There was a time during the Great Depression when conventional wisdom condemned government intervention in any form as inimical to economic recovery. As the economy spiraled downward, scholars and pundits alike continued to advocate a balanced federal budget and a tight rein on the money supply. This view was highlighted in a letter written by Herbert Hoover to President-elect Roosevelt in 1932, and later quoted by Galbraith: "It would steady the country greatly if there could be prompt assurance that there will be no tampering with or inflation of the currency; that the budget will be unquestionably balanced even if further taxation is necessary; that the Government credit will be maintained by refusal to exhaust it in the issue of securities."

At the time, these policies were based on solid theoretical principles and thus earned the widespread support of the economics profession. Objections were not unheard of and...