Keynesian Economics and the U.S. Federal Government Response to the Great Depression

           The Great Depression is one of the most challenging periods in American economic history and had national and international influences and origins. In the years following the Great War (WWI) and into the 1920s, the “U.S. economy boomed.”[1] However, tranquility was not on the cards for long as the government interceded in 1928 when the U.S. Federal Reserve “raised interest rates” to “combat inflation.”[2] The timing could not have been worse; Europe was still in a period of rebuilding and establishing new governments for many countries. Ultimately, the burden of the tremendous amount of resources and money loaned by the U.S. to Europe became too much, and many countries began to default on those loans. The result was a slow down of the economy leading to stagnation and the “deflation” of the U.S. economy.

            To understand the causes of the Great Depression, we can look to noteworthy economists, like John Maynard Keynes, a British economist who theorized on governmental participation in the economy. Keynes introduced his theory, known as Keynesian Economics, in 1936 that theorized that an economy was healthiest when directed by increased consumer spending and that when markets took a downturn, it was up to the government to step in to buoy the economy. Keynes felt the government should act aggressively in times of trouble, whereby the government must step in and “inflate the money supply” to avoid further recession.[3] Keynes described the events of the Great Depression to be a “major turning point” in economic history.[4]

            As the Great Depression began to sweep around the world, many compounding factors began to grow to evaporate any chance of a quick remedy to the problem. Since the 1930s, scholars from around the world have “debated the cause and consequences of bank failures” of the Great Depression, some believing the cause to be “widespread withdrawals, financial contagion, and lack of liquidity,” or simply the “decline” in value of “assets,” default on loans, “agricultural and industrial” slumps that caused banks to fail.[5] The actual cause(s) of the Great Depression is too “numerous” to pinpoint one exact root cause of the economic decline.[6] One variable of the catastrophe was the United States’ “adherence to the gold standard.”[7]

            The Gold Standard is a “monetary system in which a nation’s currency is pegged into the value of gold,” which defines a monetary value of gold to a “given amount of paper money.”[8] At the time of the Great Depression, the sudden closure of banks, defaults on loans, and the devaluation of assets caused Americans to lose trust in the institutions, leading to runs on banks, where masses of clients would demand the withdrawal of all their money; which of course the bank was dependent upon to conduct their business. Subsequently, Americans across the U.S. began to essentially “hoard” as much gold as they could.[9]

            Thus in a very Keynesian effort, President of the United States, Franklin D. Roosevelt, issues an executive order on March 5^th, 1933, marking a “nationwide bank moratorium” to “prevent” subsequent bank runs “by consumers lacking confidence in the economy.”[10] Under the guidelines of FDR’s Executive Order 6102, all American citizens were required to surrender “all Gold coin, Gold Bullion, and Gold Certificates” to the Federal Reserve Bank, thereby outlawing the “hoarding of gold” worth more than $100.[11] Thus, citizens would bring their excess gold to the Federal Reserve bank, where they would be paid $20.67 per ounce of gold in paper currency.[12]

Figure 1: New York Times Article, March 6, 1933.

           The purpose of Executive Order 6102 was for the U.S. government to take direct action to improve the economy, as encouraged by Keynes’s economic theories. In a New York Times article, headlined: Roosevelt Orders 4-Day Bank Holiday, Puts Embargo on Gold, Calls Congress, it is reported that the purpose of the prohibition of excess gold stockpiling by citizens had in fact “resulted in severe drains on the nation’s stocks of gold,” creating what FDR described as a “national emergency,” and that as President he must act “in the best interest of all bank depositors” and “prevent” further harm (see figure 1).[13] Furthermore, the memorandum also prevented banks from complying with any further withdrawals of gold at that time, easing the tensions of insolvency and liquidation in banks across the U.S.

             As a result, the confiscated gold increased Federal reserves substantially, allowing for more printing of money and deflation in the currency’s value overall.[14] Overall, the U.S. government “had taken in $300 million of gold coin and $470 million of gold certificates,” and new legislation had abolished any “public or private” bank policies forcing clients to “repay the creditor” in gold, thereby gaining further credibility to the U.S. Dollar or paper money; as a result, by 1934 the price of gold by the U.S. Federal Reserve had increased to $35 per ounce. [15]

While the resolution to embargo gold from the American public to stabilize U.S. currency was not a cure-all, it was a contributing factor to the rebounding of the U.S. economy leading up to the Second World War in the 1940s and certainly left a lasting impact on the psyche of citizens around the world. Ultimately, the failures of banks, industrial, agricultural, international, and export commerce contributed to the spiraling that led the world’s economies into default. The ability of the U.S. government to harness the powers they could, under executive action, indeed stabilized and garnered credibility for the dollar and thus created a foundation with which the U.S. economy could remake itself in the years ahead.

Amy M. White, M.A. 

Bibliography

Crafts, Nicholas and Peter Fearon. “Lessons from the 1930s Great Depression.” Oxford Review of Economic Policy, Vol. 26, no. 3, Autumn 2010: 285-317.

History.com Editors. FDR takes United States off Gold Standard. Jun 17, 2020. https://www.history.com/this-day-in-history/fdr-takes-united-states-off-gold-standard (accessed Apr 21, 2021).

Konkel, Lindsey. How Did the Gold Standard Contribute to the Great Depression? May 8, 2018. https://www.history.com/news/how-did-the-gold-standard-contribute-to-the-great-depression#:~:text=The%20government%20raised%20the%20price,depths%20of%20the%20Great%20Depression. (accessed Apr. 22, 2021).

Richardson, Gary. “Categories and Causes of Bank Distress During the Great Depression, 1929-1933: The Illiquidity versus Insolvency Debate Revisited.” Explorations in Economic History, 2007: 588-607.

The New York Times, Vol. LXXXII, No. 27435. “Roosevelt Orders 4-Day Bank Holiday, Puts Embargo on Gold, Calls Congress: The President’s Bank Proclamation.” Mar 6, 1933: 1.

U.S. Government Printing Office. Executive Order of President of the U.S., Franklin D. Roosevelt. The White House, Washington, D.C., Apr. 5, 1933.

United States Gold Bureau. Gold Confiscation of 1933. Aug 5, 2010. https://www.usgoldbureau.com/news/what-was-1933-gold-confiscation (accessed Apr 22, 2021).

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[1] Konkel, Lindsey. How Did the Gold Standard Contribute to the Great Depression? May 8, 2018. https://www.history.com/news/how-did-the-gold-standard-contribute-to-the-great-depression#:~:text=The%20government%20raised%20the%20price,depths%20of%20the%20Great%20Depression. (accessed Apr. 22, 2021).

[2] Konkel.

[3] History.com Editors. FDR takes United States off Gold Standard. Jun 17, 2020. https://www.history.com/this-day-in-history/fdr-takes-united-states-off-gold-standard (accessed Apr 21, 2021).

[4] Crafts, 285.

[5] Richardson, Gary. "Categories and Causes of Bank Distress During the Great Depression, 1929-1933: The Illiquidity versus Insolvency Debate Revisited." Explorations in Economic History, 2007: 605.

[6] Konkel.

[7] Konkel.

[8] Konkel.

[9] History.com Editors. FDR takes United States off Gold Standard.

[10] History.com Editors. FDR takes United States off Gold Standard.

[11] U.S. Government Printing Office. Executive Order of President of the U.S., Franklin D. Roosevelt. The White House, Washington, D.C., Apr. 5, 1933.

[12] United States Gold Bureau. Gold Confiscation of 1933. Aug 5, 2010. https://www.usgoldbureau.com/news/what-was-1933-gold-confiscation (accessed Apr 22, 2021).

[13] The New York Times, Vol. LXXXII, No. 27435. "Roosevelt Orders 4-Day Bank Holiday, Puts Embargo on Gold, Calls Congress: The President's Bank Proclamation." Mar 6, 1933: 1.

[14] United States Gold Bureau. Gold Confiscation of 1933.

[15] History.com Editors. FDR takes United States off Gold Standard.