By Jim Powell
Mr. Powell, the editor of Laissez Faire Books, is a senior fellow at
the Cato Institute.
Following is an excerpt from Mr. Powell's controversial new book,
FDR's Folly: How Roosevelt and His New Deal Prolonged the Great
Depression (Crown Forum, 2003).
The Great Depression has had an immense influence on our thinking,
particularly about ways to handle an economic crisis, yet we know
surprisingly little about it. Most historians have focused on
chronicling Franklin D. Roosevelt's charismatic personality, his
brilliance as a strategist and communicator, the dramatic One Hundred
Days, the First New Deal, Second New Deal, the "court-packing" plan,
and other political aspects of the story. Comparatively little
attention has been paid to the effects of the New Deal.
In recent decades, however, many economists have tried to determine
whether New Deal policies contributed to recovery or prolonged the
depression. The most troubling issue has been the persistence of high
unemployment throughout the New Deal period. From 1934 to 1940, the
median annual unemployment rate was 17.2 percent.1 At no point during
the 1930s did unemployment go below 14 percent. Even in 1941, amidst
the military buildup for World War II, 9.9 percent of American workers
were unemployed. Living standards remained depressed until after the war.2
While there was episodic recovery between 1933 and 1937, the 1937 peak
was lower than the previous peak (1929), a highly unusual occurrence.
Progress has been the norm. In addition, the 1937 peak was followed by
a crash. As Nobel laureate Milton Friedman observed, this was "the
only occasion in our record when one deep depression followed
immediately on the heels of another."3
Scholarly investigators have raised some provocative questions. For
instance, why did New Dealers make it more expensive for employers to
hire people? Why did FDR's Justice Department file some 150 lawsuits
threatening big employers? Why did New Deal policies discourage
private investment without which private employment was unlikely to
revive? Why so many policies to push up the cost of living? Why did
New Dealers destroy food while people went hungry? To what extent did
New Deal labor laws penalize blacks? Why did New Dealers break up the
strongest banks? Why were Americans made more vulnerable to disastrous
human error at the Federal Reserve? Why didn't New Deal securities
laws help investors do better? Why didn't New Deal public works
projects bring about a recovery? Why was so much New Deal relief
spending channeled away from the poorest people? Why did the Tennessee
Valley Authority become a drag on the Tennessee Valley?
Curiously, although the Great Depression was probably the most
important economic event in twentieth-century American history,
Stanford University's David M. Kennedy seems to be the only major
political historian who has mentioned any of the recent findings.
"Whatever it was," he wrote in his Pulitzer Prize–winning Freedom from
Fear (1999), the New Deal "was not a recovery program, or at any rate
not an effective one."4
It's true the Great Depression was an international
phenomenon—depression in Germany, for instance, made increasing
numbers of desperate people search for scapegoats and support Adolf
Hitler, a lunatic who couldn't get anywhere politically just a few
years earlier when the country was still prosperous. But compared to
the United States, as economic historian Lester V. Chandler observed,
"in most countries the depression was less deep and prolonged."5
Regardless whether the depression originated in the United States or
Europe, there is considerable evidence that New Deal policies
prolonged high unemployment.
FDR didn't do anything about a major cause of 90 percent of the bank
failures, namely, state and federal unit banking laws. These limited
banks to a single office, preventing them from diversifying their loan
portfolios and their source of funds. Unit banks were highly
vulnerable to failure when local business conditions were bad, because
all their loans were to local people, many of whom were in default,
and all their deposits came from local people who were withdrawing
their money. Canada, which permitted nationwide branch banking, didn't
have a single bank failure during the Great Depression.
FDR's major banking "reform," the second Glass-Steagall Act, actually
weakened the banking system by breaking up the strongest banks to
separate commercial banking from investment banking. Universal banks
(which served depositors and did securities underwriting) were much
stronger than banks pursuing only one of these activities, very few
universal banks failed, and securities underwritten by universal banks
were less risky. Almost every historian has praised FDR's other major
financial "reform," establishing the Securities and Exchange
Commission to supervise the registration of new securities and the
operation of securities markets, but in terms of rate of return,
investors were no better off than they were in the 1920s, before the
Securities and Exchange Commission came along.
FDR didn't do much about a contributing factor in the Great
Depression, the Smoot-Hawley tariff which throttled trade. Indeed, he
raised some tariffs, while Secretary of State Cordell Hull negotiated
reciprocal trade agreements which cut tariffs only about 4 percent.
FDR approved the dumping of agricultural commodities below cost
overseas, which surely aggravated our trading partners.
FDR tripled taxes during the Great Depression, from $1.6 billion in
1933 to $5.3 billion in 1940.6 Federal taxes as a percentage of the
gross national product jumped from 3.5 percent in 1933 to 6.9 percent
in 1940, and taxes skyrocketed during World War II.7 FDR increased the
tax burden with higher personal income taxes, higher corporate income
taxes, higher excise taxes, higher estate taxes, and higher gift
taxes. He introduced the undistributed profits tax. Ordinary people
were hit with higher liquor taxes and Social Security payroll taxes.
All these taxes meant there was less capital for businesses to create
jobs, and people had less money in their pockets.
In addition, FDR increased the cost and risk of employing people, and
so there shouldn't have been any surprise that the unemployment rate
remained stubbornly high. Economists Richard K. Vedder and Lowell E.
Gallaway, in their 1997 study Out of Work: Unemployment and Government
in Twentieth-Century America, reported: "New Deal policies (and some
Hoover-era policies predating the New Deal) systematically used the
power of the state to intervene in labor markets in a manner to raise
wages and labor costs, prolonging the misery of the Great Depression,
and creating a situation where many people were living in rising
prosperity at a time when millions of others were suffering severe
deprivation. . . . Of the ten years of unemployment rates over 10
percent during the Depression, fully eight were during the Roosevelt
administration (counting 1933 as a Roosevelt year)."8 Vedder and
Gallaway estimated that by 1940 unemployment was eight points higher
than it would have been in the absence of higher payroll costs imposed
by New Deal policies.9
Economists Thomas E. Hall and J. David Ferguson reported, "It is
difficult to ascertain just how much the New Deal programs had to do
with keeping the unemployment rate high, but surely they were
important. A combination of fixing farm prices, promoting labor
unions, and passing a series of antibusiness tax laws would certainly
have had a negative impact on employment. In addition, the uncertainty
experienced by the business community as a result of the frequent tax
law changes (1932, 1934, 1935, 1936) must have been enormous. Since
firms' investment decisions very much depend on being able to plan, an
increase in uncertainty tends to reduce investment expenditures. It
should not be a surprise that investment as a proportion of output was
at low levels during the mid-1930s."10
Black people were among the major victims of the New Deal. Large
numbers of blacks were unskilled and held entry-level jobs, and when
New Deal policies forced wage rates above market levels, hundreds of
thousands of these jobs were destroyed. Above-market wage rates
encouraged employers to mechanize and in other ways cut total labor
costs. Many New Deal policies were framed to benefit northern
industries and undermine the position of employers in the South, where
so many blacks worked. "New Deal labor policies contributed to a
persistent increase in African American unemployment," reported
economist David E. Bernstein.11
When millions of people had little money, New Deal era policies made
practically everything more expensive (the National Industrial
Recovery Act), specifically maintained above-market retail prices (the
Robinson-Patman Act and the Retail Price Maintenance Act) and
above-market airline tickets (Civil Aeronautics Act). Moreover, FDR
signed into law the Agricultural Adjustment Act, which led to the
destruction of millions of acres of crops and millions of farm
animals, while many Americans were hungry.
New Deal agricultural policies provided subsidies based on a farmer's
acreage and output, which meant they mainly helped big farmers with
the most acreage and output. The New Deal displaced poor sharecroppers
and tenant farmers, a large number of whom were black. High farm
foreclosure rates persisted during the New Deal, indicating that it
did almost nothing for the poorest farmers. Historian Michael A.
Bernstein went farther and made a case that New Deal agricultural
policies "sacrificed the interests of the marginal and the
unrecognized to the welfare of those with greater political and
economic power."12
The flagship of the New Deal was the National Industrial Recovery Act,
which authorized cartel codes restricting output and fixing high
prices for just about every conceivable business enterprise, much as
medieval guild restrictions had restricted output and fixed prices.
That FDR approved contraction was astounding, because the American
people had suffered through three years of catastrophic contraction.
With the National Industrial Recovery Act, it actually became a crime
to increase output or cut prices—a forty-nine-year-old immigrant dry
cleaner was jailed for charging 35 cents instead of 40 cents to press
a pair of pants.
This wasn't full-scale government control as in the Soviet Union, but
it came closer than anybody had thought possible. Although the NIRA
was struck down by the Supreme Court in May 1935, the New Deal
continued to multiply restrictions on business enterprise. "Perhaps
the greatest defect in these limited planning measures," wrote
economic historian Ellis W. Hawley, "was their tendency toward
restriction, their failure to provide any incentive for expansion when
an expanding economy was the crying need of the time."13
While FDR authorized the spending of billions for relief and public
works projects, a disproportionate amount of this money went not to
the poorest states such as the South, but to western states where
people were better off, apparently because these were "swing" states
which could yield FDR more votes in the next election. The South was
already solidly Democratic, so there wasn't much to be gained by
buying votes there. It was observed at the time that relief and public
works spending seemed to increase during election years. Politicking
with relief and public works money got to be so bad that Congress
passed the Hatch Act (1939).
The New Deal approached its climax in 1938 as Thurman Arnold, head of
the Justice Department's Antitrust Division, began to file about 150
lawsuits against companies employing millions of people. Hawley called
this "the most intensive antitrust campaign in American history."14
Whatever the merits of the government's claims, these lawsuits made it
politically more risky for businesses to pursue long-term investments,
and private investment remained at an historically low level
throughout the New Deal—prolonging the Great Depression.
All the highly publicized relief programs and public works projects
couldn't make up for the damage inflicted by New Deal taxes,
restrictions, antitrust lawsuits, and the rest. Indeed, the more money
the government spent on relief and public works, the more tax revenue
it needed, and the more damage done to the economy.
As a cure for the Great Depression, government spending didn't work.
In 1933, federal government outlays were $4.5 billion; by 1940 they
were $9.4 billion, so FDR more than doubled federal spending, and
still unemployment remained stubbornly high. Changes in federal budget
deficits didn't correspond with changes in gross domestic product, and
in any case the federal budget deficit at its peak (1936) was only 4.4
percent of the gross domestic product, much too small for a likely cure.15
The most that could be said in FDR's defense was this, by Donald R.
Richberg, former head of the National Recovery Administration:
"Although the tremendous expenditures and supports for agriculture and
industrial labor that were projected in the Roosevelt administration
did not end a huge unemployment problem, they did raise new hopes and
inspire new activities among the American people which turned them
away for a time at least from even more radical political programs."16
FDR had assumed unprecedented arbitrary power supposedly needed to get
America out of the Great Depression. Although Democrats controlled
Congress, FDR was impatient with American democracy, and he issued an
extraordinary number of executive orders—3,728 altogether17—which is
more than all the executive orders issued by his successors Harry
Truman, Dwight D. Eisenhower, John F. Kennedy, Lyndon B. Johnson,
Richard M. Nixon, Gerald R. Ford, Jimmy Carter, Ronald Reagan, George
H. W. Bush, and Bill Clinton combined. In the name of fairness, FDR
saw to it that some individuals were treated much more harshly than
others under the federal tax code. NRA codes denied individuals the
fundamental liberty to enter the business of their choosing.
Compulsory unionism denied individuals the right to work without
joining a union. Americans gave up these liberties and more without
getting out of the Great Depression, as had been promised. Principal
legacies of the New Deal have been a massive expansion of government
power and loss of liberty.
FDR's failure to end chronic high unemployment and his increasingly
arbitrary tactics were reasons why, after 1936, his political support
declined. Republicans gained seats in Congress during the 1938
elections, and they gained more seats in 1940. FDR's own vote totals
declined after 1936, and Republican presidential vote totals increased
over both those of 1936 and 1932.
FDR didn't make the recovery of private, productive employment his top
priority. Along with advisers like Louis Brandeis, Felix Frankfurter,
Rexford Tugwell, and Thomas Corcoran, FDR viewed business as the cause
of the Great Depression, and he did everything he could to restrict
business. His goal was "reform," not recovery. Accordingly, the New
Deal taxed money away from the private sector, and government
officials, not private individuals, made the spending decisions. New
Deal laws determined what kind of people businesses must hire, how
much they must be paid, what prices businesses must charge, and it
interfered with their ability to raise capital.
The British economist John Maynard Keynes recognized that FDR's
priorities were subverting the prospects for ending high unemployment.
He wrote FDR a letter which was published in the December 31, 1933,
issue of the New York Times. Keynes warned that "even wise and
necessary Reform may, in some respects, impede and complicate
Recovery. For it will upset the confidence of the business world and
weaken their existing motives to action. . . . I am not clear, looking
back over the last nine months, that the order of urgency between
measures of Recovery and measures of Reform has been duly observed, or
that the latter has not sometimes been mistaken for the former."18
Newspaper columnist Walter Lippmann observed that New Deal "reformers"
would "rather not have recovery if the revival of private initiative
means a resumption of private control in the management of corporate
business . . . the essence of the New Deal is the reduction of private
corporate control by collective bargaining and labor legislation, on
the one side, and by restrictive, competitive and deterrent government
action on the other side."19
The failure of the New Deal seems incredible considering that FDR is
widely rated among America's greatest presidents. Moreover, many of
the brightest minds of the era were recruited to Washington. FDR, who
graduated from Harvard College, filled many of his top positions with
graduates of Harvard Law School. They had clerked with the most
respected judges of the era. These and other New Dealers were hailed
for their compassion and their so-called progressive thinking. They
were widely viewed as more noble than the greedy businessmen and
reckless speculators who were thought to have brought on the
depression. New Dealers wanted to eliminate poverty, abolish child
labor, and right other social wrongs. Many New Dealers saw themselves
as trying to make the world over. How could such bright, compassionate
people have gone so wrong?
This book attempts to explain what went wrong and why. I draw on major
findings by economists about the actual effects of the New Deal—how it
promoted cartels, imposed confiscatory taxes, made it harder for
companies to raise capital, made it more expensive for companies to
employ people, bombarded companies with dubious antitrust lawsuits,
and relentlessly denounced employers and investors, prolonging high
unemployment. Published during the last four decades, these findings
have been virtually ignored by pro–New Deal political historians like
James MacGregor Burns, Arthur M. Schlesinger Jr., Frank Freidel,
William Leuctenburg, and Kenneth S. Davis. In his autobiography,
Schlesinger acknowledged that he "was not much interested in
economics." It is remarkable how such respected historians, writing
about the most important economic event of twentieth-century American
history, could disregard the growing economics literature which
challenges their views.
Unless we clearly understand the effects of the New Deal, we cannot
say we understand it at all—and more important, what the Great
Depression experience means for us now. It would be tragic if, in a
future recession or depression, policymakers repeated the same
mistakes of the New Deal because they knew only the political
histories of the time.
I believe the evidence is overwhelming that the Great Depression as we
know it was avoidable. Better policies could have prevented the bank
failures which accelerated the contraction of the money supply and
brought on the Great Depression. The Great Depression could have been
over much more quickly—the United States recovered from the severe
1920 depression in about a year. Chronic high unemployment persisted
during the 1930s because of a succession of misguided New Deal policies.
A principal lesson for us today is that if economic shocks are
followed by sound policies, we can avoid another Great Depression. A
government will best promote a speedy business recovery by making
recovery the top priority, which means letting people keep more of
their money, removing obstacles to productive enterprise, and
providing stable money and a political climate where investors feel
that it's safe to invest for the future.
Introduction
11.Richard K. Vedder and Lowell E. Gallaway, Out of Work: Unemployment
and Government in Twentieth-Century America (New York: New York
University Press, 1997), p. 129.
12.Lester V. Chandler, American Monetary Policy, 1928-1941 (New York:
Harper & Row, 1971), p. 247.
13.Milton Friedman and Anna Jacobson Schwartz, A Monetary History of
the United States, 1867–1960 (Princeton: Princeton University Press,
1963), p. 493.
14.David M. Kennedy, Freedom from Fear: The American People in
Depression and War, 1929-1945 (New York: Oxford University Press,
1999), p. 361.
15.Lester V. Chandler, America's Greatest Depression, 1929-1941 (New
York: Harper & Row, 1970), p. 91.
16.Historical Statistics of the United States from Colonial Times to
the Present (Washington, D.C.: Department of Commerce, 1974), II, p. 1107.
17.http://www.colorado.edu
18.Vedder and Gallaway, pp. 128, 131, 132.
19.Vedder and Gallaway, p. 141.
10.Thomas E. Hall and J. David Ferguson, The Great Depression: An
International Disaster of Perverse Economic Policies (Ann Arbor:
University of Michigan Press, 1998), p. 147.
11.David E. Bernstein, Only One Place of Redress: African Americans,
Labor Regulations, and the Courts from Reconstruction to the New Deal
(Durham, N.C.: Duke University Press, 2001), p. 103.
12.Michael A. Bernstein, The Great Depression: Delayed Recovery and
Economic Change in America, 1929–1939 (Cambridge: Cambridge University
Press, 1987), p. 270.
13.Ellis W. Hawley, The New Deal and the Problem of Monopoly: A Study
in Economic Ambivalence (Princeton: Princeton University Press, 1966),
p. 485.
14.Hawley, p. 421.
15."Gross Domestic Product (Millions of 1929 dollars)," National
Bureau of Economic Research, NBER Series 08166.
http://www.korpios.org/resurge
Outlays and Surpluses of Deficits, 1789–2004," The Budget for Fiscal
Year 2000, p. 19, http://w3.access.gpo .gov/usbudget /fy2000/pdf/hist.pdf.
16.Donald R. Richberg, My Hero: The Indiscreet Memoirs of an Eventful
but Unheroic Life (New York: Putnam's, 1954), p. 152.
17.National Archives and Records Administration, Executive Orders
Disposition Tables, http://www.nara.gov/fedreg/eo
18.http://newdeal.feri.org/misc
19.Quoted in Gary Dean Best, Pride, Prejudice, and Politics: Roosevelt
Versus Recovery, 1933–1938 (Westport, Conn.: Praeger, 1991), p. 213.
Related Links
# Are the Revisionists Right About FDR? Alonzo Hamby (HNN)
http://hnn.us/articles/3800
No comments:
Post a Comment