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The story of the Great Depression is well known. It started with the stock market crash; Herbert Hoover dithered as things got worse; then Roosevelt came in with his New Deal and solid Keynesian principles and saved the day. Cue the old adage: It’s not what you don’t know that gets you in trouble; it’s what you know that isn’t true. Every part of the well-known story about the Great Depression isn’t true.

Start with the stock market crash. It is very difficult to find any connection between the stock market crash in October 1929 and the onset of the Great Depression a year later. Stock market crashes still get lots of press, but then nobody pays attention to what happens in the months after the crash. By April 1930, the S&P 500 had risen back to the level it was at in May 1929. (The same bounce back happened after the stock market crash earlier this year.) As Milton Friedman and Anna Jacobson Schwartz documented, the real culprit causing the Great Depression was the wave of bank failures beginning in 1930, leading to a money supply collapse.

What about the cure for the Great Depression? We also should not be too hasty to think the New Deal had a positive impact. As George Selgin argues in his new book, False Dawn: The New Deal and the Promise of Recovery, 1933–1947, the New Deal probably made things worse. An activist government rapidly changing policies seemingly on a whim is not a recipe for success.

What Worked?

Not everything the Roosevelt administration did was counterproductive. Ending the bank runs was the first order of business, and FDR spectacularly tackled that on his second day in office by declaring a national bank holiday. As he explained in his first fireside address (a masterpiece of rhetoric), every single bank in the nation would be closed until federal regulators had vetted the bank and certified that it was sound. Over the following weeks, banks were reopened, and the panic vanished. Coupled with the introduction of deposit insurance, there is no doubt that this is one of the greatest accomplishments of Roosevelt’s administration.

The complete story, though, is a bit more complicated. As Selgin demonstrates, the national bank holiday was not as significant a shock as it appears to us today. In the month before FDR took office, several states had declared their own bank holidays, which caused panic to spread rapidly as depositors feared the same thing might happen in their state. By the time he actually became president, 37 states already had enacted full or partial bank closures. The Federal Reserve Banks closed themselves on the morning of his inauguration. In that environment, the national bank holiday seems predictable.

If, as Selgin argues, the primary fault of the New Deal was the radical uncertainty it created, then the obvious lesson is that government policy should be stable and predictable.

In the face of the complete closure of the entire banking system, how is it possible that the bank holiday lasted such a short time? Selgin argues we should thank Hoover for the speed with which this was all done. When FDR was sworn in, officials from Hoover’s Treasury Department stuck around to help with the transition. The plan to close and reopen the banks had been worked out by the Hoover Administration. Even the outline of Roosevelt’s fireside chat was prepared by Hoover’s Treasury undersecretary. How did the relatively small number of bank examiners vet so many banks in such a short period of time? They didn’t. The vetting relied largely on the bank examinations that had been conducted in the Hoover Administration.

By itself, ending the bank runs would not have been enough to reverse the collapse of the money supply. It was another Roosevelt action that reversed that trend. The Gold Reserve Act in 1934, raising the official price of gold from $20.67 to $35 per ounce, resulted in an increase in the money supply, directly from the higher money stock which can be issued per ounce of gold and indirectly from an increased gold inflow into the US as net exports rose. While the resulting increase in the money supply was not enough to induce a quick recovery, it certainly did put the economy on an upward trajectory for a few years.

What Didn’t Work?

So much for the success stories of the Roosevelt Administration’s efforts to combat the Great Depression. When we turn our attention away from the monetary side of things, the narrative becomes quite dismal. The lack of success was not from a lack of trying. As every high school history student knows, keeping track of the alphabet soup of New Deal policies involves a lot of memorization.

Selgin meticulously dissects the “twin pillars of Roosevelt’s recovery program.” First, the Agricultural Adjustment Administration (AAA) aimed to raise the prices of agricultural products, which certainly benefits the farmers who are selling the products, but is not so helpful to those buying the products. The agricultural sector, however, was about a quarter of the population, and it is certainly true that if a sufficient number of farmers went bankrupt, it would result in a noticeable drop in the food supply.

The AAA simultaneously provided direct benefits to farmers and required them to limit the amount of food they produced, causing prices to rise. As a relief measure for farmers, the effect of such a policy is obvious. But, did it help economic recovery? The evidence here is pretty overwhelming that it did not. Transferring money from one set of the population (those who buy food) to another set (those who produce food) is not a net benefit. Even within the agricultural sector, the effect on recovery was negative. While the farm owners benefited from the payments they received and the higher prices for their products, because the farm owners were restricting production, those benefits are offset by the reduction in the number of farm workers employed by the farm owners.

What about the other pillar of the New Deal, the National Recovery Administration (NRA)? It was even worse. An ever-expanding set of rules trying to micromanage just about every aspect of business behavior, the NRA was the clear centerpiece of the Roosevelt Administration’s effort to promote economic recovery. Price and wage controls, production limits, industry codes, business and worker councils, the list goes on and on. As Selgin concludes: “After initially raising hopes, the NRA ended up disappointing almost everyone, including those businessmen who hoped to profit by dominating the code-writing boards. Before the experiment ended, Roosevelt himself felt compelled to admit (privately, to Frances Perkins) that ‘the whole thing is a mess.’”

Perhaps the focus on the details of the individual programs is not the right approach. Isn’t the positive effect of the New Deal the stimulus from increased government spending? Isn’t the idea underlying the New Deal the Keynesian argument that it doesn’t matter how the government spends money (digging ditches and filling them back up is fine) as long as there are large government budget deficits? Isn’t the New Deal the prime example of a Keynesian success story? Not at all.

For most years in the Great Depression, the increased federal government spending was matched by reductions in state and local government spending. There was a large federal deficit in 1936 when Congress passed a veterans’ bonus bill. Since the bill was passed over Roosevelt’s veto, it is hard to sell the 1936 deficit as a part of the New Deal fiscal program.

As Selgin amply documents, far from being someone who brought Keynesian economic policies to the national stage, Roosevelt opposed the Keynesians. He was quite determined to have balanced budgets, matching any increases in spending with new taxes. It was only in 1938 that Roosevelt even made a nod toward Keynesian policies, agreeing to forays into fairly small deficits.

You don’t have to take Selgin’s word for the fact that the New Deal is not even remotely a Keynesian program. Keynes himself routinely criticized economic policy under the New Deal, often in very public ways. Selgin, no fan of Keynesianism, ironically notes, “Keynes had little influence on New Deal policies is only part of the truth too many popular accounts of the New Deal fail to tell. It’s also true that had Roosevelt actually taken Keynes’s advice, the Great Depression might not have been so severe.”

Since it wasn’t Keynesianism, what did motivate the assorted initiatives in the New Deal? Selgin quotes Frances Perkins, who was Secretary of Labor for all four Roosevelt terms: “It is important to repeat, the New Deal was not a plan, not even an agreement, and it was certainly not a plot, as was later charged.” Instead, as Selgin documents, the New Deal was a haphazard collection of unrelated policies without any underlying economic model. Later attempts to portray the New Deal as a cohesive set of polices fly in the face of what Roosevelt’s closest advisors said. For example, Raymond Moley, the originator of Roosevelt’s “Brain Trust,” wrote that a belief that the New Deal was a “unified plan” is akin to the belief “that the accumulation of stuffed snakes, baseball pictures, school flags, old tennis shoes, carpenter’s tools and chemistry sets in a boys bedroom could have been put there by an interior decorator.”

Was the New Deal Harmless?

The failure of the New Deal policies to effect economic recovery does not necessarily mean the programs were harmful. Even if their direct effects were not positive, perhaps the fact that the government was active just doing something provided encouragement to the population, leading to an indirect positive benefit. After all, in his inaugural address, FDR noted that the national mood matters: “We have nothing to fear but fear itself.”

But Selgin argues forcefully that the New Deal had a very large effect on both the mood of the country and the economy. The effects were negative, however. Taken as a whole, “the New Deal ultimately left business confidence in tatters.” The most important economic effects of the New Deal were not in the specific details of the program or in the fact that the government was spending, but in the effects on how business leaders thought about the future:

The New Deal gave businessmen the willies in two different ways. One was by heightening regime uncertainty in the strict sense: as the Roosevelt administration’s policy experiments multiplied, with no clear end in sight and no telling what might come next, businessmen no longer felt able to plan for the future. The other was by employing rhetoric that vilified those same businessmen or coming up with laws that seemed to deliberately aimed at punishing them.

Why does such a collapse in business confidence matter? Faced with uncertainty, businesses are naturally far less likely to spend funds on investment. If you don’t know what economic policies will exist in six months, why would you choose to spend large sums building a new factory? One of the things which caused the Great Depression to last as long as it did was the unwillingness of businesses to expand their operations in an uncertain environment.

One of the reasons the economy recovered after World War II was an increased public confidence in business. Selgin argues this is an important bit of evidence demonstrating that the volatility and rhetoric of the New Deal were a large problem. Because of the huge success of American business in producing the instruments of war, officials in Washington had learned that business leaders were not inherently evil. At the same time, the Truman and Eisenhower administrations were much less erratic in setting policy. As a result, post-war business investment boomed, and the economy started growing rapidly.

Enduring Lessons from the New Deal

Ben Bernanke once said that understanding the Great Depression is the holy grail of economists. Because things went so horribly wrong for a decade, there are surely important lessons to be learned so that we can avoid the mistakes of the past. Unfortunately, memories are short.

If, as Selgin argues, the primary fault of the New Deal was the radical uncertainty it created, then the obvious lesson is that government policy should be stable and predictable. We can see the shifts in uncertainty about economic policy in the Economic Policy Uncertainty Index, which uses a range of measures to gauge how confident people are that they know what government economic policies will be in place going forward.

Recent history suggests this index may be predictive. Since the mid-1980s, there have been three times when the index spiked to over five times the historical average. The first was in September 2008, when Wall Street was melting down, and it was incredibly unclear what the government was going to do. A recession soon followed. The second was in March-May of 2020, dates which are engraved in everyone’s mind, and again a recession followed. The third was in January and June of 2025. The publication of Selgin’s book, demonstrating that uncertainty about future government policy can create large economic harm, could not have been better timed.

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This article was published by Law & Liberty and is reproduced with permission.

Image Credit: Wikimedia Commons