depended on the mood of the investors, not the supply of savings, interest rates, or thrift. In pessimistic times money sat idly, waiting for investors to feel courageous again. Economists ultimately called the phenomena a “liquidity trap”—a term meant to contradict Adam Smith’s claim that savings easily made their way back into circulation. Thus, “the equilibrium level of employment, i.e. the level at which there is no inducement to employers as a whole either to expand or to contract employment, will depend on the amount of current investment.”6
Keynes showed how, ironically, a high savings rate could kill growth. It could facilitate depression. He argued that a perfect balance of savings and investment was rare, “an optimum relationship” that “can only exist … by accident or design,” but hardly in the natural state of the economy.7 Put in simplest terms, Keynes argued that the economy’s vulnerability came from the investor class—rich capitalists and their hired guns—who could, in their flightiness and timidity, choke the economy into depression.
But an alternative existed. Government could “compensate” for the investor class by spending those idle savings when investors lost their nerve. It could “prime the pump” and return the economy to full employment. Indeed, only government could pursue the public interest over the narrow anxieties of the investor class and restore the economy to a full employment equilibrium.8
While it took time and developed piecemeal, eventually the Keynesian approach came to dominate the thinking of the New Dealers. For New Dealers, monopolists and reckless bankers—whose hatred Roosevelt had “welcomed” in 1936—need not be evil.9 Keynes showed they were just as dangerous by being timid, flighty, and narrow. They could effectively ruin the economy either way. The Keynesian approach had the additional advantage of showing that difficult and often controversial efforts to regulate and reorganize business were unnecessary. Rather, government simply needed to spend, and spend enough to restore the economy to full employment.10 Indeed, as spending on World War II ramped up, Keynes appeared to be a prophet: the American economy grew dramatically and unemployment disappeared.
By the mid-1930s, Roosevelt began to worry that he had prioritized the domestic economy at the expense of the international. His secretary of state, Cordell Hull, prevailed upon him to embrace the cause of free trade. While Hull never gained Roosevelt’s full confidence, Roosevelt did support the Reciprocal Trade Agreement Act of 1934, which gave him authority to grant “most favored nation status” and unilaterally reduce tariffs with a particular country. Then came a 1938 U.S.-British trade agreement, lowering tariffs on a handful of goods. Roosevelt’s interest in the global economy accelerated as war seemed inevitable. Starting with his “Good Neighbor” policy toward Latin America, Roosevelt increasingly saw economic diplomacy laying the foundation for security.11
As Hull also began to think of war as inevitable, he initiated a Committee on Problems of Peace and Reconstruction, staffed largely with veterans of Woodrow Wilson’s administration. This group tried to divine “out of the experiences of the interwar years and out of the experiences of the [First World] war itself” what had gone so terribly wrong. They concluded that Wilson’s efforts had focused too narrowly on political reconstruction alone. “No program of constructive economic and social action agreed upon among all the victor powers of 1918 had come into being.” As a result, when “insecurity had grown” because of “problems left by the war,” and because of “the lag between national and international economic, social, and political policy on the one hand and swift technological development and desires for a higher standard of living on the other,” the precepts of “Christianity and democracy” had collapsed.12
By 1940, the committee made economic reconstruction, rather than political reconstruction, its starting point since “the common interests of nations were more generally recognized in the economic than in the political field.” This seemed a particularly good starting point because “the experiences of the interwar period”—that is, the global Depression—had “focused [policymakers’] attention on the effects of economic policies on international relations.” Echoing Walter Lippmann’s 1933 essay, the committee argued that a collapse of international trade would be followed by nationalist economic and political policies. Lack of global economic cooperation created an “important source of friction between nations and [was] a basic factor contributing to stability or instability within states.”13
But trade remained a particularly thorny issue, particularly with the British. When Roosevelt met with Winston Churchill to craft what became the Atlantic Charter in 1941 (the Charter stood as the fundamental document outlining American and British war aims), the State Department inserted a clause that the United States and Britain would “strive to promote mutually advantageous economic relations … through the elimination of any discrimination … against the importation of any product originating in the other country.” Churchill balked at this. The British, former champions of free trade, had since the depression realized the value of a preferential system of trade within their vast empire.
“Time being of the essence,” Roosevelt thought it best to compromise with Churchill. He rewrote the passage to say only that the two countries would “endeavor to further the enjoyment by all peoples of access, without discrimination and on equal terms to the markets and to the raw materials of the world which are needed for their economic prosperity.” Churchill reluctantly supported this broad, vague aim.14
By 1943, the idea of creating a global economic order had become fundamental to American postwar planning. In testimony before Congress, Hull explained that “when the day of victory comes, we and other nations will have before us a choice … as it was in 1918.” On the one hand, the world could choose “extreme nationalism, growing rivalries, jealousies and hatreds”; or it could choose “increased international cooperation in a wide variety of fields” and a chance at peace. “Of the various necessary fields of international collaboration one of the most essential is the field of economic life.” In what became almost a mantra in the postwar period, Hull said, “The political and social instability caused by economic distress is a fertile breeding ground of agitators and dictators, ready to plunge the peoples over whom they seize control into adventure and war.” Avoiding this outcome required “mutual willingness to cooperate in the fundamental business of earning a living.”15
Hull had placed his analytic eggs in the basket of economic determinism. Of course, on the surface, this did not distinguish his views from Roosevelt and the rest of the New Dealers. They, too, saw the political consequences of economic downturns. “Democracy has disappeared in several other great nations,” Roosevelt argued, “not because the people of those nations disliked democracy, but because they had grown tired of unemployment and insecurity.” After “seeing their children hungry while they sat helpless in the face of government confusion” they eventually settled for the security offered by authoritarian leaders such as Hitler.16
For Hull, however, the causal flow moved from the international to the domestic. Democracy had disappeared in other nations because the people in those nations sought a way to assert nationalist claims on the international stage. The collapse of an open economic system after World War I had left Germany and Japan, for example, in economic distress. As the Council of Foreign Relations explained in one of its Studies of American Interests, “high and discriminatory tariffs and colonial quotas were already limiting the possibilities of Japanese trade expansion by 1935.” The Japanese acted in a predictable way. “People in extreme economic distress have [often] turned to some new form of authoritative government.”17
In fairness, “I do not mean, of course, that flourishing international commerce is of itself a guarantee of peaceful international relations,” Hull explained.18 Still, he assumed that economic breakdown did more than provoke armed conflict; it produced distinctly illiberal regimes within countries cut off from the global market. As Dean Acheson (Hull’s assistant secretary of state) explained, “If you wish to control the entire trade and income
