Did the New Deal End the Great Depression?

0:00:07.3 Trevor Burrus: Welcome to Free Thoughts. I’m Trevor Burrus.

0:00:09.3 Aaron Powell: And I’m Aaron Powell.

0:00:11.7 Trevor Burrus: Joining us today is George Selgin, a Senior Fellow and Director of the Center for Monetary and Financial Alternatives at the Cato Institute. Today, we’re discussing a series of essays he recently wrote on the New Deal and the Great Depression. Welcome back to the show, George.

0:00:24.1 George Selgin: Thank you, Trevor. It’s nice to be back.

0:00:26.5 Trevor Burrus: So let’s start basic. What is a depression in the way that economists talk about it?

0:00:34.3 George Selgin: A depression is a downturn in all kinds of economic activity, so that’s distinct from a situation where you have some markets that are depressed, some industries that are doing badly, some sectors of the economy. It’s a situation where the economy as a whole isn’t growing and is, in fact, shrinking. Officially, the gurus who determine whether we have started a recession or depression or not count two periods of negative economic growth or economic contraction as the start of a recession. When a recession becomes a depression is, as far as I know, nowhere very strictly defined, insofar, at least, the term depression, which everyone understands to mean a really bad recession or downturn, is still reserved for the Great Depression of the 1930s; we don’t have any other depressions that we speak of.

0:01:44.7 Aaron Powell: What do you mean by the economy is shrinking or contracting? If we have an economy, we have lots of companies and businesses that exist, lots of people going to work, and then we hit a recession or a depression and it shrinks, all of that stuff, all those people, all those businesses are… They’re still there, it’s not like something came in and sucked them up or blew them up, so what does it mean when a an economy shrinks?

0:02:12.1 George Selgin: It means that measures of the growth rate of total output have gone down. So of course, there are different government bureaus that collect different statistics that measure the total amount of output in the economy, the total output of goods and services. And the most important of those measures, the most commonly used, anyway, are the gross domestic product. And in past times, the gross national product was often referred to instead, they’re very similar measures. And when those don’t grow, when they shrink, that’s a sign that the economy is going into a recession.

0:02:58.8 Trevor Burrus: Now, your series of essays were somewhat written in response to a group of different writers and public intellectuals championing a propos of the pandemic and some of the spending that we’ve been doing, championing the New Deal and FDR’s policies, which has long been an item of discussion back and forth between the left and the right economists. What is the general view of the New Deal that is coming out of this, and your desire to sort of be a corrective on this, but the general view is that it worked, right, I mean, it worked really well.

0:03:38.7 George Selgin: Well, I’d say that is a very popular view, and it’s important, first of all, and this is one of the things I try to clarify in my essays, to distinguish between the different goals of the New Deal. And FDR himself, Roosevelt, was pretty clear about this, very clear, really, people speak of the three Rs and he did as well, of relief, that’s getting money to people who aren’t able to get by otherwise; reform, which is programs aimed at long-​run reform of various aspects of economic activity; and finally recovery.

0:04:23.0 George Selgin: And when people speak fondly of the New Deal, they don’t always distinguish between its accomplishments with regard to one or two of the Rs and with regard to the other. My concern is with the question of recovery only in my essays, how much did the New Deal contribute to getting out of the Depression in the sense of getting the private economy to generate jobs and produce goods and services again, instead of having negative growth. And the popular view there, but only in the last decade or so, has become that the New Deal was really good at getting us out of and ending, even, the Great Depression.

0:05:11.9 George Selgin: And that’s kind of odd because, actually, until about a decade ago, it was pretty universally understood, even by people who are fans of the New Deal in other respect, by Keynesians, for example, that one of the things it didn’t do was bring recovery from the Great Depression, that it took World War II to do that. So I’m pushing back against what’s really a revisionist view, now popular, that the New Deal achieved not just relief in a form, but recovery from the Great Depression, that’s what I’m criticizing, and as I say, that was not a view that needed much criticism a decade or so, ago.

0:06:00.5 Aaron Powell: This might be a really dumb question, but what is the mechanism by which that recovery is supposed to work? That if economic growth has slowed, people are out of work, you can give them money, but that just… That helps them through some, but that doesn’t necessarily get them back to work. In fact, it makes it slightly easier for them, and I’m not saying this is bad, but it makes it easier for them to get by without the work. So when people say the government needs to intervene, the New Deal helps with the recovery, what’s the mechanism by which it gets economic growth going again, as opposed to the mechanism by which it helps people live better during a time of negative or slow growth?

0:06:48.2 George Selgin: Well, in fact, it turns out, Aaron, that the mechanism for recovery does or can involve getting money to people. And the reason for that is that recessions often involve a reduction in spending in the economy, it could be due to a collapse of the money supply, it could be due to people hoarding rather than spending. Both of those things took place in a very big way in the first years of the Great Depression. There was a dramatic collapse of spending, part of which was due to the collapse of the banking system: Many, many banks failed and big chunks of the money supply disappeared as they failed. So the result is that you just had a lot less spending, spending by consumers, investment spending.

0:07:42.4 George Selgin: And when firms aren’t… When people aren’t spending on goods and services, firms, of course aren’t earning revenues and they can’t pay their bills, and then they start failing. And of course, they stop employing people as a way to cut costs and to spare themselves expenses, because they don’t have the revenue to pay their ordinary expenses. So this is essentially what happens often in recessions, and what happens to a more severe extent, what happened in the Great Depression. And once you realize that a lack of spending is a factor driving the economy into depression, then of course, it’s also the case that policies that revive spending, whether that means fiscal policy and handouts or monetary reforms, monetary policy, central bank expansionary policies, what have you, and we can talk about just what helped in the actual case of the Great Depression, those efforts can help the economy start producing again and start employing people again.

0:09:00.8 George Selgin: That begs a question, what is the difference between relief and recovery. And the answer is that if the government is handing out relief checks, for example, just giving people checks, that can contribute to recovery, but the real recovery consists not of the fact that people are getting checks so that they can go out and feed themselves, etcetera; the real recovery takes place when the spending of that money spurs industry to start producing and hiring again, that’s the recovery, so that one gauges recovery that way, and not simply by the number of checks being written.

0:09:38.7 Trevor Burrus: Another aspect of the New Deal story, at least one that I was taught in school, and you still hear a lot, is that Herbert Hoover’s laissez faire free market policies were… Either contributed to the existence of the Great Depression or helped push us further into the Great Depression, and FDR needs to come along with a New Deal package and kind of save us all. Is there any truth to that general idea?

0:10:06.9 George Selgin: There’s some, but not that much. Although it’s not the main purpose of my essay to assess Hoover’s policies or compare them to FDR’s, Hoover does get a really terrible rap. Now, it’s somewhat complicated to comment on Hoover, because in fact, he was a much more aggressive interventionist than any previous president so far as dealing with this kind of crisis was concerned. He really took unprecedented steps, and nevertheless, he was certainly a conservative; anything that smacked of socialism he wasn’t willing to try. He placed a great deal of emphasis on voluntary efforts to revive spending, etcetera, raise wages. He did not want heavy-​handed government; nevertheless, he do a lot, and many of the, or at least a surprising number of the FDR New Deal initiatives were actually mere extensions of ones that, to some extent, had been put into place on a smaller scale or on a more voluntary scale by the Hoover administration.

0:11:35.7 George Selgin: Finally under Hoover, the government spending did go up to record levels, deficit spending, and the deficits were really not that much smaller under Hoover than they were under FDR, I should say. They did grow under FDR, but in both cases, deficit spending, the bigger deficits were despite rather than because of the plans of the two presidents. Both of them tried to balance the budget, and the big deficits were more driven in each case by the economy’s failure to generate tax revenues than by any deliberate increases in spending aimed at promoting recovery. But I don’t want to minimize the fact that FDR’s government did in fact spend more, but the amount of fiscal stimulus during the New Deal has been vastly exaggerated and it in fact contributed very little to recovery.

0:12:42.6 George Selgin: The real driving force for what recovery took place under the Roosevelt administration was monetary policy, and it’s even not the case that it was deliberate monetary policy, it was more incidental monetary developments that helped the economy recover, but not fully.

0:13:06.3 Trevor Burrus: That’s one of the aspects of your essays that I really liked, ’cause I’ve told people time and again that the New Deal was not a fiscal stimulus in any meaning of the way we use it today, and it was not Keynesian, which is interesting. The idea that FDR promised to balance the budget during his campaign, and of course, Keynes himself even criticized the New Deal, so if it wasn’t stimulus, what was the New Deal?

0:13:34.5 George Selgin: There was stimulus, but it didn’t come from New Deal policies. The biggest source of demand growth during, after the banking crisis, which marked the end of the shrinking of the economy and the shrinking of spending, but the biggest stimulus to spending after that consisted of gold flowing into the United States. And the irony is that policy had very little to do with it; rather, although the devaluation of the dollar, which was an FDR policy, and it did help to reverse the balance of trade, rather, the big development that really got the gold flowing into the US after the Depression or after the first phase of it, was the political situation in Europe and the rise of Hitler.

0:14:31.7 George Selgin: It was following Hitler’s rise to power that you started to have more and more gold flow into the United States seeking refuge from the European situation. And that was the biggest cause of growing spending in the 1930s, so of course, at some level, the fact that we had a stable, trustworthy government contributed to that, but it wasn’t a consequence of New Deal policies per se. And those policies contributed very little to overall aggregate demand growth beyond the stimulus that was provided by devaluation, that was probably the biggest contribution of the Roosevelt administration to spending stimulus was devaluation.

0:15:22.9 Aaron Powell: How does this relationship between people bringing gold in and increased spending work? If people have gold in Europe and they’re worried about the rise of Nazism and Hitler’s armies, and so they bring that goal to the United States, which is safer, are they then… Are they just bringing it here to store it here, or are they bringing it here and then spending it, because if you’re just storing it… I’m not sure, I’m not seeing how that would lead to stimulus?

0:15:53.0 George Selgin: Well, the gold, of course, would mostly be coming to be invested in some fashion or other, but what would happen would be that the foreigners would be essentially buying dollars with it proximately and then using the dollars in whatever manner they chose as a way to protect and perhaps augment their wealth. And after the banking crisis and bank holiday, all of the gold had to be sold to the US Treasury, that is the Treasury would obtain gold from abroad, from foreigners, or their bankers, what have you, and they would get dollars, and then the Treasury would give gold certificates to the banks, essentially representing the gold that was coming in. And in this way, the banks would acquire assets and their reserves, the banking system’s reserves, would go up.

0:17:00.4 George Selgin: So it’s gold coming in for dollars, the Treasury, which owns the gold now, issuing certificates that are placed in the Federal Reserve system, and that adds to the reserves of the banks, and then the banks have more reserves with which to expand credit. So that’s the mechanism by which the gold flows added to the US money supply.

0:17:27.8 Trevor Burrus: On the topic of gold, FDR had some, what strike me as very strange beliefs about gold and did some very strange things to the gold supply and legalized ownership of gold. But the other interesting thing about this is he didn’t seem to really have an opinion, a strong opinion about this when he was campaigning about the gold standard, but he, over the course of time he developed these ideas about what to do with gold and how to manipulate it. So what were those ideas? What was his general theory of what you could do to gold and how it would have fixed the economy?

0:18:04.3 George Selgin: Well, you’re right. First of all, Roosevelt didn’t have any strong gold policy in mind before taking office. He did, however, avoid making any commitments to maintain the gold value of the dollar; at least, he wouldn’t expressly commit to it. That itself was unfortunate because it led to, or contributed to a panic just before FDR took the oath of office, which in those days presidents did in March. So in February and early March, at the beginning of March, there was a big run on the banking system as people tried to get federal reserve notes and then they ran on the Fed, and that was what caused the system to break down. Of course, that event itself informed gold policy, mainly because it made it more and more likely that the dollar would have to be devalued in terms of gold in order to restore confidence in the system.

0:19:11.4 George Selgin: It also informed policies that made it illegal for Americans to take gold out of their banks any longer and indeed forced them to return the gold they’d taken. That’s one way to end a run on gold, is you make any illegal to own gold, and they did that. The fancy gold policies, though, were a result of discussions that FDR had with a agricultural economist named George Warren from Cornell. And Warren had this view that if you just change the price, the official price of gold, that itself would suffice to raise the general level of prices.

0:19:55.5 George Selgin: And in some respects there were some merit to his theory, but he understood it in a much more direct mechanical fashion than was actually the case. So what’s true is that if you change the price of gold internationally, that could lead in the long run to some monetary expansion, and through that prices would generally rise, but Pearson was convinced that there was this direct mechanism that just made the price level move in lockstep with the price… The general level of prices move in lockstep with the official price of goal. And that was not a sound theory at all.

0:20:35.9 George Selgin: It resulted in a period when FDR was changing the price of gold in cooperation with the Treasury, the official price, moving it up, moving it down and making it, generally speaking, quite unpredictable with Keynes, Keynes referred to this as the gold standard on the booze, and he thought it was a very bad idea, it simply contributed to the general lack of investor confidence, etcetera, which was not something calculated to help recovery.

0:21:07.7 George Selgin: Finally, FDR settled on a formal devaluation of the dollar, raising its price, official price, to $35 per ounce, I think there was a brief period when it was $34 and then it went to $35, and that was that, and that remained the dollar’s official value through World War, and it was under that standard that we saw those gold inflows that I was talking about earlier.

0:21:34.4 Trevor Burrus: There’s a lot of discussion of this, and when you read New Deal stuff, and given my somewhat poor knowledge of monetary policy, that this idea of devaluation of the dollar… What does that mean at the time, and what was the theory about what it would do overall in terms of prompting recovery, and do we still talk about about devaluing the dollar as a method, is it still something today, or was it a very kind of 1930s thing as a method of some sort of system of recovery or stimulus?

0:22:06.0 George Selgin: Properly understood, devaluation was a 1930s’ thing in the sense that it refers to what you do when you have an official currency that’s linked convertible at a definite price into some underlying money, in this case gold. And so we had a dollar that was equivalent to a certain amount of gold, where the price was approximately $20-$21 an ounce. So what we did when we devalued was we raised the price of gold or lowered the gold price of the dollar, you can look at it either way, but looking at it the second way makes it easier to understand that for foreigners who had gold, the dollar was being made cheap, and if the dollar was made cheap in terms of gold, it was also the case that American goods were being made more attractive to foreigners cheaper, relative to their own goods, at least in the short run.

0:23:11.6 George Selgin: So the most obvious way devaluation could help would be by making American exports cheaper than they were before devaluation, for a while. And of course, this only works if the other countries don’t devalue their currencies at the same time to the same extent. If everybody does it, it’s like the story where everybody stands up in the stadium to get a better view, they all end up without a better view and somewhat less comfortable than before.

0:23:45.2 George Selgin: Anyway, today, devaluation, the term is sometimes used to just refer to a depreciation of the dollar relative to goods and services or to some foreign currency, but strictly speaking, there’s no devaluing the dollar today because there’s no official fixed exchange rate between the dollar and gold or any foreign currency, and therefore, since we don’t have a rate to begin with, we can’t devalue to a different rate as a matter of formal policy.

0:24:17.3 Aaron Powell: What good does devaluing the dollar in the previous way do via this mechanism of exports become cheaper for people overseas to buy, because if I’m a producer in the United States, my ultimate goal is to earn an income by selling what I produce, it’s not to just, I’m not selling it for the sake of selling it, I’m selling it for income. And so if I… On the one hand, the devalued dollar means that I’m selling more stuff because people are buying more of my stuff because it’s cheaper for them, and so I’m bringing in more dollars than I would have been otherwise, but the dollar has lower purchasing power, and so I can’t then turn around and buy as much stuff for quality of living or whatever else with those dollars as I could have beforehand, so it feels like it’s almost like it could be a wash or something, that I’m selling more, but I’m getting less for it.

0:25:19.6 George Selgin: It depends on the situation you start out with. So let’s go back to what a depression or recession involves. There’s a collapse of spending, and initially prices may fall generally, but they may not fall completely, and they don’t fall enough to allow the economy to hire as many people. So you have a period when the price level is high relative to the fallen level of spending. In that case, devaluation, first of all, is helping to revive spending, but it also doesn’t necessarily raise prices that much, because remember that the prices are going to depend on the overall state of demand, so if prices are still are high relative to the state of demand, and you’re raising the amount of demand by exporting, having more net exports, then demand is catching up to a price level that is too high or has been too high, rather than having a situation where demand is pushing prices higher.

0:26:25.0 George Selgin: Do you see what I mean? It’s an example of the more relevant point that if we just have monetary expansion starting from an economy at full employment, it can raise prices, but if we’re starting with a depressed economy, monetary expansion just makes it unnecessary for prices to have to fall so much. And that’s the general principle on which the argument for devaluation as a recovery device rests.

0:26:55.8 Trevor Burrus: Yeah, you write in your essays that, and you mentioned it previously, that the period of ’33 to ’37 does see recovery in some meaningful sense, I think on one of the metrics, the 25% unemployment, down to 17% or 14%, which is still amazingly high, but that’s better. But you said the monetary policy inadvertent, to some extent, inadvertent was the biggest cause of that. Can you elaborate a bit on that?

0:27:24.8 George Selgin: Yeah. The biggest cause of recovery definitely after ’33, at the through of the crisis, was gold inflows. Devaluation was a boost, but it didn’t persist very long. Then when the gold came in from Europe through the mechanism I described earlier, you really did get a boost in overall spending that was persistent. And as spending recovered, so did employment and output, until ’37, not that this was a smooth recovery, but it was definitely a recovery. Now, I want to say a little bit about those unemployment numbers, because there are a couple of facts that have to be kept in mind with regard to them.

0:28:16.9 George Selgin: First of all, those high numbers you cited, which are the ones I emphasize, controversially, those numbers leave the people on relief out; that is, they consider them out of the… They consider them unemployed rather than employed by the government. So obviously, if there are a lot of people on government jobs, when I say relief, by the way, I include temporary government jobs created for the purpose of providing relief, those people… The Work Progress Administration was the big one, but there were smaller efforts, like the Civilian Conservation Corps, anyway, all these people are counted as unemployed in those statistics.

0:29:06.1 George Selgin: Now for certain purposes, you don’t want to do that, ’cause they’re working. If you’re planning trees, you’re working, if you’re building a dam, you’re working. And it’s terrible to refer to people as unemployed in that case. However, if what you’re trying to do is gauge the private economy’s capacity to employ, how many people it’s taking on as a way to understand whether you’re really recovering from the depression, whether the economy is getting healthy again, then the thing that’s of importance is how many people are unable to find jobs in the private marketplace, ordinary permanent jobs, and that’s where those statistics become relevant, that there are other statistics for other purposes.

0:29:52.1 George Selgin: So anyway, measured that way, unemployment did fall a lot during this period. But there’s another caveat. What many people don’t realize is that part of the New Deal policies, particularly the National Recovery Administration policies, that were consequences of the National Recovery Act passed in ’33, there was a lot of labor sharing, which meant that workers’ hours were cut, firms were only allowed to hire workers for a certain amount of time, so that jobs would be shared more widely; that is, if a firm has a certain revenue out of which it can hire a certain number of workers, by giving each worker fewer hours, they could hire some more. And that kind of labor sharing was a big part of, perhaps a quarter, of the total gain in employment. And that’s important because it, again, means that it didn’t quite have as big a recovery in total employment as the numbers of persons employed might suggest.

0:31:05.5 George Selgin: It was not quite that robust a recovery. You really want full-​time jobs for more people, not more jobs divided, not the same number of… Limited number of jobs divided amongst a larger number of people. It’s like the difference between having a shrunken pizza that you slice into more slices versus a bigger pizza.

0:31:36.1 Trevor Burrus: Yeah, you have a whole essay of your series on the National Industrial Recovery Act, which I’ve written about and spoken about a lot, which I think is important, going back to a previous discussion, that the New Deal wasn’t primarily stimulus in the way that we had in 2008, and we’ve had in the pandemic where they’re mailing checks to me, but it was actually a very, very authoritarian attempt to control and micromanage the workplace in ways that I don’t think people really realize. I’ve called many times the National Industrial Recovery Act the silliest law that we have ever passed. Now, there are a lot of really silly laws, but it was insanely silly, and no one would suggest it today, I don’t think. But can you elaborate a little on the sort of mechanisms of the National Industrial Recovery Act?

0:32:23.2 George Selgin: Yeah, sure. The National Industrial Recovery Act is one piece of New Deal legislation that most people still today recognize as not only having not contributed much to recovery, but as actually having hampered recovery and made it less complete than it might have been. And people on the left, as well as on the right recognized this. Bt of course, I want to talk about it in my essay to make clear just what damage it did. The basic idea, there, it was a hodge-​podge, it sought to make everyone better off, but it was a classic case of what Bastiat calls the great fiction of everybody trying to live at everybody else’s expense.

0:33:24.3 George Selgin: So what the NRA did was it gave businesses permission to cartelize and set their own prices and other standards, subject to government approval, and restrict production for the purpose, the hope being that raising prices would help the economy recover. Now, right there, there was a big fallacy. To go back to our earlier discussion, in a recession, it’s the lack of spending that’s causing unemployment and reduced output, and it’s also putting downward pressure on prices. And what you want to do is revive spending, and by the way, in this respect, I’m a Keynesian. Unlike many critics of the New Deal, and I think it’s important for your readers to understand this, my criticisms take for granted that it was desirable to stimulate aggregate demand to boost recovery.

0:34:19.9 George Selgin: I don’t question that, because I believe it, so this is not an anti-​Keynesian set of essays in that sense. If you use Keynesian in that broad way to refer to anybody who thinks the government or policy should uphold or promote aggregate demand, then I’m a Keynesian, fine. But what the NRA did was to treat higher prices as desirable in themselves, regardless of how they were achieved. So instead of contributing to increased spending that would then help prices stop falling and start rising, the NRA boosted prices by arranging all these cartels that would restrict production. Well, that could help the firms gain monopoly prices, but it isn’t helping recovery, because it’s not doing anything about the status, overall spending.

0:35:23.2 George Selgin: And in fact, of course, every firm that succeeded in raising its own prices may have done itself some good, but it harmed all the other firms, not to mention all the consumers. And so when you put all these firms together and tell them all to help… Help them all to create higher monopoly prices, in fact, everybody ends up a lot worse off. The same general legislation created as well policies to help labor by raising the cost of labor, the equivalent of minimum wages and other pricing guidelines, but it was the same general idea. It again didn’t contribute to growth of spending, but it was designed to the jack-​up prices, the idea being that laborers could make more. But of course, some may have made more, but without an increase in spending, firms only still had so much revenue to spread around, so they ended up paying higher wages to fewer workers.

0:36:27.4 George Selgin: And in fact, the NRA, what it did was to dilute the effectiveness of whatever increased spending took place by seeing to it that a smaller number of workers benefited than might have. So instead of having a genuine, a stronger increase in the total amount of employment in the economy, you had a subset of workers who were kept employed and doing better, doing in some cases very well, and others tossed out to rely on relief, more than would have been the case without the NRA. So the NRA undid a lot of the recovery gains that might have been achieved from those gold inflows we were talking about. It diluted their success in promoting recovery. If there had been no NRA, we would have seen more, higher numbers of employed during that stretch of time, we would have seen more output, and indeed I think it’s possible that we would have seen a recovery, a complete recovery before World War II.

0:37:47.7 Trevor Burrus: My interest, of course, stems from the Supreme Court case that struck down the NRA as a violation of the powers of Congress. That case itself is a story that illustrates the strange heavy-​handedness.

0:38:03.6 George Selgin: Yes, the reach of the whole thing, yes. Somebody was allowed to… Some consumer was allowed to pick a chicken instead of being given the run of the mill.

0:38:13.7 Trevor Burrus: And the Supreme Court laughed at them. There’s a part in the oral argument where yes, as you pointed out, this is four Jewish brothers who ran a kosher butcher that was cartelized and imposed restrictions on them that would violate kosher laws, including the inability of the consumer to choose the bird, because there was some sort of theory that people would take the best birds, and it was… I’m not even sure what the theory was, but there’s a part where he says, one of the Justices says, so what is the rule that the government has imposed, or the cartels imposed, you have to read your hand into the coop and pull out the first chicken that touches your hand, and if you don’t do that, you’re violating the law. And then they ask, okay, what if you want to buy half of a coop, can you choose the chickens? And they’re like, no, you just have to split the coop in half, you’re not allowed to choose chickens.

0:39:02.2 Trevor Burrus: And another Justice asks the obvious follow-​up, which is what if all the chickens go to one half of the coop and no longer you can split the chicken coop in half. But this was how insane it was, that they’re trying to explain this law to the Justices of the Supreme Court who 9-0 would strike down the law, including people like Louis Brandeis, who was generally quite favorable toward New Deal policies, so it’s an occasion where the implementation was insane, in that way.

0:39:28.2 George Selgin: In fact, Brandeis’ ideas were… Played an important part in the… Ironically enough, in the development of the NIRA, they informed it, but it took on a life of its own, as these things often do.

0:39:43.4 Aaron Powell: I keep coming back to confusion about mechanisms, and the story that you’ve just told, so on the one hand, we are restricting production, we’re creating monopolies and cartels in order to raise prices, but at the same time, we’re undertaking policies in order to raise wages, so that people are getting paid more, so they have more spending power, but that spending power doesn’t go as far because prices have gone up, and so it seems like, unless I’m misunderstanding something, they’re basically saying, okay, the way we’re going to go out of this depression is we’re going to double everyone’s wages, but also double all the prices, eureka.

0:40:29.7 George Selgin: Well, again, it has to do with confusion of mechanisms and what recovery really means. If you revive total spending, you will, by doing that raise the general equilibrium level of prices. So again, in a recession, what’s happening in a recession or a depression is spending has fallen, so you’ve got a price level, the equilibrium price level has fallen, even if the actual price level hasn’t fallen that much or has fallen only partially towards equilibrium. And to the extent that the actual price level is above the equilibrium, you have unemployment, you have goods that don’t sell, services don’t sell and labor that doesn’t sell.

0:41:26.9 George Selgin: So if you revive spending in that context, it raises the equilibrium price level, and that’s a good thing. On the other hand, you can also raise the equilibrium price level by cartelizing industry, by imposing minimum wages, etcetera, etcetera, without doing anything to increase spending. And then what that does is makes unemployment worse, because you’ve now got still higher equilibrium prices and a spending flow that hasn’t budged, and so it’s worse than what you just described, Aaron, because, for example, when you raise the prices of workers in the NRA, you don’t give workers more purchasing power, you make it so that firms have to hire fewer workers and pay those who still are working for them a higher wage rate per hour. That’s not the same thing as we’re using workers’ purchasing power, it’s making some workers better off, but workers as a whole worse off, in the sense that now more are unemployed.

0:42:38.7 George Selgin: And so the NRA isn’t doing anybody any favors, but it’s not just… If all the NRA did was to raise prices, let’s say it raised prices all around and wages 20%, but it also raised spending 20%, you’d end up in an equilibrium just where you start. But what we’re doing with the NRA is you’re raising prices and wages 20%, and spending, which was already too low to sustain full employment, is now that much less adequate because the prices are so high, so unemployment gets worse. So the NRA really is a vicious policy under these circumstances, particularly, and I think they ultimately… Everybody hated the NRA, by the way.

0:43:23.7 George Selgin: One thing that… To set the record straight on the Supreme Court decision, everyone hated the NRA. It’s true that the administration were determined to save some aspects of it, but the legislation was scheduled to expire and it had very, very few friends. Labor didn’t like it, labor felt really cheated by it, for good reasons, but the firms didn’t like it, because in the end, it proved a bureaucratic nightmare and they were being impoverished by the other firms raising their product prices, so nobody came out ahead. Everyone hated it. It’s the one New Deal policy we should all be able to agree upon as a bad thing.

0:44:17.4 Trevor Burrus: Yeah, but still, ironically, and I point this out a lot when I talk about agricultural policy, the agricultural part of the NRA was essentially, re-​passes the Agricultural Adjustment Act of 1937, which is still… Basically creates the framework for our batty agricultural policies today, it’s still essentially a cartelization framework.

0:44:36.7 George Selgin: Well, yes and no, Trevor, because of the AAA, the original Agricultural Adjustment Act, actually passed before the NRA was a separate act, so it really wasn’t part of the NRA, it was a separate piece of legislation. And it too was struck down by the Supreme Court as unconstitutional, but it was, as you just said, revised and re-​established partly through a new Agricultural Adjustment Act passed in ’37, but, but, as I write in my most recent essay, which is about the AAA, unlike the NRA, which people assume was designed to contribute to recovery, after all, it’s called the National Recovery Act, the AAA, the Agricultural Adjustment Act, actually contributed, may have contributed more to the recovery than the NRA, which detracted from it, and it was designed to.

0:45:44.2 George Selgin: Even though it doesn’t sound like it, the Agricultural Adjustment Act was as important a part of the New Deal recovery program as the NRA. It may even have been considered more important by Roosevelt, among others, and it worked on very different… Some very different principles, but there’s some evidence that it worked because it didn’t work the same way as the NRA did.

0:46:12.2 Trevor Burrus: Well, the legal reason for the… So there was a part of the NRA applied to agriculture, but the legal reason for constitutional law at that time was that agricultural products were inter-​state, so they worked differently, and that gave them their jurisdictional hook which they didn’t necessarily have at that time for agricultural goods in the way that they didn’t have for, say, a laundrymat in Harrisburg, Pennsylvania. But yeah, I take your point about… But we still have somewhat of a system of cartels that work in our agricultural system that they run differently and they’re entered into through kind of voluntary… Marketing agreements and things like this.

0:46:51.2 George Selgin: Well, as I point out, the reason the AAA may have helped, and the evidence here is pretty skimpy that it helped, but the reason, and this was understood to be the mechanism back then, by the way, is that unlike the NRA, which promised to make everybody rich in the same way, the AAA recognized that what it was doing was redistributing income. Now, we know governments can redistribute income, so this is not… This is not a simple fallacy of composition that’s behind the NRA. The idea, very express idea is that, at least proximately, farmers are going to get paid more, and part of that’s going to come out of taxes placed on food processors, and part of it’s going to come from consumers who are going to pay the higher prices for higher agricultural products.

0:47:52.8 George Selgin: But… So how is this going to help? You’re taking from Peter to pay Paul or whatever. How is that going to help general recovery? Well, the theory was, and it’s kind of a Keynesian theory, but again, this didn’t take Keynes, this was all pre-​Keynes, as far as anybody in the United States was concerned, they weren’t referring to him, the belief was, or the hope was that the farmers would have a higher, what Keynesians would call a higher marginal propensity to consume, that they’re going to end up spending so much more compared to what the processors and consumers would have spent if they weren’t paying for this program, that in the end, there’ll be a heightened overall aggregate demand, with the farmers buying a lot more stuff from manufacturers that will ultimately help the manufacturers and ultimately help people get jobs, so even consumers generally end up better off even though the food costs them more.

0:48:56.0 George Selgin: That was the theory and… Take my word for it. If the parameter values are right, you can make this work, okay. Then there’s some evidence that it did work, some evidence, but it’s pretty weak, but what I point out in the essay, which goes back to what you said about the AAA is because the AAA in some fashion ended up hanging around forever, it didn’t go away, as most of the other New Deal programs or many of them went away. Not all of them, of course, the reform ones didn’t. It hung around and it hung around long after it was serving the purpose I just described of aiding recovery, obviously. And I think it’s pretty fair to say that it’s been a very costly program, that it has been regressive, that it has rewarded a very small number of farmers who got the vast majority of benefits from it, and it survived because of the farm lobby, that is those farmers who were enriched by it carried a lot of political clout.

0:50:08.2 George Selgin: So I argue in that essay, in that installment, that while the AAA may have had some benefits, it’s unlikely that any reasonable reckoning of long run and short run costs and benefits of the AAA would come out, would have it come out in the net benefit category.

0:50:32.8 Aaron Powell: We are in a pretty significant economic downturn right now, and it’s not really clear what the recovery from it is going to look like. Looking back at all of this, at everything we’ve discussed today, what lessons do you think we should draw for how we can handle digging ourselves out of the COVID recession?

0:50:56.1 George Selgin: Well, the most obvious lesson, if you ask me, is that we should stop talking about the New Deal as a model for how to get out of a deep slump, any deep slump. So set aside the fact that the current crisis is dramatically different in its origins and even in its make-​up from the Great Depression, they’re completely different, but the point is not simply that the New Deals, that the New Deal doesn’t offer us lessons for today, because this crisis is different. The lesson is that it doesn’t offer good lessons for getting out of any crisis, any depression, because most of the New Deal policies either hurt or didn’t help much. The only exceptions, the only obvious exceptions… I mean, fiscal policy didn’t help because there just wasn’t very much of it.

0:51:57.3 George Selgin: So my discussion of that doesn’t… I don’t provide evidence that fiscal policy doesn’t work or any argument against it, I simply say if you want… If you want inspiration for aggressive fiscal policy, you’re going to have to look somewhere else, because it just didn’t happen back then. But otherwise, the policies that help were devaluation of the dollar, obviously ending the banking crisis, well, we haven’t had a banking crisis. And by the way, ending the banking crisis, I wouldn’t give FDR and his administration that much credit for it, because almost everything that was done to handle that crisis was planned by Hoover’s Treasury team and implemented even by them with several, many of them stayed around to help.

0:52:49.1 George Selgin: And Hoover deserves some blame, because it’s not clear whether he could have moved on his own as a lame duck President, he didn’t think he could close the banks, but I think there was a fair amount of just plain obstinacy on his part. He wanted to get FDR to help him, and FDR naturally wasn’t interested. It’s a long story. In any event, fine, if you want to give FDR and the New Deal credit for ending the bank holiday, alright, I’ll spot people that one. And devaluation did help, as much as gold buffs hated the idea, it did help for a while. And that was it. Otherwise, the big thing that was positive was the gold inflows from Europe, thank you, Adolf.

0:53:46.6 George Selgin: And then there were a lot of New Deal policies that. While they may have helped with regard to relief, and that was good, that was a good thing, I’m not criticizing relief, they did not contribute anything toward recovery. So the lesson is mostly negative, and I wish people would stop talking about having a new New Deal for this reason when we’re talking about crises and recovery and unemployment, because it suggests to me a lack of real appreciation of what the New Deal accomplished and what it didn’t accomplish, and it did not accomplish very much when it came to getting people back into a permanent private sector jobs.

0:54:47.9 Aaron Powell: Thank you for listening. If you enjoy Free Thoughts, make sure to rate and review us in Apple Podcasts or in your favorite podcast app. Free Thoughts is produced by Landry Ayres. If you’d like to learn more about libertarianism, visit us on the web at www​.lib​er​tar​i​an​ism​.org.