When Frankie Met Johnny

Gary North discusses the largely unknown meeting between Roosevelt and Keynes in 1934 - two years before Keynes published his General Theory.

Few historians or economists know that the most influential American President of the twentieth century and the most influential economist of the twentieth century had a meeting in June of 1934. This is recorded in a book by Frances Perkins, who served as Roosevelt's Secretary of Labor: The Roosevelt I Knew (1946).

The account appears in Miss Perkins' chapter, "Labor and the Codes." The National Recovery Administration (NRA) under Hugh Johnson in 1934 was forcing businesses to adopt price floors and wage floors. More than any other institution of the early New Deal, the NRA extended the depression. By making it illegal for businesses and workers to offer their goods and services at a market price, the NRA extended unemployment, not just of workers but of all economic assets. Miss Perkins was a big fan of the NRA. . . .

Perkins records that Keynes came to America in 1934 and consulted with members of Roosevelt's administration. She then writes the following.

He pointed out that the combination of relief, public works, raising wages by NRA codes, distributing moneys to farmers under agricultural adjustment, was doing exactly what his theory would indicate as correct procedure. He was full of faith that we in the United States would prove to the world that this was the answer.

What Perkins neglected to mention was that these early New Deal policies were the intellectual offsprings of two books by two non-economists, William Foster and Waddill Catchings. Foster was the president of Reed College, a left-wing school in Portland, Oregon, named after John Reed, the Portland radical who was (and remains) the only American buried in Red Square. Foster's Ph.D. was in English, with a specialty in rhetoric. Catchings was a businessman. Their books, Profits (1925) and Money (1928), offered a defense of the idea that insufficient consumer demand is what causes economic slumps. Their work is generally regarded as pre-Keynesian. It would be more accurate to say that Keynes' work was Foster/Cachingsism. . . .

Here is Perkins' account of the meeting.

Keynes visited Roosevelt in 1934 rather briefly, and talked lofty economic theory.

Roosevelt told me afterward, "I saw your friend Keynes. He left a whole rigmarole of figures. He must be a mathematician rather than a political economist" (p. 225).

Roosevelt had a politician's ability to size up a man rapidly. Did he have Keynes' number! Keynes had earned a bachelor's degree in mathematics. His dissertation, A Treatise on Probability, was respected at the time. He had not majored in economics. His father, Cambridge economist John Neville Keynes, had put up half of the money for Cambridge to hire him. Keynes, Jr. earned no degree beyond the B.A. To call him a legacy scholar would be condescending but accurate.

Perkins added this.

Coming to my office after his interview with Roosevelt, Keynes repeated his admiration for the actions Roosevelt had taken, but said cautiously that he had "supposed the President was more literate, economically speaking" (p. 226).

He had sized up Roosevelt as accurately as Roosevelt had sized up him.

Perkins then added this report on Keynes' words to her. I have seen no better summary of Keynesian economics.

He pointed out once more that a dollar spent on relief by the government was a dollar given to the grocer, by the grocer to the wholesaler, and by the wholesaler to the farmer, in payment for supplies. With one dollar paid out for relief or public works or anything else, you have created four dollars' worth of national income.

Perkins did not ask this question: "Where did the government get that dollar?" This question is also not asked in any college-level economics textbook, and never has been. It deserves at least a subsection.

The absence of this obvious question over the last seven decades provides what I regard as the supreme example of academic blindness in modern times. There are lots of others, but nothing matches this one for its simultaneous simplicity and centrality. Ludwig von Mises was correct. Keynesian economics is the economics of stones into bread. In Paul Samuelson's version, it is fiat money into bread. [Emphasis mine]