In The Money Makers, his 2015 book on the New Deal and its aftermath, Eric Rauchway says that FDR “conducted an active monetary and fiscal program of recovery…working along lines suggested by Keynes.” His book’s subtitle in turn declares that between them, “Roosevelt and Keynes ended the Depression.” Other popular accounts likewise declare that “[t]he beliefs of Keynes and FDR proved successful at alleviating the Great Depression” and even that “Without John Maynard Keynes, FDR’s New Deal may never have happened.”
In this series, in contrast, I’ve argued that, instead of ending the Great Depression, the New Deal did relatively little to counter it, and, in some ways prolonged it. Readers who share the popular understanding of Keynes’s influence upon New Deal policies will therefore conclude that I also consider Keynesian economics a failure. But they’d be wrong, for a very simple reason: despite what one reads everywhere, the New Deal was not particularly “Keynesian,” and was in some ways quite un-Keynesian.
According to Rexford Tugwell (1957, p. 290), the Columbia economics professor who was a member of FDR’s original Brain Trust, “the Keynesian myth” (as he styles it) first became fashionable in the later 1930s, as the General Theory began to sweep the board of macroeconomic thought. It was later reinforced by Roy Harrod’s Life of Keynes (1951)—though Harrod admitted, in a 1950 letter to Dennis Robertson, that he’d deliberately exaggerated Keynes’s influence on Roosevelt’s policies because “in the mind of the general public you have to have One Man. There isn’t room for more.” Rauchway’s more recent effort appears to reflect a similar awareness of popular psychology.
Tugwell dismisses the claim that Keynes influenced FDR’s thinking, or that Keynes otherwise played an important part in shaping New Deal policies. Another New Dealer, Leon Keyserling, who served as an attorney for the AAA, and helped draft some other major New Deal legislation, does as well, though in starker terms: “With all due respect to Keynes,” he wrote in 1972, “I have been unable to discover much reasonable evidence that the New Deal would have been greatly different if he had never lived, and if a so-called school of economics had not taken on his name.”
That Keynes the man played hardly any part shaping those New Deal policies that came retrospectively to be described as “Keynesian” is only part of the truth. It’s also true that, had Keynes’s advice, or that of many American economists who independently favored those policies, actually been taken, the Great Depression would have taken a far different, and less destructive, course.
Brains and Keynes
Any account of Keynes’s role in shaping New Deal policies should begin with an appreciation of two facts. The first is that, despite his stature in Great Britain, Keynes was not well known in the United States until after he published the General Theory in 1936. The second is that, far from feeling any need to seek advice from a British economist, FDR came to office accompanied by a corps of advisors unmatched by any other in the history of the U.S. presidency.
Historians of the New Deal have found it convenient, if perhaps never entirely accurate, to divide FDR’s many advisors into various factions. All agree that the most important of these were the “planners,” led by Tugwell, and the “trust-busters,” led by Harvard law professor Felix Frankfurter. As the name suggests, the trust-busters’ ideal was something like economists’ notion of “perfect competition,” which they hoped to more closely approximate by breaking-up large corporations and banks. The planners, in contrast, had nothing against large-scale enterprises: to their way of thinking, competition was more dangerous than desirable, and the trust-busters were hopelessly out of touch. Rather than try to do away with it, the planners merely wanted to transfer control of big business from businessmen to bureaucrats like themselves, who would manage it rationally, in the public interest, instead of just trying to make a buck.
As diametrically opposed as their ideals were in many respects, these factions had at least one important belief in common: both treated the Great Depression “less as a problem to be solved than as an opportunity to be exploited for radical surgery on U.S. business and finance” (Best 1991, p. 11). Nor was it obvious how either of their programs, which predated the depression, would help end it. The generally-held verdict, that these reforms “never contributed much to economic recovery” (Hawley 1966, p. 15), should therefore not come as a surprise. Nor should it be necessary to add that such reforms bore only an incidental relation to policies aimed at enhancing aggregate spending that later came to be identified with “Keynesian” economics. The simple truth is that, when it came to fiscal and monetary policy, most of FDR’s closest advisors, including members of the original Brain Trust, simply weren’t “Keynesians,” even in a loose sense.
This isn’t to say that FDR received no “Keynesian” advice. Besides the trust-busters and planners, a third group of advice-givers—the “inflationists”—also influenced his thinking. This group, whose most influential members, neither of whom was a genuine New Dealer, were Irving Fisher and Cornell agricultural economist George Warren, the latter of whom gained an important ally in Henry Morgenthau, FDR’s second Treasury Secretary. Though they were fiscal conservatives, Fisher, Warren and Morgenthau favored suspending the gold standard and otherwise trying to raise prices by means of what may loosely be called “monetary” policy. Expansionary fiscal policy, and particularly large-scale spending on public works, had their own New Deal proponents in Frances Perkins, Harold Ickes, Harry Hopkins, and Marriner Eccles. But calling the policies these New Dealers favored “Keynesian” is one thing; claiming that they were actually influenced by Keynes is quite another. In fact, there’s no evidence that any of them came to think as they did because of Keynes.
Until The General Theory made its big splash in 1936, Keynes’s own arguments appear to have impressed only one of FDR’s close advisors: trust-buster Felix Kaufman. In the fall of 1933, Kaufmann went on sabbatical to England where, in early December, after visiting Keynes at Cambridge, he encouraged him to write the open letter published in the New York Times later that year. Keynes gave Kaufmann an advance copy, which Kaufman sent to Roosevelt on the 12th (Edwards 2018, pp. 1-2). If Tugwell (1957, p. 404) is right in saying that FDR “never…read anything Keynes wrote, except perhaps some newspaper pieces commenting on his [Roosevelt’s] own actions,” that letter would have been one of Roosevelt’s first helpings of Keynes’s own advice. But the letter didn’t impress him. “You can tell the Professor,” Roosevelt told Frankfurter in reply, “that in regard to public works we shall spend in the next fiscal year nearly twice the amount we are spending in this fiscal year, but there is a practical limit to what the Government can borrow.” From that terse reply and other evidence, William Barber (1996, p. 83) concludes that Keynes’s pleas “had little impact on Roosevelt’s thinking.”
Nor were the two men’s minds ever to really meet. Their disharmony was especially evident when, in May 1934, the men themselves met for the first and only time. To judge by the impressions each shared with Frances Perkins after their one-hour meeting, that event, which Kaufman hoped would establish a rapport between them, was unsuccessful. “I saw your friend Keynes,” Roosevelt said. “He left a whole rigmarole of figures. He must be a mathematician rather than a political economist.” Keynes, for his part, told Perkins that, though he admired the President very much, he expected him to be “more literate, economically speaking.” According to Arthur Schlesinger (1960, p. 406), Keynes later told Alvin Johnson, the New School’s director who was himself an economist, “I don’t think your President Roosevelt knows anything about economics.” However much the men may have respected one another, so far as economic policy was concerned, each might have spoken a foreign language that the other couldn’t understand.
The Wrong R’s
As Tugwell (1970, p. 103) points out, FDR’s “less than enthusiastic” response to Keynes’s advice was due, not to his being unpersuaded by it, but to his belief that Keynes was merely telling him “to do what he had already been doing for some time’.” But was he?
Keynes himself certainly didn’t think so. One purpose of his open letter was to encourage FDR to spend more—much more—on public works, and to finance that spending by borrowing more instead of raising taxes. As we’ll see, Keynes was quite right to think that FDR needed such encouragement. But that wasn’t all: Keynes also disapproved of much that FDR had “already been doing.” Among other things, Keynes questioned FDR’s priorities, wondered whether he was quite sure what he was doing, and called some of the advice he was taking “crack-brained and queer.”
Regarding priorities, Keynes believed that of Roosevelt’s had two of his “three R’s”—Reform, Relief, and Recovery—out of order. Instead of making Recovery his administration’s first priority, Keynes told the president, he was engaged on a double task, Recovery and Reform,” whereas he ought to defer reform until recovery was achieved. Keynes was especially critical of the National Recovery Administration (NRA), a brainchild of the “planners,” describing it, accurately, as a reform that masqueraded as part of a plan for recovery while actually impeding it. He called some of the advice FDR was taking “foolish,” while comparing the gyrations in gold’s price that those policies were abetting to “a gold standard on the booze.” In short, while Keynes applauded FDR’s willingness to reject orthodox policies in favor of “bold experimentation,” he believed he’d chosen the wrong experiments, while clinging to some of the most obstructive orthodoxies.
Nor was Keynes less critical when, not long after meeting FDR in 1934, he once again shared his thoughts with The New York Times, this time in the shape of some brief “notes” on the New Deal. Here Keynes again took aim at the NRA, objecting to its “excessive complexity and regimentation,” and especially to its “impractical and unnecessary” attempts to regulate prices. He noted as well the lack of business confidence, “for some of which the administration may be to blame.” (And how!) And he complained that, despite a temporary boost, the government was still his not spending, or not deficit-spending, enough. Keynes repeated many of these complaints, more trenchantly, in a February 1, 1938 letter to the President.
Even such a cursory review of Keynes’s public and private remarks on the New Deal should suffice to call into question Eric Rauchway’s claim that he “staunchly defended the New Deal through 1933, and continued to do so into 1934.” Keynes admired Roosevelt’s boldness. He particularly applauded his decision to abandon the gold standard. He also approved of some of the reforms his administration was pursuing as long-term reforms. But in 1933 and 1934, Keynes’s verdict on the New Deal as a program for recovery was, on the whole, negative. And he made no bones about it.
Of all the steps Roosevelt took during his first year in office, none pleased Keynes more than his decision to abandon the gold standard. But much as Keynes, who had famously condemned the gold standard as a “barbarous relic” in his 1923 Tract on Monetary Reform, welcomed that decision, he had nothing to do with it.
That the gold standard might eventually have to go was a possibility FDR recognized as early as October 1932, when he wisely chose not to mention the topic in his campaign speeches. “I do not want to be committed to the gold standard,” he privately explained to his aides at the time. “I haven’t the faintest idea whether we will be on the gold standard on March 4th or not; nobody can foresee where we shall be.”
On the eve of the inauguration, FDR and his advisors still hadn’t given up on the gold standard. According to Sebastian Edwards (2017, p. 3), although they considered “tinkering with the currency,” they viewed doing so as “an option with a rather low priority.” Events, more than economic doctrine, were to ultimately seal the gold standard’s fate: the banking crisis, which had been triggered by a run on the dollar, compelled Roosevelt to restrict both gold exports and domestic ownership of gold, while gold’s subsequent appreciation, which FDR would eventually encourage through his gold purchase program, put paid to any prospect of a restoration of the dollar’s former gold value.
Had FDR wished to permanently devalue the dollar all along, he didn’t need to turn to any British economist to gain an expert’s approval of that decision. Days before the inauguration, Irving Fisher, who was then, according to Joseph Schumpeter, the United States’ “greatest scientific economist,” urged FDR to begin his presidency by announcing that the United States was abandoning the gold standard in favor of a “managed currency.” That step, Fisher maintained, “would reverse the present deflation overnight and would set us on a path toward new peaks of prosperity” (Barber 1996, p. 25). But FDR wasn’t yet prepared to go that far. Instead, he settled for his March 6th Bank Holiday proclamation suspending both gold exports and internal gold payments—steps that could hardly be avoided since gold withdrawals were about to exhaust the New York Fed’s reserves. Subsequent Executive Orders extended and reinforced these prohibitions until, on April 20th, FDR issued a proclamation formally suspending the gold standard.
FDR’s next, major step away from the gold standard consisted of his “bombshell” cable of July 3rd, 1933, effectively withdrawing his support for the currency stabilization goals of the World Economic Conference then being held in London. The other participating nations hoped the United States would cooperate with them to restore the international gold standard, with the system of fixed exchange rates that went hand-in-hand with it, by agreeing to stabilize the then free-floating gold value of the dollar. Though it was understood by then that the dollar would be devalued, the thought was that, by working together, the assembled delegates could avoid “competitive” devaluations that might delay the gold standard’s revival, if not prevent it altogether. The United States’ withdrawal left FDR free to devalue the dollar as much as he liked, or to let it keep floating forever.
Keynes’s role in FDR’s decision to not support the conference’s currency stabilization agenda has been exaggerated. He approved of the bold steps Roosevelt took during the Bank Holiday, and his decision to officially let the dollar float that April. He also understood that Roosevelt was prepared to permanently devalue the dollar if that would help to raise the U.S. price level. Keynes believed that FDR’s willingness to devalue the dollar made his cooperation crucial to any successful, international stabilization plan. “[T]here is one man in the world,” Keynes wrote in the Daily Mail that June, who seems to take seriously the business in hand to which others do not more than pay lip service, namely, President Roosevelt, [yet] we are all talking as though that man is defeating the alleged objects of the conference” (Rauchway 2015, p. 70). But it doesn’t follow that it was Keynes who convinced FDR to torpedo the conference.
As far as I’m aware, the only evidence for that claim consists of Raymond Moley’s (1939, p. 236) statement that FDR’s thinking had been “greatly influenced” by Keynes’s 1930 Treatise on Money. But that statement, which Rauchway (2015, p. 51) takes at face value, simply isn’t credible. For one thing, Moley contradicts himself, saying elsewhere 1939, p. 225n20; my emphasis) that FDR’s views “seemed to approximate those” found in the Treatise, which means something altogether different. It’s also highly unlikely that FDR, who had little patience for abstract thought, and who Tugwell says hardly read anything by Keynes, either had or took the time to read Keynes’s longest and most abstruse work!
But the most important reason for doubting Moley’s claim is simply that there’s nothing in the Treatise that could possibly have inspired FDR’s July 1933 decision. Although it’s true that, in his Tract on Monetary Reform, Keynes’s disparaged attempts to restore the then dismantled gold standard, by 1930 “the facts had changed,” and so had Keynes’s thinking. “Today,” Keynes wrote in the Treatise’‘s second volume (1930, p. 338),
the reasons seem stronger…to accept, substantially, the fait accompli of an international standard… . For to seek the ultimate good via an autonomous national system would mean not only a frontal attack on the forces of conservatism, …but it would [sic] divide the forces of intelligence and goodwill and separate the interests of nations.
Such words could hardly have inspired FDR to “torpedo” the London conference! Nor are there any other passages in the Treatise that might have done so.
Instead, the experts whose views almost certainly informed FDR’s decisions were Fisher and, above all, Warren. Although Fisher, like Keynes, was never one of FDR’s official advisors, unlike Keynes he corresponded with FDR often, and met with him on numerous occasions, throughout the New Deal. Between late February and early June 1933 alone Fisher sent Roosevelt no fewer than seven letters, all addressing the currency question. In a March 2 letter, he wrote that “The present situation in currency cries to heaven for reflation (up to a reasonable price level about half way back) and, after such reflation, for stabilization” (my emphasis). According to Barber (1996, p. 33), just before the London conference began, Fisher wrote again, advising FDR that the U.S. “should not wait for action by other countries, nor make our action dependent on theirs, nor tie up our standard to theirs irrevocably.” The cable’s endorsement of “efforts to plan national currencies with the objective of giving those currencies a continuing purchasing power which does not vary in terms of commodities” might have been written by Fisher himself, who long favored the idea.
Warren also urged Roosevelt not to commit to any definite plan to stabilize the dollar. Ever since Roosevelt took office, Warren had been trying to win him over his theory that, as the price of gold rose, so would other commodity prices. After Roosevelt let the dollar float, commodity prices started to rise rapidly, while gold depreciated, in apparent confirmation of the theory. Then, when it seemed that the United States was going to please Britain by stabilizing the dollar, gold depreciated, and prices fell. Between them, these events and Warren’s advice played an important role in convincing FDR to resist getting “trapped” (Warren’s term) by any proposal to stabilize the dollar’s gold value while commodity prices were still well below their pre-depression levels. The Committee for the Nation, a lobbying group (a sympathetic source, on which this paragraph draws, describes it as a group of bankrupt farmers, businessmen, bankers, and cooperative leaders) to which both Fisher and Warren belonged, joined them in advising Roosevelt against tying the United State’s hands.
In short, U.S. experts appear to have done all the persuading necessary to get Roosevelt to fire off his July 3rd cable. Keynes’s welcome but minor contribution consisted solely of the support he gave to FDR after the fact, by publishing an article in the Daily Mail declaring him, by its title, “Magnificently Right.”
While Roosevelt’s withdrawal from the London conference left little doubt that the old gold dollar was history, it offered no clue as to where its gold value would settle, or even whether it would settle anywhere, rather than continuing to float. Nor does Roosevelt himself seem to have known yet. Instead, he sought further advice. But once again he turned for it to U.S. experts, not to Keynes. Some advice came from Fisher and from one of Fisher’s many students, Yale economist James Harvey Rogers. But it was George Warren’s thinking that ultimately prevailed—and Warren was certainly the least Keynesian of the bunch.
Warren’s theory, which he and Frank Pearson developed on the basis of mere extrapolation from the past, posited a more-or-less mechanical link connecting the dollar price of gold to the price of agricultural and other commodities. According to it, a sufficient devaluation of the dollar, however achieved, was sure to deliver on FDR’s promise to restore the prices of farm products to their 1926 level. Warren’s theory thus inspired FDR’s ill-fated gold buying spree.
But apart from convincing FDR himself, Warren’s theory won few converts either in or outside of the Roosevelt administration. Henry Morgenthau bought it. “Foolish” and “nonsense” were the brusque opinions of James Warburg and Rex Tugwell, respectively; and their view seems to have been closer to the general consensus among economists. (Even Fisher, whose views superficially resembled Warren’s, insisted that raising gold’s price alone wouldn’t raise other prices: monetary expansion was needed to get people to spend more.) By February 1934, when FDR and Morgenthau quit buying gold, and fixed the dollar’s official gold content at 59 percent of its former level, these critics had every reason to feel vindicated, if not to gloat: the wholesale price index was only three percent higher than it had been at the start of the gold buying program in October 1933.
Whether he gloated or not, Keynes was among Warren’s most unsparing critics. In his December 1933 open letter, it was Warren’s theory that he considered “crack brained,” observing that it rested on a “set of fallacies.” Instead of supposing that gold’s appreciation would cause higher prices, Keynes told FDR, he ought to have gotten both gold’s price and those of other commodities up by other means, and then devalued the dollar accordingly. Because the gold purchase program put the gold depreciation cart before the price-raising horses of expansionary monetary and fiscal policy, its main result consisted, not of higher equilibrium prices, but of those disturbing “gyrations of the dollar” that seemed to Keynes “more like a gold standard on the booze than the ideal managed currency of my dreams.”
In view of Keynes’s harsh remarks, it seems a real stretch to suggest, as Eric Rauchway (2014, p. 58) does, that “[i]n the general outline of his beliefs, Warren had support from John Maynard Keynes.” In truth, it was Warren’s opinions rather than Keynes’s that Roosevelt heeded. But as Roy Harrod understood, once one discerns that, in the mind of the general public, “you have to have One Man,” a little truth-stretching is hard to resist.
(To be continued.)
Continue Reading The New Deal and Recovery:
Part 1: The Record
Part 2: Inventing the New Deal
Part 3: The Fiscal Stimulus Myth
Part 4: FDR’s Fed
Part 5: The Banking Crises
Part 6: The National Banking Holiday
Part 7: FDR and Gold
Part 8: The NRA
Part 8 (Supplement): The Brookings Report
Part 9: The AAA
Part 10: The Roosevelt Recession
Part 11: The Roosevelt Recession, Continued
Part 12: Fear Itself
Part 13: Fear Itself, Continued
Part 14: Fear Itself, Concluded
Part 15: The Keynesian Myth
 Keynes’s rejection of much of the thinking behind the NRA and AAA predated the New Deal. In “The Raising of Prices,” one of several letters he published in the London Times and The New Statesman in March 1933 (republished in the U.S. as The Means to Prosperity), Keynes called “the idea of raising prices of commodities by restricting their supply,” with which Neville Chamberlain, then England’s Chancellor of the Exchequer, had then been flirting, “worse than useless.” Instead of serving to diminish employment, he said, “it is, rather, a method of distributing more evenly what employment there is, at the cost of somewhat increasing it.” According to Elliot Rosen (2005, p. 80), FDR’s longtime friend Viscount Astor sent advance copies of Keynes’s letters to the White House. Of FDR’s reaction to these, assuming he read them, there’s no record. In any event, one doubts that Keynes would have been impressed by Raymond Moley’s claim that in criticizing the NRA he “missed” the fact that it was not primarily concerned with increasing production, but with spreading work.”
 In his discussion of the failure of the London conference in Stable Money: A History of the Movement (1934, pp. 351-2), Fisher attributes it to the irreconcilable difference between the desire of delegates from several countries, including France and England, to see their currencies’ exchange rates with the U.S. dollar stabilized before taking steps to raise their national price levels, and Roosevelt’s desire to reflate the U.S. price level before entering into any agreements to stabilize the exchanges. Roosevelt’s preference was, of course, the position Fisher had himself urged him to take prior to the conference.
 Despite its apparent failure in the 30s, and the many economists who disparaged it then and since, Warren’s theory still has its adherents, including Scott Sumner, who (besides defending Warren) offers a nice summary of the difference between his and Fisher’s thinking. Sumner himself draws on Sebastian Edward’s fine account of FDR’s gold policy, and the economists who influenced it, in American Default.
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