Book Review: How the Very Gullible Describe the New Deal

Story Stream
recent articles

In 1920 and 1921, the U.S. economy contracted. The recession was massive; far greater than the contraction that revealed itself from 1929-30.

Most, however, are unaware of the downturn that took place ten years before the Great Depression began. They're unaware arguably because the economic decline was so brief.

Why was it? A clue resides in how the U.S. political class responded. Members of it did less than nothing.

Contrary to popular opinion today that says governments must spend with abandon during times of economic hardship in order to boost "demand," back then federal spending was slashed.  It fell from $6.4 billion in 1920 all the way to $3.3 billion in 1923.

The non-response was textbook perfect economics. Governments can only spend what they've extracted from the real economy first, so during economic slowdowns the ideal strategy is for politicians to reduce the governmental spending burden in order to leave economic resources in the market-disciplined private sector. Demand is always and everywhere an effect of production, so the goal among politicians should be to leave recovery to a private sector focused on allocating resources as expertly as possible to those most prone to deploying them in productive ways.

Also contrary to popular opinion today that says governments must devalue the currency during times of economic hardship, during the recessed early ‘20s the dollar's integrity as 1/20th of an ounce of gold was maintained. This too was textbook perfect economics. Companies and the work that springs from them are a direct result of investors who are buying future currency income streams. In that case the last thing a monetary authority would ever do is seek devaluation of those income streams.

So with the political class having done less than nothing in response to the brutal recession of 1920-21, the result was grand. The economy took off. Unemployment sat at 11.3% in 1920, but by 1923 it had fallen all the way to 1.7%. Despite what economists, politicians and historians tell us, recessions are healthy. They're a happy sign of an economy on the mend, of it being cleansed of all the misuses of labor, bad investments, and lousy companies that caused it to run off track in the first place. Recessions, to be blunt, are the necessary economic cure. That's plainly why recessions, when left alone, lead to booming economic growth. Recessions signal the growth ahead. Recessions are misnamed. They should be called economic recovery.

The "unknown" recession of 1920-21 sprang to mind while reading UC Davis historian Eric Rauchway's new book, The Money Makers: How Roosevelt and Keynes Ended the Depression, Defeated Fascism, and Secured a Prosperous Peace. Though billed as an economic history of the 1930s, The Money Makers is in truth a gullible, incomplete and nuance-free account of an important economic period routinely misunderstood by the historians and economists who've set out to write about it.

That Rauchway chose to omit the 1920-21 downturn, along with the "why" behind the 1920s recovery, provides the reader with an early clue that his history of the Roosevelt years that led to the Bretton Woods monetary agreement is anything but. It's what Rauchway doesn't know, or that he purposely chose to leave out, that tells the real story. Notable here is that his failure to discuss the 1920s was one of many glaring omissions from an incomplete book that only FDR (and more broadly the most willfully blind of New Deal cheerleaders) could have endorsed with any kind of straight face.

In Rauchway's flawed retelling, recessions cannot be left alone. And as opposed to the cure signaling a looming rebound, recessions must be fought through government intervention in the economy. To Rauchway, FDR was heroic for having "conducted an active monetary and fiscal program of recovery" that included dollar devaluation alongside increased government spending. About all this, no mention was made of a different, and far more successful approach to recession in the 1920s.

While we know of the 1920s as a "Roaring" decade today, to read The Money Makers with zero knowledge of the 1930s is to believe that the ‘30s were similarly marked by an economic boom. That's amazingly how Rauchway describes a decade historically known as one defined by misery and want.

Opposite the 1920s, the alleged solution in the ‘30s brought to life by Roosevelt was again, massive increases in government spending. Not mentioned by the author there was that Hoover and Congress had already tried government spending increases, but with no positive result. Somehow, if one is to believe Rauchway, the spending worked in the 1930s. Apparently it worked so well that as he reports midway through the book, the Nazis "hated the New Deal for restoring the United States to strength."

Fast forward to 2009, apparently the only reason government spending didn't work then to restore the U.S. economy was that the final spending bill signed into law by President Obama did "not supply enough stimulus to provide a full recovery, because what was arithmetically sufficient to employ adequate numbers of Americans would be politically too much to ask of Congress." We're all central planners now, or something like that.

Not discussed by Rauchway was where Congress would get these resources to spend the U.S. back to prosperity in the either the ‘30s or 2009. Missed by him and others is that Congress can only spend what it extracts from the real economy first. The latter being incontrovertible, Rauchway didn't bother to explain how Roosevelt then, and Nancy Pelosi/John Boehner in 2009, could allocate the economy's precious resources better than market-disciplined actors in the private sector. Can anyone say with a straight face now that the members of Congress (approval rating, 10%?) know how to deploy the economy's resources better than do Jeff Bezos, FedEx founder Fred Smith, and venture capitalist Peter Thiel?

Rauchway's answer might be something involving Gross Domestic Product; that it rises when governmental expenditures increases, but to make such a silly statement is to engage in double-counting of the most fraudulent kind. Put simply, politicians only have money to spend insofar as the private sector produces taxable wealth first. It can't then be multiplied by politicians. GDP is wholly fraudulent.

What about devaluation of the dollar? There Rauchway unwittingly revealed early on why it cannot work, and didn't work in the 1930s. Talking about the aversion on Wall Street to FDR leaving the gold standard (more on his decision in a bit), Rauchway noted that "Bankers hated the prospect of inflation, which would see them paid back dollars cheaper than the ones they had lent." Absolutely! What Rauchway acknowledged there was that there are two sides to every transaction. For every borrower, there's a lender first. Devaluation by his very analysis chills the desire of lenders to be intrepid with their savings.

Thinking about companies and jobs, it bears repeating again that both are the clear result of investment first. There's no economic school that can disprove the latter. In that case, Rauchway's correct statement about lender aversion to devaluation applies itself perfectly to the investors necessary for economic recovery. Devaluation makes intrepid allocation of capital far more perilous for it creating the potential for substantial devaluation of any returns gained by investors in search of opportunity. What this tells us about FDR's devaluation of the dollar from 1/20th of an ounce of gold to 1/35th is that it had a chilling effect on their willingness to put precious capital to work.

Rauchway discussed none of this; instead taking government spending and devaluation at their Keynesian (at least his not very clear understanding of Keynesianism) word. To him both were the recovery, but as he unwittingly revealed later in the book, the "recovery" engineered by an approach that was the polar opposite of what took place in the early 1920s gifted the economy with something quite a bit different than strength. Indeed, on page 109 of the book, Rauchway noted that as of 1935, "as many as 10 million workers remained without a job."  Notable about 1935 is that in 1934 Roosevelt and Congress boosted spending to the tune of a $7 billion deficit. Rauchway never mentioned it.  

Further on, he wrote about the monetary conference that was to take place at the Mount Washington Hotel in Bretton Woods, NH. In his description of the resort, he noted that "The Depression had brought it to disuse and disrepair and almost disaster." The federal government spent hundreds of thousands to restore a resort that had nearly died so that it could house the conference attendees, but government spending hardly stimulated the economy in a broad sense. As Rauchway added in the same paragraph, the New Deal spending that saved the Mount Washington Hotel meant that it didn't suffer "the decline that overtook so many of its peers, and preserved it as an isolated island of alpine opulence." If the economy had boomed in the ‘30s as Rauchway suggests, at least some of the resorts created during prior boom times would have survived; not just one propped up with the money of others.

All this was the "recovery" that apparently bothered the Nazis? More realistically, the Nazis were empowered by failed government stimulus (a redundant phrase if there ever was one) that had the U.S. economy on its back throughout the 1930s. Figure unemployment still sat at 14.6 percent as late as January of 1940. Notable there is that it was down from 17.4 percent in 1938. The New Deal mostly ended in 1938, so it's no surprise that the jobless rate began to fall. Rauchway naturally failed to point any of this out given his failed attempt to turn the shame that was the 1930s into some kind of dynamic rebirth that could only be imagined by the most fabulist of historians.

At the same time, and to his credit, Rauchway did not promote the hideous falsehood popular among economists that all the maiming, killing and wealth destruction that defined World War II actually authored the economy's rebound. The latter remains arguably the most tragic indictment of the economics profession to this day. So while Rauchway didn't fall for the biggest fallacy in the proverbial book, his acceptance of what he presumes is Keynesian theory sans protest was startling. Figure Rauchway didn't need to promote the war as stimulus owing to his total acceptance of government spending as the path to economic growth in the first place. His analysis tells him that full recovery thanks to government spending revealed itself in the 1930s. It seemingly never occurred to him that governments can only spend and/or borrow insofar as the private sector is productive in the first place. Members of academia are a rather sheltered lot. The Money Makers reveals the latter in spades.

Another major problem with the book is that it was so literal, so gullible. Rauchway has clearly never read Fredric Bastiat, or for that matter Henry Hazlitt. He only considers the first result of government intervention in the economy. Never the 2nd, 3rd and 4th. One could argue that his shallow acceptance of everything Keynesian speaks to his being an historian as opposed to an economist, but as evidenced by the broad belief among economists that war stimulates, excusing Rauchway's confusion about what is common sense lets him off way too easily.

Early on he writes about a federal loan to France that would facilitate the purchase of American tractors. To Rauchway, the aforementioned deal "would spur U.S. manufacturing as well as help France recover" economically. No mention was made of the entrepreneurs and companies that went without capital (and perhaps American tractors) so that the federal government could shift resource access to France.

Writing about banks in the 1930s, Rauchway explained what he sees as the good of bank "holidays" whereby banks were closed by political decree. To him this would slow down runs on banks: "If nobody could ask for their money, nobody could start a run on the bank." Maybe, but banks prone to shutting down would soon not have any depositors to begin with. If one can't withdraw with ease, one can't deposit with ease either. Not considered was how bank "holidays" arguably weakened the banking system for making depositing in them more risky.

About reducing federal spending in the 1930s, Rauchway deduced that if FDR "cut federal spending now, he would take still more money out of circulation in the name of an austere savings program..." Wrong once again. Federal spending was as previously mentioned slashed from 1920 to 1923; from $6.4 billion in 1920 to $3.3 billion in 1923. This didn't take "money out of circulation" as Rauchway incorrectly assumes; rather a reduced government spending burden meant more resources for the private sector to access on the way to a major economic boom. With Rauchway we're talking about someone who doesn't bother to distinguish between government and the private sector. No matter how wasteful the government spending, no matter the businesses that never attain funding thanks to government consuming so much in the way of precious resources, the economy in Rauchway's confused eyes is enhanced when government spends.

Back to the the subject of money, Rauchway observed that FDR "would never put currency stability before prosperity." Implicit there is that money is wealth and that creation of it without regard to stability in terms of value is a source of government-manufactured economic growth. But if true, El Salvador would be as rich as the United States. Anyone can create money, but it serves no purpose unless there's production taking place.

Money supply is an effect of production, not the driver of it. In that case, money is best when it's stable in value. John Maynard Keynes himself knew this well. As he put it in his Tract on Monetary Reform, "Capitalism of to-day presumes a stable measuring rod of value, and cannot be efficient - perhaps cannot survive - without one."

Rauchway lauds FDR for leaving a gold standard that in Rauchway's words limited money creation to a ratio informed by the "amount of shiny yellow metal a nation had on hand," but the problem here is that Rauchway's analysis is spectacularly untrue. As monetary expert Nathan Lewis explained it recently about the U.S. gold standard,

A gold standard system is not, and has never been, a system that "fixes the supply of money to the supply of gold." Absolutely not. A gold standard system is what I call a fixed-value system. The value of the currency - not the quantity - is linked to gold, for example at 23.2 troy grains of gold per dollar ($20.67/ounce). This was U.S. policy from 1834 to 1933.

From 1775 to 1900, the U.S. money supply (technically known as "base money") increased by 163 times, from $12 million to $1,954 million. During this time, the total aboveground gold supply increased by about 3.4x due to mining production.

163 is not the same as 3.4.

Contrary to what Rauchway would like the reader to believe, supply of dollars up to 1933 was in no way limited by the amount of gold the U.S. had in its vaults. Rauchway cites Keynes's assertion that "no country in the world has such a thing" as a strict gold standard, and there he was absolutely right. The U.S. certainly didn't, and neither did Great Britain before it.

Rauchway adds near the book's end that a "country that loses more than half its gold reserve, as the United States did in 1958-71, without reducing its money supply, is not on the gold standard." Absolutely. Still, by the previous quote the U.S. once again never was on the gold standard, thus raising the question why Rauchway spent so much time focused on the exit from something that never really existed in the first place.

Per David Ricardo, a stable money advocate as much as any Classical thinker, a country realistically needs no gold in order to have money defined in gold terms. More specifically, a country needs no gold to be on a gold exchange standard; the latter the norm for the U.S. and Great Britain. FDR merely continued the U.S. migration to what already existed in reality: a gold exchange standard.

FDR's big mistake was not in suspending all the odd machinations that created the pretense of the U.S. being on an actual gold standard, but instead his devaluation of the dollar from 1/20th of an ounce of gold to 1/35th. Economies require investors in order to grow, no economic school or theory can contradict the latter, so what a mistake it was for FDR to devalue the dollar. Doing so chilled the very investors necessary for a rebound.

Worse is that per Rauchway, FDR reserved "the right to change the dollar's value again if he had to." Is it any wonder that investors were less courageous in the 1930s? Also glossed over by Rauchway is that the U.S. economy boomed after the 1920-21 recession despite the dollar's value being maintained. Rauchway owed it to his readers to provide them with this important bit of historical contrast. This wasn't the only time he was stingy with the truth about the past.

About Adolf Hitler, Rauchway's explanation of Hitler's rise came in the form of a quote from the economist most aggressive with FDR about devaluing the dollar, George Warren. Warren said "Hitler is a product of deflation," but any honest accounting of how Hitler ascended to power in Germany would surely acknowledge that after World War I, and as of 1923, the dollar bought 4,200,000,000,000 units of the almost worthless German Mark. Rauchway never mentioned Germany's stunning currency devaluation, nor the historical truth that Hitler's rise began amid gruesome years defined by massive inflation. Though a worshipful fan of an economist he plainly doesn't understand, Rauchway also left out a classic quote by Keynes about inflation in The Economic Consequences of the Peace; one that further helps explain the rise of Hitler:

"There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."

Instead, Rauchway focused all of his energies on the horrors of deflation. The problem there is that Rauchway plainly doesn't understand what deflation is. Or at least its impact.

Missed by Rauchway is that in a growing economy marked by stable money values, investment is big and bold. Thanks to investment, the cost of previously luxurious items falls. We've seen it in modern times with computers that first cost millions, and as recently as the late 1990s, many thousands of dollars. We've seen it with mobile phones that initially cost $3,995 in 1983 when Motorola manufactured the first one. We've seen it more modernly with flat screen televisions that cost $20,000+ in the early 2000s, but now retail for $250-$500. Falling prices are the norm in a growing economy, but this is not deflation. If prices of some goods are falling, this frees up money not spent for the consumption of other items; that, or savings are merely shifted to consumers who will have extra buying power thanks to falling prices not consuming the disposable income of savers.

To Rauchway, the falling prices that always reveal themselves in concert with booming growth are bad. As he attempted to explain about the 1930s, and in concert with his cheering of FDR's aforementioned devaluation of the dollar, "As prices fell, money increased in value, which meant any decision to buy goods was a decision to spend money that would be worth more tomorrow." Books have and will be written about all that's wrong with the previous statement. Needless to say, to save is not to not consume as Rauchway naively presumes; it's merely to shift consumption to others. Banks don't pay for deposits so that they can lovingly stare at "money."

Second, money is always going to be "worth more tomorrow" due to the simple truth about compound interest that reveals itself when we save or invest. Money is only "worth less tomorrow" if politicians are devaluing money to begin with. Devaluation is bad simply because entrepreneurs require savings in order to innovate. That money is worth more at a later date is a feature of growing economy, not a bug. By Rauchway's confused reasoning interest on deposits and investment returns should be abolished so that people have no reason to save.

Third, think of Apple. It's the most valuable company in the world, and it is despite the fact that it's actively working to reduce the cost of its own products. Apple is not alone. Top companies feverishly work to reduce the prices charged to consumers simply because high prices are to competition what blood is to sharks. If falling prices really were a consumer deterrent as Rauchway asserts, then Apple would be bankrupt and the opposite of valuable. What Rauchway thinks "deflation" is, meaning falling prices, in fact describes a dynamic economy.

True deflation, like true inflation, signals a compromised currency. Returning to Ricardo, "A currency, to be perfect, should be absolutely invariable in value." In that case, a deflation signals a currency that is being deprived of its purpose as a measure as it rises in value. That wasn't what happened in the 1930s. The dollar had a definition as 1/20th of a gold ounce until 1933 when FDR devalued it. Rauchway's history is incorrect.

Rauchway's most glaring historical omission unsurprisingly concerns the New Deal itself.

As has already been mentioned, he views the ‘30s as a period of impressive growth. More specifically, Rauchway writes that "Under the New Deal, the U.S. economy grew at rapid rates, even for an economy in recovery." That's interesting when we consider the musings of Henry Morgenthau, a New Deal architect, and one of the most prominent names in The Money Makers. As Morgenthau put it about the New Deal in May of 1939 before the House Ways & Means Committee:

"We have tried spending money. We are spending more than we have ever spent before and it does not work."

"I say after eight years of this Administration we have just as much unemployment as when we started. ... And an enormous debt to boot!"

Amazingly the historian in Rauchway left this important bit of history out of his book altogether. So while his book has value for reasons that will soon be explained, it's hard to recommend to even the most true blue of Keynesian/FDR apologists simply because so much that is important has been left out.

What makes The Money Makers worthwhile in light of its gullible, literal, and all-too-often incomplete telling of history? It offers up two very important truths; one that this writer had never heard of.

About gold-defined money, it's common today for those who disdain an exchange standard to point out that the vast majority of economists think a return to a stable dollar would be a bad idea. Interesting there is that in the 1970s, economists almost to a man and woman said tax cuts would cause inflation. If you were an economist and for tax cuts in the ‘70s, you were an outcast.

Interesting about the 1940s is that if you were an economist seeking departure from the gold-exchange standard, you were well outside the mainstream. As Rauchway reports, in the aftermath of the Bretton Woods monetary conference that concluded with the dollar being defined as 1/35th of an ounce of gold (participant countries pegging their currencies to the dollar), a poll taken of the membership of the American Economic Association "showed 90 percent in favor of the [Bretton Woods] system." The latter will hopefully quiet the critics who use the present negative "consensus" among economists about gold as their argument against gold-defined money.  It means very little. 

Considering the conference itself, there's been a modern tendency among many on the right to equate the Fed with the dollar's exchange policy. But as The Money Makers properly reminds readers, the dollar's exchange value is a Treasury function. Treasury secretary Morgenthau presided over Bretton Woods, not the Fed Chairman. As for Roosevelt's 1933 decision to devalue the dollar, the Fed had nothing to do with what took place. This was a decision that FDR came to with his top advisors. Fed Chairman Eugene Meyer resigned in response to FDR's action. There's much to dislike about the Fed, but the dollar's decline since 1913 isn't one of those reasons.

The irony about a book that is hard to recommend is that the best, most informed line in it came from a tailor in the days after FDR took the U.S. off of the gold standard despite the U.S. never really having been on a pure gold standard. Americans were worried about the change, at which point Rauchway writes that tailor Rogers Peet "ran an ad explaining that ‘money is of little value except as a medium of exchange. You can't eat it. You can't wear it.'" So true. Money is a measure used to facilitate the actual exchange of wealth.

What a shame that Eric Rauchway didn't lead with the truism put forward by a tailor. If so his history of the 1930s would be much different. More important is that his history would be much better.


John Tamny is editor of RealClearMarkets, Director of the Center for Economic Freedom at FreedomWorks, and a senior economic adviser to Toreador Research and Trading ( He's the author of Who Needs the Fed? (Encounter Books, 2016), along with Popular Economics (Regnery, 2015).  His next book, set for release in May of 2018, is titled The End of Work (Regnery).  It chronicles the exciting explosion of remunerative jobs that don't feel at all like work.  

Show commentsHide Comments

Related Articles