I was recently asked why people believe that Franklin Delano Roosevelt’s ‘New Deal’ saved the United States from the Great Depression.
The answer is that people are told so – by television and radio shows, films, and (of course) at school. A more difficult question would be why do some people not believe this, indeed why are some people anti-statist generally, in spite of the ‘education system’ and the mainstream media.
Perhaps the leftists (using the modern definition of ‘left’ – I know that Bastiat sat on the left hand side of the French Assembly and so on) have some variation of their ‘authoritarian personality’ fraud (the theory that purported to explain away conservative opinions as a personality disorder). to explain away libertarian opinions. Or perhaps there is some genetic characteristic (although leftists prefer environmental explanations) that could be claimed to ‘explain’ why libertarians believe the things we do.
Of course the above ‘explanations’ (as with older Marxist doctrines of ‘class interest’ and ‘ruling class ideology’) are efforts to avoid having to deal with the facts and arguments presented by non-leftists.
As for the ‘New Deal’ itself, some background is in order… Among free market folk there are two conflicting explanations as to why a bust occurs. The view supported by (for example) Milton Friedman is that the government allows the money supply to decline and this causes the great economic decline. Milton Friedman never claimed that preventing the decline of the money supply would prevent recessions – but he did claim that preventing such a decline would prevent a great economic reverse such as the Great Depression, hence his oft repeated claim that as long as the government (or rather the Federal Reserve system) did not allow such a decline of the money supply the United States was “depression proof”.
The competing view goes back to such men as David Hume and many others (see the first volume of Murry Rothbard’s history of economic thought) and is expressed in such works as Ludwig Von Mises’ Theory of Money and Credit and Human Action and Murry Rothbard’s The Panic of 1819 and America’s Great Depression.
This view holds that it is the risein the money supply that creates the conditions for the bust – i.e. that is the credit money ‘boom’ that causes the bust.
The temptation here is to become too technical, to go into a long discussion as to why one is not dealing with “over-investment” but rather with “mal-investment” and what exactly this is. And then to examine whether a credit money bubble needs to be directly related to “investment” (i.e. spending on capital goods) at all – or whether borrowing for consumer consumption can be the cause of some boom-busts.
However, such treatment is not needed here. All that needs to be said is that the ‘Austrian’ view of of the economic cycle holds that it is caused by efforts to finance loans over and above the amount available from real savings.
Real savings are the amount of people’s incomes they do not spend (or hoard) – but loan out (normally via third parties such as banks) instead.
Efforts to lend out more money than has actually been saved (either by printing money, of by the various complicated methods of credit-money expansion) lead (in this view to a boom-bust. Governments may be involved via a central bank (or something like the ‘private’ Federal Reserve System), but there need be no central government institutions. If banks and other financial institutions are led to expand loans over and above real savings (either by such things as the National Banking Act of Lincoln’s time, which dominated banking till 1913, or by the informal understandings of the pre Civil War period) there will be a boom-bust cycle. And government efforts to delay the bust by keeping the credit bubble inflated (as Milton Friedman suggested) will just (in the Austrian view) just make the bust all the worse when it comes.
Whichever of these two sides is correct (leftists, of course, would hold that both sides are wrong), there is no dispute between them over what non-monetary government policy should be in an economic slump.
Government should do what the government of the United States did in every economic slump from 1819 to 1929 – basically nothing at all.
The classic example is the crash of 1921.
During the First World War a great credit money bubble built up and this credit money boom liquidated itself in 1921. There was a major fall in both prices and output and a large rise in unemployment. The United States Administration of President Harding did nothing much, apart from cut government spending,(in spite of all the ideas of Commerce Secretary Herbert Hoover to try and keep up prices and wages and to introduce various statist projects) and the economy was in recovery within six months.
In the late 1920′s another credit money bubble built up – largely because of the efforts of New York Federal Reserve Bank Governor Ben Strong (a hero of Milton Friedman’s) to help the Governor of the Bank of England (M. Norman) maintain the artificially high 1925 exchange rate of the Pound to the Dollar (this was expressed in the language of ‘maintaining the Gold Standard’ although if gold had really been the currency the exchange rate between the Pound and Dollar would have been a matter of how much gold the Pound represented and how much gold the Dollar represented).
When the bubble eventually burst the Federal Reserve system (not Mr Strong himself – he was dead) made efforts to prop up the bubble – not great enough efforts according to Milton Friedman, pointless or damaging efforts according the Austrian school.
More importantly President Herbert “The Forgotten Progressive” Hoover and Congress (contrary to the myth of the inactivity) went into hyper active mode.
Not for them the Taoist idea that to do nothing is often the correct thing for a ruler to do (however hard it may be to resist the endless demands to do various things). Prices and especially wages must be kept up – because if real wages were allowed to fall ‘demand’ would fall and recovery be prevented.
Economic theory that disputed the importance of keeping up demand was (long before Keynes had an impact on the United States) denounced as ‘orthodox’ or ‘reactionary’ (Herbert Hoover denounced it in these terms). As for the fact that in every previous bust (from 1819 to 1921) real wages has fallen and recovery (in output, employment and wages) had taken place after this had occurred, well the self styled ‘empirical’ people of the time (and of our time) choose to ignore this.
President Hoover and Congress also worked out the basic forms of the later ‘New Deal’ public works programs (although on a smaller scale), and in this they were supported by most of the economists of their time (the “what is seen and what is unseen”, showing that every government project must be paid for at the expense of more productive non-government activity, as Bastiat was considered out of date, although he had not actually been effectively refuted). However, most economists of the time did not support the massive increase in import taxes that went into effect in 1931 – President Hoover himself had doubts about this move of Congress but he still signed the bill.
All in all the government price and wage rigging efforts (voluntary’ agreements with various concerns), tax and spend policy (and the trade ‘war’ of beggar-my-neighbour tariffs) managed to turn a credit-money bust into the Great Depression.
“But then F.D.R. saved us from it”.
Errr. no he did not.
Real output (once one has taken account of inflation) was about as low in 1938 as if had been in 1932, and unemployment was almost as high. This simply was no the case in other major countries. For example, in National Socialist Germany unemployment had been eliminated – not by the “build up to war” so much as by the control of real wages as prices rose (as supported, after the fact, by Lord Keynes in the introduction to the German edition of his General Theory of 1936).
For those people (such as myself) who do not support government control of wages, British economic performance is worthy of note. Contrary to the myth, British output and real incomes rose more than German in the 1930′s (and vastly more than American output or real incomes did – indeed American output and real incomes were worse at the end of the 1930′s than they had been and the start) and unemployment fell greatly between 1932 and 1937 (before conscription even started).
There was still large scale unemployment in certain areas of Britain in 1937 as the trade union Acts of 1875 and 1906 were not repealed (restoring the rule of contract was not needed in Germany as they had a more direct approach to dealing with union power – they physically smashed the unions rather than bringing them back under the law of contract), but the British performance in reducing unemployment compares very well with the America – a great contrast to the 1920′s when American unemployment had been greatly lower than British unemployment.
Those interested in the details of President Roosevelt’s polices – for example the subsidy to produce X commodity, together with the government program to destroy the same commodity (various farm products), or the complex efforts to promote cartels (such as the National Industrial Recovery Act) at one point, and the “anti trust” efforts to break cartels at another point, the various public works projects (both corrupt and non corrupt – nothing is simple, indeed their were often different government agencies operating in the same field and operating quite differently)…….. and so on and so on (even as a child studying all the contradictions and absurdities of President Roosevelt’s polices made me feel sick, but other people have different tastes).
The articles of Henry Hazlitt and H.L.M. are also worth reading (and Albert J. Nock and all the rest).
However, Bruce Ramsey came out with an edition of Garet Garrent’s articles in 2002 (“Salvos Against the New Deal from the Saturday Evening Post: 1932-1940″) and that is as good a place to start as any.
I will not make many comments of my own.
Firstly the stealing of privately owned gold in 1933 and the voiding of the gold clauses in private contracts is often dismissed as a concern only of ‘gold bugs’, but if government can do this (in defiance of the Constitution’s demand that government uphold contracts and that only gold or silver coin be legal tender in any State) and not even the four ‘reactionaries’ on the Supreme Court really object – well then things are rather bad. Nor was there even the poor excuse of war.
There is also the story (which I will not go into the details of) of how the power to “regulate interstate commerce” got mutated into a power to regulate non interstate commerce. Here the Supreme Court did put up some resistance – and not just on the grounds that someone selling to someone else in the same State is not “interstate commerce” (however much it may affect it), but also on the grounds that the power belongs to Congress not any arbitrary executive agency that may be set up under an enabling act (the 1935 case that struck down the National Industrial Recovery Act was all nine judges, not just the ‘reactionaries’, they were all against the National Recovery Agency being set up as a bunch of God Kings). However, court judgements during World War II basically broke the limits on Federal government regulatory power – and these judgements have not yet been reversed.
Oddly enough it was the war time inflation (at a time of wage controls) that actually broke the real wage rigidity
that had prevented the market clearing and unemployment really coming down in the 1930′s – and the “Do nothing” Congress elected in 1946 refused to go back to the endless regulations and union power of the 1930′s (so mass unemployment and depression did not return after World War II). The New Dealers had a horror of balanced budgets and free markets – and that is (more or less) what the “Do nothing” Republican Congress (Senator Bricker of Ohio and the rest) gave the nation – with the opposite results to what the New Dealers would have predicted.
As for the ‘positive’ aspects of the New Deal.
Yes the Golden Gate Bridge in San Francisco looks good – and this project (like others controlled by the same agency – very unlike other New Deal agencies) was fairly honest, but this is covered by Bastiat’s what is seen and what is unseen. Any government project, no matter how nice looking and however honestly managed can only be finance at the opportunity cost of a more productive private activity.
Also (Senator James Webb please note) for all the stress on such things as the TVA the South tended to get less money per head of population than other areas of the country – in spite of its greater poverty (the area voted Democrat anyway, so why bother to spend money on the locals).
True Virginia was not hit as hard by the Great Depression as many States (although that alone may come as a bit of a shock to Senator of Virginia J. Webb), but New Deal money was not exactly think on the ground in States like Texas either, and these States were (in those days) very poor indeed.
Also perhaps the most important long term project of the FDR Administration was, at the time, of small importance.
Things like the fairly honest PWA and the corrupt WPA are long gone, the farm subsidies are still with us (indeed bigger than ever – and just like in the 1930′s they are justified by talk of poor family farms and in fact tend to go to the biggest farmers), but they are small compared to another New Deal project – Social Security.
This program was passed in 1935 (although the tax did not hit till 1937). The government ‘pension’ Ponzi scheme was small at first but is vast now -it (along with Medicare and Medicaid) dwarfs the rest of the Federal government.
Such programs are justified as being for the ‘general welfare’ of the United States. That the ‘common defence and general welfare’ was the purpose of the powers granted to Congress by the Constitution, not a power in its self is ignored – the ever increasing burden of this final gift of the New Deal will be harder and harder to ignore over the coming years.