FDR's Folly: How Roosevelt and His New Deal Prolonged the Great Depression

From the Inside Flap "Admirers of FDR credit his New Deal with restoring the American economy after the disastrous contraction of 1929-33. Truth to tell - as Powell demonstrates without a shadow of a doubt - the New Deal hampered recovery from the contraction, prolonged and added to unemployment, and set the stage for ever more intrusive and costly government. Powell's analysis is thoroughly documented, relying on an impressive variety of popular and academic literature both contemporary and historical." Milton Friedman , Nobel Laureate, Hoover Institution"There is a critical and often forgotten difference between disaster and tragedy. Disasters happen to us all, no matter what we do. Tragedies are brought upon ourselves by hubris. The Depression of the 1930s would have been a brief disaster if it hadn't been for the national tragedy of the New Deal. Jim Powell has proven this." P.J. O'Rourke , author of Parliament of Whores and Eat the Rich "The material laid out in this book desperately needs to be available to a much wider audience than the ranks of professional economists and economic historians, if policy confusion similar to the New Deal is to be avoided in the future." James M. Buchanan , Nobel Laureate, George Mason University"I found Jim Powell's book fascinating. I think he has written an important story, one that definitely needs telling." Thomas Fleming , author of The New Dealers' War "Jim Powell is one tough-minded historian, willing to let the chips fall where they may. That's a rare quality these days, hence more valuable than ever. He lets the history do the talking." David Landes , Professor of History Emeritus, Harvard University"Jim Powell draws together voluminous economic research on the effects of all of Roosevelt's major policies. Along the way, Powell gives fascinating thumbnail sketches of the major players. The result is a devastating indictment, compellingly told. Those who think that government intervention helped get the U.S. economy out of the depression should read this book." David R. Henderson , editor of The Fortune Encyclopedia of Economics and author of The Joy of Freedom The Great Depression and the New Deal. For generations, the collective American consciousness has believed that the former ruined the country and the latter saved it. Endless praise has been heaped upon President Franklin Delano Roosevelt for masterfully reining in the Depression's destructive effects and propping up the country on his New Deal platform. In fact, FDR has achieved mythical status in American history and is considered to be, along with Washington, Jefferson, and Lincoln, one of the greatest presidents of all time. But would the Great Depression have been so catastrophic had the New Deal never been implemented"In FDR's Folly , historian Jim Powell argues that it was in fact the New Deal itself, with its shortsighted programs, that deepened the Great Depression, swelled the federal government, and prevented the country from turning around quickly. You'll discover in alarming detail how FDR's federal programs hurt America more than helped it, with effects we still feel today, including:How Social Security actually increased unemploymentHow higher taxes undermined good businessesHow new labor laws threw people out of workAnd much moreThis groundbreaking book pulls back the shroud of awe and the cloak of time enveloping FDR to prove convincingly how flawed his economic policies actually were, despite his good intentions and the astounding intellect of his circle of advisers. In today's turbulent domestic and global environment, eerily similar to that of the 1930s, it's more important than ever before to uncover and understand the truth of our history, lest we be doomed to repeat it. JIM POWELL, editor of Laissez Faire Books, has been a senior fellow at the Cato Institute since 1988. He is the author of the bestselling book The Triumph of Liberty , which the Wall Street Journal called “a literary achievement,” and he has written more than 400 articles for the New York Times, the Wall Street Journal, the Chicago Tribune, Money magazine, Reason, and numerous other national publications. A world-renowned historian, Mr. Powell studied under Daniel Boorstin and William McNeill at the University of Chicago, and he has lectured across the United States as well as in England, Germany, Japan, Brazil, and Argentina. He lives in Connecticut. Excerpt. © Reprinted by permission. All rights reserved. The Great Depression has had an immense influence on our thinking, particularly about ways to handle an economic crisis, yet we know surprisingly little about it. Most historians have focused on chronicling Franklin D. Roosevelt’s charismatic personality, his brilliance as a strategist and communicator, the dramatic One Hundred Days, the First New Deal, Second New Deal, the “court-packing” plan, and other political aspects of the story. Comparatively little attention has been paid to the effects of the New Deal.In recent decades, however, many economists have tried to determine whether New Deal policies contributed to recovery or prolonged the depression. The most troubling issue has been the persistence of high unemployment throughout the New Deal period. From 1934 to 1940, the median annual unemployment rate was 17.2 percent.1 At no point during the 1930s did unemployment go below 14 percent. Even in 1941, amidst the military buildup for World War II, 9.9 percent of American workers were unemployed. Living standards remained depressed until after the war.2 While there was episodic recovery between 1933 and 1937, the 1937 peak was lower than the previous peak (1929), a highly unusual occurrence. Progress has been the norm. In addition, the 1937 peak was followed by a crash. As Nobel laureate Milton Friedman observed, this was “the only occasion in our record when one deep depression followed immediately on the heels of another.”3Scholarly investigators have raised some provocative questions. For instance, why did New Dealers make it more expensive for employers to hire people? Why did FDR’s Justice Department file some 150 lawsuits threatening big employers? Why did New Deal policies discourage private investment without which private employment was unlikely to revive? Why so many policies to push up the cost of living? Why did New Dealers destroy food while people went hungry? To what extent did New Deal labor laws penalize blacks? Why did New Dealers break up the strongest banks? Why were Americans made more vulnerable to disastrous human error at the Federal Reserve? Why didn’t New Deal securities laws help investors do better? Why didn’t New Deal public works projects bring about a recovery? Why was so much New Deal relief spending channeled away from the poorest people? Why did the Tennessee Valley Authority become a drag on the Tennessee Valley?Curiously, although the Great Depression was probably the most important economic event in twentieth-century American history, Stanford University’s David M. Kennedy seems to be the only major political historian who has mentioned any of the recent findings. “Whatever it was,” he wrote in his Pulitzer Prize–winning Freedom from Fear (1999), the New Deal “was not a recovery program, or at any rate not an effective one.”4It’s true the Great Depression was an international phenomenon—depression in Germany, for instance, made increasing numbers of desperate people search for scapegoats and support Adolf Hitler, a lunatic who couldn’t get anywhere politically just a few years earlier when the country was still prosperous. But compared to the United States, as economic historian Lester V. Chandler observed, “in most countries the depression was less deep and prolonged.”5 Regardless whether the depression originated in the United States or Europe, there is considerable evidence that New Deal policies prolonged high unemployment.FDR didn’t do anything about a major cause of 90 percent of the bank failures, namely, state and federal unit banking laws. These limited banks to a single office, preventing them from diversifying their loan portfolios and their source of funds. Unit banks were highly vulnerable to failure when local business conditions were bad, because all their loans were to local people, many of whom were in default, and all their deposits came from local people who were withdrawing their money. Canada, which permitted nationwide branch banking, didn’t have a single bank failure during the Great Depression.FDR’s major banking “reform,” the second Glass-Steagall Act, actually weakened the banking system by breaking up the strongest banks to separate commercial banking from investment banking. Universal banks (which served depositors and did securities underwriting) were much stronger than banks pursuing only one of these activities, very few universal banks failed, and securities underwritten by universal banks were less risky. Almost every historian has praised FDR’s other major financial “reform,” establishing the Securities and Exchange Commission to supervise the registration of new securities and the operation of securities markets, but in terms of rate of return, investors were no better off than they were in the 1920s, before the Securities and Exchange Commission came along.FDR didn’t do much about a contributing factor in the Great Depression, the Smoot-Hawley tariff which throttled trade. Indeed, he raised some tariffs, while Secretary of State Cordell Hull negotiated reciprocal trade agreements which cut tariffs only about 4 percent. FDR approved the dumping of agricultural commodities below cost overseas, which surely aggravated our trading partners.FDR tripled taxes during the Great Depression, from $1.6 billion in 1933 to $5.3 billion in 1940.6 Federal taxes as a percentage of the gross national product jumped from 3.5 percent in 1933 to 6.9 percent in 1940, and taxes skyrocketed during World War II.7 FDR increased the tax burden with higher personal income taxes, higher corporate income taxes, higher excise taxes, higher estate taxes, and higher gift taxes. He introduced the undistributed profits tax. Ordinary people were hit with higher liquor taxes and Social Security payroll taxes. All these taxes meant there was less capital for businesses to create jobs, and people had less money in their pockets.In addition, FDR increased the cost and risk of employing people, and so there shouldn’t have been any surprise that the unemployment rate remained stubbornly high. Economists Richard K. Vedder and Lowell E. Gallaway, in their 1997 study Out of Work: Unemployment and Government in Twentieth-Century America, reported: “New Deal policies (and some Hoover-era policies predating the New Deal) systematically used the power of the state to intervene in labor markets in a manner to raise wages and labor costs, prolonging the misery of the Great Depression, and creating a situation where many people were living in rising prosperity at a time when millions of others were suffering severe deprivation. . . . Of the ten years of unemployment rates over 10 percent during the Depression, fully eight were during the Roosevelt administration (counting 1933 as a Roosevelt year).”8 Vedder and Gallaway estimated that by 1940 unemployment was eight points higher than it would have been in the absence of higher payroll costs imposed by New Deal policies.9Economists Thomas E. Hall and J. David Ferguson reported, “It is difficult to ascertain just how much the New Deal programs had to do with keeping the unemployment rate high, but surely they were important. A combination of fixing farm prices, promoting labor unions, and passing a series of antibusiness tax laws would certainly have had a negative impact on employment. In addition, the uncertainty experienced by the business community as a result of the frequent tax law changes (1932, 1934, 1935, 1936) must have been enormous. Since firms’ investment decisions very much depend on being able to plan, an increase in uncertainty tends to reduce investment expenditures. It should not be a surprise that investment as a proportion of output was at low levels during the mid-1930s.”10Black people were among the major victims of the New Deal. Large numbers of blacks were unskilled and held entry-level jobs, and when New Deal policies forced wage rates above market levels, hundreds of thousands of these jobs were destroyed. Above-market wage rates encouraged employers to mechanize and in other ways cut total labor costs. Many New Deal policies were framed to benefit northern industries and undermine the position of employers in the South, where so many blacks worked. “New Deal labor policies contributed to a persistent increase in African American unemployment,” reported economist David E. Bernstein.11When millions of people had little money, New Deal era policies made practically everything more expensive (the National Industrial Recovery Act), specifically maintained above-market retail prices (the Robinson-Patman Act and the Retail Price Maintenance Act) and above-market airline tickets (Civil Aeronautics Act). Moreover, FDR signed into law the Agricultural Adjustment Act, which led to the destruction of millions of acres of crops and millions of farm animals, while many Americans were hungry. New Deal agricultural policies provided subsidies based on a farmer’s acreage and output, which meant they mainly helped big farmers with the most acreage and output. The New Deal displaced poor sharecroppers and tenant farmers, a large number of whom were black. High farm foreclosure rates persisted during the New Deal, indicating that it did almost nothing for the poorest farmers. Historian Michael A. Bernstein went farther and made a case that New Deal agricultural policies “sacrificed the interests of the marginal and the unrecognized to the welfare of those with greater political and economic power.”12The flagship of the New Deal was the National Industrial Recovery Act, which authorized cartel codes restricting output and fixing high prices for just about every conceivable business enterprise, much as medieval guild restrictions had restricted output and fixed prices. That FDR approved contraction was astounding, because the American people had suffered through three years of catastrophic contraction. With the Natio... Read more