04/22/2013 06:16 pm ET Updated Jun 22, 2013

Conservatives Favored Deficits Before Keynes

Believe it or not aggressive deficit spending was a conservative idea before it was a liberal one. In 1932 with unemployment over 20 percent, the Great Depression in its fourth year, and four years before John Maynard Keynes made deficit spending respectable among liberals, the founders of the famously conservative Chicago School urged then-President Herbert Hoover to spend aggressively to revive growth and employment. Those who Milton Friedman himself identified as the founders of the school --- Frank Knight, Lloyd Mints, Henry Simons, and Jacob Viner --- all backed big deficits.

Americans need to understand the reasoning of the Chicagoans and of Keynes then and its relevance now. Sadly, politicians and the public 80 years after the Depression still don't understand why economists are overwhelmingly urging more spending until the recovery gets stronger. They still believe that balancing the budget is "common sense" although plain observation in the 1930s and for the last four years shows that cuts in government spending like cuts in private spending mean fewer jobs and less growth.

So you ask were the Chicagoans in the 1930s who favored increased government spending truly conservatives: Absolutely! They were staunch defenders of capitalism and private enterprise that then were under attack. They wrote about the unparalleled benefits that this free system had delivered over the previous decades and worried that its enormous political and economic virtues would be cast aside because of the Depression.

The Chicago conservatives also were sharp critics of much of Franklin Roosevelt's New Deal. They criticized the National Recovery Act (NRA) that encouraged cartelization in 600 American industries before the Supreme Court in 1935 declared it unconstitutional. They abhorred unions and New Deal flirtations with trade protectionism, currency manipulation, and planning. They sharply disagreed with Keynes' suggestion that the prolonged Depression might mean that consumer markets were saturated and therefore that new private investment was no longer profitable, implying a permanent need for governments to step in and spend.

The Chicagoans and Keynes, however, shared a central political fear. They wanted government to spend heavily to create jobs because of a fear that most Americans repress or deny today. Keynes and these conservatives were committed to political democracy and free societies and understood that disastrous economic performance could lead to the destruction of the cherished freedoms that they valued above everything. They feared that failure to deal with unemployment could lead to upheaval and totalitarianism in the U.S. and the United Kingdom as it had in Nazi Germany, the Soviet Union, and a host of other countries.

The Chicagoans sharply disagreed with other conservatives who like today's primitives on the right were counseling balanced budgets and governmental austerity in the belief that this would give investors the confidence to right the economy by themselves. The Chicagoans did not believe like many liberals at the time that the Depression had been caused by faults in the basic capitalist system. They blamed the extraordinary depth of the Crisis on banks that financed out-of-control speculation, gambling in stocks by Wall Streeters and the public, inadequate financial oversight and inept monetary policy at the Fed. But most important for today's policy makers, while the Chicagoans passionately defended the capitalist system they did not believe it could cure the American economy without forceful government action in the form of spending.

What the Chicago conservatives in 1932 said the government should do was spend aggressively on useful public works and infrastructure. There were then and are now plenty of liberal ideas that deserve harsh criticism. Government spending is not one of them when there is an output gap of a trillion dollars per year that the private sector can not close. The Chicagoans understood that governments had to spend enough to close the gap and move the country toward full employment before it could return to the more laissez faire policies they preferred. The Chicagoans understood this 80 years ago and historically conscious people, conservative as well as liberal, should be learning from them today but they are not.