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To stabilize the economy the government must spend more than it takes in in tax revenues, or run a “budget deficit.” This was considered unthinkable among orthodox economists, for whom the idea of always balancing the budget (keeping expenditures and tax revenues equal) was sacred.

     Keyenes’ new ideas concerning the role of the government in the economy created a furor in academic, business and government circles. Conservative thinkers saw his ideas as a radical (perhaps even communistic) threat to the free-enterprise system. To others, his theories represented perhaps the only way to save the economic system from its own self-destructive tendency toward depressions.

     While controversy and uncertainty prevented Keynes’ proposed policies from being used significantly in the 1930′s, the outbreak of the Second World War after 1939 forced governments to increase their spending dramatically without offsetting increases in taxes, that is to have large budget deficits. The economic results were equally dramatic, as the economy recovered quickly and unemployment virtually disappeared. For many, the debate had been won – not by theories, but by actual experience.

     After the Second World War ended in 1945, a new philosophy concerning the role of the government in the economy developed. “Keynesian” economics, introduced against considerable conservative opposition into university programs, became the basis for the acceptance by government of its responsibility for the level of employment in the economy. In its 1945 White Paper on Employment and Incomes, the federal government accepted responsibility for maintaining a “high and stable level of employment” in the economy and stated that “The Government will be prepared in periods when unemployment threatens to incur the deficits…resulting from its employment and income policy, whether that policy in the circumstances is best applied through increased expenditures or reduced taxation.” Laissez faire had been abandoned; the government had become committed to influencing the direction of the entire economy.

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