Keynes on Confidence

July 13, 2010

by Jerry O’Driscoll  

Amity Shlaes has written an enlightening op ed on “FDR, Obama and ‘Confidence’” in today’s Wall Street Journal. She details how FDR destroyed investor confidence in the 1930s by his incessant attacks on business and businessmen, and by his policy inconsistency.

Treasury Secretary Morgenthau at first served as FDRs “yes” man and cheerleader.  But he came to realize how destabilizing FDRs actions were. The Treasury Secretary began resisting his boss’s policies.  She writes that Morgenthau “found an unlikely supporter” in John Maynard Keynes. Keynes wrote a critical letter to FDR about his persecution of utilities. “What’s the object of chasing them around the lot every other week?”

Market confidence returned when FDR concluded he needed to make allies of business once he decided he needed to plan for war. She concludes: “Perhaps Mr. Geithner might like to read up on Morgenthau’s progress.  Treasury secretaries who forget the past condemn us all to repeat it.”

8 Responses to “Keynes on Confidence”


  1. I assume Paul Krugman will be be consistent with his unconditional support to Keynes’ ideas and will from now on oppose business regulation and tariffs…

  2. Wonks Anonymous Says:

    The link is behind a paywall. What specifically is Geithner accused of doing wrong?

  3. Jim C Says:

    Does demand destruction not “destroy investor confidence?” What can we do to get corporations to invest the large hoards of cash they are sitting on?

    What causes an executive to want build another factory?

    The bailouts were not good enough for “making allies?” What was Paulson trying to do? Create enemies of Wall Street?

    Would investor confidence increase if Obama apologizes to BP for over-regulation and gets rid of MMS because it was already captured and incentivized by the oil e&p industry.

    Should Obama also bring Frank Lautenberg inline to not question BP’s involvement for the alleged exchange of terrorists for profits.

    Should Oakland cut the size of its police force? It’s all regulation to me. And it’s corrupt and obviously not working, so let’s get rid of it.

    ————-
    Note: Not everyone agrees with Krugman. And you can see this by reading the comments on his NYT blog because he does not censor and delete the comments of people who do not agree with his views. If you do not want “non-elites” to commit on this blog, then require registration. I guess since I have two graduate degrees from NYU and have studied at both Stern and Courant, I would not qualify to participate in the discussion of WSJ articles.


  4. @Mathieu — I thought of Krugman and wondered how he’d react.

    @Wonks — Geithner not accused of doing anything wrong so much as not learning from the history of the 1930s.

    @Jim C — Firms are not investing in part because of lack of confidence. Two sides of the same coin.

  5. Jim C Says:

    Dr. O’Driscoll,

    You said, “Firms are not investing in part because of lack of confidence. Two sides of the same coin.”

    You did not specify who is lacking the confidence: the investor or the consumer.

    Yes, I would hope that the firm would not invest if the firm lacked confidence in the investment. That is the best way to lose money. Another statement of the obvious is “To make money in the stock market, you must buy low and sell high.”

    Therefore, you must be saying that the firm is not investing–IN PART–because of the lack of consumer confidence. Was that your point?

    So what PART (or eigenvalue) is most significant: consumer confidence, “incessant attacks on business and businessmen”, or “policy inconsistency?”

    ——–
    Ms. Shlaes forgot to include the salutation, “Dear Mr. President.” It was obvious she was writing her op ed directly to President Obama. Why else would she write in a the style of a nursery rhyme?


  6. Jim C — Shlaes and Keynes meant “investor confidence.” It may be related to consumer confidence, but is a separate factor. Right now, firms are not investing because of what Robert Higgs calls “regime uncertainty.”

  7. Jim C Says:

    Dr. O’Driscoll,

    I know Shlaes and Keynes meant “investor confidence.” So, your saying that “consumer confidence” is not a factor that influences “investor confidence?”

    Are you saying capital investment is never undertaken with the concern for consumer demand? So when James Dyson was investing in the development of his vacuum cleaner, he had no concerns for what the market demand would be for his new product??? All he worried about was “regime uncertainty.”

    Capital flows without any regard for market demand doesn’t sound like efficient markets to me. That’s information that I wouldn’t want to eliminate from my business analysis.

    Also, why are most your comments loaded with bias derogatory descriptions: incessant attacks, regimes, etc.? Does your research require the ad hominem?


  8. Jim C,

    You have a perspective and that is fine. I have one, too, and that is equally fine.

    FDR did make incessant attacks on business, and that is descriptively accurate. (I quoted Keynes on point.) “Regime uncertainty” is a term of art coined by historian Robert Higgs. It is neither derogatory nor ad hominem.


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