Monetary policy involves the supply and availability of money. Down to 1933, the primary concern of the U. S. Federal Reserve Board was protecting the international gold standard, largely by restricting the money supply in circulation at any given time. However, Franklin D. Roosevelt entered the White House that March determined to increase the money supply in order to fuel economic recovery from the Great Depression. Encouraged by the ideas of Raymond Moley, George
F. Warren, Irving Fisher, and Secretary of the Treasury Henry Morgenthau, Roosevelt embraced the notion that enlarged money supplies would bring about inflated prices and spur recovery. Toward these ends, he would have to exert presidential authority over the Federal Reserve and institute a “managed currency” under his control. Roosevelt’s first step was declaring a bank holiday and passing the Banking Act oe 1933, which created the Federal Deposit Insurance Corporation to entice the public to resume depositing their money. People did so in droves, and the increased deposits enabled banks, in turn, to expand loan activities and increase the national money supply. However, the recovery appeared sluggish, so in November Roosevelt announced a new policy that reduced the gold contact of the dollar by 50 percent, thereby artificially boosting the price of that metal. This led to an influx of gold from abroad, which was exchanged for Federal Reserve notes and enlarged the money supply. The Gold Reserve Act of 1934 then officially devalued the dollar by pegging its price to gold at $35 an ounce, which once again led to a major influx of foreign gold. The Banking Act oe 1935 also produced an expansionary monetary policy. Consequently, the money supply increased rapidly by 11 percent between 1933 and 1937 and helped fuel some national economic recovery. Throughout that period the gross national product expanded at a robust 12 percent annually, a record that has never been matched.
By 1937 Roosevelt was fearful that the rapid growth of the economy might trigger inflation, so he authorized the Federal Reserve to reduce the influx of gold to the United States Also because of a return to restrictive FISCAL POLICY, a severe recession ensued in 1937-38, which only ended when the president ordered the Federal Reserve to resume the acquisition of gold and when federal spending increased. On the downside, this constant flow into America’s coffers drained Europe of gold and forced them off the gold standard. This had the effect of promoting unstable exchange rates, which further impeded international trade and economic recovery abroad. WORLD War II produced an economic boom for the United States, primarily because of defense spending but also due in part to Roosevelt’s monetary policy. From a standpoint of policy implementation, the era marks an important precedent: Hereafter, chief executives have wielded their power in both monetary and fiscal policy to head off economic conditions that might bring on a depression.
See also EccLES, Marriner; economy; recession OF 1937-1938.
Further reading: Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867-1960 (Princeton, N. J.: Princeton University Press, 1963); Elliot A. Rosen, Roosevelt, the Great Depression, and the Economic Recovery (Charlottesville: University of Virginia Press, 2005); Gene Smiley, Rethinking the Great Depression (Chicago: Ivan R. Dee, 2002); Frank G. Stiendl, Understanding Economic Recovery in the 1930s (Ann Arbor: University of Michigan Press, 2004); John H. Wood, A History of Central Banking in Great Britain and the United States (New York: Cambridge University Press, 2005).
—John C. Fredriksen
Morgenthau, Henry T., Jr. (1891-1967) government official
A close friend and confidant of President Franklin D. RooSEVELT, Henry Morgenthau, Jr., served as secretary of the treasury from 1934 to 1945.
Morgenthau was born in New York City in 1891, into a wealthy family active in social justice efforts and the Democratic Party. After studying at Cornell and working briefly at the Henry Street Settlement in New York, he used family money to purchase a farm that he managed himself in Dutchess County, New York, not far from Roosevelt’s home in Hyde Park. Despite their much different personalities—Morgenthau tended to be an introverted and often insecure worrier who was not very articulate in public, while Roosevelt was just the reverse—the two became fast friends after meeting in 1915. Among other things, they shared a devotion to rural life and a conviction that government should play an important role in ensuring the well-being of the American people.
After being elected governor of New York in 1928, Roosevelt named Morgenthau chairman of the state Agricultural Advisory Commission and then when reelected in 1930 appointed him state conservation commissioner. When FDR was elected president in 1932, he put Morgen-thau in charge of the Federal Farm Board created by the Agricultural Marketing Act of the Hoover presidency. Morgenthau oversaw the transition of the Federal Farm Board into the new Farm Credit Administration, and when Secretary of the Treasury William H. Woodin, ill with cancer, could no longer perform his duties, Roosevelt named Morgenthau acting secretary in November 1933 and then secretary of the treasury in January 1934.
Serving as secretary of the treasury longer than anyone but Andrew Mellon, Morgenthau was deeply involved in New Deal monetary policy and fiscal policy. In fiscal policy, he was always a staunch champion of the balanced budget. He vigorously objected when the administration turned to Keynesianism and deficit spending as a result of the recession of 1937-1938, and even threatened to resign. As always, however, he remained loyal to FDR, and in any case he supported the social reform priorities of New Deal spending even if he abhorred the deficits. He also supported New Deal efforts for more progressive taxation and was disappointed that Congress kept tax reform from going further in closing loopholes and taxing the wealthy.
During World War II, Morgenthau not only was instrumental in policies to finance economic mobilization efforts but also played a role in the development of the Lend-Lease Act, the Bretton Woods Conference, and the United Nations. He opposed the relocation of Japanese Americans and urged Roosevelt to do more to help European Jews, particularly as evidence of the Holocaust surfaced. Toward the end of the war, he helped to establish the War Refugee Board. An ardent foe of Hitler and Nazi Germany and an early advocate in the 1930s of a more vigorous foreign policy to oppose the Axis, he proposed the so-called Morgenthau Plan in 1944 that called for not only denazifying and demilitarizing but also dividing and deindustrializing Germany after the war. Seen by many as vindictive and misguided, the Morgen-thau Plan and the reaction to it contributed to his difficult relationship with new president Harry S. Truman. Morgenthau resigned as secretary of the treasury in July 1945 and returned to his life as a farmer in Dutchess County until he died in 1967.
Further reading: John Morton Blum, Roosevelt and Morgenthau: A Revision and Condensation of From the Mor-
Genthau Diaries (Boston: Houghton Mifflin, 1970);-,
From the Morgenthau Diaries, 3 vols. (Boston: Houghton Mifflin, 1959-1967).
World History
