Kenneth Lipartito: How the Depression Made Keynesians of Capitalists

Kenneth Lipartito is a professor of history at Florida International University. His co-written history of corporate social responsibility will be published in 2012. The opinions expressed are his own.

Re-elected with 61 percent of the vote in 1936, President Franklin D. Roosevelt told his supporters, "Now I'm going back to do what they call balance the budget." True to his word, he cut spending and promptly sent the nation into a recession -- a sharper decline than in 1929.

The orthodox wisdom in Washington in 1937 remained cutting spending, reducing taxes and balancing the budget to restore business confidence. Punitive taxes on investments and capital gains and "unreasonable restrictions" on finance had put businessmen into "a state of stagnation if not panic," critics of the New Deal argued. Uncertainty was the main reason the economy was in a slump, declared the U.S. Chamber of Commerce. The conservative "Brass Hats" of the National Association of Manufacturers told Roosevelt to end social-welfare policies and get tough with labor if he wanted to reduce unemployment. Chase National Bank President Winthrop Aldrich said it was time to "dismantle the anti-business elements of the New Deal."

Many in the Roosevelt administration also believed business confidence was key. Treasury Secretary Henry Morgenthau Jr., a close friend of the president, promoted the "Treasury view" that government spending merely crowded out private investment. The only way out of the Great Depression, Morgenthau said, "was through restoring business confidence." The liberal Securities and Exchange Commission Chairman William O. Douglas believed that corporate executives were "marking time" and going on vacation rather than investing their firms' cash. Roosevelt himself never completely shook off his view that balanced budgets were a good thing. He had chastised Herbert Hoover for big deficits in the 1932 campaign and cut the wages of federal workers by 15 percent when he took office. His behavior in 1936 was completely in character....