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Monetary Central Planning and the State, Part 14: The New Deal and Its Critics

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In May 1935, Lewis W. Douglas delivered the annual Godkin Lectures at Harvard University, which were published later that year under the title The Liberal Tradition: A Free People and a Free Economy. Douglas had been appointed by Franklin D. Roosevelt to serve as Director of the Bureau of the Budget when the New Deal began in March 1933. But he resigned a year later, frustrated and disappointed that FDR had failed to implement the program promised in the Democratic National Platform of 1932. (See “Monetary Central Planning and the State, Part XIII: FDR’s New Deal,” Freedom Daily, January 1998.)

Douglas was convinced that the road that Roosevelt’s New Deal was following meant regimentation and ruin for America. Real economic recovery from the Great Depression would come only from freeing the economy from government power and planning.

The National Recovery Administration (NRA) and the Agricultural Adjustment Administration (AAA) had denied American industry and agriculture the freedom and flexibility to normally and properly adjust to bring the economy back into balance. The budget deficits and monetary manipulations of the New Deal had threatened financial chaos. The choice America faced, Douglas said, was clear:

“Will we choose to subject ourselves — this great country — to the despotism of bureaucracy, controlling our every act, destroying what equality we have attained, reducing us eventually to the condition of impoverished slaves of the state? Or will we cling to the liberties for which man has struggled for more than a thousand years? It is important to understand the magnitude of the issue before us…. If we do not elect to have a tyrannical oppressive bureaucracy controlling our lives, destroying progress, depressing the standard of living … then should it not be the function of the Federal government under a democracy to limit its activities to those which a democracy may adequately deal, such for example as national defense, maintaining law and order, protecting life and property, preventing dishonesty, and … guarding the public against … vested special interests?”

A year earlier William MacDonald published a book equally critical of the New Deal entitled The Menace of Recovery (1934). MacDonald observed:

“The underlying assumption of the entire recovery program is that social wisdom is the possession of the Federal government, and that neither individuals, nor social groups … can be expected to act wisely and efficiently if left to themselves.”

Instead, the federal government was controlling and regimenting the American economy:

“Business is no longer free and such freedom as it retains is being systematically curtailed. Government price-fixing is limiting profits and capital issues must pass elaborate and drastic government tests. Minimum wages, with fixed minimum and maximum periods of labor, will before long be imposed and guaranteed by government for every business and industry, with all differences between employers and employees adjudicated under Federal law administrated by Federal agents.

“The maximum acreage for staple crops is being fixed by the government, almost every step of the marketing process is being brought under direct government regulation, and farmers are being told what they may do with land which government pressure has withdrawn from cultivation.

“Banking today is virtually a government function, capital increases that were not needed have been forced and a dangerous scheme of deposit insurance extorted, and the mere possession of gold coin and bullion by the citizen has been made a crime.

“Direct government competition on grossly unequal terms has been set up through the Tennessee Valley Authority in a large area extending into six States, and the entire social life of the region is to be reconstituted on a government model with government financial aid and government-directed propaganda….

“One has only to envisage a few years more of this kind of “recovery” to perceive a nation a large majority of whose people will be living off the government, assured of maintenance because the government cannot let go, and neither expected nor able to show initiative or independence in the face of a government plan and government grants.”

A similar analysis was given by Ralph Robey in his book Roosevelt versus Recovery (1934), in which he concluded:

“If we are to prevent such a national disaster, we must turn back to the tenets of liberal capitalism. If we are to prosper as a nation, we must restore the requisites of a sound economic system…. It is a choice between the New Deal and sound prosperity. It is Roosevelt versus Recovery.”

The same fears were expressed in 1936 by Howard E. Kershner in his volume The Menace of Roosevelt and His Policies. He pointed out that “under the leadership of President Roosevelt America has smoked economic opium,” with resulting dreams and delusions of prosperity through planning and paternalism. He concluded his analysis by pointing out:

“At best, government has always involved a good deal of political racketeering. It was the first and biggest racket ever devised by man, and the fact that it is sometimes carried on by catch words, slogans and the jargon of the so-called economists, instead of swords, guillotines and guns does not make it any less of a racket. How men have struggled, schemed and fought for control of the public purse! How they have used public position and power for private ends!…

“Mr. Roosevelt … took charge of our government when it was comparatively simple, and for the most part confined to the essential functions of government, and transformed it into a highly complex, bungling agency for throttling business and bedeviling the private lives of free people. It is no exaggeration to say that he took the government when it was a small racket and made a large racket out of it….

“In taking the position that the Federal Government in Washington is responsible for the economic condition of the individual, and in putting a vast army of people on federal relief, many of whom now seem to think that government owes them a living, Mr. Roosevelt has sowed to the wind and will reap the whirlwind….

“If we are to preserve democracy we must go back to economic freedom. By his persistent advocacy of “socialistic” experiments, his extravagant waste of money, his reckless expansion of public credit, his policy of inflation and tinkering with the currency, his bureaucracy, his catering to class hatreds, his repudiation of promises and loss of faith in government, which his policies have caused — by all this and more, Mr. Roosevelt has endangered our entire heritage of political and economic freedom. Such is the menace of Roosevelt and his policies.”

And in his 1937 book, The Twilight of American Capitalism, A.S.J. Baster pointed out that one of the great merits of a free-market economy was that it neither respected nor protected those who desired special privileges. “Competition is the greater enemy of economic privilege for a group,” Baster explained. “It can destroy groups altogether (as those founded on attempted monopolies) and it will maintain others (as those founded on human capacities) only for individuals whose contribution is regularly tested in the market and who are summarily ejected if it is found wanting.”

In Baster’s view, “The moral is plain.” Under the New Deal political order in America, no longer was market competition determining the relative income shares earned by members of the society as a reflection of their success in serving consumer demand. Instead, the political influence of special interests would increasingly determine the amount of income various groups could successfully obtain through governmental redistribution and favors. As a consequence, the very stability of a free democratic order could be threatened as it became the plaything of special interests rather than the protector of individual rights and the competitive order:

“Lobbies will be maintained by beneficiaries of the State in order to ensure a permanent flow of favors, and by everyone else in order to demand equal treatment; economic decisions will be purchased, or settled by the flimsy oratory of the Chambers; and democracy must ultimately perish when the Government becomes too obviously the sport of all the interests or the mouthpiece of one of them…. The fatal weakness of the New Deal is … the degeneration of democracy resulting from those [economic] plans [and interventions].”

The worst features of the New Deal were ended when the U.S. Supreme Court declared the NRA and the AAA unconstitutional in 1935. The federal government’s power to directly dictate prices and production in the American economy was declared outside the bounds of the free society as conceived by the American Founders.

But “activist” government was not defeated. Before long, Roosevelt was able to appoint new members to the Supreme Court, who were more open to viewing the Constitution as a malleable “living” document susceptible to changing conceptions of government’s “responsibility” in social and economic affairs.

And more to the point, a “new economics” was on the horizon that would offer a sophisticated rationale for a broad range of fiscal and monetary manipulations by the state. Keynesian economics was about to transform the role of government in the market economy.

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    Richard M. Ebeling is a professor of economics at Northwood University. He was formerly president of The Foundation for Economic Education (2003–2008), was the Ludwig von Mises Professor of Economics at Hillsdale College (1988–2003) in Hillsdale, Michigan, and served as vice president of academic affairs for The Future of Freedom Foundation (1989–2003).