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New Deal Charades

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New Deal or Raw Deal? by Burton Folsom Jr.
(Threshold Editions, 2008); 318 pages.

The New Deal rescued the United States from the terrible depression caused by the instability of our capitalist economy. Thats the standard line peddled to gullible Americans by most history books, historians, and politicians. It was not surprising when Republican Speaker of the House Newt Gingrich said several years ago that he regarded Franklin D. Roosevelt as a great president. The view of Roosevelt that has been engraved on the American mind is one of secular sainthood.

At last, however, the protective coating seems to have worn off the Roosevelt shrine. Last year, Amity Schlaess book The Forgotten Man landed a direct hit. She exposed the relentless, often thuggish, tactics of Roosevelt and his New Dealers in ensuring political victory by any means necessary. Now comes a more synoptic book that delves into the economics and politics of the New Deal as none previously has. New Deal or Raw Deal? by Hillsdale College history professor Burton Folsom is more than a direct hit on the Roosevelt myth its an earthquake beneath its foundations.

As long as the Roosevelt legend is intact, Folsom writes, the principal public policy derived from the New Deal will continue to dominate American politics. He proceeds to dismantle that legend.

Folsom begins with a brief sketch of Roosevelts early life. Born into a wealthy New York family, he was graduated from Harvard, where he was a decidedly mediocre student. Subsequently he attended Columbia Law School. One of his law-school professors said of him, He was not much of a student and not much of a lawyer afterwards. He didnt appear to have any aptitude for the law, and made no attempt to overcome this handicap by hard work. Roosevelt was employed briefly at a New York City law firm, but a senior partner described his work as worthless.

Practicing law was not to Roosevelts liking, so he tried his hand at a number of business ventures, financed with family money. All flopped. But in his mid twenties, he became infatuated with politics, telling friends he would one day be elected president. His first step in that direction was taken in 1910, when he was elected to the New York state senate. Here was something he was good at! Folsom comments, When he switched his thinking from how to earn money to how to influence voters, he was playing to his natural strength.

Roosevelt served as secretary of the Navy in the Wilson administration, then ran as the vice presidential nominee on the Democratic ticket in 1920. After that losing effort, he returned to New York politics, winning the governorship narrowly in 1928. He was thus perfectly positioned to grab the Democratic nomination for president in 1932 and run against the mortally wounded Herbert Hoover.

Hoovers mortal wound, of course, was the Depression. Following the stock-market crash in October 1929, Hoover had tried frantically to get the nations economy moving again. Unfortunately, he completely misunderstood the causes of the Depression and all his efforts made matters worse. By the time of the 1932 election, the economic situation was so grave that a Republican victory was inconceivable.

Causes of the Depression

What did cause the Depression? Folsom is a historian who has learned a good deal of economics and he devotes a chapter to explaining its causes in easy-to-understand terms. Erratic monetary policy by the Federal Reserve in the late 1920s led to a speculative bubble, and when the Fed abruptly changed its expansionary policy to a contractionary one in 1929, the bubble burst. The stock market crashed, but the country could easily have recovered from it had it not been for Hoovers meddling. He pushed through the ruinous Smoot-Hawley Tariff in mid 1930 and a huge tax increase in 1932. Furthermore, the Fed sat by as banks failed and the money supply fell sharply. Note that there is nothing here about some inherent instability in a free-market economy the leftist party line. Historians who idolize Roosevelt and the interventionist state have implanted that idea in nearly all accounts of the Depression, but its entirely false.

Both Hoover and Roosevelt believed a version of the instability thesis, namely that the Depression was due to undercon-sumption. In other words, people could not spend enough to keep the economy rolling. Socialists were drawn to that idea because it enabled them to argue that rich capitalists were taking too much in profits and paying the workers too little. Hoover bought into that and tried to browbeat industrialists into keeping their wages up despite plunging sales.

Roosevelt knew nothing about economics but liked the under-consumption theory because it enabled him to demagogue the issue. During the campaign, he repeatedly blasted economic royalists to great applause from the desperate and envious masses.

Folsom shows that the under-consumption theory is completely groundless.

Roosevelt handily won the 1932 election, often telling different voting groups contradictory things and revealing his penchant for simply making facts up. He was never one to let truth and consistency get in the way of winning voters to his side.

New Deal programs

The heart of the book is Folsoms discussion of the various facets of the New Deal. First off the block in 1933 was the National Industrial Recovery Act. This shockingly authoritarian law promoted the cartelization of industries and the unionization of workers. The New Dealers believed that prosperity could be regained if prices and wages rose, and the NRA was meant to force that to happen. It was a classic case of mistaking symptoms for causes.

Under the NIRA, businesses were required to come up with codes of fair competition that fixed wages and prices. To enforce the codes, the law established the National Recovery Administration, and Roosevelt chose an irascible and dogmatic former army general, Hugh Johnson, to head it. Johnson delighted in cracking down on businessmen who dared to think that they still had the right to run their operations their own way. Folsom recounts some appalling stories of the NRAs vindictiveness small businesses forced to close because the owners could not afford to pay the mandatory wages or fined for charging poor customers prices that were illegally low.

Not only did the NIRA not help bring about economic recovery, it actually got in the way. The cartelization of business and price fixing gummed up the works of the price system, obstructing market signals. (Roosevelt and his Brain Trust had no idea about the importance of the price system.) Moreover, the hiring of a small army of federal bureaucrats cost a lot of money. The NRA and dozens of other new agencies drained away money from private spending and investment so that thousands of new government employees could do work that impeded production and trade.

Eventually the Supreme Court declared the NIRA unconstitutional (in 1935), but during its existence, it did a great deal of harm. Folsom notes that Roosevelt had no regard for the Constitution, once telling legislators that they should not allow thoughts about the constitutionality of a bill to get in their way of passing it.

Chapters take us through a bevy of other New Deal programs cut from the same bolt of fascist cloth: the Agricultural Adjustment Act, the Works Progress Administration, the Air Mail Act, Tennessee Valley Authority, Social Security, the National Labor Relations Act, and more. All were dreadful, arrogant blunders that exacted a high cost in lost prosperity, lost freedom, and yes, loss of life. How badly each of those programs did with respect to the goal of sparking the economy is rather old news, but Folsom keeps the reading fresh with personal stories showing how individual Americans suffered under New Deal coercion.

The repulsive Roosevelt

Where the book really sizzles is in the authors description of the ways Roosevelt turned America into a nation where party politics became paramount. If you think Richard Nixon invented political dirty tricks, youll find out that Roosevelt mastered the art decades before. Roosevelt was eager to use the IRS to harass those who spoke out against the New Deal. One revealing case was that of Moses Annenberg, a German immigrant who had established a chain of newspapers in Pennsylvania. Annenberg wrote his own editorials and pointed out many embarrassing facts about the New Deal that Roosevelt did not like seeing in print. He ordered the IRS to investigate Annenberg and, sure enough, it found that the financially sloppy Annenberg was guilty of tax fraud. Off to jail he went, providing a useful lesson for others who might dare to question Roosevelts leadership.

With radio, it was even worse for freedom of speech. Under the Radio Act of 1934, a federal agency had to approve applications for radio licenses. Naturally, the agency was quick to approve applications from stations known to favor the New Deal, while those from stations that had been critical gathered dust. In summary, Folsom quotes New York Times columnist Arthur Krock, who wrote in 1935 that Roosevelts administration was guilty of more ruthlessness, intelligence, and subtlety in trying to suppress legitimate unfavorable comment than any other I have known.

We also learn what a repulsive man Roosevelt was not just his flagrant marital infidelity but especially his unwillingness to listen civilly to anyone who disagreed with him. Folsom reports an exchange between Alexander Forbes and Roosevelt. Forbes had been a Harvard classmate and was a professor at Harvard Medical School. He was also a cousin to Roosevelt. In a letter, Forbes had the temerity to suggest that charitable giving, which had declined with the New Deal tax increases, did more good than the government relief programs. Roosevelt fired back a nasty letter in which he called Forbes one of the worst anarchists in the U.S. Like intolerant demagogues everywhere, Roosevelt could not stand it when people challenged him, no matter how politely and reasonably.

Corruption

And now we come to what I think is the books best contribution of all: Roosevelts use of federal money to buy elections and pressure politicians. In early 1936, the nations economy was still so badly mired in the Depression that it seemed possible that Roosevelt could lose his reelection bid. To avoid that, Roosevelt and two advisors conducted poll after poll to find out where he stood. Federal money was then targeted only to states where the issue was in doubt, such as Pennsylvania. Hardly any federal money went to solid Democratic states (mostly in the South), even though the people there were generally much worse off. Likewise, little federal money went to states that looked solidly Republican. Money flooded into the competitive states, always with the message that it came from the benevolence of the Roosevelt administration. That ploy worked brilliantly and thanks to targeted spending and special-interest-group promises, Roosevelt easily won the election. Money was taxed away from struggling American households and businesses so that the president could spend lavishly on political pork to buy votes. It hardly needs to be said that we continue to suffer from this brand of win-at-any-cost politics.

Roosevelt also used the carrot-and-stick approach within his party to reward politicians who went along with his plans and to punish those who didnt with a loss of federal money for their states. Clearly, Roosevelt regarded the United States as his personal fiefdom, the people there to obey his commands and its wealth to be employed however he pleased. He was no more troubled by the use of deceit, lies, and threats than any dictator throughout history. Folsom notes that at one point, 45 percent of the people feared that the country was heading into dictatorship.

In the books closing chapter, Folsom asks what really ended the Depression. Having already shredded the liberal historians myth that New Deal programs resuscitated the economy, Folsom turns his attention to another popular notion that war spending did. The war did get rid of unemployment (which stood at more than 20 percent in 1939) by drafting millions of men into the military, but the standard of living for most Americans remained depressed until 1946, when most of the wartime economic controls were lifted, taxes were reduced, and Roosevelts successor, Harry Truman, proved not so adamantly hostile to business as Roosevelt had been. Prosperity depends on freedom and property rights, both of which had taken a ferocious beating during the New Deal.

We still suffer from the blunders of the New Deal. It fundamentally altered the relationship between the American citizen and the government. Formerly, Americans had been free to do what they wanted as long as they did not violate the well-understood rights of others. After the New Deal, they had to obey an ever-growing mountain of statutes and regulations. Liberty is no longer the default condition. Control is.

It is frustrating to contemplate the persistence of the New Deal myth. Statist defenders of the myth treat it as a sacred religious relic; they seem to realize that if people stopped believing the lie that capitalism led to the Depression and government activism saved us, the intellectual house of cards they have constructed would come down. If ordinary Americans came to see that the New Deal was actually a vast waste of money and human energy, they might drop their support for todays Roosevelt-like politicians. Ditto if they understood that Roosevelt was just an arrogant and impetuous crackpot rather than a visionary leader.

The job of the scholar is to find and present the truth. Professor Folsom has been admirably fulfilling that role for many years, and his current book serves up a huge portion of truth about the New Deal, one of the most misunderstood aspects of our history.

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    George C. Leef is the research director of the John W. Pope Center for Higher Education Policy in Raleigh, North Carolina. He was previously the president of Patrick Henry Associates, East Lansing, Michigan, an adjunct professor of law and economics, Northwood University, and a scholar with the Mackinac Center for Public Policy.