ABOUT THIS BOOK

CHOSEN AS ONE OF THE WALL STREET JOURNAL’S 10 BEST BOOKS OF 2025

A definitive history of the United States’ recovery from the Great Depression—and the New Deal's true part in it.

FDR’s New Deal has long enjoyed a special place in American history and policy—both because it redefined the government’s fundamental responsibilities and because Roosevelt’s “bold experimentation” represented a type of policymaking many would like to see repeated.

But “the thing about bold experiments,” economist George Selgin reminds us, “is that they often fail.” In False Dawn Selgin draws on both contemporary sources and numerous studies by economic historians to show that, although steps taken during the Roosevelt administration’s first days raised hopes of a speedy recovery from the Great Depression, instead of fulfilling those hopes, subsequent New Deal policies proved so counterproductive that over seventeen percent of American workers—more than the peak unemployment rate during the COVID-19 crisis—were still either unemployed or on work relief six years later.

By distinguishing the New Deal’s successes from its failures, and explaining how the U.S. finally managed to lay the specter of mass unemployment to rest, Selgin draws salient lessons for dealing with future recessions.

AUTHOR BIOGRAPHY

REVIEWS

TABLE OF CONTENTS

1. The Record - George Selgin
DOI: 10.7208/chicago/9780226838991.003.0001
[New Deal;Great Depression;Unemployment;Works Progress Administration;Michael Darby]
Whatever its achievements may have been, the New Deal cannot be said to have brought the US Great Depression to a rapid end. While many countries suffered from the Depression, the US downturn was especially long-lasting. Throughout the 1930s, the percentage of US workers who were either unemployed or dependent upon emergency jobs seldom fell below double digits, while real GDP remained below, and sometimes well-below, its 1929 level. Only France had a worse record. Conditions improved rapidly following the outbreak of WWII. But the recovery that took place then and especially after US entry into the war cannot be attributed to any New Deal legislation. On the contrary: during the war New Deal hostility toward businessmen gave way to business-government cooperation, which in turn served to revive business confidence. And that revival of confidence was to play a crucial part in preventing the US economy from lapsing back into a depression when the war—and the large-scale government spending that went with it—ended. (pages 3 - 16)
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2. Inventing the New Deal - George Selgin
DOI: 10.7208/chicago/9780226838991.003.0002
[Brain Trust;Frances Perkins;Raymond Moley;New Deal;Rexford Tugwell;Eric Rauchway;domestic allotment;Herbert Hoover;gold standard;Franklin Roosevelt]
Although some have claimed that the New Deal consisted of a comprehensive plan for economic reform, relief, and recovery that had been formulated by Roosevelt and his advisors well before Roosevelt took office, and even before his 1932 election victory, that claim is contradicted by a wealth of evidence, including the testimony of several of Roosevelt's most intimate associates. Instead the New Deal is best understood as FDR himself described it during one of his 1932 campaign speeches, namely, as a program of "bold experimentation." The difference is important, for while bold experiments sometimes succeed, and may succeed brilliantly, they often fail. The New Deal's contributions to the US recovery, or lack thereof, are best appreciated with this fact in mind. (pages 17 - 28)
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3. The Banking Crisis - George Selgin
DOI: 10.7208/chicago/9780226838991.003.0003
[bank runs;bank holiday;Bank of United States;gold standard;Federal Reserve System;hoarding;Reconstruction Finance Corporation]
The US Depression was exceptionally severe because it involved an almost complete collapse, in the weeks leading to FDR's inauguration, of the nation's banking system. The stage for that collapse was set long before, by unit banking laws that led to the proliferation of small and under-diversified banks, and by an unsustainable agricultural investment boom inspired by WWI. The new Roosevelt administration was thus faced with an economic calamity far worse than anything it could have prepared for. Addressing that calamity successfully would prove to be one of the first Roosevelt administrations most important achievements, without which no subsequent economic recovery would have been possible. (pages 29 - 42)
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4. The Bank Holiday
DOI: 10.7208/chicago/9780226838991.003.0004
[bank holiday;devaluation;Ogden Mills;Emergency Banking Act;Great Contraction;deposit insurance;gold standard]
Before it could proceed with any of its New Deal experiments, the Roosevelt administration had to deal with the banking crisis. It did so by declaring a national bank holiday, and by preparing a plan for eventually reopening the nation's banks. In fact, officials at the New York Federal Reserve Bank, which was on the brink of running out of gold, had urged Hoover to declare a national banking holiday days before the inauguration. Although Hoover gave serious consideration to the idea, he was unwilling to carry it out without FDR's support. FDR, for his part, was unwilling to take part in any government action while still a private citizen. Hoover's failure to take sole responsibility for closing the nation's banks was regrettable. On the other hand, members of Hoover's Treasury staff, several of whom stayed on after the inauguration, deserve credit for authoring and helping to implement the plan that eventually allowed many of the nation's banks to reopen. While the plan for reviving the banking system was not, strictly speaking, part of the New Deal, its success set the stage for economic recovery, making the FDR's willingness to implement it one of his administration's most important achievements.

5. Deposit Insurance - George Selgin
DOI: 10.7208/chicago/9780226838991.003.0005
[deposit insurance;FDIC;1933 Banking Act;Glass-Steagall Act;Carter Glass;moral hazard;Regulation Q]
The FDIC's establishment, as part of the Banking Act of 1933, is the best-known of several measures that made it possible to reopen many of the nation's banks after the national bank holiday. In fact, deposit insurance may have been less important than suspension of the gold standard, which put an end to runs to convert dollars into gold that were, together with state bank holidays, the proximate cause of the February-March banking crisis. Although FDR signed the Banking Act, he was no fan of its deposit guarantee provisions, which he opposed until it became clear that without them the whole Banking Act would fail. (Hoover, in contrast, came by the end of his term to favor insurance for want of other remedies to the banking crisis.) Like many economists then and since, Roosevelt feared that deposit guarantees would invite excessive bank risk taking—as they eventually did. Even so, those guarantees discouraged bank runs, thereby helping to clear the way toward economic recovery. There is on the other hand no evidence that the Banking Act's other provisions served to promote recovery. (pages 52 - 67)
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6. The RFC, Part 1 - George Selgin
DOI: 10.7208/chicago/9780226838991.003.0006
[Reconstruction Finance Corporation;National Credit Corporation;Eugene Meyer;Charles Dawes;railroad loans]
Although it began as a Hoover administration innovation, the Reconstruction Finance Corporation eventually became the largest of all New Deal agencies. Although the RFC's original emergency bank lending program proved incapable of averting banking crises, its bank share purchase program allowed many banks to reopen that might otherwise have been liquidated. The RFC's railroad lending program appears, on the other hand, to have done more harm than good, with railroads that took advantage of it ultimately becoming worse off than they would have by declaring bankruptcy. Although that program was was itself ultimately aimed at helping banks, along with insurance companies, many of which invested heavily in railroad securities, it was to set a precedent for all sorts of RFC lending that had no connection at all to its original aim of helping to shore-up the US financial system. (pages 68 - 78)
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7. FDR and Gold - George Selgin
DOI: 10.7208/chicago/9780226838991.003.0007
[Thomas amendment;inflation;gold purchase plan;George Warren;devaluation;hot money;Henry Morgenthau, Jr.;Gold Reserve Act]
Before taking office, FDR had no definite plans to abandon the gold standard. But fears that he would take that step ultimately forced his hand, and so became self-fulfilling. Unless gold payments were suspended, the nations' banks could not be reopened without risking further runs. But FDR's policies went further: they succeeded, not only in preventing more gold from leaving the banking system, but in compelling Americans who'd been hoarding gold to return it to their banks! Although these policies removed former barriers to monetary expansion, instead of taking full advantage of this fact, the Roosevelt administration resorted to a controversial "gold purchase" plan that raised the price of gold, but was ultimately ineffective at raising the general price level. At last, in January 1934, the dollar was officially devalued, setting the stage for subsequent monetary expansion. Yet the main cause of subsequent growth of the U.S. money stock was Hitler's rise to power, which caused vast amounts of gold to be shipped to the U.S. by Europeans seeking a safe haven for their savings. (pages 79 - 90)
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8. The AAA
DOI: 10.7208/chicago/9780226838991.003.0008
[Agricultural Adjustment Agency;McNary-Haugenism;domestic allotment;tenant farmers;sharecroppers;Henry Wallace;George Peek]
The goal of restoring crop and livestock prices to their pre-Depression levels, was central to the New Deal recovery strategy. To achieve that end, the Agricultural Adjustment Administration (AAA) paid farmers to reduce output using the proceeds of a new tax levied on food processors. Once their own earnings recovered, farmers' increased spending would contribute to general recover—or so the prevailing theory held. But while there is no doubt that the plan helped certain farmers, others benefited little if at all, while in the cotton South landowners profited at the expense of sharecroppers and tenants, many of whom found themselves dispossessed as the acres they once farmed were taken out of production. Whether the program contributed to general recovery remains controversial, for while enriched farmers spent more, their increased spending was partly offset by the reduced spending of unemployed farm laborers and the reduced earnings of food processors. Consumers, in turn, had less to spend on non-food items. AAA farm subsidies nevertheless served as a precedent for a similar subsidies that persisted long after the Depression ended.

9. The NRA
DOI: 10.7208/chicago/9780226838991.003.0009
[National Recovery Administration;Ellis Hawley;work sharing;Wagner Act;industrial codes;blanket code;President's Reemployment Agreement;high-wage doctrine;Thurman Arnold;Schechter Poultry Corp.]
Like the AAA, the New Deal's National Recovery Administration (NRA) sought to achieve recovery by raising prices; and like it, though less deliberately, it raised prices by restricting output: industries were encouraged to establish "codes of fair competition" setting minimum wage rates and prices. But most firms could only afford to pay higher wage rates by hiring fewer man hours: and had it not been for the combined effects of "work sharing," with existing jobs divided among several workers, and demand-boosting gold inflows from Europe, the codes would have dramatically reduced total employment. In practice businessmen dominated the code-making process the NRA, which exempted complying firms from antitrust prosecution, boosted prices even more than it boosted wage rates, so that workers also suffered a decline in their wages' purchasing power. Economists generally agree that, instead of helping the US recover from the depression, the NRA stood in the way of recovery. Although the Supreme Court struck down the NRA in 1935, lax antitrust prosecution allowed NRA-sponsored cartels to survive until Thurman Arnold was put in charge of the Justice Department's Antitrust Division in 1938. The Wagner Act in turn kept labor costs high, especially by encouraging collective bargaining and strikes.

10. The NRA, Coda: The Brookings Report
DOI: 10.7208/chicago/9780226838991.003.0010
[Brookings Institution;Leverett Lyon;Harold Moulton;Charles Roos;1933 boomlet]
In 1935, the Brookings Institution published an investigation of the NRA that was both remarkably thorough and apparently free from any partisan or ideological bias. Despite its age the study remains the most detailed of all assessments of that New Deal agency's contribution to the US recovery. And its assessment is scathing. Instead of promoting recovery, the report concludes, by raising the prices of goods and labor the NRA hampered it, because it made the amount of money income needed to achieve full employment higher than it would have been otherwise. Yet, damning as the Brookings Report's assessment of the NRA is, an almost equally thorough,1937 assessment by Charles F. Roos, the NRA’s own principal economist until September 1934, is even more so: instead of hastening recovery, Roos says, NRA codes "kept business in a churn, prevented re-employment, and consequently retarded American development."

11. A New Deal for Housing - George Selgin
DOI: 10.7208/chicago/9780226838991.003.0011
[Home Owners Loan Corporation;foreclosures;building and loan societies;redlining;Farm Credit Administration;federal land banks;Farm Mortgage Act]
When the Depression broke out, Americans who had taken out mortgages during the housing boom of the 1920s found themselves unable to keep up their payments, deeply underwater, and facing foreclosure. Mortgage lenders in turn faced bankruptcy, for even if they foreclosed, they could not hope to recover the value of their loans. To relieve hard-pressed homeowners, but especially to save their creditors, the Roosevelt administration established the Home Owners Loan Corporation (HOLC). The HOLC offered to swap its guaranteed government bonds for lenders' nonperforming mortgages, which it then refinanced on more generous terms. Within two years, the HOLC refinanced almost a million loans, allowing hundreds of thousands of homeowners to avoid foreclosure, and saving many a mortgage lender, all while supposedly turning profit. Some therefore consider the New Deal's greatest success story. But the HOLC's success, real as it was, has been exaggerated. Proper accounting shows that it did not quite break even; and only the WWII revival of US house prices spared it heavy losses. A similar Farm Credit program proved less fortunate, because instead of ending with the Depression, it survived until 1987, when another farm crisis wiped-out the lenders taking part in it. (pages 131 - 147)
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12. The RFC, Part 2
DOI: 10.7208/chicago/9780226838991.003.0012
[Jesse Jones;Industrial Advances Act;Commodity Credit Corporation;backdoor spending;Fulbright Committee;Defense Plant Corporation]
The RFC’s support for railroads was the first sign of mission creep that eventually had it making all sorts of business loans, on the grounds that private lenders were overlooking sound lending opportunities. The heavy loss rate on those loans proved otherwise. But neither those losses nor the failure of most of the RFC's other undertakings sufficed to arrest the growth that eventually tuned the RFC into the biggest of all New Deal agencies. The RFC client that benefited most from its largess was the federal government itself. Once given the opportunity, Congress and the Executive Branch took full advantage of the RFC's ability to fund various undertakings independently of the usual appropriations process, and especially so after the US entered WWII, when the RFC financed numerous defense-related undertakings. But while its loans helped keep the Depression at bay until the war ended, the RFC contributed the lasting recovery that followed. Instead, after Jesse Jones, its powerful but scrupulous chair, resigned in 1945, its directors involved it in numerous dubious loans chiefly aimed, it seemed, at enriching themselves and their acquaintances. The RFC survived the scandal, but not for long: in 1952 the Eisenhower arranged for its liquidation.

13. Fiscal Stimulus? - George Selgin
DOI: 10.7208/chicago/9780226838991.003.0013
[debt deflation;Irving Fisher;deficit spending;Veterans' Bonus;E. Cary Brown;Economy Act of 1933;undistributed profits tax;balanced budget]
Today, governments mainly combat downturns through some combination of easy monetary policy and deficit spending, and it is tempting to assume that the same measures, and deficit spending in particular, formed an important part of the New Deal's recovery effort. But the truth is otherwise: although the first two Roosevelt administrations each spent roughly twice as much as the Hoover administration, heavy New Deal taxation kept that spending from translating into correspondingly high deficits. Only the New Deal deficits of 1934 and 1936 were markedly larger than those of Hoover's last years in office; and the large 1936 deficit was the result of that year's Veterans' Bonus, which Roosevelt tried, unsuccessfully, to veto. In fact, Roosevelt, instead of subscribing to the "Keynesian" view that deficits promote recovery, was a fiscal conservative, who tolerated deficits only as an unavoidable counterpart of relief spending he was unwilling to skimp on. Otherwise Roosevelt made every effort to balance the federal budget. Consequently, as economist E. Cary Brown put it in a well-known 1956 article, fiscal stimulus did little to end the Great Depression, “not because it did not work, but because it was not tried.” (pages 157 - 170)
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14. FDR’s Fed
DOI: 10.7208/chicago/9780226838991.003.0014
[open-market operations;Eugene Meyer;Marriner Eccles;Banking Act of 1935;silver purchase program;gold stock;Christina Romer]
If deliberate fiscal stimulus was not an important part of the Roosevelt administration's recovery efforts, deliberate monetary stimulus played hardly any part at all. Although the US money stock grew after the dollar was devalued, that growth was almost entirely fueled by gold imports. Although the Fed's balance sheet grew passively as the Treasury acquired foreign gold, its discounts and security purchases hardly grew at all. This wasn't a matter of its failure to cooperate with Roosevelt administration, for after the passage of the 1935 Banking Act, and Roosevelt's appointment of Marriner Eccles as Fed chair, Roosevelt was in a far better position to influence Fed policy than Hoover had been. Yet Hoover deserves much of the credit for the only substantial, if nonetheless very limited, Depression-era attempt at monetary stimulus, consisting of two rounds of what (by that era's standards) were large-scale Fed open market security purchases during the spring and summer of 1932. According to some monetary historians, had those purchases continued, they might have avoided the monetary collapse of 1933. FDR's Fed, in contrast, not only resisted active asset purchases: by doubling banks' reserve requirements 1936, it may have helped trigger the 1937-38 "Roosevelt Recession."

15. The Recovery So Far - George Selgin
DOI: 10.7208/chicago/9780226838991.003.0015
[investment;Flandrin experiment;Accord de Matignon;quantitative easing;gold inflow;General Motors strike]
By the spring of 1937, the first New Deal had run its course, while a "second" New Deal, more devoted to reform than to recovery, was nearing completion. Though economic conditions had improved considerably since 1933, 11 percent of American workers were still either dependent upon emergency jobs or unemployed; and the driving force behind such recovery as did occur consisted of growth in aggregate spending due not to deliberate monetary or fiscal stimulus but to gold fleeing from Europe. Though early Roosevelt administration actions set the stage for recovery by endingthe banking crisis and devaluing the dollar, many subsequent New Deal experiments, and the NRA in particular, hampered it, by artificially raising prices and wage rates, and thereby limiting the extent to which increased demand translated into increased employment and output. Hence the improved pace of recovery after many businesses stopped complying with NRA codes, and especially after the NRA was declared unconstitutional in May 1935. But even then, the recovery, besides being far from complete, was unsatisfactory in another crucial respect: while consumption revived, private investment remained stagnant; and until investment recovered, the US economy could not fully recover. (pages 182 - 194)
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16. The Roosevelt Recession - George Selgin
DOI: 10.7208/chicago/9780226838991.003.0016
[Roosevelt Recession;gold sterilization;reserve requirements;Lauchlin Currie;sit-down strikes;National Labor Relations Board;balanced budget]
Between May 1937 and June 1938, industrial production fell by one-third, and unemployment jumped back to 19 percent, undoing much of the post-1933 recovery. Various explanations have been given for what came to be known as the "Roosevelt Recession": the Federal Reserve doubled member banks' minimum reserve requirements; the Treasury began "sterilizing" gold inflows instead of allowing them to contribute to the revival of aggregate spending; and the federal government reduced its expenditures. All of these developments had a common origin, namely, officials' belief that recovery was nearly complete, and the fear that inflation was about to replace deflation as the US economy's chief adversary. Reflecting on the tragic results of such thinking, John Maynard Keynes is supposed to have remarked that those officials "professed to fear that for which they dared not hope." Another, less frequently mentioned factor in the 1937 collapse was the substantial increase in strikes, and sit-down strikes especially.Although some attribute the strikes to the collective-bargaining provisions of the 1935 Wagner Act, they are better understood as organized labor's response to that acts failure to deliver on its promises. (pages 195 - 207)
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17. The Keynesian Myth - George Selgin
DOI: 10.7208/chicago/9780226838991.003.0017
[John Maynard Keynes;Leon Keyserling;Felix Frankfurter;Brain Trust;World Economic Conference;gold purchase program;Irving Fisher]
The New Deal is often portrayed, both by its champions and its critics, as an early exercise in Keynesian economics. In fact, Keynes's own attempts toinfluence the Roosevelt administration's policies were mostly unsuccessful, and in many respects those policies were quite un-Keynesian. In fact there was, according to one prominent New Dealer, no evidence that "the New Deal would have been greatly different if [Keynes] had never lived, and if a so-called school of economics had not taken on his name.” Although a few participants in the Roosevelt administration—Marriner Eccles was a prominent example—argued for fiscal stimulus, mostly unsuccessfully, most came to their beliefs independently of Keynes, while others who, like Alvin Hansen, who were genuine Keynesians, had little influence upon, and still less enthusiasm for, actual New Deal policies. Keynes's own opinion of many of those policies, and of the NRA especially, was decidedly negative, as was his opinion of Roosevelt's anti-business rhetoric and investment-discouraging policies. Nor, despite claims to the contrary, was Keynes responsible for Roosevelt's decision to abandon the gold standard. Instead, Roosevelt was influenced by American economists Irving Fisher and especially by George Warren, whose theories Keynes excoriated. (pages 208 - 216)
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18. The Keynesian Myth, Continued
DOI: 10.7208/chicago/9780226838991.003.0018
[Chicago School;pump priming;Robert La Follette, Jr.;Public Works Administration;Robert Wagner;Harry Hopkins;Third New Deal;Beardsley Ruml]
Keynes's influence upon New Deal fiscal policy, and that of "Keynesian" thinking more generally, have been particularly exaggerated. Although some New Dealers, including Merriner Eccles and Lauchlin Currie, favored countercyclical deficit spending, such spending had been favored by many economists long before Keynes's writings on the subject became well known outside of England. Even the supposedly ultra-orthodox Herbert Hoover had long championed countercyclical pulic works spending, only to resist it once faced with growing Depression-inspired deficits. But Roosevelt, who attacked Hoover's (relatively) large deficits during the 1932 presidential campaign, was hardly less anxious to avoid them than Hoover had been. As presidenthe made several attempts, against Keynes's advice, to balance the federal budget, including vetoing, unsuccessfully, the 1936 Veterans' Bonus that was responsible for his administration's biggest peacetime deficit.Although, in the aftermath of the 1937-1938 downturn, some of Roosevelt's advisers convinced him to resort to deliberate deficit spending on the grounds that it would prove countercyclical, Keynes himself played no part in that effort. Nor did Roosevelt ever whole-heartedly embrace"Keynesian" thinking. Instead, according to John Kenneth Galbrait (among others), he "remained committed to the deeper canons of conservative finance...until the advent of war swept this issue aside."

19. Fear Itself - George Selgin
DOI: 10.7208/chicago/9780226838991.003.0019
[regime uncertainty;Robert Higgs;animal spirits;business confidence;Second New Deal;Wealth Tax;Huey Long;Wheeler-Rayburn Act;court packing plan]
The New Deal was much more than a recovery plan: as its name suggests, it was a novel policy regime. While a regime change can serve to revive confidence, it can also undermine it by fostering uncertainty, or by instilling fear. According to one popular hypothesis, both frequent changes in the Roosevelt administration's economic policies, and Roosevelt's tendency, especially after 1935, to resort to anti-business rhetoric, if not to seemingly punitive policies, stood in the way of economy recovery, especially by discouraging investment. Several prominent businessmen who otherwise supported the Roosevelt administration subscribed to this view, which economic historian Robert Higgs later dubbed the "regime uncertainty" hypothesis, as did some administration officials and advisors themselves, including Raymond Moley and University of Chicago economist Jacob Viner. Another subscriber was none other than John Maynard Keynes, who urged Roosevelt to take steps "to dispel the “atmosphere of disappointment, disillusion, and perplexity” to which the New Deal was contributing. New Deal developments that are supposed to have undermined business included his 1935 "Soak the Rich" tax, the "death sentence" he imposed on utility holding companies that same year, the 1936 undistributed profits tax, and Roosevelt's thwarted attempt to pack the Supreme Court. (pages 228 - 240)
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20. Fear Itself, Continued
DOI: 10.7208/chicago/9780226838991.003.0020
[Ben Bernanke;wait-and-see hypothesis;policy uncertainty index;regime change]
While there has never been any shortage of anecdotal evidence consistent with the regime uncertainty hypothesis, despite that theory's popularity during the Depression, and notwithstanding Keynes's discussion of the role of "animal spirits" in economic downturns, formal theories and statistical tests supporting it have been lacking until relatively recently. The situation changed when the hypothesis was revived, or reinvented, to account for persistent unemployment following the Great Recession of 2008-2009. New theories and statistics developed with the hypothesis in mind were subsequently employed to reassess the role of uncertainty in the Great Depression itself. While these relatively recent efforts can't be said to establish once and for all the extent to which regime uncertainly was to blame of the limited and "investment-less" recovery of the 1930s, some do appear to supply further support for the hypothesis.

21. War, and Peace - George Selgin
DOI: 10.7208/chicago/9780226838991.003.0021
[conservative coalition;secular stagnation;National Resources Planning Board;Alvin Hansen;Office of War Mobilization;Full Employment bill;Employment Act of 1946;demobilization]
Although the rise to dominance of the so-called "Conservative Coalition" following the 1938 election conservative put a stop to the New Deal, considered as an active legislative program, the Depression itself wore on,with 17 percent of the labor force either unemployed or on work relief at the start of 1939. Despite latercontrary claims, no one then, not excepting Roosevelt himself, believed that the New Deal had succeeded in ending the Depression. Some Keynesians instead believed that the US economy was in a state of "secular stagnation" that only an increase in government spending far greater than most New Dealer's ever contemplated, and permanent, would end the malaise. Despite the Conservative Coalition, but thanks to World War II, the US economy got a dose of secular stagnationists' medicine, in the shape first of large-scale European orders for war materiel, and, after Pearl Harbor, the United States' own war mobilization. Yet the war proved a double-edge sword so far as Keynesians were concerned, both by making the Depression yesterday's news, and by convincing many that, instead of being chronically ill, American industry was fundamentally healthy after all. (pages 255 - 266)
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22. The Phantom Depression - George Selgin
DOI: 10.7208/chicago/9780226838991.003.0022
[demobilization;price controls;Office of Price Administration;Julius Krug;G.I. Bill;Simon Kuznets;GNP estimates]
US spending on war production could not be expected to outlast the war itself. Roosevelt administration economists, who by Roosevelt's third term were at last mostly Keynesians, therefore feared that the US economy would plunge into a deep depression again unless the government's postwar peacetime spending assumed a similarly large scale. But instead of taking their advice, the Truman administration's demobilization plans came closer to free-market shock therapy: military orders were cancelled, factories and boatyards were decommissioned, government controls were swept aside, and government spending, as a share of GDP, was reduced to a level only modestly above its prewar level. Yet the much-feared collapse never came. On the contrary: the economy managed to quickly generate jobs enough to keep the unemployment rate at levels even Keynesian economists considered consistent with "full" employment. Whatever allowed it to do so is the real explanation for the US economy's full recovery from the Great Depression. (pages 267 - 273)
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23. The Fate of Rosie the Riveter - George Selgin
DOI: 10.7208/chicago/9780226838991.003.0023
[discouraged workers;War Manpower Commission;Woman's Bureau;women workers;industrial reconversion]
The claim that there was no immediate postwar recession relies on official employment statistics, among other evidence. Economist Frances Coppola claims that those statistics severely understate the extent of postwar unemployment by overlooking the fact that large numbers of women workers left the labor force after the war, not because they wished to do so, but because they understood that there would be no jobs for them once troops were demobilized. However, a careful review of the evidence, including surveys of women workers taken just before and just after the war ended, suggests that most women workers who left the labor force after the war had planned to do so, while those who didn't plan on leaving usually found jobs, albeit ones that were often inferior to their wartime jobs. Instead of being misleading, the impression of a fully-recovered economy conveyed by postwar unemployment statistics appears to be reasonably accurate. (pages 274 - 279)
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24. Happy Days - George Selgin
DOI: 10.7208/chicago/9780226838991.003.0024
[automatic stabilizers;investment revival;pent-up savings]
How did the United States avoid slipping back into a deep depression after WWII despite a demobilization Keynesian economists considered a recipe for mass unemployment? Government spending during the immediate postwar period fell dramatically short of what those economists considered necessary to avoid a deep slump; and while the period witnessed robust consumer spending, the public financed that spending not by drawing on its wartime savings, for savings continued to accumulate, but by spending a bigger share of its enhanced postwar earnings. That Americans were both consuming and saving more, despite huge cutbacks in government spending, could mean only one thing: private investment, moribund since the Depression began, had taken wing. The postwar revival of private investment was not just a sign that the US economy had finally recovered from the Great Depression: it was the very essence of that recovery. It follows that the fundamental explanation for the United States' permanent recovery from the Great Depression resides in the changes, whatever they were, that made that revival possible. (pages 280 - 287)
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25. Postwar Monetary Policy - George Selgin
DOI: 10.7208/chicago/9780226838991.003.0025
[Treasury Accord;Marriner Eccles;easy money;inflation;monetization]
It's tempting to suppose that the postwar investment revival was at least partly due to easy monetary policy. Postwar Federal Reserve policy does indeed appearto have been exceedingly easy, having mainly consisted of the continuation, up to the famous Treasury Accord of March 4, 1951, of the Fed’s wartime commitment to keep interest rates low by propping-up the prices of various Treasury securities. But appearances here are deceiving: whereas during the war the Fed kept interest rates low, despite heavy borrowing, by buying any Treasuries the public wouldn't take at offered yields, afterwards rates stayed low without the Fed's help, because the government was no longer borrowing so much. In fact the Fed often found itself selling rather than buying Treasuries, its chief concern having changed from that of helping to finance the war to keeping a lid on postwar inflation. In short, whatever was responsible for the postwar investment revival, it wasn't easy monetary policy. (pages 288 - 293)
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26. The Great Rapprochement - George Selgin
DOI: 10.7208/chicago/9780226838991.003.0026
[Alexander Sachs;Fair Labor Standards Act;dollar-a-year men;Harold Ickes;Friedrich Hayek;Third New Deal]
What ended the Great Depression? The New Deal didn't: double-digit unemployment survived the ending of both the original and the "second" New Deal. Neither did World War II government spending, the end of which was expected to bring the Depression roaring back. Instead, the key to the United States lasting recovery consisted of the remarkable postwar revival of private business investment.Why were businesses willing to invest so much more after the war than they had been either during it or during the Great Depression itself? The answer consists of the dramatic change, during the war, of the Federal government's attitude toward, and treatment of businessmen. New Deal hostility gave way to wartime cooperation, if not coddling. The change reanimated businessmen's long-dormant "animal spirits."It in this respect, and not simply because it involved a massive (though temporary) increase in spending by the federal government, that the war can be credited for the United States' lasting recovery. But it would be no less correct to say that the US economy finally recovered because the New Deal had been swept aside, and wasn't expected to come back. (pages 294 - 306)
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