Reassessing The Presidency

19

From Kennedy’s “New Economics” to Nixon’s “New Economic Policy”: Monetary Inflation and the March of Economic Fascism

Joseph T. Salerno

On August 15, 1971, President Richard Nixon in a nationwide radio and television address informed the American public that he was ordering the implementation of “the most comprehensive New Economic Policy to be undertaken by this nation in four decades.”1 The centerpiece of his New Economic Policy was a wage-price freeze, which he introduced in the following words:

The time has come for decisive action—action that will break the vicious circle of spiraling wages and costs. I am today ordering a freeze on all prices and wages throughout the United States for a period of 90 days. . . . I have today appointed a Cost of Living Council within the Government. I have directed this Council to work with leaders of labor and business to set up the proper mechanism for achieving continued price and wage stability after the 90-day freeze is over.2

Nixon proceeded to deny that the freeze would involve “the mandatory wage and price controls that crush personal and economic freedom.”3 Nixon’s denial was a bald-faced and absurd prevarication, given his caveat that the wage-price freeze “will be backed by Government sanctions, if necessary.” The initial ninety-day wage-price freeze soon gave way to three subsequent phases of mandatory price controls that lasted until April 1974 and revealed the Nixonian New Economic Policy as the usual coercive and heavy-handed attempt at political price fixing involving gross abrogation of economic freedoms and private property rights.4

What was more surprising than the imposing of wage and price controls by a Republican president during peacetime, however, was the sparseness and mildness of the critical reaction among market-oriented economists and business leaders to Nixon’s announcement of a policy that would, in one fell swoop, effectively suspend the operation of the market economy. Indeed, for some time leading up to the imposition of controls, an important segment of the business community had been clamoring for “direct action” on inflation, particularly on its manifestation in rising wage rates.5 Thus, The Washington Post was probably not exaggerating when, on the day after Nixon unveiled his wage-price freeze, it described the mood of business and banking as “almost euphoric.”6 Also, in late 1970, the conservative economist Arthur Burns, a former chairman of the Council of Economic Advisers (CEA) during the Eisenhower administration and Nixon’s new appointee as the chairman of the Federal Reserve System, suddenly joined such longtime left-wing advocates of wage and price controls as John Kenneth Galbraith in the chorus of voices calling for an “incomes policy” to moderate inflation.7 Moreover, a number of prominent conservative economists long associated with the Republican Party—including Burns himself, Paul McCracken, Herbert Stein, and George P. Schultz—were directly involved in crafting the Nixonian program of wage and price controls.

While there were a few free-market economists who did criticize the wage-price freeze, including Milton Friedman and a group of Chicago School economists headed by Allen Meltzer, their criticisms were relatively mild and did not reflect recognition that the New Economic Policy marked the abolition of the market economy and its replacement by a regime of national economic planning.8 Perhaps the only economist to fully identify and clearly express the origins, nature, and momentous implications of the New Economic Policy was Murray Rothbard, a student of Ludwig von Mises and the leader of the Austrian School in the United States. Rothbard wrote:

It is now clear that price and wage controls of some sort will succeed the 90-day freeze—in short that we now have entered a political economy of permanent direct controls. There is only one word for this New Economic Policy, a word that is at first glance harsh and exaggerated, but in fact is precisely appropriate. That word is “fascism.” A system of permanent price and wage controls, administered by a central government bureaucracy, probably headed by some form of tripartite board including Big Business, Big Labor, and Big Government—this is precisely what fascism is, precisely the economic system of Mussolini’s Italy and Hitler’s Germany. This is the economy of the “corporate state,” administered by dictation from the top, controlled and monopolized by Big Business and Big Union interests, with the individual, and the consumer, the person who suffers. In short, the mass of the American public will suffer from this system of corporate statism, from the death of the free price system, from the invasion of individual rights, from the hampering of growth, efficiency, and productivity, that the system will entail.9

In January 1971, eight months before the imposition of the wage-price freeze, Rothbard had foretold the coming of wage and price controls, which he characterized as the natural culmination of fascistic trends in the U.S. economy that had been developing since the beginning of the 1960s and that had gathered significant momentum during the Nixon administration. He also foresaw the surprising complicity of conservative “free-market” economists in bringing about these controls and the favorable reaction of the leaders of big business to their implementation. Rothbard’s prescient and perceptive analysis of the emerging fascist political economy is worth quoting at length:

Well, we have had two years of Nixonism and what we are undergoing is a super-Great Society—in fact, what we are seeing is the greatest single thrust toward socialism since the days of Franklin Roosevelt. It is not Marxian socialism, to be sure, but neither was FDR’s; it is . . . a big-business socialism, or state corporatism, but that is cold comfort indeed. There are only two major differences in content between Nixon and Kennedy-Johnson . . . (1) that the march into socialism is faster because the teeth of conservative Republican opposition have been drawn; and (2) that the erstwhile “free-market” conservatives, basking in the seats of Power, have betrayed whatever principles they may have had for the service of the State. Thus, we have Paul McCracken and Arthur F. Burns, dedicated opponents of wage-price “guideline” dictation and wage-price controls when out of power, now moving rapidly in the very direction they had previously deplored. . . .

But now the administration has swung around to the Liberal thesis of monetary fiscal expansion to cure the recession, while yelling and griping at labor and employers not to raise wages and prices—a “guidelines” or “incomes” policy that is only one step away from wage and price controls. . . .

Not only is it impossible for direct controls to work; their imposition adds the final link in the forging of a totalitarian economy, of an American fascism. What is it but totalitarian to outlaw any sort of voluntary exchange, any voluntary sale of a product, or hiring of a laborer? But once again Richard Nixon is responsive to his credo of big business liberalism, for direct controls satisfy the ideological creed of liberals while at the same time they are urged by big business in order to try to hold down the pressure of wages on selling prices which always appear in the late stages of a boom.10

Early in this passage, Rothbard hints at the substantial continuity between the economic policies of the Kennedy and Johnson administrations on the one hand, and the Nixon administration on the other. This chapter elaborates this hint into the thesis that much of the ideological and institutional groundwork for the economic fascism of Nixon’s New Economic Policy was laid by the proponents and policies of Kennedy’s “new economics” in the early 1960s. It argues, in particular, that monetary inflation was a neglected but key element propelling the march toward the corporate statism that emerged during the Nixon administration. Furthermore, it seeks to demonstrate that the unleashing of the long-running monetary inflation that was initiated during the Kennedy years and culminated in the inflationary recession of 1973–1975 was a direct result of the radical reshaping of the opinions of the political establishment and the general public toward monetary policy, which was accomplished in a remarkably short time by Kennedy’s new economist-advisers.

The chapter is structured in the following way. Section 2 presents a rigorous definition of economic fascism adopted in emended form from the American journalist and political commentator John T. Flynn. Section 3 is devoted to a discussion of the origins of the new economics, which was developed in the latter half of the 1950s by American followers of John Maynard Keynes, most of whom served in some administrative capacity in the U.S. planned economy during World War II. Section 4 critically analyzes the main tenets of the new economics and argues that the doctrine served as a blueprint for the macroeconomic national planning regime that began to take shape under Kennedy and that progressively evolved through the Johnson and Nixon administrations. The influence of the new economics on Kennedy and the implementation of its fiscal policy during his administration are detailed in Section 5. Section 6 discusses the radically inflationary shift in monetary policy that was inspired by the new economics and argues that it was this change and not the much-ballyhooed revolution in fiscal policy that constituted the core of Kennedy’s economic policy revolution. Finally, Section 7 examines Kennedy’s attempt in 1962 to compel leading steel corporations to rescind an announced price increase, an event that foreshadowed and facilitated the economic fascism of Nixon’s New Economic Policy.

What is Economic Fascism?

Fascism is an emotion-laden term that is burdened with many negative connotations, so it must be carefully defined to be useful in analyzing politico-economic doctrines, policies and institutions.11 One of the most rigorous attempts to define fascism was undertaken by John T. Flynn, the great American journalist and essayist of the Old Right, a diverse movement of libertarians, conservatives, and anti-FDR liberals and Old Progressives that coalesced in the 1930s.12 In his classic work, As We Go Marching, published in 1944, Flynn enumerated what he called “the essential ingredients of fascism.”13 According to Flynn, the first ingredient is a large centralized government that spends large sums on “planned consumption”—or what today is euphemistically called welfare—financed by means of huge budget deficits. The second ingredient is what Flynn called “the planned economy,” which involves systematic government interference with prices, wages, rents, and interest rates within the formal structure of a capitalist economy. Militarism as a deliberate and permanent economic institution and imperialism as its handmaiden represent the third and fourth ingredients, respectively. The combination of these four ingredients Flynn labeled the “prologue to fascism.”14 Here, we will refer to it either as “economic fascism” or, more descriptively, “the welfare-warfare state.”15

For Flynn, full fascism comes into being when to the ingredients constituting economic fascism is added a totalitarian state with a “leader” or dictator at its head. Although Flynn derived this definition from Fascist Italy, he argued compellingly that it fully described National Socialist Germany as well. Moreover, he demonstrated that by the 1930s, the U.S. had arrived at economic fascism and was precariously poised on the precipice of a headlong plunge into full fascism in the 1940s.16 Flynn graphically described the evolving American style of fascism in the following passage:

The test of fascism is not one’s rage against the Italian and German war lords. The test is—how many of the essential principles of fascism do you accept and to what extent are you prepared to apply those fascist ideas to American social and economic life? When you can put your finger on the men or the groups that urge for America the tax-supported state, the autarchical corporative state, the state bent on the socialization of investment and the bureaucratic government of industry and society, the establishment of the institution of militarism as the great glamorous public works project of the nation and the institution of imperialism under which it proposes to regulate and rule the world and, along with this, proposes to alter the forms of our government to approach as closely as possible the unrestrained, absolute government—then you will know you have located the authentic fascist. . . . Fascism will come at the hands of perfectly authentic Americans, as violently against Hitler and Mussolini as the next one, but who are convinced that the present economic system is washed up and that the present political system in America has outlived its usefulness and who wish to commit this country to the rule of the bureaucratic state; interfering in the affairs of the states and cities; taking part in the management of industry and finance and agriculture; assuming the role of great national banker and investor, borrowing billions every year and spending them on all sorts of projects through which such a government can paralyze opposition and command public support; marshaling great armies and navies at crushing costs to support the industry of war and preparation for war which will become our greatest industry; and adding to all this the most romantic adventures in global planning, regeneration, and domination all to be done under the authority of a powerfully centralized government in which the executive will hold in effect all the powers with Congress reduced to the role of a debating society. There is your fascist.17

Despite the rigor and historical applicability characterizing Flynn’s definition of fascism, however, it lacked a crucial ingredient. This lack was manifest in Flynn’s prediction, which since has been falsified on numerous occasions, that economic fascism could not last very long without being ruthlessly imposed by a totalitarian dictatorship a la National Socialist Germany or Fascist Italy. In other words, for Flynn, economic fascism was inconsistent with a liberal-democratic political order so that the only choice in both the short run and the long run was between full fascism and the free-market economy. He reasoned that as soon as the citizenry was hit with the immense tax bill required to finance the interest payments on the accumulating debt generated by the welfare-warfare state, it would spontaneously rise up in a glorious tax revolt and either abolish it in short order or be crushed by a totalitarian dictator who comes to the fore. In Flynn’s words:

The spending of borrowed money as a permanent policy with a continuous rise in the public debt can have only one effect. As the debt rises, the yearly interest charge increases. In time the interest charge gets to be more than all the other costs of government. Funds for interest can be obtained only by taxes. A rising public debt means a continuously rising interest charge and persistently rising taxes to service the debt. . . . Of course businessmen and individuals will resist such taxes. The free society knows such a device as the “tax strike”. . . . Only in a totalitarian state can these oppressive levies be imposed and enforced. And even in such a state there is a limit. But the limit in the free society is swiftly reached. . . . It is for this reason—and there are other reasons as well—that I make the statement that this managed public-debt-supported autarchy must turn to the totalitarian government or abandon its plans.18

Unfortunately, here’s where Flynn was misled by his own inadequate definition of the fascist political economy, for he left out its most important component: monetary inflation, the unrestrained creation of fiat money by the government or its central bank. Thus, if a democratic government is able to finance its spending on domestic welfare programs and imperialist military adventures by money creation, it can effectively hide the true costs of these programs from its citizens for years or decades, during which economic fascism could come to thrive under mass democracy. This has been the experience of the U.S. since the early 1960s.

There is a second problem with Flynn’s definition, however, in that it does not provide the causal mechanism by which huge government deficits and spending programs transform a market economy with an unhampered price system into a centrally planned economy with all-around controls of prices, wage rates, profits, and interest rates. Once again, monetary inflation provides the key. When the consequences of monetary expansion become visible in the form of rapidly rising prices, the government may at first react to suppress these symptoms by employing “jawboning” or “moral suasion” to convince big business and labor unions to abide by “voluntary” wage and price guidelines or incomes policy. Of course, this policy is completely ineffective in preventing the depreciation of the monetary unit in the face of the relentless and ongoing expansion of the supply of money. Nonetheless, it does serve to obscure the responsibility of the State for accelerating price inflation and to direct the attention and ire of the public onto “grasping” corporations and “piggish” labor unions. In fact, it is precisely the inevitable failure of such moderate incomes policy that smooths the way for the later imposition of mandatory wage and price controls, which are then touted as a necessary final resort for curing a manifestly intractable problem. However, coercive wage and price controls, if they are not to result in a systemic breakdown of the entire economy, must be supplemented by a comprehensive and detailed system of government directives to private resource owners and firms regarding the allocation of land, labor, and capital goods in the production process and the rationing of the final products to consumers. This policy is, of course, tantamount to abolishing the market economy and instituting central planning.

Thus, contrary to Flynn, the unrestrained spending on welfare and warfare programs and the bloated budget deficits that are essential characteristics of economic fascism do not necessarily give rise in the short run to a war to the knife between a dictatorial regime and a mass tax-resistance movement. It is more likely that economic fascism will evolve slowly under the guise of mass democracy as the monetary inflation undertaken as a surreptitious method of confiscatory taxation eventually, yet inevitably, begins to engender the highly unpopular consequence of accelerating price inflation. This outcome will compel the incumbent administration to devise and implement progressively more thoroughgoing interventions into the price system that end up in comprehensive economic planning within the nominal property rights structure of a market economy.

The Origins of the New Economics

Economics has come of age in the 1960s. Two presidents have recognized and drawn on modern economics as a source of national strength and presidential power. . . . The paralyzing grip of economic myth and false fears on policy has been loosened, perhaps even broken. We at last accept in fact what was accepted in law twenty years ago (in the Employment Act of 1946), namely that the Federal government has an overarching responsibility for the nation’s economic stability and growth. . . . These are profound changes. What they have wrought is not the creation of a “new economics,” but the completion of the Keynesian Revolution—thirty years after John Maynard Keynes fired the opening salvo. And they have put the political economist at the president’s elbow.19

Thus wrote Walter Heller, the primary architect of the new economics.20 In a similar vein, another prominent new economist, Arthur Okun, described the role of the economist in advising government as assisting in the effective exercise of presidential leadership, which “consists of selecting priorities, making commitments, identifying the aims of the nation, and then working to fulfill them.”21 In frankly characterizing the new economics as a “source” of the growing strength of the central state and of its embodiment in presidential power, the new economists ironically confirmed Murray Rothbard’s later evaluation of Keynesian economics as ultimately “the pure economics of power.”22 For as Heller also recognized, such an expansion of the power of the federal government and its centralization in the executive branch is necessary for “unleashing] fiscal and monetary policy for the aggressive pursuit” of both short-run stabilization and long-run growth objectives.23

The crucial link between Keynesian macroeconomics on the one hand and centralized and unrestrained political power on the other was revealed much earlier by Keynes himself. Writing in the foreword to the German edition of the General Theory, which was published almost contemporaneously with the English edition, Keynes declared:

The theory of aggregate production, which is the point of the following book, nevertheless can be much easier adapted to the conditions of a totalitarian state than the theory of production and distribution of a given production put forth under conditions of free competition and a large degree of laissez-faire.24

The stronghold of the new economists during the Kennedy and Johnson administrations was centered in the membership, staff, and outside consultants of the Council of Economic Advisers.25 The most prominent among them were, almost to the man, academicians from Eastern establishment universities. Besides Heller and Okun who were from the University of Minnesota and Yale respectively, there were Robert Solow and Paul Samuelson from MIT, James Tobin from Yale, Otto Eckstein and Kenneth Arrow from Harvard, and Gardner Ackley from the University of Michigan. Two Harvard professors, John Kenneth Galbraith, who served on the White House staff during the early months of the Kennedy administration, and Seymour Harris, who headed up a standing committee of academic consultants to the Treasury Department under Kennedy and Johnson, were, along with Samuelson, also personal economic consultants to Kennedy during and after his campaign for the presidency.

These liberal economists were part of the coterie of left-leaning academicians who surrounded President Kennedy. As described by John H. Makin and Norman J. Ornstein, these liberal intellectuals

were impatient with the fundamentally conservative Truman and Eisenhower administrations. They viewed the decade and a half after 1945 as an interruption of what they saw as the thrust of the New Deal away from laissez-faire capitalism.26

From the left side of the political spectrum, economic historian Anthony S. Campagna has expressed a similar view, writing that:

The liberals, so weary of the dullness of the Eisenhower administrations, cheered as Kennedy raided the universities for advisers and searched for talent from previous public servants, so long on the sidelines. The eggheads from Cambridge, Massachusetts, together with the “Irish Mafia” from anywhere, gave the administration and Washington an intellectual excitement not felt since the New Dealers.27

Campagna’s choice of the term “eggheads” to describe the new economists is indeed an apt one, though probably unwittingly so. The new economists fit to a T John Flynn’s much earlier definition of an egghead, as

a character who pretends to the title of philosopher—a sort of professional intellectual—dedicated to the theory that the eggheads are the appointees of Destiny who will bring about something known in the trade as “security” to a creature known as the “common man” in return for which all they ask is that he deliver his soul to the management of a government operated by the eggheads. For Flynn, the term described “the intellectual lacking in common sense, a doctrinaire contemptuous of experience, a fuzzy-minded, starry-eyed dreamer.” Flynn perceptively summed up the egghead’s philosophy “in the two words which describe it—the Planned Society or Economic Planning.”28

Thus, it is no surprise that a number of the new economist-eggheads had served in economic planning capacities during and immediately after World War II. Heller was attached to the occupational military government of Germany, while Tobin and Ackley served with the Office of Price Administration (OPA). The OPA was headed for a time by Galbraith, before he was unceremoniously ejected. Harris was a senior member of the OPA staff and served as its liaison with the Board of Economic Warfare and with the State Department.29 The heady experience of the economist’s brush with the exercise of political power during the New Deal, and the psychological consequences of suddenly being stripped of such power, has been well described by Galbraith. In his memoirs, Galbraith comments on being ousted from his position as the first director of the OPA in 1943:

The sudden loss of power leaves you suddenly, unimaginably empty, facing decompression and a psychic case of the bends. You are assailed, however unnaturally, by self-doubt. And by continuous thought of the decisions that now lack your guiding hand. Worst of all, and least expected, you are now naked to your enemies.30

Thus when Galbraith was asked by Arthur Schlesinger on behalf of Kennedy if he wished to serve as chairman of the CEA, a post eventually given to Walter Heller, he refused. “I was little enchanted by the thought of doing with slight authority, what I had done with vast power twenty years earlier,” he said.31 Galbraith, in other words, as an unrepentantly old-fashioned New Deal socialist, saw the job of the new economist policymaker fundamentally as planning the national economy. So did his fellow new economists, although their rhetoric, as we shall see, was couched in more contemporary macroeconomic terms of “stabilizing” the economy and ensuring that its “actual” rate of growth coincided with its “potential” rate of growth.32

The New Economics as a Blueprint for Economic Fascism

The new economics provided an elaboration of the theoretical framework of Keynesian economics into the rhetoric of comprehensive economic planning adapted to American political conditions. As Makin and Ornstein astutely note, “the young liberal economists around Kennedy were interested not just in avoiding depression and unemployment. They began to see Keynes’s ideas as the basis for a magic formula that could be used to create growth and prosperity by government fiat.”33 Actually, it was not Keynes himself but extreme postwar Keynesians such as Alvin Hansen and Abba Lerner who were the direct forebears of the new economists.34 It was these economists who developed the doctrine of “functional finance” (Lerner’s term), according to which the overriding purpose of the federal budget was to regulate the rate of total spending in the economy in the interest of economic stabilization.

The doctrinal development of the new economics began in earnest in the waning years of the second Eisenhower administration, when younger American Keynesians associated with the left wing of the Democratic Party produced a stream of academic and popular articles that delineated the political-economic principles they were to help implement as government advisers and policymakers in the 1960s. These writings were in part a response to what the new economists saw as the policy inaction of the Eisenhower administration in the face of the recessions of 1958 and 1960, the mediocre growth performance of the United States relative to the Soviet Union during the 1950s, and the bogus missile and technology gaps that were alleged to yawn between the two mega-states at the end of that decade.35 A few of these articles also attempted to grapple with the intellectual problem presented by the failure of prices to fall during the recession of 1958, a phenomenon that was fundamentally inconsistent with Keynesian theory.36 Finally, to some degree, the development of this new political economy reflected the partisan sympathies of its Democratic liberal architects, since it served to undermine the widespread perception among the lay public that economic performance under Eisenhower was satisfactory.37 Thus it was that when the new economists attained positions of influence within the Kennedy administration, they came fully armed with a set of ready-made doctrines that could be put at the service of presidential power to revolutionize the American economy and drive it toward economic planning. The programmatic statement of the new economics appeared in 1962 in the first economic report of the Kennedy administration.38

Unlike Keynesian theory, the fundamental concepts and principles of which were esoteric and inaccessible to noneconomists as well as economists trained in pre-Keynesian traditions, the basic doctrine of the new economics was—and was intended to be—straightforward. The new economists saw the molding of public opinion as an important part of the role of economic adviser. In Heller’s words, the main task of the economist as presidential adviser is “economic education of, by and for presidents.”39 In other words, the new economics was to be taught to the president and then, through both the properly instructed president and his economic advisers directly to the public.

The key concept of the new economics is “potential output,” which refers to the total quantity of goods and services or “real GNP” that would be produced by the economy when labor and other resources are fully employed. During the 1950s and early 1960s, the U.S. economy was considered by the new economists to be operating at full employment and, therefore, performing up to its full potential when the unemployment rate among labor was equal to 4 percent. At this rate of unemployment, the only workers without jobs were either those who were voluntarily unemployed because they were in the process of searching for better jobs that existed or those whose skills currently did not match the requirements of existing jobs. In either case, Keynesian macroeconomic demand management policies could not improve the situation. However, if the unemployment rate rose above 4 percent, then the dread “GNP gap” would emerge, as the economy’s actual output declined below its potential output. This gap measuring the excess of potential over actual output at the same time measures the real social costs of unemployment in terms of lost output and also indicates the extent to which “aggregate demand” or total spending must be increased by expansionary government policies to reestablish full employment.40

According to the new economists, the cumulative real GNP gap for the decade of the 1950s totaled $175 billion (in 1961 dollars). Even more troubling to them was their perception that the GNP gap had endured without interruption from the end of 1955 to the accession of the Kennedy administration to power in 1961. The gap persisted throughout the entire recovery from the 1958 recession and reached a high of 8 percent of GNP on an annualized basis in the recessionary first quarter of 1961. In light of this, the 1962 annual report of Kennedy’s CEA concluded: “We face a stubborn problem of chronic slack, and the road to full recovery is a long one.”41

Thus, the new economists forecast an era of chronic and extravagantly wasteful unemployment of resources for the American economy, unless the federal government under their tutelage intervened with demand management policies on a massive scale. The prescription of the new economists for the elimination of the pesky GNP gap and the “full recovery” of the U.S. economy was for the government to run deficits, deficits and more deficits. As Samuelson put it in 1961:

In principle, though, there is only one correct rule about budget balance—Smith’s Law (not from Adam Smith but Professor Warren Smith from the University of Michigan). It goes as follows:

Smith’s Law: There is only one rule about budget balancing, and it is that the budget should never be balanced.

Never? Well, hardly ever. Economic conditions will generally call for either a surplus or a deficit. Only in the transition as the budget is passing from the black to the red (or from the red to the black) should the budget be fleetingly in balance.42

Despite Samuelson’s purely formal admission that a surplus might be required under certain conditions, Smith’s Law in conjunction with the new economists’ diagnosis of “chronic slack,” implied a sea of red ink on the long road to “full recovery.” But Samuelson and his fellow new economists recognized the formidable political obstacle to the implementation of their remedy: the American public’s deep-seated ideological commitment to balanced budgets.43 In an effort to camouflage and divert attention from their emphasis on deficit spending, the new economists devised the concept of the “full-employment surplus.” As Herbert Stein, a right-wing Keynesian and a critic of the new economics has pointed out, in the early postwar period the orthodox Keynesians rejected the concept of a full-employment budget.44 This concept had been developed by the more conservative economists associated with the Committee on Economic Development as a benchmark for the “automatic stabilization” policies they favored, but the left-wing Keynesian economists of the early postwar years summarily rejected it on the grounds that there was no compelling reason for the budget to be balanced or in surplus at full employment. However, according to Stein, “The Kennedy team recognized that there might be some people out there who cared about balancing the budget, and for them they offered the comfort that the budget would be balanced at full employment.”45

According to the new economists, a full-employment budget surplus may exist even when the actual budget is in deficit, if the current situation involves unemployment. The reason is that, as aggregate demand increases and the economy begins to recover, the increased employment and production will generate additional income. Thus, without any change in the tax structure, the rising economic activity and prosperity will cause the federal government to realize a progressive increase in its tax revenues, while enabling it to also restrict its expenditures on unemployment benefits and welfare programs. Once the recovering economy has attained the level of income consistent with full employment and potential output, revenues may very well exceed expenditures so that the budget is now in surplus. This analysis allowed the new economists to disguise their persistent advocacy of pumping up aggregate demand by expanding the actual budget deficit as merely a call for trimming back a full-employment budget surplus that proved too large to sustain full employment. This also allowed the new economists to argue that an actual budget deficit of a given size may, under certain circumstances, prove restrictive rather than stimulative of economic activity, and this certainly suited their purposes in the recession year of 1961.

The rhetorical value of the concept of the full-employment surplus is emphasized in the sympathetic retrospective assessment of the new economics by Keynesian macroeconomists Rudiger Dornbusch and Stanley Fischer:

The New Economists planned to use fiscal policy as the instrument with which to close the GNP gap. It was important to get across to Congress and the public the idea of the full-employment surplus because the unemployment rate was high in 1961, and the federal budget was in an actual deficit. Any proposals to increase spending or cut taxes would certainly imply a larger deficit if GNP were to remain unchanged. Members of Congress could be relied upon to look with great suspicion on any policy that might increase the budget deficit. By focusing attention on the full-employment budget, the New Economists appropriately succeeded in shifting attention away from the state of the actual budget to concern with how the budget would look at full employment—which had the side benefit of focusing attention on the full employment issue itself.46

Unfortunately for the new economists, Congress didn’t fully absorb the lesson on deficits they sought to teach. This fact is evinced in a hilarious exchange during a Joint Economic Committee meeting in 1965 between a bewildered and increasingly frustrated Senator William Proxmire and an embarrassed and equivocating Gardner Ackley, by then a member of the Johnson administration’s CEA:

Senator Proxmire. I notice that the national accounts budget has been in deficit. . . until the first quarter of this year. Therefore it is stimulating at this level of unemployment; is that correct?

Mr. Ackley. That is correct in the sense that efforts to reduce this deficit by raising taxes or reducing expenditures would have created even more unemployment. . . .

Senator Proxmire. I take it that this means that during this entire period the contribution of the Federal Government has been stimulative.

Mr. Ackley. I think the best measure of the impact of the budget is not the actual figure, which reflects a lot of things, but rather the full-employment budget, and that is why we focus on it.

Senator Proxmire. You can take 3 percent [unemployment], 2 percent, 1 percent, but why not take what is going on right now? . . . Right now it is 4.7 percent. If the national accounts budget is in deficit, is it not clear that the contribution of the Federal Government at this level tends to be stimulative?

Mr. Ackley. It tends to be more stimulative than if the deficit were smaller, or if there were a surplus.47

If the full-employment surplus doctrine was concocted to make budget deficits an acceptable tool of stabilization policy, the twin concepts of “fiscal drag” and “fiscal dividend” were invented to justify perennial deficits and continually increasing government expenditures as a permanent feature of a growing economy. Fiscal drag was the term the new economists used to denote the deflationary effect of the automatic increase in tax revenues that resulted when an economy’s potential output was growing at a normal rate. With a given tax structure and a constant level of government expenditure, growing incomes would engender additional tax payments, producing an unwarranted and contractionary rise in the full-employment budget surplus, and thereby dragging output and employment below their potential levels. The remedy for this phenomenon, according to the new economists, was for the government to declare a “fiscal dividend” and use the growth-induced increases in tax revenues to increase its expenditures or to reduce tax rates or to combine both policies.

Thus, the new economists raised the specter of the progressive growth in the full-employment budget surplus—which was as inexorable as the march of time itself—as a rationale to justify a perpetual stream of budget deficits stretching out into the indefinite future. Wrote Heller:

Bitter experience shows that there is nothing easier than letting the full employment surplus grow. Time, bringing with it ever increasing productivity and rapid additions of young new workers to the labor force . . . will rapidly raise the full-employment surplus unless deliberate and repeated steps are taken to prevent it. . . . Present programs [implemented from 1961 to 1965] have eliminated the full-employment surplus. But in the future it will again and again rear its ugly head in the form of a growing fiscal drag, or its lovely head in the form of recurring fiscal dividends.48

For Heller, the prospective “huge growth” in the “lovely” fiscal dividend would mainly be used to expand the size, scope, and power of the federal government via “support for vital new or expanded federal programs; well-timed tax cuts; more generous transfers of funds to hard-pressed state and local governments; perhaps even a helping hand to the social security system.”49

Heller and the new economists’ “new look in fiscal policy” also required an enormous augmentation in presidential power, especially over the tax system. This was necessary to render fiscal policy as flexible as possible in quickly responding to the rapid and unforeseen fluctuations in aggregate demand that are the putative cause of recession and inflation. Consequently, the new economists advocated policies designed “to shorten the period between fiscal decision and fiscal action, either by carefully hedged standby powers for the president or by streamlined congressional procedures, or by some combination of the two.”50 An example of the first was embodied in the request by President Kennedy to Congress in 1962 for authority to make cuts of up to 5 percentage points in individual income tax rates as a means of fighting recession.51

A second effect of the rhetoric about the full-employment budget surplus was to obfuscate and suppress the all-important question of how the anticipated deficits in the real-world budget were to be financed. In other words, to be effective in closing the GNP gap and counteracting fiscal drag, must it be the case that such budget deficits are “monetized” by the Federal Reserve System? Answering this question openly in the affirmative would naturally open up the new economists to charges of hawking old wine in new bottles, advocating monetary inflation as a panacea for all economic ailments.52 The new economists of the CEA gingerly addressed this issue in the Economic Report of the President of 1963:

How can the Federal Government raise the money to finance a budget deficit? At one logical extreme—which of course no one seriously contemplates—the Federal Reserve could buy Treasury securities and increase the quantity of bank reserves in an amount equal to the deficit. In this way the reserve base of the banking system would be increased by virtually the entire amount of the deficit, paving the way for a multiple expansion of bank deposits and bank credit. This is the most liquid and most expansionary way of increasing the debt of the Federal Government.

At the other extreme, the Government might finance a deficit while the Federal Reserve permitted no increase in bank reserves. This means that the Treasury would not be able to sell any of its securities, directly or indirectly, to the Federal Reserve Banks. The Treasury would have to sell them either to the public or to the commercial banks; and the banks would be able to buy them only to the extent that they in turn sold other securities to the public or denied loan accommodation to private borrowers.53

Note that the option of financing a budget deficit wholly through the issuance of public debt—that is, without recourse to monetary inflation—is here characterized as an “extreme” position. The unspoken implication, of course, is that the prerequisite for an effectively expansionary fiscal policy is continuing additions to the quantity of money. Indeed, when pressed on this point before the Joint Economic Committee in 1963 by a bemused Senator Paul Douglas, a former economics professor at the University of Chicago, Heller reluctantly and somewhat evasively conceded that an effective policy of deficit financing necessitated monetary inflation. Douglas posed the following question: “[I]f the Federal Reserve Board insisted that the deficit must be met out of the savings of individuals, would not this divert capital from industry and result in no net increase in monetary purchasing power, and, consequently, no net increase in demand?” Heller’s response to this query was, “If the policy were . . . to raise interest rates to a point where private spending, capital spending in particular, were depressed by as much as the tax cut expanded spending, surely it would be a self-defeating proposition.”54 In effect, Heller was admitting that expansionary fiscal policy was impotent unless it was supplemented by monetary inflation.

The emphasis of the new economics, however, was not merely on the “short-run” concern of closing the gap between actual and potential GNP and ensuring full employment. It also stressed the importance of achieving and maintaining a high rate of growth of potential output. In Heller’s words, “The new economics has made a major shift in economic targetry. . . . Now, the policy focus is centered on the ever-rising potential of the economy, on gap-closing and growth.”55 Makin and Ornstein perceptively characterize the underlying theoretical impetus, which first emerged in the 1950s, for this momentous policy innovation:

At the time, growth theory was an esoteric, highly mathematical branch of economics, but it was beginning to be seen as a dynamic extension of Keynesian principles. The idea was not just to dampen business cycles but perhaps to alter the trajectory—the growth path—of the economy That involved discovering ways to accelerate capital formation and thereby to increase growth, real wages, and income per capita. To many young economists of the era, it appears that Keynes had discovered the philosopher’s stone that could turn base metals into gold.56

Since Solow and Tobin were in the vanguard of these Keynesian growth theorists, naturally the goal of high growth strongly conditioned the program of monetary and fiscal policy advocated by the new economists as they assumed positions of influence and power in the Kennedy administration. The “optimal” combination of policies for promoting a stable economy and economic growth, according to the new economists, was one of loose money and tight budgets. Writing in 1961, Samuelson said that he had been preaching such “a two-step program for growth” for half a dozen years.57 The first step of Samuelson’s program consisted of “militant monetary expansion” to drive down interest rates and cheapen credit to business borrowers in order to induce an increase in private investment. The second step involved “austere fiscal policies” in the form of an increase in tax rates relative to “needed government expenditure on current and capital goods and on welfare transfers.”58 According to Samuelson, this fiscal program of chronic overtaxation, to use his term, was necessary to effect “the reduction in consumption needed to release the scarce resources in our postulated full-employment economy that are needed for the induced investment programs.”59 In other words, Samuelsonian “austerity” applied only to the productive American families and businesses who would be forced to bear the burden of the increased taxes to pay for a federal budget surplus that would supposedly succeed in “supplementing private thrift by public thrift.” The bloated federal political establishment, in sharp contrast, would be free to continue and even expand the needed” spending programs that benefitted its subsidized military-industrial, agricultural, welfare, and foreign-aid clientele.

The tax-and-spend policies so beloved by politicians of both political parties were thus given a scientific justification in cutting-edge economic theory. But even more momentously, the new economists elaborated Keynesian growth theory into a blueprint for the comprehensive macroeconomic planning of the American economy. In his article entitled “Growth through Taxation,” originally published in the New Republic in July 1960, Tobin called for monetary and fiscal policies to be employed as instruments for centrally directing the allocation of resources to broad categories of use. Thus, he began his article with the declaration, “The overriding issue of political economy in the 1960s is how to allocate the national output.”60 He went on to frankly suggest, “The question of accelerating economic growth brings the question of allocation to the fore.” Tobin posed the general case for a planning solution to this question in the form of two rhetorical questions:

Can we as a nation, by political decision and governmental action, increase our rate of growth? Or must the rate of growth be regarded fatalistically, the result of uncoordinated decisions and habits of millions of consumers, businessmen and governments, uncontrollable in our kind of society except by exhortation and prayer?61

Without any more argumentation than this, Tobin took the intellectual case for macroeconomic central planning as established and went on to present his proposal for its implementation.

Tobin introduced his proposal with the dictum, “To stimulate growth we must somehow engineer two shifts in the composition of actual and potential national output.”62 The first shift was “from private consumption to the public sector.” In addition to the stimulus it would provide growth via public investment in education and basic research, this shift was also mandated by the “possibly equally urgent reasons” of “increased defense, increased foreign aid, increased public consumption.” The second shift involved a diversion of resources “from private consumption to private investment.”

To accomplish these two shifts, Tobin prescribed the following “program for growth” designed to “stimulate the desired government and private expenditures” and “discourage consumption.”63 First, federal, state, and local governments would increase expenditures on “education, basic and applied research, urban redevelopment, resource conservation and development, transportation and other public facilities.” Second, in order to stimulate private investment, the Federal Reserve and Treasury would cooperate in an “easy money” policy that would make credit cheap and plentiful, especially on long-term capital markets. Also, tax credits for new investment by business and more generous provisions for business income averaging and loss offsets would be incorporated into the corporate income tax code. These last two measures would obviate a reduction in the corporate income tax rate. Third, the requisite restriction of consumption to finance these increased expenditures by government and business would be accomplished by a number of additional tax measures. These included an across-the-board increase in personal income tax rates, increases in state and local taxes, and a limitation on “the privilege of deducting advertising and promotional expenses from corporate income subject to tax.” In attempting to reply in advance to the inevitable controversy that this last measure would elicit, Tobin completely ignored the issues of the free-speech rights of business owners and even of microeconomic efficiency. Instead, he sought to justify the restriction on advertising in terms of its efficiency in promoting his macroeconomic central plan, arguing, “From the economic point of view, it absorbs too large a share of the nation’s resources; at the same time it generates synthetic pressures for higher consumption.”

Tobin concluded his proposal with the emphatic declaration: “Increased taxation is the price of growth.” The macroeconomic policy techniques devised by the new economists will thus ensure growth by bringing “under public decision the broad allocation of national output.” Moreover, according to Tobin, this macroeconomic foray into central planning of economic activity could be accomplished without recourse to the heavy-handed direct controls of wartime. He gravely warned, however, that the absence of such direct controls put us at a disadvantage vis-à-vis “our communist competitors” in attempting to prevent the allocation of increases in per capita income to wasteful spending on personal consumption rather than to such socially beneficial uses as forced saving-investment and government spending on the military establishment. “Since they do not pay out such increases in output as personal incomes in the first place, they do not have the problem of recapturing them in taxes or saving,” he wrote.64

Routine budget deficits, chronic monetary inflation, confiscatory taxation, and centralized macroeconomic direction of resource allocation were not the only components of economic fascism that the new economists were eager to foist upon the American public. They also urged a vast and permanent increase in the level of spending on the military establishment and on civilian defense projects as a means of closing the alleged “missile gap” with the Soviet Union and both the domestic GNP gap.65 In an article published in 1958,66 Tobin criticized the cuts in the defense budget then being undertaken by the Eisenhower administration, arguing that “[t]he unfilled needs of defense are great and they are urgent.”67 From Tobin’s Olympian vantage point as a macroeconomic planner, the likely alternative uses of these resources in the civilian sector were frivolous and wasteful. Queried Tobin:

For what more pressing purposes were these resources released? For research and development of new consumer luxuries, for new plants in which to produce more consumers’ goods, old and new, all to be marketed by the most advanced techniques of mass persuasion to a people who already enjoy the highest and most frivolous standard of living in history.68

These and many additional resources to be extracted from the private sector would be used to much greater advantage not only in repairing the missile gap and equipping U.S. forces to wage conventional wars against local communist aggression but also in constructing shelters against nuclear attack and undertaking a thoroughgoing deconcentration of U.S. industry and subterranean installation of vital industrial plants.

Tobin went on in his article to argue on the basis of Keynesian doctrine that there was nothing to fear from the economic consequences of the institutionalized regime of militarism that he prescribed. We should not shrink from the build-up in the national debt entailed by this program because, in Tobin’s words, “Since the debt is, so to speak, within the family, its size can and should be the servant of public policy, not the master.”69 The adverse effect of high government budgets and taxes on American productivity was also nothing to be afraid of because, according to Tobin, from the point of view of national security, “most of our vast production is just thrown away,” i.e., on frivolous consumer goods. Furthermore, “the growth of our productive power requires expansion of government activities,” such as education, libraries, police protection, highways, etc., and the spending decisions of politicians and bureaucrats are no less rational and efficient than those in the private sector.70 Finally, the inflationary consequences of inflation “should be avoided by resolute taxation.”

But the goal of the new economists to construct a massive welfare-warfare state strictly on the basis of macroeconomic policy hit a snag in the late 1950s. In the three consecutive years from 1958 to 1960, the U.S. price level, as measured by the CPI, rose at annual rates of 1.8 percent, 1.7 percent, and 1.4 percent, respectively. This occurred despite the fact that the corresponding unemployment rates for those years were stuck at recessionary levels of 6.8 percent, 5.5 percent, and 5.5 percent.71 According to orthodox Keynesian theory, of course, the simultaneous coexistence of inflation and recession, of deficient and excess aggregate demand, was not possible. On the one hand, if aggregate demand were insufficient to maintain actual GNP at its potential level, the unemployment rate would rise to recessionary levels, and excess capacity would emerge, neutralizing any upward pull on the price level. If, on the other hand, aggregate demand exceeded potential GNP at the existing price level, prices would be pulled up to choke off the excess demand.

Recognizing that recent experience was patently inconsistent with the Keynesian “demand-pull” story of inflation, the new economists in the late 1950s formulated a “cost-push” theory of inflation that seemed to offer a more comfortable fit with the facts. According to this theory, the inflationary process might be initiated by a nonmonetary event, such as an increase in the price of an important input to the production process, like the price of steel or the wage rates of unionized labor. Since important industries in the economy were dominated, according to the new economists, by a few big oligopolistic firms that had the power to “administer” or set their prices irrespective of supply and demand conditions, these cost increases could be passed on to consumers despite the existence of economic slack. As the cost of living began to rise, however, workers, especially unionized workers, would respond by demands for higher wages to compensate for their loss of purchasing power, which would be granted by those firms possessing the power to administer their prices. But of course this would set off another round of increases in the cost of living and so on, resulting in a cost-push spiral of inflation throughout the price structure.

The new economists also incorporated the purely empirical relation depicted by the “Phillips curve” into their explanation of why inflation and underutilization of resources seemed to simultaneously afflict the U.S. economy. The Phillips curve, which the Australian economist A.W. Phillips originally fitted to data for the United Kingdom, postulates a rigid tradeoff between unemployment and inflation based purely on historical observation.72 Thus a reduction of the rate of unemployment through Keynesian fiscal policy can only come at the cost of an increase in the inflation rate. The new economists Samuelson and Solow adapted the Phillips curve to American data and portrayed it as a menu of given policy choices for macroeconomic planners.73 Thus the planners could choose, say, a 4 percent unemployment rate and a 2 percent annual rate of inflation for the American economy, or by utilizing a more expansionary fiscal policy, they could obtain a 3 percent unemployment rate combined with a 4.5 percent inflation rate.

These theoretical and empirical considerations allowed the new economists to assign blame to the unruly private sector of the economy for the inflationary consequences of their high-employment, high-growth macroeconomic policy. It was the decisions and actions of business executives and laborers that produced the intractable tradeoff between inflation and unemployment and that threatened at any time to precipitate a devastating inflationary wage-price spiral. As a means of taming and shaping up the recalcitrant and uncooperative private sector and rendering it amenable to macroeconomic planning, Kennedy’s CEA devised wage-price guideposts, which were unveiled in the 1962 Economic Report of the President.74 According to the guideposts, compliance with which was supposed to be strictly voluntary, the annual increase in wage rates was to be restricted to no more than the yearly increase in the average rate of labor productivity for the economy, then estimated at about 3 percent per year. If the rate of growth in productivity in a particular industry equaled the average rate for the overall economy, then that industry was to keep its prices stable because its per unit labor costs would remain constant. Those industries whose productivity growth rate exceeded the economy’s average were instructed to cut their prices to reflect their declining labor costs, while those whose productivity growth rate fell short of the economy’s average were permitted to raise their prices in step with the rise in their labor costs. The CEA believed that widespread compliance with the guideposts would improve the Phillips curve tradeoff while neutralizing the threat of a cost-push inflation. This would permit the Kennedy administration to aggressively undertake expansionary policies that rapidly pushed actual GNP to its potential with very little increase in inflation. As we shall see below, this led to Kennedy’s confrontation with the steel industry, in which, in the words of a supporter of the new economics, “Kennedy deployed every weapon conceivable at that time.” These weapons went far beyond “moral suasion” to induce voluntary cooperation and included unleashing the awesome police powers of the federal government on a handful of private steel firms.

Kennedy’s New Economics in Action

Although Kennedy had not completely digested the lessons of the new economics until at least a year after his inauguration, he began to profess its basic principles almost immediately upon assuming the presidency.75 In his State of the Union address of January 1961, he was already referring to the new economic doctrines on GNP gap and fiscal drag, when he declared in a famous statement: “The present state of our economy is disturbing. We take office in the wake of seven months of recession, three and one-half years of slack, seven years of diminished economic growth, and nine years of falling farm income.”76 In the same month, he urged Heller, his appointee as chairman of the CEA, “to use the White House as a pulpit for public education in economics, especially on the desirable effects of a federal deficit in a recession.”77 Heller and the other new economists heeded this exhortation with great enthusiasm, constantly touting to one and all the benefits of deliberate budget deficits.

In July 1961, during the Berlin crisis, Kennedy’s adherence to the new economics, specifically its doctrine of military Keynesianism, was tested. Responding to the Soviet threat to deny the western Allies access to West Berlin, Kennedy sought to increase military expenditures by $3.25 billion, which he initially planned to finance by an increase in taxes.78 His “Berlin surcharge,” which would have raised taxes by $3 billion, was reflexively and vigorously opposed by the new economists. Arguing that the tax increase would abort the incipient recovery from the 1960–61 recession, Heller, Samuelson, and Seymour Harris prevailed upon Kennedy to drop the idea and to accept the resulting deficit as a contribution toward strengthening the fragile recovery.79 Early in 1962, Samuelson hailed the stabilization results of military Keynesianism, declaring that,

as a result of two or three upward revisions of our defense budget, and not as a result of a cool decision on the part of the New Team to disregard ideology [of balanced budgets] and prescribe for the nation what its sound economic health required, fiscal 1962 looks to end up with the sizable deficit designed to promote a healthy rate of recovery and expansion.80

The Keynesian view of military spending as an engine of economic recovery was recognized and embraced by Kennedy himself in the letter that he wrote for inclusion in the Economic Report of the President for 1962. Wrote Kennedy:

The Federal Budget played its proper role as a powerful instrument for promoting economic recovery . . . major increases in expenditures for national security and space programs became necessary. In a fully employed economy, these increases would have required new tax revenues to match. But I did not recommend tax increases at this point because they would have cut into private purchasing power and retarded the recovery.81

The hand of the new economists could also be seen in the revenue-neutral tax bill aimed at stimulating business investment in new capital equipment proposed by the Kennedy administration in the spring of 1961.82 This bill was an attempt to induce a more rapid rate of economic growth via macroeconomic planning that would be “costless” in terms of lost revenue to the Treasury. The gist of the bill was that business firms would be given a tax credit for investment in excess of their depreciation allowances, while the tax loopholes on expense account deductions would be closed and the partial tax exemptions on dividends would be repealed. It was also proposed that dividends and interest be subject to withholding and that a limit be imposed on the credit for foreign taxes. Business opposed this attempt at macro-economic planning because it offered no tax relief and also “seemed capricious and likely to favor limited segments of industry.”83 Needless to say investors and retirees also vociferously objected to the withholding provisions of the bill, which was only passed in 1962 after thoroughgoing congressional modifications had gutted its “revenue enhancing” provisions and its restriction of the investment tax credit to new investment only. Nevertheless, the bill as initially proposed served to demonstrate the extent of influence of the new economics in the Kennedy administration. Thus, as Makin and Ornstein point out, “The proposal to accelerate economic growth by inducing the increased purchase of specific forms of capital represented a remarkably rapid adoption by government policymakers of ideas that had appeared only five years earlier in esoteric economic journals.”84

By the beginning of 1962, the economic recovery was still intact, and, according to the CEA, the GNP gap had narrowed from $51 billion in the first quarter of 1961 to $28 billion in the fourth quarter of the year. This was partly due to the fact that the full-employment surplus had fallen from $12.5 billion to $8.25 billion from the latter half of 1960 to the latter half of 1961 as a result of the $4 billion budget deficit in 1961.85 However, the recovery began to lag early in 1962, and toward the summer the perception among the new economists was that a new recession threatened. They began to actively plump for a substantial cut in taxes that would further reduce the full employment surplus.86 On June 11, 1962, in a commencement address at Yale University, Kennedy announced his public conversion to the new economics. His speech also marked the initiation of a concerted effort to proselytize the American public into accepting this doctrine.87

The theme of the speech was the pernicious influence of entrenched myths on the formulation of public policy particularly national economic policy What Kennedy meant by myths was a coherent ideology and specifically the classical-liberal or limited-government ideology that called for tight constraints on government action in the economic realm. He referred to the tenets and rules of application of this ideology as “the clichés of our forebears” and “a prefabricated set of interpretations.”88 In attacking the myth that “government is big, and bad—and steadily getting bigger and worse,” Kennedy argued that “generalities in regard to federal expenditures . . . can be misleading.”89 Hence, federal expenditures may be appropriate in any sector and for any given purpose, and each expenditure must be evaluated on its own merits. Turning to fiscal policy Kennedy opined that “myths are legion and the truth hard to find.”90 He challenged the “persistent” myth that “federal deficits create inflation and budget surpluses prevent it.” He conceded that deficits were sometimes “dangerous” but warned that the same was true for surpluses, and concluded that “honest assessment plainly requires a more sophisticated view than the old and automatic cliché that deficits automatically bring inflation.”91 Last, Kennedy discussed the “problem of confidence,” mainly the lack of confidence manifested in the stock market in response to the economic policies of his administration. But according to Kennedy these “speculative turns of the speculative wheel” are a “false issue.”92 In proclaiming what he perceived as the “simple reality” Kennedy also revealed the fascist vision of a partnership of the various economic sectors under government tutelage underlying his new economics of government-led growth: “The solid ground of mutual confidence is the necessary partnership of government with all of the sectors of our society in the steady quest for economic progress.”93 Kennedy concluded that economic decisions should no longer be based on ideological considerations but on the requirements for “the practical management of a modern economy.”94

Kennedy’s speech thus went beyond the standard Keynesian appeal for use of the budget for anti-cyclical purposes to a call for functional finance to promote comprehensive macroeconomic planning of the economy.95 Thus the speech that Heller hailed as “[Kennedy’s] own call for economic independence” was precisely that: a call for the independence of politicians, and particularly those manning the executive branch, from the Constitutional restraints that prevented them from using their coercive power to override the economic plans and choices of individual American citizens that were expressed and coordinated in the outcomes of the market economy. Indeed, Kennedy was intensely interested in applying western European indicative planning techniques to the American economy. In his speech, he noted that western European governments, which are “prepared to face technical problems without ideological preconceptions, can coordinate the elements of a national economy and bring about growth and prosperity.” Kennedy went on to urge “the start of a serious dialog [in the U.S.] of the kind which has led in Europe to such fruitful collaboration among all the elements of economic society and to a decade of unrivaled economic progress.”96 And so we are informed by one of his court historians, Arthur M. Schlesinger, Jr., that this observation on Europe in Kennedy’s speech

reflected his marked interest in the performance of the western European economies. Early in his administration he had charged Heller on his transatlantic trips to report on European planning methods, and he used to cross-examine European visitors to learn the secret of their success. He soon discovered that western Europe was happily free of the American budgetary obsession. . . . The president learned too about European planning of the indirect or “indicative” sort—not centralized physical direction of the economy but the technique of laying down projections for major industries and then persuading everybody to do what was necessary to make the projections come true.

Lacking a principled belief in the sanctity of balanced budgets or of unregulated markets, Kennedy found all this a perfectly rational way to run a modern economy.97

The new economists continued to ratchet up the pressure on their protégé for implementation of their expansionary fiscal program. At the end of June 1962, a few weeks after Kennedy’s clarion call for corporate statist planning of the economy, Samuelson, reacting to the slowdown of the recovery, “raised the odds on a 1962 recession from 20 percent to even.” By mid-July, Samuelson and Solow were calling for temporary emergency tax cuts on top of the existing budget deficit to counteract “the developing recession,” and Heller warned of a downturn “before the snow melts.”98 Kennedy, having now fully digested the teachings of the new economics, began to enthusiastically parrot its dogmas in private and in public. In August, Kennedy confided to an old crony, Chattanooga Times Washington Correspondent Charles Bartlett: “Everybody talks about our deficit. Everyone wants us to cut spending. They don’t seem to understand that it’s the deficit, the spending that’s keeping the economy pumped up. I love that deficit.”99

At the end of 1962, Kennedy gave a speech to six hundred assembled businessmen and Wall Street financiers at the Economic Club of New York. There, he unveiled his plan for a tax cut despite the existence of a budget deficit. But Kennedy did not try to justify his planned expansion of the budget deficit as a standard anti-recession device because, by December 1962, he realized the pace of the recovery had picked up again and recession no longer loomed.100 Instead, he defended this plan by invoking the “topsy-turvy” principles of the new economics101:

Surely, the lesson of the last decade is that budget deficits are not caused by wild-eyed spenders but by slow economic growth and periodic recessions. . . . In short, it is a paradoxical truth that tax rates are too high today and tax revenues are too low and the soundest way to raise the revenues in the long run is to lower the rates now.102

Afterward, Kennedy reveled in the success of his selling effort on behalf of the new economics: “I gave them straight Heller and Keynes and they loved it. If I can sell it to those guys, I can sell it to anyone.”103 In mid-January 1963, during his State of the Union Address, Kennedy informed Congress of his intention to propose a tax-cut bill. This proposal called for “a revenue cut equal to almost 15 percent of the federal budget” without compensating spending cuts and while the budget was already in deficit.104 Ted Sorensen, Kennedy’s special assistant and another of his court historians, revealed insight into the profound politico-economic implications of the tax cut plan when he chortled that it was

one of the boldest and most far-reaching domestic economic measures ever proposed—the $10 billion tax cut bill of 1963, [was] offered without experiencing or even predicting for the immediate future any of the three traditional occasions for a tax cut: a budget surplus, a reduction in spending or a recession.105

In the words of Richard Reeves, “The thoughts of Heller and Samuelson were now proposed as the law of the land.”106

This tax-cut bill, introduced in January 1963, was passed by the House in October but was not enacted as law until it was passed by the Senate in February 1964, after Kennedy had been assassinated. In stumping for its passage, Kennedy hammered home the point that the new-economic revolution he was seeking to orchestrate in economic policy was closely related to the enhancement of U.S. military might and its successful projection abroad.107 Indeed, Kennedy was now publicly espousing the military Keynesianism propounded by Tobin and the new economists according to which an unbalanced budget would be used to siphon resources out of civilian uses for the aggrandizement of a permanent military establishment. Thus Kennedy’s proposed fiscal 1964 budget totaled $98.9 billion, $5 billion more than the fiscal 1963 budget, and this proposed spending increase was coming on the heels of the previous year’s budget deficit. Of the $98.9 billion, $55.4 billion would go to the military and another $5.7 billion to the space race and to the funding of covert CIA operations.108 During his first year in office, Kennedy had exhorted the American people to sacrifice to implement his expanded military agenda, including the militarization of many aspects of social and economic life and of foreign relations: to “pay the price for these programs . . . accept a long struggle . . . share their resources with less fortunate people . . . exercise self-restraint rather than push up wages and prices . . . strive for excellence in their schools, in their cities, in their physical fitness.”109 Wielding the new tool of macroeconomic planning via budget deficits, Kennedy was now able to impose these sacrifices upon them without their informed consent.

Kennedy had finally and fully grasped that the new economics was indeed the economics of power: the power to vastly increase the resources, scope, and stature of the federal government. This was exemplified by Kennedy’s attitude toward an American moon landing, a pet project he intended to complete at all costs as a manifestation to the entire world of the unchallenged technological and military predominance of the American mega-state. Thus when questioned by his Treasury Secretary in 1963 concerning the projected date of the landing, Kennedy replied, “1967. I’d rather unbalance my budget and all the rest.”110

Kennedy’s Unheralded “Monetary Revolution” and the Triumph of the New Economics

Contrary to the fiscal doctrines of the left-wing new economists and of the politico-economic analysis of the Old Right critic of the New Deal, John Flynn, however, it was not ultimately budget deficits that allowed Kennedy to initiate the corporatist planning and militarization of the U.S. economy that bore first fruit in the emergence of the American welfare-warfare state during Johnson’s Great Society and culminated in Nixon’s fascist New Economic Policy The policy that facilitated Johnson’s simultaneous financing of extravagant expenditures on welfare programs and the military adventure in Vietnam and made conditions ripe for Nixon’s imposition of wage and price controls was not newfangled functional finance but old-fashioned monetary inflation. As the historian of macroeconomic policy, Kenneth Weiher, has pointed out, it was not the much-vaunted “fiscal revolution” but the overlooked “monetary revolution” that took place during the Kennedy administration which turned out to be the predominant influence on the economic events of the 1960s and 1970s.111 As Weiher stated: “There was a revolution all right, but the most important change occurred at the Federal Reserve; however, 10 years passed before more than a handful of people caught on to what was happening.”112

In the three years of the Kennedy administration the growth of the money supply as measured by M2 averaged about 8 percent per year. If we take the eleven prior years going back to 1950, the rate of growth of M2 averaged 3.6 percent per year; if we go back four more years, to the first postwar year of 1946, the average annual rate of M2 growth over the fifteen-year period drops to 3.3 percent.113

There were basically two reasons why the role of monetary policy tended to be so grossly underplayed in the economic histories of this period. The first was that the new economists themselves, as unreconstructed Keynesians, uniformly denigrated the potency of monetary policy while touting the effectiveness of fiscal policy. Thus the Kennedy tax-cut bill, which did not even take effect until 1964, receives the lion’s share of the credit for stimulating the recovery from the 1960–1961 recession. Second, because most economists since the 1930s, including and especially those of Keynesian orientation, identified inflation with increases in the price level, they interpreted the 1.2 percent average annual rate of increase of the CPI during the period 1961–1963 as evidence of the absence of inflation. But in fact, the effect on the price level of the monetary expansion during the Kennedy years was blunted by two factors. The first was the rapid rate of growth in real output that began in 1962 and continued through 1966 and that was partially induced by the monetary inflation itself. The second factor was the substantial increase in the demand for money, or the decline in the “velocity of circulation of money” that occurred from 1960 to 1965. Thus the ratio of nominal GNP—that is, total current dollars spent on final goods and services in the economy per year—to the total money stock as measured by M2 fell from 1.72 in 1960 to 1.57 at the end of 1965, indicating that the public increased the average amount of dollars they held in currency and in checking and savings accounts in relation to their money incomes. These two factors taken together meant that some of the new dollars that were being injected into the economy by the Fed were being diverted from increasing the demands for goods and services in the economy at the same time that the supplies of many of these goods and services were being rapidly augmented. This explains why general prices rose at a much lower rate than the supply of money114

Despite the negligible increase in the CPI, however, the effects of the rapid, and initially unanticipated, monetary inflation were visible in credit markets as real interest rates trended steadily downward throughout the decade.115 Unfortunately, both Keynesian and central bank orthodoxies of the 1960s focused on the nominal interest rate as an important indicator of the degree of ease or restraint of monetary policy, making no allowance for the effect of inflationary expectations on the nominal interest rate. Consequently, neither the new economists nor the monetary authorities believed that monetary policy was “unduly” expansionary because short-term nominal interest rates rose from 1961 to 1963.116 Indeed, the new economists were quite pleased with monetary policy during this period, an attitude typified in Seymour Harris’s observation that “the [Federal Reserve] board provided the country with a reasonably easy money policy.”117 Harris’s judgment was echoed by another Keynesian, George Bach, who chaired a committee of academic monetary economists that began advising the Fed in 1963 and Bach wrote, “Throughout [the Kennedy years], monetary policy was permissive if not aggressively expansionary.”118

Given that monetary policy was indeed grossly inflationary during the Kennedy years, what accounts for the sudden and radical shift in Federal Reserve policy from the moderate inflationism under the Eisenhower administration? The answer is Kennedy and his new economists, who conducted a relentless and incessant campaign for easy money from the very beginning of his administration. This campaign took the form of repeated public utterances on the part of the president and his economic advisers, as well as direct presidential pressure on William McChesney Martin, who was chairman of the Fed under Eisenhower and continued in that position until 1970.

Even before Kennedy was elected, he began beating the drums for a cheap-money policy. In a press conference in October 1960, then-Senator Kennedy alleged that high interest rates had induced a recession without arresting the inflation.119 Shortly after his inauguration, in February 1961, Kennedy affirmed the need for low long-term interest rates, while allowing that short-term interest rates could not be reduced due to the balance-of-payments problems the dollar was then mired in. In a July 1963 press conference, Kennedy, while defending his platform pledge of cheap money in the face of rising short-term interest rates, boasted that “mortgage rates and other rates which affect business have dropped since this administration took office.” In an address the following day, Kennedy pointed to the contemporary economic recovery as evidence that “a determined effort can succeed in keeping long-term investments and mortgage money plentiful and cheap while boosting short-term interest rates.”120

Under the influence of the new economists, Kennedy also sought to obscure the link between cheap money and price inflation and to portray inflation as a consequence of the irresponsible behavior of private sectors of the economy Thus in his January 1962 State of the Union message, Kennedy argued, “Our first line of defense against inflation is the good sense and public spirit of business and labor—keeping their total increases in wages and profits in line with productivity.” Similarly, in an April 1963 meeting with newspaper editors, Kennedy contended that the economy was then threatened by deflation, not inflation. He argued that “a wage-price push inflation” could not be sustained given the prevailing levels of unused capacity and high unemployment. Even when Kennedy finally began to express fears about impending inflation, as he did in the following month, he did so in terms of “some concerns over the possibilities of a wage inflation.”121

Kennedy and key members of his administration also doggedly prodded the Fed, both publicly and privately, to ease monetary policy, even threatening to terminate its independent status if it did not acquiesce. As early as his campaign for the presidency, Kennedy expressed his disappointment with the Fed’s tendency to resort to restrictive monetary policy to rein in inflation and his intention to break with such a policy.122 In April 1962, Kennedy petitioned Congress for a revision of the terms of the Fed chairmanship that would enable each president to nominate a new chairman at the beginning of his term.123 Heller, Treasury Secretary Dillon, and Treasury Undersecretary Roosa also weighed in with calls for the Fed to ease monetary policy.124

Despite some initial foot-dragging and repeated caveats that the Fed would only finance real economic growth and not budget deficits, Fed Chairman Martin ultimately capitulated to the insistent demands of Kennedy and the new economists for a cheap-money policy. In fact, in February 1961, the Fed abandoned its long-standing “bills-only doctrine,” which dictated that open market operations be conducted exclusively in the market for short-term securities. In doing so, the Fed was accommodating the administration’s request to reduce long-term interest rates by buying long-term securities while simultaneously selling short-term securities in order to nudge up short-term interest rates. This attempt to artificially twist the interest-rate structure—nicknamed Operation Twist—was devised by the new economists to accomplish two goals: to stimulate domestic business investment and new housing purchases and to discourage the outflow of domestic and encourage the inflow of foreign short-term capital as a means of mitigating the U.S. balance-of-payments deficit.125 Needless to say, this attempt to have one’s cake and eat it too—to pursue a domestic cheap-money policy and to avoid its adverse consequences for the balance of payments—was a failure. As Weiher concludes:

All involved were probably foolish to think the Fed could partition the markets so well as to accomplish this artificial “Operation Twist.” . . . In the end, investors were not tricked, and all the Fed accomplished was a significantly higher money supply growth rate.126

Our conclusion then is that Kennedy and the new economists succeeded in wringing from the Fed precisely the inflationary monetary policy they desired and that this policy represented a radical break with the monetary policy pursued in the 1950s. This conclusion, which is certainly reflected in the money-supply growth rates cited above, also accords with the perceptions of the new economists themselves. Seymour Harris, long-time Kennedy economic adviser and chief academic consultant to the Kennedy Treasury, made this pellucidly clear in his book on the economic policies of the Kennedy years. Harris concluded that:

In short, monetary policy under Kennedy was much more expansionist than under Eisenhower. . . .

Federal Reserve policy in 1961–1963 was not like that of 1952–1960. At the early stages of recovery in the 1950s, the Federal Reserve, overly sensitive to inflationary dangers, aborted recoveries. Whether the explanation was the growing conviction that inflation was no longer a threat, or whether it was an awareness that the Kennedy administration would not tolerate stifling monetary policies, the Federal Reserve made no serious attempts to deflate the economy after 1960. In fact, in 1963 Mr. Martin boasted of the large contributions made to expansion.

An examination of rate movements; of purchases of securities by the Federal Reserve; of reductions in reserve requirements; and of inclusion of vault cash as reserves as a means of offsetting gold losses; of financing increased currency in circulation and providing a base for more money creation; and also the high volume of free reserves of commercial banks—all of these point to a degree of cooperation of the Federal Reserve which was lacking in the 1950s.127

Thus, inflationary monetary policy was the sine qua non for the regime of permanent budget deficits that was initiated in the early 1960s and continued uninterrupted almost to the end of the twentieth century That private investment was able to continually expand concurrently with sharply increasing government spending on military and other programs was attributable in large measure to the fact that, during the Kennedy years, the Fed was induced to “cooperate” by routinely monetizing the cumulating budget deficits necessary to finance these programs.

A Foretaste of Economic Fascism: Kennedy’s Assault on the Steel Industry

The monetary revolution inspired by the doctrines of the new economics had another momentous influence on the thrust of U.S. political economy toward economic fascism. It was during the Kennedy administration that presidential power was brought to bear—for the first time during peacetime—in an attempt to obscure the effects of monetary inflation by politically dictating the prices that private citizens could charge for their wares. During the so-called Steel Crisis of 1962, Kennedy and other members of his administration harassed and threatened the executives of U.S. Steel and a few other steel companies into rescinding an announced price increase that Kennedy’s economic advisers considered to be inflationary.

In truth, the roots of the steel crisis lay not in any actions of the steel companies but in the doctrines of the new economics. For as Susan Lee points out:

Keynesians were always hectoring the Fed to be a little looser in providing money to the economy and hectoring business and workers to hold down prices and wages. In other words, at the same time they were encouraging inflation with a loose monetary policy, they were trying to limit its impact by forbidding management and labor to cope.128

The new economists institutionalized such hectoring and scapegoating of business and labor by devising a set of ostensibly voluntary wage and price guideposts that the Kennedy administration would apply in assessing the inflationary impact of private wage agreements and pricing decisions.

The steel crisis began in August 1961 when Walter Heller sent Kennedy an absurd memo “warning him that a steel strike or a sharp rise in the price of steel or steelworkers wages, or both, was the greatest single threat to economic stability during his presidency.”129 Heller told Kennedy, “Steel bulks so large in the manufacturing sector of the economy that it can upset the applecart all by itself.”130

Agitated by Heller’s memo, Kennedy wrote an open letter to the major steel companies in September urging them to eschew any price increases after October 1, the date when wage increases negotiated earlier were scheduled to go into effect.131 It seems the CEA, whose understanding of the technical aspects of steel production was derived from Popular Mechanics magazine, had calculated that the steel companies could absorb these wage increases without recourse to a price increase. Steel prices had not increased since the recession year of 1958, although cost pressures had been building and the industry’s average rate of return on equity had been substantially below the average for all U.S. manufacturing since that year.132

As if presidential interference weren’t bad enough, however, the steel companies were treated to economics lectures by the new economists. As Barbara Bergmann, a CEA staff member at the time, recollected, “We lectured them on whether they had made the correct investment decisions and told them they would lose market share [if they raised prices].” The enormity of this intrusion of the federal government into the pricing decisions of a particular industry was later remarked on by Roger Blough, chairman of U.S. Steel, the leader among the twelve major steel producers: “The president’s attempt to predetermine the prices of the steel industry was, to my knowledge, an unprecedented move in the history of our country at peacetime.”133

In late 1961, Kennedy also began to converse regularly with Blough and David McDonald, president of the United Steelworkers union. Kennedy’s objective in these conversations was to persuade them that their restraint in the upcoming contract negotiations was “the key to checking inflation.” In February Kennedy began to lobby both sides to initiate early negotiations for a new industry-wide contract that was to go into effect in June. He believed that an early start to negotiations decreased the probability of a strike and that an early contract settlement was less likely to be inflationary. Negotiations between the industry and the union began in February, broke down for a while in March, and came to a successful close on March 31. The contracts between the individual steel companies and the union were signed during the following week. Kennedy was elated because the agreement provided for no increase in wage rates and a rise in fringe benefits of ten cents per hour—overall a 2.5 percent increase in hourly compensation, well within the CEA’s productivity guidelines of 3 percent.

Kennedy’s elation over his perceived triumph was to be short-lived, however. In the late afternoon of April 10, Blough personally delivered to Kennedy in his White House office a mimeographed copy of a statement released earlier to the press announcing U.S. Steel’s intention of raising steel prices by about $6 per ton, or 3.5 percent, effective the following day. Despite the fact that Blough had made no promise to refrain from raising prices, Kennedy was furious and felt that Blough had double-crossed him, undermining his inflation policy, humiliating him personally, and damaging his relations with labor. But it was clear even to Kennedy-insider Arthur Schlesinger that Blough was not attempting to deliberately deceive Kennedy by withholding information about the impending price increase during labor negotiations. Indeed, as Schlesinger incredulously noted, “Blough’s whole demeanor suggested a genuine belief that an increase in steel prices was no more the business of government than an increase in the price of the lemonade a child might sell in front of his house.”134 The behavior that Schlesinger interpreted as stemming from political naiveté, however, may have been attributable to Blough’s grasp of the fundamental economic principle that the height of prices, whether of steel or of lemonade, were not arbitrarily determined by sellers but crucially dependent on factors influencing market supply and demand, including the quantity of money created by the central bank. Be that as it may, Schlesinger tells us that Kennedy now “was coldly determined to mobilize all the resources of public pressure and private suasion to force steel to rescind the increase.”135 Other commentators on the episode noted that Kennedy “took personal charge of a campaign against U.S. Steel” and “deployed every weapon conceivable at that time.”136

The next day, Kennedy learned that five more steel companies had matched U.S. Steel’s price increase. One of the first weapons Kennedy deployed was an all-out rhetorical assault designed to inflame public opinion against the steel industry. At a previously scheduled press conference that afternoon, Kennedy excoriated “a tiny handful of steel executives whose pursuit of private power and profit exceeds their sense of public responsibility” and “a few gigantic corporations [that] have decided to increase prices in ruthless disregard of their public responsibilities.” He proceeded to attribute all manner of evil consequences to their actions, including higher prices for items purchased by every American family and every American business; an exacerbation of U.S. balance-of-payments woes and worsening of the gold outflow, and the threat of an inflationary spiral capable of “eating up the pensions of our older citizens.” He also contended that the rise in steel prices jeopardized national security by adding $1 billion to the defense bill, and he darkly and shamelessly insinuated that such an action was unpatriotic, if not treasonous, “when we are confronted by grave crises in Berlin and Southeast Asia . . . when we are asking reservists to leave their homes and families for months on end and servicemen to risk their lives—and four were killed in the last two days in Vietnam.” Kennedy concluded his remarks by using his famous inaugural exhortation calling for the sacrifice of the individual citizen’s resources and welfare to the purposes of the central government as a rhetorical bludgeon against the steel companies: “Some time ago I asked each American to consider what he would do for his country, and I asked the steel companies. In the last twenty-four hours we had their answer.”137 During the question-and-answer period following his remarks, Kennedy continued to cynically play the patriotism card and “even answers to unrelated questions on service wives and Vietnam were related by the president to the actions of the steel companies.”138

Kennedy’s campaign of public vilification of the steel industry extended to arming journalists friendly to the administration with loaded questions for use at Blough’s press conference the following day. In addition, cabinet members were assigned statements to make regarding the effects of the steel price rise on their various constituencies. That same evening, Kennedy complained that the NBC Nightly News with Chet Huntley was being much too kind to the steel industry, and he reacted by immediately telephoning Newton Minnow, chairman of the Federal Communications Commission. After expressing his dismay at the report in the strongest terms, Kennedy ordered Minnow: “I thought they were supposed to be our friends. I want you to do something about that. You do something about that.”139 In the midst of all this, the Bureau of the Budget prepared an analysis of the steel price increase on gross national product, tax revenues, and the overall budget, concluding that it “would increase GNP by (roughly) $2.8 billion to $2.85 billion. Very roughly, then, in fiscal 1963, Budget receipts would rise $900 million. Budget expenditures would rise $600 million. The Budget surplus would gain $300 million.”140 Needless to say, the administration did not release these estimates to the public.

Kennedy, at the behest of his new economic advisers, also sought to exert economic pressure on the industry. Administration officials, including Kennedy himself, contacted their friends and acquaintances at steel companies that had refrained from raising prices, particularly Inland Steel Company and Kaiser Steel Corporation, and pressed them to continue to resist following the industry leaders. Defense Secretary McNamara ordered defense contractors to shift their purchases to companies that had not raised their prices and personally ordered that a $5.5 million order for a specialty steel product originally developed by U.S. Steel for the Polaris submarine program be given entirely to a small steel company that had not raised its prices. Walter Heller estimated that “the government used so much steel that it could shift as much as 9 percent of the industry’s total business away from the six companies that had announced price rises to six that were still holding back.”141

Not satisfied that the pressure of adverse public opinion and economic sanctions would achieve the goal of an immediate and unconditional price rescission and determined to completely crush their resistance to save face, Kennedy also unleashed on the defiant steel companies the awesome police powers of the federal government. Thus, at Kennedy’s behest, his brother, Attorney General Robert Kennedy convened a federal grand jury to investigate charges of price fixing against the steel companies and subpoenaed their records. The pretext of the investigation was a statement attributed by an AP report to the president of Bethlehem Steel at the annual stockholders meeting held just prior to the steel price increase that called into question the wisdom of raising steel prices in the near future. A day later, Edwin Martin, the company’s president, denied the report and announced that Bethlehem Steel was matching U.S. Steel’s price increases. The Kennedys alleged that Bethlehem Steel’s sudden about-face was evidence of illegal collusion. Robert Kennedy ordered FBI agents in Philadelphia and Wilmington to search for evidence of the alleged collusion. According to Robert Kennedy’s personal recollections, he told the agents:

We’re going for broke. Their expense accounts and where they’d been and what they were doing . . . I told the FBI to interview them all—march into their offices . . . subpoenaed for their personal records . . . subpoenaed for their company records. . . . We can’t lose this.142

The FBI agents responded by telephoning steel executives in the middle of the night. They also showed up at the doors of several reporters beginning at 3:00 A.M. on April 12 requesting that they turn over the notes they took while covering Bethlehem Steel’s stockholder meeting. The Federal Trade Commission suddenly decided to reexamine the industry’s compliance with a 1951 consent decree precluding price collusion, while Democratic Senator Estes Kefauver announced that his Antitrust and Monopoly Subcommittee would probe the pricing policies of the steel industry. President Kennedy himself implied later that the executives of the targeted steel companies were also blackmailed with threats of IRS audits of their expense accounts.143

The evening of April 12, Kennedy received word that Blough and U.S. Steel were considering surrender. Ironically, Kennedy was hosting a state dinner for the shah and empress of Iran when he learned of his impending victory over a handful of business firms that had the temerity to violate his futile price guideposts by peacefully exercising their rights to engage in exchange with buyers at a mutually agreeable price. The shah was the head of a U.S. puppet government that had come to power in 1953 as the result of a coup orchestrated and financed by the CIA. From 1954 to 1966, the U.S. government poured $1.3 billion of taxpayers’ funds into Iran to help sustain the shah’s government in power, a power that was based largely on the terror and torture tactics of SAVAK, his CIA-trained security police.144 The next morning, April 13, Inland Steel and Kaiser Steel announced that they would hold the line on prices. One hour after Kaiser Steel’s announcement, Bethlehem Steel announced that it was rescinding its price increases. Finally, at 5:30 that evening, U.S. Steel issued a press release revoking its price increases.

Unlike Nixon’s much more thoroughgoing attempt to control prices through political dictation a decade later, Kennedy’s assault on the steel industry elicited politically discerning commentary from across American society. For example, George McDougal, the vice president of a construction company in Greenville, South Carolina, remarked, “I just figured that this is the way Hitler took over.”145 Milton Friedman wrote, “It brings home dramatically how much power for a police state resides in Washington,” while David Lawrence, the editor of U.S. News and World Report courageously referred to the “‘quasi-Fascism’ . . . [that] had led the public into believing that price increases are sinful or unpatriotic.”146 A cartoon published in the now-defunct New York Herald Tribune showed Kennedy Press Secretary Pierre Salinger reporting back to his boss after his recent trip to Moscow: “Khrushchev says he liked your style in the steel crisis.”147 Finally, the president of Pittsburgh Steel, Allison R. Maxwell, Jr., incisively commented during a speech: “This administration is heading toward a form of socialism in which the pretense of private property is retained while, in fact, prices, wages, production and distribution are dictated by bureaucrats.”148

As one sympathetic commentator presciently concluded in 1969,

By the end of a momentous week in 1962, Kennedy had seemingly unleashed all the potential power of the presidency on the steel industry, and the reverberations of his attack may last for another decade. . . . [T]he political action itself established a precedent for direct intervention by the executive branch against highly concentrated economic power when that power is believed to threaten the public interest. In the months to follow, President Lyndon B. Johnson was to use this power repeatedly, it became part of the Kennedy legacy.149

Two years after these words were written, Nixon used presidential power on a grand scale to implement thoroughgoing wage-and-price controls that foisted a regime of economic fascism on U.S. society. Sadly by this time, the experience with the new economics and the accelerating monetary inflation it had loosed on American society had so changed the ideological climate that almost no one, with the exception of Murray Rothbard, protested or even recognized the radical change that was being perpetrated in the economic system.

One can read whole reams of economic literature written by both fervent followers of John Maynard Keynes and his attackers as well and never know that there was a German language edition of his profoundly influential General Theory late in 1936, for which Keynes wrote a special foreword addressed solely to German readers, (p. 197)

The real barrier to optimal fiscal policy is not procedural or administrative. It is ideological. . . .The American public simply cannot stomach budget deficits of the size sometimes needed for stability, high employment and growth. Or what is really an indistinguishable variant, the American public cannot be persuaded or persuade itself that such sizable deficits are truly needed and feasible. (Ibid., p. 103)

In truth it cannot be denied that the economics of Functional Finance, in its application to a condition of unemployment, is topsy-turvy. . . . Topsy-turvy economics is just what is appropriate for an economy that is suffering from unemployment. (Economics of Employment, pp. 142–43)

• 1Arthur M. Schlesinger, Jr., The Imperial Presidency (Boston: Houghton Mifflin, 1973).
• 2Forrest McDonald, The American Presidency: An Intellectual History (Lawrence: University Press of Kansas, 1994).
• 3President Washington is invariably ranked with Lincoln and Franklin Roosevelt as the three greatest presidents in these polls of the professional historians, which speaks volumes about the political persuasion of a large part of this profession.
• 4Ralph Raico, “The Rise, Fall, and Renaissance of Classical Liberalism—Part I” Freedom Daily (August 1992): 11.
• 5Felix Morley, The Foreign Policy of the United States (New York: Alfred A. Knopf, 1951), p. 4.
• 6This was first noted in two popular magazines at the time, the New Republic and Nation which both supported their ideas. See Dwight D. Murphey, Liberalism in Contemporary America (McLean, Va.: Council for Social and Economic Studies, 1992).
• 7Webster’s New Universal Unabridged Dictionary, deluxe 2nd ed. (New York: New World Dictionaries/Simon and Schuster, 1979), p. 334.
• 8David Conway, Classical Liberalism: The Unvanquished Ideal (New York: St. Martin’s Press, 1995); see also another excellent history and analysis of classical liberalism in Great Thinkers in Classical Liberalism, vol. 1, The Locke-Smith Review, Amy H. Sturgis, ed. (Nashville, Tenn.: LockeSmith Institute, 1994).
• 9Conway, Classical Liberalism, p. 8.
• 10Ibid., p. 25.
• 11Ludwig von Mises, Liberalism: In the Classical Tradition (Irvington-on-Hudson, N.Y.: Foundation for Economic Education and San Francisco: Cobden Press, 1985).
• 12See the classic work by Albert Jay Nock, Our Enemy, The State (New York: Free Life Editions, 1973).
• 13See Joan Kennedy Taylor, ed., Liberty Against Power: Essays by Roy A. Childs, Jr. (San Francisco: Fox and Wilkes, 1994).
• 14Charles T. Sprading, ed., Liberty and the Great Libertarians: Anthology on Liberty, A Handbook of Freedom (New York: Arno Press and The New York Times, 1972), p. 82.
• 15Antony Jay, ed., The Oxford Dictionary of Political Quotations (New York and Oxford: Oxford University Press, 1996), p. 193 (emphasis added).
• 16Christopher Hollis, The American Heresy (New York: Minton, Balch, 1930), p. 38.
• 17Sprading, ed., Liberty and the Great Libertarians, p. 53.
• 18Ludwig von Mises, Omnipotent Government: The Rise of the Total State and Total War (New Rochelle, N.Y.: Arlington House, 1969), pp. 46–47.
• 19Yohann Christian Friedrich Hölderlin as quoted by F.A. Hayek in The Collected Works of F.A. Hayek, vol. 10, Socialism and War: Essays, Documents, Reviews, Bruce Caldwell, ed. (Chicago: University of Chicago Press, 1997), p. 175.
• 20John V. Denson, ed., The Costs of War: America’s Pyrrhic Victories, 2nd ed. (New Brunswick, N.J.: Transaction Publishers, 1999), app. 1, p. 496; see also Essays in the History of Liberty: Selected Writings of Lord Acton, J. Rufus Fears, ed. (Indianapolis, Ind.: Liberty Classics, 1985), p. 365.
• 21See Christopher Hollis, The American Heresy, cited earlier. This is an excellent study of American history which concludes that the Jeffersonian theory of a limited central government and States’ rights ended with the Civil War and was replaced by Hamilton’s ideas of big government in partnership with big business, which was solidified into place by Woodrow Wilson who led America into World War I.
• 22Richard E. Welch, Jr., The Presidencies of Grover Cleveland (Lawrence: University Press of Kansas, 1988), pp. 118, 129.
• 23Ibid., pp. 83, 88, 93.
• 24Ibid., p. 147.
• 25Ibid., pp. 147, 207.
• 26Garet Garrett, “The Revolution Was” in The People’s Pottage (Caldwell, Idaho: Caxton Printers, [1953] 1993), p. 55.
• 27Ibid.
• 28Louis Fisher, Presidential War Power (Lawrence: University Press of Kansas, 1995), p. 42.
• 29H.D. Rickover, How the Battleship Maine was Destroyed (Washington, D.C.: U.S. Department of Navy, 1976), p. 91.
• 30Welch, The Presidencies of Grover Cleveland, p. 145.
• 31Ibid., p. 147.
• 32Ibid., p. 211.
• 33For the same opinion, see David T. Beito and Linda Royster Beito, “Gold Democrats and the Decline of Classical Liberalism, 1896–1900,” The Independent Review: A Journal of Political Economy vol. 4, no. 4 (Spring 2000): 555–71.
• 34The interested student may want to consult the following works analyzing the Harding and Coolidge administrations: Eugene P. Trani and David L. Wilson, The Presidency of Warren G. Harding (Lawrence: University Press of Kansas, 1977) and Robert Sobel, Coolidge: An American Enigma (Washington, D.C.: Regnery Publishing, 1998).
• 35Schlesinger, The Imperial Presidency, p. 208.
• 36Ibid., p. 212.
• 37Edward S. Corwin, Total War and the Constitution (New York: Alfred A. Knopf, 1947), p. vii.
• 38Ibid., p. 16.
• 39Hughes served in numerous public offices including Governor of New York, Associate Justice of the U.S. Supreme Court, Secretary of State and as Chief Justice of the U.S. Supreme Court from 1930 to 1941. Woodrow Wilson barely defeated him for the presidency in 1916.
• 40Corwin, Total War and the Constitution, p. 2; see also Schlesinger, The Imperial Presidency, p. 93 (emphasis added).
• 41Corwin, Total War and the Constitution, pp. vii and viii.
• 42Ibid., p. viii.
• 43Fisher, Presidential War Power, p. 90.
• 44See Garry Wills, Cincinnatus: George Washington and the Enlightenment, Images of Power in Early America (Garden City, N.Y.: Doubleday, 1984).
• 45John F. Kennedy, Profiles in Courage (New York: HarperPerennial, 1964), pp. 132–58. Also for a very favorable and thorough analysis of the amazing career of Andrew Johnson, including his presidency and his subsequent return to the U.S. Senate, see Lloyd Paul Stryker, Andrew Johnson: A Study in Courage (New York: Macmillan, 1929).
• 46For an excellent analysis of the disastrous consequences of Franklin Roosevelt’s alliance with the bloody dictator Josef Stalin, see Amos Perlmutter, FDR and Stalin: A Not So Grand Alliance, 1943–1945 (Columbia: University of Missouri Press, 1993).
• 47Wythe Holt, “The Judiciary Act of 1789,” in The Oxford Companion to the Supreme Court of the United States, Kermit L. Hall, ed. (New York: Oxford University Press, 1992), pp. 472–74.
• 48Adams, History of the United States, vol. 1, pp. 174–75.
• 49Edmund Pendleton, “The Danger Not Over,” October 5, 1801, reprinted in Life and Letters of Edmund Pendleton, 1734–1803, David John Mays, ed. (Charlottesville: University Press of Virginia, 1967), pp. 695–99.
• 50Ibid., p. 698.
• 51Ibid., p. 695.
• 52Ibid., pp. 698–99.
• 53Adams, History of the United States, vol. 1, pp. 173–74.
• 54Ibid., p. 177.
• 55For an excellent short discussion of Tucker and his edition of Blackstone, see St. George Tucker, View of the Constitution of the United States: With Selected Writings, Clyde Wilson, ed. (Indianapolis, Ind.: Liberty Fund, 1999), pp. vii–xvii.
• 56Adams, History of the United States, vol. 2, pp. 398–99.
• 57Quoted in ibid., vol. 2, pp. 401–02.
• 58Ibid., pp. 402–03.
• 59M.E. Bradford, “Samuel Chase: Maryland Vesuvius,” in Against the Barbarians and Other Reflections on Familiar Themes (Columbia: University of Missouri Press, 1992), pp. 110–12.
• 60Adams, History of the United States, vol. 2, pp. 451–66.
• 61Ibid., p. 463.
• 62Ibid.
• 63Jefferson to William Branch Giles, April 20, 1807, Thomas Jefferson: Writings, p. 1175.
• 64Adams, History of the United States, vol. 1, pp. 174, 176, 178.
• 65Jefferson to P.S. Dupont de Nemours, January 18, 1802, Thomas Jefferson: Writings, pp. 1099–1101.
• 66Jefferson to Elbridge Gerry, March 29, 1801, ibid., pp. 1088–89; Jefferson to C.F. de C. Volney, February 8, 1805, ibid., p. 1158; Jefferson to Barnabas Bidwell, July 5, 1806, ibid., p. 1163.
• 67Jefferson to Gideon Granger, August 13, 1800, ibid., p. 1078.
• 68Jefferson, “Second Inaugural Address,” ibid., p. 519.
• 69Jefferson, “Sixth Annual Message,” December 2, 1806, ibid., p. 529.
• 70Ibid., p. 530.
• 71Ibid.
• 72Jefferson to Joel Barlow, February 24, 1806, ibid., p. 1160.
• 73Jefferson, “Eighth Annual Message,” November 8, 1808, ibid., p. 549 (emphasis added).
• 74Jefferson, “Eighth Annual Message,” ibid., p. 549.
• 75Malone, Jefferson the President: Second Term, 1805–1809, p. 510; Adams, History of the United States, vol. 1, p. 205.
• 76Malone, Jefferson the President: Second Term, p. 556.
• 77Jefferson, “Proclamation of April 19, 1808,” Annals of Congress (1808–09), p. 580.
• 78Adams, History of the United States, vol. 2, pp. 1111–13.
• 79Ibid., pp. 1112–13.
• 80Jefferson to Gideon Granger, August 13, 1800, Thomas Jefferson: Writings, p. 1079.
• 81Gallatin to Jefferson, December 18, 1807, quoted in Adams, History of Jefferson’s Second Administration, vol. 2, pp. 1043–44.
• 82Condy Raguet, “On the Principles of Free Trade,” Free Trade Advocate (January 1829): 2.
• 83Adams, History of the United States, vol. 2, p. 1116.
• 84Adams, History of the United States, vol. 2, p. 1081; Malone, Jefferson the President: Second Term, pp. 512, 515.
• 85John Randolph referred to the Republican desire to incorporate Canada during his famous speech on Gregg’s Resolutions in March 1806, quoted in Russell Kirk, John Randolph of Roanoke (Indianapolis, Ind.: Liberty Press, 1978), p. 326; see also Malone, Jefferson the President: Second Term, pp. 427, 508–09. Ten days after the United States Congress declared war on Great Britain, Jefferson expressed the hope that his countrymen would invade and conquer Canada and thus “strip her [Great Britain] of all her possessions on this continent.” Jefferson to General Thaddeus Kosiusko, June 28, 1812, Thomas Jefferson: Writings, p. 1265. A year and a half later, he repeated his desire that the American army would “remove them [the British] fully and finally from our continent.”
• 86Jefferson to Madame de Tesse, December 8, 1813, ibid., p. 1316.
• 87Jefferson to Dr. Thomas Leib, June 23, 1808, ibid., pp. 1188–89.
• 88Jefferson remarked thus on his program:
• 89Adams, ibid., pp. 1204–07.
• 90See Adams’s summary of these meetings, ibid, pp. 1209–13.
• 91Ibid., pp. 1210–11.
• 92Ibid., pp. 1213–14.
• 93Ibid., p. 1215.
• 94Ibid., pp. 1214–15.
• 95Jefferson to Joseph C. Cabell, February 2, 1816, Thomas Jefferson: Writings, p. 1381.
• 96Jefferson, “First Inaugural Address,” ibid., p. 494.
• 97Jefferson to Gideon Granger, August 13, 1800, ibid., pp. 1079–80.
• 98Hamilton to Bayard, January 15, 1801, quoted in Adams, History of the United States, vol. 1, pp. 188–89.
• 99John Taylor to James Monroe, October 26, 1810, quoted in Richard Ellis, Jeffersonian Crisis: Courts and Politics in the Young Republic (New York: Oxford University Press, 1971), p. 235.
• 100Quoted in Kirk, John Randolph of Roanoke, p. 92.
• 101Ibid., p. 212.
• 102Stampp, And the War Came: The North and the Secession Crisis, 1860–1861, p. 282.
• 103Tilley, Lincoln Takes Command, p. 219 (emphasis in the original).
• 104Ibid., pp. 223–24 (emphasis added).
• 105Jefferson Davis, Rise and Fall of the Confederate Government (Nashville, Tenn: William Mayes Coats, 1996), vol. 1, p. 284.
• 106Ramsdell, “Lincoln and Fort Sumter,” p. 280.
• 107Tilley, Lincoln Takes Command, p. 230 (emphasis in the original).
• 108Ibid.
• 109Ibid., p. 231.
• 110Ibid., p. 233.
• 111Catton, The Coming Fury, p. 297.
• 112Tilley, Lincoln Takes Command, p. 263.
• 113Foote, The Civil War, pp. 47–48.
• 114Perkins, Northern Editorials on Secession, p. 716.
• 115Ibid., pp. 718–19 (emphasis in the original).
• 116Ibid., pp. 711–13 (emphasis in the original).
• 117Ibid., pp. 706–08 (emphasis in the original).
• 118Foote, The Civil War, p. 50.
• 119James G. Randall, Constitutional Problems Under Lincoln (Chicago: University of Chicago Press, 1951), p. 50.
• 120Tilley, Lincoln Takes Command, p. 288.
• 121Ibid., p. 265.
• 122Ramsdell, “Lincoln and Fort Sumter,” pp. 284–85.
• 123Tilley, Lincoln Takes Command, p. 227 (emphasis added).
• 124Davis, The Rise and Fall of the Confederate Government, vol. 1, pp. 292–95 (emphasis in the original).
• 125Ibid., pp. 297. Also, see explanation of Confederate Vice President Alexander H. Stephens, A Constitutional View of the War Between the States (Harrisonburg, Va.: Sprinkle Publications, 1994), vol. 2, pp. 34–36, 349. For another compact and reasonable interpretation of Lincoln’s first shot maneuver, see Stampp, And the War Came, pp. 263–86.
• 126Arthur M. Schlesinger, Jr., “War and the Constitution: Abraham Lincoln and Franklin D. Roosevelt,” in Lincoln The War President: The Gettysburg Lectures, Gabor S. Boritt, ed. (New York: Oxford University Press, 1992), pp. 155–56; Also for other details of Lincoln’s unconstitutional conduct see James G. Randall, Constitutional Problems Under Lincoln.
• 127Tilley, Lincoln Takes Command.
• 128Ramsdell, “Lincoln and Fort Sumter,” p. 285.
• 129Tilley, Lincoln Takes Command, p. 152.
• 130Ramsdell, “Lincoln and Fort Sumter,” p. 286.
• 131Ibid.
• 132Ibid.
• 133Ibid., pp. 287–88 (emphasis added).
• 134Ibid., p. 288.
• 135Masters, Lincoln, the Man, p. 418 (emphasis added).
• 136Boritt, “War Opponent and War President,” in Lincoln, the War President: The Gettysburg Lectures, Gabor S. Boritt, ed. (New York: Oxford University Press, 1992), pp. 190–91. Also, for a more full explanation of Lincoln’s attack on President Polk, see Masters, Lincoln, the Man, pp. 97–98.
• 137Mark E. Neelly, Jr., The Fate of Liberty: Abraham Lincoln and Civil Liberties (New York: Oxford University Press, 1991), p. 213 (emphasis in the original).
• 138Boritt, ed., “War Opponent and War President,” p. 191.
• 139Ibid. (emphasis in the original).
• 140Fareed Zakaria, From Wealth to Power: The Unusual Origins of America’s World Role (Princeton, N.J.: Princeton University Press, 1998), p. 48.
• 141J. Rufus Fears, ed., Essays in the History of Liberty, Selected Writings of Lord Acton (Indianapolis, Ind.: Liberty Fund, 1985), vol. 1, p. 363.
• 142Ibid. (emphasis added).
• 143Ibid., p. 366.
• 144Carl N. Degler, “The United States and National Unification,” in Lincoln, the War President: The Gettysburg Lectures, Gabor S. Boritt, ed. (New York: Oxford University Press, 1992), p. 106.
• 145Randall, Constitutional Problems Under Lincoln, p. 57.
• 146Forrest McDonald, The American Presidency (Lawrence: University Press of Kansas, 1994), p. 400.
• 147Neally, Jr., The Fate of Liberty, pp. 10, 23.
• 148Christopher N. May, In the Name of War: Judicial Review and the War Powers Since 1918 (Cambridge, Mass.: Harvard University Press, 1989), p. 19.
• 149Bart Rhett Talbert, Maryland: The South’s First Casualty (Berryville, Va.: Rockbridge, 1995), pp. 59–66 (emphasis added).