Part 6

by Robin McMeeking

Part 6

Evolving Economic Theory

Before we discuss Harry Truman and the end of the war etc, this seems like an appropriate place to explore further developments in economic theory that were going on during the depression. Undoubtedly the best known economist of the time is Keynes, John Maynard Keynes. Born in 1883, Keynes was English and studied economics at Kings College. His first book on economics (Indian Currency and Finance) was published in 1913. He went to work for the British government in Treasury where he stayed until the end of WW I. He had risen to the head of “A Division”, dealing with the inter-allied economic effort. Following the war he left the government to write and try to influence public opinion, initially by opposing the reparations requirements of the armistice. In the 1930s he turned his analysis to the depression. In 1936 he published his most significant work, The General Theory of Employment, Interest and Money. In it he put forward the following propositions:

Keynes stated that if Investment exceeds Saving, there will be inflation. If Saving exceeds Investment there will be recession. One implication of this is that, in the midst of an economic depression, the correct course of action should be to encourage spending and discourage saving. This runs contrary to the prevailing wisdom, which says that thrift is required in hard times. In Keynes’s words, “For the engine which drives Enterprise is not Thrift, but Profit.”

Keynes took issue with Say’s Law – one of the economic “givens” of his era. Say’s Law states that supply creates demand. Keynes believed the opposite to be true – output is determined by demand.

Keynes argued that full employment could not always be reached by making wages sufficiently low. Economies are made up of aggregate quantities of output resulting from aggregate streams of expenditure – unemployment is caused if people don’t spend enough money.

In recessions, the aggregate demand of economies falls. In other words, businesses and people tighten their belts and spend less money. Lower spending results in demand falling further and a vicious circle ensues of job losses and further falls in spending. Keynes’s solution to the problem was that governments should borrow money and boost demand by pushing the money into the economy. Once the economy recovered, and was expanding again, governments should pay back the loans. [My emphasis. Keynes was not advocating perpetual deficit spending, just during significant economic downturns. He did want the deficits to be payed back.]

Economically and socially successful economies have significant contributions from both the government and the private sectors.

Keynes’s view that governments should play a major role in economic management marked a break with the laissez-faire economics of Adam Smith, which held that economies function best when markets are left free of state intervention.

Roosevelt met with Keynes in 1934 and Roosevelt seemed to be impressed with him. However, no one seems to know if Roosevelt attempted to follow Keynes economic advice. His policies were somewhat Keynesian, but true Keynesians say that Roosevelt stopped short of spending at the level necessary to create the required demand. During the war, however, spending did rise dramatically and unemployment disappeared. After the war there was an economic boom. Keynesians say that the wartime spending ended the depression and confirmed Keynes’ theory.

But wartime economics is vastly different from peacetime. Very few consumer goods were being produced; all effort was into building war materials; planes, tanks, ships, munitions, etc. No cars or tires were made for the general public. Many things were rationed and had price controls. So, the typical measurements of economic activity are all skewed to the point they are of very little use. By the end of the war a great demand had built up for all kinds of consumer goods. Furthermore, the manufacturing facilities in Europe and Asia had suffered extensive war damage and needed to be rebuilt. In the eyes of many economists this was not a valid test of Keynes proposals.

Speaking of tests, this is a good time to point out that none of the philosophical or economic things we have discussed can properly be called “scientific”. Although all of the authors speak as though they are presenting facts, in reality they are opinions. The practice of science depends on the scientific method. For a theory to be scientific it must meet certain criteria. One of these criteria is that there must be tests that can be performed that can disprove the theory; controlled tests that can be repeated by other researchers. A test of a theory that doesn’t disprove it gives the theory a stronger position, but never really proves it. For example, Newton’s theory of gravity passed many tests, but as measurements got more precise it became clear that it wasn’t quite right. This led Einstein to propose a theory of “relativity” that has passed every test devised over the past 100 years. But it is still “just a theory”.

Several days after writing the above, I saw a story on the internet about scientists finding a 1971 Russian lunar probe that had a reflector mounted on it. “No one had seen the reflector since 1971,” said Tom Murphy, an associate professor of physics at the University of California San Diego. Murphy leads a team of scientists in a long-term effort to use laser reflectors to measure the shape of the lunar orbit and look for deviations in Einstein’s Theory of General Relativity.

I think it is obvious that there is no way to set up a controlled test of an economic theory. Small-scale experiments based on “game” rules have examined some economic concepts, but the situations are so different from actual national or global economic complexities that it is not clear how much can be learned from them. The same applies to non-economic philosophical ideas as well.

This is not to say that we haven’t improved our economic understanding over the past few centuries, we undoubtedly have. Every year we accumulate more data with ever improving detail about actual market events that can be analyzed to look for cause and effect results to refine our understanding. However, disaster occurs when we become over-confidant in our knowledge and our ability to control the economic engine. The monumental failures of communism attest to that, as do more recent economic woes here and abroad.

Let’s return to the narrative by looking at another economist of influence. Friedrich von Hayek was born in Austria in 1899, 16 years after Keynes. “He studied at the University of Vienna where he earned doctorates in law and political science in 1921 and 1923 respectively, and he also studied philosophy, psychology and economics with a keen interest. Between 1923 and 1924 Hayek took advantage of an opportunity to work as a research assistant to Prof. Jeremiah Jenks of New York University, compiling macroeconomic data on the American economy and the operations of the U.S. Federal Reserve.”

The following is from the The Concise Encyclopedia of Economics: Most of Hayek’s work from the 1920s through the 1930s was in the Austrian theory of business cycles, capital theory, and monetary theory. Hayek saw a connection among all three. The major problem for any economy, he argued, is how people’s actions are coordinated. He noticed, as Adam Smith had, that the price system—free markets—did a remarkable job of coordinating people’s actions, even though that coordination was not part of anyone’s intent. The market, said Hayek, was a spontaneous order. By spontaneous Hayek meant unplanned—the market was not designed by anyone but evolved slowly as the result of human actions. However, the market does not work perfectly…

[He concluded that actions by the federal banking system could inadvertently lead the business community to make decisions that turn out to be counterproductive. For instance, an excess increase in the money supply would lead to lower interest rates for long term borrowing.] …artificially low interest rates not only cause investment to be artificially high, but also cause “malinvestment”—too much investment in long-term projects relative to short-term ones, and the boom turns into a bust. Hayek saw the bust as a healthy and necessary readjustment. The way to avoid the busts, he argued, is to avoid the booms that cause them.

In the late 1930s and early 1940s, Hayek turned to the debate about whether socialist planning could work. He argued that it could not. The reason socialist economists thought central planning could work, argued Hayek, was that they thought planners could take the given economic data and allocate resources accordingly. But Hayek pointed out that the data are not “given.” The data do not exist, and cannot exist, in any one mind or small number of minds. Rather, each individual has knowledge about particular resources and potential opportunities for using these resources that a central planner can never have. The virtue of the free market, argued Hayek, is that it gives the maximum latitude for people to use information that only they have. In short, the market process generates the data. Without markets, data are almost nonexistent…

…After he moved to Britain, he noticed that many British socialists were advocating some of the same policies for government control of people’s lives that he had seen advocated in Germany in the 1920s. He had also seen that the Nazis really were National Socialists; that is, they were nationalists and socialists. So Hayek wrote The Road to Serfdom[1944] to warn his fellow British citizens of the dangers of socialism. His basic argument was that government control of our economic lives amounts to totalitarianism. “Economic control is not merely control of a sector of human life which can be separated from the rest,” he wrote, “it is the control of the means for all our ends.”

To the surprise of some, John Maynard Keynes praised the book highly. On the book’s cover, Keynes is quoted as saying: “In my opinion it is a grand book…. Morally and philosophically I find myself in agreement with virtually the whole of it; and not only in agreement with it, but in deeply moved agreement.”

Harry Truman and the Cold War

We have had WW II on hold long enough. Lets get back to Truman and finish it off. I have previously mentioned that our two main political parties each represent a rather broad ideological perspective. That was particularly true of the Democratic party prior to the 1970s as a remnant of the alignment following the Civil War. Southern Democrats had little in common with the eastern progressive/liberal wing of the party. It was common practice in presidential elections to create a “balanced” ticket with the vice presidential candidate representing a different region and philosophy than the presidential candidate. This was clearly the case where Truman was concerned. He came from Missouri and had a background that one would not normally equate with presidential aspirations.

Harry Truman was born in 1884 into a farming family. Not attracted to farming, he tried his hand at an unsuccessful business venture. He served in the National Guard in France during WW I and returned home for another attempt at business. When this also failed he ran for a county judgeship in 1922 and was elected, but not reelected. He made a comeback in ’26 and served as a presiding judge until 1934. In that position he managed the county finances and earned a reputation for honesty and integrity. He was elected to the U.S. Senate in ’34 where he served until being nominated for VP in ’44. After only 82 days in office Roosevelt died and Truman became our 33rd president (April 12, 1945).

Truman knew that the war in Europe was nearing an end, but there was a lot he didn’t know. He was unaware of the Manhattan Project developing an atomic bomb and he didn’t know about the secret agreements made at Yalta. Less than two weeks after taking office Truman met with Russian ambassador Molotov and demanded that the Soviet Union honor its agreements for democratic elections in Poland. Molotov said he had never been talked to like that and stormed out. To many historians this episode, more or less, marks the beginning of the Cold War, with Truman making a sharp break with Roosevelt’s policies toward the U.S.SR. More recently, Wilson D. Miscamble in From Roosevelt to Truman: Potsdam, Hiroshima, and the Cold War, argues that Truman attempted to continue the Roosevelt approach for about two years, gradually coming to the conclusion that Stalin could not be trusted. My own limited research suggests that within a year Truman was making significant policy changes toward the U.S.SR. Perhaps as we go along the reader can look for clues to help resolve the question. It isn’t an issue of substance for this essay. As we saw above, only days before his death Roosevelt had come to realize that Stalin could not be trusted. We can never know how his dealings with the U.S.SR might have changed.

On May 8th Germany surrendered. On July 12 Churchill was informed that his Conservative Party had lost a general election and he was no longer Prime Minister, the new PM was Clement Attlee. An American atom bomb was successfully tested on July 16. On July 17 Truman attended the last of the war summit conferences along with Stalin. Churchill came too, but was replaced by Attlee mid way through. This one was held in Potsdam, a suburb of Berlin that was relatively free of war damage. It lasted until August 2. The main purpose of the conference was to finalize the areas in Europe to be controlled and by whom. Most of this was ironing out details without significantly changing the plan set out in Yalta. If Truman was unhappy with the arrangements (unknown) it was too late to do anything about it. The great irony of WW II is that it started when Germany invaded Poland and the Allies came to the rescue. It ended with Poland lost to Russia.

During a meeting break Truman got Stalin alone. He later recalled, “on July 24 I casually mentioned to Stalin that we had a new weapon of unusual destructive force. The Russian Premier showed no special interest. All he said was he was glad to hear it and hoped we would make ‘good use of it against the Japanese.'” Churchill and several of Truman’s aids were watching Stalin closely for a reaction. No one detected a hint of surprise.

A surrender ultimatum was sent to Japan by the Allied powers from the conference. On August 6 an atom bomb was dropped on Hiroshima followed on August 9 by another on Nagasaki. The estimated deaths from these bombings, including fatalities from radiations burns and other injuries, was over 200,000 by the end of 1945. Over the years Truman and the U.S. have been severely criticized for this action. He also has many supporters. I have no illusions that I can resolve this debate, but I will lay out some of the arguments. There is much about WW II that influences our politics today, and this is one of those things.

The argument against the use of these weapons is primarily humanitarian. The immense loss of life, primarily civilian, is almost incomprehensible. Additionally there were thousands of long term sufferers from radiation poisoning and other injuries sustained in the blasts. In the spring of ’45 communiques from Japan to their envoy in Moscow asked about the possibility of peace without unconditional surrender. The conditions proposed in these cables were never presented to Stalin as he was busy preparing for the Potsdam conference. They proposed that Japan be permitted to retain its government and influence in the Pacific. These cables were intercepted by U.S. code breakers and were made known to Truman. They originated from the diplomatic part of the Japanese government, not the military or the emperor. So it seems possible, but far from certain, that peace could have been achieved diplomatically without an invasion or the use of the bomb.

Can the use of the atom bomb be justified? Maybe not, but perhaps it can be understood in the context of the time. There are several points to consider when attempting to do this. One is the prevailing attitude toward civilians as legitimate targets. Another has to do with likely casualties, etc. from continuing the conventional warfare. Also important was the relationship with Russia which had gobbled up numerous countries and was poised to take more.

During WW II both sides came to consider cities as valid targets, and civilian casualties were acceptable collateral damage. Precise targeting with conventional bombs was impossible. “Carpet” bombing with hundreds of bombs sometimes failed to destroy a military or industrial target. Generally the cities were industrial centers or had other military significance. However, there are several cases where civilian casualties may have been the primary objective. As the war went on there was a switch to “firebombing” where the purpose was to engulf a large area in a firestorm that could go on for hours after the planes had left. The following is from Wikepedia; “In the last seven months of the campaign, a change to firebombing tactics resulted in great destruction of 67 Japanese cities, as many as 500,000 Japanese deaths and some 5 million more made homeless.” The U.S. was planning an invasion of Japan for November. Casualty estimates were astronomical. Russia had promised Roosevelt to enter the war in August and many in the Truman administration were concerned about what that would mean in terms of Soviet expansion. It seemed likely that Russia would get control of all of Korea and part of Japanese occupied China. We will see a little later that Truman and Churchill were quite concerned about Russia and the possibility of additional Russian expansion in Europe when the Allied armies relocated to the Pacific. Some analysts believe that the use of the bomb was a means of attaining a quick victory, permitting some forces to stay in Europe and sending a strong deterrent message to Stalin.

For a more detailed look into these positions and the related documents, I suggest the following two sites. The National Security Archive and the H-Diplo Roundtable .

During the Civil War General Sherman made the remark that “war is hell”. Almost 100 years of technological advances had only made it worse.

On August 14 Japan surrendered. Korea, which had been occupied by Japan was split into Soviet and American controlled areas. In 1948 UN controlled elections were held to determine a new government for Korea; Russian controlled North Korea refused to participate.


Lets return to the beginnings of the “Cold War”. Immediately after Truman took office, he had to deal with a communication from Stalin (sent to Roosevelt) that he intended to provide his own solution for Poland. Truman exchanged many messages with Churchill about the situation. He wanted Stalin to adhere to the Yalta agreements.

860C.01/4-1345: Telegram

President Truman to the British Prime Minister (Churchill)

[WASHINGTON,] April 13, 1945-4: 30 p. m.

[2.] Stalin’s replies to you and to President Roosevelt make our next step of the greatest importance. Although with a few exceptions he does not leave much ground for optimism, I feel very strongly that we should have another go at him. I have very much in mind your observations in your no. [929?] to President Roosevelt on the danger of protracted negotiations and obstructionist tactics being utilized to consolidate the rule of the Lublin group in Poland and I recognize the compulsion you are under to speak in the House of Commons. I feel, however, that we should explore to the full every possibility before any public statement is made which could only be as matters now stand to announce the failure of our efforts due to Soviet intransigence. Once public announcement is made of a breakdown in the Polish negotiations it will carry with it the hopes of the Polish people for a just solution of the Polish problem to say nothing of the effect it will have on our political and military collaboration with the Soviet Union. I suggest for your consideration, therefore, that we send a joint message to Stalin over both our names to be delivered personally by our Ambassadors in reply to his messages to us. I give you below for your consideration a suggested text of this joint message. If you agree that a joint message is desirable I hope you will go over most carefully the following proposed text and let me have as soon as possible your comments and suggestions so that we can without delay get it off to our Ambassadors for delivery to Stalin.

And this a few days later:

Truman Papers: Telegram

President Truman to Prime Minister Churchill 1


31. Your messages 34 2 and 35.3

I am in agreement with your opinion that a meeting of the three heads of government would be desirable in order to get action on the questions of interest to the three governments upon which either a decision or a common understanding have not been reached.

I very much prefer to have the request for such a tripartite meeting originate from Marshal Stalin and not from either one of us. Perhaps you have means of some kind with which to endeavor to induce Stalin to suggest or request such a meeting.

In the meantime it is my present intention to adhere to our interpretation of the Yalta agreements, and to stand firmly on our present announced attitude toward all the questions at issue.

Churchill’s reply expressed even stronger concerns about Soviet intentions.

Leahy Papers: Telegram

Prime Minister Churchill to President Truman’

TOP SECRET LONDON, 12th May 1945.

Prime Minister to President Truman. Personal and top secret.

Number 44.

1. I am profoundly concerned about the European situation as outlined in my number 41.2 I learn that half the American air force in Europe has already begun to move to the Pacific Theatre. The newspapers are full of the great movements of the American armies out of Europe. Our armies also are under previous arrangements likely to undergo a marked reduction. The Canadian Army will certainly leave. The French are weak and difficult to deal with. Anyone can see that in a very short space of time our armed power on the Continent will have vanished except for moderate forces to hold down Germany.

2. Meanwhile what is to happen about Russia? I have always worked for friendship with Russia, but like you, I feel deep anxiety because of their misinterpretation of the Yalta decisions, & their attitude towards Poland, their overwhelming influence in the Balkans excepting Greece, the difficulties they make about Vienna, the combination of Russian power and the territories under their control or occupied, coupled with the Communist technique in so many other countries, and above all their power to maintain very large armies in the field for a long time. What will be the position in a year or two, when the British and American armies have melted and the French” has not yet been formed on any major scale, when we may have a handful of divisions mostly French, and when Russia may choose to keep two or three hundred on active service?

3. An iron curtain [emphasis mine] is drawn down upon their front. We do not know what is going on behind. There seems little doubt that the whole of the regions east of the line Lubeck-Trieste-Corfu will soon be completely in their hands. To this must be added the further enormous area conquered by the American armies between Eisenach and [the] Elbe, which will I suppose in a few weeks be occupied, when the Americans retreat, by the Russian power. All kinds of arrangements will have to be made by General Eisenhower to prevent another immense flight of the German population westward as this enormous Muscovite advance into the centre of Europe takes place. And then the curtain will descend again to a very large extent if not entirely. Thus a broad band of many hundreds of miles of Russian-occupied territory will isolate us from Poland.

4. Meanwhile the attention of our peoples will be occupied in inflicting severities upon Germany, which is ruined and prostrate, and it would be open to the Russians in a very short time to advance if they chose to the waters of the North Sea and the Atlantic.

5. Surely it is vital now to come to an understanding with Russia, or see where we are with her, before we weaken our armies mortally or retire to the zones of occupation. This can only be done by a personal meeting. I should be most grateful for your opinion and advice. Of course we may take the view that Russia will behave impeccably and no doubt that offers the most convenient solution. To sum up, this issue of a settlement with Russia before our strength has gone seems to me to dwarf all others.

The message from Stalin to Roosevelt that preceded these is much too long to include here, but the interested reader can find it here at the bottom of the page. It is within the context of these telegrams that we can better understand the meeting of Truman and Molotov mentioned above. Perhaps these considerations also influenced Truman’s decision to use the bomb to end the war with Japan as quickly as possible.

We also see a distinct difference in the relationship of Truman to Churchill compared to Roosevelt and Churchill. Of course, Roosevelt’s relationship with Churchill would likely have changed too after he became disillusioned with Stalin. At any rate Truman seems to have genuinely liked Churchill as they maintained correspondence even after Churchill lost the Prime Minister title. Churchill seems to have been the only western leader who saw the dangers of Nazism and Communism before they got big enough to threaten the world. He was ringing the alarm bell long before the others. The 20th century would have been much different without him.

In March of 1946 Truman invited Churchill to Missouri. In the town of Fulton, at Westminster College, Churchill delivered a speech to a crowd of 40,000. This now famous “Iron Curtain” speech changed the way the west regarded the U.S.SR. In it he said, “From Stettin in the Baltic to Trieste in the Adriatic, an iron curtain has descended across the Continent. Behind that line lie all the capitals of the ancient states of Central and Eastern Europe. Warsaw, Berlin, Prague, Vienna, Budapest, Belgrade, Bucharest and Sofia, all these famous cities and the populations around them lie in what I must call the Soviet sphere, and all are subject in one form or another, not only to Soviet influence but to a very high and, in many cases, increasing measure of control from Moscow.”

Communists in Greece had been waging an insurrection. Britain had been providing aid to the government and to Turkey which was also under threat. In 1947 Britain announced that it could no longer afford to continue this aid. In March of ’47 the “Truman Doctrine” was announced which committed the U.S. to a policy of containment – to prevent any further expansion of communism throughout the world. This policy, which formalized the Cold War, was adhered to by administrations of both parties until the Soviet Union collapsed in 1990/91, although support for it did weaken at times.

Also of significance early in Truman’s presidency was the forming of the United Nations, fulfilling Roosevelt’s dream. “In 1945, representatives of 50 countries met in San Francisco at the United Nations Conference on International Organization to draw up the United Nations Charter. Those delegates deliberated on the basis of proposals worked out by the representatives of China, the Soviet Union, the United Kingdom and the United States at Dumbarton Oaks, United States, in August-October 1944. The Charter was signed on 26 June 1945 by the representatives of the 50 countries. Poland, which was not represented at the Conference, signed it later and became one of the original 51 member states.” One of the key figures from the U.S. in developing the UN charter was Alger Hiss. He was later found to be a Communist operative. We will get back to this later.

In 1947 Truman signed the National Security Act, creating the Central Intelligence Agency, the National Security Council, and combining the various branches of the armed services into the Department of Defense. To strengthen the economies of western Europe as an aid to resisting internal threats of communist insurgency, the Marshal Plan was enacted in 1948. It was overwhelmingly successful in bringing economic stability to the non-communist parts of Europe.

America tried to make use of the United Nations in executing its containment policy, but the charter provision giving any Security Council member veto power over UN actions stifled most such attempts. Another multi-national organization was formed in 1949 that was better suited to the task. This was the North Atlantic Treaty Organization, NATO, composed primarily of the U.S. and western European nations.