Richard Adelstein wrote:  

> Barkley Rosser's point is dead on, and very important.  There is 
> indeed no other explanation for the extraordinary plunge in 
> unemployment in Germany between 1933 and 1936 (not 1939, as Barkley 
> suggests) than the large scale public spending of the German 
> government on roads, infrastructure and similar capital projects 
> (largely related only indirectly  to military objectives, as in the 
> case of the Autobahnen), financed by public debt through the device of 
> Mefo bills, undertaken from the outset of the Nazi regime.  This was 
> precisely what Keynes's letter to the New York Times prescribed on 
> December 31, 1933, and was widely recognized as such at the time, as 
> Friedrich Baerwald's admiring account in the AER in 1934 makes clear.  
> Despite some divergences from what the General Theory would later 
> advocate (higher taxes, enforced saving and, of course, increasing 
> dirigisme over the entire period), there's no serious doubt that 
> Hitler's policy in these crucial years represented the first serious 
> experiment in "Keynesian economics," at least as Keynes's himself 
> understood it at the time, and that this is true whatever Hitler's 
> ultimate intentions in reviving the German economy might have been, 
> and whether Hitler knew anything at all about Keynes's economics, or 
> anyone else's.
>


I'm afraid Adelstein's valiant attempt to defend the efficacy of fiscal 
policy (deficit spending) to reduce the rate of unemployment with 
reference to the German experience is incomplete, misleading, and 
dangerous.  First, who purchased the Mefo bills?  If it was the German 
central bank, then it was the increased quantity of money (currency) 
rather than the deficit /per se/ that should be cited as the cause of 
unemployment reduction.  (Remember James Tobin's famous 1978  "post hoc, 
ergo propter hoc?" critique of Milton Friedman.)   Government deficits 
financed by bonds sold to the public would simply substitute government 
spending for private sector spending.  This is, of course, the famous 
"Treasury View," or what we now term the crowding out of private sector 
spending by government spending.  And as R.G. Hawtrey pointed out while 
disputing the efficacy of Keynes's multiplier argument, "The true 
function ... of the capital outlay undertaken by the Government is not 
to fill a gap between capital outlay and savings, but to bring about a 
release of cash.  If it is sufficient to outweigh the general tendency 
to absorb cash [hoarding], it will 'set the ball rolling.' ... It is 
only called for at all on the assumption that the banking system cannot 
perform the necessary service" (1937, 127).   It helps understanding of 
Hawtrey's argument also to appreciate that savings are spent, as the 
classics have taught, and that they are not the equivalent of cash 
hoarding or a leakage from the expenditure stream. 

Adelstein also has to tell us what happened to prices in Germany with 
Hitler's method of financing the government's deficits.  The classical 
forced saving doctrine, which Keynes (1936) either misunderstood or 
deliberately misrepresented, explains that an increase in the quantity 
of money (currency) relative to its demand raises the price level, 
reduces real wages (given fixed nominal wages) as well as real interest 
and rental rates, and thus causes the rate of unemployment to decrease 
in the short run.  The German episode appears thus to be an illustration 
of a well-known classical principle. 

However, the German experience occurred under a totalitarian state,  
which could order people into its chosen activities and also prevail 
over sharply falling real wages for quite a long time.  (What was the 
rate of unemployment in the Soviet Union, and what is it now under 
Castro's Cuba?)  As Keynes notes in his Preface to the German edition of 
the /General Theory/, such regimes could afford to ignore "the influence 
of loan expenditure on prices and real wages, the part played by the 
rate of interest" (xxvii) -- the factors that cause a reversal of the 
short-run positive effects of monetary inflation "under conditions of 
free competition and a large measure of laissez-faire" (xxvi); recall 
the modern long-run, vertical Phillips curve analysis.   Thus, one might 
argue that the German success in reducing the rate of unemployment to 
the extent and duration it did under Hitler, had more to do with the 
ability of a totalitarian regime to achieve such a result than with the 
efficacy of fiscal policy or deficit spending.  Several  dictatorships 
around the world have run huge budget deficits, financed by their 
central banks, but have not been able to replicate the German 
experience.  Therein lies the danger of Adelstein's incomplete analysis.

I also have a preference for the kind of economic analysis that points 
the way to enhancing human well-being rather than promoting widespread 
repression and destitution. 

James  Ahiakpor