Case Studies

Hard Times

The Great Depression was more than an economic problem. It was a human calamity. Millions went hungry, some to the point of starvation. While it seemed things couldn’t possibly get worse, they did. The politicians of 1932 were prisoners of the economic theories of the day, theories that held the economy would soon improve. That’s the message President Hoover kept delivering to the American people.

But in Cambridge, England John Maynard Keynes was telling his students that the American economy was bound to get worse. As people lost jobs, they stopped spending. As they stopped buying, stores stopped ordering inventory, more factories close, more jobs were lost, more stores and business failed in a vicious downward spiral.

It is a bitter irony of history that virtually everything the Hoover Administration tried to do only made things worse. The Republicans and Democrats worshipped at the altar of the balanced budget. By 1932 the budget was so far out of balance that a revenue bill cut government expenditures and imposed a huge tax increase on the reeling economy, which only made matters worse. When President Hoover was finally authorized to pump two billion dollars in investment money into the economy under the Reconstruction Finance Corporation, it was too late. The demand for goods and services was not there.

Comment & Analysis by Richard Gill Economic analyst Richard Gill examines Keynes theory that held that total private demandódemand for both consumption goods and investment goods might be insufficient to sustain full employment. The total demand was so weak that indeed we had The Great Depression of the 1930’s.

John Maynard Keynes

John Maynard Keynes was one of the truly memorable figures of the 20th century. He managed a theatrical company, ran an insurance business, and wrote a learned treatise on mathematical probability. But first and foremost he was a teacher at Cambridge University in England. Apart from all the treatises he published in mathematics and economics, Keynes was first and foremost a realist. When John Maynard Keynes published The General Theory of Employment, Interest & Money in 1936 not everyone, certainly not economists trained in classical economic theory, was ready for the revolutionary theory of aggregate demand or the call for government intervention. Initially economists resisted. the idea and Keynes followers were shunned in the universities. However, eventually the Keynesian economic principles swept into the American universities and eventually became the basis of pubic policy in Washington, DC.

Comment & Analysis by Richard Gill Richard Gill explains how Keynes ideas were revolutionary at the time and gave economists a way of looking at the Great Depression that made sense.: It was the notion that total demand---demand for consumers’ goods plus business demand for investment---might not be sufficient to maintain a high level of employment in the economy. This was what caused such a tidal wave of interest in the universities of the land.


Franklin Delano Roosevelt did not come to the White House convinced of the need for a Keynesian program of public spending to revive the shattered economy. FDR had spent much of the 1932 campaign declaring his faith in a lanced budget and blasting Hoover as a big spender.

Though Franklin Roosevelt was an economic conservative, he was a social liberal. Roosevelt saw rising unemployment and responded by resuming government spending. This government intervention stimulated the economy in a way that Keynes had been urging since 1933. But deep in his heart, Roosevelt simply did not trust theories or the economist who invented them. The idea of countering a Depression by lowering taxes and increasing government spending and doing it year after year was simply too fanciful for Roosevelt. And so FDR spent a little and the economy recovered a little.

But it would takeWorld War II to eventually end the Great Depression, as government spending soared. Massive government spending brought full production and full employment.

Comment & Analysis by Richard Gill Keynes said that pubic demand -- government spending on goods and services needed to make up the difference in demand to sustain a level of income to support full employment.

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