My excellent Conversation with George Selgin

Here is the audio, video, and transcript.  Here is part of the episode summary:

Tyler and George discuss the surprising lack of fiscal and monetary stimulus in the New Deal, whether revaluing gold was really the best path to economic reflation, how much Glass-Steagall and other individual parts of the New Deal mattered, Keynes’ “very sound” advice to Roosevelt, why Hayek’s analysis fell short, whether America would’ve done better with a more concentrated banking sector, how well the quantity theory of money holds up, his vision for a “night watchman” Fed, how many countries should dollarize, whether stablecoins should be allowed to pay interest, his stake in a fractional-reserve Andalusian donkey ownership scheme, why his Spanish vocabulary is particularly strong on plumbing, his ambivalence about the eurozone, what really got America out of the Great Depression, and more.

Excerpt:

COWEN: But once we revalue gold, as you know, starting in 1933, you have manufacturing-output growth rates of 7 percent to 8 percent until we screw it up later on with some disinflationary pressures. How much better could we have done? Wasn’t that a pretty good performance?

SELGIN: It was pretty good, but it didn’t last very long. In fact, the New Dealers knew that it wouldn’t last very long. There are a couple of reasons why.

First of all, there was a big burst of output that was connected to the expectation that the NRA, the National Recovery Administration, was going to be coming into effect, because it was one of the early New Deal measures. It was going to artificially raise prices through controls. There was a boom that was based only on manufacturers’ desires to jump the gun and buy inputs and produce inventory before their own costs went up. That was part of the story.

Of course, when you’re coming out from the deepest depths of a depression with a banking crisis and all that, you would expect rather rapid growth to follow from the stabilization of the banking situation itself. I don’t want to deny that there was genuine progress during those early months of the New Deal, and I don’t want to deny that the New Dealers deserve credit for much of it, but it didn’t last. Of course, we all know it didn’t last.

Beyond that first period, once the NRA and associated programs for price controls kicked in, things started to slow down very rapidly. What kept the progress going after that — though at a slower rate — was mostly gold starting to rush in from Europe. It was rushing in only initially because of devaluation. After that, it was mostly rushing in because of fears of the consequences of Hitler coming to power and the possibility of war breaking out.

That’s the story of the early phase of the New Deal: a good start that didn’t last that long, except as a result of help from abroad that was quite unintentional help.

COWEN: Was revaluing the gold price the best way of reflating the economy? Because there were many proposals at the time. You shut down the domestic gold market as well. Could it have been done better?

SELGIN: Yes, it could have been done better. I think that what should have happened was immediate devaluation of the dollar. It was clear by the time Roosevelt took office, the gold standard, as it had been, had to be at least suspended because the New York banks had run out of gold essentially. That was not something there was much choice about.

Then the question was, “Okay, what are we going to do going forward?” As I said, what I think they should have done was to just plan on a devaluation of the dollar, get it over with as quickly as possible. You don’t announce that plan before you’ve suspended gold payments because that’s just going to make the run on gold worse. Once you’ve suspended, then you can go ahead and proceed with the devaluation.

What Roosevelt did was to engage in this crazy gold purchase program for quite a few months, based on a harebrained theory by a fellow named George Warren, who was very influential. They toyed with the price of gold. The theory was that if you raise the price of gold, other prices will start going up. Didn’t happen. Eventually, after many months, general prices had hardly risen at all.

Finally, Roosevelt picked a value for the dollar, a proper devaluation. Confirmed it, put it into effect, and at that point, things started to improve. That’s what should have happened.

By the way, this is as good a time as any to mention, this is what Keynes would have recommended and did recommend. He scolded or criticized Roosevelt for following Warren’s theories instead. I think that on this and many other scores, Keynes’s advice about dealing with the Depression was actually very sound. The myth is that Roosevelt was following it when, in fact, most of the time, he wasn’t.

Recommended, informative throughout.  I am happy to recommend George’s new and excellent book False Dawn: The New Deal and the Promise of Recovery, 1933-1947.  Plus George now owns a rather large number of donkeys…