The Disaster Called the New Deal

[New Deal or Raw Deal? How FDR’s Economic Legacy Has Damaged America. By Burton Folsom, Jr. Threshold Editions, 2008. Xvi + 318 pages.]

Readers of The Mises Review will not be surprised to learn that Folsom considers the New Deal a failure. Nevertheless, even those already familiar with such books as John T. Flynn’s The Roosevelt Myth will find Folsom’s book valuable. Folsom advances new and important arguments.

His anti–New Deal verdict is hard to dispute: levels of unemployment at the end of the 1930s remained at depression levels. In May 1939, Treasury Secretary Henry J. Morgenthau Jr., one of Franklin Roosevelt’s best friends, testified before the House Ways and Means Committee: “I say after eight years of this Administration we have just as much unemployment as when we started… And an enormous debt to boot” (p. 2). When he spoke, unemployment exceeded 20 percent. Further, and here Folsom has absorbed the pioneering research of Robert Higgs, not even the onset of World War II ended the Depression. True enough, unemployment ended; but this was only because of the draft. Absent this military slavery, there is every reason to think that Roosevelt would have continued to struggle with unemployment.

A diehard defender of Roosevelt might essay two replies to this indictment. He might argue that Roosevelt was insufficiently far-reaching: despite his radical reputation, Roosevelt only reluctantly embraced the Keynesian prescription of increased public spending. Roosevelt did indeed spend a great deal on government programs; but this must be balanced against his tax increases. When the two are taken together, the stimulus that New Deal outlays provided the economy was less than needed to restore prosperity. William Leuchtenburg, one of the most influential historians of the New Deal, favors this approach.

“The havoc that had been done before Roosevelt took office,” Leuchtenburg argues, “was so great that even the unprecedented measures of the New Deal did not suffice to repair the damage.” … Some historians say that FDR should have done more deficit spending during the recession of 1937. (p. 12)

Folsom wisely rejects this argument. It rests on a familiar fallacy, classically exposed by Frédéric Bastiat in the 19th century and Henry Hazlitt in the 20th. Spending by the government does not add to employment, since taxes displace private spending and investing. Folsom aptly quotes Hazlitt in this connection:

“Every dollar of government spending must be raised through a dollar of taxation,” Hazlitt emphasized. If the WPA builds a $10 million dollar bridge, for example, “the bridge has to be paid out of taxes… Therefore,” Hazlitt observed, “for every public job created by the bridge project a private job has been destroyed somewhere else… All that has happened, at best, is that there has been a diversion of jobs because of the project. (p. 84)

Keynesians of course have a response ready. They will say that investors, owing to pessimism about the future, would not have spent on their own the money the government takes in taxes. Instead, they would have hoarded it; had the money remained in private hands, the increase in employment would have been less than what occurred under the beneficent auspices of Washington.

Folsom ably dispatches this Keynesian canard. If businessmen were reluctant to invest, precisely the antibusiness attitude of the Roosevelt administration was in large part responsible. Roosevelt supported confiscatory rates of taxation; small wonder, then, that investors were reluctant to embark on new projects. They had good reason to think that if they were to be successful, Roosevelt would grab their profits for his own dubious schemes. Polls of businessmen taken in 1939 make evident this reluctance.

In March 1939, for example, AIPO [American Institute of Public Opinion] asked a national sample, “Do you think the attitude of the Roosevelt administration toward business is delaying business recovery?” More than twice as many respondents said “yes” as said “no.” (p. 248)

Unfortunately, there is a gap in Folsom’s case. His argument, as so far presented, is sound; but what if the government simply increases the money supply? In that case, defenders of interventionism will claim, the new jobs created by the government generate a net increase in employment.

To refute this, one needs the Austrian theory of the business cycle. Government spending, if it takes place through the expansion of bank credit, will, if “successful,” result in another artificially created boom. The recovery thus generated will result in the long run in even worse economic distress, once that new boom in turn collapses. Nor can a policy of further monetary expansion indefinitely postpone disaster. Eventually people’s confidence in the monetary system will crumble, and a hyperinflation will result.

Folsom, though not blind to the danger of inflation, ignores Austrian theory. In his own account of the continued severity of the depression that began in 1929, he rightly stresses the malign effects of the Smoot-Hawley tariff. Its extraordinarily high rates greatly restricted trade, not only through restricting imports but also because of retaliatory tariffs imposed by other nations. But he says nothing at all about the Austrian view, i.e., that the expansion of bank credit during the 1920s was the principal cause of the 1929 crash.

Quite the contrary, he follows Milton Friedman and the Chicago School in bemoaning the Federal Reserve’s contraction of the money supply.1  He appears not to be aware of the Austrian view. He does not cite Hayek or Mises on the cycle, and he ignores Lionel Robbins’s outstanding The Great Depression. (The fact that Robbins wrongly repudiated his own book should not make one reluctant to benefit from its analysis.) He includes only one reference to Rothbard’s America’s Great Depression, and this is in connection with Herbert Hoover and the RFC (p. 276, note 18).

But I come not to bury Folsom, but, mostly, to praise him. One of his best insights is that the New Deal programs were financed in large part by the poor. At Roosevelt’s behest, excise taxes were imposed on many popular items of consumption; and these weighed especially heavily on the impoverished. “In the first four years of Roosevelt’s presidency, revenue from excise taxes exceeded that of income and corporate taxes combined” (p. 126). (I do not think it right, though, to call excise taxes “regressive,” as Folsom does. Everyone paid the same rate; the poor were not charged more.)

This was far from the only way in which New Deal programs hurt the poor. Blacks fared very badly under Roosevelt, the supposed great exemplar of enlightened modern liberalism. Minimum-wage laws proved a stumbling block to efforts by blacks to secure jobs. These laws prevented employers from undercutting unions by offering lower wages to nonunion members. Since blacks faced exclusion from many of the powerful unions, they were in effect frozen out. Roosevelt, by the way, allowed unions freely to violate private-property rights: sit-down strikes, i.e., the forcible seizure and occupation of an employer’s property, were for him quite in order. In the famous sit-down strike by Walter Reuther’s United Auto Workers against General Motors, neither “Governor Frank Murphy of Michigan nor President Roosevelt was willing to support evicting the strikers from GM property” (p. 120).

Roosevelt was not much concerned with the effects of his programs on blacks. Indeed, he did little to support civil rights: he would not, e.g., support antilynching legislation. To do so might antagonize important Southern congressmen. Despite his seeming indifference to blacks, Roosevelt gained support among many members of the black community, in part owing to carefully calibrated publicity gestures by members of his administration. Nevertheless, several prominent blacks saw through him. Roosevelt snubbed Jesse Owens after the latter’s triumph at the 1936 Berlin Olympic Games; and thereafter Owens campaigned against him. Joe Louis sent a telegram of support to Wendell Willkie in the 1940 election: “’Win by a knockout,’ Louis telegrammed” (p. 210).

Folsom ably addresses an objection to his anti-Roosevelt thesis. If Roosevelt’s policies were such a miserable failure, why was he reelected? In 1936, he won by a landslide over the Republican candidate, Governor Alf Landon of Kansas. Moreover, not even the most bitter anti-Roosevelt partisan can deny the president’s popularity.

In part, Folsom claims, the answer lies in Roosevelt’s great personal charm. Even opponents, such as the eminent journalist Arthur Krock, found themselves under its sway. Krock once explained to Roosevelt why he no longer attended presidential press conferences. “You charm me so much that when I go back to write a comment on the proceedings, I can’t keep it in balance” (p. 223).

But Folsom has a deeper explanation. Roosevelt manipulated welfare programs, especially jobs under the WPA, to gain votes. WPA officials were quite willing, if need be, to twist arms in order to gain votes for the president and his congressional supporters. More generally, under the expert advice of Emil Hurja, the principal assistant to Postmaster General James Farley, polls were undertaken to indicate where patronage and pork could be used to best advantage.

Folsom here uses to good advantage a long-forgotten book, Who Were the Eleven Million? by David Lawrence, the founder and editor of US News & World Report. Through a county-by-county analysis of the 1936 election, Lawrence showed that voting for Roosevelt varied directly with the patronage and jobs extended. Sometimes one can trace in detail the way particular acts of political beneficence shifted voters to the Democratic camp. The Republicans were caught in a bind. As the party out of power, they could not match Roosevelt as a dispenser of favors. They could to an extent try the path of virtue, denouncing Roosevelt’s tactics for what they were; but this tactic could not be pushed too far. To do so risked alienating voters who benefited from the government’s largesse. Thus, Landon promised to maintain payments to farmers under the AAA, fatally compromising his denunciation of Roosevelt for political manipulation of welfare.

Folsom places great emphasis on Roosevelt’s character, and the president comes off very poorly indeed. Politicians are hardly noted for honesty, but even judged by the low standards of the breed, Roosevelt was mendacious. In a speech in the 1920 election, when he ran for vice president on the Democratic ticket, Roosevelt falsely claimed to have drafted the constitution of Haiti. When challenged, he denied ever making the statement, though numerous witnesses attested that he had done so. Folsom might also have mentioned the charges of dubious dealings leveled against Roosevelt’s Warm Springs Foundation for polio victims. (Folsom does mention this project but says little about it.)

The president did not grow more honest with age. Though he had promised to stay neutral in the fight between Alben Barkley and Pat Harrison for Senate majority leader, he came down decisively for Barkley, who won the vote, 38-37.2  As a result, he converted the popular Harrison from a strong New Dealer to an opponent.

Roosevelt also had an unslakeable thirst for power. Though the 1936 elections gave the Democrats overwhelming control of Congress, this was not enough for Roosevelt. He sought to purge those who were not fully behind his program. In particular, he could not forgive those who dared to oppose his unsuccessful proposal to pack the Supreme Court. He opposed long-serving and influential Democratic congressmen, favoring instead more pliant newcomers. (One favorite was Lyndon Johnson, whose later efforts to bring the New Deal to South Vietnam were not altogether a success.) In most cases, Roosevelt’s efforts proved unavailing. The once-dominant Roosevelt, despite his undoubted political gifts, found himself in a much weaker political position at the end of the 1930s than he had been in 1936. Roosevelt had overreached.

Roosevelt’s quest for power and disdain for criticism had a sinister side. He used government agencies, especially the FBI and IRS, to harass his political opponents. Thus, at the president’s instigation, a case of tax evasion against former Treasury Secretary Andrew Mellon was pursued, though known to be without basis by Elmer Irey, the head of the special intelligence unit of the IRS. Robert Jackson, who ordered the prosecution of Mellon, was later elevated to the Supreme Court. Mellon was eventually vindicated. As soon as Jesse Owens and Joe Louis criticized Roosevelt, IRS investigations of them commenced. Readers of this well-documented book will view Roosevelt with distaste.3

David Gordon covers new books in economics, politics, philosophy, and law for The Mises Review, the quarterly review of literature in the social sciences, published since 1995 by the Mises Institute. He is author of The Essential Rothbard, available in the Mises Store. Comment on the blog.

This review originally appeared in The Mises Review, Fall 2008.

• 1It is possible to support the Austrian view of the Depression’s cause while still rejecting the Fed’s monetary policy once the Depression started as overly deflationist, but it is most unlikely that Folsom adopts this approach. For a criticism of Chicago orthodoxy, see Murray Rothbard, America’s Great Depression, and Melchior Palyi, The Twilight of Gold.
• 2I cannot resist the story of Barkley’s death. In a speech in 1956, he said, “I would rather be a servant in the House of the Lord than to sit in the seats of the mighty” and moments later dropped dead from a heart attack.
• 3There appears to be a mishap in the text of p. 306, note 38. Folsom refers to a letter from Arthur Sears Henning to Herbert Hoover, apparently on the court-packing plan, and thanks Gary Dean Best for calling this letter to his attention; but the letter is not mentioned in the accompanying text.