Selgin observes at the outset that the US recovery from the Depression was slow and sporadic. He writes: “If one wants to properly gauge the progress of economic recovery after any collapse, one can’t simply look at the number of persons doing any sort of work or the amount of stuff being produced. One must ask how close the economy is to making full use of its available resources, including its labor force.” By 1940, despite all FDR’s promises and policies, (here Selgin quotes historian and Harper’s Magazine editor Frederick Lewis Allen), “the prosperity which had vanished in 1929 seemed as unattainable as a rainbow.” While other industrial nations had substantially recovered from the Depression, the United States had not. Indeed, the nation did not fully recover until after World War II, with the phasing out of wartime economic controls and, most importantly, the end of the government’s hostility to free enterprise.

Tiny banks and the gold standard / Although he doesn’t devote much time to the causes of the Depression, Selgin makes it clear that the banking crisis of 1931–1932 was what truly brought the economy to its knees. The problem was not, as opponents of laissez-faire economics are fond of saying, that a market-based economy is unstable, but rather that our bad banking laws set the stage for a collapse. The laws in many states prohibited branch banking and geographic diversification, resulting in a fragile system. The United States had more than 10,000 “tiny banks,” most of them serving rural communities. “Their fortunes,” Selgin writes, “were bound up with the farmers they served, where the farmers’ earnings in turn depended on the success of a small number of crops, if not a single crop.” That undiversified lending industry began to collapse with the fall in agricultural prices in the late 1920s and later spread to larger banks as worried depositors began withdrawing their money.

With a banking crisis brewing in 1931, our weakened system suffered another blow when England went off the gold standard, causing further anxiety among US depositors, who withdrew gold coins and certificates. President Herbert Hoover’s exhortations to the public not to hoard money had no effect, and then he made matters worse by mentioning in a speech that the government’s gold stock was dwindling, raising fears about currency convertibility.

With the country’s banking system seizing up and panic spreading, what could be done? Hoover’s advisers recommended a bank holiday—a brief nationwide closing of the banks that was intended to halt the runs—but the president hesitated, not believing that he had authority under the Constitution to order one. When FDR took over the White House in March 1933, a national banking holiday was one of his first moves. Selgin contends that the suspension was necessary to stanch the panic. “With it,” he writes, “the Great Contraction that began in 1929 came to an end.” As banks were allowed to reopen after receiving federal approval, the public’s shaken confidence was restored.

Suppressing competition and investment / So, the opening shot of the New Deal was a good one. But as the rest of Selgin’s book shows, little else that FDR did was helpful, and many of the New Deal’s signature policies were highly detrimental to economic recovery. The primary reason why, he argues, was that FDR’s “brain trust” believed in some terribly mistaken economic ideas. One of them was that prosperity would be restored by getting prices, which had been falling, back up to their 1926 levels. Boosting prices became the administration’s obsession, reflected in one initiative after another.

For example, New Deal agricultural policy sought to raise farm prices by restricting output. The theory was that if farmers’ incomes went up, their increased spending would give the whole economy a boost through the multiplier effect. Selgin regards that as a simplistic notion that ignored the inevitable secondary effects of the high price policy. He writes:

A closer look at the Agricultural Adjustment Act’s contribution shows, however, that it is wrong to suppose that it benefited all, as opposed to certain farmers. For one thing, while southern and Midwestern producers of tobacco, cotton, wheat, corn and hogs benefited substantially, dairy, poultry and livestock farmers in the Northeast lost out as a result of higher feed costs.

Other losers were the many poor sharecroppers in the South because there was less demand for their labor as the federal government paid farm owners to produce less. Thus, federal policy did not restore prosperity in general; it was a boon to some at the expense of others. Selgin notes that wasteful New Deal agricultural policies are still with us, enriching big, politically connected farmers by keeping prices artificially high for their output.

The high price folly was also at the heart of FDR’s National Industrial Recovery Act (NIRA). The theory behind the legislation was that free enterprise was outmoded and the country should supplant it with an up-to-date economic model with less competition and more central control—the heavily interventionist Mussolini model that FDR’s top advisers so admired. As they saw things, wide-open competition led to low prices and instability, the opposite of what the country needed in 1933. NIRA therefore sought to promote business cartels that would raise prices, along with strong unions that would make sure that employee compensation rose as well.

To enforce the law, the National Recovery Administration strong-armed recalcitrant firms and fined businesses that kept prices too low. Selgin calls this thinking “a crude fallacy.” The suppression of competition did nothing to restore prosperity, but it did make many small business owners feel the government regarded them as enemies. They stopped investing, and that more than anything else is what kept the economy in the doldrums. Selgin argues that the collapse of private investment was the main reason why, unlike after previous recessions, the economy was so slow to rebound.

The constant introduction of new, experimental programs, combined with FDR’s often heated rhetoric against business owners, created great “regime uncertainty” (Selgin approvingly quotes historian Robert Higgs’s apt phrase) that kept private capital on the sidelines for years. That was a huge unintended consequence of the New Deal’s collectivistic experimentation and hostility toward capitalists.

Selgin’s discussion of John Maynard Keynes is fascinating. Most readers will be surprised to learn that Keynes opposed key aspects of New Deal policy, including the fixation on engineering wage and price increases and the bashing of the business community. Conventional wisdom has it that the New Deal was a triumph for the Keynesian approach of using government deficit spending to prime the economic pump, but Selgin shows that FDR did not follow that theory. Surprisingly, the president’s innate fiscal conservatism kept him fretting about federal deficits, which he thought had to be offset with increased taxes, such as the undistributed profits tax that business owners found so distressing. Selgin is not saying that Keynes had the right formula, but that recovery probably would have been faster if Roosevelt had listened to him.

Most books on the New Deal end with the onset of World War II, but False Dawn has important things to say about the immediate post-war years. Mainstream economic policy experts, both in and out of Harry Truman’s administration, predicted another economic crash once the war was over. They claimed the flood of returning troops would face massive unemployment unless the government could stimulate aggregate demand with huge new programs. But Congress did not enact such programs, and unemployment nevertheless staid low as former soldiers reentered the labor force. Why? Selgin’s explanation:

The proximate cause was a revival of private spending far exceeding what many economists, especially Keynesians, predicted. The revival proved more than sufficient to compensate for a reduction in government spending that was greater than most had allowed for.

Thus, another depression was averted by the elimination of wartime controls and peaceful coexistence with the business sector.

Conclusion / The book’s big takeaway is the United States would have recovered from the Great Depression far sooner if FDR had not given his “progressive” brain trusters such a free hand to reshape the economy in line with their ideological convictions. Selgin’s concluding paragraph is right on the mark:

When the next severe downturn occurs, policymakers and other experts will once again cast about for ways out. Relying on conventional wisdom, many will be tempted to seek them among various New Deal undertakings. But if, as has been argued here, many New Deal policies held back recovery, while those that helped most—such as insuring bank deposits and relaxing gold standard limits on monetary expansion—are as unrepeatable as losing one’s virginity, they’d be wiser to treat most of the New Deal episode as a warning about steps best avoided and to look elsewhere for better ones.

As we approach the hundredth anniversary of the onset of the Great Depression, there will be much discussion about the role of federal policy in ending (or extending) it. Selgin’s carefully researched, measured, and persuasive book should play a large role in that discussion.