Fascism Comes to America
Part 7: Governor Roosevelt: 1928–1932

Two major grounds are put forward nowadays for the unbounded greatness of Franklin Roosevelt, both stemming from major national tragedies. The second is his supposed brilliance as leader of the forces of democracy in the Second World War. The first is the role claimed for him as the nation's savior in the Great Depression. According to Newt Gingrich (erstwhile leader of the never-to-be-forgotten Republican Revolution), it was because Roosevelt "did bring us out of the Depression," that he must be considered "the greatest figure of the 20th century."

The Depression, which began in 1929, was the worst and longest-lasting in our history. It was, in truth, devastating for many millions of those who lived through it. Ever since it occurred, statists have exploited it in their attack on the free market. If only a far-seeing government had taken the anarchic private enterprise system in hand, if only it had exercised a wise and firm supervision and control over the economy, vast suffering could have been prevented. The culprit in this scenario, of course, is horrid laissez faire, together with the greedy businessmen and corrupt apologists who upheld it.

As economist Roger Garrison has recently analyzed the matter, there are two basic questions: (1) How did the boom of the 1920s turn into the Depression? and (2) Why did the Depression last so long? Leaving aside the second question for the time being, and dealing with the first, one thing is clear: no "anarchic," unfettered private-enterprise system existed in America in the 1920s. In fact, a government-sponsored and government-supported institution had been created in 1913 whose very function was to supervise the economy and ensure its stability. That institution was the Federal Reserve Board. As late as the spring of 1929, the politician-financier Bernard Baruch complacently assured the country that, with the Fed giving us "coordinated control of our financial resources and a unified banking system," there was nothing to fear. The boom could go on forever.

The most complete and satisfactory interpretation we have linking booms and busts is the Austrian theory of the business cycle, originated by Ludwig von Mises and developed by F. A. Hayek, Murray Rothbard, and others. (Mises was the only major economist who actually predicted the Great Depression.) In America's Great Depression, Rothbard sets forth in detail how the Federal Reserve acted to stimulate economic growth in the 1920s. Through the artificial creation of bank credit – i.e., credit not based on real savings – the Fed distorted market signals such as interest rates. That induced businessmen to go on an investment spree that could not be indefinitely sustained. Finally and inevitably, the bubble burst. As has recently been suggested, the "Hoovervilles" of the Great Depression should more aptly be called "Federalreservevilles."

After his reelection as governor in 1930, the overarching concern of Roosevelt and his circle of intimates was the next presidential election. First, though, he had somehow to deal with the economic crisis as it affected his state. The flood of bank failures that swept the country hit New York particularly hard. Among many others, City Trust and the Bank of the United States, both with hundreds of thousands of depositors, failed. On the Bank of the United States, Robert Moses had warned the governor that the directors, some of them with Tammany connections, were engaging in seriously unsound practices. Roosevelt, who by that point considered Moses a political enemy, had ignored the warnings. Now he ostentatiously set up commissions to study the bank failure problem, but nothing was done.

As more and more thousands of New Yorkers joined the ranks of the jobless, FDR pushed for an unemployment insurance scheme, financed through insurance companies, under state supervision. But employees, he insisted, had to contribute to the fund, since otherwise it would amount to a mere dole and undermine individual character. That would be un-American, Roosevelt declared.

Thus, in the first couple of years of the crisis, Franklin was still in his middle-of-the-road mode. While he invoked once again the memory of his cousin Theodore to sanctify a positive attitude towards government activism, he remained cautious and even oddly conservative. He ordered all state departments to pare down expenses, including the number of employees. He attacked President Herbert Hoover for setting up federal relief efforts funded by deficit financing. FDR established a state agency, TERA, the Temporary Emergency Relief Administration, with an initial appropriation of $20,000,000. (A social worker named Harry Hopkins was brought in as executive director.) But he stipulated that this was all to come out of current revenue; under no circumstances was the state to resort to borrowing money for the program. When the Republican legislature appeared to be too open-handed with relief appropriations, Roosevelt fought it. The legislators were threatening the state with bankruptcy, he announced.

As the Depression deepened, Roosevelt rummaged around for further remedies. He proposed a five-day work week, with an eight-hour day, as a means of "sharing the work," an idea that went nowhere. What about a back-to-the-land movement, which would "adjust the balance" between urban and rural living? A program was set up and 244 families relocated to farms. For a while Franklin looked on this as a promising breakthrough on the unemployment front. But farmers in New York, and then the Midwest, began to grumble that food prices were already too low. They didn't need any competitors transplanted from the cities. Roosevelt, fearing a loss of the farm vote in the upcoming election, shelved his plan and nothing more was heard of it.

Roosevelt's floundering for solutions to the economic crisis – his "empirical" approach to government that his devotees admire so much – would continue to be his trademark for the rest of the decade. That is hardly surprising, since he lacked any understanding of what had caused the breakdown in the first place. While still governor, FDR held that the Depression had been caused by the absence of organization in the economy. He wrote to his brother-in-law that overproduction was at the root of the problem. Industry and agriculture were simply producing too much, a propensity that had to be curbed. Overconsumption, too, would have somehow to be brought under control. Here new-fangled schemes for consumer credit were at fault, and Roosevelt recalled that for years he had fretted over "installment buying by the individual consumer" as "the most dangerous thing we had to contend with."

Roosevelt's multiple confusions may seem downright comical. Yet no one in Washington had any better idea of how to cope with the crisis, least of all President Hoover. Today, Hoover's name is a synonym for "reaction," for a fuddy-duddy adherence to an obsolete and dreadful laissez faire. But, in fact, as president, Hoover was what he had been from the start: a Progressive, a veteran of Wilson's war-collectivism, a believer in government leadership in economic affairs, but on a "voluntary" basis if possible. Faced with the Depression, Hoover had funds allocated for relief. He set up the Reconstruction Finance Corporation (RFC), a resurrected version of Wilson's war-collectivist War Finance Corporation, to shore up failing businesses. (In the decades to come, the RFC became one of the major founts of corporate welfare.)

Most important, Hoover constantly pushed businessmen to keep wages up. Nothing could have been more wrong-headed in the midst of an economic downturn, when the market dictated a fall in real wages, which would have sopped up much of the unemployment. But Hoover was a captive of the smiley-face, topsy-turvy philosophy of the '20s, whereby high wages were the cause – rather than the effect – of high productivity. The big businessmen who heeded the president's preachings did their patriotic duty, kept wages high, and saw the unemployment rolls rise ever higher.

There were some things Hoover would not do, however. In the summer of 1932, veterans converged on Washington, demanding the payment of the bonus that was, by law, due them in 1945. Some of these "Bonus Marchers" encamped on the Anacostia Flats, in the District of Columbia. Hoover had them cleared away by army troops, led by Gen. Douglas MacArthur. Two of the Bonus Marchers were killed. The beleaguered president was more politically vulnerable than ever.

The dream that Louis Howe had years before instilled in Franklin, that someday he would be president of the United States, seemed on the point of being realized. FDR played his hand brilliantly, acting the part of the statesman amidst the economic disaster. He called together conferences of governors to discuss the crisis, where he could perform the leadership role that naturally fell to him as chief executive of the Empire State – meanwhile continuing to build bridges to influential politicians. Jim Farley, New York state Democratic chairman, was put in charge of the presidential campaign and toured the Middle West and West, lining up support. Even old Colonel House, Woodrow Wilson's confidante, was brought on board.

FDR looked to be the inevitable candidate at the Democratic convention that was to gather in Chicago in June. But while he was clearly the front-runner, there was still that two-thirds rule for nomination. Was it possible that Al Smith would try again, and, together with the numerous favorite sons, deny Roosevelt the necessary super majority? Smith had maintained overtly friendly relations with Roosevelt, even renominating him for governor in 1930. But the Happy Warrior, bitter that, as he saw it, his Catholicism and his opposition to Prohibition had cost him the presidency in 1928, felt he should be given one more chance, now under vastly more favorable circumstances.

While Democratic leaders across the country were flocking to Roosevelt, many still had qualms. The nagging doubts were summed up by the nation's best-known and most influential pundit, Walter Lippmann of the New York Herald Tribune: "Governor Roosevelt belongs to the new post-war school of politicians who do not believe in stating their views unless and until there is no avoiding it." He was "an amiable man with many philanthropic impulses," but also "a highly impressionable person, without a firm grasp of public affairs and without very strong convictions." In targeting Roosevelt's opportunistic political style, these remarks hurt FDR to the quick and caused consternation among his staff. Soon he was delivering speeches which at least appeared to put him on record on the issues. While he was once an enthusiast for the League of Nations, he declared, he now opposed entering the League, which had not lived up to Woodrow Wilson's vision. This mollified the powerful newspaper publisher, William Randolph Hearst, who had distrusted FDR as an internationalist. Roosevelt now clearly called for repeal of the Prohibition Amendment, but added that the states should control liquor sales to prevent excesses and bring in much-needed revenue – a clever sop to the Drys in the South.

Still, what about the main issue? What was his economic program for the nation? To help him with ideas, Roosevelt turned to the academic world. A professor from Columbia University, Raymond Moley, was brought to his attention. The two men hit it off, and Moley assembled a group from Columbia that came to be known as "the Brain Trust." They were all eager-beaver reformers to one degree or another. The most radical was an economist, Rexford Guy Tugwell, who entertained many rather curious notions for a basic transformation of the American system. Roosevelt was now ready to deliver a major address on subduing the Depression. It became known as "the Forgotten Man" speech and would provoke a savage retort from Al Smith.

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Ralph Raico [send him mail] is a senior fellow of the Mises Institute. You can study the history of civilization under his guidance here: MP3-CD and Audio Tape.

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