Why the Application of Keynesian Ideas Failed During the Great Depression

John Maynard Keynes, a prominent economist, is renowned for his theories and contributions to modern economics. However, during the Great Depression, his ideas were not fully embraced and applied. This article explores the reasons behind this failure and delves into the economic flaws that hindered the effective implementation of Keynesian policies.

Keynesian Ideas and the Great Depression

During the Great Depression, several prominent figures, including US President Franklin D. Roosevelt and Congress, attempted to alleviate poverty and stabilize the economy through various programs. However, there was a significant resistance to wholly adopt Keynesian theories, particularly his emphasis on increased government spending and intervention.

The Nyquist of Ambivalence

Raymond Moley, a close advisor to President Roosevelt, believed that Roosevelt and Keynes did not fully understand each other or each other’s ideas. Roosevelt himself did not attempt to implement the full scale of Keynesian policies, either because of personal disagreements or due to the prevailing economic and political climate. A key reason was Roosevelt’s concern about the backlash from increased taxes to prevent deficit spending, as well as the growing resistance from the public towards extensive government assistance.

Economic Context and Policy Resistance

Further complicating the situation, the Federal Reserve maintained a tight monetary policy, resulting in limited credit availability. This was due to the fear of another stock market speculation-driven crash. Bankers who were responsible for managing the economy blamed the previous era of excessive speculation and were hesitant to permit another speculative boom. This created a hostile environment for implementing Keynesian policies, which necessitated easier credit and stimulation.

The Resurgence of Fiscal Measures

Instead of embracing Keynesianism, President Roosevelt implemented a range of government spending projects. Public works programs, such as the Works Progress Administration (WPA), were designed to provide employment and stimulate economic growth. However, these efforts faced significant resistance, partly due to public reluctance to support extensive assistance to able-bodied individuals. Instead, the public preferred more modest forms of relief, such as food and old age assistance. As a result, even with the enactment of spending measures by Congress, there was substantial resistance to sufficient spending.

Theories and Realities

In 1936, Keynes published "The General Theory of Employment, Interest, and Money," a comprehensive tome outlining his economic theories. However, his propositions were only relevant to the context in which they were written, and not much focus was given to their immediate application. Keynes' ideas were simple in concept—identify that existing policies were ineffective, such as raising taxes and interest rates—yet they required a complete shift in economic philosophy, which was difficult to achieve.

Pervasive Skepticism and Criticism

Unfortunately, Keynes' ideas were met with skepticism, especially in the academic and political spheres. His advocacy for non-traditional fiscal policies appalled traditional economists and policymakers. Academics such as Milton Friedman were particularly critical of Keynesian theories, arguing that they overlooked the root causes of the Great Depression. Despite criticisms, Keynesian concepts gained momentum in the lead-up to, and during, World War II. The significant deficit spending to build up military spending is often credited with ending the Great Depression by providing a substantial economic boost.

Conclusion

In conclusion, while Keynes' ideas offered a viable solution during the Great Depression, their implementation was hampered by several factors. Economic policymakers might have needed a more holistic and pragmatic approach, well beyond the simple recognition that existing policies were ineffective. Nevertheless, Keynesian economics has since become a cornerstone of modern economic policy, providing essential insights into fiscal management and economic stabilization during challenging periods.