191 Depression’s Lessons

In 1883, William Graham Sumner, a Yale professor, noted:  “As soon as A observes something which seems to him to be wrong, from which X is suffering, A talks it over with B, and A and B then propose to get a law passed to remedy the evil and help X.  Their law always proposes to determine what C shall do for X, or in the better case, what A, B, and C shall do for X . . . .  What I want to do is look up C.  I want to show you what manner of man he is.  I call him the Forgotten Man.  Perhaps the appellation is not strictly correct.  He is the one who never is thought of . . . .”  This forgotten man, Sumner concludes, “works, he votes, generally he prays—but he always pays. . . .”  

Sumner’s phrase serves as the title for Amity Shlaes’ recent work:  The Forgotten Man:  A New History of the Great Depression (New York:  HarperCollinsPublishers, c. 2007).  For too long, she argues, fans of Franklin Delano Roosevelt have forged the story of the Depression to portray him in heroic terms.  But in truth he effectively prolonged it.  Following a decade of genuine prosperity (the 1920s) the stock market crashed in 1929.  Yet this event in itself “did not cause the Depression.  It was a necessary correction of a too-high stock market, but not a necessary disaster” (p. 5).  What caused the Great Depression was the loss of faith in the free market and consequent government intervention—begun by Herbert Hoover and continued by FDR—that acerbated and deepened the nation’s economic woes.  (In the last presidential debate, incidentally, Barack Obama declared we were in the midst of the greatest economic crisis since the Great Depression, and John McCain replied that Obama’s economic proposals would, like Herbert Hoover’s, exacerbate it.  Though Obama probably exaggerated the gravity of the crisis, McCain was surely right in identifying Obama’s announced economic agenda as a rerun of Hoover’s.)  

To set the stage, Shlaes portrays the positive aspects of the “Roaring ‘20s.”  Presiding over the prosperity of the nation was President Calvin Coolidge, a “country lawyer” committed to limited government and individual liberty.  Aiding Coolidge was his Secretary of the Treasury, Andrew Mellon, whose tax policies “reduced the national debt from $24 billion to $16 billion” (p. 37).  Unemployment dropped to “5 percent in the year he was elected.  From there it dropped to 3.2 percent in 1925 and then into the twos and ones” (p. 39).  On the other hand, his Secretary of Commerce, Herbert Hoover—the “Great Engineer”—envisioned and agitated for a more activist government.  Of Hoover, Coolidge quipped:  “’that man has offered me unsolicited advice for six years, all of it bad’” (p. 38).  

Despite the nation’s prosperity, discontent flourished in “progressive” circles.  Illustrative of this was a 1927 USSR-bound “junket” of intellectuals, including:  Rexford Guy Tugwell, a Columbia University economist who would significantly shape the New Deal; Paul Douglass, a University of Chicago labor scholar; and Stuart Chase, an economist deeply influenced by Henry George and his “single tax” proposals, who wrote a book entitled A New Deal in 1932.  Joining them were labor union officials, ACLU lawyers, and noted socialists.  They called themselves an “unofficial American trade union delegation” and endeavored to cultivate friendly ties with Joseph Stalin and his Communist regime.  They were not, of course, Stalinists themselves.  But as idealistic “progressives”—or, in some instances, “radicals”—they longed for a more egalitarian world, a society favoring workers rather than dollars.  Thus, Tugwell lamented:  “’Life in the 1920s was often frustrating for those of my political persuasion—political progressives or radicals’” who were “’all but regarded as social misfits’” (p. 61).  

When the market crashed in October 1929, these “misfits” were poised to make radical changes in the country.  Though hardly himself a radical, the recently elected President, Herbert Hoover, shared their conviction that dramatic governmental action was needed to rectify the economic downturn.  He had written a book entitled American Individualism, but it was hardly a defense of what earlier generations had understood by that term.  Indeed he “disdained laissez-faire economics” and refused to make a fetish of private property (p. 34).  Within a month he poured $423 million into a “public buildings program” designed to “boost the economy” (p. 91).  He then urged Congress to provide national programs for all sorts of folks.  Former President Coolidge later protested “these socialistic notions of government” (p. 94), but within a year (Shlaes argues) Hoover managed to seriously damage the economy “on three fronts: by intervening in business, by signing into law a destructive tariff, and by assailing the stock market” (p. 92).  The 1930 protectionist Smoot-Hawley Tariff, passed despite the opposition of one thousand of the nation’s premier economists, proved especially disastrous, shutting down international trade at precisely the moment it was most needed.  Playing the populist, blaming Wall Street for the nation’s woes proved popular—especially as FDR picked up on the litany—but did little more than provide an outlet for anger.  

When Roosevelt won the 1932 election, he reminded the nation that, as the Harvard historian  Frederick Jackson Turner had declared, the endless opportunity of the western frontier had ended and it was now “time for the ‘princes of property,’ the wealthy, to share their resources.  Growth would not provide for the poor; only redistribution could” (p. 135).  So he brought to Washington D.C. a corps of “reformers,” his Brain Trust of elite university professors committed to economic experiment and change.  The currency was instantly inflated by discarding the gold standard—“an act of social redistribution” whereby $200 billion was transferred from creditors to debtors.  Within two years of his election, income tax rates for the wealthy soared to 75 per cent, quickly quenching most all entrepreneurial activity.  He launched a host of federal agencies—the “alphabet soup (quipped Huey Long) of CCC, WPA, NRA, AAA, WPA, et al.—designed  to provide employment and infuse cash into the system.  

Naturally these populist endeavors placated the populace.  FDR enjoyed great popularity as a spokesman for the people, a leader who was getting great things done.  He appealed to the masses with soaring, utopian rhetoric, declaring:  “’We are beginning to wipe out the line that divides the practical from the ideal; and in so doing we are fashioning an instrument of unimagined power for the establishment of a morally better world’” (p. 299).  Unfortunately he, like Hoover, abjectly failed to deal effectively with the depression.  Massive governmental intervention paralyzed the economy, doing nothing to restore it to health.  His fireside chats persuaded the folks that he cared for them, but his economic policies insured their prolonged suffering.  “Where the New Deal was faltering economically, it was gaining politically.  Roosevelt’s radio voice was succeeding” (p. 210).  His popularity fueled his love of power and prodded him to propose “packing” the Supreme Court with justices more amenable to his agenda—a rash act that ignited his opponents and stalled some of his momentum.  

Joining the opposition was New York’s venerable Al Smith, who’d run as the Democratic presidential nominee in the 1928 election.  Addressing a large crowd in the nation’s capital, “Smith argued fiercely against Roosevelt’s ‘arraignment of class against class’; of the brain trust he said ‘the young Brain Trusters caught the socialists in swimming and ran away with their clothes.’  Most outrageous of all to Smith was the rise of professors, the way Roosevelt had ignored others—himself, especially included—and constructed such a revolution with the brain trusters” (p. 265).  The brain trusters themselves, such as Raymond Tugwell, began departing FDR’s administration following his re-election in 1936.  Their ideas had been tried and found wanting.  Unemployment endured.  Stocks had not regained their value.  By 1938, it was becoming apparent, even to Democrats, that government intervention had sucked the life out of the private sector.  

The economy recovered, quite simply, when the nation was plunged into WWII.  “Roosevelt hadn’t known what to do with the extra people in 1938, but now he did:  he could make them soldiers” (p. 381).  

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Jim Powell anticipated many of Amity Shlaes’ positions in FDR’s Folly:  How Roosevelt and His New Deal Prolonged the Great Depression (New York:  Crown Forum, c. 2003).  The author is a historian who studied under Daniel Boorstin and William McNeill—two of the greatest 20th century American historians—at the University of Chicago.  He is now a senior fellow at the Cato Institute and is thus openly aligned with its libertarian, laissez faire economic philosophy.  

Powell begins by noting that despite FDR’s many initiatives during his first two administrations, “the medium annual unemployment rate was 17.2 percent” (p. vii).  Living standards for the American people regained pre-depression levels only after WWII.  The President did, however, triple taxes during the ‘30s.  He imposed “higher personal income taxes, higher corporate income taxes, higher excise taxes, higher estate taxes, and higher gift taxes.  . . . .  Ordinary people were hit with higher liquor taxes and Social Security payroll taxes” (pp. ix-x).  Amazingly, in 1942, FDR informed Congress:  “’No American citizen ought to have a net income, after he has paid his taxes, of more than 25,000 a year.’  The Treasury Department submitted to the House Ways and Means Committee a memorandum calling for a 100 percent tax on incomes over $25,000” (p. 245).  Everyone paid more.  No one prospered.  But government expanded, federal employees proliferated, and FDR garnered powers unimagined by the nation’s Founders.  He failed to end the Great Depression, but he radically altered the nature of the United States.

To set the stage for his analysis, Powell asks, in his first chapter, “How Could Such Bright, Compassionate People Be Wrong?”  Among those bright people was Stuart Chase, the author of A New Deal (1932) and one of the “progressives” who had visited the USSR in 1927.  Fondly remembering his visit to Stalin’s paradise, Chase declared that communists possessed a “’burning zeal to create a new heaven and a new earth’” and wondered “‘Why should Russians have all the fun of remaking a world?’” (p. 3).  Though Roosevelt himself had little interest in any ideology, he surrounded himself with folks like Chase and easily “absorbed the spirit and tactics of class warfare” (p. 6) whenever it suited his purposes.  Thus, in dealing with the nation’s agricultural problems, he relied on Rexford Tugwell, who had for years advocated the central-planning, collectivist socialism promoted by Scott Nearing.   

When he became President in 1933, Roosevelt basically followed Herbert Hoover’s agenda, confident that government spending would end the depression.  To provide his New Deal for the American people, various federal agencies were chartered to dictate policies and provide financial subsidies for farmers and businessmen, labor unions and power companies.  Taxes soared (despite tax revolts around the country), the dollar was devalued, and the banking industry was significantly changed.  “The New Deal,” Powell says, “was the American version of the collectivist trend that became fashionable around the world,” quite similar to developments in Europe, such as Mussolini’s Fascism, wherein, as Mario Palmieri said, “’Economic initiatives cannot be left to the arbitrary decisions of private, individual interests.’”  Rather than encourage free enterprise,  “’The proper function of the state in the Fascist system is that of supervising, regulating and arbitrating the relationships of capital and labor, employers and employees, individuals and associations, private interests and national interests. . . .  More important than the production of wealth is its right distribution, distribution which must benefit in the best possible way all the classes of the nation, hence the nation itself.  Private wealth belongs not only to the individual, but, in a symbolic sense, to the State as well’” (pp. 76-77).  

But despite all its supervising and regulating, despite all the subsidies hurled at the helpless, the New Deal failed to bring the nation out of the depression.  Powell details, with both statistics and anecdotes, the abject failure of FDR’s central planning experiments.  Unemployment persisted.  Incomes languished.  Poverty deepened.  Tragically, “New Dealers assumed that individual rights, private property, and economic liberty were obstacles to recovery, but they are essential” (p. 166).  Despite the ugly aspects of the Industrial Revolution, living standards for ordinary people had soared to unimaginable heights in the 19th and 20th centuries, while FDR’s New Deal, suffused with frequently primitivist socialist ideology, sought to harness (or reverse) the economic growth of free enterprise capitalism.  

“The Great Depression,” Powell concludes, “was a government failure, brought on principally by Federal Reserve policies that abruptly cut the money supply; unit banking laws that made thousands of banks more vulnerable to failure; Hoover’s tariffs, which throttled trade; Hoover’s taxes, which took unprecedented amounts of money out of people’s pockets at the worst possible time; and Hoover’s other policies, which made it more difficult for the economy to recover.  High unemployment lasted as long as it did because of all the New Deal policies that took more money out of people’s pockets, disrupted the money supply, restricted production, harassed employers, destroyed jobs, discouraged investment, and subverted economic liberty needed for sustained business recovery” (p. 267).  

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The foremost 20th century critics of socialism—and of central planning in any guise—were the Austrian economists Friedrich A. Hayek and Ludwig von Mises.  Surveying, at mid-point, the ravages of collectivism, Hayek wrote The Road to Serfdom (Chicago:  Phoenix Books, c. 1944), a durable manifesto that warns, in the words of David Hume:  “It is seldom that liberty of any kind is lost all at once.  Still more, citing Hilaire Belloc:  “The control of the production of wealth is the control of human life itself” (p. 88).  Though Hayek was (by training and profession) an economist, his real concern was philosophical, and he championed, in the tradition of John Stuart Mill, the preeminent good of human freedom.  He knew, however, as Lord Action perceptively observed, that “’at all times sincere friends of freedom have been rare, and its triumphs have been due to minorities, that have prevailed by associating themselves with auxiliaries whose objects often differed from their own; and this association, which is always dangerous, has sometimes been disastrous’” (p. vi).  

Economic freedom fueled the industrial revolution that birthed the modern world and lifted millions of men and women into an unprecedented affluence.  Economic inequities, however, prompted various socialists to propose utopian solutions—including Marxist-inspired central planning endeavors in Russia (Communism) and Germany (Fascism) that precipitated much misery.   (Hayak clearly shows why both the Bolsheviks and the Nazis were thoroughly socialistic in a chapter entitled “The Socialist Roots of Naziism”.)  Parallel developments in Great Britain and the United States, while not blemished by the harshly dictatorial and genocidal policies of Stalin and Hitler, have (inasmuch as they weakened or destroyed economic liberty) set those nations on a similar “the road to serfdom.”  This is because “the most important change which extensive government control produces is a psychological change, an alteration in the character of the people” (p. xiv).  Whenever people surrender themselves to the State, begging politicians to care for them, they will in time be enslaved to its policies.    

Following the unification of their country under Bismarck in the 1870s, Germans surrendered many of their freedoms to the welfare state he established decades before Hitler.  They simply followed “people of good will, men who were admired and held up as models in the democratic countries” because they sought to satisfy understandable cravings for comfort and security.  The unintended consequences of their “high ideals” and “compassionate” policies would prove highly destructive.   Self-righteously pursuing “high ideals,” enraptured with visions of “social justice,” they abandoned the “basic ideals” of Western Civilization—the commitment to individual freedom and justice shaped by the Greco-Roman, Hebrew, and Christian traditions.  Consequently, in the 20th century, despite warnings from “some of the greatest political thinkers of the nineteenth century, by De Tocqueville and Lord Acton, that socialism means slavery, we have steadily moved in the direction of socialism” (p. 13).  

This was done on behalf of perfecting the world.  While most intellectuals had abandoned any hope for eternal life in God’s Heaven, they certainly longed for a heavenly world here-and-now.  In the wake of the French Revolution, they idolized the State as the humanly-designed means to an earthly heaven.  As the great German poet Hoelderlin, noted:   “What has always made the state a hell on earth has been precisely that man has tried to make it his heaven” (p. 24).  Empowering the State requires collectivism, sucking away the rights and power of the individual.  “The common features of all collectivist systems may be described, in a phrase ever dear to socialists of all schools, as the deliberate organization of the labors of society for a definite social goal” (p. 56).  As Lenin declared, in 1917:  “The whole of society will have become a single office and a single facotry with equality of work and equality of pay” (p. 119).  In 1848, the year when revolutions rocked much of Europe and Marx and Engels published their “Communist Manifesto,” Alexis de Tocqueville noted that “Democracy extends the sphere of individual freedom” whereas “socialism restricts it.  Democracy attaches all possible value to each man; socialism makes each man a mere agent, a mere number” (p. 25).  

Whereas collectivists dream grandly of a world following their agenda within which inequity and poverty have disappeared, individualists generally exhibit a down-to-earth humility, dealing realistically with both themselves and the possibilities of political structures.  Thus they support laws that restrict individual wrong-doing, whereas collectivists seek to draft laws to organize everyone into a perfect world.  Similarly, individualists want to punish theft whereas collectivists want to eliminate poverty.  Individualists favor traffic laws that prevent accidents whereas collectivists want to shove everyone into mass transit systems.  

In sum:  “The choice open to us is not between a system in which everybody will get what he deserves according to some absolute and universal standard of right, and one where the individual shares are determined partly by accident or good or ill chance, but between a system where it is the will of a few persons that decides who is to get what, and one where it depends at least partly on the ability and enterprise of the people concerned and partly on unforeseeable circumstances” (pp. 101-102).  We can take responsibility for our lives, or we can ask the State to care for us and discover, in time, that the State will also order us about.  

That this was taking place in England and America alarmed Hayek.  He was especially concerned with the “end justifies the means” ethics of a growing number of intellectuals, such as E. H. Carr, who defended making “morality a function of politics” and rejected any higher, absolute source of truth and goodness.  Carr further supported what he labeled “’a revolution against the predominant ideas of the nineteenth century:  liberal democracy, national self-determination and laissez faire economics’” (p. 188).  Professors like Carr prospered in Hitler’s Germany, Hayek asserts, and the fact that they hold prestigious positions in England and America should be considered alarms in the night.  As is his classic, The Road to Serfdom!