Why Capitalist Economies Need Government Management

Capitalist economies need strong central management for many reasons. One reason: to modify the wild swings from “boom” to “bust” that result when many risk-taking competitors pursue their different economic interests. Only a national government can manage a national economy in a way that most competitors will accept as reasonably fair. And as corporations and the private economy grow larger, only a strong government, able to invest and spend enough to make a difference in overall economy, can do the job.

It took the United States about one hundred fifty years to understand the need for central economic management, and still longer for most economists and politicians to learn how to do it right. For many years, everyone believed the government could only print an amount of money equal to the gold bullion it held, at Fort Knox or elsewhere. Economic Panics and Depressions came and went, with the government doing little or nothing to make things better. Then during the Great Depression of the 1930’s, we learned a couple of new things, mostly by accident.

First, people saw a national government help get us out of a Depression by spending more than it had in bullion, and more than it collected in taxes. For the first three years of the Depression, Republican President Hoover had done what the “experts” of his day thought he should do: he cut government spending sharply, because the government was collecting less in taxes. And things got worse and worse. One quarter of the former workforce was out of work. Many thousands hit the road as “tramps,” hitching free rides on freight trades, and sleeping in corn cribs. And many banks didn’t have enough money to pay all their debts.

When he ran against Hoover for President in 1932, Franklin Roosevelt promised more of the same cost-cutting as Hoover – but when he took office, he did something dramatic and different. He began by closing ALL the banks for a few days, and then allowing only the solvent banks to reopen. Now, people who had some money felt safe to put it in a bank again, where it could be loaned out to buy goods or grow businesses. And, the U.S. went off the “gold standard” altogether, with the government spending as much as was needed to address the nation’s problems. It turned out that a dollar was still worth a dollar as long as retailers and bankers gave you goods or interest for it. Trust was what mattered. Gold became just one more product.

Even more importantly, FDR also did what he had done on a small scale as Governor of New York when he saw a lot of people out of work: he hired them to work for the government, and put money in their pockets. They cut trails through forests, built dams and produced electricity, built a lot of train stations and public buildings. Of course, the workers on those projects spent every penny they earned as fast as they could. That meant other Americans had money in their pockets, and usually, they also spent it as fast as they could, and so on. In that way, over the course of a year, each new wage dollar added multiple dollars to the economy.

The Roosevelt Administration and the Congress also started other new programs that put more money in the pockets of ordinary people.  These included Social Security, a minimum wage, unemployment insurance, and a National Labor Relations Board. These programs, besides boosting the economy, addressed the radical inequality between huge corporations and individual workers, and between people of property who could live without work, and former wage workers who had no income in old age or unemployment. With all this new purchasing power in people’s pockets, the economy began to GROW again. The government had “primed the pump,” and the private economy began pumping again. With all the new economic activity, tax collections also rose.

By 1937, people figured the Great Depression was history. All that spending by the government was no longer needed! So the Roosevelt government cut spending way back – and we went back into recession! It turned out we had cut government spending too soon and too far for an economy that was still in recovery. At this point — unfortunately for the world, but fortunately for the U.S. economy – Hitler, Mussolini and Tojo launched a war to take over the world. To build weapons and pay soldiers and sailors, the U.S. returned to really huge levels of deficit spending. The economy recovered for good this time, and grew quickly, year after year. We were finally out of the Depression.   By 1945, we began thirty years of growth (with occasional short recessions), which was widely shared with a new kind of people – the American Middle Class: blue collar and service workers with money in their pockets.

Before and after Roosevelt and the war, a British economist, John Maynard Keynes, had written books explaining how a government should manage the economy, and why. His new theory, “Keynesian economics,” called for deficit spending as a way to get out of recessions, just as the Roosevelt Administration had done for its own reasons, without really knowing what to expect. (He also said government deficits should be cut when the private sector was booming.) Now, confirmed by Roosevelt’s actions, Keynes’ theory became the guide to government economic management from that point forward.

Many business people, and other conservatives, were offended by the idea that government could borrow and print the money it needed to pay its debts. They saw that government “make-work” tended to increase the wages they had to pay to hire employees. They worried that government might have more power than they did. But as the new system prevented downturns from becoming Depressions, and let workers earn enough to buy what they produced, it benefited business along with everyone else, so they grumbled all the way to the bank.

Since the 1930’s, the Federal Government generally spends more than it has (deficit spending) in hard times, and then cuts back spending once the private sector grows strongly again.  In the 1960’s, Republican President Nixon settled the issue for most people when he said, “we are all Keynesians now.”

In my next blog, we’ll look at some pictures of how this system works.

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