Nearly a century later, the Great Depression still shapes how we think about the government’s role in America’s free enterprise system. That lasting influence is no surprise: the Depression remains the most severe economic contraction in U.S. history. Between 1929 and 1933, per capita GDP fell by roughly 30 percent, industrial production by nearly 50 percent, unemployment soared to almost 25 percent, and close to a third of the nation’s banks failed. Just as important, however, the Depression triggered a fundamental shift in how the government responds to recessions—a transformation that continues to shape policy today.
At the center of that shift was Franklin Delano Roosevelt’s New Deal, a set of policies aimed at promoting recovery, providing relief, and laying the groundwork for long-term reform. Yet despite decades of scholarship, two central questions remain: What ended the Depression—and what role, if any, did the New Deal play? In False Dawn: The New Deal and the Promise of Recovery, George Selgin takes up these questions directly. Drawing on contemporary accounts of the Depression and the New Deal, retrospective assessments from the decades that followed, and modern scholarship, Selgin makes a compelling case that the New Deal not only failed to promote recovery but likely delayed it.
By the numbers, the New Deal’s record on recovery is hard to defend. Although the economy improved markedly during FDR’s first term, by 1939—a year after the New Deal had effectively ended as a legislative program—it remained in poor shape despite the administration’s recovery efforts. Roughly 17 percent of the labor force was still either unemployed or on work relief—which, as Selgin notes, even New Dealers regarded as a poor substitute for real employment. Industrial production had barely edged above its level from a decade earlier, and per capita GDP was still below its 1929 peak.
One major reason, Selgin maintains, is that the New Deal’s signature legislative achievements—such as the Agricultural Adjustment Act (AAA) and the National Industrial Recovery Act (NIRA)—facilitated the cartelization of agriculture, industry, and labor—hardly a recipe for recovery. The AAA sought to raise farm prices by restricting output; the NIRA aimed to achieve the same for industrial prices, while also raising wages through higher minimums and enhanced union power. In both cases, the New Dealers mistook a symptom of the Depression—falling prices and wages—for its cause. The result was sadly predictable: prices and wages rose, but output and employment fell.
As misguided as the AAA and NIRA were, Selgin argues, the deeper problem lay not in any single intervention, but in the uncertainty created by the administration’s constant policy experimentation—and Roosevelt’s unwillingness to change course once it became clear those policies weren’t working. This regime uncertainty depressed business confidence and stalled the rebound in private investment that was crucial for recovery—a point emphasized by none other than John Maynard Keynes in his correspondence with the president. Yet Roosevelt ignored Keynes’s advice. As a result, private investment remained depressed throughout his presidency.
Making matters worse, Selgin stresses, was FDR’s skepticism toward the two tools most economists today consider essential for boosting aggregate demand: deficit spending and monetary expansion. As Selgin demonstrates, Roosevelt remained firmly committed to balancing the federal budget—a pledge he had made during his 1932 campaign. As a result, much of the spending that occurred during FDR’s first term was offset by new taxes, reflecting Roosevelt’s fiscal conservatism. Indeed, throughout the New Deal era, the federal deficit remained below the peak reached under the Hoover administration and did not surpass it until the onset of World War II.
To be sure, not everything Roosevelt did hampered recovery. As Selgin acknowledges, several of FDR’s early decisions involving the banking system and the gold standard helped end the Great Contraction that had begun in 1929 and gave a much-needed boost to demand. Chief among them was the declaration of a national bank holiday shortly after his inauguration—a move Selgin regards as perhaps the single greatest achievement of Roosevelt’s first term. While FDR deserves credit for declaring the bank holiday, much of the groundwork had already been laid by the Hoover administration, making it less a New Deal innovation than a continuation of earlier efforts.
The bank holiday by itself, however, was not enough to restore public confidence in the banking system. That required convincing depositors their funds were safe. This was accomplished, in part, through the creation of federal deposit insurance. Interestingly, as Selgin explains, Roosevelt opposed deposit insurance on the grounds that it would encourage banks to behave imprudently—a concern many economists share today. In fact, FDR threatened to veto the Banking Act of 1933 specifically because of its inclusion of deposit insurance. He signed it only when it became clear that Congress would override his veto. Although Roosevelt would later claim credit for creating deposit insurance, associating it with the New Deal would be misleading.
Also crucial to the recovery was Roosevelt’s decision to devalue the dollar. During the Great Contraction, gold had flowed out of the U.S., shrinking the monetary base. Devaluation reversed this dynamic by encouraging gold inflows, which expanded the money supply and supported recovery. Yet because FDR remained wary of monetary expansion, the Federal Reserve sterilized many of these inflows, limiting their stimulative effect. Even setting aside the Fed’s response, however, devaluation could provide only a one-time boost: once international monetary equilibrium was restored, the gold inflows would stop. If monetary expansion were to continue, it would have to be fueled by a different source.
That source, as it turned out, was an unlikely one. Fearing war in Europe after Adolf Hitler’s rise to power, many Europeans transferred their gold to the United States, expanding the U.S. monetary base. At the same time, rising gold prices prompted Joseph Stalin to ramp up Soviet gold production—much of it produced by forced labor in gulag-run mines. Together, these inflows significantly increased the U.S. money supply. Combined with renewed confidence in the banking system, they helped fuel a 60 percent rise in nominal spending between 1933 and 1937—an increase that, Selgin contends, accounts for most of the economic improvements during FDR’s first term. Yet here too, Roosevelt’s persistent skepticism toward monetary expansion and fear of inflation led the Federal Reserve to partially sterilize the inflows, muting their full potential effect.
The massive increase in government spending during World War II certainly contributed to the recovery. But as Selgin observes, if wartime spending were solely responsible, the economy should have collapsed when the war ended. Indeed, many prominent economists at the time predicted as much. Yet when government spending fell sharply after the war, the expected downturn never materialized. Instead, the economy boomed. These forecasts, Selgin argues, proved wrong because support for the kinds of New Deal interventions FDR had pursued before the war had waned. As a result, the regime uncertainty that had depressed business confidence receded, private investment returned, and the recovery finally took hold.
One of the book’s many strengths is Selgin’s evenhanded approach. This is no polemic. He readily credits the Roosevelt administration’s successes—recognizing the policies that aided recovery—and engages seriously with scholarship that challenges his account. Rather than dismiss opposing views, he addresses them directly and thoughtfully, making his case all the more persuasive for its fairness. False Dawn is a remarkable contribution that will undoubtedly stand as the authoritative account of the New Deal for years to come.
‘False Dawn: The New Deal and the Promise of Recovery’ by George Selgin was published in 2025 by The University of Chicago Press (ISBN: 978-0-22-683293-7) 370pp.
