Lecture 9: FDR’s New Deal and the Great Depression
Politics and the Law: Perverse Incentives and Unintended Consequences
As you evaluate what takes place in the news media -- particularly regarding those things
touching philosophy and politics -- I would advise you to maintain a healthy dose of skepticism
before being persuaded.
It is human nature to want to solve problems. When we see problems out in society as a whole,
many pursue political action to try to solve those problems and the end result of such political
action is the expansion of law and a resulting reduction in individual liberty. Most everything
comes at a cost including attempted political solutions.
First, they may not actually solve the problem and waste a lot of resources in the process that
could have been put to better uses.
Second, even if they provided some measure of solution to the problem at hand, they might also
cause perverse incentives and unintended side effects that impose societal costs which
overwhelm whatever societal benefits might have been achieved.
The economic costs of the implementation of such political “solutions” usually fall
predominately on business which makes it more difficult for them to succeed and, in turn, may
negatively impact our economic prosperity. It is not enough to just have good political/social
intentions–we must be concerned about the actual net societal results that come from trying to
solve every problem, and right every wrong, through the force of law.
Herbert Spencer complained in 1884 about the political apathy in his native England, and this
was at a time when there were no such competing diversions as television, video games, the
internet, etc. Said he:
“‘Surely,’ rejoins some one, ‘facility in reading opens the way to political knowledge.’
Doubtless; but will the way be followed? Table-talk proves that nine out of ten people
read what amuses them or interests them rather than what instructs them; and that the last
thing they read is something which tells them disagreeable truths or dispels groundless
hopes. That popular education results in an extensive reading of publications which
foster pleasant illusions rather than those which insist on hard realities, is beyond
question.”1
In other words, Spencer observed that even though people read lots of things, they were not
willing to read the right things—things that would instruct and teach hard truths and realities.
Instead, they were only willing to read things that would just entertain and tend to create
groundless political hopes and pleasant illusions.
J. Reuben Clark, Jr., once observed: “there always comes a time when unpleasant truths must be
retold, even though the retelling disturbs the ease and quiet of a luxurious error. Today seems to
1
Herbert Spencer, The Man versus the State, p. 52.
1
be such a time….”2 In that address, he lamented where the country had been taken as a result of
FDR’s New Deal.
What “groundless hopes,” or “luxurious errors” surround our understanding of FDR’s New Deal
policies and the effects they had on the Great Depression? What “disagreeable truths,”
“unpleasant truths” or “hard realities” should we consider and understand about that chapter of
American history?
Specifically, I would ask you how Franklin Delano Roosevelt was presented to you in school
regarding how his New Deal policies affected the Great Depression. If you were taught as I was
taught, you were led to believe that FDR saved us from the Great Depression.
Recently, I read some books that take serious issue with that conclusion and argue just the
opposite–that the reason that particular economic depression was so long and so deep compared
to prior national economic depressions, was because of the extremely negative impact his various
political policies, regulatory policies, tax policies, and his personal, and very publicly expressed,
revulsion for business, had on the country’s business and economic climate and the economic
opportunities available to our citizens. As I hope you will be able to see from this discussion,
his policies discouraged risk-taking, scared new investment out of the market place, and
practically guaranteed that the depression would truly become “Great” compared to all previous
economic depressions.
If the personal model you have constructed about how the world works includes a strong belief
that FDR’s invasive micro-management of the free market saved us from the Great Depression
and effectively improved the health of our economy, and consider that issue to be firmly settled
in your mind, I doubt you will be willing to read or listen to the rest of this lecture. For people
tend to become very invested in the various models they create in their minds and tend to be
more willing to ignore or explain away inconvenient facts that tend to call into question the
accuracy of their models, than to consider the need to adjust their models to better comport with
reality.
In my introductory lecture I introduced J. Reuben Clark, Jr., as an honest seeker of truth. In his
1898 university commencement address at the University of Utah, he said that he and his fellow
students had been “taught those two great lessons first, to seek truth for the love of it, and
second, and equally important, to recognize truth when found.”3
As a humble seeker of truth, Clark recognized the possibility that he might not yet have fully
discovered it. In a quick memorandum he prepared at the request of Judge Salmon O. Levinson
on American foreign policy, Clark said: “I reserve the right to change any and all views therein
expressed, after more mature reflection.”4 He emphasized that statement by putting it into
italics.
2
Some Elements of Postwar American Life (1945), Yarn 5, p.541.
J. Reuben Clark, J. Reuben Clark Selected Papers On Americanism and National Affairs, the fifth of a
multivolume set on the life and work of J. Reuben Clark, Jr., edited by David H. Yarn, Jr., (Brigham Young
University, 1987), p.12.
4
Some elements of an American Foreign Policy (1925), Yarn 4, pp.349-50.
3
2
In other words, he always kept an open mind sensitive to the possibility that he might be wrong
concerning the various models he had constructed in his own mind to explain how the world
works and may, from time to time, have to change his position on something or, in other words,
adjust his models. That is a great mental frame of reference that we all would be wise to adopt if
we are to accurately be described as honest seekers of truth.
As we begin our discussion of the New Deal, I would like to share a couple of other quotes from
J. Reuben Clark that are applicable. The first quote occurred near the end of FDR’s first hundred
days in office as President where there had been a flurry Congressional activity passing lots of
his New Deal programs. Clark said:
“But we must not forget that some men are still selfish, that they still love power and
dominion, that they still use all the means necessary to secure their ends. Tyranny has
been so long away from us, that our ears do not detect his tread, our eyes do not
recognize his face and then he comes in so many guises. What our fathers knew of him
instinctively, we do not now know even by inspection. We must not sleep, lest we shall
be bound before we waken. And while we watch and examine to spy out him who comes
to rob us of our heritage, let us remember no tyrant is so hard to discern, none is so hard
to unmask, as he who comes in the garb of a hypocritical interest in the welfare of the
common people.”5
After FDR’s death and the end of WWII, Clark similarly observed:
“Tyranny has never come to live with any people with a placard on his breast bearing his
name. He always comes in deep disguise, sometimes proclaiming an endowment of
freedom; sometimes promising to help the unfortunate and downtrodden, not by creating
something for those who do not have, but by robbing those who have. But Tyranny is
always a wolf in sheep’s clothing, and he always ends by devouring the whole flock,
saving none. So it is today.”6
How the Law Affects the Success or Failure of Business
If the law becomes too intrusive, it will discourage business risk taking and negatively affect the
economy. Business risks will only voluntarily be undertaken, and the economy allowed to grow,
when the prospects for financial gain exceed the perceived risks of loss in the minds of those
with ideas.
Most businesses fail because their costs of operation exceed their revenues over time. While it is
very easy to see taxes as a cost of doing business, many seem to ignore the fact that legal
regulations also impose artificial costs on business that must be covered like every other cost of
doing business, if a company is to survive.
Recently I scanned the table of contents of a forthcoming book to be published by the Utah State
5
Enemies of Liberty, Baccalaureate speech delivered June 4, 1933, University of Idaho, Southern Branch, Pocatello,
Idaho; Clarkana Papers, Box 211, Harold B. Lee Library, Brigham Young University.
6
Inroads Upon the Constitution by the Roman Law (1946), Yarn 5, pp.143-44.
3
Bar that is designed to help entrepreneurs comply with all the various federal and state laws that
will apply to them. The very distinct impression I got was that if a budding entrepreneur were to
read that table of contents and see all the legal mine fields that lay ahead of him before he took
the plunge into business, he would probably decide not to go forward with his new idea for a
business; rather than produce a job for himself and perhaps others down the road, he would
probably consider the potential legal risks and hassles to be too daunting and beg somebody else
for a job. That is not the way to produce a growing and vibrant economy that expands the
economic opportunities for everybody. Rather, it would tend to inhibit and impair an economy
and make good jobs relatively scarce.
Our relative prosperity and opportunities are not accidental-- a key determinant is freedom and a
legal system that supports it. If we are not careful, we can “kill the goose that laid the golden
egg,” or in other words, we can destroy what has been our amazingly prosperous economy. We
can inadvertently kill it by regulating it and taxing it to death, be it under the name of rights,
social justice, fairness, equality, equity, or any other euphemism one could use to get people to
buy into that destructive proposition.
Rather than the Great Depression being a failure of capitalism, many believe it was a “failure of
government”7 as will be explained shortly.
Again, this conclusion goes entirely against what I was taught in school which was that FDR’s
government policies saved us from the Great Depression. But when you see the various policies
of FDR’s New Deal, try to imagine yourself in the shoes of business people and ask yourself if
you would have been inclined to borrow money and/or risk your capital in a new business
venture, or to expand an existing one, if you personally faced the various New Deal policies
discussed below. Most likely, just like the many business people of that day, you probably
would have taken your money off of the table, headed for your tornado cellar, and waited for the
political tornado of the New Deal to blow over and for calmer and sunnier political skies to rise
in Washington D.C. before venturing out to again be willing to take risks with your capital or
with borrowed funds.
How Did the Federal Government Deal with the Various Economic Depressions Before the
Great Depression?
We have had several “depressions”8 in our history but they usually lasted only a few years before
things turned around and economic growth resumed.9 In contrast to the Great Depression where
7
Economics Nobel Laureate Milton Friedman, Imprimis, Volume 35, Number 7, July 2006, p.5, (monthly periodical
published by Hillsdale College); Jim Powell, FDR’s Folly–How Roosevelt and His New Deal Prolonged the Great
Depression (New York: Three Rivers Press (2003), pp.205 & 267.
Apparently economic downturns were traditionally called “depressions” until after the Great Depression of the
1930s. Since then we have used the word “recession” to call such downturns since nothing after the Great
Depression has ever approached its depth and length. “Depressions” occurred in 1819, 1839-1843, 1873-1879,
1895-1897, and 1920-1921. Hans F. Sennholz, “Cyclical Unemployment,” The Freeman: Ideas on Liberty, Vol.36,
No.4, April 1986 published by the Foundation for Economic Education (http://www.fee.org).
8
9
Powell, pp.268-269; The World Book Encyclopedia (1986), Vol. 8 (G), p.340b.
4
the federal government tried to micro-manage our way through it, our prior depressions were
relatively short-lived in duration because the federal government tried to get out of the way of
the free market allowing it to make its necessary corrections without interference through
regulation and taxation.10
Before the Great Depression, companies were able to adjust to declining economic conditions by
laying off some of their workforce. While it is true that this caused great hardships on those
thrown out of work, it had the benefit of keeping the company healthy and able to survive the
downturn and be in a position to increase its workforce when the economy began to recover. To
use a naval analogy, before the Great Depression, the prime objective was to save the ship (i.e.
businesses and the economy) at the sacrifice of some of the sailors (i.e. workers), knowing that if
the ship sunk all would be lost rather than just those few that had to be sacrificed to save the
ship. And a sunk ship would be permanently lost to all potential future usage and benefit.
How was Herbert Hoover’s Approach to the Depression Different from Other Presidents in
Dealing with Their Economic Depressions?
But before talking about FDR, let us begin with Herbert Hoover. After the shock of the October
1929 stock market crash, on November 21st, President Hoover called the most prominent
businessmen of the nation to White House for consultations. Amity Shlaes observed:
“After hearing their views, Hoover did something radical. He noted that ‘liquidation’
([or in other words,]layoffs) had accompanied all previous American recessions and that
the federal government had allowed those liquidations to take place. This time ‘his every
instinct’ told him things must be different; wages must stay in place. Otherwise values
would be ‘stepped down’; industry must help to ‘cushion down’ the situation. At the
worst, businesses in trouble might reduce hours to share jobs. But the general push must
be to keep high wages and keep up employment.
*
*
*
“Hoover’s wage ideas sounded good to some. And they were indeed the opposite of
federal policies in the last downturn. But they did not really make sense: to force
business to go on spending when it did not want to was to hurt business. And in some
areas–wages, especially–the president’s policy was dramatically counterproductive. As
the crash continued, profits began to drop. Yet businesses could not adjust: if they
wanted to be good citizens, they had to keep their pledge to Hoover and sustain
employment and wages. The president was, essentially, requiring that companies take
the hit in profits instead of employment.
“...This was different from 1921, when companies had been able to cover their losses by
cutting wages. But there was also, of course, an effect on employers. Their wage costs
forced down the value of company shares, aggravating the downturn that Hoover had
vowed to fight....
“...Albert Wiggin of the Chase bank argued that Hoover had his logic about wages
10
Powell, pp.268-269; Paul Johnson, Modern Times: The World from the Twenties to the Nineties, (New York:
Harper & Row (1983)), p.216.
5
backward. ‘It is not true that high wages make for prosperity,’ Wiggin would protest at
one point. ‘Instead, prosperity makes high wages.’”11
So, to return to my prior analogy, Hoover’s plan was to try to save every sailor as the first
priority rather than having that first priority be to save the ship (i.e. business). FDR later pursued
the same policy but in a faster and more complete way.
We call the depression that happened in the 1930s the “Great Depression” because it lasted so
long and was so deep. It started in 1929 and didn’t end until about 1942 when we entered WWII
in full force.12
Jim Powell observed:
“From 1934 to 1940, the median annual unemployment rate was 17.2 percent.13 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.”14
Things didn’t really get better until future presidents stopped the anti-business rhetoric, lowered
taxes, cut back on government regulation of business and moved us back towards the free market
model. In addition to the foregoing, we had the good fortune of being isolated by two gigantic
oceans from the war zones which largely destroyed the industrial capacities of our economic
rivals but left ours intact to quickly re-convert to the production of consumer products after the
war.
What Caused Me to Look at Things Differently about FDR’s Effect on the Great
Depression?
I have always puzzled over why the Great Depression lasted so long--we had abundant natural
resources, factories, machinery, and people who wanted to work. I was always taught that FDR
saved us from the Great Depression, through all of the government agencies he created and laws
he passed and I simply believed what I was told by my teachers.
But a few years ago I saw some book titles that grabbed my attention: The Roosevelt Myth by
John T. Flynn, and FDR’s Folly–How Roosevelt and His New Deal Prolonged the Great
Depression by Jim Powell. I bought them and finally discovered what the legal policies of
FDR’s New Deal consisted of and could see the answers to my prior question which I will
summarize momentarily.
11
Amity Shlaes, The Forgotten Man–A New History of the Great Depression (New York, HarperCollins Publishers
(2007)), pp.92-94.
12
The World Book Encyclopedia (1986), Vol. 8 (G), p.340d.
13
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.
14
Powell, p.vii.
6
Before getting into the details, consider two supporting statements by two Nobel prize-winning
economists in the forward to Powell’s book:
Milton Friedman: “Admirers of FDR credit his New Deal with restoring the American
economy after the disastrous contraction of 1929-1933. Truth to tell–as Powell
demonstrates without a shadow of doubt–the New Deal hampered recovery from the
contraction, prolonged and added to unemployment, and set the stage for ever more
intrusive and costly government. Powell’s analysis is thoroughly documented, relying
upon an impressive variety of popular and academic literature, both contemporary and
historical.”
James M. Buchanan: “The material laid out in this book desperately needs to be available
to a much wider audience than the ranks of professional economists and economic
historians, if policy confusion similar to the New Deal is to be avoided in the future.”
Presidents Wilson’s Contributions to the Great Depression
Before we discuss what FDR did, let us stay true to chronology and briefly consider some other
things that happened on Woodrow Wilson’s watch. The Federal Reserve (Fed) was created in
1914 under Woodrow Wilson “primarily to act as a ‘lender of last resort’ from which private
banks could borrow money in times of crisis.”15 Before this time the commercial bank
clearinghouses performed this function.16
Great Britain had gone off the gold standard during World War I in order to print more money to
pay its various war expenses. This caused inflation and after the war, it wanted to get back onto
the gold standard at its original rate. In order to do this it had to have help from other countries
to support its currency. Interest rates in America were higher than in England so money and gold
were flowing out of England and over to America. In July of 1927, Montagu Norman, the head
of the Bank of England, asked Benjamin Strong, the governor of the Federal Reserve Bank of
New York, to help. In response, Strong cut the discount rate, at which the Fed would lend
money to member Federal Reserve banks, from 4 percent to 3 percent. In addition he directly
supported the English currency by sending gold to the Bank of England to buy 12 million British
pounds. This caused the American stock market to rise significantly for at least two reasons.
First, it made bonds less attractive relative to stocks, and second, lowering the discount rate
effectively expanded the money supply and spurred lending; much of the resulting easy money
was invested in the stock market causing prices to rise.17
By the way, do you see any similarities to what is happening today with the Federal Reserve’s
discount rate currently being zero? What has happened to the stock market?—it has recovered
all of its staggering losses from 2007 forward and has even rocketed past its prior high set in
Ivan Pongracic, Jr., “The Great Depression According to Milton Friedman,” The Freeman: Ideas on Liberty,
September 2007, Vol. 57, No. 7, published by the Foundation for Economic Education. (See http://www.fee.org)
15
16
Pongracic, Id.
17
Powell, pp.28-29.
7
2007 by more than a thousand points. The Fed is currently creating new money to the tune of
about $85 billion per month in lending money to the government to support its voracious
spending habits. As old bonds are being retired and replaced by new bond issues, most of those
new bonds are not being bought by private investors with their pre-existing funds, but rather, are
being bought by the Fed with new money it made out of thin air. Much of those freed-up
private funds are then finding their way into the stock market thus propping up stock prices.
Now lets get back to our story about the conditions preceding the stock market crash of 1929.
By 1928 a number of Federal Reserve officials became concerned about the rampant stock
market speculation. In response they turned off the liquidity tap by raising the discount rate to 5
percent. In August of 1929, following Strong’s death, it was further raised to 6 percent. This
discouraged lending, constricted the money supply, and exerted deflationary pressures
throughout the economy—including the stock market.18
Milton Friedman, who won the Nobel Prize in economics for his book The Monetary History of
the United States, 1867-1960, said that the Fed’s action caused the money supply to shrink by
about a third which was the main cause of the depression.19 Mismanagement of the money
supply obviously is a failure of government, not business.20 Ivan Progracic said:
“In 2002 Ben Bernanke... [now (in 2013) the Fed Chairman] , made this startling
admission in a speech given in honor of Friedman’s 90th birthday: ‘I would like to say to
Milton [Friedman]...: Regarding the Great Depression, you’re right. We [the Fed] did it.
We’re very sorry.’”21
In 1929 there were about 25,000 banks in the United States. By mid-1933 that number had
dropped to about 15,000. People’s savings were wiped out so their natural response was to save
and cut back on their spending causing the economy to falter. The Gross Domestic Product
(GDP) was 29 percent lower in 1933 than in 1929. And the unemployment rate hit its historic
high of 25 percent in 1933.22
“Friedman and Schwartz argued that all this was due to the Fed’s failure to carry out its assigned
18
Powell, pp.28-29.
19
Powell, p.30; Milton , Imprimis, Volume 35, Number 7, July 2006, p.5, (monthly periodical published by
Hillsdale College.)
20
Some argue the Federal Reserve is not part of the federal government. How can that be when (1) the Federal
Reserve Chairman is a Presidential appointment needing confirmation in the Senate, and (2) any interest it earns on
the federal bonds it owns is returned to the U.S. Treasury?
21
Pongracic, Id. Apparently taking his cues from that conclusion, Bernake did some extraordinary things in early
2008 in response to the fear of a pending recession. While the stock markets were closed on Martin Luther King’s
holiday, foreign stock markets around the world dropped around 5% on that single day. After an emergency session
by the Fed, and with the obvious intent of heading off a similar drop in our stock markets, just before their opening
the next day, it dropped the federal discount rate by 3/4 of a percentage point. About a month later, it dropped the
discount rate down to only 2% in response to more negative economic news. Later in the financial crisis, the Fed
eventually lowered the discount rate all the way down to 0% and has kept it there at least to the end of 2013.
22
Pongracic, Id.
8
role as the lender of last resort. Rather than providing liquidity through loans, the Fed just
watched as banks dropped like flies, seemingly oblivious to the [reducing] effect this would have
on the money supply. The Fed could have offset the decrease created by bank failures by
engaging in bond purchases, but it did not. As Milton and Rose Friedman wrote in Free to
Choose:
“‘The [Federal Reserve] System could have provided a far better solution by engaging in
large-scale open market purchases of government bonds. That would have provided
banks with additional cash to meet the demands of their depositors. That would have
ended–or at least sharply reduced–the stream of bank failures and have prevented the
public’s attempted conversion of deposits into currency from reducing the quantity of
money....’”23
Actual cash became so scarce that many communities, including Cedar City, created their own
money substitutes to facilitate commerce. For example, J. David Leigh who had a store in Cedar
City, had metal tokens made in various increments from five cents to a dollar that could be
redeemed in purchases at his store. These were used in the our area as equivalents of real
nickels, dimes, etc. and helped facilitate the continuance of business in our area rather than
having to resort to wholesale bartering as our only means of transacting sales and purchases.
Pongracic asked:
“The obvious question is: Why didn’t the Fed act? We don’t know for sure, but
Friedman and Schwartz proposed several possible explanations: 1) the Fed officials did
not fully understand the disastrous consequences of letting so many banks go under....; 2)
Fed officials may have been acting out of their own self-interest since many of them were
affiliated with large Northeastern banks. Bank failures, at least in the early stages, ‘were
concentrated among smaller banks and since the most influential figures in the system
were big-city bankers who deplored the existence of smaller banks, their disappearance
may have been viewed with complacency’; 3) The inactivity may have been caused by
political infighting between the Federal Reserve Board in Washington D.C., and regional
Fed banks, in particular the New York district bank, which was the most important part
of the system at that time.”24
Pongracic continued:
“...Friedman and Schwartz claimed that the depression would not have been a Great
Depression if there had been no Federal Reserve in the first place: ‘[I]f the pre-1914
banking system rather than the Federal Reserve System had been in existence in 1929,
the money stock almost certainly would not have undergone a decline comparable to the
one that occurred.’”25
Lawrence H. White further explains:
23
Pongracic, Id.
24
Pongracic, Id.
25
Pongracic, Id.
9
“Friedman understood...that the Fed, having nationalized the roles of the clearinghouse
associations [CHAs], particularly the lender-of-last-resort role, did less to mitigate the
panic than the CHAs had done in earlier panics like 1907 and 1893. In that sense, the
economy would have been better off if the Fed had not been created.”26
The mismanagement of the money supply by the Fed was the first government failure which
pushed us into the depression. But that depression became “Great” because of an accumulation
of many other sequential government failures as explained below. While what the Fed did was
not done for the sake of promoting social justice, the things that follow were.
More About Hoover’s Contribution to the Great Depression
Referring to Herbert Hoover, Pongracic observed:
“(1) In response to a sharp decrease in tax revenues in 1930 and 1931 (caused by a
slowdown of economic activities), the federal government passed the largest peacetime
tax increase in the history of the United States [raising the top marginal individual
income tax bracket from 25% to 63%], which clearly applied the brakes on any recovery
that could have taken place; (2) the federal government also passed the Smoot-Hawley
Tariff Act in 1930, substantially increasing tariffs and leading to retaliatory restrictions
by trading partners, which resulted in a considerable decrease in demand for U.S. exports
and a further slowdown in production (not to mention a loss of mutually advantageous
division of labor); (3) the federal government also instituted all sorts of ‘public works’
programs, beginning under Herbert Hoover and increasing dramatically under FDR; the
programs removed hundreds of thousands of people from the labor market and engaged
them in economically wasteful activities, such as carving faces of dead presidents into the
sides of a mountain, preventing or delaying necessary labor-market adjustments....”27
As economically damaging as Hoover’s policies were, FDR made things even worse by several
times. Even though Hoover was extremely interventionist compared to his predecessors, the
level of FDR’s interventions were so much larger still that perhaps this is the reason that Hoover
was called a “do nothing President.”
FDR’s “Brain Trust”
FDR picked academic intellectuals as his top advisors rather than successful business people.
They became known as the “Brain Trust.”28 But as we will see from the economic effects of the
New Deal policies, the collective wisdom of a small number of “experts” is far less than the
collective wisdom of the free market as a whole where the millions of daily votes by consumers
give the necessary signals for the free market to naturally respond to prevailing economic
conditions.
26
Pongracic, Id.
27
Pongracic, Id.
28
John T. Flynn, The Roosevelt Myth, (San Francisco, Fox & Wilkes, (1998)), p.31.
10
Political experts get easily blinded by their goals and hopes and tend to focus only on the direct
and immediate results they hope and expect to achieve. They tend to ignore the indirect and
delayed consequences of their legal policies. They tend to ignore the perverse incentives and
unintended negative side effects they are creating by trying to use the force of law to solve
problems and promote some sense of “social justice.”
The New Deal’s Micro-Management of Business
Law is designed to affect human behavior, but it is rarely the case that it affects human behavior
in just one way. Usually it causes a multiplicity of human behavioral responses the sum total of
which may, on net, be bad rather than good despite the motives and intents of the policy makers
to the contrary. The Great Depression is a good example of these dynamics.
Before FDR took office, he and his advisors were impressed by the attempts by Mussolini in
Italy to create a planned economy.29 The intellectuals were so impressed with Mussolini that he
was being promoted for the Man of the Year by Time magazine.30
They believed that businessmen were too selfish and made business decisions that benefited only
them but hurt everybody else. They believed that businessmen had abused their freedoms and
therefore, should have them taken away. They further believed that altruistic experts through the
exercise of political power could plan and run the economy on a more moral and effective basis
than the free market could on its own. And they were bold enough to put their theories to work
by passing a plethora of regulatory law.31
Since the Democrats controlled both houses of Congress, during his first term in office, FDR,
playing captain of the ship, would issue orders and Congress would usually dutifully comply. In
a prior lecture I discussed one big exception to that general rule dealing with FDR’s unsuccessful
proposal to pack the Supreme Court during his second term, but during his first term, he usually
got what he wanted out of Congress. Within the first 100 days in office, at FDR’s prompting the
Democrats passed the National Industrial Recovery Act (NIRA) which created the National
Recovery Administration (NRA) headed by General Hugh Johnson, also an admirer of
Mussolini.32 Back then, when people heard the acronym “NRA” they immediately thought of
the National Recovery Administration not the “National Rifle Association” like most people
today would tend to think.
The NRA would propose various codes to minutely regulate various industries and FDR would
impose them on the country by executive order.33 In all, there were over 500 such codes
29
Flynn, p.39; Powell, pp.76-77.
30
Powell, p.113; Time, January 1, 1934; http://www.time.com/time/special/moy/1933.html.
31
Flynn, pp.92-93, 106-107, 264-265, 381-382, & 395-396; Powell, pp.76-77, 114, & 116.
32
33
Flynn, p.39; Lawrence W. Reed, Great Myths of the Great Depression, Mackinac Center for Public Policy, p.11.
Powell, p.122.
11
administered by the NRA ranging from the production of lightning rods to the manufacture of
corsets and brassieres. They covered more than 2 million employers and 22 million workers.
There were codes for the production of hair tonic, dog leashes, and even musical comedies.34
As I said, these Codes were implemented through Executive Orders and were applied in a
mandatory manner,35 but if a company voluntarily agreed in writing to comply with its
applicable Code, it was entitled to display a newly created “Blue Eagle” insignia. Critics
derisively called it the “blue buzzard,”36 “Roosevelt buzzard,”37 and/or “soviet duck.”38
General Johnson orchestrated a massive public relations blitz to sell the program to the American
people.39 He said that while America’s men won WWI in our fight against the Germans, it
would be America’s women who would win our war against the Great Depression by only
allowing into their homes goods sold by those patriotically displaying the Blue Eagle. Johnson
warned: “May Almighty God have mercy on anyone who attempts to trifle with that bird.”40
Henry Ford refused to sign the Code that applied to his industry and embarrassed the government
when bids were requested by the Civilian Conservation Corps (CCC) from the various car
companies to buy a fleet of trucks. Ford’s bid was much less than the other car companies which
had signed on to their applicable Code. The CCC accepted Ford’s low bid and in response, FDR
signed an Executive Order prohibiting the federal government in the future from buying from
those who refused to sign on to their applicable Code.41
Apparently the general public appreciated Ford’s refusal to submit to the government’s attempt
to micro-manage his company since his sales increased rather than decreased despite (1) General
Johnson’s pleas for the public not to buy from anybody who did not display the Blue Eagle and
(2) Ford’s loss of all government contracts for vehicles because of his refusal to sign onto the
code.42
Consider a few examples of the minute level of regulatory micro-management and intrusiveness
under the various NRA codes and the Agricultural Adjustment Act.
34
Flynn, p.40; Reed, p.11; Powell estimates the code totals to be about 550, p.121.
35
Shlaes, pp.217-218.
36
Powell, pp.120, 124-125.
37
Powell, p.120.
38
Flynn, pp.40-41.
39
Flynn, pp.40-41; Powell, pp.119-120.
40
Flynn, p.40; see slightly different version on Jim Powell, p.120.
41
Powell, pp.120, 125-126.
42
Powell, pp.126-127.
12
The Code applicable to those who slaughtered chickens was so detailed as to prohibit the
customer from choosing the live chicken he wanted to buy and have slaughtered. The butcher
was required to randomly pick the first chicken he happened to grab from the pen and sell that
one to the customer.43 What the government hoped to achieve by such a rule is hard to discern.
Perhaps the government wanted to do away with price differentiation based upon perceived
differences in quality. This is consistent with the later policy of the Office of Price
Administration that sought to do away with all quality differentiation.44
A N.J. tailor named Jack Magid was jailed for 3 months for charging 35 cents instead of the
code-mandated 40 cents to press a pair of trousers. When his story was made public, wondering
what type of country we had become, a storm of indignation swept through the nation. In hopes
of trying to end this public relations nightmare for the NRA, the judge quickly summoned the
tailor from his jail cell, remitted his sentence, and offered to give the offender the judge’s own
pants to press.45
Flynn observed:
“The NRA was discovering it could not enforce its rules. Black markets grew up. Only
the most violent police methods could procure enforcement. In...[the] garment industry
the code authority employed enforcement police. They roamed through the garment
district like storm troopers. They could enter a man’s factory, send him out, line up his
employees, subject them to minute interrogation. Flying squadrons of these private coatand-suit police went through the district at night, battering down doors with axes looking
for men who were committing the crime of sewing together a pair of pants at night. But
without these harsh methods many code authorities said there could be no compliance
because the public was not back of it.”46
The price fixing associated with the codes hurt small businesses by destroying their ability to
compete with big business through price-cutting competition.47 Similarly it hurt blacks who
formerly were able to successfully compete for jobs by offering their services at lower hourly
rates. It is estimated that a half million blacks lost their jobs due to the NRA minimum wage
laws.48 The experts probably didn’t expect or desire these results, but such is the nature of
perverse incentives and unintended side effects associated with legal mandates that tend to get so
easily ignored by the so-called “experts.”
43
Shlaes, pp.217-218.
44
See John T. Flynn, pp.290-291.
45
Flynn, p.41; Powell, pp.121-122.
46
Flynn, p.41; Powell, p.127.
47
Powell, pp.119-120 & 123.
48
Powell, pp.118-119, 228-229, & 205.
13
Lawrence Reed said: “Some economists have estimated that the NRA boosted the cost of doing
business by an average of 40 percent--not something a depressed economy needed for
recovery.”49
American farm production increased shortly after WWI in order to help feed a starving Europe
whose fields were destroyed during the war. But as reconstruction progressed over there and
agricultural production went up, this foreign market for American farmers started drying up and
creating a problem with over-production by our farmers. This overproduction caused prices to
drop radically, threatening the livelihoods of many American farmers.50 A bushel of wheat sold
for $1 in 1929 but later only sold for only 30 cents in 1932.51
Through the Agricultural Adjustment Act (AAA), FDR tried to come to their rescue by
encouraging/forcing farmers to plant less acreage in hopes of forcing market prices up for
them.52 Price subsidies were given to farmers through the Commodity Credit Corporation.53 But
by trying to micro-manage the farm economy in this way, he created scarcity and price hikes for
food at a time when people were hungry and had very little money to pay for food.
Under the first AAA, farmers were paid to take a portion of their farming operations out of
production with respect to just 6 controlled crops (cotton, corn, wheat, rice, peanuts and
tobacco). That left more than 100 other crops uncontrolled.54 Farmers responded by (1) taking
their least productive acreage out of production and intensively cultivating the remaining acreage
with the controlled crop, and/or (2) using the newly fallowed acreage to produce other
non-controlled crops thus increasing their overall production, lowering prices, and hurting those
farmers who relied solely upon producing those other non-restricted crops.55 Consequently, at
least in the case of cotton, rather than supply going down, supply went up.56 Since the subsidies
were based on the amount of acreage taken out of production (on those 6 crops), big farmers
garnered the lion’s share of the subsidies. The top 1% of the farmers got 21% of the subsidies.57
The Secretary of Agriculture, Henry Wallace, ordered 6 million piglets slaughtered.58 Healthy
49
Lawrence W. Reed, Great Myths of the Great Depression, Mackinac Center for Public Policy, p.11.
50
Powell, p.129.
51
Reed, p.7.
52
Powell, p.131.
53
Powell, pp.136 & 140.
54
Powell, p.137.
55
Powell, pp.137-138.
56
Powell, pp.138 & 140.
57
Powell, p.137.
58
Powell, p.134.
14
cattle, sheep, and pigs were slaughtered and buried in mass graves.59 The meat was purposefully
wasted at a time many Americans were hungry. Why?--again, to raise prices for the farmers.
The government’s quick attempts to micro-manage the economy prompted conflicting programs
and results.60 For example, trying to save the farmers by propping up their prices hurt everybody
else; and trying to help everybody else through strict price-fixing and forced wage increases61
through the NRA codes hurt the farmers.62 Limiting business output for the sake of raising
prices stopped employers from hiring new employees.63 So too did the artificial forcing up of
wages which encouraged automation.64
The goal of recovery slowly morphed into the goal of reforming the free market system along
supposedly more socially just lines.65
Flynn said:
“This was a plan to take the whole industrial and agricultural life of the country under the
wing of the government, organize it into vast farm and industrial cartels, as they are
called in Germany, corporatives as they were called in Italy, and operate business and the
farms under plans made and carried out under the supervision of the government. This is
the complete negation of [classical] liberalism. It is, in fact, the essence of fascism.
Fascism goes only one step further and insists, logically, that this cannot be done by a
democratic government; that it can be done successfully only under a totalitarian
regime....In those days fascism....was a word to describe the political system of
Mussolini.”66
The New Deal’s Taxing Policies
Not only was federal hyper-regulation discouraging to business, but super high tax rates
discouraged risk-taking. Businessmen and investors saw themselves as being under attack on
multiple fronts.67 At one time the highest individual marginal tax rate was 94%.68 If that wasn’t
59
Reed, p.10; Flynn, pp.44-45.
60
Flynn, p.117; Powell, pp.119-120, 123, & 139.
61
Powell, p.117.
62
Powell, pp.131,136-137.
63
Powell, pp.119 & 123.
64
Powell, p.119.
65
Flynn, pp.380-381, 395-396, & 402; Powell, pp.100, 228, 247-248; Shlaes, pp.270 & 272.
66
Flynn, pp.72, 139-142, 302.
67
Powell, pp.80, 84, & 87.
68
See the Tax Foundation website at http://www.taxfoundation.org for the years 1944 & 1945 in their report that
historically tracks income tax rates.
15
discouraging enough, on April 27, 1942, FDR proposed to entirely confiscate all incomes over
$25,000 per year and when Congress refused to go along, he tried to implement his plan through
an Executive Order on October 3, 1942, but it was rescinded by Congress.69 The corporate
excess profits tax hit 95%.70 As this all demonstrates, redistribution of wealth for the sake of
promoting social justice became a reform goal to be implemented though a confiscatory tax
system.71
At one point in 1937, FDR said: ‘We are beginning to wipe out the line that divides the practical
from the ideal; and in so doing we are fashioning an instrument of unimagined power for the
establishment of a morally better world.’72
The tax code did not allow taxpayers to carry back or forward business losses to be able to offset
them in otherwise profitable tax years.73 The practical result of this was that if you were a
wealthy capitalist, risked your capital in a particular venture, and happened to be successful,
Uncle Sam insisted upon becoming your partner to the tune of 94% of your net income with you
keeping only the remaining 6%. But if you lost your shirt in the venture and had no other
business income that year against which to offset your losses, Uncle Sam would refuse to be
your partner in loss and make you absorb all of it yourself. Who would want to take on new
risks under those very unfavorable terms?
In the years when the top marginal tax bracket was not that high, the investment and risk-taking
disincentive would not be as extreme, but still very discouraging. At no time during the Great
Depression did the top marginal tax bracket drop below 63%.74
FDR passed an undistributed profits tax on corporations to force them to pay out their after-tax
net earnings in dividends to their shareholders so that the government could tax that income
again when received as dividend income by the shareholders. This hurt small companies whose
prime source of capital for future expansion was retained earnings.75 Ford Motor Company was
able to innovate and expand its production by reinvesting its retained earnings rather than paying
them out in dividends to its shareholders.76
69
Powell, pp.245-246; Reed, p.14.
70
Powell, p.245.
71
Powell, pp.79-80.
72
Shlaes, p.299.
73
Powell, pp,78, 83-84.
74
See the Tax Foundation website at http://www.taxfoundation.org in their report that historically tracks income tax
rates.
75
Powell, pp.80-81.
76
Shlaes, pp.21 & 272.
16
Moreover, if a company was stripped of its retained earnings, it lost the buffer it would otherwise
have to continue paying workers even in bad times when the company was losing money.
Without that buffer, companies were quicker to lay off employees when losses started
accumulating.77 And laying off employees during the bad times only deepened and elongated
the depression.
The payroll tax associated with Social Security discouraged private sector job creation. FDR
admitted the program was political rather than economic.78 It took about $2 billion out of the
economy for 3 years before payouts began on January 1, 1937.79
It was accurately predicted that the government could not resist the temptation to spend excess
Social Security contributions on general government expenditures rather than accumulate them
to fund future payouts under the program.80 The federal government even openly argued that it
could spend those contributions however it pleased.81 Because it has done so, Social Security is
currently heading towards a fiscal train wreck as the “baby boomers” approach retirement and
switch from the paying side of the table to the receiving side.
Year after year the anticipated cross over date when the Social Security Administration would
start paying out more than it took in, kept getting accelerated until it finally happened sometime
in 2010. Even so, we were told not to worry since the Social Security “trust fund” would kick in
at that point and wouldn’t run out of funds for another fifteen years or so.
But what is that “trust fund”?—it is simply an accumulation government IOUs owed by the
government to itself and expanded each time it spent the excess Social Security tax revenue on
general government expenditures. The fact that it is not the type of reliable trust fund the general
populace has been led to believe it is, was laid bare in the summer of 2011 during the fight
between President Obama and the Congress over raising our national debt limit. In order to get
the debt limit raised, the President played his political trump card and threatened that if the debt
limit weren’t raised, Social Security checks couldn’t be sent out to those depending upon such
checks. He made the same threat in the lead up to the fight over extending the debt limit again in
October of 2013.
In other words, if the Social Security trust fund were composed of normal investments that could
easily be liquidated into cash by selling them as and when the government needed funds to pay
out to Social Security recipients, the government’s borrowing ability, or lack thereof, would have
no effect upon its ability to send out Social Security checks. But because the Social Security
trust fund is just made up of government IOU’s to itself, that means it just consists of the
77
Shlaes, pp.252 & 334.
78
Powell, pp.180-181.
79
Powell, pp.183-186, 226.
80
Powell, pp.185, 253-255.
81
Helverling v. Davis, 301 U.S. 619 (1937).
17
government’s promise to use its future taxing and borrowing powers to come up with the
necessary funds to pay out Social Security checks.
But in reality, since its other general government expenditures have far exceeded the
government’s tax revenues by more than a trillion dollars annually under each year of President
Obama’s administration, that means that the Social Security trust fund really just currently
consists of the government’s promise to use its future borrowing powers to come up with the
necessary funds to pay out Social Security checks.
Hence, the President has again threatened that the Social Security checks will stop flowing
unless the federal government’s debt limit is again raised so it can borrow more money, which as
I said earlier, will mostly consist of borrowing from the Federal Reserve since very few private
investors are willing to lend the U.S. government any more money at interest rates that are so
low that no real economic return can be realized by the would-be investors. Hence, the Federal
Reserve has to step in and create money out of thin air at the current rate of about $85 billion per
month to prop up the federal government’s over-spending binge in its efforts to try to make good
on all of the economically unsustainable political promises—including those regarding Social
Security—that were used so often in the past to buy votes.
Anyway, back to the effects of FDR’s New Deal policies on the economy. The over-regulation
of business and the constant uncertainty spawned by the ever-changing tax code, as discussed
above, increased perceived risk among business people and thus stifled the investment needed to
expand the economy and create new jobs for the many millions of people who were out of
work.82
FDR Tried to Blame Business for the Failure of His Policies
As the Great Depression drug on and on with little or no end in sight, FDR blamed business for
pretty much everything.83 FDR’s constant public vilification of business further discouraged
business. In his 1933 inaugural speech he called them “unscrupulous money changers.”84 In
accepting the 1936 Democratic presidential nomination, he “lashed out against ‘economic
royalists...the privileged princes of these new economic dynasties, thirsting for power, [who]
reached out for control over government itself.’ In FDR’s view, ‘They created a new despotism
and wrapped it in the robes of legal sanction. In its service new mercenaries sought to regiment
the people, their labor, their property...this new industrial dictatorship....Against economic
tyranny such as this, the American citizen could only appeal to the organized power of
government...we seek to take away their power.’”85 “In public remarks, Roosevelt’s men were
speaking of ‘corporate tentacles’ or ‘aristocratic anarchy.’”86
82
Powell, p.x.
83
Powell, pp.225, 231-232.
84
Reed, p.9.
85
Powell, p.82.
86
Shlaes, pp.343-344.
18
Businessmen saw FDR as moving us steadily towards socialism or fascism and refused to invest
as a result.87 Without that investment, job creation slowed down and even reversed.88 While he
said that he was only “priming the pump”89 to get business back on its feet, when his massive
federal spending slackened, another stock market crash occurred90 and the depression returned in
full force in 1938. Unemployment rates were quickly approaching what they were when he first
took office.91 Further contributing to the “depression within a depression,” the Fed had earlier
increased bank-reserve requirements in three steps in 1936 and 1937, leading to another
significant decrease in the money supply.92
The Pro-Union Legislation and Anti-Trust Litigation Hurt Business
The pro-union legislation made it more difficult for employers when their unions forced wage
increases which reduced profitability, contributed to unemployment, and prolonged the
Depression.93 First, the various industrial unions recognized under the National Industrial
Recovery Act (NIRA) were able to force their employers to pay above-market minimum wages
under the various industry-specific codes imposed by President through Executive Orders.
Despite such concessions, there were more strikes in 1933 (the year of its passage) than in any
year since 1921.94
After the Supreme Court held the NIRA to be unconstitutional, Congress passed the Wagner Act
to force the continued recognition of unions and resolve disputes between labor and management
through the National Labor Relations Board (NLRB). Again, instead of fewer strikes, after the
Wagner Act was passed, the number of strikes increased.95 A pattern seemed to develop
whereby once employers made concessions to the unions they were followed by an escalation
and radicalization of demands by the unions. “[I]nstead of staying within the safe confines of the
law, the protestors were pushing the envelope, seeing how far they could take the country.”96 To
some this provided fearful reminders of prior happenings in Italy, Germany, and Russia.97
87
Flynn, pp.90 & 108; Powell, pp.227-228.
88
Flynn, p.105.
89
Flynn, p.90.
90
Flynn, pp.106-107; Powell, p.226.
91
Flynn, pp.105, 109, 384 & 391-392.
92
Pongracic, Id.
93
Powell, pp.187-188, 201-202, 225-226.
94
Powell, pp.117 & 123.
95
Powell, pp.204-205.
96
Shlaes, p.324.
97
Shlaes, p.324.
19
Further scarring business and poisoning the business environment, was the aggressive
government anti-trust litigation against big businesses.98
From 1937 to 1938 the stock market again took a mighty tumble. In mid-August of 1937, the
Dow Jones Industrial Average (DJIA) stood at 190 but by March 31, 1938 it had dropped to
98.95–a 48% drop in value.99
It is interesting to note that the high point for the DJIA in 1929 (the year of the crash) was 381 on
9/3/29. Its low point of 41 occurred sometime in mid-1932. That was an amazing 89% drop in
value. It would take about a quarter of a century for the DJIA to reach 381 again.100
Eight years into the New Deal, Treasury Secretary Morganthau’s private diary read:
“We have tried spending money. We are spending more than we have ever spent before
and it does not work...We have never made good on our promises....I say after eight years
of this Administration we have just as much unemployment as when we started...and an
enormous debt to boot!”101
FDR’s Assault on Business Continued
When the depression roared back in 1938, FDR was angry with his advisors and demanded
solutions. In a cabinet meeting Treasury Secretary Morgenthau suggested that business needed
reassurance from the administration--they needed assurances that the New Deal would not
continue to push the country towards socialism. A couple of other advisors agreed.102
In a short-lived attempt to extend an olive branch to business, Morgenthau gave a major address
to the business leaders in America where he said:
“We believe that much of the remaining unemployment will disappear if private capital
funds are increasingly employed in productive enterprise. We believe that one of the
most important ways of achieving these ends at this time is to continue progress toward a
balance of the federal budget.”103 (emphasis added)
The audience was incredulous at that statement—“continue progress toward a balance of the
federal budget”? What “progress” had occurred in that process under FDR that could be credibly
“continued?” Over the course of his entire presidency, FDR spent three times more than all of
98
Powell, pp.234-243.
99
Reed, p.13.
100
Reed, p.7.
101
John Morton Blum, From the Morgenthau Diaries: Years of Crisis, 1928-1938 (Boston: Haughton Mifflin
Company, 1959), pp.24-25.
102
Flynn, p.108.
103
Flynn, pp. 108-09.
20
his thirty-one predecessors combined.104 Even though at the time of Morgenthau’s speech, FDR
had not yet accomplished that feat, the audience could see that he was on that trajectory and
broke into spontaneous laughter at the absurdity of Morgenthau’s statement about continuing the
administration’s progress towards balancing the federal budget. The President’s men said this
proved that is was hopeless to work with business, and so they withdrew their ever-so-modest
olive branch and resumed their public blame game against business.105
FDR’s Public Job Creation Crowded Out Private Job Creation
FDR crowded out private business by all sorts of public works projects.106 For example,
believing there to be only so much work to go around, TVA workers were paid for a full day’s
work for working only 6-hour shifts.107 How could business compete with that? The Works
Progress Administration (WPA) built a casino as a public works project in Sarasota, Florida.108
Besides the many bridges, post offices, etc., that were built by the WPA, one can only wonder
how many other pure pork barrel projects of a similar nature to that casino were also paid for
under such government programs?
The goal of FDR’s New Deal was to get people back to work--it didn’t matter to him so much
how inherently useful their efforts were. For example, in Kentucky, WPA workers catalogued
350 different ways to cook spinach. The agency employed 6,000 actors many of whom were
employed to work in propaganda plays to castigate business and support FDR’s New Deal
programs.109 “Hundreds of WPA workers were used to collect campaign contributions for
Democratic Party candidates.”110 Critics started saying that WPA stood for “We Piddle
Around.”111
“Roosevelt’s Civil Works Administration (CWA) hired actors to give free shows and librarians
to catalog archives. It even paid researchers to study the history of the safety pin, hired 100
Washington workers to patrol the streets with balloons to frighten starlings away from public
buildings, and put men on the public payroll to chase tumbleweeds on windy days.”112
104
Flynn, p.28.
105
Flynn, pp. 108-09.
Powell, pp.84, 89-90, & 103.
106
Shlaes, p.260; I once saw a History Channel program that said TVA workers got a full day’s pay for only putting
in a 5-hour shift rather than the 6-hour shift noted by Shlaes.
107
108
I saw this on a History Channel program on Sarasota, Florida, aired sometime in late 1995 or early 1996.
109
Reed, p.12.
110
Reed, p.12.
111
Reed, p.12.
112
Reed, p.12.
21
Jim Powell said:
“...Roosevelt’s tinkering...prolonged the Depression and...largely prevented the jobless
from finding real [and productive] jobs in the first place. The stupefying roster of
wasteful spending generated by these jobs programs represented a diversion of valuable
resources to politically motivated and economically counterproductive purposes.
“A brief analogy will illustrate this point. If a thief goes house to house robbing
everybody in the neighborhood, then heads off to the nearby shopping mall to spend his
ill-gotten loot, it is not assumed that because his spending ‘stimulated’ the stores at the
mall he has thereby performed a national service or provided a general economic benefit.
Likewise, when the government hires someone to catalog the many ways of cooking
spinach, his tax-supported paycheck cannot be counted as a net increase to the economy
because the wealth used to pay him was simply diverted, not created.”113
In other words, it ignores the benefits the economy would have seen had that wealth been left in
the hands of those who earned it and they, rather than the government, had spent it.114
Blank Check Legislation Used for Political Gains
In order to allow FDR to move quickly in responding to the nation’s economic troubles,
Congress passed “blank check” legislation115 where he was given billions of dollars to spend as
he saw fit without any sort of congressional oversight. Today we are being conditioned to accept
government spending in the trillion dollar range, but back then, billions of dollars was considered
to be mind-boggling in size.
Lest you think this is only a puny amount compared to what we currently spend today, you
should consider the “time value of money” concept and convert those 1930’s dollars to 2013
dollars after adjusting for about 80 years of cumulative inflation. After doing that, those
numbers will become much more impressive to you.
Much of the spending occurred through the Reconstruction Finance Corporation (RFC) which
was empowered to borrow and spend about $20 billion without any specific Congressional
oversight.116
Economic historian Gavin Wright estimated that 80 percent of the state-by-state variation in per
person New Deal spending could be explained by political factors.117 WPA employment reached
peaks in the fall of election years. Public assistance dollars were more heavily directed to those
113
Reed, p.12.
114
Powell, pp.89-90, 96-97.
115
Flynn, pp.266-267; Powell, pp.96-97.
116
Flynn, pp.269-270; Powell, p.93.
117
Powell, pp.101-103.
22
states with narrow winning margins for FDR in past elections.118
Burton Fulsom, a history professor at Hillsdale College, related a very interesting story about
FDR’s experiment to buy the people’s votes with the people’s own money through taxation. He
gave the following information in a lecture entitled “Three Myths of the Great Depression”
before the Foundation for Economic Education in July of 2004.
The experiment took place in East Port, Maine in the 1934 off-year election. What was unique
about Maine at that time is that they held their national elections in September in election years
when most of the country held them two months later in November.
In the 1932 election where FDR won his first bid to be President, only 32% of East Port voted
for him, so it was a Republican stronghold. FDR decided to see if he could sway the vote there
in his favor through a flurry of public works projects before their elections in September of 1934.
If his experiment succeeded, he could replicate it by initiating massive public works projects all
over the rest of the country before they voted two months later in November of 1934.
FDR started a public works project in East Port that included building new streets, a new bridge
into town, new tennis courts, an outdoor basketball court, remodeling the fire station, and
rebuilding the sea wall protecting the town. The local people who got jobs on those building
projects were paid more than the prevailing wages in the local factory and other local places of
private employment. Consequently, many people wanted to get those public jobs and in some
cases even quit their existing jobs provided by private employers, to get them.
This is an example of how the government doesn’t create new jobs, it just diverts jobs that
otherwise would have existed in the private sector had the taxpayers been able to keep their tax
dollars and spend them on what they really wanted to buy.
What were the results from the September elections in East Port, Maine? The political winds
had shifted quite dramatically in the Democrats’ favor—65% of the people voted for the
Democrats when only 32% of them had voted for the Democrats two years earlier in the 1932
elections. By any measure, FDR’s political experiment was a stunning success, so in the two
months between the elections in East Port and the elections throughout the rest of the country
that year, FDR instituted similarly impressive public works projects.
How politically successful were his efforts? Again, they were quite stunning. The landslide
1932 victory for the Democrats had already resulted in the Democrats controlling Congressional
seats over the Republicans by a ratio of 3:1. Traditionally in off year elections like those in
1934, the controlling party usually loses Congressional seats, especially when the balance of
political power was skewed so heavily in one party’s favor like it was from the 1932 elections.
But what happened this time? Even with such a huge pre-existing advantage in Congressional
seats, the Democrats picked up an additional thirteen new seats!
118
Powell, pp.101-103.
23
J. Reuben Clark had this to say about the prospect of buying votes though the taxpayers own
money:
“In simple English, this system [of doles] results in, and frequently aims at, buying the
electorate. Such civic villainy always wears the cloak of helping suffering humanity, and
that poor, ignorant, hungry humanity eats the loaf which is the deadly poison of its
liberty. The worst despotisms that exist in the world today were notoriously built by the
simple process of supplying first one desire or need of the people, and then another and
still another, the people always giving in return some bit of their freedom, until, when the
giving was finished, their liberties were gone. This is the actual demonstration of the
existing political laboratories of Europe today [1939]. Yet either ignoring or ignorant
thereof, we travel exultingly along the same way. Whoever builds his power on these
foundations is an enemy of all that God intended man to be.”119
Power Corrupts
As Lord Acton warned: “Power tends to corrupt and absolute power corrupts absolutely.” FDR
also illustrated the truth of that saying.
In Lecture #7 I already told how FDR’s people pressured people on public assistance through the
WPA, to politically support FDR’s favored political candidates at the risk of getting unfavorable
work assignments and even being fired if they refused.
FDR’s people cut off all public works money to New York in trying to force the Mayor to fire a
former political enemy of FDR’s who was overseeing one of the bridge-building public works
projects in N.Y.120
Being over the post office, FDR took many valuable initial proofs of various stamp issues for his
own private collection which sold for about $275,000 on his death.121 His sons played
financially off their father’s position as President.122 They landed high-paying jobs in companies
and industries that needed something from, or were in trouble with, the FDR administration. His
wife collected all sorts of “gifts” and lucrative speaking engagements because of her husband’s
position.123 But apparently, things like that don’t matter much as long as the President is
perceived to be a champion of social justice.
How Did FDR’s Actions as President Compare with What He Said and Promised as a
“Some Thoughts and Expectations of a Policyholder” (1939), J. Reuben Clark Selected Papers: On Americanism
and National Affairs, David H. Yarn, Jr. General Editor (book 5 in a multivolume set), pp.460-62.
120
Powell, pp.94-95.
119
121
Flynn, pp.253-54.
122
Flynn, pp.221-225.
123
Flynn, pp.229 & 237.
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Presidential Candidate?
After all of this, it might be interesting to consider the party platform for the Democratic party in
1932 and what FDR was saying on the stump to beat President Herbert Hoover in his 1932 reelection bid. “Roosevelt blasted Hoover for spending and taxing too much, boosting the national
debt, choking off trade, and putting millions on the dole. He accused the president of ‘reckless
and extravagant’ spending, of thinking ‘that we ought to center control of everything in
Washington as rapidly as possible,’ and of presiding over ‘the greatest spending administration
in peacetime in all of history.’ Roosevelt’s running mate, John Nance Garner, charged that
Hoover was ‘leading the country down the path of socialism.’124 ”125
Lawrence W. Reed observed:
“The party platform of the Democratic Party, whose ticket Roosevelt headed, declared,
‘We believe that a party platform is a covenant with the people to be faithfully kept by
the party entrusted with power.’ It called for a 25-percent reduction in federal spending, a
balanced federal budget, a sound gold currency ‘to be preserved at all hazards,’ the
removal of government from areas that belonged more appropriately to private enterprise,
and an end to the ‘extravagance’ of Hoover’s farm programs. This is what candidate
Roosevelt promised [in 1932], but it bears no resemblance to what President Roosevelt
actually delivered [over the next 13+ years as president.]”126 (emphasis added)
The Great Depression was a Failure of Government, Not a Failure of Business
Again, the Great Depression was not a failure of business, but rather, a failure of government. 127
Ivan Pongracic, Jr., stated:
“Economists have come to understand the Great Depression as a ‘perfect storm’ of policy
failures. A truly frightening number of destructive policies were carried out nearly
simultaneously. In retrospect it seems as though whenever the economy began showing
the slightest inkling of recovery, a policy would be enacted that would put a quick stop to
it.
“The better explanation of the Great Depression revealed it was not caused by unfettered
market forces...Rather, we now know that we must look for causes of these phenomena in
mismanaged and erroneous government policies.”128
Ronald Nash observed: “According to Benjamin Anderson, the nation’s failure ‘to get out of the
124
“FDR’s Disputed Legacy,” Time, February 1, 1982, p.23.
125
Reed, p.6.
126
Reed, p.8.
127
Flynn, pp.15-25; Powell, pp.27-29, 205; Shlaes, pp.90-91.
Ivan Pongracic, Jr., “The Great Depression According to Milton Friedman,” The Freeman: Ideas on Liberty,
September 2007, Vol. 57, No. 7, published by the Foundation for Economic Education. (See http://www.fee.org)
128
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depression in the years 1933 to 1939 [was] due to the great multiplicity of New Deal ‘remedies,’
all tending to impair the freedom and efficiency of the markets, to frighten venture capital, and to
create frictions and uncertainties, and impediments to individual and corporate initiative.’129
Murray Rothbard ends his long study of the Depression by stating:
“The guilt for the Great Depression must, at long last, be lifted from the shoulders of the
free market economy, and placed where it properly belongs: at the doors of politicians,
bureaucrats, and the mass of ‘enlightened economists [i.e. the Keynesian economists.]’130
”131
The tragic irony of it all is that very few people know enough about our history to appreciate that
fact. FDR prolonged the Great Depression when our textbooks mistakenly credit him with
saving us from it. That is a profound tragedy that continues to have political consequences
today. The rhetoric the left uses to buy votes is very similar to what FDR used to gain political
power. People today seem to again think that government is, and should be, the primary answer
to their financial problems.
After seeing how far FDR was taking things, Herbert Hoover criticized FDR for:
“[shifting] the relation of government to free enterprise from that of umpire to controller.
Directly or indirectly they politically controlled credit, prices, production or industry,
farmer and laborer. They devalued, pump-primed and deflated. They controlled business
by government competition, by regulation and by taxes. They met every failure with
demands for more and more power and control…When it was too late they discovered
that every time they stretched the arm of government into private enterprise, except to
correct abuse, then somehow, somewhere, men’s minds became confused. At once men
became fearful and hesitant. Initiative slackened, industry slowed down production.”132
In a similar fashion, Ronald Nash observed:
“When the Roosevelt interventionists saw that things were not going as they had planned,
they proclaimed that the ensuing disaster was not the result of their efforts. It was a result
rather of their measures not going far enough. What the nation needed [they mistakenly
thought] was more priming of the economy by the federal government.”133
That dynamic is very common in political spheres. When politicians seek to use the force of law
to solve various social problems and things do not get better, or even worsen, they resist placing
any blame on themselves and insist that they have just not gone far enough with their plans, and
129
Benjamin M. Anderson, Economics and the Public Welfare (Indianapolis, Ind.: Liberty Press, 1979 [1949]),
p.224.
130
Murray N. Rothbard, America’s Great Depression, 3rd Ed. (Kansas City: Sheet and Ward, 1975), p.295.
Ronald Nash, “Four Myths About America’s Great Depression,” The Freeman: Ideas on Liberty, November
1994, Vol. 44, No. 11, published by the Foundation for Economic Education. (See http://www.fee.org)
131
132
133
John T. Flynn, The Roosevelt Myth, (San Francisco, Fox & Wilkes, (1998)), p.188.
Nash, Id.
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need to apply even more legal force than before, to be successful.134 Then they promptly
proceed to make things even worse. When FDR ignored his own harmful tinkerings in the free
market and constantly blamed business for the depression and our failure to lift ourselves out of
it, he exemplified the following play on words of a common expression: “It’s not whether you
win or lose, it’s how you place the blame.”
What Does the Passage of the 22nd Amendment Imply About the Nation’s Opinion of
FDR’s Impact on the Great Depression?
FDR was a 4-term president. With how hard it is to successfully pass a Constitutional
Amendment, there must have been widespread political appreciation of the fact that he had
become too powerful and used his power to hurt the economy. Otherwise, the 22nd Amendment
limiting a president to only two terms in office, could not have been passed. A nationwide 1939
public opinion poll asked people: “Do you think the attitude of the Roosevelt administration
toward business is delaying business recovery?” People answered “yes” by a margin of more
than two-to-one. The business community felt even more strongly so.135
If People Thought He was Hurting the Country, Why Did People Keep Voting for FDR?
If people were tiring of him and thinking he was hurting the economy, why did they keep
re-electing him? Reminiscent of the 1934 election results from East Port, Maine, columnist
Joseph Sobran answered that best when he said:
“Can the real Constitution be restored? Probably not. Too many Americans depend on
government money under programs the Constitution doesn’t authorize, and money talks
with an eloquence Shakespeare could only envy. Ignorant people don’t understand The
Federalist Papers, but they understand government checks with their names on them.”
Moreover, “by the time [people] began to realize that his policies were harmful, World War II
came, the people rallied around their commander-in-chief, and there was little desire to change
the proverbial horse in the middle of the stream by electing someone else.”136
Social Justice Can Be Harmful to a Nation’s Economic Health
Again, all of the foregoing economic pain and suffering America endured for more than a decade
in the Great Depression, was largely motivated by the notion of social justice held by FDR and
his team of New Dealers. Social justice was more important to them than economic recovery
and they found they could get their way politically by buying off the electorate with their own
money through public works projects and other means of financial assistance, funded by
taxpayer dollars..
So as you hear various teachers, politicians, and the news media favor forceful legal solutions to
134
Flynn, p.148.
Robert Higgs, “Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed
After the War,” The Independent Review, Volume I, Number 4, p.577; Reed, p.15; Powell, pp.84 & 230.
135
136
Reed, p.15.
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our various social problems, remember what happened in the Great Depression and don’t be so
quick to fall for all of the good intentions they express in making their arguments; and don’t be
so quick to conclude that those who argue against such forceful policies lack similar good
intentions.
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