• The Nightmare of the New Deal

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

    If
    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
    blunders.

    The bad
    guys

    Shlaes’s
    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.

    Nevertheless,
    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
    election

    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
    high.

    April
    3, 2008

    George
    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
    Freeman
    .

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