FDR’s New Deal broke with the past in a number of ways: for the first time in American history, the federal government assumed responsibility for providing jobs. New programmes came into being almost overnight to stabilise farm incomes, finance home ownership, regulate banks and the securities industry and bring affordable electricity to millions of homes. Not all of these innovations were successful. But none of them would have been possible without Roosevelt’s willingness to defy the economic orthodoxy of the day – then known in the US, as in Britain, as “the Treasury view” – which held that deficit spending was not just evil but ineffectual.
The US treasurer in 1937 was Henry Morgenthau, a gentleman apple farmer who, as historian Alan Brinkley points out, owed his job “largely to an accident of geography: he was a neighbour of Franklin Roosevelt in Dutchess County, New York.” Morgenthau wasn’t a total waste of space; he made a genuine pest of himself trying to get his friend to notice the Nazi Holocaust. But even his admirers would hesitate to call him a great economist, and after FDR’s landslide reelection in 1936, Morgenthau made cutting the federal deficit his personal cause.
By the fall of 1937, he’d convinced the president that though “the patient might scream a bit”, it was time to “throw away the crutches”. Not everyone agreed. Marriner Eccles, a Mormon banker who thought along the same lines as John Maynard Keynes, warned that the recovery was too fragile; so did the tiny handful of US economists who’d actually heard of Keynes. But Roosevelt, like David Cameron, believed that a balanced budget was a sign of fiscal virtue, and hundreds of government programmes were cut back or eliminated.