• • •
In 1947 the question of how to deal with Germany was still unsettled. Keynes, White, and their respective governments had been embroiled in a bitter debate beginning within weeks of D-day three years before. White was an aggressive advocate of the deindustrialization of Germany, while Keynes argued for economic integration and recovery. Keynes first learned of the Morgenthau Plan from the papers a few weeks later in July 1944. The Versailles Treaty, which he had repeatedly assailed as “Carthaginian” throughout the 1920s and which he blamed for another world war, was punitive. But it was an attempt by the victors to make Germany pay the costs of the war. The Morgenthau Plan was designed to return Germany, a modern economy, to its eighteenth-century preindustrial state. The plan had two strengths, Keynes observed in a letter to the Chancellor of the Exchequer, John Anderson: It was being proposed at a moment of bitter fighting and horrendous casualties when extreme measures—even genocidal ones—had become acceptable. It was a plan. The State Department and the War Department had nothing as coherent.
Keynes did not speak out, because he could not afford to alienate Morgenthau or White. He saw that instantly. He eased his conscience by predicting that the plan would never pass Congress. In this he was correct. By the time Eisenhower assumed control of southern Germany in 1945, the Morgenthau Plan had been shelved. But the lack of a positive vision or concrete counterproposal left a vacuum, and Keynes’s failure to speak out still had consequences. In the absence of a positive plan, “Morgenthau principles and Morgenthau men” governed Germany for three full years. As early as June 1945, Austin Robinson, on a fact-finding mission for the Treasury, reported to Keynes that he “felt more worried about the economic system that has completely stopped than about the physical damage.” He found “no papers . . . no telephones that operate over long distances, little true communication of any sort.” Instead “the Germany of the towns is in ruins, with its factories flat, its houses burnt out or bombed out, and its life dead. The Germany of the country[side] still vigorous, the work of the fields proceeding normally . . . lacking only incentives to sell to the towns that have so little to offer in exchange for food.”17
The refusal to permit a resumption of economic activity in Germany had two consequences unforeseen by the American authorities. First, the collapse of the German economy prevented the rest of Europe from recovering. Second, the cost of the occupation to American and British taxpayers soared. The price tag had, according to conservative estimates, multiplied by a factor of three. Robinson warned Keynes that if the Russians “or just possibly the French” extracted too much in reparations, Britain “would have to provide and pay for imports to feed and maintain our zone sufficiently to prevent starvation and disaster.”18 Having witnessed the same phenomenon after World War I, Keynes responded immediately: “For goodness sake, see that we don’t have to pay the reparations this time.”19
• • •
The United States ultimately adopted the Marshall Plan. With Europe starving and in danger of falling into the Communist camp, the Marshall Plan was a natural heir to Bretton Woods and the commitment of Britain and the United States to create institutions that could help promote growth and stability among the free world’s economies. The shift from nationalism to a global perspective in economic policy was thus part of the changing perceptions about security and postwar diplomatic and military strategy. The notion that economic collapse had produced totalitarian regimes created American resolve to restore the economic health of Europe that became more urgent when it became clear in 1947 that Europe was not recovering on its own. Economic revival was in the interest of American business, as well as a necessary condition for European self-defense. Truman’s rationale helped win over business leaders to massive government spending on aid and the military in peacetime.
Although Germany got relatively little Marshall aid, Germany’s recovery was so strong that it was quickly labeled Wirtschaftswunder or economic miracle. In the three years after the currency reform of 1948, per capita output jumped an average of 15 percent every year. By 1950, despite the destruction of the war and the removal of machinery by Russians, it was 94 percent of prewar level.
What happened? Ludwig Erhard, the finance minister, attributed the Wirtschaftswunder to the introduction of a new currency and lifting of price controls in 1948. “More perhaps than any other economy,” he recalled, “the German one experienced the economic and supra-economic consequences of an economic and trading policy subjected to the extremes of nationalism, autarchy and government control. We have learned the lesson.” The liberalization “awakened entrepreneurial impulses. The worker became ready to work, the trader to sell, and the economy to produce.” Hitherto there had been a premium on stagnation. Foreign trade moved languidly in a framework provided by allied instructions. Goods were lacking; there was a universal cry for supplies; yet the economic impulse was wanting.20
For Hayek, Germany’s rise from the ashes was both a vindication of his faith in free markets, free trade, and sound money, and a hopeful portent that the liberal European civilization he loved was not, after all, doomed to extinction.
When he got an invitaion to teach at the University of Chicago, he resigned from the LSE, got a divorce, and married his longtime lover. He indulged his passion for book collecting and intellectual biography by writing a charming account of John Stuart Mill’s partnership with Harriet Taylor, and spent his honeymoon retracing Mill’s famous pilgrimage from London to Rome.
Hayek’s turn as a darling of American conservatives was short-lived. He despised most Republican politicians, all cars, and practically everything else about life in America, including the absence of universal health insurance and government-sponsored pensions. Homesick for Europe and no longer welcome at the LSE, he finally settled at the University of Salzburg.
In 1974, the Swedish Academy of Sciences plucked Hayek out of obscurity by awarding him a Nobel Prize for his “penetrating analysis of the interdependence of economic, social and institutional phenomena.” Ironically, he shared it with Swedish socialist Gunnar Myrdal. A few years later, his Constitution of Liberty became the bible of Margaret Thatcher’s conservative revival. And in the early 1990s, the collapse of the Soviet Union and the spread of free market reforms in Eastern Europe and Asia made him a hero among conservatives around the globe.
Chapter XVI
Instruments of Mastery: Samuelson Goes to Washington
I don’t care who writes the nation’s laws—or crafts its advanced treaties—if I can write its economics textbooks.
—Paul A. Samuelson1
Paul Anthony Samuelson, the anonymous mind behind the government report to which President Roosevelt referred in his “radical” State of the Union message, had whiled away the first months of the war force-feeding economics to bored engineering students and producing endless calculations for the army at MIT’s Radiation Lab.2 As early as 1940, Lauchlin Currie, FDR’s economics aide, had suggested to the president that it was not too early for the United States to begin planning for the postwar era. The president agreed, and Currie promptly recruited a new class of freshman brain trusters to work at the National Resources Planning Board, the nation’s first and only planning agency, run by the president’s uncle Frederic A. Delano. Samuelson, a twenty-five-year-old Harvard wunderkind, newly minted PhD, and MIT assistant professor, soon became the titular head of a group of twenty or so economists and a bunch of graduate students from Johns Hopkins University assigned to calculate possible trajectories for the postwar economy and propose solutions to potential problems.3 To reassure his superiors that the new Keynesian economics was no more subversive than a branch of accounting, Samuelson made a point of wearing a green eyeshade at White House briefings.
On the morning after Labor Day 1944, for the first time in nearly a year, this foot soldier in the Roosevelt administration’s vast wartime army of university consultants was back in Washington, D.C. Short, wiry, and crew-cut, Samuelson had come down from
Boston by overnight train. Nattily dressed in a suit and bow tie, he made the rounds of “sweltering temporaries” that had sprung up all over the capital, buttonholing former colleagues and students, pumping them for news and gossip.
Samuelson could “smell cuts in war production.”4 Every office he visited was awash in desk calculators, messy piles of green sheets, and stacks of budget reports. With the end of the war now certain, Washington’s attention was shifting from the problems of wartime production to those of conversion to a peacetime economy. Hundreds of bureaucrats were busy calculating how much military procurement could be scaled back, how many GIs could be discharged, how long it would take to convert tank production lines into car production lines. The first round of reductions was slated to begin that fall, perhaps not coincidentally during the 1944 presidential election campaign, which pitted the president against Republican Thomas E. Dewey, who held FDR’s old job of governor of New York. As it turned out, the Allied sweep through Europe stalled that fall at the Battle of the Bulge, and the actual reconversion was postponed until early 1945.5
Despite the sultry temperature and oppressive humidity, Samuelson found the mood in Washington among “experts,” as well as Congress, unexpectedly sanguine. The day before, the New York Times had run a headline: “Boom After War Almost Certain.”6 He was appalled. The potential problems were staggering: 11 million men and women were in uniform, and 16 million—almost a third of the labor force—were working in defense plants. In 1943 the federal government had spent more than $60 billion—nearly half the nation’s annual output—and nearly seven times as much as in 1940. The more Samuelson looked beyond the war, the more worried he felt.
His mood coincided with that of other Keynesians who took for granted that American business could increase production, efficiency, and per capita income year in and year out but were less certain that businesses and households could be counted on to spend, rather than save, the profits and wages that all this activity generated. Increasingly, Samuelson leaned toward the view that the tendency of the economy to stagnate was not necessarily a transient illness caused by monetary policy mistakes or external shocks, but rather a chronic disease. David M. Kennedy, the economic historian, observes that the tenor and conclusions of Samuelson’s report for the NRPB reflected two sources. One was Keynes’s judgment, expressed in his 1940 pamphlet How to Pay for the War, of the British economy’s poor postwar prospects absent a major and constant infusion of government spending.7 The other was that of the administration’s Keynesian advisors, notably Currie, White, and Alvin Hansen, a Harvard professor and a consultant for the NRPB and the Federal Reserve. It was Hansen who had rallied the conservative department’s graduate students and instructors (the “lumpen proletariat,” Samuelson liked to say) to the Keynesian banner. If anything, Kennedy points out, Keynes’s American disciples were even more pessimistic than their leader. As early as 1938, the year Hansen arrived at Harvard from the Midwest, he published a book, Full Recovery or Stagnation, in which he already foresaw a dismal postwar future.
Samuelson, who wrote as fast and breezily as he talked, launched a stellar second career in journalism with a provocative two-part series for the New Republic on “the coming economic crisis.”8 His tone was energetic, not fatalistic. Implying that the problem, though dire, was fixable, he urged the same steps as he had in the 1942 NRPB report: slow down demobilization and keep government spending high. The piece radiated confidence that, as New Dealer Chester Bowles once remarked: “We have seen the last of our great depressions for the simple reason that the public [is] wise enough to know that it doesn’t have to stand for one.”9
• • •
Samuelson was a child of the Jewish exodus out of Russia to America, the World War I boom in the Midwest, and the go-go twenties. He was born in Gary, Indiana, in 1915, a fact to which he later attributed his lifelong zest for economics and stock market speculation. Gary was not yet an exurb of Chicago. Instead it was a gritty company town of behemoth steel mills and brand-new tenements rising out of the prairie and shrouded in its own special atmosphere of soot, smoke, and money. During World War I, the mills blazed day and night. Steelworkers, mostly immigrants, had the opportunity to work 12/7. When factory hands got sick, they went to the druggist instead of the doctor to avoid losing a day’s pay. Frank Samuelson was in the happy position of being one of the town’s few pharmacists. A first-generation Jewish immigrant, he spoke Russian and Polish to his customers.
He was also a small-time real estate speculator, as was the typical midwesterner with cash to spare, whether saved or borrowed. The war boom had spilled into the farm economy and sent grain prices into the stratosphere. Farmers, who had never had it so good, borrowed money and poured it into more acreage and machinery. And for several years, they and Frank Samuelson, who invested in property in downtown Gary, prospered. Like Gopher Prairie, the fictional town in Sinclair Lewis’s Main Street, Gary was full of overachievers like Frank Samuelson and their discontented wives, who despised the town for its ugliness and resented their husbands for marooning them a full day’s travel from Chicago. Pretty, vain, and “a great snob,” Ella Lipton Samuelson alternately egged on her husband and heaped scorn on him. A woman of uncertain temper and a passionate desire to become a famous hat designer, she longed for daughters. Instead she had three sons whom she farmed out, one after the other, to foster parents not long after they were old enough to walk.
At age seventeen months, the blond, blue-eyed toddler was sent to a farm in Wheeler, Indiana, a crossroads standing amid endless fields of wheat, without electricity, indoor plumbing, a telephone, or an automobile. Later, Samuelson said, “I did experience first hand, in my virtual infancy, the disappearance of the horse economy, the arrival of indoor plumbing and electric lighting. After that radio waves through the air or TV pictures left one blasé.”10 He did not see his mother again until he was ready to start kindergarten.
Maternal abandonment can produce coldness and detachment, but it can also create a longing for attachment and a desire to please. In Samuelson’s case, it did a little of both. His foster mother became the first of the many women in his life who adored him: from wives and secretaries to daughters and dogs. Unlike his birth mother, she was ample, warm, kind, and a good cook.
When five-year-old Paul went home again, the armistice had been signed, and the new Federal Reserve was turning off the credit spigot in an effort to reverse wartime inflation. In England and France, the biggest markets for American wheat, central banks were doing the same. In a matter of months, grain prices had fallen by half, the steel mills were standing idle, and banks were failing in droves. “Now, bank failures were not a strange and unfamiliar phenomenon in my part of Indiana,” Samuelson recalled. “The farms that were mortgaged up and fully equipped at the peak of the War prosperity were hard hit by the drop in grain prices. And so country banks failed.” Inevitably, land prices collapsed, and so did the Samuelsons’ financial security.
The economic recovery that began in mid-1921 did little to revive the battered farm economy or the family finances. For four years, Frank Samuelson watched his once-thriving pharmacy business melt away. Finally, in the summer of 1925, lured by delicious visions of warm winters and tropical bounty—oranges at the front door—and tired of his wife’s constant scolding, he handed the keys of his drugstore to a new owner. He and Ella got in their car and headed south to Miami, joining tens of thousands of other families in the great Florida land rush. Florida land looked like a sure bet: with 10 percent down, a doubling in price meant a 1,000 percent profit on the original investment. Never mind that the “dream development” was “midway between pine thicket and swamp.”11
When their parents left Gary, Samuelson, ten, and his twelve-and-one-half-year-old brother, Harold, were back in Wheeler, where they always spent summers. Around Labor Day, they were summoned by their parents. The boys rode from Chicago to Miami in a Pullman. Samuelson recalled that his first sight when he got off the train was
not his mother or father but “men in plus-four knickerbockers on the streets buying and selling land.”12
By mid-1925, the boom had spread all the way north to Jacksonville, a sleepy farm town near the Atlantic Ocean, 350 miles from Miami. It had also attracted an already infamous con man named Charles Ponzi, who sold parcels for $10 that turned out to be sixty-five miles (as the crow flies) from Jacksonville and 1/23 of an acre. In 1926 faith that Florida’s streets were lined with gold was beginning to wane, and the influx of new buyers began to tail off. Inevitably, prices did too. Then came two hurricanes, and what looked like a pause in a perpetual upward climb became a plunge. Frank Samuelson lost most of his remaining money and accumulated more of his wife’s reproaches. “She didn’t hold a lot in,” Paul said of his mother, who relished retelling the story of her husband’s foolish bets long after his premature death from heart disease at age forty-eight. The nature of the family’s economic problem was clear even to a ten-year-old.
Two years later, the Samuelsons were back in the Midwest, settling on Chicago’s South Side, then as now a middle-class enclave squeezed between Lake Michigan and an African-American ghetto. The Chicago economy was booming once more. The stench from the stockyards mingled with smog from the steel mills in Gary that came drifting across the lake. Paul entered Hyde Park High School and joined the rest of the country in studying the stock pages daily, often with his high school math teacher.
The cult of F. Scott Fitzgerald, author of The Great Gatsby, was at its height. Samuelson wrote stories for the school’s literary magazine featuring worldly-wise, cynical youths who fell in and out of love in the time it took them to change their clothes and spit out one-liners like “For the love of Mike, Pat, Pete, and the other seven apostles, shut up!”13 Living with a mother who was “a screamer,” he fantasized about escaping to an eastern college with “a white chapel tower” in a “peaceful green village.”14 By the time Samuelson graduated from high school in 1931 at age sixteen, a Great Depression was settling on Main Streets all over America like a long winter night. Going east for college was no longer in the cards, if it had ever been a realistic possibility. So Samuelson enrolled at the University of Chicago in January 1932, declared a math major, and continued to live at home.