Eric Rauchway on Roosevelt, Keynes and Monetary Policy

In mid-January, Adam Rice, organizer of the New York City Deficit Owls meetup group, emailed me to ask whether I had heard of a 2015 book by Eric Rauchway, The Money Makers: How Roosevelt and Keynes Ended the Depression, Defeated Fascism, and Secured a Prosperous Peace.

I responded that I had not and that I thought the book's subtitle was preposterous. Neither Roosevelt nor Keynes ended the Great Depression, nor did they defeat fascism. But since Adam had recommended the book, I put in a reserve request for it. My local branch had a copy on the shelf already, so I got to read it very quickly.

I still think the subtitle is preposterous -- publisher's hype, no doubt -- but the book is quite good. While the book is based on considerable scholarly and archival research, it is written in a style accessible to the general reader. You don't have to be an economist or a historian to understand Rauchway's arguments.

A Memory-Filtered History of Roosevelt, Keynes and Monetary Policy

If at any time in the past forty years -- the forty years since I was a graduate student in economics -- someone had asked me to discuss the impact of Keynes and Keynesian economic theory on the policies and practices of the U.S. government in the 1930s and 1940s, I would have responded something like this:

A Better Historical Understanding

Having read The Money Makers, I now realized that large parts of that story are inaccurate. Rauchway redirects our attention more toward monetary policy rather than fiscal policy. He argues that Roosevelt was a good lay student of economics and was knowledgeable about what, in the 1920s and early 1930s, would have been considered the heterodox economic thinking of the day -- heterodoxy already shaped, in part, by Keynes' The Economic Consequences of the Peace and other writings. He came into office convinced of the need for anti-deflationary policies and of the need to jettison the gold standard (suspension of convertibility of the U.S. dollar into gold). Going off the gold standard was no improvisation on Roosevelt's part. He came into office determined to do it on the basis of his own understanding of monetary theory. He did it on his third day in office. So his first anti-Depression measures fell into the realm of monetary policy rather than fiscal policy.

Keynes wrote to Roosevelt and corresponded with Roosevelt's economic advisers even before the General Theory was published. So Keynesian economic ideas were having an impact on U.S. government policies even before they began to be formally discussed within the economics profession within the U.S. Keynes met with Roosevelt on several occasions as well. It is probably nonetheless true that Keynes' biggest direct impact as an individual on U.S. policy came in his participation in the Bretton Woods conference in 1944.

The Roosevelt administration's grasp of what would come to be called Keynesian economics was certainly incomplete, as best demonstrated by the attempt to balance the budget in 1937, which sparked the steep recession of that year.

For discussion

What are the implications of the history recounted by Rauchway for advocates of modern monetary theory in 2019?

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Challenges for Modern Monetary Theory Advocates in the U.S. in 2019


James E Keenan | January 31 2019

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