Was revaluing gold the best way to reflate the economy in the 1930s?

Selgin suggests immediate devaluation of the dollar would have been better. Roosevelt's gold purchase program, based on George Warren's theory, was a 'hairbrained' approach that didn't work. A confirmed devaluation, as eventually done, led to improvement.

What caused the severe recession of 1937-38?

The recession was a 'perfect storm' of bad policies. Monetary policy tightened with the Fed doubling reserve requirements and the Treasury sterilizing gold inflows. Simultaneously, fiscal policy involved retrenchment and efforts to balance the budget, creating a contractionary environment.

Which economist's views on the New Deal hold up best?

John Maynard Keynes's advice to Roosevelt on dealing with the American depression is considered soundest, particularly concerning regime uncertainty, prioritizing recovery over reform, and criticizing policies like the gold purchase program and NRA.

How did macroeconomists like those from the Austrian or Chicago schools perform in diagnosing the 1930s?

Hayek's policy recommendations were inconsistent with his theories. Early Chicago school economists, like Henry Simons, advocated for public works ahead of Keynes, but Simons's push to end fractional reserve banking was seen as a poor response to the crisis. Irving Fisher was forward-looking with his managed fiat dollar proposal.

Is the quantity theory of money reliable today?

Selgin believes the quantity theory of money is badly misunderstood. While historically showing some correlation between M2 growth and inflation, factors like financial and regulatory innovation, and changing demand for real money balances, have made the relationship unreliable, especially since 2008.

What is George Selgin's ideal reform for the Federal Reserve?

Selgin advocates for an NGDP stabilizing monetary policy, ideally managed by a computer program as Milton Friedman suggested, with a 'night watchman' ensuring no tampering. This 'night watchman Fed' would replace the FOMC to maintain nominal spending stability.

Should more countries dollarize their economies?

Selgin believes fewer countries should dollarize, only those consistently incapable of fiscal restraint or managing exchange rates without hyperinflation or speculative attacks. He argues that for such 'basket case' economies, dollarization is the lesser of evils.

How should stable coins be regulated, especially regarding interest payments?

Selgin argues that stable coins should not be restricted simply because they compete with banks. Regulation should focus on ensuring the stability coin industry itself is reliable, not on protecting existing banking industries from competition. He notes that past stable coin failures highlight the need for sound regulation.

What was the real reason World War II helped end the Great Depression?

Beyond fiscal stimulus, the war changed government attitudes from hostility to cooperation with business, fostering confidence and investment. Post-war, this booming investment compensated for reduced wartime spending, preventing predicted Keynesian depressions.

What are the potential impacts of an AI boom on economic policy?

Selgin thinks policymakers are currently unprepared for productivity-driven deflation. He suggests a gradual shift towards allowing prices to fall, starting with convincing central banks to move away from targeting positive inflation and agreeing on nominal income stability first.

George Selgin on the New Deal and What Ended the Great Depression (live at @catoinstitutevideo)

Q: Did specific New Deal policies like the Glass-Steagall Act help or hurt recovery?

The Glass-Steagall Act, specifically separating investment and commercial banking, was irrelevant to recovery as this separation wasn't a cause of the depression. The Reconstruction Finance Corporation (RFC) mostly hurt, though its recapitalization program was helpful. The Agricultural Adjustment Act (AAA) was detrimental due to its focus on supply reduction.

Conversations with Tyler

News & Politics4 min read73 min video

Oct 15, 2025|4,120 views|81|3

Great Depression Banking Econ Economics Fed Federal Reserve

Save to Pod

Key Moments

TL;DR

George Selgin discusses the New Deal's limited stimulus, the complexities of gold devaluation, and the mixed impact of various policies on Great Depression recovery.

Key Insights

The New Deal significantly underutilized fiscal and monetary stimulus, surprising many who believe it was a large-scale intervention.

Revaluing gold provided a temporary boost to economic recovery, but its effects were short-lived and influenced by external factors like fear of war.

Many New Deal policies, such as the NIRA and AAA, are viewed as having hindered or had negligible positive impact on recovery due to flawed economic reasoning or counterproductive mechanisms.

The 1937-38 recession was a severe downturn caused by a confluence of restrictive monetary policies (doubled reserve requirements, sterilized gold inflows) and fiscal tightening.

While Keynes's advice on combating the depression was generally sound, particularly regarding uncertainty and the need for recovery over immediate reform, his call for increased spending remains a point of contention.

The role of the Federal Reserve's independence is crucial, and its potential erosion under executive control could lead to fiscal dominance and destabilizing monetary policy.

THE LIMITED STIMULUS OF THE NEW DEAL

George Selgin's analysis of the New Deal reveals a surprising lack of modern-style fiscal and monetary stimulus. Contrary to popular belief, the New Deal did not employ large-scale interventions aimed at boosting aggregate demand through government spending or monetary expansion. This approach contrasts sharply with contemporary economic thought, which often associates such crises with robust governmental stimulus measures. Selgin emphasizes that a significant portion of the New Deal's recovery narrative omits this crucial detail, leading to widespread misconceptions about its economic strategy.

GOLD REVALUATION AND EARLY RECOVERY

The revaluation of gold in 1933 is identified as a key, albeit temporary, driver of early recovery. Initial surges in manufacturing output were partly fueled by expectations of the National Recovery Administration's price controls and the stabilization of the banking system. However, the positive impact of gold devaluation itself waned, and subsequent inflows were increasingly driven by geopolitical fears in Europe rather than domestic economic policy. This early boom, therefore, proved unsustainable, demonstrating the limitations of a recovery reliant on external factors and short-term price manipulations.

ASSESSING KEY NEW DEAL POLICIES

Selgin provides a critical assessment of various New Deal policies. The Glass-Steagall Act's separation of commercial and investment banking is deemed irrelevant to recovery efforts, as commercial banks' involvement in investment banking was not a primary cause of the depression. The Reconstruction Finance Corporation (RFC) had mixed results; while recapitalization through direct equity purchases was effective, its initial lending programs and overall expansion often proved detrimental. The Agricultural Adjustment Act (AAA) is criticized for its misguided theory of taxing food processors to raise farmer income and for reducing output through paid cutbacks, a strategy with dubious aggregate demand effects and negative aggregate supply implications.

BANKING ACT OF 1933 AND THE FEDERAL RESERVE

The Banking Act of 1933, particularly its introduction of deposit insurance, is viewed with nuance. While deposit insurance contributed to banking system stabilization and the reopening of banks, its role is often overstated. President Roosevelt initially opposed it, and other factors played a more significant role in restoring public confidence in banks. The Banking Act of 1935's centralization of Federal Reserve power to Washington is seen as a missed opportunity. Despite increased governmental control, the Fed under Marriner Eccles pursued a monetary conservative stance, failing to implement significant monetary stimulus, even as fiscal stimulus was not a priority for the administration.

POLICY UNCERTAINTY AND THE 1937-38 RECESSION

Policy uncertainty is highlighted as a major impediment to investment and sustained recovery. Businesses, uncertain about future regulations and government policies, were hesitant to invest, leading to a collapse in net investment throughout the 1930s. The severe 1937-38 recession is attributed to a 'perfect storm' of coordinated monetary and fiscal tightening. Monetary policy saw doubled reserve requirements and sterilized gold inflows, while fiscal policy involved retrenchment efforts aimed at balancing the budget. This confluence of restrictive measures created a sharp economic downturn.

KEYNESIAN INSIGHTS AND THE END OF THE DEPRESSION

John Maynard Keynes's direct advice to President Roosevelt on combating the depression is considered surprisingly sound, particularly his emphasis on reducing regime uncertainty and prioritizing recovery over immediate reforms. Keynes also critiqued counterproductive policies like the gold purchase program and the NRA. While his endorsement of increased spending aligns with fiscal stimulus, Selgin argues that even without this, Roosevelt's actions, if focused on stability and avoiding harmful interventions, would have been preferable. The war's role in ending the depression is re-evaluated: not just through fiscal stimulus, but by altering government-business relations towards cooperation, fostering post-war investment.

THE FUTURE OF BANKING AND MONETARY POLICY

Discussions on banking systems explore the long-term implications of concentrated banking versus decentralized models and the role of deposit insurance. Selgin argues that government interference, through harmful restrictions and later, the moral hazard of guarantees, has undermined banking stability more than inherent structural issues. Regarding monetary policy, Selgin favors NGDP (Nominal Gross Domestic Product) targeting and advocates for a reformed, potentially more independent Federal Reserve. He dismisses the possibility of returning to a gold standard, citing the difficulty of credibly re-establishing it after government intervention, and views dollarization as a last resort for countries incapable of sound fiscal and monetary management.

Mentioned in This Episode

●Software & Apps

●Books

●Concepts

●People Referenced

Common Questions

George Selgin argues that the New Deal made little use of fiscal or monetary stimulus. Its initial burst of recovery was partly due to the anticipation of NRA price controls and stabilization of the banking system. Later recovery was aided by foreign gold inflows, not solely by New Deal policies.

Topics

New Deal Economic Recovery Gold Standard Chicago School Quantity Theory Of Money Dollarization

Mentioned in this video

bookFederal Reserve Act of 1935

Concentrated control of the Federal Reserve in Washington bureaucrats, allowing more New Deal influence over monetary policy. However, this potential was not utilized due to Marriner Eccles's monetary conservatism.

personDoug Irwin

Considered the great expert on the Smoot-Hawley Tariff, whose opinion is that it was a small factor in the Great Depression.

conceptM2

A monetary aggregate used in the quantity theory of money, whose growth rate is roughly correlated with inflation, though this relationship is complicated by financial and regulatory innovation.

personGeorge Warren

Associated with a 'hairbrained theory' used by Roosevelt for the gold purchase program, which aimed to raise prices by increasing the price of gold.

bookBanking Act of 1933

Primarily known for deposit insurance, which Roosevelt initially opposed. It helped stabilize the banking system but was less important than other factors in encouraging people to trust banks.

bookSmoot-Hawley Tariff

Considered a small factor in the Great Depression, deferring to research by Doug Irwin.

conceptEurozone

Discussed as a mixed bag, with the common currency being positive but offset by regulatory baggage and bureaucracy.

countryLithuania

Selgin advised Lithuania on currency reform in the early 1990s, recommending a currency board backed by eurobonds.

personAlexander Field

Authored work on technical innovation during the 1930s, highlighting the expansion of production possibilities.

bookFalse Dawn

George Selgin's book on the New Deal and its promise of recovery.

bookFalse Dawn: The New Deal and the Promise of Recovery, 1933 to 1947

George Selgin's new book, described as the best on its topic, discussing the New Deal's impact on economic recovery.

bookGlass-Steagall Act

Discussed with its most famous part separating investment from commercial banking. It's considered irrelevant to recovery as commercial banks' involvement in investment banking wasn't a cause of the depression.

personHenry Simons

An early Chicago school economist who advocated for public works and suggested doing away with fractional reserve banking, which Selgin views as a bad response to the banking crisis.

conceptNGDP

Nominal GDP, which George Selgin advocates for stabilizing as a target for monetary policy.

personMarriner Eccles

Appointed chair of the Fed, he was a monetary conservative who did not believe in monetary stimulus, leading to no active fiscal stimulus or open market purchases under his watch.

personJacob Viner

An early Chicago school economist who, along with others, pushed for public works ahead of Keynes.

organizationArgentina

Found this useful? Build your knowledge library

Get AI-powered summaries of any YouTube video, podcast, or article in seconds. Save them to your personal pods and access them anytime.

Try Summify free