The Nightmare of the New Deal

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Forgotten Man: A New History of the Great Depression
Amity Shlaes (HarperCollins, 2007)

you ask a random sample of Americans who know (or think they know)
something about U.S. history to discuss the twin subjects of the
Great Depression and the New Deal, most will say something like
this: “The Depression hit the country because capitalism has
a tendency to sometimes collapse, but luckily Roosevelt was elected
and his brilliant New Deal policies got the economy moving again.”

That view is
not just mistaken – it’s a key component of the statist
mythology in America. So long as people think that they need a strong,
interventionist government to protect them from the instability
of capitalism, libertarianism will have a very hard time making
any headway. People want prosperity. If they believe that big government
is necessary for it, big government they will have.

With her new
book, The Forgotten Man, Amity Shlaes has dealt a shattering
blow to that mythology. Her lucid and highly readable book leaves
the reader with the understanding that capitalism got a bum rap
in the 1930s and that the New Deal, far from being brilliant, was
a nightmare. Shlaes isn’t the first writer to try to set the
historical record straight and undermine the fawning adulation usually
given to Roosevelt, but her book may succeed more than all the others
put together because it’s (a) nonacademic and (b) published
by a major house. Except for die-hard statists, this book will at
least cause readers to smirk next time they read that Franklin Roosevelt
was one of our “great” presidents.

Shlaes begins
diabolically, telling the heart-wrenching story of a young teenager
who killed himself so that the rest of his impoverished family might
have a little more to eat. Naturally, the reader starts to think,
“That miserable bum Hoover – why didn’t he do something
to improve conditions in the country?!” Then Shlaes springs
the surprise: the event actually took place in late 1937, after
Roosevelt had been president for nearly five years. The little-known
truth (although painfully evident at the time) is that economic
conditions had improved only slightly during Roosevelt’s first
term and took a nosedive in the latter half of 1937, giving the
nation a depression within a depression. While the United States
had suffered through recessions in the past (always, Murray Rothbard
has shown, owing to monetary bungling by the government), not one
had lasted more than two years. Instead of hastening the normal
recovery, the efforts of Hoover and Roosevelt had managed only to
deepen and lengthen the misery while transforming the nation in
terrible ways.

In the United
States of 1929, the federal government played a very small role,
employed very few people, and spent very little money. Most important,
very few Americans looked to Washington, D.C., to solve “social
problems.” Three years of interventionist policies under Hoover
– Shlaes makes it clear that Hoover was anything but the dogmatic
laissez-faire advocate he is usually said to have been – and
five more under Roosevelt had turned America into a country where
a nearly omnipotent government was everywhere, controlled by people
who admired Stalin and Mussolini as models of forward-looking leaders.
It was as if a person with a cold took a medicine that turned the
cold into pneumonia and it brought on dementia as well.

As an aside,
one can’t help wondering what the United States would be like
today if, instead of turning to coercive, statist “remedies”
for the Depression, Americans had drawn the correct conclusions
and turned away from the bad policies they already had, especially
high tariffs and central banking. America would be a much freer
and more prosperous country today but for the intellectual blunders
of the 1930s. Although Shlaes doesn’t indulge in any libertarian
daydreaming, she does a good job of exposing those intellectual

The bad

narrative is driven along by an odd cast of characters. In fact,
if there weren’t proof that these people really were as described,
you might be inclined to say, “Naw – gotta be made up.”
Mostly the book centers on the bad guys. They were all true believers
in the notion that the time had come to remake American society
along “progressive” lines – which is to say, replacing
individual liberty and private property with central planning and
bureaucratic control. Early on, we are introduced to the leftist
pilgrims who went to visit the Soviet Union in 1927 and fell for
communism like a teenage boy who falls for the first girl who kisses
him. Among them was Columbia University economist Rexford G. Tugwell,
who would later become one of Roosevelt’s closest advisors.
He wrote that in contrast to the moribund America, the Soviet Union
was “a stirring new life hardly yet come to birth.” These
people were intellectuals infatuated with the glittering prospect
of social perfection brought about by the firm but kindly hand of
the state.

The main bad-guy
role goes to Roosevelt himself, of course. Other writers have previously
punctured the myth that he was a visionary mental giant who fortunately
was on hand to lead the country in its time of despair. Shlaes reinforces
the image of Roosevelt as merely a clever, conniving politician
with one big asset, namely his great radio persona. Once he had
sweet-talked his way into the White House – not a difficult
task given that Herbert Hoover was a sourpuss political dud –
his approach to policy was utterly clueless. He told the voters
that he would be an experimenter in the 1932 campaign, but in office
his experimenting was much like that of a child who is let loose
in a chemistry lab and who thinks, ”Wouldn’t it be cool
to try mixing some of this and some of this and see what happens?”
Roosevelt and his subordinates tinkered and tampered constantly
with the liberty and property of Americans. The federal budget grew
and grew and regulations on business mushroomed, but the economy
remained in the doldrums. It never dawned on the New Dealers that
coercion is counterproductive.

Another group
of bad guys is Roosevelt’s political cronies. A hallmark of
modern politics in America is the use of cronies to shape public
opinion by creating good news where there really isn’t any
and pinning the blame for bad news on scapegoats. Those tactics
were perfected in Roosevelt’s first term. Shlaes points out,
for example, that the federal government hired lots of artists whose
job it became to do everything they could to extol the New Deal.
The Federal Theater Project, for example, dramatized the evils of
electric power companies and suggested that governmental ownership
along Tennessee Valley Authority lines would be the people’s
salvation. And photographers were paid to seek out scenes that would
cast a favorable light on the New Deal. Bill Clinton didn’t
invent the “continuing campaign” – Roosevelt did.

More of the
bad guys in the book are Roosevelt’s henchmen who eagerly bad-mouthed
and even prosecuted his opponents for spite and political advantage.
The two most famous targets of Roosevelt’s attack dogs were
Andrew Mellon, the wealthy former secretary of the treasury, and
Samuel Insull, who had made a fortune by supplying electricity to
Chicago – and lost almost everything following the stock-market
crash. Income-tax charges were filed against both men, not because
they had committed any clear violation of the difficult-to-understand
IRS code (yes, even then: Shlaes includes a copy of a letter from
Roosevelt himself to the IRS commissioner explaining that he couldn’t
figure out how to calculate his own taxes), but just because the
prosecutions helped inflame public opinion against those “economic
royalists,” as Roosevelt liked to characterize people who had
earned a lot of money.

Who were the
good guys? They were people who fought against the collectivization
favored by Roosevelt and his “brain trust.”

Shlaes devotes
a full chapter to the Schechter brothers. The Schechters were the
defendants in the most important legal case during Roosevelt’s
first term. They ran a kosher poultry butchering business in Brooklyn
and were put on trial for criminal offenses against regulations
enforced by the National Recovery Administration. Shlaes has dug
deep into the case and her reporting is filled with illuminating
details – details that students who read the case in constitutional
law classes don’t get. For one thing, the NRA rules forbade
customers to select individual chickens they wanted, demanding that
customers select a coop of birds for killing, but not individual
birds. Both Jewish tradition and common-sense business practices
had to be abandoned to conform to the authoritarian regulations
of “The Blue Eagle” – the symbol of the NRA. When
the Schechter brothers continued to operate as they had for years,
the government agents, who had been hounding them for weeks, were
only too happy to pounce with indictments.

Not only did
the NRA regulations conflict with Jewish practice, but, Shlaes writes,

The NRA code
did not make sense. The clash came in several areas. The first
was prices. The code forbade setting prices too low, in part to
combat a general “low price problem” – deflation.
But one could not drive up prices generally by ordering a specific
business to charge more.

the Schechters (and many other small businesses across America)
were prosecuted for charging too little for their products.

The coverage
of the case in the leftist media was repugnant and tinged with anti-Semitism.
Writers such as Drew Pearson cheered on the government, which, after
all, stood for enlightened social regulation for the common good,
and sneered at the “grubby” Jewish defendants and their
lawyer. The trial court found the Schechters guilty, imposing a
fine that would have taken them many years to pay and sentencing
them to jail terms lasting up to three months. They hadn’t
hurt anyone (despite sensational statements that they had sold diseased
chickens, a charge shown to be untrue), and yet were looking at
a ruinous penalty and criminal records merely for doing business
as they always had. That was the crucial way in which America had
changed: it was now easy to get into trouble over nothing.

When the Supreme
Court heard the case on May 2, 1935, the government’s lawyer
argued that upholding the law was essential to fighting the Depression
and that the justices shouldn’t bother about individual freedom,
which was merely “the liberty to starve.” Joseph Heller,
who had been counsel for the Schechters all along, argued that Congress
had exceeded its powers, since his clients’ business did not
involve interstate commerce. Frederick Wood, a lawyer with one of
the prominent Wall Street firms, contended that the increase in
government power was dangerous and illegal. Shlaes writes, “He
argued that it might be all right to go the way of Mussolini or
Hitler, but a constitutional amendment was necessary for that, not
merely an act of Congress.”

The Court’s
decision was quickly reached and announced on May 27. The NRA was
unanimously declared to be unconstitutional. Roosevelt grumbled
that the Supreme Court was stuck in “the horse-and-buggy age,”
but the stock market staged its biggest rally since 1930.

The 1940

Another critic
of the New Deal who figures prominently in the history is Wendell
Willkie. Willkie is best known as Roosevelt’s Republican opponent
in the election of 1940, but few people know much about his background.
He had been an old-line Democrat (generally favoring free trade
and minimal government) who was a top executive in the utility company
Commonwealth and Southern. What soured him on Roosevelt was the
way he and his minions went after private enterprise and especially
the utilities. Roosevelt never came right out and said so, but it
became clear that his socialistic underlings envisioned an America
with nothing but governmentally owned electric companies. The Tennessee
Valley Authority was just the opening salvo in a war, Willkie understood.
He was determined not to see the investments of his shareholders
destroyed, and gradually became more and more of an outspoken critic
of the New Deal.

Shlaes recounts
a radio debate Willkie had with one of Roosevelt’s lawyers,
Robert Jackson, later named to the Supreme Court. Willkie had come
to see that, as Shlaes writes, “while Roosevelt might call
himself a liberal, the inexorable New Deal emphasis on the group
over the individual was not liberal in the classic sense.”
Well prepared to counter Jackson’s claim that the Depression
was lingering because of a “strike by capital” –
an instance of the blame-shifting that Roosevelt and his team liked
to engage in – Willkie pointed out that the New Deal had created
enormous uncertainty for business and investors. If there was “idle
money” in the country, the reason was to be found in the hostility
the administration constantly exhibited toward business.

The response
to the debate greatly bothered “the brain trust.” Raymond
Moley wrote that Willkie had utterly outclassed Jackson. Because
of his willingness to stick his neck out and criticize New Deal
policies, Willkie was noticed by some Republicans and was talked
into allowing his name to be placed in nomination at the 1940 convention.
He won out over experienced politicians such as Thomas Dewey but
was defeated in the general election by Roosevelt’s superior
political gamesmanship and the coalition of special-interest groups
he had put together to secure his win in 1936.

All in all,
Shlaes must be commended for giving an accurate account of the Depression
years that completely refutes the conventional wisdom about that
period. I have only a few quibbles with the book.

First, she
speaks favorably of the Civilian Conservation Corps, many of whose
projects can still be found throughout the country. Sure, CCC workers
built some nice things, but the program was just another in the
procession of unconstitutional “experiments” that took
resources away from the private sector and put them to federal use.
The fact that some CCC projects weren’t complete boondoggles
should not cause us to praise it.

Second, I wish
that Shlaes had spent a little more time on the causes of the 1929
crash and especially the banking panic in 1930. She leads the reader
to understand that the failure of the Bank of the United States
had a cataclysmic effect on the banking system but doesn’t
clearly explain precisely how the bank collapsed and why it had
such widespread repercussions. Some discussion of fractional-reserve
banking and America’s banking laws that prevented interstate
branch banking would have clarified a point that’s a crucial
part of the case that government intervention was the real culprit.

Third, the
book has no footnotes. Instead, there is a section of “bibliographic
notes” at the end. I think that specific references at specific
points in the text are more valuable to the reader than just having
a few paragraphs that mention each chapter’s sources.

A few minor
blemishes such as those don’t detract much from this very significant
book. I recommend reading it and then buying copies for friends
and relatives who might be won over to the side of liberty if they
knew that the Depression was nothing but governmental bungling piled

3, 2008

C. Leef [send him mail]
is the director of the Pope Center for Higher Education Policy in
Raleigh, North Carolina, and book review editor of The

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