FDR, the gold standard, and the Great Depression

gold standard

Call it selective memory: we tend to forget that the survival of our democratic system was by no means assured on March 4, 1933, when Franklin Delano Roosevelt was sworn in as president. With the country paralyzed by twenty-five percent unemployment, shuttered factories, insolvent banks, and rapidly falling prices for farm commodities and consumer goods alike, both Communism on the Left and fascism on the Right were rapidly gaining adherents.

It was far from clear that a catastrophic clash of the extremes could be prevented. Contemporary events in Europe suggested that even the best-educated and most sophisticated societies could all too easily turn dangerously radical: barely more than a month earlier, Hitler had been named Chancellor of Germany. In The Money Makers, historian Eric Rauchway reviews the economic policies that FDR deployed to rescue the nation from a similar fate, steering the country on a moderate course through the years of the Depression and the world war that followed.


The Money Makers: How Roosevelt and Keynes Ended the Depression, Defeated Fascism, and Secured a Prosperous Peace by Eric Rauchway (2015) 338 pages

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Saving capitalism

Today, it’s widely accepted among everybody except those on the extreme Right that Roosevelt succeeded in “saving capitalism.” Most historians give the credit to New Deal policies such as the Works Progress Administration, Social Security, and the Agricultural Adjustment Act — more generally, what economists call fiscal policy, which entails spending government funds to achieve social ends. Indeed, Roosevelt did use deficit spending through these and many other programs, and huge numbers of Americans gained desperately needed jobs or income subsidies. However, it’s recognized now (as Roosevelt himself did at the time) that the funds devoted to these programs were far from enough to turn the economy around. Rauchway asserts that it was not fiscal policy but monetary policy that played the larger role.

At the outset of the famous first “100 days” of the New Deal, Roosevelt took two bold steps: declaring a bank holiday to put a lid on bank failures — and taking the United States off the gold standard. Rauchway makes a strong case that the latter was the decisive action, not just because it stemmed deflation, allowing prices to rise for the benefit of business and consumers alike, but also because it allowed the United States to exert leadership in restoring world trade.

The only major weakness in Rauchway’s argument is that he gives equal credit for this policy shift to John Maynard Keynes; other economists, perhaps influenced by Keynes but important in their own right, helped persuade Roosevelt to take the dollar off the gold standard. In any case, Roosevelt didn’t need much, if any, persuading, as Rauchway makes clear.

Keynes’ direct role in steering American economic policy didn’t become critical until midway through World War II, when he faced off with New Deal economist Harry Dexter White as head of Britain’s economic negotiating team. The two men were central, even decisive, in shaping the agreement that emerged from the Bretton Woods Conference, which gave birth to the International Monetary Fund and the World Bank. Though these two new institutions may not have been immediately significant to the extent that Rauchway contends — other historians indicate that their true importance didn’t emerge until years later — there is little doubt that the IMF and the World Bank played large roles in extending the prosperity that came on the heels of World War II.

Taking Keynes’ later role into account, which helped pave the way for these developments, it might be appropriate to include him in the book’s subtitle along with FDR. However, it could be argued that two other men — Henry Morgenthau, Jr., and Harry Dexter White — also merit inclusion. Rauchway’s account assigns that prominence to them, the subtitle notwithstanding. The resulting run-on sentence might have been more than a little awkward, though.

The gold standard, deflation, and class war

From the earliest days of American history, the conflict between debtors and creditors has dominated our economic life. In the modern world, creditors, for the most part, have been bondholders; despite the media focus on the stock market, the bond market is nearly twice as large. Bonds are predominantly held by rich people and banks. Debtors are all the rest of us. Though we don’t directly pay the interest that accrues to bondholders, our taxes and the prices we pay for goods and services do make them possible.

Naturally, bondholders would like very much to receive their interest payment in dollars that are worth more than when they bought the bonds. That happens under deflation, which lowers prices and thus increases the value of the dollar because it buys more. Bondholders grow richer; consumers grow poorer in a vicious cycle, losing their jobs because businesses fold since they can no longer make a profit with prices so much lower. As prices fall further, people have even less money to spend because more businesses have folded. And so forth.

When FDR took office, deflation was rampant and threatened to spiral out of control. In Europe, where that had taken place, deflation played a major role in enabling the rise of Nazism and fascism. There, and increasingly in the United States, movements on the political extremes quickly grew as the pain of deflation increased. Despite the obvious threat that this instability implied, Wall Street bankers and the Republican Party cried out nearly in unison that the country should be put back on the gold standard lest runaway inflation take hold. (The most extreme of them have never ceased making the same demand.)

Like John Maynard Keynes but only a handful of other economists at the time, Roosevelt understood that the gold standard was the key to sustaining deflation. Since every dollar had to be backed by gold, the amount of money in circulation was limited because gold was so scarce and the government’s hoard of the yellow metal was no longer increasing. (That had taken place during the major gold discoveries of the nineteenth century; in the twentieth, only European payments for World War I debts brought gold to the United States, but those payments had long since halted as the Depression got underway.) It was abundantly clear that only if enough money circulated through the economy could prosperity be restored. To increase the money supply and defeat deflation, FDR would have to take the dollar off the gold standard. It was that action which enabled the Roosevelt Administration to engage in the limited deficit spending that the political environment allowed. Even more important, delinking the dollar from gold permitted prices to rise domestically — and world trade to increase as Roosevelt and Keynes maneuvered major European countries into parallel policies.

About the author

Eric Rauchway teaches history at the University of California, Davis. He specializes in the Progressive Era and the New Deal. An earlier book, published in 2008, The Great Depression and the New Deal, covered some of the same territory. Rauchway holds a Ph.D. from Stanford. The Money Makers is his fifth book.

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