It is simply a matter of time before the Federal Reserve finds itself having to choose between inflation and federal insolvency.
To compare The Money Makers: How Roosevelt and Keynes Ended the Depression, Defeated Fascism, and Secured a Prosperous Peace to a 100,000-word inflationist op-ed by Paul Krugman would be unfair—unfair to Paul Krugman. It goes beyond Keynesian hagiography to Keynesian deification.
Author Eric Rauchway, who teaches history at the University of California at Davis, makes a number of provocative arguments. He says that President Franklin Roosevelt was a sophisticated economic thinker; that FDR had a consistent, Keynesian monetary policy; that the New Deal ended the Depression (and did so on at least two occasions); that Roosevelt recognized the danger of European fascism on his first day in office; and that he pursued economic recovery in order to prepare the United States to defeat it. These arguments range from untenable to absurd.
When President Roosevelt took office in early 1933, the U.S. dollar had been exchangeable for a set amount of gold for almost a century. This prevented inflation but occasioned deflation in economic slumps. To induce inflation, FDR wiped out half the dollar’s gold value in 1934. The dollar was exchangeable for gold in international exchange until 1971, when President Nixon let the dollar “float.” Rauchway applauds both of these devaluations. He is a monetary “nominalist,” which means he believes money should be worth whatever the sovereign says it is.
Rauchway does not claim that FDR said in his first inaugural address, “I intend to adopt Keynesian monetary policy, which will end the Depression and enable us to defeat Hitlerite fascism in the war that I know is coming.” But he might as well have. He goes on to say that Keynesian monetary theory became the basis for the postwar Bretton Woods international financial system, which produced decades of economic stability and growth. We lived happily for a generation, but the repudiation of Keynesianism in the 1980s led to the crash of late 2007 to 2009 and the slow recovery since then.
From these premises he concludes: “We can return to the lately prevailing orthodoxy that discounted Roosevelt and Keynes, and which led to our current discontents, or we can heed the lessons of their success.” But the book’s historical argument fails on every front, and makes this advice for the present as unreliable as a Roosevelt dollar.
The reader is not given any evidence for the claim that FDR had considerable “economic literacy . . . contrary to his critics’ beliefs, the president had long been a student of economics.” Such evidence would be very helpful, because there is a raft of evidence that our 32nd President was an economic ignoramus. And though Roosevelt’s and Keynes’s faces are cheek-by-jowl on the book’s cover, and Rauchway often makes it sound like they were in some sort of hypostatic intellectual union, he admits he cannot show that the British economist had a direct influence on the American President. This should relieve fans of both Roosevelt and Keynes. Keynes complained of FDR’s economic ignorance, and most historians conclude that FDR fell into a vulgar Keynesian all but accidentally.
It is rather breathtaking that Rauchway takes seriously the crackpot schemes of the Cornell economist George Warren, who urged Roosevelt to raise the price of gold as a way to raise other commodity prices. He does not mention the story of Roosevelt’s setting the price of gold according to his own “lucky numbers,” which, as his Treasury Secretary Henry Morgenthau noted, would have frightened the American public if knowledge of this recklessness had gotten out.
Nor are the signature economic programs of the first New Deal discussed in these pages. I refer to the National Industrial Recovery and Agricultural Adjustments Acts, which aimed to establish cartels across American product and labor markets. The Supreme Court temporarily saved us from these sweeping “plans,” though they were implemented in particular product and labor markets after the Court capitulated to FDR’s threat to “pack” it in 1937, and after he did pack it with liberals in subsequent years.
Many critics likened Roosevelt’s polices to fascism, but—even more breathtakingly—Rauchway turns this around and claims that defenders of the gold standard, balanced budgets, and pre-Keynesian economic orthodoxy were the real fascists. He engages in the “brown-baiting” typical of liberals in the 1930 and 1940s. The first House Committee on Un-American Activities was chaired by Samuel Dickstein, a New York Democrat, and under Dickstein, Rauchway claims, HUAC discovered that “in defense of the gold standard, some wealthy Americans were attempting to engineer a fascist coup.” (That the firmest connection there with domestic subversion turned out to be Representative Dickstein’s being a Soviet agent doesn’t rate a mention in the text.)
Management of the dollar “had become a valuable tool for thwarting fascist advances within the US,” he avers. Not only did dollar devaluation counter the domestic threat of fascism, it thwarted the fascists over in Germany, according to him. The Nazis “hated the New Deal for restoring the US to strength,” which they knew would be brought to bear to foil Hitler’s designs. The end notes are lush and thick, but provide no substantial evidence for these extravagant claims.
Rauchway says repeatedly that the New Deal brought America well down the road of economic recovery by the end of FDR’s first term, but that a lapse back into classical budget-balancing fiscal orthodoxy triggered the “Roosevelt recession” of 1937. More aggressive Keynesianism in his second term produced full recovery and the massive deficit spending of World War II clinched the argument for Keynesianism.
Space does not permit an extensive evaluation of these claims. Suffice it to say that there are many economic historians who have concluded that the first-term recovery took place despite rather than because of New Deal policies, and that the Roosevelt recession stemmed from these policies, not from shifting away from them. The claim that the war “ended the Depression” is also highly dubious. The war ended unemployment (as Hitler’s rearmament and the U.S. government’s instituting conscription had done years before), but war rarely raises living standards. Sherman tanks and B-29s were produced in abundance; consumer goods had to be rationed. And the government’s price controls and manipulation of economic data make any accurate conclusion difficult. This was true even in peacetime. FDR began his administration by pressuring the National Emergency Council to officially date the beginning of the recovery later so that it would fall within his administration rather than that of his predecessor, Herbert Hoover.
The idea that Roosevelt’s monetary policies were driven by a desire to defeat fascism abroad is perhaps the most untenable of this book’s many bold claims. FDR has been roundly criticized—mostly by liberals, in fact—for having been too timid and slow to rally the American public to recognize the Nazi threat, and for having conceded too much to the isolationists of his day. Over a decade before he ran for President, in 1920, FDR had run as the Democratic candidate for Vice President in support of President Wilson’s internationalism. But he hid his light under a bushel-basket in 1932 to secure nomination to the top job and, once in it, to keep Progressive isolationist Democrats on board for his legislative agenda and reelection campaigns of 1936 and 1940.
Indeed, Rauchway concedes this—thus exposing the incoherence of his argument—when he says that Roosevelt, “the nation’s main champion of intervention . . . mainly refrained from speaking his mind, in the interest of retaining office.” What kind of “champion” is this?
The book’s last section, on the postwar economic system of Bretton Woods, is similarly overly triumphant. The idea that the 1945 to 1980 period was a paradise of economic prosperity and stability is a staple of contemporary liberalism. (The liberal “brown-baiting” continued in this period, with Roosevelt warning in his fourth inaugural that opposition to extending the New Deal would mean that we had defeated fascism abroad but had capitulated to it at home. As for Morgenthau, he concluded that opponents of the Bretton Woods system were “fascists at heart.”)
In fact, the economic performance of the United States after World War II, especially in the 1950s, was rather mediocre. To be sure, that decade is usually remembered as an unusually prosperous one, even a golden age. But economic growth was only 2.4 percent annually in the Eisenhower years (1953 to 1960), almost half that of the previous seven years and less than half that of the following seven. These figures may sound minor, but small percentage differences amount to a lot over time. Consider that the United States grew at a rate of 3.62 percent from the Civil War until 1913 (the deflationary years), and has grown at a 3.26 percent rate since then (the inflationary years). If the earlier growth rate had continued, we would be 50 percent richer today.
The golden age reputation probably derives from the fact that the growth was remarkably widespread, this being the heyday of the “great compression” of income distribution. A number of factors—high income tax rates, strong labor unions, very low immigration—produced the most impressive erasure of income inequality in American history. The entire economy was aided by a near halving of energy prices in the 1950s and 1960s. Perhaps most important of all was the lack of foreign competition. With our major economic rivals recovering from World War II, American producers could pass the costs of regulation on to consumers even in a free-trade environment.
But this golden age was really an anomalous fool’s paradise. Once regulatory costs increased in the 1960s, fuel prices went up, and international competition sharpened, we got the serious economic distress that, by 1970, made people reconsider the benefits of the New Deal political economy. Their disillusion began the movement toward conservatism and deregulation. This same sense that government is incompetent and cannot manage the economy is feeding the Trump and Sanders campaigns today.
Finally, the idea that Roosevelt’s economic policies saved liberal democracy at home and abroad invites more than a little skepticism. Rauchway does not take seriously the constitutional threats that the New Deal posed. The “bank holiday” that began the New Deal was based on the Trading with the Enemy Act of 1917, a laughably tenuous authority. When Roosevelt devalued the dollar, the government’s creditors lost some $3 billion ($48 billion in today’s dollars) and private creditors lost $200 billion (over $3 trillion today). When it appeared that the Supreme Court would hold the devaluation unconstitutional (government bonds and private contracts contained clauses promising to repay in gold), Roosevelt prepared a message explaining that he would defy the Court. But the Court backed down, though liberal Justice Louis Brandeis privately conceded that administration’s conduct was disgraceful.
These and similar usurpations led Roosevelt to become the only American President who felt compelled to reassure the American people that he had no aspirations to be a dictator.
The truth is that neither Roosevelt nor Keynes ended the Great Depression. The United States defeated fascism, but no thanks to their economic theories. In that same amount should they be credited for such postwar prosperity as there was.