesian approach came to dominate the thinking of the New Dealers. For New Dealers, monopolists and reckless bankers—whose hatred Roosevelt had “welcomed” in 1936—need not be evil.⁹ Keynes showed they were just as dangerous by being timid, flighty, and narrow. They could effectively ruin the economy either way. The Keynesian approach had the additional advantage of showing that difficult and often controversial efforts to regulate and reorganize business were unnecessary. Rather, government simply needed to spend, and spend enough to restore the economy to full employment.¹⁰ Indeed, as spending on World War II ramped up, Keynes appeared to be a prophet: the American economy grew dramatically and unemployment disappeared.

      By the mid-1930s, Roosevelt began to worry that he had prioritized the domestic economy at the expense of the international. His secretary of state, Cordell Hull, prevailed upon him to embrace the cause of free trade. While Hull never gained Roosevelt’s full confidence, Roosevelt did support the Reciprocal Trade Agreement Act of 1934, which gave him authority to grant “most favored nation status” and unilaterally reduce tariffs with a particular country. Then came a 1938 U.S.-British trade agreement, lowering tariffs on a handful of goods. Roosevelt’s interest in the global economy accelerated as war seemed inevitable. Starting with his “Good Neighbor” policy toward Latin America, Roosevelt increasingly saw economic diplomacy laying the foundation for security.¹¹

      As Hull also began to think of war as inevitable, he initiated a Committee on Problems of Peace and Reconstruction, staffed largely with veterans of Woodrow Wilson’s administration. This group tried to divine “out of the experiences of the interwar years and out of the experiences of the [First World] war itself” what had gone so terribly wrong. They concluded that Wilson’s efforts had focused too narrowly on political reconstruction alone. “No program of constructive economic and social action agreed upon among all the victor powers of 1918 had come into being.” As a result, when “insecurity had grown” because of “problems left by the war,” and because of “the lag between national and international economic, social, and political policy on the one hand and swift technological development and desires for a higher standard of living on the other,” the precepts of “Christianity and democracy” had collapsed.¹²

      By 1940, the committee made economic reconstruction, rather than political reconstruction, its starting point since “the common interests of nations were more generally recognized in the economic than in the political field.” This seemed a particularly good starting point because “the experiences of the interwar period”—that is, the global Depression—had “focused [policymakers’] attention on the effects of economic policies on international relations.” Echoing Walter Lippmann’s 1933 essay, the committee argued that a collapse of international trade would be followed by nationalist economic and political policies. Lack of global economic cooperation created an “important source of friction between nations and [was] a basic factor contributing to stability or instability within states.”¹³

      But trade remained a particularly thorny issue, particularly with the British. When Roosevelt met with Winston Churchill to craft what became the Atlantic Charter in 1941 (the Charter stood as the fundamental document outlining American and British war aims), the State Department inserted a clause that the United States and Britain would “strive to promote mutually advantageous economic relations … through the elimination of any discrimination … against the importation of any product originating in the other country.” Churchill balked at this. The British, former champions of free trade, had since the depression realized the value of a preferential system of trade within their vast empire.

      “Time being of the essence,” Roosevelt thought it best to compromise with Churchill. He rewrote the passage to say only that the two countries would “endeavor to further the enjoyment by all peoples of access, without discrimination and on equal terms to the markets and to the raw materials of the world which are needed for their economic prosperity.” Churchill reluctantly