Don't Listen to the Naysayers -- The New Deal Helped to End the Depression


Anthony D'Agostino is author of "The Rise of Global Powers: International Politics in the Era of the World Wars" (Cambridge University Press, 2012).

Europe and the United States are now four years into the slump and deepening financial crisis that followed the crash of 2008. Efforts to find a way out have been limited by monetarist notions that dominated the boom years and the central bank response to economic stagnation has been restricted to repeatedly recapitalizing the big banks, printing money, and hoping for a return of confidence. The globalist ideological consensus has been an additional burden with its simplistic notions of internationalism. For the last few decades progress has been more or less defined in terms of getting beyond the Westphalia model of great states, presumably as part of a global process that the EU and the euro were thought to be leading by example. This view was ironclad during the days before the crash of 2008. Now it is attached incongruously to a tragic view of the Great Depression that produces a potted history in advocacy of what amounts to a “withering away of the state.” These ideas are making recovery more difficult and perhaps impossible.

The first generation of revisionist historians who reviled the New Deal and opposed the entrance of the United States into Word War II already provided the elements of the argument. They insisted that the New Deal had deepened and prolonged the Depression, that it had failed before the world in the recession of 1937 and had only been rescued when Roosevelt decided to stop being Dr. New Deal in order to become Dr. Win the War. The New Deal was in this view part of a general recourse of the world to national economy in the face of the slump, to “beggar thy neighbor” policies that drove the world to war. History (presumably) shows that economic remedies can only be applied globally.

Is this what history shows? In fact, the New Deal provided a steady recovery of national income to pre-slump levels by the start of the war in 1939, with only a little caesura in the recession of 1937. There would seem to be no reason to doubt that U.S. public works spending was an effective multiplier and much reason to question the current view of critics that the Obama stimulus of 2009 had a “negative multiplier.” Roosevelt’s rejection of what he considered an international deflation line at the time of the London Economic Conference of 1933 was not prompted by dogmatic protectionism, but by the realization that adherence to economic policies friendly to the French-led gold bloc would make recovery impossible.

Civilian Conservation Corps camp, 1940. Credit: National Archives

His view was not so different from that of the British, who had gone off gold and were pursuing their own policy of national economy though Imperial Preference. It was the French view that proved to be untenable even before the dramatic rise of German power. A gold drain to the United States, in addition to supplies from the Soviet Union, strengthened confidence in the New Deal. The gold bloc fell when the French strike wave of June 1936 resulted in capital flight. Something similar happened in 1968 after the May/June profests and in 1981-3 when François Mitterand initiated his socialist policies. The end of the gold bloc was the final defeat of the old orthodoxy. Yet the United States did not try to take advantage. Instead it signed a Tripartite Agreement with Britain and France. This seemingly ineffectual pact nevertheless prefigured the new international financial cooperation of the Bretton Woods system. It was only World War II that stood in the way. In fact, going off gold resulted in a later return to gold. Economic nationalism led to a new internationalist synthesis.

The choice was not really between national or international policies but between stagnation and recovery. National economy produced or abetted many things, including aggressive expansionism of the “have not” powers, Germany, Japan and Italy. But for the others it was the road to survival. It certainly implied a kind of “military Keynesianism.” The British built bombers, the Americans built carriers, fighters and bombers. But they did not want or cause war. On the other hand, the proponents of national economy who did want war, the “have nots,” would have caused trouble even in the most perfect international financial regime. Resisting them would have been entirely impossible if the democracies had still been punishing their economies in the style of Hoover, Snowden, Bruning, and Shidehara in order to save the gold standard. As austerity came up against social resistance and radicalization, recourse to authoritarian measures would have seemed necessary and would in turn have promoted a sympathetic view of fascist states. Austerity is only the first stage with much worse to come.

As Mark Twain would have said, there is a certain rhyme today. In the place of the gold bloc we have the eurozone. The lesson would seem to be: Don’t repeat the fate of the gold bloc pursuing Malthusian austerity and class war to the point of collapse. It is not a question of international discipline but of recovery. Has everyone forgotten that the state can help? Creation of money by quantitative easing has worked a miracle to revive the market, if not the real economy. Can it not do something similar for the real economy? Has the West developed a dogmatic fear of practical initiatives that will bring recovery and bolster democracy? It would all seem to be a question of executive leadership. What would Teddy Roosevelt, or FDR, or the “state socialist” Bismarck do?

Do we really need the Western states to sink into domestic contention like that of the Weimar Republic, with extreme programs on the left and right drawing off all the votes of the parties of the center? Something like this is already happening in Greece, with the rise of Syriza on the left and Golden Dawn on the fascist right. While we contemplate Weimar Greece, or Weimar Europe, the only response is the monetarist one. Everyone looks toward it hopefully. But along with its little miracle, QE also incentivizes grander global speculation and conjures up a vista of bank recapitalizations unto the death, that is, unto the next crisis, the Weimar syndrome, and the decline, not yet of the world, but of the western part of it. More successful powers are going their own way in the spirit of national economy. Do they know something that we do not?

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