Nascent Keynesianism? Denmark in the 1930s

The object of this essay is to review the defeat of the radical approach to deficit spending in Denmark in the 1930s, a defeat that was paralleled in Britain, the home of Keynesian ideas. The details of British pragmatism and cautious advance in fiscal policy during the depression and recovery years are well established in the literature, but there is a danger of such details dominating the discourse, not least in terms of the influence of the Treasury and the civil service elite in British political economy. The Danish story illustrates that the power of the status quo and the resistance to any radicalization of economic policy in the 1930s were as much in evidence there as they were in Britain at the time. Both Denmark and Britain had used relief works on a small scale in the early 1920s to combat unemployment. The arguments subsequently deployed in each country for and against the use of larger-scale public works as a counter-cyclical device in the 1930s were also similar, although the intellectual environment was different(Garside 1990, 318; Topp 1987, 34-36).

Britain's reluctance to embrace the deficit-financed economic alternative promulgated principally by Keynes as the necessary step toward revitalizing private capitalism is frequently contrasted with the supposedly more enlightened fiscal stance adopted in Sweden. Although "nascent Keynesianism" in Sweden is now known to have been less evident in the 1930s than is conventionally thought, this focus on Sweden has diverted attention from developments in Denmark. It was there that economists as early as 1930 were enunciating a concept of the multiplier, recognizing the potential of public works expenditure as a means of boosting employment and incomes. Even those Danish economists who were traditionally in favor of balanced budgets left open the possibility that fiscal measures might be necessary to remedy the unemployment of the 1930s. This internal debate did not, however, encourage any form of fiscal radicalism. There were major constraints-economic and political-on the emergence of an alternative economic policy. The policies that were adopted, conservative and limited though they might have been, appear in hindsight to have been particularly appropriate to the trading difficulties and industrial structure of the country. Nonetheless, the debate over whether to make more active use of the budget captures some of the Danish preoccupations with "nascent Keynesianism" as the country sought economic stability and rising employment.

Public Works in the 1920s

In the 1920s the principle of a self-regulating market economy under which continuous adjustments in wages and prices would propel the economy toward a state of equilibrium found general support among Danish economists and government officials. It was recognized that a return to the gold standard and the concomitant adjustment of prices and wages would be painful but that the transition would rapidly be overcome when industries were once more able to benefit from the access to foreign markets on the basis of a stable currency. The main ambition with regard to fiscal policy was to carry out a retrenchment of the public sector, to maintain a low level of public debt, and to strive to balance annual budgets. The normal rules of conduct had been suspended in most European countries during the war, and a return to the rules of a "sound" fiscal policy was seen as a prerequisite to establishing normal economic conditions.

Any proposals for a major rise in expenditure on works programs to combat unemployment were countered by three arguments. First, public works would disturb the free formation of prices and lead to a crowding out of private investment. Second, the public sector, by creating employment, would impede the free formation of prices and wages by reducing the incentives to accept jobs in the private sector at the prevailing wage. Third, new public expenditures were not in accordance with the general objects of balancing the budget and reducing the public debt.

The celebrated call by the British Liberal Party in the late 1920s for an extensive two-year program of public investment to "conquer" unemployment, endorsed intellectually by John Maynard Keynes and...