George Selgin on Contextualizing the Great Depression and its Implications on Monetary Policy Today

George Selgin is a senior fellow and director emeritus at the Center for Monetary and Financial Alternatives at the Cato Institute, as well as the author of the new book titled False Dawn: The New Deal and the Promise of Recovery, 1933-1947. George returns to the show to discuss the complicated economic history of the Great Depression, how that history has led us to the macro-events of 2008, 2010, and 2020, how we can apply lessons from the Great Depression to macroeconomic policy to the current moment, and much more.

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This episode was recorded on May 13th, 2025

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].

David Beckworth: Welcome to Macro Musings, where each week we pull back the curtain and take a closer look at the most important macroeconomic issues of the past, present, and future. I am your host, David Beckworth, a senior research fellow with the Mercatus Center at George Mason University. I’m glad you decided to join us.

Welcoming George Selgin and False Dawn

David: Our guest today is George Selgin. George is a senior fellow and director emeritus at the Center for Monetary and Financial Alternatives at the Cato Institute. George is also the author of a brand-new book on the Great Depression that is titled False Dawn: The New Deal and the Promise of Recovery, 1933–1947. George joins us today to discuss his book and its implication for macroeconomic policy today. George, welcome back to the program.

George Selgin: Thanks, David. It's great to be back.

David: Well, it's great to have you on. You are coming to us live from Spain. I'm here in the United States. It's a modern marvel that we can connect like this in this day and age. Here we are. You have a great new book on the Great Depression and the New Deal in particular. We'll get into the details of that. Now, we discussed this book briefly in 2022. In fact, right before you left for Spain, I believe you came into the studio. We sat down and we did a bonus episode.

We didn't get a full treatment of it, so this is our full treatment of it. It's just been released. It's hot off the press. We encourage all our listeners to go out and get their copy of it and share it with all their friends. In fact, I saw on X that David Andolfatto got onto the airplane with a copy of his book. Someone sitting next to him said, "Hey, I want a copy." If that tells you anything, that means you too should get your copy, right, George?

George: [laughs] I suppose that's right.

David: George, something else that was really nice about your book, wonderful to see, is that your brother participated in it, right? He is the artist who designed the cover. It's a beautiful image. His name is Peter Selgin. Tell us about him.

George: Well, he's multi-talented. He got pretty much all of the right brain in the family. He has a good amount of left brain, too, but I have mostly left brain. He's an artist, he's a teacher, he's a writer, and he designs book covers professionally. He has a bunch of other talents, too, his paintings are lovely. You can look them up online. Anyway, since he is a professional cover designer, I asked him to do the cover for this book, and I was very pleased with the result.

David: Yes, it was an amazing picture.

George: Yes, he's very good. If you look at his website, you'll see that he's got wonderful covers up there, including a lot that he did of famous books, and how he would have designed the covers, and by gosh, I think they're better than any of the originals. I should say here, and I mean this sincerely, a lot of academic book covers, particularly, are God awful. Folks, if you're writing an academic book, and you have any say, don't let them put a lousy cover on it, and don't do it yourself unless you're a pro. Covers are important. I judge books by their covers all the time. I don't know about you, [laughs] but I think it makes a big difference, so keep that in mind.

Why Another Book on the Great Depression?

David: Okay, so let's jump into your book, False Dawn. Why a new book now on the Great Depression? There's been a lot of literature, a lot of writing on this topic already. What are you answering that has not been answered previously?

George: Well, that's a good question. The last big book I wrote was about coining in the Industrial Revolution. I had to scrounge around for my sources. This one is just the opposite. There's an immense amount of literature out there on the New Deal and on the Great Depression, so your question is the right one. What the heck did I have to add to all that? But it turns out I did have something to add.

I should say that I was starting this project, I started about five years ago, so nothing that's happened since was the inspiration. It was already conceived back then. As I say in the preface, there's no book specifically devoted to the questions, two questions. One, how exactly did the US finally get out of the Great Depression? Everybody knows we were in it for a long time. Some things didn't work or weren't adequate.

The related question is, what role did the New Deal play in that recovery? Of course, other works do address these questions, but no book-length work specifically is devoted to them. Even though there's a ton of stuff out there that touches on the subject, a lot of it is more than 20 years old. It's amazing how much has been written, mostly in professional journals, that's pertinent to answering those questions just during the last 20 years.

There was a need for a work that took this more recent research into account, research that isn't really that readily available to most people because it's in professional journals and it's often very technical. Those were my big reasons. I should add a little more. Of course, there are answers floating around out there to the questions my book raises, but they're very bad. The conventional wisdom is divided here.

On the one hand, you have people saying, "Well, the New Deal was a complete success, got us out of the Great Depression." Implicitly, by 1939, thanks to FDR and company, it was all over. That's very popular. It's out there. The other equally popular view, which isn't quite as absurd, but it still has big problems, is that World War II spending got us out. That's inadequate as well.

Oh, and related to the second view, or both views, is the view that the New Deal actually kept the United States depressed—was the main reason why it didn't get out of depression until World War II. These are all the views that are out there. They all contain small elements of truth, but a lot of untruth. I think we needed a book that straightened out the truth from the fiction.

The New Deal’s Role in Recovery from the Great Depression

David: Reading through your book, it was great to see all the sources, citations. You reference economists, economic historians, historians. You bring it all together in an original new synthesis that answers this narrow question about the recovery as it relates to the New Deal. What role did the New Deal play with it? Just to be clear, and you're very clear in your book but for our listeners, the three R's of the New Deal. Relief, recovery, reform. You focus on the recovery. The recovery from the depths of the great contraction or the Great Depression as it’s more popularly known.

George: That's right, yes. Those three R's, of course, are ones that were originally distinguished by Roosevelt, by the New Dealers. They recognized that they were all different things. It's very important to say that my book is just concerned with recovery. How did it happen? What did the New Deal contribute? It's important partly because there's a tendency for people to think of the New Deal as a monolithic thing.

It's either worked or it didn't work. Of course, it may have worked for some R's and not so well for others. Also, even for any particular R, like recovery, some of its programs may have contributed. Some may not have done much, and others may have hurt. My book tries to sort out which New Deal programs worked, how they worked, which ones hurt, and what their overall consequences were, and whether, in fact, they were sufficient to get us out of the Depression, and if not, what did get us out.

David: Like most things in life, the answer is, it's complicated.

George: That's right.

David: There's yes. There's no.

George: It's at least 360 pages complicated. It might be a lot more complicated than that.

David: It's a great read. It's accessible. Again, I liked that you bring all this literature together. You mentioned the last 20 years. Sometimes historians don't read economists, economists don't read historians, and you do a nice job bridging those two worlds together and giving us some conclusions. Again, at the end of the day, I hope to circle back to where we are in the current policy world and some of the lessons learned from this experience.

Myths About the New Deal Overview of the Great Depression

Before we jump into your book, I do want to maybe whet our listeners' appetite by addressing some of the myths we will address along the way of our conversation. Number one, the New Deal ended the Great Depression. That's myth number one. Well, actually, it did not end the Great Depression, hence the title, False Dawn. Now, to be clear, again, as we just said, some programs did help, some programs did not, but it wasn't a clean slate.

Number two or myth number two, fiscal stimulus was large under Roosevelt. We'll address that. Number three, Roosevelt planned the New Deal in advance. Another myth. Myth number four, the New Deal was a very Keynesian program, which is a very surprising myth to debunk, George, because that's a standard fare you often hear when people bring up this period. Finally, World War II ended the Great Depression, so you'll also pour some cold water on that view as well. 

We'll work through those as we go through our conversation today. Before we get into this, though, maybe remind the listeners about the Great Depression. What are the broad contours? What happened? Why is it such a monumental event in US economic history?

George: Well, the Great Depression, of course, began not just in the United States but in other parts of the world in the late 1920s. The conventional dating of it for the US anyway is with the October 1929 stock market crash. It was extremely severe for the United States. Many countries, as I said, were involved. The US had one of the deepest depressions and one of the most long-lasting. The only country that fared as badly or worse, among the major countries at least, was France.

In the United States, we'll get to this with the question of whether the New Deal ended the Depression. By most accounts, the Depression was still going strong in the late 1930s. Real recovery had to await World War II. As I argue in the book, it was not until World War II was over that we really knew that the economy had recovered and wasn't going to sink back into a deep depression.

It was a deep depression both with regard to output and with regard to employment. I think the employment figures will stun people. At one point, 25% of the United States labor force was either unemployed outright or employed only in work relief programs, emergency programs that created jobs for the purpose of providing relief. As late as 1939, before World War II broke out, the US unemployment rate was still over 17%. That's accounting people on work relief. I have to emphasize that.

I also want to emphasize that if you're trying to gauge how much an economy is recovering, you don't want to confuse having a lot of people on work relief with recovery. If we had put everybody on work relief, but there were no private jobs for them to take instead, that wouldn't be a recovered economy. By the way, the New Dealers understood it, so they had the same understanding. They understood that relief jobs were no substitute for getting permanent private sector jobs going. That's the rough out longer than any of the recent recessions and deeper than any of them. It was the big mama of all depressions.

Measuring Unemployment

David: Right. Despite the pain we went through these past two deep recessions, the COVID recession, the recession 2008, 2009, they pale in comparison. It's interesting, you cover this debate in your book, how do you properly measure unemployment during this period? The point you just made is when you want to really wrap your mind around the notion of a recovery, getting back to normal or to full potential or full employment, you really do need to look at that bigger number, 25% at its peak. That slowly came down, the BLS's measure, even though it's contested by Darby and others.

George: Well, it's contested, but it's important to recognize that Darby had this view. It's only according to this view that his number is the right measure of recovery. Darby's view, I was going to say "implicit," but I'm not sure it's all that implicit, maybe quite explicit, was that the people who had relief jobs with the WPA or otherwise could all have had private sector jobs if they'd wanted them. Therefore, one shouldn't count those people as being among those who would be unemployed in the absence of relief programs.

I muster a bunch of evidence in the book showing why I don't consider that belief credible at all. There were people lining up for available jobs. Not all of them could get them. Work relief programs were not particularly attractive alternatives for people. Most people on work relief would have loved to have had real jobs and just couldn't get them. Anyway, I put that evidence together. If what you want to know is how many people are destitute, not earning anything, starving perhaps, then, of course, you would not include people on work relief.

You would only consider that people who are outright unemployed simply don't have any source of income. They may be relying on friends and family, but they don't have any obvious means of support. That's answering a different question. That's not answering a question about how well the economy is…how much progress it's making towards a normal operation, achieving its productive capacity, et cetera, et cetera. That's a different question.

David: Just going with the BLS numbers, unemployment reached a peak of 25%. By the end of the decade, 1939, before World War II starts, it's at 14%, 15%, is that right?

George: I think it's a little higher. Well, it depends on just which endpoint you pick, but a statistic that sticks in my mind for '39 is 17.3%.

David: Okay, 17%. The point being, though, there was no recovery during the 1930s. There was a return to some positive growth, but no recovery in terms of returning to full employment and, thus, the pain of the decade.

George: We should be careful here, David, because there was recovery between 1933, which was the draw off when we had 25% unemployment, and 1937. Then there was yet another serious recession, the recession within the Great Depression of 1937/38 that undid many of the gains of that earlier period. The recovery wasn't complete by any means in 1937 when this other serious dip occurred. A dip makes it sound like nothing, but it was an extremely sharp contraction, sharper than the first one.

That setback left the economy with very high double-digit unemployment that did not peter out that much between then and the end of the decade. It was only when the war got started in Europe and we started producing materiel for the purpose that our economy started to revive. To that extent, of course, the revival was a wartime phenomenon. As I argue in the book, what needs to be explained is how we managed to keep on being revived and how after the war ended.

The Gold Standard and the Great Depression

David: Okay, I want to jump into the New Deal policies, but I do think it's important to just briefly touch on the causes of the Great Depression. I know that's not the focus of your book. I think it's helpful, at least the international gold story, because later on, the New Deal policies address the devaluation of the gold and such like that, which does facilitate some of this recovery. Walk us through the international gold standard. In fact, it's called the interwar gold standard, and why it was consequential to help create the Great Depression.

George: Right. Most of the Western world was on the gold standard, going into the Great Depression was on some kind of gold standard. It's important to know which, and we'll get to that. That meant that the quantity of money that these economies were capable of sustaining was limited by available gold reserves. It followed that the price levels that they were able to sustain were themselves tied down by available gold.

Now, the gold standard that prevailed at this time, especially in Europe and the United States, was very different from the pre-World War I gold standard. It was different in a way that made it extremely vulnerable. The basic story there, I'll try to keep it short, is that during World War I, all the belligerents, more or less, went off the gold standard. The one exception was the US. We imposed gold embargoes, so we were partially suspended.

During the war, they cranked up the money supplies. Prices rose dramatically because the gold constraints had been removed temporarily. After the war, many countries that had been involved in these transactions found themselves with high prices, large quantities of money, and a desire to restore the gold standard. Now, under the circumstances, since the quantity of gold itself hadn't gone up all that much during this time, there were several choices that countries could make.

One was to devalue. Just make every unit of gold, every ounce, a higher price level, higher quantity of money, so that the outstanding quantities of money could be supported with gold convertibility again, but at a different convertibility rate. Second choice was deflation. Just put the economies through a wrenching downward adjustment of money and prices, so the old gold parity could be restored.

There was a third option that people came up with, which was the gold exchange standard. This is most important for our story. It was a plan that was meant to avoid both devaluations. You get to have your old gold standard back, at least it appears to be the same, but you also avoid deflation. How did this work? It consisted of, as it were, a more economical gold standard called the gold exchange standard, where only certain countries would redeem their monies into gold.

The United States and Great Britain were playing that role. Other countries, instead of holding gold itself as their reserves, would simply keep accounts at either the Federal Reserve or at the Bank of England. In this way, limited gold reserves at those two big central banks, main central banks, would serve in place of a lot more gold. You'd be able to stretch the available gold reserves and have them support higher prices and larger monetary stocks.

Now, I'm vastly oversimplifying. At this time, this system, this gold exchange standard, is something of a house of cards. Why? It depends on much more cooperation than the old classical standard where every country took responsibility for holding its own gold reserves. It depends on countries being willing to just let chips accumulate at the main central banks I mentioned. If any major countries start cashing in those chips, then the whole thing can collapse.

Well, France decided it was going to adopt the hard franc in the late 1920s. It cashed in its chips, drawing on the Bank of England's limited gold reserves. That was one of the events, the most important one, precipitating the collapse of the entire gold exchange standard. By the way, this is not unlike what happened with France also playing the spoiler part that caused the Bretton Woods system of fixed exchange rates to collapse. Very interesting parallels between the two cases.

However, in this earlier case, the entire world monetary system basically went into a nosedive. It started with England being forced off the gold standard in September 1931, but other countries found their gold reserves threatened. Of course, the more people feared that gold redeemability would be suspended, the more they grabbed for their gold. They did so in the United States big time on a couple of occasions, immediately following Britain's suspension.

Then again, and this was the fatal case, in February/March 1933, a massive run on the dollar that ultimately led to the nationwide suspension of the gold standard. There you go. Of course, accompanying all this is a lot of money being destroyed and a collapse of spending, which you and I, being good NGDP stabilizing types, understand is something that's bound to be very hard on overall macroeconomic activity.

That's a big story, I should add, that in the United States, the monetary collapse was extreme because the banking system failed. That is, you had large numbers of bank failures and that many deposits either disappearing or at least being frozen for a long time. Suddenly, the money stock that people rely on to make purchases with is big parts of it, just about a third of it, disappeared. There you go.

David: The gold standard was a key part of the origin story of the global Great Depression. It's what linked all these countries together as you outlined.

George: That's right. You could say the gold exchange standard, particularly, they were paying the piper for World War I but long after the fact. It was a delayed comeuppance, as it were, for not playing by the gold standard rules back when.

David: Yes, so the bill is coming due and then, in particular, two countries didn't play by the rules of the game. France and the US, they ended up hoarding gold, which meant other countries did not have the gold, which meant their money supply is contracted. For every dollar issued, you'd have so much gold behind it. If gold is being hoarded by two countries, France in particular, and Doug Irwin has a great paper on this—

George: Excellent work.

David: Yes, it causes contraction around the rest of the world when you have this linkage. Interestingly, you mentioned the French also being the culprits for the breakdown in the Bretton Woods or being the catalyst. Maybe the system was flawed and going to fail in any event. It's interesting, I had Ashoka Mody on the podcast a while back. He has a book called EuroTragedy. In that, we go through the role the French played in the creation of the euro.

You can really trace the French's influence all the way back to the Great Depression. This is a long arc here, but just bear with me, George. The French play a key role in creating or starting the Great Depression, right? Great Depression, in turn, contributes at some point to the rise of Nazis in World War II. There's a lot more happening, but let's just tie these links here.

All right, so World War II cast a long shadow over Germany. The French use that and manipulate that guilt into the Germans joining the euro eventually, which is interesting. Then, of course, by the time we get to 2008 and then 2010, the eurozone crisis, we have Jean-Claude Trichet, a Frenchman at the helm of the ECB. You see the French fingerprints throughout much of the monetary history of Europe in some of the worst disasters.

George: Yes, indeed. I don't want to blame everything on the French, but let's go ahead and blame some things on them. [chuckles]

David: Okay, yes. It's just a fun, interesting history to see the role the French have played in monetary history.

George: Yes, you don't know what the French have been up to. You don't know your 20th-century monetary history.

David: Yes, so go back and read Doug Irwin's article on the Great Depression. Also, with Ashoka Mody's book on it. It's called EuroTragedy.

George: It's a very good book. By the way, if I may jump in, a very good book on the French role in the Great Depression by Clark Johnson that also is very much worth reading, similar arguments. I'm pretty sure he cites Johnson's book. Both of those authors are really good on the subject of the French hoarding of gold and its consequences in the 1930s.

David: Yes, so the key takeaway from all this, though, is that the gold standard, as Barry Eichengreen put it, were golden fetters of sorts that constrained policymakers' ability, at least the way that they implemented and played the game. 

New Deal Policies and Their Impact on Recovery

Let's go to the New Deal policies, which your book covers, in terms of the role they played in the recovery or they did not play.

Then maybe to make this accessible, let's create two buckets here. Let's create a bucket where New Deal policies helped or contributed to the recovery, those that did not. Now, there may be some New Deal policies that belong in both buckets. The effect is ambiguous. Let's start with those that were helpful. Let's start with a positive case for the New Deal policies. What would you put in that bucket?

Helpful: Suspension of the Gold Standard and the Bank Holiday

George: Well, the first thing I'll put in that bucket relates to what you've been saying about the gold standard and what I was saying about the banking crisis. Both of which, of course, played a very important role in the initial downturn. This is going to go in the positive bucket. But it goes there with a big asterisk. I'm going to get to the asterisk in a moment.

What I'm referring to here are both the way the banking crisis was handled in the immediate wake of Roosevelt's inauguration, when everything was melting down, and the suspension of the gold standard, which, of course, freed those golden fetters Eichengreen talks about. These were both crucial steps to making recovery possible. 

Now, for the asterisk. These are steps, of course, undertaken by the Roosevelt administration. First of all, on gold, it was inevitable by this time that the gold standard would have to be suspended. The banking crisis that occurred just as Roosevelt was about to take office involved a massive run on gold as I explained. It was the Federal Reserve Bank of New York, which particularly was suffering from this run on gold. It was the Fed, not private bankers but the Fed, that sought first a state holiday and then a nationwide holiday to, first of all, prevent it from running out of gold.

Even though the Fed had been sitting on vast amounts of gold in 1929, it was running into the gold standard limits and was about to be forced off of gold. At least the New York Fed was in March 1933. Roosevelt really didn't have any choice. He hadn't been planning definitely on suspending the gold standard by any means. He did not know, when he was running for office in '32, what the state of the gold standard would be, what the situation would be when the inauguration came in March.

We have to remember that there's a big lag between the election and inauguration at this time. It was the last time that lag took place. Roosevelt astutely didn't try to leave the door open. He was not willing to take a particular stance. Unfortunately, that also gave people the jitters and contributed to their withdrawing gold. He did not want to make a commitment to stay on the gold standard that he couldn't keep. In the event, he couldn't have kept it.

Anyway, this suspension is a New Deal step, but it can't be said to have been part of any deliberate New Deal plan or something that any administration could have avoided at that point under those circumstances. 

The banking holiday story is even more interesting. Many people who know anything about Roosevelt and his term are aware of the famous fireside chats that he gave over the radio. The first of which was also, I think, the most famous, which is where he discusses what they're doing with the banks, how they've closed them all, declared them all closed, and how they're going to eventually reopen them.

This is a very, very, very successful plan. They are able to, as it were, reopen the banks and get the banking system going again. Not all the banks, of course. Many were closed for good. Roosevelt delivered the fireside chat with tremendous talent and verve and got people's confidence up and all that.

What most people don't realize is that the whole plan for both shutting down the banking system and reopening the banks was cobbled together by Hoover's treasury team and mostly implemented by them. They stayed on after FDR took office. One of them even wrote the first draft of that famous fireside chat that Roosevelt revised and read with such elan.

The asterisk belongs on the achievement of the bank holiday and subsequent bank reopenings because it really was Hoover's swan song being implemented by Roosevelt, which is not necessarily to deny Roosevelt credit. He didn't have to go along with what was a very good plan. He certainly didn't have to do all that he could to make it a success. An asterisk, but still in the positive bucket.

By the way, one of the things that people assume Roosevelt was behind that was a part of the banking legislation that came out of this crisis is deposit insurance. There as well, they are mistaken. Roosevelt had always been a critic of deposit insurance. He remained a critic of deposit insurance as a component of the 1933 Banking Act until the 11th hour. He simply couldn't kill it. He knew that he wouldn't want to or probably couldn't veto the entire Banking Act.

Deposit insurance got through over his position. On the other hand, and people don't know this either, Hoover, who had been, like Roosevelt, a critic of deposit insurance, once the banking crisis was really getting severe, he was urging the Fed to reconsider it, urging the Fed officials and others to consider the deposit insurance alternative. He actually came around on the subject. I'm not endorsing the FDIC.

It was a good temporary solution. It wasn't the best thing that could have been done to improve the US banking system, I've argued elsewhere. What we really needed was a structurally sound system based on branch banking. Mr. Steagall was adamantly opposed to any such reform. Ultimately, he, rather than Carter Glass, who favored branch banking, had his way on that. That's number one in the good bucket.

David: Okay, so number one includes the devaluation of gold and the bank holiday, a package.

George: Yes, the suspension of the gold standard and the bank holiday. I have to be careful. We have to be careful about the devaluation of gold. That's not so easily fit into the bucket. It isn't that the devaluation wasn't ultimately necessary, desirable, unavoidable, I would say. The way Roosevelt went about that was by starting with the so-called Gold Purchase Plan that was a George Warren innovation or idea that Roosevelt was almost unique in considering worth undertaking.

Almost everybody else then and still today, with the notable exception of our good friend Scott Sumner, most people thought that Warren's theory was simply wrong. What Warren believed was that if the government boosted the price of gold by buying gold, once the gold standard had been suspended, that other prices would follow gold's price upwards. They tried that for quite a few months. It seemed to work initially, but ultimately, it didn't work at all. After buying a whole bunch of gold at ever-increasing prices, the general price level was about 3% higher than it had been before. A very small change that probably didn't have anything to do with the program.

Then finally, in April 1934, they have the real devaluation. They set the new value of the dollar. The criticism here isn't of devaluation per se. It's that it would have been much better to go directly to it, to simply devalue the dollar once and for all and forget about this dog and pony show that was the gold purchase program. This is one of many places, by the way, where I stand exactly where Keynes stands on the issue. Keynes was a critic of the gold purchase program. He called the regime that it ushered in a gold standard on the booze, or compared it to a gold standard on the booze, as opposed to a policy of outright devaluation.

David: All right, we'll come back to this part a little bit later when we talk about policy implications for today because I want to come back and discuss the importance of inflation expectations, gold clauses, and the like, because it has some bearing for policy questions today. Let's move on to something else that could be in this bucket. Would you put the Reconstruction Finance Corporation in that bucket or not?

Unhelpful: Reconstruction Finance Corporation

George: I'd say no. No.

David: Okay.

George: The RFC, first of all, was a Hoover program that became a Frankenstein monster under Roosevelt and financed all kinds of things. Most of the RFC's recovery efforts that had something to do with recovery, could be said to have been aimed at recovery, didn't accomplish much. I refer to a book by Olson is his name. I'm sorry. I'm drawing a blank on his first name right now, but it's the best book on the RFC. A very good book.

If you go through the book and read about each RFC program until World War II, you find that the programs just didn't accomplish very much. There was one program that was important that I would put in. One RFC program I would put in the positive box was the recapitalization of the banks. Here, we're going back to the banking crisis and reopening the banks. It wasn't just deposit insurance that helped make it possible to reopen as many banks as were reopened.

It was the fact that the RFC recapitalized a lot of them, which it had to do if they were going to qualify for insurance, because the FDIC wasn't going to insure them unless their capital was restored. The RFC stepped in at a certain point and started actually buying shares. It was a partial nationalization of the banks. It contributed to the success of the bank reopening project. I'll put that in the positive box. The rest of the RFC undertakings before World War II, I would say, did not contribute.

As for World War II itself, of course, the RFC spent oodles on the war, but it didn't have much to do with recovery. It had to do with other things. Well, to the extent that the thing worked well, it worked well because it had somebody in charge who was particularly capable of keeping it from being abused very badly, Jesse Jones. Once he stepped down toward the end of the war, it became a gigantic boondoggle with all kinds of scandalous spending. Eisenhower got rid of it, and it was good riddance by then.

David: Okay. What else would you put in the good bucket, the bucket that helped contribute to the recovery?

Helpful: Creation of the Home Owners Loan Corporation

George: My biggest item for the good bucket, the one that's indisputably a New Deal program and that almost certainly did a lot of good, was the creation of the Home Owners Loan Corporation fairly early in the depression. What that corporation did was to basically refinance homeowners' mortgages. Now, many homeowners are deeply underwater. It has to do both with the depression itself and with the nature of the mortgages that existed at the time and no floating rates, very little amortization, short-term, et cetera, et cetera. The book goes into all the details. 

Either these people were going to get thrown out of their homes, and their lenders were going to be saddled with property that they couldn't do anything with. It was worth very little, or somebody had to step in and refinance the loans and make them viable again, and thereby rescuing both the homeowners and the lenders. The lenders here include banks but are not just banks.

That's what the HOLC did. It did it very cleverly. It took advantage of government guarantees of both principal and interest on government securities that were then offered to the original mortgage lenders in purchasing the loans. Then the borrowers were given alternative terms with long amortization periods, favorable rates of interest, but not obscenely low, not so low that the program cost a lot of money. In the end, there's a myth that they made a profit.

It didn't make a profit. It lost some money if you take the opportunity cost of the funds involved into account, that sort of thing. But it didn't lose much. It did a lot of people a lot of good. That indirectly, of course, helped the whole economy get out of trouble. I should say that the success of the program as far as not losing money depended crucially on the timing of when it was wound up. If it had been wound up too soon, real estate prices would have been low.

The program would have failed because the HOLC also ended up having to foreclose because some people couldn't meet even its more favorable terms. The war, World War II, raised property prices a lot. If they'd waited even longer to sell, they would have made a bundle. As it happens, they were pretty close to breaking even. Very important. In order to stress the importance of this program, and there was another program analogous to it that I think was also successful, but we don't have the statistics to be so sure, was the farm lending program.

A similar idea for farmers for farm properties. What makes them so important is debt deflation. I think it's very important to understand when the money supply and credit collapses. Ideally, if all prices collapse, if you could renegotiate all nominal contracts, you could get out of the depression pretty quickly. Some contracts are not so easy to negotiate. Among these, the most notorious are fixed-debt contracts. Even though you had a lot of deflation going on, you had people sitting on these mortgages. They weren't deflating. They weren't adjusting in any way until they were renegotiated.

You can think of these mortgage refinancing programs as the government's stepping in and doing what a Walrasian auctioneer might do, maybe I'm being a little too generous, to change the prices involved to reflect the new monetary conditions, which isn't something that was not going to happen otherwise. Simply wasn't going to happen. I rate these efforts very high. I would even say that if they had been less successful or cost more money, they still would have been good ideas based on a sound understanding of what it is that can keep an economy depressed that's suffering from a monetary collapse.

David: All right. Let's move on to the other bucket now, programs that did not contribute to the recovery. What would you place in that one?

Unhelpful: The National Recovery Administration

George: The most obvious candidate, and I am no revisionist on this, is the NRA, the National Recovery Administration, and the act that created it, the National Industrial Recovery Act. The NRA component of that act is the one that tried to help the economy get back on its feet by creating a bunch of industry-led cartels or planners that, in each different industry, would mandate particular prices and other rules for all producers in that industry, the so-called codes.

The idea was to prop up both prices of output and wage rates in the industries involved. There was also a blanket code. While the particular industries were coming up with their own code, a blanket code was temporarily imposed until they did so, until each did so, which raised prices and wages all around for all the industries. The theory, if you can call it that, was that, well, we know that when there's a deflation, a monetary collapse, prices are falling and the economy is depressed.

If we can just get prices, including wages, back up, the economy won't be depressed anymore. Workers will have more purchasing power. They'll buy more stuff. Firms will earn revenues sufficient to cover the cost, et cetera, et cetera. It's a fallacy. Keynes was right here too. He was no fan of the NRA. It's a fallacy. Yes, if you pump up the money supply or if you revive spending, it can be through fiscal policy, monetary policy.

If you can revive spending, that's going to put upward pressure on prices and wages. It's going to make employment and output go the same direction. Great. Here, we're not talking about that. We're talking about price controls, where you mandate higher prices and wages, but the spending hasn't gone up, which means you can only sell the products at higher mandated prices by selling fewer. That is, consumers aren't spending anymore.

They have no more to spend, so they can afford fewer. Similarly, you can hire workers for higher wage rates, but guess what? You can't hire as many. You're actually increasing unemployment. I consider the NRA a complete disaster, as do most economists, with one very notable recent exception. That's Gauti Eggertsson, who has been on your program, I believe, who has an argument defending the NRA. I side with those who say that this was completely counterproductive.

By the way, while the NRA was in place, it's true that total employment did not suffer. It went up, but it went up entirely because part of the rules that were implemented, including work-sharing rules, Jason Taylor has written very well about this, so you took jobs and divided them. If you had one full-time job, a 40-hour week, let's say a 50-hour week, you would create two or more jobs with half as many or a smaller number of hours for more workers.

That's the only reason the employment numbers go up. It's not total labor hours that are going up. It's total workers working the same labor hours or even somewhat lower total labor hours. That's the big employment boost from the NRA. It's a complete fiction as far as the total amount of real employment that's going on. I discussed Gauti's counter argument that has to do with inflationary expectations. His argument was essentially that if you get people to think prices are going to be rising, no matter why they're rising, whether it's codes or anything, that that means higher inflationary expectations, and that's, other things equal, going to lower real interest rates if nominal rates are at their zero lower bound, which is approximately the case in the '30s.

Well, I talk about why I don't think this is a plausible argument. There are many reasons that I offer, and I cite other critics as well. First of all, the codes only do a one-time increase in prices and wages. They jump up. There's no reason based on these codes for people to think they're going to keep rising it at some higher percentage rate than had been the case before.

It's also the case that people aren't naïve, not that naïve, they may expect the NRA to raise prices, but they also can expect it, by the same token, to reduce output. It's not clear, in fact, it is pretty clear from anecdotal evidence that the public and government officials, for that matter, many of them ultimately did not come to have more optimism as a result of the NRA. In fact, they were very pessimistic, with the exception of Roosevelt himself, Almost everybody in the administration by 1935, before the Supreme Court struck down the NRA, they all were wishing it good riddance. None of them wanted to see it continued. There's so much for optimism and all that.

David: They were thankful when the Supreme Court actually ruled against it. 

George: I think some of them were. 

David: The irony.

George: Yes, it was a question of just getting rid of the thing and giving it a decent burial finally. Then Roosevelt did try to revive it, and to some extent succeeded with some other programs, but not to the extent that he succeeded, for example, with the AAA, which was killed as well by the Supreme Court, but then a new AAA rose from the ashes as it were. Until fairly recently, we've been stuck with AAA-type farm subsidies. That stayed alive. Thank goodness we haven't had an NRA-like arrangement in place since the 1930s.

Unhelpful: Fiscal and Monetary Policy and Ignoring Keynes

David: Okay, two other areas I know that you throw into the bucket. One would be counter-cyclical macroeconomic policy. Fiscal and monetary policy were not very effective, not even really used during this time. Then the other one was Keynes. Keynes was largely ignored. He wasn't a part of the New Deal roadmap or vision. 

George: Yes, they're closely related, of course. It's a striking fact that neither fiscal nor monetary stimulus, which today we could consider your first line of defense against depression or recession. Neither of them was resorted to in any big way. Monetary stimulus, well, [chuckles] there was monetary stimulus in the '30s, and it was the biggest driver of the recovery. Such recoveries took place during that time, but it wasn't a result of deliberate monetary policy. It was gold flooding into the United States for various reasons we can go into, but they didn't have much to do with the New Deal.

Devaluation had something to do with it, but that was only responsible for the gold inflows initially. What kept the gold flowing into the US that was helping to prop up the economy subsequent to the 1934 devaluation was mostly European war jitters that got serious starting when Hitler became chancellor. A lot of gold flew into the United States, and there was monetary stimulus as a result of that.

The Fed, on the other hand, did nothing. Its balance sheet, other than gold inflows, did not expand. It didn't discount more, and it didn't engage in any substantial open market operations during the Roosevelt period before the war.

Fiscal policy, well, it's true that the Roosevelt administration spent about twice as much, but they also taxed more. As a result, if you look at deficits strictly in terms of their contribution to recovery, their stimulus impact, none of Roosevelt's deficits was any more impressive in that regard than some of the deficits of Hoover. The biggest Roosevelt-era deficit as far as stimulus oomph was the 1936 deficit, but that was almost all because of the veterans bonus bill that was passed that year over FDR's veto; FDR vetoed it, but it lacked adequate support in Congress to sustain the veto.

Now, here's the thing. Roosevelt and Hoover had exactly similar views on fiscal policy. As most of your listeners may recall, Roosevelt campaigned on a balanced budget platform and was very critical of Hoover's deficits. He meant it. He wasn't insincere. When he came into office, he did so with the intent of trying to balance the budget.

Now he would not balance the budget if that meant not providing relief. He was willing to make an exception, as was Hoover, by the way. He didn't have as much relief, but he had that same, he made a similar statement. "I'm not going to make people starve to balance the budget." They both said that, and they both did it, but especially Roosevelt. If Roosevelt's deficits were larger in absolute terms, it was because his relief programs were larger. He never, never embraced Keynesian deficit spending. That is, the idea that deficits per se would help the economy get out of recession. He never really believed it. He never understood it. He didn't practice it to the extent that he could avoid doing so.

There was one attempt in 1938 with the Keynesians in the administration, because by then there were some, managed to convince Roosevelt to give Keynesian stimulus a try. This was after the debacle of 1937/1938. Even that effort was half-hearted.

Deficit spending was not important. Roosevelt was never a Keynesian. Keynes did try to persuade Roosevelt to spend more, but Roosevelt's response was that he was already doing everything he could do, and that Keynes was just telling him to do what he was already doing, [chuckles] and that sort of thing. There you go. Neither fiscal nor monetary policy—deliberate stimulus from either played very little part in Roosevelt's recovery plans or efforts. Of course, those are the main weapons we use today. One big lesson from the New Deal is, don't try to learn too many lessons from it, because we know more than they do. [laughs] We know a lot more.

David: Yes. Which is ironic because a lot of people will invoke that period and say, "See, they followed Keynes' prescription, and they got out of the Great Depression," when in fact that has history completely backward.

George: It's absolutely untrue. Not only that, there's two sides to the FDR as Keynesian myth. One side, which we've discussed, is that FDR was never a fan of Keynesian fiscal stimulus. He did not believe in it. To the extent that he contributed to it, that his administration practiced it, it was quite inadvertent, and sometimes, as I mentioned, it was despite FDR's opposition.

The other side, which is just as important, is that Keynes was very critical of a lot of the things the New Deal did do. Now, we have to be very careful here. The three R's become relevant again. Keynes was not necessarily critical of some of the reforms that the New Deal involved, long-run reform efforts. It should be said, it needs to be said, that a lot of people in the Roosevelt administration saw the New Deal as an opportunity to get through legislation. They would have tried to get through under any circumstance, depression or no depression, because they could try to say that it was going to help end the depression.

Keynes was scathing about a lot of the New Deal programs, certainly the NRA, which he attacked for all the right reasons, but in particular, he said, "Look, even though some of these reform efforts may be worthwhile, this is not the time for them because they might contribute to reform, but they're not calculated to help contribute to recovery, and you need to have recovery first. That's got to be the first priority." 

He wasn't keen on Roosevelt attacking the utilities. He wasn't keen on the gold purchase program. Generally, he was very critical of Roosevelt's hostility to businessmen. This gets us to a very big issue that's very important with Keynes, which is that Keynes—and we'll talk more about this, I guess—Keynes was very concerned, was very convinced that regime uncertainty with all of Roosevelt's experimentation, was scaring the hell out of businessmen, which meant that investment couldn't revive, long-run fixed investment, which meant recovery could not happen. It needed reinvestment, which was absolutely in the doldrums throughout the whole New Deal. Keynes, he wrote very eloquently about it, “animal spirits,” and all that, but Keynes was one of many people at the time, and important ones since, who stressed that you had to rebuild businessmen's confidence. You couldn't make them feel like they couldn't plan for the future, that their investment returns would not ultimately pay off. You had to coddle them. He said that you had to coddle them, not threaten them.

David: Okay. We've gone through two buckets, those programs that helped the recovery, those that did not, or even, in some cases, stalled, and there's more details there, so I encourage listeners to go check out the book and find out the rest of the story. We've also touched on some of the myths that I outlined above. For the sake of time, I'm not going to address all of them here. Again, I encourage listeners to go into the book.

What I do want to do, though, in our final moments together, George, is to take some of these lessons and apply them to the present. Now, you've already provided some insights, such as don't look to the New Deal necessarily for macroeconomic advice, but let's go through some of the developments then, and how would you see them as relevant to today? Let's start with the first one, and you touched on that, but uncertainty.

George: Yes.

Lessons for Today: Uncertainty

David: How important was uncertainty to the slow recovery, and what should we take away from that for today's trade wars and the uncertainty created by it?

George: Well, I think uncertainty was very important. It's crucial to understand that unless investment revives, if investment is moribund, as it was in the '30s, you're not going to have a lasting revival. You can't. You've got to get investment spending up. Without giving too much away, it was a revival of businessmen's confidence and willingness to invest that took place during World War II. It wasn't the spending on armaments, ultimately, that mattered most. It was the revival of businessmen's willingness to invest, and that was due to changes in the attitude of government to business that took place during the war. That was key.

This is very relevant today because what it means is that if people are uncertain about policy, if businessmen can't be confident about where things are headed in order to make business plans, in order to be willing to invest capital, then you're going to have a stagnant economy. That's all there is to it, and you can have plenty of good policies that you're contemplating or trying out—remember, Roosevelt was the big experimenter. That was his thing. The New Deal was bold experimentation. That was the best description of it from Roosevelt's campaign, and it remains an accurate description. That kind of thing can backfire, both because bold experiments often fail, as I say in the book, but also because if the experimentation is too unpredictable, then even if the experiments themselves are good ones, the businessmen aren't—they're waiting. They're playing wait and see, and as long as they're doing that, they're not investing, and the economy is not doing well.

We, of course, have had recently, according to most measures, many measures, a bad bout of regime uncertainty, the worst since the Great Depression, actually, and so even if the policies being considered, in this case, various tariffs, even if the plan were a sound plan, ultimately, or might be, the uncertainty about where things are headed has had a very chilling effect on investment. I think we'll see that in the investment statistics eventually. I think there's a lesson here, which is that an economy that's depressed won't recover if there's a lot of regime uncertainty, and an economy that faces a lot of regime uncertainty can also get depressed.

David: Another lesson I want to touch on ties to some of the policy choices that the Fed made and you could say maybe the Roosevelt Administration as well during this period. This is the importance of getting back to a level path, or the trend path. I want to specifically bring up the 1937/38 recession. One of the stories is that leading up to that, the Fed began to get concerned about inflation. Inflation was beginning to hit 4% or 5%, even though the price level itself had collapsed 30%. The dollar size of the economy was still far, far below. Nominal incomes were still far below. As you mentioned earlier, we had all these debt contracts, but our nominal incomes have fallen dramatically.

George: All right.

The Lesson of Level Targeting

David: One of the critiques I see, or one of the lessons maybe is, don't miss the forest for the trees here. You get fixated on growth rates, and you're losing sight of the level loss that you had. To me, this is an argument for level targeting of some kind.

George: Yes.

David: Now, I understand, and I had this conversation with Athanasios Orphanides recently on the podcast where he argues, "Well, David, there's a lot of things we don't know. We don't know what's the true trend path. We don't know the output gap." When you have huge, huge losses, like the Great Depression, I think you still make some concerted effort to do catch-up policy. I bring this up, George, because it looks like the Fed Framework Review is going to completely abandon makeup policy. Maybe they won't, but everything I've heard suggests they're going to go from fate back to fit. I understand there's problems with fate. To me, a key takeaway from this period is we need to at least have somewhere on the shelf the ability to think about and do level targeting.

George: Of course. Absolutely. It's one of the most amazing things that, as you say, starting in 1936, and certainly early 1937, the Fed was—not just Fed officials, but everybody in the administration. By the way, the Fed is as under the thumb of the administration as it ever was. You can't say, oh, the Fed did this wrong, but the administration wanted it. It was pretty much the Fed was doing the administration's bidding here. They were worried about inflation, even though, for years now, the government has been talking about how we need to get back to 1926 prices. Everybody knows they're not back. They're not even close. I cannot find a source for this. One book claims, and I read this a long time ago and never forgot it, that Keynes quipped about this situation that the people at the Fed, and elsewhere in the administration at this time, “professed to fear that for which they dared not hope,” which is a wonderful line. In fact, they did. You had two different things going on, or reactions to this inflation that people were afraid of.

One was the Fed doubling reserve requirements, and the other one was the Treasury starting to sterilize those gold inflows I talked about, that is, not letting them influence money and prices. Between them, I think the gold sterilization was more important. There are a number of reasons I think so that I explain in the book. Between them, these policies put a stop to the main source of stimulus that had been driving recovery before, which was those gold inflows. They couldn't have the influence they had before because, A, they were sterilized and B, [chuckles] reserve requirements were going up, so that would have knocked out some of the power.

This was a disaster, of course, which led to that calamitous collapse in 1937 of GDP, industrial production just went off a cliff. Yes, if you need an episode to explain why we shouldn't give up on makeup policies, why level targeting can sometimes be essential, here you go. This is one. It was a terrible mistake. They should have been welcoming that inflation instead of fearing it, with open arms. They should have done whatever they could to keep it going. 

By the way, this is part of a general point that people need to realize. The people at that time, the Roosevelt's and Eccles, they were against monetary expansion. They thought monetary expansion was a bad thing. They weren't against inflation all the time, but when they said they wanted inflation, they meant that they wanted prices to go up, but they didn't want the money supply to expand, and that in this episode, of course, they didn't even want prices to go up too much. Between these ideas, you have very little scope for taking advantage of whatever capacity for monetary stimulus the economy possessed at that time.

David: That preference for focusing on higher prices, but not higher money supply, has it completely backwards, as we talked about earlier. The proper approach is to say, "Hey, we want higher nominal spending, we want higher money being actively spent," and then let the prices go up to meet that. Not the other way around. Let's have higher prices and somehow keep money low.

George: Yes, I should say when they talked about inflation back then, they meant rising money supply. They were against inflation, but they weren't against higher prices. You have to have the old-fashioned terminology straight. Now, when you think about it that way, it all makes sense, right? Their fear of inflation in '36, '37, is fear of money supply growing too much. That's why they want to raise reserve requirements. That's why they want to sterilize the gold inflow. They don't mind if the price level goes up. They don't really mind that. In this sense, Keynes's quip misses the point. They just don't want the money supply to grow, and they think somehow you can make prices return to their 1926 levels without any expansion of money, which is why they try things like the NRA codes. It's weird. They want prices to go up, but they don't want inflation, which means monetary expansion. That's a bad thing. That's what irresponsible governments do.

David: I dare say there's some of that still today because if you focus on inflation, you're missing what's really the key driver that policy affects, and that's aggregate demand. Keep your eyes on the proper goal, and the rest becomes easier. 

Breaching Contracts

Let's go to one other lesson learned. There's a lot we could invoke from this period, but time is running short. I want to talk about the gold clauses during that time. I had Sebastián Edwards on the show before, a great book on this whole period. He talks about how President Roosevelt led this effort to basically void the gold clause in contracts in order to have this devaluation work. It was a major legal breach of contract. I bring this up because one of the calls from the current Trump administration, at least some in there, is to have a Mar-a-Lago Accord, where, among other things, they would force foreign holders to swap their current Treasury holdings for some perpetual bond or really really long-term bond. Effectively, it would be a default of some kind. It would force them to take some other security. That would be another breach of contract. To me, that's an anathema. That would be devastating to the Treasury market.

However, I look back at this period. They effectively did something similar. It wasn't the end of the world. In fact, it may have even supported recovery. Now, we're not in a Great Depression. We don't need this to stimulate the economy. In terms of legal precedent, rules of law, keeping the current Treasury market robust and healthy, it raises red flags and concerns for me. Here was an episode where it seemed to be okay. It wasn't the end of the world. Maybe it's a very different context. I can't compare. What do you think?

George: [chuckles] This is a tough one for me. When I was an undergrad, at least, let's say a beginning grad student, I read all about the Gold Clause Cases. Henry Mark Holzer had a very good book about them, and he was quite critical of those decisions. My reaction at the time was, "This is God awful." You've got these contracts, [chuckles] including government's own contracts, and it's reneging on its solemn promises, et cetera, et cetera.

Ethically, my young self couldn't see any way around the fact that this was really a rotten thing to do. Well, you now have the research by Sebastián, and also very good research some years ago by Randy Kroszner on how abrogating these contracts proved important in helping the US economy get out of the depression. I don't think it was the essential thing, but I think it may have mattered. I'm now of two minds. I've got the ethical contracts-are-contracts me, and the economist me who's wondering what would have happened if they hadn't done what they did with the Gold Clauses, and who's somewhat persuaded that it would have been very ugly.

In the long run, what does this all have to do with the attractiveness of US securities? Well, abrogating contracts cannot help, but being a depressed economy doesn't help either. [chuckles] Being a depressed economy in turmoil because suddenly you've overturned these decisions could be even worse. Once again, people need certainty more than anything. If you have a policy that's not very nice, but everybody has a grasp of what's going to be the case going forward, it may be better than the alternatives of turmoil, uncertainty, court decisions dragging out, lawsuits, and all that. There you go. I'm being a Truman two-handed economist.

David: I think the lesson or the takeaway is if you're in a deep depression, there are more important issues at that moment, recovery particularly, than necessarily preserving that contract, which is very different than today. Today, we are at full employment, and there's no reason to abrogate those contracts.

George: There's certainly no reason for doing anything like that now. There's no necessity, but of course, I'm afraid we have an administration that is all too inclined to invoke emergency measures that ought to be used only in extreme situations, if then, [chuckles] in circumstances that don't deserve to be considered so. We have precedent, right? I'm thinking, of course, of the Alien and Seditions Act, or suspending habeas corpus. If you can toy around with those things under circumstances that can hardly be described as emergencies, and don't deserve to be described as invasions, then, of course, you can come up with an excuse for just about anything, can't you?

David: Yes.

George: I'm veering. [laughs] All right, I've said enough about that.

David: Okay. With that, our time is up. Our guest today has been George Selgin. George, thank you so much for coming on the program again.

George: Thank you, David. It's always great. I appreciate it.

David: Macro Musings is produced by the Mercatus Center at George Mason University. Dive deeper into our research at mercatus.org/monetarypolicy. You can subscribe to the show on Apple Podcasts, Spotify, or your favorite podcast app. If you like this podcast, please consider giving us a rating and leaving a review. This helps other thoughtful people like you find the show. Find me on Twitter @DavidBeckworth, and follow the show @Macro_Musings.