How 1936 Consolidated the Progressives' Triumph in 1913

Politically conservative Americans and libertarians generally agree on the worst year of the 20th century: 1913.

In 1913, three major events took place. First, Americans were informed that a constitutional amendment establishing an income tax passed. That was a lie. It did not pass. But the Attorney General of the United States announced that it had passed, and so, as far as the public was concerned, it had passed.

Second, the Constitution was amended, so that members of the Senate were voted into office by a general public election. This was mostly a symbolic change. Over half of the states had already adopted this. But it was a recognition that there had been a fundamental alteration of the United States Constitution. The old idea that the Senate would be elected by state legislatures was now officially [amazon asin=1604190442&template=*lrc ad (right)]defunct.

The third issue was the creation of the Federal Reserve System in late December.

The election of 1912 had pitted three Progressives against each other: Taft, Roosevelt, and Wilson. The election of 1904, in which the never-remembered Alton B. Parker lost to Teddy Roosevelt, was the last time that anyone holding constitutional principles of the federal government achieved the nomination by one of the two major political parties. Teddy Roosevelt smashed him at the polls. After the election, the radical Populist William Jennings Bryan announced that this was the end of “Clevelandism.” He was correct.

1936

I submit that the year 1936 was the second disastrous year in the 20th century. In that year, Franklin Roosevelt was overwhelmingly reelected as President. The New Deal seemed to have been successful in reducing unemployment and getting the economy working [amazon asin=1494837188&template=*lrc ad (right)]again. In fact, it was monetary expansion by the Federal Reserve, coupled with the creation of the FDIC in 1934, which combined to allow the expansion of the money supply, which boosted the economy in a temporary boom.

In 1937, that boom turned into a major recession. From that time on, the New Deal was unsuccessful in overcoming the Great Depression. Only with the beginning of orders for military purchases by the British government in 1940 did the Great Depression recede. It disappeared during World War II, because of the combination of mass monetary inflation and price controls. The government pulled 12 million men out of the labor force, and it then expanded the economy by military purchases. Price controls lead to rationing. So, the rate of unemployment fell, along with 405,000 American dead, who were removed from the category “actively seeking employment” on a permanent basis. The Great Depression — unemployed resources — disappeared because real wages fell sharply, which is exactly what would have happened, had President Hoover and President Roosevelt not imposed various price floors, which kept prices from adjusting, thereby failing to clear the markets.[amazon asin=0990463109&template=*lrc ad (right)]

The other major event of 1936 was the publication of John Maynard Keynes’s book, The General Theory of Employment, Interest, and Money. After six years of depression, standard economists, other than the Austrian school economists, could not explain the Great Depression. It should have disappeared by 1933. It did not. The academic economists had no explanation, and the younger economists wanted one. Keynes’s book seemed to offer both an analytical solution and a practical solution: massive government deficit spending. This was what governments had been doing ever since 1930, but Keynes’s book baptized the practice, and called for more of the same.

Those economists who, in later years, would be critical of Keynes’s economics, were like deaf-mute blind men in 1936 and 1937. Hayek did not respond in public to the book, which relegated his career from 1936 to 1974 as a kind of forgotten critic on the sidelines of economic analysis. The economics profession abandoned him, because he had abandoned the economics profession. He was the major[amazon asin=1416592377&template=*lrc ad (right)] critic of Keynes in 1936, and he refused to respond in print to the book. It seemed that he had been defeated intellectually. It seemed that Keynes’s economic analysis was immune to criticism by the most famous member of the Austrian school of economics.

In 1937, McMillan, which had published Keynes’s book, and which had previously published the 1934 book by Lionel Robbins, The Great Depression, published a book by three authors, which analytically dealt with the causes of the Great Depression: Banking and the Business Cycle. It blamed central banking. But this book never got any traction, and it remains forgotten today. Fortunately, the Mises Institute makes it available free of charge or in a conveniently printed format, but almost nobody remembers it. Almost nobody knew about it in 1937.

Keynes created an intellectual revolution within the economics profession, and also within the political community as well. Keynes advocated what the politicians wanted to do anyway. We live in the shadow of Keynes, because the academic economists lived in the shadow of the Great Depression in 1936. They were defeated intellectually, or in Hayek’s case, remained mute. That was sufficient to transfer to Keynes and his disciples the intellectual leadership in economics for the remainder of the 20th century, and it is still dominant today. It is not so dominant as it was in 1956, or 1965, but it is still overwhelmingly dominant.

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