Book Reviews

Money Men

How Franklin D. Roosevelt and John Maynard Keynes ushered in modern monetary policy.

By James Ledbetter

Tagged Historymonetary policy

In August 1933, as the effects of the New Deal’s better-known programs were beginning to ripple through the United States’s ravaged economy, Franklin D. Roosevelt and his economic advisers were trying to tackle a problem that was significant and yet, to the vast majority of Americans, obscure: what to do about the relationship between the dollar and gold. Even before his inauguration earlier that year, FDR had decided that there was an urgent need to raise the depressed prices of America’s crops, notably wheat and cotton; if he failed to accomplish that simple goal, it seemed entirely possible that an agrarian rebellion could erupt and destroy the country’s entire economic constitution.

FDR believed the best and swiftest way to inflate prices was to take the United States off the gold standard (which he’d done in the opening weeks of his presidency), and then to change the price of gold in dollars. This policy had the support of the most prominent and far-seeing economist alive, Britain’s John Maynard Keynes. Although the two men had at that point never met, Keynes saw Roosevelt as his most powerful ally in trying to remove the world’s monetary system from the gold standard, which Keynes had famously labeled a “barbarous relic.”

But even in Roosevelt’s closest circles, the barbarous relic had its champions. James Warburg, a banker who was then a key FDR adviser, was disturbed by the suggestion that Roosevelt or any government official could arbitrarily set the price of gold; he thought it would destroy confidence in the U.S. economy. As Warburg sought allies to try to block the President, his best bet was Dean Acheson, a headstrong lawyer who had become acting treasury secretary when his predecessor became ill.

Acheson opposed the revaluation of the gold-dollar price, not merely for the practical reason Warburg offered, but also for a more profound one that would cause him to resign a few months later: He believed that it was illegal. In a memorandum produced that summer, Acheson argued (in Eric Rauchway’s summary) that “Treasury still, by law, had to buy gold at the old Jacksonian price—$20.67 for an ounce.” FDR’s bureaucratic maneuvering to accomplish his goal was, in Acheson’s words, “a sham and a violation of law.”

The notion that laws set by Andrew Jackson should determine currency policy a century later illustrates the stakes and the absurdity of the monetary dogma FDR fought in his first term. Never mind the contemporary desperation of an economy with millions unemployed; the government, in this view, was powerless to use the price of its money to account for such economic events as the demise of the Second Bank of the United States, the Civil War, the introduction of paper currency, the founding of the Federal Reserve system, and the Great War—at that time the deepest international conflict in modern history. Roosevelt’s dramatic break with both the gold standard and the ossified economic thinking around it ushered in the modern monetary era. And yet, as anyone familiar with today’s politics can attest, the allure of the barbarous relic remains powerful for millions of Americans. The hatred for New Deal-style big government is almost always commingled with dissatisfaction with the global monetary order, and Roosevelt’s struggles with both are remarkably similar to our own.

Hatred for New Deal-style big government is almost always commingled with dissatisfaction with the global monetary order.

Clearing such Achesonian cobwebs from policymakers’ minds is one of the greatest, and largely unsung, economic accomplishments of the twentieth century. Eric Rauchway, who teaches history at the University of California, Davis, and has written several well-received books on the New Deal and Progressive eras, documents in The Money Makers the history of the idea that the world’s economy is better served if it is based on currencies valued by markets, not by an amount of metal. It stretches from Keynes’s theoretical conception in the 1920s, through implementation by FDR in the 1930s, to the founding of the Bretton Woods system—in which both men had a guiding hand, even after their deaths—in the 1940s. In Rauchway’s maximalist interpretation, the triumph of this idea not only cured America’s Depression, but provided the crucial economic strength to win World War II and to underpin the postwar prosperity. Stylistically, The Money Makers is a kind of literary mashup: part dual biography (borrowing thematically and structurally from Nicholas Wapshott’s 2011 Keynes Hayek); part economic history; part espionage thriller; and part advocacy against conservative economic ideas, then and now.

The economic record of FDR’s first term is something of a historian’s minefield, for the very reasons that the Acheson showdown demonstrates. Several of FDR’s early economic advisers were Republican carryovers or, like Warburg, Wall Street luminaries who were willing to help out the President while ensuring that the New Deal’s socialist tendencies were kept in check. When they departed, they often spewed angry octopus ink that clouded the economic and historical waters for decades. Once Warburg could not get his way on the question of devaluating the dollar, for example, he not only opposed FDR’s economic policies, but conducted a well-funded propaganda campaign against them.

What’s worse, for today’s goldbugs, Roosevelt’s abandonment of the gold standard, which made it illegal for most individuals to own or buy gold for what ended up being 40 years, represents a near-treasonous betrayal—a view that often colors historical treatments of New Deal economics. Indeed, much of what defines today’s right-wing economic thinking—the continued gold fetishism, the moralistic rampages against debt and deficits—has its roots in the reaction to FDR’s first year or so in office. Rauchway’s account of the inner workings of FDR’s economic policymaking is not only clear and illuminating, but is also mostly free of the mythmaking or icono-blasting that other historians insist on. As Rauchway puts it, too many historians “have depended on unreliable sources to understand the president.”

From a historian’s point of view, Rauchway sets himself a challenge by pairing FDR with Keynes. During the 1930s, the two men corresponded infrequently and met only once, and while there was much agreement between them, it was not exactly a golden moment. FDR complained that Keynes was more mathematician than economist, while Keynes—not known for his sociability—said that he had “supposed the president was more literate, economically speaking.” Moreover, by the time their meeting took place—May 28, 1934—the grim realities of American politics had already begun to dilute the New Deal’s economic impact. A big part of the problem was race: If federal jobs programs like the Civil Works Administration hired black workers in the South at a higher wage than white cotton farmers were paid, then Southern Democrats—who made up just under half of Congress, and held key leadership posts—would split from FDR. As Rauchway notes ironically, “[N]ow that he had specific advice directly from Keynes, Roosevelt could not follow it.”

To the extent that any one figure guided the early New Deal’s dramatic departures from traditional economics, Rauchway convincingly presents the case for George Warren, a Cornell professor who specialized in agricultural economics. Rauchway makes much of a trip Warren took to Washington, D.C. the morning after FDR was inaugurated. He recounts a nighttime meeting between Warren and the President in which the two men come to an agreement on the need to inflate the dollar and go off the gold standard—and then, a few days later, despite confusion and objections, it happens.

Epiphanies of resolution like this typify the book; Rauchway is intent on portraying FDR as in command on economic issues from before he takes office until the day he dies. In this volume, FDR’s program is brilliant, his timing is always strategic, and his opponents are usually badly motivated and soon proven wrong.

This approach makes for brisk reading and strong argument, but at times it’s a little too easy. Some of Rauchway’s well-researched material could just as plausibly be used to show that the President and his economic advisers were conspicuously unprepared for the thousands of ripple effects of going off the gold standard. For example, Rauchway cites an April 12, 1933, meeting in which FDR raises the “obstacle” of gold clauses in contracts. At the time, it was common practice for commercial contracts to include a clause allowing creditors to demand payment in gold; this was to ensure that they would not lose out over the length of a contract simply because the dollar lost its value.

Obviously, the Administration’s prohibition against citizens owning and trading in gold made any such transactions impossible, and thus nullified thousands of contracts both at home and with other countries. This was not some marginal detail, as upcoming Supreme Court cases would demonstrate. And thus if FDR considered this “obstacle” for the first time in April—Rauchway offers no evidence of any earlier discussion—then he and his team had in fact been negligent. After all, the financial weekly Barron’s had published lengthy investigations into how going off the gold standard would affect commercial contracts—not only before FDR initiated the policy, but well before he was elected (one essay was written by James Truslow Adams, the Pulitzer Prize-winning historian who coined the phrase “the American Dream”).

Similarly, Rauchway ignores the fact that the original Warren-inspired plan for the government to buy gold in order to raise its price applied only to gold mined in the United States. But to serve the purpose of raising the price of crops (many of which were sold overseas), it would also have to apply to foreign gold as well. Eventually the Administration figured this out, but such planning hiccups are mostly absent from Rauchway’s account. One does not have to be a sworn enemy of FDR to acknowledge that he could be both impetuous and stubborn, and that the sweeping effects of the New Deal as well as much of its political failure stemmed from a President whose decisiveness sometimes came at a cost.

Nonetheless, it’s hard not to share Rauchway’s awe for the sheer scope of what FDR and Keynes managed to achieve economically, not only in the United States (for which FDR has long received both credit and blame) but for much of the world. Leave aside the complications of the Cold War and just imagine the complexity and gloom of envisioning a monetary system for the entire developed world as it emerged from the rubble of World War II. The United Nations at this point is a startup. Most of the victorious Allies are broke, exhausted, and squabbling among themselves. American bankers and Republicans are dead set against anything that seems likely to increase debt or that resembles a world currency.

How many administrations in American history would have had the vision and stamina to use that crisis to create an unprecedented system of international economic cooperation, based largely on a plan that Keynes had developed and much of the world was likely to hate? The final third of Rauchway’s book details the improbable negotiations that took place at Bretton Woods in the summer of 1944 and then with Congress to try to pass it. Rauchway can’t resist delving into the tale of Treasury Department official Harry Dexter White, a onetime minor intelligence asset for the Soviet Union who suddenly loomed large as the International Monetary Fund (IMF) and World Bank took shape. This story has been told at greater length in Benn Steil’s 2013 book, The Battle of Bretton Woods. Rauchway doesn’t seem to think that White’s early and infrequent leaks made much difference in Bretton Woods or in general. But the sometimes bumbling Soviet attempts at extra-diplomatic influence during the Bretton Woods conference—a Canadian delegate answered a knock at his hotel room door to find “a fairly statuesque and good-looking Russian blonde [who] said that she had come to discuss the wording of the articles of agreement”—provide a flavor of the complexity of international negotiations, and foreshadow UN showdowns of later decades.

The eventual agreement that created the IMF and World Bank owed more to the American draft than to Keynes’s original vision. Its reliance on the U.S. dollar as the linchpin of an international monetary system might have been politically unavoidable, but would also prove to be unsustainable. The world’s economy grew much faster than its ability to produce gold, and even without yellow metal at the core of the world’s money, this discrepancy sank the Bretton Woods system. Keynes had envisioned an international currency called the bancor, but the pull of the barbarous relic proved too strong. (A version of such a currency would finally come into existence decades later in the form of the IMF’s special drawing rights, a type of money that only central banks can spend with one another.) Despite the inadequacies, it was kind of a swan song for both men; even before Congress accepted the Bretton Woods system, Roosevelt was dead, and Keynes would follow him a year later.

Rauchway’s account of the congressional debate over Bretton Woods is almost nostalgic for a time when the actual substance of a policy mattered in winning the argument against self-interested opponents. The American Bankers Association fiercely fought Bretton Woods, with members of Congress from both parties, fearful of debt and foreign meddling, on their side. Rauchway details Treasury Secretary Henry Morgenthau’s brilliant lobbying campaign, which enlisted support from rural interests and organized labor. Supporters produced not only pamphlets but even an illustrated children’s book called The Story of Bretton Woods, in which the League of Women Voters urged kids to get their parents to write Congress to support a new international monetary system.

For Rauchway, the triumph of forward-looking international thinking is a story that keeps retelling itself: The Dean Achesons of our day must continually be knocked down. “We can return to the lately prevailing orthodoxy that discounted Roosevelt and Keynes, and which led to our current discontents: or we can heed the lessons of their success,” he concludes.

Not everyone will agree, but it is undeniable that the intellectual and political issues Keynes and Roosevelt battled are very much with us today. Indeed, Keynes’s idea of money not tied to something physical has lately been one-upped. Bitcoin has demonstrated the market for a currency not tied to any central banking authority; despite its rocky rise, digital currency in some form seems likely to play a role in future international economic transactions.

The intellectual and political issues Keynes and Roosevelt battled are very much with us today.

The Bretton Woods framework collapsed; the world’s monetary system no longer has the dollar or a fixed amount of gold at its center. But, arguably, its failure pushed the world in an even greater Keynesian direction, and Bretton Woods’s two major institutions—the IMF and World Bank—are more important players in the global economy today than they were in the late 1940s, when Rauchway’s tale ends. Even in their much-reformed condition, the Bank and Fund have critics ranging from radicals to isolationists, and their effectiveness has certainly been tested by crises such as the 2008 global financial meltdown and, more recently, Greece’s debt bomb. Still, almost no economic thinkers anywhere near the political mainstream would advocate a global system without some version of the international stabilizers they are intended to be.

The question of government deficits and debt is, as Rauchway implies, not greatly different or more settled than it was in the 1930s. Keynes and Roosevelt gave the world a tremendous gift by providing conceptual legitimacy to deficit spending. But even progressives will concede that at some point, public debt can be harmful. At what point is it too much—and under what mathematics could anyone determine the level? Under what conditions—such as World War II—should governments tolerate “unacceptable” levels of debt, and for how long? The Paulson-Bernanke-Geithner bailout that began in 2008, and subsequent rounds of Federal Reserve “quantitative easing,” added debt that took the United States to above 100 percent of its GDP. Observers ranging from extremists like Ron Paul to mainstream Republican economists like Glenn Hubbard told us this debt would cripple the economy. But it hasn’t—yet!—and our slow and uneven recovery certainly seems preferable to continued global depression (ask the southern Europeans). At the same time, if Keynesian insight were enough, the global monetary system that Rauchway applauds ought to prevent such crises in the first place. To the degree that it doesn’t, the economic bogeymen that he thinks should have disappeared in the 1930s will continue to haunt our debates. If Rauchway seems to pine for a time when right and wrong were clear-cut, it may be less for the specific policy solutions than for the sense of certainty that seems to elude today’s statesmen and economists.

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James Ledbetter is the editor of Inc. magazine and His next book is a history of American politics and monetary debates.

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