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Federal Reserve and Banking: A Brief History

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Read Mike Konczal’s review of multiple recent books dealing with the intersection of the Federal Reserve and the banking system.

PEOPLE MAY REMEMBER that in his 1933 inaugural address, Franklin Delano Roosevelt told us “that the only thing we have to fear is fear itself.” What they might not remember is that Roosevelt also described “an adequate but sound” currency as one of his core “lines of attack” against the Great Depression. Adequate was key there; putting it first, above sound, was a clear signal that Roosevelt would no longer let the supply of gold determine the amount of currency in circulation. Two days after that address, Roosevelt suspended the convertibility of money into gold, effectively taking us off the gold standard.

The story of how this happened is told in excellent detail by Eric Rauchway’s The Money Makers. Rauchway provides both the particulars and an entertaining story about the connection between the high-level monetary ideas of Roosevelt and Keynes, and how they acted on them. The first “fireside chat” features Roosevelt arguing that there is something “more important than gold, and that is the confidence of the people themselves,” and the economy has never been the same since.

That it is portrayed as a clear decision consistently executed puts Rauchway’s account at odds with much of the recent New Deal scholarship. Historians tend to focus on the flailing and contradictory nature of what the New Deal wanted to accomplish with its economic policy. Economist Alvin Hansen stating that he doesn’t “know what the basic principle of the New Deal is” in 1940, and the more generous “chaos of experimentation” formulation of the historian Richard Hofstadter, tends to characterize the literature on New Deal economic policy.

Worse, tomes on the New Deal often spend a few sentences on this crucial decision to go off the gold standard, focusing more on government spending. When people looked to the New Deal to deal with the Great Recession, what to do about money was sorely lacking in public discussion. Rauchway provides a useful corrective here, showing that the major decisions weren’t an accident, but a conscious decision emanating from political commitments that would continue in the postwar order built at Bretton Woods.

Plenty to chew on throughout.

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