Eric Rauchway on the Great Depression and the New Deal
Dec 1 2008

Eric Rauchway of the University of California at Davis and the author of The Great Depression and the New Deal: A Very Short Introduction, talks with EconTalk host Russ Roberts about the 1920s and the lead-up to the Great Depression, Hoover's policies, and the New Deal. They discuss which policies remained after the recovery and what we might learn today from the policies of the past.

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Explore audio transcript, further reading that will help you delve deeper into this week’s episode, and vigorous conversations in the form of our comments section below.


Dec 2 2008 at 2:18pm


Enjoyed this podcast very much. Was interested to hear of the parallels between Hoover’s and Bush’s approaches to their respective banking/financial problems.

Was also interested in Eric’s view of FDR as much more of a proponent of capitalism than he’s otherwise viewed…and his view of how the New Deal emerged from interactions among the executive, legislative, and judicial branches. The latter was particularly thought provoking because the way FDR is taught, it’s as though he had this master plan of alphabet soup programs that he instituted throughout the 1930s.

It certainly made me want to read his book, and I suppose that’s an underlying goal of any author you interview here.

Steve Spiller
Dec 3 2008 at 10:48am

Russ – I would have liked you to have spent another 15 minutes with Eric Ranchway to explore the FRD policies (if any) responsible for the 1936-37 downturn.

Steve Spiller
Dec 3 2008 at 11:32am

Russ – I found some of my answers in a July 5, 2007 Slate article by Prof. Rauchway criticizing Amity Shlaes book The Forgotten Man.

Eric Vincent Raehn
Dec 3 2008 at 11:20pm

Great podcast! It was very interesting and well worth listening to.

Henry Bowman
Dec 4 2008 at 12:23pm

I must admit that this one one of the shallowest of the EconTalk podcasts I’ve listened to (and I get them all); I was really disappointed. It seems to me that the single biggest cause of the Great Depression (meaning its extraordinary length) was the ridiculous notion that prices must be stable (meaning stay high) as well as wages. Both Hoover & FDR advocated both these absurd policies, yet the podcast only discusses them briefly. And, in my view far too much credence is placed on the views of Keynes.

Our thief-in-chief, Henry Paulson, seems intent upon repeating the mistakes of the Hoover and Roosevelt Administrations.

Dec 4 2008 at 11:07pm

I was prepared for a talk about the FDR recession that started in 1933. I was glad to see at least some discussion of the events that lead to the depression. However, I’m curious that Calvin Coolidge is never discussed. He was president from 1923 to 1929. What of his policies and their relation to the onset of the depression?

Russ thanks for getting a guest with opposing views/ perspectives.

Dec 6 2008 at 1:17am

As a regular listener to econtalk, I have to say this one was a bit disappointing, in that I didn’t know much more about the depression’s causes and the reasons for its persistence than before, and it’s not clear to me what Rauchway has added to the account. The takeaways seem to be:
-Trade barriers contributed
-Loss of faith in the banking system led to runs and vicious cycles of credit contraction, business contraction, unemployment, etc.
-The various FDR programs were ad hoc and it’s unclear whether and how much they contributed to alleviating the depression.
-Lack of safety nets exacerbated things. (This is such conventional wisdom that it begs to be questioned.)
-It’s unclear why the depression ended, except I think Rauchway hints that conscription relieved unemployment–hardly a surprise.
All this is pretty much conventional wisdom isn’t it? As for Rauchway’s view that Roosevelt “saved” capitalism by not rejecting it, I remember that was one of the first things I learned from a student taking econ 101 (or was it 102?) before I’d taken any econ at all.
Did I miss something?

Daniel Klein
Dec 6 2008 at 7:12pm


Informative and enjoyable, but I regret that the discussion neglected some of the stronger arguments against the aggressive interventionism of the 1930s.

Have you ever had a debate? I’d love to hear a high quality debate on the 1930s.

interested observer
Dec 8 2008 at 6:14am


Thanks for all the great work. Very enjoyable.

You often mention in your podcasts that a person could learn to think like an economist by reading a handful of blogs. I am familiar with EconLib, Cafe Hayek and Marginal Revolution; are there any other economic blogs you could recommend for the economically curious?


Dec 8 2008 at 7:31pm

I second Dan Klein’s debate request

Have you ever had a debate? I’d love to hear a high quality debate on the 1930s.

Dec 10 2008 at 4:08pm


Great podcast. Very enjoyable.

I do have one response to something you said to him during the discussion. It was in response to the idea that the government was trying to get the banks lending (as they are today). You commented that banks were there to make money and had no social obligation to lend.

I disagree. They are to lend, especially in a society where lending is how most of commerce takes place. If they are given help by having their “assets” purchased, then they need to lend. People put money in banks to be safe. Investment banks are another thing but banks have an obligation to lend AND protect what the depositors place under their care.

Now, I think this model of running society (debt and consumption based) is totally screwed up but it is what we have(for now). Under this model banks ARE obligated to lend. Thats what they do. They are as important as doctors and nurses providing health care.

Dec 12 2008 at 10:26pm


Good podcast. I think the guest, Rauchway, put a little too much faith in central planning. I disagree with Rauchway’s assertion that FDR saved capitalism by mixing it with socialism. That doesn’t make any sense.

Nonethless, I do a agree with Rauchway and your sentiments that the timing of World War II makes it to hard figure out how the country got out of the Great Depression.


Comments are closed.


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Podcast Episode Highlights
0:36Intro. First of a number of podcasts on the Great Depression. Back to the 1920s, run-up to the Depression. Have to go back to 1919. New system of debt created after WWI. Channeling John Maynard Keynes's view of the world, and the Treaty of Versaille. Before the war, economic utopia, capital investment, people moved fairly freely, first time in history for Malthusian fetters to be lifted, export labor and manufactured goods, import food stuffs. War puts pay to all that. Reparations. What's not in the Treaty is any attempt to reconstruct Europe or readjust the systems of the old world and the new. Results predicted: Depression predicted that men and women will overthrow civilization. Long historical perspective: what would have happened had there been a Bretton Woods settlement and a Marshall Plan after WWI? Could we have avoided the Great Depression? On its merits, answer might be yes; political plausibility nil.
4:51Integration and globalization missing at the time. Too many deaths from WWI to create a Marshall Plan post WWI. What happened to capital flows and borrowing in the 1920s? WWI was a watershed for capital flows. Before WWI, United States was the world's great borrower; afterwards, creditor. Before the war, United Kingdom was the great creditor; money was lent to push out the frontiers of new nations, railroads, fencing, etc., so with the new production the loans could be paid back. WWI borrowing was instead destructive, not much money to repay the loans. On net, everybody owed money to the United States in the 1920s, but with so many killed and so many fields destroyed, little wherewithal to repay. How did the 1920s proceed? A few good years for America. Country least touched by the war. New tariffs and barriers raised, little foreign competition. World system where nobody could sell to the United States or go to the United States, or at least very few people; no way to relieve the pressure. Countries relied on American lending. Apparently great times in the United States, though. Much as the world system of debt flipped in WWI, American attitudes about debt flipped. Doubling of debt after WWI; Americans willing to buy on credit after WWI. GMAC set up. Beginnings of our modern consumer culture. Interesting parallel to the last decade. In last part of the 1990s as stock market doing extremely well, people wanted to consume some of that paper wealth, smooth their consumption stream. Borrowing in and of itself is not irresponsible--it's borrowing what you can't pay back. Stock market run-up of that time probably gave people the confidence that they could repay their debts. Maybe that would have been fine in the long run had other things not occurred. Same for foreign debt. Might have been fine. Dawes settlement. Smooth-Hawley Tariff. Restraining immigration also closed off the country. Brinley Thomas. Perception at the time was that immigration restriction was placing a strain. Tariffs in the early part of the 1920s. United States has a recession or downturn right after WWI, Wilson interregnum, Republicans, victory for Harding, reaction against the red scare, going back to normal. Restoring old standbys of Republican stance. Emergency tariff act, immigration act. Smoot-Hawley in 1930. Tariffs rising around the world, League of Nations tried to get agreement to keep tariffs down, no dice.
14:06First chilling event of the 1920s was the crash in October of 1929. Arguments that it was precipitated by Fed's deliberate efforts to curb speculation; doesn't like the idea that bank money is being used to buy investments on Wall Street. Raise interest rates, first in 1928; becomes more enticing to invest in the United States. Followed by drop in consumer spending. Immediate transfer via the uncertainty mechanism to the real economy. Parallel, recent drop in automobile purchases; people afraid they will lose their jobs; banks afraid they will lose their jobs and be unable to pay the loans back. Strange that Treasury Secretary Henry Paulson is angry about that. Nice parallel with the 1930s. Hoover administration created the Reconstruction Finance Corporation in 1932, similar to the Troubled Assets Relief Program (TARP). RFC originally going to lend money to banks to prop them up. Realize that this is not going to work and they have to recapitalize the banks. Hoover doesn't like the idea of buying bank stocks. We recently went through in a few weeks what we went through from January 1932 to March 1933 back then. We sped it up. The speed discomfits consumers. Banks now are rather cautious. In the 1930s, Jesse Jones got frustrated that the banks weren't lending; RFC said it would end, only to find that there weren't enough qualified borrowers. Maybe we'll recover much quicker too. Uncertainty about what may happen next is offsetting.
19:12Back to Hoover. He signs the tariff act, with some zeal. Contrary to the myth that he was a laissez faire ideologue. Not a stand-idly-by guy. Became increasingly desperate through 1932. Not the same as saying he was a proto-New Dealer. There had been recessions before. At some point you have to say Hoover should have been doing more. Hoover tried to coordinate businessmen to prevent a drop in wages. Ineffective, can't get enough businessmen to agree. Get around it by laying people off--pay higher wages but hire fewer people. Unemployment was about 25%, annual figures: just shy of that in 1932, about that in 1933. Tension, but no Keynesian economics yet since The General Theory wasn't written till 1936: unemployment so wages have to fall to entice firms to hire workers; but if people don't have jobs, economy won't recover, people don't have any money to buy things so firms have no money to pay for more employees. Circular flow of macroeconomics understood and hard to navigate politically. Difference then vs. now: no unemployment insurance, no deposit insurance, no old age pensions--state level and some private stuff, but tapped out by 1931 or 1932. Agricultural difficulties of the 1920s also used up some of these resources. People drew money out of their savings, putting pressure on the banks. Banks already suffering because foreign debt was going into default; stock related debts going into default; municipalities and states going into default. No brake, no way of softening the blow. No deposit insurance, hence runs on banks. Banking system begins to collapse. This is where the stark contrast is traditionally drawn between Hoover and Roosevelt. Hoover doesn't do anything. Savings just vanish, no recourse. Lack of confidence in the system with no deposit insurance, people wondering if their bank will be next. Data are elusive even when carefully measured. Great Depression was a great spur to our collection of data, mostly a boon. Thinking about 1894, worst depression before the Great Depression, 40 years before, somewhat fresh in people's minds, pretty horrible, don't have good measures. What happened to banks in 1894? Pressures on banks. Controversy over how bad the unemployment was. Famous story about Henry Adams swooping back to save the family fortunes. Nathan Strauss handed out private relief, mitigating problems in New York. Back to Hoover, bank failures. Can always rely on a good economic historian to reconstruct. Gary Richardson, which banks failed. What else did Hoover try? RFC, came later, cheerleading, businessmen's conference, tariff, contraction of the money supply which you can't lay at his feet--Federal Reserve at fault for that. He does increase spending. Limited by institutions and circumstances. Federal government wasn't big enough to have a big effect. Tried to back increases of public works by working with the states. Too little too late, not enough stimulus.
30:19New Deal. Hoover gets booted out in November of 1932. Bryan Caplan, EconLog, uncovered Hoover's last speech. Last time that a President would be inaugurated March 4, long lame-duck period. Roosevelt right away closes the banks. Bank holiday. Urged by advisers. Allows officials to audit the resources of the banks and shutter those that are not sound. Restores confidence in the American banking system. Sets country on the road toward deposit insurance. FDIC, Roosevelt originally against it. Has had a good run. George Selgin podcast. Psychological: some banks stamped as fine and others as not fine. United States goes off the gold standard. Roosevelt walks the dollar in an erratic way down to $35/ounce, pegged in January 1934, stays there through 1971. Some economists will say that alone might have been adequate to reverse the downturn. Stabilized banking system, devalued dollar, attracts deposits back into the banking system, dollar more attractive as a foreign investment, attracting foreign money back in 1934, increasing afterwards. Argument is that that alone is enough fuel to the recovery fire. May be true, hard to know; not a lot of episodes to compare. Even if it were true, what do you do with a crippled economy? Underlying problem much deeper. Half those who have jobs are job-sharing and only have part of a job. Lots of people depend on them for food. Lots of people going hungry or starving, don't want to wait for monetary policy to trickle down and take effect. Right now, we are in nothing like the straits we were in in 1933, so we shouldn't be acting like it is 1933.
37:19Roosevelt put in office to do something; proceeds to enact a wide range of stuff. Some passed, some ruled unconstitutional. Hayek and emergence; quote from book. Flavor of scope of what was tried. Important the extent to which the New Deal is not something that springs from the brain of Franklin Roosevelt. Comes out of conflict between Roosevelt, Congress, and the courts. Have to divide up New Deal into bits. Banking legislation we've done. Relief is key element, proto-Keynesian bit. First feature: plan for recovery by putting the government into the mix. Managerial efforts were not created for the purpose but were left-over policies that were hanging around for previous two decades. Farmers had long wanted protective tariffs, and finally got it. Industrial sector, mechanism hanging about, modeled on cooperation during WWI; series of boards for each industry where representative of government and businesses meet and craft codes for each industry. That's the National Recovery Administration. Real effect is not measured by size of employees, but how big was it? NRA is viewed by economists as a terrible idea in principle. Trying to raise prices and wages at the same time, which is going to get you nowhere in terms of recovery. Second, even if implemented perfectly it would be a problem, but it was implemented imperfectly. Lots of cartel boards, rarely with consumer or labor representatives, rarely get a code written. But it is part of the psychological ambiance of the era, waved about as a success. Didn't get going till summer of 1933, through latter part of 1933 great deal of hope for it. Martial metaphors, logo with blue eagle, businesses encouraged to display the logo. Falls apart quickly when it becomes clear it's not doing anything. Moribund in 1934, declared unconstitutional in 1935. AAA, farm policy, killing pigs (shoats) to keep prices high, also declared unconstitutional. Comes back under guise of soil conservation, sustainable production. Certain bits of the NRA that were perceived to work were kept. Unions legal, antitrust. 1935 gets established as the Wagner Act. Consumer voice idea kept, consumer organizations outside the government as a check on government. Final and most important phase in New Deal, policies adopted under the heading of "countervailing power" (John Kenneth Galbraith). Wagner Act: instead of having the government do something, you recognize unions bargain with management and take care of things like wages themselves. Policies designed to get around the supreme court's concerns. TVA, South will plan for itself; the West; same for Social Security, people can bargain for themselves. Federal government should enable people to do things for themselves.
47:48Birth of the mixed economy, attempt to try to allow market forces to work with some pushes and shoves without central control by government. Social Security at the time was very small. Ultimately became an important social program, but at the time of its start in 1935 it was mostly symbolic. Not important as a recovery policy. Important as a reform policy, an effort to make future downturns less severe. Unionization of the private sector has fallen steadily from 1955 to the present, now under 10% of the private sector work force. Era lasted about 20 years, then made less important by private forces rather than government attempts to reduce them. Taft-Hartley, about 1948, just after WWII, rolls back some of the guarantees of the Wagner Act, limit power of collective bargaining. Unions help the people who are unionized, raising wages higher than they would otherwise be, which harms those looking for work. If a lot of unemployed, want to have low wages so a lot of companies want to hire them. But contradiction: want to help those who already have jobs. Wide variation across regions in what would be called a living wage, so Federal wage-setting problematic. WPA, created 1935; Roosevelt reluctant to have a Federal relief program. Attempt to regionalize wages, but very rough, so some people benefited greatly, others did worse. Myth that Roosevelt was a great deficit spender, but he was very reluctant. In 1937, begins cutting back on WPA; Keynes wrote him a polite letter saying he probably shouldn't have done that. New downturn. Around 1938, people start thinking they should be Keynesians; but not really Keynesians: marginal tax rates had increased under Hoover. Look at composition of Federal Revenue: about half from excise taxes, sales tax, highly regressive form of taxation. Not hugely redistributionist program until after WWII. Under WPA, murals painted, bridges built. Supreme Court does become more accommodationist.
56:30What is significant about the New Deal for the Great Depression? It set in motion things that stayed with us for many years, and some still in motion. What other things mattered for the 1930s themselves? Thing to remember about the New Deal: has to be seen in an international context. Soviet communism and European fascism as the solutions to the demise of capitalism in the Great Depression, looked like the alternatives around the world. Hitler's time correlated. Roosevelt doing something else, sometimes to the detriment of the policies basis, but it seems to go forward. You could reckon with the depression without throwing away capitalism. Little you can say about the period without the specter of war. If you don't have Hitler, do you still get that investment? After recession of 1937-38, get a more Keynesian Roosevelt administration. If they had run bigger deficits would it have been different? We don't know because they were preparing for war. Have recovery to pre-crash employment levels during the war, but not private sector. And it was 12 years later. Things are getting better but hard to know if it was the war. Hard to generalize, one data point. Robert Barro podcast on disasters. These things come along once or twice a century, leading to ex post story-telling. People still care about and write about what caused and got us out of the Great Depression. Public myths change over time: Roosevelt got us out, war got us out.

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