In his latest book, UC Davis historian Eric Rauchway places Franklin Delano Roosevelt at the center of a worldwide monetary revolution.
Roosevelt wanted to end the Great Depression in a way that preserved capitalism and democratic institutions. His decision to take the U.S. off the gold standard was key to the country’s economic recovery. But his monetary policy has been given scant credit — until now.
Roosevelt saw recovery as both an economic imperative and a political bulwark against the spread of fascism. Saving capitalism and preserving democracy required a new currency and a new global economic order in which nations would collaborate to manage their currencies rather than compete over a finite supply of gold. He also understood that, through runaway deflation, the gold standard had partially caused the Great Depression.
Within the first days of his presidency, Roosevelt replaced the gold-backed dollar with a new, managed currency. In his first Fireside Chat on March 13, 1933, he announced that a “new currency is being sent out by the Bureau of Engraving and Printing in large volume to every part of the country. It is sound currency because it is backed by actual, good assets.”
Taking the United States off the gold standard in 1933 was an important first step in international economic transformation that culminated with the adoption, in 1944, of the Bretton Woods System — a multinational agreement among the Allies that fixed international exchange rates for managed currencies, established the World Bank, and created the International Monetary Fund for rebuilding postwar Europe.
Story of modern money
By foregrounding Roosevelt’s personal involvement in crafting American monetary policy, The Money Makers: How Roosevelt and Keynes Ended the Depression, Defeated Fascism, and Secured a Prosperous Peace (Basic Books, 2015) changes the way historians and economists understand the United States’ recovery from the Great Depression.
“The personality of Franklin Roosevelt is essential to the story of modern money,” says Rauchway. “And, perhaps paradoxically, his personality is also part of the reason we don’t understand the story as well as we should.”
An earlier generation of historians portrayed Roosevelt as an economic dilettante—an intellectual lightweight who simply stumbled” into a successful monetary policy. Rauchway’s extensive archival research (which included the private papers of Roosevelt and his closest aides) reveal Roosevelt’s “particular kind of goal-driven and highly capable intellect, a kind of intellect that is often infuriating to another, more methodical kind of mind, which wants to be told exactly how things will play out.”
Roosevelt could roll with the political punches in order to reach his long-term goals. In foregrounding FDR’s hands-on approach to monetary policy, Rauchway strives “to show Roosevelt in action, to show precisely what he said, and did, and with what immediate as well as long term consequences.” Roosevelt had a clear vision for global prosperity based on capitalism and democracy, but he achieved those goals with a mix of pragmatism and occasional improvisation.
That nimble approach enabled him to convince British economist John Maynard Keynes that a global shift toward a managed currency was possible. As Rauchway explains, “[Keynes] likewise possessed an intellect comfortable with improvisation in response to circumstances, and was therefore able to appreciate Roosevelt.”
Keynes had theorized that the gold standard was an impediment to global prosperity, and had worked out the broad contours of a new worldwide currency system as early as 1930. But, Rauchway notes, “it wasn't until he saw Roosevelt in action in 1933 that he began to believe that it was really possible, and to adapt his thinking accordingly.”
From “Cash and Carry” to “Lend-Lease”
Yet it would take another world crisis — the Second World War — to bring down the last vestiges of the old economic order. As the Nazi blitzkrieg consumed Europe in 1940, Roosevelt was running for an unprecedented third term as president. Roosevelt viewed Nazism as an existential threat to capitalism and democracy but, out on the campaign trail, the pragmatic president pledged neutrality to an isolationist American public. Behind the scenes, Roosevelt looked for ways to assist Britain in its battle against the Nazis.
Federal law required all international munitions purchases be made in gold under the “cash and carry” policy of 1939. Having exhausted its gold reserves purchasing munitions from the United States, Britain could not hold out indefinitely against the blitz without U.S. aid. After Roosevelt won his third term, he and Keynes aimed to replace cash and carry with the Lend-Lease policy — an agreement wherein the US would “lend” military supplies to the Allies in exchange for “leased” military bases. The value of American manufactured goods — in this case munitions — was no longer tied to the value of British gold.
Roosevelt countered Hitler’s master plan for a Nazi world order with an alternative postwar vision. As Rauchway explains:
“Keynes, taking his cue from Roosevelt, sketched a plan for a postwar, peaceful world economy that would ensure ‘social security’ around the world by permitting nations to manage the value of their currency in keeping with their domestic needs.”
The President articulated this vision in his 1940 State of the Union address, when he outlined a postwar world built on the "Four Freedoms" — freedom of speech, freedom of worship, freedom from want, and freedom from fear. Roosevelt saw freedom from want as a global extension of the New Deal, designed to establish the economic security required for lasting peace.
“Freedom from Want” was more than a wartime slogan — Roosevelt and Keynes willed it into political reality at the 1944 Bretton Woods Conference. Forty-four allied nations sent seven hundred delegates to the picturesque New Hampshire mountain town, where they adopted a postwar economic order built on a system of managed currency and removed trade barriers.
The gold standard and high tariffs had, the previous decade, caused the Great Depression. But the delegates were committed to preventing that history from repeating itself. Although in practice the Bretton Woods system fell short of Roosevelt and Keynes’s grand plan of a global Freedom from Want, the result was 30 years of relative peace and uninterrupted economic prosperity.
The Money Makers does more than explain how macroeconomic theory became a historical reality. Rauchway’s research reveals the raucous and poignant moments that shaped the trajectory of American history. The dour economists who framed the Bretton Woods agreement found solidarity through after-hours carousing in the hotel bar — complete with their own “Bretton Woods” drinking song that ran, “And when I die, don’t bury me at all/Just cover my bones in alcohol.” Such diversions helped the delegates find the camaraderie and cohesion required to craft a comprehensive worldwide accord.
In another vignette, Rauchway narrates a weary Roosevelt’s final days at his Little White House in Warm Springs, Georgia. The night before his death, Roosevelt and his Treasury Secretary Henry Morgenthau recalled their fight against the gold standard over the last 12 years, and their successful campaign to persuade Congress to ratify the Bretton Woods agreement. Through this candid encounter, Rauchway shows what other historians have overlooked or disregarded — that monetary policy was an essential component of Roosevelt’s agenda from his first day in office to his last.
The Money Makers is an academic history aimed at informing contemporary public policy debates. Rauchway began the project in 2008, just as the United States experienced its worst wave of bank failures since the Great Depression. Published on the eve of the 2016 presidential elections, The Money Makers has much to teach policymakers from both major parties.
“In response to the recent economic crisis, our international institutions and domestic governments have done only just enough to avert depression, and not enough to spur a full recovery,” says Rauchway.
“I would like for policymakers to think about that problem not only in economic terms but, like Roosevelt, in political terms—in terms of preserving democracy from fascism.”
Whether one agrees with FDR’s vision or not, The Money Makers is instructive for policymakers interested in the potential of big economic visions to become political and historical realities.
— Loren Michael Mortimer
Learn more about Eric Rauchway at his faculty webpage.