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.
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:
The Roosevelt administration took power in March 1933. Since Keynes's The General Theory of Employment, Interest, and Money was not published until 1936, and since his theories only began to be digested by the U.S. economics profession (e.g., Alvin Hansen) around 1938, it doesn't make sense to speak of Keynesian theory as having an impact on U.S. government policies with respect to the Depression until the late 1930s. True, many Roosevelt administration policies (deficit spending; public works programs to directly tackle unemployment) were consistent with what became known as Keynesian economics, but they were more a result of the administration's bent for pragmatic improvisation in the face of the economic crisis than an attempt to actualize Keynesian ideas.
Keynes' biggest direct impact on U.S. government policies came as a result of his leadership of the British delegation to the 1944 Bretton Woods conference which led to the creation of the International Monetary Fund and the World Bank.
Keynesian economic theory's impact emerged most clearly after the war with the passage of the Employment Act of 1946, which, among other things, created the President's Council of Economic Advisers. Keynesianism's high water mark came in the area of fiscal policy: the passage of income tax cuts proposed by the Kennedy administration and seen to enactment by the Johnson administration in 1964. American Keynesianism fell into disrepute, however, in the 1970s when it became unable to explain the simultaneous existence of higher levels of unemployment and inflation than the country had experienced since the end of World War II.
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.
What are the implications of the history recounted by Rauchway for advocates of modern monetary theory in 2019?
Challenges for Modern Monetary Theory Advocates in the U.S. in 2019
James E Keenan | January 31 2019
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