My Review of George Selgin's "False Dawn: The New Deal and the Promise of Recovery, 1933-1947"

The Recovery that Failed

Libertarian economist George Selgin has written an intriguing history of the New Deal and role Keynesian thought played in it. The book is largely a critique of Eric Rauchway’s “The Moneymakers.” (See:   https://shulmaven.blogspot.com/2015/12/my-amazon-review-of-eric-rauchways.html ) In the main I agree with Selgin. Simply put, many policies attributed to Roosevelt weren’t really his and by and large Roosevelt was wary of deficits as a macroeconomic policy tool. In Selgin’s framework the New Deal consisted of three R’s: recovery, relief, and reform. Selgin focuses on the recovery aspects and notes that Roosevelt’s deficits came from funding relief.

To begin with the ideas behind the Emergency Banking Act of 1933 which closed and then reopened the banks came from Hoover’s treasury department, namely Secretary Ogden Reed and Under-Secretary Arthur Ballentine. Further Roosevelt opposed the deposit insurance provisions of the Glass-Steagall Act because of the moral hazards associated with it. That issue would come to the fore in the 1980’s. A criticism of Selgin is that he does not give credit for how successful deposit insurance was during the 1937-38 downturn. The bank runs of the early depression were over.

 

As to deficit financing, the biggest deficit took place in 1936 when the World War I veterans’ bonus was paid out. Roosevelt opposed it and his veto was over-ridden. The payout provided a short-term boost to the economy and played a significant role in his re-election. However, in 1937 the lack of such stimulus played a role in that year’s downturn.

 

In the Spring of 1938 Roosevelt and his advisors finally took Keynes’ advice and embarked on the first true Keynesian stimulus of his administration. However, in the light of the World War II spending that was to come, it was far too little.

 

Selgin credits the massive gold inflows of the 1930’s for the modest recovery that took place. The gold came from Stalin’s stepping up gold production in the Soviet Union and European flight capital fearing Hitler. It was the gold inflow that enabled the Fed to embark on a policy of monetary easing, a policy that was halted in late 1936 as the treasury sterilized the gold inflows out of fear of inflation.

Roosevelt did take the U.S. off the gold standard in 1933 and raised the price of gold, a stratagem that Keynes advised. To Keynes it would be path to monetary ease. However, according to Selgin the increase in price of gold came from the ideas of George Warren who thought that a rise in the price of gold would automatically increase commodity prices. It did not.

 

Along the way Selgin notes how Roosevelt’s reforms stalled the economy, and the anti-business nature of his policies greatly weakened private investment. That would not turn until World War II ended and the feared depression did not take hold. Selgin observed a rise in business optimism in the aftermath of the war; however, this sentiment was not reflected in stock prices, as Wall Street experienced a three-year bear market from 1946 to 1949.  Stock market investors at the time were clearly worried. As a result, it would have helped to have some discussion of stock prices during his 1933-1947 history.