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Roosevelt and Keynesian Economics

Roosevelt’s New Deal is most peoples’ idea of Keynesian economics in action. Sir Vince Cable describes how this is and is not the whole story.
Roosevelt’s New Deal is most people’s idea of Keynesian economics in action. The energy and activism of Roosevelt’s first and second periods as President– that’s 1933 to 1940– turned the United States around from the depths of the Great Depression, when it had collapsed by almost a third. The New Deal cemented Roosevelt’s political reputation as one of the greats, with Washington and Lincoln. And it built a powerful coalition around the Democratic Party, which lasted for decades. And that experience cemented the reputation of Keynesians in the United States, at least, in the Democratic Party. Uncomfortably, for the story, however, there is little evidence beyond one short meeting that Keynes had any direct influence on President Roosevelt’s thinking.
And the principles of Keynesian economics are scarcely apparent in his budget policies, but are so often with political ideas. It’s the narrative, rather than the reality that matters. Roosevelt was part of a political dynasty. His uncle Theodore was President. He entered politics young. He ran as a Democrat vice presidential candidate and became governor of New York. The United States under a succession of Republican presidents, Harding, Coolidge, Hoover had experienced boom, financial crash, and then depression. The time was right for an active president willing to try unorthodox measures to stimulate the economy and help millions of struggling Americans.
Roosevelt marked his victory in 1932 and succession to power with a 100-day programme of action, a radical reform of the banking and wider financial system, including the Glass-Steagall Act, which split the big and powerful banks, strengthened labour rights, and the minimum wage, a suppression of cut-throat competition, big job creation schemes, mortgage relief, and to promote growth a series of bigpump priming investments, like the Tennessee Valley Authority. Fiscal policy, however, was orthodox. And Roosevelt tried to balance the budget and indeed, introduced some pretty popular cash saving measures, such as cutting the benefits of war veterans.
Keynes did seek to influence Roosevelt through an open letter in which he advocated borrowing to finance public investment and aggressive monetary policy to achieve low interest rates. So this wasn’t easily achieved in America’s very fragmented system of banking. There is, however, no evidence that Roosevelt was influenced by this and indeed, he boasted of his lack of knowledge of economics. Keynesians argue that Roosevelt’s failure to depart from orthodox budget policy explains a relapse into recession in 1937, albeit, after an impressive recovery, which had cut unemployment from 25% to 11% and grew the economy by around a third. Elected for a second term, Roosevelt extended relief programmes, strengthened union rights, and built on his earlier programmes.
It’s difficult to assess the effectiveness of his economic policies, since he lost control of Congress at this point, and some of his key programmes were blocked. Still the facts speak for themselves. By 1940, the economy had grown 68% from 1932. And despite a fairly conservative approach to the budget, net public debt had grown from 16% to 40% of GDP. And wartime mobilisation under Roosevelt’s leadership completed the recovery. One of Roosevelt’s legacies is what could be called American Keynesianism, which influenced the liberal wing of the Democratic Party and was absolutely decisive in the early days of the Obama presidency in using deficit financing to combat recession after the 2008 financial crisis.
The other major economic legacy of Roosevelt, and one to which Keynes made a major contribution himself, was the attempt to construct a global economic order at the 1944 Bretton Woods conference. It was built around the International Monetary Fund, the World Bank, and though it had a bumpy start, the General Agreement on Tariffs and Trade. And this economic corridor was to run in parallel with the United Nations. And until the 1970s, when the fixed exchange rate system buckled under pressure and the first OPEC oil shock provided a new kind of challenge, the Bretton Woods system played a massive part in ensuring post-war recovery within an international co-operative framework.

The New Deal cemented Franklin D. Roosevelt’s political reputation as one of the ‘greats’ along with Washington and Lincoln. It built a powerful coalition around the Democratic Party which lasted for decades. Further, the New Deal is also most peoples’ idea of Keynesian economics in action.

Sir Vince Cable tells the story of President Franklin D. Roosevelt’s efforts to stimulate the economy and help millions of struggling Americans in this film. While near synonymous today in most people’s minds, Vince shows the only limited ways in which Keynes influenced President Roosevelt and his economic thinking.

Recovery from the Great Depression is attributed to many factors including President Roosevelt’s implementation of some Keynesian economic ideas. Please read Keynes’ Open Letter to President Roosevelt and pay particular attention to what advice Keynes shares with the President. Discuss in the comments below whether you think President Roosevelt followed Keynes’ advice and whether we should attribute the success of the recovery to Keynesian economics.

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The Politics of Economics and the Economics of Politicians

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