The Nightmare of the New Deal

DIGG THIS

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.

Political Theatre

LRC Blog

LRC Podcasts