Roosevelt, the Great Depression, and the Economics of Recovery

Published by EH.NET (June 2006)

Eliot A. Rosen, Roosevelt, the Great Depression, and the Economics of Recovery. Charlottesville, VA: University of Virginia Press, 2005. xii + 308 pp. $39.50 (hardcover), ISBN: 0-8139-2368-9.

Reviewed for EH.NET by Elmus Wicker, Department of Economics, Indiana University.

The title of Rosen’s book can easily create the impression that it is about the economics of recovery from the Great Depression. Rather it is a history of Roosevelt’s New Deal and the story of how it came into being. The reader will not find an economic assessment of New Deal policies; there are no references to recent contributions to the debate either in books or professional economic journals.[1] After having read the book we still may ask: what does the evidence tell us about the success or failure of the many New Deal initiatives?

But Rosen is not an economist, and it would be unfair to hold his feet to the economist’s fire. His work must be judged by the standards of the historian. It is the very first task of the historian to describe what happened from a comprehensive examination of the surviving archives. And for the New Deal these records are numerous. Rosen lists over sixty sources of the papers of New Deal policymakers. What a grueling and time consuming ordeal! His account, however, is richer for the effort to uncover the origins of the NRA, AAA, and PWA, as well as the other agencies. His description is authoritative, sometime original, and always scholarly.

The first four chapters describe Roosevelt’s monetary experiments both domestic and international including the temporary departure from the gold standard, the gold buying policy and the repudiation of a debt settlement with our allies during World War I. The author details the growing tension within the new administration between those who would rely on a purely domestic stimulus and those who, like Cordell Hull, opted for free trade and the maintenance of the gold standard. Rosen denies that Roosevelt’s policies were exclusively responsible for the beggar-thy-neighbor policies of the 30’s. In his view Neville Chamberlain, the British Chancellor of the Exchequer, pushed Roosevelt toward his nationalist outlook. Tension accelerated when Roosevelt proceeded to detach the dollar from gold, terminating with the resignations of Dean Acheson and Lewis Douglas.

In at least two instances Rosen has suggested revisions of the conventional interpretation of the Roosevelt-Hoover relationship and the cause of the failure of the London Monetary and Financial Conference in 1933. The stand-off between Roosevelt and Hoover during the transition period, usually attributed to Roosevelt’s intransigence and general unwillingness to cooperate, was the result of Hoover’s efforts to obtain Roosevelt’s assurance “that there will be no tampering or inflation of the currency, that the budget will be unquestionably balanced even if further taxation is necessary.” It was Hoover’s guile to expect the incoming president to continue his failed policies.

In the second example, Rosen denies that Roosevelt was solely responsible for the failure of the London Monetary and Economic Conference, originally convened for the purpose of exchange stability after Roosevelt’s gold buying experiment. Rosen maintains that there was no longer any reason for the Conference. James Warburg, Roosevelt’s chief negotiator and Leith Ross, his British counterpart, had already agreed to a dollar discounted in a range of 15 to 25 percent, considerably less than what Roosevelt desired and effectively sealing the decision of the president to abruptly terminate further monetary policy negotiations.

If the old gold standard was no longer regarded as sacrosanct, neither was the balanced budget principle. New Deal fiscal policy required the abandonment of the balanced budget principle. Rosen attributes the initial stimulus for the policy shift to Laughlin Currie, Marriner Eccles, and Alvin Hansen, all of whom subscribed to the view of countercyclical budget deficits in contraction and surpluses in expansion. The Currie-Eccles approach implied active management of the economy. Countercyclical policy predated Keynes’s General Theory. This revolutionary shift in fiscal policy is described in chapters five and ten. Chapter Ten is labeled “The New Economics” but that term had already been appropriated to refer to the advent of Keynesian economics.

What is missing in an otherwise balanced account is any attempt to summarize current evidence on the extent of the stimulus provided by the unbalanced budgets. The countercyclical budget debate generated another debate on planning — how extensive it should be and where it would be most effective. The limits of planning is the subject of chapter seven, and the responsibilities of the National Resources Planning Board for planning in chapter 11.

Roosevelt rejected the principle of an independent Federal Reserve. For the first and last time the President of the United States assumed full responsibility for U.S. monetary policy. And Federal Reserve officials acquiesced without precipitating a crisis.[2]

Rosen has accomplished successfully the task of describing what the New Deal was about and how it came into existence. He is less successful, however, in providing an economic evaluation of the New Deal policies, especially what caused the economic recovery, an exercise requiring deeper penetration into the territory of the economist.

Notes:

1. See, for example, Michael Weinstein, “Some Macroeconomic Impacts of the National Industrial Recovery Act, 1933-1935.” In The Great Depression Revisited, edited by Karl Brunner (1981) and Frank G. Stendl, Understanding Recovery in the 1930s: Endogenous Propagation of the Great Depression (2003).

2. Elmus Wicker, “Roosevelt’s 1933 Monetary Experiment,” Journal of American History (1971).

Elmus Wicker is Professor Emeritus of Economics at Indiana University. His most recent book is The Great Debate on Banking Reform: Nelson Aldrich and the Origins of the Fed (Ohio State University Press, 2005).